FOR: VERSATILE SYSTEMS INC.
TSX VENTURE SYMBOL: VV
AIM SYMBOL: VVS
November 3, 2008
Versatile Reports the Results for Its First Quarter
Cash flow from operations for the quarter was U.S. $236,674
VANCOUVER, CANADA--(Marketwire - Nov. 3, 2008) - Versatile Systems Inc. (TSX VENTURE:VV)(AIM:VVS), today
announces its results for the three months ended September 30, 2008.
Revenue for the three months ended September 30, 2008 was $14,303,851 compared to $12,615,506 for the same
quarter last year, an increase of $1,688,345 or 13.4%. Cost of sales for the quarter amounted to $10,550,751
resulting in a gross profit of $3,753,100 or 26.2% of sales as compared to $9,535,389 resulting in a gross
profit of $3,080,117 or 24.4% of sales for the same quarter last year. Research and Development costs for the
quarter were $424,752 compared to $408,259 for the same quarter last year. The Net Earnings for the quarter
amounted to $56,615 ($0.00 per share) compared to a Net Loss of $56,504 ($0.00 per share) for the same period
last year.
The EBITDA for the quarter was $252,572 compared to an EBITDA of $10,791 for the same quarter last year. EBITDA
is defined as net earnings before interest expense, 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.
"The Company's operations have not been immune to the current economic crisis and we have been experiencing an
overall slowdown in orders from customers which has impacted all areas of our business," said John Hardy,
Chairman and CEO of Versatile. "Nevertheless, the Company enjoyed repeat business from its existing customer
base, as well as new customers such as Tree of Life and generated positive cash flow from operations. We will
continue to monitor our cost structure to ensure that it is in line with the overall performance of the
business."
Highlights for the quarter included:
- Revenue for the three months ended September 30, 2008 was $14,303,851 compared to $12,615,506 for the same
period last year, an increase of 13.4%;
- Cash flow from operations, before the non-cash working capital items, was $236,674 for the quarter ended
September 30, 2008 compared to cash flow of $760 for the same period last year;
- Deferred revenue at September 30, 2008 was $7,773,787 (of which $6,516,296 is expected to be recognized in
the next four quarters) compared to $7,343,606 at September 30, 2007, an increase of $430,181;
- Working capital as of September 30, 2008 of $3,938,350, an increase of $165,888 over the working capital at
the year-end of June 30, 2008;
- Mobiquity Kiosk(TM) passed a milestone of generating more than $2 Billion of credit facilities since
inception for 512,243 customers of retailers;
- Deploying the Mobiquity Route(TM) solution on the AT&T Data Network with Tree of Life; and
- Announcing the subscription packages for the Rockland and Madison Kiosks.
The working capital as of September 30, 2008 was $3,938,350, an increase of $165,888 over the working capital
at the year-end of June 30, 2008.
"During the quarter our financial position continued to improve," said Fraser Atkinson, CFO of Versatile. "We
also significantly reduced our cash outlays on investing and financing activities."
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) 2008 Versatile Systems Inc. All rights
reserved.
/T/
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Versatile Systems Inc.
Consolidated Balance Sheets
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Expressed in U.S. dollars September 30, 2008 June 30, 2008
------------------ -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,136,432 $ 1,500,005
Accounts receivable 8,777,332 11,842,754
Current portion of deferred contract costs 4,940,787 4,918,704
Work-in-progress 156,459 80,668
Prepaid expenses 489,220 309,061
Inventory 1,748,322 1,944,100
Future income tax benefits 680,983 706,249
---------------------------
17,929,535 21,301,541
Long-term accounts receivable 38,081 26,522
Deferred contract costs 1,076,692 1,050,694
Capital Assets 892,106 867,771
Intangible assets 604,846 695,726
Future income tax benefits 4,547,393 4,672,907
Goodwill 9,977,659 9,977,659
---------------------------
$ 35,066,312 $ 38,592,820
---------------------------
---------------------------
LIABILITIES
Current Liabilities
Line of credit $ - $ 74,942
Bank overdraft - 127,214
Accounts payable and accrued liabilities 7,454,889 10,704,330
Current portion of deferred revenue 6,516,296 6,582,593
Promissory Notes 20,000 40,000
---------------------------
13,991,185 17,529,079
Deferred Revenue 1,257,491 1,272,536
---------------------------
15,248,676 18,801,615
---------------------------
SHAREHOLDERS' EQUITY
Share Capital 50,713,746 51,353,054
Warrants 369,965 369,965
Contributed surplus 3,831,049 3,188,496
Deficit (35,006,481) (35,063,096)
Accumulated other comprehensive income (loss) (90,643) (57,214)
---------------------------
19,817,636 19,791,205
---------------------------
$ 35,066,312 $ 38,592,820
---------------------------
---------------------------
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Versatile Systems Inc.
Consolidated Statements of Earnings and Deficit
(unaudited - prepared by management)
--------------------------------------------------------------------------
Expressed in U.S. dollars Three months ended September 30
2008 2007
---------------------------
SALES $ 14,303,851 $ 12,615,506
COST OF SALES 10,550,751 9,535,389
---------------------------
3,753,100 3,080,117
---------------------------
EXPENSES
General and administrative 1,323,060 1,094,919
Selling and marketing 1,769,825 1,531,330
Research and development 424,752 408,259
Foreign Exchange (gain) Loss (20,352) 8,967
Stock-based compensation 3,243 25,851
---------------------------
3,500,528 3,069,326
---------------------------
Earnings before interest, taxes and amortization 252,572 10,791
Amortization of capital assets 69,900 57,174
Amortization of intangible assets 90,674 188,862
Interest expense 29,088 35,475
---------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 62,910 (270,720)
Current income tax expense (4,500) (9,586)
Future income tax (expense) benefit (1,795) 223,802
---------------------------
NET EARNINGS (LOSS) FOR THE PERIOD 56,615 (56,504)
---------------------------
DEFICIT, BEGINNING OF PERIOD (35,063,096) (35,263,226)
---------------------------
DEFICIT, END OF PERIOD (35,006,481) (35,319,730)
---------------------------
---------------------------
EARNINGS PER SHARE (basic and fully diluted) $ 0.00 ($0.00)
---------------------------
---------------------------
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Versatile Systems Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited - prepared by management)
--------------------------------------------------------------------------
Expressed in U.S. dollars Three months ended September 30
2008 2007
---------------------------
Net earnings (loss) for the period 56,615 (56,504)
Other comprehensive income (loss)
Foreign currency translation adjustments (33,429) 43,078
---------------------------
Comprehensive income (loss) for the period 23,186 (13,426)
---------------------------
---------------------------
Statement 4
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Versatile Systems Inc.
Consolidated Statements of Cash Flows
(unaudited - prepared by management)
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Expressed in U.S. dollars Three months ended September 30
2008 2007
---------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss) for the period $ 56,615 $ (56,504)
Items not affecting cash
Amortization of capital and intangible assets 166,902 246,036
Loss on disposal of capital assets - 212
Stock-based compensation 3,243 25,851
Foreign exchange loss 8,119 8,967
Future income tax expense (benefit) 1,795 (223,802)
---------------------------
Cash flow from operations before other items 236,674 760
Net change in non-cash working capital items (385,172) 1,823,917
---------------------------
(148,498) 1,824,677
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from disposition of capital assets - 1,867
Additions to capital assets (103,478) (186,547)
---------------------------
(103,478) (184,680)
---------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs - 416,202
Repayment of line of credit (74,942) (3,383)
Proceeds from (Repayment of) bank overdraft (127,214) 363,452
Repayment of the Term Loan - (175,000)
Repayment of Promissory Notes (20,000) -
Repayment of capital lease obligations - (2,738)
---------------------------
(222,156) 598,533
---------------------------
Effect of foreign exchange rate on cash 110,559 (43,078)
Increase (decrease) in cash and cash equivalents (363,573) 2,195,452
CASH and cash equivalents, beginning of period 1,500,005 3,369,087
---------------------------
CASH and cash equivalents, end of period $ 1,136,432 $ 5,564,539
---------------------------
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Versatile Systems Inc.
Consolidated Financial Statements
(unaudited - prepared by management)
September 30, 2008
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Consolidated Balance Sheets Statement 1
Consolidated Statements of Operations and Deficit Statement 2
Consolidated Statements of Comprehensive Income (Loss) Statement 3
Consolidated Statements of Cash Flows Statement 4
Notes to Consolidated Financial Statements
Statement 1
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Versatile Systems Inc.
Consolidated Balance Sheets
--------------------------------------------------------------------------
Expressed in U.S. dollars September 30, 2008 June 30, 2008
------------------ -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 1,136,432 $ 1,500,005
Accounts receivable 8,777,332 11,842,754
Current portion of deferred contract costs 4,940,787 4,918,704
Work-in-progress 156,459 80,668
Prepaid expenses 489,220 309,061
Inventory 1,748,322 1,944,100
Future income tax benefits (note 7) 680,983 706,249
---------------------------
17,929,535 21,301,541
Long-term accounts receivable 38,081 26,522
Deferred contract costs 1,076,692 1,050,694
Capital Assets 892,106 867,771
Intangible assets 604,846 695,726
Future income tax benefits (note 7) 4,547,393 4,672,907
Goodwill 9,977,659 9,977,659
---------------------------
$ 35,066,312 $ 38,592,820
---------------------------
---------------------------
LIABILITIES
Current Liabilities
Line of credit (note 3) $ - $ 74,942
Bank overdraft - 127,214
Accounts payable and accrued liabilities 7,454,889 10,704,330
Current portion of deferred revenue 6,516,296 6,582,593
Promissory Notes 20,000 40,000
---------------------------
13,991,185 17,529,079
Deferred Revenue 1,257,491 1,272,536
---------------------------
15,248,676 18,801,615
---------------------------
SHAREHOLDERS' EQUITY
Share Capital (note 4) 50,713,746 51,353,054
Warrants (note 5) 369,965 369,965
Contributed surplus 3,831,049 3,188,496
Deficit (35,006,481) (35,063,096)
Accumulated other comprehensive income (loss) (90,643) (57,214)
19,817,636 19,791,205
---------------------------
---------------------------
$ 35,066,312 $ 38,592,820
---------------------------
---------------------------
APPROVED BY THE DIRECTORS:
DIRECTOR: John Hardy DIRECTOR: Fraser Atkinson
See Notes to Consolidated Financial Statements
Statement 2
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Versatile Systems Inc.
Consolidated Statements of Earnings and Deficit
(unaudited - prepared by management)
--------------------------------------------------------------------------
Expressed in U.S. dollars Three months ended September 30
2008 2007
-------------------------------
SALES $ 14,303,851 $ 12,615,506
COST OF SALES 10,550,751 9,535,389
---------------------------
3,753,100 3,080,117
---------------------------
EXPENSES
General and administrative 1,323,060 1,094,919
Selling and marketing 1,769,825 1,531,330
Research and development 424,752 408,259
Foreign Exchange (gain) Loss (20,352) 8,967
Stock-based compensation 3,243 25,851
---------------------------
3,500,528 3,069,326
---------------------------
Earnings before interest, taxes and amortization 252,572 10,791
Amortization of capital assets 69,900 57,174
Amortization of intangible assets 90,674 188,862
Interest expense 29,088 35,475
---------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 62,910 (270,720)
Current income tax expense (4,500) (9,586)
Future income tax (expense) benefit (1,795) 223,802
---------------------------
NET EARNINGS (LOSS) FOR THE PERIOD 56,615 (56,504)
---------------------------
DEFICIT, BEGINNING OF PERIOD (35,063,096) (35,263,226)
---------------------------
DEFICIT, END OF PERIOD (35,006,481) (35,319,730)
---------------------------
---------------------------
EARNINGS PER SHARE (basic and fully diluted) $0.00 ($0.00)
---------------------------
---------------------------
See Notes to Consolidated Financial Statements
Statement 3
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Versatile Systems Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited - prepared by management)
--------------------------------------------------------------------------
Expressed in U.S. dollars Three months ended September 30
2008 2007
-------------------------------
Net earnings (loss) for the period 56,615 (56,504)
Other comprehensive income (loss)
Foreign currency translation adjustments (33,429) 43,078
-------------------------------
Comprehensive income (loss) for the period 23,186 (13,426)
-------------------------------
-------------------------------
See Notes to Consolidated Financial Statements
Statement 4
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Versatile Systems Inc.
Consolidated Statements of Cash Flows
(unaudited - prepared by management)
--------------------------------------------------------------------------
Expressed in U.S. dollars Three months ended September 30
2008 2007
-------------------------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss) for the period $ 56,615 $ (56,504)
Items not affecting cash
Amortization of capital and intangible assets 166,902 246,036
Loss on disposal of capital assets - 212
Stock-based compensation 3,243 25,851
Foreign exchange loss 8,119 8,967
Future income tax expense (benefit) 1,795 (223,802)
---------------------------
Cash flow from operations before other items 236,674 760
Net change in non-cash working capital items (385,172) 1,823,917
---------------------------
(148,498) 1,824,677
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from disposition of capital assets - 1,867
Additions to capital assets (103,478) (186,547)
---------------------------
(103,478) (184,680)
---------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of shares, net of costs - 416,202
Repayment of line of credit (74,942) (3,383)
Proceeds from (Repayment of) bank overdraft (127,214) 363,452
Repayment of the Term Loan - (175,000)
Repayment of Promissory Notes (20,000) -
Repayment of capital lease obligations - (2,738)
---------------------------
(222,156) 598,533
---------------------------
Effect of foreign exchange rate on cash 110,559 (43,078)
Increase (decrease) in cash and cash equivalents (363,573) 2,195,452
CASH and cash equivalents, beginning of period 1,500,005 3,369,087
---------------------------
CASH and cash equivalents, end of period $ 1,136,432 $ 5,564,539
---------------------------
---------------------------
Supplementary information
Cash paid for interest expense $ 25,118 $ 71,104
Cash paid for income taxes 27,985 9,586
See Notes to Consolidated Financial Statements
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Versatile Systems Inc.
Notes to Consolidated Financial Statements
For the period ended September 30, 2008
(Unaudited - Prepared by Management)
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/T/
1. Consolidated financial statement presentation:
These unaudited interim consolidated financial statements at September 30, 2008 and the consolidated statements
of operations and deficit, comprehensive income (loss) and cash flows for the periods ended September 30, 2008
and 2007, 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, 2008.
The results of operations for the period ended September 30, 2008 are not necessarily indicative of the results
for the full year ending June 30, 2009. 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 September 30, 2008 have not been reviewed or audited
by the Company's auditor.
2. Accounting Polcies:
The accounting policies applied in these interim financial statements are consistent with those applied in the
Annual financial statements.
3. Bank term loan and 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. The line of credit bears
interest at the State of New York prime rate of lending and is secured with a first charge on the assets of
these U.S. subsidiaries.
4. Common Shares
/T/
Authorized
Unlimited common shares without par value
Issued and outstanding
Number
of shares Amount
--------------------------
Issued and outstanding - June 30, 2008 121,148,643 $ 51,808,079
Cancelled shares that were held in Treasury (2,559,000) (1,094,333)
--------------------------
Balance - September 30, 2008 118,589,643 $ 50,713,746
--------------------------
/T/
During the current quarter the Company cancelled 2,559,000 common shares that had been purchased pursuant to a
Normal Course Issuer Bid. As a result the share capital is reduced by the average cost of shares, which results
in contributed surplus of $639,308.
5. Warrants
/T/
Issued and outstanding:
Exercise Number of
Expiry date Price CDN$ Warrants Cost
--------------------------------------------------------------------------
March 31, 2009 $ 0.38 1,411,808 107,627
March 31, 2009 $ 0.414 1,411,808 75,971
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 - September 30, 2008 5,419,194 $ 369,965
--------------------
--------------------
/T/
6. Stock Options
/T/
Weighted
Number of average exercise
Stock Options price CDN$
----------------------------------
Balance - June 30, 2008 8,768,200 $ 0.53
Granted during the period -
Forfeited during the period -
Exercised during the period -
----------------------------------
Balance - September 30, 2008 8,768,200 $ 0.53
----------------------------------
----------------------------------
/T/
7. 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 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/
September 30, 2008 June 30, 2008
------------------ -------------
(unaudited)
Future income tax assets
Tax losses and deductions $ 8,040,616 $ 8,201,781
Capital assets 431,656 441,178
Share issuance costs 340,956 354,780
Other 181,081 183,861
---------------------------
Future income tax assets 8,994,309 9,181,600
Valuation allowance (3,052,988) (3,060,592)
---------------------------
Net Future income tax asset 5,941,321 6,121,008
Future income tax liabilities - Goodwill (712,945) (741,852)
---------------------------
Net Future income tax asset 5,228,376 5,379,156
Less current portion (680,983) (706,249)
---------------------------
Non-current portiion of net future income
tax asset $ 4,547,393 $ 4,672,907
---------------------------
/T/
During the three months ended September 30, 2008 the Company recorded a $1,795 non-cash future income tax
expense (September 30, 2007 - $223,802 future income tax benefit) related to the recognition of future income
tax assets.
8. Segmented Information
The company's only reportable segment is the development and sales of computer software, hardware and system
integration.
The company's assets and sales by geographic area are as follows:
/T/
Three months ended
September 30 June 30 September 30
2008 2008 2008 2007
-----------------------------------------------------------
Capital assets, Capital assets,
intangible intangible
assets and assets and
goodwill goodwill Revenue Revenue
U.S. companies
United States $ 11,466,374 $ 11,529,258 $ 13,998,907 $ 12,342,059
Canada 50,992 102,388
Netherlands - 14,900
France - 35,449
United Kingdom 10,625 7,000
Other - -
UK and Canadian
companies
United Kingdom 7,916 11,574 243,327 113,710
Canada 321 324 - -
-----------------------------------------------------------
11,474,611 11,541,156 14,303,851 12,615,506
-----------------------------------------------------------
-----------------------------------------------------------
/T/
During the three months ended September 30, 2008 the company did not have a customer with more than 10% of the
total revenue. For the three months ended September 30, 2007 the Company generated revenue of $2,145,443 from
Comcast Cable representing 17.0% of the revenue for the period.
During the three months ended September 30, 2008 the company purchased products and services from one vendor
for $5,543,011 (September 30, 2007 - $5,942,014) representing 52.5% (2007 - 62.3%) of the cost of sales.
Versatile Systems Inc.
Management Discussion and Analysis
Three months ended September 30, 2008
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 October 31, 2008 on the
unaudited interim consolidated financial statements and notes for the three months ended September 30, 2008.
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 by
the Company's Audit Committee and approved 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 (used in) operations before the
net change in non-cash working capital items as it may be used be certain investors as further measures 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.
Acquisition of Sagent Solutions
On December 28, 2007 the Company acquired all of the issued and outstanding shares and units of Sagent
Solutions, based in Somerset, New Jersey. Sagent is focused on the rapidly growing need of enterprises to
leverage the cost and efficiency benefits of virtualizing their IT infrastructures.
The consideration consisted of Promissory Notes bearing interest at 3% per annum in the amount of $80,000
payable to the Vendor in quarterly amounts (of which $40,000 had been paid by the year-end) and 600,000 share
purchase warrants exercisable at CDN $0.30 per share with a term of four years, which were approved by the TSX
Venture Exchange on January 30, 2008.
For the period from January 1, 2007 to December 28, 2007 Sagent Solutions reported revenue of $2,474,455 and
pre-tax earnings of $56,106. These figures have not been reviewed or audited. The operations of Sagent
Solutions have been included in the consolidated financial statements for the company subsequent to December
28, 2007.
Highlights of the first quarter
Highlights of the Company's operations for the first quarter included:
- Revenue for the three months ended September 30, 2008 was $14,303,851 compared to $12,615,506 for the same
period last year, an increase of 13.4%;
- Cash flow from operations, before the non-cash working capital items, was $236,674 for the quarter ended
September 30, 2008 compared to cash flow of $760 for the same period last year;
- Deferred revenue at September 30, 2008 was $7,773,787 (of which $6,516,296 is expected to be recognized in
the next four quarters) compared to $7,343,606 at September 30, 2007, an increase of $430,181;
- Working capital as of September 30, 2008 of $3,938,350, an increase of $165,888 over the working capital at
the year-end of June 30, 2008;
- Mobiquity Kiosk(TM) passed a milestone of generating more than $2 Billion of credit facilities since
inception for 512,243 customers of retailers;
- Deploying the Mobiquity Route(TM) solution on the AT&T Data Network with Tree of Life; and
- Announcing the subscription packages for the Rockland and Madison Kiosks.
Cash flow from operations
The cash flow from operations, before the non-cash working capital items, was $236,674 for the quarter ended
September 30, 2008 compared to cash flow of $760 for the same period last year.
Over the past four years the cash flow from operations, before non-cash working capital items, has been as
follows:
/T/
2008 $ 1,452,981
2007 2,159,289
2006 1,099,233
2005 (878,482)
/T/
Review of the first quarter
Revenue for the three months ended September 30, 2008 was $14,303,851 compared to $12,615,506 for the same
quarter last year, an increase of $1,688,345 or 13.4%. While the Company had repeat business from its existing
customer base including Motorola, Thermo Fisher Scientific, Respironics, Iron Mountain, Carnegie Melon, Comcast
and various retailers, universities and government organizations as well as new customers such as Tree of Life,
the Company is experiencing an overall slowdown in orders from customers for routine expenditures on
infrastructure.
The EBITDA for the quarter was $252,572 compared to an EBITDA of $10,791 for the same quarter last year.
The Net Earnings for the quarter amounted to $56,615 ($0.00 per share) compared to a Net Loss of $56,504 ($0.00
per share) for the same period last year.
Cost of sales
Cost of sales for the quarter amounted to $10,550,751 resulting in a gross profit of $3,753,100 or 26.2% of
sales as compared to $9,535,389 resulting in a gross profit of $3,080,117 or 24.4% of sales for the same
quarter last year. The Company generated sales of higher margin products resulting in an increase in gross
profit as a percentage of sales.
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 September 30, 2008 the Company had an inventory provision of $231,586 (June 30, 2008 - $231,586).
General and administrative
General and administrative expenses for the quarter amounted to $1,323,060 compared to $1,094,919 for the same
quarter last year. As a percentage of sales the general and administrative expenses were 9.2% in the quarter
compared to 8.7% in the same quarter last year.
Technology Investment
Over the past five 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 $424,752 compared to $408,259 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 3.0% in the quarter compared to 3.2% in the same quarter last year.
The increase in the research and development expense can be attributed to the number of research and
development projects as noted in the following paragraphs.
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:
- Implementation of new features into Mobiquity Route(TM); and
- Updated the management console for Mobiquity Sell(TM).
For the Mobiquity Transaction Engine 3.0(TM) these included the following:
- Implementation of Event Flow module - a drag-and-drop web interface for interacting with tasks and complex
events from the Mobiquity Transaction Engine 3.0(TM); and
- Development of a simulator to simulate location events, RFID events, and temperature and sensor events for
product and sales demonstrations.
For the Mobiquity Kiosk(TM), these included the following:
- Preliminary development of a new small form-factor self-service unit called the Cortland, which is an
integrated computer with an eight inch diagonal touch screen, making it ideal for check-out lanes and retailers
where space is a premium;
- Implementation of the credit application with General Financial Services;
- Improvement of the video support to allow Mobiquity Kiosk(TM) to deliver smooth high definition video;
- Implementation of a new interactive digital signage Welcome Kiosk solution; and
- Enhancements to the Kiosk platform including automated software delivery to allow the Company to remotely
make software, content and configuration changes.
The Company incurred $173,066 for research and development activities related to Mobiquity Route(TM), DEX and
related mobile software products.
The Company incurred $200,620 for research and development activities related to Mobiquity Transaction Engine
3.0(TM), Mobiquity Kiosk(TM) (including the Rockland and Madison Kiosks) and research on Virtualization.
Selling and marketing expenses
Selling and marketing expense for the quarter amounted to $1,769,825 compared to $1,531,330 for the same
quarter last year. 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 12.4% in the quarter compared to 12.1% in the same quarter last year. As a percentage of gross
profit the selling and marketing expenses were 47.2% in the quarter compared to 49.7% 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 September 30, 2008 the Company recorded a $1,795 non-cash future income tax expense
related to the recognition of future income tax assets. To the extent that the Company expects to generate
sufficient profits in the following fiscal period, that portion has been classified as current.
Amortization
The amortization of capital assets and intangible assets for the quarter amounted to $166,902 (September 30,
2007 - $246,036). The purchased technology arising from the acquisition of Perfect Order was fully amortized in
the 2008 fiscal year so consequently the amount of amortization of intangible assets is lower.
Foreign Exchange Loss
The foreign exchange gain for the quarter amounted to $20,352 compared to a loss of $8,967 for the same quarter
last year. The gain was due to an increase in the U.S. dollar against the Canadian dollar and British Sterling
Pounds in the quarter.
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/
Q2 2007 Q3 2007 Q4 2007 Q1 2008
Dec 06 Mar 07 Jun 07 Sept 07
-------------------------------------------
Revenue 17,140,576 12,391,840 18,193,167 12,615,506
Cost of Sales 13,187,863 9,029,838 13,770,768 9,535,389
-------------------------------------------
Gross Profit 3,952,713 3,362,002 4,422,399 3,080,117
-------------------------------------------
Expenses:
General and administrative 1,180,790 1,179,582 1,252,940 1,103,886
(including foreign exchange)
Research and Development 262,261 254,565 339,369 408,259
Selling and Marketing 1,807,753 1,578,391 1,587,817 1,531,330
Stock-based compensation 134,916 129,571 264,896 25,851
-------------------------------------------
3,385,720 3,142,109 3,445,022 3,069,326
-------------------------------------------
Earnings before interest,
taxes and amortization 566,993 219,893 977,377 10,791
Amortization (309,825) (249,562) (282,705) (246,036)
Interest (80,321) (56,907) (69,236) (35,475)
Income taxes 1,981 157,047 367,130 214,216
-------------------------------------------
Net Earnings (loss) 178,828 70,471 992,566 (56,504)
-------------------------------------------
-------------------------------------------
Per share, basic and diluted 0.00 0.00 0.01 (0.00)
-------------------------------------------
Q2 2008 Q3 2008 Q4 2008 Q1 2009
Dec 07 Mar 08 Jun 08 Sept 08
-------------------------------------------
Revenue 18,523,167 14,519,869 13,721,812 14,303,851
Cost of Sales 13,716,667 11,094,832 10,180,648 10,550,751
-------------------------------------------
Gross Profit 4,806,500 3,425,037 3,541,164 3,753,100
-------------------------------------------
Expenses:
General and administrative 1,412,063 1,219,904 1,530,733 1,302,708
(including foreign exchange)
Research and Development 491,459 397,591 448,260 424,752
Selling and Marketing 1,756,538 1,746,710 1,470,184 1,769,825
Stock-based compensation 27,452 56,587 (63,219) 3,243
-------------------------------------------
3,687,512 3,420,792 3,385,958 3,500,528
-------------------------------------------
Earnings before interest,
taxes and amortization 1,118,988 4,245 155,206 252,572
Amortization (249,035) (261,951) (193,655) (160,574)
Interest (26,521) 90,375 (167) (29,088)
Income taxes (157,133) 99,709 (323,427) (6,295)
-------------------------------------------
Net Earnings (loss) 686,299 (67,622) (362,043) 56,615
-------------------------------------------
-------------------------------------------
Per share, basic and diluted 0.01 (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.
In summary with the quarterly results the Company has improved cash flow from operations while maintaining
selling, marketing, general and administration expenses in relation to revenue at relatively the same level.
Financial position
The working capital as of September 30, 2008 was $3,938,350, an increase of $165,888 over the working capital
at the year-end of June 30, 2008.
At September 30, 2008 the Company had cash and cash equivalents of $1,136,432 compared to $1,500,005 at the
year-end of June 30, 2008.
The cash flow from operations, before non-cash working capital items amounted to $236,674 for the quarter ended
September 30, 2008 compared to $760 for the same period last year.
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
State of New York prime rate of lending and is secured with a first charge on the assets of VAC, VSI and POI.
As at September 30, 2008 the line of credit was Nil (September 30, 2007 - $74,942) and the Company had a bank
overdraft of Nil (September 30, 2007 - $127,214).
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 invoice date. At September 30, 2008 the financial covenants for these
companies include requirements for debt coverage of 1.2 and minimum Tangible Net worth of $4,800,000. The
companies met these tests.
Included in accounts payable and accrued liabilities is $1,781,383 owing to a major supplier, which is
subordinated to the bank line of credit.
Capital Expenditures
During the three months ended September 30, 2008 the majority of the capital expenditures relates to the costs
of Kiosks that have been deployed under various subscription agreements.
Share Capital
As of October 31, 2008 the Company had 118,589,643 common shares issued and outstanding. The Company is holding
150,000 common shares in Treasury that were purchased in October 2008.
During the current fiscal quarter the Company cancelled 2,559,000 shares that were held in Treasury that had
been purchased in the 2008 fiscal year pursuant to a Normal Course Issuer Bid to purchase up to 6,000,000
common shares through the facilities of the TSX Venture Exchange.
Stock Options
The Company can grant up to 10,800,000 options pursuant to its stock option plan.
/T/
Weighted
Number of average exercise
shares price CDN$
--------------------------------------------------------------------------
Outstanding - June 30, 2008 8,768,200 0.53
Granted - -
Forfeited - -
Expired - -
Exercised - -
-------------------------------
Outstanding - September 30, 2008 8,768,200 0.53
-------------------------------
/T/
For the quarter ended September 30, 2008, the Company recognized $3,243 in stock-based compensation, a non-cash
item, for vesting of stock options granted to employees, consultants, directors and officers of the Company in
prior years.
Warrants
The details of the outstanding warrants at September 30, 2008 are as follows:
/T/
Exercise Number of
Expiry date Price CDN$ Warrants Cost
------------------------------------------------------------------------
March 31, 2009 $ 0.38 1,411,808 107,627
March 31, 2009 $ 0.414 1,411,808 75,971
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 - September 30, 2008 5,419,194 $ 369,965
--------------------------------------
--------------------------------------
/T/
Related Party Transactions
During the current fiscal quarter, the Company paid consulting fees and salaries, which are included in the
General and administration expense, of $184,600 (2007 - $179,663) 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 June 19, 2000, Perfect Order 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 June 30, 2005 and has an accumulated deficit of $35.0 million to
September 30, 2008. 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 maintain its current level of profitability.
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 their 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 restated 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 25% of total assets as at September 30, 2008.
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 5% of total assets as at September 30, 2008. 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 4% of the Company's total
assets as at September 30, 2008, 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 15% of the Company's assets as at
September 30, 2008, 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 28% of the Company's total assets as at
September 30, 2008, 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 the following new Handbook sections issued by the Canadian Institute of
Chartered Accountants ("CICA") on July 1, 2007:
a) Section 3855, "Financial Instruments - Recognition and Measurement", establishes the standards for
recognizing and measuring financial assets, financial liabilities and nonfinancial derivatives. Under the new
standards, the Company is now required to classify:
(i) its financial assets as held-to-maturity, available-for-sale, held-for-trading, or loans and receivables;
and
(ii) its financial liabilities as either held-for-trading, or other financial liabilities.
All financial instruments, including derivatives, are included on the consolidated balance sheet and are
initially measured at fair value with the exception of financial instruments with related parties. Subsequent
measurement and recognition of changes in fair value of financial instruments depends on their initial
classification as follows: Held-to-maturity investments, loans and receivables, and other financial liabilities
are measured at cost. Held-for-trading financial investments are measured at fair value and all gains and
losses are included in net earnings in the period in which they arise. Available-for-sale financial instruments
are measured at fair value with revaluation gains and losses included in other comprehensive income until the
asset is disposed of or impaired.
The Company has made the following classifications:
- Cash and cash equivalents, bank overdraft and line of credit are classified as held for trading and are
measured at fair value. This category best describes the Company's current management practices with regards to
cash and cash equivalents.
- Accounts receivable are classified as loans and receivables and recorded at amortized cost using the
effective interest rate method.
- Accounts payable and accrued liabilities are classified as other liabilities and measured at amortized cost
using the effective interest rate method.
- Long term debt is carried at amortized cost using the effective interest rate method.
Under the new standards, a derivative is a financial instrument or other contract whose value changes in
response to the change in a specified rate, price or index that requires nominal or no initial investment and
which is settled at a future date. Derivative financial instruments can be utilized by the Company in the
management of its foreign currency risk to reduce its exposure to fluctuations in foreign exchange on certain
committed and anticipated transactions. The Company, where applicable, formally documents the relationships
between derivative financial instruments and hedged items, as well as the risk management objective and
strategy. The Company assesses, on an ongoing basis, whether the derivative financial instruments continue to
be effective in offsetting changes in fair values or cash flows of the hedged transactions.
Section 3855 also requires that the Company identify embedded derivatives that require separation from the
related host contract and measure any embedded derivatives at fair value.
From time to time, the Company enters into certain contracts for the purchase or sale of non-financial items
that are denominated in currencies other than the U.S. dollar. In cases where the foreign exchange component is
not leveraged and does not contain an option feature and the contract is denominated in either the functional
currency of the Company or the counter-party, the embedded foreign currency derivative is considered to be
closely related to the host contract and is not accounted for separately.
If the contract is neither denominated in the functional currency of the Company or the associated counter-
party, the embedded foreign currency derivative is separated from the host contract unless the non-financial
item delivered requires payments denominated in the currency that is routinely accepted in commercial
transactions around the world, or is commonly used for such transactions in the economic environment in which
the transaction takes place. The Company did not identify any embedded foreign currency derivatives from their
related host contracts during the period ended September 30, 2008.
The change in accounting policy related to embedded derivatives did not result in any changes to the June 30,
2008 consolidated financial statements and did not require restatement of prior years financial statements.
b) Section 3861, "Financial Instruments - Disclosure and Presentation", establishes standards for presentation
of financial instruments and non-financial derivatives, and identifies the information that should be disclosed
about them. This change in accounting policy did not have a material impact on the current year financial
statements and did not require restatement of prior year financial statements.
c) Section 1530, "Comprehensive Income", describes the change in equity of an enterprise during a period
arising from transactions and other events and circumstances from non-owner sources. It includes items that
would normally not be included in net income such as changes in the foreign currency translation adjustment
relating to self sustaining foreign operations and unrealized gains or losses on available-for-sale financial
instruments. This section describes how to report and disclose comprehensive income and its components. As a
result of the adoption of this section, the consolidated financial statements now include a statement of
comprehensive loss and deficit.
For the period ended September 30, 2008 the Company does not have any items that should be presented in other
comprehensive income therefore, net loss for the period is equivalent to comprehensive loss for the period.
d) Section 3251, "Equity", replaces section 3250, "Surplus", and establishes standards for the presentation of
equity and changes in equity as a result of the new requirements of Section 1530, "Comprehensive Income".
e) Section 3865, "Hedges", describes when hedge accounting is appropriate. Hedge accounting ensures that all
gains, losses, revenues and expenses from the derivative and the item it hedges are recorded in the statement
of earnings in the same period. The Company did not have any hedging items during the year.
f) Section 1506, "Accounting Changes", allows for voluntary changes in accounting policy only if they provide
more reliable and relevant information in the financial statements.
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
Website: www.versatile.com
The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of
this release.
Versatile Systems Inc.
Versatile Systems (LSE:VVS)
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Versatile Systems (LSE:VVS)
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