VendTek Systems announces second quarter financial results

TSX Venture Exchange: VSI

VANCOUVER, June 25 /CNW/ - VendTek Systems Inc. (VSI - TSX Venture) (the "Company"), a developer and licensor of software for the global prepaid and financial services markets, today reported its financial results for the second quarter ended April 30, 2010.

    
    Selected Second Quarter Operational Highlights

    -   Signed an agreement with Nantian Electronics in China to co-develop
        an asset management software system
    -   Transactions processed increased 8.1% from 38.2 million in the first
        six months of 2009 to 41.3 million for the first six months of 2010.

    Selected Financial Information

    For the Three Months ended April 30th, 2010
    -------------------------------------------
    -   Revenues for the quarter ended April 30, 2010, increased $536,000 to
        $30.4 million, or 1.8%, from $29.8 million for the corresponding
        period in 2009;
    -   Software and related service revenues increased by $12,000, or 3.3%,
        to $373,000 for the second quarter of 2010.
    -   Net loss of $139,000 for the second quarter of 2010 compared to loss
        of $98,000 for the same period in 2009.

    For the Six Months ended April 30th, 2010
    -----------------------------------------
    -   Revenues for the six months ended April 30, 2010, increased $193,000
        to $60.7 million from $60.5 million for the corresponding period in
        2009;
    -   Prepaid revenues increased $236,000 from $59.7 million for the first
        six months of 2009 to $60 million for the first six months of 2010
    -   Net loss of $245,000 for 2010, compared to $253,000 for 2009
    

"We are focused on executing several distinct initiatives: growing our license revenues, expanding our distribution networks, and broadening the e-Fresh(TM) platform. We are doing this to maximize the number of transaction processed by e-Fresh(TM) globally," said Doug Buchanan, President and Chief Executive Officer of VendTek.

Nurez Khimji, Chief Financial Officer of the Company, says VendTek's financial performance over the last two years underscores the consistency of the Company's business.

"We have continued to increase our revenues over the last two years despite the challenging economic circumstances. We are well positioned for growth and our strong financial foundation allows us to pursue global opportunities," said Khimji.

Financial Review for the Three Months Ended April 30, 2010 and 2009

Revenue

Our prepaid telecommunications revenue totalled $30 million for the quarter ended April 30, 2010, compared to $29.5 million for same quarter in 2009.

Our virtual prepaid revenues increased by $1.3 million, or 4.6%, in the second quarter of fiscal 2010 compared to the second quarter of 2009. This was partially offset by a decrease in hard card sales by $777,000 from $817,000 in the second quarter of 2009 to $40,000 in second quarter of 2010. This decrease is a result of the decision by many telephone companies in Canada to eliminate their hard card products.

Our virtual prepaid revenues in Canada for the quarter ended April 30, 2010 were $29 million compared to $28.1 million for the same period in 2009. This represents a 3.1% increase. In the U.S., our virtual prepaid revenues were $988,000 and $553,000 in the second quarters of 2010 and 2009 respectively. This equates to a 78.7% increase for the quarter ended April 30, 2010 compared to the corresponding period in 2009. The increase in our virtual prepaid revenue is due to our ongoing installation of POS terminals across Canada and the U.S. for distribution of virtual prepaid telecommunications vouchers (or PINs) through our distribution network.

Our software and related service revenues increased by $12,000, or 3.3%, to $373,000 for the second quarter of 2010. We received software and service revenues from the U.A.E, China, Africa, Thailand and the U.S. We also recorded software revenue of $51,000 U.S. in April 2010 to reflect a payment received from our partner in the Middle East: Privinvest Holdings. We are negotiating a contract with Privinvest to grant territory rights for our e-Fresh(TM) software. While the contract details have not been finalized, we expect to receive $50,000 U.S. per month in exchange for exclusivity for our e-Fresh(TM) software within a specific territory.

While the number of transactions processed through our system in the U.A.E. increased by 20%, our software and services revenue increased only modestly primarily due to the offsetting effect of foreign exchange changes. Our software and related service revenue are denominated in U.S. dollars. We were negatively impacted by the weakening U.S. dollar. The average U.S. exchange rate for the second quarter in fiscal 2010 was 1.03 compared to 1.24 for the same period in 2009.

Cost of Revenues

Cost of revenues for the three months ended April 30, 2010, were $28.9 million, or 95.07% of revenues, compared to $28.3 million, or 94.94% of revenues for the same quarter in 2009. The consistent low margin is indicative of the virtual prepaid telecommunications industry.

General and Administrative

General and administrative expense increased $147,000, or 17.3%, to $990,000 for the three months ended April 30, 2010 as compared to $843,000 for the three months ended April 30, 2009. General and administrative expense increased mainly due to increases in legal, investor relations, director's fees and travel costs.

Sales and Marketing

Our sales and marketing expenses increased $75,000, or 36.7%, to $278,000 in the quarter ended April 30, 2010 as compared to $203,000 for same period in 2009. The increase in sales and marketing expense was primarily due to marketing costs incurred for the launch our 3V Virtual Visa product.

Research and Development

Product development costs for the three months ended April 30, 2010 were $213,000, or approximately 0.70% of revenues. This compares to $192,000, or approximately 0.64% of revenues for the quarter ended April 30, 2009. The $21,000 increase from 2009 to 2010 is the result of hiring additional engineering staff.

Restatement Costs

Restatement costs consist of accounting, legal and consulting costs incurred. During the second quarter ended April 30, 2010 we incurred $70,000 of costs related to the restatement of our 2006 and 2007 annual financial statements and the quarters ended January 31, April 30 and July 31, 2008. This is a reduction of $198,000 compared to the same period of 2009. These costs are one-time expenses that will not continue beyond the second quarter ended April 30th, 2010.

Financial Review for the Six Months Ended April 30, 2010 and 2009

Revenue

Our prepaid telecommunications revenues increased $236,000 (0.4%) for the first six months of 2010 compared to the same period of 2009. Our virtual prepaid revenues increased by $1.9 million in the first six months of 2010 compared to the first six months of 2009. This was partially offset by a decrease in hard card sales of $1.7 million from $1.8 million in the first six months of 2009 to $98,000 in the same quarter of 2010. This decrease is a result of the decision by many telephone companies in Canada to eliminate their hard card products.

Our virtual prepaid revenues in Canada for the six months ended April 30, 2010 were $58 million compared to $57 million for the same period in 2009 which equates to a 1.7% increase. In the U.S., our virtual prepaid revenues were $1.9 million and $943,000 in the first six months of 2010 and 2009 respectively (101.8% increase). The increase in our virtual prepaid revenue is due to our ongoing installation of POS terminals across Canada and the U.S. for distribution of virtual prepaid telecommunications vouchers (or PINs) through our distribution network.

Our software and related service revenue decreased by $56,000, or 7.5%, to $692,000 for the first six months of fiscal 2010 from $747,000 during the same period in 2009. We received software and service revenues from the U.A.E, China, Africa, Thailand and the U.S. While the number of transactions processed through our system in the U.A.E. increased by 20%, our software and services revenue decreased primarily due to decreased foreign exchange changes. Our software and related service revenue are denominated in U.S. dollars. We were negatively impacted by the weakening U.S. dollar. The average U.S. exchange rate for the first six months in 2010 was 1.04 compared to 1.24 for the same period in 2009.

Cost of Revenues

Cost of revenues for the six months ended April 30, 2010, were $57.7 million, or 95.09% of revenues, compared to $57.5 million, or 95.0% of revenues for the same six months in 2009. The consistent low margin is indicative of the virtual prepaid telecommunications industry.

General and Administrative

General and administrative expense decreased $49,000, or 2.4%, for the six months ended April 30, 2010 as compared to same period in 2009.

General and administrative expense decreased due to lower stock option expenses, and travel costs. These were partially offset by increases repairs, bad debts provisions and investor relations costs.

Sales and Marketing

Our sales and marketing expenses increased $113,000, or 31.1%, to $478,000 in the six months ended April 30, 2010 as compared to $365,000 for same period in 2009. The increase in sales and marketing expense was primarily due to marketing costs incurred for the launch of our 3V Virtual Visa product.

Research and Development

Product development costs for the six months ended April 30, 2010 were $386,000, or approximately 0.64% of revenues and were reasonably consistent with the prior year's costs of $396,000, or approximately 0.65% of revenues for the six months ended April 30, 2009.

Outlook

We have a multi-point strategy to drive growth with the primary goal of increasing the number of transactions processed through our e-Fresh(TM) system globally.

Revenues

Going forward, we expect to focus on increasing transaction volumes and sales by deploying e-Fresh(TM) software to point-of-sale terminals through the NPP network in North America and by supporting existing partners and adding new partners in international markets.

In Canada, we expect that we will continue to add additional POS terminals and products. While the terminal growth in Canada will unlikely match the growth we have already experienced, we expect that we will see transaction growth from products recently added to our system such as Ukash, prepaid credit cards, and international mobile top-up. These additional products do not require significant capital outlay.

In the U.S., we expect that we will continue to support our existing ISOs and add new ISOs. We believe that our successful execution of this strategy in Canada can be replicated in the U.S. As our ISOs continue to deploy new POS terminals, we believe that we can cost effectively increase our NPP network. We also expect to add additional products to our network in the U.S. We are planning to add additional financial products and bill payment services.

International markets for prepaid telecommunications products are larger than North America. We expect to see continued growth in higher-margin license revenues from our international customers. While our partner in the UAE has contributed the majority of license revenues to-date from transactions in the UAE and Africa, we expect that our new partners in Africa, India and Thailand will launch in 2010 and contribute increasing license fees as their operations expand. We will continue to expand our international network by seeking additional license opportunities. In specific circumstances, we may pursue opportunities to launch our network ourselves in some international markets.

Gross Margins

Generally, while we expect our revenue mix to continue to be dominated by our Canadian revenues (due to the way we recognize our revenues), the global scope of our operations is better evidenced by our gross margins. For example, in 2009, while 1.1% of our revenues were derived from international license revenues, 22% of our gross margin was from international license revenues.

In Canada, we expect to see continued margin pressure as the prepaid telecommunication market matures. Some Canadian carriers have recently announced the reduction in some product channel margins effective May 1, 2010, which could further reduce our margins. This may be partially offset by the increase in sales for higher-margin financial products. This may also be the case for the U.S.

Internationally, we receive 100% margin transaction fees. Currently, we process about 200,000 transactions a day which improve our lower margin distribution revenues in North America.

We expect our gross margins percentage to increase as our international revenues increase.

Operating Expenses

While we focus on reducing our costs, we expect our operating expenses to remain consistent as a percentage of revenues. However, we expect that our operating expense directed towards our Canadian market will shift as our international operations expand.

VendTek's MD&A and complete statements are available at www.sedar.com and the Company's website www.vendteksystems.com.

Conference Call

VendTek management will host a conference call on Monday, June 28, 2010 at 10:00 a.m. EDT (7:00 a.m. PDT) to discuss its financial results and operational highlights for the second quarter of fiscal 2010.

To access the conference call by telephone, dial 1-647-427-7450 or 1-888-231-8191 and reference the company name, VendTek Systems Inc., or the conference code 81926702.

A live audio webcast of the conference call will be available at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3116960 Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast.

About VendTek

VendTek develops and licenses automated transaction system software and supporting technologies that improve the efficiency of product delivery, reduce costs to clients and offer superior safety measures. VendTek's customers, subsidiaries and its Now Prepay division use e-Fresh(TM) software to build electronic, prepaid services networks that enable consumers to purchase prepaid products and services via POS and self-serve terminals connected to a central e-Fresh(TM) server. This system creates significant value through improved efficiencies compared to a traditional distribution model. e-Fresh(TM) reduces shrinkage and inventory requirements for vendors while improving consumer access to prepaid products and services by completely eliminating physical cards and vouchers. VendTek has deployed its software around the world including Canada, United States, Asia, the Middle East and Africa. For further information please visit the Company's websites www.vendteksystems.com and www.nowprepay.com

Forward-Looking Information

This news release contains statements which are not current statements or historical facts and are "forward-looking information" within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact, contained in this news release constitute forward-looking information. Wherever possible, words such as "plans", "expects" or "does not expect", "budget", "forecasts", "projections", "anticipate" or "does not anticipate", "believe", "intent", "potential", "strategy", "schedule", "estimates" and similar expressions or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved and other similar expressions have been used to identify forward-looking information. These forward-looking statements relate to, among other things the Company's expectations regarding future growth, results of operations (including, without limitation, future production and sales, and operating and capital expenditures), performance (both operational and financial), business and political environment and business prospects (including the timing and development of new deposits and the success of exploration activities) and opportunities.

Although the forward-looking information in this news release reflects the Company's current beliefs on the date of this news release based upon information currently available to management and based upon what management believes to be reasonable assumptions, the Company cannot be certain that actual results, performance, achievements, prospects and opportunities, either expressed or implied, will be consistent with such forward-looking information. By its very nature, forward-looking information necessarily involves significant known and unknown risks, assumptions, uncertainties and contingencies that may cause the Company's actual results, assumptions, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking information. These risks and uncertainties include, among other things, revenue growth, operating results, the market demand for our products, product development, and litigation as well other factors described in the Risks Related to Our Business Section in our 2009 annual Management Discussion and Analysis. There may be other factors that cause results, assumptions, performance, achievements, prospects or opportunities in future periods not to be as anticipated, estimated or intended.

There can be no assurances that forward-looking information and statements will prove to be accurate, as many factors and future events, both known and unknown could cause actual results, performance or achievements to vary or differ materially, from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained in this news release. Accordingly, all such factors should be considered carefully when making decisions with respect to the Company, and prospective investors should not place undue reliance on forward-looking information. The Company assumes no obligation to update or revise forward-looking information to reflect changes in assumptions, changes in circumstances or any other events affecting such forward-looking information, except as required by applicable law.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

For further information: or to receive the complete statements please contact Samantha White at 604-805-4653 or 1-800-806-4958 or [email protected]