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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Vers. Sys. Di | LSE:VVS | London | Ordinary Share | CA92531V1067 | COM SHS NPV (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 2.75 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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FOR: VERSATILE SYSTEMS INC.
TSX VENTURE SYMBOL: VV
AIM SYMBOL: VVS
May 12, 2008
Versatile Reports Results for Third Quarter
Revenue of $45,658,542 for the first nine months at a record level
VANCOUVER, CANADA--(Marketwire - May 12, 2008) - Versatile Systems Inc. (TSX VENTURE:VV)(AIM:VVS), announces
its results for the third quarter of the 2008 fiscal year. For the year-to-date results the Company reported
record Revenue, Gross Profit dollars, EBITDA and Cash flow from operations before non-cash working capital
items.
Revenue for the nine months ended March 31, 2008 was $45,658,542 generating a gross profit of $11,311,654 or
24.8% of revenue compared to $44,037,108 generating a gross profit of $10,293,398 or 23.4% of revenue for the
same period last year. The Company generated sales of higher margin products which resulted in an increase in
gross profit of $1,018,256 compared with the same period last year.
Net Earnings for the period amounted to $562,173 compared to $386,879 for the same period last year, an
increase of 45.3%.
The cash flow from operations, before non-cash working capital items improved to $1,304,528 for the nine months
ended March 31, 2008 compared to 1,033,314 for the same period last year, an increase of 26.2%.
The EBITDA for the nine months ended March 31, 2008 was $1,134,024 compared to an EBITDA of $1,015,528 for the
same period last year, an increase of 11.7%. EBITDA is defined 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.
"The Company's overall financial position has improved," said John Hardy, Chairman and CEO of Versatile.
"During the quarter we not only repaid an outstanding term loan of $2.7 million, we also negotiated a new
operating line of credit, with Commerce Bank, of $5.8 million at a favorable interest rate. In addition, the
working capital position, since year-end, improved by $1.8 million. Despite deteriorating U.S. economic
conditions the performance of the Company compares favorably to the comparable period last year."
"On the business front we achieved a significant milestone in deploying the first phase of a multi-million
dollar route accounting project for a U.S. based distributor using our Mobiquity Route(TM) software. Our
pipeline for mobile products is growing, aided by recent advances in wireless technology as the carriers build
out their networks to the 3G standard. We expect to see further growth in this area in subsequent quarters."
Highlights of the quarter:
- Revenue for the three months ended March 31, 2008 was $14,519,869 compared to $12,391,840 for the same period
last year, an increase of 17.2%;
- Deferred revenue at March 31, 2008 was $7,002,514 (of which $5,986,232 is expected to be recognized in the
next four quarters) compared to $5,331,408 at March 31, 2007, an increase of $1,671,106 or 31.3%;
- The Company repaid the Term Loan of $2,749,263;
- The working capital as of March 31, 2008 was $4,547,545 an improvement of $1,860,046 over the working capital
at the year-end of June 30, 2007;
- At March 31, 2008 the Company had cash and cash equivalents of $3,109,385 compared to $3,369,087 at the year-
end;
- Obtained a line of credit of $5,800,000 from the Commerce Bank, an increase from the previous line of credit
of $3,000,000; and
- Completed the first phase of deployment of a route accounting system for a major U.S. distributor with
Versatile's Mobiquity Route(TM) 4.0 as the core driver of this system.
Revenue for the three months ended March 31, 2008 was $14,519,869 compared to $12,391,840 for the same quarter
last year, an increase of $2,128,029. While the Company had repeat business from its existing customer base,
the Company experienced a slowdown in orders from customers for routine expenditures on infrastructure. Cost of
sales for the quarter amounted to $11,094,832 resulting in a gross profit of $3,425,037 or 23.6% of sales as
compared to $9,029,838 resulting in a gross profit of $3,362,002 or 27.1% of sales for the same quarter last
year.
Selling and Marketing expense for the quarter amounted to $1,746,710, compared to $1,578,391 for the same
quarter last year. The Net Loss for the quarter amounted to $67,622 compared to Net Earnings of $70,471 for the
same period last year.
Technology Development
During the current quarter the Company spent $397,591 on research and development compared to $254,565 for the
same quarter last year, to enhance functionality of current product lines and requirements from various
partners:
For the Mobiquity Route(TM) these included the following:
- Commenced development on an interactive version of Mobiquity Route 4.0(TM);
- Expanded the reporting functions; and
- Developed company profiles for all DEX maintenance customers.
For the Mobiquity Transaction Engine 3.0(TM) these included the following:
- Implementation of a proof-of-concept theft deterrent system using the Mobiquity Transaction Engine 3.0(TM),
RFID, Biometrics and Video Cameras;
- Integrated a flexible reporting and business intelligence framework into MTE by leveraging BIRT;
- Implementation of a new user interface. The new user interface leverages AJAX and a windows-like interface
running in a web browser; and
- Finalized the Mobiquity Transaction Engine 3.0(TM) data model asset management.
For the Mobiquity Kiosk(TM), these included the following
- Completion of the hardware and operating system support for the new Madison Kiosk desktop computer;
- Implementation of web browsing capability in the Kiosk;
- Implementation of a time tracking kiosk for a welfare education service provider;
- Implementation of a new screen design for Alliance Data Systems
- Completion of the development of the electronic credit application for American General Financial Services;
and
- Implementation of an "Enter to Win" lead management application that integrates with ePrize.com.
Financial position
The Company had working capital of $4,547,545 at March 31, 2008 an improvement of $1,860,046 over the working
capital at the year-end on June 30, 2007. During the current quarter the Company repaid the term loan in the
amount of $2,749,263, which had been classified with current liabilities. As of March 31, 2008 the Company had
purchased, pursuant to its Normal Course Issuer Bid, 1,360,500 common shares and cancelled 702,500 of these
shares.
At March 31, 2008 the Company had cash and cash equivalents of $3,109,385 compared to $3,369,087 at the year-
end. The cash flow from operations, before non-cash working capital items improved to $1,304,528 for the nine
months ended March 31, 2008 compared to 1,033,314 for the same period last year, an increase of 26.2%.
"The uses of cash flow are specific to the period so the Company is well positioned to respond to prevailing
market conditions," said Fraser Atkinson, CFO of Versatile. "With the repayment of all of the long term debt
the Company will see a drop in its interest expense, which combined with a declining amortization expense, will
have a favorable impact on the bottom line in future periods."
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.
/T/
--------------------------------------------------------------------------
Versatile Systems Inc.
Consolidated Financial Statements
(unaudited - prepared by management)
March 31, 2008
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated Balance Sheets Statement 1
Consolidated Statements of Operations and Deficit Statement 2
Consolidated Statements of Cash Flows Statement 3
Notes to Consolidated Financial Statements
Statement 1
--------------------------------------------------------------------------
Versatile Systems Inc.
Consolidated Balance Sheets
--------------------------------------------------------------------------
Expressed in U.S. dollars March 31, 2008 June 30, 2007
-------------- -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 3,109,385 $ 3,369,087
Accounts receivable 8,955,594 15,200,919
Current portion of deferred contract costs 4,113,247 4,489,111
Work in progress 104,282 41,705
Prepaid expenses 443,612 347,023
Inventory 1,541,437 1,268,682
Future income tax benefits (note 8) 1,203,875 1,094,579
-----------------------------
19,471,432 25,811,106
Long term accounts receivable - 812,000
Deferred contract costs 875,592 396,423
Capital Assets 775,574 492,979
Intangible assets 823,419 1,335,877
Future income tax benefits (note 8) 4,456,599 4,326,136
Goodwill 9,977,659 9,914,350
-----------------------------
$ 36,380,275 $ 43,088,871
-----------------------------
-----------------------------
LIABILITIES
Current Liabilities
Line of credit (note 4) $ - $ 3,383
Bank overdraft 321,034 170,422
Accounts payable and accrued liabilities 8,556,621 13,720,928
Current portion of deferred revenue 5,986,232 6,299,863
Bank term loan (note 4) - 2,749,263
Term loan - 175,000
Promissory Notes 60,000 -
Current portion of capital lease obligations - 4,748
-----------------------------
14,923,887 23,123,607
Deferred Revenue 1,016,282 487,416
-----------------------------
15,940,169 23,611,023
-----------------------------
SHAREHOLDERS' EQUITY
Share Capital (note 5) 51,666,224 51,643,963
Warrants (note 6) 369,965 382,650
Contributed surplus 3,161,954 2,998,798
Deficit (34,701,053) (35,263,226)
Foreign currency translation adjustment (56,984) (284,337)
-----------------------------
20,440,106 19,477,848
-----------------------------
$ 36,380,275 $ 43,088,871
-----------------------------
-----------------------------
APPROVED BY THE DIRECTORS:
DIRECTOR: John Hardy DIRECTOR: Fraser Atkinson
See Notes to Consolidated Financial Statements
Statement 2
--------------------------------------------------------------------------
Versatile Systems Inc.
Consolidated Statements of Operations and Deficit
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------
Three months Nine months
Expressed in U.S. ended March 31 ended March 31
dollars 2008 2007 2008 2007
---------------------------------------------------
SALES $ 14,519,869 $ 12,391,840 $ 45,658,542 $ 44,037,108
COST OF SALES 11,094,832 9,029,838 34,346,888 33,743,710
---------------------------------------------------
3,425,037 3,362,002 11,311,654 10,293,398
---------------------------------------------------
EXPENSES
General and
administrative 1,176,901 1,162,952 3,561,691 3,325,335
Selling and marketing 1,746,710 1,578,391 5,034,578 4,914,234
Research and
development 397,591 254,565 1,297,309 728,847
Foreign Exchange Loss 43,003 16,630 174,162 18,906
Stock-based
compensation 56,587 129,571 109,890 290,548
---------------------------------------------------
3,420,792 3,142,109 10,177,630 9,277,870
---------------------------------------------------
Earnings before
interest, taxes and
amortization 4,245 219,893 1,134,024 1,015,528
Amortization of
capital assets 70,282 61,780 187,629 198,040
Amortization of
intangible assets 191,669 187,782 569,393 682,096
Interest expense
(income) (90,375) 56,907 (28,379) 231,682
---------------------------------------------------
EARNINGS (LOSS) BEFORE
INCOME TAXES (167,331) (86,576) 405,381 (96,290)
Current income tax
expense (19,269) (11,064) (35,817) (60,386)
Future income tax
benefit 118,978 168,111 192,609 543,555
---------------------------------------------------
NET EARNINGS (LOSS) FOR
THE PERIOD (67,622) 70,471 562,173 386,879
---------------------------------------------------
DEFICIT, BEGINNING
OF PERIOD (34,633,431) (36,326,263) (35,263,226) (36,642,671)
---------------------------------------------------
DEFICIT, END OF PERIOD (34,701,053) (36,255,792) (34,701,053) (36,255,792)
---------------------------------------------------
---------------------------------------------------
EARNINGS PER SHARE
(basic and fully
diluted): ($0.00) $0.00 $0.00 $0.00
---------------------------------------------------
---------------------------------------------------
See Notes to Consolidated Financial Statements
Statement 3
--------------------------------------------------------------------------
Versatile Systems Inc.
Consolidated Statements of Cash Flows
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------
Three months Nine months
Expressed in U.S. ended March 31 ended March 31
dollars 2008 2007 2008 2007
---------------------------------------------------
CASH FLOWS FROM (USED
IN) OPERATING
ACTIVITIES
Net earnings (loss)
for the period $ (67,622) $ 70,471 $ 562,173 $ 386,879
Items not affecting
cash
Amortization of
capital and
intangible assets 261,951 249,562 757,022 880,136
Loss on disposal of
capital assets - - 212 400
Stock-based
compensation 56,587 129,571 109,890 290,548
Foreign exchange loss 43,375 16,630 67,840 18,906
Future income tax
expense (benefit) (118,978) (168,111) (192,609) (543,555)
---------------------------------------------------
Cash flow from
operations before
other items 175,313 298,123 1,304,528 1,033,314
Net change in
non-cash working
capital items 2,597,341 (1,450,083) 1,534,730 (2,039,793)
---------------------------------------------------
2,772,654 (1,151,960) 2,839,258 (1,006,479)
CASH FLOWS FROM (USED
IN) INVESTING
ACTIVITIES
Purchase of net assets - - 2,541 -
Proceeds from
Disposition of
capital assets - - 1,867 1,940
Additions to capital
and intangible assets (155,839) (36,058) (463,711) (391,313)
---------------------------------------------------
(155,839) (36,058) (459,303) (389,373)
---------------------------------------------------
CASH FLOWS FROM (USED
IN) FINANCING
ACTIVITIES
Proceeds from issuance
of shares - 319,923 416,202 513,417
Purchase of Company
shares (219,791) - (307,269) -
Repayment of the line
of credit - 685,486 (3,383) 1,312,859
Increase (decrease) in
the bank overdraft (1,147,336) 12,010 150,612 (311,212)
Repayment of the Bank
Term Loan (2,749,263) (2,749,263)
Repayment of the
Term Loan - - (175,000) -
Repayment of the
Promissory Notes (20,000) (20,000)
Repayment of capital
lease obligations (844) (2,114) (4,748) (5,226)
---------------------------------------------------
(4,137,234) 1,015,305 (2,692,849) 1,509,838
---------------------------------------------------
Effect of foreign
exchange rate on cash (276,896) (17,343) 53,192 (5,188)
Increase in cash and
cash equivalents (1,797,315) (190,056) (259,702) 108,798
CASH and cash
equivalents, beginning
of period 4,906,700 397,864 3,369,087 99,010
---------------------------------------------------
CASH and cash
equivalents, end
of period $ 3,109,385 $ 207,808 $ 3,109,385 $ 207,808
---------------------------------------------------
---------------------------------------------------
Supplementary
information
Cash paid for
interest expense 18,526 83,377 149,997 $ 234,144
Cash paid for
income taxes 6,132 75,110 35,817 167,045
Non-cash investing and
financing activities
Promissory Notes issued
for the acquisition
of Sagent - - 80,000 -
Other consideration
issued for the
acquisition of Sagent - - 42,000 -
See Notes to Consolidated Financial Statements
/T/
Versatile Systems Inc.
Notes to Consolidated Financial Statements
For the period ended March 31, 2008
(Unaudited - Prepared by Management)
1. Consolidated financial statement presentation:
These unaudited interim consolidated financial statements at March 31, 2008 and the consolidated statements of
operations and deficit and cash flows for the periods ended March 31, 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 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, 2007.
The results of operations for the period ended March 31, 2008 are not necessarily indicative of the results for
the full year ending June 30, 2008. 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 March 31, 2008 have not been reviewed or audited by
the Company's auditor.
2. Accounting Changes:
The accounting policies applied in these interim financial statements are consistent with those applied in the
Annual financial statements.
Change in functional and reporting currency:
Effective July 1, 2006, the functional currency of the Company changed to the U.S. dollar. Concurrent with the
change in its functional currency, the Company adopted the U.S. dollar as its reporting currency. The
consolidated financial statements of the Company for the comparative periods ended on or before June 30, 2006
which were based on a Canadian functional currency have been translated into the U.S. reporting currency using
the current rate method as follows: assets and liabilities using the rate of exchange prevailing at the balance
sheet date; shareholders' equity using the applicable historic rate; and revenue and expenses using a weighted
average rate of exchange for the respective periods. Translation gains and losses have been included as part of
the cumulative foreign currency translation adjustment which has been reported as a component of shareholders'
equity.
In making this change in reporting currency, the Company followed the recommendations of the Emerging Issues
Committee ("EIC") of the Canadian Institute of Chartered Accountants ("CICA"), set out in EIC-130, "Translation
Method when the Reporting Currency Differs from the Measurement Currency or there is a Change in the Reporting
Currency".
3. Acquisition of Sagent Solutions
On December 28, 2007 the Company acquired Sagent Solutions, which is based in New Jersey and is focused on the
rapidly growing need of enterprises to leverage the tremendous 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 over the next year and 600,000 share purchase warrants exerciseable
at CDN $0.30 per share with a term of four years, subject to the approval of the TSX Venture Exchange.
On January 30, 2008 the TSX Venture Exchange approved the 600,000 share purchase warrants that were to be
issued pursuant to the acquisition of Sagent Solutions.
4. Bank term loan and Line of Credit
During the third quarter the Company repaid the Bank term loan in the amount of $2,749,263 with the Commerce
Bank. The Company also increased its line of credit with the Commerce Bank to $5,800,000.
/T/
5. Common Shares
Authorized
Unlimited common shares without par value
Issued and outstanding
Number Amount
-------------------------
Issued and outstanding - June 30, 2007 120,377,943 $ 51,643,963
Shares issued for exercised stock options 27,200 6,382
Shares issued for exercised warrants 1,446,000 409,820
Shares cancelled that were held in Treasury (702,500) (300,405)
Warrant cost for exercised warrants 48,040
Contributed surplus related to the exercised
stock options 278
-------------------------
Issued and outstanding 121,148,643 51,808,078
Less shares held in Treasury (658,000) ( 141,854)
-------------------------
Balance - March 31, 2008 120,490,643 $ 51,666,224
-------------------------
/T/
During the first quarter the Company received proceeds of $409,820 (CDN $433,800) for 1,446,000 exercised
warrants.
During the second quarter the Company purchased 360,000 common shares, pursuant to a Normal Course Issuer Bid.
During the third quarter the Company purchased 1,000,500 common shares, pursuant to a Normal Course Issuer Bid
and cancelled 702,500 shares.
/T/
6. Warrants
Issued and outstanding:
Exercise Number of
Expiry date Price CDN$ 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 - March 31, 2008 5,419,194 $ 369,965
-------------------
-------------------
7. Stock Options
Weighted
average
Number of exercise price
Stock Options CDN$
--------------------------------
Balance - June 30, 2007 9,293,900 $ 0.57
Granted during the period 605,000 $ 0.30
Forfeited during the period (1,007,700) $ 0.79
Exercised during the period (27,200) $ 0.25
--------------------------------
Balance - March 31, 2008 8,864,000 $ 0.53
--------------------------------
-------------
/T/
During the third quarter the Company granted 605,000 stock options to employees of the Company, with an
exercise price of CDN $0.30 per share, vesting over two years and with a term of four years.
8. 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/
March 31, 2008 June 30, 2007
-------------- -------------
(unaudited)
Future income tax assets
Tax losses and deductions $ 9,339,850 $ 9,161,889
Capital assets 443,829 437,557
Share issuance costs 496,719 653,200
Other 99,913 99,913
------------------------------
Future income tax assets 10,380,311 10,352,559
Valuation allowance (3,963,075) (4,200,345)
------------------------------
Net Future income tax asset 6,417,236 6,152,214
Future income tax liabilities - Goodwill (756,762) (731,499)
------------------------------
Net Future income tax asset 5,660,474 5,420,715
Less current portion (1,203,875) (1,094,579)
------------------------------
Non-current portiion of net future income
tax asset $ 4,456,599 $ 4,326,136
------------------------------
/T/
During the three months ended March 31, 2008 the Company recorded a $118,978 non-cash future income tax expense
(March 31, 2007 - $168,111 future income tax benefit) related to the recognition of future income tax assets.
9. Segmented Information
The company's only reportable segment is the development and sales of computer software, hardware and system
integration services.
/T/
The company's assets and sales by geographic area are as follows:
Nine months ended
March 31 June 30 March 31
2008 2007 2008 2007
--------------------------------------------------------
Capital assets, Capital assets,
intangible intangible
assets and assets and
goodwill goodwill Revenue Revenue
U.S. companies
United States $ 11,561,071 $ 11,722,692 $ 44,765,368 $ 43,188,829
Canada 183,496 2,127
Netherlands 14,900 348,540
France 243,405 -
United Kingdom 61,250 -
Other 12,300 24,908
UK and Canadian
companies
United Kingdom 13,803 16,678 377,823 472,704
Canada 1,779 3,836 - -
------------------------------------------------------
11,576,653 11,743,206 45,658,542 44,037,108
------------------------------------------------------
------------------------------------------------------
/T/
During the nine months ended March 31, 2008 the company generated revenue of $4,635,481 from Comcast Cable
representing 10.2% of the revenue for the period.
During the nine months ended March 31, 2008 the company purchased products and services from one vendor for
$18,650,705 (March 31, 2007 - $20,697,965) representing 54.3% (2007 - 61.3%) of the cost of sales.
Versatile Systems Inc.
Management Discussion and Analysis
Nine months ended March 31, 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 May 9, 2008 on the unaudited
interim consolidated financial statements and notes for the nine months ended March 31, 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.
Change of Functional and Reporting Currency to the U.S. dollar
Effective July 1, 2006, the Company's functional currency changed to the U.S. dollar. The change in functional
and reporting currency is to better reflect the company's business activities and to improve investors' ability
to compare the Company's financial results with other publicly traded businesses in the industry. The Company
conducts most of its operations in the United States, derives over 90% of its revenue from customers based in
the United States and generates positive cash flow from operations. Furthermore the Company's banking
facilities are with a U.S. lender. Prior to July 1, 2006, the Company reported its annual and quarterly
consolidated balance sheets and the related consolidated statements of operations and shareholders' equity and
cash flows in Canadian dollars ("CDN"). The financial statements and corresponding notes prior to July 1, 2006
have been restated to U.S. dollars for comparison to the fiscal 2007 financial results.
In making this change in reporting currency, the Company followed the recommendations of the Emerging Issues
Committee ("EIC") of the Canadian Institute of Chartered Accountants ("CICA"), set out in EIC-130, "Translation
Method when the Reporting Currency Differs from the Measurement Currency or there is a Change in the Reporting
Currency".
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 over the next year 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 third quarter
Highlights of the Company's operations for the third quarter included:
- Revenue for the three months ended March 31, 2008 was $14,519,869 compared to $12,391,840 for the same period
last year, an increase of 17.2%;
- Deferred revenue at March 31, 2008 was $7,002,514 (of which $5,986,232 is expected to be recognized in the
next four quarters) compared to $5,331,408 at March 31, 2007, an increase of $1,671,106 or 31.3%;
- The Company repaid the Term Loan of $2,749,263;
- The working capital as of March 31, 2008 was $4,547,545 an improvement of $1,860,046 over the working capital
at the year-end of June 30, 2007;
- At March 31, 2008 the Company had cash and cash equivalents of $3,109,385 compared to $3,369,087 at the year-
end;
- Obtained a line of credit of $5,800,000 from the Commerce Bank, an increase from the previous line of credit
of $3,000,000; and
- Completed the first phase of deployment of a route accounting system for a major U.S. food distributor with
Versatile's Mobiquity Route(TM) 4.0 as the core driver of this system.
Cash flow from operations
The cash flow from operations, before the non-cash working capital items, was $1,304,528 for the nine months
ended March 31, 2008 compared to cash flow of $1,033,314 for the same period last year, an increase of 26.2%.
Over the past three years the cash flow from operations, before non-cash working capital items, has been as
follows:
/T/
2007 $2,159,289
2006 1,099,233
2005 (878,482)
/T/
Review of the third quarter
Revenue for the three months ended March 31, 2008 was $14,519,869 compared to $12,391,840 for the same quarter
last year, an increase of $2,128,029. While the Company had repeat business from its existing customer base
including Motorola, Fisher Scientific, Respironics, Iron Mountain, Comcast and various retailers, universities
and government organizations, the Company experienced a slowdown in orders from customers for routine
expenditures on infrastructure.
The EBITDA for the quarter was $4,245 compared to an EBITDA of $219,893 for the same quarter last year.
The Net Loss for the quarter amounted to $67,622 ($0.00 per share) compared to Net Earnings of $70,471 ($0.00
per share) for the same period last year.
Cost of sales
Cost of sales for the quarter amounted to $11,094,832 resulting in a gross profit of $3,425,037 or 23.6% of
sales as compared to $9,029,838 resulting in a gross profit of $3,362,002 or 27.1% 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 March 31, 2008 the Company had an inventory provision of $204,218 (June 30, 2007 - $199,354).
General and administrative
General and administrative expenses for the quarter amounted to $1,176,901 compared to $1,162,952 for the same
quarter last year. As a percentage of sales the general and administrative expenses were 8.1% in the quarter
compared to 9.4% in the same quarter last year.
Technology Investment
Over the past five years the Company has made a significant investment in the form of expense 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 $397,591 compared to $254,565 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 2.7% in the quarter compared to 2.1% 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.
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:
- Commenced development on an interactive version of Mobiquity Route 4.0(TM);
- Expanded the reporting functions; and
- Developed company profiles for all DEX maintenance customers.
For the Mobiquity Transaction Engine 3.0(TM) these included the following:
- Implementation of a proof-of-concept theft deterrent system using the Mobiquity Transaction Engine 3.0(TM),
RFID, Biometrics and Video Cameras;
- Integrated a flexible reporting and business intelligence framework into Mobiquity Transaction Engine 3.0(TM)
by leveraging BIRT;
- Implementation of a new user interface. The new user interface leverages AJAX and a windows-like interface
running in a web browser; and
- Finalized the Mobiquity Transaction Engine 3.0(TM) data model asset management.
For the Mobiquity Kiosk(TM), these included the following
- Completion of the hardware and operating system support for the new Madison Kiosk desktop computer;
- Implementation of web browsing capability in the Kiosk;
- Implementation of a time tracking kiosk for a welfare education service provider;
- Implementation of a new screen design for Alliance Data Systems
- Completion of the development of the electronic credit application for American General Financial Services;
and
- Implementation of an "Enter to Win" lead management application that integrates with ePrize.com.
Selling and marketing expenses
Selling and marketing expense for the quarter amounted to $1,746,710 compared to $1,578,391 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 12.0% in the quarter compared to 12.7% in the same quarter last year. As a percentage of gross
profit the selling and marketing expenses were 51.0% in the quarter compared to 46.9% in the same quarter last
year.
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 March 31, 2008 the Company recorded a $118,978 non-cash future income tax benefit
related to the adjustment in the future income tax benefits recorded on the Balance Sheet.
Amortization
The amortization of capital assets and intangible assets for the quarter amounted to $261,951 (March 31, 2007 -
$249,562). The purchased technology arising from the acquisition of Perfect Order will be fully amortized in
the fourth quarter of the current fiscal year so consequently the amount of amortization will be lower in
subsequent periods.
Foreign Exchange Loss
The foreign exchange loss for the quarter amounted to $43,003 compared to $16,630 for the same quarter last
year. The increase was due to a significant decline in the U.S. dollar against the Canadian dollar and British
Sterling Pounds in the quarter.
Review of the operations for the nine months ended March 31, 2008
Revenue for the nine months ended March 31, 2008 was $45,658,542 generating a gross profit of $11,311,654 or
24.8% of revenue compared to $44,037,108 generating a gross profit of $10,293,398 or 23.4% of revenue for the
same period last year. The Company generated sales of higher margin products resulting in an increase in gross
profit of $1,018,256 compared with the same period last year. The EBITDA for the period was $1,134,024 compared
to an EBITDA of $1,015,528 for the same period last year, an increase of 11.7%. Net Earnings for the period
amounted to $562,173 ($0.00 per share) compared to $386,879 ($0.00 per share) for the same period last year, an
increase of 45.3%.
Cost of sales
Cost of sales for the nine months ended March 31, 2008 amounted to $34,346,888 resulting in a gross profit of
$11,311,654 or 24.8% of sales as compared to $33,743,710 resulting in a gross profit of $10,293,398 or 23.4% of
sales for the same period last year.
General and administrative
General and administrative expenses for the nine months ended March 31, 2008 amounted to $3,561,691 compared to
$3,325,335 for the same period last year, an increase of 7.1%.
Technology Investment
Research and development expense for the nine months ended March 31, 2008 amounted to $1,297,309 compared to
$728,847 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 2.8% compared to 1.7% in the same
period last year.
Selling and marketing expenses
Selling and marketing expense for the nine months ended March 31, 2008 amounted to $5,034,578 compared to
$4,914,234 for the same period last year, an increase of 2.4%.
Amortization
The amortization of capital assets and intangible assets for the nine months ended March 31, 2008 amounted to
$757,022 (March 31, 2007 - $880,136).
Foreign exchange loss
The foreign exchange loss for the nine months ended March 31, 2008 was $174,162 compared to $18,906 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/
Q4 2006 Q1 2007 Q2 2007 Q3 2007
Jun 06 Sept 06 Dec 06 Mar 07
----------------------------------------------
(restated)
Revenue 15,288,876 14,504,692 17,140,576 12,391,840
Cost of Sales 11,395,093 11,526,009 13,187,863 9,029,838
----------------------------------------------
Gross Profit 3,893,783 2,978,683 3,952,713 3,362,002
----------------------------------------------
Expenses:
General and administrative 1,001,277 983,869 1,180,790 1,179,582
(including foreign exchange)
Research and Development 269,015 212,021 262,261 254,565
Selling and Marketing 1,842,837 1,528,090 1,807,753 1,578,391
Stock-based compensation 31,278 26,061 134,916 129,571
----------------------------------------------
3,144,407 2,750,041 3,385,720 3,142,109
----------------------------------------------
Earnings before interest,
taxes and amortization 749,376 228,642 566,993 219,893
Amortization (359,607) (320,749) (309,825) (249,562)
Interest (252,534) (94,454) (80,321) (56,907)
Income taxes 2,387,551 324,141 1,981 157,047
----------------------------------------------
Net Earnings (loss) 2,524,786 137,580 178,828 70,471
----------------------------------------------
----------------------------------------------
Per share, basic and diluted 0.03 0.00 0.00 0.00
----------------------------------------------
Q4 2007 Q1 2008 Q2 2008 Q3 2008
Jun 07 Sept 07 Dec 07 Mar 08
----------------------------------------------
Revenue 18,193,167 12,615,506 18,523,167 14,519,869
Cost of Sales 13,770,768 9,535,389 13,716,667 11,094,832
----------------------------------------------
Gross Profit 4,422,399 3,080,117 4,806,500 3,425,037
----------------------------------------------
Expenses:
General and administrative 1,252,940 1,103,886 1,412,063 1,219,904
(including foreign exchange)
Research and Development 339,369 408,259 491,459 397,591
Selling and Marketing 1,587,817 1,531,330 1,756,538 1,746,710
Stock-based compensation 264,896 25,851 27,452 56,587
----------------------------------------------
3,445,022 3,069,326 3,687,512 3,420,792
----------------------------------------------
Earnings before interest,
taxes and amortization 977,377 10,791 1,118,988 4,245
Amortization (282,705) (246,036) (249,035) (261,951)
Interest (69,236) (35,475) (26,521) 90,375
Income taxes 367,130 214,216 (157,133) 99,709
----------------------------------------------
Net Earnings (loss) 992,566 (56,504) 686,299 (67,622)
----------------------------------------------
----------------------------------------------
Per share, basic and diluted 0.01 0.00 0.01 (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 year-to-date 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 Company had working capital of $4,547,545 at March 31, 2008 an improvement of $1,860,046 over the working
capital at the year-end on June 30, 2007. During the current quarter the Company repaid the term loan in the
amount of $2,749,263, which had been classified with current liabilities.
At March 31, 2008 the Company had cash and cash equivalents of $3,109,385 compared to $3,369,087 at the year-
end.
The cash flow from operations, before non-cash working capital items improved to $1,304,528 for the nine months
ended March 31, 2008 compared to 1,033,314 for the same period last year, an increase of 26.2%.
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 March 31, 2008 the line of credit was not drawn (June 30, 2007 - $3,383) and the Company had a bank
overdraft of $321,034 (June 30, 2007 - $170,422).
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. Based on the accounts receivable at March 31, 2008
approximately $4.9 million of this credit facility was available to the Company.
At March 31, 2008 the financial covenants for these companies include requirements for debt coverage of 1.5 and
minimum Tangible Net worth of $3,000,000. The companies met these tests.
Included in accounts payable and accrued liabilities is $2,888,805 owing to the Company's major suppliers,
which is secured by a second charge on the accounts receivable and other assets of VSI and is subordinated to
the bank term loan and line of credit. During the quarter the Company secured a new line of credit from its
supplier for up to $7,500,000.
Capital Expenditures
During the nine months ended March 31, 2008 the majority of the capital expenditures relates to the conversion
of the Company's accounting system to MAS500 as well as routine replacement of laptops.
Share Capital
As of April 30, 2008 the Company had 121,148,643 common shares issued and outstanding.
During the first quarter the Company received proceeds of $409,820 (CDN $433,800) for 1,446,000 exercised
warrants.
During the first quarter a total of 27,200 stock options were exercised for proceeds of $6,382.
During the second quarter the Company announced a Normal Course Issuer Bid to purchase up to 6,000,000 common
shares through the facilities of the TSX Venture Exchange. As of March 31, 2008 the Company had purchased
1,360,500 common shares and cancelled 702,500 of these shares.
Stock Options
The Company can grant up to 10,800,000 options pursuant to its stock option plan.
/T/
Weighted
Number of average exercise
shares price CDN$
--------------------------------------------------------------
Outstanding - June 30, 2007 9,293,900 0.57
Granted 605,000 0.30
Forfeited (1,007,700) 0.79
Exercised (27,200) 0.25
-----------------------------
Outstanding - March 31, 2008 8,864,000 0.53
-----------------------------
/T/
For the period ended March 31, 2008, the Company recognized $56,587 in stock-based compensation, a non-cash
item, for vesting of stock options granted to employees, consultants, directors and officers of the Company in
prior years.
Warrants:
The details of the outstanding warrants at March 31, 2008 are as follows:
/T/
Exercise Number of
Expiry date Price CDN$ 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 - March 31, 2008 5,419,194 $ 369,965
-------------------
/T/
During the first quarter the Company received proceeds of $409,820 (CDN $433,800) for 1,446,000 exercised
warrants and 200,000 warrants expired on August 11, 2007.
Related Party Transactions
During the current quarter, the Company paid consulting fees and salaries, which are included in the General
and administration expense, of $189,109 (2007 - $166,692) 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 $34.7 million to
March 31, 2008. Although the Company has decreased its operating expenses in recent periods and increased its
revenues 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. The Company has yet to file any applications for
patent protection and has not registered any trademarks or copyrights. 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 March 31, 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 4% of total assets as at March 31, 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 March 31, 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.
Capital 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
March 31, 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 27% of the Company's total assets as at March
31, 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.
Evaluation and Effectiveness of Disclosure Controls and Procedures
The Company has established and maintains disclosure controls and procedures over financial reporting. The
certifying officers have evaluated the effectiveness of the issuer's disclosure controls and procedures as of
March 31, 2008 and have concluded that such procedures are adequate and effective to ensure accurate and
complete disclosures in annual filings.
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
All amounts are expressed in U.S. dollars unless otherwise stated. (C) 2008 Versatile Systems Inc. All rights
reserved.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Versatile Systems Inc.
John Hardy
Chairman and CEO
1-800-262-1633 or 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.
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