2009 2 quarter report - quorum...

2009 2nd Quarter Report



Our Mission

Changing the face of automotive retail through technology.

At Quorum, our mission is to be the very best at building and supporting the most advanced automotive

Dealership & Customer Relationship Management System, and technology infrastructure, in the automotive industry to enable dealerships to streamline their operations and better serve their customers.

Our Values Integrity

While our abilities are considerable, we will be realistic, honest and fair in our commitments, and above all, we will follow through.

Respect

Our customers and our people are our greatest resource; we encourage, listen to, and value their contributions.

Excellence

We set high standards, strive for continuous improvement in everything we do, and we exceed expectations.

Knowledge

Understanding our customers’ business processes, and the technology that supports them, is our focus.

Empowerment

We empower our people with the resources needed to promote innovation and fresh thinking.

Teamwork

Our success is the result of teamwork. We operate with the highest level of cooperation and trust, and will share objectives between departments.

Table of Contents President’s Message.................................................................................................................................................. ...1 Results of Operations................................................................................................................................................. . 3 Management’s Discussion and Analysis of Financial Condition and Results of Operations..................................... .4 Unaudited – Interim Consolidated Balance Sheets................................................................................................... .14 Unaudited – Interim Consolidated Statements of Operations, Comprehensive Income and Deficit..........................15 Unaudited – Interim Consolidated Statements of Cash Flows................................................................................... 16 Notes to Unaudited Interim Consolidated Financial Statements.................................................................................17 Corporate Information...................................................................................................................... Inside Back Cover


President’s Message

Quorum is both an Integrated Dealership Management System (IDMS) strategic partner with GM and a strategic partner with Microsoft. Quorum’s XSELLERATOR product is broadly promoted to our target dealerships throughout North America by these prominent industry partners.

With Chrysler’s and General Motor’s recent emergence from the bankruptcy process, the automotive industry has begun to stabilize and the resulting reorganized domestic manufacturing companies are focused on lean, profitable operations. Quorum’s XSELLERATOR solution is ideally suited for the industry at a time when dealerships are looking for strategic advantage, reduced costs and increased profitability. XSELLERATOR significantly improves dealerships’ processes and allows them to become customer centric organizations. In partnership with GM, we have built factory-to-dealership integration that is unparalleled, scalable to other OEMs, and drives real efficiencies for both dealerships and the OEM (GM). XSELLERATOR also provides immediate and direct cost reductions on an on-going basis from the traditional fees charged by the dominant market providers. The impact to Quorum of GM’s U.S. bankruptcy proceedings and dealership franchise reductions was fairly minimal. Quorum did not experience any interruption in its GM payments during the bankruptcy proceedings. According to published accounts, GM notified 42% of their dealerships across the U.S. and Canada that their franchises would not be renewed at the end of 2010. Approximately 23% of Quorum’s GM dealership customers received such notifications. Many of these dealerships have told us that they are transforming their business to provide other automotive sales and services and will remain with Quorum to serve their DMS needs. Quorum predicts that approximately 10% of its customer base will cease operations entirely as a result of the franchise changes, and those closures will be spread over the next 18 months. Quorum also expects new sales to completely offset those closures during this timeframe. The automotive industry remains a challenging environment. However, despite all of the recent turmoil, Quorum continues to produce positive results:

- Four consecutive quarters of profitable results (see table below). - Positive Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for Q2 FY2009

of $250K and FY2009 year-to-date of $619K. - Although Net New and Integration revenue declined for the quarter, our recurring support revenues

remained consistent at $1,460K for both Q1 and Q2 FY2009. - #1 GM IDMS Supplier in North America measured by number of GM IDMS dealerships. - Only Dealer Service Provider (DSP) to have developed and deployed all available GM integration

points in both Canada and the U.S.

Focus on Results Quorum delivers its dealership management system (DMS), XSELLERATOR™, and related services to General Motors (GM), Chrysler and Hyundai Dealerships throughout North America.


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- Strong partnership with Newfoundland government allowed Quorum to strengthen its balance sheet with a $0.5 million, 0%, non-secured government loan with the Atlantic Canada Opportunities Agency (ACOA).

Net Income & EBITDA Table ($000’s) Q2 FY 2009 Q1 FY2009 Q4 FY2008 Q3 FY2008 EBITDA 250 369 (31) 263 Net income (loss) 3 189 76 72 Note - EBITDA is calculated based on eResearch’s March 12, 2009 Analyst Report which is different than the EBITDA calculation in past Quorum quarterly reports. Access the report at http://www.quorumdms.com/pdfs/investors/Quorum2009March12-IR.pdf Although our Q2 FY2009 results were not as strong as Q1 FY 2009, the Company still produced a positive net income even while our largest customer, GM, was going though bankruptcy proceedings in the U.S. Quorum management believes that we will produce improved results in Q3 and Q4 FY2009 as the industry continues to rebound. Highlights of our Q2 FY2009 results (in 000’s) are as follows:

• Generated a positive EBITDA (earnings before interest, taxes and amortization) in Q2 FY2009 of $250K versus a positive EBITDA in Q2 FY2008 of $60K.

• Generated a positive net income in Q2 FY2009 of $3K versus a net loss in Q2 FY2008 of $252K. • Decreased revenue by 7% from $3,790K year to date Q2 FY2008 to $3,533K year to date Q2

FY2009. • Generated positive cash flow from operating activities in Q2 FY2009 of $53K versus a negative cash

flow in Q2 FY2008 of $264K. • Cash flow from investing activities in Q2 FY2009 consumed $236K versus a consumption of $351K

in Q2 FY2008. Conclusion Quorum produced solid results during one of the most challenging quarters for both the automotive industry, and specifically General Motors. Now that the major restructuring is complete for GM and Chrysler, we look forward to getting “back to business” and growing the Company profitably.


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Results of Operations (dollar figures in ‘000)

Six Months

Ended June 30,

2009

Six Months Ended

June 30, 2008

Q2 Ended June 30,

2009

Q2 Ended June 30,

2008

Q1 Ended March 31,

2009

Q1 Ended March 31,

2008

Gross revenue

$ 3,533

$ 3,790

$ 1,636

$ 2,117

$ 1,896

$ 1,673

Gross profit 2,010 1,352 903 847 1,107 505 Expenses 2,119 2,146 1,180 1,093 772 945 Operating income (loss) before

interest, taxes, depreciation and amortization (EBITDA)

619

(271)

250

60

369

(331) Net income (loss) 191 (774) 3 (252) 189 (522) Cash flow from operating activities 342 (490) 53 (264) 289 (226) Quarterly cash expenditures (cash

payments for operating and investing activities)

$ 4,032

$ 4,757

$ 2,072

$ 2,422

$ 1,960

$ 2,336 KEY MANAGEMENT METRICS

XSELLERATOR installations – in the period

3 12 1 10 2 2

XSELLERATOR total rooftops 224 213 224 213 225 203


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Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Corporation’s interim consolidated results of operations and financial condition. This “Management’s Discussion and Analysis” should be read in conjunction with the unaudited interim consolidated financial statements for the six months ended June 30, 2009 and the audited annual consolidated financial statements of the Corporation for the year ended December 31, 2008 and the notes thereto. Comparisons made to prior periods are to the corresponding period in the preceding year unless otherwise indicated. Background and Description of Business Quorum Information Technologies Inc. (“Quorum” or the “Corporation”) is an information technology company that focuses on the automotive retail business, and is incorporated under the Business Corporations Act of Alberta. Quorum develops, markets, implements and supports its software product, XSELLERATOR™, a Dealership Management System (DMS) for the automotive market. The product is delivered to General Motors (GM), Chrysler and Hyundai dealerships throughout North America. The Corporation is an Integrated Dealership Management System (IDMS) strategic partner with GM and a strategic partner with Microsoft. Quorum has a large opportunity with a market of approximately 4,000 dealerships; to capitalize on this market Quorum has invested significant funds and resources. Q2 FY2009 Overview There are significant costs associated with operating throughout North America as a public company and maintaining the GM IDMS contract, other manufacturer relationships and a strong Microsoft strategic relationship. The key to covering Quorum’s total fixed costs is having a critical mass of installed dealerships that supply a recurring revenue stream. Despite a sharp deterioration in market conditions in the fourth quarter of 2008 and into 2009, resulting in only a single new dealership being installed in Q2 FY2009, we have continued to grow our gross profit and net income. Gross profit has increased to $0.9 million in Q2 FY2009 from $0.8 million in Q2 FY2008, a 7% increase from Q2 FY2008. Net income increased to $2,679 in Q2 FY2009 from a net loss of $251,785 in Q2 FY2008. In 2008, we became very diligent in working towards reducing operating costs and improving the efficiency and effectiveness of our business processes. Staffing was reduced to align our cost structure with activity levels. We set a target to reduce our cost structure to a level where recurring support and integration services revenues will cover over 95% of fixed costs. By Q2 FY2009, we have been able to financially see the returns on the execution of these process improvements. Operating salaries and general and administrative expenses have been reduced by 28%, and 8%, respectively from Q2 FY2008. By operating under a lower cost structure, with more efficient processes, the Company will also be more profitable as sales increase in the future.

The effective management of cash collections and accounts payable over the quarter has enabled Quorum to achieve a positive cash flow from operations of $52,703 for Q2 FY2009 and $341,574 for the six months ended June 30, 2009. Working capital has also improved to $1,216,074 at June 30, 2009 from $994,870 at


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December 31, 2008. These results are direct indicators that, even with the current uncertainties of the automotive industry, Quorum is becoming a self-sustaining, profitable business.

The state of the current automotive industry has forced Quorum to make operational decisions that will enable it to continue to succeed under these difficult circumstances. New sales were minimal in the second quarter due to uncertainties among dealerships with regard to the future of General Motors and Chrysler. However, our belief is that there is a significant demand backlog that will emerge as the industry stabilizes and dealerships look to reduce their own costs and improved their competitiveness. Q2 FY2009 Financial Highlights

• 7% increase in gross profit from Q2 FY2008. • 21% increase in on-going annuity XSELLERATOR software support and dealer services revenue

over Q2 FY2008. • Positive EBITDA (earnings before interest, taxes and amortization) in Q2 FY2009 of $249,866

versus a positive EBITDA in Q2 FY2008 of $59,991. • Net income for Q2 FY2009 of $2,679 compared to a net loss of $251,785 in Q2 FY2008. • Positive quarterly cash flow from operating activities of $52,703 in Q2 FY2009 versus negative

$264,156 in Q2 FY2008. • 14% decrease in quarterly cash expenditures from Q2 FY2008. • 70% decrease in cash consumption (net of financing activities) from Q2 FY2008.

Results of Operations (dollar figures in ‘000)

Six Months

Ended June 30,

2009

Six Months Ended

June 30, 2008

Q2 Ended June 30,

2009

Q2 Ended June 30,

2008

Q1 Ended March 31,

2009

Q1 Ended March 31,

2008

Gross revenue $ 3,533 $ 3,790 $ 1,636 $ 2,117 $ 1,896 $ 1,673 Gross profit 2,010 1,352 903 847 1,107 505 Expenses 2,119 2,146 1,180 1,093 772 945 Operating income (loss) before interest,

taxes, depreciation and amortization (EBITDA)

619

(271)

250

60

369

(331) Net income (loss) 191 (774) 3 (252) 189 (522) Cash flow from operating activities 342 (490) 53 (264) 289 (226) Quarterly cash expenditures (cash

payments for operating and investing activities)

$ 4,032

$ 4,757

$ 2,072

$ 2,422

$ 1,960

$ 2,336 KEY MANAGEMENT METRICS

XSELLERATOR installations – in the period 3 12 1 10 2 2 XSELLERATOR total rooftops 224 213 224 213 225 203 Income Summary The net profit from operations (EBITDA) for Q2 FY2009 was $249,866 or $0.006 per share compared to $59,990 or $0.001 per share for Q2 FY2008. Net income for Q2 FY2009 was $2,679 or $0.0001 per share, compared to a net loss of $(251,785) or $(0.006) for Q2 FY2008.


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Detailed Discussion on Operating Results for the Periods Ended June 30, 2009 and June 30, 2008 Revenue and Gross Profit Analysis Six Months

Ended June 30,

2009

Six Months Ended

June 30, 2008

Q2 Ended June 30,

2009

Q2 Ended June 30,

2008

Q1 Ended March 31,

2009

Q1 Ended March 31,

2008

Gross revenue $ 3,532,715 $ 3,789,854 $ 1,636,363 $ 2,116,971 $ 1,896,352 $ 1,672,883 Cost of products and services sold 1,522,497 2,437,780 733,227 1,270,157 789,270 1,167,624 Gross profit $ 2,010,218 $ 1,352,074 $ 903,136 $ 846,814 $ 1,107,082 $ 505,259 Gross profit % 57% 36% 55% 40% 58% 30% Support and other revenue $ 2,920,751 $ 2,430,363 $ 1,460,510 $ 1,208,915 $ 1,460,241 $ 1,266,387 Net new and migrations 416,029 972,264 131,759 684,345 284,270 287,919 Integration 195,935 387,227 44,094 223,711 151,841 118,577 Gross revenue $ 3,532,715 $ 3,789,854 $ 1,636,363 $ 2,116,971 $ 1,896,352 $ 1,672,883 Revenue For Q2 FY2009, revenues from operations were $1.64 million compared to $2.12 million for Q2 FY2008, a decrease of $0.48 million or 23%. While our recurring support and other revenue increased, reduced net new, integration and migrations revenue contributed to this decline. Quorum revenue results were as follows:

a) Recurring support and other revenue increased to $1.46 million in Q2 FY2009, compared to $1.21 million in Q2 FY2008, an increase of 21%.

b) Integration revenue for Q2 FY2009 was $0.04 million compared to $0.22 million in Q2 FY2008. Currently Quorum is completing three integration projects, and new integration projects are being initiated for Q3 and Q4 FY2009.

c) Migrations and net new revenue was $0.13 million in Q2 FY2009 compared to $0.68 million in Q2 FY2008. Most GM dealers that are migrating are also signing a GM IDMS contract.

Cost of Products and Services Sold and Gross Profit The Cost of Products and Services includes all direct costs related to implementations and support including all the implementation, migrations, dealer services and support staff. For Q2 FY2009, gross profit increased to $0.90 million or 55% compared to $0.85 million or 40% for Q2 FY2008. The gross profit increased in Q2 FY2009 due to an increase in recurring revenues, an overall reduction in staff and a strong emphasis on purchasing controls.


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Expenses Six Months

Ended June 30,

2009

Six Months Ended

June 30, 2008

Q2 Ended June 30,

2009

Q2 Ended June 30,

2008

Q1 Ended March 31,

2009

Q1 Ended March 31,

2008

Salaries & benefits

$ 635,313

$ 818,909

$ 271,897

$ 375,939

$ 363,416

$ 442,971

Employee stock option benefits 71,599 222,653 37,275 113,778 34,324 108,875

General & administrative 650,454 712,310 333,031 363,942 317,423 348,368

Sales & marketing 105,447 92,103 48,342 46,943 57,106 45,160

Total expenses $ 1,462,813 $ 1,845,975 $ 690,545 $ 900,602 $ 772,269 $ 945,374

Total expenses before interest, taxes, amortization and foreign exchange for Q2 FY2009 were $0.69 million or 42% of sales compared to $0.90 million or 43% of sales for Q2 FY2008. Salaries and benefits expenses for Q2 FY2009 were $271,897 compared to $375,939 in Q2 FY2008. This decrease is due to a reduction of staffing levels at the end of FY2008 to more effectively manage our operations under the current economic situation in the automotive industry. Employee stock option benefits expense for Q2 FY2009 was $37,275 compared to $113,778 in Q2 FY2008, a decrease of $76,503. On January 15, 2009, all staff stock options were cancelled and new options were issued at a price of $0.15 per option. This has reduced the expense to be recognized on these options for current and future periods. The employee stock option expense is a non-cash expense. General and administrative expenses for Q2 FY2009 were $333,031 compared to $363,942 for Q2 FY2008, a decrease of $30,911 or 9%. This decrease is due to the concentrated effort of management to control and reduce costs where feasible. Sales and marketing expenses for Q2 FY2009 were $48,342 or 3% of sales compared to $46,943 for Q2 FY2008 or 2% of sales. The increase is the result of sales consulting services provided during the period to maintain our sales strategy. The Corporation leverages significant benefit through IDMS-related press in key trade publications and through the GM corporate messaging systems. Capitalization & Amortization During Q2 FY2009, the Corporation continued to invest significantly in the further development of its proprietary software product, XSELLERATOR. XSELLERATOR is the ”next generation” of Dealership Management Systems (DMS) in the automotive market, and the most advanced, fully-integrated Windows-based product in the marketplace. Summary of software development costs capitalized during the quarter and related amortization for XSELLERATOR: Six Months

Ended June 30, 2009

Six Months Ended June 30,

2008

Q2 Ended June 30,

2009

Q2 Ended June 30,

2008

Total software development costs

capitalized $ 487,045 $ 653,727 $ 201,497 $ 328,767

Amortization of software development costs

$ 242,140 $ 106,800 $ 115,160 $ 63,720


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All research and development costs are expensed as incurred unless they satisfy the generally accepted accounting criteria for deferral and subsequent amortization. As noted above, the Corporation continues to conduct ongoing research and development towards the improvement of XSELLERATOR and has capitalized payroll costs of $162,085 and direct overheads of $39,412 for a total of $201,497 in Q2 FY2009 compared to $287,154 of capitalized payroll costs and direct overheads of $41,613 in Q2 FY2008 for a total of $328,767. The reduced capitalized amount is due to the reduction of staffing levels across the Corporation. XSELLERATOR is the leading-edge product in the automotive DMS space and the Corporation intends to maintain this lead through continued investment in the product. The Corporation has continued its development efforts as it prepares to roll out additional features and functionality and improved integration with the manufacturers. The outlook is to continue to operate at a reduced capitalized development cost level in FY2009, with a strict focus on development work that will improve customer satisfaction, reduce calls (and our cost of support) and on paid integration work through the GM IDMS contract and other manufacturer integration work. Amortization for Q2 FY2009 increased to $115,160 compared to $63,720 for Q2 FY2008. This increase is a result of including user licenses relating to migrations in the amortization calculation compared to just net new licenses in prior years. The Corporation’s 2002 through 2005 Scientific Research and Experimental Development (SR&ED) claims were accepted as filed. The resulting investment tax credits of $1,509,104 have been recorded as a reduction of capitalized software development costs. The 2006 SR&ED claim has been filed and is currently being reviewed by the Canada Revenue Agency. The 2007 SR&ED claim was filed as of June 30, 2009. Liquidity and Financial Resources June 30,

2009 December 31,

2008 Current Assets Cash $ 858,867 $ 706,803 Accounts receivable 1,225,333 1,559,288 Inventory 25,326 24,204 Prepaid expenses 99,412 88,959 2,208,938 2,379,254 Current Liabilities Accounts payable and accrued liabilities 724,602 1,108,477 Deferred revenue 176,169 191,976 Deferred government assistance 46,386 - Current portion of long-term debt 45,707 83,931 992,864 1,384,384 Net working capital $ 1,216,074 $ 994,870 Net working capital at June 30, 2009 was $1,216,074, with a current ratio of 2.22, compared to $994,870 at December 31, 2008, with a current ratio of 1.72, an increase of $221,204. On March 31, 2009, the Corporation completed an agreement with the Atlantic Canada Opportunities Agency (ACOA) to provide a $500,000 interest-free, unsecured loan to provide funding to develop version 4.7 of the XSELLERATOR system and to expand the office in St. John’s, Newfoundland. As of June 30, 2009, $384,000 has been received and $46,386 of the funding is recognized as deferred government assistance as it relates to funding for expenditures relating to future periods.


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Cash Flows from Operations The Corporation’s cash balance decreased by $213,066 in Q2 FY2009 compared to an increase of $624,506 in Q2 FY2008. Cash flows from operating activities were $52,703 in Q2 FY2009 compared to $(264,156) in Q2 FY2008. The Corporation has been diligent in cost management and collection of accounts, along with increased recurring revenues to significantly improve the management of cash. The emphasis on these areas has enabled the Corporation to obtain positive cash flow from operations for the first two quarters of FY2009. Cash flows relating to financing activities were $(29,020) in Q2 FY2009 compared to an inflow of $1,239,615 in Q2 FY2008. $29,020 of loan repayments were made in Q2 FY2009, pursuant to a software license agreement and a loan agreement, all entered into in early 2006. In Q2 FY2008, proceeds of $1,500,000, net of financing costs, were received from the issuance of a convertible debenture. The Corporation has a strong commitment to continually enhance and improve XSELLERATOR and invested $236,749 in product development in Q2 FY2009. Current Liabilities Accounts payable and accrued liabilities were $724,602 at June 30, 2009 compared to $1,108,477 at December 31, 2008. In January, 2006, the Corporation entered into a software license agreement with Cyclone Commerce, Inc. The remaining balance of $45,707 is payable in variable quarterly installments with the final payment in February, 2010. Under the GM IDMS contract, the Corporation’s support billings are billed in advance. As of June 30, 2009, there was $176,169 of support fees billed that relate to July, 2009. In FY2006, Quorum entered into six capital lease agreements for computer hardware. These debt obligations were been fully paid as of March 31, 2009. Long-Term Debt On March 31, 2009, the Corporation completed an agreement with the Atlantic Canada Opportunities Agency (ACOA) to provide a $500,000 interest-free, unsecured loan to provide funding to develop version 4.7 of the XSELLERATOR system and to expand the office in St. John’s, Newfoundland. On March 31, 2009, $384,000 was received. As of June 30, 2009, the loan is recognized as $205,103, with a fair value of $191,399 and accredited interest of $13,704. Share Capital There has been no change in the share capital of the Corporation since December 31, 2008. Note 9 of the June 30, 2009 unaudited consolidated financial statements of the Corporation provides further details on share capital. Material Contracts & Commitments On March 31, 2009, the Corporation completed an agreement with the Atlantic Canada Opportunities Agency (ACOA) to provide a $500,000 interest-free, unsecured loan. On March 31, 2009, $384,000 was received. This loan is to be repaid with equal installments over a five-year period with payments commencing in July 2010.


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Effective January 3, 2006 the Corporation was named an IDMS supplier on behalf of GM throughout North America. This contract required the Corporation to expand operations and capabilities to meet the requirements of an expanded North American customer base. During FY2006, the Corporation entered into a financing agreement for software licenses. The financial obligation will be fully repaid in February 2010. Notes 7 and 8 of the December 31, 2008 audited consolidated financial statements of the Corporation provide further details of these obligations. Off Balance Sheet Arrangements Other than the lease commitments noted in Note 14 of the 2008 audited financial statements, the Corporation has not entered into any off balance sheet arrangements. Net Income and Earnings per Share Q2 FY 2009

June 30 Q2 FY 2008

June 30

Net income (loss) $ 2,679 $ (251,785) Earnings (loss) per share - Basic $ 0.0001 $ (0.006) - Diluted $ 0.0001 $ (0.006) Weighted average number of common shares - Basic 39,298,438 39,298,438 - Diluted 39,298,438 39,298,438 Net income for Q2 FY2009 was $2,679 or $0.0001 per share, compared to a net loss of $(251,785) or $(0.006) for Q2 FY2008. Critical Accounting Policies The selection and application of accounting policies is an important process that has developed as the Corporation’s business activities have evolved and as accounting rules have changed. The Corporation prepares its financial statements in accordance with Canadian generally accepted accounting principles (GAAP) as published by the Canadian Institute of Chartered Accountants. Following GAAP involves the implementation and interpretation of existing rules and the use of judgment relative to the circumstances existing in the Corporation’s business. Every effort is made to comply with GAAP, and the Corporation believes the proper implementation and consistent application of GAAP is critical. The Corporation’s significant accounting policies are described in detail in Note 2 to the FY2008 audited consolidated financial statements. Outlook The automotive dealership market has traditionally implemented older, character-based technology for its in-house systems. However, in recent years the auto manufacturers have worked towards developing numerous new electronic interfaces between their systems and the auto dealerships’ systems. As a Windows-based, fully-integrated product, XSELLERATOR is the most technologically advanced software in the DMS field, and as such, is better able to implement the new electronic interfaces more quickly and effectively than its competitors that utilize older technology. The Corporation anticipates that there will be a considerable amount of demand from the auto dealership industry to upgrade to the latest technology, and for companies


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that utilize new technology in order to electronically interface with the auto manufacturers. This provides a unique opportunity for the Corporation to market its XSELLERATOR product both at the dealership and the manufacturer level. The Corporation believes that its success depends largely upon the following factors:

• Financial health of the automotive industry including dealerships and manufacturers. • Sales, installations and support of the Corporation’s XSELLERATOR product. • Continued enhancements and upgrades contained in the new version releases of the Corporation’s

proprietary software product, XSELLERATOR. • The ability of the Corporation to attract and retain top quality people. • The ability of the Corporation to attract and leverage quality business partners to help accelerate the

Corporation’s growth and penetration into the expanding marketplace. • Development of business processes and standardization of those processes, to facilitate the

implementation and support of XSELLERATOR on a global scale. • Building and maintaining positive relationships with the automotive manufacturers, and in particular

GM Canada and GM U.S. through the IDMS contract. • Continued financial support from the Atlantic Canada Opportunities Agency (ACOA) and the

Newfoundland and Labrador provincial government. • Continued access to capital to fund growth and meet any debt repayment obligations which cannot

be funded from internal sources. Management expects sales from its suite of DMS software products will continue to grow over the next several years. Management is committed to enhancing its market share in the DMS software market in both Canada and the U.S. However, it is difficult to forecast the Corporation’s sales and market share with precision due to factors such as: the nature of the automotive industry; acceptance of XSELLERATOR; the overall sales cycle; and the continued support of GM and approvals from other auto manufacturers. Forward-Looking Statements Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions and the Corporation’s actual results may differ materially from those anticipated in these forward-looking statements. Factors which may cause such differences include, but are not limited to those set forth under “Business Risks”. The Corporation does not take any obligation to release any public information of the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances occurring in the future, except as required by securities regulations. Business Risks As a relatively young and growing information technology company, the Corporation faces key risks, including emergence of superior competing technologies, retention of skilled employees, reliance on relatively few key suppliers and customers, and adequacy of capital and/or cash flow to pursue its business plan objectives. This list is not intended to be exhaustive, but merely to communicate to shareholders certain key risks faced by the Corporation in its business. A significant portion of the Company’s business is conducted with General Motors and its dealerships. If GM was unable to make payments to Quorum, the Corporation would not have enough cash to sustain itself. The Corporation has achieved positive operational cash flow for Q1 and Q2 FY2009 due to an effective execution of the Corporation’s strategic plan over the last fiscal year, which has been specifically focused on cash flow management. The Corporation is continuously focusing its strategies to sustain this trend but it


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will rely on maintaining a certain level of recurring revenue. According to published accounts, GM notified 42% of their dealerships across the U.S. and Canada that their franchises would not be renewed at the end of 2010. Approximately 23% of Quorum’s GM dealership customers received such notifications. Many of these dealerships have told us that they are transforming their business to provide other automotive sales and services and will remain with Quorum to serve their DMS needs. Quorum predicts that approximately 10% of its customer base will cease operations entirely as a result of the franchise changes, and those closures will be spread over the next 18 months. Quorum also expects new sales to offset those closures during this timeframe. Quorum attempts to mitigate these risks through various strategic and operating mechanisms such as ongoing research and development to maintain XSELLERATOR’s position as the most advanced product in the automotive DMS field, fair and equitable compensation and workplace policies, flexibility in operational decision making, review and discussion of competitors’ policies to maintain market advantage, and ongoing interaction with both debt and capital markets. Management believes these strategies reduce the Corporation’s business risk to an acceptable level, which will allow the Corporation to continue to grow and maximize shareholder value. Despite the Corporation’s attempts to mitigate key risks, shareholders should be aware that the information technology industry is subject to rapid technological change, and the products and services provided by the Corporation are also expected to be subject to rapid technological changes. To remain competitive, the Corporation must be able to keep pace with the technological developments in this industry and change its product and service lines to meet new demands. The Corporation will depend on research and development for improvements and enhancements to XSELLERATOR, and the introduction of new products and services that have not been commercially tested to accelerate its future growth. The Corporation has a proven track record of success in innovative product design and enhancements, and has the expertise and the capital backing in place to continue it.


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2009 2nd Quarter Financial Statements


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Quorum Information Technologies Inc. Unaudited – Interim Consolidated Balance Sheets

As at

June 30, 2009

December 31, 2008

ASSETS Current: Cash $ 858,867 $ 706,803 Accounts receivable 1,225,333 1,559,288 Inventory 25,326 24,204 Prepaid expenses 99,412 88,959 2,208,938 2,379,254 Property and equipment Note 4 388,427 475,059 Software development costs Note 5 9,679,534 9,434,629 Software licenses held for resale 40,366 74,965 Future tax asset 3,890,991 3,739,697 Investment tax credits 1,509,104 1,509,104

$ 17,717,360

$ 17,612,708 LIABILITIES Current: Accounts payable and accrued liabilities $ 724,602 $ 1,108,477 Deferred revenue 176,169 191,976 Deferred government assistance Note 6 46,386 - Current portion of long-term debt Note 7 45,707 83,931 992,864 1,384,384 Long-term debt Note 7 205,103 12,124 Convertible debenture Note 8 1,334,259 1,294,162 2,532,226 2,690,670 SHAREHOLDERS’ EQUITY Share capital Note 9 23,399,937 23,399,937 Convertible debenture Note 8 195,685 195,685 Contributed surplus 1,633,604 1,562,005 Deficit (10,044,092) (10,235,589) 15,185,134 14,922,038 $ 17,717,360 $ 17,612,708 See accompanying notes to interim consolidated financial statements. Approved on behalf of the Board: (Maury Marks) (John Carmichael) ________________________ Director _______________________ Director Maury Marks John Carmichael President & CEO Chairman of the Board of Directors


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Quorum Information Technologies Inc. Unaudited – Interim Consolidated Statements of Operations,

Comprehensive Income and Deficit

Period ended

Three months

ended June 30, 2009

Three months

ended June 30, 2008

Six months

ended June 30, 2009

Six months ended June

30, 2008 Gross revenue $ 1,636,363 $ 2,116,971 $ 3,532,715 $ 3,789,854 Cost of products and services sold 733,227 1,270,157 1,522,497 2,437,780 Gross profit 903,136 846,814 2,010,218 1,352,074 Expenses Salaries and benefits 271,897 375,939 635,313 818,909 Employee stock option benefits 37,275 113,778 71,599 222,653 General and administrative 333,031 363,942 650,454 712,310 Sales and marketing 48,342 46,943 105,448 92,103 Interest expense on long-term debt 74,263 49,544 132,120 52,134 Bank charges and other interest

expense 7,989 10,901 15,652 15,581

Amortization of software development costs

115,160 63,720 242,140 106,800

Amortization of property and equipment

8,667 62,410 56,106 123,275

Amortization of software licenses held for resale

17,300 17,300 34,600 34,600

Foreign exchange loss (gain) 266,019 (11,281) 175,430 (32,772) Total expenses 1,179,943 1,093,196 2,118,862 2,145,593 Net loss before income taxes (276,807) (246,382) (108,644) (793,519) Future income tax recovery

(expense) 279,486 (5,403) 300,141 19,514

Net income (loss) and

comprehensive income (loss) 2,679

(251,785)

191,497

(774,005)

Deficit, beginning of period

(10,046,771)

(10,132,130)

(10,235,589)

(9,609,910)

Deficit, end of the period

$ (10,044,092)

$(10,383,915)

$(10,044,092)

$(10,383,915)

Earnings (loss) per share - Basic $ 0.0001 $ (0.006) $ 0.005 $ (0.020) - Diluted $ 0.0001 $ (0.006) $ 0.005 $ (0.020) Weighted average number of

common shares

- Basic 39,298,438 39,298,438 39,298,438 39,298,438 - Diluted 39,298,438 39,298,438 39,298,438 39,298,438

See accompanying notes to interim consolidated financial statements.


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Quorum Information Technologies Inc. Unaudited – Interim Consolidated Statements of Cash Flows

Period ended Three

months ended June

30, 2009

Three months

ended June 30, 2008


30, 2009


30, 2008

Cash flow from operating activities Cash receipts from customers $ 1,888,193 $ 1,806,638 $ 3,850,862 $ 3,579,078 Cash paid to suppliers and employees (1,777,146) (2,020,349) (3,404,293) (4,011,058) Interest paid (58,344) (50,445) (104,995) (57,715) 52,703 (264,156) 341,574 (489,695) Cash flow from financing activities Proceeds from long-term debt - 1,470,000 384,000 1,470,000 Proceeds on issuance of promissory

notes

-

- - 200,000 Repayment of promissory notes - (200,000) - (200,000) Repayment of long-term debt (29,020) (28,621) (50,347) (45,633) Payment of capital lease obligations - (1,764) - (17,533) (29,020) 1,239,615 333,653 1,406,834 Cash flow from investing activities Purchase of property and equipment - (23,469) (867) (33,885) Software development costs (236,749) (327,484) (522,296) (654,757) (236,749) (350,953) (523,163) (688,642) Increase (decrease) in cash (213,066) 624,506 152,064 228,497

Cash, beginning of period 1,071,933 354,607 706,803 750,616 Cash, end of period $ 858,867 $ 979,113 $ 858,867 $ 979,113

See accompanying notes to interim consolidated financial statements.


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Quorum Information Technologies Inc. Notes to Unaudited Interim Consolidated Financial Statements

1. Nature of Operations

Quorum Information Technologies Inc. (“Quorum” or the “Corporation”) is an information technology company that focuses on the automotive retail business in Canada and the US and is incorporated under the Business Corporations Act of Alberta. Quorum develops, markets, implements and supports its own software product, XSELLERATOR™, a Dealership Management System, for the automotive market.

2. Significant Accounting Policies and Basis of Presentation

The interim consolidated financial statements of the Corporation have been prepared by management following the same accounting policies and methods of computation as outlined in the consolidated financial statements for the fiscal year ended December 31, 2008, except as noted in Note 3 below. The results of operations for the interim periods are not necessarily indicative of the operating results for the full year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Corporation’s annual report for the year ended December 31, 2008. The preparation of these interim consolidated financial statements, in conformity with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The interim consolidated financial statements have, in management’s opinion, been properly prepared using careful judgment within reasonable limits of materiality. The interim consolidated financial statements have not been reviewed by the Corporation’s external auditors.

3. Change in Accounting Policy

On January 1, 2009, the Corporation adopted the provisions of Section 3064, Goodwill and Intangible Assets, as prescribed by the Canadian Institute of Chartered Accountants (“CICA”). This section harmonizes Canadian standards with International Financial Reporting Standards (“IFRS”) by providing more specific guidance on the recognition of internally-developed intangible assets and requiring that research and development expenditures be evaluated against the same criteria as expenditures for intangible assets. The adoption of this standard has had no impact on the Company’s consolidated financial statements as of June 30, 2009.

4. Property and Equipment

June 30, 2009

Cost Accumulated Amortization

Net Book Value

Computer equipment $ 916,943 $ 738,314 $ 178,629 Computer software 535,718 535,718 - Leasehold improvements 384,741 323,004 61,737 Office equipment 410,693 278,683 132,010 Vendor distribution rights 42,646 26,595 16,051 Total property and equipment $ 2,290,741 $ 1,902,314 $ 388,427


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4. Property and Equipment (continued)

December 31, 2008

Cost Accumulated Amortization

Net Book Value

Computer equipment $ 916,943 $ 706,791 $ 210,152 Computer software 535,718 535,718 - Leasehold improvements 384,741 317,059 67,682 Office equipment 421,802 241,137 180,665 Vendor distribution rights 42,646 26,086 16,560 Total property and equipment $ 2,301,850 $ 1,826,791 $ 475,059

5. Software Development Costs

June 30, 2009 December 31, 2008

Cost

$ 11,410,116

$ 10,923,071

Accumulated amortization 1,730,582 1,488,442 Net book value $ 9,679,534 $ 9,434,629

6. Deferred Government Assistance

On March 31, 2009, the Corporation entered into an unsecured, interest-free loan agreement with the Atlantic Canada Opportunities Agency (ACOA) to finance a project for the expansion of the St. John’s office and the release of XSELLERATOR, version 4.7. The completion date of the project is December 31, 2009. The $192,601 difference between the fair value of the loan and the cash received has been accounted for as a government grant, as prescribed by Section 3800 of the CICA Handbook. The amount relates to expenses and capital expenditures to be incurred over the term of the project. Any amounts allocated to capital expenditures will be deducted from the specific fixed assets with depreciation calculated on the net amount over the life of the asset. As of June 30, 2009, $46,386 of this balance has been recognized as deferred government assistance as it relates to future expenditures.


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7. Long-term Debt

June 30,

2009 June 30,

2009 December 31,

2008 December 31,

2008 CDN$ US$ CDN$ US$ Payable in Canadian dollars: Software financing (a) $ - $ - $ 4,637 $ - ACOA financing (b) 205,103 - - - 205,103 - 4,637 - Payable in U.S. dollars: Software licensing balance of purchase price (c)

45,707 37,941 91,418 74,651

250,810 37,941 96,055 74,651 Installments due within one year 45,707 37,941 83,931 64,751 Total long-term debt $ 205,103 $ - $ 12,124 $ 9,990

(a) In 2006, the Corporation entered into a loan agreement with DeLage Landen Financial Services

Canada Inc. to finance the purchase of software to upgrade the Corporation’s internal accounting system. The loan bears interest at a rate of 8.5% and matured in March, 2009. The loan was paid in full as at March 31, 2009.

(b) On March 31, 2009, the Corporation entered into a $500,000 loan agreement with the Atlantic

Canada Opportunities Agency (ACOA) to finance the expansion of the St. John’s office and the release of XSELLERATOR, version 4.7. The loan, which is unsecured and interest-free, matures on July 1, 2015. Monthly repayments will commence on July 1, 2010. As of June 30, 2009, $384,000 of the loan amount had been received and recorded at a fair value of $191,399. The difference between the fair value of the loan and the cash received has been accounted for as deferred government assistance (refer to note 6).

(c) On January 31, 2006, the Corporation entered into a software license agreement with Cyclone

Commerce, Inc. The purchase price of US$238,000 is payable in variable quarterly installments commencing in January, 2006 and ending in February, 2010.


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8. Convertible Debenture On April 15, 2008 the Corporation issued a $1.5 million secured convertible debenture. The debenture is secured by a fixed and floating charge on all assets of the Company. It will be released on conversion of the debenture. The debenture bears interest at a rate of 12% per annum, payable monthly in arrears, and matures April 15, 2011. It is convertible any time prior to maturity, at the debenture holders’ option, into common shares of Quorum Information Technologies Inc. at a price of $0.55 per common share, equating to 2,727,272 shares. As the debenture is convertible, the liability and equity components have been presented separately. Using the residual method, the liability component has been calculated at $1,255,036, net of transaction costs, with the remaining $195,685 being recognized as equity. The equity component is being accreted using the effective interest rate method over the term of the debenture. As at June 30, 2009, there had been no conversions exercised on the debenture. June 30,

2009 December 31,

2008 Convertible debenture issued, net of transaction costs

$ 1,450,721 $ 1,450,721

Valuation of conversion feature

(195,685)

(195,685)

Debt component of convertible debenture 1,255,036 1,255,036

Accretion of effective interest 79,223 39,126 Convertible debenture-ending balance $ 1,334,259 $ 1,294,162

9. Share Capital

(a) AUTHORIZED Unlimited number of: Common voting shares Preferred shares issuable in series

(b) ISSUED AND OUTSTANDING

Number of Shares

Amount

Common Shares Balance, December 31, 2008 39,298,438 $ 23,399,937 Issued, January 1 – June 30, 2009 - - Total share capital at June 30, 2009 39,298,438 $ 23,399,937


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9. Share Capital (continued)

(c) STOCK OPTIONS

At the 2009 Annual General Meeting, the Corporation received regulatory and shareholder approval to amend the previously adopted Stock Option Plan (“Stock Plan 2002”) which authorized the Board of Directors of the Corporation to grant options to purchase common shares of the Corporation to directors, officers, employees and consultants who are in a position to contribute to the growth and development of the Corporation. Pursuant to the amended Stock Plan 2002, options may be granted to purchase common shares of the Corporation up to a maximum of 10% of common shares currently issued and outstanding. Prior to the approved amendment the limit was 3,900,000 common shares in aggregate. The exercise price of the options is determined by the Board of Directors in accordance with the policies of the TSX Venture Exchange (“TSXV”). The options have a maximum term of five years with a hold period of four months from the date of the initial grant, and no more than 1/3 of the stock options granted to any one individual shall vest in any twelve-month period Stock option transactions for the respective periods and the number of stock options outstanding are summarized as follows:

As at June 30, 2009 As at December 31, 2008

Number of

shares Weighted

average exercise price

Number of shares

Weighted average

exercise price

Options outstanding at beginning of period

2,978,797 $ 0.55 3,585,683 $ 0.56

Granted 1,872,900 $ 0.15 345,300 $ 0.47 Exercised - - - - Cancelled or expired (2,078,797) $ 0.58 (952,186) $ 0.64 Options outstanding at end of period 2,772,900 $ 0.26 2,978,797 $ 0.55

Options exercisable at end of period 1,224,300 $ 0.32 1,931,365 $ 0.57

The following table summarizes information about stock options outstanding at June 30, 2009:

Exercise prices Number outstanding Weighted average

remaining contractual life in years

Weighted average exercise price

$ 0.15 1,872,900 4.8 $ 0.15 $ 0.49 900,000 3.3 $ 0.49

2,772,900 4.3 $ 0.26


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9. Share Capital (continued)

(d) SHARE PURCHASE WARRANTS As at June 30, 2009, all 2,735,167 of the whole share purchase warrants issued in conjunction with the March 14, 2007 brokered private placement had expired. In addition, as at June 30, 2009, all 382,923 warrants issued to Paradigm Capital Inc. (Paradigm) in conjunction with this private placement had expired.

10. Related Party Transactions

During the quarter ended June 30, 2009, the Corporation incurred fees in the amount of $Nil (June 30, 2008 – $3,125) under a consulting agreement with the spouse of an officer and director, of which $Nil (June 30, 2008 - $3.125) remained unpaid at June 30, 2009. The fees were in relation to tax and consulting services.

Related party transactions have been recorded at their exchange amounts which represent carrying values.

11. Segmented Information

The Corporation operates in one segment, the computer network and business software industry. In 2004 the Corporation commenced selling into the United States marketplace. Gross revenue by geographic area is summarized as follows:

Three months ended June 30,

2009

Three months ended June 30,

2008

Six months ended June 30,

2009

Six months ended June 30,

2008 Canada $ 1,257,089 $ 1,372,577 $ 2,653,753 $ 2,600,785 United States 379,274 744,394 878,962 1,189,069 Total gross revenue $ 1,636,363 $ 2,116,971 $ 3,532,715 $ 3,789,854 12. Economic Dependence

The Corporation is an information technology company that has an Integrated Dealership Management System (IDMS) contract with General Motors. Currently, the Corporation receives 75% of its recurring support revenue from General Motors dealerships under the terms of this contract.


23


13. Capital Structure The Corporation’s capital structure is comprised of shareholders’ equity and long-term debt. The Corporation’s objectives when managing its capital structure are to:

(a) maintain financial flexibility so as to preserve the Corporation’s access to capital markets and its ability to meet its financial obligations; and

(b) finance internally-generated growth As a relatively young and growing company, the Corporation strives to minimize the use of debt. To manage its capital structure, the Corporation may adjust capital spending, issue new shares or issue new debt.

Corporate Information

QUORUM INFORMATION TECHNOLOGIES Head Office

Suite 300, 10655 Southport Road SW, Calgary, AB T2W 4Y1 Phone: 403.777.0036

E-mail: [email protected] Web Site: www.QuorumDMS.com

Maury Marks Director President & Chief Executive Officer Quorum Information Technologies Inc.

John Carmichael Chairman of Board of Directors Dealer Principal City Buick Pontiac Cadillac

Craig Nieboer Director Chief Financial Officer Canadian Energy Services L.P

Michael Podovilnikoff Director Business Consultant

Board of Directors

Officers

John Carmichael Chairman of Board of Directors Maury Marks President & Chief Executive Officer Jeff Sharpe Chief Financial Officer Corporate Counsel Burnet Duckworth & Palmer Calgary, Alberta Bankers Canadian Imperial Bank of Commerce Calgary, Alberta Auditors DNTW Chartered Accountants, LLP Calgary, Alberta Stock Exchange Listing TSX Venture Exchange Trading Symbol: QIS Registrar and Transfer Agent Computershare Trust Company of Canada Calgary, Alberta

Scot Eisenfelder Director Strategy Consultant AutoNation Inc.

QUORUM INFORMATION TECHNOLOGIES Suite 300, 10655 Southport Road SW, Calgary, AB T2W 4Y1

Phone: 403.777.0036 Fax: 403-777-0039 E-mail: [email protected] www.QuorumDMS.com

Stock Symbol – TSXV: QIS

2009 2 quarter report - quorum...

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