TIDMVVS
Versatile Reports Fourth Quarter and Fiscal 2011 Results
Versatile reports fourth quarter and fiscal 2011 results
Positive cash flow from operations for the year
Vancouver, Canada September 9, 2011 - Versatile Systems Inc. (Trading symbols on the TSX Venture Exchange: VV
and on AIM: VVS), announces its results for the fourth quarter and the 2011 fiscal year.
Revenue for the year ended June 30, 2011 was $45,903,472 generating a gross profit of $10,129,378 or 22.1% of
sales compared to $44,188,021 generating a gross profit of $10,036,501 or 22.7% of sales for the previous
fiscal year. The Net Loss for the period amounted to $98,762 ($0.00 per share) compared to a Net Loss of
$1,236,621 ($0.01 per share) for the previous fiscal year, an improvement of $1,137,859.
The Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) for the year ended June 30, 2011
was $112,195 compared to an EBITDA loss of $1,291,424 for the previous fiscal year, an improvement of
$1,403,619.
"While economic conditions continue to be challenging, we are pleased with the significant turnaround from the
previous fiscal year," said John Hardy, Chairman and CEO of Versatile. "Heading into fiscal 2012 we remain
committed to improving profitability, while carefully managing our expenses."
Revenue for the three months ended June 30, 2011 was $10,180,289 generating a gross profit of $2,381,728 or
23.4% of sales compared to $11,517,023 generating a gross profit of $2,419,338 or 22.1% of sales for the same
quarter last year. The Net Loss for the quarter amounted to $221,251 ($0.00 per share) compared to a Net Loss
of $292,335 ($0.01 per share) for the same period last year.
Highlights for the quarter included:
* Revenue for the three months ended June 30, 2011 was $10,180,289 compared to $11,517,023 for the same
quarter last year;
* The normalized EBITDA for the quarter was $45,167, compared to a normalized EBITDA loss of $398,232
for the same quarter last year. Normalized EBITDA excludes the non-recurring expenses and the non-cash
stock based compensation charge:
* The research and development expense for the quarter amounted to $210,996 compared to $177,744 for the
same quarter last year;
* Deferred revenue at June 30, 2011 was $6,320,199 (of which $5,670,932 is expected to be recognized in
the next four quarters) compared to $8,142,479 at June 30, 2010; and
* The Investment in Equus consists of 962,962 shares of Equus Total Return, Inc. which is a public
company trading on the NYSE under the symbol EQS. The net asset value of Equus at June 30, 2011 was
$3.92 per share.
During the current quarter, the Company incurred $116,328 for research and development activities related to
Mobiquity Route(TM), DEX and related mobile software products and $53,181 related to Mobiquity Transaction Engine
3.0(TM) and Mobiquity Kiosk(TM).
Subsequent to the year-end the Company changed its banking facilities for its U.S. based operations to a new
financial institution, which is providing a credit facility for up to $4,500,000 on more favorable terms than
the former bank.
"Versatile generated cash flow from operations before non-cash operating balance sheet items of $319,649 for
the current fiscal year compared to cash flow used in operations before non-cash operating balance sheet items
of $1,164,160 for last year," said Fraser Atkinson, CFO of Versatile. "This is an improvement of $1,483,809
and has helped to strengthen the Company's financial position."
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.
FOR FURTHER INFORMATION, PLEASE CONTACT:
John Hardy, Chairman and CEO Fraser Atkinson, CFO
1-800-262-1633 1-800-262-1633
International: 001-206-979-6760
Daniel Stewart & Company plc (Nominated Adviser & Broker)
Noelle Greenaway
+44 (0) 207 776 6550
The TSX Venture Exchange and the AIM market of the London Stock Exchange have not reviewed and do not accept
responsibility for the adequacy or accuracy of this release. All amounts are expressed in U.S. dollars unless
otherwise stated. © 2011 Versatile Systems Inc. All rights reserved.
Consolidated financial statements of
Versatile Systems Inc.
June 30, 2011 and 2010
Versatile Systems Inc.
June 30, 2011 and 2010
Table of contents
Independent Auditor's Report 1
Consolidated balance sheets 2
Consolidated statements of operations and deficit 3
Consolidated statements of comprehensive loss 4
Consolidated statements of cash flows 5
Notes to the consolidated financial statements 6-25
Deloitte & Touche LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: 604-669-4466
Fax: 604-685-0395
www.deloitte.ca
Independent Auditor's Report
To the Shareholders of Versatile Systems Inc.
We have audited the accompanying consolidated financial statements of Versatile Systems Inc., which comprise
the consolidated balance sheets as at June 30, 2011 and 2010, and the consolidated statements of operations and
deficit, comprehensive loss and cash flows for the years then ended, and notes to the consolidated financial
statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with Canadian generally accepted accounting principles, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of Versatile Systems Inc. as at June 30, 2011 and 2010 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting principles.
(Signed) Deloitte & Touche LLP
Chartered Accountants
September 8, 2011
Versatile Systems Inc.
Consolidated balance sheets
As at June 30, 2011 and 2010
(Expressed in U.S. dollars)
=---------------------------------------------------------------------------------------
2011 2010
=---------------------------------------------------------------------------------------
$ $
Assets
Current assets
Cash and cash equivalents 978,656 1,738,036
Investment in Equus (Note 3) 2,311,109 2,203,043
Accounts receivable (Notes 4 and 14 (a)) 7,134,328 10,580,706
Current portion of deferred contract costs 4,469,066 5,793,180
Prepaid expenses 228,062 236,993
Inventory 1,849,635 1,719,477
Future income tax benefits (Note 18) 546,252 721,975
=---------------------------------------------------------------------------------------
17,517,108 22,993,410
Long-term accounts receivable (Note 4) 401,742 265,612
Deferred contract costs 579,710 598,366
Capital assets (Note 5) 270,437 519,391
Intangible assets (Note 6) - 459
Future income tax benefits (Note 18) 6,454,904 6,243,875
Goodwill (Note 7) 9,914,350 9,914,350
=---------------------------------------------------------------------------------------
35,138,251 40,535,463
=---------------------------------------------------------------------------------------
=---------------------------------------------------------------------------------------
Liabilities
Current liabilities
Line of credit and bank overdraft (Note 8) 1,007,767 1,353,312
Accounts payable and accrued liabilities (Note 9) 6,823,643 9,955,342
Current portion of deferred revenue 5,670,932 7,432,210
=---------------------------------------------------------------------------------------
13,502,342 18,740,864
Deferred revenue 649,267 710,269
=---------------------------------------------------------------------------------------
14,151,609 19,451,133
=---------------------------------------------------------------------------------------
Shareholders' equity
Share capital (Note 10) 54,433,709 54,433,709
Warrants (Note 11) 42,000 186,367
Contributed surplus (Note 12) 4,578,470 4,231,539
Deficit (37,064,598) (36,965,836)
Accumulated other comprehensive loss (1,002,939) (801,449)
=---------------------------------------------------------------------------------------
20,986,642 21,084,330
=---------------------------------------------------------------------------------------
35,138,251 40,535,463
=---------------------------------------------------------------------------------------
=---------------------------------------------------------------------------------------
Commitments (Note 17)
Subsequent Event (Note 21)
Approved by the Directors
(Signed) John Hardy
=------------------------
John Hardy, Director
(Signed) Fraser Atkinson
=------------------------
Fraser Atkinson, Director
Versatile Systems Inc.
Consolidated statements of operations and deficit
Years ended June 30, 2011 and 2010
(Expressed in U.S. dollars)
=---------------------------------------------------------------------------------------
2011 2010
$ $
=---------------------------------------------------------------------------------------
Sales 45,903,472 44,188,021
Cost of sales 35,774,094 34,151,520
=---------------------------------------------------------------------------------------
10,129,378 10,036,501
=---------------------------------------------------------------------------------------
Expenses
Selling and marketing 4,659,897 5,969,542
General and administrative 3,702,160 4,058,864
Research and development 960,399 856,787
Non-recurring expenses 492,950 358,811
Stock-based compensation 202,564 93,102
Foreign exchange gain (787) (9,181)
=---------------------------------------------------------------------------------------
10,017,183 11,327,925
=---------------------------------------------------------------------------------------
112,195 (1,291,424)
=---------------------------------------------------------------------------------------
Amortization of capital assets 225,227 258,742
Amortization of intangible assets - 332,214
Interest expense 16,426 32,239
Goodwill impairment - 63,309
Loss (gain) on sale of investments 4,610 (4,952)
=---------------------------------------------------------------------------------------
Loss before income taxes (134,068) (1,972,976)
Current income tax expense - (756)
Future income tax benefit 35,306 737,111
=---------------------------------------------------------------------------------------
Net loss (98,762) (1,236,621)
Deficit, beginning of year (36,965,836) (35,729,215)
=---------------------------------------------------------------------------------------
Deficit, end of year (37,064,598) (36,965,836)
=---------------------------------------------------------------------------------------
=---------------------------------------------------------------------------------------
Loss per share (basic and diluted) (0.00) (0.01)
=---------------------------------------------------------------------------------------
=---------------------------------------------------------------------------------------
Weighted average number of common shares outstanding,
basic and diluted 157,285,643 137,839,068
=---------------------------------------------------------------------------------------
=---------------------------------------------------------------------------------------
Versatile Systems Inc.
Consolidated statements of comprehensive loss
Years ended June 30, 2011 and 2010
(Expressed in U.S. dollars)
=-----------------------------------------------------------------------------------------------
2011 2010
=-----------------------------------------------------------------------------------------------
$ $
Net loss (98,762) (1,236,621)
Other comprehensive loss
Net change in fair value of available-for-sale investments (201,490) (519,670)
=-----------------------------------------------------------------------------------------------
Comprehensive loss for the year (300,252) (1,756,291)
=-----------------------------------------------------------------------------------------------
Accumulated other comprehensive loss, beginning of year (801,449) (281,779)
Other comprehensive loss for the year (201,490) (519,670)
=-----------------------------------------------------------------------------------------------
Accumulated other comprehensive loss, end of year (1,002,939) (801,449)
=-----------------------------------------------------------------------------------------------
Versatile Systems Inc.
Consolidated statements of cash flows
Years ended June 30, 2011 and 2010
(Expressed in U.S. dollars)
=------------------------------------------------------------------------------------------------
2011 2010
=------------------------------------------------------------------------------------------------
$ $
Operating activities
Net loss (98,762) (1,236,621)
Items not involving cash
Amortization of capital and intangible assets 256,075 665,091
Stock-based compensation 202,564 93,102
Goodwill impairment - 63,309
Loss (gain) on sale of investments and capital assets 4,610 (4,952)
Unrealized foreign exchange gain (9,532) (6,978)
Future income tax benefit (35,306) (737,111)
=------------------------------------------------------------------------------------------------
Cash flow used in operations before other items 319,649 (1,164,160)
Net change in non-cash operating balance sheet items
(Note 20) (418,517) (1,538,546)
=------------------------------------------------------------------------------------------------
(98,868) (2,702,706)
=------------------------------------------------------------------------------------------------
Investing activities
Purchase of investment in Equus (309,556) (2,722,713)
Proceeds from disposition of capital assets 76,968 57,253
Purchase of capital assets (82,379) (99,606)
=------------------------------------------------------------------------------------------------
(314,967) (2,765,066)
=------------------------------------------------------------------------------------------------
Financing activities
Proceeds from issuance of shares - 3,876,257
Share issue costs - (26,291)
(Repayment of) proceeds from line of credit (345,545) 1,353,312
=------------------------------------------------------------------------------------------------
(345,545) 5,203,278
=------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (759,380) (264,494)
Cash and cash equivalents, beginning of year 1,738,036 2,002,530
=------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 978,656 1,738,036
=------------------------------------------------------------------------------------------------
=------------------------------------------------------------------------------------------------
Supplemental cash flow information (Note 20)
Versatile Systems Inc.
Notes to the consolidated financial statements
June 30, 2011 and 2010
(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"),
Mobiquity Investments Limited ("MIL"), Versatile Mobile Systems (Europe)
Ltd. ("VMS-Europe") and Sagent Solutions. The wholly-owned subsidiaries,
Versatile Investments Limited, 596327 B.C. Ltd. and EvolutionB
Information Inc. ("EvolutionB"), are inactive.
2. Significant accounting policies
(a) 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.
All intercompany balances and transactions are eliminated upon
consolidation.
All amounts are expressed in U.S. dollars, unless otherwise stated.
(b) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly
liquid short-term interest bearing securities with maturities at the
date of purchase of three months or less. Interest earned during the
year is recognized in the statement of operations.
(c) Inventory
Inventory consists of kiosk hardware, handheld devices and
peripherals used in sales force automation systems. Inventory is
valued at the lower of cost and net realizable value, determined on
a first-in, first-out basis.
(d) Deferred service contract costs
Deferred service contract costs are amortized on a straight-line
basis over the life of the contracts, which range from three months
to three years. These deferred amounts relate to third party
maintenance costs for third party equipment installed at customer
sites and sales commission costs, which have been paid for in
advance.
(e) Research and development
Research costs are charged to operations when they are incurred.
Development costs are charged to operations in the period incurred
unless the Company can demonstrate that a development project meets
certain criteria for capitalization and amortization under Canadian
generally accepted accounting principles. The Company has not
capitalized any development costs during 2010 or 2011.
(f) Capital assets
The Company records capital assets at acquisition cost. The capital
assets are amortized using the straight-line method at the following
rates:
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
(g) 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:
Purchased technology 33-1/3% per annum
Customers - Perfect Order 20% per annum
Intellectual property 66% per annum
Licences 25% per annum
The amortization method and estimated useful lives of intangible assets are reviewed annually.
In the case of Sagent Solutions the estimated useful life was reduced from 60 months to 30 months.
Goodwill is not amortized and is tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. The impairment test is carried out in two
steps. In the first step, the carrying amount of a reporting unit is compared with its fair value. When
the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered
not to be impaired and the second step of the impairment test is unnecessary.
The second step is only required when the carrying amount of the reporting unit exceeds its fair value, in
which case the implied fair value of a reporting unit's goodwill is compared with its carrying amount to
measure the amount of the impairment loss. When the carrying amount of a reporting unit's goodwill exceeds
the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess and is
presented as a separate line item in the statement of operations before extraordinary items and discontinued
operations.
At June 30, 2010 the Company recorded a charge of $63,309 related to the impairment of goodwill from its
acquisition of Sagent Solutions.
(h) Income taxes
The Company follows the asset and liability method of accounting for
income taxes. Under this 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 not more likely than not that the
future income tax asset will be realized.
(i) Foreign currency translation
The U.S. dollar is the reporting and functional currency for the
Company. The functional currency of all self-sustaining subsidiaries
is the U.S. dollar.
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 the statement of operations.
(j) Financial instruments
The Company's classification and measurement basis of its financial instruments are as follows:
Measurement
Instrument Classification basis
-----------------------------------------------------------------------------------------
Cash and cash equivalents Held for trading Fair value
Investment in Equus Available for sale Fair value
Accounts receivable Loans and receivables Amortized cost
Line of credit and bank overdraft Other liabilities Amortized cost
Accounts payable and accrued liabilities Other liabilities Amortized cost
Changes in fair value of instruments classified as held for trading are recorded in the statement of
operations. Changes in fair value of instruments classified as available for sale are recorded in
other comprehensive income unless the decline in fair value is considered other than temporary, in
which case it is recorded in the statement of operations. All amounts carried at amortized cost are
calculated using the effective interest rate method.
Available-for-sale securities are reviewed periodically for possible
other-than-temporary impairment and more frequently when economic or
market concerns warrant such evaluation. The review includes an
analysis of the facts and circumstances of the investment including
the severity of loss, the financial position and near term prospects
of the investment, the length of time the fair value has been below
cost, management's intent and ability to hold the security for a
period of time sufficient to allow for any anticipated recovery in
fair value and management's market view and outlook.
The Company classifies and discloses the fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy has
the following levels:
-- Level 1 - Valuation based on quoted prices (unadjusted) in
active markets for identical assets or liabilities;
-- Level 2 - Valuation techniques based on inputs other than quoted
prices included in Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices); and
-- Level 3 - Valuation techniques using inputs for the asset or
liability that are not based on observable market data
(unobservable inputs).
The fair value hierarchy requires the use of observable market
inputs whenever such inputs exist. A financial instrument is
classified to the lowest level of the hierarchy for which a
significant input has been considered in measuring fair value.
(k) Revenue recognition
Revenue on sales of hardware products is recognized when delivered
to the customer. The Company recognizes revenue from the sale of
software products on delivery of the product or performance of the
services if persuasive evidence of an agreement with the customer
exists, the price is fixed and determinable, collection is probable,
and there are no ongoing obligations of the Company to provide
future services.
Revenue from projects which include significant modification or
customization of software is recognized using the percentage of
completion method of accounting, whereby revenue and profit in the
period are based on the ratio of costs incurred to total estimated
costs of the project. Costs include all direct costs and certain
indirect costs related to the projects. A provision is made for the
entire amount of future estimated losses, if any, for contracts in
progress. Revenue from professional services is recognized on a
percentage of completion basis. Maintenance revenue is recognized
over the term of the related agreement on a straight-line basis.
Deferred revenues represent amounts invoiced in excess of revenues
recognized.
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.
(l) 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.
(m) 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.
Significant estimates are used in determining, but are not limited
to, the assessment of the carrying values of allowances for
unrecoverable accounts receivable and long-lived assets, the
valuation of stock-based compensation, warrants, accrued warranty
costs, going concern, and future income tax assets. Actual results
could differ from those estimates.
(n) 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. 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 there is 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.
(o) Earnings (loss) per share
The Company presents the basic (loss) earnings per share data for
its common shares, calculated by dividing the (loss) earnings
attributable to common shareholders of the Company by the weighted
average number of common shares outstanding during the period. The
diluted earnings per share reflects the potential dilution of common
share equivalents, such as outstanding stock options and share
purchase warrants, in the weighted average number of common shares
outstanding for the year, if dilutive. The number of additional
shares is calculated by assuming that outstanding stock options and
warrants were exercised and that the proceeds from such exercises
were used to acquire common shares at the average market price
during the reporting period. During the year ended June 30, 2011 and
2010 all outstanding stock options and warrants were anti-dilutive.
(p) Adoption of future accounting standards
In January 2009, the CICA issued Section 1582, Business
Combinations, Section 1601, Consolidated Financial Statements, and
Section 1602, Non-controlling Interests. Section 1582 establishes
standards for the accounting for business combinations that is
equivalent to the business combination accounting standard under
International Financial Reporting Standards. Section 1582 is
applicable for any business combinations with acquisition dates on
or after July 1, 2011. Early adoption of this section is permitted.
Section 1601 together with Section 1602 establishes standards for
the preparation of consolidated financial statements. Section 1601
is applicable for the Company's interim and annual consolidated
financial statements for its fiscal year beginning July 1, 2011.
Early adoption of this section is permitted. If the Company chooses
to early adopt any one of these sections, the other two sections must
also be adopted at the same time. The Company does not expect the
adoption of these standards will have a material impact on its
consolidated financial statements.
In December 2009, the CICA issued Emerging Issues Committee Abstract
("EIC") 175, Multiple Deliverable Revenue Arrangements, replacing EIC 142,
Revenue Arrangements with Multiple Deliverables. This abstract was
amended to (1) exclude from the application of the updated guidance
those arrangements that would be accounted for in accordance with
ASC 985-605 (formerly Financial Accounting Standards Board Statement
of Position 97-2), Software Revenue Recognition, as amended by
Accounting Standards Update 2009-14; (2) provide updated guidance on
whether multiple deliverables exist, how the deliverables in an
arrangement should be separated, and the consideration allocated;
(3) require in situations where a vendor does not have vendor-
specific objective evidence or third-party evidence of selling
price, that the entity allocate revenue in an arrangement using
estimated selling prices of deliverables; (4) eliminate the use of
the residual method and require an entity to allocate revenue using
the relative selling price method; and (5) require expanded
qualitative and quantitative disclosures regarding significant
judgments made in applying this guidance.
The accounting changes summarized in EIC 175 are effective for
fiscal years beginning on or after January 1, 2011, with early
adoption permitted. Adoption may either be on a prospective basis or
by retrospective application. The Company does not believe the
adoption of this standard will have a material impact on its
consolidated financial statements.
Convergence with International Financial Reporting Standards
Canadian public companies will be required to prepare their
financial statements in accordance with International Financial
Reporting Standards ("IFRS"), as issued by the International
Accounting Standards Board ("IASB"), for financial years beginning
on or after January 1, 2011 ("Changeover Date"). Effective July 1,
2011, the Company will adopt IFRS as the basis for preparing its
consolidated financial statements. The Company will issue its
financial results for the quarter ended September 30, 2011 prepared
on an IFRS basis and provide comparative data on an IFRS basis as
required.
3. Investment in Equus
Investment in Equus consists of 962,962 shares of Equus Total Return, Inc. which is a public company
trading on the NYSE under the symbol EQS.
% of Cumulative
ownership Cost Fair value losses
=--------------------------------------------------------------------------
$ $ $
Equus Total Return, Inc. 9.1% 3,032,269 2,311,109 (721,160)
=--------------------------------------------------------------------------
=--------------------------------------------------------------------------
4. Accounts receivable
Included in accounts receivable is an amount receivable from customers
with monthly payment terms over a three year period. The total amount of
the receivable is carried at amortized cost of $660,647 (2010 -
$513,405), of which $258,905 (2010 - $247,793) has been classified as
current.
5. Capital assets
2011
=--------------------------------------------------------------------
Accumulated Net book
Cost amortization value
=--------------------------------------------------------------------
$ $ $
Automobiles 10,005 9,338 667
Computer and office equipment 1,766,547 1,523,033 243,514
Kiosk equipment 80,907 59,009 21,898
Computer software 628,486 628,486 -
Tenant improvements 115,117 110,759 4,358
=--------------------------------------------------------------------
2,601,062 2,330,625 270,437
=--------------------------------------------------------------------
=--------------------------------------------------------------------
As at June 30, 2011, equipment held for leasing purposes with a cost of $80,907 (2010 - $245,931) and
accumulated amortization of $59,009 (2010 - $135,008) is included in capital assets.
2010
=------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
=------------------------------------------------------------------------
$ $ $
Automobiles 10,005 7,170 2,835
Computer and office equipment 1,698,326 1,304,454 393,872
Kiosk equipment 245,931 135,008 110,923
Computer software 628,486 628,313 173
Tenant improvements 115,056 103,468 11,588
=------------------------------------------------------------------------
2,697,804 2,178,413 519,391
=------------------------------------------------------------------------
=------------------------------------------------------------------------
6. Intangible assets
The carrying amounts of the amortized intangible assets as at June 30,
2011 and 2010 are as follows:
2011
=-------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
=-------------------------------------------------------------------------
$ $ $
Customers 1,813,509 1,813,509 -
Purchased technology 1,211,969 1,211,969 -
Intellectual property 451,250 451,250 -
Other intangibles 1,400 1,400 -
Licences 522,402 522,402 -
=-------------------------------------------------------------------------
4,000,530 4,000,530 -
=-------------------------------------------------------------------------
=-------------------------------------------------------------------------
2010
=-------------------------------------------------------------------------
Accumulated Net book
Cost amortization value
=-------------------------------------------------------------------------
$ $ $
Customers 1,813,509 1,813,509 -
Purchased technology 1,211,969 1,211,969 -
Intellectual property 451,250 451,250 -
Other intangibles 1,400 941 459
Licences 522,402 522,402 -
--------------------------------------------------------------------------
4,000,530 4,000,071 459
--------------------------------------------------------------------------
--------------------------------------------------------------------------
7. Goodwill
The carrying amounts of the goodwill for the years ended June 30, 2011
and 2010 are as follows:
2011
=-------------------------------------------------------------------------
Accumulated
amortization Net book
Cost and impairment value
=-------------------------------------------------------------------------
$ $ $
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 8,220,221 9,914,350
=-------------------------------------------------------------------------
=-------------------------------------------------------------------------
2010
=-------------------------------------------------------------------------
Accumulated
amortization Net book
Cost and impairment value
=-------------------------------------------------------------------------
$ $ $
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 8,220,221 9,914,350
=-------------------------------------------------------------------------
=-------------------------------------------------------------------------
No amortization for goodwill has been recorded for 2011 or 2010. During the current fiscal year
ended June 30, 2011, the Company performed an assessment of the carrying value of the goodwill
recorded in connection with the acquisition of VMS-US and Perfect Order and determined that
there was no impairment of the value. At June 30, 2010 the Company recorded a charge of $63,309
related to the impairment of goodwill from its acquisition of Sagent Solutions.
8. Line of credit and bank overdraft
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, 2011, the
Company had drawings of $1,007,767 (2010 - $1,353,312) under its line of
credit and had a bank overdraft of $Nil (2010 - $Nil). During the
current fiscal year, the interest on the line of credit amounted to
$27,887 (2010 - $30,425).
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, 2011, 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.
Subsequent to year-end, this credit facility was replaced by a new
facility as described in Note 21.
9. Accounts payable and accrued liabilities
Included in accounts payable and accrued liabilities is $1,471,435 and
$1,209,736 (2010 - $3,246,018) owing to two major suppliers.
10. Share capital
Authorized
Unlimited common shares without par value
Issued and outstanding
Number of
shares Amount
-------------------------------------------------------------------------------
$
Balance, June 30, 2009 118,285,643 50,583,743
Shares issued for cash, net of share issue costs 39,000,000 3,849,966
-------------------------------------------------------------------------------
Balance, June 30, 2010 and 2011 157,285,643 54,433,709
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
During the 2010 fiscal year, the Company issued 39,000,000 common shares for cash consideration of
$3,876,257 and incurred share issue costs of $26,291.
11. Warrants
The following warrants were outstanding:
Number of warrants
-----------------------------------------
Balance, Balance,
Exercise June 30, June 30,
Expiry date price 2010 Expired Issued 2011 Amount
=-------------------------------------------------------------------------------
Cdn$ $
March 31, 2011 0.5690 1,411,808 (1,411,808) - - -
April 6, 2011 0.6636 583,770 (583,770) - - -
January 22, 2012 0.3000 600,000 - - 600,000 42,000
=--------------------------------------------------------------------------------
2,595,578 (1,995,578) - 600,000 42,000
=--------------------------------------------------------------------------------
=--------------------------------------------------------------------------------
Number of warrants
-----------------------------------------
Balance, Balance,
Exercise June 30, June 30,
Expiry date price 2009 Expired Issued 2010 Amount
=--------------------------------------------------------------------------------
Cdn$ $
March 31, 2011 0.5690 1,411,808 - - 1,411,808 63,309
April 6, 2011 0.6636 583,770 - - 583,770 81,058
January 22, 2012 0.3000 600,000 - - 600,000 42,000
=--------------------------------------------------------------------------------
2,595,578 - - 2,595,578 186,367
=--------------------------------------------------------------------------------
=--------------------------------------------------------------------------------
During the current fiscal year, 1,995,578 warrants expired.
12. Contributed surplus
Contributed surplus consists of the following:
$
Balance, June 30, 2009 4,138,437
Stock-based compensation 93,102
=------------------------------------------------------
Balance, June 30, 2010 4,231,539
Expired warrants 144,367
Stock-based compensation 202,564
=------------------------------------------------------
Balance, June 30, 2011 4,578,470
=------------------------------------------------------
=------------------------------------------------------
During the year ended June 30, 2011, 1,995,578 warrants expired, resulting in their ascribed
value of $144,367 being recorded as contributed surplus.
13. Stock options
Under the Company's stock option plan, the Company is authorized to
grant stock options to employees, officers and directors to purchase up
to 15,728,564 (2010 - 15,728,564) common shares. The exercise price of
each option is not less than the market price of the Company's stock on
the date of grant, and the exercise period is to a maximum term of five
years. Options granted under this plan have vesting periods of up to
three years.
A summary of stock option activity for the years ended June 30, 2011 and
2010 is presented below:
average average
Number of exercise Number of exercise
options price options price
=---------------------------------------------------------------------------
Cdn$ Cdn$
Outstanding, beginning
of year 7,901,000 0.45 9,160,000 0.42
Granted 7,122,100 0.11 - -
Exercised - - - -
Forfeited (950,000) 0.11 (123,300) 0.27
Expired (3,125,000) 0.94 (1,135,700) 0.28
=---------------------------------------------------------------------------
Outstanding, end of
year 10,948,100 0.12 7,901,000 0.45
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
Exercisable, end of year 10,506,433 0.12 7,376,000 0.47
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
The following table summarizes information about stock options issued and exercisable at June 30, 2011:
Options outstanding Options exercisable
=-----------------------------------------------------------------------------
Weighted
average
Number of remaining Number of
Exercise options contractual options
price outstanding life (years) exercisable
=---------------------------------------------------------------------------
Cdn$
0.30 560,000 0.56 560,000
0.10 3,766,000 1.97 3,691,000
0.11 6,622,100 4.65 6,255,433
=-----------------------------------------------------------------------------
10,948,100 10,506,433
=-----------------------------------------------------------------------------
=-----------------------------------------------------------------------------
During the current fiscal year, 7,122,100 stock options were granted at
an exercise price above the market price of a common share. The options
granted had an exercise price of Cdn$0.11 and a weighted average fair
value of Cdn$0.033.
For the year ended June 30, 2011, the Company has recognized $202,564
(2010 - $93,102) in stock- based compensation for stock options granted
to employees. There were no options granted to non- employees during the
year ended June 30, 2011. The estimated fair value of each stock option
grant was estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
2011 2010
=-------------------------------------------------------------------------
Expected dividend yield 0.0% 0.0%
Expected volatility 84.6% 74.8%
Risk-free interest rate 3.0% 3.0%
Expected average option term (years) 1.1 1.1
14. Financial risk management and financial instruments
This section provides disclosures relating to the nature and extent of
the Company's exposure to risks arising from financial instruments,
including credit risk, liquidity risk, foreign currency risk and
interest rate risk, and how the Company manages those risks.
(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.
Accounts receivable, excluding the non-current receivable described
in Note 4, as at June 30 are summarized as follows:
2011 2010
=---------------------------------------------------------------------------
$ $
Current 6,237,810 8,050,717
Overdue
31 - 60 days 650,446 760,147
61 - 90 days 380,249 1,704,648
Over 90 days (77,832) 121,039
Less allowance for doubtful accounts (56,345) (55,845)
=---------------------------------------------------------------------------
7,134,328 10,580,706
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
In establishing the appropriate provisions for accounts receivables,
assumptions are made with respect to the future collectibility of
the receivables. Assumptions are based on an individual assessment
of a customer's credit quality as well as subjective factors and
trends. The following table reflects the movement in the allowance
for doubtful accounts:
2011 2010
=---------------------------------------------------------------------------
$ $
Opening balance 55,845 66,268
Change in the provision 500 2,000
Less receivable write-offs - (12,423)
=---------------------------------------------------------------------------
Closing balance 56,345 55,845
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
(b) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they come due. The Company's objective of
managing liquidity risk is to maintain sufficient resources to pursue
its growth strategy. The Company manages liquidity risk by continuously
monitoring actual and projected cash flows. The Board of Directors
reviews and approves the Company's operating and capital budgets, as
well as any material transactions outside of the ordinary course of
business including proposals on major investments. The Company's
financial liabilities are comprised primarily of accounts payable. The
Company generates cash from its operations and maintains available
credit facilities to support the liquidity requirements of the business.
(c) Foreign currency risk
The Company's functional and reporting currency is the U.S. dollar.
Foreign currency risk is primarily related to the Company's operations
in Canada and the UK. The Company's UK operations are conducted
primarily in pound Sterling and the Canadian operations in Canadian
dollars. The operations of the wholly-owned subsidiaries are
consolidated in U.S. dollars. For the Company's foreign currency
transactions, fluctuations in the respective exchange rates relative to
the U.S. dollar will create volatility in the Company's cash flows and
the reported amounts of sales, cost of goods sold and general and
administrative expenses on a period-to-period basis and compared with
operating budgets and forecasts. Additional earnings variability arises
from the translation of monetary assets and liabilities denominated in
foreign currencies at the rates of exchange at each balance sheet date,
the impact of which is reported as a foreign exchange gain or loss in
the determination of net income (loss) for the period. The Company's
sales are primarily transacted in U.S. dollars with some sales in pound
Sterling. A 1% change in the Canadian dollar exchange rate would not
have a material impact on the net income.
(d) Interest rate risk exposure
Financial instruments that potentially subject the Company to interest
rate risk consist primarily of its line of credit.
(e) Fair values of financial instruments
The carrying value of accounts receivable, line of credit and bank
overdraft, and accounts payable and accrued liabilities approximate
their fair values due to the immediate or short- term nature of
these instruments.
The fair value of both cash and cash equivalents and the investment
in Equus which is publicly traded is determined by the quoted market
values for the investment, a Level 1 valuation methodology (Note
2(j)).
15. Capital disclosures
The Company's objective of managing capital is to ensure sufficient liquidity
to pursue its growth strategy. The Company's capital is composed of cash and
cash equivalents, line of credit and bank overdraft, and shareholders' equity.
At June 30, 2011 the Company also had unused credit facilities. The Company's
primary uses of capital are to finance increases in non-cash working capital
and capital expenditures. The Company currently funds these requirements out
of the cash flow from operations. The Company monitors its cash flow
continuously and is subject to covenants related to its credit facilities.
The Company has complied with all covenant requirements without exception.
16. Related party transactions
During the current year, the Company granted incentive stock options to
directors to acquire 5,622,100 common shares of the Company with an
exercise price of Cdn$0.11 per share.
During the year ended June 30, 2010, the Company issued 39,000,000
common shares to a director of the Company and to a Company controlled
by another director of the Company. These shares were issued at fair
value.
17. Commitments
As at June 30, 2011, future minimum lease payments for premises and
equipment are as follows:
2012 475,736
2013 319,966
2014 320,114
2015 314,186
2016 234,525
Thereafter 140,172
----------------------------------------------------------------------------
1,804,699
----------------------------------------------------------------------------
----------------------------------------------------------------------------
18. Income taxes
The Company has tax losses and deductions available to offset future
taxable income in various jurisdictions for the following approximate
amounts:
$
Canada 671,335
United Kingdom 10,270,911
United States 17,689,555
Tax losses and deductions which may be taken in the United States expire as follows:
Tax deductions which may be taken from 2012 to 2020 4,886,146
2021 941,118
2022 1,025,046
2023 477,803
2024 1,045,650
2025 1,265,169
2026 472,150
2028 148,117
2029 2,947,390
2030 3,275,109
2031 1,205,857
------------------------------------------------------------------------------------------------
17,689,555
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
VMS-US, VAC, VSI and POI file a consolidated US federal tax return. As these companies have been
profitable, the Company expects that the net operating losses will be utilized in full. Consequently,
there is no valuation allowance for these companies. During the year, the Company recorded $35,306
for the income tax benefit 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, and utilize the
tax benefit of the losses, that portion has been classified as current. 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 2012 to 2020 relate to the 338 election for the acquisition
of Perfect Order in 2005 for the excess values of the assets over their book values primarily
representing goodwill.
The tax losses in Canada expire in 2012 and 2021. 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 the United Kingdom losses.
The tax effects of temporary differences that give rise to significant
portions of future income tax assets and future income tax liabilities
as at June 30, 2011 and 2010 at the statutory enacted rates are as
follows:
2011 2010
=---------------------------------------------------------------------------
$ $
Future income taxes
Future income tax assets
Tax losses and deductions 9,185,997 8,929,483
Capital assets 969,879 1,063,918
Share issuance costs 4,609 115,754
Other 194,619 338,000
=---------------------------------------------------------------------------
Future income tax assets 10,355,104 10,447,155
Valuation allowance (2,598,297) (2,725,655)
=---------------------------------------------------------------------------
Net future income tax asset 7,756,807 7,721,500
Future income tax liabilities
Goodwill (755,651) (755,650)
=---------------------------------------------------------------------------
Net future income tax asset 7,001,156 6,965,850
Less: Current portion (546,252) (721,975)
=---------------------------------------------------------------------------
Non-current portion of net future income tax 6,454,904 6,243,875
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
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 a full valuation allowance has been provided.
The following table sets forth a reconciliation of the effective tax
rate to the statutory rates:
2011 2010
=---------------------------------------------------------------------------
$ $
Tax at the statutory tax rate of 27.5% (2010 -
29.25%) (36,869) (557,095)
Foreign tax rate differential 29,592 (304,729)
Effect of foreign exchange losses - 8,839
True-up to income tax returns 135,131 119,558
Permanent differences 8,582 12,140
Expiry of previously recognized benefit of prior
year losses 141,299 174,368
Use of prior year losses - (291,137)
Change in tax rates (169,958) 242,443
Changes in valuation allowance (127,357) (140,742)
Other (15,726) -
=---------------------------------------------------------------------------
(35,306) (736,355)
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
Future income tax recovery 35,306 737,111
Current income tax expense - (756)
=---------------------------------------------------------------------------
35,306 736,355
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
19. 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 capital assets, intangible assets and goodwill and sales by
geographic area are as follows:
2011 2010
=---------------------------------------------------------------------------
Capital Capital
assets, assets,
intangible intangible
assets and assets and
goodwill Revenue goodwill Revenue
=---------------------------------------------------------------------------
$ $ $ $
U.S. companies
United States 10,176,014 44,583,359 10,431,566 43,217,692
Canada - 361,848 - 276,039
Netherlands - 31,115 - 45,183
France - 90,664 - 158,162
United Kingdom - 138,019 - 64,511
Australia - 65,636 - -
Other - 75,337 - 74,924
UK and Canadian
companies
United Kingdom 3,588 557,494 2,634 351,510
Canada 5,185 - - -
=---------------------------------------------------------------------------
10,184,787 45,903,472 10,434,200 44,188,021
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
Revenue is attributable to the geographic area dependent on the location of
the customer.
During the year ended June 30, 2011, the Company did not have any customers
with revenues exceeding 10% of sales. During the year ended June 30, 2010
the Company earned revenue of $5,808,432 from one customer representing
13.1% of revenue.
During the year ended June 30, 2011, the Company purchased products and
services for $11,680,313 (2010 - $14,973,237) from a vendor, representing
32.7% (2010 - 43.9%) of the cost of sales.
20. Supplemental cash flow information
2011 2010
-----------------------------------------------------------------------------------------------
$ $
Cash paid for interest 31,314 37,027
Cash paid for taxes 2,820 3,843
The changes in the non-cash operating balance sheet items are as follows:
2011 2010
-----------------------------------------------------------------------------------------------
$ $
Accounts receivable 3,446,378 (2,172,613)
Current portion of deferred contract costs 1,324,114 (47,687)
Work in progress - 65,134
Prepaid expenses 8,931 49,716
Inventory (130,158) (315,720)
Long-term receivable (136,130) (152,831)
Long-term portion of deferred contract costs 18,656 204,880
Accounts payable and accrued liabilities (3,128,028) 1,420,658
Current portion of deferred revenue (1,761,278) (322,941)
Long-term portion of deferred revenue (61,002) (267,142)
-----------------------------------------------------------------------------------------------
(418,517) (1,538,546)
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
The cash and cash equivalents consists almost entirely of cash.
21. Subsequent Event
On August 10, 2011 the Company entered into an agreement with a U.S.
financial institution for a credit line facility for up to $4,500,000
from a U.S. based financial institution. The line of credit is secured
with a first charge on the assets of VSI. The amount that may be
advanced under the credit line is limited to 80% of eligible accounts
receivable of VSI less than 90 days from invoice date. The financial
covenants for these facilities included requirements for debt coverage
of 1.25 and debt to tangible net worth of 1.75.
Versatile Systems Inc.
Management Discussion and Analysis
Year ended June 30, 2011
=-------------------------------------------------------------------------------------------------------------
The following management discussion and analysis of the consolidated results of operations and financial
condition of Versatile Systems Inc. (the "Company" or "Versatile") is made as of September 8, 2011 on the
consolidated financial statements and notes for the year ended June 30, 2011.
The consolidated financial statements of the Company have been prepared in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP") and are stated in United States dollars unless otherwise
specified. The unaudited interim consolidated financial statements and management discussion and analysis have
been reviewed and approved by the Company's Audit Committee as directed by the Company's Board of Directors.
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates
and assumptions, which affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those estimates.
Forward-Looking Statements
This document may contain forward-looking statements relating to Versatile's operations or to the environment
in which it operates, which are based on Versatile's operations, estimates, forecasts and projections. These
statements are not guarantees of future performance and involve risks and uncertainties that are difficult to
predict or are beyond Versatile's control. A number of important factors including those set forth in other
public filings could cause actual outcomes and results to differ materially from those expressed in these
forward looking statements. Consequently readers should not place any undue reliance on such forward-looking
statements. In addition, these forward looking statements relate to the date on which they are made. Versatile
disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
Non-GAAP Disclosure
EBITDA is defined by the Company as net earnings before interest, income taxes, depreciation and amortization.
The Company has included information concerning EBITDA because it believes that it may be used by certain
investors as one measure of the Company's financial performance. EBITDA is not a measure of financial
performance under Canadian GAAP and is not necessarily comparable to similarly titled measures used by other
companies. EBITDA should not be construed as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with Canadian GAAP) as a measure of liquidity.
In addition, the Company has included information concerning its cash flow from operations before the net
change in non-cash operating balance sheet items as it may be used by certain investors as a measure of the
Company's financial performance.
Overview
The Company's core business is developing solutions that solve customers' problems in the storage, security,
transmission and collection of mission critical data. The Company's proprietary software applications, the
Mobiquity(TM) Solution Suite, are a key component of this solution. This enables companies to improve the sales,
marketing and distribution of their products. The Company delivers wireless/wired solutions to the consumer
packaged goods, retail, financial, pharmaceutical, healthcare, and logistics verticals through an integrated
combination of licensed software, professional services, and the re-sale of mobile and storage related
hardware. The Company also offers maintenance and support via a 24 hour call centre.
Highlights of the Fourth quarter
Highlights of the Company's operations for the quarter included:
* Revenue for the three months ended June 30, 2011 was $10,180,289 compared to $11,517,023 for the same
quarter last year;
* The normalized EBITDA for the quarter amounts to $45,167, which excludes the non-recurring expenses of
$199,293 and the stock based compensation of $141,658 compared to a normalized EBITDA loss of $398,232
for the same quarter last year;
* The Net Loss for the quarter amounted to $221,251 ($0.00 per share) compared to a Net Loss of $292,335
($0.00 per share) for the same period last year;
* The cash flow used in operations before non-cash operating balance sheet items amounted to $162,977
for the three months ended June 30, 2011 compared to cash flow used in operations before non-cash
operating balance sheet items of $194,052 for the same period last year, an improvement of $31,075;
* The working capital as of June 30, 2011 was $4,014,766, a decrease of $237,780 compared to the working
capital of $4,252,546 at June 30, 2010;
* The research and development expense for the quarter amounted to $210,996 compared to $177,744 for the
same quarter last year;
* Deferred revenue at June 30, 2011 was $6,320,199 (of which $5,670,932 is expected to be recognized in
the next four quarters) compared to $8,142,479 at June 30, 2010;
* The Investment in Equus consists of 962,962 shares of Equus Total Return, Inc. which is a public
company trading on the NYSE under the symbol EQS; and
* The Company generated revenue of $1,290,112 from Thermo Fisher, $693,593 from Comcast, $322,711 from a
school district, $321,413 from Michaels, and $315,497 from Kehe.
Review of the Fourth quarter
Revenue for the three months ended June 30, 2011 was $10,180,289 compared to $11,517,023 for the same quarter
last year, a decrease of $1,336,734. During the current quarter the Company generated revenue of $1,290,112
from Thermo Fisher, $693,593 from Comcast, $322,711 from a school district, $321,413 from Michaels, and
$315,497 from Kehe. The Company also had repeat business from its existing customer base consisting of various
retailers, universities and government organizations.
The EBITDA loss for the quarter was $295,784 compared to an EBITDA loss of $207,195 for the same quarter last
year.
The normalized EBITDA for the quarter amounts to $45,167, which excludes the non-recurring expenses of $199,293
and the stock based compensation of $141,658 compared to a normalized EBITDA loss of $398,232 for the same
quarter last year.
During the current quarter the Company recorded a non-recurring expense consisting of an additional provision
of $199,293 (2010 - recovery of $214,924) for legal and settlement costs for a transaction occurring in a
previous period.
During the quarter the Company had a future income tax benefit of $131,027 compared to a future income tax
benefit of $113,497 for the same quarter last year.
The Net Loss for the quarter amounted to $221,251 ($0.00 per share) compared to a Net Loss of $292,335 ($0.01
per share) for the same period last year.
Cost of sales
Cost of sales for the quarter amounted to $7,798,561 resulting in a gross profit of $2,381,728 or 23.4% of
sales as compared to $9,097,685 resulting in a gross profit of $2,419,338 or 21.0% of sales for the same
quarter last year.
At June 30, 2011 the Company had an inventory provision of $168,364 (June 30, 2010 - $172,169).
General and administrative
General and administrative expenses for the quarter amounted to $929,913 compared to $1,140,105 for the same
quarter last year, a decrease of $210,192. As a percentage of sales the general and administrative expenses
were 9.1% in the quarter compared to 9.9% in the same quarter last year.
Technology Investment
Over the past ten years the Company has made a significant investment in the form of expenses to advance the
abilities of its technology and resulting service offering. This investment does not contribute directly to
revenues during the period that the research and development expenses are incurred.
Research and development expense for the quarter amounted to $210,996 compared to $177,744 for the same quarter
last year. The significant expense item in this category is salary and benefit costs. As a percentage of sales
the research and development expenses are 2.1% in the quarter compared to 1.5% in the same quarter last year.
The decrease in the overall expenditures on research and development expense can be attributed to the reduction
in the number of research and development projects.
During the current quarter the Company's technology investment related to enhanced product functionality and
requirements from various partners:
For the Mobiquity Route(TM) these included the following developing a trade show application.
For Self-service, these included the following:
* Developing content editing, scheduling and reporting tools for the Versatile Smart Sign interactive
digital signage platform;
* Developing a new operating system for the Versatile Self-Service platform providing improved
performance, stability and hardware/application support; and
* Developing web content delivery capabilities for the Versatile Self-Service platform.
For the Mobiquity Transaction Engine 3.0(TM) these included the following:
* Enhancing the Key Times application to support more complex configurations;
* Enhancing reporting application to support Key Times requirements;
* Designing complex and sophisticated rules based alerting for asset battery life; and
* Improving user interface and workflow for Venue Management system.
During the current period, the Company incurred $128,802 for research and development activities related to
Mobiquity Route(TM) and related mobile software products.
During the current period, the Company incurred $53,181 for research and development activities related to
Mobiquity Transaction Engine 3.0(TM), Mobiquity Kiosk(TM) and Autostore.
Selling and marketing expenses
Selling and marketing expense for the quarter amounted to $1,186,724 compared to $1,497,988 for the same
quarter last year, a decrease of $311,264. Selling and marketing expenses includes salaries, commissions,
advertising, trade shows and promotion costs to support the various sales initiatives. As a percentage of
sales the selling and marketing expenses are 11.7% in the quarter compared to 13.0% in the same quarter last
year. As a percentage of gross profit the selling and marketing expenses were 49.8% in the quarter compared to
61.9% 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, 2011 the Company recorded a future income tax benefit of $131,027 compared
to a future income tax benefit of $113,497 for the same quarter last year.
To the extent that the Company expects to generate sufficient profits in the following fiscal period, that
portion of the Future income tax benefits have been classified as current.
Amortization
The amortization of capital assets and intangible assets for the quarter amounted to $56,998 (2010 - $144,719),
which includes $5,525 of amortization classified with the cost of sales for Kiosks deployed pursuant to various
subscription agreements.
Foreign Exchange Loss
The foreign exchange loss for the quarter amounted to $8,928 compared to a foreign exchange loss of $1,733 for
the same quarter last year. The loss was primarily due to the fluctuation in the U.S. dollar against the
Canadian dollar in the quarter.
Review of the operations for the year ended June 30, 2011
Revenue for the year ended June 30, 2011 was $45,903,472 generating a gross profit of $10,129,378 or 22.1% of
sales compared to $44,188,021 generating a gross profit of $10,036,501 or 22.7% of sales for the same period
last year. The EBITDA for the period was $112,195 compared to and EBITDA loss of $1,291,424 for the same period
last year. The Net Loss for the period amounted to $98,762 ($0.00 per share) compared to a Net Loss of
$1,236,621 ($0.01 per share) for the same period last year.
Cost of sales
Cost of sales for the year ended June 30, 2011 amounted to $35,774,094 resulting in a gross profit of
$10,129,378 or 22.1% of sales as compared to $34,151,520 resulting in a gross profit of $10,036,501 or 22.7% of
sales for the same period last year. The decline in the gross profit percentage can be attributed to a drop in
the rebate programs that are available to the Company, which offset or reduce the cost of sales. For the year
ended June 30, 2011 the Company earned rebates from its largest supplier of $39,443 compared to $599,724 in
2010, a decrease of $560,281
General and administrative
General and administrative expenses for the year ended June 30, 2011 amounted to $3,702,160 compared to
$4,058,864 for the same period last year, a decrease of $356,704.
Technology Investment
Research and development expense for the year ended June 30, 2011 amounted to $960,399 compared to $856,787 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 2.1% compared to 1.9% in the same period last
year.
Selling and marketing expenses
Selling and marketing expense for the year ended June 30, 2011 amounted to $4,659,897 compared to $5,969,542
for the same period last year.
Amortization
The amortization of capital assets and intangible assets for the year ended June 30, 2011 amounted to $256,075
(2010 - $665,091) including the amortization related to Kiosks that has been classified with cost of sales.
Foreign exchange gain
The foreign exchange gain for the year ended June 30, 2011 was $787 compared to a foreign exchange gain of
$9,181 for the same period last year.
Summary of Quarterly Results
The table below provides a summary of certain selected unaudited financial information from the Consolidated
Statements of Operations for the most recent eight fiscal quarters comprising the Company's preceding two
years:
Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011
--------------------------------------------------------------------------------------
Sept 09 Dec 09 Mar 10 Jun 10 Sept 10 Dec 10 Mar 11 Jun 11
--------------------------------------------------------------------------------------
Revenue 11,616,225 11,259,292 9,795,481 11,517,023 9,219,050 15,460,033 11,044,100 10,180,289
Cost of Sales 8,960,921 8,599,212 7,493,702 9,097,685 7,115,223 12,491,896 8,368,414 7,798,561
--------------------------------------------------------------------------------------
Gross Profit 2,655,304 2,660,080 2,301,779 2,419,338 2,103,827 2,968,137 2,675,686 2,381,728
--------------------------------------------------------------------------------------
Expenses:
General and
administrative 888,890 1,010,991 1,007,964 1,141,838 892,783 1,018,146 851,603 938,841
(including foreign
exchange)
Non recurring expenses 19,860 28,219 525,656 (214,924) 20,668 37,503 235,486 199,293
Research and
Development 246,670 247,084 185,289 177,744 192,268 278,909 278,226 210,996
Selling and Marketing 1,361,701 1,619,075 1,490,778 1,497,988 1,008,567 1,327,878 1,136,728 1,186,724
Stock-based
compensation 22,388 23,242 23,585 23,887 - - 60,906 141,658
--------------------------------------------------------------------------------------
2,539,509 2,928,611 3,233,272 2,626,533 2,114,286 2,662,436 2,562,949 2,677,512
--------------------------------------------------------------------------------------
Earnings (loss) before
interest taxes
and amortization 115,795 (268,531) (931,493) (207,195) (10,459) 305,701 112,737 (295,784)
Amortization (157,298) (152,962) (152,631) (128,065) (71,161) (48,108) (54,485) (51,473)
Interest (3,769) (10,441) (7,781) (10,248) (14,970) (666) 1,826 (2,616)
Goodwill impairment - - - (63,309) - - - -
Gain (loss) on sale - 4,952 - - - (2,575) (625) (1,410)
Income taxes (1,503) 346,321 275,055 116,482 7,276 (75,387) (26,615) 130,032
--------------------------------------------------------------------------------------
Net Earnings (loss) (46,775) (80,661) (816,850) (292,335) (89,314) 178,965 32,838 (221,251)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Per share, basic and
diluted (0.00) (0.00) (0.01) (0.00) (0.00) 0.00 0.00 (0.00)
--------------------------------------------------------------------------------------
The Company's revenues and earnings fluctuate from quarter to quarter. A number of factors can cause such
fluctuations, including the timing of substantial orders, the timing of releases of new products, timing of the
deployment of solutions and delays by customers. Because the Company's operating expenses are determined based
on anticipated sales, are generally fixed and are incurred throughout each fiscal quarter, any of the factors
listed above can cause significant variations in the Company's revenues and earnings in any given quarter.
Thus, the Company's quarterly results are not necessarily indicative of the Company's overall business, results
of operations and financial condition.
Over the past three years the Company has improved its financial position while maintaining selling, marketing,
general and administration expenses at relatively the same level as revenue.
Financial position
The working capital as of June 30, 2011 was $4,014,766 a decrease of $237,780 compared to the working capital
of $4,252,546 at June 30, 2010.
Cash and cash equivalents at June 30, 2011 was $978,656 compared to $1,738,036 at June 30, 2010.
The cash flow generated from operations before non-cash operating balance sheet items amounted to $319,649 for
the year ended June 30, 2011 compared to cash flow used in operations before non-cash operating balance sheet
items of $1,164,160 for the same period last year, an improvement of $1,483,809.
As at June 30, 2011 the Company had a credit line facility of $5,800,000, which was limited to 70% of eligible
accounts receivable of certain U.S. subsidiaries from a U.S. based financial institution. The line of credit
bears interest at the prime rate of lending as published in the Wall Street Journal and is secured with a first
charge on the assets of VAC, VSI and POI. At June 30, 2011 the amount drawn on the line of credit was
$1,007,767, a decrease of $345,545 from the amount drawn at June 30, 2010 of $1,353,312.
The amount that may be advanced under the credit line is limited to 70% of eligible accounts receivable of VAC,
POI and VSI less than 90 days from the invoice date. At June 30, 2011 this amounted to $5,563,494. At June
30, 2011 the financial covenants for these companies include the requirement of a minimum Tangible Net worth of
$4,800,000. The companies met this test.
On August 10, 2011 the Company entered into an agreement with a U.S. financial institution for a credit line
facility for up to $4,500,000 from a U.S. based financial institution. The line of credit is secured with a
first charge on the assets of VSI. The amount that may be advanced under the credit line is limited to 80% of
eligible accounts receivable of VSI less than 90 days from invoice date. The financial covenants for these
facilities included requirements for debt coverage of 1.25 and debt to tangible net worth of 1.75.
Investment in Equus
The Investment in Equus is held by the Company's wholly owned subsidiary, Mobiquity Investments Limited
("Mobiquity") and consists of 962,962 shares of Equus Total Return, Inc. which is a public company trading on
the NYSE under the symbol EQS (the "Fund"). The share price as at June 30, 2011 was $2.40 so the unrealized
loss for the quarter was $192,592 and the cumulative unrealized loss was $721,160.
On August 13, 2010 Equus released its results for the second quarter. The net asset value of Equus at June 30,
2010 was $4.28 per share.
On November 11, 2010 Equus released its results for the third quarter. The net asset value of Equus at
September 30, 2010 was $3.55 per share.
Between November 24, 2010 and December 21, 2010 Mobiquity purchased an additional 140,931 shares of Equus at a
cost of $309,556.
On March 18, 2011 Equus released its results as at and for the year ended December 31, 2010. The net asset
value of Equus at December 31, 2010 was $4.29 per share.
On June 2, 2011, Equus appointed Alessandro Benedetti the Fund's Executive Chairman and John Hardy the Chief
Executive Officer.
On August 15, 2011 Equus released its results for the second quarter. The net asset value of Equus at June 30,
2011 was $3.92 per share.
Capital Expenditures
During the year ended June 30, 2011 the additions to capital assets amounted to $82,379 (2010 - $99,606). The
majority of the capital expenditures relate to the costs of Kiosks that have been deployed under various
subscription agreements.
Share Capital
As of September 8, 2011 the Company had 157,285,643 common shares issued and outstanding.
Stock Options
The Company can grant up to 15,728,564 of the issued shares pursuant to its stock option plan.
Number of Weighted
shares average exercise price
CDN$
=--------------------------------------------------------------------------------------------------------------
Outstanding - June 30, 2010 7,901,000 0.45
Granted 7,122,100 0.11
Forfeited (950,000) 0.11
Expired (3,125,000) 0.94
----------------------------------------------
Outstanding - June 30, 2011 10,948,100 0.12
----------------------------------------------
For the year ended June 30, 2011, the Company recorded a stock-based compensation charge of $202,564 (2010 -
$93,102) for vesting of stock options granted to employees, consultants, directors and officers of the Company
in prior years.
Warrants
The details of the outstanding warrants at June 30, 2011 are as follows:
Number of warrants
--------------------------------------------
Balance, Balance,
Exercise June 30, June 30,
Expiry date price 2010 Expired Issued 2011 Amount
=--------------------------------------------------------------------------------
Cdn$ $
=--------------------------------------------------------------------------------
March 31, 2011 0.5690 1,411,808 (1,411,808) - - -
=--------------------------------------------------------------------------------
April 6, 2011 0.6636 583,770 (583,770) - - -
=--------------------------------------------------------------------------------
January 22, 2012 0.3000 600,000 - - 600,000 42,000
=--------------------------------------------------------------------------------
2,595,578 (1,995,578) - 600,000 42,000
=--------------------------------------------------------------------------------
=--------------------------------------------------------------------------------
Off Balance Sheet Arrangements
The Company has not entered into any off balance sheet arrangements other than standard office lease
arrangements
Related Party Transactions
During the current quarter, the Company paid consulting fees and salaries, which are included in the general
and administration expense, of $208,164 to four Directors and Officers of the Company (2010 - $184,703 was paid
to three Directors and Officers of the Company).
During the current year, the Company granted incentive stock options to directors to acquire 5,622,100 common
shares of the Company with an exercise price of Cdn$0.11 per share.
Risk Factors
The securities of the Company should be considered a highly speculative investment and investors should
carefully consider all of the information disclosed in this Management Discussion & Analysis prior to making an
investment in the Company. In addition to the other information presented in this Management Discussion &
Analysis, the following risk factors should be given special consideration when evaluating an investment in the
Company's securities.
Operating History
The Company's predecessor company commenced operations in March 1987 to distribute and sell Maximizer products
in European countries, as well as provide consulting services and Customer Relationship Management ("CRM")
solutions to companies. In January 1997, the Company changed its focus to research and development of CRM
software. The Company purchased Versatile Mobile Systems on September 19, 2000, Perfect Order, Inc. and
Versatile Systems, Inc. on April 26, 2005 and Sagent Solutions on December 28, 2007. The Company may face many
of the risks and uncertainties encountered by early-stage companies in rapidly evolving markets.
History of Losses
The Company had a history of losses up to September 30, 2005 and since that time has had varying results, but
has an accumulated deficit of $37,064,598 to June 30, 2011. Although the Company has decreased its operating
expenses (excluding non recurring expenses) the Company cannot be assured that it can consistently maintain
profitable operations.
No Certainty of Future Profitability
The Company's product revenues are not predictable with any significant degree of certainty and future product
revenues may differ from historical patterns. If customers cancel or delay orders, it can have a material
adverse impact on the Company's revenues and results of operations from quarter to quarter. Because the
Company's results of operations may fluctuate from quarter to quarter, investors should not assume that results
of operations in future periods can be predicted based on results of operations in past periods.
Even though the Company's revenues are difficult to predict, the Company's expense levels are based in part on
future revenue projections. Many of the Company's expenses are fixed and, accordingly, the Company cannot
quickly reduce spending if revenues are lower than expected.
Competitive Market
The market for the Company's software is intensely competitive, fragmented and rapidly changing. Some of the
Company's actual and potential competitors are larger, established companies that have greater technical,
financial and marketing resources. In addition, as the Company develops new products, particularly applications
focused on electronic commerce or specific industries, it may begin competing with companies with whom it has
not previously competed. It is also possible that new competitors will enter the market or that the Company's
competitors will form alliances that may enable them to rapidly increase market share.
Increased competition may result in price reductions, lower gross margins or loss of the Company's market
share, any of which could materially adversely affect its business, financial condition and operating results.
Technological Change
The market for the Company's solutions is characterized by rapidly changing technology and evolving industry
standards. The market is affected by changes in end user requirements and frequent new product introductions
and enhancements. The Company's products embody complex technology and may not always be compatible with
current and evolving technical standards and products, developed by others. Failure or delays by the Company to
meet or comply with the requisite and evolving industry or user standards could have a material adverse effect
on the Company's business, results of operations and financial condition. The Company's ability to anticipate
changes in technology, technical standards and product offerings will be a significant factor in the Company's
ability to compete. There can be no assurance that the Company will be successful in identifying, developing,
manufacturing and marketing products that will respond to technological change, evolving standards or
individual wireless communications service provider standards or requirements. The Company's business will be
adversely affected if the Company incurs delays in developing new products or enhancements or if such products
or enhancements do not gain market acceptance. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's products or technologies non-competitive or
obsolete.
Limited Sales and Support Infrastructure
The Company's future revenue growth will depend in large part on its ability to successfully expand its direct
sales force and its customer support capability. The Company may not be able to successfully manage the
expansion of these functions or to recruit and train additional direct sales, consulting and customer support
personnel.
If the Company is unable to hire and retain additional highly skilled direct sales personnel, it may not be
able to increase its license revenue to the extent necessary to achieve profitability. If the Company is
unable to hire highly trained consulting and customer support personnel, it may be unable to meet customer
demands. The Company is unlikely to be able to increase its revenues as planned if it fails to expand its
direct sales force or its consulting and customer support staff. Even if the Company is successful in
expanding its direct sales force and customer support capability, the expansion may not result in revenue
growth.
Dependence on Business Alliances
A key element of the Company's business strategy is the formation of corporate alliances with leading
companies. The Company is currently investing and plans to continue to invest significant resources to develop
these relationships. The Company believes that its success in penetrating new markets for its products will
depend in part on its ability to maintain these relationships and to cultivate additional or alternative
relationships. There can be no assurance that the Company will be able to develop additional corporate
alliances with such companies, that existing relationships will continue or be successful in achieving their
purposes or that such companies will not form competing arrangements.
Dependence on Key Personnel
The Company's success depends largely upon the continued service of its executive officers and other key
management, sales and marketing and technical personnel. The loss of the services of one or more of the
Company's executive officers or other key employees could have a material adverse effect on its business,
results of operations or financial condition.
The Company's future success also depends on its ability to attract and retain highly qualified personnel. The
competition for qualified personnel in the computer software and Internet markets is intense, and the Company
may be unable to attract or retain highly qualified personnel in the future. In addition, due to intense
competition for qualified employees, it may be necessary for the Company to increase the level of compensation
paid to existing and new employees to the degree that operating expenses could be materially increased.
Management of Growth
The Company expects to experience a period of significant growth in the number of personnel that will place a
strain upon its management systems and resources. The Company's future will depend in part on the ability of
its officers and other key employees to implement and improve its financial and management controls, reporting
systems and procedures on a timely basis and to expand, train and manage its employee workforce. There can be
no assurance that the Company will be able to effectively manage such growth. The Company's failure to do so
could have a material adverse effect upon the Company's business, prospects, results of operation and financial
condition.
Integration of Newly Acquired Businesses or Technology
The Company may expand its operations through acquisitions of additional businesses or technology. There can
be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses
or technology or successfully integrate acquired businesses or technology into the Company without substantial
expense, delay or other operational or financial problems. Further, acquisitions may involve a number of
additional risks, including diversion of management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances, legal liabilities and amortization of acquired intangible assets, some
or all of which could have a material adverse effect on the Company's business, financial condition and results
of operation. In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated
revenues and earnings. The failure of the Company to manage its acquisition strategy successfully could have a
material adverse effect on the Company's business, financial condition and results of operation.
Potential Fluctuations in Quarterly Financial Results
The Company's quarterly financial results may be affected by the timing of new releases of its products and/or
substantial customer orders. The Company's operating expenses are based on anticipated revenue levels in the
short term, are relatively fixed, and are incurred throughout the quarter. As a result, if expected revenues
are not realized on a timely basis as anticipated, the Company's financial results could be materially and
adversely affected. These or other factors, including possible delays in the shipment of new products, may
influence quarterly financial results in the future. Accordingly, there may be significant variation in the
Company's quarterly financial results.
International Sales
Sales outside of the United States currently represent less than 10% of the Company's total gross revenues. The
Company believes that its continued growth and profitability will require additional expansion of its sales in
international markets. To the extent that the Company is unable to expand international sales in a timely and
cost effective manner, the Company's business, results of operations and financial condition could be
materially and adversely affected. In addition, even with the successful recruitment of additional personnel
and international resellers, there can be no assurance that the Company will be successful in maintaining or
increasing international market demand for the Company's products.
Currency Exchange Rate Risk
The Company's results have been stated in U.S. dollars as a substantial portion of the Company's revenues and a
material portion of its expenses are denominated in US dollars.
Dependence on Proprietary Technology and Limited Patent and Trademark Protection
The Company relies on a combination of copyright and trademark laws, trade secret, confidentiality procedures
and contractual provisions to protect its proprietary rights. Unauthorized parties may attempt to copy aspects
of the Company's products or obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's product is difficult, time-consuming and costly as is the pursuing of patents
in each jurisdiction in which the Company carries on business. Although the Company is unable to determine the
extent to which piracy of its software product exists, software piracy is a possibility. In addition, the laws
of certain countries in which the Company's products may be licensed do not protect its product and
intellectual property rights to the same extent as the laws do in Canada or the United States. There is no
assurance that the Company's means of protecting its proprietary rights will be adequate or the Company's
competitors will not independently develop similar technology, the effect of either of which may be materially
adverse to the Company's business, results of operations and financial condition.
Risk of Third Party Claims for Infringement
The Company is not aware that its product infringes the proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim such infringement by the Company or its licensees with
respect to current or future products. The Company expects that software product developers will increasingly
be subject to such claims as the number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to the
Company. Any of the foregoing could have a materially adverse effect on the Company's business, results of
operations and financial condition.
Lengthy Sales and Implementation Cycle
The adoption of the Company's product generally involves a significant commitment of resources by potential
customers. As a result, the Company's sales process is often subject to delays associated with lengthy
approval processes by potential customers. For these and other reasons, the sales cycle associated with the
license of the Company's product varies substantially from customer to customer and typically lasts between 6
to 12 months during which time the Company may devote significant time and resources to a prospective customer,
including costs associated with multiple site visits, product demonstrations and feasibility studies, and
experience a number of significant delays over which the Company has no control. Any significant or ongoing
failure by the Company to ultimately achieve such sales could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, following license sales, the
implementation period is expected to involve a time period for customer training and integration with the
customer's existing systems. A successful implementation program requires a close working relationship between
the Company, the customer and, generally, third party consultants and system integrators who assist in the
process. There can be no assurance that delays or difficulties in the implementation process for any given
customer will not have a material adverse effect on the Company's business, results of operations and financial
condition.
Risk of System Defects
System development involves the integration of the Company's proprietary software and software of others into
the customer's operating systems. There can be no assurance that defects and errors will not be found in the
Company's product when integrated with other products or systems. Any such defects and errors could result in
adverse customer reactions, negative publicity regarding the Company and its product or damages. Consequently,
there could be a material adverse effect on the Company's business, results of operations and financial
condition.
Requirements for New Capital
As a growing business, the Company typically needs more capital than it has available to it or can expect to
generate through the sale of its products. In the past, the Company has had to raise, by way of debt and
equity financing, considerable funds to meet its capital needs. There is no guarantee that the Company will be
able to continue to raise funds needed for its business. Failure to raise the necessary funds in a timely
fashion will limit the Company's growth.
Critical Accounting Estimates
General
Unless otherwise specified in the discussion of the specific critical accounting estimates, the Company is not
aware of trends, commitments, events, or uncertainties that it reasonably expects to materially affect the
methodology or assumptions associated with the critical accounting estimates, subject to the circumstances
identified above.
Changes are made to assumptions underlying all critical accounting estimates to reflect current economic
conditions and updating of historical information used to develop the assumptions, where applicable. Unless
otherwise specified in the discussion of the specific critical accounting estimates, it is expected that no
material changes in overall financial performance and financial statement line items would arise either from
reasonably likely changes in material assumptions underlying the estimate or within a valid range of estimates,
from which the recorded estimate was selected.
All critical accounting estimates are uncertain at the time of making the estimate.
Accounts Receivable
Allowance for doubtful accounts
The Company considers the business area that gives rise to the accounts receivable, maintains procedures for
granting credit terms on sales transactions and performs specific account identification when determining its
allowance for doubtful accounts. This accounting estimate is in respect of the accounts receivable line item on
the Company's consolidated balance sheet comprising approximately 20% of total assets as at June 30, 2011. In
the event the future results were to adversely differ from management's best estimate of the allowance for
doubtful accounts, the Company could experience a bad debt charge in the future. Such a bad debt charge would
not result in a cash outflow.
The estimate of the Company's allowance for doubtful accounts could materially change from period to period due
to the allowance being a function of the balance and composition of accounts receivable, which can vary on a
month-to-month basis. The variance in the balance of accounts receivable can arise from a variance in the
amount and composition of operating revenues and from variances in accounts receivable collection performance.
Inventories
Provision for inventory obsolescence
The Company determines its provision for inventory obsolescence based upon historical experience, expected
inventory turnover, inventory aging and current condition, and current and future expectations with respect to
product offerings.
Assumptions underlying the provision for inventory obsolescence include the activity levels over previous
fiscal years, and the expected inventory requirements and inventory composition necessary to support these
future sales and offerings. The estimate of the Company's provision for inventory obsolescence could materially
change from period to period due to changes in product offerings and consumer acceptance of those products.
This accounting estimate is in respect of the inventory line item on the Company's consolidated balance sheet
comprising approximately 5.2% of total assets as at June 30, 2011. If the provision for inventory obsolescence
was inadequate, the Company could experience a charge to direct cost of sales in the future. Such an inventory
obsolescence charge would not result in a cash outflow.
Long-Lived Assets
The accounting estimates for long-lived assets that include capital assets, purchased technology, intellectual
property, customer contracts and licenses, in aggregate, represent approximately 1% of the Company's total
assets as at June 30, 2011, presented in its consolidated balance sheet. If the Company's estimated useful
lives of assets were different as a result of changes in facts and circumstances, the Company could experience
increased or decreased charges for amortization and the Company could potentially experience future material
impairment charges in respect of its recovery of long-lived assets.
The estimated useful lives of capital assets are determined by a continuing program of asset life studies. The
recoverability of capital assets is significantly impacted by the estimated useful lives. Assumptions
underlying the estimated useful lives of capital assets include timing of technological obsolescence,
competitive pressures and future infrastructure utilization plans. In the event management's best estimate of
the useful lives of capital assets was adversely affected, the Company could potentially experience a charge to
amortization expense in the future. Such a charge to amortization would not result in a cash outflow.
The purchased technology, intellectual property, customer contracts and licenses were fully amortized in the
2010 fiscal year.
Future Income Tax Benefits
The amount recorded for Future Income Tax Benefits represents approximately 20% of the Company's assets as at
June 30, 2011, presented in its consolidated balance sheet. If the Company determines that the valuation
allowances relating to the loss carry forwards and tax deductions should be increased, the Company could
experience a reduction in the recorded future income tax benefits.
The Company determined that because VSI, POI, VAC and VMS-US were expected to generate sufficient profits that
it was more likely than not that the losses would be fully utilized and the deductions attributable to these
companies would be fully utilized. Consequently, there is no valuation allowance for these companies. The
difference between the value of these tax benefits less the valuation allowance is the amount of the future
income tax asset that is recorded by the Company.
Goodwill
The accounting estimates for goodwill represents approximately 28% of the Company's total assets as at June 30,
2011, presented in its consolidated balance sheet. If the future were to adversely differ from management's
best estimate to recover the Company's investments in its goodwill, the Company could potentially experience
future material impairment losses in respect of its goodwill. The impairment losses would be recognized and
presented as a separate line item in the consolidated statements of loss and deficit. Impairment losses to
goodwill would not result in a cash outflow.
Changes in accounting policies
Adoption of future accounting standards:
In January 2009, the CICA issued Section 1582, "Business Combinations", Section 1601, "Consolidated
Financial Statements", and Section 1602, "Non-controlling Interests". Section 1582 establishes
standards for the accounting for business combinations that is equivalent to the business combination
accounting standard under International Financial Reporting Standards. Section 1582 is applicable for
any business combinations with acquisition dates on or after July 1, 2011. Early adoption of this
Section is permitted. Section 1601 together with Section 1602 establishes standards for the
preparation of consolidated financial statements. Section 1601 is applicable for the Company's interim
and annual consolidated financial statements for its fiscal year beginning July 1, 2011. Early
adoption of this Section is permitted. If the Company chooses to early adopt any one of these
Sections, the other two sections must also be adopted at the same time. The Company does not expect
the adoption of these standards will have a material impact on its consolidated financial statements.
In December 2009, the CICA issued Emerging Issues Committee Abstract ("EIC") 175, "Multiple
Deliverable Revenue Arrangements", replacing EIC 142, "Revenue Arrangements with Multiple
Deliverables". This abstract was amended to (1) exclude from the application of the updated guidance
those arrangements that would be accounted for in accordance with ASC 985-605 (formerly Financial
Accounting Standards Board Statement of Position 97-2), "Software Revenue Recognition" as amended by
Accounting Standards Update 2009-14; (2) provide updated guidance on whether multiple deliverables
exist, how the deliverables in an arrangement should be separated, and the consideration allocated;
(3) require in situations where a vendor does not have vendor-specific objective evidence or third-
party evidence of selling price, that the entity allocate revenue in an arrangement using estimated
selling prices of deliverables; (4) eliminate the use of the residual method and require an entity to
allocate revenue using the relative selling price method; and (5) require expanded qualitative and
quantitative disclosures regarding significant judgments made in applying this guidance.
The accounting changes summarized in EIC 175 are effective for fiscal years beginning on or after
January 1, 2011, with early adoption permitted. Adoption may either be on a prospective basis or by
retrospective application. The Company does not believe the adoption of this standard will have a
material impact on its consolidated financial statements.
Key International Financial Reporting Standards (IFRS) conversion dates
According to dates set out by the Accounting Standards Board (AcSB), the Company will be required to begin
publicly reporting under IFRS in the fiscal year ending June 30, 2012. Because of the need to present
comparative financial information, the Company will need to create its first IFRS compliant balance sheet as at
July 1, 2010. For the fiscal year ending June 30, 2011, the Company will need to prepare information for
financial statements and note disclosures under both Canadian GAAP and IFRS in order to meet Canadian GAAP
reporting requirements that year and to allow for comparative information to be presented in 2012.
The Company has identified the following areas where IFRS adoption will significantly alter the Company's
accounting policies and methodologies and the resulting form of its consolidated financial statements under
IFRS:
1. Share-based payments: IFRS 2, "Share-based Payments", requires that each tranche of vesting stock
options be valued separately using dissimilar assumptions in the Black-Scholes Option Pricing model,
and further requires that each tranche is expensed over its vesting period. Currently, the Company
values all options in a grant using the same set of Black-Scholes assumptions, and expenses the
entire fair value over the vesting period of the options.
Upon adoption, the Company expects to claim the exemption available under IFRS 1, "First Time
Adoption of IFRS", which will allow the Company not to revalue any stock options which were fully
vested prior to the date of IFRS implementation.
The Company expects that upon IFRS adoption, we will be required to make an adjustment to account
for the differences noted above. The effect of this adjustment will be increase our deficit and
our contributed surplus, as previously unrecognized stock-based compensation will be required to
be recognized.
2. The Effects of Changes in Foreign Exchange Rates: IAS 21, "The Effects of Changes in Foreign
Exchange Rates", prescribes accounting guidance surrounding transactions in foreign currencies and
how to include the results of foreign operations in an entity's financial statements.
In regards to foreign exchange translation of subsidiaries, Canadian GAAP requires an assessment
of whether or not a subsidiary is integrated or self- sustaining. IAS 21 does not include this
type of assessment, but rather requires the assessment of each entity's functional currency based
on certain indicators.
Based on our preliminary evaluation, we expect that most of the companies in our group will be
assessed as having the U.S. dollar as their functional currency.
Based on this preliminary assessment, as the Company will be required to account for the majority
of its entities using the U.S. dollar as their functional currency, we expect that upon IFRS
adoption we will continue to report our financial position and our results from operations using
the U.S. dollar as the reporting currency. We are currently working through detailed calculations
in order to determine the impact this change will have on our opening balance sheet as at the date
of adoption of IFRS.
3. Income Taxes: IAS 12, "Income Taxes", prescribes how to account for current and future income taxes.
IAS 12 requires that all deferred income tax assets are to be shown as long-term assets.
Currently, the Company presents a portion of its future income tax assets as current.
4. Deferred Contract Costs: IAS 38, "Intangible Assets", prescribes the definition of and method for
accounting for intangible assets.
IAS 38 requires that assets qualify as intangible assets only if they are separable (capable of
being separated from the entity and sold, transferred, or disposed of) or if they arise from
contractual or legal rights.
Based on our evaluation, the Company does not believe that the deferred contract costs meet this
definition. As such, we expect that upon IFRS adoption, we will be required to make an adjustment
to remove these deferred contract costs. The effect of this adjustment will be to reduce the
balance of the deferred contract costs and to increase our deficit. The amount of deferred
contract costs to be removed at the date of adoption is $141,238.
We have substantially completed our accounting policy choices. Based on our assessment, we do not believe that
any other exemption provisions available under IFRS 1 will be applicable to the Company.
As our policies and accounting methodologies have now been substantially finalized, we will develop the form of
IFRS financial statements to help ensure that data required to comply with the more extensive disclosures under
IFRS will be adequately captured by our systems.
We have not yet prepared the 2010 comparative results for the full year under IFRS. This work will be completed
prior to December 31, 2011, and may result in additional adjustments that have not been anticipated above. In
addition, the International Accounting Standards Board (IASB) continues to update IFRS. If any standards change
prior to June 30, 2012, we will likely be required to apply such changes retrospectively to the date of
transition (July 1, 2011), and any such changes may have a material impact on our financial statements.
Other than the impact on our financial statements, the most significant aspect of the changeover to IFRS that
we have identified is the need for significantly enhanced disclosure in the notes to the financial statements.
Developing the form of the IFRS financial statements, as noted above, will help ensure that our accounting
systems and procedures have been adequately modified to capture the incremental data required to be disclosed
under IFRS.
Increased disclosure is not expected to have any material impact on the Company's operations, but can
reasonably be expected to impact our internal controls over financial reporting ("ICFR"), which we consider to
include disclosure controls and procedures ("DCP"). Over the coming months, we may implement modifications to
existing controls, as appropriate, to address the transition to IFRS. We expect to complete the implementation
and review of our ICFR under IFRS prior to issuing our first quarter financial results for the 2012 fiscal
year. Nevertheless, we may need to continue to review, modify and test our ICFR throughout 2012 as we complete
the convergence project. We do not yet know whether such changes to our ICFR or DCP will constitute material
changes under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings.
This information is provided to allow investors and others to obtain a better understanding of the Company's
IFRS changeover plan and the resulting possible effects on the Company's financial statements and operations.
Readers are cautioned, however, that it may not be appropriate to use such information for any other purpose.
This information also reflects the Company's most recent assumptions and expectations; circumstances may arise,
such as changes in IFRS, regulations or economic conditions, which could change these assumptions or
expectations.
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, 2011, 2010 and 2009:
=-------------------------------------------------------------------------------------------------------------
2009 2010 2011
=-------------------------------------------------------------------------------------------------------------
(a) Sales $49,118,091 $44,188,021 $45,903,472
(b) Net Earnings (loss) (666,119) (1,236,621) (98,762)
(c) Net Earnings (loss) per share, basic and diluted (0.01) (0.01) 0.00
(d) Total assets 36,161,102 40,535,463 35,138,251
(e) Total long-term financial liabilities 977,411 710,269 649,267
(f) Cash Dividends declared per share N/A N/A N/A
Revenue for the year ended June 30, 2011 was $45,903,472 generating a gross profit of $10,129,378 or 22.1% of
sales compared to $44,188,021 generating a gross profit of $10,036,501 or 22.7% of sales for the same period
last year. The decline in the gross profit percentage can be attributed to a drop in the rebate programs that
are available to the Company. The Company generated positive cash flow from operations before non-cash
operating balance sheet items of $319,649 for the year ended June 30, 2011 compared to cash flow used in
operations before non-cash operating balance sheet items of $1,164,160 for the same period last year, an
improvement of $1,483,809.
Revenue for the year ended June 30, 2010 was $44,188,021 compared to $49,118,091 for the prior year, a decrease
of $4,930,070. While the Company had repeat business from its existing customer base including Comcast, Tyco,
Motorola, Music Choice, Hershey, Thermo Fisher, Urban Outfitters, and various retailers, universities and
government organizations, the Company had been impacted by the overall macro-economic environment and continued
to experience a slowdown in orders from customers for routine expenditures on infrastructure.
Revenue for the year ended June 30, 2009 was $49,118,091 compared to $59,380,354 for the prior year, a decrease
of $10,262,263. While the Company had repeat business from its existing customer base including Comcast,
Motorola, PASAP Software, Hershey, Thermo Fisher Scientific, Tyco Electronics, Tree of Life and various
retailers, universities and government organizations, the Company had been impacted by the overall macro-
economic environment and experienced a slowdown in orders from customers for routine expenditures on
infrastructure.
Versatile Systems Inc.
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