MANAGEMENT'S DISCUSSION AND ANALYSIS. For the year ended December 31, 2011

Transcription

1 MANAGEMENT'S DISCUSSION AND ANALYSIS Fr the year ended December 31, 2011

2 Selected Cnslidated Financial Infrmatin and Management s Discussin and Analysis This Management s Discussin and Analysis ( MD&A ) dated as f April 27, 2012 fr VersaPay Crpratin ( VersaPay r the Cmpany ) shuld be read in cnjunctin with the cnslidated financial statements and the accmpanying ntes fr the year ended December 31, The cnslidated financial statements and cmparative infrmatin have been prepared in accrdance with Internatinal Financial Reprting Standards (IFRS). Additinal infrmatin relating t the Cmpany is available n SEDAR at under VersaPay Crpratin. All dllar amunts discussed in the MD&A are in Canadian dllars unless therwise specified. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION This MD&A cntains "frward-lking infrmatin" within the meaning f applicable securities laws. Frward-lking infrmatin typically cntains statements including wrds such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "prpse", r similar wrds suggesting future utcmes r statements regarding an utlk. Frward-lking infrmatin in this MD&A includes, but is nt limited t, expectatins regarding future revenues, earnings, capital expenditures, and perating and ther csts; business strategy and bjectives; market trends; acquisitin and dispsitin plans; the sufficiency f cash and wrking capital fr future peratins; and the timing and the cmpletin f varius develpment prjects. Frward-lking infrmatin is based n a number f assumptins, which may prve t be incrrect. In additin t ther assumptins identified in this MD&A, assumptins have been made regarding, amng ther things, the Cmpany's transitin t new prducts and releases; a cntinuing increase in the number f custmer relatinships; the length f the sales cycles; the cmpetitive envirnment; the ability t maintain r accurately frecast revenue frm the Cmpany's prducts r services; the ability f the Cmpany t identify, hire, train, mtivate and retain qualified persnnel; the ability f the Cmpany t develp, intrduce and implement new prducts as well as enhancements r imprvements fr existing prducts that respnd, in a timely fashin, t custmer/prduct requirements and rapid technlgical change; risks assciated with peratins; the impact f any changes in the laws and regulatins in the jurisdictins in which the Cmpany perates; and the effect f new accunting prnuncements r guidance. Althugh the Cmpany believes that the expectatins reflected in such frward-lking infrmatin are reasnable, undue reliance shuld nt be placed n frward-lking infrmatin because the Cmpany can give n assurance that such expectatins will prve t be crrect. The frward-lking infrmatin cntained herein is based n VersaPay s current expectatins, estimates and prjectins, and is subject t a number f significant risks and uncertainties that culd cause actual results t differ materially frm thse anticipated. Such risks and uncertainties include, amng thers, general business and ecnmic cnditins; the verall perfrmance f stck markets; actins f cmpetitrs and partners; the regulatry envirnment; the crprate gvernance envirnment and regulatry reprting requirements fr VersaPay s clients; prduct capability and acceptance; the Cmpany s ability t generate sufficient cash flw frm peratins t meet its current and future bligatins; and the Cmpany s ability t access external surces f financing, if required. A mre detailed assessment f the risks that culd cause actual results t materially differ frm current expectatins is cntained in the Risk Factrs sectin f this MD&A. The freging list is nt exhaustive and ther risks are detailed frm time t time in ther cntinuus disclsure filings f the Cmpany. Shuld ne r mre f these risks r uncertainties materialize, r shuld assumptins underlying the frward-lking infrmatin prve incrrect, actual results may vary materially frm thse described herein as anticipated, believed, estimated r expected. The Cmpany uses future-riented financial infrmatin fr budgeting and planning purpses and the infrmatin may nt be apprpriate fr ther purpses. OVERVIEW VersaPay is a payment services cmpany that enables businesses t accept and prcess debit cards and mst majr credit cards. VersaPay prvides businesses with access t the Canadian netwrks that prcess credit and debit card payments, the acquisitin and installatin f payment prcessing technlgy and training and supprt fr the card payment infrastructure. Payment prcessing fr VersaPay s merchant custmers is prvided by VersaPay s payments partners, Chase Paymentech and PsiGate. The Cmpany als develps technlgy t enable electrnic invice presentment and funds transfer services. VersaPay earns revenues frm transactin and prcessing service fees, prduct sales and ther revenues, VersaCard/EFT and EMT fees. Transactin and prcessing service fees, which are the largest categry f revenues earned, are fees earned in cnnectin with the prcessing f a credit r debit based transactin thrugh a merchant's pint f sale device r ecmmerce applicatin. Prduct sales and ther revenues earned are related t the sale, lease r rental f pint f sale 2

3 devices. VersaCard/EFT fees are earned thrugh administrative fees, fees assciated with merchants funding their VersaCards, and fees resulting frm the cmpletin f a VersaCard/EFT transactin. EMT fees are related t revenues earned frm custmers sending invices and cmpleting electrnic funds transfer transactins using the Cmpany s nline invicing and payments system. Key Aspects f Overall Perfrmance in the year ended December 31, 2011 Fr the year ended December 31, 2011, revenues were $15.1 millin, an increase f $2.5 millin (19%) frm the year ended December 31, Recurring revenues, which are defined as transactin prcessing revenues and VersaCard/EFT and EMT fees, were $14.9 millin fr the year, an increase f $2.7 millin r 22% ver Fr the year ended December 31, 2011, ttal expenses nt related t cst f prducts and services were $4.0 millin, a decrease f $1.2 millin (23%) cmpared t The decrease is primarily a reflectin f the prir year incurring higher csts as management fcused n expanding its gegraphic presence int the Trnt market and building the infrastructure required t be a publicly traded cmpany. The decrease als reflects the fact that in the first quarter f 2010, the Cmpany incurred a nn-cash listing expense f $.4 millin related t its reverse take ver f JG Capital Crp. Adjusted EBITDA (see definitin belw) fr the year was $(.4) millin, cmpared t $(1.4) millin fr the year ended December Net lss frm cntinuing peratins was $ (.9) millin fr the year ended December 31, 2011 cmpared t a net lss f ($2.4) millin fr the year ended December 31, The fllwing were key aspects f the Cmpany's verall perfrmance in 2011: Strng rganic sales grwth: The Cmpany cntinues t sign up merchants which led t an increase in 29% grss credit and debit card prcessing dllars cmpared t the year ended December 31, The Cmpany's merchant clients prcessed $924 millin f credit and debit card transactins 1 in 2011 versus $717 millin in On-ging cntrl f perating cst: Cmpany management cntinued with its cmmitment t ensure perating csts are in line with the Cmpany s strategy fr grwth and develpment. Management cntinues t explre ways t increase peratinal efficiencies by reviewing all expenses and emplying technlgy t imprve business prcesses. Cntinued investment in electrnic invice presentment and payment technlgy: the Cmpany cntinued t invest in its nline payments prduct during The prduct has been designed t enable businesses and individuals t mre efficiently exchange invices and payments relative t traditinal ptins such as paper invices and cheques. The Cmpany began charging fees t use the prduct in the furth quarter f Develping strategic partnerships: the Cmpany cntinues t develp partnerships with rganizatins with cmplementary prducts and services in rder t leverage its grwth pprtunities. SELECTED CONSOLIDATED FINANCIAL INFORMATION The fllwing tables set ut selected financial infrmatin fr VersaPay fr the year ended December 31, 2011 and 2010 n a cnslidated basis. Financial statements fr publicly traded cmpanies in Canada are nw required t reprt under IFRS. The Cmpany s cnslidated financial statements fr the year ended December 31, 2011 have been prepared under these standards. In additin, the cmparative 2010 financial statements have been restated frm Canadian GAAP t IFRS. Ntes: 1 Ttal vlume prcessed represents the ttal dllar vlume f credit and debit card transactins prcessed by VersaPay's merchant custmers. 3

4 Summary f Results Fr the Year ended December 31, Change $ % Ttal Revenue $15,135,138 $12,668,592 2,466,546 19% Grss Prfit 3,064,432 2,824, ,537 8% Adjusted EBITDA (1) (406,825) (1,405,988) 999,163 nmf Lss frm cntinuing peratins (923,423) (2,387,879) 1,464,456 nmf per share diluted (0.07) (0.19) 0.11 nmf Margins Grss Prfit 20% 22% -2% -9% Adjusted EBITDA (1) nmf nmf nmf nmf Net Earnings nmf nmf nmf nmf nmf = nt meaningful (1) Adjusted Earnings befre interest, taxes, depreciatin and amrtizatin ( Adjusted EBITDA ) is a nn-gaap financial measure which des nt have any standardized meaning prescribed by IFRS and is therefre unlikely t be cmparable t similar measures presented by ther issuers. Adjusted EBITDA prvides useful infrmatin t users as it reflects the net earnings prir t the effect f nn-perating expenses such as interest, tax, depreciatin and amrtizatin, share based payments and listing expenses. Management uses Adjusted EBITDA in measuring the financial perfrmance f the Cmpany as this measure reflects results that are cntrllable by management in day-t-day peratins. Management mnitrs Adjusted EBITDA against budget and past results n a regular basis. The fllwing is a recnciliatin f Adjusted EBITDA t net earnings: Year ended December Adjusted EBITDA (1) ($406,825) ($1,405,988) Share based payments (193,612) (448,481) Listing expense - (396,000) Interest expense (150,385) 4,588 Amrtizatin (172,601) (141,998) Lss frm cntinuing peratins ($923,423) ($2,387,879) Year Ended December 31, 2011 and 2010 Transactin Prcessing Fees Transactin prcessing fees fr the year ended December 31, 2011 were $14.7 millin, an increase f $2.7 millin (22%) ver This increase is due t sales and marketing initiatives, which drve grwth in new merchant accunts and higher transactin vlumes. Prduct Sales and Other Revenues A significant prtin f VersaPay s prduct sales are related t the sale f pint-f-sale devices that merchants used t prcess credit and debit payments. Revenues frm prduct sales and ther fr the year ended December 31, 2011 were $233 thusand, a decrease f $257 thusand (52%) frm the year ended December 31, This decrease is the result f barding fewer merchants in the year that required terminal hardware fr payment prcessing and is cnsistent with the trend f rganizatins increasingly accepting payments thrugh integrated nline systems. 4

5 VersaCard/EFT and EMT Fees Revenues frm VersaCard/EFT and EMT fees fr the year ended December 31, 2011 increased t $235 thusand frm $201 thusand in 2010, an increase f $33 thusand r 17%. The increase reflects the intrductin f the Cmpany's electrnic invice presentment and payment prducts. Cst f Services Cst f services is cmpsed f fees that VersaPay pays t its partners t prvide prcessing services t its merchant clients. Cst f services fr the year ended December 31, 2011 increased t $10.4 millin frm $8.3 millin in 2010, an increase f $2.1 millin r 26%. These csts vary with the dllar vlume f transactins that are cmpleted by VersaPay's merchant custmers. The rise in cst f services in 2011 ver 2010 is cnsistent with the higher transactin vlumes in Cst f services were als relatively lwer in 2010 because Visa had a preferential interchange rate t encurage merchants t cnvert t "chip and PIN" technlgy. The Visa prgram did nt run in 2011, and as a result, grss margins were lwer cmpared t Cst f Prducts Sld Cst f prducts sld cnsists f the cst f pint f sale terminals and related prducts, cmmissins paid t emplyees, third party sales rganizatins and the Cmpany s partners. Cst f prducts sld fr the year ended December 31, 2011 were apprximately the same as the year ended December 31, 2010, with nly a slight increase f $15 thusand (1%). The decrease in cst f prducts sld due t lwer terminal sales in 2011 was essentially ffset by the increase in csts due t a larger share f the Cmpany's sales generated by independent sales partners that require the n-ging payment f cmmissins. VersaCard/EFT and EMT Csts VersaCard/EFT and EMT csts cnsist f fees paid t credit card assciatins such as Visa and MasterCard and bank fees directly related t the VersaCard/EFT and EMT prduct. Fr the year ended December 31, 2011, VersaCard/EFT and EMT csts increased t $134 thusand frm $76 thusand, an increase f $58 thusand frm the same perid in The increase reflects the higher sales vlumes frm these prduct lines. Rent and Occupancy Rent and ccupancy csts fr the year ended December 31, 2011 was $291 thusand versus $282 thusand in prir year. Rent and ccupancy expenditures primarily cnsisted f rentals f ffices in Trnt, Vancuver and Mntreal and have remained relatively cnsistent. General and Administrative Expenditures General and administrative expenditures fr the year ended December 31, 2011, were $378 thusand an increase f $25 thusand (7%) frm the prir year. General and administrative expenditures cnsist f all expenses, ther than cmpensatin, that relate t the administrative and infrmatin technlgy supprt fr ur peratins. The increase reflects higher administrative csts t supprt the Cmpany's grwth and was partially ffset by cst cntrl initiatives put in place during the year. Listing Expense Listing expense recrded in the year ended December 31, 2010 result frm the Cmpany s January 2010 amalgamatin with JG Capital Crp. The listing expense was recrded based n the estimated fair value f JG Capital Crp. s cmmn shares at the date f the amalgamatin. Marketing and Prmtin Expenditures Marketing and prmtin expenditures fr the year ended December 31, 2011 were $152 thusand, a decrease f $33 thusand (18%). The variance in marketing and prmtin expenditures reflects the timing f varius prmtinal campaigns. 5

6 Cnsulting Fees Cnsulting fees fr the year ended December 31, 2011 were $271 thusand versus $202 thusand fr the same perid last year, representing an increase f $70 thusand (35%). The higher cnsulting fees primarily reflect a greater number f cnsultants invlved in building ur EMT prduct. Cnsulting fees are cmpsed f fees paid t utside service prviders. Cmpensatin and Benefits Cmpensatin and benefits fr the year ended December 31, 2011 were $1.7 millin; $371 thusand (18%) lwer than the same perid f Cmpensatin and benefits primarily cnsisted f wages and benefits paid t senir management, sales, IT, peratins and administrative staff. The Cmpany had a call center in 2010, which did nt exist in The decrease in salaries and benefits frm 2010 resulted frm decreased headcunt in the Cmpany s sales, IT and administrative departments. Share Based Payments Share based payments fr the year ended December 31, 2011 were $194 thusand, a decrease f $255 thusand frm the same perid in Share based payments are calculated differently under IFRS than Canadian GAAP. Accunting fr share based payments under IFRS heavily weighs the expense in the beginning f the vesting perid. This change in accunting standards resulted in increased share based payments expense in 2010 under IFRS standards and in turn lwer current year expense. In additin, in the first quarter f 2010, there was a charge t share based payments t reflect incremental ptin value assciated with VersaPay becming a public cmpany. The amalgamatin that was cmpleted in the first quarter f 2010 was deemed t have been a mdificatin f all f the Cmpany's utstanding ptins at the time f the amalgamatin. As a result, sme f the increase in value that was accrded t ptin hlders due t the increased liquidity assciated with being ptins in a public, rather than a private, cmpany was expensed in the first quarter f Prfessinal Fees Prfessinal fees primarily cnsisted f fees paid t utside accunting and legal advisrs. Prfessinal fees fr the year ended December 31, 2011 were $260 thusand, a decrease f $377 thusand (59%) frm the same perid f This decrease is mainly due t 2010 having higher than nrmal legal fees related t the departure f a senir executive and the Cmpany s amalgamatin with JG Capital. Telecm and Wireless Cnnectin Fees Telecm and wireless cnnectin fees fr the year ended December 31, 2011 were $289 thusand, a decrease f $92 thusand r 24%. The year ver year decrease is a result f a lwer headcunt, the implementatin f new, less expensive technlgy and reduced discretinary csts. Other Expenditures Other expenditures include amrtizatin, bank interest and travel. Other expenditures fr the year ended December 31, 2011 were $443 thusand, an increase f $194 thusand. The increases are primarily due t the interest expense related t the Prmissry Nte, which did nt exist in the prir perid. Additinally, amrtizatin f the EMT intangible asset nly cmmenced in Q3 2010, and therefre was lwer in the prir year. Liquidity Cash ttalled $559 thusand as at December 31, Based n VersaPay s current business plan, management believes that it has sufficient wrking capital. Hwever, if the Cmpany becmes subject t an unfreseen reductin in cash flw relative t its business plan r if management identifies additinal prjects that it believes will create value fr sharehlders, the Cmpany may need t raise additinal wrking capital thrugh the issuance f equity r debt. There can be n assurance that the Cmpany will be able t raise these additinal funds, in which case VersaPay may nt be able t cntinue t develp its business r may be required t mdify its business plans. perating activities used cash f $382 thusand in the year ended December 31, 2011 cmpared t using $2.4 millin f cash in The decrease f cash used in perating activities was driven by an increase in earnings 6

7 and decreased investment in wrking capital. VersaPay s net lss fr the year ended December 31, 2011 was $923 thusand cmpared t a lss f $2.4 millin fr the same perid in Wrking capital increased cash by $133 thusand fr the year ended December 31, This figure cmpares t use f wrking capital f $992 thusand fr the same perid in VersaPay s timing f settlement f accunts payables and receivables largely drve the decreased investment in wrking capital. financing activities used cash by $42 thusand fr the year ended December 31, 2011, versus an increase in cash frm financing activities f $3.5 millin in the year ended December 31, This difference reflects the funds raised in the IPO in the first quarter f 2010 and prmissry ntes issued in the furth quarter f investing activities used cash f $138 thusand in the year ended December 31, 2011 as cmpared t $172 thusand used fr the same perid in This decrease is due t less investment in capital equipment and ceasing t capitalize the develpment f the VersaPay EMT system. Capital Resurces Capital Leases The Cmpany had five capital leases utstanding as at December 31, Fur leases have terms f 36 mnths, and the ther has a term 80 mnths. Internal interest is calculated at 6% and the mnthly blended payments ttal $5,983. Cmmitments and Cntractual Obligatins The fllwing table lists cntractual bligatins as at December 31, 2011, December 31, 2010 and January 1, VersaPay expects t fund these expenditures ut f wrking capital. Payments due as at December 31, 2011 Cntractual Obligatins Ttal Less than 1 year 1-3 years 4-5 years After 5 years $ $ $ $ $ Accunts payable and accrued liabilities 535, , Funds due t merchants 443, , Prmissry ntes 1,296,000 99, , ,000 - Obligatins under finance lease 108,708 57,580 49,833 1,295 - Payments due as at December 31, 2010 Cntractual Obligatins Ttal Less than 1 year 1-3 years 4-5 years After 5 years $ $ $ $ $ Accunts payable and accrued liabilities 440, , Funds due t merchants 474, , Prmissry ntes 1,395,000 99, ,000 1,098,000 - Obligatins under finance lease 153,756 63,127 73,782 15,552 1,295 Payments due as at January 1, 2010 Cntractual Obligatins Ttal Less than 1 year 1-3 years 4-5 years After 5 years $ $ $ $ $ Accunts payable and accrued liabilities 1,259,384 1,259, Funds due t merchants 365, , Lan Payable 225, , Obligatins under finance lease 134,365 28,194 73,775 31,101 1,295 7

8 Off-Balance Sheet Arrangements As f December 31, 2011, VersaPay did nt have any ff-balance sheet arrangements. Equity Issued Subsequent t Year End On March 30, 2012 the Cmpany issued $2,070,000 in new equity. Net f brkerage and prfessinal fees, the equity raise resulted in a net prceeds f apprximately $1.8 millin. 186,300 brker warrants were issued as part f the financing. These warrants have an exercise price f $1.02 and expire n March 31, The prceeds frm the raise will be used t fund the Cmpany's cntinued grwth and fr general crprate purpses. Summary f the Last Eight Quarters in thusands, except per share infrmatin Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Ttal Revenues $2,636 $3,070 $3,583 $3,379 $3,309 $3,767 $4,316 $3,743 Incme (lss) befre discntinued peratins ($1,230) ($602) ($299) ($256) ($296) ($279) $14 ($363) Net incme (lss) per share-basic and fully diluted ($0.10) ($0.04) ($0.03) ($0.02) ($0.02) ($0.02) $0.00 ($0.03) Net Incme/lss ($1,226) ($628) ($249) ($256) ($296) ($279) $14 ($363) Net incme (lss) per share-basic and fully diluted ($0.10) ($0.04) ($0.03) ($0.02) ($0.02) ($0.02) $0.00 ($0.03) Ttal shares utstanding 12,740 12,873 12,829 12,740 12,943 13,009 13,009 13,009 The Cmpany s results ver the last eight quarters reflect its cntinued lng term grwth frm expanding its transactin prcessing business as well as the intrductin f its EMT electrnic invice presentment and payment service. The cmpany derives a significant prprtin f it revenues frm the travel industry, which is seasnally strnger in the secnd and third quarters. Furth Quarter Results Revenues in the furth quarter decreased $573 thusand frm the third quarter, but were higher than the furth quarter f 2010 by $364 thusand. This decrease in the furth quarter ver the prceeding third quarter is mainly a reflectin f the seasnality f the prtfli mix. The Cmpany's merchants in the travel industry, in particular, generally have lwer prcessing vlumes in the fall mnths cmpared t the summer perid. Cmpared t the furth quarter f 2010, revenues increased by $364 thusand and reflects the Cmpany cntinued trend f year ver year grwth. Grss prfit in the furth quarter decreased by $49 thusand frm the third quarter. Cmpared t the furth quarter f 2010, grss prfit increased by $26 thusand. Ttal expenses in the furth quarter increased by $185 thusand frm the third quarter and by $133 thusand frm the furth quarter f Net lss fr the furth quarter was $363 thusand cmpared t a net incme f $14 thusand fr the third quarter. Cmpared t the furth quarter in the prir year, net lss was $107 thusand higher. Sme f the key expenses variances that impacted net incme in the furth quarter included: Prfessinal fees mainly cnsist f fees paid fr the legal and accunting services. Prfessinal fees in the furth quarter are lwer than any ther quarter in It was $130 thusand lwer than the same perid 2010, due t the higher than nrmal csts in 2010 related t the IPO and amalgamatin with JG Capital. Cnsulting fees cntinued t increase since the first quarter f 2011 and was $85 thusand higher cmpared t the prir year. The increase stems frm the Cmpany engaging a great number f cnsultants t build its electrnic invice presentment and payments platfrm. Salaries and cmpensatin csts were $102 thusand higher than the prir year's quarter. This represents a 27% increase and is due t the greater number f emplyees needed t supprt the Cmpany's grwth. 8

9 Cmpared t the third quarter, expenses were $120 thusand higher due t the higher staffing levels in the quarter. Interest expenses were $33 thusand higher cmpared t the prir year. This is due t the fact that the prmissry nte was nly utstanding fr a part f last year's furth quarter but was utstanding fr in the entire furth quarter f OUTLOOK Operatins Despite the intense cmpetitin in the payment prcessing industry, VersaPay cntinues t build new custmer relatinships and generate revenue grwth. The Cmpany's current sales pipeline includes a number f pprtunities that management believes will result in cntinued grwth in custmers and revenues ver the next year. Recent Gvernment Regulatin On August 16, 2010, the federal gvernment's vluntary Cde f Cnduct fr the Credit and Debit Card Industry came int effect. The cde was created t address the cncerns f merchants regarding sme f the business practices f credit and debit card netwrks, issuers and acquirers. The specific plicies that are mst relevant t VersaPay include increased transparency and disclsure in merchant statements and guidelines related t ntifying merchants f fee changes. The Cmpany believes that it is in full cmpliance with the cde. Transactins with Related Parties The fllwing related party transactins were incurred: $ $ Senir management cmpensatin 630, ,097 Share based payments fr key emplyees 81,998 89,878 Prfessinal fees paid t directrs 13,970 38,923 Share based payments fr directrs 15, ,357 Fees paid t a cmpany in which an emplyee is a partner 335, ,257 Prfessinal fees paid t a law firm in which a directr is a partner 53, ,251 1,130,537 1,636,763 Changes in Accunting Plicies and Recently Issued Accunting Prnuncements: Fr the year ended December 31, In February 2008, The Canadian Accunting Standards Bard ("AsSB") cnfirmed that the use f Internatinal Financial Reprting Standards ( IFRS ) will be required in Canada fr publicly accuntable prfit-riented enterprises fr fiscal years beginning n r after January 1, The December 31, 2011 and cmparative December 31, 2010 cnslidated financial statements have been prepared under these standards. The fllwing details the impact that the changever frm Canadian GAAP t IFRS has had n the Cmpany s financial statements. Key Accunting Area Impact fr the Cmpany First Time Adptin Impact is pervasive t the financial statements Restatement f all accunts affected by IFRS cnversin Creatin f an pening balance sheet as at January 1, 2010 Impact f elective and mandatry exceptins t adptin Share Based Payments Different amrtizatin fr ptins that vest in installments Different measurement rules fr cash settled arrangements Use f frfeiture estimates Expenses related t shares issued in a reverse takever transactin Revenue Sme revenue recgnitin differences fr up-frnt fees 9

10 Financial instruments risk, expsure and management: The Cmpany has expsure t the fllwing risks frm its use f financial instruments: credit risk, market risk, and liquidity risk. (a) Credit Risk The nly financial instruments that ptentially subject the Cmpany t cncentratins f credit risk are its accunts receivable. Management is f the pinin that any risk f accunting lss n accunts receivable is significantly reduced due t the financial strength f the Cmpany's majr custmers. All f the cash and funds held fr merchants are held with Canadian chartered banks. As at December 31, 2011, three [December 31, three, January 1, tw] custmers represent 85% [December 31, %, January 1, %] f the accunts receivable balance. Fr the year ended December 31, 2011, three [fr the year ended December 31, 2010, three] custmers represent 98% [fr the year ended December 31, 2010, 98%] f ttal revenue. The Cmpany has gd credit histry with these custmers and the amunts due frm them are generally received as expected. Prvisins fr dubtful accunts are made n an accunt by accunt basis. The maximum expsure t credit risk in terms f accunts receivable as at December 31, 2011 and December 31, 2010 was: December 31, 2011 December 31, 2010 January 1, 2010 $ $ $ 0-30 days 382, , , days - 4,345 13, days - 4,178 7,894 Greater than 90 days 34,404 35,133 11,300 Ttal accunts receivable 417, , ,675 (b) Market Risk: Market risk is the risk that changes in market prices, such as freign exchange risks and interest rates, will affect the fair value f future cash flws f financial instruments. (c) Liquidity risk (i) Freign exchange risk The Cmpany is expsed t minimal freign exchange risk as the Cmpany had nly a nminal balance f net assets denminated in US dllars as at December 31, 2011, December 31, 2010 and January 1, (ii) Interest rate risk The Cmpany is expsed t minimal interest rate cash flw risk as the interest rate n interest-bearing prmissry ntes is fixed. Liquidity risk is the risk that the Cmpany will nt be able t meet its financial bligatins as they fall due. The Cmpany's apprach t managing liquidity risk is t ensure that it will have sufficient wrking capital and cash flw generated frm peratins t fund the peratins and settle debt and liabilities when due. All f the Cmpany's financial liabilities, ther than the prmissry ntes, have cntractual maturities f less than 45 days. 10

11 RISK FACTORS Management defines risk as the evaluatin f prbability that an event might happen in the future that culd negatively affect the financial cnditin and/r results f peratins f the Cmpany. The fllwing sectin describes specific and general risks that culd affect the Cmpany. The fllwing descriptins f risk d nt include all pssible risks as there may be ther risks f which management is currently unaware. Ging Cncern The Cmpany's ability t generate sufficient cash flws t maintain nrmal peratins, if unsuccessful, will result in it nt being able t cntinue as a ging cncern. The Cmpany has incurred lsses frm cntinuing peratins since inceptin. Fr the year ended December 31, 2011, the Cmpany had a lss frm cntinuing peratins f $923,423 (year ended December 31, 2010, lss f $2,387,879). As at December 31, 2011, the Cmpany had accumulated a deficit f $9,309,656 (December 31, $8,386,233). Accrdingly, there is substantial dubt that the Cmpany will be able t cntinue as a ging cncern. Management has been able, thus far, t finance peratins thrugh equity and debt financings and will cntinue, as apprpriate, t seek financing frm these and ther surces; hwever, there are n assurances that any such financings can be btained n favrable terms, if at all. In view f these cnditins, the ability f the Cmpany t cntinue as a ging cncern is dependent upn its ability t btain financing, generate sufficient cash flws and, ultimately, achieve prfitable peratins. The utcme f these matters cannt be predicted at this time. Reliance n Service Prviders VersaPay relies n agreements with ther payment prcessing rganizatins t enable it t prvide credit and debit card authrizatin, data capture, settlement and merchant accunting services and access t varius reprting tls t the merchants it serves. VersaPay relies primarily n Chase Paymentech and PsiGate fr its frnt-end and back-end prcessing needs. While VersaPay is reliant n Chase Paymentech t prvide key peratins that permit VersaPay t cnduct its business, Chase Paymentech is, in turn, reliant n its relatinship with a Canadian bank and its agreements with the credit and debit card assciatins t be eligible t prvide its credit and debit card payment prcessing services. If Chase Paymentech was t terminate its relatinship with VersaPay (either by terminating its agreement with VersaPay, refusing t renew its agreement with VersaPay, r ceasing t prvide payment prcessing services in Canada), r Chase Paymentech s relatinship with its current bank spnsr r the credit r debit card assciatins was t end such that Chase Paymentech culd n lnger ffer payment prcessing services, VersaPay wuld need t establish a relatinship with anther payment prcessr. In the event that VersaPay was nt able t reach an agreement with anther payment prcessr n at least as favrable terms as its agreement with Chase Paymentech r at all, there culd be a material adverse effect n VersaPay s business and peratins. Additinal Financing In rder t execute its business plan in an efficient and timely manner, VersaPay may require additinal debt r equity financing r a cmbinatin f bth t supprt nging peratins, undertake capital expenditures r undertake acquisitins. There can be n assurance that additinal financing will be available t VersaPay when needed r n terms acceptable t VersaPay. VersaPay s inability t raise financing t supprt nging peratins r fund capital expenditures r acquisitins culd limit VersaPay s grwth and may have a material adverse effect n VersaPay s business and peratins. Merchant Attritin Risk VersaPay experiences attritin in its merchant base in the rdinary curse f business resulting frm several factrs, including business clsures, merchant inslvency and lsses t cmpetitrs. Increased merchant attritin r the lss f a large merchant culd have a material adverse effect n VersaPay s financial cnditin and results f peratins. If VersaPay is unable t attract new merchant custmers t replace the nes it lses, there culd be a material adverse effect n the Cmpany s financial cnditin. Increases in Interchange Rates Visa and MasterCard peridically increase their respective interchange rates. Interchange rates are als knwn as the discunt rates that are charged fr transactins prcessed thrugh Visa and MasterCard. Althugh VersaPay histrically has reflected these increases in its pricing t merchants, there can be n assurance (i) that merchants will cntinue t assume the entire impact f future increases r (ii) that transactin prcessing vlumes will nt decrease and/r (iii) that merchant attritin will nt increase as a result f these interchange rate increases. If interchange rates increase t a pint 11

12 where it becmes unprfitable fr VersaPay t prvide Visa and MasterCard payment services, there wuld be materially adverse ecnmic cnsequences fr VersaPay. Cmpetitin The payment prcessing services industry is highly cmpetitive and VersaPay cmpetes with a substantial number f cmpanies that have greater financial resurces. VersaPay s primary cmpetitrs include ther independent prcessrs, as well as certain majr natinal and smaller reginal banks, financial institutins and independent sales rganizatins. There can be n assurance that VersaPay s cmpetitrs will nt ffer better value t VersaPay s merchant custmers r substantially increase the resurces devted t the develpment and marketing f prducts and services that cmpete with thse f VersaPay. In additin, there can be n assurance that new cmpetitrs will nt enter the varius markets in which VersaPay is active. In certain aspects f its business, VersaPay als cmpetes with a number f small and mediumsized cmpanies, which have certain cmpetitive advantages such as lwer verhead csts and specialized reginal strengths. If VersaPay s cmpetitrs are successful in ffering better pricing, service r prducts than VersaPay, this culd render VersaPay s prduct and services fferings less desirable t merchant custmers, resulting in the lss f merchant custmers r a reductin in the price it culd earn fr its fferings. Failures f VersaPay and Third Party Systems VersaPay depends n the efficient and uninterrupted peratin f its cmputer netwrk systems, sftware, data center and telecmmunicatins netwrks, as well as the systems f third parties, in particular the payment prcessing systems f Chase Paymentech and PsiGate. VersaPay s systems and peratins r thse f its third-party prviders culd be expsed t damage r interruptin frm, amng ther things, fire, natural disaster, pwer lss, telecmmunicatins failure, unauthrized entry and cmputer viruses. VersaPay s insurance may nt be adequate t cmpensate it fr all lsses r failures that may ccur. Defects in its systems r thse f third parties, errrs r delays in the prcessing f payment transactins, telecmmunicatins failures r ther difficulties culd result in: lss f revenues; lss f merchant relatinships; lss f merchant and cardhlder data; harm t its business r reputatin; expsure t fraud lsses r ther liabilities; negative publicity; additinal perating and develpment csts; and/r diversin f technical and ther resurces. Nn-Sufficient Funds Risk VersaPay's VersaCard/EFT, EMT and Electrnic Invice Presentment and Payment prducts and services rely n the use f third party inter-banking clearing systems. In Canada, VersaPay uses the Autmatic Clearing Settlement System (ACSS) which is perated by the Canadian Payments Assciatin (CPA). In the United States, VersaPay uses the Autmated Clearing Huse ("ACH") netwrk, which is gverned by the US Federal Reserve. The use f these systems carry an inherent risk f a custmer defaulting n a payment due t a nn-sufficient funds ("NSF") balance. This ccurs when a custmer attempts t transfer mre funds than they have available in their bank accunt. VersaPay has develped safeguards t try t avid NSF's by hlding custmers funds fr a reasnable perid f time t ensure transactins clear and by having detectin tls that immediately generate alerts t management whenever a NSF ccurs. In the event f a NSF, VersaPay has recurse t recver the funds frm bth the party sending the funds and the recipient receiving the funds. Hwever, in the event that bth the sender and recipient are unable r unwilling t reimburse VersaPay, VersaPay will incur a lss n the transactin and the lss culd be material. While VersaPay believes it has develped reliable safeguards, there can be n assurance that lsses frm NSF's d nt ccur. Lss f Sales Partners VersaPay relies upn referrals frm third parties, such as independent sales cnsultants and trade assciatins, t supplement its direct sales team. The lss f referrals frm these surces wuld result in less sales pprtunities being made available t VersaPay and ptentially a lss f revenues which culd have a material adverse effect n VersaPay s financial cnditin. 12

13 Changes in Cnsumer Spending A significant prtin f VersaPay s revenues is derived frm the fees related t the prcessing f cnsumer credit and debit card transactins. Any recessin r ecnmic event that affects spending, r an increase in the use f debit cards (which have lwer transactin fees) and crrespnding decrease in the use f credit cards, may have a material adverse effect n the business and financial cnditin f VersaPay. Operating Risk and Insurance VersaPay has implemented an insurance and risk management prgram t prtect its assets, peratins and emplyees. VersaPay has prgrams in place t address cmpliance with current safety and regulatry standards. VersaPay s peratins are subject t risks inherent in the payment prcessing industry, such as equipment defects, malfunctin, failures and natural disasters. These risks and hazards culd expse VersaPay t substantial liability fr persnal injury, lss f life and business interruptin. Reliance n Technlgy VersaPay is reliant n cntinuus imprvements in technlgy t meet merchant custmer demands in respect f perfrmance and cst, and t explre additinal business pprtunities. There can be n assurance that VersaPay will be successful in its effrts in this regard r that it will have the resurces available t meet this demand. While VersaPay anticipates that its research and develpment experience will allw it t explre additinal business pprtunities, there is n guarantee that thse business pprtunities will be realized. VersaPay has nt sught nr btained patent r ther similar prtectin in respect f any technlgy develped by VersaPay. VersaPay s cmmercial advantage will depend t a significant extent n the intellectual prperty and prprietary technlgy f VersaPay and the ability f VersaPay t prevent thers frm cpying thse prprietary technlgies. VersaPay relies n intellectual prperty rights and ther cntractual r prprietary rights, including (withut limitatin) cpyright, trade secrets, cnfidential prcedures, cntractual prvisins and licenses, t prtect its prprietary technlgy. VersaPay may have t engage in litigatin t prtect its intellectual prperty rights, r t determine the validity r scpe f the prprietary rights f thers. This type f litigatin can be expensive and time-cnsuming, regardless f whether r nt VersaPay is successful. In the future, VersaPay may seek patents r ther similar prtectins in respect f particular technlgies; hwever, there can be n assurance that any future patent applicatins will actually result in issued patents, r that, even if patents are issued, they will be f sufficient scpe r strength t prvide meaningful prtectin r any cmmercial advantage t VersaPay. Mrever, the prcess f seeking patent prtectin can be lng and expensive. In the meantime, cmpetitrs may develp technlgies that are similar r superir t the technlgy f VersaPay r design arund the patents wned by VersaPay, thereby adversely affecting VersaPay s cmpetitive advantage in ne r mre f its businesses. Despite VersaPay s effrts, its intellectual prperty rights may be invalidated, circumvented, challenged, infringed r required t be licensed t thers. There can be n assurance that any steps VersaPay may take t prtect its intellectual prperty rights and ther rights t thse prprietary technlgies that are central t VersaPay s peratins will prevent misapprpriatin r infringement f VersaPay s technlgy. Risk f Third Party Claims fr Infringement A third party may claim that the use f VersaPay s technlgy has infringed its rights r challenge the right f VersaPay t use its intellectual prperty. Any claim, whether r nt with merit, culd be time cnsuming t evaluate, result in cstly litigatin and have material adverse effects n the business, peratins and financial cnditin f VersaPay. Such a claim culd result in VersaPay having t enter int licensing arrangements that may require the payment f a license fee r ryalties t the wner f the intellectual prperty. Such ryalty r licensing arrangements, if required, may nt be available n terms acceptable t VersaPay. Cnflicts f Interest Certain f the directrs and fficers f VersaPay are als directrs and fficers f ther cmpanies, and cnflicts f interest may arise between their duties as fficers and directrs f VersaPay and as fficers and directrs f such ther cmpanies. Such cnflicts must be disclsed in accrdance with, and are subject t such ther prcedures and remedies as apply under the CBCA. Ptential Dilutin t VersaPay s Existing Sharehlders VersaPay may require additinal equity financing t be raised in the future and may issue equity securities r securities cnvertible int equity securities t d s. Any transactin invlving the issuance f equity securities r securities cnvertible int equity securities wuld result in a dilutin t present sharehlders f VersaPay. 13

14 Privacy Breach The Cmpany cannt assure that the use f applicatins designed fr data security and integrity will address changing technlgies r the security and privacy cncerns f existing and ptential custmers. Althugh the Cmpany requires that agreements with service prviders wh have access t merchant and cnsumer data include cnfidentiality bligatins that restrict these parties frm using r disclsing any cnsumer r merchant data except as necessary t perfrm their services under the applicable agreements, there can be n assurance that these cntractual measures will prevent the unauthrized disclsure f merchant r cnsumer data. If the Cmpany is unable t prtect the security and privacy f ur electrnic transactins and data, ur business vlume and prfitability will be materially adversely affected. A security r privacy breach culd: expse the Cmpany t additinal liability and t ptentially cstly litigatin; increase expenses relating t the reslutin f these breaches; deter custmers frm using ur services; and decrease market acceptance f electrnic cmmerce transactins. Fraud The Cmpany faces the risk f lss due t fraud and disputes between cnsumers and merchants, including the unauthrized use f banking infrmatin and identity theft, merchant fraud, disputes ver the quality f gds and services, breaches f system security, emplyee fraud and use f the system fr illegal r imprper purpses. While the Cmpany attempts t recver frm the merchant the amunt charged back and the amunt f the fines impsed, we may nt always be successful in ding s fr varius reasns, such as merchant inslvency. Merchant Fraud Merchant fraud with respect t Internet-based bankcard and EFT/EMT transactins culd cause us t incur significant lsses. The Cmpany significantly relies n the prcessing revenue derived frm bankcard and EFT/EMT transactins. If any merchant r custmer were t submit r prcess unauthrized r fraudulent bankcard r EFT/EMT transactins, depending n the dllar amunt, we culd incur significant lsses which culd have a material adverse effect n the Cmpany s business and results f peratins and liquidity. Despite systems designed t manage such risk, the Cmpany cannt guarantee that ur systems will prevent fraudulent transactins frm being submitted and prcessed r that the funds set aside t address such activity will be adequate t cver all ptential situatins that might ccur. The Cmpany des nt have insurance t prtect it frm these lsses. There is n assurance that any chargeback r prcessing reserve will be adequate t ffset against any unauthrized r fraudulent prcessing lsses that the Cmpany may incur. Accrdingly, shuld we experience such fraudulent activity and such lsses, ur results f peratins culd be immediately and materially adversely affected. Security Breaches, Service Interruptins by Cyber Terrrists r Fraudulent r Illegal Use f ur Services Because sme f the Cmpany s activities invlve the strage and transmissin f cnfidential persnal r prprietary infrmatin, such as credit card numbers and bank accunt numbers, and because the Cmpany is a link in the chain f e- Cmmerce, it is vulnerable t internal and external security breaches, service interruptins and third-party and emplyee fraud schemes that culd damage ur reputatin and expse the Cmpany us t a risk f lss r litigatin and mnetary damages. The Cmpany s payment services may be susceptible t credit card and ther payment fraud schemes, including unauthrized use f credit cards, debit cards r bank accunt infrmatin, identity theft r merchant fraud. Management expects that technically sphisticated criminals will cntinue t attempt t circumvent the Cmpany s anti-fraud systems. If such fraud schemes are successful r therwise cause merchants, custmers r partners t lse cnfidence in the Cmpany s services in particular, r in Internet systems generally, the Cmpany s business wuld be materially adversely affected. The Cmpany s business may als be susceptible t ptentially illegal r imprper uses. These uses may include: illegal nline gambling, fraudulent sales f gds r services, illicit sales f prescriptin medicatins r cntrlled substances, sftware and ther intellectual prperty piracy, mney laundering, bank fraud, prhibited sales f alchlic beverages and tbacc prducts and nline securities fraud. Despite measures we have taken t detect and lessen the risk f this kind f cnduct, the Cmpany cannt ensure that these measures will succeed. The Cmpany believes it is cmpliant with the Payment Card Industry s (PCI) Security Standard which incrprates Visa s Cardhlder Infrmatin Security Prgram (CISP) and MasterCard s Site Data Prtectin (SDP) standard. Hwever, there is 14

15 n guarantee that the Cmpany will maintain such cmpliance r that cmpliance will prevent illegal r imprper use f ur payment system. The Cmpany s security measures may nt prevent security breaches, service interruptins and fraud schemes and the failure t d s may disrupt the Cmpany s business, damage its reputatin and expse it t risk f lss r litigatin and pssible mnetary damages that wuld materially adversely affect the Cmpany s business, results f peratin and financial cnditin. OUTSTANDING SHARE DATA The Cmpany is authrized t issue an unlimited number f cmmn shares and an unlimited number f preferred shares. As at the date f this MD&A, there were 15,287,438 cmmn shares utstanding. Emplyees, directrs, fficers and cnsultants have been granted ptins t purchase cmmn shares under a stck ptin plan. As at the date f this MD&A, there were ptins utstanding t purchase 1,813,000 cmmn shares. The Cmpany als had 998,300 warrants utstanding as at the date f this MD&A. The warrants are held by investrs in the Cmpany, pre-amalgamatin investrs in JG Capital and brkers that acted fr the Cmpany t cmplete the fundraising in the past. 15