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