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Verso Clings On

Light Reading
News Analysis
Light Reading
7/26/2005

Struggling softswitch vendor Verso Technologies Inc. (Nasdaq: VRSO) is showing faint signs of recovery following its restructuring efforts, but the company still faces a cash crunch and has been forced to restructure some of its debt (see Verso's Extreme Makeover and Verso Restructures Debt).

The slight recovery comes in the form of increasing revenues. In its second quarter, Verso recorded revenues of $8.5 million, a 29 percent increase over the $6.6 million posted in both the previous quarter and the second quarter of 2004 (see Verso Reports Q2). The company attributes the increase to sales of its enterprise gateways and revenue assurance system rather than a boost in demand for its carrier softswitches.

However, net loss grew to $6.4 million, or 5 cents a share, compared with a net loss of $6.3 million, or 4 cents a share, in the year-ago quarter.

Some of that loss is down to the restructuring process: Verso took a $2.6 million charge for sub-leasing some of its office space to conserve cash. But it is cash that is a chief concern, as the company's reserves shrank to $12.8 million by the end of June from $16.3 million at the end of March.

To help conserve cash, Verso announced Monday the extension of payment terms for $4.5 million in convertible debt originally due in November. CFO Juliet Reising says the restructuring will give Verso 10 more months to pay off the debt.

The company now carries two issues of convertible debentures and a note payable totaling $16.6 million, $4.4 million of which is current.

Verso has been in survival mode since the beginning of the year when it announced significant staff reductions. It has also sold off two business units -- NACT Communications for $4 million and MCK Telecommunications for $3.5 million -- to help curb operational expenditures (see Verso Sells Business Unit).

But the company needs to do more to give itself a fighting chance, reckons Pacific Growth Equities Inc. analyst Joe Noel. “We think they need to get a couple more customers in order to show people that the company has some long-term viability," he says. "We have a wait-and-see attitude. We think the business is starting to improve, but it’s clearly too early to say." Verso COO Lewis Jaffe, who was brought in late last year to help turn the ailing company around, remains positive and believes the company has learned from past mistakes (see Verso Aims to Stay Single ). “Everything we're chasing now is real. We are still thinly capitalized, but we believe if we execute well we have sufficient liquidity, and we can use our bank line if we need to. We can get to EBITDA positive,” Jaffe insists.

Verso declines to give actual guidance numbers for third-quarter revenues. CFO Reising, however, says she expects the company’s expenses to be flat, while gross margins should rise by a few percentage points.

Verso's share price closed Monday at 43 cents. The company’s stock hasn’t topped a dollar since late September 2004, and the Nasdaq has given Verso until November to get its stock back above $1 or face delisting.

— Mark Sullivan, Reporter, Light Reading

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