Warwick Communications Re-Files Its Quarterly And Year-End Financials

Warwick Communications, a NEX company currently suspended due to cease-trade orders issued against it by both the Alberta and the B.C. Securities Commissions, has sent out releases that announce the re-filing of the M D & A for the first quarter of FY '07 [PDF file] and the filing of both the interim unaudited financial statements [PDF file] and the accompanying M D & A for the second quarter of this fiscal year [another PDF file.] The first quarter ended March 31st, and the second quarter ended June 30th. An accompanying news release explains the re-filing of the first document: "The financial statements for the quarter ended March 31, 2007, were revised to ensure that ending deficit on the income statement reconciled to the deficit balance on the balance sheet. The revisions to the management's discussion and analysis for the quarter ended March 31, 2007, and the year ended Dec. 31, 2006, were substantially to include and expand on discussion of the corporation's disclosure controls and procedures and internal controls over financial reporting." The release ends with a disclosure of the cease-trade orders and states that the company is trying to get them revoked.

Warwick, unusually for a NEX company, has listed in its current assets $400,000 of inventory. This figure is unchanged as of the second quarter of FY '07, ending June 30th of this year, with respect to the last quarter of '06 ending Dec. 31st. Its current liabilities are larger than its current assets, resulting in a working-capital deficit of $126,460, down from a deficit of $70,629 as of 2Q '06. Using a different method, roughly equivalent to omitting inventories from the current liabilites, the M D & A's numbers for the working capital deficiencies are $517,208 for 2Q '07 and $461,377 for 4Q '06. Book value as of June 30th '07 is -2.10 cents/share, as compared with -1.17 cents/share as of June 30th/06.

Also unusually for a NEX company, Warwick has revenue, even though quarterly revenue is down sharply from the same period in '06: $14,016, as opposed to $62,908 in 2Q '06, not including $5,462 in government assistance in the earlier period. (There was no government assistance for FY '07.) Expenses, however, were larger than the revenue, giving rise to a loss for both periods. Selling and promotion expenses for 2Q '07 were $10,000; for 2Q '06, they were $17,499. Production expenses were zero for 2Q '07, and were $26,259 in 2Q '06. Gross profit, before administration expenses and depreciation, was: $4,016 for 2Q '07 and $24,612 (or $19,150 net of government assistance) for 2Q '06.

For the first two quarters of '07, revenue net of government assistance was $33,730 and expenses before administration and depreciation were $25,000, leaving a gross profit of $8,730 net of government help [of $5,462.] For the first two quarters of '06, the comparable figures were: revenue of $94,656 net of government assistance [of $27,343] and expenses before administrative and depreciation of $94,725, for a gross loss of $69 before proceeds from government cheques. For 2Q '07, administration costs ate up the gross profit and then some; depreciation added to the loss somewhat to yield a quarterly loss of $21,651 as compared to a loss of $44,622 for 2Q '06. The loss for the first half of '07 was $55,831; for the first half of FY '06, it was $100,542. 2Q '07 was the only period when the net loss per share was below a cent/share: for 2Q '06, it was a penny per share. The net loss for the first half of FY '07 was 1 cent/share; for the first half of FY '06, it was 2 cents/share including government assistance. The M D & A attributes the shrinkage of revenues to increased returns in 2Q '07.

Warwick has no cash - in fact, it has recurrent bank overdrafts. As of June 30/07, the overdraft (or cash deficit) was $4,440, up from a deficit of $4,986 as of June 30/06. The company is being kept afloat, cash-wise, by advances from directors. These advances have shrunk to a little more than half of 2Q '06's level: $8,750 as opposed to 2Q '06's $14,705. Advances from directors for the first half of FY '07 totaled $14,705, as compared with $25,527 in 2Q '06. Note 2 of the financials specifies: "Amounts due to directors are non interest bearing and are due on demand."

The M D & A starts off with a qualified assessment of its disclosure procedures: "[Warwick] has a small Board and only two officers with varying degrees of knowledge concerning the various regulatory disclosure requirements. The Corporation is not of a sufficient size to justify a separate department or one or more staff member specialists in this area. Therefore the Corporation must rely upon its advisors/consultants to assist it and as such they form part of the disclosure controls and procedures.... While the Corporation believes it has adequate disclosure controls and procedures in place, lapses in the disclosure controls and procedures could occur and/or mistakes could happen. Should such occur, the Corporation will take whatever steps necessary to minimize the consequences thereof." (This statement seems to refer to the re-filing, but isn't confined to that.)

Next to be discussed is its line of business. The revenue generator of Warwick Communications is publishing; the company has produced over 300 books, calenders and CDs aimed at the consumer. These are distributed to bookstores on a consignment basis. The distributor Warwick used changed several times due to bankruptcies, which has put Warwick's fortunes in some peril. The current distributor, Perseus Distribution, is a United States company; dealing with it involves border hassles. This distributor, though, hasn't foundered as of the time of the writing of the M D & A. Also bedeviling Warwick is a shortened turnaround time of returned consignment orders, typically to 90 days, as well as recent difficulties in the book-retailing sector. Attempts by Warwick's in-house sales force to turn things around were, in the M D & A's words, "disappointing," to the point where no further materials were produced as of March 30 of this year. Also explained in the M D & A is the reason behind the cease-trade orders, both issued in June of 2005: failure to file financial statements in a timely manner. These two filings make Warwick current in this area, and constitute the grounds for an application to revoke both orders.

The discussion of the earnings in the M D & A ends, before describing measures to cut expenses through stopping production and reducing lease costs, with this statement: "There have been no defaults by the Corporation to date, but the Corporation’s arrears are substantial."


UPDATE: Copies of Warwick's 2005 M D & A [PDF file] and 2006 M D & A [PDF file] are also webbed. In each of them is an explanation for the delays in filing that brought the cease-trade orders down, although the one from FY 2005's, quoted below, is more detailed in the final paragraph:

On June 17, 2005, the Executive Director of the Alberta Securities Commission issued the cease trade order under section 198 of the Securities Act (Alberta) in respect of the securities of the Corporation. On June 8, 2005 the British Columbia Securities Commission issued a cease trade order.

The Corporation was cease traded due to the failure of the Corporation to file, with the Executive Director of the Alberta Securities Commission, interim unaudited financial statements for the period ended March 31, 2005, as required under the Securities Act (Alberta).

The interim unaudited financial statements for the period ended March 31, 2005 were not filed due to a health condition developed by the Corporation’s auditor, operating as a sole practitioner. Interim unaudited financial statements and annual audited financial statements were not filed for the periods subsequent to the cease trade order. The Corporation has not changed auditors out of a sense of loyalty to such auditor in a difficult time and the fact that the auditor’s medical condition was more serious and continued longer than expected.