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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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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 | |
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0.00 | 0.00% | 2.75 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
FOR: VERSATILE SYSTEMS INC. TSX VENTURE SYMBOL: VV AIM SYMBOL: VVS October 2, 2008 Versatile Reports the Results for Its Year-End and Fourth Quarter Cash flow from operations for the year was U.S. $1,452,981 VANCOUVER, CANADA--(Marketwire - Oct. 2, 2008) - Versatile Systems Inc. (TSX VENTURE:VV)(AIM:VVS), today announces its results for the fourth quarter and the year ended June 30, 2008. Revenue for the twelve months ended June 30, 2008 was $59,380,354 generating a gross profit of $14,852,818 or 25.0% of revenue compared to $62,230,275 generating a gross profit of $14,715,797 or 23.7% of revenue for the same period last year. The Company generated sales of higher margin products resulting in an increase in gross profit of $137,021 compared with the prior year. Net Earnings for the period amounted to $200,130 ($0.00 per share) compared to $1,379,445 ($0.01 per share) for the prior year with the significant change relating to the future income tax expense of $101,604 for the current year compared to a benefit of $951,622 for the prior year. Comprehensive income for the year amounted to $427,253 compared to $1,403,649 for the prior year. The EBITDA for the year was $1,289,230 compared to an EBITDA of $1,992,905 for the same period last year. EBITDA is defined as net earnings before interest expense, income taxes, depreciation and amortization. The Company has included information concerning EBITDA because it believes that it may be used by certain investors as one measure of the Company's financial performance. "The downturn in the U.S. economy has impacted all aspects of our business," said John Hardy, Chairman and CEO of Versatile. "Nevertheless we continued to generate significant cash flow from operations while also investing in our proprietary products and sales resources. As the economy improves we will be positioned to respond to and support growth opportunities." The cash flow from operations, before non-cash working capital items, was $1,452,981 for the year ended June 30, 2008 compared to cash flow of $2,159,289 for the same period last year. Over the past four years the cash flow from operations, before non-cash working capital items, has been as follows: /T/ 2008 $1,452,981 2007 2,159,289 2006 1,099,233 2005 (878,482) /T/ The Company had working capital of $3,772,462 at June 30, 2008, an improvement of $1,084,963 over the working capital at the year-end on June 30, 2007. During the current fiscal year the Company repaid two term loans in the amount of $2,924,263, which had been classified with current liabilities. "During the year our financial position improved," said Fraser Atkinson, CFO of Versatile. "Our working capital increased by $1,084,963, and we generated $1,452,981 cash flow from operations. We repaid two term loans totaling $2,924,263. In addition our deferred revenue increased by $1,067,850." Highlights for the year included: - Revenue for the twelve months ended June 30, 2008 was $59,380,354 generating a gross profit of $14,852,818 or 25.0% of revenue compared to $62,230,275 generating a gross profit of $14,715,797 or 23.7% of revenue for the same period last year; - Deferred revenue at June 30, 2008 was $7,855,129 (of which $6,582,593 is expected to be recognized in the next four quarters) compared to $6,787,279 at June 30, 2007, an increase of $1,067,850 or 15.7%; - The working capital as of June 30, 2008 was $3,772,462, an improvement of $1,084,963 over the working capital at the year-end of June 30, 2007; - Obtained a line of credit of $5,800,000 from the Commerce Bank, an increase from the previous line of credit of $3,000,000; and - Mobiquity Kiosk(TM): implementation of a new HSBC-based financial services kiosk which enables electronic processing of private label credit applications, MasterCard loyalty credit card applications, credit limit checks and information on other HSBC financial products and services; - Mobiquity Kiosk(TM) implementation of a kiosk-based electronic credit application for Citi Financial; - Deployed a large scale virtualization solution in each of the healthcare and telecommunication sectors; - Completed the first phase of deployment of a route accounting system for Tree of Life, a major U.S. distributor, with Versatile's Mobiquity Route(TM) 4.0 as the core driver of this system. - Partnering with CitiFinancial in order to simplify and streamline the credit application process for Shaw flooring retailers with the Mobiquity Kiosk(TM); - Completed large Proof of Concept deployments of Virtual Desktop Infrastructure for a leading global financial services company and a global education provider; and - Opened the Versatile Virtual Desktop Infrastructure Center of Excellence in conjunction with Sun Microsystems at their New York City Metro headquarters in Manhattan. Revenue for the three months ended June 30, 2008 was $13,721,812 compared to $18,193,167 for the same quarter last year, a decrease of $4,471,355. While the Company had repeat business from its existing customer base, the Company experienced a slowdown in orders from customers for routine expenditures on infrastructure. The EBITDA for the quarter was $155,206 compared to an EBITDA of $977,377 for the same quarter last year. The Net Loss for the quarter amounted to $362,043 ($0.00 per share) compared to Net Earnings of $992,566 ($0.01 per share) for the same period last year with the significant change relating to the future income tax expense of $294,213 for the current year compared to a future income tax benefit of $408,067 for the same quarter last year. Technology Development During the fourth quarter the Company spent $448,260 on Research and development compared to $339,369 in the same period last year. Versatile had many feature improvements to current product lines. For the Mobiquity Route(TM) these included the following: - Implementation of new features into Mobiquity Route(TM), including: -- Non-APL warnings and APL filterings -- Warehouse stock-on-hand quantities -- Brand lookup capabilities -- Discontinued Items warnings -- Historical Data -- Promotional Items -- Suggested Product Substitutions -- CheckSelect(TM) feature -- Intelligent Orders(TM) feature set - Implementation of a demonstration system for AT&T sales representatives to pre-sell Mobiquity Route(TM); and For the Mobiquity Transaction Engine 3.0(TM) these included the following: - Implementation of an RFID-based manufacturing solution for tracking pallets and work-in-progress in a manufacturing facility; - Implementation of support for WiFi Location tracking using Cisco access points and Cisco's Location Appliance; - Implementation of the Mobiquity Transaction Engine 3.0(TM) Health Care asset-tracking solution, which allows high-value assets to be tracked and intelligently monitored using Mobiquity Transaction Engine 3.0(TM) and WiFi location tags; - Expanded device support for the Mobiquity Transaction Engine 3.0(TM), including Symbol handheld scanners, Alien RFID readers, Data Logic RFID Readers, Cisco Wifi Location data, Newbury Wifi Location data; and - Enhancing the functionality of the Mobiquity Transaction Engine 3.0(TM) Time Tracking System. For the Mobiquity Kiosk(TM), these included the following: - Deployment of the hardware and operating system support for the new Madison Kiosk desktop computer; - Implementation of the Shaw Flooring Alliance credit application in association with Citi Financial; - Implementation of self-service conference registration kiosk application; - Implementation of an application to allow customers to register for retailer mailings at the kiosk; and - Enhancements to the Kiosk platform including improved networking support, better system performance, expanded device support, improved configuration, and support for new banking requirements. About Versatile Versatile provides business solutions that enable companies to improve sales, marketing and distribution of their products. Versatile also provides information technology services for the implementation, maintenance and security of mission-critical computer environments. Versatile has the ability to architect solutions involving both proprietary and third party components. For more information: www.versatile.com. Forward-Looking Statements This document may contain forward-looking statements relating to Versatile's operations or to the environment in which it operates, which are based on Versatile's operations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or are beyond Versatile's control. A number of important factors including those set forth in other public filings could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. Consequently, readers should not place any undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. Versatile disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. All amounts are expressed in U.S. dollars unless otherwise stated. (c) 2008 Versatile Systems Inc. All rights reserved. /T/ -------------------------------------------------------------------------- -------------------------------------------------------------------------- Versatile Systems Inc. Consolidated Balance Sheets -------------------------------------------------------------------------- Expressed in U.S. dollars June 30, 2008 June 30, 2007 ------------- ------------- ASSETS Current Assets Cash and cash equivalents $ 1,500,005 $ 3,369,087 Accounts receivable 11,842,754 15,200,919 Current portion of deferred contract costs 4,918,704 4,489,111 Work-in-progress 80,668 41,705 Prepaid expenses 309,061 347,023 Inventory 1,944,100 1,268,682 Future income tax benefits 706,249 1,094,579 ------------- ------------- 21,301,541 25,811,106 Long-term accounts receivable 26,522 812,000 Deferred contract costs 1,050,694 396,423 Capital Assets 867,771 492,979 Intangible assets 695,726 1,335,877 Future income tax benefits 4,672,907 4,326,136 Goodwill 9,977,659 9,914,350 ------------- ------------- $ 38,592,820 $ 43,088,871 ------------- ------------- ------------- ------------- LIABILITIES Current Liabilities Line of credit $ 74,942 $ 3,383 Bank overdraft 127,214 170,422 Accounts payable and accrued liabilities 10,704,330 13,720,928 Current portion of deferred revenue 6,582,593 6,299,863 Bank term loan - 2,749,263 Term loan - 175,000 Promissory Notes 40,000 - Current portion of capital lease obligations - 4,748 ------------- ------------- 17,529,079 23,123,607 Deferred Revenue 1,272,536 487,416 ------------- ------------- 18,801,615 23,611,023 ------------- ------------- SHAREHOLDERS' EQUITY Share Capital 51,353,054 51,643,963 Warrants 369,965 382,650 Contributed surplus 3,188,496 2,998,798 Deficit (35,063,096) (35,263,226) Accumulated other comprehensive income (57,214) (284,337) ------------- ------------- 19,791,205 19,477,848 ------------- ------------- $ 38,592,820 $ 43,088,871 ------------- ------------- ------------- ------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------- Versatile Systems Inc. Consolidated Statements of Earnings and Deficit -------------------------------------------------------------------------- Expressed in U.S. Three months Twelve months dollars ended June 30 ended June 30 2008 2007 2008 2007 ------------------------------------------------------ (unaudited) SALES $ 13,721,812 $ 18,193,167 $ 59,380,354 $ 62,230,275 COST OF SALES 10,180,648 13,770,768 44,527,536 47,514,478 ------------------------------------------------------ 3,541,164 4,422,399 14,852,818 14,715,797 ------------------------------------------------------ EXPENSES General and administrative 1,529,268 1,263,358 5,090,959 4,588,693 Selling and marketing 1,470,184 1,587,817 6,504,762 6,502,051 Research and development 448,260 339,369 1,745,569 1,068,216 Foreign Exchange Loss 1,465 (10,418) 175,627 8,488 Stock-based compensation (63,219) 264,896 46,671 555,444 ------------------------------------------------------ 3,385,958 3,445,022 13,563,588 12,722,892 ------------------------------------------------------ Earnings before interest, taxes and amortization 155,206 977,377 1,289,230 1,992,905 Amortization of capital assets 69,300 90,251 256,929 288,291 Amortization of intangible assets 124,355 192,454 693,748 874,550 Interest expense (income) 167 69,236 (28,212) 300,918 ------------------------------------------------------ EARNINGS (LOSS) BEFORE INCOME TAXES (38,616) 625,436 366,765 529,146 Current income tax expense (29,214) (40,937) (65,031) (101,323) Future income tax (expense) benefit (294,213) 408,067 (101,604) 951,622 ------------------------------------------------------ NET EARNINGS (LOSS) FOR THE PERIOD (362,043) 992,566 200,130 1,379,445 ------------------------------------------------------ DEFICIT, BEGINNING OF PERIOD (34,701,053) (36,255,792) (35,263,226) (36,642,671) ------------------------------------------------------ DEFICIT, END OF PERIOD (35,063,096) (35,263,226) (35,063,096) (35,263,226) ------------------------------------------------------ ------------------------------------------------------ EARNINGS PER SHARE (basic and fully diluted) ($0.00) $0.01 $0.00 $0.01 ------------------------------------------------------ ------------------------------------------------------ -------------------------------------------------------------------------- -------------------------------------------------------------------------- Versatile Systems Inc. Consolidated Statements of Comprehensive Income (Loss) -------------------------------------------------------------------------- Expressed in U.S. Three months Twelve months dollars ended June 30 ended June 30 2008 2007 2008 2007 ------------------------------------------------------ (unaudited) Net earnings (loss) for the period (362,043) 992,566 200,130 1,379,445 Other comprehensive income (loss) Foreign currency translation adjustments (230) 21,749 227,123 24,204 ------------------------------------------------------ Comprehensive income (loss) for the period (362,273) 1,014,315 427,253 1,403,649 ------------------------------------------------------ ------------------------------------------------------ -------------------------------------------------------------------------- -------------------------------------------------------------------------- Versatile Systems Inc. Consolidated Statements of Cash Flows -------------------------------------------------------------------------- Expressed in U.S. Three months Twelve months dollars ended June 30 ended June 30 2008 2007 2008 2007 ------------------------------------------------------ (unaudited) CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net earnings (loss) for the period $ (362,043) $ 992,566 $ 200,130 $ 1,379,445 Items not affecting cash Amortization of capital and intangible assets 193,655 282,705 950,677 1,162,841 Loss on disposal of capital assets - 4,293 212 4,693 Stock-based compensation (63,219) 264,896 46,671 555,444 Foreign exchange loss 85,847 8,488 153,687 8,488 Future income tax expense (benefit) 294,213 (408,067) 101,604 (951,622) ------------------------------------------------------ Cash flow from operations before other items 148,453 1,144,881 1,452,981 2,159,289 Net change in non-cash working capital items (1,087,563) 24,665 449,708 (1,907,534) ------------------------------------------------------ (939,110) 1,169,546 1,902,689 251,755 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Cash acquired on acquisition of Sagent Solutions 5,081 - 5,081 - Proceeds from disposition of capital assets - 700 1,867 2,640 Additions to capital assets (170,470) (63,921) (634,181) (455,234) ------------------------------------------------------ (165,389) (63,221) (627,233) (452,594) ------------------------------------------------------ CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Proceeds from issuance of shares, net of costs - 4,050,642 416,202 4,564,059 Purchase of Company shares (311,511) - (618,780) - Repayment of convertible debenture - - - (107,594) Proceeds from (repayment of) line of credit 74,942 (1,680,236) 71,559 (367,377) Repayment of bank overdraft (193,820) (276,334) (43,208) (587,546) Repayment of the Bank Term Loan - - (2,749,263) - Repayment of the Term Loan - - (175,000) - Repayment of Promissory Notes (20,000) - (40,000) - Repayment of capital lease obligations - (1,196) (4,748) (6,422) ------------------------------------------------------ (450,389) 2,092,876 (3,143,238) 3,495,120 ------------------------------------------------------ Effect of foreign exchange rate on cash (54,492) (37,922) (1,300) (24,204) Increase (decrease) in cash and cash equivalents (1,609,380) 3,161,279 (1,869,082) 3,270,077 CASH and cash equivalents, beginning of period 3,109,385 207,808 3,369,087 99,010 ------------------------------------------------------ CASH and cash equivalents, end of period $ 1,500,005 $ 3,369,087 $ 1,500,005 $ 3,369,087 ------------------------------------------------------ ------------------------------------------------------ /T/ Versatile Systems Inc. Consolidated Financial Statements June 30, 2008 and 2007 (expressed in U.S. dollars) /T/ PricewaterhouseCoopers LLP Chartered Accountants PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, British Columbia Canada V6C 3S7 Telephone +1 604 806 7000 Facsimile +1 604 806 7806 /T/ Auditors' Report To the Shareholders of Versatile Systems Inc. We have audited the consolidated balance sheets of Versatile Systems Inc. as at June 30, 2008 and 2007 and the consolidated statements of earnings and deficit, comprehensive income and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. (signed) PricewaterhouseCoopers LLP Chartered Accountants Vancouver, British Columbia September 26, 2008 "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. /T/ Versatile Systems Inc. Consolidated Balance Sheets As at June 30, 2008 and 2007 -------------------------------------------------------------------------- (expressed in U.S. dollars) 2008 2007 $ $ Assets Current assets Cash and cash equivalents 1,500,005 3,369,087 Accounts receivable (note 4) 11,842,754 15,200,919 Current portion of deferred contract costs 4,918,704 4,489,111 Work-in-progress 80,668 41,705 Prepaid expenses 309,061 347,023 Inventory 1,944,100 1,268,682 Future income tax benefits (note 20) 706,249 1,094,579 --------------------------- 21,301,541 25,811,106 Long-term accounts receivable (note 4) 26,522 812,000 Deferred contract costs 1,050,694 396,423 Capital assets (note 5) 867,771 492,979 Intangible assets (note 6) 695,726 1,335,877 Future income tax benefits (note 20) 4,672,907 4,326,136 Goodwill (note 7) 9,977,659 9,914,350 --------------------------- 38,592,820 43,088,871 --------------------------- --------------------------- Liabilities Current liabilities Line of credit (note 8) 74,942 3,383 Bank overdraft (note 8) 127,214 170,422 Accounts payable and accrued liabilities (note 9) 10,704,330 13,720,928 Current portion of deferred revenue 6,582,593 6,299,863 Bank term loan (note 8) - 2,749,263 Term loan (note 12) - 175,000 Promissory notes 40,000 - Current portion of capital lease obligations (note 11) - 4,748 --------------------------- 17,529,079 23,123,607 Deferred revenue 1,272,536 487,416 --------------------------- 18,801,615 23,611,023 --------------------------- Shareholders' Equity Share capital (note 13) 51,353,054 51,643,963 Warrants (note 14) 369,965 382,650 Contributed surplus (note 15) 3,188,496 2,998,798 Deficit (35,063,096) (35,263,226) Accumulated other comprehensive income (57,214) (284,337) --------------------------- 19,791,205 19,477,848 --------------------------- 38,592,820 43,088,871 --------------------------- --------------------------- Commitments (note 19) Subsequent event (note 23) Approved by the Board of Directors (signed) John Hardy Director (signed) Fraser Atkinson Director --------------------------- --------------------------- The accompanying notes are an integral part of these consolidated financial statements. Versatile Systems Inc. Consolidated Statements of Earnings and Deficit For the years ended June 30, 2008 and 2007 -------------------------------------------------------------------------- (expressed in U.S. dollars) 2008 2007 $ $ Sales 59,380,354 62,230,275 Cost of sales 44,527,536 47,514,478 --------------------------- 14,852,818 14,715,797 --------------------------- Expenses General and administrative 5,090,959 4,588,693 Research and development 1,745,569 1,068,216 Selling and marketing 6,504,762 6,502,051 Foreign exchange loss 175,627 8,488 Stock-based compensation 46,671 555,444 --------------------------- 13,563,588 12,722,892 --------------------------- Earnings before interest, taxes and amortization 1,289,230 1,992,905 Interest (income) expense (28,212) 300,918 Amortization of capital assets 256,929 288,291 Amortization of intangible assets 693,748 874,550 --------------------------- Earnings before income taxes 366,765 529,146 Current income tax expense (65,031) (101,323) Future income tax (expense) benefit (101,604) 951,622 --------------------------- Net earnings for the year 200,130 1,379,445 Deficit - Beginning of year (35,263,226) (36,642,671) --------------------------- Deficit - End of year (35,063,096) (35,263,226) --------------------------- --------------------------- Earnings per share - basic and diluted 0.00 0.01 --------------------------- --------------------------- The accompanying notes are an integral part of these consolidated financial statements. Versatile Systems Inc. Consolidated Statements of Comprehensive Income For the years ended June 30, 2008 and 2007 -------------------------------------------------------------------------- (expressed in U.S. dollars) 2008 2007 $ $ Net earnings for the year 200,130 1,379,445 Other comprehensive income Foreign currency translation adjustments 227,123 24,204 --------------------------- Comprehensive income for the year 427,253 1,403,649 --------------------------- --------------------------- Versatile Systems Inc. Consolidated Statements of Cash Flows For the years ended June 30, 2008 and 2007 -------------------------------------------------------------------------- (expressed in U.S. dollars) 2008 2007 $ $ Cash flows from operating activities Net earnings for the year 200,130 1,379,445 Items not affecting cash Amortization of capital and intangible assets 950,677 1,162,841 Stock-based compensation 46,671 555,444 Loss on disposal of capital assets 212 4,693 Foreign exchange loss 153,687 8,488 Future income tax expense (benefit) 101,604 (951,622) --------------------------- 1,452,981 2,159,289 Net change in non-cash working capital items 449,708 (1,907,534) --------------------------- 1,902,689 251,755 --------------------------- Cash flows from investing activities Cash acquired on acquisition of Sagent Solutions 5,081 - Proceeds from disposition of capital assets 1,867 2,640 Additions to capital assets (634,181) (455,234) --------------------------- (627,233) (452,594) --------------------------- Cash flows from financing activities Proceeds from issuance of shares - net of costs 416,202 4,564,059 Purchase of company shares (618,780) - Repayment of convertible debenture - (107,594) Proceeds from (repayment of) line of credit 71,559 (367,377) Repayment of bank overdraft (43,208) (587,546) Repayment of the bank term loan (2,749,263) - Repayment of the term loan (175,000) - Repayment of Promissory notes (40,000) - Repayment of capital lease obligations (4,748) (6,422) --------------------------- (3,143,238) 3,495,120 --------------------------- Effect of foreign exchange rate on cash (1,300) (24,204) --------------------------- (Decrease) increase in cash and cash equivalents (1,869,082) 3,270,077 Cash and cash equivalents - Beginning of year 3,369,087 99,010 --------------------------- Cash and cash equivalents - End of year 1,500,005 3,369,087 --------------------------- --------------------------- Supplemental cash flow information (note 22) The accompanying notes are an integral part of these consolidated financial statements. /T/ Versatile Systems Inc. Notes to Consolidated Financial Statements June 30, 2008 and 2007 (expressed in U.S. dollars) 1 Nature of operations Versatile Systems Inc. ("Versatile-Canada" or the "Company"), which was continued from the Yukon Territories to British Columbia, is primarily engaged in software development and sales of computer software, hardware and system integration services related to wired and wireless mobile business solutions through its wholly owned subsidiaries, Versatile Acquisition Corporation ("VAC"), Perfect Order, Inc. ("POI"), Versatile Systems, Inc. ("VSI"), Versatile Mobile Systems, Inc. ("VMS-US"), Versatile Mobile Systems (Europe) Ltd. ("VMS-Europe") and Sagent Solutions. The wholly owned subsidiaries, 596327 B.C. Ltd. and EvolutionB Information Inc. ("EvolutionB") are inactive. 2 Significant accounting policies Basis of presentation These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Company and all its wholly owned subsidiaries - VAC, POI, VSI, VMS- US, VMS-Europe, 596327 B.C. Ltd. and EvolutionB. All intercompany accounts and transactions are eliminated on consolidation. All amounts are expressed in U.S. dollars, unless otherwise stated. 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 is recognized immediately into earnings. Inventory Inventory consists of kiosk hardware and 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. 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. Research and development Research costs are expensed as incurred. Development costs are charged as an expense in the period incurred unless the Company believes that a development project meets certain criteria under generally accepted accounting principles for deferral and amortization. The Company has not capitalized any development costs during the year. Capital assets The Company records capital assets at acquisition cost. The capital assets are amortized using the straight- line method at the following rates: /T/ Automobiles 20% per annum Computer and office equipment 20% - 33-1/3% per annum Computer software 33% - 1/3% per annum Demonstration equipment 50% per annum Tenant improvements straight-line over remaining term of lease /T/ 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. 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. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method at the following rates: /T/ Purchased technology 3 years Customers 5 years Intellectual property 1-1/2 years Licences 4 years /T/ The amortization method and estimated useful lives of intangible assets are reviewed annually. 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 would be required if 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 earnings before extraordinary items and discontinued operations. Income taxes The Company follows the liability method of accounting for income taxes. Under the liability method of tax allocation, future 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 future tax asset to the extent that it is more likely than not that the future income tax asset will not be realized. During the current fiscal year, the Company determined that VSI, POI, VAC and VMS-US are generating sufficient profits that it is more likely than not that the losses will be fully utilized and the deductions attributable to these companies will be fully utilized. Consequently, the valuation allowance has been reduced accordingly. The difference between the value of these tax benefits less the valuation allowance is the amount of the future income tax asset that is recorded by the Company. During the current year, the Company recorded $101,604 for the income tax expense related to the recognition of future income tax assets. To the extent that the Company expects to generate sufficient profits in the following fiscal period, that portion has been classified as current. Foreign currency translation The U.S. dollar is the reporting currency for the Company. The functional currency of each subsidiary throughout the group is generally the local currency. For consolidation purposes, assets and liabilities of these subsidiaries are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average exchange rate for the period. The effects of translating the financial position and results of operations from local functional currencies are included in "other comprehensive income." The Company employs the current rate method of translation for its self-sustaining operations. Under this method, all assets and liabilities denominated in a currency other than the recording entity's functional currency are translated at the year-end rates and all revenue and expense items are translated at the average monthly exchange rates for recognition in income. Differences arising from these foreign currency translations are recorded in accumulated other comprehensive income as a cumulative translation adjustment until they are realized by a reduction in the net investment. The Company employs the temporal method of translation for its integrated operations. Under this method, monetary assets and liabilities denominated in a currency other than the recording entity's functional currency are translated at the year-end rates and all other assets and liabilities are translated at applicable historical exchange rates. Revenue and expense items are translated at the rate of exchange in effect at the date the transactions are recognized in income, with the exception of amortization which is translated at the historical rate for the associated asset. Realized exchange gains and losses and currency translation adjustments are included in income. 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, on 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. The Company also sells products and services containing multiple elements, which may include a combination of the above. These revenues are recognized in accordance with EIC 142 "Revenue Arrangements with Multiple Elements". For sales involving multiple elements, the Company determines if the elements within the arrangement can be separated amongst its different elements, using guidance under Canadian generally accepted accounting principles. That is, (i) the product or service has value to the customer on a standalone basis; (ii) objective, reliable and verifiable evidence of fair value exists; and (iii) the undelivered elements are not essential to the functionality of the delivered elements. Under this guideline, the Company recognizes revenue for each element based on relative fair values. 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. Use of estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles 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. Earnings per share Earnings per common share is computed using the weighted average number of common shares outstanding during the year, being 120,991,438 (2007 - 110,705,812) in the current year. Diluted earnings per common share has not been disclosed as the effect of common shares issuable upon the exercise of options or warrants would not be significant. 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 contributed surplus. Upon issuance of shares under the Option Plan the Company records a credit to share capital for the amount paid and the stock based compensation charge that has been previously recorded, if any. 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 contributed surplus are recorded as share capital on exercise of the options. During the current fiscal year the Company recognized $46,671 (2007 - $555,444) in compensation expense and additional contributed surplus for stock options granted to employees. A description of the Company's stock- based compensation plan is disclosed in note 16. Changes in accounting policies The Company retroactively adopted the following new Handbook sections issued by the Canadian Institute of Chartered Accountants ("CICA") on July 1, 2007: a) Section 3855, "Financial Instruments - Recognition and Measurement", establishes the standards for recognizing and measuring financial assets, financial liabilities and nonfinancial derivatives. Under the new standards, the Company is now required to classify: i) its financial assets as held-to-maturity, available-for-sale, held-for-trading, or loans and receivables; and ii) its financial liabilities as either held-for-trading, or other financial liabilities. All financial instruments, including derivatives, are included on the consolidated balance sheet and are initially measured at fair value with the exception of financial instruments with related parties. Subsequent measurement and recognition of changes in fair value of financial instruments depends on their initial classification as follows: Held-to-maturity investments, loans and receivables, and other financial liabilities are measured at amortized cost and gains and losses are recognized in net earnings. Held-for- trading financial investments are measured at fair value and all gains and losses are included in net earnings in the period in which they arise. Available-for-sale financial instruments are measured at fair value with revaluation gains and losses included in other comprehensive income until the asset is disposed of or impaired. Financing charges that reflect the cost to obtain new debt financing are expensed as incurred. Financing charges that reflect the cost to obtain new equity financing are deducted from net proceeds as incurred. The Company has made the following classifications: - Cash and cash equivalents, bank overdraft and line of credit are classified as held for trading and are measured at fair value. This category best describes the Company's current management practices with regards to cash and cash equivalents. - Accounts receivable are classified as loans and receivables and recorded at amortized cost using the effective interest rate method. - Accounts payable and accrued liabilities are classified as other liabilities and measured at amortized cost using the effective interest rate method. - Long-term debt is carried at amortized cost using the effective interest rate method. Section 3855 also requires that the Company identify embedded derivatives that require separation from the related host contract and measure any embedded derivatives at fair value. From time to time, the Company enters into certain contracts for the purchase or sale of non-financial items that are denominated in currencies other than the U.S. dollar. In cases where the foreign exchange component is not leveraged and does not contain an option feature and the contract is denominated in either the functional currency of the Company or the counter-party, the embedded foreign currency derivative is considered to be closely related to the host contract and is not accounted for separately. If the contract is neither denominated in the functional currency of the Company or the associated counter- party, the embedded foreign currency derivative is separated from the host contract unless the non-financial item delivered requires payments denominated in the currency that is routinely accepted in commercial transactions around the world, or is commonly used for such transactions in the economic environment in which the transaction takes place. The Company did not identify any embedded foreign currency derivatives from their related host contracts during the year ended June 30, 2008. The change in accounting policy related to embedded derivatives did not result in any changes to the June 30, 2008 consolidated financial statements and did not require restatement of prior years financial statements. b) Section 3861, "Financial Instruments -- Disclosure and Presentation", establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them This change in accounting policy did not have a material impact on the current year financial statements and did not require restatement of prior year financial statements. c) Section 1530, "Comprehensive Income", describes the change in equity of an enterprise during a period arising from transactions and other events and circumstances from non-owner sources. It includes items that would normally not be included in net income such as changes in the foreign currency translation adjustment relating to selfsustaining foreign operations and unrealized gains or losses on available-for-sale financial instruments. This section describes how to report and disclose comprehensive income and its components. As a result of the adoption of this section, the consolidated financial statements now include a statement of comprehensive loss and deficit. d) Section 3251, "Equity", replaces section 3250, "Surplus", and establishes standards for the presentation of equity and changes in equity as a result of the new requirements of Section 1530, "Comprehensive Income". e) Section 3865, "Hedges", describes when hedge accounting is appropriate. Hedge accounting ensures that all gains, losses, revenues and expenses from the derivative and the item it hedges are recorded in the statement of earnings in the same period. The Company did not have any hedging items during the year. f) Section 1506, "Accounting Changes", allows for voluntary changes in accounting policy only if they provide more reliable and relevant information in the financial statements. Recent accounting pronouncements issued and not yet adopted The following is an overview of accounting standard changes that the Company will be required to adopt in future periods: Capital Disclosures and Financial Instruments - Presentation and Disclosure The CICA issued three new accounting standards: Section 1535, "Capital Disclosures", Section 3862, "Financial Instruments - Disclosures", and Section 3863, "Financial Instruments - Presentation". These new standards are effective for fiscal years beginning on or after October 1, 2007. The Company will adopt these standards on July 1, 2008. The Company is in the process of evaluating the disclosure and presentation requirements of the new standards. Section 1535 establishes disclosure requirements about an entity's capital and how it is managed. The purpose will be to enable users of the financial statements to evaluate the entity's objectives, policies and processes for managing capital. Sections 3862 and 3863 will replace Section 3861, "Financial Instruments - Disclosure and Presentation", revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections will place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. Inventories The CICA issued Section 3031, "Inventories", which will replace Section 3030, "Inventories". This new standard is effective for fiscal years beginning on or after January 1, 2008. The Company will adopt this section effective July 1, 2008. Under the requirements of the new standard, inventories will be measured at the lower of cost and net realizable value, cost of inventories that are not ordinarily interchangeable and goods or services produced and segregated for specific projects will be assigned by using a specific identification of their individual costs, consistent use of either first-in, first out or weighted average cost is prescribed for other inventories, and the reversal of previous write-downs to net realizable value occurs when there is a subsequent increase in the value of the inventories. The Company has not yet determined what the impact of adopting this standard will have on its consolidated financial statements. Going concern Effective July 1, 2008, the Company will be required to adopt the additional requirements of the CICA Handbook Section 1400, "General Standards of Financial Statements". The additional requirements require management to make an assessment of the Company's ability to continue as a going concern, and to disclose any material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern. The Company does not anticipate any impact to its consolidated financial statements arising from this accounting pronouncement. Goodwill and intangible assets In February 2008, the CICA issued Section 3064, "Goodwill and Intangible Assets", replacing Section 3062, "Goodwill and other Intangible Assets" and Section 3450, "Research and Development Costs". The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning July 1, 2009. This Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements. The Company will be evaluating the impact of these standards. 3 Acquisition of Sagent Solutions business On December 28, 2007 the Company acquired all of the issued and outstanding shares and units of Sagent Solutions, based in Somerset, New Jersey. Sagent sells hardware, computer software and system integration services focused on the rapidly growing need of enterprises to leverage the cost and efficiency benefits of virtualizing their IT infrastructures. The consideration consisted of Promissory Notes bearing interest at 3% per annum in the amount of $80,000 payable to the Vendors in quarterly amounts commencing January 15, 2008 and 600,000 share purchase warrants of Versatile Systems Inc. exercisable at CDN $0.30 per share with a term of four years, which were approved by the TSX Venture Exchange on January 30, 2008. The Company assigned a value of $0.07 to each warrant. The acquisition was accounted for under the purchase method of accounting. Total consideration, including costs of acquisition, was allocated based on the estimated fair values of the acquired assets on the date of acquisition as follows: /T/ $ Net assets acquired Cash and cash equivalents 5,081 Other current assets 4,169 Capital and intangible assets 2,541 Customers 56,150 Goodwill 63,309 Accounts payable and accrued liabilities (9,250) ---------- Fair value of net assets acquired 122,000 ---------- ---------- Total consideration comprises Promissory notes 80,000 Value assigned to the Versatile warrants 42,000 ---------- Total consideration as at the date of acquisition 122,000 ---------- ---------- /T/ The above purchase price allocation is based on the estimated fair values of the assets and liabilities acquired. To the extent that the finalization of these fair value results in changes to amounts set out in these consolidated financial statements, the amount assigned to goodwill will be adjusted by an equal and offsetting amount. 4 Accounts receivable Included with accounts receivable is an amount that the Company has with a customer providing for monthly payments over a three year term. The total amount of the receivable is carried at amortized cost of $39,914 of which $13,392 has been classified as current. In the prior fiscal year the Company had $1,353,333 of which $541,333 was classified as current and the Company recorded interest based on an imputed interest rate of approximately 10% per annum. 5 Capital assets /T/ 2008 ---------------------------------------- Accumulated Cost amortization Net $ $ $ Automobiles 10,005 3,168 6,837 Computer and office equipment 2,654,591 1,850,481 804,110 Demonstration equipment 104,339 104,339 - Computer software 106,084 95,216 10,868 Tenant improvements 120,649 74,693 45,956 ---------------------------------------- 2,995,668 2,127,897 867,771 ---------------------------------------- ---------------------------------------- /T/ As at June 30, 2008, equipment held for leasing purposes with a cost of $39,544 and accumulated amortization of $1,034 are included in capital assets. /T/ 2007 ---------------------------------------- Accumulated Cost amortization Net $ $ $ Automobiles 10,005 1,335 8,670 Computer and office equipment 2,048,105 1,631,145 416,960 Demonstration equipment 104,339 104,339 - Computer software 99,884 88,754 11,130 Tenant improvements 113,625 57,406 56,219 ---------------------------------------- 2,375,958 1,882,979 492,979 ---------------------------------------- ---------------------------------------- /T/ 6 Intangible assets The carrying amounts of the amortized intangible assets as at June 30, 2008 and 2007 are as follows: /T/ 2008 ---------------------------------------- Accumulated Cost amortization Net $ $ $ Customers 1,813,509 1,118,612 694,897 Purchased technology 1,211,969 1,211,969 - Intellectual property 451,250 451,250 - Other intangibles 3,791 2,962 829 Licences 522,402 522,402 - ---------------------------------------- 4,002,921 3,307,195 695,726 ---------------------------------------- ---------------------------------------- 2007 ---------------------------------------- Accumulated Cost amortization Net $ $ $ Customers 1,757,359 761,518 995,841 Purchased technology 1,211,969 875,314 336,655 Intellectual property 451,250 451,250 - Other intangibles 6,127 2,746 3,381 Licences 522,402 522,402 - ---------------------------------------- 3,949,107 2,613,230 1,335,877 ---------------------------------------- ---------------------------------------- /T/ 7 Goodwill The carrying amounts of the goodwill for the years ended June 30, 2008 and 2007 are as follows: /T/ 2008 ---------------------------------------- Accumulated Cost amortization Net $ $ $ Goodwill Perfect Order 7,195,380 - 7,195,380 Sagent Solutions 63,309 - 63,309 VMS-US 10,875,882 8,156,912 2,718,970 ---------------------------------------- 18,134,571 8,156,912 9,977,659 ---------------------------------------- ---------------------------------------- 2007 ---------------------------------------- Accumulated Cost amortization Net $ $ $ Goodwill Perfect Order 7,195,380 - 7,195,380 VMS-US 10,875,882 8,156,912 2,718,970 ---------------------------------------- 18,071,262 8,156,912 9,914,350 ---------------------------------------- ---------------------------------------- /T/ No amortization for goodwill has been recorded for 2008 or 2007. During the current fiscal year ended June 30, 2008, the Company performed an assessment of the carrying value of the goodwill recorded in connection with the acquisition of VMS-US, Perfect Order and Sagent Solutions. The assessment showed that no impairment charge was required for the year ended June 30, 2008. 8 Line of credit, bank overdraft and bank term loan The Company has a credit line facility for up to $5,800,000 from a U.S. based financial institution. The line of credit bears interest at the State of New York prime rate of lending and is secured with a first charge on the assets of VAC, VSI and POI. As at June 30, 2008, the Company had a line of credit of $74,942 (2007 - $3,383) and had a bank overdraft of $127,214 (2007 - $170,422). During the current fiscal year, the interest on the line of credit amounted to $4,224 (2007 - $48,078). During the current fiscal year, the Company repaid a term loan in the amount of $2,749,263 from the same U.S. based financial institution. During the current fiscal year, the interest on the term loan amounted to $161,538 (2007 - $257,648). The amount that may be advanced under the credit line is limited to 70% of eligible accounts receivable of VAC, POI and VSI less than 90 days from invoice date. At June 30, 2008, the financial covenants for these facilities included requirements for debt coverage of 1.2 and minimum Tangible Net worth of $4,800,000, which the Company met. 9 Accounts payable and accrued liabilities Included in accounts payable and accrued liabilities is $2,740,373 (2007 - $7,707,954) owing to a major supplier, which is subordinated to the bank line of credit. 10 Convertible debenture On April 10, 2006, the Company issued a convertible debenture for proceeds of $3,617,700 to a U.S. based institution. On June 30, 2006, $3,000,000 of the debenture was converted into 8,789,633 common shares of the Company leaving a balance of $107,594 which was repaid during the prior fiscal year. 11 Capital lease obligations The Company leases certain computer and office equipment under capital leases, which are collateralized by the assets financed by these leases. Interest expense on capital lease obligations for the year ended June 30, 2008 is $225 (2007 - $1,262). 12 Term loan The note payable to Ben Franklin Technology Partners for $175,000 bore interest at the rate of 4.75% per annum, was unsecured and was repaid on July 17, 2007. During the current fiscal year, the interest amounted to $387 (2007 - $8,312). 13 Share capital /T/ Authorized Unlimited common shares without par value Issued and outstanding Number of shares Amount $ Balance - June 30, 2006 97,393,694 44,473,680 Shares issued on conversion of debenture, net of share issue costs 8,789,633 2,470,862 Shares issued for cash, net of share issue costs 7,241,380 2,871,165 Shares issued for exercised warrants 4,546,986 1,394,118 Warrant cost related to the exercised warrants - 182,876 Shares issued for exercised stock options 2,406,250 248,934 Contributed surplus related to the exercised stock options - 2,328 ---------------------------- Balance - June 30, 2007 120,377,943 51,643,963 Shares repurchased and cancelled (702,500) (300,405) Shares issued for exercised warrants 1,446,000 409,820 Warrant cost related to the exercised warrants - 48,040 Shares issued for exercised stock options 27,200 6,382 Contributed surplus related to the exercised stock options - 279 ---------------------------- Issued and outstanding at June 30, 2008 121,148,643 51,808,079 Less: Shares held in Treasury (2,559,000) (455,025) ---------------------------- Balance - June 30, 2008 118,589,643 51,353,054 ---------------------------- ---------------------------- /T/ During the current fiscal year the Company acquired 3,261,500 common shares at a cost of $618,780. On January 30, 2008 the Company cancelled 702,500 shares and the balance of shares are held in Treasury. On April 16, 2007, the Company closed a brokered private placement and issued 7,241,380 shares at a price of $0.5759 (CDN $ 0.6636) per share for gross proceeds of $4,170,390 (CDN $4,805,380). The Company also issued the broker 583,770 warrants. Each common share purchase warrant entitles the holder to purchase one common share of the Company for a period of four years after the closing date at a price of CDN $0.6636 per common share. 14 Warrants The following warrants were outstanding: /T/ Balance - June 30, 2008 ------------------- Exercise Balance- Expired Number price June 30, or of Amount Expiry date CDN $ 2007 exercised Issued warrants $ August 10, 2007 0.30 1,646,000 (1,646,000) - - - March 31, 2009 0.38 1,411,808 - - 1,411,808 107,627 March 31, 2009 0.414 1,411,808 - - 1,411,808 75,971 March 31, 2011 0.569 1,411,808 - - 1,411,808 63,309 April 16, 2011 0.6636 583,770 - - 583,770 81,058 January 22, 2012 0.30 - - 600,000 600,000 42,000 -------------------------------------------------- 6,465,194 (1,646,000) 600,000 5,419,194 369,965 -------------------------------------------------- -------------------------------------------------- Balance - June 30, 2007 Exercise Balance- ------------------- price June 30, Number of Amount Expiry date CDN $ 2006 Expired Issued warrants $ August 10, 2007 0.30 1,646,000 - - 1,646,000 54,685 March 31, 2009 0.38 1,411,808 - - 1,411,808 107,627 March 31, 2009 0.414 1,411,808 - - 1,411,808 75,971 March 31, 2011 0.569 1,411,808 - - 1,411,808 63,309 April 22, 2007 0.35 5,135,413 (5,135,413) - - - April 25, 2007 0.345 750,000 (750,000) - - - April 16, 2011 0.6636 - - 583,770 583,770 81,058 --------------------------------------------------- 11,766,837 (5,885,413) 583,770 6,465,194 382,650 --------------------------------------------------- --------------------------------------------------- /T/ On January 22, 2008, the Company issued 600,000 warrants expiring on January 22, 2012 with an exercise price of CDN $0.30 as part of the consideration for the acquisition of Sagent Solutions. Each warrant entitles the holder to purchase one common share of the Company. The Company assigned a value of $0.07 to each warrant. On April 16, 2007, the Company issued 583,770 warrants expiring on April 16, 2011 with an exercise price of CDN $0.6636. Each warrant entitles the holder to purchase one common share of the Company. The Company assigned a value of $0.1389 (CDN $0.16) to each warrant. 15 Contributed surplus Contributed surplus consists of the following: /T/ $ Balance - June 30, 2006 2,392,030 Expiration of warrants 53,652 Stock-based compensation 555,444 Stock-based compensation for exercised stock options (2,328) ------------ Balance - June 30, 2007 2,998,798 Shares repurchased and cancelled 136,661 Expiration of warrants 6,645 Stock-based compensation 46,671 Stock-based compensation for exercised stock options (279) ------------ Balance - June 30, 2008 3,188,496 ------------ ------------ /T/ During the year ended June 30, 2008, 200,000 (2007 - 1,338,427) warrants expired, resulting in their ascribed value of $6,645 (2007 - $53,652) being recorded as contributed surplus. 16 Stock options Under the Company's stock option plan, the Company is authorized to grant stock options to employees, officers and directors to purchase up to 10,800,000 (2007 - 10,800,000) common shares. The exercise price of each option is not less than the market price of the Company's stock on the date of grant, and the exercise period is to a maximum term of five years. Options granted under this plan have vesting periods of up to three years. A summary of stock option activity for the years ended June 30, 2008 and 2007 is presented below: /T/ 2008 2007 ---------------------- ----------------------- Weighted Weighted average average Number exercise Number exercise of price of price shares CDN $ shares CDN $ Outstanding - Beginning of year 9,293,900 0.57 7,742,900 0.24 Granted 605,000 0.30 4,060,000 0.94 Exercised (27,200) 0.25 (2,406,250) 0.12 Forfeited (1,018,500) 0.79 (102,750) 0.27 Expired (85,000) 0.32 - ------------ ------------ Outstanding - End of year 8,768,200 0.53 9,293,900 0.57 ------------ ------------ ------------ ------------ Options exercisable at year-end 8,116,533 0.55 8,013,900 0.59 ------------ ------------ ------------ ------------ /T/ The following table summarizes information about stock options outstanding at June 30, 2008: /T/ Options outstanding Options exercisable ------------------------------------ ----------------------- Weighted Number average Weighted Number Weighted outstanding remaining average exercisable average Exercise at contractual exercise at exercise prices June 30, life price June 30, price CDN $ 2008 (years) CDN $ 2008 CDN $ 0.25 633,200 1.47 0.25 633,200 0.25 0.30 4,875,000 1.23 0.30 4,271,667 0.30 0.92 1,525,000 2.23 0.92 1,476,667 0.92 0.96 1,735,000 2.35 0.96 1,735,000 0.96 ----------- ----------- 8,768,200 8,116,534 ----------- ----------- ----------- ----------- /T/ During the year ended June 30, 2008, all of the stock options were granted at an exercise price above the market price of a common share. The options granted in 2008 had an exercise price of CDN $0.30 (2007 -CDN $0.94) and a weighted average fair value of CDN $0.038 (2007 - CDN $0.18). For the year ended June 30, 2008, the Company has recognized $46,671 (2007 - $555,444) in stock-based compensation for stock options granted to employees. There were no options granted to non-employees during the years ended June 30, 2008 and 2007. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: /T/ Dividend yield 0.00% Expected volatility 7.01% Risk-free interest rate 3.00% Expected average option term (months) 13.33 /T/ 17 Financial instruments a) Credit risk exposure Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents with high credit quality financial institutions. Concentration of credit risk, with respect to accounts receivable is considered to be limited due to the credit quality of the customers comprising the Company's customer base. The Company performs ongoing credit evaluations of its customers' financial condition to determine the need for an allowance for doubtful accounts. The Company has not experienced significant credit losses to date. The maximum amount of credit risk exposure is limited to the carrying amounts of these balances in the consolidated financial statements. b) Interest rate risk exposure Financial instruments that potentially subject the Company to interest rate risk consist primarily of its line of credit. c) Fair values The fair values of the Company's cash and cash equivalents, accounts receivable, long term receivables, line of credit, bank overdraft, accounts payable and accrued liabilities, and Promissory Notes approximate their carrying values due to their short-term nature. 18 Related party transactions During the current fiscal year an officer and director of the Company exercised 1,000,000 share purchase warrants at an exercise price of CDN $0.30 per share. During the prior fiscal year, the Company granted incentive stock options to directors to acquire 1,735,000 common shares of the Company with an exercise price of CDN $0.96 per share and incentive stock options to acquire 1,280,000 common shares of the Company with an exercise price of CDN $0.92 per share. 19 Commitments As at June 30, 2008, future minimum lease payments for premises and equipment are as follows: /T/ $ 2009 832,728 2010 658,933 2011 451,407 2012 102,897 2013 - /T/ 20 Income taxes The Company has tax losses and deductions available to offset future taxable income in various jurisdictions for the following approximate amounts: /T/ $ Canada 4,658,509 United Kingdom 11,869,223 United States 12,253,586 /T/ Tax losses in Canada expire as follows: /T/ EvolutionB 596327 BC Versatile Information Ltd. (Canada) Inc. CDN $ CDN $ CDN $ 2009 - 2,642,231 62,806 2010 24,000 1,551,967 166,780 2015 - 297,373 - ------------------------------------------- 24,000 4,491,571 229,586 ------------------------------------------- ------------------------------------------- /T/ Tax losses and deductions which may be taken in the United States: /T/ $ Net operating losses expire as follows: 2020 521,291 2021 1,012,343 2022 1,025,046 2023 477,803 2024 1,045,650 2025 1,142,013 2026 110,883 2028 383,623 Tax deductions which may be taken from 2009 to 2020 6,534,934 ------------- 12,253,586 ------------- ------------- /T/ VMS-US, VAC, VSI and POI file a consolidated federal tax return. As these companies have been profitable, the Company expects that the net operating losses will be utilized in full. Consequently these financial statements reflect the future income tax benefits relating to these losses. Each company files separate State tax returns so these losses are not available to VAC, POI or VSI on the various state tax returns. The tax deductions which may be taken from 2009 to 2020 relate to the 338 election for the POI acquisition for the excess values of the assets over their book values primarily representing goodwill. The tax losses in the United Kingdom can be carried forward indefinitely subject to the tax authority's approval. A full valuation allowance has been provided against the potential tax benefits of these losses. The tax effects of temporary differences that give rise to significant portions of future income tax assets and future income tax liabilities at the statutory enacted rates are as follows: /T/ 2008 2007 $ $ Future income taxes Future income tax assets Tax losses and deductions 8,201,781 9,161,889 Capital assets 441,178 437,557 Share issuance costs 354,780 653,200 Other 183,861 99,913 ---------------------------- Future income tax assets 9,181,600 10,352,559 Valuation allowance (3,060,592) (4,200,345) ---------------------------- Net future income tax asset 6,121,008 6,152,214 Future income tax liabilities Goodwill (741,852) (731,499) ---------------------------- Net future income tax asset 5,379,156 5,420,715 Less: Current portion (706,249) (1,094,579) ---------------------------- Non-current portion of net future income tax 4,672,907 4,326,136 ---------------------------- ---------------------------- /T/ In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As management believes there is sufficient uncertainty regarding the realization of future tax assets relating to the UK losses and EvolutionB Information Inc. losses, a full valuation allowance has been provided respectively. The following table sets forth a reconciliation of the effective tax rate to the statutory rates: /T/ 2008 2007 $ $ Tax at the statutory tax rate of 32.8% (2007 - 35%) 120,336 227,204 Foreign tax rate differential 37,518 176,455 Effect of foreign exchange losses 78,580 (219,391) Temporary differences - (38,578) Permanent differences 39,839 (252,633) Expiry of prior year losses 833,972 1,441,606 Use of prior year losses - (149,908) Change in tax rates 237,361 - Changes in valuation allowance (1,139,753) (2,051,365) Other (41,218) 16,311 ---------------------------- 166,635 (850,299) ---------------------------- ---------------------------- Future income tax (expense) benefit (101,604) 951,622 Current income tax expense (65,031) (101,323) ---------------------------- Current income tax expense (166,635) 850,299 ---------------------------- ---------------------------- /T/ 21 Segmented information The operating segments of the Company have been aggregated into one reportable segment based on their similar economic characteristics. 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/ 2008 2007 ----------------------- ----------------------- Capital Capital assets, assets, intangible intangible assets and assets and goodwill Revenue goodwill Revenue $ $ $ $ U.S. companies United States 11,529,258 57,997,937 11,722,692 60,691,793 Canada - 216,854 - 119,651 Netherlands - 14,900 - 348,540 France - 388,951 - 188,756 United Kingdom - 94,370 - - Spain - - - 24,908 Other - 12,430 - 4,375 UK and Canadian companies United Kingdom 11,574 654,912 16,678 852,252 Canada 324 - 3,836 - ------------------------------------------------- 11,541,156 59,380,354 11,743,206 62,230,275 ------------------------------------------------- ------------------------------------------------- /T/ Revenue is attributable to the geographic area dependent on the location of the business responsible for the sale. During the year ended June 30, 2008, the Company earned revenue from one customer of $7,792,867 (2007 - $6,616,008) representing 13.1% (2007 - 10.6%) of revenue. During the year ended June 30, 2008, the Company purchased products and services from one vendor for $19,919,235 (2007 - $30,902,089) and from a second vendor for $5,780,900 (2007 - $nil) representing 44.6% (2007 - 64.7%) and 12.9% (2007 - $nil) respectively of the cost of sales. 22 Supplemental cash flow information /T/ 2008 2007 $ $ Cash paid for taxes 65,473 167,045 Cash paid for interest 169,600 321,572 Non-cash investing and financing activities Promissory Notes issued for the acquisition of Sagent Solutions 80,000 - Warrants issued 42,000 81,058 /T/ 23 Subsequent event On July 14, 2008, the Company cancelled 2,559,000 shares held in Treasury. Versatile Systems Inc. Management Discussion and Analysis Year ended June 30, 2008 The following management discussion and analysis of the consolidated results of operations and financial condition of Versatile Systems Inc. (the "Company" or "Versatile") is made as of September 26, 2008 on the audited consolidated financial statements and notes for the year ended June 30, 2008. The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") and are stated in United States dollars unless otherwise specified. The consolidated financial statements and management discussion and analysis have been reviewed by the Company's Audit Committee and approved by the Company's Board of Directors. The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions, which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Forward-Looking Statements This document may contain forward-looking statements relating to Versatile's operations or to the environment in which it operates, which are based on Versatile's operations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or are beyond Versatile's control. A number of important factors including those set forth in other public filings could cause actual outcomes and results to differ materially from those expressed in these forward looking statements. Consequently readers should not place any undue reliance on such forward-looking statements. In addition, these forward looking statements relate to the date on which they are made. Versatile disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Non-GAAP Disclosure EBITDA is defined by the Company as net earnings before interest, income taxes, depreciation and amortization. The Company has included information concerning EBITDA because it believes that it may be used by certain investors as one measure of the Company's financial performance. EBITDA is not a measure of financial performance under Canadian GAAP and is not necessarily comparable to similarly titled measures used by other companies. EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with Canadian GAAP) as a measure of liquidity. In addition, the Company has included information concerning its cash flow from (used in) operations before the net change in non-cash working capital items as it may be used be certain investors as further measures of the Company's financial performance. Overview The Company's core business is developing solutions that solve customers' problems in the storage, security, transmission and collection of mission critical data. The Company's proprietary software applications, the Mobiquity(TM) Solution Suite, are a key component of this solution. This enables companies to improve the sales, marketing and distribution of their products. The Company delivers wireless/wired solutions to the consumer packaged goods, retail, financial, pharmaceutical, healthcare, and logistics verticals through an integrated combination of licensed software, professional services, and the re-sale of mobile-computing devices and related hardware. The Company also offers maintenance and support via a 24 hour call centre. Acquisition of Sagent Solutions On December 28, 2007 the Company acquired all of the issued and outstanding shares and units of Sagent Solutions, based in Somerset, New Jersey. Sagent is focused on the rapidly growing need of enterprises to leverage the cost and efficiency benefits of virtualizing their IT infrastructures. The consideration consisted of Promissory Notes bearing interest at 3% per annum in the amount of $80,000 payable to the Vendor in quarterly amounts (of which $40,000 had been paid by the year-end) and 600,000 share purchase warrants exercisable at CDN $0.30 per share with a term of four years, which were approved by the TSX Venture Exchange on January 30, 2008. For the period from January 1, 2007 to December 28, 2007 Sagent Solutions reported revenue of $2,474,455 and pre-tax earnings of $56,106. These figures have not been reviewed or audited. The operations of Sagent Solutions have been included in the consolidated financial statements for the company subsequent to December 28, 2007. Highlights of the fourth quarter Highlights of the Company's operations for the fourth quarter included: - Revenue for the three months ended June 30, 2008 was $13,721,812 compared to $18,193,167 for the same period last year; - Deferred revenue at June 30, 2008 was $7,855,129 (of which $6,582,593 is expected to be recognized in the next four quarters) compared to $6,787,279 at June 30, 2007, an increase of $1,067,850 or 15.7%; - The working capital as of June 30, 2008 was $3,772,462, an improvement of $1,084,963 over the working capital at the year-end of June 30, 2007; - Partnering with CitiFinancial in order to simplify and streamline the credit application process for Shaw flooring retailers with the Mobiquity Kiosk(TM); - Partnering with Technology Group International, Ltd. to deliver the Mobiquity Route(TM) solution to TGI's Customers; - Completed large Proof of Concept deployments of Virtual Desktop Infrastructure for a leading global financial services company and a global education provider; and - Opened the Versatile Virtual Desktop Infrastructure Center of Excellence in conjunction with Sun Microsystems at their New York City Metro headquarters in Manhattan. Cash flow from operations The cash flow from operations, before the non-cash working capital items, was $1,452,981 for the year ended June 30, 2008 compared to cash flow of $2,159,289 for the same period last year. Over the past four years the cash flow from operations, before non-cash working capital items, has been as follows: /T/ 2008 $ 1,452,981 2007 2,159,289 2006 1,099,233 2005 (878,482) /T/ Review of the fourth quarter Revenue for the three months ended June 30, 2008 was $13,721,812 compared to $18,193,167 for the same quarter last year, a decrease of $4,471,355. While the Company had repeat business from its existing customer base including Motorola, ThermoFisher Scientific, Respironics, Iron Mountain, Comcast and various retailers, universities and government organizations, the Company experienced a slowdown in orders from customers for routine expenditures on infrastructure. The EBITDA for the quarter was $155,206 compared to an EBITDA of $977,377 for the same quarter last year. The Net Loss for the quarter amounted to $362,043 ($0.00 per share) compared to Net Earnings of $992,566 ($0.01 per share) for the same period last year. Cost of sales Cost of sales for the quarter amounted to $10,180,648 resulting in a gross profit of $3,541,164 or 25.8% of sales as compared to $13,770,768 resulting in a gross profit of $4,422,399 or 24.3% of sales for the same quarter last year. The Company generated sales of higher margin products resulting in an increase in gross profit as a percentage of sales. The Company determines its provision for inventory obsolescence based upon historical experience, expected inventory turnover, inventory aging and current condition, and current and future expectations with respect to product offerings. Assumptions underlying the provision for inventory obsolescence include future sales trends and product offerings, and the expected inventory requirements and inventory composition necessary to support these future sales and offerings. The estimate of the Company's provision for inventory obsolescence could materially change from period to period due to changes in product offerings and consumer acceptance of those products. At June 30, 2008 the Company had an inventory provision of $231,586 (June 30, 2007 - $199,354). General and administrative General and administrative expenses for the quarter amounted to $1,529,268 compared to $1,263,358 for the same quarter last year. As a percentage of sales the general and administrative expenses were 11.1% in the quarter compared to 7.0% in the same quarter last year. The increase primarily related to an increase in the bad debt expense which amounted to $184,604, which is due to an increase in the allowance for doubtful accounts for one account that has experienced delays in paying their account. Technology Investment Over the past five years the Company has made a significant investment in the form of expenses to advance the abilities of its technology and resulting service offering. This investment does not contribute directly to revenues during the period that the research and development expenses are incurred. Research and development expense for the quarter amounted to $448,260 compared to $339,369 for the same quarter last year. The significant expense item in this category is salary and benefit costs. As a percentage of sales the research and development expenses are 3.3% in the quarter compared to 1.9% in the same quarter last year. The increase in the research and development expense can be attributed to the number of research and development projects as noted in the following paragraphs. During the current quarter the Company's technology investment related to enhanced product functionality and requirements from various partners: For the Mobiquity Route(TM) these included the following: - Implementation of new features into Mobiquity Route(TM), including: -- Non-APL warnings and APL filterings -- Warehouse stock-on-hand quantities -- Brand lookup capabilities -- Discontinued Items warnings -- Historical Data -- Promotional Items -- Suggested Product Substitutions -- CheckSelect(TM) feature -- Intelligent Orders(TM) feature set - Implementation of a demonstration system for AT&T sales representatives to pre-sell Mobiquity Route(TM); and - Published White paper: How Intelligent Field Sales Automation Can Reduce Out-of-Stock Conditions On the Retailer's Shelf. For the Mobiquity Transaction Engine 3.0(TM) these included the following: - Implementation of an RFID-based manufacturing solution for tracking pallets and work-in-progress in a manufacturing facility; - Implementation of support for WiFi Location tracking using Cisco access points and Cisco's Location Appliance; - Implementation of the Mobiquity Transaction Engine 3.0(TM) Health Care asset-tracking solution, which allows high-value assets to be tracked and intelligently monitored using Mobiquity Transaction Engine 3.0(TM) and WiFi location tags; - Expanded device support for the Mobiquity Transaction Engine 3.0(TM), including Symbol handheld scanners, Alien RFID readers, Data Logic RFID Readers, Cisco Wifi Location data, Newbury Wifi Location data; and - Enhancing the functionality of the Mobiquity Transaction Engine 3.0(TM) Time Tracking System. For the Mobiquity Kiosk(TM), these included the following: - Deployment of the hardware and operating system support for the new Madison Kiosk desktop computer; - Implementation of the Shaw Flooring Alliance credit application in association with Citi Financial; - Implementation of self-service conference registration kiosk application; - Implementation of an application to allow customers to register for retailer mailings at the kiosk; and - Enhancements to the Kiosk platform including improved networking support, better system performance, expanded device support, improved configuration, and support for new banking requirements. The Company also sponsored Intermec Technology Day and Intek Conference. Selling and marketing expenses Selling and marketing expense for the quarter amounted to $1,470,184 compared to $1,587,817 for the same quarter last year. Selling and marketing expenses includes salaries, commissions, advertising, trade shows and promotion costs to support the various sales initiatives. As a percentage of sales the selling and marketing expenses are 10.7% in the quarter compared to 8.7% in the same quarter last year. As a percentage of gross profit the selling and marketing expenses were 41.5% in the quarter compared to 35.9% in the same quarter last year. There were no significant changes in the selling and marketing activities during the quarter. Future Income Tax Benefits Canadian GAAP requires a valuation allowance to be recorded against any future tax asset to the extent that it is more likely than not that the future income tax asset will not be realized. Prior to the 2006 fiscal year, the Company determined that it had not met this test so the Company recorded a full valuation allowance against the potential value of all of its tax losses and deductions available to be taken against future years' taxable income. As a result, future income tax assets were fully provided for. During the 2006 fiscal year, the Company determined that the U.S. subsidiaries were generating sufficient profits such that they were more likely than not to utilize the losses and deductions attributable to these U.S. subsidiaries. Consequently, the Company concluded that the valuation allowance be reduced accordingly. The difference between the total value of these tax benefits less the valuation allowance is the amount of the future income tax asset that is recorded by the Company. For the three months ended June 30, 2008 the Company recorded a $294,213 non-cash future income tax expense related to the recognition of future income tax assets. To the extent that the Company expects to generate sufficient profits in the following fiscal period, that portion has been classified as current. Amortization The amortization of capital assets and intangible assets for the quarter amounted to $193,655 (June 30, 2007 - $282,705). The purchased technology arising from the acquisition of Perfect Order was fully amortized in the current quarter so consequently the amount of amortization will be lower in subsequent periods. Foreign Exchange Loss The foreign exchange loss for the quarter amounted to $1,465 compared to ($10,418) for the same quarter last year. The increase was due to a decline in the U.S. dollar against the Canadian dollar and British Sterling Pounds in the quarter. Review of the operations for the year ended June 30, 2008 Revenue for the twelve months ended June 30, 2008 was $59,380,354 generating a gross profit of $14,852,818 or 25.0% of revenue compared to $62,230,275 generating a gross profit of $14,715,797 or 23.6% of revenue for the same period last year. The Company generated sales of higher margin products resulting in an increase in gross profit of $137,021 compared with the prior year. The EBITDA for the period was $1,289,230 compared to an EBITDA of $1,992,905 for the same period last year. Net Earnings for the year amounted to $200,130 ($0.00 per share) compared to $1,379,445 ($0.01 per share) for the prior year. Comprehensive income for the year amounted to $427,253 compared to $1,403,649 for the prior year. Cost of sales Cost of sales for the year ended June 30, 2008 amounted to $44,527,536 resulting in a gross profit of $14,852,818 or 25.0% of sales as compared to $47,514,478 resulting in a gross profit of $14,715,797 or 23.6% of sales for the same period last year. General and administrative General and administrative expenses for the year ended June 30, 2008 amounted to $5,090,959 compared to $4,588,693 for the same period last year, an increase of 10.9%. The significant increases consisted of the bad debt expense which amounted to $184,604 compared to a recovery in the prior year, which is due to an increase in the allowance for doubtful accounts for one account that has experienced delays in paying their account. The rent increased by $65,298 due to rate increases and some additional space that was taken in Mechanicsburg, PA. The fees paid to the Nominated Advisor amounted to $100,183 for the current fiscal year compared to less than $25,000 for the prior year as the Nominated Advisor was engaged for less than three months. Technology Investment Research and development expense for the year ended June 30, 2008 amounted to $1,745,569 compared to $1,068,216 for the same period last year. The significant expense item in this category is salary and benefit costs. As a percentage of sales the research and development expenses are 2.9% compared to 1.7% in the same period last year. The Company had planned on increasing the research and development expenditures for Mobiquity Route(TM) and Mobiquity Kiosk(TM). The Company incurred $586,959 (2007 - $378,430) for research and development activities related to Mobiquity Route(TM), DEX and related mobile software products. The Company incurred $980,735 (2007 - $566,578) for research and development activities related to Mobiquity Transaction Engine 3.0(TM), Mobiquity Kiosk(TM) (including the Rockland and Madison Kiosks), Portal and Foundation. Selling and marketing expenses Selling and marketing expense for the year ended June 30, 2008 amounted to $6,504,762 compared to $6,502,051 for the same period last year. As a percentage of gross profit the selling and marketing expenses were 43.8% for the current fiscal year compared to 44.2% for the prior year. There were no significant changes in the selling and marketing activities during the year. Amortization The amortization of capital assets and intangible assets for the year ended June 30, 2008 amounted to $950,677 (June 30, 2007 - $1,162,841). Foreign exchange loss The foreign exchange loss for the year ended June 30, 2008 was $175,627 compared to $8,488 for the prior year. Summary of Quarterly Results The table below provides a summary of certain selected unaudited financial information from the Consolidated Statements of Operations for the most recent eight fiscal quarters comprising the Company's preceding two years: /T/ Q1 2007 Q2 2007 Q3 2007 Q4 2007 Sept 06 Dec 06 Mar 07 Jun 07 ---------------------------------------------- Revenue 14,504,692 17,140,576 12,391,840 18,193,167 Cost of Sales 11,526,009 13,187,863 9,029,838 13,770,768 ---------------------------------------------- Gross Profit 2,978,683 3,952,713 3,362,002 4,422,399 ---------------------------------------------- Expenses: General and administrative 983,869 1,180,790 1,179,582 1,252,940 (including foreign exchange) Research and Development 212,021 262,261 254,565 339,369 Selling and Marketing 1,528,090 1,807,753 1,578,391 1,587,817 Stock-based compensation 26,061 134,916 129,571 264,896 ---------------------------------------------- 2,750,041 3,385,720 3,142,109 3,445,022 ---------------------------------------------- Earnings before interest, taxes and amortization 228,642 566,993 219,893 977,377 Amortization (320,749) (309,825) (249,562) (282,705) Interest (94,454) (80,321) (56,907) (69,236) Income taxes 324,141 1,981 157,047 367,130 ---------------------------------------------- Net Earnings (loss) 137,580 178,828 70,471 992,566 ---------------------------------------------- ---------------------------------------------- Per share, basic and diluted 0.00 0.00 0.00 0.01 ---------------------------------------------- Q1 2008 Q2 2008 Q3 2008 Q4 2008 Sept 07 Dec 07 Mar 08 Jun 08 ---------------------------------------------- Revenue 12,615,506 18,523,167 14,519,869 13,721,812 Cost of Sales 9,535,389 13,716,667 11,094,832 10,180,648 ---------------------------------------------- Gross Profit 3,080,117 4,806,500 3,425,037 3,541,164 ---------------------------------------------- Expenses: General and administrative 1,103,886 1,412,063 1,219,904 1,530,733 (including foreign exchange) Research and Development 408,259 491,459 397,591 448,260 Selling and Marketing 1,531,330 1,756,538 1,746,710 1,470,184 Stock-based compensation 25,851 27,452 56,587 (63,219) ---------------------------------------------- 3,069,326 3,687,512 3,420,792 3,385,958 ---------------------------------------------- Earnings before interest, taxes and amortization 10,791 1,118,988 4,245 155,206 Amortization (246,036) (249,035) (261,951) (193,655) Interest (35,475) (26,521) 90,375 (167) Income taxes 214,216 (157,133) 99,709 (323,427) ---------------------------------------------- Net Earnings (loss) (56,504) 686,299 (67,622) (362,043) ---------------------------------------------- ---------------------------------------------- Per share, basic and diluted (0.00) 0.01 (0.00) (0.00) ---------------------------------------------- /T/ The Company's revenues and earnings fluctuate from quarter to quarter. A number of factors can cause such fluctuations, including the timing of substantial orders, the timing of releases of new products, timing of the deployment of solutions and delays by customers. Because the Company's operating expenses are determined based on anticipated sales, are generally fixed and are incurred throughout each fiscal quarter, any of the factors listed above can cause significant variations in the Company's revenues and earnings in any given quarter. Thus, the Company's quarterly results are not necessarily indicative of the Company's overall business, results of operations and financial condition. In summary with the year-to-date results the Company has improved cash flow from operations while maintaining selling, marketing, general and administration expenses in relation to revenue at relatively the same level. Financial position The Company had working capital of $3,772,462 at June 30, 2008, an improvement of $1,084,963 over the working capital at the year-end on June 30, 2007. During the current fiscal year the Company repaid two term loans in the amount of $2,924,263, which had been classified with current liabilities. At June 30, 2008 the Company had cash and cash equivalents of $1,500,050 compared to $3,369,087 at the year-end on June 30, 2007. The cash flow from operations, before non-cash working capital items amounted to $1,452,981 for the year ended June 30, 2008 compared to 2,159,289 for the same period last year. The Company has a credit line facility of $5,800,000, which is limited to 70% of eligible accounts receivable of certain U.S. subsidiaries from a U.S. based financial institution. The line of credit bears interest at the State of New York prime rate of lending and is secured with a first charge on the assets of VAC, VSI and POI. As at June 30, 2008 the line of credit was $74,942 (June 30, 2007 - $3,383) and the Company had a bank overdraft of $127,214 (June 30, 2007 - $170,422). The amount that may be advanced under the credit line is limited to 70% of eligible accounts receivable of VAC, POI and VSI less than 90 days from invoice date. At June 30, 2008 the financial covenants for these companies include requirements for debt coverage of 1.2 and minimum Tangible Net worth of $4,800,000. The companies met these tests. Included in accounts payable and accrued liabilities is $2,740,373 owing to a major supplier, which is subordinated to the bank line of credit. Capital Expenditures During the year ended June 30, 2008 the majority of the capital expenditures relates to the conversion of the Company's accounting system to MAS500 as well as routine replacement of laptops. Share Capital As of September 25, 2008 the Company had 118,589,643 common shares issued and outstanding. During the current fiscal year the Company received proceeds of $409,820 (CDN $433,800) for 1,446,000 exercised warrants. During the current fiscal year a total of 27,200 stock options were exercised for proceeds of $6,382. During the second quarter the Company announced a Normal Course Issuer Bid to purchase up to 6,000,000 common shares through the facilities of the TSX Venture Exchange. As of June 30, 2008 the Company had purchased 3,261,500 common shares at a cost of $618,780 and cancelled 702,500 of these shares during the current fiscal year. Stock Options The Company can grant up to 10,800,000 options pursuant to its stock option plan. /T/ Weighted Number of average exercise shares price CDN$ --------------------------------------------------------------------- Outstanding - June 30, 2007 9,293,900 0.57 Granted 605,000 0.30 Forfeited (1,018,500) 0.79 Expired (85,000) 0.32 Exercised (27,200) 0.25 ------------------------------- Outstanding - June 30, 2008 8,768,200 0.53 ------------------------------- /T/ For the year ended June 30, 2008, the Company recognized $46,671 in stock-based compensation, a non-cash item, for vesting of stock options granted to employees, consultants, directors and officers of the Company in prior years. Warrants: The details of the outstanding warrants at June 30, 2008 are as follows: /T/ Exercise Number of Expiry date Price CDN$ Warrants Cost --------------------------------------------------------------------- March 31, 2009 $ 0.38 1,411,808 107,627 March 31, 2009 $ 0.414 1,411,808 75,971 March 31, 2011 $ 0.569 1,411,808 63,309 April 16, 2011 $ 0.6636 583,770 81,058 January 22, 2012 $ 0.30 600,000 42,000 ---------------------- Balance - June 30, 2008 5,419,194 $ 369,965 ---------------------- /T/ During the current fiscal year the Company received proceeds of $409,820 (CDN $433,800) for 1,446,000 exercised warrants and 200,000 warrants expired on August 11, 2007. Related Party Transactions During the current fiscal year, the Company paid consulting fees and salaries, which are included in the General and administration expense, of $734,982 (2007 - $721,194) to Directors and Officers of the Company. Risk Factors The securities of the Company should be considered a highly speculative investment and investors should carefully consider all of the information disclosed in this Management Discussion & Analysis prior to making an investment in the Company. In addition to the other information presented in this Management Discussion & Analysis, the following risk factors should be given special consideration when evaluating an investment in the Company's securities. Operating History The Company's predecessor company commenced operations in March 1987 to distribute and sell Maximizer products in European countries, as well as provide consulting services and Customer Relationship Management ("CRM") solutions to companies. In January 1997, the Company changed its focus to research and development of CRM software. The Company purchased Versatile Mobile Systems on June 19, 2000, Perfect Order on April 26, 2005 and Sagent Solutions on December 28, 2007. The Company may face many of the risks and uncertainties encountered by early-stage companies in rapidly evolving markets. History of Losses The Company had a history of losses up to June 30, 2005 and has an accumulated deficit of $35.1 million to June 30, 2008. Although the Company has decreased its operating expenses in recent periods and increased its revenues the Company cannot be assured that it can maintain its current level of profitability. No Certainty of Future Profitability The Company's product revenues are not predictable with any significant degree of certainty and future product revenues may differ from historical patterns. If customers cancel or delay orders, it can have a material adverse impact on the Company's revenues and results of operations from quarter to quarter. Because the Company's results of operations may fluctuate from quarter to quarter, investors should not assume that results of operations in future periods can be predicted based on results of operations in past periods. Even though the Company's revenues are difficult to predict, the Company's expense levels are based in part on future revenue projections. Many of the Company's expenses are fixed and, accordingly, the Company cannot quickly reduce spending if revenues are lower than expected. Competitive Market The market for the Company's software is intensely competitive, fragmented and rapidly changing. Some of the Company's actual and potential competitors are larger, established companies that have greater technical, financial and marketing resources. In addition, as the Company develops new products, particularly applications focused on electronic commerce or specific industries, it may begin competing with companies with whom it has not previously competed. It is also possible that new competitors will enter the market or that the Company's competitors will form alliances that may enable them to rapidly increase their market share. Increased competition may result in price reductions, lower gross margins or loss of the Company's market share, any of which could materially adversely affect its business, financial condition and operating results. Technological Change The market for the Company's solutions is characterized by rapidly changing technology and evolving industry standards. The market is affected by changes in end user requirements and frequent new product introductions and enhancements. The Company's products embody complex technology and may not always be compatible with current and evolving technical standards and products, developed by others. Failure or delays by the Company to meet or comply with the requisite and evolving industry or user standards could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's ability to anticipate changes in technology, technical standards and product offerings will be a significant factor in the Company's ability to compete. There can be no assurance that the Company will be successful in identifying, developing, manufacturing and marketing products that will respond to technological change, evolving standards or individual wireless communications service provider standards or requirements. The Company's business will be adversely affected if the Company incurs delays in developing new products or enhancements or if such products or enhancements do not gain market acceptance. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. Limited Sales and Support Infrastructure The Company's future revenue growth will depend in large part on its ability to successfully expand its direct sales force and its customer support capability. The Company may not be able to successfully manage the expansion of these functions or to recruit and train additional direct sales, consulting and customer support personnel. If the Company is unable to hire and retain additional highly skilled direct sales personnel, it may not be able to increase its license revenue to the extent necessary to achieve profitability. If the Company is unable to hire highly trained consulting and customer support personnel, it may be unable to meet customer demands. The Company is unlikely to be able to increase its revenues as planned if it fails to expand its direct sales force or its consulting and customer support staff. Even if the Company is successful in expanding its direct sales force and customer support capability, the expansion may not result in revenue growth. Dependence on Business Alliances A key element of the Company's business strategy is the formation of corporate alliances with leading companies. The Company is currently investing and plans to continue to invest significant resources to develop these relationships. The Company believes that its success in penetrating new markets for its products will depend in part on its ability to maintain these relationships and to cultivate additional or alternative relationships. There can be no assurance that the Company will be able to develop additional corporate alliances with such companies, that existing relationships will continue or be successful in achieving their purposes or that such companies will not form competing arrangements. Dependence on Key Personnel The Company's success depends largely upon the continued service of its executive officers and other key management, sales and marketing and technical personnel. The loss of the services of one or more of the Company's executive officers or other key employees could have a material adverse effect on its business, results of operations or financial condition. The Company's future success also depends on its ability to attract and retain highly qualified personnel. The competition for qualified personnel in the computer software and Internet markets is intense, and the Company may be unable to attract or retain highly qualified personnel in the future. In addition, due to intense competition for qualified employees, it may be necessary for the Company to increase the level of compensation paid to existing and new employees to the degree that operating expenses could be materially increased. Management of Growth The Company expects to experience a period of significant growth in the number of personnel that will place a strain upon its management systems and resources. The Company's future will depend in part on the ability of its officers and other key employees to implement and improve its financial and management controls, reporting systems and procedures on a timely basis and to expand, train and manage its employee workforce. There can be no assurance that the Company will be able to effectively manage such growth. The Company's failure to do so could have a material adverse effect upon the Company's business, prospects, results of operation and financial condition. Integration of Newly Acquired Businesses or Technology The Company may expand its operations through acquisitions of additional businesses or technology. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or technology or successfully integrate acquired businesses or technology into the Company without substantial expense, delay or other operational or financial problems. Further, acquisitions may involve a number of additional risks, including diversion of management's attention, failure to retain key acquired personnel, unanticipated events or circumstances, legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operation. In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated revenues and earnings. The failure of the Company to manage its acquisition strategy successfully could have a material adverse effect on the Company's business, financial condition and results of operation. Potential Fluctuations in Quarterly Financial Results The Company's quarterly financial results may be affected by the timing of new releases of its products and/or substantial customer orders. The Company's operating expenses are based on anticipated revenue levels in the short term, are relatively fixed, and are incurred throughout the quarter. As a result, if expected revenues are not realized on a timely basis as anticipated, the Company's financial results could be materially and adversely affected. These or other factors, including possible delays in the shipment of new products, may influence quarterly financial results in the future. Accordingly, there may be significant variation in the Company's quarterly financial results. International Sales Sales outside of the United States currently represent less than 10% of the Company's total gross revenues. The Company believes that its continued growth and profitability will require additional expansion of its sales in international markets. To the extent that the Company is unable to expand international sales in a timely and cost effective manner, the Company's business, results of operations and financial condition could be materially and adversely affected. In addition, even with the successful recruitment of additional personnel and international resellers, there can be no assurance that the Company will be successful in maintaining or increasing international market demand for the Company's products. Currency Exchange Rate Risk The Company's results have been restated into U.S. dollars as a substantial portion of the Company's revenues and a material portion of its expenses are denominated in US dollars. Dependence on Proprietary Technology and Limited Patent and Trademark Protection The Company relies on a combination of copyright and trademark laws, trade secret, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company has yet to file any applications for patent protection and has not registered any trademarks or copyrights. Unauthorized parties may attempt to copy aspects of the Company's products or obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's product is difficult, time-consuming and costly as is the pursuing of patents in each jurisdiction in which the Company carries on business. Although the Company is unable to determine the extent to which piracy of its software product exists, software piracy is a possibility. In addition, the laws of certain countries in which the Company's products may be licensed do not protect its product and intellectual property rights to the same extent as the laws do in Canada or the United States. There is no assurance that the Company's means of protecting its proprietary rights will be adequate or the Company's competitors will not independently develop similar technology, the effect of either of which may be materially adverse to the Company's business, results of operations and financial condition. Risk of Third Party Claims for Infringement The Company is not aware that its product infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by the Company or its licensees with respect to current or future products. The Company expects that software product developers will increasingly be subject to such claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to the Company. Any of the foregoing could have a materially adverse effect on the Company's business, results of operations and financial condition. Lengthy Sales and Implementation Cycle The adoption of the Company's product generally involves a significant commitment of resources by potential customers. As a result, the Company's sales process is often subject to delays associated with lengthy approval processes by potential customers. For these and other reasons, the sales cycle associated with the license of the Company's product varies substantially from customer to customer and typically lasts between 6 to 12 months during which time the Company may devote significant time and resources to a prospective customer, including costs associated with multiple site visits, product demonstrations and feasibility studies, and experience a number of significant delays over which the Company has no control. Any significant or ongoing failure by the Company to ultimately achieve such sales could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, following license sales, the implementation period is expected to involve a time period for customer training and integration with the customer's existing systems. A successful implementation program requires a close working relationship between the Company, the customer and, generally, third party consultants and system integrators who assist in the process. There can be no assurance that delays or difficulties in the implementation process for any given customer will not have a material adverse effect on the Company's business, results of operations and financial condition. Risk of System Defects System development involves the integration of the Company's proprietary software and software of others into the customer's operating systems. There can be no assurance that defects and errors will not be found in the Company's product when integrated with other products or systems. Any such defects and errors could result in adverse customer reactions, negative publicity regarding the Company and its product or damages. Consequently, there could be a material adverse effect on the Company's business, results of operations and financial condition. Requirements for New Capital As a growing business, the Company typically needs more capital than it has available to it or can expect to generate through the sale of its products. In the past, the Company has had to raise, by way of debt and equity financing, considerable funds to meet its capital needs. There is no guarantee that the Company will be able to continue to raise funds needed for its business. Failure to raise the necessary funds in a timely fashion will limit the Company's growth. Critical Accounting Estimates General Unless otherwise specified in the discussion of the specific critical accounting estimates, the Company is not aware of trends, commitments, events, or uncertainties that it reasonably expects to materially affect the methodology or assumptions associated with the critical accounting estimates, subject to the circumstances identified above. Changes are made to assumptions underlying all critical accounting estimates to reflect current economic conditions and updating of historical information used to develop the assumptions, where applicable. Unless otherwise specified in the discussion of the specific critical accounting estimates, it is expected that no material changes in overall financial performance and financial statement line items would arise either from reasonably likely changes in material assumptions underlying the estimate or within a valid range of estimates, from which the recorded estimate was selected. All critical accounting estimates are uncertain at the time of making the estimate. Accounts Receivable Allowance for doubtful accounts The Company considers the business area that gives rise to the accounts receivable, maintains procedures for granting credit terms on sales transactions and performs specific account identification when determining its allowance for doubtful accounts. This accounting estimate is in respect of the accounts receivable line item on the Company's consolidated balance sheet comprising approximately 31% of total assets as at June 30, 2008. In the event the future results were to adversely differ from management's best estimate of the allowance for doubtful accounts, the Company could experience a bad debt charge in the future. Such a bad debt charge would not result in a cash outflow. The estimate of the Company's allowance for doubtful accounts could materially change from period to period due to the allowance being a function of the balance and composition of accounts receivable, which can vary on a month-to-month basis. The variance in the balance of accounts receivable can arise from a variance in the amount and composition of operating revenues and from variances in accounts receivable collection performance. Inventories Provision for inventory obsolescence The Company determines its provision for inventory obsolescence based upon historical experience, expected inventory turnover, inventory aging and current condition, and current and future expectations with respect to product offerings. Assumptions underlying the provision for inventory obsolescence include the activity levels over previous fiscal years, and the expected inventory requirements and inventory composition necessary to support these future sales and offerings. The estimate of the Company's provision for inventory obsolescence could materially change from period to period due to changes in product offerings and consumer acceptance of those products. This accounting estimate is in respect of the inventory line item on the Company's consolidated balance sheet comprising approximately 5% of total assets as at June 30, 2008. If the provision for inventory obsolescence was inadequate, the Company could experience a charge to direct cost of sales in the future. Such an inventory obsolescence charge would not result in a cash outflow. Long-Lived Assets The accounting estimates for long-lived assets that include capital assets, purchased technology, intellectual property, customer contracts and licenses, in aggregate, represent approximately 4% of the Company's total assets as at June 30, 2008, presented in its consolidated balance sheet. If the Company's estimated useful lives of assets were different as a result of changes in facts and circumstances, the Company could experience increased or decreased charges for amortization and the Company could potentially experience future material impairment charges in respect of its recovery of long-lived assets. The estimated useful lives of capital assets are determined by a continuing program of asset life studies. The recoverability of capital assets is significantly impacted by the estimated useful lives. Assumptions underlying the estimated useful lives of capital assets include timing of technological obsolescence, competitive pressures and future infrastructure utilization plans. In the event management's best estimate of the useful lives of capital assets was adversely affected, the Company could potentially experience a charge to amortization expense in the future. Such a charge to amortization would not result in a cash outflow. Purchased Technology The recoverability of the Company's investment in purchased technology is determined by an ongoing analysis of the economic benefits attributed to the purchased technology. The Company estimates the future economic benefits attributed to the purchased technology and compares the results with the net book value of the asset. Assumptions underlying the estimated future economic benefits of purchased technology costs include future sales trends, product offerings, timing of technological obsolescence, competitive pressures and consumer acceptance of product offerings. If management's best estimate of the future economic benefits of purchased technology costs was adversely affected, the Company could potentially experience a charge to amortization expense in the future. Such a charge to amortization would not result in a cash outflow. Customer Contracts The recoverability of the Company's investment in customer contracts is determined by an ongoing analysis of the economic benefits attributed to the customer contracts in place at the date of the acquisition. The Company estimates the future economic benefits attributed to the customer contracts and compares the results with the net book value of the asset. Assumptions underlying the estimated future economic benefits of customer contracts include future sales trends, product offerings, timing of technological obsolescence, competitive pressures and consumer acceptance of product offerings. If management's best estimate of the future economic benefits of customer contracts was adversely affected, the Company could potentially experience a charge to amortization expense in the future. Such a charge to amortization would not result in a cash outflow. Future Income Tax Benefits The amount recorded for Future Income Tax Benefits represents approximately 14% of the Company's assets as at June 30, 2008, presented in its consolidated balance sheet. If the Company determines that the valuation allowances relating to the loss carry forwards and tax deductions should be increased, the Company could experience a reduction in the recorded future income tax benefits. Goodwill The accounting estimates for goodwill represents approximately 26% of the Company's total assets as at June 30, 2008, presented in its consolidated balance sheet. If the Company's estimated fair value were incorrect, the Company could experience increased or decreased charges for changes to the estimated fair value in the future. If the future were to adversely differ from management's best estimate to recover the Company's investments in its goodwill, the Company could potentially experience future material impairment losses in respect of its goodwill. The impairment losses would be recognized and presented as a separate line item in the consolidated statements of loss and deficit. Impairment losses to goodwill would not result in a cash outflow. Changes in accounting policies The Company retroactively adopted the following new Handbook sections issued by the Canadian Institute of Chartered Accountants ("CICA") on July 1, 2007: a) Section 3855, "Financial Instruments - Recognition and Measurement", establishes the standards for recognizing and measuring financial assets, financial liabilities and nonfinancial derivatives. Under the new standards, the Company is now required to classify: (i) its financial assets as held-to-maturity, available-for-sale, held-for-trading, or loans and receivables; and (ii) its financial liabilities as either held-for-trading, or other financial liabilities. All financial instruments, including derivatives, are included on the consolidated balance sheet and are initially measured at fair value with the exception of financial instruments with related parties. Subsequent measurement and recognition of changes in fair value of financial instruments depends on their initial classification as follows: Held-to-maturity investments, loans and receivables, and other financial liabilities are measured at cost. Held-for-trading financial investments are measured at fair value and all gains and losses are included in net earnings in the period in which they arise. Available-for-sale financial instruments are measured at fair value with revaluation gains and losses included in other comprehensive income until the asset is disposed of or impaired. The Company has made the following classifications: - Cash and cash equivalents, bank overdraft and line of credit are classified as held for trading and are measured at fair value. This category best describes the Company's current management practices with regards to cash and cash equivalents. - Accounts receivable are classified as loans and receivables and recorded at amortized cost using the effective interest rate method. - Accounts payable and accrued liabilities are classified as other liabilities and measured at amortized cost using the effective interest rate method. - Long term debt is carried at amortized cost using the effective interest rate method. Under the new standards, a derivative is a financial instrument or other contract whose value changes in response to the change in a specified rate, price or index that requires nominal or no initial investment and which is settled at a future date. Derivative financial instruments can be utilized by the Company in the management of its foreign currency risk to reduce its exposure to fluctuations in foreign exchange on certain committed and anticipated transactions. The Company, where applicable, formally documents the relationships between derivative financial instruments and hedged items, as well as the risk management objective and strategy. The Company assesses, on an ongoing basis, whether the derivative financial instruments continue to be effective in offsetting changes in fair values or cash flows of the hedged transactions. Section 3855 also requires that the Company identify embedded derivatives that require separation from the related host contract and measure any embedded derivatives at fair value. From time to time, the Company enters into certain contracts for the purchase or sale of non-financial items that are denominated in currencies other than the U.S. dollar. In cases where the foreign exchange component is not leveraged and does not contain an option feature and the contract is denominated in either the functional currency of the Company or the counter-party, the embedded foreign currency derivative is considered to be closely related to the host contract and is not accounted for separately. If the contract is neither denominated in the functional currency of the Company or the associated counter- party, the embedded foreign currency derivative is separated from the host contract unless the non-financial item delivered requires payments denominated in the currency that is routinely accepted in commercial transactions around the world, or is commonly used for such transactions in the economic environment in which the transaction takes place. The Company did not identify any embedded foreign currency derivatives from their related host contracts during the year ended June 30, 2008. The change in accounting policy related to embedded derivatives did not result in any changes to the June 30, 2008 consolidated financial statements and did not require restatement of prior years financial statements. b) Section 3861, "Financial Instruments - Disclosure and Presentation", establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. This change in accounting policy did not have a material impact on the current year financial statements and did not require restatement of prior year financial statements. c) Section 1530, "Comprehensive Income", describes the change in equity of an enterprise during a period arising from transactions and other events and circumstances from non-owner sources. It includes items that would normally not be included in net income such as changes in the foreign currency translation adjustment relating to self sustaining foreign operations and unrealized gains or losses on available-for-sale financial instruments. This section describes how to report and disclose comprehensive income and its components. As a result of the adoption of this section, the consolidated financial statements now include a statement of comprehensive loss and deficit. For the year ended June 30, 2008 the Company does not have any items that should be presented in other comprehensive income therefore, net loss for the period is equivalent to comprehensive loss for the period. d) Section 3251, "Equity", replaces section 3250, "Surplus", and establishes standards for the presentation of equity and changes in equity as a result of the new requirements of Section 1530, "Comprehensive Income". e) Section 3865, "Hedges", describes when hedge accounting is appropriate. Hedge accounting ensures that all gains, losses, revenues and expenses from the derivative and the item it hedges are recorded in the statement of earnings in the same period. The Company did not have any hedging items during the year. f) Section 1506, "Accounting Changes", allows for voluntary changes in accounting policy only if they provide more reliable and relevant information in the financial statements. Additional information relating to the Company can be found on the Canadian Securities Administrators System for Electronic Document Analysis and Retrieval (SEDAR), located at www.sedar.com. Pursuant to the requirements of National Instrument Policy 51-102F1 the Company is providing selected annual information as set forth in Section 1.3 of that Policy. Section 1.3 Selected Financial Information - Annual Below is a summary of certain selected financial information extracted from the audited consolidated financial statements for the years ending June 30, 2008, 2007 and 2006: /T/ --------------------------------------------------------------------------- 2006 2007 2008 --------------------------------------------------------------------------- (restated) (a) Sales $ 59,921,368 $ 62,230,275 $ 59,380,354 (b) Net Earnings 4,058,555 1,379,445 200,130 (c) Net Earnings per share, basic and diluted 0.04 0.01 0.00 (d) Total assets 33,026,354 43,088,871 38,592,820 (e) Total long-term financial liabilities 3,462,744 487,416 1,272,536 (f) Cash Dividends declared per share N/A N/A N/A /T/ Revenue for the year ended June 30, 2008 was $59,380,354 compared to $62,230,275 for the prior year, a decrease of $2,849,921. While the Company had repeat business from its existing customer base including Motorola, Fisher Scientific, Respironics, Iron Mountain, Comcast and various retailers, universities and government organizations, the Company experienced a slowdown in orders from customers for routine expenditures on infrastructure. Revenue increased by $2,308,907 or 3.9% in 2007 over the 2006 fiscal year. The Company has focused its sales efforts on higher margin sales including its own proprietary products and solutions. The Company also enjoyed significant repeat business from a broad range of industries and customers including: - Manufacturing - Tyco Electronics, Motorola and Cadbury; - Major Universities - Penn State, Harvard and Ohio State; - Healthcare - Thermo Fisher Scientific, Fisher Scientific and Respironics; - Retail - Albertsons, Toys "R" Us and Sheetz; and - Others - Comcast, Mine Safety Appliances and Iron Mountain. Revenue increased by $39,001,110 or 186% in 2006 over the 2005 fiscal year. The increase was primarily related to the full year of operations from Perfect Order, which was acquired on April 25, 2005. -30- FOR FURTHER INFORMATION PLEASE CONTACT: Versatile Systems Inc. John Hardy Chairman and CEO 1-800-262-1633 or International: 001-206-979-6760 OR Versatile Systems Inc. Fraser Atkinson CFO 1-800-262-1633 Website: www.versatile.com The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release. -0- Versatile Systems Inc.
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