TIDMVVS
Versatile Reports Second Quarter Results
FOR: VERSATILE SYSTEMS INC.
TSX VENTURE SYMBOL: VV
AIM SYMBOL: VVS
January 25, 2010
Versatile Reports Second Quarter Results
VANCOUVER, CANADA--(Marketwire - Jan. 25, 2010) -
All amounts are expressed in U.S. dollars unless otherwise stated.
Versatile Systems Inc. (TSX VENTURE:VV)(AIM:VVS), announces its results for the second quarter of the 2010
fiscal year.
Revenue for the three months ended December 31, 2009 was $11,259,292 generating a gross profit of $2,660,080 or
23.6% of sales compared to $12,327,064 generating a gross profit of $3,039,395 or 24.7% of sales for the same
quarter last year. The Net Loss for the quarter amounted to $80,661 ($0.00 per share) compared to a Net Loss of
$533,171 ($0.00 per share) for the same period last year, an improvement of $452,510.
"The overall economic environment continues to be difficult. In addition, Oracle's potential acquisition of Sun
Microsystems has created uncertainty and had a negative effect on both our pipeline and top line revenue," said
John Hardy, Chairman and CEO of Versatile. "Nevertheless, we managed to significantly reduce our Net Loss by
$452,510 over the same quarter last year. We continue to monitor our cost structures to ensure they are in line
with anticipated revenues and Gross Profit. Our goal is to move back to sustained profitability by year end."
Highlights for the quarter included:
- Cash and cash equivalents and short term investments at December 31, 2009 was $6,096,258 compared to
$2,002,530 at June 30, 2009, an increase of $4,093,728;
- Revenue for the three months ended December 31, 2009 was $11,259,292 compared to $12,327,064 for the same
quarter last year, a decrease of $1,067,772;
- Deferred revenue at December 31, 2009 was $7,512,605 (of which $6,641,170 is expected to be recognized in the
next four quarters);
- Net Loss for the quarter amounted to $80,661 ($0.00 per share) compared to a Net Loss of $533,171 ($0.00 per
share) for the same period last year, an improvement of $452,510;
- Research and development expense for the quarter amounted to $247,084 compared to $391,088 for the same
quarter last year;
- Non-brokered private placement with the issuance of 39,000,000 shares for proceeds of $3,876,257; and
- The Company increased its position to 696,869 shares of Equus Total Return, Inc. which is a public company
trading on the NYSE under the symbol EQS.
The working capital as of December 31, 2009 was $6,148,754, an increase of $3,578,333 compared to the working
capital of $2,570,421 at June 30, 2009.
Revenue for the six months ended December 31, 2009 was $22,875,517 generating a gross profit of $5,315,384 or
23.2% of revenue compared to $26,630,915 generating a gross profit of $6,792,495 or 25.5% of revenue for the
same period last year. The Net Loss for the period amounted to $127,436 ($0.00 per share) compared to $476,556
($0.00 per share) for the same period last year, an improvement of $349,120.
"With working capital exceeding $6 million at December 31, 2009 the Company has the strongest financial
position in its history," said Fraser Atkinson, CFO of Versatile.
About Versatile
Versatile provides business solutions that enable companies to improve sales, marketing and distribution of
their products. Versatile also provides information technology services for the implementation, maintenance and
security of mission-critical computer environments. Versatile has the ability to architect solutions involving
both proprietary and third party components. For more information: www.versatile.com.
Forward-Looking Statements
This document may contain forward-looking statements relating to Versatile's operations or to the environment
in which it operates, which are based on Versatile's operations, estimates, forecasts and projections. These
statements are not guarantees of future performance and involve risks and uncertainties that are difficult to
predict or are beyond Versatile's control. A number of important factors including those set forth in other
public filings could cause actual outcomes and results to differ materially from those expressed in these
forward-looking statements. Consequently, readers should not place any undue reliance on such forward-looking
statements. In addition, these forward-looking statements relate to the date on which they are made. Versatile
disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
All amounts are expressed in U.S. dollars unless otherwise stated. (C) 2010 Versatile Systems Inc. All rights
reserved.
/T/
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Versatile Systems Inc.
Consolidated Financial Statements
(unaudited - prepared by management)
December 31, 2009
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Consolidated Balance Sheets
Consolidated Statements of Operations and Deficit
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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Versatile Systems Inc.
Consolidated Balance Sheets
(unaudited - prepared by management)
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Expressed in U.S. dollars
December 31, 2009 June 30, 2009
----------------- -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 3,795,423 $ 2,002,530
Short term investments (note 3) 2,300,835 -
Accounts receivable 7,499,668 8,408,093
Current portion of deferred contract costs 5,029,092 5,745,493
Work-in-progress 42,822 92,145
Prepaid expenses 387,000 286,709
Inventory 1,446,357 1,376,746
Future income tax benefits (Note 9) 944,843 944,843
---------------------------
21,446,040 18,856,559
Long-term accounts receivable 238,868 112,781
Deferred contract costs 678,291 803,246
Capital Assets 644,145 794,008
Intangible assets 242,138 332,953
Future income tax benefits (Note 9) 5,631,462 5,283,896
Goodwill 9,977,659 9,977,659
---------------------------
$ 38,858,603 $ 36,161,102
---------------------------
---------------------------
LIABILITIES
Current Liabilities
Line of credit and bank overdraft (Note 4) $ 2,558,445 $ -
Accounts payable and accrued liabilities 6,097,671 8,530,987
Current portion of deferred revenue 6,641,170 7,755,151
---------------------------
15,297,286 16,286,138
Deferred Revenue 871,435 977,411
---------------------------
16,168,721 17,263,549
---------------------------
SHAREHOLDERS' EQUITY
Share Capital (Note 5) 54,433,709 50,583,743
Warrants (Note 6) 186,367 186,367
Contributed surplus 4,208,236 4,138,437
Deficit (35,856,651) (35,729,215)
Accumulated other comprehensive loss (281,779) (281,779)
---------------------------
22,689,882 18,897,553
---------------------------
$ 38,858,603 $ 36,161,102
---------------------------
---------------------------
APPROVED BY THE DIRECTORS:
DIRECTOR: John Hardy DIRECTOR: Fraser Atkinson
See Notes to Consolidated Financial Statements
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Versatile Systems Inc.
Consolidated Statements of Earnings (Loss) and Deficit
(unaudited - prepared by management)
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Expressed in Three Months ended Six Months ended
U.S. dollars December 31 December 31
2009 2008 2009 2008
---------------------------------------------------
SALES $ 11,259,292 $ 12,327,064 $ 22,875,517 $ 26,630,915
COST OF SALES 8,599,212 9,287,669 17,560,133 19,838,420
---------------------------------------------------
2,660,080 3,039,395 5,315,384 6,792,495
---------------------------------------------------
EXPENSES
General and
administrative 1,100,145 1,278,420 1,974,493 2,601,480
Selling and
marketing 1,619,075 1,717,311 2,980,776 3,487,136
Research and
development 247,084 391,088 493,754 815,840
Non recurring expenses 28,219 372,177 48,079 372,177
Foreign exchange (gain)
loss (89,154) (76,407) (74,612) (96,759)
Stock-based
compensation 23,242 2,753 45,630 5,996
---------------------------------------------------
2,928,611 3,685,342 5,468,120 7,185,870
---------------------------------------------------
Earnings before
interest, taxes and
amortization (268,531) (645,947) (152,736) (393,375)
Amortization of
capital assets 62,287 87,406 128,911 157,306
Amortization of
intangible assets 90,675 90,675 181,349 181,349
Interest expense 10,441 354 14,210 29,442
Gain on sale of
investments (4,952) - (4,952) -
---------------------------------------------------
EARNINGS (LOSS)
BEFORE INCOME TAXES (426,982) (824,382) (472,254) (761,472)
Current income tax
expense (1,245) (16,044) (2,748) (20,544)
Future income tax
expense 347,566 307,255 347,566 305,460
---------------------------------------------------
NET EARNINGS (LOSS) (80,661) (533,171) (127,436) (476,556)
---------------------------------------------------
DEFICIT, BEGINNING
OF PERIOD (35,775,990) (35,006,481) (35,729,215) (35,063,096)
---------------------------------------------------
DEFICIT, END OF PERIOD (35,856,651) (35,539,652) (35,856,651) (35,539,652)
---------------------------------------------------
---------------------------------------------------
EARNINGS (LOSS) PER
SHARE (basic and
diluted) ($0.00) ($0.00) ($0.00) ($0.00)
---------------------------------------------------
---------------------------------------------------
See Notes to Consolidated Financial Statements
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Versatile Systems Inc.
Consolidated Statements of Comprehensive (Loss) Income
(unaudited - prepared by management)
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Expressed in Three Months ended Six Months ended
U.S. dollars December 31 December 31
2009 2008 2009 2008
---------------------------------------------------
Net earnings (loss) (80,661) (533,171) (127,436) (476,556)
Other comprehensive
(loss) income
Foreign currency
translation
adjustments 0 (367,732) 0 (400,981)
---------------------------------------------------
Comprehensive (loss)
income (80,661) (900,903) (127,436) (877,537)
---------------------------------------------------
---------------------------------------------------
See Notes to Consolidated Financial Statements
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Versatile Systems Inc.
Consolidated Statements of Cash Flows
(unaudited - prepared by management)
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Expressed in Three Months ended Six Months ended
U.S. dollars December 31 December 31
2009 2008 2009 2008
------------------------------------------------
CASH FLOWS FROM (USED
IN) OPERATING
ACTIVITIES
Net earnings (loss) $ (80,661) $ (533,171) $ (127,436) $ (476,556)
Items not affecting
cash
Amortization of
capital and
intangible assets 170,862 178,081 348,987 344,983
Stock-based
compensation 23,242 2,753 45,630 5,996
Gain on sale of
investments (4,952) - (4,952) -
Unrealized foreign
exchange loss (gain) (38,209) 27,913 (42,539) 36,032
Future income tax
expense (benefit) (347,566) (307,255) (347,566) (305,460)
-------------------------------------------------
Cash flow from (used in)
operations before other
items (277,284) (631,679) (127,876) (395,005)
Net change in non-cash
working capital items 41,236 2,213,837 (2,157,242) 1,828,665
-------------------------------------------------
(236,048) 1,582,158 (2,285,118) 1,433,660
CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES
Short term investments (567,558) - (2,300,835) -
Proceeds from
disposition of capital
assets 7,701 - 7,701 -
Additions to capital
assets (21,414) (106,511) (37,266) (209,989)
-------------------------------------------------
(581,271) (106,511) (2,330,400) (209,989)
-------------------------------------------------
CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES
Proceeds from issuance
of shares 3,876,257 - 3,876,257 -
Share issue costs (26,291) - (26,291) -
Purchase of company
shares - (25,088) - (25,088)
Proceeds from (Repayment
of) line of credit (503,051) - 2,558,445 (74,942)
Repayment of bank
overdraft - - - (127,214)
Repayment of Promissory
Notes - (20,000) - (40,000)
-------------------------------------------------
3,346,915 (45,088) 6,408,411 (267,244)
-------------------------------------------------
Effect of foreign
exchange rate on cash - (195,478) - (84,919)
Increase in cash and
cash equivalents 2,529,596 1,235,081 1,792,893 871,508
CASH and cash
equivalents, beginning
of period 1,265,827 1,136,432 2,002,530 1,500,005
-------------------------------------------------
CASH and cash
equivalents, end
of period $3,795,423 $2,371,513 $ 3,795,423 $2,371,513
-------------------------------------------------
-------------------------------------------------
Supplementary information
Cash paid for interest
expense $ 14,130 $ 683 $ 14,672 $ 25,801
Cash paid for income
taxes 1,455 2,620 2,963 30,605
See Notes to Consolidated Financial Statements
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Versatile Systems Inc.
Notes to Consolidated Financial Statements
For the period ended December 31, 2009
(Unaudited - Prepared by Management)
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/T/
1. Consolidated financial statement presentation:
These unaudited interim consolidated financial statements at December 31, 2009 and the consolidated statements
of operations and deficit, comprehensive income (loss) and cash flows for the periods ended December 31, 2009
and 2008, have been prepared in accordance with Canadian generally accepted accounting principles. These
unaudited interim financial statements do not include all the disclosures required for annual audited financial
statements and should be read in conjunction with the Company's annual audited consolidated financial
statements and notes therein for the year ended June 30, 2009.
The results of operations for the period ended December 31, 2009 are not necessarily indicative of the results
for the full year ending June 30, 2010. All amounts herein, including the comparative figures, have been
expressed in United States dollars unless otherwise noted.
The financial statements as at and for the periods ended December 31, 2009 have not been reviewed or audited by
the Company's auditor.
2. Accounting Policies
The accounting policies applied in these interim financial statements are consistent with those applied in the
Annual financial statements.
3. Short term investments
The short term investments consists of 696,869 shares of Equus Total Return, Inc. which is a public company
trading on the NYSE under the symbol EQS.
4. Bank Line of Credit
The Company has a credit line facility for up to $5,800,000, which is limited to 70% of eligible accounts
receivable of certain U.S. subsidiaries from a U.S. based financial institution. At December 31, 2009 this
amounted to $4,415,003. The line of credit bears interest at the prime rate of lending as published in the Wall
Street Journal and is secured with a first charge on the assets of these U.S. subsidiaries.
5. Share Capital
/T/
Authorized
Unlimited common shares without par value
Issued and outstanding
Number
of shares Amount
---------------------------
Issued and outstanding - June 30, 2009 118,285,643 $ 50,583,743
Issued in the current quarter 39,000,000 3,876,257
Less share issue costs (26,291)
---------------------------
Balance - December 31, 2009 157,285,643 $ 54,433,709
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/T/
6. Warrants
/T/
Issued and outstanding:
Exercise Number of
Expiry date Price CDN$ Warrants Cost
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March 31, 2011 $ 0.569 1,411,808 63,309
April 16, 2011 $ 0.6636 583,770 81,058
January 22, 2012 $ 0.30 600,000 42,000
--------------------
Balance - December 31, 2009 2,595,578 186,367
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--------------------
/T/
7. Stock Options
/T/
Weighted
Number of average exercise
Stock Options price CDN$
-------------------------------
Balance - June 30, 2009 9,160,000 $ 0.42
Granted during the period -
Forfeited during the period -
Expired during the period (1,179,000) $ 0.28
-------------------------------
Balance - December 31, 2009 7,981,000 $ 0.44
-------------------------------
/T/
During the current quarter 579,000 stock options expired that had been granted on December 19, 2005.
8. Non Recurring Expenses
During the current quarter the Company recorded an additional provision, primarily for legal costs, for
transactions occurring in prior periods.
9. Income taxes
Canadian GAAP requires a valuation allowance to be recorded against any future tax asset to the extent that it
is more likely than not that the future income tax asset will not be realized. This is also the Company's
stated accounting policy.
Prior to the 2006 fiscal year the Company determined that it had not met this test so the Company recorded a
full valuation allowance against the potential value of all of its tax losses and deductions available to be
taken against future years' income tax returns. As a result there has been no future income tax asset.
During the 2006 fiscal year, the Company determined that the U.S. subsidiaries were generating sufficient
profits that they were more likely than not to utilize the losses and deductions attributable to these U.S.
subsidiaries. Consequently, the Company concluded that the valuation allowance be reduced accordingly. The
difference between the total value of these tax benefits less the valuation allowance is the amount of the
future income tax asset that is recorded by the Company.
The tax effects of temporary differences that give rise to significant portions of future income tax assets and
future income tax liabilities at the statutory enacted rates are as follows:
/T/
December 31, 2009 June 30, 2009
------------------ -------------
(unaudited)
Future income tax assets
Tax losses and deductions $ 8,538,624 $ 8,378,058
Capital assets 1,134,697 1,134,697
Share issuance costs 217,338 217,338
Other 392,741 392,741
-------------------------
Future income tax assets 10,283,400 10,122,834
Valuation allowance (2,951,444) (3,138,444)
-------------------------
Net Future income tax asset 7,331,956 6,984,390
Future income tax liabilities - Goodwill (755,651) (755,651)
-------------------------
Net Future income tax asset 6,576,305 6,228,739
Less current portion (944,843) (944,843)
-------------------------
Non-current portion of net future income
tax asset $ 5,631,462 $ 5,283,896
-------------------------
/T/
During the three months ended December 31, 2009 the Company recorded a future income tax benefit of $347,566
(2008 - $307,255) related to the recognition of future income tax assets.
10. Segmented Information
The Company's only reportable segment is the development and sales of computer software, hardware and system
integration services.
The Company's assets and sales by geographic area are as follows:
/T/
Three months ended
December 31 June 30 December 31
2009 2009 2009 2008
--------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Capital assets, Capital assets,
intangible assets intangible assets
and goodwill and goodwill Revenue Revenue
U.S.
companies
United
States $ 10,858,409 $ 11,104,620 $ 10,949,663 $ 12,000,473
Canada 138,802 55,909
Netherlands 16,579 -
France 32,390 173,180
United
Kingdom 16,884 20,225
Other 32,906 -
UK and
Canadian
companies
United
Kingdom 4,694 3,950 72,068 77,277
Canada 838 2,046 - -
--------------------------------------------------------------
10,863,941 11,110,616 11,259,292 12,327,064
--------------------------------------------------------------
--------------------------------------------------------------
/T/
During the three months ended December 31, 2009 the Company generated revenue of $1,804,020 from Comcast Cable
representing 16.0% of the revenue for that period. During the three months ended December 31, 2008 the Company
did not have a customer with more than 10% of the total revenue.
During the three months ended December 31, 2009 the Company purchased products and services from one vendor for
$3,551,944 (2008 - $5,112,104) representing 41.0% (2008 - 55.0%) of the cost of sales.
/T/
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Versatile Systems Inc.
Management Discussion and Analysis
Six months ended December 31, 2009
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/T/
The following management discussion and analysis of the consolidated results of operations and financial
condition of Versatile Systems Inc. (the "Company" or "Versatile") is made as of January 22, 2010 on the
consolidated financial statements and notes for the six months ended December 31, 2009.
The consolidated financial statements of the Company have been prepared in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP") and are stated in United States dollars unless otherwise
specified. The consolidated financial statements and management discussion and analysis have been reviewed and
approved by the Company's Audit Committee as directed by the Company's Board of Directors.
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates
and assumptions, which affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those estimates.
Forward-Looking Statements
This document may contain forward-looking statements relating to Versatile's operations or to the environment
in which it operates, which are based on Versatile's operations, estimates, forecasts and projections. These
statements are not guarantees of future performance and involve risks and uncertainties that are difficult to
predict or are beyond Versatile's control. A number of important factors including those set forth in other
public filings could cause actual outcomes and results to differ materially from those expressed in these
forward looking statements. Consequently readers should not place any undue reliance on such forward-looking
statements. In addition, these forward looking statements relate to the date on which they are made. Versatile
disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
Non-GAAP Disclosure
EBITDA is defined by the Company as net earnings before interest, income taxes, depreciation and amortization.
The Company has included information concerning EBITDA because it believes that it may be used by certain
investors as one measure of the Company's financial performance. EBITDA is not a measure of financial
performance under Canadian GAAP and is not necessarily comparable to similarly titled measures used by other
companies. EBITDA should not be construed as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with Canadian GAAP) as a measure of liquidity.
In addition, the Company has included information concerning its cash flow from operations before the net
change in non-cash working capital items as it may be used by certain investors as a measure of the Company's
financial performance.
Overview
The Company's core business is developing solutions that solve customers' problems in the storage, security,
transmission and collection of mission critical data. The Company's proprietary software applications, the
Mobiquity(TM) Solution Suite, are a key component of this solution. This enables companies to improve the
sales, marketing and distribution of their products. The Company delivers wireless/wired solutions to the
consumer packaged goods, retail, financial, pharmaceutical, healthcare, and logistics verticals through an
integrated combination of licensed software, professional services, and the re-sale of mobile-computing devices
and related hardware. The Company also offers maintenance and support via a 24 hour call centre.
Highlights of the Second quarter
Highlights of the Company's operations for the quarter included:
/T/
=- Cash and cash equivalents and short term investments at December 31,
2009 was $6,096,258 compared to $2,002,530 at June 30, 2009, an increase
of $4,093,728. The short term investments consists of 696,869 shares of
Equus Total Return, Inc. which is a public company trading on the NYSE
under the symbol EQS;
=- Revenue for the three months ended December 31, 2009 was $11,259,292
compared to $12,327,064 for the same quarter last year, a decrease of
$1,067,772;
=- Deferred revenue at December 31, 2009 was $7,512,605 (of which
$6,641,170 is expected to be recognized in the next four quarters)
compared to $7,986,465 for the same quarter last year;
=- EBITDA loss for the quarter was $268,531 compared to an EBITDA loss of
$645,947 for the same quarter last year;
=- Net Loss for the quarter amounted to $80,661 ($0.00 per share) compared
to a Net Loss of $533,171 ($0.00 per share) for the same period last
year, an improvement of $452,510;
=- Research and development expense for the quarter amounted to $247,084
compared to $391,088 for the same quarter last year;
=- Non-brokered private placement with the issuance of 39,000,000 shares
for gross proceeds of $3,876,257;
=- The Company generated revenue of $1,804,020 from Comcast, $672,579 from
Tyco, $491,783 from Hershey, $463,343 from Urban Outfitters and $347,057
from Motorola; and
=- The Company increased its position to 696,869 shares of Equus Total
Return, Inc. (NYSE:EQS).
/T/
Review of the Second quarter
Revenue for the three months ended December 31, 2009 was $11,259,292 compared to $12,327,064 for the same
quarter last year, a decrease of $1,067,772. During the current quarter the Company generated revenue of
$1,804,020 from Comcast, $672,579 from Tyco, $491,783 from Hershey, $463,343 from Urban Outfitters and $347,057
from Motorola. While the Company had repeat business from its existing customer base including Comcast, Tyco,
Motorola, PASAP Software, Hershey, Thermo Fisher, and various retailers, universities and government
organizations, the Company has been impacted by the overall macro-economic environment and continued to
experience a slowdown in orders from customers for routine expenditures on infrastructure.
The EBITDA loss for the quarter was $268,531 compared to an EBITDA loss of $645,947 for the same quarter last
year.
During the current quarter the Company recorded a Non-recurring expense consisting of an additional provision
of $28,219 (2008 - $372,177) primarily for legal costs, for transactions occurring in prior periods.
During the quarter the Company recorded a future income tax benefit of $347,566 compared to $307,255 for the
same quarter last year.
The Net Loss for the quarter amounted to $80,661 ($0.00 per share) compared to a Net Loss of $533,171 ($0.00
per share) for the same period last year, an improvement of $452,510.
Cost of sales
Cost of sales for the quarter amounted to $8,599,212 resulting in a gross profit of $2,660,080 or 23.6% of
sales as compared to $9,287,669 resulting in a gross profit of $3,039,395 or 24.7% of sales for the same
quarter last year.
The Company determines its provision for inventory obsolescence based upon historical experience, expected
inventory turnover, inventory aging and current condition, and current and future expectations with respect to
product offerings. Assumptions underlying the provision for inventory obsolescence include future sales trends
and product offerings, and the expected inventory requirements and inventory composition necessary to support
these future sales and offerings. The estimate of the Company's provision for inventory obsolescence could
materially change from period to period due to changes in product offerings and consumer acceptance of those
products. At December 31, 2009 the Company had an inventory provision of $169,817 (June 30, 2009 - $172,569).
General and administrative
General and administrative expenses for the quarter amounted to $1,100,145 compared to $1,278,420 for the same
quarter last year, a decrease of $178,275. As a percentage of sales the general and administrative expenses
were 9.8% in the quarter compared to 10.4% in the same quarter last year.
Technology Investment
Over the past ten years the Company has made a significant investment in the form of expenses to advance the
abilities of its technology and resulting service offering. This investment does not contribute directly to
revenues during the period that the research and development expenses are incurred.
Research and development expense for the quarter amounted to $247,084 compared to $391,088 for the same quarter
last year. The significant expense item in this category is salary and benefit costs. As a percentage of sales
the research and development expenses are 2.2% in the quarter compared to 3.2% in the same quarter last year.
The decrease in the overall expenditures on research and development expense can be attributed to the reduction
in the number of research and development projects.
During the current quarter the Company's technology investment related to enhanced product functionality and
requirements from various partners:
For the Mobiquity Route(TM) these included the following:
/T/
=- Researching iPhone development tools for Mobiquity Route(TM); and
=- Researching SQL Reporting to enhance future development of Mobiquity
Route(TM)
/T/
For the Mobiquity Transaction Engine 3.0(TM)these included the following:
/T/
=- Completing the design and implementation of adaptors to support the
latest wi-fi temperature monitors;
=- Enhancing the functionality and accuracy of wi-fi real time location
services data processing;
=- Enhancing the functionality available through the Motorola UCA server
and CA50 device; and
=- Implementing object-level security throughout the system.
/T/
For the Mobiquity Kiosk(TM), these included the following:
/T/
=- Enhancing the printing capabilities for the Mobiquity Kiosk(TM),
including PDF printing, barcode printing, and multi printer support for
thin client environments;
=- Completing the initial platform and application designs to support
multi-seated Mobiquity Kiosk(TM)environments. A multi-seated environment
will allow two independent self-service applications (with interfaces on
separate touch displays) to run simultaneously off of a single Mobiquity
Kiosk(TM)computing device;
=- Improving the content management delivery system to provide enhanced
capabilities allowing customers to self-manage application images,
screen text, coupons and receipts;
=- Researching integration with a mail marketing company to deliver instant
marketing capabilities with the Mobiquity Kiosk(TM). This functionality
benefits the Mobiquity Kiosk(TM) owner by driving traffic to their
location through registration code and bar code marketing delivered to
customers via direct mailers;
=- Enhancing the Mobiquity Kiosk(TM)administration engine, allowing for the
streamlining and consolidation of health reporting in conjunction with
bank related transaction reporting; and
=- Improving the audio subsystem on the Mobiquity Kiosk(TM), allowing for
quicker response times between touch screen interaction and audio
output.
/T/
During the current period, the Company incurred $104,619 for research and development activities related to
Mobiquity Route(TM) and related mobile software products.
During the current period, the Company incurred $109,717 for research and development activities related to
Mobiquity Transaction Engine 3.0(TM), Mobiquity Kiosk(TM) and research on Virtualization.
Selling and marketing expenses
Selling and marketing expense for the quarter amounted to $1,619,075 compared to $1,717,311 for the same
quarter last year, a decrease of $98,236. Selling and marketing expenses includes salaries, commissions,
advertising, trade shows and promotion costs to support the various sales initiatives. As a percentage of sales
the selling and marketing expenses are 14.4% in the quarter compared to 13.9% in the same quarter last year. As
a percentage of gross profit the selling and marketing expenses were 60.9% in the quarter compared to 56.9% in
the same quarter last year. There were no significant changes in the selling and marketing activities during
the quarter.
Future Income Tax Benefits
Canadian GAAP requires a valuation allowance to be recorded against any future tax asset to the extent that it
is more likely than not that the future income tax asset will not be realized.
Prior to the 2006 fiscal year, the Company determined that it had not met this test so the Company recorded a
full valuation allowance against the potential value of all of its tax losses and deductions available to be
taken against future years' taxable income. As a result, future income tax assets were fully provided for.
During the 2006 fiscal year, the Company determined that the U.S. subsidiaries were generating sufficient
profits such that they were more likely than not to utilize the losses and deductions attributable to these
U.S. subsidiaries. Consequently, the Company concluded that the valuation allowance be reduced accordingly. The
difference between the total value of these tax benefits less the valuation allowance is the amount of the
future income tax asset that is recorded by the Company.
For the three months ended December 31, 2009 the Company recorded a future income tax benefit of $347,566
compared to $307,255 for the same quarter last year.
To the extent that the Company expects to generate sufficient profits in the following fiscal period, that
portion of the Future income tax benefits have been classified as current.
Amortization
The amortization of capital assets and intangible assets for the quarter amounted to $170,862 (December 31,
2008 - $178,081) including amortization of $17,900 included in cost of sales for Kiosks deployed pursuant to
various subscription agreements.
Foreign Exchange Gain
The foreign exchange gain for the quarter amounted to $89,154 compared to a foreign exchange gain of $76,407
for the same quarter last year. The gain was primarily due to the fluctuation in the U.S. dollar against the
Canadian dollar in the quarter.
Review of the operations for the six months ended December 31, 2009
Revenue for the six months ended December 31, 2009 was $22,875,517 generating a gross profit of $5,315,384 or
23.2% of sales compared to $26,630,915 generating a gross profit of $6,792,495 or 25.5% of sales for the same
period last year. The EBITDA loss for the period was $152,736 compared to $393,375 for the same period last
year. The Net Loss for the period amounted to $127,436 ($0.00 per share) compared to $476,556 ($0.00 per share)
for the same period last year.
Cost of sales
Cost of sales for the six months ended December 31, 2009 amounted to $17,560,133 resulting in a gross profit of
$5,315,384 or 23.2% of sales as compared to $19,838,420 resulting in a gross profit of $6,792,495 or 25.5% of
sales for the same period last year.
General and administrative
General and administrative expenses for the six months ended December 31, 2009 amounted to $1,974,493 compared
to $2,601,480 for the same period last year.
Technology Investment
Research and development expense for the six months ended December 31, 2009 amounted to $493,754 compared to
$815,840 for the same period last year. The significant expense item in this category is salary and benefit
costs. As a percentage of sales the research and development expenses are 2.2% compared to 3.1% in the same
period last year.
Selling and marketing expenses
Selling and marketing expense for the six months ended December 31, 2009 amounted to $2,980,776 compared to
$3,487,136 for the same period last year.
Amortization
The amortization of capital assets and intangible assets for the six months ended December 31, 2009 amounted to
$348,987 (December 31, 2008 - $344,983).
Foreign exchange gain
The foreign exchange gain for the six months ended December 31, 2009 was $74,612 compared to $96,759 for the
same period last year.
Summary of Quarterly Results
The table below provides a summary of certain selected unaudited financial information from the Consolidated
Statements of Operations for the most recent eight fiscal quarters comprising the Company's preceding two
years:
/T/
Q3 2008 Q4 2008 Q1 2009 Q2 2009
Mar 08 Jun 08 Sept 08 Dec 08
-------------------------------------------
Revenue 14,519,869 13,721,812 14,303,851 12,327,064
Cost of Sales 11,094,832 10,180,648 10,550,751 9,287,669
-------------------------------------------
Gross Profit 3,425,037 3,541,164 3,753,100 3,039,395
-------------------------------------------
Expenses:
General and administrative 1,219,904 1,530,733 1,302,708 1,202,013
(including foreign exchange)
Non recurring expenses - - - 372,177
Research and Development 397,591 448,260 424,752 391,088
Selling and Marketing 1,746,710 1,470,184 1,769,825 1,717,311
Stock-based compensation 56,587 (63,219) 3,243 2,753
-------------------------------------------
3,420,792 3,385,958 3,500,528 3,685,342
-------------------------------------------
Earnings (loss) before interest
taxes and amortization 4,245 155,206 252,572 (645,947)
Amortization (261,951) (193,655) (160,574) (178,081)
Interest 90,375 (167) (29,088) (354)
Gain on sale of investments
Income taxes 99,709 (323,427) (6,295) 291,211
-------------------------------------------
-------------------------------------------
Net Earnings (loss) (67,622) (362,043) 56,615 (533,171)
-------------------------------------------
-------------------------------------------
Per share, basic and diluted (0.00) (0.00) 0.00 (0.00)
-------------------------------------------
Q3 2009 Q4 2009 Q1 2010 Q2 2010
Mar 09 Jun 09 Sept 09 Dec 09
-------------------------------------------
Revenue 10,877,354 11,609,822 11,616,225 11,259,292
Cost of Sales 8,553,367 8,614,785 8,960,921 8,599,212
-------------------------------------------
Gross Profit 2,323,987 2,995,037 2,655,304 2,660,080
-------------------------------------------
Expenses:
General and administrative 898,936 987,696 888,890 1,010,991
(including foreign exchange)
Non recurring expenses 160,158 (110,823) 19,860 28,219
Research and Development 278,701 186,568 246,670 247,084
Selling and Marketing 1,515,711 1,685,829 1,361,701 1,619,075
Stock-based compensation 2,696 12,719 22,388 23,242
-------------------------------------------
2,856,202 2,761,989 2,539,509 2,928,611
-------------------------------------------
Earnings (loss) before interest
taxes and amortization (532,215) 233,048 115,795 (268,531)
Amortization (182,273) (124,066) (157,298) (152,962)
Interest 1,648 (5,520) (3,769) (10,441)
Gain on sale of investments 4,952
Income taxes 139,885 279,930 (1,503) 346,321
-------------------------------------------
-------------------------------------------
Net Earnings (loss) (572,955) 383,392 (46,775) (80,661)
-------------------------------------------
-------------------------------------------
Per share, basic and diluted (0.00) 0.00 (0.00) (0.00)
-------------------------------------------
/T/
The Company's revenues and earnings fluctuate from quarter to quarter. A number of factors can cause such
fluctuations, including the timing of substantial orders, the timing of releases of new products, timing of the
deployment of solutions and delays by customers. Because the Company's operating expenses are determined based
on anticipated sales, are generally fixed and are incurred throughout each fiscal quarter, any of the factors
listed above can cause significant variations in the Company's revenues and earnings in any given quarter.
Thus, the Company's quarterly results are not necessarily indicative of the Company's overall business, results
of operations and financial condition.
Over the past three years the Company has improved its financial position while maintaining selling, marketing,
general and administration expenses at relatively the same level as revenue.
On January 22, 2009 the Company announced that it had reduced its workforce, focused research and development
activities on core products, and redeployed research and development staff to the professional services group
resulting in estimated annual savings of approximately $1,670,000. Since that time the Company has made further
reductions in its workforce and other cost reductions bringing the total estimated annual savings to
approximately $2.5 million.
Financial position
The working capital as of December 31, 2009 was $6,148,754, an increase of $3,578,333 compared to the working
capital of $2,570,421 at June 30, 2009.
Cash and cash equivalents and short term investments at December 31, 2009 was $6,096,258 compared to $2,002,530
at June 30, 2009, an increase of $4,093,728.
The cash flow used in operations, before non-cash working capital items amounted to $277,284 for the three
months ended December 31, 2009 compared to cash flow used in operations of $631,679 for the same period last
year, an improvement of $354,395.
The Company has a credit line facility of $5,800,000, which is limited to 70% of eligible accounts receivable
of certain U.S. subsidiaries from a U.S. based financial institution. The line of credit bears interest at the
prime rate of lending as published in the Wall Street Journal and is secured with a first charge on the assets
of VAC, VSI and POI. At December 31, 2009 the line of credit was $2,558,445 (June 30, 2009 - Nil).
The amount that may be advanced under the credit line is limited to 70% of eligible accounts receivable of VAC,
POI and VSI less than 90 days from the invoice date. At December 31, 2009 this amounted to $4,415,003. At
December 31, 2009 the financial covenants for these companies include the requirement of a minimum Tangible Net
worth of $4,800,000. The companies met this test.
Included in accounts payable and accrued liabilities is $2,866,659 owing to a major supplier.
Investment in Equus
The short term investments consists of 696,869 shares of Equus Total Return, Inc. which is a public company
trading on the NYSE under the symbol EQS.
On October 5, 2009 the Company filed a Schedule 13D with the U.S. Securities and Exchange Commission.
Versatile purchased the shares of Common Stock of EQS based on Versatile's belief that the Common Stock at
current market prices are undervalued and represent an attractive investment opportunity. Depending upon
overall market and general economic conditions, other investment opportunities available to Versatile, the
market prices of the shares of EQS, the business affairs and financial condition of EQS, Versatile may endeavor
to increase or decrease their position in EQS through, among other things, the purchase or sale of shares of
EQS in the open market or in private transactions, including the purchase of shares through a tender offer or
otherwise, on such terms and at such times as Versatile may deem advisable.
Capital Expenditures
During the three months ended December 31, 2009 the majority of the capital expenditures of $21,414 relate to
the costs of Kiosks that have been deployed under various subscription agreements.
Share Capital
As of January 22, 2010 the Company had 157,285,643 common shares issued and outstanding.
Stock Options
The Company can grant up to 10% of the issued shares pursuant to its stock option plan.
/T/
Weighted
Number of average exercise
shares price CDN$
=--------------------------------------------------------------
Outstanding - June 30, 2009 9,160,000 0.42
Granted -
Forfeited -
Expired (1,179,000) 0.28
Exercised - -
-----------------------------
Outstanding - December 31, 2009 7,981,000 0.44
-----------------------------
/T/
For the three months ended December 31, 2009, the Company recognized $23,242 (2008 - $2,753) in stock-based
compensation, a non-cash item, for vesting of stock options granted to employees, consultants, directors and
officers of the Company in prior years.
Warrants
The details of the outstanding warrants at December 31, 2009 are as follows:
/T/
Exercise Number of
Expiry date Price CDN$ Warrants Cost
=-------------------------------------------------
March 31, 2011 $ 0.569 1,411,808 63,309
April 16, 2011 $ 0.6636 583,770 81,058
January 22, 2012 $ 0.30 600,000 42,000
------------------
Balance 2,595,578 186,367
------------------
------------------
/T/
Related Party Transactions
During the current quarter, the Company paid consulting fees and salaries, which are included in the general
and administration expense, of $178,753 (2008 - $163,970) to Directors and Officers of the Company.
Risk Factors
The securities of the Company should be considered a highly speculative investment and investors should
carefully consider all of the information disclosed in this Management Discussion & Analysis prior to making an
investment in the Company. In addition to the other information presented in this Management Discussion &
Analysis, the following risk factors should be given special consideration when evaluating an investment in the
Company's securities.
Operating History
The Company's predecessor company commenced operations in March 1987 to distribute and sell Maximizer products
in European countries, as well as provide consulting services and Customer Relationship Management ("CRM")
solutions to companies. In January 1997, the Company changed its focus to research and development of CRM
software. The Company purchased Versatile Mobile Systems on September 19, 2000, Perfect Order, Inc. and
Versatile Systems, Inc. on April 26, 2005 and Sagent Solutions on December 28, 2007. The Company may face many
of the risks and uncertainties encountered by early-stage companies in rapidly evolving markets.
History of Losses
The Company had a history of losses up to September 30, 2005 and has an accumulated deficit of $35.9 million to
December 31, 2009. Although the Company has decreased its operating expenses and increased its revenues over
the past three years the Company cannot be assured that it can consistently maintain profitable operations.
No Certainty of Future Profitability
The Company's product revenues are not predictable with any significant degree of certainty and future product
revenues may differ from historical patterns. If customers cancel or delay orders, it can have a material
adverse impact on the Company's revenues and results of operations from quarter to quarter. Because the
Company's results of operations may fluctuate from quarter to quarter, investors should not assume that results
of operations in future periods can be predicted based on results of operations in past periods.
Even though the Company's revenues are difficult to predict, the Company's expense levels are based in part on
future revenue projections. Many of the Company's expenses are fixed and, accordingly, the Company cannot
quickly reduce spending if revenues are lower than expected.
Competitive Market
The market for the Company's software is intensely competitive, fragmented and rapidly changing. Some of the
Company's actual and potential competitors are larger, established companies that have greater technical,
financial and marketing resources. In addition, as the Company develops new products, particularly applications
focused on electronic commerce or specific industries, it may begin competing with companies with whom it has
not previously competed. It is also possible that new competitors will enter the market or that the Company's
competitors will form alliances that may enable them to rapidly increase market share.
Increased competition may result in price reductions, lower gross margins or loss of the Company's market
share, any of which could materially adversely affect its business, financial condition and operating results.
Technological Change
The market for the Company's solutions is characterized by rapidly changing technology and evolving industry
standards. The market is affected by changes in end user requirements and frequent new product introductions
and enhancements. The Company's products embody complex technology and may not always be compatible with
current and evolving technical standards and products, developed by others. Failure or delays by the Company to
meet or comply with the requisite and evolving industry or user standards could have a material adverse effect
on the Company's business, results of operations and financial condition. The Company's ability to anticipate
changes in technology, technical standards and product offerings will be a significant factor in the Company's
ability to compete. There can be no assurance that the Company will be successful in identifying, developing,
manufacturing and marketing products that will respond to technological change, evolving standards or
individual wireless communications service provider standards or requirements. The Company's business will be
adversely affected if the Company incurs delays in developing new products or enhancements or if such products
or enhancements do not gain market acceptance. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's products or technologies non-competitive or
obsolete.
Limited Sales and Support Infrastructure
The Company's future revenue growth will depend in large part on its ability to successfully expand its direct
sales force and its customer support capability. The Company may not be able to successfully manage the
expansion of these functions or to recruit and train additional direct sales, consulting and customer support
personnel.
If the Company is unable to hire and retain additional highly skilled direct sales personnel, it may not be
able to increase its license revenue to the extent necessary to achieve profitability. If the Company is unable
to hire highly trained consulting and customer support personnel, it may be unable to meet customer demands.
The Company is unlikely to be able to increase its revenues as planned if it fails to expand its direct sales
force or its consulting and customer support staff. Even if the Company is successful in expanding its direct
sales force and customer support capability, the expansion may not result in revenue growth.
Dependence on Business Alliances
A key element of the Company's business strategy is the formation of corporate alliances with leading
companies. The Company is currently investing and plans to continue to invest significant resources to develop
these relationships. The Company believes that its success in penetrating new markets for its products will
depend in part on its ability to maintain these relationships and to cultivate additional or alternative
relationships. There can be no assurance that the Company will be able to develop additional corporate
alliances with such companies, that existing relationships will continue or be successful in achieving their
purposes or that such companies will not form competing arrangements.
Dependence on Key Personnel
The Company's success depends largely upon the continued service of its executive officers and other key
management, sales and marketing and technical personnel. The loss of the services of one or more of the
Company's executive officers or other key employees could have a material adverse effect on its business,
results of operations or financial condition.
The Company's future success also depends on its ability to attract and retain highly qualified personnel. The
competition for qualified personnel in the computer software and Internet markets is intense, and the Company
may be unable to attract or retain highly qualified personnel in the future. In addition, due to intense
competition for qualified employees, it may be necessary for the Company to increase the level of compensation
paid to existing and new employees to the degree that operating expenses could be materially increased.
Management of Growth
The Company expects to experience a period of significant growth in the number of personnel that will place a
strain upon its management systems and resources. The Company's future will depend in part on the ability of
its officers and other key employees to implement and improve its financial and management controls, reporting
systems and procedures on a timely basis and to expand, train and manage its employee workforce. There can be
no assurance that the Company will be able to effectively manage such growth. The Company's failure to do so
could have a material adverse effect upon the Company's business, prospects, results of operation and financial
condition.
Integration of Newly Acquired Businesses or Technology
The Company may expand its operations through acquisitions of additional businesses or technology. There can be
no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or
technology or successfully integrate acquired businesses or technology into the Company without substantial
expense, delay or other operational or financial problems. Further, acquisitions may involve a number of
additional risks, including diversion of management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances, legal liabilities and amortization of acquired intangible assets, some
or all of which could have a material adverse effect on the Company's business, financial condition and results
of operation. In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated
revenues and earnings. The failure of the Company to manage its acquisition strategy successfully could have a
material adverse effect on the Company's business, financial condition and results of operation.
Potential Fluctuations in Quarterly Financial Results
The Company's quarterly financial results may be affected by the timing of new releases of its products and/or
substantial customer orders. The Company's operating expenses are based on anticipated revenue levels in the
short term, are relatively fixed, and are incurred throughout the quarter. As a result, if expected revenues
are not realized on a timely basis as anticipated, the Company's financial results could be materially and
adversely affected. These or other factors, including possible delays in the shipment of new products, may
influence quarterly financial results in the future. Accordingly, there may be significant variation in the
Company's quarterly financial results.
International Sales
Sales outside of the United States currently represent less than 10% of the Company's total gross revenues. The
Company believes that its continued growth and profitability will require additional expansion of its sales in
international markets. To the extent that the Company is unable to expand international sales in a timely and
cost effective manner, the Company's business, results of operations and financial condition could be
materially and adversely affected. In addition, even with the successful recruitment of additional personnel
and international resellers, there can be no assurance that the Company will be successful in maintaining or
increasing international market demand for the Company's products.
Currency Exchange Rate Risk
The Company's results have been stated into U.S. dollars as a substantial portion of the Company's revenues and
a material portion of its expenses are denominated in US dollars.
Dependence on Proprietary Technology and Limited Patent and Trademark Protection
The Company relies on a combination of copyright and trademark laws, trade secret, confidentiality procedures
and contractual provisions to protect its proprietary rights. Unauthorized parties may attempt to copy aspects
of the Company's products or obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's product is difficult, time-consuming and costly as is the pursuing of patents
in each jurisdiction in which the Company carries on business. Although the Company is unable to determine the
extent to which piracy of its software product exists, software piracy is a possibility. In addition, the laws
of certain countries in which the Company's products may be licensed do not protect its product and
intellectual property rights to the same extent as the laws do in Canada or the United States. There is no
assurance that the Company's means of protecting its proprietary rights will be adequate or the Company's
competitors will not independently develop similar technology, the effect of either of which may be materially
adverse to the Company's business, results of operations and financial condition.
Risk of Third Party Claims for Infringement
The Company is not aware that its product infringes the proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim such infringement by the Company or its licensees with
respect to current or future products. The Company expects that software product developers will increasingly
be subject to such claims as the number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to the
Company. Any of the foregoing could have a materially adverse effect on the Company's business, results of
operations and financial condition.
Lengthy Sales and Implementation Cycle
The adoption of the Company's product generally involves a significant commitment of resources by potential
customers. As a result, the Company's sales process is often subject to delays associated with lengthy approval
processes by potential customers. For these and other reasons, the sales cycle associated with the license of
the Company's product varies substantially from customer to customer and typically lasts between 6 to 12 months
during which time the Company may devote significant time and resources to a prospective customer, including
costs associated with multiple site visits, product demonstrations and feasibility studies, and experience a
number of significant delays over which the Company has no control. Any significant or ongoing failure by the
Company to ultimately achieve such sales could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, following license sales, the implementation period
is expected to involve a time period for customer training and integration with the customer's existing
systems. A successful implementation program requires a close working relationship between the Company, the
customer and, generally, third party consultants and system integrators who assist in the process. There can be
no assurance that delays or difficulties in the implementation process for any given customer will not have a
material adverse effect on the Company's business, results of operations and financial condition.
Risk of System Defects
System development involves the integration of the Company's proprietary software and software of others into
the customer's operating systems. There can be no assurance that defects and errors will not be found in the
Company's product when integrated with other products or systems. Any such defects and errors could result in
adverse customer reactions, negative publicity regarding the Company and its product or damages. Consequently,
there could be a material adverse effect on the Company's business, results of operations and financial
condition.
Requirements for New Capital
As a growing business, the Company typically needs more capital than it has available to it or can expect to
generate through the sale of its products. In the past, the Company has had to raise, by way of debt and equity
financing, considerable funds to meet its capital needs. There is no guarantee that the Company will be able to
continue to raise funds needed for its business. Failure to raise the necessary funds in a timely fashion will
limit the Company's growth.
Critical Accounting Estimates
General
Unless otherwise specified in the discussion of the specific critical accounting estimates, the Company is not
aware of trends, commitments, events, or uncertainties that it reasonably expects to materially affect the
methodology or assumptions associated with the critical accounting estimates, subject to the circumstances
identified above.
Changes are made to assumptions underlying all critical accounting estimates to reflect current economic
conditions and updating of historical information used to develop the assumptions, where applicable. Unless
otherwise specified in the discussion of the specific critical accounting estimates, it is expected that no
material changes in overall financial performance and financial statement line items would arise either from
reasonably likely changes in material assumptions underlying the estimate or within a valid range of estimates,
from which the recorded estimate was selected.
All critical accounting estimates are uncertain at the time of making the estimate.
Accounts Receivable
Allowance for doubtful accounts
The Company considers the business area that gives rise to the accounts receivable, maintains procedures for
granting credit terms on sales transactions and performs specific account identification when determining its
allowance for doubtful accounts. This accounting estimate is in respect of the accounts receivable line item on
the Company's consolidated balance sheet comprising approximately 20% of total assets as at December 31, 2009.
In the event the future results were to adversely differ from management's best estimate of the allowance for
doubtful accounts, the Company could experience a bad debt charge in the future. Such a bad debt charge would
not result in a cash outflow.
The estimate of the Company's allowance for doubtful accounts could materially change from period to period due
to the allowance being a function of the balance and composition of accounts receivable, which can vary on a
month-to-month basis. The variance in the balance of accounts receivable can arise from a variance in the
amount and composition of operating revenues and from variances in accounts receivable collection performance.
Inventories
Provision for inventory obsolescence
The Company determines its provision for inventory obsolescence based upon historical experience, expected
inventory turnover, inventory aging and current condition, and current and future expectations with respect to
product offerings.
Assumptions underlying the provision for inventory obsolescence include the activity levels over previous
fiscal years, and the expected inventory requirements and inventory composition necessary to support these
future sales and offerings. The estimate of the Company's provision for inventory obsolescence could materially
change from period to period due to changes in product offerings and consumer acceptance of those products.
This accounting estimate is in respect of the inventory line item on the Company's consolidated balance sheet
comprising approximately 4% of total assets as at December 31, 2009. If the provision for inventory
obsolescence was inadequate, the Company could experience a charge to direct cost of sales in the future. Such
an inventory obsolescence charge would not result in a cash outflow.
Long-Lived Assets
The accounting estimates for long-lived assets that include capital assets, purchased technology, intellectual
property, customer contracts and licenses, in aggregate, represent approximately 2% of the Company's total
assets as at December 31, 2009, presented in its consolidated balance sheet. If the Company's estimated useful
lives of assets were different as a result of changes in facts and circumstances, the Company could experience
increased or decreased charges for amortization and the Company could potentially experience future material
impairment charges in respect of its recovery of long-lived assets.
The estimated useful lives of capital assets are determined by a continuing program of asset life studies. The
recoverability of capital assets is significantly impacted by the estimated useful lives. Assumptions
underlying the estimated useful lives of capital assets include timing of technological obsolescence,
competitive pressures and future infrastructure utilization plans. In the event management's best estimate of
the useful lives of capital assets was adversely affected, the Company could potentially experience a charge to
amortization expense in the future. Such a charge to amortization would not result in a cash outflow.
Purchased Technology
The recoverability of the Company's investment in purchased technology is determined by an ongoing analysis of
the economic benefits attributed to the purchased technology. The Company estimates the future economic
benefits attributed to the purchased technology and compares the results with the net book value of the asset.
Assumptions underlying the estimated future economic benefits of purchased technology costs include future
sales trends, product offerings, timing of technological obsolescence, competitive pressures and consumer
acceptance of product offerings. If management's best estimate of the future economic benefits of purchased
technology costs was adversely affected, the Company could potentially experience a charge to amortization
expense in the future. Such a charge to amortization would not result in a cash outflow.
Customer Contracts
The recoverability of the Company's investment in customer contracts is determined by an ongoing analysis of
the economic benefits attributed to the customer contracts in place at the date of the acquisition. The Company
estimates the future economic benefits attributed to the customer contracts and compares the results with the
net book value of the asset. Assumptions underlying the estimated future economic benefits of customer
contracts include future sales trends, product offerings, timing of technological obsolescence, competitive
pressures and consumer acceptance of product offerings. If management's best estimate of the future economic
benefits of customer contracts was adversely affected, the Company could potentially experience a charge to
amortization expense in the future. Such a charge to amortization would not result in a cash outflow.
Future Income Tax Benefits
The amount recorded for Future Income Tax Benefits represents approximately 17% of the Company's assets as at
December 31, 2009, presented in its consolidated balance sheet. If the Company determines that the valuation
allowances relating to the loss carry forwards and tax deductions should be increased, the Company could
experience a reduction in the recorded future income tax benefits.
Goodwill
The accounting estimates for goodwill represents approximately 26% of the Company's total assets as at December
31, 2009, presented in its consolidated balance sheet. If the Company's estimated fair value were incorrect,
the Company could experience increased or decreased charges for changes to the estimated fair value in the
future. If the future were to adversely differ from management's best estimate to recover the Company's
investments in its goodwill, the Company could potentially experience future material impairment losses in
respect of its goodwill. The impairment losses would be recognized and presented as a separate line item in the
consolidated statements of loss and deficit. Impairment losses to goodwill would not result in a cash outflow.
Changes in accounting policies
The Company retroactively adopted, on July 1, 2008, the following new Handbook sections issued by the CICA:
(i) General standards on financial statement presentation
In June 2007, the CICA amended Section 1400, General Standards on Financial Statement Presentation. The new
section is applicable to financial statements relating to fiscal years beginning on or after January 1, 2008.
The amended section includes requirements to assess and disclose a company's ability to continue as a going
concern.
(ii) Inventories
The Company adopted the recommendations of CICA Handbook Section 3031 on inventories which provides guidance on
the determination of cost of inventories and its subsequent recognition as an expense, and includes additional
disclosure requirements. The new section also requires the Company to account for the reversal of write-downs
previously recognized when there is a subsequent increase in the value of inventories. This accounting policy
was applied retroactively; the retroactive application did not have an impact on the comparative financial
statements presented. There was no effect as of September 30, 2009 or for the year then ended.
(iii) Financial instrument disclosures
On July 1, 2008, the Company adopted three new CICA Handbook sections: Section 1535, Capital Disclosures;
Section 3862, Financial Instruments - Disclosures; and Section 3863, Financial Instruments - Presentation.
Prior year financial statements have not been restated. These sections relate to disclosure and presentation
only and have no impact on the consolidated financial results.
Section 1535 requires disclosure of an entity's objectives, policies, and processes for managing capital;
information about what the entity regards as capital; whether the Company has complied with any external
capital requirements; and the consequences of not complying with these capital requirements.
Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation.
Section 3863 carries forward unchanged the presentation requirements of Section 3861 while Section 3862
requires enhanced financial instrument disclosures focusing on disclosures related to the nature and extent of
risks arising from financial instruments and how the entity manages those risks.
The following is an overview of accounting standard changes that the Company will be required to adopt in
future periods:
(i) Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, replacing Section 3062,
Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. The new section will be
applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly,
the Company will adopt the new standards for its fiscal year beginning July 1, 2009. This section establishes
standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit-oriented enterprises. In February 2007, the CICA amended Section
1000, Financial Statement Concepts, to clarify the criteria for the recognition of an asset. The amended
section is applicable to all entities and is effective for interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for
its fiscal year beginning July 1, 2009.
Key International Financial Reporting Standards (IFRS) conversion dates
According to dates set out by the AcSB, the Company will be required to changeover to IFRS on July 1, 2010 and
begin publicly reporting under IFRS in the fiscal year ending June 30, 2012. Because of the need to present
comparative financial information, the Company will need to create its first IFRS compliant balance sheet as at
July 1, 2010. For the fiscal year ending June 30, 2011, the Company will need to prepare information for
financial statements and note disclosures under both Canadian GAAP and IFRS in order to meet Canadian GAAP
reporting requirements that year and to allow for comparative information to be presented in 2012.
Additional information relating to the Company can be found on the Canadian Securities Administrators System
for Electronic Document Analysis and Retrieval (SEDAR), located at www.sedar.com.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Versatile Systems Inc.
John Hardy
Chairman and CEO
1-800-262-1633
International: 001-206-979-6760
OR
Versatile Systems Inc.
Fraser Atkinson
CFO
1-800-262-1633
www.versatile.com
OR
NCB Stockbrokers Limited (Nominated Adviser)
Christopher Caldwell or Barclay Clibborn
+44 (0) 20 7071 5200
The TSX Venture Exchange and the AIM market of the London Stock Exchange have not reviewed and do not accept
responsibility for the adequacy or accuracy of this release.
Versatile Systems Inc.
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