##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-22190
 VERSO TECHNOLOGIES, INC.
  Minnesota
    
    41-1484525(State of incorporation)
    
    (I.R.S. EmployerIdentification No.)
 
 678.589.3500
 þ o
  o o þ
 o þ




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##### 



VERSO TECHNOLOGIES, INC.
FORM 10-Q
INDEX
 Page
No.
 Part I.
FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the three months ended March 31,
2007 and 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2007 and 2006 (unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    35Item 6. Exhibits
    
    
    36Signature Page
    
    
    37Exhibit Index
    
    
    38EX-10.6 TRADEMARK ASSIGNMENT OF SECURITYEX-10.7 PATENT ASSIGNMENT OF SECURITYEX-10.8 PATENT ASSIGNMENT OF SECURITYEX-10.9 PATENT ASSIGNMENT OF SECURITYEX-10.10 PATENT ASSIGNMENT OF SECURITYEX-10.11 PATENT ASSIGNMENT OF SECURITYEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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VERSO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Audited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    1,764
    
    
    $
    1,134Restricted cash
    
    
    847
    
    
    
    1,041Accounts receivable, net
    
    
    9,273
    
    
    
    10,058Inventories
    
    
    6,902
    
    
    
    7,184Other current assets
    
    
    930
    
    
    
    1,027Current portion of note receivable
    
    
    2,166
    
    
    
    324Total current assets
    
    
    21,882
    
    
    
    20,768Property and equipment, net
    
    
    1,500
    
    
    
    1,807Loan issuance costs, net
    
    
    3,051
    
    
    
    3,427Investment
    
    
    699
    
    
    
    745Note receivable, net of current portion
    
    
    
    
    
    
    1,810Other intangibles, net
    
    
    5,200
    
    
    
    5,068Goodwill
    
    
    3,224
    
    
    
    3,224Total assets
    
    $
    35,556
    
    
    $
    36,849LIABILITIES AND SHAREHOLDERS EQUITY:Current liabilities:Credit facility
    
    $
    3,979
    
    
    $
    3,945Accounts payable
    
    
    2,652
    
    
    
    2,665Accrued compensation
    
    
    2,111
    
    
    
    2,268Accrued expenses
    
    
    3,714
    
    
    
    3,592Purchase price payable for acquisition
    
    
    250
    
    
    
    1,500Current portion of accrued loss on sublease
    
    
    467
    
    
    
    465Current portion of liabilities of discontinued operations
    
    
    1,201
    
    
    
    1,081Current portion of convertible debentures
    
    
    3,375
    
    
    
    3,375Unearned revenue and customer deposits
    
    
    2,492
    
    
    
    2,645Total current liabilities
    
    
    20,241
    
    
    
    21,536Accrued loss on sublease, net of current portion
    
    
    676
    
    
    
    773Credit facility, net of current portion
    
    
    3,375
    
    
    
    3,938Liabilities of discontinued operations, net of current portion
    
    
    302
    
    
    
    361Notes payable
    
    
    2,902
    
    
    
    2,862Convertible subordinated debentures, net of discount
    
    
    4,460
    
    
    
    4,700Total liabilities
    
    
    31,956
    
    
    
    34,170Shareholders equity:Common stock, $.01 par value, authorized shares of 120,000,000;
48,270,963 and 41,691,911 shares issued and outstanding
    
    
    483
    
    
    
    417Additional paid-in capital
    
    
    358,565
    
    
    
    352,303Deferred compensaton
    
    
    (410
    )
    
    
    Accumulated deficit
    
    
    (354,786
    )
    
    
    (349,767
    )Accumulated other comprehensive income (loss)  foreign currency translation
    
    
    (252
    )
    
    
    (274
    )Total shareholders equity
    
    
    3,600
    
    
    
    2,679Total liabilities and shareholders equity
    
    $
    35,556
    
    
    $
    36,849
  2




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VERSO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share data)
  For the three months ended March 31,2007
    
    
    2006Revenue:Products
    
    $
    8,277
    
    
    $
    3,597Services
    
    
    4,208
    
    
    
    3,191Total revenue
    
    
    12,485
    
    
    
    6,788Cost of revenue:Products:Product costs
    
    
    4,643
    
    
    
    1,657Amortization of intangibles
    
    
    143
    
    
    
    194Total cost of product
    
    
    4,786
    
    
    
    1,851Services
    
    
    3,161
    
    
    
    2,096Total cost of revenue
    
    
    7,947
    
    
    
    3,947Gross profit:Products
    
    
    3,491
    
    
    
    1,746Services
    
    
    1,047
    
    
    
    1,095Total gross profit
    
    
    4,538
    
    
    
    2,841Operating expenses:General and administrative
    
    
    2,872
    
    
    
    2,433Sales and marketing
    
    
    2,387
    
    
    
    1,774Research and development
    
    
    2,080
    
    
    
    1,779Depreciation and amortization
    
    
    651
    
    
    
    463Total operating expenses
    
    
    7,990
    
    
    
    6,449Operating loss from continuing operations
    
    
    (3,452
    )
    
    
    (3,608
    )Other income (expense), net:Other income (expense)
    
    
    (5
    )
    
    
    1Equity in loss of investment
    
    
    (46
    )
    
    
    (66
    )Interest expense, net, including $1,033 and $903 of
amortization of loan fees and discount on convertible
debentures in each period, respectively
    
    
    (1,516
    )
    
    
    (1,267
    )Other expense, net
    
    
    (1,567
    )
    
    
    (1,332
    )Loss from continuing operations before income taxes
    
    
    (5,019
    )
    
    
    (4,940
    )Income taxes
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (5,019
    )
    
    
    (4,940
    )Loss from discontinued operations
    
    
    
    
    
    
    Total loss on disposal from discontinued operations
    
    
    
    
    
    
    Net loss
    
    $
    (5,019
    )
    
    $
    (4,940
    )Net loss per common share  basic and diluted:Loss from continuing operations
    
    $
    (0.11
    )
    
    $
    (0.17
    )Loss from discontinued operations
    
    
    
    
    
    
    $
    (0.11
    )
    
    $
    (0.17
    )Weighted average shares outstanding  basic and diluted
    
    
    46,286,962
    
    
    
    29,933,805
  3




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VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands, except share data)
 (Unaudited)
 For the three months ended March 31,2007
    
    
    2006Operating Activities:Continuing operations:Net loss from continuing operations
    
    $
    (5,019
    )
    
    $
    (4,940
    )Adjustments to reconcile net loss from continuing operations to net
cash used in continuing operating activities:Equity in loss of investment
    
    
    46
    
    
    
    66Stock based compensation
    
    
    489
    
    
    
    55Non-cash interest expense
    
    
    208
    
    
    
    Depreciation and amortization
    
    
    794
    
    
    
    658Provision for doubtful accounts
    
    
    38
    
    
    
    80Amortization of loan fees and discount on convertible subordinated debentures
    
    
    1,033
    
    
    
    903Other
    
    
    20
    
    
    
    9Changes in current operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    765
    
    
    
    364Inventories
    
    
    (211
    )
    
    
    (1,458
    )Other current assets
    
    
    64
    
    
    
    27Accounts payable
    
    
    (11
    )
    
    
    420Accrued compensation
    
    
    (217
    )
    
    
    (188
    )Accrued expenses
    
    
    27
    
    
    
    247Unearned revenue and customer deposits
    
    
    (153
    )
    
    
    (119
    )Net cash used in continuing operating activities
    
    
    (2,127
    )
    
    
    (3,876
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    Adjustment to reconcile loss from discontinued operations
to net cash provided by (used in) discontinued operating activities, rental payments
    
    
    29
    
    
    
    (259
    )Net cash provided by (used in) discontinued operating activities
    
    
    29
    
    
    
    (259
    )Net cash used in operating activities
    
    
    (2,098
    )
    
    
    (4,135
    )Investing Activities:Continuing operations:Net cash provided by (used in) investing activities for continuing operationsDecrease (increase) in restricted cash
    
    
    194
    
    
    
    (15
    )Purchases of property and equipment
    
    
    (53
    )
    
    
    (123
    )Purchase of businesses
    
    
    (1,250
    )
    
    
    Net cash used in investing activities for continuing operations
    
    
    (1,109
    )
    
    
    (138
    )Discontinued operations:Proceeds from notes receivable
    
    
    
    
    
    
    240Net cash provided by investing activities for discontinued operations
    
    
    
    
    
    
    240Net cash (used in) provided by investing activities
    
    
    (1,109
    )
    
    
    102Net cash used in operating and investing activities
    
    
    (3,207
    )
    
    
    (4,033
    )Financing Activities:Net repayments on line of credit
    
    
    (529
    )
    
    
    (1,269
    )Payments on convertible debentures, net
    
    
    
    
    
    
    (675
    )Proceeds from private placement, net
    
    
    4,356
    
    
    
    6,888Proceeds from issuances of common stock in connection with the
exercise of options and warrants, net
    
    
    9
    
    
    
    6Net cash provided by financing activities
    
    
    3,836
    
    
    
    4,950Effect of exchange rate changes on cash
    
    
    1
    
    
    
    Increase in cash and cash equivalents
    
    
    630
    
    
    
    917Cash and cash equivalents at beginning of period
    
    
    1,134
    
    
    
    1,079Cash and cash equivalents at end of period
    
    $
    1,764
    
    
    $
    1,996Supplemental disclosure of cash flow information:Cash payments during the years for:Interest
    
    $
    192
    
    
    $
    110Income taxes
    
    
    6
    
    
    
    (4
    )Non-cash investing and financing activitiesCommon stock consideration for acquisitions:WSECI  issuance of 62,950 and 18,155 shares of common stock, respectively
    
    $
    71
    
    
    $
    20Common stock and compensatory options issued
    
    
    429
    
    
    
    Issuance of common stock and warrants in exchange for services
    
    
    
    
    
    
    123Issuance of common stock in lieu of principal
    
    
    844
    
    
    
    
  4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. BASIS OF PRESENTATION
       5




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1. BASIS OF PRESENTATION, Continued
     2. MERGERS AND ACQUISITIONS
 Acquisition of iMarc product line business
  ®
  6




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2. MERGERS AND ACQUISITIONS, Continued
 Acquisition of iMarc product line business  (Continued)
     Cash paid and due to be paid by June 29, 2007
    
    $
    2,500Direct transaction costs
    
    
    75Total purchase consideration
    
    $
    2,575
  PurchasePriceAllocationTangible assets:Property & equipment, net
    
    $
    180Other assets
    
    
    15Goodwill
    
    
    710Other intangible assets- customer relationship
    
    
    1,900Liabilities assumed
    
    
    (230
    )Total estimated purchase price allocation
    
    $
    2,575
 7




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##### Table of Contents



2. MERGERS AND ACQUISITIONS, Continued
 Acquisition of Business Assets of Verilink
   Value of common stock issued
    
    $
    2,784Value of Series C preferred stock issued
    
    
    2,784Direct transaction costs
    
    
    338Total purchase consideration
    
    $
    5,906
  PurchasePriceAllocationTangible assets:Inventories
    
    $
    3,953Property & equipment, net
    
    
    499Other assets
    
    
    294Intangible assets
    
    
    1,751Liabilities assumed
    
    
    (591
    )Total estimated purchase price allocation
    
    $
    5,906
 8




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##### Table of Contents



2. MERGERS AND ACQUISITIONS, Continued
 Acquisition of Assets of WSECI, Inc.
    WSECIProperty and equipment
    
    $
    52Accounts receivable
    
    
    93Other intangibles
    
    
    1,578Cost of acquisition
    
    $
    1,723
  Three
Months Ended March 31,2007
    
    2006Net sales
    
    $
    12,485
    
    
    $
    15,530Net loss
    
    $
    (5,019
    )
    
    $
    (9,577
    )Earnings (loss) per share, basic
    
    $
    (0.11
    )
    
    $
    (0.27
    )Earnings (loss) per share, diluted
    
    $
    (0.11
    )
    
    $
    (0.27
    )
 9




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3. EQUITY INVESTMENT
    Three Months Ended March 31,2007
    
    2006Operating results:Revenues
    
    $
    8
    
    
    $
    Operating loss
    
    $
    (46
    )
    
    $
    (67
    )Net loss
    
    $
    (46
    )
    
    $
    (67
    )
 4. DISCONTINUED OPERATIONS
   March 31,
    
    
    March 31,2007
    
    
    2006Notes receivable
    
    $
    2,166
    
    
    $
    2,134Liabilities of discontinued operations:Accrued rent
    
    $
    887
    
    
    $
    792Other current liabilities
    
    
    616
    
    
    
    650Liabilities of discontinued operations
    
    $
    1,503
    
    
    $
    1,442
 10




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4. DISCONTINUED OPERATIONS, Continued
      Three months ended March 31,2007
    
    
    2006Balance beginning of period
    
    $
    1,442
    
    
    $
    2,531Lease payments, net of sublease receipts
    
    
    95
    
    
    
    (160
    )Other payments
    
    
    (26
    )
    
    
    (38
    )Legal and other costs of disposal
    
    
    (8
    )
    
    
    (11
    )Balance end of period
    
    $
    1,503
    
    
    $
    2,322
 11




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##### Table of Contents



5. INVENTORIES
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    5,709
    
    
    $
    5,157Work in process
    
    
    223
    
    
    
    78Finished goods
    
    
    970
    
    
    
    1,949Total Inventories
    
    $
    6,902
    
    
    $
    7,184
    12




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6. GOODWILL AND OTHER INTANGIBLES
   Amortization
    
    
    March 31,
    
    
    December 31,Period in months
    
    
    2007
    
    
    2006Intangibles subject to amortization:Current technology
    
    36 months
    
    $
    2,399
    
    
    $
    2,328Customer relationship
    
    36-120 months
    
    
    6,054
    
    
    
    5,561Weighted average months
    
    55.2 months
    
    
    8,453
    
    
    
    7,889Accumulated amortization:Current technology
    
    
    
    
    
    
    (1,828
    )
    
    
    (1,685
    )Customer relationship
    
    
    
    
    
    
    (1,425
    )
    
    
    (1,136
    )Net intangibles subject to amortization
    
    
    
    
    
    
    5,200
    
    
    
    5,068Goodwill
    
    
    
    
    
    
    3,224
    
    
    
    3,224Total goodwill and other intangibles
    
    
    
    
    
    $
    8,424
    
    
    $
    8,292
 7. LOAN FACILITIES
     13




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7. LOAN FACILITIES, Continued
  8. CONVERTIBLE DEBENTURES
 Senior Unsecured Convertible Debentures
    9. OTHER COMPREHENSIVE LOSS
  Three months ended March 31,2007
    
    
    2006Net loss
    
    $
    (5,019
    )
    
    $
    (4,940
    )Other comprehensive loss:Foreign currency translation
    
    
    22
    
    
    
    (23
    )Comprehensive loss
    
    $
    (4,997
    )
    
    $
    (4,963
    )
 14




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10. SEGMENT INFORMATION
   The Technologies Group includes the Companys softswitching, I-Master, and NetPerformer
divisions and the Companys subsidiaries, Telemate.Net and Verso Verilink. The Technologies
Group includes domestic and international sales of hardware and software, integration,
applications and technical training and support. The Technologies Group offers
software-based solutions (which include hardware) for companies seeking to build private,
converged packet-based voice and data networks. In addition, the Technologies Group offers
software-based solutions for Internet access and usage management that include call
accounting and usage reporting for Internet protocol network devices. In 2006, the
Technologies Group added the product suites from the Verilink Acquisition and the iMarc
Acquisition. These products provide access, multiplexing and transport of voice and data
services.
  The Companys Advanced Applications Services Group, consists of the Companys technical
applications support group which was previously included as part of the Enterprise Solutions
Group, and includes outsourced technical application services and application installation
and training services to both customers of the Technologies Group and outside customers.
  AdvancedTechnologies
    
    ApplicationGroup
    
    Services Group
    
    TotalFor the Three Months Ended March 31, 2007Revenue
    
    $
    10,368
    
    
    $
    2,117
    
    
    $
    12,485(Loss) contribution before unallocated items
    
    
    (783
    )
    
    
    68
    
    
    
    (715
    )At March 31, 2007Goodwill
    
    
    1,771
    
    
    
    1,453
    
    
    
    3,224Total assets
    
    
    22,069
    
    
    
    3,862
    
    
    
    25,931For the Three Months Ended March 31, 2006Revenue
    
    
    4,881
    
    
    
    1,907
    
    
    
    6,788(Loss) contribution before unallocated items
    
    
    (1,577
    )
    
    
    200
    
    
    
    (1,377
    )At December 31, 2006Goodwill
    
    
    1,771
    
    
    
    1,453
    
    
    
    3,224Total assets
    
    
    23,168
    
    
    
    3,864
    
    
    
    27,032
 15




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10. SEGMENT INFORMATION, Continued
  Three Months Ended March 31,2007
    
    
    2006Loss before unallocated items, per above
    
    $
    (715
    )
    
    $
    (1,377
    )Corporate general and administrative expenses
    
    
    (2,060
    )
    
    
    (1,742
    )Corporate research and development
    
    
    (26
    )
    
    
    (26
    )Depreciation and amortization
    
    
    (651
    )
    
    
    (463
    )Other
    
    
    (1,567
    )
    
    
    (1,332
    )Loss from continuing operations
    
    $
    (5,019
    )
    
    $
    (4,940
    )
  March 31,
    
    
    December 31,2007
    
    
    2006Total assets before unallocated items, per above
    
    $
    25,931
    
    
    $
    27,032Corporate assets:Cash and cash equivalents
    
    
    1,764
    
    
    
    1,134Restricted cash
    
    
    847
    
    
    
    1,041Current portion of notes receivable
    
    
    2,166
    
    
    
    324Other current assets
    
    
    349
    
    
    
    394Property and equipment, net
    
    
    749
    
    
    
    942Loan issuance costs
    
    
    3,051
    
    
    
    3,427Investment
    
    
    699
    
    
    
    745Notes receivable, net of current portion
    
    
    
    
    
    
    1,810$
    35,556
    
    
    $
    36,849
  Canada
    
    United States
    
    TotalFor the Three Months ended March 31, 2007Revenue
    
    $
    
    
    
    $
    12,485
    
    
    $
    12,485(Loss) contribution before unallocated Items
    
    
    (1,143
    )
    
    
    428
    
    
    
    (715
    )For the Three Months ended March 31, 2006Revenue
    
    
    
    
    
    
    6,788
    
    
    
    6,788Loss before unallocated Items
    
    
    (1,294
    )
    
    
    (83
    )
    
    
    (1,377
    )At March 31, 2007Total Assets
    
    
    316
    
    
    
    35,240
    
    
    
    35,556At December 31, 2006Total Assets
    
    
    551
    
    
    
    36,298
    
    
    
    36,849
 16




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11. REORGANIZATION COSTS
  12. STOCK OPTIONS AND WARRANTS
  OPTIONS AND WARRANTS ISSUED TO EMPLOYEES
 Range of
    
    Outstanding at
    
    
    Weighted Average
    
    
    Exercisable at
    
    
    Weighted AverageExercise Prices
    
    March 31, 2007
    
    
    Exercise Price
    
    
    March 31, 2007
    
    
    Exercise Price$1.00-$1.45
    
    
    2,807,848
    
    
    $
    1.19
    
    
    
    429,598
    
    
    $
    1.40$1.46-$2.50
    
    
    602,154
    
    
    
    2.24
    
    
    
    548,904
    
    
    
    2.24$2.51-$5.30
    
    
    106,578
    
    
    
    3.25
    
    
    
    79,578
    
    
    
    3.17$5.31-$7.50
    
    
    114,292
    
    
    
    6.58
    
    
    
    76,792
    
    
    
    6.74$7.51-$90.00
    
    
    802,334
    
    
    
    13.87
    
    
    
    802,334
    
    
    
    13.87Total
    
    
    4,433,206
    
    
    $
    3.82
    
    
    
    1,937,206
    
    
    $
    7.08
   Number ofShares of
    
    WeightedUnderlying
    
    AverageOptions
    
    Exercise PricesOutstanding at beginning of period
    
    
    4,653,843
    
    
    $
    4.27Granted
    
    
    100,000
    
    
    
    1.24Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (10,000
    )
    
    
    1.64Expired
    
    
    (310,637
    )
    
    
    9.84Outstanding at end of period
    
    
    4,433,206
    
    
    $
    3.82Exercisable at end of period
    
    
    1,937,206
    
    
    $
    7.08
  17




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##### Table of Contents



12. STOCK OPTIONS AND WARRANTS, Continued
  Number of
    
    
    Weighted AverageExercise Price
    
    Outstanding Warrants
    
    
    Exercise Price
    
    
    Expiration Date$0.01-$1.25
    
    
    5,294,347
    
    
    $
    0.97
    
    
    September 2011 and beyond$1.56-$1.85
    
    
    6,414,692
    
    
    $
    1.60
    
    
    August 2011$2.49
    
    
    2,462,400
    
    
    $
    2.49
    
    
    February 2010 - February 2015$5.26
    
    
    491,505
    
    
    $
    5.26
    
    
    February 2011Total
    
    
    14,662,944
    
    
    $
    1.64
   Number of
    
    WeightedOutstanding
    
    AverageWarrants
    
    Exercise PricesOutstanding at beginning of period
    
    
    11,962,944
    
    
    $
    1.81Granted
    
    
    2,700,000
    
    
    
    1.25Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Outstanding at end of period
    
    
    14,662,944
    
    
    $
    1.64Exercisable at end of period
    
    
    14,662,944
    
    
    $
    1.64
    18




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12. STOCK OPTIONS AND WARRANTS, Continued
  Three Months Ended March 31,2007
    
    2006Risk-free interest rate
    
    4.7%
    
    4.8%Expected life
    
    4 years
    
    4 yearsExpected volatility
    
    108.00%
    
    106.00%Expected dividend yield
    
    0.0%
    
    0.0%
    Nonvested shares at
January 1, 2007
    
    
    2,422,753Granted
    
    
    100,000Vested
    
    
    (26,750
    )Forfeited
    
    
    Nonvested shares at
March 31, 2007
    
    
    2,496,003
  19




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13. NET LOSS PER SHARE
  March 31,2007
    
    2006Shares issuable under conversion of preferred stock
    
    
    
    
    
    
    Shares issuable under stock options
    
    
    658
    
    
    
    12,290Shares issuable pursuant to warrants
to purchase common stock
    
    
    1,003,147
    
    
    
    4,8301,003,805
    
    
    
    17,120
 14. PRIVATE PLACEMENT
  15. COMMON STOCK ISSUED IN CONNECTION WITH ACQUISITION OF BUSINESS ASSETS OF WSECI
  16. LITIGATION
  20




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17. INCOME TAXES
      18. RECENT ACCOUNTING PRONOUNCEMENTS
  19. SUBSEQUENT EVENT
  21




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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
   -
    
    the volatility of the price of the Companys common stock;-
    
    the delisting of the Companys common stock from the Nasdaq Capital Market if
the bid price falls and remains below $1.00 per share for a specified period;-
    
    the Companys obligation to pay liquidated damages to certain investors under certain
circumstances;-
    
    the Company may be unable to fund future growth;-
    
    the risks associated with acquisitions;-
    
    the Companys ability to be profitable;-
    
    the Companys ability to attract and retain qualified personnel;-
    
    general economic conditions of the telecommunications market;-
    
    the Companys research and development expenditures;-
    
    market demand for, and market acceptance of, the Companys products;-
    
    legal claims against the Company, including, but not limited to, claims of patent
infringement;-
    
    the Companys ability to protect the Companys intellectual property;-
    
    defects in the Companys products;-
    
    the Companys obligations to indemnify certain customers;-
    
    the Companys exposure to risks inherent in international operations and emerging markets;-
    
    the Companys dependence on contract manufacturers and suppliers;-
    
    general economic and business conditions; and-
    
    other risks and uncertainties disclosed in the Annual Report and in the Companys other
filings with the SEC.
  Overview
  22




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23




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Results of Operations
 Three Months Ended March 31, 2007, Compared to Three Months Ended March 31, 2006
  Continuing Operations
            24




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Business Unit Performance
 Packet-based
    
    
    AdvancedTechnologies
    
    
    Applications(Dollars in thousands)
    
    Group
    
    
    Services Group
    
    
    ConsolidatedFor the Three Months Ended March 31,
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    10,368
    
    
    $
    4,881
    
    
    $
    2,117
    
    
    $
    1,907
    
    
    $
    12,485
    
    
    $
    6,788Gross profit
    
    
    4,220
    
    
    
    2,439
    
    
    
    318
    
    
    
    402
    
    
    
    4,538
    
    
    
    2,841Gross margin
    
    
    41
    %
    
    
    50
    %
    
    
    15
    %
    
    
    21
    %
    
    
    36
    %
    
    
    42
    %General and administrative
    
    
    681
    
    
    
    565
    
    
    
    131
    
    
    
    126
    
    
    
    812
    
    
    
    691Sales and marketing
    
    
    2,268
    
    
    
    1,698
    
    
    
    119
    
    
    
    76
    
    
    
    2,387
    
    
    
    1,774Research and development
    
    
    2,054
    
    
    
    1,753
    
    
    
    
    
    
    
    
    
    
    
    2,054
    
    
    
    1,753(Loss) contribution before
unallocated items
    
    $
    (783
    )
    
    $
    (1,577
    )
    
    $
    68
    
    
    $
    200
    
    
    
    (715
    )
    
    
    (1,377
    )Unallocated items:Corporate general and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,060
    
    
    
    1,742Corporate research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    26Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    651
    
    
    
    463Operating loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,452
    )
    
    
    (3,608
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,567
    )
    
    
    (1,332
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,019
    )
    
    $
    (4,940
    )
 Technologies Group
    25




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Advanced Applications Services Group
    Discontinued Operations
  Critical Accounting Policies
  Revenue Recognition
     26




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Allowance for Doubtful Accounts
  Inventory Obsolescence
  Liabilities of Discontinued Operations
   27




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Deferred Tax Asset Valuation Allowance
  Litigation and Related Contingencies
  Goodwill, Intangible Assets and Long-Lived Assets
   Liquidity and Capital Resources
 Summary
    28




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29




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Cash Flow
      Contractual Obligations and Commercial Commitments
 30




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##### Table of Contents



Less than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsLine of credit
    
    $
    7,354
    
    
    $
    3,979
    
    
    $
    3,375
    
    
    $
    
    
    
    $
    Additional payments for the acquisition of
Encore Group
    
    
    25
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Notes payable for the purchase of Clarent
    
    
    3,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    Convertible subordinated debentures
    
    
    7,835
    
    
    
    3,375
    
    
    
    4,460
    
    
    
    
    
    
    
    Operating leases:Continuing operations
    
    
    6,093
    
    
    
    2,299
    
    
    
    3,739
    
    
    
    55
    
    
    
    Discontinued operations
    
    
    1,063
    
    
    
    380
    
    
    
    683
    
    
    
    Contractual payment for acquisition of iMarc
    
    
    250
    
    
    
    250Total contractual cash obligations
    
    $
    25,620
    
    
    $
    13,308
    
    
    $
    12,257
    
    
    $
    55
    
    
    $
    
  Sources of Cash
     31




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32




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Item 3: Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
  Interest Rate Risks
  Foreign Currency Risks
  
 Item 4: Controls and Procedures
   33




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   34




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Item 1A. Risk Factors
   The Company may be required to pay liquidated damages to certain of the Companys investors
under certain circumstances.
  35




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Item 6. Exhibits
  36




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##### Table of Contents



SIGNATURE
  VERSO TECHNOLOGIES, INC.Date: May 15, 2007
    
    By:
    
    /s/ Martin D. Kidder

Chief Financial Officer (duly authorized
signatory and
Principal Financial and Accounting Officer)
 37




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Exhibit
    
    Method of Filing2.1
    
    Amendment No. 1 to Asset
Purchase Agreement, dated
as of January 25, 2007,
among the Registrant,
Paradyne Networks, Inc. and Zhone Technologies, Inc.
    
    Incorporated by reference
to Exhibit 2.1 to the
Registrants Current Report
on Form 8-K filed January
31, 2007.2.2
    
    Amendment No. 2 to Asset
Purchase Agreement, dated
as of February 7, 2007,
among the Registrant,
Paradyne Networks, Inc. and
Zhone Technologies, Inc.
    
    Incorporated by reference
to Exhibit 2.1 to the
Registrants Current Report
on Form 8-K filed February
12, 2007.2.3
    
    Agreement and Plan of
Merger, dated as of April
4, 2007, among the
Registrant, sentitO
Networks, Inc., SN
Acquisition Corporation and
Brett Hauser as the
Stockholders Agent. (The
schedules to the Agreement
and Plan of Merger have
been omitted from this
Current Report pursuant to
Item 601(b)(2) of
Regulation S-K, and the
Registrant agrees to
furnish copies of such
omitted copies
supplementally to the
Securities and Exchange
Commission upon request.)
    
    Incorporated by reference
to Exhibit 2.1 to the
Registrants Current Report
on Form 8-K filed April 5,
2007.4.1
    
    Form of Warrant to purchase
shares of the Companys
common stock dated January
31, 2007, issued pursuant
to the Securities Purchase
Agreement among the
Registrant and the
purchasers signatory
thereto dated as of January
30, 2007.
    
    Incorporated by reference
to Exhibit 4.1 to the
Registrants Current Report
on Form 8-K filed January
31, 2007.4.2
    
    Form of Registration Rights
Agreement dated as of
January 30, 2007 entered
into pursuant to the
Securities Purchase
Agreement among the
Registrant and the
purchasers signatory
thereto dated as of January
30, 2007.
    
    Incorporated by reference
to Exhibit 99.2 to the
Registrants Current Report
on Form 8-K filed January
31, 2007.4.3
    
    Form of Warrant to purchase
shares of the Registrants
common stock dated February
5, 2007 issued pursuant to
the Securities Purchase
Agreement among the
Registrant and the
purchasers signatory
thereto dated as of
February 2, 2007.
    
    Incorporated by reference
to Exhibit 4.1 to the
Registrants Current Report
on Form 8-K filed February
6, 2007.4.4
    
    Form of Warrant to purchase
shares of the Registrants
common stock dated February
6, 2007 issued pursuant to
the Securities Purchase
Agreement among the
Registrant and the
purchasers signatory
thereto dated as of
February 5, 2007.
    
    Incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report
on Form 8-K filed February
6, 2007.4.5
    
    Form of Registration Rights
Agreement dated as of
February 2, 2007 entered
into pursuant to the
Securities Purchase
Agreement among the
Registrant and the
purchasers signatory
thereto dated as of
February 2, 2007.
    
    Incorporated by reference
to Exhibit 99.2 to the
Registrants Current Report
on Form 8-K filed February
6, 2007.4.6
    
    Form of Registration Rights
Agreement dated as of
February 5, 2007 entered
into pursuant to the
Securities Purchase
Agreement among the
Registrant and the
purchasers signatory
thereto dated as of
February 5, 2007.
    
    Incorporated by reference
to Exhibit 99.4 to the
Registrants Current Report
on Form 8-K filed February
6, 2007.
 38




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##### Table of Contents



Exhibit No.
    
    Exhibit
    
    Method of Filing4.7
    
    Form of Warrant to purchase
shares of the Registrants
common stock dated February
9, 2007 issued pursuant to
the Securities Purchase
Agreement among the
Registrant and the
purchaser signatory thereto
dated as of February 9,
2007.
    
    Incorporated by reference
to Exhibit 4.1 to the
Registrants Current Report
on Form 8-K filed February
12, 2007.4.8
    
    Form of Registration Rights
Agreement dated as of
February 9, 2007 entered
into pursuant to the
Securities Purchase
Agreement among the
Registrant and the
purchaser signatory thereto
dated as of February 9,
2007.
    
    Incorporated by reference
to Exhibit 99.2 to the
Registrants Current Report
on Form 8-K filed February
12, 2007.4.9
    
    Form of Registration Rights
Agreement entered into
between the Registrant and
the shareholders signatory
thereto in connection with
the Agreement and Plan of
Merger, dated as of April
4, 2007, among the
Registrant, sentitO
Networks, Inc., SN
Acquisition Corporation and
Brett Hauser as the
Stockholders Agent.
    
    Incorporated by reference
to Exhibit 4.1 to the
Registrants Current Report
on Form 8-K filed April 23,
2007.4.10
    
    Form of Warrant issued in
connection with the
Agreement and Plan of
Merger, dated as of April
4, 2007, among the
Registrant, sentitO
Networks, Inc., SN
Acquisition Corporation and
Brett Hauser as the
Stockholders Agent.
    
    Incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report
on Form 8-K filed April 23,
2007.4.11
    
    Form of Warrant issued on
January 31, 2007 to
placement agents in
connection with the
Registrants first quarter
2007 private placement.
    
    Incorporated by reference
to Exhibit 4.1 to the
Registrants Registration
statement on Form S-3 filed
on April 24, 2007 (No.
333-142339).4.12
    
    Form of Warrant issued on
February 5, 2007 to
placement agents in
connection with the
Registrants first quarter
2007 private placement.
    
    Incorporated by reference
to Exhibit 4.2 to the
Registrants Registration
statement on Form S-3 filed
on April 24, 2007 (No.
333-142339).4.13
    
    Form of Warrant issued on
February 9, 2007 to
placement agents in
connection with the
Registrants first quarter
2007 private placement.
    
    Incorporated by reference
to Exhibit 4.3 to the
Registrants Registration
statement on Form S-3 filed
on April 24, 2007 (No.
333-142339).10.1
    
    Securities Purchase
Agreement dated as of
January 30, 2007 among the
Registrant and the
purchasers signatory
thereto.
    
    Incorporated by reference
to Exhibit 99.1 to the
Registrants Current Report
on Form 8-K filed January
31, 2007.10.2
    
    Securities Purchase
Agreement dated as of
February 2, 2007 among the
Registrant and the
purchasers signatory
thereto.
    
    Incorporated by reference
to Exhibit 99.1 to the
Registrants Current Report
on Form 8-K filed February
6, 2007.10.3
    
    Securities Purchase
Agreement dated as of
February 5, 2007 among the
Registrant and the
purchasers signatory
thereto.
    
    Incorporated by reference
to Exhibit 99.3 to the
Registrants Current Report
on Form 8-K filed February
6, 2007.
 39




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##### Table of Contents



Exhibit No.
    
    Exhibit
    
    Method of Filing10.4
    
    Securities Purchase
Agreement dated as of
February 9, 2007 among the
Registrant and the
purchaser signatory
thereto.
    
    Incorporated by reference
to Exhibit 99.1 to the
Registrants Current Report
on Form 8-K filed February
12, 2007.10.5
    
    Escrow Agreement dated as
of April 17, 2007 among the
Registrant, the
Stockholders Agent and
SunTrust Bank, a Georgia
Banking Corporation.
    
    Incorporated by reference
to Exhibit 99.1 to the
Registrants Current Report
on Form 8-K filed April 23,
2007.10.6
    
    Amendment to Intellectual
Property Security Agreement
dated as of May 10, 2007
among the Registrant,
Telemate.Net Software,
Inc., Verso Verilink, LLC
and Laurus Master Fund,
Ltd.
    
    Filed herewith.10.7
    
    Trademark Assignment of
Security dated as of May
10, 2007 among the
Registrant and Laurus
Master Fund, Ltd.
    
    Filed herewith.10.8
    
    Patent Assignment of
Security dated as of May
10, 2007 among the
Registrant and Laurus
Master Fund, Ltd.
    
    Filed herewith.10.9
    
    Patent Assignment of
Security dated as of April
18, 2007 among sentitO
Networks, Inc. and Laurus
Master Fund, Ltd.
    
    Filed herewith.10.10
    
    Patent Assignment of
Security dated as of April
18, 2007 among sentitO
Networks, Inc. and Laurus
Master Fund, Ltd.
    
    Filed herewith.10.11
    
    Joinder Agreement dated as
of April 17, 2007 among
sentitO Networks, Inc. and
Laurus Master Fund, Ltd.
    
    Filed herewith.31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification by the
Registrants Chief
Executive Officer.
    
    Filed herewith.31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification by the
Registrants Chief
Financial Officer.
    
    Filed herewith.32.1
    
    Section 1350 Certification
by the Registrants Chief
Executive Officer.
    
    Filed herewith.32.2
    
    Section 1350 Certification
by the Registrants Chief
Financial Officer.
    
    Filed herewith.
 40