OMT Inc. (TSX VENTURE:OMT) announced today the Company's consolidated results
for the period ended September 30, 2009.
Third Quarter Highlights
- iMediaTouch was deployed in a number of new key accounts including 23 Maritime
Broadcasting stations and Corus Radio (Kitchener), with other key sales
concluding with various other clients for implementation throughout 2009.
- As part of the overall 2009 marketing program, OMT attended the National
Association of Broadcasters (NAB) show in Philadelphia and CCBE show in Toronto.
OMT continues to showcase our products with target clients through participation
in these and other industry events.
- OMT's YTD Canadian sales have increased as a percentage of our total revenues
from 16% year-to-date in 2008 to 44% in 2009. This has resulted in both a
further diversification of our client base and a partial mitigation of the
unfavourable USA economic conditions that impact our sales.
- During the third quarter, a major milestone was achieved with the completion
and customer acceptance of the large custom contract in progress that began in
2005 and valued at over $500,000 in revenue recorded over the four years.
Description of Business
OMT Inc. (TSX VENTURE:OMT) is a digital media content and technology solution
provider to radio broadcasters. Through its wholly-owned operating subsidiary,
OMT Technologies Inc. the Company delivers radio automation systems to radio
stations internationally. OMT's broadcasting, multi-media technology, and
content are heard daily by over 50 million people worldwide through radio,
satellite, television and Internet delivered broadcasts. To learn more about the
Company, its products and services, visit its website at www.omt.net.
Management's Discussion and Analysis
Certain statements made in the following Management's Discussion and Analysis
contain forward-looking statements including, but not limited to, statements
concerning possible or assumed future results of operations of the Company.
Forward-looking statements represent the Company's intentions, plans,
expectations and beliefs, and are not guarantees of future performance. Such
forward-looking statements represent our current views based on information as
at the date of this report. They involve risks, uncertainties and assumptions
and the Company's actual results could differ, which in some cases may be
material, from those anticipated in these forward-looking statements. Unless
otherwise required by applicable securities law, we disclaim any intention or
obligation to publicly update or revise this information, whether as a result of
new information, future events or otherwise. The Company cautions investors not
to place undue reliance upon forward-looking statements.
Sale of Intertain Media Inc.:
The Corporation undertook a 10 month process to seek interested parties to
acquire Intertain Media Inc., a wholly-owned subsidiary, employing the services
of a professional advisor. The Board of Directors had determined that the
potential sale of Intertain would be in the best interest of the company
considering Intertain had experienced limited recent growth and would require
continued investment to realize its possible future potential. At the conclusion
of this sale review process after considering all offers received, the Board of
Directors approved the sale of Intertain to the President and Chief Executive
Officer and a member of the Board of Directors of OMT Inc. On the closing date
of May 31, 2009, OMT Inc. sold all of its shares in its wholly-owned subsidiary,
Intertain Media Inc. for a total consideration estimated to be $172,500.
Included in the consideration was a cash payment of $50,000 on closing, and an
estimated $32,500 payable upon the completion of a specific customer contract
and $90,000 of royalty payments payable estimated at $30,000 on each the next
three closing date anniversaries. The consideration, including royalty payments,
are subject to certain refinements under the terms of the Purchase Agreement.
The initial gain on sale included in discontinued operations in the Statement of
Operations is estimated at $51,553 as follows:
Cash proceeds on sale of discontinued operations $ 50,000
Estimated proceeds on completion of specific customer contract 32,500
Less: Net asset value (11,542)
Less: Estimated closing costs (19,405)
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Estimated initial gain on sale of discontinued operations $ 51,553
------------
Results of Operations
This review contains Management's discussion of the Company's operational
results and financial condition, and should be read in conjunction with the
consolidated financial statements for the nine months ended September 30, 2009
and the associated notes, which were prepared in accordance with Canadian
generally accepted accounting principles (GAAP). All amounts are in Canadian
dollars unless otherwise indicated.
The unaudited consolidated financial statements provide a comparison of the
three and nine month periods ended September 30, 2009 to the three and nine
month periods ended September 30, 2008. The eight quarter review figures have
been adjusted to reflect the discontinued operations of Intertain Media Inc.
Eight Quarter Review (numbers shown in '000s) (unaudited)
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2009 2008 2007
------------------------ ----------------------------------- --------
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------- ------- ------- -------- -------- -------- -------- --------
Total
Sales $709 $ 558 $485 $661 $571 $803 $745 $700
Gross
profit $405 $ 408 $357 $447 $393 $502 $449 $455
Gross
profit % 57% 73% 74% 68% 69% 63% 60% 65%
Operating
expenses $344 $ 454 $318 $355 $372 $512 $411 $378
EBITDA $ 61 ($46) $ 39 $ 92 $ 21 ($10) $ 38 $ 77
Other
expenses $107 ($102) $150 $151 $152 $145 $140 $169
Net
income
(loss) ($46) $56 ($111) ($59) ($131) ($155) ($102) ($92)
Net
income
(loss)
per
share (0.002) $0.002 ($0.004) ($0.002) ($0.005) ($0.005) ($0.004) ($0.003)
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Results for the quarters ended in 2009, 2008 and 2007 reflect the total business
of OMT Inc. and its wholly-owned subsidiary, OMT Technologies Inc. Sales, cost
of sales and expenses for now divested Intertain Media Inc. have been removed to
allow proper comparison between the periods and are not shown on this chart. OMT
Technologies includes the iMediaTouch radio automation and related products.
Sales in the third quarter of this year are $138,000 (24%) higher than the same
quarter last year. Three large contracts were delivered in this quarter, but
were not yet fully implemented at the client's location by quarter-end. Hardware
sales increased by $132,000 (90%) and software sales were up $27,000 (17%) over
last year but implementation activity related to these large contracts was not
completed by quarter-end and as a result, implementation revenue was down
$57,000 (50%). The large custom contract which had been in progress for several
years was completed in the third quarter and the remaining revenue was fully
recognized. The weak US economy continues to negatively impact the financial
performance of the radio industry, causing an increased focus on capital
expenditure reduction by our clients. Some clients have decided to postpone
annual technical maintenance contract renewals. As a consequence, recurring
revenue has been negatively affected and is $9,000 (6%) lower than this quarter
last year.
Sales have been directly affected by the economic slowdown which started in Q3
of 2008. A look at the quarterly results reflects this external impact. The
current economic conditions are improving, however, radio advertising is still
not yet at previous levels. Management expects sales will return to
pre-recession levels when radio advertising fully recovers, which is forecasted
by the industry to occur sometime in 2010.
Gross margin at 57% in the third quarter of this year was lower than normal for
several reasons. The increase in hardware sales discussed above without a
corresponding increase in software and service revenue changes the sales mix and
results in lower margins. This is a temporary situation and will correct itself
in the fourth quarter. The custom contract which has finally been completed and
billed did not achieve expected gross margins due to unforeseen costs. In
addition, the Canadian dollar has appreciated substantially in the last quarter,
which also impacts our USA sales when expressed in Canadian dollars.
Operating expenses in Q3-2009 were $28,000 (7.5%) lower than Q3-2008 and
$110,000 (24.2%) lower than Q2-2009. Q3-2009 is the first full quarter that the
Company operated out of its new premises. Other expense reduction initiatives,
including the sale of Intertain Media, have contributed to the decreased
expenses as reflected on the chart above.
EBITDA is defined as Earnings before Interest, Tax, Depreciation and
Amortization and is a measure that has no standardized meaning under Canadian
GAAP and is considered a non-GAAP earnings measure. Therefore this measure may
not be comparable to similar measures reported by other companies. EBITDA can be
used to compare the Company's operating performance on a consistent basis. It is
presented in this MD&A to provide the reader with additional information
regarding the Company's liquidity and ability to generate funds to finance its
operations. The majority of the quarters show a positive EBITDA. The noticeable
exceptions are the second quarters, this year and last year. The main reason for
the negative Q2 results are the increased expenses incurred due to participation
at a key industry trade-show. In Q3-2009 EBITDA is a positive $61,000, with an
improving external economy that should assist OMT in it's financial objectives
over time.
Other expenses that are not included in EBITDA to
arrive at net income include: Q3-2009 Q3-2008
--------- ---------
Interest, finance and related expense $106 $151
Amortization 1 1
--------- ---------
Total $107 $152
--------- ---------
The net loss of $46,000 for Q3-2009 is an improvement of $85,000 (64%) over the
Q3-2008 net loss of $131,000.
The loss per share, in all quarters, is based on 28,922,090 shares issued and
outstanding. Per share amounts have not been calculated using diluted share
numbers because of the unlikelihood of anyone exercising their right to buy
shares at the option price of $0.12.
Cash Flow
Cash flow from operations, net of financing, in the third quarter was a negative
$191,000. The negative cash flow in the third quarter this year is due to
several large sales near the end of the third quarter. Accounts receivable
temporarily increased substantially without a corresponding increase in accounts
payable. These accounts have now been collected within normal timeframes and
management expects positive cash flow for the fourth quarter with a
corresponding reduction in the bank line of credit. For the year to date, cash
flow, net of financing, was a negative $144,000. Last year the cash flow from
operations, net of financing, in the third quarter was a positive $1,000 and a
negative $100,000 year to date.
Related Party Transactions
In October 2005, a major shareholder provided a guarantee for $400,000 to the
Bank of Nova Scotia in support of the Company's line of credit. This guarantee
is ongoing and requires payments of a monthly administration fee of $1,000 as
well as a monthly standby fee of $1,000. If the Company actually draws down on
the guarantee, then the interest rate would be 20% of the amount received. The
Company consummated this related party transaction to support the operating Line
of Credit with the Bank.
The Company has now completed a contract with a company of which one of OMT's
directors is also an officer and a director. At September 30, 2009, the project
is complete and fully invoiced. The outstanding account receivable is $263,000.
Liquidity
Working capital, as defined by the Company's principal lenders, was positive
$48,000 as compared to a negative $29,000 at December 31, 2008, an increase of
$77,000. Working capital includes all of the current liabilities except deferred
revenue. Deferred revenue (customer deposits on projects and service contracts)
at September 30, 2009 and December 31, 2008 was $315,000 and $267,000
respectively.
The bank line of credit, which bears interest at a floating rate of prime plus
1%, is limited to a maximum of $400,000 of which $305,000 (December 31, 2008 -
$220,000) has been drawn at September 30, 2009. This amount is expected to
significantly decrease in the fourth quarter as the unusually high accounts
receivable at the end of the 3rd quarter are collected within our normal
process.
The long-term debt was originally recorded on the consolidated balance sheet at
its combined discounted values of $2,960,430 and was to be accreted equally over
the four year term of the loan for effective interest, and at maturity was to be
equal to the face value of the debentures and loans. The long-term debt of
$3,995,000 was scheduled to mature on December 20, 2008. In separate agreements
signed April 11, 2008 with the loan and the debenture holders, the date of
maturity was extended to July 15, 2009. A subsequent amending agreement signed
on April 28, 2009 with the principal debt holders further extended the date of
maturity of all of the debt to July 15, 2011. No principal payments are required
until that date. Since the long-term loans of $3,000,000 are held by principal
shareholders, under Generally Accepted Accounting Principles (GAAP) the further
extension to these loans do not require a change to the present value of the
debt. The change to the maturity date of the long-term debentures, held by
arms-length parties, however, under GAAP requires revaluation as if the old debt
was extinguished and new debt re-issued under new terms and reflecting a current
market interest rate. The current effective interest rate, estimated by
management, was 20% at the time of the extension, up slightly from the previous
years' effective interest rate of 19.9%. Under GAAP, the extension of the
long-term debentures results in a one-time gain of $205,197. This amount reduces
the fair value of the debentures and is shown as a gain on extension of the
long-term debentures in the consolidated financial statements. The one-time gain
represents a recovery of past effective interest expensed on the extended
debentures, due to extending the required principal repayment date, and will be
accreted over the remaining term of the debentures as interest expense.
In a separate agreement signed April 11, 2008, the principal debt holders, who
together hold $3,000,000 of the Company's long-term debt, provided the Company
with a signed waiver to defer the monthly interest payments, representing
approximately $20,000 per month until such time that the Company's cash reserves
grow to $500,000. A subsequent amending agreement signed on April 28, 2009 with
the principal debt holders changed the date for interest deferrals to July 15,
2011, or until such time when cash reserves grow to $500,000. Interest continues
to be paid monthly on the remaining debt of $995,000 represented by CIBC Mellon
Trust Company.
The ability of the Company to carry on as a going concern is dependant upon
achieving profitable operations which cannot be predicted at this time, the
ability of the Company to operate within its line of credit and to obtain
additional financing when its existing financing becomes due. The consolidated
financial statements do not reflect adjustments that would be necessary if the
going concern assumptions were not appropriate. If the going concern basis was
not appropriate for these consolidated financial statements, then adjustments
would be necessary in the carrying value of assets and liabilities, the reported
revenues and expenses, and the balance sheet classifications used.
Changes in Accounting Policies
Recent accounting pronouncements adopted on January 1, 2009
Section 3064 - Goodwill and Intangible Assets
This section, which replaces sections 3062 and 3450, establishes guidance for
the recognition, measurement, presentation and disclosure of goodwill and
intangible assets. Adoption has had no significant impact on the earnings or
financial position of the Company.
International Financial Reporting Standards (IFRS)
In February, 2008 the Canadian Accounting Standards Board (AcSB) announced that
as at January 1, 2011, publicly accountable enterprises are expected to adopt
IFRS. Accordingly, the Company expects to adopt these new standards during its
fiscal year beginning on January 1, 2011. The AcSB also stated that during the
transition period, enterprises will be required to provide comparative IRFS
information for the previous fiscal year. The IFRS issued by the International
Accounting Standards Board (IASB) require additional financial statement
disclosures and, while the conceptual framework is similar to Canadian GAAP,
enterprises will have to take account of differences in accounting principles.
We are currently assessing the impact of these new standards on the consolidated
financial statements, but are unable to determine the final impact on future
financial statements at this time. However, an initial assessment has not
identified any substantial changes to the financial statements.
Internal Controls
The management of OMT is responsible for establishing and maintaining disclosure
controls and procedures for the Company and has designed such disclosure
controls and procedures, or caused them to be designed under OMT's management
supervision, to provide reasonable assurance that material information relating
to the Company, including its consolidated subsidiary, is made known to OMT's
management by others within the Company, including its consolidated subsidiary.
OMT management has evaluated the effectiveness of the Company's disclosure
controls and procedures for the period covered by this MDA and based on that
evaluation has concluded that the disclosure controls and procedures are
effective. New legislation, however, does not require certification over
internal controls; rather the President and Chief Financial Officer will be
signing the bare certificate. There may be additional risks to quality,
reliability and transparency of interim and annual filings and other reports
provided under this new securities legislation.
Risks and Uncertainties
The risks and uncertainties discussed below must be taken into account, as they
may affect the Company's ability to achieve our strategic goals. Investors are
therefore advised to consider the following items in assessing the Company's
future prospects as an investment.
Capital requirements
OMT Inc. has renegotiated the terms of repayment on the subordinated debt which
will now mature on July 15, 2011. It is uncertain if future cash flow from
operations will be sufficient to repay the subordinated debt at maturity. Also,
the Company's ability to continue to operate as a going concern will be
dependent on continued cash management within the Company's current line of
credit facility, and later, obtaining new financing and/or renegotiating the
repayment terms of the subordinated debt prior to the newly extended July 15,
2011 maturity date. Readers should refer to notes 1(a) and 4 in the consolidated
financial statements.
Current External Economic and Financial Crisis
The global economic and financial crisis is having a negative impact on the
revenues of the Company in 2009, which may continue throughout the year.
Generally, prices are under pressure and client capital investment decisions and
new maintenance contracts may be postponed. In this environment, it is proving
to be difficult to achieve revenue projections for 2009. As the revenues of our
customers are negatively impacted, we see additional focus on their part to
reduce or postpone costs. The Company procurement approach does not expose it to
any risk from any specific vendor.
Custom Contract
Payments received on a project contracted with a company of which one of the
Company's directors is also an officer and director are guaranteed up to a
maximum amount of US $263,000. Progress payments received to date on the project
total US $263,021 (Cdn.$282,000). The contracting company has the right to
demand repayment of these funds based on a "Performance Security Guarantee". The
Company has purchased "Performance Security Insurance" (PSI) for up to 95% of
the money advanced to date, from the Export Development Corporation to protect
itself against this possibility. The PSI is valid until March 31, 2010. At
September 30, 2009 there is a contingent liability for the 5% PSI deductible or
US $13,151. It is unlikely that repayment will be required and therefore this
amount has not been recorded in the consolidated financial statements.
Competition and technological obsolescence
Our products' markets experience ongoing technological changes and apart from
the fact that OMT Inc. must compete with existing technology and service
providers, new companies and advancing technologies remain a competitive fact.
In order to remain fully competitive in our target markets, OMT must continue to
innovate and respond with advanced generations of software, products and
services. The inability to react in a timely fashion to technological and
competitive changes could have an impact on the value of the Company's
intangible assets and our ability to attract and retain our customers. Moreover,
the highly competitive market in which we operate could cause the Company to
reduce its prices and offer other favorable terms in order to compete
successfully with its rivals. These practices could, over time, limit the prices
that OMT can charge for its products. If OMT was unable to offset such potential
price reductions by a corresponding increase in sales or to lower expenses, such
a decline in revenues from software sales and related products could negatively
impact our profit margins and operating results.
Additional Information
Additional information related to the Company, including all public filings, is
available on SEDAR (www.sedar.com).
Unaudited Consolidated Financial Statements of
OMT INC.
Three and Nine Month periods ended September 30, 2009 and 2008
(Unaudited)
These interim consolidated financial statements have not been audited or
reviewed by the Company's independent external auditors, Ernst & Young LLP.
OMT INC.
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008
(Unaudited)
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September December
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Assets
Current assets:
Cash $ 27,844 $ 31,568
Accounts receivable 548,504 164,987
Contract in progress - 141,581
Inventory 57,582 82,754
Prepaid expenses 25,355 50,102
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Total current assets 659,285 470,992
Assets of discontinued operations - 109,960
Property, equipment, software and other assets 161 1,586
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$ 659,446 $ 582,538
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Liabilities and Shareholders' Deficiency
Current liabilities:
Bank demand loan $ 305,000 $ 220,000
Accounts payable and accrued liabilities 306,670 280,370
Deferred revenue 315,181 266,812
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Total current liabilities 926,851 767,182
Liabilities of discontinued operations - 80,254
Long-term debt (note 4) 4,159,376 4,071,940
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Total liabilities 5,086,227 4,919,376
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Commitments and contingencies (notes 5, and 7)
Shareholders' deficiency:
Capital stock 1,278,458 1,278,458
Other paid-in capital 693,579 693,579
Contributed surplus 216,427 216,427
Deficit (6,615,245) (6,525,302)
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Total shareholders' deficiency (4,426,781) (4,336,838)
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Total liabilities and shareholders' deficiency $ 659,446 $ 582,538
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See accompanying notes to consolidated financial statements.
On behalf of the Board:
"Harold Heide" Director "Murray Bamforth" Director
OMT INC.
Consolidated Statements of Operations, Comprehensive Income (Loss)
and Deficit
Three and Nine Month periods Ended September 30, 2009 and 2008
(Unaudited)
------------------------- -------------------------
2009 2008
------------------------- -------------------------
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Q3 YTD Q3 YTD
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Sales $ 708,601 $ 1,751,469 $ 571,969 $ 2,120,139
Cost of sales 303,336 580,972 177,520 775,082
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Gross profit 405,265 1,170,497 394,449 1,345,057
Selling and
administrative 314,819 1,048,765 330,460 1,164,162
Research and development 19,156 78,146 28,922 99,345
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333,975 1,126,911 359,382 1,263,507
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Income for the period
before the undernoted 71,290 43,586 35,067 81,550
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Other expenses (gains):
Amortization 327 1,424 865 2,594
Interest on long-term
debt (note 4) 104,614 352,159 148,742 431,341
Gain on extension of
debentures (note 4) - (205,197) - -
Interest on short-term
debt 2,128 6,593 1,992 2,595
Foreign exchange loss
(gain) 9,996 (10,499) 13,934 32,364
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117,065 144,480 165,533 468,894
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(Loss) for the period
before discontinued
operations (45,775) (100,894) (130,466) (387,344)
Discontinued operations net
of tax of nil (note 5) (12,405) 10,951 ( 28,432) (146,589)
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Net (loss) and
comprehensive
(loss) for the period (58,180) (89,943) (158,898) (533,933)
Deficit, beginning of
period (6,557,065) (6,525,302) (6,267,975) (5,892,941)
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Deficit, end of period $(6,615,245) $(6,615,245) $(6,426,873) $(6,426,874)
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(Loss) per share before
discontinued operations $ (0.002) $ (0.003) $ (0.005) $ (0.013)
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Income (loss) per share
from discontinued
operations $ (0.000) $ 0.001 $ (0.001) $ (0.005)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total (loss) per share $ (0.002) $ (0.003) $ (0.006) $ (0.018)
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See accompanying notes to consolidated financial statements.
OMT INC.
Consolidated Statements of Cash Flows
Three and Nine Month Periods ended September 30, 2009 and 2008
(Unaudited)
--------------------- ----------------------
2009 2008
--------------------- ----------------------
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----------------------------------------------------------------------------
Q3 YTD Q3 YTD
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Cash provided by (used in):
Operations:
Comprehensive (loss) for
the period $ (58,180) $(89,943) $(158,899) $ (533,933)
Items not involving cash:
Amortization 327 1,424 865 2,594
Amortization of
discontinued operations - - 3,318 9,734
Non-cash interest accretion
(note 4) 80,551 292,633 128,679 371,795
Gain on extension of
long-term debt - (205,197) - -
Loss (gain) on sale of
discontinued
operations (note 5) 12,405 (51,553) - -
Change in non-cash operating
working capital (225,728) (91,251) 27,164 49,364
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(190,625) (143,887) 1,127 (100,446)
Financing:
Increase (decrease) in bank
demand loan 165,000 85,000 60,000 145,000
Cash received on sale of
discontinued operations
(note 5) - 50,000 - -
----------------------------------------------------------------------------
165,000 135,000 60,000 145,000
Investments:
Disposal of (addition to)
property and equipment
from discontinued
operations - 4,916 - (4,223)
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Increase (decrease) in cash (25,625) (3,971) 61,127 40,331
Cash position, beginning of
period 53,469 31,815 21,251 42,047
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Cash position, end of period $ 27,844 $ 27,844 $ 82,378 $ 82,378
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Supplementary information:
Interest paid $ 22,263 $ 43,927 $ 22,055 $ 62,141
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See accompanying notes to consolidated financial statements.
OMT INC.
Notes to Consolidated Financial Statements (Unaudited)
Three and Nine Month Periods ended September 30, 2009 and 2008
General:
OMT Inc. "the Company", through its subsidiaries, OMT Technologies Inc. "OMT"
and Intertain Media Inc., (Intertain) provides media delivery systems and
technology and solutions to the retail and broadcast industries.
1. Significant accounting policies
(a) Basis of presentation and financial restructuring:
These consolidated financial statements have been prepared on a going concern
basis in accordance with Canadian generally accepted accounting principles
"GAAP". The going concern basis of presentation assumes that the Company will
continue in operation for the foreseeable future and be able to realize its
assets and discharge its liabilities and commitments in the normal course of
business. There is significant doubt about the appropriateness of the use of the
going concern assumption because the Company has experienced significant losses
in the last six years.
The ability of the Company to carry on as a going concern is dependant upon
achieving profitable operations which cannot be predicted at this time and the
ability of the Company to operate within its line of credit and to obtain
additional financing when its existing financing becomes due. The consolidated
financial statements do not reflect adjustments that would be necessary if the
going concern assumptions were not appropriate. If the going concern basis was
not appropriate for these consolidated financial statements, then adjustments
would be necessary in the carrying value of assets and liabilities, the reported
revenues and expenses, and the balance sheet classifications used.
(b) Basis of consolidation:
The Company's accounting policies are in accordance with accounting principles
generally accepted in Canada and are consistent with those outlined in the
annual audited financial statements except where stated below. These interim
consolidated financial statements do not include all disclosures normally
provided in annual financial statements and should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 2008. In management's opinion, the interim consolidated financial
statements include all the adjustments necessary to present fairly such
information. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, OMT Technologies Inc. and Intertain
Media Inc. All significant inter-company balances and transactions have been
eliminated on consolidation. On May 31, 2009 the Company sold all of its shares
in its wholly-owned subsidiary, Intertain Media Inc. All revenue and expense
directly related to the Intertain operations have been removed from the detailed
line items on the statements of operations, cash flows and comparative charts
and are shown as discontinued operations (note 5).
(c) On January 1, 2009 the company adopted the following Canadian Institute of
Chartered Accountants (CICA) handbook sections.
Section 3064 - Goodwill and Intangible assets
This section, which replaces sections 3062 and 3450, establishes guidance for
the recognition, measurement, presentation and disclosure of goodwill and
intangible assets. Adoption has had no significant impact on the earnings or
financial position of the Company.
(d) Future accounting policy changes:
International Financial Reporting Standards (IFRS):
The accounting framework under which financial statements are prepared in Canada
for all publicly accountable enterprises is scheduled to change to IFRS by
January 1, 2011. GAAP in Canada will cease to apply and will be replaced by
IFRS. Commencing in fiscal year 2010, the Company will need to prepare accounts
in accordance with both GAAP and IFRS in order to have comparative financial
statements on full implementation of IFRS in 2011.
2. Segment Information:
With the sale of Intertain, the Company no longer operates in the retail
segment. Operations within the retail segment have been removed from operating
results and are shown as discontinued operations. The business is now focused on
one major product suite serving the radio broadcast industry segment.
Geographic information about the Company's revenue is based on the product
shipment destination or the location of the contracting organization.
Three and Nine month periods ended September 30, 2009 and 2008
2009 Revenue 2008 Revenue
------------------ --------------------
$ (000's) $ $ (000's) $
Q3 YTD Q3 YTD
-----------------------------------------------------------
Canada 293 796 75 329
United States 416 955 497 1,791
----- ------------ ------- ------------
Totals 709 1,751 572 2,120
----- ------------ ------- ------------
Sales to two significant customers in Q3 represents 52% (2008 - one customer
representing 10%) of the total revenue. Sales to two significant customers, year
to date, represents 20% (2008 - two customers represent 21%) of the total
revenue.
3. Related party transactions and measurement uncertainty:
(a) Bank line guarantee:
In October 2005 a major shareholder of the Company, with representation on its
Board of Directors, provided a guarantee for $400,000 to the Bank of Nova Scotia
to support the Company's line of credit at the bank. This guarantee is ongoing
and requires payments of a monthly administration fee of $1,000, as well as a
monthly standby fee of $1,000. In the event that the Company actually draws down
on the guarantee, then the interest rate would be 20% of the amount received.
The guarantee is secured by a charge on any current and after-acquired assets
and ranks ahead of the long-term debt.
(b) Sale of Intertain Media Inc.:
On May 31, 2009 the Company sold all of the issued and outstanding shares of
Intertain Media Inc., a wholly-owned subsidiary, to the President & Chief
Executive Officer and a member of the Board of Directors. More details of this
related party transaction are presented in Note 5.
(c) Custom Contract:
The Company has now completed a contract with a company of which one of OMT's
directors is also an officer and a director. At September 30, 2009, the project
is complete and fully invoiced. The outstanding account receivable is $263,000
(2008 - $24,000).
4. Long-term debt:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009 2008
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Long-term loans (face value at maturity of
$3,000,000, plus deferred interest at 8%
($850,000) for a combined total of $3,850,000
due July 15, 2011), with an effective
interest rate of 7.8%. $ 3,346,791 $ 3,102,452
Long-term debentures (face value at maturity of
$995,000),interest only at 8%, payable monthly,
due July 15, 2011, with an effective interest
rate of 20%. (2008-19.9%) 812,585 969,488
----------------------------------------------------------------------------
4,159,376 4,071,940
----------------------------------------------------------------------------
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Long-term loans and long-term debentures are convertible into common shares at a
price equal to $0.12 per share.
The long-term debt was originally recorded on the consolidated balance sheet at
its combined discounted values of $2,960,430 and was to be accreted equally over
the four year term of the loan for effective interest, and at maturity was to be
equal to the face value of the debentures and loans. The long-term debt of
$3,995,000 was scheduled to mature on December 20, 2008. In separate agreements
signed April 11, 2008 with the loan and the debenture holders, the date of
maturity was extended to July 15, 2009. A subsequent amending agreement signed
on April 28, 2009 with the principal debt holders further extended the date of
maturity of all of the debt to July 15, 2011. No principal payments are required
until that date. Since the long-term loans of $3,000,000 are held by principal
shareholders, under Generally Accepted Accounting Principles (GAAP) the further
extension to these loans do not require a change to the present value of the
debt. The change to the maturity date of the long-term debentures, held by
arms-length parties, however, under GAAP requires revaluation as if the old debt
was extinguished and new debt re-issued under new terms and reflecting a current
market interest rate. The current effective interest rate, estimated by
management, was 20% at the time of the extension, up slightly from the previous
years' effective interest rate of 19.9%. Under GAAP, the extension of the
long-term debentures results in a one-time gain of $205,197. This amount reduces
the fair value of the debentures and is shown as a gain on extension of the
long-term debentures in the consolidated financial statements. The one-time gain
represents a recovery of past effective interest expensed on the extended
debentures, due to extending the required principal repayment date, and will be
accreted over the remaining term of the debentures as interest expense.
In a separate agreement signed April 11, 2008, the principal debt holders, who
together hold $3,000,000 of the Company's long-term debt, provided the Company
with a signed waiver to defer the monthly interest payments, representing
approximately $20,000 per month until such time that the Company's cash reserves
grow to $500,000. A subsequent amending agreement signed on April 28, 2009 with
the principal debt holders changed the date for interest deferrals to July 15,
2011, or until such time when cash reserves grow to $500,000. Interest continues
to be paid monthly on the remaining long-term debentures of $995,000 represented
by CIBC Mellon Trust Company.
The long-term debt is collaterized by a general security agreement covering all
assets and by an assignment of all the book debts of the Company, subordinate to
the bank line-of-credit (note 3a).
Detail of interest paid and interest accreted is as follows:
2009 2008
------ ------
Q3 YTD Q2 YTD
---------- ----------- ----------- --------------
Interest paid $ 20,063 $ 59,526 $ 20,063 $ 59,546
Interest accreted 80,551 292,633 128,679 371,795
---------- ----------- ----------- --------------
Interest on long-term debt 104,614 352,159 148,742 431,341
---------- ----------- ----------- --------------
5. Discontinued operations - Sale of Intertain Media Inc:
Following a formal process to sell Intertain Media Inc., a wholly-owned
subsidiary, on May 31, 2009 OMT Inc. sold all of its issued and outstanding
shares of its wholly-owned subsidiary, Intertain Media Inc. to the President and
Chief Executive Officer and a member of the Board of Directors of the Company.
The shares were sold for an aggregate consideration estimated to be $172,500.
Included in the consideration are royalty payments totaling $90,000 with
estimated annual payments of $30,000 payable on each the next three closing date
anniversaries. The consideration, including royalty payments, is subject to
potential refinements under the terms of the Purchase Agreement.
The total carrying value of equipment and software included in the sale amounted
to $4,916. Sales, and net losses and the initial gain on sale reflected in
discontinued operations follow:
2009 2008
------ ------
Q3 YTD Q3 YTD
---------- ---------- ----------- ----------
Sales $ - $ 172,594 $ 99,471 $ 243,882
---------- ----------- ----------
Operating loss - (40,602) (28,433) (146,589)
---------- ----------- ----------
Initial gain on sale (12,405) 51,553
---------- ----------
Discontinued operations (12,405) 10,951
---------- ----------
Taxes payable in 2009 Nil
(2008-Nil).
6. Credit and foreign exchange risk:
The Company's contracts for projects denominated in foreign currencies as well
as accounts receivable in foreign currencies potentially subjects the Company to
credit and foreign exchange risk, as collateral is generally not required and
exchange rates to US funds can change significantly. The project nature of the
business also leads to a concentration of credit risk. As at September 30, 2009
four customers accounted for 67% (December 31, 2008 five customers - 62%) of the
total accounts receivable. However, the risk of loss is partially mitigated due
to the Company's policy of collecting a deposit before any project is commenced.
The Company also bills in advance for service and support contracts. At
September 30, 2009 the overdue accounts receivable from customers amounted to
$318,000 (December 31, 2008 - $105,000) and the allowance for doubtful accounts
was set at $7,000 (December 31, 2008 - $10,000). The allowance for doubtful
accounts is based on specific customer history and write-offs are solely based
on specific customer defaults.
7. Contingency:
Payments received on a project contracted with a company of which one of OMT's
directors is also an officer and director as defined in note 3(c) are guaranteed
up to a maximum amount of US $358,106. Progress payments received to date on the
project total US $263,021 (Cdn $320,000). The contracting company has the right
to demand repayment of these funds based on a "Performance Security Guarantee"
(PSG). OMT has purchased "Performance Security Insurance" (PSI) for up to 95% of
the money advanced to date, from the Export Development Corporation (EDC) to
protect itself against this possibility. The Guarantee is valid until March 31,
2010. At September 30, 2009 there is a contingent liability for the 5%
deductible or US $13,151 which has not been recorded in the financial
statements.
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