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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
Versatile Reports First Quarter Results
FOR: VERSATILE SYSTEMS INC.
TSX VENTURE SYMBOL: VV
AIM SYMBOL: VVS
December 19, 2011
Versatile Reports First Quarter Results
VANCOUVER, CANADA--(Marketwire - Dec. 19, 2011) - Versatile Systems Inc. (TSX VENTURE:VV)(AIM:VVS)
announces its results for the first quarter of the 2012 fiscal year.
Revenue for the three months ended September 30, 2011 was $9,039,212 generating a gross profit of
$1,790,378 or 19.8% of sales compared to $9,219,050 generating a gross profit of $2,103,827 or 22.8%
of sales for the same quarter last year. The Net Loss for the quarter amounted to $359,911 ($0.00 per
share) compared to a Net Loss of $89,314 ($0.01 per share) for the same period last year.
"As a result of economic events occurring mid-quarter, several key customers reduced spending, which
negatively impacted both revenue and gross profit," said John Hardy, Chairman and CEO of Versatile.
"Nevertheless, we managed to be effectively cash flow neutral. In addition, we obtained a new credit
facility of $4.5 million, and reduced operating expenses with a strategic relocation of our
Mechanicsburg facility. We are in the process of adding new sales resources and remain committed to
improving profitability, while carefully managing our expenses."
Highlights for the quarter included:
/T/
=- Revenue for the three months ended September 30, 2011 was $9,039,212
compared to $9,219,050 for the same quarter last year, a decrease of
$179,838;
=- The cash flow used in operations amounted to $51,134 for the three
months ended September 30, 2011 compared to cash flow generated from
operations of $150,269 for the same period last year;
=- The research and development expense for the quarter amounted to
$244,110 compared to $192,268 for the same quarter last year;
=- Deferred revenue at September 30, 2011 was $6,047,097 (of which
$5,449,475 is expected to be recognized in the next four quarters)
compared to $6,320,199 at June 30, 2011; and
=- In order to save costs, the Company relocated to a smaller facility in
Mechanicsburg, PA incurring a one-time cost of $65,040. This move will
lead to a reduction in premise costs of approximately $200,000 per
annum.
/T/
During the current quarter, the Company incurred $129,294 for research and development activities
related to Mobiquity Route(TM), DEX and related mobile software products and $72,362 related to
Mobiquity Transaction Engine 3.0(TM) and Mobiquity Kiosk(TM).
During the current quarter the Company changed its banking facilities for its U.S. based operations to
a new financial institution, which is providing a credit facility for up to $4,500,000 on more
favorable terms than the former bank.
"While the Company incurred a loss of $359,911 the cash used in operations amounted to $51,134," said
Fraser Atkinson, CFO of Versatile. "Excluding the one-time moving costs the Company would have
generated positive cash flow from operations. In addition, restoring the gross profit of 19.8% to the
historical average of 21% to 22% will have a positive impact on cash flow."
The Company adopted IFRS during the current reporting period. The Company has applied the transitional
exceptions and exemptions to full retroactive application of IFRS in its preparation of an opening
IFRS consolidated statement of financial position at July 1, 2010. The most significant changes
include the reclassification of deferred contract costs to intangible assets and the reclassification
of current deferred income taxes to long term. Further details of the conversion to IFRS are provided
in Management's Discussion and Analysis and in the Notes to the Company's unaudited, Condensed
Consolidated Financial Statements, as at and for the three months ended September 30, 2011.
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 September 30, 2011
(unaudited - prepared by management)
Consolidated Statements of Financial Position
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The interim consolidated financial statements as at and for the period ended September 30, 2011 have
not been reviewed or audited by the Company's auditor.
/T/
Versatile Systems Inc.
Consolidated Statements of Financial Position
(Unaudited - Prepared by Management)
Expressed in U.S. September 30, June 30, July 1,
dollars 2011 2011 2010
---------------------------------------------------
ASSETS
Current Assets
Cash and cash
equivalents $ 563,999 $ 978,656 1,738,036
Investment in Equus
(note 3) 1,810,369 2,311,109 2,203,043
Accounts receivable 5,535,268 7,134,328 10,580,706
Prepaid expenses 253,291 228,062 236,993
Inventory 1,910,121 1,849,635 1,719,477
-------------------------------------------------
10,073,048 12,501,790 16,478,255
Long-term accounts
receivable 312,339 401,742 265,612
Capital Assets 221,587 270,437 519,391
Intangible assets
(note 4) 5,123,645 5,048,776 6,392,005
Deferred income tax
assets (note 9) 7,136,316 7,001,156 6,965,850
Goodwill 9,914,350 9,914,350 9,914,350
-------------------------------------------------
$ 32,781,285 $ 35,138,251 40,535,463
-------------------------------------------------
-------------------------------------------------
LIABILITIES
Current Liabilities
Line of credit
(note 5) $ 724,981 1,007,767 1,353,312
Accounts payable and
accrued liabilities 5,878,754 6,823,643 9,955,342
Current portion of
deferred revenue 5,449,475 5,670,932 7,432,210
-------------------------------------------------
12,053,210 13,502,342 18,740,864
Deferred Revenue 597,622 649,267 710,269
-------------------------------------------------
12,650,832 14,151,609 19,451,133
-------------------------------------------------
SHAREHOLDERS' EQUITY
Share Capital
(note 6) 54,433,709 54,433,709 54,433,709
Warrants (note 7) 42,000 42,000 186,367
Equity Reserve 4,582,940 4,578,470 4,231,539
Deficit (37,424,509) (37,064,598) (36,965,836)
Accumulated other
comprehensive loss (1,503,687) (1,002,939) (801,449)
-------------------------------------------------
20,130,453 20,986,642 21,084,330
-------------------------------------------------
$ 32,781,285 $ 35,138,251 40,535,463
-------------------------------------------------
-------------------------------------------------
Approved on behalf of the Board on December 13, 2011:
DIRECTOR: John Hardy DIRECTOR: Fraser Atkinson
See Notes to Consolidated Financial Statements
Versatile Systems Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited - Prepared by Management)
Expressed in U.S. dollars Three months ended September 30
2011 2010
----------------------------------------
SALES $ 9,039,212 $ 9,219,050
COST OF SALES 7,248,834 7,115,223
----------------------------------------
1,790,378 2,103,827
----------------------------------------
EXPENSES
Selling and marketing 1,019,931 1,008,567
General and administrative 961,127 890,450
Research and development 244,110 192,268
Non recurrring expenses - 20,668
Stock-based compensation 4,470 -
Foreign exchange loss 824 2,333
----------------------------------------
2,230,462 2,114,286
----------------------------------------
OPERATING LOSS (440,084) (10,459)
Amortization of capital assets 48,419 71,161
Interest expense 5,223 14,970
----------------------------------------
LOSS BEFORE INCOME TAXES (493,726) (96,590)
Current income tax expense (1,345) (995)
Deferred income tax benefit 135,160 8,271
----------------------------------------
NET LOSS (359,911) (89,314)
----------------------------------------
----------------------------------------
LOSS PER SHARE (basic and diluted) ($0.00) ($0.00)
----------------------------------------
----------------------------------------
Net loss (359,911) (89,314)
Other comprehensive loss
Net change in fair value of
available-for-sale investments (500,748) (246,609)
----------------------------------------
Total comprehensive loss (860,659) (335,923)
----------------------------------------
----------------------------------------
See Notes to Consolidated Financial Statements
Versatile Systems Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited - Prepared by Management)
Expressed in U.S. dollars
Accumu-
lated
other
compreh-
Share Warr- Equity ensive
Capital ants Reserve Deficit loss Total
----------------------------------------------------------------
Balance,
July 1,
2010 54,433,709 186,367 4,231,539 (36,965,836) (801,449) 21,084,330
Net loss (89,314) (89,314)
Net change
in fair
value of
available-
for-sale
invest-
ments (246,609) (246,609)
----------------------------------------------------------------
Balance,
September
30,
2010 54,433,709 186,367 4,231,539 (37,055,150) (1,048,058) 20,748,407
----------------------------------------------------------------
----------------------------------------------------------------
Balance,
June 30,
2011 54,433,709 42,000 4,578,470 (37,064,598) (1,002,939) 20,986,642
Net loss (359,911) (359,911)
Net change
in fair
value of
available-
for-sale
investment
s (500,748) (500,748)
Share-based
compens-
ation
expense - - 4,470 - - 4,470
----------------------------------------------------------------
Balance,
September
30,
2011 54,433,709 42,000 4,582,940 (37,424,509) (1,503,687) 20,130,453
----------------------------------------------------------------
----------------------------------------------------------------
See Notes to Consolidated Financial Statements
Versatile Systems Inc.
Consolidated Statements of Cash Flows
(Unaudited - Prepared by Management)
Expressed in U.S. dollars Three months ended September 30
2011 2010
----------------------------------------
OPERATING ACTIVITIES
Net loss $ (359,911) $ (89,314)
Items not affecting cash
Amortization of capital assets 52,509 74,252
Stock-based compensation 4,470 -
Unrealized foreign exchange gain - 495
Deferred income taxes (135,160) (8,271)
----------------------------------------
Cash flow used in operations
before other items (438,092) (22,838)
Net change in non-cash working
capital (note 11) 386,958 173,107
----------------------------------------
(51,134) 150,269
INVESTING ACTIVITIES
Proceeds from disposition of
capital assets 1,341 73,094
Intangible assets - contract cost
additions (1,355,780) (1,629,194)
Amortization of intangible assets 1,280,911 1,604,148
Purchase of capital assets (7,209) (39,825)
----------------------------------------
(80,737) 8,223
----------------------------------------
FINANCING ACTIVITIES
Repayment of line of credit (282,786) (433,031)
----------------------------------------
(282,786) (433,031)
----------------------------------------
Decrease in cash and cash
equivalents (414,657) (274,539)
Cash and cash equivalents,
beginning of period 978,656 1,738,036
----------------------------------------
Cash and cash equivalents, end of
period $ 563,999 $ 1,463,497
----------------------------------------
----------------------------------------
Supplemental cash flow information
(note 11)
See Notes to Consolidated Financial Statements
/T/
Versatile Systems Inc.
Notes to Consolidated Financial Statements
For the period ended September 30, 2011
(Unaudited - Prepared by Management)
1. Consolidated financial statement presentation:
The Company previously prepared its financial statements in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP") as set out in Part V of the Handbook of the Canadian
Institute of Chartered Accountants ("CICA Handbook"). In 2010, the CICA Handbook was revised to
incorporate International Financial Reporting Standards ("IFRS"), and required publicly accountable
enterprises to apply such standards effective for years beginning on or after January 1, 2011, with
early adoption permitted. Accordingly, these unaudited interim consolidated financial statements are
prepared in accordance with IFRS, as issued by the International Accounting Standards Board ("IASB").
In these unaudited interim consolidated financial statements, the term "Canadian GAAP" refers to
Canadian GAAP before the Company's adoption of IFRS.
As these financial statements represent the Company's initial presentation of its financial position,
financial performance and cash flows in accordance with IFRS, they have been prepared in accordance
with International Accounting Standard ("IAS") 34, Interim Financial Reporting, and IFRS 1, "First-
Time Adoption of International Financial Reporting Standards" ("IFRS 1"). Subject to certain
transition elections disclosed in Note 16, the Company has consistently applied the same accounting
policies in its opening IFRS statement of financial position as at July 1, 2010 and throughout all
periods presented, as if these policies had always been in effect. Note 11 discloses the impact of the
transition to IFRS on the Company's reported financial position and results from operations, including
the nature and effect of significant changes in accounting policies from those used in its Canadian
GAAP consolidated financial statements for the three months ended September 30, 2010 and the year
ended June 30, 2011.
The results of operations for the period ended September 30, 2011 are not necessarily indicative of
the results for the full year ending June 30, 2012.
Significant Accounting Policies
(a) Principles of consolidation
These consolidated financial statements are prepared in accordance with IFRS and include the accounts
of the Company and all its wholly-owned subsidiaries. All intercompany balances and transactions are
eliminated upon consolidation.
All amounts are expressed in U.S. dollars, unless otherwise stated.
(b) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest bearing
securities with maturities at the date of purchase of three months or less. Interest earned during the
year is recognized in the statement of operations.
(c) Inventory
Inventory consists of kiosk hardware, handheld devices and peripherals used in sales force automation
systems. Inventory is valued at the lower of cost and net realizable value, determined on a first-in,
first-out basis.
(d) Deferred service contract costs
Deferred service contract costs are amortized on a straight-line basis over the life of the contracts,
which range from three months to three years. These deferred amounts relate to third party maintenance
costs for third party equipment installed at customer sites and sales commission costs, which have
been paid for in advance.
(e) Capital assets
The Company records capital assets at acquisition cost. The assets' residual values and useful lives
are reviewed, and adjusted if appropriate, at the end of each reporting period. changes in the
expected useful life or the expected pattern of consumption of future economic benefits embodies in
the asset are accounted for by changing the depreciation period and are treated as changes in
accounting estimates. The capital assets are amortized using the straight-line method over the
following estmated useful lives:
/T/
Automobiles 20% per annum
Computer and office 20% - 33-1/3% per annum
Computer software 33-1/3% per annum
Demonstration 50% per annum
Tenant improvements Over the remaining term of lease
/T/
(f) Goodwill and intangible assets
Goodwill represents the excess of the purchase price of an acquired business over the fair values of
the identifiable net assets acquired.
Research costs are charged to operations when they are incurred. Development costs are charged to
operations in the period incurred unless the Company can demonstrate that a development project meets
certain criteria for capitalization and amortization under IFRS. The Company has not capitalized any
development costs during 2010 or 2011.
Intangible assets acquired, either individually or with a group of assets, are initially recognized
and measured at cost. Intangible assets acquired in a business combination that meet the specified
criteria for recognition, apart from goodwill, are initially recognized and measured at fair value.
All of the Company's intangible assets have finite lives and are amortized over their estimated useful
lives using the straight-line method at the following rates:
/T/
Deferred contract costs Average contract term
Purchased technology 3 years
Customers - Perfect 5 years
Intellectual property 18 months
Licences 4 years
/T/
Goodwill is not amortized and is tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the asset might be impaired. The impairment test is carried out
in two steps. In the first step, the carrying amount of a reporting unit is compared with its fair
value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not to be impaired and the second step of the impairment test is unnecessary.
The second step is only required when the carrying amount of the reporting unit exceeds its fair
value, in which case the implied fair value of a reporting unit's goodwill is compared with its
carrying amount to measure the amount of the impairment loss. When the carrying amount of a reporting
unit's goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an
amount equal to the excess and is presented as a separate line item in the statement of operations
before extraordinary items and discontinued operations.
(g) Income taxes
Deferred income tax is recognized using the liability method, based on temporary differences between
consolidated financial statement carrying amounts of assets and liabilities and their respective
income tax bases. Deferred income tax is determined using tax rates that have been enacted or
substantively enacted by the date of the statement of financial position and are expected to apply
when the related deferred income tax asset is realized or the deferred income tax liability is
settled. The amount of deferred income tax recognized is based on the expected manner and timing of
realization or settlement of the carrying amount of assets and liabilities.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be utilized. Deferred income tax
assets are reviewed at each date of the statement of financial position and amended to the extent that
it is no longer probable that the related tax benefit will be realized.
(h) Foreign currency translation
The U.S. dollar is the reporting and functional currency for the Company.
The functional currency of all of the Company's subsidiaries is the U.S. dollar. The consolidated
financial statements are presented in U.S. dollars, which is the functional currency of the Company.
Foreign currency transactions, including U.S. dollar, Canadian dollar and Great Britain pound
operating transactions, are translated to U.S. dollars at the average exchange rate for the month.
Monetary assets and liabilities are translated at period-end exchange rates. Foreign exchange gains
and losses resulting from the settlement of such transactions and from the translation at period-end
exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in
profit or loss in the period in which they arise.
(i) Financial Instruments
The Company's classification and measurement basis of its financial instruments are as follows:
/T/
Instrument Classification Measurement
basis
=--------------------------------------------------------------------------
Cash and cash equivalents Held for trading Fair value
Investment in Equus Available for sale Fair value
Accounts receivable Loans and receivables Amortized cost
Line of credit and bank overdraft Other liabilities Amortized cost
Accounts payable and accrued
liabilities Other liabilities Amortized cost
/T/
Changes in fair value of instruments classified as held for trading are recorded in the statement of
operations. Changes in fair value of instruments classified as available for sale are recorded in
other comprehensive income unless the change in fair value is considered other than temporary, in
which case it is recorded in the statement of operations. All amounts carried at amortized cost are
calculated using the effective interest rate method.
Available-for-sale securities are reviewed periodically for possible other-than-temporary impairment
and more frequently when economic or market concerns warrant such evaluation. The review includes an
analysis of the facts and circumstances of the investment including the severity of loss, the
financial position and near term prospects of the investment, the length of time the fair value has
been below cost, management's intent and ability to hold the security for a period of time sufficient
to allow for any anticipated recovery in fair value and management's market view and outlook.
The Company classifies and discloses 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 has
the following levels:
/T/
=- 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).
/T/
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.
(j) Revenue recognition
Revenue on sales of hardware products is recognized when delivered to the customer. The Company
recognizes revenue from the sale of software products on delivery of the product or performance of the
services if persuasive evidence of an agreement with the customer exists, the price is fixed and
determinable, collection is probable, and there are no ongoing obligations of the Company to provide
future services.
Revenue from projects which include significant modification or customization of software is
recognized using the percentage of completion method of accounting, whereby revenue and profit in the
period are based on the ratio of costs incurred to total estimated costs of the project. Costs include
all direct costs and certain indirect costs related to the projects. A provision is made for the
entire amount of future estimated losses, if any, for contracts in progress. Revenue from professional
services is recognized on a percentage of completion basis. Maintenance revenue is recognized over the
term of the related agreement on a straight-line basis. Deferred revenues represent amounts invoiced
in excess of revenues recognized.
Post-contract support, or maintenance, revenue associated with certain of the Company's products is
recognized on a straight-line basis over the maintenance term, which is generally within the next
fiscal year. Revenue not recognized in profit or loss under this policy is classified as deferred
revenue in the statement of financial position when amounts have been billed in advance.
(k) Warranty costs
Warranty costs that are not otherwise covered by suppliers are accrued upon the recognition of the
related revenue, based on the Company's best estimate, with reference to past experience.
(l) Sales and Marketing
The primary components of sales and marketing are employee compensation, employee benefits, office and
communications, travel, and professional services.
(m) Research and development
The primary components of research and development expenses are employee compensation, employee
benefits, professional services, communications, and travel.
(n) General and administration
The primary components of general and administration are premise costs, employee compensation,
employee benefits, communications, travel, public company administration, insurance, and professional
services.
(o) Stock-based compensation
The Company has an employee stock option plan ("Option Plan"). The Company records the estimated fair
value of the grants as compensation expense over the benefit period with a corresponding credit to
equity reserve. The Company recognizes the stock-based compensation expense for all employee and non-
employee stock-based compensation transactions using a fair value based method. The fair value of
stock-based payments to non-employees is periodically re-measured until the earlier of: completion of
the services provided a firm commitment to complete the services or the vesting date and any change
therein is recognized over the service period. For stock options exercised, consideration paid plus
the fair value of options previously recorded as equity reserve are recorded as share capital on
exercise of the options.
(p) Significant accounting estimates
The preparation of these interim consolidated interim financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during the reporting period.
Actual outcomes could differ from these estimates. The interim consolidated financial statements
include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive
throughout the interim consolidated financial statements, and may require accounting adjustments based
on future occurrences. Revisions to accounting estimates are recognized in the period in which the
estimate is revised and the revision affects both current and future periods.
(q) Adoption of Future Accounting Standards
The IASB has issued the following standards, which have not yet been adopted by the Company. Each of
the new standards is effective for annual periods beginning on or after January 1, 2013, with early
adoption permitted. The Company has not yet begun the process of assessing the impact that the new and
amended standards will have on its interim consolidated financial statements or whether to early adopt
any of the new requirements.
The following is a description of the new standards:
IFRS 9 - "Financial Instruments" ("IFRS 9")
IFRS 9 was issued in November 2009 and contained requirements for financial assets. This standard
addresses classification and measurement of financial assets and replaces the multiple category and
measurement models in IAS 39 Financial Instruments - Recognition and measurement for debt instruments,
with a new mixed measurement model having only two categories: amortized cost and fair value through
profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments
are either recognized at fair value through profit or loss or at fair value through other
comprehensive income (loss). Where such equity instruments are measured at fair value through other
comprehensive income (loss), dividends are recognized in profit or loss to the extent not clearly
representing a return of investment; however, other gains and losses (including impairments)
associated with such instruments remain in accumulated comprehensive income (loss) indefinitely.
Requirements for financial liabilities were added in October 2010 and they largely carried forward
existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities
designated at fair value through profit and loss would generally be recorded in other comprehensive
income (loss).
The Company has not yet assessed the impact of the adoption of IFRS 9 on its results from operations
or its financial position.
IFRS 10 - "Consolidation" ("IFRS 10")
IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through its
power over the investee. Under existing IFRS, consolidation is required when an entity has the power
to govern the financial and operating policies of an entity so as to obtain benefits from its
activities. IFRS 10 replaces SIC-12 "Consolidation-Special Purpose Entities" and parts of IAS 27,
"Consolidated and Separate Financial Statements". The Company does not believe the adoption of IFRS 10
will materially affect its results from operations or its financial position.
IFRS 11 - "Joint Arrangements" ("IFRS 11")
IFRS 11 requires a venture to classify its interest in a joint arrangement as a joint venture or joint
operation. Joint ventures will be accounted for using the equity method of accounting, whereas for a
joint operation, the venture will recognize its share of the assets, liabilities, revenue and expenses
of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate
or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, "Interests in Joint
Ventures", and SIC-13, "Jointly Controlled Entities-Non-monetary Contributions by Ventures". The
Company does not believe the adoption of IFRS 10 will materially affect its results from operations or
its financial position.
IFRS 12 - "Disclosure of Interests in Other Entities" ("IFRS 12")
IFRS 12 establishes disclosure requirements for interests in other entities, such as joint
arrangements, associates, special purpose vehicles and off-balance sheet vehicles. The standard
carries forward existing disclosures and also introduces significant additional disclosure
requirements that address the nature of, and risks associated with, an entity's interests in other
entities. The Company does not believe the adoption of IFRS 10 will materially affect its results from
operations or its financial position.
IFRS 13 - "Fair Value Measurement" ("IFRS 13")
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use
across all IFRS. The new standard clarifies that fair value is the price that would be received to
sell an asset, or paid to transfer a liability in an orderly transaction between market participants,
at the measurement date. It also establishes disclosures about fair value measurement. Under existing
IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards
requiring fair value measurements and, in many cases, does not reflect a clear measurement basis or
consistent disclosures. The Company has not yet assessed the impact of the adoption of IFRS 13 on its
results from operations or its financial position.
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 September 30, 2011 was $1.88
so the unrealized loss for the quarter was $500,748 and the cumulative unrealized loss was $1,211,900.
4. Intangible Assets
Intangible assets consists of deferred service contract costs, which is comprised of third party
maintenance costs and deferred sales commissions.
5. Line of Credit
The Company has a credit line facility for up to $4,500,000, which is limited to 80% of eligible
accounts receivable of a U.S. subsidiary from a U.S. based financial institution. At September 30,
2011 this amounted to $3,548,623. The line of credit bears interest at the prime rate of lending as
published in the Wall Street Journal plus one-half percent and is secured with a first charge on the
assets of the U.S. subsidiary.
6. Share Capital
/T/
Authorized
Unlimited common shares without par value
Issued and outstanding
Number
of shares Amount
--------------------------------
Issued and outstanding - June 30, 2011 157,285,643 $ 54,433,709
Issued during the period - -
--------------------------------
Balance - September 30, 2011 157,285,643 $ 54,433,709
--------------------------------
/T/
7. Warrants
/T/
Issued and outstanding:
Exercise Number of
Expiry date Price CDN$ Warrants Cost
=------------------------------------------------------------------------
January 22, 2012 $ 0.30 600,000 $ 42,000
------------------------
Balance - September 30, 2011 600,000 $ 42,000
------------------------
------------------------
/T/
The effect of any adjustment to the carrying value of the warrants under IFRS would not be material to
these financial statements.
8. Stock Options
/T/
Weighted
average
Number of exercise
Stock Options price CDN$
--------------------------------
Balance - June 30, 2011 10,948,100 $ 0.12
Granted during the period -
Forfeited during the period -
Expired during the period -
--------------------------------
Balance - September 30, 2011 10,948,100 $ 0.12
--------------------------------
--------------------------------
Exerciseable - September 30, 2011 10,506,433 $ 0.12
--------------------------------
--------------------------------
/T/
The estimated fair value of the stock options granted during the year ended June 30, 2011 was
estimated on the date of the grant using the Black-Scholes option pricing model with an expected
dividend yield of Nil, expected volatility of 84.6%, risk free interest rate of 3.0% and an expected
average option term of 1.1 years.
9. Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method
of tax allocation, deferred income tax assets and liabilities are determined based on the differences
between the financial reporting and tax basis of assets and liabilities and are measured using
substantively enacted tax rates expected to be in effect when the differences are expected to be
reversed. A valuation allowance is recorded against any deferred tax asset to the extent that it is
probably that taxable profit will be available against which the deductible temporary difference can
be utilized.
/T/
September 30, June 30,
2011 2011
--------------------------------------
Deferred income tax assets
Tax losses and deductions $ 9,322,507 $ 9,185,997
Capital assets 964,355 969,879
Share issuance costs 4,278 4,609
Other 240,346 194,619
--------------------------------------
Deferred income tax assets 10,531,486 10,355,104
Valuation allowance (2,639,519) (2,598,297)
--------------------------------------
Net deferred income tax asset 7,891,967 7,756,807
Deferred income tax liabilities -
Goodwill (755,651) (755,651)
--------------------------------------
Deferred income tax asset 7,136,316 7,001,156
--------------------------------------
--------------------------------------
/T/
During the three months ended September 30, 2011 the Company recorded a deferred income tax benefit of
$135,160 related to the recognition of deferred income tax assets compared to a deferred income tax
benefit of $8,271 for the comparable period last year.
10. Segmented Information
The Company's only reportable segment is the development and sales of computer software, hardware and
system integration services.
The Company's assets and sales by geographic area are as follows:
/T/
Three months ended
September 30 June 30 September 30
2011 2011 2011 2010
----------------------------------------------------------
Capital Capital
assets, assets,
intangible intangible
assets assets
and goodwill and goodwill Revenue Revenue
U.S. companies
United States $ 15,253,802 $ 15,224,790 $ 8,296,498 $ 8,983,332
Canada - - 327,363 31,931
Netherlands - - 8,256 6,775
France - - 30,389 24,418
United Kingdom - - 149,122 36,987
Australia - - 17,413 27,803
Other - - 6,109 6,955
UK and Canadian
companies
United Kingdom 968 3,588 229,731 100,849
Canada 4,812 5,185 - -
----------------------------------------------------------
15,259,582 15,233,563 9,039,212 9,219,050
----------------------------------------------------------
----------------------------------------------------------
/T/
During the three months ended September 30, 2011 the Company generated revenue of $1,234,533 from
American Eagle representing 13.7% of the revenue for that period. During the three months ended
September 30, 2010 the Company generated revenue of $1,181,577 from Comcast Cable representing 12.8%
of the revenue for that period.
During the three months ended September 30, 2011 the Company purchased products and services from two
vendors for $2,082,484 and $1,129,619 respectively (2010 - $3,616,381) representing 28.7% and 15.6%
(2010 - 50.8%) of the cost of sales.
11. Supplemental cash flow information
/T/
2011 2010
------------------------------
Cash paid for interest expense $ 12,374 $ 12,064
Cash paid for income taxes 1,423 1,419
The net changes in the non-cash working
capital:
Accounts receivable 1,599,060 3,898,946
Prepaid expenses (25,229) (77,209)
Inventory (60,486) 41,607
Long-term accounts receivables 89,403 38,102
Accounts payable and accrued liabilities (942,688) (3,821,833)
Deferred revenue (273,102) 93,494
------------------------------
386,958 173,107
------------------------------
------------------------------
/T/
12. Adoption of IFRS
Overview
The effect of the Company's transition to IFRS, as described in note 2, is summarized as follows: (a)
transition elections; (b) reconciliation of equity and comprehensive income (loss) as previously
reported under Canadian GAAP to IFRS; (c) explanatory notes; (d) adjustments to the consolidated
interim statements of cash flows; and (e) additional IFRS information and disclosures for the year
ended June 30, 2011.
Transition elections
The adoption of IFRS requires the application of IFRS 1, "First-time Adoption of International
Financial Reporting Standards" ("IFRS 1"), which provides guidance for an entity's initial adoption of
IFRS. IFRS 1 generally requires retrospective application of IFRS effective at the end of the
Company's first annual IFRS reporting period. However, IFRS 1 also provides certain optional
exemptions and mandatory exceptions to this retrospective treatment.
The Company has applied the following transitional exceptions and exemptions to full retrospective
application of IFRS in its preparation of an opening IFRS consolidated statement of financial position
at July 1, 2010 (the Company's "Transition Date"):
i) To apply IFRS 2, "Share-based Payments", retrospectively only to awards that were issued after
November 7, 2002 and where any portion of said awards had not vested by the Transition Date; and
ii) To apply IFRS 3, "Business Combinations", prospectively from the Transition Date and, therefore,
not restate business combinations that took place prior to the Transition Date. As such, Canadian GAAP
balances relating to business combinations entered into before the Transition Date, including acquired
intangible assets, have been carried forward without adjustment.
The Company's Transition Date IFRS consolidated statement of financial position is included as
comparative information in the consolidated interim statements of financial position in these interim
consolidated financial statements.
Reconciliation of Statement of Financial Position at July 1, 2010
/T/
IFRS
Canadian Reclassifi-
Notes GAAP cations IFRS
----------------------------------------------------
ASSETS
Current Assets
Cash and cash
equivalents 1,738,036 1,738,036
Investment in Equus 2,203,043 2,203,043
Accounts receivable 10,580,706 10,580,706
Current portion of
deferred contract
costs (a) 5,793,180 (5,793,180) -
Prepaid expenses 236,993 236,993
Inventory 1,719,477 1,719,477
Future income tax
benefits (b) 721,975 (721,975) -
---------------------------------------------
22,993,410 (6,515,155) 16,478,255
Long-term accounts
receivable 265,612 265,612
Deferred contract
costs (a) 598,366 (598,366) -
Capital Assets 519,391 519,391
Intangible assets (a) 459 6,391,546 6,392,005
Future income tax
benefits (b) 6,243,875 721,975 6,965,850
Goodwill 9,914,350 9,914,350
---------------------------------------------
40,535,463 - 40,535,463
---------------------------------------------
---------------------------------------------
LIABILITIES
Current Liabilities
Line of credit 1,353,312 1,353,312
Accounts payable and
accrued liabilities 9,955,342 9,955,342
Current portion of
deferred revenue 7,432,210 7,432,210
--------------- ---------------
18,740,864 18,740,864
Deferred Revenue 710,269 710,269
--------------- ---------------
19,451,133 19,451,133
SHAREHOLDERS' EQUITY
Share Capital 54,433,709 54,433,709
Warrants (c) 186,367 186,367
Contributed surplus (d) 4,231,539 4,231,539
Deficit (36,965,836) (36,965,836)
Accumulated other
comprehensive loss (801,449) (801,449)
--------------- ---------------
21,084,330 21,084,330
40,535,463 40,535,463
--------------- ---------------
--------------- ---------------
/T/
Reconciliation of Statement of Financial Position at June 30, 2011
/T/
IFRS
Canadian Reclassifi-
Notes GAAP cations IFRS
----------------------------------------------------
ASSETS
Current Assets
Cash and cash
equivalents $ 978,656 $ 978,656
Investment in Equus 2,311,109 2,311,109
Accounts receivable 7,134,328 7,134,328
Current portion of
deferred contract
costs (a) 4,469,066 (4,469,066) -
Prepaid expenses 228,062 228,062
Inventory 1,849,635 1,849,635
Future income tax
benefits (b) 546,252 (546,252) -
---------------------------------------------
17,517,108 (5,015,318) 12,501,790
Long-term accounts
receivable 401,742 401,742
Deferred contract
costs (a) 579,710 (579,710) -
Capital Assets 270,437 270,437
Intangible assets (a) - 5,048,776 5,048,776
Future income tax
benefits (b) 6,454,904 546,252 7,001,156
Goodwill 9,914,350 9,914,350
---------------------------------------------
35,138,251 - 35,138,251
---------------------------------------------
---------------------------------------------
LIABILITIES
Current Liabilities
Line of credit 1,007,767 1,007,767
Accounts payable and
accrued liabilities 6,823,643 6,823,643
Current portion of
deferred revenue 5,670,932 5,670,932
--------------- ---------------
13,502,342 13,502,342
Deferred Revenue 649,267 649,267
--------------- ---------------
14,151,609 14,151,609
SHAREHOLDERS' EQUITY
Share Capital 54,433,709 54,433,709
Warrants (c) 42,000 42,000
Contributed surplus (d) 4,578,470 4,578,470
Deficit (37,064,598) (37,064,598)
Accumulated other
comprehensive loss (1,002,939) (1,002,939)
--------------- ---------------
20,986,642 20,986,642
35,138,251 35,138,251
--------------- ---------------
--------------- ---------------
/T/
Explanatory notes
/T/
a. Intangible assets. Under Canadian GAAP, the Company deferred and
amortized deferred contract costs, consisting of third party maintenance
costs and deferred sales commissions. These costs were split into their
current and long-term portions on the statement of financial position as
deferred contract costs. Under IFRS, these costs continue to be
deferred; however, they are now presented as a portion of intangible
assets. On the Transition Date, $5,793,180 was reclassified from current
deferred contract costs and $598,366 was reclassified from long-term
deferred contract costs to intangible assets. Amortization of those
assets remained the same under IFRS as it was under Canadian GAAP.
b. Deferred income taxes. Under Canadian GAAP, deferred income taxes
(future income taxes) were classified as current or long term based on
the underlying classification of the item in the statement of financial
position on which it was calculated. Under IFRS, deferred income taxes
are all long-term. At the Transition Date, the Company reclassified
$721,975 from current to long-term deferred tax assets.
c. Warrants. Under Canadian GAAP the Warrants were valued at the time that
they were issued. IFRS requires that these be revalued at the end of
each reporting period. On the Transition Date, the change was not
material so no adjustment was made.
d. Share-based compensation. Under Canadian GAAP, each stock option grant
was treated as a single arrangement and compensation expense was
determined at the time of grant and amortized over the vesting period,
generally 48 months, on a straight-line basis. IFRS requires a separate
calculation of compensation expense for awards that vest in instalments.
Under Canadian GAAP, forfeitures of the share-based compensation awards
could be accounted for in the period in which the forfeitures occurred.
Under IFRS, compensation expense differs from Canadian GAAP based on the
changing fair values used for each instalment, the application of the
forfeiture rate and the timing of recognizing compensation expense.
Generally, this results in accelerated expense recognition under IFRS.
On the Transition Date, the amount of the additional compensation
expense was not material so no adjustment was made.
/T/
Versatile Systems Inc.
Management Discussion and Analysis
Three months ended September 30, 2011
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 December
13, 2011 on the unaudited interim consolidated financial statements and notes for the three months
ended September 30, 2011.
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ("IFRS") 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 IFRS 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 IFRS 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 IFRS) as a measure of
liquidity.
In addition, the Company has included information concerning its cash flow from operations before the
net change in non-cash operating balance sheet items as it may be used by certain investors as a
measure of the Company's financial performance.
Overview
The Company's core business is developing solutions that solve customers' problems in the storage,
security, transmission and collection of mission critical data. The Company's proprietary software
applications, the Mobiquity(TM) Solution Suite, are a key component of this solution. This enables
companies to improve the sales, marketing and distribution of their products. The Company delivers
wireless/wired solutions to the consumer packaged goods, retail, financial, pharmaceutical,
healthcare, and logistics verticals through an integrated combination of licensed software,
professional services, and the re-sale of mobile and storage related hardware. The Company also offers
maintenance and support via a 24 hour call centre.
Adoption of International Financial Reporting Standards (IFRS)
The Company adopted IFRS during the current reporting period. The effect of the Company's transition
to IFRS, as described in the notes to the interim consolidated financial statements as at and for the
period ended September 30, 2011, is summarized as follows: (a) transition elections; (b)
reconciliation of equity and comprehensive income (loss) as previously reported under Canadian GAAP to
IFRS; (c) explanatory notes; (d) adjustments to the consolidated interim statements of cash flows; and
(e) additional IFRS information and disclosures for the year ended June 30, 2011.
Transition elections
The adoption of IFRS requires the application of IFRS 1, "First-time Adoption of International
Financial Reporting Standards" ("IFRS 1"), which provides guidance for an entity's initial adoption of
IFRS. IFRS 1 generally requires retrospective application of IFRS effective at the end of the
Company's first annual IFRS reporting period. However, IFRS 1 also provides certain optional
exemptions and mandatory exceptions to this retrospective treatment.
The Company has applied the following transitional exceptions and exemptions to full retrospective
application of IFRS in its preparation of an opening IFRS consolidated statement of financial position
at July 1, 2010 (the Company's "Transition Date"):
/T/
=- To apply IFRS 2, "Share-based Payments", retrospectively only to awards
that were issued after November 7, 2002 and where any portion of said
awards had not vested by the Transition Date; and
=- To apply IFRS 3, "Business Combinations", prospectively from the
Transition Date and, therefore, not restate business combinations that
took place prior to the Transition Date. As such, Canadian GAAP balances
relating to business combinations entered into before the Transition
Date, including acquired intangible assets, have been carried forward
without adjustment.
/T/
The following provides a reconciliation of the Company's working capital under IFRS and under the
previous Canadian GAAP
/T/
30-Sep-11 30-Jun-11 01-Jul-11
------------------------------------------
Current Assets - IFRS 10,073,048 12,501,790 16,478,255
Add back deferred contract costs 4,588,704 4,469,066 5,793,180
Add back deferred income taxes 539,701 546,252 721,975
------------------------------------------
Current Assets - Canadian GAAP 15,201,453 17,517,108 22,993,410
Current Liabilities - IFRS and
Canadian GAAP - 12,053,210 - 13,502,342 - 18,740,864
------------------------------------------
Working Capital - Canadian GAAP 3,148,243 4,014,766 4,252,546
------------------------------------------
------------------------------------------
Reconciliation of Statement of Financial Position at July 1, 2010
IFRS
Canadian Reclassifi-
Notes GAAP cations IFRS
--------------------------------------------------
ASSETS
Current Assets
Cash and cash
equivalents 1,738,036 1,738,036
Investment in Equus 2,203,043 2,203,043
Accounts receivable 10,580,706 10,580,706
Current portion of
deferred contract
costs (a) 5,793,180 (5,793,180) -
Prepaid expenses 236,993 236,993
Inventory 1,719,477 1,719,477
Future income tax
benefits (b) 721,975 (721,975) -
------------------------------------------
22,993,410 (6,515,155) 16,478,255
Long-term accounts
receivable 265,612 265,612
Deferred contract costs (a) 598,366 (598,366) -
Capital Assets 519,391 519,391
Intangible assets (a) 459 6,391,546 6,392,005
Future income tax
benefits (b) 6,243,875 721,975 6,965,850
Goodwill 9,914,350 9,914,350
------------------------------------------
40,535,463 - 40,535,463
------------------------------------------
------------------------------------------
LIABILITIES
Current Liabilities
Line of credit 1,353,312 1,353,312
Accounts payable and
accrued liabilities 9,955,342 9,955,342
Current portion of
deferred revenue 7,432,210 7,432,210
-------------- --------------
18,740,864 18,740,864
Deferred Revenue 710,269 710,269
-------------- --------------
19,451,133 19,451,133
SHAREHOLDERS' EQUITY
Share Capital 54,433,709 54,433,709
Warrants (c) 186,367 186,367
Contributed surplus (d) 4,231,539 4,231,539
Deficit (36,965,836) (36,965,836)
Accumulated other
comprehensive loss (801,449) (801,449)
-------------- --------------
21,084,330 21,084,330
40,535,463 40,535,463
-------------- --------------
-------------- --------------
Reconciliation of Statement of Financial Position at June 30, 2011
IFRS
Canadian Reclassifi-
Notes GAAP cations IFRS
--------------------------------------------------
ASSETS
Current Assets
Cash and cash
equivalents $ 978,656 $ 978,656
Investment in Equus 2,311,109 2,311,109
Accounts receivable 7,134,328 7,134,328
Current portion of
deferred contract
costs (a) 4,469,066 (4,469,066) -
Prepaid expenses 228,062 228,062
Inventory 1,849,635 1,849,635
Future income tax
benefits (b) 546,252 (546,252) -
------------------------------------------
17,517,108 (5,015,318) 12,501,790
Long-term accounts
receivable 401,742 401,742
Deferred contract costs (a) 579,710 (579,710) -
Capital Assets 270,437 270,437
Intangible assets (a) - 5,048,776 5,048,776
Future income tax
benefits (b) 6,454,904 546,252 7,001,156
Goodwill 9,914,350 9,914,350
------------------------------------------
35,138,251 - 35,138,251
------------------------------------------
------------------------------------------
LIABILITIES
Current Liabilities
Line of credit 1,007,767 1,007,767
Accounts payable and
accrued liabilities 6,823,643 6,823,643
Current portion of
deferred revenue 5,670,932 5,670,932
---------------- --------------
13,502,342 13,502,342
Deferred Revenue 649,267 649,267
---------------- --------------
14,151,609 14,151,609
SHAREHOLDERS' EQUITY
Share Capital 54,433,709 54,433,709
Warrants (c) 42,000 42,000
Contributed surplus (d) 4,578,470 4,578,470
Deficit (37,064,598) (37,064,598)
Accumulated other
comprehensive loss (1,002,939) (1,002,939)
---------------- --------------
20,986,642 20,986,642
35,138,251 35,138,251
-------------- --------------
-------------- --------------
/T/
Explanatory Notes:
(a) Intangible assets. Under Canadian GAAP, the Company deferred and amortized deferred contract
costs, consisting of third party maintenance costs and deferred sales commissions. These costs were
split into their current and long-term portions on the statement of financial position as deferred
contract costs. Under IFRS, these costs continue to be deferred; however, they are now presented as a
portion of intangible assets. On the Transition Date, $5,793,180 was reclassified from current
deferred contract costs and $598,366 was reclassified from long-term deferred contract costs to
intangible assets. Amortization of those assets remained the same under IFRS as it was under Canadian
GAAP.
(b) Deferred income taxes. Under Canadian GAAP, deferred income taxes (future income taxes) were
classified as current or long term based on the underlying classification of the item in the statement
of financial position on which it was calculated. Under IFRS, deferred income taxes are all long-term.
At the Transition Date, the Company reclassified $721,975 from current to long-term deferred tax
assets.
(c) Warrants. Under Canadian GAAP the Warrants were valued at the time that they were issued. IFRS
requires that these be revalued at the end of each reporting period. On the Transition Date, the
change was not material so no adjustment was made.
(d) Share-based compensation. Under Canadian GAAP, each stock option grant was treated as a single
arrangement and compensation expense was determined at the time of grant and amortized over the
vesting period, generally 48 months, on a straight-line basis. IFRS requires a separate calculation of
compensation expense for awards that vest in instalments. Under Canadian GAAP, forfeitures of the
share-based compensation awards could be accounted for in the period in which the forfeitures
occurred. Under IFRS, compensation expense differs from Canadian GAAP based on the changing fair
values used for each instalment, the application of the forfeiture rate and the timing of recognizing
compensation expense. Generally, this results in accelerated expense recognition under IFRS. On the
Transition Date, the amount of the additional compensation expense was not material so no adjustment
was made.
Highlights of the First quarter
Highlights of the Company's operations for the quarter included:
/T/
=- Revenue for the three months ended September 30, 2011 was $9,039,212
compared to $9,219,050 for the same quarter last year, a decrease of
$179,838;
=- The cash flow used in operations amounted to $51,134 for the three
months ended September 30, 2011 compared to cash flow generated from
operations of $150,269 for the same period last year;
=- The research and development expense for the quarter amounted to
$244,110 compared to $192,268 for the same quarter last year;
=- In order to save costs, the Company relocated to a smaller facility in
Mechanicsburg, PA incurring a one-time cost of $65,040. This move will
lead to a reduction in premise costs of approximately $200,000 per
annum;
=- Deferred revenue at September 30, 2011 was $6,047,097 (of which
$5,449,475 is expected to be recognized in the next four quarters)
compared to $6,320,199 at June 30, 2011;
=- 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 $1,234,534 from American Eagle,
$672,263 from Motorola, $530,643 from Comcast, $400,701 from Thermo
Fisher, $399,989 from Eastman Kodak, and $304,193 from a school
district.
/T/
Review of the first quarter
Revenue for the three months ended September 30, 2011 was $9,039,212 compared to $9,219,050 for the
same quarter last year, a decrease of $179,838. During the current quarter the Company generated
revenue of $1,234,534 from American Eagle, $672,263 from Motorola, $530,643 from Comcast, $400,701
from Thermo Fisher, $399,989 from Eastman Kodak, and $304,193 from a school district. The Company also
had repeat business from its existing customer base consisting of various retailers, universities and
government organizations.
The EBITDA loss for the quarter was $440,084 compared to an EBITDA loss of $10,459 for the same
quarter last year.
During the quarter the Company had a deferred income tax benefit of $135,160 compared to a deferred
income tax benefit of $8,271 for the same quarter last year.
The Net Loss for the quarter amounted to $359,911 ($0.00 per share) compared to a Net Loss of $89,314
($0.01 per share) for the same period last year.
Cost of sales
Cost of sales for the quarter amounted to $7,248,834 resulting in a gross profit of $1,790,378 or
19.8% of sales as compared to $7,115,223 resulting in a gross profit of $2,103,827 or 22.8% of sales
for the same quarter last year. The lower gross profit was due to several larger orders with lower
margins.
At September 30, 2011 the Company had an inventory provision of $173,508 (June 30, 2011 - $168,364).
General and administrative
General and administrative expenses for the quarter amounted to $961,127 compared to $890,450 for the
same quarter last year. The increase of $70,677 relates to the moving costs of $65,040 that were
incurred during the quarter for the move of the premises in Mechanicsburg, PA. As a percentage of
sales the general and administrative expenses were 10.6% in the quarter compared to 9.7% 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 $244,110 compared to $192,268 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.
During the current quarter the Company's technology investment related to enhanced product
functionality and requirements from various partners:
For the Mobiquity Route(TM) these included the following:
/T/
=- Developing return tracking, which allows users to record totes and
quantity of boxes for credit transactions on pick up items;
=- Improving the management console;
=- Improving the mobile application; and
=- Developing a Bluetooth wand scanner to allow the device to be used with
the route accounting software.
/T/
For Self-service, these included the following:
/T/
=- Developing a new operating system for the Versatile Self-Service
platform providing improved performance, stability and
hardware/application support;
=- Developing enhanced text formatting and font control, localized content
and security controls for the Versatile Smart Sign interactive digital
signage platform; and
=- Improving video performance and stability for the Versatile Smart Sign
platform.
/T/
For the Mobiquity Transaction Engine 3.0(TM) these included the following:
/T/
=- Implementing a more flexible reporting engine that allows users to
quickly create and customize reports;
=- Enhancing the audit of data capture and display and providing instant
feedback to authorized users of changes to data; and
=- Implementing additional alert capture functionality to meet specific
requirements from security departments.
/T/
During the current period, the Company incurred $129,294 for research and development activities
related to Mobiquity Route(TM) and related mobile software products.
During the current period, the Company incurred $72,362 for research and development activities
related to Mobiquity Transaction Engine 3.0(TM), Mobiquity Kiosk(TM) and Autostore.
Selling and marketing expenses
Selling and marketing expense for the quarter amounted to $1,019,931 compared to $1,008,567 for the
same quarter last year, an increase of $11,364. 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 11.2% in the quarter compared to 10.9% in
the same quarter last year. There were no significant changes in the selling and marketing activities
during the quarter.
Deferred Income Tax Assets
For the three months ended September 30, 2011 the Company recorded a deferred income tax benefit of
$135,160 compared to a deferred income tax benefit of $8,271 for the same quarter last year.
In accordance with IFRS all of the deferred income tax assets have been classified as long term.
Amortization
The amortization of capital assets for the quarter amounted to $52,509 (2010 - $74,252), which
includes $4,090 of amortization classified with the cost of sales for Kiosks deployed pursuant to
various subscription agreements.
Foreign Exchange Loss
The foreign exchange loss for the quarter amounted to $824 compared to a foreign exchange loss of
$2,333 for the same quarter last year. The loss was primarily due to the fluctuation in the U.S.
dollar against the Canadian dollar in the quarter.
Summary of Quarterly Results
The table below provides a summary of certain selected unaudited financial information from the
Consolidated Statements of Operations for the most recent eight fiscal quarters comprising the
Company's preceding two years:
/T/
Q2 2010 Q3 2010 Q4 2010 Q1 2011
Dec 09 Mar 10 Jun 10 Sept 10
--------------------------------------------------
Revenue 11,259,292 9,795,481 11,517,023 9,219,050
Cost of Sales 8,599,212 7,493,702 9,097,685 7,115,223
--------------------------------------------------
Gross Profit 2,660,080 2,301,779 2,419,338 2,103,827
--------------------------------------------------
Expenses:
General and
administrative
(including foreign
exchange) 1,010,991 1,007,964 1,141,838 892,783
Non recurring
expenses 28,219 525,656 (214,924) 20,668
Research and
Development 247,084 185,289 177,744 192,268
Selling and Marketing 1,619,075 1,490,778 1,497,988 1,008,567
Stock-based
compensation 23,242 23,585 23,887 -
--------------------------------------------------
2,928,611 3,233,272 2,626,533 2,114,286
--------------------------------------------------
Earnings (loss) before
interest taxes and
amortization (268,531) (931,493) (207,195) (10,459)
Amortization (152,962) (152,631) (128,065) (71,161)
Interest (10,441) (7,781) (10,248) (14,970)
Goodwill impairment - - (63,309) -
Gain (loss) on sale 4,952 - - -
Income taxes 346,321 275,055 116,482 7,276
--------------------------------------------------
Net Earnings (loss) (80,661) (816,850) (292,335) (89,314)
--------------------------------------------------
--------------------------------------------------
Per share, basic and
diluted (0.00) (0.01) (0.00) (0.00)
--------------------------------------------------
Q2 2011 Q3 2011 Q4 2011 Q1 2012
Dec 10 Mar 11 Jun 11 Sept 11
--------------------------------------------------
Revenue 15,460,033 11,044,100 10,180,289 9,039,212
Cost of Sales 12,491,896 8,368,414 7,798,561 7,248,834
--------------------------------------------------
Gross Profit 2,968,137 2,675,686 2,381,728 1,790,378
--------------------------------------------------
Expenses:
General and
administrative
(including foreign
exchange) 1,018,146 851,603 938,841 961,951
Non recurring
expenses 37,503 235,486 199,293 -
Research and
Development 278,909 278,226 210,996 244,110
Selling and Marketing 1,327,878 1,136,728 1,186,724 1,019,931
Stock-based
compensation - 60,906 141,658 4,470
--------------------------------------------------
2,662,436 2,562,949 2,677,512 2,230,462
--------------------------------------------------
Earnings (loss) before
interest taxes and
amortization 305,701 112,737 (295,784) (440,084)
Amortization (48,108) (54,485) (51,473) (48,419)
Interest (666) 1,826 (2,616) (5,223)
Goodwill impairment - - - -
Gain (loss) on sale (2,575) (625) (1,410) -
Income taxes (75,387) (26,615) 130,032 133,815
--------------------------------------------------
Net Earnings (loss) 178,965 32,838 (221,251) (359,911)
--------------------------------------------------
--------------------------------------------------
Per share, basic and
diluted 0.00 0.00 (0.00) (0.00)
--------------------------------------------------
/T/
The Company's revenues and earnings fluctuate from quarter to quarter. A number of factors can cause
such fluctuations, including the timing of substantial orders, the timing of releases of new products,
timing of the deployment of solutions and delays by customers. Because the Company's operating
expenses are determined based on anticipated sales, are generally fixed and are incurred throughout
each fiscal quarter, any of the factors listed above can cause significant variations in the Company's
revenues and earnings in any given quarter. Thus, the Company's quarterly results are not necessarily
indicative of the Company's overall business, results of operations and financial condition.
Over the past three years the Company has improved its financial position while maintaining selling,
marketing, general and administration expenses at relatively the same level as revenue.
Financial position
Cash and cash equivalents at September 30, 2011 was $563,999 compared to $978,656 at June 30, 2011.
As at September 30, 2011 the Company had a credit line facility of $4,500,000, which was limited to
80% of eligible accounts receivable of the Company's subsidiary Versatile Systems, Inc. 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 plus one-half percent and is secured with a first charge on the
assets of Versatile Systems, Inc. At September 30, 2011 the amount drawn on the line of credit was
$724,981, a decrease of $282,786 from the amount drawn at June 30, 2011 of $1,007,767.
The amount that may be advanced under the credit line is limited to 80% of eligible accounts
receivable of VSI less than 90 days from the invoice date. At September 30, 2011 this amounted to
$3,548,623.
The cash flow used in operations amounted to $51,134 for the three months ended September 30, 2011
compared to cash flow generated from operations of $150,269 for the same period last year.
Investment in Equus
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 September 30,
2011 was $1.88 so the unrealized loss for the quarter was $500,748 and the cumulative unrealized loss
was $1,211,900. The Company believes that the cumulative unrealized loss is temporary and is not a
permanent impairment in the value of the Investment.
On August 13, 2010 Equus released its results for the second quarter of the 2010 fiscal year. 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 third quarter of the 2010 fiscal year. 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.
On March 18, 2011 Equus released its results as at and for the year ended December 31, 2010. The net
asset value of Equus at December 31, 2010 was $4.29 per share.
On June 2, 2011, Equus appointed Alessandro Benedetti the Fund's Executive Chairman and John Hardy the
Chief Executive Officer.
On August 15, 2011 Equus released its results for the second quarter of the 2011 fiscal year. The net
asset value of Equus at June 30, 2011 was $3.92 per share.
On November 14, 2011 Equus released its results for the third quarter of the 2011 fiscal year. The net
asset value of Equus at September 30, 2011 was $3.69 per share.
Capital Expenditures
During the three months ended September 30, 2011 the additions to capital assets amounted to $7,209
(2010 - $39,825). The decrease in the capital expenditures relate to the decline in the Kiosks that
have been deployed under subscription agreements.
Share Capital
As of December 13, 2011 the Company had 157,285,643 common shares issued and outstanding.
Stock Options
The Company can grant up to 15,728,564 of the issued shares pursuant to its stock option plan.
/T/
Weighted
Number of average exercise
shares price CDN$
=-------------------------------------------------------------------------
Outstanding - June 30, 2011 10,948,100 0.12
Granted -
Forfeited -
Expired -
--------------------------------
Outstanding - September 30, 2011 10,948,100 0.12
--------------------------------
/T/
For the three months ended September 30, 2011 there was no activity with stock options.
Warrants
The Company has 600,000 issued and outstanding warrants at September 30, 2011 with an exercise price
of CDN $0.30, which expire on January 22, 2012.
Off Balance Sheet Arrangements
The Company has not entered into any off balance sheet arrangements other than standard office lease
arrangements.
Related Party Transactions
During the current quarter, the Company paid consulting fees and salaries, which are included in the
general and administration expense, of $153,284 to three Directors and Officers of the Company (2010 -
$242,364 was paid to four 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 $37,424,509 to September 30, 2011. Although the Company has
decreased its operating 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 18% of total assets as at September 30, 2011. 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 6% of total assets as at September 30, 2011. 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, deferred service
contracts, purchased technology, intellectual property, customer contracts and licenses, in aggregate,
represent approximately 16% of the Company's total assets as at September 30, 2011, 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.
Deferred Income Tax Benefits
The amount recorded for Deferred Income Tax Assets represents approximately 22% of the Company's
assets as at September 30, 2011, presented in its consolidated financial position. 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 probable 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 deferred income tax asset that is recorded by the Company.
Goodwill
The accounting estimates for goodwill represents approximately 30% of the Company's total assets as at
September 30, 2011, 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 future accounting standards:
The IASB has issued the following standards, which have not yet been adopted by the Company. Each of
the new standards is effective for annual periods beginning on or after January 1, 2013, with early
adoption permitted. The Company has not yet begun the process of assessing the impact that the new and
amended standards will have on its interim consolidated financial statements or whether to early adopt
any of the new requirements.
The following is a description of the new standards:
IFRS 9 - "Financial Instruments" ("IFRS 9")
IFRS 9 was issued in November 2009 and contained requirements for financial assets. This standard
addresses classification and measurement of financial assets and replaces the multiple category and
measurement models in IAS 39 Financial Instruments - Recognition and measurement for debt instruments,
with a new mixed measurement model having only two categories: amortized cost and fair value through
profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments
are either recognized at fair value through profit or loss or at fair value through other
comprehensive income (loss). Where such equity instruments are measured at fair value through other
comprehensive income (loss), dividends are recognized in profit or loss to the extent not clearly
representing a return of investment; however, other gains and losses (including impairments)
associated with such instruments remain in accumulated comprehensive income (loss) indefinitely.
Requirements for financial liabilities were added in October 2010 and they largely carried forward
existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities
designated at fair value through profit and loss would generally be recorded in other comprehensive
income (loss).
The Company has not yet assessed the impact of the adoption of IFRS 9 on its results from operations
or its financial position.
IFRS 10 - "Consolidation" ("IFRS 10")
IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through its
power over the investee. Under existing IFRS, consolidation is required when an entity has the power
to govern the financial and operating policies of an entity so as to obtain benefits from its
activities. IFRS 10 replaces SIC-12 "Consolidation-Special Purpose Entities" and parts of IAS 27,
"Consolidated and Separate Financial Statements". The Company does not believe the adoption of IFRS 10
will materially affect its results from operations or its financial position.
IFRS 11 - "Joint Arrangements" ("IFRS 11")
IFRS 11 requires a venture to classify its interest in a joint arrangement as a joint venture or joint
operation. Joint ventures will be accounted for using the equity method of accounting, whereas for a
joint operation, the venture will recognize its share of the assets, liabilities, revenue and expenses
of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate
or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, "Interests in Joint
Ventures", and SIC-13, "Jointly Controlled Entities-Non-monetary Contributions by Ventures". The
Company does not believe the adoption of IFRS 10 will materially affect its results from operations or
its financial position.
IFRS 12 - "Disclosure of Interests in Other Entities" ("IFRS 12")
IFRS 12 establishes disclosure requirements for interests in other entities, such as joint
arrangements, associates, special purpose vehicles and off-balance sheet vehicles. The standard
carries forward existing disclosures and also introduces significant additional disclosure
requirements that address the nature of, and risks associated with, an entity's interests in other
entities. The Company does not believe the adoption of IFRS 10 will materially affect its results from
operations or its financial position.
IFRS 13 - "Fair Value Measurement" ("IFRS 13")
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use
across all IFRS. The new standard clarifies that fair value is the price that would be received to
sell an asset, or paid to transfer a liability in an orderly transaction between market participants,
at the measurement date. It also establishes disclosures about fair value measurement. Under existing
IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards
requiring fair value measurements and, in many cases, does not reflect a clear measurement basis or
consistent disclosures. The Company has not yet assessed the impact of the adoption of IFRS 13 on its
results from operations or its financial position.
Additional information relating to the Company can be found on the Canadian Securities Administrators
System for Electronic Document Analysis and Retrieval (SEDAR), located at www.sedar.com.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Versatile Systems Inc.
John Hardy
Chairman and CEO
1-800-262-1633
International: 001-206-979-6760
OR
Versatile Systems Inc.
Fraser Atkinson
CFO
1-800-262-1633
www.versatile.com
OR
Daniel Stewart & Company plc (Nominated Adviser & Broker)
Noelle Greenaway, Paul Shackleton
+44 (0) 207 776 6550
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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