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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 | 00:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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TIDMVVS
Half year report
FOR: VERSATILE SYSTEMS INC.
TSX VENTURE SYMBOL: VV
AIM SYMBOL: VVS
January 26, 2011
Versatile Reports Second Quarter Results
Revenue of $15,460,033 for the Quarter Produces Net Earnings of $178,965
VANCOUVER, BRITISH COLUMBIA--(Marketwire - Jan. 26, 2011) - Versatile Systems Inc. (TSX VENTURE:VV)(AIM:VVS) announces its results for
the second quarter of the 2011 fiscal year.
Revenue for the three months ended December 31, 2010 was $15,460,033 compared to $11,259,292 for the same quarter last year, an
increase of $4,200,741. The Net Earnings for the quarter amounted to $178,965 ($0.00 per share) compared to a Net Loss of $80,661
($0.00 per share) for the same period last year.
"All key financial metrics have shown substantial improvement over the comparable quarter last year, as well as the first quarter ended
September 30, 2010," said John Hardy, Chairman and CEO of Versatile. "Revenue, deferred revenue, working capital, cash flow and
earnings have all increased. We will continue our efforts to improve the Company's financial performance in future quarters."
Highlights for the quarter included:
=- Revenue for the three months ended December 31, 2010 was $15,460,033
compared to $11,259,292 for the same quarter last year, an increase of
$4,200,741;
=- Deferred revenue at December 31, 2010 was $8,112,256 (of which
$7,264,273 is expected to be recognized in the next four quarters)
compared to $7,512,605 at December 31, 2009;
=- The Earnings before interest, taxes and amortization for the quarter was
$305,701 compared to a Loss before interest, taxes and amortization of
$268,531 for the same quarter last year, an improvement of $574,232;
=- The cash flow generated from operations before other items amounted to
$299,384 for the three months ended December 31, 2010 compared to cash
flow used in operations before other items of $277,284 for the same
period last year, an improvement of $576,668;
=- The Net Earnings for the quarter amounted to $178,965 ($0.00 per share)
compared to a Net Loss of $80,661 ($0.00 per share) for the same period
last year, an improvement of $259,626;
=- The working capital as of December 31, 2010 was $4,381,730, an increase
of $352,858 compared to the working capital of $4,028,872 at September
30, 2010;
=- The research and development expense for the quarter amounted to
$278,909 compared to $247,084 for the same quarter last year; and
=- The Investment in Equus consists of 962,962 shares of Equus Total
Return, Inc. which is a public company trading on the NYSE under the
symbol EQS. During the quarter the Company acquired an additional
140,391 shares, thereby increasing its holdings to 10.9% of the total
issued shares. On November11, 2010 Equus released its results for the
third quarter. The net asset value of Equus at September 30, 2010 was
$3.55 per share.
During the current quarter, the Company incurred $124,442 for research and development activities related to Mobiquity Route(TM), DEX
and related mobile software products and $114,660 related to Mobiquity Transaction Engine 3.0(TM), Mobiquity Kiosk(TM) and Autostore.
Revenue for the six months ended December 31, 2010 was $24,679,083 compared to $22,875,517 for the same period last year, an increase
of $1,803,566. Net Earnings for the period amounted to $89,651 ($0.00 per share) compared to a Net Loss of $127,436 ($0.00 per share)
for the same period last year.
"Versatile generated cash flow from operations before other items of $299,384 this quarter," said Fraser Atkinson, CFO of Versatile.
"This has helped to further strengthen the Company's financial position in addition to $5 million that was unused and available on its
bank line of credit."
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) 2011 Versatile Systems Inc. All rights reserved.
Versatile Systems Inc.
Consolidated Financial Statements
December 31, 2010
Consolidated Balance Sheets
Consolidated Statements of Operations and Deficit
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Versatile Systems Inc.
Consolidated Balance Sheets
(Unaudited - Prepared by Management)
Expressed in U.S. dollars December 31, 2010 June 30, 2010
------------------------------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 923,825 $ 1,738,036
Investment in Equus (note 3) 2,407,405 2,203,043
Accounts receivable 10,814,932 10,580,706
Current portion of deferred contract costs 5,509,052 5,793,180
Prepaid expenses 277,956 236,993
Inventory 1,806,109 1,719,477
Future income tax benefits (note 8) 731,006 721,975
------------------------------------
22,470,285 22,993,410
Long-term accounts receivable 318,386 265,612
Deferred contract costs 758,408 598,366
Capital Assets 356,972 519,391
Intangible assets - 459
Future income tax benefits (note 8) 6,186,924 6,243,875
Goodwill 9,914,350 9,914,350
------------------------------------
$ 40,005,325 $ 40,535,463
------------------------------------
LIABILITIES
Current Liabilities
Line of credit (note 4) $ 815,855 $ 1,353,312
Accounts payable and accrued liabilities 10,008,427 9,955,342
Current portion of deferred revenue 7,264,273 7,432,210
------------------------------------
18,088,555 18,740,864
Deferred Revenue 847,983 710,269
------------------------------------
18,936,538 19,451,133
------------------------------------
SHAREHOLDERS' EQUITY
Share Capital (note 5) 54,433,709 54,433,709
Warrants (note 6) 186,367 186,367
Contributed surplus 4,231,539 4,231,539
Deficit (36,876,185) (36,965,836)
Accumulated other comprehensive loss (906,643) (801,449)
------------------------------------
21,068,787 21,084,330
------------------------------------
$ 40,005,325 $ 40,535,463
------------------------------------
APPROVED BY THE DIRECTORS:
DIRECTOR: John Hardy DIRECTOR: Fraser Atkinson
See Notes to Consolidated Financial Statements
Expressed in U.S. dollars Three months ended December 31 Six months ended December 31
2010 2009 2010 2009
--------------------------------------------------------------
SALES $ 15,460,033 $ 11,259,292 $ 24,679,083 $ 22,875,517
COST OF SALES 12,491,896 8,599,212 19,607,119 17,560,133
--------------------------------------------------------------
2,968,137 2,660,080 5,071,964 5,315,384
--------------------------------------------------------------
EXPENSES
Selling and marketing 1,327,878 1,619,075 2,336,445 2,980,776
General and administrative 1,051,897 1,100,145 1,942,347 1,974,493
Research and development 278,909 247,084 471,177 493,754
Non recurrring expenses 37,503 28,219 58,171 48,079
Stock-based compensation - 23,242 - 45,630
Foreign exchange gain (33,751) (89,154) (31,418) (74,612)
--------------------------------------------------------------
2,662,436 2,928,611 4,776,722 5,468,120
--------------------------------------------------------------
Earnings (loss) before interest, taxes and
amortization 305,701 (268,531) 295,242 (152,736)
Amortization of capital assets 48,108 62,287 119,269 128,911
Amortization of intangible assets - 90,675 - 181,349
Interest expense 666 10,441 15,636 14,210
Loss (Gain) on sale of capital assets and
investments 2,575 (4,952) 2,575 (4,952)
--------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 254,352 (426,982) 157,762 (472,254)
Current income tax expense (995) (1,245) (1,990) (2,748)
Future income tax (expense) benefit (74,392) 347,566 (66,121) 347,566
--------------------------------------------------------------
NET EARNINGS (LOSS) 178,965 (80,661) 89,651 (127,436)
--------------------------------------------------------------
DEFICIT, BEGINNING OF PERIOD (37,055,150) (35,775,990) (36,965,836) (35,729,215)
--------------------------------------------------------------
DEFICIT, END OF PERIOD (36,876,185) (35,856,651) (36,876,185) (35,856,651)
--------------------------------------------------------------
EARNINGS (LOSS) PER SHARE (basic and diluted) $0.00 ($0.00) $0.00 ($0.00)
--------------------------------------------------------------
See Notes to Consolidated Financial Statements
Versatile Systems Inc.
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited - Prepared by Management)
Three Months ended December
Expressed in U.S. dollars 31 Six Months ended December 31
2010 2009 2010 2009
---------------------------------------------------------
Net earnings (loss) 178,965 (80,661) 89,651 (127,436)
Other comprehensive (loss) income
Net change in fair value of available-for-sale
investments 141,415 - (105,194) -
---------------------------------------------------------
Comprehensive (loss) income 320,380 (80,661) (15,543) (127,436)
---------------------------------------------------------
See Notes to Consolidated Financial Statements
Versatile Systems Inc.
Consolidated Statements of Cash Flows
(Unaudited - Prepared by Management)
Three Months ended Six Months ended
Expressed in U.S. dollars December 31 December 31
2010 2009 2010 2009
------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 178,965 $ (80,661) $ 89,651 $ (127,436)
Items not affecting cash
Amortization of capital and intangible assets 63,597 170,862 137,849 348,987
Stock-based compensation - 23,242 - 45,630
Loss (Gain) on sale of capital assets and
investments 2,575 ( 4,952) 2,575 ( 4,952)
Unrealized foreign exchange gain ( 20,886) ( 38,209) ( 20,391) ( 42,539)
Future income tax expense (benefit) 74,392 ( 347,566) 66,121 ( 347,566)
------------------------------------------------------
Cash flow used in operations before other items 298,643 ( 277,284) 275,805 ( 127,876)
Net change in non-cash operating balance sheet
items ( 415,708) 41,236 ( 267,647) ( 2,157,242)
------------------------------------------------------
( 117,065) ( 236,048) 8,158 ( 2,285,118)
INVESTING ACTIVITIES
Short term investments (309,556) (567,558) (309,556) (2,300,835)
Proceeds from disposition of capital assets 30,174 7,701 103,268 7,701
Additions to capital assets ( 38,799) ( 21,414) ( 78,624) ( 37,266)
------------------------------------------------------
( 318,181) ( 581,271) ( 284,912) ( 2,330,400)
------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of shares - 3,876,257 - 3,876,257
Share issue costs - (26,291) - (26,291)
Proceeds from (repayment of) line of credit (104,426) (503,051) (537,457) 2,558,445
------------------------------------------------------
( 104,426) 3,346,915 ( 537,457) 6,408,411
------------------------------------------------------
Increase (decrease) in cash and cash equivalents ( 539,672) 2,529,596 ( 814,211) 1,792,893
CASH and cash equivalents, beginning of period 1,463,497 1,265,827 1,738,036 2,002,530
------------------------------------------------------
CASH and cash equivalents, end of period $ 923,825 $ 3,795,423 $ 923,825 $ 3,795,423
------------------------------------------------------
Supplementary information
Cash paid for interest expense $ 4,929 $ 14,130 $ 16,993 $ 14,672
Cash paid for income taxes 1,050 1,455 2,469 2,963
See Notes to Consolidated Financial Statements
Versatile Systems Inc.
Notes to Consolidated Financial Statements For the period ended December 31, 2010
(Unaudited - Prepared by Management)
1. Consolidated financial statement presentation:
These unaudited interim consolidated financial statements at December 31, 2010 and the consolidated statements of operations and
deficit, comprehensive income (loss) and cash flows for the periods ended December 31, 2010 and 2009, 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, 2010.
The results of operations for the periods ended December 31, 2010 are not necessarily indicative of the results for the full year
ending June 30, 2011. All amounts herein, including the comparative figures, have been expressed in United States dollars unless
otherwise
The financial statements as at and for the period ended December 31, 2010 have not been reviewed or audited by the Company's auditor.
2. Accounting Policies
The accounting policies applied in these interim financial statements are consistent with those applied in the Annual financial
statements.
3. Investment in Equus
The Investment in Equus consists of 962,962 shares of Equus Total Return, Inc. which is a public company trading on the NYSE under the
symbol EQS. The share price as at December 31, 2010 was $2.50 so the unrealized gain for the quarter was $141,415 and the cumulative
unrealized loss was $624,864.
4. Bank Line of Credit
The Company has a credit line facility for up to $5,800,000, which is limited to 70% of eligible accounts receivable of certain U.S.
subsidiaries from a U.S. based financial institution. At December 31, 2010 this amounted to $5,800,000. The line of credit bears
interest at the prime rate of lending as published in the Wall Street Journal and is secured with a first charge on the assets of these
U.S. subsidiaries.
5. Share Capital
Authorized
Unlimited common shares without par value
Issued and outstanding
Number
of shares Amount
----------------------------------
Issued and outstanding - June 30, 2010 157,285,643 $ 54,433,709
Issued during the period - -
----------------------------------
Balance - December 31, 2010 157,285,643 $ 54,433,709
----------------------------------
6. Warrants
Issued and outstanding:
Exercise Number of
Expiry date Price CDN$ Warrants Cost
=-------------------------------------------------------------------------------------------------------------
March 31, 2011 $ 0.569 1,411,808 $ 63,309
April 16, 2011 $ 0.6636 583,770 81,058
January 22, 2012 $ 0.30 600,000 42,000
---------------------------------
Balance - December 31, 2010 2,595,578 $ 186,367
---------------------------------
7. Stock Options
Weighted average
Number of exercise price
Stock Options CDN$
------------------------------------
Balance - June 30, 2010 7,901,000 $ 0.45
Granted during the period -
Forfeited during the period (225,000) $ 0.10
Expired during the period (3,125,000) $ 0.94
------------------------------------
Balance - December 31, 2010 4,551,000 $ 0.12
------------------------------------
During the second quarter 1,610,000 stock options expired and during the first quarter 1,515,000 stock options expired and 225,000
stock options were forfeitted.
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.
December 31, 2010 June 30, 2010
---------------------------------------
(unaudited)
Future income tax assets
Tax losses and deductions $ 8,990,499 $ 8,929,483
Capital assets 1,078,107 1,063,918
Share issuance costs 123,435 115,754
Other 347,103 338,000
---------------------------------------
Future income tax assets 10,539,144 10,447,155
Valuation allowance (2,865,564) (2,725,655)
---------------------------------------
Net Future income tax asset 7,673,580 7,721,500
Future income tax liabilities - Goodwill (755,650) (755,650)
---------------------------------------
Net Future income tax asset 6,917,930 6,965,850
Less current portion (731,006) (721,975)
---------------------------------------
Non-current portiion of net future income tax asset $ 6,186,924 $ 6,243,875
---------------------------------------
During the three months ended December 31, 2010 the Company recorded a future income tax expense of $74,392 related to the recognition
of future income tax assets compared to a future income tax benefit of $347,566 for the comparable period last year.
9. Segmented Information
The Company's only reportable segment is the development and sales of computer software, hardware and system integration services.
The Company's assets and sales by geographic area are as follows:
Three months ended
December 31 June 30 December 31
2010 2010 2010 2009
------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Capital assets, Capital assets,
intangible assets intangible assets
and goodwill and goodwill Revenue Revenue
U.S. companies
United States $ 10,267,025 $ 10,431,566 $ 15,112,456 $ 10,949,663
Canada 81,507 138,802
Netherlands 10,460 16,579
France 37,120 32,390
United Kingdom 30,000 16,884
Australia 12,050
Other 9,852 32,906
UK and Canadian companies
United Kingdom 4,297 2,634 166,588 72,068
Canada - - - -
------------------------------------------------------------------------
10,271,322 10,434,200 15,460,033 11,259,292
------------------------------------------------------------------------
During the three months ended December 31, 2010 the Company generated revenue of $2,785,710 (2009 - $1,804,020) from Comcast Cable
representing 18.0% (2009 - 16.0%) of the revenue for that period.
During the three months ended December 31, 2010 the Company purchased products and services from one vendor for $5,564,358 (2009 -
$3,551,944) representing 44.5% (2009 - 41.0%) of the cost of sales.
Versatile Systems Inc.
Management Discussion and Analysis
Six months ended December 31, 2010
The following management discussion and analysis of the consolidated results of operations and financial condition of Versatile Systems
Inc. (the "Company" or "Versatile") is made as of January 24, 2011 on the consolidated financial statements and notes for the six
months ended December 31, 2010.
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 unaudited interim consolidated
financial statements and management discussion and analysis have been reviewed and approved by the Company's Audit Committee as
directed by the Company's Board of Directors.
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions, which
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from
those estimates.
Forward-Looking Statements
This document may contain forward-looking statements relating to Versatile's operations or to the environment in which it operates,
which are based on Versatile's operations, estimates, forecasts and projections. These statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to predict or are beyond Versatile's control. A number of important
factors including those set forth in other public filings could cause actual outcomes and results to differ materially from those
expressed in these forward looking statements. Consequently readers should not place any undue reliance on such forward-looking
statements. In addition, these forward looking statements relate to the date on which they are made. Versatile disclaims any intention
or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Non-GAAP Disclosure
EBITDA is defined by the Company as net earnings before interest, income taxes, depreciation and amortization. The Company has included
information concerning EBITDA because it believes that it may be used by certain investors as one measure of the Company's financial
performance. EBITDA is not a measure of financial performance under Canadian GAAP and is not necessarily comparable to similarly titled
measures used by other companies. EBITDA should not be construed as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with Canadian GAAP) as a measure of liquidity.
In addition, the Company has included information concerning its cash flow from operations as it may be used by certain investors as a
measure of the Company's financial performance.
Overview
The Company's core business is developing solutions that solve customers' problems in the storage, security, transmission and
collection of mission critical data. The Company's proprietary software applications, the Mobiquity(TM) Solution Suite, are a key
component of this solution. This enables companies to improve the sales, marketing and distribution of their products. The Company
delivers wireless/wired solutions to the consumer packaged goods, retail, financial, pharmaceutical, healthcare, and logistics
verticals through an integrated combination of licensed software, professional services, and the re-sale of mobile and storage related
hardware. The Company also offers maintenance and support via a 24 hour call centre.
Highlights of the Second quarter
Highlights of the Company's operations for the quarter included:
=- Revenue for the three months ended December 31, 2010 was $15,460,033
compared to $11,259,292 for the same quarter last year, an increase of
$4,200,741;
=- The EBITDA for the quarter was $305,701 compared to an EBITDA Loss of
$268,531 for the same quarter last year, an improvement of $574,232;
=- The Net Earnings for the quarter amounted to $178,965 ($0.00 per share)
compared to a Net Loss of $80,661 ($0.00 per share) for the same period
last year;
=- The cash flow generated from operations before other items amounted to
$299,384 for the three months ended December 31, 2010 compared to cash
flow used in operations before other items of $277,284 for the same
period last year, an improvement of $576,668;
=- The working capital as of December 31, 2010 was $4,381,730, an increase
of $352,858 compared to the working capital of $4,028,872 at September
30, 2010;
=- The research and development expense for the quarter amounted to
$278,909 compared to $247,084 for the same quarter last year;
=- Deferred revenue at December 31, 2010 was $8,112,256 (of which
$7,264,273 is expected to be recognized in the next four quarters)
compared to $7,512,605 at December 31, 2009;
=- The Investment in Equus consists of 962,962 shares of Equus Total
Return, Inc. which is a public company trading on the NYSE under the
symbol EQS; and
=- The Company generated revenue of $2,785,710 from Comcast, $1,238,965
from Frontier, $1,157,092 from Michaels, $972,921 from American Eagle,
$933,596 from Hershey, $791,964 from Duferco and $582,464 from Motorola.
Review of the Second quarter
Revenue for the three months ended December 31, 2010 was $15,460,033 compared to $11,259,292 for the same quarter last year, an
increase of $4,200,741. During the current quarter the Company generated revenue of $2,785,710 from Comcast, $1,238,965 from Frontier,
$1,157,092 from Michaels, $972,921 from American Eagle, $933,596 from Hershey, $791,964 from Duferco and $582,464 from Motorola. The
Company had repeat business from its existing customer base including Comcast, Hershey, Motorola, and various retailers, universities
and government organizations, as well as significant increases with other customers such as Frontier, Duferco and Michaels.
The EBITDA for the quarter was $305,701 compared to an EBITDA Loss of $268,531 for the same quarter last year.
During the current quarter the Company recorded a Non-recurring expense consisting of an additional provision of $37,503 (2009 -
$28,219) primarily for legal costs, for transactions occurring in prior periods.
During the quarter the Company had a future income tax expense of $74,392 compared to a future income tax benefit of $347,566 for the
same quarter last year.
The Net Earnings for the quarter amounted to $178,965 ($0.00 per share) compared to a Net Loss of $80,661 ($0.00 per share) for the
same period last year.
Cost of sales
Cost of sales for the quarter amounted to $12,491,896 resulting in a gross profit of $2,968,137 or 19.2% of sales as compared to
$8,599,212 resulting in a gross profit of $2,660,080 or 23.6% of sales for the same quarter last year. The decline in the gross profit
percentage can be attributed to a drop in the rebate programs that are available to the Company as well as several of the larger
transactions in the quarter that had lower margins.
At December 31, 2010 the Company had an inventory provision of $181,649 (June 30, 2010 - $172,169).
General and administrative
General and administrative expenses for the quarter amounted to $1,051,897 compared to $1,100,145 for the same quarter last year, a
decrease of $48,248. As a percentage of sales the general and administrative expenses were 6.8% in the quarter compared to 9.8% in the
same quarter last year.
Technology Investment
Over the past ten years the Company has made a significant investment in the form of expenses to advance the abilities of its
technology and resulting service offering. This investment does not contribute directly to revenues during the period that the research
and development expenses are incurred.
Research and development expense for the quarter amounted to $278,909 compared to $247,084 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 1.8% in the quarter compared to 2.2% in the same quarter last year. The decrease in the overall expenditures on research and
development expense can be attributed to the reduction in the number of research and development projects.
During the current quarter the Company's technology investment related to enhanced product functionality and requirements from various
partners:
For the Mobiquity Route(TM) these included the following:
=- Creating multiple distribution center catalogs for a single mobile
route;
=- Developing regional assignments for users, routes, customers and
catalogs;
=- Developing audit templates with work assignment alerts;
=- Developing compound product lookups on mobile devices; and
=- Developing host initiated Discount Management Module with multiple sub-
discounts per item.
For the Mobiquity Kiosk(TM), these included the following:
=- Improving the content management/delivery infrastructure to enhance
content scheduling capabilities;
=- Developing a customer facing interface and middleware integration with a
third party direct mail and marketing solution;
=- Improving web browsing capabilities;
=- Integrating select applications onto the Apple iPhone and iPad
platforms; and
=- Developing an interactive digital signage platform.
For the Mobiquity Transaction Engine 3.0(TM)these included the following:
=- Implementing faster and more detailed search capabilities;
=- Enhancing UI navigation functionality;
=- Architecting and designing a hosted version of SyncSeer; and
=- Implementing updated adaptors for Wifi device tracking.
During the current period, the Company incurred $124,442 for research and development activities related to Mobiquity Route(TM) and
related mobile software products.
During the current period, the Company incurred $114,660 for research and development activities related to Mobiquity Transaction
Engine 3.0(TM)and Mobiquity Kiosk(TM).
Selling and marketing expenses
Selling and marketing expense for the quarter amounted to $1,327,878 compared to $1,619,075 for the same quarter last year, a decrease
of $291,197. 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 8.6% in the quarter compared to 14.4% in the
same quarter last year. As a percentage of gross profit the selling and marketing expenses were 44.7% in the quarter compared to 60.9%
in the same quarter last year. There were no significant changes in the selling and marketing activities during the quarter.
Future Income Tax Benefits
Canadian GAAP requires a valuation allowance to be recorded against any future tax asset to the extent that it is more likely than not
that the future income tax asset will not be realized.
Prior to the 2006 fiscal year, the Company determined that it had not met this test so the Company recorded a full valuation allowance
against the potential value of all of its tax losses and deductions available to be taken against future years' taxable income. As a
result, future income tax assets were fully provided for.
During the 2006 fiscal year, the Company determined that the U.S. subsidiaries were generating sufficient profits such that they were
more likely than not to utilize the losses and deductions attributable to these U.S. subsidiaries. Consequently, the Company concluded
that the valuation allowance be reduced accordingly. The difference between the total value of these tax benefits less the valuation
allowance is the amount of the future income tax asset that is recorded by the Company.
For the three months ended December 31, 2010 the Company recorded a future income tax expense of $74,392 compared to a future income
tax benefit of $347,566 for the same quarter last year.
To the extent that the Company expects to generate sufficient profits in the following fiscal period, that portion of the Future income
tax benefits have been classified as current.
Amortization
The amortization of capital assets and intangible assets for the quarter amounted to $63,597 (2009 - $170,862), which includes $15,489
of amortization classified with the cost of sales for Kiosks deployed pursuant to various subscription agreements.
Foreign Exchange Gain
The foreign exchange gain for the quarter amounted to $33,751 compared to a foreign exchange gain of $89,154 for the same quarter last
year. The gain was primarily due to the fluctuation in the U.S. dollar against the Canadian dollar in the quarter.
Review of the operations for the six months ended December 31, 2010
Revenue for the six months ended December 31, 2010 was $24,679,083 generating a gross profit of $5,071,964 or 20.6% of sales compared
to $22,875,517 generating a gross profit of $5,315,384 or 23.2% of sales for the same period last year. The EBITDA for the period was
$295,242 compared to and EBITDA Loss of $152,736 for the same period last year. The Net Earnings for the period amounted to $89,651
($0.00 per share) compared to a Net Loss of $127,436 ($0.00 per share) for the same period last year.
Cost of sales
Cost of sales for the six months ended December 31, 2010 amounted to $19,607,119 resulting in a gross profit of $5,071,964 or 20.6% of
sales as compared to $17,560,133 resulting in a gross profit of $5,315,384 or 23.2% of sales for the same period last year.
General and administrative
General and administrative expenses for the six months ended December 31, 2010 amounted to $1,942,347 compared to $1,974,493 for the
same period last year, a decrease of $32,146.
Technology Investment
Research and development expense for the six months ended December 31, 2010 amounted to $471,177 compared to $493,754 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 1.9% compared to 2.2% in the same period last year.
Selling and marketing expenses
Selling and marketing expense for the six months ended December 31, 2010 amounted to $2,336,445 compared to $2,980,776 for the same
period last year.
Amortization
The amortization of capital assets and intangible assets for the six months ended December 31, 2010 amounted to $137,849 (December 31,
2009 - $348,987).
Foreign exchange gain
The foreign exchange gain for the six months ended December 31, 2010 was $31,418 compared to $74,612 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:
Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
Mar 09 Jun 09 Sept 09 Dec 09 Mar 10 Jun 10 Sept 10 Dec 10
--------------------------------------------------------------------------------------
Revenue 10,877,354 11,609,822 11,616,225 11,259,292 9,795,481 11,517,023 9,219,050 15,460,033
Cost of Sales 8,553,367 8,614,785 8,960,921 8,599,212 7,493,702 9,097,685 7,115,223 12,491,896
--------------------------------------------------------------------------------------
Gross Profit 2,323,987 2,995,037 2,655,304 2,660,080 2,301,779 2,419,338 2,103,827 2,968,137
--------------------------------------------------------------------------------------
Expenses:
General and
administrative
(including foreign
exchange) 898,936 987,696 888,890 1,010,991 1,007,964 1,141,838 892,783 1,018,146
Non recurring expenses 160,158 (110,823) 19,860 28,219 525,656 (214,924) 20,668 37,503
Research and
Development 278,701 186,568 246,670 247,084 185,289 177,744 192,268 278,909
Selling and Marketing 1,515,711 1,685,829 1,361,701 1,619,075 1,490,778 1,497,988 1,008,567 1,327,878
Stock-based
compensation 2,696 12,719 22,388 23,242 23,585 23,887 - -
--------------------------------------------------------------------------------------
2,856,202 2,761,989 2,539,509 2,928,611 3,233,272 2,626,533 2,114,286 2,662,436
--------------------------------------------------------------------------------------
Earnings (loss) before
interest taxes and
amortization (532,215) 233,048 115,795 (268,531) (931,493) (207,195) (10,459) 305,701
Amortization (182,273) (124,066) (157,298) (152,962) (152,631) (128,065) (71,161) (48,108)
Interest 1,648 (5,520) (3,769) (10,441) (7,781) (10,248) (14,970) (666)
Goodwill impairment - - - - - (63,309) - -
Gain (loss) on sale - - - 4,952 - - - (2,575)
Income taxes 139,885 279,930 (1,503) 346,321 275,055 116,482 7,276 (75,387)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Net Earnings (loss) (572,955) 383,392 (46,775) (80,661) (816,850) (292,335) (89,314) 178,965
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Per share, basic and
diluted (0.00) 0.00 (0.00) (0.00) (0.01) (0.00) (0.00) 0.00
--------------------------------------------------------------------------------------
The Company's revenues and earnings fluctuate from quarter to quarter. A number of factors can cause such fluctuations, including the
timing of substantial orders, the timing of releases of new products, timing of the deployment of solutions and delays by customers.
Because the Company's operating expenses are determined based on anticipated sales, are generally fixed and are incurred throughout
each fiscal quarter, any of the factors listed above can cause significant variations in the Company's revenues and earnings in any
given quarter. Thus, the Company's quarterly results are not necessarily indicative of the Company's overall business, results of
operations and financial condition.
Over the past three years the Company has improved its financial position while maintaining selling, marketing, general and
administration expenses at relatively the same level as revenue.
Financial position
The working capital as of December 31, 2010 was $4,381,730, an increase of $352,858 compared to the working capital of $4,028,872 at
September 30, 2010.
Cash and cash equivalents at December 31, 2010 was $923,825 compared to $1,463,497 at September 30, 2010.
The cash flow generated from operations before other items amounted to $299,384 for the three months ended December 31, 2010 compared
to cash flow used in operations before other items of $277,284 for the same period last year, an improvement of $576,668.
The Company has a credit line facility of $5,800,000, which is limited to 70% of eligible accounts receivable of certain U.S.
subsidiaries from a U.S. based financial institution. The line of credit bears interest at the prime rate of lending as published in
the Wall Street Journal and is secured with a first charge on the assets of VAC, VSI and POI. At December 31, 2010 the amount drawn on
the line of credit was $815,855 a decrease of $537,457 from the amount drawn at June 30, 2010 of $1,353,301.
The amount that may be advanced under the credit line is limited to 70% of eligible accounts receivable of VAC, POI and VSI less than
90 days from the invoice date. At December 31, 2010 this amounted to $5,800,000. At December 31, 2010 the financial covenants for these
companies include the requirement of a minimum Tangible Net worth of $4,800,000. The companies met this test.
Included in accounts payable and accrued liabilities is $3,233,227 owing to a major supplier.
Investment in Equus Total Return, Inc.
The Investment in Equus is held by the Company's wholly owned subsidiary, Mobiquity Investments Limited ("Mobiquity") and consists of
962,962 shares of Equus Total Return, Inc. which is a public company trading on the NYSE under the symbol EQS (the "Fund"). The share
price as at December 31, 2010 was $2.50 so the unrealized gain for the quarter was $141,415 and the cumulative unrealized loss was
$624,864.
On April 14, 2010 Mobiquity filed a Schedule 13D/A (Amendment No. 1) with the U.S. Securities and Exchange Commission and reported that
the Fund had agreed to nominate Fraser Atkinson, Alessandro Benedetti, John Hardy and Bertrand des Pallieres as directors of the Fund
(the "Nominees") and to support the election of the Nominees at the Fund's Annual Meeting scheduled to be held on May 12, 2010. On
April 13, 2010, the Fund filed a definitive proxy statement on Schedule 14A with the Securities and Exchange Commission to, among other
things, solicit stockholders of the Fund to vote in favor of the Nominees selected by the Reporting Persons, along with the other
nominees for director in connection with the Fund's 2010 Annual Meeting.
On May 20, 2010 the Inspector of Elections who attended the Annual Meeting of the Equus stockholders held on May 12, 2010 certified
that Fraser Atkinson, Alessandro Benedetti, John Hardy and Bertrand des Pallieres had been elected to the Board of Directors of Equus.
On June 8, 2010 John Hardy was appointed Executive Chairman and Fraser Atkinson was appointed Chairman of the Audit Committee.
On August 13, 2010 Equus released its results for the second quarter. The net asset value of Equus at June 30, 2010 was $4.28 per
share.
On November 11, 2010 Equus released its results for the thirds quarter. The net asset value of Equus at September 30, 2010 was $3.55
per share.
Between November 24, 2010 and December 21, 2010 Mobiquity purchased an additional 140,931 shares of Equus at a cost of $309,556.
Capital Expenditures
During the three months ended December 31, 2010 the additions to capital assets amounted to $38,799 (2009 - $21,414). Substantially all
of the capital expenditures relate to the costs of Kiosks that have been deployed under various subscription agreements.
Share Capital
As of January 24, 2011 the Company had 157,285,643 common shares issued and outstanding.
Stock Options
The Company can grant up to 15,728,564 of the issued shares pursuant to its stock option plan.
Number of shares Weighted average exercise price CDN$
=-----------------------------------------------------------------------------------------------------------
Outstanding - June 30, 2010 7,901,000 0.45
Granted -
Forfeited (225,000) 0.10
Expired (3,125,000) 0.94
Exercised -
----------------------------------------------------------
Outstanding - December 31, 2010 4,551,000 0.12
----------------------------------------------------------
For the three months ended December 31, 2010, the Company had no stock-based compensation charge (2009 - $23,242) for vesting of stock
options granted to employees, consultants, directors and officers of the Company in prior years.
Warrants
The details of the outstanding warrants at December 31, 2010 are as follows:
Expiry date Exercise Price CDN$ Number of Warrants Cost
=-----------------------------------------------------------------------------------------------------------
March 31, 2011 $ 0.569 1,411,808 63,309
April 16, 2011 $ 0.6636 583,770 81,058
January 22, 2012 $ 0.30 600,000 42,000
-------------------------------------------------------------
Balance 2,595,578 186,367
-------------------------------------------------------------
Related Party Transactions
During the current quarter, the Company paid consulting fees and salaries, which are included in the general and administration
expense, of $254,872 to four Directors and Officers of the Company (2009 - $178,753 was paid to three Directors and Officers of the
Company).
Risk Factors
The securities of the Company should be considered a highly speculative investment and investors should carefully consider all of the
information disclosed in this Management Discussion & Analysis prior to making an investment in the Company. In addition to the other
information presented in this Management Discussion & Analysis, the following risk factors should be given special consideration when
evaluating an investment in the Company's securities.
Operating History
The Company's predecessor company commenced operations in March 1987 to distribute and sell Maximizer products in European countries,
as well as provide consulting services and Customer Relationship Management ("CRM") solutions to companies. In January 1997, the
Company changed its focus to research and development of CRM software. The Company purchased Versatile Mobile Systems on September 19,
2000, Perfect Order, Inc. and Versatile Systems, Inc. on April 26, 2005 and Sagent Solutions on December 28, 2007. The Company may face
many of the risks and uncertainties encountered by early-stage companies in rapidly evolving markets.
History of Losses
The Company had a history of losses up to September 30, 2005 and since that time has had varying results, but has an accumulated
deficit of $36,876,185 to December 31, 2010. Although the Company has decreased its operating expenses (excluding non recurring
expenses) the Company cannot be assured that it can consistently maintain profitable operations.
No Certainty of Future Profitability
The Company's product revenues are not predictable with any significant degree of certainty and future product revenues may differ from
historical patterns. If customers cancel or delay orders, it can have a material adverse impact on the Company's revenues and results
of operations from quarter to quarter. Because the Company's results of operations may fluctuate from quarter to quarter, investors
should not assume that results of operations in future periods can be predicted based on results of operations in past periods.
Even though the Company's revenues are difficult to predict, the Company's expense levels are based in part on future revenue
projections. Many of the Company's expenses are fixed and, accordingly, the Company cannot quickly reduce spending if revenues are
lower than expected.
Competitive Market
The market for the Company's software is intensely competitive, fragmented and rapidly changing. Some of the Company's actual and
potential competitors are larger, established companies that have greater technical, financial and marketing resources. In addition, as
the Company develops new products, particularly applications focused on electronic commerce or specific industries, it may begin
competing with companies with whom it has not previously competed. It is also possible that new competitors will enter the market or
that the Company's competitors will form alliances that may enable them to rapidly increase market share.
Increased competition may result in price reductions, lower gross margins or loss of the Company's market share, any of which could
materially adversely affect its business, financial condition and operating results.
Technological Change
The market for the Company's solutions is characterized by rapidly changing technology and evolving industry standards. The market is
affected by changes in end user requirements and frequent new product introductions and enhancements. The Company's products embody
complex technology and may not always be compatible with current and evolving technical standards and products, developed by others.
Failure or delays by the Company to meet or comply with the requisite and evolving industry or user standards could have a material
adverse effect on the Company's business, results of operations and financial condition. The Company's ability to anticipate changes in
technology, technical standards and product offerings will be a significant factor in the Company's ability to compete. There can be no
assurance that the Company will be successful in identifying, developing, manufacturing and marketing products that will respond to
technological change, evolving standards or individual wireless communications service provider standards or requirements. The
Company's business will be adversely affected if the Company incurs delays in developing new products or enhancements or if such
products or enhancements do not gain market acceptance. In addition, there can be no assurance that products or technologies developed
by others will not render the Company's products or technologies non-competitive or obsolete.
Limited Sales and Support Infrastructure
The Company's future revenue growth will depend in large part on its ability to successfully expand its direct sales force and its
customer support capability. The Company may not be able to successfully manage the expansion of these functions or to recruit and
train additional direct sales, consulting and customer support personnel.
If the Company is unable to hire and retain additional highly skilled direct sales personnel, it may not be able to increase its
license revenue to the extent necessary to achieve profitability. If the Company is unable to hire highly trained consulting and
customer support personnel, it may be unable to meet customer demands. The Company is unlikely to be able to increase its revenues as
planned if it fails to expand its direct sales force or its consulting and customer support staff. Even if the Company is successful in
expanding its direct sales force and customer support capability, the expansion may not result in revenue growth.
Dependence on Business Alliances
A key element of the Company's business strategy is the formation of corporate alliances with leading companies. The Company is
currently investing and plans to continue to invest significant resources to develop these relationships. The Company believes that its
success in penetrating new markets for its products will depend in part on its ability to maintain these relationships and to cultivate
additional or alternative relationships. There can be no assurance that the Company will be able to develop additional corporate
alliances with such companies, that existing relationships will continue or be successful in achieving their purposes or that such
companies will not form competing arrangements.
Dependence on Key Personnel
The Company's success depends largely upon the continued service of its executive officers and other key management, sales and
marketing and technical personnel. The loss of the services of one or more of the Company's executive officers or other key employees
could have a material adverse effect on its business, results of operations or financial condition.
The Company's future success also depends on its ability to attract and retain highly qualified personnel. The competition for
qualified personnel in the computer software and Internet markets is intense, and the Company may be unable to attract or retain highly
qualified personnel in the future. In addition, due to intense competition for qualified employees, it may be necessary for the Company
to increase the level of compensation paid to existing and new employees to the degree that operating expenses could be materially
increased.
Management of Growth
The Company expects to experience a period of significant growth in the number of personnel that will place a strain upon its
management systems and resources. The Company's future will depend in part on the ability of its officers and other key employees to
implement and improve its financial and management controls, reporting systems and procedures on a timely basis and to expand, train
and manage its employee workforce. There can be no assurance that the Company will be able to effectively manage such growth. The
Company's failure to do so could have a material adverse effect upon the Company's business, prospects, results of operation and
financial condition.
Integration of Newly Acquired Businesses or Technology
The Company may expand its operations through acquisitions of additional businesses or technology. There can be no assurance that the
Company will be able to identify, acquire or profitably manage additional businesses or technology or successfully integrate acquired
businesses or technology into the Company without substantial expense, delay or other operational or financial problems. Further,
acquisitions may involve a number of additional risks, including diversion of management's attention, failure to retain key acquired
personnel, unanticipated events or circumstances, legal liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, financial condition and results of operation. In addition, there
can be no assurance that acquired businesses, if any, will achieve anticipated revenues and earnings. The failure of the Company to
manage its acquisition strategy successfully could have a material adverse effect on the Company's business, financial condition and
results of operation.
Potential Fluctuations in Quarterly Financial Results
The Company's quarterly financial results may be affected by the timing of new releases of its products and/or substantial customer
orders. The Company's operating expenses are based on anticipated revenue levels in the short term, are relatively fixed, and are
incurred throughout the quarter. As a result, if expected revenues are not realized on a timely basis as anticipated, the Company's
financial results could be materially and adversely affected. These or other factors, including possible delays in the shipment of new
products, may influence quarterly financial results in the future. Accordingly, there may be significant variation in the Company's
quarterly financial results.
International Sales
Sales outside of the United States currently represent less than 10% of the Company's total gross revenues. The Company believes that
its continued growth and profitability will require additional expansion of its sales in international markets. To the extent that the
Company is unable to expand international sales in a timely and cost effective manner, the Company's business, results of operations
and financial condition could be materially and adversely affected. In addition, even with the successful recruitment of additional
personnel and international resellers, there can be no assurance that the Company will be successful in maintaining or increasing
international market demand for the Company's products.
Currency Exchange Rate Risk
The Company's results have been stated in 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 28% of
total assets as at December 31, 2010. 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 December 31, 2010. 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 1% of the Company's total assets as at December 31, 2010, 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.
The purchased technology, intellectual property, customer contracts and licenses were fully amortized in the 2010 fiscal year.
Future Income Tax Benefits
The amount recorded for Future Income Tax Benefits represents approximately 17% of the Company's assets as at December 31, 2010,
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.
The Company determined that because VSI, POI, VAC and VMS-US were expected to generate sufficient profits that it was more likely than
not that the losses would be fully utilized and the deductions attributable to these companies would be fully utilized. Consequently,
there is no valuation allowance for these companies. The difference between the value of these tax benefits less the valuation
allowance is the amount of the future income tax asset that is recorded by the Company.
Goodwill
The accounting estimates for goodwill represents approximately 25% of the Company's total assets as at December 31, 2010, presented in
its consolidated balance sheet. 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
Adoption of new accounting standards in the current fiscal year:
On July 1, 2009, the Company adopted the changes made by the Canadian Institute of Chartered Accountants ("CICA") to Handbook Section
3862, "Financial Instruments - Disclosures", whereby an entity is required to classify and disclose the fair value measurements using a
fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have
the following levels:
Level 1 - Valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - Valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 - Valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable
inputs).
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified
to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
On July 1, 2009, the Company adopted the requirements of CICA Handbook Section 3064, Goodwill and Intangible Assets. The new standard
provides guidance on when expenditures qualify for recognition as intangible assets. The adoption of this standard did not have a
significant impact on the financial statements.
Adoption of future accounting standards:
In January 2009, the CICA issued Section 1582, "Business Combinations", Section 1601, "Consolidated Financial Statements", and Section
1602, "Non-controlling Interests". Section 1582 establishes standards for the accounting for business combinations that is equivalent
to the business combination accounting standard under International Financial Reporting Standards. Section 1582 is applicable for any
business combinations with acquisition dates on or after July 1, 2011. Early adoption of this Section is permitted. Section 1601
together with Section 1602 establishes standards for the preparation of consolidated financial statements. Section 1601 is applicable
for the Company's interim and annual consolidated financial statements for its fiscal year beginning July 1, 2011. Early adoption of
this Section is permitted. If the Company chooses to early adopt any one of these Sections, the other two sections must also be adopted
at the same time. The Company does not expect the adoption of these standards will have a material impact on its consolidated financial
statements.
In December 2009, the CICA issued Emerging Issues Committee Abstract ("EIC") 175, "Multiple Deliverable Revenue Arrangements",
replacing EIC 142, "Revenue Arrangements with Multiple Deliverables". This abstract was amended to (1) exclude from the application of
the updated guidance those arrangements that would be accounted for in accordance with ASC 985-605 (formerly Financial Accounting
Standards Board Statement of Position 97-2), "Software Revenue Recognition" as amended by Accounting Standards Update 2009-14; (2)
provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the
consideration allocated; (3) require in situations where a vendor does not have vendor-specific objective evidence or third-party
evidence of selling price, that the entity allocate revenue in an arrangement using estimated selling prices of deliverables; (4)
eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and (5)
require expanded qualitative and quantitative disclosures regarding significant judgments made in applying this guidance.
The accounting changes summarized in EIC 175 are effective for fiscal years beginning on or after January 1, 2011, with early adoption
permitted. Adoption may either be on a prospective basis or by retrospective application. The Company does not believe the adoption of
this standard will have a material impact on its consolidated financial statements.
Key International Financial Reporting Standards (IFRS) conversion dates
According to dates set out by the AcSB, the Company will be required to begin publicly reporting under IFRS in the fiscal year ending
June 30, 2012. Because of the need to present comparative financial information, the Company will need to create its first IFRS
compliant balance sheet as at July 1, 2010. For the fiscal year ending June 30, 2011, the Company will need to prepare information for
financial statements and note disclosures under both Canadian GAAP and IFRS in order to meet Canadian GAAP reporting requirements that
year and to allow for comparative information to be presented in 2012.
The Company has not yet completed a full evaluation of the adoption of IFRS and its impact on its financial position and results of
operations. The full evaluation and an implementation plan will be completed during the ensuing fiscal year. The evaluation and
implementation plan will address the impact of IFRS, among others, on:
=- accounting policies, including policies permitted under IFRS and
implementation decisions such as whether changes will be applied on a
retrospective or a prospective basis;
=- Information technology and data systems;
=- Controls and procedures; and
=- Financial reporting expertise, training requirements and the need for
assistance from outside expertise.
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 or International: 001-206-979-6760
OR
Versatile Systems Inc.
Fraser Atkinson
CFO
1-800-262-1633
www.versatile.com
OR
NCB Stockbrokers Limited (Nominated Adviser)
Christopher Caldwell
+44 (0) 20 7071 5200
The TSX Venture Exchange and the AIM market of the London Stock Exchange have not reviewed and do not accept responsibility for the
adequacy or accuracy of this release.
Versatile Systems Inc.
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