**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-Q**

 

| **Mark One**                                                                                                                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                            |
| **for  the Quarterly Period Ended March 31, 2003.**                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                            |
| **or**                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                            |
| **o****Transition Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                            |
| **for  the Transition Period From                       To                     ** |

** **

**Commissionfile number:  000-25755**

** **

**WORLDGATE COMMUNICATIONS, INC.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                                               |   | **23-2866697**                        |
|------------------------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation)                                  |   | (I.R.S. Employer  Identification No.) |
|                                                       |   |                                  |
| **3190  Tremont Avenue Trevose, Pennsylvania **       |   | **19053**                             |   |
| (Address of Principal  Executive Offices)                  |   | (Zip Code)                            |
|                                                       |   |                                  |
| **(215)  354-5100**                                        |
| (Registrant’s Telephone  Number, Including Area Code) |
|                                                            |        |                                       |  |  |  |

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ýNo o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act.

Yes o No ý

 

As of May 7, 2003, there were 23,579,887 shares of common stock, parvalue $.01 per share, outstanding.

 

 

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WORLDGATE COMMUNICATIONS,INC.

 

QUARTERLY REPORT ON FORM10-Q

FOR THE THREE MONTHSENDED MARCH 31, 2003

 

TABLE OF CONTENTS

 
| PART I   |              | FINANCIAL INFORMATION                                                                       |   |
|----------|-------------------|---------------------------------------------------------------------------------------------|--------|
|     |              |
| Item  1. |              | Financial  Statements                                                                       | 3      |
| Item  2. |              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10     |
| Item  3. |              | Quantitative  and Qualitative Disclosures about Market Risk                                 | 14     |
| Item  4. |              | Controls  and Procedures                                                                    | 14     |
|     |              |
| PART II  | OTHER INFORMATION |                                                                                        |
|     |              |
| Item 1.  |              | Legal Proceedings                                                                           | 15     |
| Item  2. |              | Changes  in Securities and Use of Proceeds                                                  | 15     |
| Item 3.  |              | Defaults upon  Senior Securities                                                            | 15     |
| Item  4. |              | Submission  of Matters to a Vote of Security Holders                                        | 15     |
| Item 5.  |              | Other Information                                                                           | 15     |
| Item 6.  |              | Exhibits and  Reports on Form 8-K                                                           | 16     |
|          |                   |                                                                                             |        |  |  |  |  |

 

2

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**PARTI. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIALSTATEMENTS**

 

**WORLDGATE COMMUNICATIONS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(Dollars in Thousands)**

 
|                                                                                                                                                                                        |   | **March 31,  2003** |   | **December  31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|------------|
|                                                                                                                                                                                        |   |                |   |                    |       |
| ASSETS                                                                                                                                                                                      |   |                |   |                    |       |
|                                                                                                                                                                                        |   |                |   |                    |       |
| Current assets:                                                                                                                                                                             |   |                |   |                    |       |
| Cash and cash  equivalents                                                                                                                                                                  |   | $                   | 121    |                    | $          | 589 |   |
| Short - term  investments                                                                                                                                                                   |   | 2,472               |   | 3,218                   |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,329 at March 31, 2003  and $1,596 at December 31, 2002                                                                     |   | 625                 |   | 1,407                   |       |
| Accounts  receivable due from related parties                                                                                                                                               |   | 468                 |   | 1,186                   |       |
| Inventory                                                                                                                                                                                   |   | 3,670               |   | 3,962                   |       |
| Prepaid and  other assets                                                                                                                                                                   |   | 826                 |   | 281                     |       |
| Total current  assets                                                                                                                                                                       |   | 8,182               |   | 10,643                  |       |
|                                                                                                                                                                                        |   |                |   |                    |       |
| Property and  equipment                                                                                                                                                                     |   | 5,070               |   | 5,109                   |       |
| Less:  accumulated depreciation and amortization                                                                                                                                            |   | (2,833              | )      | (2,605                  | )          |
|                                                                                                                                                                                        |   |                |   |                    |       |
| Property and  equipment, net                                                                                                                                                                |   | 2,237               |   | 2,504                   |       |
| Deposits and  other assets                                                                                                                                                                  |   | 758                 |   | 872                     |       |
| Total assets                                                                                                                                                                                |   | $                   | 11,177 |                    | $          | 14,019 |   |
|                                                                                                                                                                                        |   |                |   |                    |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                  |   |                |   |                    |       |
|                                                                                                                                                                                        |   |                |   |                    |       |
| Current  Liabilities:                                                                                                                                                                       |   |                |   |                    |       |
| Notes payable                                                                                                                                                                               |   | $                   | 505    |                    | $          | 50 |   |
| Accounts payable                                                                                                                                                                            |   | 166                 |   | 775                     |       |
| Accounts payable  due to related party                                                                                                                                                      |   | 153                 |   | 453                     |       |
| Accrued expenses                                                                                                                                                                            |   | 501                 |   | 779                     |       |
| Accrued  compensation and benefits                                                                                                                                                          |   | 877                 |   | 1,132                   |       |
| Contractual  obligations related to equity financing                                                                                                                                        |   | 3,283               |   | 3,283                   |       |
| Other                                                                                                                                                                                       |   | 84                  |   | 87                      |       |
| Total current  liabilities                                                                                                                                                                  |   | 5,569               |   | 6,559                   |       |
|                                                                                                                                                                                        |   |                |   |                    |       |
| Other                                                                                                                                                                                       |   | 158                 |   | 165                     |       |
| Total  liabilities                                                                                                                                                                          |   | 5,727               |   | 6,724                   |       |
|                                                                                                                                                                                        |   |                |   |                    |       |
| Stockholders’  equity:                                                                                                                                                                 |   |                |   |                    |       |
| Preferred stock,  $.01 par value, 13,500,000 shares authorized                                                                                                                              |   | —              |   | —                  |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 23,578,694 shares issued and  outstanding at March 31, 2003 and 23,577,963 shares issued and outstanding at  December 31, 2002 |   | 236                 |   | 236                     |       |
| Additional  paid-in capital                                                                                                                                                                 |   | 194,431             |   | 193,391                 |       |
| Warrant for  Common Stock                                                                                                                                                                   |   | 1,911               |   | 1,911                   |       |
| Accumulated  deficit                                                                                                                                                                        |   | (191,123            | )      | (189,238                | )          |
| Less Treasury  Stock, at cost – 500,000 shares as of March 31, 2003 and December 31, 2002                                                                                              |   | (5                  | )      | (5                      | )          |
| Total  stockholders’ equity                                                                                                                                                            |   | 5,450               |   | 7,295                   |       |
| Total  liabilities and stockholders’ equity                                                                                                                                            |   | $                   | 11,177 |                    | $          | 14,019 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**WORLDGATE COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(Dollars in Thousands, Except per Share Amounts)**

 
|                                                                                                                                                               |   | **Three  months ended March 31** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                                               |   | **2003**                         |   | **2002** |   |
| Revenues                                                                                                                                                           |   |                             |   |   |   |
| Equipment  product revenues earned from third parties                                                                                                              |   | $                                | 95     |   | $ | 274 |   |
| Equipment  product revenues earned from related parties                                                                                                            |   | 1,092                            |   | 31 |   |
| Service fee  revenues earned from third parties                                                                                                                    |   | 188                              |   | 353 |   |
| Service fee  revenues earned from related parties                                                                                                                  |   | 790                              |   | 2,518 |   |
| Total revenues                                                                                                                                                     |   | 2,165                            |   | 3,176 |   |
| Costs and  expenses                                                                                                                                                |   |                             |   |   |   |
| Cost of  equipment product revenues                                                                                                                                |   | 640                              |   | 1,181 |   |
| Cost of service  fee revenues                                                                                                                                      |   | 783                              |   | 2,356 |   |
| Engineering and  development (excluding depreciation and amortization amounts of $144 and $150  for the three months ended March 31, 2003 and 2002, respectively). |   | 1,070                            |   | 2,315 |   |
| Sales and  marketing (excluding depreciation and amortization amounts of $17 and $81 for  the three months ended March 31, 2003 and 2002, respectively).           |   | 342                              |   | 676 |   |
| General and  administrative (excluding depreciation and amortization amounts of $84 and  $86 for the three months ended March 31, 2003 and 2002, respectively).    |   | 962                              |   | 551 |   |
| Depreciation and  amortization                                                                                                                                     |   | 245                              |   | 317 |   |
|                                                                                                                                                               |   |                             |   |   |   |
| Total costs and  expenses                                                                                                                                          |   | 4,042                            |   | 7,396 |   |
|                                                                                                                                                               |   |                             |   |   |   |
| Loss from  operations                                                                                                                                              |   | (1,877                           | )      | (4,220 | ) |
|                                                                                                                                                               |   |                             |   |   |   |
| Interest and  other income                                                                                                                                         |   | 27                               |   | 66 |   |
| Interest and  other expense                                                                                                                                        |   | (35                              | )      | (1 | ) |
|                                                                                                                                                               |   |                             |   |   |   |
| Net loss                                                                                                                                                           |   | $                                | (1,885 | ) | $ | (4,155 | ) |
|                                                                                                                                                               |   |                             |   |   |   |
| Net loss per  common share (basic and diluted)                                                                                                                     |   | $                                | (0.08  | ) | $ | (0.18 | ) |
|                                                                                                                                                               |   |                             |   |   |   |
| Weighted average  common shares outstanding - basic and diluted                                                                                                    |   | 23,578,645                       |   | 23,568,278 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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**WORLDGATE COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(Dollars in Thousands)**

 
|                                                                    |   | **Three  months ended March 31,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                    |   | **2003**                          |   | **2002** |   |
| **Cash flows from operating activities:**                               |   |                              |   |   |   |
| Net loss                                                                |   | $                                 | (1,885 | ) | $ | (4,155 | ) |
| Adjustments to  reconcile net loss to cash used in operating activities |   |                              |   |   |   |
| Depreciation and  amortization                                          |   | 245                               |   | 317 |   |
| Bad debt expense                                                        |   | 257                               |   | 0 |   |
| Amortization of  deferred compensation                                  |   | 0                                 |   | 72 |   |
| Non-cash stock  based compensation                                      |   | 40                                |   | 0 |   |
| Provision for  inventory                                                |   | 38                                |   | 0 |   |
| Loss on the  disposition of fixed assets                                |   | 8                                 |   | 0 |   |
| Changes in  operating assets and liabilities:                           |   |                              |   |   |   |
| Accounts  receivable                                                    |   | 1,243                             |   | 556 |   |
| Inventories                                                             |   | 254                               |   | 210 |   |
| Prepaid and other  assets                                               |   | 129                               |   | 13 |   |
| Accounts payable                                                        |   | (909                              | )      | (40 | ) |
| Accrued expenses                                                        |   | (278                              | )      | (494 | ) |
| Accrued  compensation and benefits                                      |   | (255                              | )      | (90 | ) |
| Other                                                                   |   | (10                               | )      | (3 | ) |
| Net cash used in  operating activities                                  |   | (1,123                            | )      | (3,614 | ) |
| **Cash flows from investing  activities:**                              |   |                              |   |   |   |
| Capital  expenditures                                                   |   | 0                                 |   | (53 | ) |
| Proceeds from  maturities of short-term investments, net                |   | 746                               |   | 1,953 |   |
| Proceeds from  sale of equipment                                        |   | 14                                |   | 0 |   |
| Net cash  provided by (used in) investing activities                    |   | 760                               |   | 1,900 |   |
| **Cash flows from financing  activities:**                              |   |                              |   |   |   |
| Proceeds from  issuance of common stock                                 |   | 0                                 |   | 5 |   |
| Repayments of  capital leases and notes payable                         |   | (105                              | )      | (1 | ) |
| Net cash  provided by (used in) financing activities                    |   | (105                              | )      | 4 |   |
| Net decrease in  cash                                                   |   | (468                              | )      | (1,710 | ) |
| Cash and cash  equivalents, beginning of period                         |   | 589                               |   | 3,356 |   |
| Cash and cash  equivalents, end of period                               |   | $                                 | 121    |   | $ | 1,646 |   |
|                                                                    |   |                              |   |   |   |
| Cash paid for  interest                                                 |   | $                                 | 3      |   | $ | 1 |   |
| **Non-cash  financing activity:**                                       |   |                              |   |   |   |
| Issuance of note payable to finance D&O insurance                   |   | 560                               |   | 0 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

5

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WORLDGATE COMMUNICATIONS,INC.

 

NOTES TO CONDENSEDFINANCIAL STATEMENTS

 

(Dollar Amounts are inThousands, Except for per Share Amounts)

(Unaudited)

 

1.                                       Basisof Presentation.

 

The unauditedfinancial statements of WorldGate Communications, Inc. (the “Company”) for thethree months ended March 31, 2003 presented herein have been prepared by theCompany pursuant to the rules and regulations of the Securities and ExchangeCommission for quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included infinancial statements prepared in accord­ance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  These financial statementsshould be read in conjunction with the financial statements for the year endedDecember 31, 2002 and the notes thereto included in the Company’s Annual Reporton Form 10-K.

 

The financialinformation in this Report reflects, in the opinion of management, alladjustments of a normal recurring nature necessary to present fairly theresults for the interim period. Quarterly operating results are not necessarilyindicative of the results that may be expected for the year ending December 31,2003.

 

2.                                       Liquidityand Going Concern Considerations

 

As of March 31,2003 the Company had cash, cash equivalents and short-term investments of$2,593.  The operating cash usage forthe three months ended March 31, 2003 was $1,123.  Current projections indicate that, without additional financing,the Company has insufficient cash to continue operations beyond June, 2003.

 

The Company has$505 of outstanding debt and its assets are not pledged as collateral.  The Company continues to evaluatepossibilities to obtain additional financing through public or private equityor debt offerings, bank debt financing, asset securitizations or from othersources.  Such additional financingwould be subject to the risk of availability, may be dilutive to ourshareholders, or could impose restrictions on operating activities.  There can be no assurance that thisadditional financing will be available on terms acceptable to the Company, ifat all.  The Company has the ability tofurther reduce its workforce and scale back on capital and operationalexpenditures to decrease cash burn.  TheCompany however can provide no assurance that such reductions in cash spending,if they are made, will extend the Company’s operations.

 

             The Company hasadvised its customers that it is exploring multiple opportunities to continueits WorldGate services and that, in the event that the Company does not obtainadditional funds, it may be forced to terminate the service coincident with itsinability to fund ongoing operations.

 

The unauditedconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities and commitments in the normal course of business.  Therefore, the financial statements do notinclude any adjustments relating to the Company’s ability to operate as a goingconcern.  The appropriateness of usingthe going concern basis in the future, however, will be dependent upon ourability to address our liquidity needs as described above.  There is no assurance that we will be ableto address our liquidity needs through the measures described above onacceptable terms and conditions, or at all, and, accordingly, there issubstantial doubt about our ability to continue as a going concern beyond June2003.

 

3.                                       RecentAccounting Pronouncements.

 

In August 2001,the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations”.  SFAS No. 143 requires,among other things, retirement obligations to be recognized when they areincurred and displayed as liabilities, with a corresponding amount capitalizedas part of the related long-lived asset. The capitalized element is required to be expensed using a systematicand rational method over its useful life. SFAS No. 143 was adopted by the Company on January 1, 2003 and did nothave an impact on the Company’s financial statements.

 

In June 2002, theFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities”, effective for exit or disposal activities initiated afterDecember 31, 2002.  SFAS No. 146addresses the financial accounting and reporting for certain costs associatedwith exit or disposal activities, including restructuring actions.  SFAS No. 146 excludes from its scopeseverance benefits that are subject to an on-going benefit arrangement governedby SFAS No. 112, “Employer’s Accounting for Post-employment Benefits,” andasset impairments governed by SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”

 

6

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SFAS No. 146 was adoptedby the Company on January 1, 2003 and did not have an impact on the Company’sfinancial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantors Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (FIN 45).  FIN 45 requires that the guarantorrecognize, at the inception of certain guarantees, a liability for the fairvalue of the obligation undertaken in issuing such guarantee.  FIN 45 also requires additional disclosurerequirements about the guarantor’s obligations under certain guarantees that ithas issued.  The initial recognition andmeasurement provisions of this interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002, and thedisclosure requirements are effective for financial statement periods endingafter December 15, 2002.   The adoptionof the recognition and initial measurement requirements of FIN 45 did not havea material impact on the Company's financial statements.

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities” (FIN 46).  FIN 46 requires a variable interest to beconsolidated by a company if that company is subject to a majority of the riskof loss from the variable interest entity’s activities or entitled to receive amajority of the entity’s residual returns or both.  The consolidation requirements apply immediately to variableinterest entities created after January 31, 2003.  The consolidation requirements apply to entities created prior toJanuary 31, 2003 in the first fiscal year or interim period beginning afterJune 15, 2003.  Certain of thedisclosure requirements apply in all financial statements issued after January31, 2003, regardless of when the variable interest entity was established.  Management is currently assessing the impactof the new standard on the Company's financial statements.

 

7

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4.                                       Inventories.

 

Inventories aresummarized as follows:

 
|                                     |   | **March 31,  2003** |   | **December  31, 2002** |   |
|------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                     |   |                |   |                   |   |
| Raw Material                             |   | $                   | 2,284  |                   | $      | 2,479 |   |
| Work in Progress                         |   | —              |   | 2                      |   |
| Finished Goods                           |   | 807                 |   | 865                    |   |
| Inventory held  by customers and vendors |   | 579                 |   | 616                    |   |
|                                     |   | $                   | 3,670  |                   | $      | 3,962 |   |

 

5.                                       Stock-BasedCompensation

 

The Companyaccounts for stock-based compensation in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended bySFAS No. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure.”

 

The Companyapplies Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” and related interpretations in accounting for its plans,and accordingly, no compensation cost has been recognized for the Company’sfixed stock based compensation.  Hadcompensation cost been determined consistent with SFAS No. 123, as amended bySFAS No. 148, the Company’s net loss would have been increased to the followingpro forma amounts:

 
|                                                                   |   | **Quarter  Ended  March 31**     |   |
|------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                   |   | **    2003** |   | **    2002** | ** ** |
| Net loss, as reported                                                  |   | $                                | (1,885 | ) | $ | (4,155 | ) |
| Add: Stock-based compensation expense included in reported net income, |   |                             |   |   |   |
| Net of related tax effects                                             |   | 40                               |   | 72 |   |
| Deduct: Total stock-based employee compensation expense determined     |   |                             |   |   |   |
| Under fair value based method for all awards, net of tax of $0         |   | (1,420                           | )      | (1,622 | ) |
| Pro forma net loss                                                     |   | $                                | (3,265 | ) | $ | (5,705 | ) |
|                                                                   |   |                             |   |   |   |
| Net Loss per share:                                                    |   |                             |   |   |   |
| Basic and diluted—as reported                                     |   | $                                | (0.08  | ) | $ | (0.18 | ) |
|                                                                   |   |                             |   |   |   |
| Basic and diluted—pro forma                                       |   | $                                | (0.14  | ) | $ | (0.24 | ) |

 

Such pro forma disclosures may not be representative of futurecompensation expense because options vest over several years and additionalgrants are made each year.

 

6.                                       RelatedParty Transactions.

 

In 1997, theCompany entered into an agreement with a cable operator who is aninvestor.  Revenues recognized from thisinvestor were approximately $57 and $96, respectively, for the three monthsended March 31, 2003 and March 31, 2002. Accounts receivable from this investor amounted to approximately $74 atMarch 31, 2003 and $97 at December 31, 2002.

 

8

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The Company hasagreements with some investors to provide engineering and developmentsupport.  As a result of theseagreements, the Company has expensed approximately $391 and $520, respectively,for the three months ended March 31, 2003 and March 31, 2002.  Accounts payable to these stockholdersamounted to $393 and $453 at March 31, 2003 and December 31, 2002,respectively.  These stockholders aresuppliers of technology and components for the Company’s products andservices.  These agreements provide forlicensing of technology, as well as contracted services, including hardware andsoftware development, product testing and certification, and the creation anddevelopment of tools and systems to facilitate the Company’s engineeringefforts.  These agreements do notprovide for ongoing royalties, purchase provisions, nor for any requirement toprovide additional funding to the Company.

 

In 1998 theCompany entered into a leasing arrangement for a building with an entity formedby non-employee investors.  Included indeposits and other assets at March 31, 2003 is $750 related to this lease.

 

7.                                       TVGatewayJoint Venture and related Cable Operator Agreements

 

On July 24, 2000, the Company formed a separate joint venture,TVGateway, LLC, with four cable operators. As part of this venture WorldGate entered into a management agreementwith TVGateway to provide engineering, operations and administrative supportservices. In addition to providing for the terms and conditions under whichsuch services were to be provided the management agreement contained aprovision providing for WorldGate and TVGateway to cooperate to transition toTVGateway some or all of the support services being provided by WorldGateand/or the employees providing these services. In addition, this provisionrequired WorldGate to remain available to provide support services untilJuly 24, 2005. During 2002 WorldGate and TVGateway agreed to commence thetransition of services pursuant to this provision. In addition, the partiesagreed that the management agreement shall be of no further force and effect withrespect to the services that are transferred as of the completion of thespecific transfers. The companies substantially completed this transition infirst quarter 2003 and accordingly, WorldGate has now been relieved of anycontinuing obligation to provide such transitioned services.

 

As part of its settlement with TVGateway the Company received fromTVGateway a cash payment of $2,428. This amount largely comprises payment ofreceivables balance as of December 31, 2002 in the amount of $1,089,payment of January 2003 service fees in the amount of $300 and otherpayments largely related to our January 2003 sale of certain equipment andinventory in the approximate amount of $1,055.

 

Revenues for such services, which are included in service fee revenue,totaled $732, and $2,439 for the three months ended March 31, 2003 and2002, respectively. In addition, product sales to TVGateway totaled $1,079 and$21 for the three months ended March 31, 2003 and 2002, respectively.Accounts Receivable from TVGateway amounted to $394 at March 31, 2003 and$1,089 at December 31, 2002. WorldGate is accounting for its 18%investment in the joint venture under the equity method.

 

The Company’s share of TVGateway losses to date have exceeded ourinvestment.  The Company  is not contemplating additional investmentin TVGateway, and is not required to make further investments in TVGateway. TVGateway continues to develop itsguide products and it is unclear as to when the guide product will be deployed.  Cable operators continue to use competitiveguide products and there is no certainty that they will convert some of thesecompetitive products to TVGateway. TVGateway is fully dependent on funding fromits cable operator owners and to the extent one or more of the partners decidesnot to provide additional funding this could impact on the viability ofTVGateway.

 

During the second quarter of 2002, Adelphia Communications, Inc.,one of the cable operator joint venture partners, filed a voluntary petitionfor relief under Chapter 11 of the U.S. Bankruptcy Code. As such, this mayaffect its ability to participate in future additional capital contributions tothe joint venture. The joint venture partners are not obligated to continuefunding TVGateway.

 

*Related Cable Operator Agreements*

 

In 2000, and concurrently with the formation of the TVGateway jointventure, the Company entered into multi-year agreements with four cableoperators for the digital deployment of the Company’s ITV- service to apredetermined number of households. In addition to the deployment agreements,the cable providers purchased an 

 

9

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aggregateof 1,531,211 shares of the Company’s Common Stock yielding proceeds to theCompany of $24,530. These same cable operators were issued warrants to purchaseadditional shares of Common Stock which will vest at varying rates based on thedeployment of the Company’s interactive television service on the cableoperator’s digital cable system.

 

Furthermore, theCompany entered into a supply agreement with the cable operators whereby theCompany agreed to supply these cable operators, on a pro rata basis, productsthat pertain to the development and deployment of the WorldGate service. TheCompany initially recorded a liability in the amount of $5,110 related to thisobligation. The recorded amount was based on the Company’s best estimate ofwhat it would cost to satisfy the contractual obligation to the various cableoperators. The Company’s policy has been not to adjust the liability after ithas been established. Any future change in the contractual obligation liabilitywould be a reclassification to additional paid in capital. When equipmentcredits are utilized by the cable operators, the value of the equipment isreflected in its entirety in the cost of revenues. The equipment credit expireson August 24, 2003. At March 31, 2003, the Company had a remainingliability of $3,283 for the anticipated cost of satisfying this obligation.

 

8.                                       NetLoss per Share

 

Basic and dilutednet loss per common share is computed by dividing the net loss available tocommon stockholders for the period by the weighted average number of shares ofcommon stock outstanding during the period. The calculation of diluted net loss per common share excludes potentialcommon shares if the effect is antidilutive. Potential common shares comprise shares of common stock issuable uponthe exercise of stock options and warrants. The number of potential common shares which would have been assumed tobe converted in the periods ended March 31, 2003 and 2002 and have a dilutiveeffect if the Company had income from continuing operations is 6,500,833 and6,322,409, respectively.

 

9.                                       OtherDevelopments

 

The Company fileda registration statement with the Securities and Exchange Commission onSeptember 16, 2002 relating to a proposed distribution to its shareholders ofsubscription rights to purchase additional shares of common stock and warrantsof the Company.  The timing of anyrights offering will, however, be dependent upon an evaluation of our stockprice and other material factors.  Ifthe Company elects to proceed with the offering it is anticipated that eachright will entitle the holder to purchase one share of the Company’s commonstock and a warrant to purchase one share of common stock at a subscriptionprice to be determined.  The Companydoes not know when, or if, the registration statement will be declaredeffective and there is no guarantee as to the level of the participation or theamount of the proceeds, if any, to be received in connection with the rightsoffering.

 

ITEM 2.    MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

(Dollar Amounts are in Thousands, Except per Share Amounts)

 

FORWARD-LOOKING ANDCAUTIONARY STATEMENTS.

 

We may from timeto time make written or oral forward-looking statements, including thosecontained in the following Management’s Discussion and Analysis of FinancialCondition and Results of Operations. The words “estimate,” “project,” “believe,” “intend,” “expect,” andsimilar expressions are intended to identify forward-looking statements,although not all forward-looking statements contain these identifyingwords.  In order to take advantage ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995, we are hereby identifying certain important factors which could cause ouractual results, performance or achievement to differ materially from those thatmay be contained in or implied by any forward-looking statement made by or onbehalf of WorldGate.  The factors,individually or in the aggregate, that could cause such forward-looking  statements not to be realized include,without limitation, the following: (1) difficulty or inability to raiseadditional financing on terms acceptable to us, (2) difficulty in developingand implementing marketing and business plans, (3) continued losses, (4) lossof any one of our large customers, (5) industry competition factors and otheruncertainty that a market for our interactive TV products will develop, (6)challenges associated with cable operators (including, uncertainty that theywill offer our interactive TV products, inability to predict the manner inwhich they will market 

 

10

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and price our interactiveTV products and existence of potential conflicts of interests and contractuallimitations impeding their ability to offer our interactive TV products), (7)challenges with advertisers and television programmers (including uncertaintiesthat they will support our Channel HyperLinkingSM technology), (8)departure of one or more key persons and (9) delisting of our Common Stock fromthe NASDAQ Small Cap Market, (10) changes in regulatory requirements and (11)other risks identified in our filings with the Securities and ExchangeCommission.  We caution you that theforegoing list of important factors is not intended to be, and is not,exhaustive.  We do not undertake toupdate any forward-looking statement that may be made from time to time by oron behalf of WorldGate.

 

Results of Operations:

 

Critical Accounting Policies and Estimates

 

The consolidatedfinancial statements are prepared in conformity with accounting principlesgenerally accepted in the United States. The preparation of these financial statements required management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

The significantaccounting policies of the Company are described in the notes to theconsolidated financial statements included in the annual report on Form10-K.  Judgments and estimates ofuncertainties are required in applying the Company’s accounting policies inmany areas.  Following are some of theareas requiring significant judgments and estimates:  revenue recognition, accounts receivable, inventories, and cashflow and valuation assumptions in performing asset impairment tests oflong-lived assets.

 

Three Months Ended March 31, 2003 and March 31, 2002

 

Revenues

 

Revenues.  Revenues decreased to $2,165 for the threemonths ended March 31, 2003, or 32%, from $3,176 for the three months endedMarch 31, 2002.  Substantially allrevenues are attributable to consulting fees and equipment sales withTVGateway, an unconsolidated entity, and the commercial deployments ofWorldGate’s interactive television products and services and cable subscriberssubscribing to these services as of March 31, 2003.  A substantial portion of the revenue decrease for the threemonths ended March 31, 2003, as compared to the three months ended March 31,2002, is attributable to reduced consulting fees, offset by increased equipmentsales, with TVGateway.  As a result ofthe transition of services to TVGateway, we do not expect to receive anysignificant revenues from consulting fees or equipment sales from TVGateway inthe future.  For the three months endedMarch 31, 2003, consulting fee revenues with TVGateway were $700, or 71% belowsuch consulting fees of $2,414 for the three months ended March 31, 2002.  For the three months ended March 31, 2003,equipment sold to TVGateway totaled $1,079, compared to $21 for the threemonths ended March 31, 2002.  At March31, 2002 we had  deployed our servicesin 68 cable systems with approximately 568,000 Revenue Generating Units.  As of March 31, 2003 we had deployed ourservices in 66 cable systems, representing approximately 559,000 RevenueGenerating Units.  For the three monthsended March 31, 2003, we derived revenues of $978, or 45%, from service feerevenues consisting of consulting fees, subscriber fees and advertising fees,and $1,187, or 55%, from the delivery of headends, keyboards, and relatedequipment products.  For the threemonths ended March 31, 2002, we derived revenues of $2,871, or 90%, fromservice fee revenues and $305, or 10%, from the delivery of headends, keyboardsand related equipment products. Included in equipment revenues for the three months ended March 31, 2003and 2002, were sales of excess inventory of $35 and $0, respectively.

 

Costs andExpenses.

 

Cost ofRevenues.  Cost of revenues consistsprimarily of equipment product costs related to initial trials and commercialdeployments and service fee revenue costs, related primarily to the provisionof engineering and administrative services. Costs of equipment product revenues for the three  months ended March 31, 2003,  were $640, or approximately 54% of equipmentproduct revenues, compared to the product costs of revenues of $1,181, orapproximately 387% of equipment product revenues, for the three months endedMarch 31, 2002.  The decrease in the costof equipment product revenues for the three months ended March 31, 2003, ascompared to the three months ended March 31, 2002, was primarily the result ofapproximately $760 of equipment sales to TVGateway which primarily consisted ofequipment previously expensed or written-off. In addition, the Company

 

11

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recorded $38 and $0 morein inventory provisions in the three months ended March 31, 2003 and 2002,respectively.  Service fee costs ofrevenues for the three months ended March 31, 2003, were $783, or approximately80% of service fee revenues.  Servicefee costs of revenues were $2,356, or approximately 82% of service fee revenuesfor the three months ended March 31, 2002. The decrease in service fee cost of revenues of $1,573 for the threemonths ended March 31, 2003, when compared to the same period in 2002, isprimarily attributable to decreased staffing levels required as a result of theTVGateway transfer.

 

Engineering andDevelopment.  Engineering anddevelopment expenses primarily consist of the cost of design, programming,testing, documentation and support of the Company’s hardware, software andservices.  Engineering and developmentcosts were $1,070 for the three months ended March 31, 2003, a decrease ofapproximately 54% when compared to $2,315 for the three months ended March 31,2002.  This decrease in expenses isprimarily attributable to declines in staffing over the last two years whichresulted in a significant payroll cost reduction, a significant portion ofwhich is the result of termination of all of the personnel of the former DVAand of the engineering development consultants for TVGateway  Employee compensation costs declined for thethree months ended March 31, 2003 by $1,241, or 55% when compared to the sameperiod in 2002.

 

Sales andMarketing.  Sales and marketing costsconsist primarily of compensation, attendance at conferences and trade shows,travel costs necessary to cover a domestic and international customer marketbase, promotions and other marketing programs substantially related to initialtrial installations and commercial deployments.  For the three and nine months ended March 31, 2003, sales andmarketing expenses were $342.  Thisrepresents a decrease of approximately 49%, when compared to sales andmarketing expenses of $676 for the three months ended March 31, 2002.  This decrease in expenses is primarilyattributable to declines in staffing over the last two years  These actions resulted in employeecompensation costs declining in the three months ended March 31, 2003 by $324,or 52%, when compared to the same period in 2002.

 

General andAdministrative.   General andadministrative expenses consist primarily of expenditures for administration,office and facility operations, finance and general management activities,including legal, accounting and other professional fees.  General and administrative expenses were$962 for the three months ended March 31, 2003, an increase of 75%, whencompared to expenses of $551 for the same period in 2002.  This increase in expenses is primarilyattributable to declines in staffing offset by allocation reductions infacility overhead costs previously charged to TVGateway,  an increase in bad debt expense of $257 inthe three months ended March 31, 2003, and the issuance of 150,000 stockoptions to an investment financial advisor with a fair value of $40 to assistus in evaluating various strategic and financial alternatives available to theCompany.  Employee compensation costsdeclined in the three months ended March 31, 2003 by $133, or 23%,  when compared to the same periods in 2002,as result of decreases in staffing. Facility expenses increased for the three months ended March 31, 2003 by$211 or 99%, when compared to the same periods in 2002.  This increase is primarily the result offacility overhead costs no longer allocable to TVGateway.

 

Interest and OtherIncome and Interest Expense.  Interestand other income and interest expense consist of interest earned on cash andcash equivalents and short-term investments, and interest expense on equipmentfinancing and short-term debt.  Interestand other income decreased from $66 for the three months ended March 31, 2002to $27 for the three months ended March 31, 2003, primarily due to decliningaverage cash balances and to declining interest rates.  During the three months ended March 31,2002, the Company earned interest on average cash balances of approximately$12,873, and incurred interest expense related to its $1,100 equipmentfinancing facility.  In comparison,during the three months ended March 31, 2003 the Company earned interest onaverage cash balances of approximately $3,712, and incurred interest expenserelated to its insurance financing.

 

Income Taxes.  The Company has incurred net operatinglosses since inception and accordingly had no income taxes and has not recordedany income tax benefit for those losses.

 

Liquidity andCapital Resources.

 

As of March 31,2003, our primary source of liquidity consisted of cash and cash equivalentsand short-term investments that are highly liquid, are of high qualityinvestment grade and have maturities of less than one year.

 

At March 31, 2003,we had cash and cash equivalents of $121 (in addition to $2,472 in short-terminvestments) as compared to cash and equivalents of $589 (in addition to $3,218in short-term investments) at December 31, 2002.  Net cash used in operations was $1,123 for the three months endedMarch 31, 2003, as

 

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compared to $3,614 usedfor the same period in 2002.  Thedecrease in net cash used for operations was primarily attributable to theCompany’s decrease in expenditures, including its reduction in workforceprograms.  Accounts receivable and inventoryreductions were partially offset by other changes in working capital during thequarter.  The Company recorded bad debtexpense in the amount of $257 during the three months ended March 31, 2003 toreflect its current assessment of the collectability of certain receivables,primarily Latin and South America.  TheCompany has instituted tighter credit procedures to minimize its collectionexposure with particular emphasis on international customers.

 

Cash provided byinvesting activities during the three months ended March 31, 2003, totaled$760  compared to $1,900 provided duringthe same period in 2002.  During thethree months ended March 31, 2003, we utilized the net proceeds from ourmaturing short-term investments of $746 compared to $1,953 for the three monthsended March 31, 2002.   Capitalexpenditures were $0 and $53 for the three months ended March 31, 2003 and2002, respectively.

 

Operations andLiquidity

 

To date, the Company has funded operations primarily through privatesales of equity securities and through an initial public offering of commonstock in April 1999. As of March 31, 2003 the Company had cash, cashequivalents, and short-term investments of $2,593. The operating cash usage forthe three months ended March 31, 2003 was $1,683. In October 2002, theCompany announced multiple actions that it believed would further reduceoperating expenses and increase operating efficiencies. These actions includeda reduction in work force as well as the implementation of an agreement withTVGateway to transfer to TVGateway certain WorldGate employees and functionsthat WorldGate was currently providing for TVGateway. During the first quarter2003, the Company substantially finalized the transition settlement and othermatters with TVGateway and in January 2003 received $2,428 in cash as partof this settlement. This amount largely comprises payment of our receivablebalance as of December 31, 2002 in the amount of $1,089, payment ofJanuary 2003 service fees in the amount of $300 and other payments largelyrelated to our January 2003 sale of certain equipment and inventory in theapproximate amount of $1,055. This transition of services removed both theobligation of WorldGate to provide the service as well as TVGateway’sobligation to pay WorldGate for rendering the service. Thus, althoughWorldGate’s revenue attributable to the transitioned service was reduced, sowas the corresponding expense of providing the service. As such, WorldGate wasnegatively impacted in that it will no longer receive any significant revenuesfrom providing these services. Also there was some overhead which was reducedor otherwise allocated and which was previously passed on to TVGateway.

 

We have $505 of outstanding debt and our assets are not pledged ascollateral. We continue to evaluate possibilities to obtain additionalfinancing through public or private equity or debt offerings, bank debtfinancing, asset securitizations or from other sources. Such additionalfinancing would be subject to the risk of availability, may be dilutive to ourshareholders, or could impose restrictions on operating activities. There canbe no assurance that this additional financing will be available on termsacceptable to us, if at all.  The Companyalso has the ability to further reduce its workforce and scale back on capitaland operational expenditures to decrease cash burn.  The Company however can provide no assurance that such reductionsin cash spending, if they are made, will extend the Company's operations.

 

Our current projections indicate that, without additional financing, wewill have insufficient cash to continue operations beyond June 2003.  Accordingly, there is substantial doubtabout our ability to continue as a going concern beyond June 2003.  We continue to seek funding to keep thecompany viable beyond this period, exploring investments, mergers, sale of thecompany as well as the sale or licensing of some or all of the company’sassets, among other means of funding. To this end, we have been, and continue, discussing possibletransactions with several parties and at the same time we are broadening andformalizing the solicitation process. We seek to obtain any and all expressions of interests in sufficienttime to ensure that we can properly evaluate all funding opportunities.  No assurances can be given that atransaction can be consummated prior to the depletion of our availablecash.  We however remain hopeful thatsufficient funding can be obtained to continue the company’s operations.

 

We believe it important to maintain the continued and informed supportof our cable operator customers and their subscribers during this difficultperiod.  As such, we have advised ourcustomers that while we are exploring multiple opportunities to continue ourWorldGate service there is the possibility that, in the event that we do notobtain additional funds, we may be forced to terminate the service coincidentwith our inability to fund ongoing operations.

 

The Companyreceived a letter dated October 8, 2002, from the NASDAQ, which notified itthat the bid price for its common stock had been below $1.00 per share for aperiod of thirty consecutive days. Subsequently the Company sought and received NASDAQ approval to transferits listing to the NASDAQ Small Cap Market, and on January 9, 2003 theCompany's common stock commenced trading on this market.  WorldGate cannot offer any assurance thatother NASDAQ requirements for continued listing will be satisfied.  If the Company's common stock is delisted, this mayhave a negative impact on the liquidity and price of its common stock andinvestors may find it more difficult to purchase or dispose of, or to obtainaccurate quotations as to the market value of, its common stock.  Furthermore, the listing of the Company'scommon stock on the NASDAQ Small Cap Market, makes it ineligible for certainexemptions from the various state securities or "blue sky" laws,which make it more difficult for the Company to raise capital through issuancesof securities.

 

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ITEM 3.    QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Interest RateRisk.  Our exposure to market riskrelated to changes in interest rates relates primarily to our investmentportfolio.  We invest in instrumentsthat meet high credit quality standards, and we limit the amount of creditexposure with respect to any one issue, issuer and type of investment.

 

As of March 31,2003, the Company’s cash and cash equivalents and short-term investments were$2,593, most of which were debt securities having a maturity of less than oneyear.  Due to the average maturity andconservative nature of our investment portfolio, management believes a suddenchange in interest rates would not have a material effect on the value of theportfolio.  Manage­ment estimates thathad the average yield of our investments decreased by 100 basis points, ourinterest income for the three months ended March 31, 2003 would have decreasedby approximately $8.  This estimate assumesthat the decrease occurred on the first day of 2003 and reduced the yield ofeach investment instrument by 100 basis points.  The impact on our future interest income of future changes ininvestment yields will depend largely on our total investments.

 

Foreign CurrencyExchange Risk.  Although we transactbusiness in various foreign countries, the principal portion of our business isin the United States and substantially all of our revenues and costs to datehave been denominated in U.S. dollars. As a result, adverse movements in foreign currency exchange rates wouldnot have a material adverse effect on us.

 

ITEM 4.    CONTROLS AND PROCEDURES

 

As of a datewithin 90 days of the filing date of this quarterly report, an evaluation ofthe effectiveness of the Company’s disclosure controls and procedures wasperformed under the supervision and with the participation of the Company’smanagement, including the chief executive officer and the chief financialofficer.  Based on that evaluation, theCompany’s management, including the chief executive officer and chief financialofficer, concluded that the Company’s disclosure controls and procedures wereeffective as of the evaluation date.

 

Subsequent to theevaluation date, there have been no significant changes in the Company’sinternal controls or in other factors that could significantly affect internalcontrols.

 

In accordance withSection 10A(i)(2) of the Securities Exchange Act of 1934, as amended by Section202 of the Sarbanes-Oxley Act of 2002, the Company is required to disclose theapproval by the Audit Committee of the Board of Directors of non-audit servicesto be performed by PricewaterhouseCoopers LLP, the Company’s independentauditors.  Non-audit services areservices other than those provided in connection with an audit or review of thefinancial statements.  During the periodcovered by this filing, the Audit Committee approved non-audit services,including (1) tax compliance assistance, (2) tax consultation, (3) tax supportand compensation and administrative services and (4) employee benefit planaudits.

 

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PART II. OTHER INFORMATION

 

(Dollars Amounts are inThousands, Except per Share Amounts)

 

ITEM 1.  LEGAL PROCEEDINGS.

 

None.

 

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

 

On January 21, 2003WorldGate issued 150,000 options, with an exercise price of $.625 per share toan investment advisor in consideration for financial services.  The options were issued pursuant to anexemption under Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

None.

 

ITEM 5.  OTHERINFORMATION.

 

None.

 

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

 

(a)     Exhibits.

 

The following is alist of exhibits filed as part of this report on Form 10-Q.  Where so indicated by footnote, exhibitswhich were previously filed are incorporated by reference.  For exhibits incorporated by reference, thelocation of the exhibit in the previous filing is indicated parentheticallyexcept in those situations where the exhibit number was the same as set forthbelow.

 
| **Exhibit  No.** |   | **Description**                                                        |
|------------------|--------|------------------------------------------------------------------------|
|             |   |                                                                   |
| 3.1              |   | Amended and Restated Certificate of Incorporation*                     |
| 3.2              |   | Amended and Restated Bylaws*                                           |
| 99.1             |   | Certification pursuant to Section 906 of  Sarbanes-Oxley Act of 2002** |
| 99.2             |   | Certification pursuant to Section 906 of  Sarbanes-Oxley Act of 2002** |

 

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*                              Incorporatedby reference to the exhibits to the Company’s Form 10-Q Report for the quarterended March 31, 1999.

**                      Furnishedherewith.

 

 

(b)     Reports on Form 8-K.

 

None.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934,  the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|   |   | WORLDGATE COMMUNICATIONS, INC. |
|--------|--------|--------------------------------|
|   |   |                           |   |   |   |
| Date:  | May    |  15, 2003                 |   | /s/ Hal M. Krisbergh |   |
|   |   |                           |   |   |   |
|   |   |                           |   |   | Hal M. Krisbergh |
|   |   |                           |   |   | Chairman and Chief Executive Officer |
|   |   |                           |   |   |   |
|   |   |                           |   |   |   |
| Date:  | May    |  15, 2003                 |   | /s/ Joel Boyarski |   |
|   |   |                           |   |   |   |
|   |   |                           |   |   | Joel Boyarski |
|   |   |                           | Vice President and Chief Financial Officer |
|        |        |                                |  |  |  |  |  |

 

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**CERTIFICATION**

 

I, Hal M. Krisbergh, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of WorldGateCommunications, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)                                      Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons fulfilling the equivalentfunction):

 

a)                                      Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated: | May 15, 2003 | /s/  HAL M. KRISBERGH |
|--------|--------------|----------------------------|
|   |         | Hal M. Krisbergh           |
|   |         | *Chief Executive Officer*  |

 

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**CERTIFICATION**

 

I, Joel Boyarski, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of WorldGateCommunications, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)                                      Presentedin this quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons fulfilling the equivalentfunction):

 

a)                                      Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated: |  May 15, 2003 | /s/  JOEL BOYARSKI   |
|--------|--------------------|---------------------------|
|   |               | Joel Boyarski             |
|   |               | *Chief Financial Officer* |
|   |               |                      |

 

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##### **Exhibit Index**

 
| **Exhibit** |   | **Description**                                                      |
|-------------|--------|----------------------------------------------------------------------|
|        |   |                                                                 |
| 99.1        |   | Certification pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 |
| 99.2        |   | Certification pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 |

 

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