The Statement of Operations shows fast-growing revenue for both licensing and servicing activities, which seems normal for a young software company with a decent product. What concerns me most about this statement is the notable jump in Operating Expenses. Specifically, SG&A has grown more than threefold between April 30, 1995 and April 30, 1997, from $4.6m to $15.3m. This exhibition that the company does not have expense growth under control is also a concern. Revenues can develop a decreasing trend overnight, but oftentimes expenses are difficult to back down.
By writing-off capitalized software in 1996, the company effectively cut its net income in half from $1.3m to $657k. Net income for 1997 was $1.9m, but would have been $829,000 lower had the company recorded the write-off during that year. Despite still selling the product, the company claims in the notes to its financial statements that it recorded the write-off because management had determined that “no net realizable value in the asset remained.” This paradox seems odd, and suggests that management may have accelerated the write-off rather than allowing it to occur naturally as depreciation/amortization expense in future years.
Other posts on the Versatility, Inc. case study:
Versatility, Inc. Case Study, Cash Flows
Versatility, Inc. Case Study, Preferred Stock
Versatility, Inc. Case Study, Mortgage Guaranty
Versatility, Inc. Case Study, IPO Initial Public Offering
Versatility, Inc. Case Study, Accounts Receivable
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