U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




FORM
10-Q


(Mark
One)




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934




For the
Quarterly period ended March 31, 2009




o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE EXCHANGE ACT




For the
transition period from ______________ to ______________




Commission
file number 000-28195




VERSADIAL,
INC.


(Exact
name of small business issuer as specified in its charter)





Nevada
            11-3535204(State
      or other jurisdiction of
            (State
      or I.R.S. Employerincorporation
      of organization)
            Identification
      Number)




350
Jericho Turnpike, Suite 300, Jericho, New York 11753


(Address
of principal executive offices)




212-986-0886


(Issuer's
telephone number including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the  Exchange Act  during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.




Yes x No  ̈


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
  Yes  ̈ No  ̈




Indicate
by check mark whether the registrant  is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12B-2 of the
Exchange Act. (Check one):




Large
accelerated filer  ̈         Accelerated
filer   ̈   Non-accelerated
filer     ̈         Smaller
reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12B-2 of the Exchange Act).




Yes  ̈ No x




APPLICABLE
ONLY TO CORPORATE ISSUERS




Indicate
the number of shares outstanding of each of the issuer's class of common stock,
as of the latest practicable date: 18,309,194 shares of common stock, par value
$0.0001 per share, as of May 20, 2009.









VERSADIAL,  INC.


FORM
10-Q


QUARTERLY
REPORT


For the Nine Months Ended
March 31, 2009





TABLE
OF CONTENTS





Part I - Financial InformationItem
      1.  Consolidated Interim Financial Statements:Consolidated
      Interim Balance Sheet
                    
                    
                    1Consolidated
      Interim Statements of Operations
                    
                    
                    2Consolidated
      Interim Statements of Cash Flows
                    
                    
                    3-4Notes
      to Consolidated Interim Financial Statements
                    
                    
                    5-17Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations
                    
                    
                    18-28Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
                    
                    
                    28Item
      4.  Controls and Procedures
                    
                    
                    28-29Part
      II. - Other Information
                    
                    
                    30Signatures
                    
                    
                    31Exhibit
      31Exhibit
      32









Item
1. Consolidated Interim Financial Statements
 
 VERSADIAL,
INC.
 
 CONSOLIDATED
INTERIM BALANCE SHEETS
 March
      31,
                                                                    
                                                                    
                                                                    June
      30,2009
                                                                    
                                                                    
                                                                    2008(Unaudited)ASSETSCurrent
      assetsCash
                                                                    
                                                                    $
                                                                    720,718
                                                                    
                                                                    
                                                                    $
                                                                    216,705Restricted
      cash
                                                                    
                                                                    
                                                                    895,750Due
      from affiliates
                                                                    
                                                                    
                                                                    24,064
                                                                    
                                                                    
                                                                    
                                                                    23,964Accounts
      receivable
                                                                    
                                                                    
                                                                    1,167,261
                                                                    
                                                                    
                                                                    
                                                                    550,554Prepaid
      inventories
                                                                    
                                                                    
                                                                    229,793Sublease
      and other receivable
                                                                    
                                                                    
                                                                    33,000
                                                                    
                                                                    
                                                                    
                                                                    19,500Inventories
                                                                    
                                                                    
                                                                    499,150
                                                                    
                                                                    
                                                                    
                                                                    261,349Prepaid
      expenses and other current assets
                                                                    
                                                                    
                                                                    187,519
                                                                    
                                                                    
                                                                    
                                                                    19,425Total
      current assets
                                                                    
                                                                    
                                                                    3,757,255
                                                                    
                                                                    
                                                                    
                                                                    1,091,497Property and equipment,
      net
                                                                    
                                                                    
                                                                    10,934,808
                                                                    
                                                                    
                                                                    
                                                                    5,692,425Other
      assetsDevelopment
      of production equipment in progress
                                                                    
                                                                    
                                                                    129,904
                                                                    
                                                                    
                                                                    
                                                                    5,599,615Deferred
      financing costs
                                                                    
                                                                    
                                                                    305,774
                                                                    
                                                                    
                                                                    
                                                                    196,000Security
      deposit
                                                                    
                                                                    
                                                                    34,155
                                                                    
                                                                    
                                                                    
                                                                    34,155Total
      other assets
                                                                    
                                                                    
                                                                    469,833
                                                                    
                                                                    
                                                                    
                                                                    5,829,770$
                                                                    15,161,896
                                                                    
                                                                    
                                                                    $
                                                                    12,613,692LIABILITIES
      AND STOCKHOLDERS'  DEFICITCurrent
      liabilitiesSecured
      accounts receivable financing and interest, related party
                                                                    
                                                                    $
                                                                    163,540
                                                                    
                                                                    
                                                                    $
                                                                    108,705Notes,
      interest and financing fees payable, net of debt discountof
      $36,750 and $nil
                                                                    
                                                                    
                                                                    4,907,095
                                                                    
                                                                    
                                                                    
                                                                    233,439Notes
      and interest payable, related parties
                                                                    
                                                                    
                                                                    2,894,915
                                                                    
                                                                    
                                                                    
                                                                    1,162,434Convertible
      note and interest payable
                                                                    
                                                                    
                                                                    10,225,773
                                                                    
                                                                    
                                                                    
                                                                    116,665Accounts
      payable and accrued expenses
                                                                    
                                                                    
                                                                    5,304,725
                                                                    
                                                                    
                                                                    
                                                                    4,679,186Due
      to licensor
                                                                    
                                                                    
                                                                    1,086,008Capital
      lease obligations
                                                                    
                                                                    
                                                                    3,427,520
                                                                    
                                                                    
                                                                    
                                                                    3,772,599Due
      to related parties
                                                                    
                                                                    
                                                                    238,639
                                                                    
                                                                    
                                                                    
                                                                    275,775Deferred
      revenue
                                                                    
                                                                    
                                                                    638,590
                                                                    
                                                                    
                                                                    
                                                                    153,264Customer
      deposits
                                                                    
                                                                    
                                                                    18,911
                                                                    
                                                                    
                                                                    
                                                                    45,570Total
      current liabilities
                                                                    
                                                                    
                                                                    28,905,716
                                                                    
                                                                    
                                                                    
                                                                    10,547,637Long-term
      liabilitiesConvertible
      note and interest payable, net of debtdiscount
      of  $154,605
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    9,017,266Notes
      and interest payable, related parties
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1,595,381Due
      to licensor
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    809,027Customer
      advance
                                                                    
                                                                    
                                                                    1,700,000
                                                                    
                                                                    
                                                                    
                                                                    1,700,000Derivative
      financial instruments
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    235,203Sublease
      security deposit, affiliate
                                                                    
                                                                    
                                                                    6,830
                                                                    
                                                                    
                                                                    
                                                                    6,830Total
      long-term liabilities
                                                                    
                                                                    
                                                                    1,706,830
                                                                    
                                                                    
                                                                    
                                                                    13,363,707Commitments
      and contingenciesStockholders'
      deficitPreferred
      stock, $.0001 par value, 2 million shares authorized,zero
      issued and outstandingCommon
      stock, $.0001 par value, 35 million shares authorized,18,309,194
      issued and outstanding
                                                                    
                                                                    
                                                                    1,831
                                                                    
                                                                    
                                                                    
                                                                    1,831Additional
      paid-in-capital
                                                                    
                                                                    
                                                                    8,839,937
                                                                    
                                                                    
                                                                    
                                                                    8,722,502Accumulated
      deficit
                                                                    
                                                                    
                                                                    (24,292,418
                                                                    )
                                                                    
                                                                    
                                                                    (20,021,985
                                                                    )Total
      stockholders' deficit
                                                                    
                                                                    
                                                                    (15,450,650
                                                                    )
                                                                    
                                                                    
                                                                    (11,297,652
                                                                    )$
                                                                    15,161,896
                                                                    
                                                                    
                                                                    $
                                                                    12,613,692
  See
accompanying notes to consolidated interim financial statements
  1
  VERSADIAL,
INC.
 
 CONSOLIDATED
INTERIM STATEMENTS OF OPERATIONS
 Nine
      Months Ended
                                                                                
                                                                                
                                                                                Three
      Months EndedMarch
      31,
                                                                                
                                                                                
                                                                                March
      31,2009
                                                                                
                                                                                
                                                                                2008
                                                                                
                                                                                
                                                                                2009
                                                                                
                                                                                
                                                                                2008(unaudited)
                                                                                
                                                                                
                                                                                (unaudited)
                                                                                
                                                                                
                                                                                (unaudited)
                                                                                
                                                                                
                                                                                (unaudited)Net
      revenues
                                                                                
                                                                                $
                                                                                4,839,100
                                                                                
                                                                                
                                                                                $
                                                                                2,422,984
                                                                                
                                                                                
                                                                                $
                                                                                3,391,793
                                                                                
                                                                                
                                                                                $
                                                                                1,251,010Cost
      of revenuesDirect
      costs
                                                                                
                                                                                
                                                                                3,433,862
                                                                                
                                                                                
                                                                                
                                                                                2,145,122
                                                                                
                                                                                
                                                                                
                                                                                2,590,920
                                                                                
                                                                                
                                                                                
                                                                                978,635Indirect
      costs
                                                                                
                                                                                
                                                                                1,549,026
                                                                                
                                                                                
                                                                                
                                                                                1,470,224
                                                                                
                                                                                
                                                                                
                                                                                672,978
                                                                                
                                                                                
                                                                                
                                                                                619,5134,982,888
                                                                                
                                                                                
                                                                                
                                                                                3,615,346
                                                                                
                                                                                
                                                                                
                                                                                3,263,898
                                                                                
                                                                                
                                                                                
                                                                                1,598,148Gross
      margin
                                                                                
                                                                                
                                                                                (143,788
                                                                                )
                                                                                
                                                                                
                                                                                (1,192,362
                                                                                )
                                                                                
                                                                                
                                                                                127,895
                                                                                
                                                                                
                                                                                
                                                                                (347,138
                                                                                )Operating
      expensesGeneral
      and administrative
                                                                                
                                                                                
                                                                                2,217,813
                                                                                
                                                                                
                                                                                
                                                                                2,423,393
                                                                                
                                                                                
                                                                                
                                                                                768,395
                                                                                
                                                                                
                                                                                
                                                                                840,032Loss
      from operations
                                                                                
                                                                                
                                                                                (2,361,601
                                                                                )
                                                                                
                                                                                
                                                                                (3,615,755
                                                                                )
                                                                                
                                                                                
                                                                                (640,500
                                                                                )
                                                                                
                                                                                
                                                                                (1,187,170
                                                                                )Other
      income (expenses)Sublease
      income, affiliates
                                                                                
                                                                                
                                                                                38,245
                                                                                
                                                                                
                                                                                
                                                                                35,745
                                                                                
                                                                                
                                                                                
                                                                                12,415
                                                                                
                                                                                
                                                                                
                                                                                11,415Interest
      expense
                                                                                
                                                                                
                                                                                (1,430,268
                                                                                )
                                                                                
                                                                                
                                                                                (1,288,923
                                                                                )
                                                                                
                                                                                
                                                                                (552,963
                                                                                )
                                                                                
                                                                                
                                                                                (391,965
                                                                                )Interest
      expense, related parties
                                                                                
                                                                                
                                                                                (167,446
                                                                                )
                                                                                
                                                                                
                                                                                (133,421
                                                                                )
                                                                                
                                                                                
                                                                                (55,818
                                                                                )
                                                                                
                                                                                
                                                                                (52,309
                                                                                )Amortization
      of debt discount
                                                                                
                                                                                
                                                                                (215,855
                                                                                )
                                                                                
                                                                                
                                                                                (544,120
                                                                                )
                                                                                
                                                                                
                                                                                (63,212
                                                                                )
                                                                                
                                                                                
                                                                                (140,085
                                                                                )Amortization
      of financing costs
                                                                                
                                                                                
                                                                                (1,211,334
                                                                                )
                                                                                
                                                                                
                                                                                (318,420
                                                                                )
                                                                                
                                                                                
                                                                                (639,485
                                                                                )
                                                                                
                                                                                
                                                                                (97,776
                                                                                )Gain
      on forgiveness of debt
                                                                                
                                                                                
                                                                                539,905
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                539,905Gain
      on derivative financial instruments
                                                                                
                                                                                
                                                                                230,658
                                                                                
                                                                                
                                                                                
                                                                                1,444,293
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                1,254,395Gain
      (loss) on foreign currency exchange
                                                                                
                                                                                
                                                                                307,263
                                                                                
                                                                                
                                                                                
                                                                                (249,672
                                                                                )
                                                                                
                                                                                
                                                                                5,251
                                                                                
                                                                                
                                                                                
                                                                                (155,047
                                                                                )(1,908,832
                                                                                )
                                                                                
                                                                                
                                                                                (1,054,518
                                                                                )
                                                                                
                                                                                
                                                                                (753,907
                                                                                )
                                                                                
                                                                                
                                                                                428,628Net
      loss
                                                                                
                                                                                $
                                                                                (4,270,433
                                                                                )
                                                                                
                                                                                $
                                                                                (4,670,273
                                                                                )
                                                                                
                                                                                $
                                                                                (1,394,407
                                                                                )
                                                                                
                                                                                $
                                                                                (758,542
                                                                                )Weighted
      average common shares outstandingBasic
      and Diluted
                                                                                
                                                                                
                                                                                18,309,194
                                                                                
                                                                                
                                                                                
                                                                                15,655,283
                                                                                
                                                                                
                                                                                
                                                                                18,309,194
                                                                                
                                                                                
                                                                                
                                                                                17,375,861Loss
      per common shareBasic
      and Diluted
                                                                                
                                                                                $
                                                                                (0.23
                                                                                )
                                                                                
                                                                                $
                                                                                (0.30
                                                                                )
                                                                                
                                                                                $
                                                                                (0.08
                                                                                )
                                                                                
                                                                                $
                                                                                (0.04
                                                                                )
 
 See
accompanying notes to consolidated interim financial statements
  2
  VERSADIAL,
INC.
 CONSOLIDATED
INTERIM STATEMENTS OF CASH FLOWS
 
 Nine
      Months EndedMarch
      31,2009
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)Cash
      flows from operating activitiesNet
      loss
                      
                      $
                      (4,270,433
                      )
                      
                      $
                      (4,670,273
                      )Adjustments
      to reconcile net loss to net cashprovided
      by (used in) operating activities:Depreciation
      and amortization
                      
                      
                      1,358,137
                      
                      
                      
                      840,290Amortization
      of debt discount
                      
                      
                      215,855
                      
                      
                      
                      544,120Amortization
      of financing costs
                      
                      
                      1,211,334
                      
                      
                      
                      318,420Gain
      on forgiveness of debt
                      
                      
                      (539,905
                      )Gain
      on derivative financial instruments
                      
                      
                      (230,658
                      )
                      
                      
                      (1,444,293
                      )Compensation
      expense for issuance of warrants
                      
                      
                      14,890
                      
                      
                      
                      47,181Changes
      in operating assets and liabilities:Due
      from affiliates
                      
                      
                      (100
                      )
                      
                      
                      5,575Accounts
      receivable
                      
                      
                      (616,707
                      )
                      
                      
                      (76,475
                      )Prepaid
      inventories
                      
                      
                      1,215,707Sublease
      and other receivable
                      
                      
                      (13,500
                      )
                      
                      
                      (15,000
                      )Inventories
                      
                      
                      (237,801
                      )
                      
                      
                      133,234Prepaid
      expenses and other current assets
                      
                      
                      (168,094
                      )
                      
                      
                      49,556Due
      to licensor
                      
                      
                      276,981
                      
                      
                      
                      269,407Accounts
      payable and accrued expenses
                      
                      
                      1,776,820
                      
                      
                      
                      2,147,209Due
      to related parties
                      
                      
                      (37,136
                      )
                      
                      
                      60,149Deferred
      revenue
                      
                      
                      (960,174
                      )
                      
                      
                      226,386Customer
      deposits
                      
                      
                      (26,659
                      )Interest
      payable
                      
                      
                      1,487,175
                      
                      
                      
                      1,161,265Net
      cash provided by (used in) operating activities
                      
                      
                      455,732
                      
                      
                      
                      (403,249
                      )Cash
      flows from investing activitiesProceeds
      from private placement
                      
                      
                      
                      
                      
                      
                      2,800,000Purchase
      of equipment
                      
                      
                      (9,216
                      )
                      
                      
                      (624,617
                      )Payments
      of development of production equipment in progress
                      
                      
                      (1,121,593
                      )
                      
                      
                      (2,828,369
                      )Payments
      for registration costs
                      
                      
                      
                      
                      
                      
                      (35,086
                      )Payments
      for private placement costs
                      
                      
                      
                      
                      
                      
                      (127,385
                      )Distributions
      to investors
                      
                      
                      
                      
                      
                      
                      (8,514
                      )Net
      cash used in investing activities
                      
                      
                      (1,130,809
                      )
                      
                      
                      (823,971
                      )Cash
      flows from financing activitiesProceeds
      from secured accounts receivable financing, related party
                      
                      
                      627,000Proceeds
      from issuance of notes, related parties
                      
                      
                      
                      
                      
                      
                      2,225,000Proceeds
      from issuance of notes
                      
                      
                      1,727,611
                      
                      
                      
                      1,200,000Payment
      on notes payable to related parties
                      
                      
                      
                      
                      
                      
                      (1,185,567
                      )Payments  on
      secured accounts receivable financing, related party
                      
                      
                      (580,442
                      )Payment
      on note payable
                      
                      
                      
                      
                      
                      
                      (106,186
                      )Payments
      on capital leases
                      
                      
                      (345,079
                      )
                      
                      
                      (505,253
                      )Payments
      for financing costs
                      
                      
                      (250,000
                      )
                      
                      
                      (40,000
                      )Net
      cash provided by financing activities
                      
                      
                      1,179,090
                      
                      
                      
                      1,587,994Net
      increase in cash
                      
                      
                      504,013
                      
                      
                      
                      360,774Cash,
      beginning of period
                      
                      
                      216,705
                      
                      
                      
                      134,361Cash,
      end of period
                      
                      $
                      720,718
                      
                      
                      $
                      495,135
 
 See
accompanying notes to consolidated interim financial statements
  3
  VERSADIAL,
INC.
 CONSOLIDATED INTERIM
STATEMENTS OF CASH FLOWS (CONTINUED)
 
 Nine
      Months EndedMarch
      31,2009
                                              
                                              
                                              2008(unaudited)
                                              
                                              
                                              (unaudited)Supplemental
      disclosure of cash flow information,cash
      paid during the period for interest
                                              
                                              $
                                              37,447
                                              
                                              
                                              $
                                              228,062Supplemental
      disclosure of non-cash operating, investing, and financing
      activities:Customer
      deposit paid direct to vendor
                                              
                                              $
                                              1,445,500
                                              
                                              
                                              $
                                              -Convertible
      debentures and note converted to common stock
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              4,000,000Interest
      paid in common stock
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              796,687Purchase
      of equipment financed by lease obligation
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              4,350,201Reclassification
      of deposit and development of production equipment in progress to
      equipment
                                              
                                              $
                                              6,591,302
                                              
                                              
                                              $
                                              147,493Interest
      converted to principal on convertible debenture
                                              
                                              $
                                              621,021
                                              
                                              
                                              $
                                              379,688Debt
      discount related to note
                                              
                                              $
                                              98,000
                                              
                                              
                                              $
                                              -Reclassification
      of deferred financing costs to accounts payable
                                              
                                              $
                                              96,108
                                              
                                              
                                              $
                                              -Reclassification
      of deferred financing costs to financing fees payable
                                              
                                              $
                                              900,000
                                              
                                              
                                              $
                                              -Issuance
      of JBCP-24 note
                                              
                                              $
                                              3,445,750
                                              
                                              
                                              $
                                              -Restricted
      cash retained by lender
                                              
                                              
                                              (895,750
                                              )Payments
      made directly to vendors
                                              
                                              
                                              (1,247,389
                                              )Financing
      costs
                                              
                                              
                                              (75,000
                                              )Net
      proceeds received
                                              
                                              $
                                              1,227,611
                                              
                                              
                                              $
                                              -
 
 See
accompanying notes to consolidated interim financial statements
  4




VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





1.
            Basis
      of presentation and consolidation





The
accompanying unaudited consolidated interim financial statements of Versadial,
Inc. (hereinafter referred to as the “Registrant” or “Versadial” or the
“Company”) as of March 31, 2009 and June 30, 2008 and for the nine and three
months ended March 31, 2009 and 2008, reflect all adjustments of a normal and
recurring nature to fully present the consolidated financial position, results
of operations and cash flows for the interim periods.  The unaudited
consolidated interim financial statements include the accounts of the Company,
Versadial, Inc., its wholly owned subsidiary, Innopump, Inc. (“Innopump”) and
Sea Change Group, LLC (“SCG”), a variable interest entity (“VIE”) that the
Company is the primary beneficiary of under Financial Accounting Standards Board
Interpretation 46R, “Consolidation of Variable Interest
Entities”.  All significant intercompany transactions and account
balances have been eliminated in consolidation.  These unaudited
consolidated interim financial statements have been prepared by the Company
according to the instructions of Form 10-Q and pursuant to the U.S. Securities
and Exchange Commission’s (“SEC”) accounting and reporting requirements under
Article 8 and Article 10 of Regulations S-X.  Pursuant to these
instructions, certain financial information and footnote disclosures normally
included in such consolidated financial statements have been condensed or
omitted.





These
unaudited consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto, together with management’s discussion and analysis or plan of
operations, contained in the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2008.  The results of operations for the nine and three
months ended March 31, 2009 are not necessarily indicative of the results that
may occur for the year ending June 30, 2009.





The
consolidated balance sheet as of June 30, 2008 was derived from the Company’s
audited financial statements but does not include all disclosures required by
generally accepted accounting principles in the United States of America (“US
GAAP”).





The
Company’s fiscal year ends on June 30, and therefore references to fiscal 2009
and 2008 refer to the fiscal years ended June 30, 2009 and June 30, 2008,
respectively.





The
Company is engaged in the manufacturing of a dual dispenser that enables the
user to blend two liquids in varying proportions. The dispensers are currently
manufactured in both Germany and the United States and are being utilized in the
food, sun care, skincare, and cosmetic industries.





2.
            Going
      concern and management’s response





The
accompanying unaudited consolidated interim financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. At March 31, 2009, the Company has incurred cumulative losses of
approximately $24.3 million since inception.  The Company has a
working capital deficit of approximately $25.1 million and a stockholders’
deficit of approximately $15.5 million as of March 31, 2009.


5


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





At March
31, 2009, current liabilities include accounts payable and accrued expenses of
approximately $5.3 million of which approximately $2.4 million is for the
purchase and development of new equipment due to two vendors in Germany for
which the Company has reached agreements to defer payment on a portion of these
costs.  In October 2008, the Company reached an agreement with one of
these vendors for the $1.7 million due that vendor at March 31, 2009, to
amortize these costs over production on a per piece basis through June 2009 with
any remaining unamortized balance due in monthly installments from July 2009
through December 2009. The Company’s customer approval of the finished product
was received in January 2009.  The first commercial shipment of the
product was completed in late January 2009.  Amortization costs due
this vendor based on actual production approximated $.3 million at March 31,
2009.  In October 2008, the Company reached an agreement with the
other vendor whereby the Company would pay approximately $275,000 in October
2008 of the outstanding balance and the remaining balance at a rate of
approximately $75,000 per month until paid with interest at
7%.   At March 31, 2009, this vendor is owed approximately $.6
million for the equipment and other related charges and approximately $.1
million in accrued interest.     Approximately $.9
million included in accounts payable is due to a vendor in the United States
for; (a) the amortization of purchased equipment under a capital lease
obligation of approximately $.4 million and; (b) start up costs and additional
equipment at a new U.S. based facility of approximately $.5
million.  Current capital lease obligations of approximately $3.4
million due to the same vendor were to be repaid through amortization of
production based on the number of units produced with any balance due 18 months
from the start of production which commenced in November
2007.  Revenues from production will not cover this
obligation.  In January 2009, the vendor agreed to reduce the amount
of amortization by unit by fifty percent effective January 2009.  The
Company is presently in discussions with this vendor regarding both the past due
balance of amortization and start up costs and extended terms of payment for the
remaining capital lease balance over a longer term and lower amortization rate
based on production forecasts.   Approximately $1.3 million of
current liabilities relates to bridge loans which are due upon the earlier of
June 30, 2009 or out of the proceeds from any new additional financings in
excess of $7.0 million.  Approximately $1.7 million of current
liabilities relates to related party loans which are an obligation of SCG and
are due on December 31, 2009.  The convertible debt of approximately $10.2
million is due on November 9, 2009.  The Company is presently in
discussions with the lender as to possible conversion of the related debt prior
to the maturity date.  In addition, the royalty due to licensor
included in current liabilities of approximately $1.1 million will not be due
prior to July 1, 2009 as per the terms of an agreement with the licensor. (See
Notes 7, 9 and 12).





On
October 20, 2008, Innopump entered into an unsecured loan agreement with SCG.
SCG is the sublicensor of the patented technology used in the manufacturing of
the Company’s proprietary products. The loan is for a principal amount of $3,445,750,
matures on June 29, 2009 and bears interest at the rate of one and eighty three
hundredths percent (1.83%) per month. The net proceeds from the loan aggregated
$1,227,611, after fees of  $75,000, the required establishment of a
cash collateral account of approximately $895,750 and payments made directly by
the lender to the Company’s vendors of $1,247,389. From the net proceeds, the
Company paid additional financing costs of $250,000 to the
lender.  The remaining proceeds of the loan were used primarily for
working capital purposes including (i) payment of current accounts payable and
other outstanding obligations and (ii) funding anticipated working capital
requirements including product development and the acquisition of tooling and
molds (see Note 8).





On March
3, 2009, Versadial entered into an Advances Agreement, in conjunction with a
binding term sheet, with FURSA Master Global Event Driven Fund, L.P. (“FURSA” or
the “Investor”). FURSA advanced $500,000 to Versadial on March 3, 2009 and
agreed to use its best efforts thereafter on the first day of each of the four
succeeding months to make additional advances of $250,000 each to
Versadial.  As of May 20, 2009, the Company has received an aggregate
of $750,000 from FURSA. The proceeds of the advances were used primarily for
working capital purposes including (i) payment of current accounts payable and
other outstanding obligations and (ii) funding anticipated working capital
requirements including product development and the acquisition of tooling and
molds (see Note 9).





Management
recognizes that the Company must generate additional revenue and gross profits
to achieve profitable operations. Management's plans to increase revenues
include the continued building of its customer base and product
lines.  In regard to these objectives, the Company commenced
commercial production in connection with a supply agreement with a customer in
the consumer products industry as related to the manufacture of a new size
(20mm) dispenser in January 2009 (see Note 12).  In addition, the
Company relocated its operations for the production of its two current product
lines (the 40mm and 49mm size dispensers) from Germany to the United
States.  The manufacturing facility in the United States commenced
operations in November 2007 and became fully operational in February
2008.  This new facility has increased both production capacity and
gross profit margins on these product lines and management anticipates these
trends to continue in the current fiscal year (see Note
12).  Management believes that the capital received to date from
previous financings will not be sufficient to pay current financial obligations,
inclusive of capital equipment commitments which were incurred in order to
expand the Company’s product lines and increase production capacity, fund
operations, and repay debt during the next twelve months.  Additional
debt or equity financing will be required which may include receivables or
purchase order financing, the issuance of new debt or equity instruments under
the terms of a private placement, additional amortization of a portion of
construction costs through the Company’s production partners and possible
restructuring of current amortization and debt agreements.


6





VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





There can
be no assurance that the Company will be successful in building its customer
base and product lines or that available capital will be sufficient to fund
current operations and to meet financial obligations as it relates to capital
expenditures and debt repayment until such time that the revenues increase to
generate sufficient profit margins to cover operating costs and amortization of
capital equipment. If the Company is unsuccessful in building its customer base
or is unable to obtain additional financing on terms favorable to the Company,
there could be a material adverse effect on the consolidated financial position,
results of operations and cash flows of the Company. The accompanying unaudited
consolidated interim financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.





3.
            Summary
      of significant accounting policies





Accounts
Receivable





The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable and
establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions. Accounts are written
off as uncollectible at the discretion of management. There was no allowance for
doubtful accounts at March 31, 2009 and June 30, 2008.





Inventories





Inventories,
which consist principally of raw materials and finished goods, are stated at
cost on the first-in, first-out basis, which does not exceed market value.
Finished goods are assembled per customer specifications and shipped upon
completion.





Revenue
Recognition





Revenues
are generally recognized at the time of shipment. The Company requires deposits
from certain customers which are recorded as current liabilities until the time
of shipment. All shipments for goods produced at the Company’s subcontractor
manufacturing facility in the United States are picked up by the customers’
freight forwarders and are F.O.B. from the Company’s subcontractor. Shipments
for goods produced at the Company’s subcontractor manufacturing facility in
Germany are either shipped F.O.B  to the customer or at the expense
and risk of the subcontractor.  The Company bears no economic risk for
goods damaged or lost in transit.





Depreciation
and Amortization





Property
and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets. The Company
provides for depreciation and amortization over the following estimated useful
lives:





Machinery
      and equipment
              7 YearsMolds
              2-7 YearsComputer
      equipment
              3 Years





Costs of
maintenance and repairs are expensed as incurred while betterments and
improvements are capitalized.





Classification
of Expenses





Cost of
revenues are classified as either direct or indirect costs. Direct costs consist
primarily of expenses at the Company’s three major subcontractor manufacturing
facilities in the United States and Germany which include production of molded
parts, assembly labor, and in certain cases filling of finished product.
Indirect costs consist primarily of equipment repair and maintenance,
depreciation of equipment and molds, the costs of ongoing and new product
development, and technical and administrative support costs as directly related
to production functions such as purchasing and receiving. General and
administrative expenses consist mainly of royalties, salaries of overhead
personnel, consulting fees, legal and professional fees, travel, and other
general expenses.


7


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





Loss
Per Share





In
accordance with SFAS No. 128, “Earnings Per Share” (“SFAS
128”), net loss per common share amounts (“basic EPS”) are computed by dividing
net loss by the weighted-average number of common shares outstanding and
excluding any potential dilution.  Net loss per common share amounts
assuming dilution (“diluted EPS”) are generally computed by reflecting potential
dilution from conversion of convertible securities and the exercise of stock
options and warrants.  However, because their effect is antidilutive,
the Company has excluded stock warrants and the potential conversion of
convertible securities aggregating 12,196,089 from the computation of diluted
EPS for the nine and three months ended March 31, 2009, respectively, and
10,992,217 for the nine and three months ended March 31, 2008,
respectively.





Fair
Value of Financial Instruments





The fair
value of the Company's assets and liabilities, which qualify as financial
instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107,
"Disclosures About Fair Value of Financial Instruments,” approximate the
carrying amounts presented in the accompanying balance sheet.





Impairment
of Long-Lived Assets





Certain
long-lived assets of the Company are reviewed at least annually to determine
whether there are indications that their carrying value has become impaired,
pursuant to guidance established in SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". Management considers assets to be impaired if
the carrying value exceeds the future projected cash flows from related
operations (undiscounted and without interest charges). If impairment is deemed
to exist, the assets will be written down to fair value. Management also
reevaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. In the fourth
quarter of fiscal 2008, we tested for impairment of our long lived assets as
part of our annual long-lived asset impairment review. There were no impairment
charges for the nine months ended March 31, 2009 or for the year ended June 30,
2008. There can be no assurance that there will not be impairment charges in
subsequent periods as a result of our future periodic impairment reviews. To the
extent that future impairment charges occur, they will likely have a material
impact on our financial results.





Foreign
Currency Transactions




The
Company complies with SFAS No. 52 “Foreign Operations and Currency Translation”.
All foreign currency transaction gains and losses are included in the Company’s
net income (loss) in the period the exchange rate changes.





Derivative
Financial Instruments





The
Company accounts for non-hedging contracts that are indexed to, and potentially
settled in, its own common stock in accordance with the provisions of Emerging
Issues Task Force (“EITF”) No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".
These non-hedging contracts accounted for in accordance with EITF No. 00-19
include freestanding warrants and options to purchase the Company's common stock
as well as embedded conversion features that have been bifurcated from the host
financing contract in accordance with the requirements of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". Under certain
circumstances that could require the Company to settle these equity items in
cash or stock, and without regard to probability, EITF 00-19 could require the
classification of all or part of the item as a liability and the adjustment of
that reclassified amount to fair value at each reporting date, with such
adjustments reflected in the Company's consolidated statements of
operations.  In the event the circumstances that previously required
the Company to classify those items as liabilities expire, the classification of
those items will revert to equity.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.


8


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“FAS 141R”). FAS 141R establishes principles and requirements for
how the acquirer in a business combination recognizes and measures in its
financial statements the fair value of identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at the
acquisition date. FAS 141R determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. FAS 141R is effective January 1, 2009. The Company
is currently evaluating the impact of adopting FAS 141R on its consolidated
results of operations and financial condition and plans to adopt it as required
in the first quarter of fiscal 2010.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“FAS 160”), an amendment of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB
51”).  FAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parent’s equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and upon
a loss of control, the interest sold, as well as any interest retained, will be
recorded at fair value with any gain or loss recognized in earnings. This
pronouncement is effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the impact of adopting FAS 160 on the
consolidated results of operations and financial condition and plans to adopt it
as required in the first quarter of fiscal 2010.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“FAS 161”).  FAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. The objective of the guidance
is to provide users of financial statements with an enhanced understanding of
how and why an entity uses derivative instruments; how derivative instruments
and related hedged items are accounted for; and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. FAS 161 is effective for fiscal years beginning
after November 15, 2008. Management is currently evaluating the impact FAS 161
will have on the Company’s consolidated financial statements.





In
April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) FAS 157-4, Determining Fair Value when the Volume and
Level of Activity for the Asset or Liability have Significantly Decreased and
Identifying Transactions that are not Orderly (“FSP 157-4”), which is effective
for the Company for the quarterly period beginning April 1, 2009. FSP 157-4
affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date under current market conditions. The FSP provides guidance for
estimating fair value when the volume and level of market activity for an asset
or liability have significantly decreased and determining whether a transaction
was orderly. This FSP applies to all fair value measurements when appropriate.
The Company does not expect that the adoption of this statement will have a
significant impact on its financial statements based on current market
conditions.





In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (“FSP 107-1”), which is effective for
the Company for the quarterly period beginning April 1, 2009. FSP 107-1
requires an entity to provide the annual disclosures required by FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments , in its
interim financial statements. The Company will provide the additional
disclosures required by FSP 107-1 in its year end report on Form 10-K for the
year  ended June 30, 2009.


9


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009




4.           Inventories




Inventories
consist of the following:





March
      31,
                    
                    
                    June
      30,2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    387,792
                    
                    
                    $
                    116,368Work-in-process
                    
                    
                    127
                    
                    
                    
                    3,303Finished
      goods
                    
                    
                    111,231
                    
                    
                    
                    141,678$
                    499,150
                    
                    
                    $
                    261,349




5.       Secured
Accounts Receivable and Purchase Order Financing, Related Party




Beginning
in May 2008, the Company began raising short-term financing through financing
its accounts receivable. Under this program, specific accounts receivable are
sold at a discount and the Company retains the right to repurchase the accounts,
subject to a 1.5% per month financing charge.  The Company records
this as a financing transaction in which the receivables sold are carried on the
consolidated balance sheet and the amount to be repaid is reflected as
short-term debt.  At March 31, 2009 and June 30, 2008, this liability
approximated $164,000 and $109,000 respectively, inclusive of interest was
payable to an entity owned by Richard Harriton, a related party, who serves as a
Director and is a major shareholder of the Company. All accounts receivable sold
at June 30, 2008, were subsequently repurchased by the
Company.  During the nine months ended March 31, 2009, the Company
financed approximately $627,000 of additional receivables and receivables to
arise subsequent to the finance date from this related party.  As of
May20, 2009,
all accounts receivable financed have been repurchased by the
Company.  Interest expense approximated $30,000 and $10,000 for the
nine and three months ended March 31, 2009.





6.    Fair
values of Financial Instruments





Cash,
Accounts Receivable and Accounts Payable





The fair
values of cash, accounts receivable and accounts payable approximate carrying
values due to the short maturity of these items.





Derivatives





The fair
values for certain of the Company’s warrants are based on current settlement
values.





Pursuant
to Paragraph 14 of EITF No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock",
certain warrants issued by the Company met the requirements of and were
accounted for as a liability since the warrants contained registration rights
where Liquidated Damages Warrants would be required to be issued to the holder
in the event the Company failed to receive and maintain an effective
registration.  On February 11, 2009,  the provision of the
warrants providing for registration rights expired.  Accordingly, the
warrants (valued at approximately $5,000) were reclassified as a component of
equity on that date.





The
Company has outstanding warrants which provide for the Company to register the
shares underlying the warrants and are silent as to the penalty to be incurred
in the absence of the Company's ability to deliver registered shares to the
warrant holders upon warrant exercise. Under EITF No. 00-19 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 00-19"), registration of the common stock
underlying the Company's warrants is not within the Company's control. As a
result, the Company must assume that it could be required to settle the warrants
on a net-cash basis, thereby necessitating the treatment of the potential
settlement obligation as a liability. Further EITF No. 00-19, requires the
Company to record the potential settlement liability at each reporting date
using the current estimated fair value of the warrants, with any changes being
recorded through the Company's statement of operations. The potential settlement
obligation related to the warrants will continue to be reported as a liability
until such time that the warrants are exercised, expire, or the Company is
otherwise able to modify the registration requirements in the warrant agreement
to remove the provisions which require this treatment. The fair value of the
warrant liability is determined using the trading value of the warrants.The fair value of these
warrants were $nil at March 31, 2009.


10





VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





The
Company adopted Statement of Financial Accounting Standards 157, "Fair Value
Measurements" (SFAS No. 157”) for the first quarter of the fiscal year ending
June 30, 2009, and there was no material impact to the consolidated financial
statements. SFAS 157 currently applies to all financial assets and liabilities
and for nonfinancial assets and liabilities recognized or disclosed at fair
value on a recurring basis. In February 2008, FASB issued FASB Staff Position
(“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS 157 for certain non-financial assets and non-financial
liabilities to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company is in the process of evaluating the effect, if any, of the adoption of
FSP No. 157-2 will have on its consolidated results of operations or financial
position. The Company does not expect the adoption of FSP No. 157-2 to have
a material effect on its consolidated financial statements.





On
October 10, 2008, the FASB issued FSP FAS No. 157-3, “Fair Value
Measurements” (FSP FAS 157-3), which clarifies the application of SFAS
No. 157 in an inactive market and provides an example to demonstrate how
the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued.  The adoption of this standard did not have a material impact on
the Company’s consolidated results of operations, cash flows or financial
positions.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
155” (“SFAS 159”). This statement permits entities to choose to measure
selected assets and liabilities at fair value. The Company adopted SFAS 159 on
July 1, 2008 resulting in no material impact to the Company’s financial
condition, results of operation or cash flows.





SFAS No.
157 requires disclosure that establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements.  SFAS No.
157 is intended to enable the readers of financial statements to assess the
inputs used to develop those measurements by establishing a hierarchy for
ranking the quality and reliability of the information used to determine fair
values.  SFAS No. 157 requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following
categories:





Level
1:  Quoted market prices in active markets for identical assets or
liabilities.


Level
2:  Observable market based inputs or unobservable inputs that are
corroborated by market data.


Level
3:  Unobservable inputs that are not corroborated by market
data.




SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. SFAS 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The derivative liabilities are valued using the Black-Scholes
model using inputs applicable to each issuance. Such valuation falls under Level
3 of the fair value hierarchy under FAS 157.




The
Company’s financial liabilities classified as Level 3 in the fair value
hierarchy consisting of warrants to purchase common stock, which were accounted
for as derivative financial instruments and had a value of approximately
$235,000 at June 30, 2008. The derivative gain for the nine and three months
ended March 31, 2009 approximated $231,000 and $nil respectively, and $1,444,000
and $1,254,000 for the nine and three months ended March 31, 2008,
respectively.


11


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





7.    License
agreement





In August
2001, SCG entered into a license agreement (“License Agreement”) with Anton
Brugger for the exclusive right to manufacture and sell the dual dispenser. In
January 2003, the License Agreement was amended and restated between SCG (the
“Licensee”) and Gerhard Brugger (the “Licensor”, an assignee of Anton Brugger).
The term of the license will be in effect for the next twenty two years. Gerhard
Brugger is also one of the Company’s major stockholders.





The
License Agreement calls for royalties to be paid to the Licensor 30% of all
gross revenues with respect to sublicensing agreements in which the Licensee
does not manufacture the dispenser. With respect to the sale of the dispenser
and products derived thereof, rates will vary between  the greater of
5% and 8.5% or a minimum royalty per the agreement.





At March
31, 2009 and June 30, 2008, the Licensor was due approximately $1,086,000 and
$809,000 in past due royalties and expenses, respectively.





On
October 20, 2008 Innopump entered into an unsecured loan agreement with SCG. In
order to provide such funds to Innopump, SCG entered into a loan transaction
with a third party lender.  The Licensor gave the third party lender
his consent of a collateral assignment of the License by SCG to the lender and
agreed that any outstanding indebtedness of SCG under the License Agreement,
which aggregated approximately $907,000 at the date of the closing and
$1,086,000 at March 31, 2009, would not be due prior to July 1,
2009.  SCG, in consideration for the Licensor’s cooperation, agreed to
provide cash collateral for its payment obligations under its License Agreement
of $895,750, which Innopump agreed to fund out of the loan proceeds. Where
Innopump complies with the terms of the loan agreement with SCG, this amount
shall be a credit against its loan agreement obligations (see Note
8).





8.    Unsecured
Loan Agreement with SCG





On
October 20, 2008 Innopump entered into an unsecured loan agreement with SCG. SCG
is an affiliate of the Company as members of the Board of Directors own
approximately 69% of the outstanding membership interests of SCG. SCG is the
sublicensor of the patented technology used in the manufacture of the Company’s
proprietary products. The loan is for a principal amount of $3,445,750, matures
on June 29, 2009 and bears interest at the rate of one and eighty three
hundredths percent (1.83%) per month payable in arrears on the first day of each
month or payable in kind at the option of Innopump with the interest being added
to the principal balance.  The agreement also obligates Innopump to
pay a fully earned facility fee of $400,000 at maturity, a commitment fee of
$250,000, which was paid upon execution of the loan, and an in kind non-interest
bearing monitoring fee in the amount of $100,000 per month for five (5)
consecutive months commencing on November 1, 2008 and terminating on March 1,
2009 payable at maturity.  The loan is not prepayable before March 1,
2009.





In order
to provide such funds to Innopump, SCG entered into a loan transaction with a
third party lender.  Innopump’s payment obligations under the terms of
its loan agreement with SCG are equivalent to SCG’s payment obligations to its
lender with the consequence that all loan payments made by Innopump to SCG will
in turn be paid by SCG to its lender. As of March 31, 2009 the aggregate balance
of $4,698,104 included in the consolidated interim financial statements in the
notes, interest, and financing fees payable, net of the debt discount, includes
the principal amount of $3,445,750, interest of $352,354, a facility fee of
$400,000, and five months monitoring fees of $500,000, payable to the third
party lender, under the terms stated above. In addition, the third party lender
was granted a warrant to purchase a 10% membership interest in SCG at an
aggregate price equal to $1. The warrant issued to the lender was valued at the
grant date at approximately $98,000 and is being amortized as debt discount over
the term of the loan. Debt discount expense aggregated approximately $61,000 and
$37,000 for the nine and three months ended March 31, 2009.  The fair
value was calculated using the Black-Scholes model with an expected volatility
of 105% and a risk free interest rate of .76%. The warrant is exercisable
through October 2010. Innopump also executed a letter in favor of the third
party lender to SCG providing an indemnity to such lender in the event the
lender becomes subject to litigation commenced by creditors of the Company on
account of its having made such loan.





Gerhard
Brugger, who is the licensor to SCG of the patented technology sublicensed to
Innopump, gave the third party lender his consent of a collateral assignment of
the License by SCG to the lender and agreed that any outstanding indebtedness of
SCG under the License Agreement, which aggregated approximately $907,000 at the
date of the closing and $1,086,000 at March 31, 2009, would not be due prior to
July 1, 2009.  SCG, in consideration for Mr. Brugger’s cooperation,
agreed to provide cash collateral for its payment obligations to Mr. Brugger
under its License Agreement of $895,750, which Innopump funded out of the loan
proceeds. Where Innopump complies with the terms of the loan agreement with SCG,
this amount shall be a credit against its loan agreement
obligations.   No changes were made in the sublicense agreement
with SCG in connection with this loan.


12




VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





The net
proceeds from the loan aggregated $1,227,611, after fees of $75,000, the
required establishment of a cash collateral account of approximately $895,750
and payments made directly by the lender to the Company’s vendors
of  $1,247,389. From the net proceeds, the Company paid additional
financing costs of $250,000 to the lender.  The remaining proceeds of
the loan were used primarily for working capital purposes including (i) payment
of current accounts payable and other outstanding obligations and (ii) funding
anticipated working capital requirements including product development and the
acquisition of tooling and molds.





Financing
fees including the monthly monitoring fees incurred in connection with this debt
approximated $1,320,000 at March 31, 2009, which are being amortized over the
term of the loan. For the nine and three months ended March 31, 2009, the
amortization of financing costs including the monthly monitoring fees
approximated $1,015,000 and $611,000, respectively.  Interest expense
for the nine and three months ended March 31, 2009 approximated $352,000 and
$201,000 payable in kind.   The principal amount of the loan
aggregated $4,298,104 at March 31, 2009 including the monthly monitoring fees
and interest payable in kind and related accrued financing costs due the lender
aggregated $400,000 at March 31, 2009





9.    Investor
- Advances Agreement, Term Sheet and Settlement Agreement





On March
3, 2009, Versadial entered into an Advances Agreement, in conjunction with a
binding Term Sheet, with the Investor under the Company’s (i) Senior Secured
Convertible Redeemable Promissory Note dated August 9, 2006 (as amended to date,
the “Convertible Note”) issued  in favor of FURSA, (ii)  the
Security Agreement dated August 9, 2006 , as amended, from the
Company  to FURSA,  (iii) a certain Security Agreement dated
August 9, 2006, as amended, from Innopump to  FURSA and (iv) all
related and ancillary documents (collectively, “Loan
Documents”).  FURSA advanced $500,000 to Versadial on March 3, 2009
and agreed to use its best efforts thereafter on the first day of each of the
four succeeding months to make additional advances of $250,000 each to Versadial
on the terms and conditions set forth in the Advances Agreement. The terms and
conditions for the making of each additional advance are set forth in the
Advances Agreement.  As of May 20, 2009, the Company has received an
aggregate of $750,000 from FURSA. Under the terms of the Advances Agreement, the
principal amount of each advance made thereunder shall be added to the principal
amount of the Convertible Note and the principal amount of the Convertible Note
shall be deemed to have accrued no interest during the period of time from
August 9, 2008 until and including July 1, 2009.  Forgiveness of debt
approximated $540,000 for the nine and three months ended March 31,
2009.  The proceeds of the advances were used primarily for working
capital purposes including (i) payment of current accounts payable and other
outstanding obligations and (ii) funding anticipated working capital
requirements including product development and the acquisition of tooling and
molds.





The principal balance of
the Convertible Debt matures on November 9, 2009, unless earlier
converted, for an amount equal to 120% (approximately $10.2 million at March 31,
2009) of the outstanding principal plus accrued but unpaid interest. The principal amount of
$10.2 million includes approximately $1.4 million due upon maturity
calculated using the effective interest method for the 20% premium due at
maturity.





The Term
Sheet contemplates the resolution of all obligations outstanding under the
Convertible Note. The Term Sheet also provides that the Company shall take all
steps reasonably necessary or required to enable Versadial to offer, on a best
efforts basis, pursuant to a private placement, up to $10,000,000, but in no
case less than $8,000,000 in aggregate principal face amount of Senior Secured
Convertible Notes with warrant coverage to third party investors on such terms
and conditions as may be agreed to between FURSA and the Company (the “New
Convertible Debt Placement”). The Term Sheet contemplates that the Company
effect a closing of the New Convertible Debt Placement by July 2,
2009.





On March
3, 2009, a  Settlement Agreement was entered into by the Company, and
certain of its affiliates, and FURSA, and certain of its
affiliates.  The Settlement Agreement released, among other things,
all claims and obligations of the parties thereto as they related to a
commitment of FURSA to participate in a private placement of the Company’s
securities, as set forth in a letter from FURSA  dated November 26,
2007 and provides for the dismissal, with prejudice, of the lawsuit previously
commenced by the Company against FURSA and certain of its affiliates on account
of, among other things, such letter.


13





VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





10.    Debt
extensions





The
Company has three outstanding notes in the aggregate principal amount of
$1,312,531 which bear interest at 8% and matured, as amended, on March 31,
2009.   On March 31, 2009, the lenders agreed to extend the
maturity date to the earlier of (a) June 30, 2009 or (b) the date on which the
Company receives gross proceeds in excess of $7.0 million from any debt or
equity financing.  Included in the aggregate principal balance due is
a note for $1,108,248 due to Richard Harriton, a related party, who serves as a
Director and is a major shareholder of the Company.





11.    Stockholders’
deficit





Loss
Per Share





Basic
loss per share excludes dilution and is calculated by dividing the net loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock.





At March
31, 2009, the basic loss per common share does not include an aggregate of
4,651,073 warrants outstanding and 7,545,016 shares issuable under the terms of
convertible debt. At March 31, 2008, the basic loss per common share does not
include an aggregate of 4,296,073 warrants outstanding and 6,696,144 shares
issuable under the terms of convertible debt. The effect of these securities
would be antidilutive. These warrants are currently exercisable at prices that
range between $.94-$2.282 and expire between August 9, 2011 and July 1, 2013. At
March 31, 2008, diluted loss per common share includes 4,915 shares as
calculated using the treasury stock method for proceeds that would have been
received from the exercise of convertible debt and warrants as if they were used
to purchase common stock at the average market price during the
period.





Issuance
of Warrants





On July
1, 2008, in consideration for an amendment of the terms of the sublicense
between the Company and SCG on June 30, 2008, the Company granted SCG 250,000
warrants to purchase the Company’s common stock exercisable for five years from
the date of issuance at an initial exercise price equal to $2.282 per
share.  These warrants were valued at the grant date at approximately
$15,000 and were treated as compensation expense.  The fair value was
calculated using the Black Scholes model with an expected volatility of 51% and
a risk free interest rate of 3.00%.  SCG assigned 175,000 of these
warrants to two related parties as consideration for debt
extensions.


14


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





12.    Commitments
and contingencies





Manufacturing
Agreement and Equipment Purchase





On
September 20, 2006, the Company entered into a 30-month manufacturing agreement
with an outside contractor located in Germany. After the initial 30-month term,
the agreement may be terminated by either party but only upon at least nine (9)
months advance written notice of such termination.  The agreement
calls for the contractor to develop certain production molds for the Company for
a new size (20 millimeter) dispenser. The Company will place all customer orders
relating to the product with the contractor until at least eighty percent (80%)
of the manufacturer’s production capacity is utilized based on five (5) days per
week, three (3) shifts per day. The agreement calls for the Company to make
payments in the aggregate of approximately $5.4 million for the required
production molds and other production equipment.   As of March
31, 2009, the Company has paid an aggregate of approximately $3.7 million for
the production molds which
are included in property and equipment and has an outstanding liability due the
contractor for $1.7 million which is included in current liabilities. On October
2, 2008, the Company and the contractor entered into an amortization agreement
as related to the $1.7 million liability.  This liability will be
deferred and amortized over production on a per piece basis with any remaining
unamortized balance due in monthly installments commencing July 2009 through
December 2009.   The Company’s customer approval of the finished
product was received in January 2009.  The first commercial shipment
of the product was completed in late January 2009.  Amortization costs due
this vendor based on actual production approximated $.3 million at March 31,
2009.  Contemporaneously
with this agreement, on October 2, 2008, the Company was fully relieved of its
obligation to repay the $1.7 million advance received from its customer, Avon
Products, Inc. (“Avon”),  provided that the Company shall instead pay
the tooling and mold contractor this amount.  The payment due the
contractor is independent of the credit relief that Avon has provided the
Company; however, if Avon does not forgive any or all of the $1.7 million
advance, then the Company and the contractor shall promptly negotiate a mutually
agreeable payment schedule for any balance due.  The Company will
recognize relief of this obligation upon completion of the payment to the
contractor.  In addition, in January 2009, Avon prepaid the contractor
approximately $1.4 million on behalf of the Company for
inventory.  This advance is being deducted from Avon’s payments for
finished product to the Company and recognized as revenue as product
ships.  At March 31, 2009, prepaid inventory aggregated approximately
$.2 million and deferred revenue aggregated approximately $.5 million as
related  to this prepayment.





In
conjunction with the above manufacturing agreement, the Company also ordered
related assembly equipment from a vendor in the amount of approximately $1.2
million.  In October 2008, the Company reached an agreement with the
vendor whereby the Company would pay approximately $275,000 in October 2008 of
the outstanding balance and the remaining balance at a rate of approximately
$75,000 per month until paid with interest at 7%.   At March 31, 2009, this
vendor is owed approximately $.6 million for the equipment and other related
charges and approximately $.1 million in accrued interest.





Supply
and Tooling Amortization Agreement





On April
24, 2007, the Company entered into a Supply Agreement and a related Tooling
Amortization Agreement with an outside contractor located in the United States
(the “Supplier”) for the manufacture of its 40mm and 49mm size dispensers which
were previously manufactured in Germany. These two agreements became effective
on April 30, 2007, when SCG and the licensor to the Company of the technology
covering the patented dispenser produced by the Company, and Gerhard Brugger,
the patent owner of the patented dispenser, entered into an Agreement to License
with the Supplier. This agreement, a condition precedent to the effectiveness of
the Supply Agreement and the related Tooling Amortization Agreement, provides
security to the Supplier if the Company were to default in the performance of
its obligations under the Supply Agreement.





The
Supply Agreement provides, among other things, that the Company, over the
five-year term of the Agreement, will purchase from the Supplier no less than
100.0 million units of the Company’s 40 millimeter and 49 millimeter
dispensers.





These
Agreements provided that the Supplier would fund the majority of the estimated
$4.6 million cost of the injection molding, tooling and automated equipment
necessary to produce the products to be purchased by the Company. Although
financed by the Supplier, the equipment will be owned by the Company. The
Company capitalized the related equipment at inception of production in November
2007.  The cost of the tooling and automated equipment, with a three
(3%) percent per annum interest factor, will be amortized over a period of 18
months against dispensers purchased and delivered to the Company pursuant to the
Supply Agreement, with a per unit amortization cost included in the cost price
for the dispensers.  If the Company fails to place orders within 18
months sufficient to cover the amortization, any remaining balance will be due
in 18 months from the inception of the respective amortization
period.





As of
March 31, 2009, all of the molds and equipment in the aggregate of approximately
$4.6 million were completed, utilized in production and capitalized by the
Company.  Approximately $4.35 million of this cost is being
amortized.  For the nine and three months ended March 31, 2009,
amortization of the molds and equipment approximated $189,000 and $25,000,
respectively, and for the nine and three months ended March 31, 2008
approximated $372,000 and $216,000, respectively. The remaining balance due at
March 31, 2009 of approximately $3.4 million is to be amortized over production
with any remaining balance due 18 months from inception of production which
commenced in November 2007.  Revenues from production will not cover
this obligation.   The Company is currently in arrears at March
31, 2009 in the amount of approximately $385,000 in amortization which is
included in current liabilities.  In January 2009, the Supplier agreed
to reduce the amount of amortization by unit by fifty percent effective January
2009.  The Company is presently in discussions with the Supplier
regarding both the past due balance of amortization and extended terms of
payment for the remaining capital lease balance of $3.4 million over a longer
term and lower amortization rate based on production forecasts.


15





VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





The
Supply Agreement also contains normal commercial terms, including a
representation by the Supplier as to the dispensers being produced in accordance
with specifications, indemnification of the Supplier by the Company against
intellectual property infringement claims of third parties, insurance,
confidentiality and termination provisions, including a right of optional
termination by Company upon payment of all unamortized tooling and equipment
costs plus a penalty, the amount of which varies based on the date of
termination.





The price
for the dispensers is fixed, subject to adjustment at six-month intervals to
reflect changes in the cost of resins and other component parts.





The
Supply Agreement also grants to the Supplier a right of first refusal to furnish
additional tooling, if the Company elects to acquire additional tooling, and
affords the Supplier a right to match the terms of a replacement supply contract
at the end of the five year term of the Supply Agreement.





The
related Agreement to License between the Supplier and Sea Change Group, LLC and
Gerhard Brugger permits the Supplier, in the event of a default by the Company
under the Supply Agreement, to require that SCG and Brugger utilize the Supplier
to continue to produce and market the dispensers that are the subject of the
Supply Agreement for the remaining term of the Supply Agreement, if the Supplier
is not then in default of its obligations under the Supply Agreement. In such
case, the right of Supplier to continue to amortize the cost of the tooling and
automatic equipment would continue.





Customer
Master Supply Agreement





On July
10, 2007 the Company entered into a two-year Master Supply Agreement with Avon,
a consumer products company, for seventeen million units of certain of the
Company’s products. The Agreement will remain in effect through the second
anniversary of the first shipment of such products in commercial production
quantities.  On October 2, 2008, the agreement was amended and Avon’s
commitment to purchase certain of the Company’s products was reduced in number
in return for certain price adjustments based on current market
conditions.  In late January 2009, the initial shipment to Avon was
made under this agreement.





Pursuant
to the terms of the Credit Memo previously entered into with Avon, the Company
was to repay Avon’s $1.7 million advances received in fiscal year 2007 by a
credit against the purchase price of products sold to Avon pursuant to the
Master Supply Agreement and pursuant to other agreements that may be entered
into between Versadial and Avon, commencing six months after the date of the
first shipment of products to Avon.  On October 2, 2008, the Company
was fully relieved of its obligation to repay the $1.7 million advance provided
that the Company shall instead pay the tooling and mold contractor this amount
pursuant to a payment schedule to be determined between the Company and the
contractor as consideration for additional equipment costs and development costs
related to the tooling and mold expenses.  In the event of a default
by the Company in payment to the contractor, the credit relief granted shall
immediately be null and void to the extent of any unpaid balance, and the
customer shall have the right to enforce against the Company collection of the
full amount of such unpaid balance.  Upon the Company’s final payment
to the tooling and mold contractor, the Company will recognize the credit relief
granted by Avon.





13.    Major
customers and segment information (unaudited)





Major
customers


16


VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


MARCH 31,
2009





Customers
accounting for 10% or more of revenues are as follows:





Ninemonths
                    ended
                    March31,2009
                  
                  
                  Ninemonths
                    ended
                    March31,2008
                  
                  
                  Threemonths
                    ended
                    March31,2009
                  
                  
                  Threemonths
                    ended
                    March31,2008Customer
      A
                  
                  $
                  1,635,000
                  
                  
                  $
                  -
                  
                  
                  $
                  1,635,000
                  
                  
                  $
                  -Customer
      B
                  
                  
                  1,460,000
                  
                  
                  
                  -
                  
                  
                  
                  1,460,000
                  
                  
                  
                  -Customer
      C
                  
                  
                  1,108,000
                  
                  
                  
                  1,913,000
                  
                  
                  
                  -
                  
                  
                  
                  874,000Customer
      D
                  
                  
                  -
                  
                  
                  
                  266,000
                  
                  
                  
                  -
                  
                  
                  
                  266,000$
                  4,203,000
                  
                  
                  $
                  2,179,000
                  
                  
                  $
                  3,095,000
                  
                  
                  $
                  1,140,000





Accounts
receivable from customer A and customer B aggregated approximately $653,000 and
$427,000, respectively, at March 31, 2009.





Segment
information





Assets,
classified by geographic location are as follows:





March 31,
                  
                  
                  June 30,2009
                  
                  
                  2008United
      States
                  
                  $
                  7,289,927
                  
                  
                  $
                  5,502,628Other
      countries
                  
                  
                  7,871,969
                  
                  
                  
                  7,111,064$
                  15,161,896
                  
                  
                  $
                  12,613,692





Assets in
other countries are primarily inventory and equipment which are located at
subcontractor production facilities in Germany and amounts classified as
deposits on production equipment.





Revenue,
classified by the major geographic areas was as follows:





Ninemonths
                      ended
                      March31,2009
                    
                    
                    Ninemonths
                      ended
                      March31,2008
                    
                    
                    Threemonths
                      ended
                      March31,2009
                    
                    
                    Threemonths
                      ended
                      March31,2008United
      States
                    
                    $
                    2,237,182
                    
                    
                    $
                    2,331,745
                    
                    
                    $
                    1,225,008
                    
                    
                    $
                    1,218,615Other
      countries
                    
                    
                    2,601,918
                    
                    
                    
                    91,239
                    
                    
                    
                    2,166,785
                    
                    
                    
                    32,395$
                    4,839,100
                    
                    
                    $
                    2,422,984
                    
                    
                    $
                    3,391,793
                    
                    
                    $
                    1,251,010




17




ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




The
following discussion should be read along with our financial statements, which
are included in another section of this 10-Q. This discussion contains
forward-looking statements about our expectations for our business and financial
needs. These expectations are subject to a variety of uncertainties and risks
that may cause actual results to vary significantly from our expectations. The
cautionary statements made in this Report should be read as applying to all
forward-looking statements in any part of this 10-Q. The forward-looking
statements are made as of the date of this Form 10-Q, and the Company assumes no
obligation to update the forward-looking statements, or to update the reasons
actual results could differ from those projected in such forward-looking
statements.





NATURE OF BUSINESS AND
COMPETITION





Versadial
is engaged in the manufacture of a dual dispenser that enables the user to blend
two liquids in varying proportions. The dispensers are currently manufactured in
both Germany and the United States and are being utilized in the food, sun care,
skincare, and cosmetic industries. Versadial’s business is designed to
capitalize on the commercial opportunities for innovation in packaging and
dispensing within the consumer products
industries.   Substantially all of our revenues come from
wholesale sales and our customers are located both in the United States and in
Europe.  The manufacture of the dual dispensers are currently
outsourced to third party subcontractors in the United States for our 40mm and
49mm size dispensers and in Germany for our 20mm size dispenser.




Innopump,
our wholly owned subsidiary, holds the exclusive worldwide license for a
patented dual-chambered variable dispensing system for all categories of uses,
marketed under the registered trademark “Versadial®”. The
patented system utilizes multiple volumetric pumps, controlled by a rotating
head and disc system, providing the dispensing of precise fixed or variable
ratios of distinct and separate fluids. The Versadial® custom
blending dual dispensing head provides consumer packaged goods manufacturers
with a new and innovative dispensing technique permitting precision measured
blending by the consumer of different lotions, gels, creams, and liquids, or
combination thereof.




Although,
we are not aware of any direct competition for our type of dual chamber variable
dispensing product, there are other dispensing solutions available.




Other
manufacturers within the sub-sector of dispensing valves, pumps and other
dispensing systems are large multinational companies offering a range of
products to all major personal care, pharmaceutical, OTC and food sectors. They
include but are not limited to Owens-Illinois, Rexam plc., Aptar, Bespak, 3M,
Calmar, Precision, Summit, Coster, Lindal and PAI Partners.




Other
manufacturers within the personal care and food packaging sectors are large,
well-financed, national and international manufacturers of caps, jars and
bottles as well as pumps and valves including but not limited to Owen-Illinois,
Tetra Pak, Crown, Cork and Seal, Alcan, Rexam plc., Amcor Limited, Toyo Seikan,
Ball, Compagnie de Saint-Gobain, and Alcoa.




Nearly
all of the other manufacturers have longer operating histories, greater
experience, greater name recognition, larger customer bases, greater
manufacturing capabilities, and significantly greater financial, technical and
marketing resources than we do. Because of their greater resources, other
manufacturers are able to undertake more extensive marketing campaigns for their
brands and products, and make more attractive offers to potential employees,
retail affiliates, and others. Although, we believe our products are superior to
any other product currently on the market, we cannot assure you that we will be
able to compete successfully against our current or future competitors or that
our business and financial results will not suffer from
competition.




18




Recent
Developments





The following developments took place
during the nine months ended March 31, 2009 and subsequent to March 31,
2009:





·
            On
      September 20, 2006, we entered into a 30-month manufacturing agreement
      with Seidel GMBH (“Seidel”), an outside contractor located in Germany. The
      agreement calls for the contractor to develop certain production molds for
      us for a new size (20 millimeter) dispenser.  After the initial
      30-month term, the agreement may be terminated by either party but only
      upon at least nine (9) months advance written notice of such
      termination.  On October 2, 2008, the agreement was amended for
      certain price adjustments based on current market
      conditions.  We also agreed to pay the contractor an aggregate
      of $1.7 million for additional equipment to be purchased and for
      development costs related to the molds under the terms of an amortization
      agreement.  The March 31, 2009 obligation due to the contractor
      of $1.7 million is being amortized over production on a per piece basis
      effective January 2009, the date of the first commercial shipment of the
      product.   Amortization costs
      due this contractor based on actual production approximated $.3 million at
      March 31, 2009.  The balance
      of the $1.7 million is to be paid to the contractor on a per piece
      amortization for all pieces produced through June 30, 2009, with any
      balance to be paid in six equal monthly payments from July 2009 through
      December 2009.  Contemporaneously with this agreement, on
      October 2, 2008, we were fully relieved of our obligation to repay the
      $1.7 million advance received from our customer, Avon, provided that we
      shall instead pay the tooling and mold contractor this
      amount.  The payment due the contractor is independent of the
      credit relief that Avon has provided to us; however, if Avon does not
      forgive any or all of the $1.7 million advance, then we and the contractor
      shall promptly negotiate a mutually agreeable payment schedule for any
      balance due.  We will recognize relief of this obligation upon
      completion of the payment to the contractor.  In addition, in
      January 2009, Avon prepaid the contractor approximately $1.4 million on
      behalf of the Company for inventory.  This advance is being
      deducted from Avon’s payments for finished product to us and recognized as
      revenue as product ships.  At March 31, 2009, prepaid inventory
      aggregated approximately $.2 million and deferred revenue aggregated
      approximately $.5 million as related  to this
      prepayment.





·
            On
      July 10, 2007 we entered into a two-year Master Supply Agreement with
      Avon, a consumer products company for seventeen million units of certain
      of our Company’s products. On October 2, 2008, the agreement was amended
      and Avon’s commitment to purchase certain of our products was reduced in
      number in return for certain price adjustments based on current market
      conditions.  In late January 2009, the initial shipment to Avon
      was made under this agreement.





In
addition, pursuant to the terms of the Credit Memo previously entered into with
Avon, we were to repay Avon’s $1.7 million advance received in fiscal year 2007
by a credit against the purchase price of products sold to Avon.  On
October 2, 2008, we were fully relieved of our obligation to repay the $1.7
million advance provided that we shall instead pay the tooling and mold
contractor this amount pursuant to a payment schedule to be determined between
us and the contractor as consideration for additional equipment costs and
development costs related to the tooling and mold expenses.  In the
event of a default by us in payment to the contractor, the credit relief granted
shall immediately be null and void to the extent of any unpaid balance, and the
customer shall have the right to enforce against us collection of the full
amount of such unpaid balance.  Upon our final payment to the tooling
and mold contractor, we will recognize the credit relief granted by
Avon.





·
            On
      October 20, 2008 Innopump entered into an unsecured loan agreement with
      SCG. SCG is an affiliate of the Company as members of the Board of
      Directors own approximately 69% of the outstanding membership interests of
      SCG. SCG is the sublicensor of the patented technology used in the
      manufacture of the Company’s proprietary products. The loan is for a
      principal amount of $3,445,750, matures on June 29, 2009 and bears
      interest at the rate of one and eighty three hundredths percent (1.83%)
      per month payable in arrears on the first day of each month or payable in
      kind at the option of Innopump with the interest being added to the
      principal balance.  The agreement also obligates Innopump to pay
      a fully earned facility fee of $400,000 at maturity, a commitment fee of
      $250,000, which was paid upon execution of the loan, and an in kind
      non-interest bearing monitoring fee in the amount of $100,000 per month
      for five (5) consecutive months commencing on November 1, 2008 and
      terminating on March 1, 2009 payable at maturity.  The loan is
      not prepayable before March 1,
2009.




19




In order
to provide such funds to Innopump, SCG entered into a loan transaction with a
third party lender.  Innopump’s payment obligations under the terms of
its loan agreement with SCG are equivalent to SCG’s payment obligations to its
lender with the consequence that all loan payments made by Innopump to SCG will
in turn be paid by SCG to its lender. As of March 31, 2009 the balance of
$4,698,104  included in the consolidated interim financial statements
in the notes, interest, and financing fees payable, net of the debt discount,
includes the principal amount of $3,445,750, interest of $352,354, a facility
fee of $400,000, and five months monitoring fees of $500,000, payable to the
third party lender, under the terms stated above. In addition, the third party
lender was granted a warrant to purchase a 10% membership interest in SCG at an
aggregate price equal to $1. The warrant issued to the lender was valued at the
grant date at approximately $98,000 and is being amortized as debt discount over
the term of the loan. Debt discount expense aggregated approximately $61,000 and
$37,000 for the nine and three months ended March 31, 2009.  The fair
value was calculated using the Black-Scholes model with an expected volatility
of 105% and a risk free interest rate of .76%. The warrant is exercisable
through October 2010. Innopump also executed a letter in favor of the third
party lender to SCG providing an indemnity to such lender in the event the
lender becomes subject to litigation commenced by creditors of the Company on
account of its having made such loan.





Gerhard
Brugger, who is the licensor to SCG of the patented technology sublicensed to
Innopump, gave the third party lender his consent of a collateral assignment of
the License by SCG to the lender and agreed that any outstanding indebtedness of
SCG under the License Agreement, which aggregated approximately $907,000 at the
date of the closing and 1,086,000 at March 31, 2009, would not be due prior to
July 1, 2009.  SCG, in consideration for Mr. Brugger’s cooperation,
agreed to provide cash collateral for its payment obligations to Mr. Brugger
under its License Agreement of $895,750, which Innopump agreed to fund out of
the loan proceeds. Where Innopump complies with the terms of the loan agreement
with SCG, this amount shall be a credit against its loan agreement
obligations.   No changes were made in the sublicense agreement
with SCG in connection with this loan.





The net
proceeds from the loan aggregated $1,227,611, after fees of  $75,000,
the required establishment of a cash collateral account of approximately
$895,750 and payments made directly by the lender to our vendors
of  $1,247,389. From the net proceeds, we paid additional financing
costs of $250,000 to the lender.  The remaining proceeds of the loan
were used primarily for working capital purposes including (i) payment of
current accounts payable and other outstanding obligations and (ii) funding
anticipated working capital requirements including product development and the
acquisition of tooling and molds.





·
            On
      March 3, 2009, we entered into an Advances Agreement, in conjunction with
      a binding Term Sheet, with the Investor under our (i) Senior Secured
      Convertible Redeemable Promissory Note dated August 9, 2006 (as amended to
      date, the “Convertible Note”) issued  in favor of FURSA,
      (ii)  the Security Agreement dated August 9, 2006 , as amended,
      from us  to FURSA,  (iii) a certain Security Agreement
      dated August 9, 2006, as amended,  from us to  FURSA
      and (iv) all related and ancillary documents (collectively, “Loan
      Documents”).  FURSA advanced $500,000 to us on March 3, 2009 and
      agreed to use its best efforts thereafter on the first day of each of the
      four succeeding months to make additional advances of $250,000 each to us
      on the terms and conditions set forth in the Advances
      Agreement.   As of May 20, 2009, we have received an
      aggregate of $750,000 from FURSA. Under the terms of the Advances
      Agreement, the principal amount of each advance made thereunder shall be
      added to the principal amount of the Convertible Note and the principal
      amount of the Convertible Note shall be deemed to have accrued no interest
      during the period of time from August 9, 2008 until and including July 1,
      2009.  Forgiveness of debt approximated $540,000 for the nine
      and three months ended March 31, 2009.  The proceeds of the
      advances were used primarily for working capital purposes including (i)
      payment of current accounts payable and other outstanding obligations and
      (ii) funding anticipated working capital requirements including product
      development and the acquisition of tooling and
  molds.





The principal balance of
the Convertible Debt matures on November 9, 2009, unless earlier
converted, for an amount equal to 120% (approximately $10.2 million at March 31,
2009) of the outstanding principal plus accrued but unpaid interest. The principal amount of
$10.2 million includes approximately $1.4 million due upon maturity
calculated using the effective interest method for the 20% premium due at
maturity.





The Term
Sheet contemplates the resolution of all obligations outstanding under the
Convertible Note. The Term Sheet also provides that we shall take all steps
reasonably necessary or required to enable us to offer, on a best efforts basis,
pursuant to a private placement, up to $10,000,000, but in no case less than
$8,000,000 in aggregate principal face amount of Senior Secured Convertible
Notes with warrant coverage to third party investors on such terms and
conditions as may be agreed to between FURSA and us (the “New Convertible Debt
Placement”). The Term Sheet contemplates that we effect a closing of the New
Convertible Debt Placement by July 2, 2009.




20




In
addition, on March 3, 2009, a  Settlement Agreement was entered into
by us, and certain of our affiliates, and FURSA, and certain of its
affiliates.  The Settlement Agreement released, among other things,
all claims and obligations of the parties thereto as they related to a
commitment of FURSA to participate in a private placement of our securities, as
set forth in a letter from FURSA  dated November 26, 2007 and provides
for the dismissal, with prejudice, of the lawsuit previously commenced by us
against FURSA and certain of its affiliates on account of, among other things,
such letter.





Critical Accounting Policies
and Estimates




We
believe that several accounting policies are important to understanding our
historical and future performance. We refer to these policies as “critical”
because these specific areas generally require us to make judgments and
estimates about matters that are uncertain at the time we make the estimate, and
different estimates, which also would have been reasonable, could have been
used, which would have resulted in different financial results. The Company
adopted changes to its critical accounting policies during the first nine months
of the fiscal year ending June 30, 2009 as set forth below.





In
September 2006, the FASB issued SFAS 157. This Standard defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. It applies to other accounting pronouncements where the
FASB requires or permits fair value measurements but does not require any new
fair value measurements. In February 2008, the FASB issued FSP 157-2, which
delayed the effective date of SFAS 157 for certain non-financial assets and
non-financial liabilities to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company adopted SFAS 157 for
financial assets and liabilities for the first quarter of the fiscal year ending
June 30, 2009. The disclosures required under SFAS 157 are set forth in Note 6
to our condensed financial statements set forth in Item 1 of this quarterly
report. We are currently in the process of evaluating the effect, if any, that
the adoption of FSP 157-2 will have on our results of operations or financial
position.





On
October 10, 2008, the FASB issued FSP FAS No. 157-3, “Fair Value
Measurements” (FSP FAS 157-3), which clarifies the application of SFAS
No. 157 in an inactive market and provides an example to demonstrate how
the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued.  The adoption of this standard did not have a material impact on
the Company’s consolidated results of operations, cash flows or financial
positions.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
155” (“SFAS 159”). This statement permits entities to choose to measure
selected assets and liabilities at fair value. The Company adopted SFAS 159 on
July 1, 2008 resulting in no material impact to the Company’s financial
condition, results of operation or cash flows.





The
critical accounting policies we identified in our Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2008 related to various significant
accounting policies. It is important that the discussion of our operating
results that follows be read in conjunction with the critical accounting
policies disclosed in our Annual Report on Form 10-KSB, as filed with the SEC on
November 14, 2008.




21




RESULTS OF
OPERATIONS





Executive
Summary





The table
below sets forth a summary of financial highlights for the nine and three months
ended March 31, 2009 and 2008:





Overall,
our revenue grew substantially by 100% during the current fiscal nine-month
period as our operations began to grow in the skincare and cosmetic sectors and
we introduced our new 20mm size dispenser in January 2009. Our revenues to date
in the current fiscal period were derived from eleven customers, two of which
are related to our new 20mm dispenser sales, as compared to nine customers in
the prior fiscal period.   Our direct costs were 71% and 89% of
revenues for the respective periods due to several factors, which were primarily
the need for manual labor of certain functions in Germany in 2007 which have
ceased as we relocated our operations for our 40mm and 49mm dispensers to the
U.S. in late 2007, the unfavorable Euro/US Dollar currency exchange fluctuation
in the prior fiscal period,  and high direct freight costs in 2007 due
mainly to component parts being produced in the U.S. and shipped to Germany for
assembly prior to completion of the U.S. facility becoming fully
operational.  Our indirect costs, which consist mainly of
depreciation, costs for prototype samples for new customers and products, and
costs for testing of new equipment, were approximately $1.5 million in both
periods.  Our revenues did not increase enough to cover these indirect
costs.  Our general and administrative expenses decreased about 8% in
the current fiscal period due to a decrease in consulting fees for primarily
overseas consultants no longer required.  These changes are explained
in more detail below.





Our focus
for the coming fiscal year and the future will be to grow our revenues and
continue to decrease our direct costs per unit which we believe will be
accomplished as our transition to the U.S. has been completed for production of
our 40mm and 49mm dispensers and our new 20mm dispenser product line is now
completed.  First commercial production and shipping of our new 20mm
dispenser commenced in January 2009 at the Seidel plant located in
Germany.  We estimate we will be able to produce approximately 15
million units annually of our 20mm dispenser.   In addition, we
believe the completion of our new U.S. based facility in February 2008 for our
40 and 49mm product line will enable us to increase production with
substantially all new automated molds and assembly
equipment.    We estimate we will be able to produce
approximately 20 million units annually of these
products.    We also anticipate improving our costs and
margins as both the injection molding and assembly functions will be performed
together at both of these new subcontractor facilities and we will be better
able to manage our costs as they will be on a per piece basis and we will no
longer need to purchase individual component parts and contract assembly labor
separately.  Additionally, we will retain the services of Holzmann
Montague, our prior assembly manufacturer in Germany, for development projects
with new and existing customers, and possibly for assembly of foreign orders or
additional production use if necessary.




22




For
      the nine months ended March 31,
                      
                      2009
                      
                      
                      2008
                      
                      
                      CHANGENet
      revenues
                      
                      $
                      4,839,100
                      
                      
                      $
                      2,422,984
                      
                      
                      
                      100
                      %Cost
      of revenuesDirect
      costs
                      
                      
                      3,433,862
                      
                      
                      
                      2,145,122
                      
                      
                      
                      60
                      %Indirect
      costs
                      
                      
                      1,549,026
                      
                      
                      
                      1,470,224
                      
                      
                      
                      5
                      %4,982,888
                      
                      
                      
                      3,615,346
                      
                      
                      
                      38
                      %Gross
      margin
                      
                      
                      (143,788
                      )
                      
                      
                      (1,192,362
                      )
                      
                      
                      -88
                      %Operating
      expensesGeneral
      and administrative
                      
                      
                      2,217,813
                      
                      
                      
                      2,423,393
                      
                      
                      
                      -8
                      %Loss
      from operations
                      
                      
                      (2,361,601
                      )
                      
                      
                      (3,615,755
                      )
                      
                      
                      -35
                      %Other
      income (expenses)Sublease
      income, affiliates
                      
                      
                      38,245
                      
                      
                      
                      35,745
                      
                      
                      
                      7
                      %Interest
      and other expense
                      
                      
                      (1,430,268
                      )
                      
                      
                      (1,288,923
                      )
                      
                      
                      11
                      %Interest
      expense, related parties
                      
                      
                      (167,446
                      )
                      
                      
                      (133,421
                      )
                      
                      
                      26
                      %Amortization
      of debt discount
                      
                      
                      (215,855
                      )
                      
                      
                      (544,120
                      )
                      
                      
                      -60
                      %Amortization
      of financing costs
                      
                      
                      (1,211,334
                      )
                      
                      
                      (318,420
                      )
                      
                      
                      280
                      %Gain
      on forgivenesss of debt
                      
                      
                      539,905
                      
                      
                      
                      
                      
                      
                      
                      100
                      %Gain
      on derivative financial instruments
                      
                      
                      230,658
                      
                      
                      
                      1,444,293
                      
                      
                      
                      -84
                      %Gain
      (loss) on foreign currency exchange
                      
                      
                      307,263
                      
                      
                      
                      (249,672
                      )
                      
                      
                      -223
                      %(1,908,832
                      )
                      
                      
                      (1,054,518
                      )
                      
                      
                      81
                      %Net
      loss
                      
                      $
                      (4,270,433
                      )
                      
                      $
                      (4,670,273
                      )
                      
                      
                      -9
                      %




REVENUES.
During the nine months ended March 31, 2009, we had revenues of $4,839,100 as
compared to revenues of $2,422,984 during the nine months ended March 31, 2008,
an increase of approximately 100%.  In 2009, 87% of the revenue was
primarily attributable to three customers in the cosmetic industries and the
balance from eight additional customers.  In 2008, 90% of the revenue
was primarily attributable to two customers in the skincare and cosmetic
industries and the balance from seven additional customers.  As
discussed above, we anticipate our revenues to continue to increase in the
coming fiscal year as to amount and customer base for all of our product
lines.





GROSS
MARGIN. Cost of revenues – direct costs, which consist of direct labor, overhead
and product costs, were $3,433,862 (71% of revenues) for the nine months ended
March 31, 2009 as compared to $2,145,122 (89% of revenues) for the nine months
March 31, 2008.  The significant improvement in the percentage of
direct costs as related to revenues for 2009 is a direct result of our
relocation to the United States in late 2007 as more fully described
above.  Cost of revenues – indirect costs, which consist of indirect
labor, quality control costs, factory maintenance, product development and
depreciation, were $1,549,026 for the nine months ended March 31, 2009 as
compared to $1,470,224 for the nine months ended March 31, 2008.  The
increase was due primarily to increased depreciation of approximately $518,000
due to the purchase of more manufacturing equipment, which was offset by a
decrease in additional costs for write-off of inventories and  runoff
testing of parts needed to validate the new U.S. equipment in the prior fiscal
period.  Gross margin was a deficit of $(143,788) for the nine months
ended March 31, 2009 as compared to a deficit of $(1,192,362) for the nine
months ended March 31, 2008, representing gross margins of approximately (3) %
and (49) % of revenues, respectively. The improvement in the gross margin is a
result of the increase in revenues allowing for greater absorption of the
indirect costs.  We believe that indirect costs, which are primarily
related to depreciation and the testing of new equipment and raw materials, will
decrease both in amount and as a percent of revenues as the equipment is placed
in service and revenues increase to cover these costs. We also believe direct
costs should remain at the current level as a percentage of revenues for our
40mm and 49mm dispensers as discussed above as our new U.S. facility became
fully operational in February 2008 and our new 20mm facility in Germany began
commercial production in January 2009.  Our production capacity and
customer base should continue to grow in the future resulting in revenue growth
to support our direct and indirect costs.


23


OPERATING
EXPENSES.  General and administrative expenses totaled $2,217,813 for
the nine months ended March 31, 2009, as compared to $2,423,393 for the nine
months ended March 31, 2008, a decrease of approximately 8%. This decrease of
approximately $205,000 is primarily attributable toa decrease in consulting
fees for primarily overseas consultants no longer required.





NET LOSS.
We had a net loss of $4,270,433 for the nine months ended March 31, 2009 as
compared to $4,670,273 for the nine months ended March 31, 2008, an improvement
of approximately $400,000. The decrease in net loss is attributable to the
corresponding increases and decreases in revenues, general and administrative
expenses and cost of revenues as described above aggregating an improvement of
approximately $1,254,000.  In addition, we incurred an increase in
gain on foreign currency exchange due to the favorable fluctuation in the
foreign currency rates of approximately $307,000 for the nine months ended March
31, 2009 as compared to a loss of approximately $(250,000) for
2008.  These improvements were offset by increased financing and
interest costs due to higher debt obligations in the current period as well as a
decrease in the amount of gain on derivative financial instruments in the prior
period which was a result of the decrease in the market price of our common
stock.  We believe that revenues should increase in the coming fiscal
year as we introduce our new 20mm product line and are able to grow our customer
base, and direct costs should decrease as production becomes more automated and
diversified in both the U.S. and in Germany, allowing operating expenses to
decline on a per piece basis and indirect costs to be covered.





ForthethreemonthsendedMarch31,
                    
                    2009
                    
                    
                    2008
                    
                    
                    CHANGENet
      revenues
                    
                    $
                    3,391,793
                    
                    
                    $
                    1,251,010
                    
                    
                    
                    171
                    %Cost
      of revenuesDirect
      costs
                    
                    
                    2,590,920
                    
                    
                    
                    978,635
                    
                    
                    
                    165
                    %Indirect
      costs
                    
                    
                    672,978
                    
                    
                    
                    619,513
                    
                    
                    
                    9
                    %3,263,898
                    
                    
                    
                    1,598,148
                    
                    
                    
                    104
                    %Gross
      margin
                    
                    
                    127,895
                    
                    
                    
                    (347,138
                    )
                    
                    
                    -137
                    %Operating
      expensesGeneral
      and administrative
                    
                    
                    768,395
                    
                    
                    
                    840,032
                    
                    
                    
                    -9
                    %Loss
      from operations
                    
                    
                    (640,500
                    )
                    
                    
                    (1,187,170
                    )
                    
                    
                    -46
                    %Other
      income (expenses)Sublease
      income, affiliates
                    
                    
                    12,415
                    
                    
                    
                    11,415
                    
                    
                    
                    9
                    %Interest
      and other expense
                    
                    
                    (552,963
                    )
                    
                    
                    (391,965
                    )
                    
                    
                    41
                    %Interest
      expense, related parties
                    
                    
                    (55,818
                    )
                    
                    
                    (52,309
                    )
                    
                    
                    7
                    %Amortization
      of debt discount
                    
                    
                    (63,212
                    )
                    
                    
                    (140,085
                    )
                    
                    
                    -55
                    %Amortization
      of financing costs
                    
                    
                    (639,485
                    )
                    
                    
                    (97,776
                    )
                    
                    
                    554
                    %Gain
      on forgiveness of debt
                    
                    
                    539,905
                    
                    
                    
                    
                    
                    
                    
                    100
                    %Gain
      on derivative financial instruments
                    
                    
                    
                    
                    
                    
                    1,254,395
                    
                    
                    
                    -100
                    %Gain
      (loss) on foreign currency exchange
                    
                    
                    5,251
                    
                    
                    
                    (155,047
                    )
                    
                    
                    -103
                    %(753,907
                    )
                    
                    
                    428,628
                    
                    
                    
                    -276
                    %Net
      loss
                    
                    $
                    (1,394,407
                    )
                    
                    $
                    (758,542
                    )
                    
                    
                    84
                    %




24





REVENUES.
During the three months ended March 31, 2009, we had revenues of $3,391,793 as
compared to revenues of $1,251,010 during the three months ended March 31, 2008,
an increase of approximately 171%. In 2009, 91% of the revenue was primarily
attributable to two customers in the cosmetic industry and the balance from two
additional customers.  In 2008, 91% of the revenue was primarily
attributable to two customers in the cosmetic and suncare
industries.   As discussed above, we anticipate our revenues to
continue to increase in the coming fiscal year as to amount and customer base in
connection with the 40mm and 49mm product lines and the start of our 20mm
product line in January 2009.





GROSS
MARGIN. Cost of revenues – direct costs, which consist of direct labor, overhead
and product costs, were $2,590,920 (76% of revenues) for the three months ended
March 31, 2009 as compared to $978,635 (78% of revenues) for the three months
ended March 31, 2008.  Cost of revenues – indirect costs, which
consist of indirect labor, quality control costs, factory maintenance, product
development and depreciation, were $672,978 for the three months ended March 31,
2009 as compared to $619,513 for the three months ended March 31, 2008. The
increase was due primarily to  increased depreciation in the current
period due to the capitalization of the 20mm equipment in January
2009.   Gross margin was  $127,895 for the three months
ended March 31, 2009 as compared to a deficit of $(347,138) for the three months
ended March 31, 2008, representing gross margins of approximately 3% and (28) %
of revenues, respectively. We believe that indirect costs, which are primarily
related to depreciation and the testing of new  equipment and raw
materials, will decrease both in amount and as a percent of revenues as the
equipment is placed in service and revenues increase to cover these costs. We also believe direct
costs should remain at the current level as a percentage of revenues for our
40mm and 49mm dispensers as discussed above as our new U.S. facility became
fully operational in February 2008 and our new 20mm facility in Germany began
commercial production in January 2009.  Our production capacity and
customer base should continue to grow in the future resulting in revenue growth
to support our direct and indirect costs.





OPERATING
EXPENSES.  General and administrative expenses totaled $768,395 for
the three months ended March 31, 2009, as compared to $840,032 for the three
months ended March 31, 2008, a decrease of approximately 9%. This decrease of
approximately $72,000 is primarily attributable toa decrease in consulting
fees for primarily overseas consultants no longer required.





NET LOSS.
We had a net loss of $1,394,907 for the three months ended March 31, 2009 as
compared to $758,542 for the three months ended March 31, 2008, an increase of
approximately $636,000. The increase in net loss is attributable to the
corresponding increases and decreases in revenues, general and administrative
expenses and cost of revenues as described above aggregating an improvement to
the net loss of approximately $546,000.  In addition, we incurred an
increase in gain on foreign currency exchange due to the favorable fluctuation
in the foreign currency rates of approximately $5,000 for the three months ended
March 31, 2009 as compared to a loss of approximately $(155,000) for
2008.  These improvements were offset by increased financing and
interest costs due to higher debt obligations in the current period as well as a
decrease in the amount of gain on derivative financial instruments in the prior
period which was a result of the decrease in the market price of our common
stock.  We believe that revenues should increase in the coming fiscal
year as we introduce our new 20mm product line and are able to grow our customer
base, and direct costs should decrease as production becomes more automated and
diversified in both the U.S. and in Germany, allowing operating expenses to
decline on a per piece basis and indirect costs to be covered.





GOING
CONCERN, LIQUIDITY AND CAPITAL RESOURCES





The
following table sets forth our working capital deficit as of March 31,
2009:





At March 31,2009Current
      assets
                  
                  $
                  3,757,255Current
      liabilities
                  
                  
                  28,905,716Working
      capital deficit
                  
                  $
                  (25,148,461
                  )




25





At March
31, 2009, we had incurred cumulative losses of approximately $24.3 million since
inception and $4.3 million for the nine months ended March 31,
2009.  We have a working capital deficit of approximately $25.1
million and a stockholders’ deficit of approximately $15.5 million as of March
31, 2009.





During
the nine months ended March 31, 2009, cash was provided by operating activities
of approximately $.5 million.   Our cash balance increased by
approximately $.5 million for the nine months ended March 31,
2009.  Cash provided by financing activities of approximately $1.2
million was utilized for the purchase of tools and equipment.





At March
31, 2009, current liabilities include accounts payable and accrued expenses of
approximately $5.3 million of which approximately $2.4 million is for the
purchase and development of new equipment due to two vendors in Germany for
which the Company has reached agreements to defer payment on a portion of these
costs.  In October 2008, we reached an agreement with one of these
vendors for the $1.7 million due that vendor at March 31, 2009, to amortize
these costs over production on a per piece basis through June 2009 with any
remaining unamortized balance due in monthly installments from July 2009 through
December 2009.  Customer approval of the finished product was received
in January 2009.  The first commercial shipment of the product was
completed in late January 2009.  Amortization costs due this vendor
based on actual production approximated $.3 million at March 31,
2009.  In October 2008, we reached an agreement with the other vendor
whereby  we would pay approximately $275,000 in October 2008 of the
outstanding balance and the remaining balance at a rate of approximately $75,000
per month until paid with interest at 7%. At March 31, 2009, this vendor is owed
approximately $.6 million for the equipment and other related charges and
approximately $.1 million in accrued
interest.     Approximately $.9 million included in
accounts payable is due to a vendor in the United States for; (a) the
amortization of purchased equipment under a capital lease obligation of
approximately $.4 million and; (b) start up costs and additional equipment at a
new U.S. based facility of approximately $.5 million.  Current capital
lease obligations of approximately $3.4 million due to the same vendor were to
be repaid through amortization of production based on the number of units
produced with any balance due 18 months from the start of production which
commenced in November 2007.  Revenues from production will not cover
this obligation.  In January 2009, the vendor agreed to reduce the
amount of amortization by unit by fifty percent effective January
2009.  We are presently in discussions with this vendor regarding both
the past due balance of amortization and start up costs and extended terms of
payment for the remaining capital lease balance over a longer term and lower
amortization rate based on production forecasts.   Approximately
$1.2 million of current liabilities relates to bridge loans which are due upon
the earlier of June 30, 2009 or out of the proceeds from any new additional
financings in excess of $7.0 million.  Approximately $1.6 million of
current liabilities relates to related party loans which are an obligation of
SCG and are due on December 31, 2009.  The convertible debt of approximately $10.2
million is due on November 9, 2009.  We are presently in discussions
with the lender as to possible conversion of the related debt prior to the
maturity date.  In addition, the royalty due to licensor included in
current liabilities of approximately $1.1 million will not be due prior to July
1, 2009 as per the terms of an agreement with the licensor.




On
October 20, 2008, Innopump entered into an unsecured loan agreement with SCG.
SCG is the sublicensor of the patented technology used in the manufacture of our
proprietary products. The loan is for a principal amount of $3,445,750, matures
on June 29, 2009 and bears interest at the rate of one and eighty three
hundredths percent (1.83%) per month.  The net proceeds from the loan
aggregated $1,227,611, after fees of  $75,000, the required
establishment of a cash collateral account of approximately $895,750 and
payments made directly by the lender to our vendors of  $1,247,389.
From the net proceeds, we paid additional financing costs of $250,000 to the
lender.  The remaining proceeds of the loan were used primarily for
working capital purposes including (i) payment of current accounts payable and
other outstanding obligations and (ii) funding anticipated working capital
requirements including product development and the acquisition of tooling and
molds.




On March
3, 2009, we entered into an Advances Agreement in conjunction with a binding
Term Sheet with FURSA Master Global Event Driven Fund, L.P. (“FURSA” or the
“Investor”).  FURSA advanced $500,000 to us on March 3, 2009 and
agreed to use its best efforts thereafter on the first day of each of the four
succeeding months to make additional advances of $250,000 each to
us.  As of May 20, 2009, we have received an aggregate of $750,000
from FURSA.   The proceeds of the advances were used primarily
for working capital purposes including (i) payment of current accounts payable
and other outstanding obligations and (ii) funding anticipated working capital
requirements including product development and the acquisition of tooling and
molds.


26





The Term
Sheet contemplates the resolution of all obligations outstanding under the
Convertible Note with FURSA. The Term Sheet also provides that we shall take all
steps reasonably necessary or required to enable us to offer, on a best efforts
basis, pursuant to a private placement, up to $10,000,000, but in no case less
than $8,000,000 in aggregate principal face amount of Senior Secured Convertible
Notes with warrant coverage to third party investors on such terms and
conditions as may be agreed to between FURSA and us (the “New Convertible Debt
Placement”). The Term Sheet contemplates that we effect a closing of the New
Convertible Debt Placement by July 2, 2009.





We
recognize that we must generate additional revenue and gross profits to achieve
profitable operations. Management's plans to increase revenues include the
continued building of its customer base and product lines.  In regard
to these objectives, we commenced commercial production in connection with a
supply agreement with Avon, a customer in the consumer products industry, as
related to the manufacture of our new size (20mm) dispenser in January
2009.  We have an initial order from Avon for 2.5 million
units.  As of May 12th, 2009
we have shipped approximately 1.9 million units of our 20mm dispenser to
Avon.  In addition, we are involved in development projects with new
customers with the potential to manufacture more than twenty (20) million units
for the combined 2009 and 2010 seasons; the solidification of high potential
customer interest equivalent to an additional twenty (20) million units for the
same period deliverable upon demonstration of ability to manufacture; the
realization that the above production is coming from a limited amount of
potential customers whose demand is so great it may limit our opportunity to
create capacity for other interested customers, and the resultant focus by us to
identify production partners who will fund manufacturing equipment in
consideration for customer commitment.  In addition, we have relocated
our operations for the production of our two other product lines (the 40mm and
49mm size dispensers) from Germany to the United States.  The
manufacturing facility in the United States commenced operations in November
2007 and became fully operational in February 2008.  This new facility
has increased both production capacity and gross profit margins on these product
lines.  We have currently manufactured and shipped approximately 6.5
million dispensers to date.  We believe we will have recurring orders
with our existing customers as well as new orders in the coming fiscal year from
several customers we are working with on new products. Management believes that
the capital received to date from previous financings will not be sufficient to
pay current financial obligations, inclusive of capital equipment commitments
which were incurred in order to expand our product lines and increase production
capacity, fund operations, and repay debt during the next twelve
months.  Additional debt or equity financing will be required which
may include receivables or purchase order financing, the issuance of new debt or
equity instruments under the terms of a private placement, additional
amortization of a portion of construction costs through our production partners
and possible restructuring of current amortization and debt
agreements.





We are
currently in negotiations with several other large consumer products companies
regarding the introduction of a 20mm dual chamber pump similar to the pump
assembled by Seidel.  The fulfillment of these orders, if obtained,
will require a similar capital investment as described above as related to our
agreement with  Seidel, our subcontractor located in Germany, and we
are currently evaluating, in lieu of additional debt or equity financing,
several opportunities for capitalization of same from existing and new
production partners in consideration for a volume and amortization
commitment.  We believe that in the future we can finance all of our
capital requirements through such arrangements due to the strength of the
current customer commitments; the performance of our products currently in the
marketplace; the consumer interest demonstrated in our products, as revealed by
our customers market research investigations and resultant large initial order
commitments; and the multiple indicators of support we are receiving from
potential manufacturing partners.





The
following is a table summarizing our significant commitments as of March 31,
2009, consisting of  equipment commitments, debt repayments, royalty
payments and future minimum lease payments with initial or remaining terms in
excess of one year for the next fiscal 5 years.


27





ContractualObligations
                        (inmillions):
                      
                      Total
                      
                      
                      FYE2009
                      
                      
                      FYE
                        2010-2011
                      
                      
                      FYE
                        2012-2013
                      
                      
                      FYE2014and
                        ThereafterConvertible
      Debt and interest
                      
                      $
                      10.2
                      
                      
                      $
                      -
                      
                      
                      $
                      10.2
                      
                      
                      $
                      -
                      
                      
                      $
                      -Notes
      and interest - related parties
                      
                      
                      3.0
                      
                      
                      
                      1.4
                      
                      
                      
                      1.6Other
      notes and interest
                      
                      
                      4.9
                      
                      
                      
                      4.9Royalties
      including arrears
                      
                      
                      15.7
                      
                      
                      
                      0.1
                      
                      
                      
                      2.3
                      
                      
                      
                      1.4
                      
                      
                      
                      11.9Equipment
      obligations and leases
                      
                      
                      2.4
                      
                      
                      
                      2.4Tooling
      Amortization
                      
                      
                      3.4
                      
                      
                      
                      3.4$
                      39.6
                      
                      
                      $
                      12.2
                      
                      
                      $
                      14.1
                      
                      
                      $
                      1.4
                      
                      
                      $
                      11.9





Based on
the current operating plan and available cash and cash equivalents currently
available, we will need to obtain additional financing through the sale of
equity securities, private placements, funding from new or existing production
partners, and/or bridge loans within the next 12 months.  Additional
financing, whether through public or private equity or debt financing,
arrangements with stockholders or other sources to fund operations, may not be
available, or if available, may be on terms unacceptable to us. The ability to
maintain sufficient liquidity is dependent on our ability to successfully build
our customer base and product line with the required capital
equipment.  If additional equity securities are issued to raise funds
or convert existing debt, the ownership percentage of existing stockholders
would be reduced. New investors may demand rights, preferences or privileges
senior to those of existing holders of common stock. Debt incurred by us would
be senior to equity in the ability of debt holders to make claims on our assets.
The terms of any debt issued could impose restrictions on our
operations.





There can
be no assurance that we will be successful in building our customer base and
product line or that available capital will be sufficient to fund current
operations and to meet financial obligations as related to capital expenditures
and debt repayment until such time that revenues increase to generate sufficient
profit margins to cover operating costs and amortization of capital equipment.
If we are unsuccessful in building our customer base or are unable to obtain
additional financing, if needed, on terms favorable to us, there could be a
material adverse effect on our financial position, results of operations and
cash flows. The accompanying  consolidated interim financial
statements do not include any adjustments that might be necessary if we are
unable to continue as a going concern.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET





As a
smaller reporting company, the registrant is not required to provide a response
to Item 3.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures




We
maintain a system of disclosure controls and procedures, as defined in Exchange
Act Rule 13a-15(e), which is designed to provide reasonable assurance that
information, which is required to be disclosed in our reports filed pursuant to
the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is
accumulated and communicated to management in a timely manner. At the end of the
period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer, who serves as our Principal Executive Officer and Principal
Financial Officer, and our Controller, who serves as our Principal Accounting
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon
that evaluation, our Chief Executive Officer and Controller concluded that our
disclosure controls and procedures as of the end of the period covered by this
report were not effective due to an insufficient number of resources in the
accounting and finance department that does not allow for a thorough review
process.


28





Changes
in Internal Control over Financial Reporting




During
the third quarter of the fiscal year ended June 30, 2009, there were no
significant changes in our internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
the supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:




· Pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;





· Provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and





· Provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the
financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. The scope of management’s
assessment of the effectiveness of internal control over financial reporting
includes all of our Company’s consolidated subsidiaries.




Our
management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2009. In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control-Integrated
Framework.”  Based on this assessment, management believes that, as of
March 31, 2009, our internal control over financial reporting was not effective
due to an insufficient number of resources in the accounting and finance
department that does not allow for a thorough review process.





The
material weakness will not be considered remediated until necessary remedial
procedures are completed and tested and management has concluded that the
procedures are operating effectively.


29


PART
II. OTHER INFORMATION




ITEM
1. Legal Proceedings




None




ITEM
1A. Risk Factors




As a
smaller reporting company, the registrant is not required to provide a response
to Item 1A.




ITEM
2. Unregistered Sales of Equity Securities




There
have been no changes in the instruments defining the rights or rights evidenced
by any class of registered securities.




There
have been no dividends declared.




ITEM
3. Defaults Upon Senior Securities




None




ITEM
4. Submission of Matters to Vote of Security Holders




None




ITEM
5. Other Information




None




ITEM
6. Exhibits




Exhibit
      No.10.23
              Loan
      Agreement dated October 20, 2008 between Sea Change Group, LLC and
      Innopump, Inc. (1)10.24
              Term
      sheet dated as of March 3, 2009 between FURSA Master Global Event Driven
      Fund, L.P. and Versadial, Inc. (2)10.25
              Advances
      Agreement dated as of March 3, 2009 between FURSA Master Global Event
      Driven Fund, L.P. and Versadial, Inc. (3)10.26
              Settlement
      and Mutual Release Agreement dated as of March 3, 2009.
  (4)31
              Certification
      of CEO and CFO pursuant to Securities Exchange Act rules 13a-15 and
      15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.*32
              Certification
      of Chief Executive Officer and Chief Financial Officer, pursuant to 18
      U.S.C. section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002.*




*
            Filed
      herewith


(1)
            Incorporated
      by reference to Exhibit 10.1 of Form 8-K of the Company filed on October
      24, 2008.


(2)
            Incorporated
      by reference to Exhibit 10.1 of Form 8-K of the Company filed on March 9,
      2009.


(3)
            Incorporated
      by reference to Exhibit 10.2 of Form 8-K of the Company filed on March 9,
      2009.


(4)
            Incorporated
      by reference to Exhibit 10.3 of Form 8-K of the Company filed on March 9,
      2009.





30





SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 20th day of May 2009.


.


VERSADIAL,
      INC./s/ Geoffrey DonaldsonBy:
                Geoffrey
      Donaldson, Principal Executive and Financial
                  Officer/s/ Karen NazzarenoBy:
                Karen
      Nazzareno,Controller




31