OMT Inc. (TSX VENTURE:OMT) announced today the Company's consolidated results
for the period ended June 30, 2009.
Second Quarter Highlights
- OMT Inc. divested its Intertain Media division in order to focus on the more
mature and proven iMediaTouch radio automation product suite and it large
installed base of clients.
- iMediaTouch was deployed in a number of new key accounts including the new
SHORE-FM Vancouver and Corus Radio in Toronto, with other key sales concluded
with various other clients for implementation throughout 2009.
- OMT completed development of its new mass storage solution, iMediaArchive,
with an initial deployment at CKUA Radio Foundation in Edmonton, in a unique,
custom application. The newly developed product is now available for other
clients who have a large internal library database management application.
- As part of the 2Q09 marketing program, OMT attended the National Association
of Broadcasters (NAB) show in Las Vegas and the Canadian CRTC hearings. The new
version 4 of iMediaTouch, due for full release in 2009, and our new WebSecure
product both were showcased with very positive feedback.
Description of Business
OMT Inc. (TSX VENTURE:OMT) is a digital media content and technology solution
provider to radio broadcasters and retailers with two business units, OMT
Technologies Inc. and Intertain Media Inc. The OMT Technologies division
delivers radio automation systems to radio stations internationally and the
Intertain Media digital entertainment division, offers commercial music,
messaging and digital signage services to major retailers. 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 $63,958 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 (7,000)
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Estimated initial gain on sale of discontinued operations $ 63,958
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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 six months ended June 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 six month periods ended June 30, 2009 to the three and six month
periods ended June 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
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Q2 Q1 Q4 Q3 Q2 Q1
-------- -------- -------- --------- -------- ---------
Sales $ 558 $ 485 $ 661 $ 571 $ 803 $ 745
Gross profit $ 408 $ 357 $ 447 $ 393 $ 502 $ 449
Gross profit % 73% 74% 68% 69% 63% 60%
Operating expenses $ 454 $ 318 $ 355 $ 372 $ 512 $ 411
EBITDA ($46) $ 39 $ 92 $ 21 ($10) $ 38
Other expenses ($102) $ 150 $ 151 $ 152 $ 145 $ 140
Net income (loss) $ 56 ($111) ($59) ($131) ($155) ($102)
Net income (loss)
per share
(basic & diluted) $ 0.002 ($0.004) ($0.002) ($0.005) ($0.005) ($0.004)
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2007
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Q4 Q3
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Sales $ 700 $ 577
Gross profit $ 455 $ 416
Gross profit % 65% 72%
Operating expenses $ 378 $ 421
EBITDA $ 77 ($5)
Other expenses $ 169 $ 179
Net income (loss) ($92) ($184)
Net income (loss)
per share
(basic & diluted) ($0.003) ($0.006)
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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 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.
The radio automation sales continue to be significantly impacted by the slowdown
in the North American economy. Compared to last year, overall sales in Q1 and Q2
are down $260,000 (34.9%) and $245,000 (30.5%) respectively. The external
economic conditions have affected both hardware and software sales. Hardware
sales are down $190,000 (62.1%) in Q1 and $155,000 (53.3%) in Q2. Software sales
are down $69,000 (28.6%) in Q1 and $25,000 (9.8%) in Q2. Recurring client
support agreement revenue has been maintained at last year's level.
The overall gross profit in 2009 of $765,000 (73.3%) has decreased $185,000
(19.5%) due to the slowdown in revenue discussed above. While the reduction in
revenue was primarily due to lower hardware sales, gross profit margins on
hardware sales are much less than on software sales. As a result, the gross
margin percentage for Q1 and Q2 2009 averaged 12% better than last year.
Operating expenses in Q2 2009 were $58,000 (8.5%) lower than Q2 2008 and
$151,000 (16.3%) lower for the six month period than in 2008. These decreases
when compared to cost levels last year are largely the result of streamlined
operations. Expenses in Q2 are $136,000 higher than Q1. Last year, Q2 expenses
were $101,000 higher than Q1. These increased costs in Q2 are incurred because
the Company spends a significant portion of its marketing budget in April when
it promotes and attends the annual National Association of Broadcasters (NAB)
show in Las Vegas.
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 at NAB. Sales
opportunities are now becoming more evident as the economy improves leading
management to believe that EBITDA will return to be positive, based on the
current outlook.
Other expenses that are not included in
EBITDA to arrive at net income include: Q2 2009 Q2 2008
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Interest, finance and related expense $ 102 $ 144
Gain on re-issue of debentures (205) -
Amortization 1 1
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Total ($102) $ 145
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Overall, the Company was able to show a positive net income during Q2. While the
overall business activity has been down sharply, this was largely offset by
improved margin percentages on the reduced sales, closely managed operating
expenses, and a one-time gain on the extinguishment and re-issue of the
long-term debentures discussed later in this document.
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
There has been substantial improvement in the cash position of the Company in
both the first and second quarters of this year. The year to date operating loss
(EBITDA) of $7,000 has been offset by several cash management activities.
Interest on the long term debt has been deferred until July, 2011, which saves
approximately $20,000 per month. The Company also received $50,000 cash related
to the sale of Intertain Media. These combined events have made it possible to
reduce the bank loan by $80,000 since the start of the year. Management believes
that the $400,000 line of credit will be sufficient for the rest of the year
based on the current business outlook.
Related Party Transactions
As discussed earlier in the discontinued operations section, 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 of the Company.
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 contracted to supply Radio Automation Software and Services to a
company of which one of OMT's directors is also an officer and director. The
project which is valued at approximately $526,000 began in 2005 and as at June
30, 2009 the cumulative revenue for the work completed and recognized to date
amounted to $468,000. The project has been delayed due to technical matters and
the ongoing customer acceptance process. Revenue has been recorded on this
contract under the percentage of completion method based upon management's best
estimate of costs still to be incurred. Management estimates that costs still to
be incurred to complete the project will be approximately $61,000. The Company
is providing additional services to this same related party customer outside of
the scope of the contract. At June 30, 2009 accounts receivable for this work
amounted to less than $1,000 and no revenue was earned in this reporting period
for these additional services.
Liquidity
Working capital, as defined by the Company's principal lenders, includes all of
the current liabilities except deferred revenue. Deferred revenue (customer
deposits on projects and service contracts) at June 30, 2009 and December 31,
2008 was $291,000 and $276,000 respectively. Working capital at June 30, 2009
was negative $2,000 as compared to a positive $3,000 at December 31, 2008, a
decrease of $5,000.
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 $140,000 (December 31, 2008 -
$220,000) has been drawn at June 30, 2009.
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
OMT has implemented a system of internal controls. New legislation 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. As
such, the ability of the Company to continue operating as a going concern will
be dependent on continued cash management within the Company's line of credit
facility and 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 6 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 in progress
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.$320,000). 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 December 31, 2009 or
completion of the project, whichever comes sooner, but the Company expects to
request an extension should the project be incomplete at that time. At June 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 Six Month periods ended June 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
June 30, 2009 and December 31, 2008
(Unaudited)
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June December
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Assets
Current assets:
Cash $ 53,469 $ 31,568
Accounts receivable 122,054 164,987
Contract in progress (note 3a) 156,075 141,581
Inventory 28,737 82,754
Prepaid expenses 27,764 50,102
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Total current assets 388,100 470,992
Assets of discontinued operations - 109,960
Property, equipment, software and other assets 488 1,586
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$ 388,587 $ 582,538
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Liabilities and Shareholders' Deficiency
Current liabilities:
Bank demand loan $ 140,000 $ 220,000
Accounts payable and accrued liabilities 250,477 280,370
Deferred revenue 291,887 266,812
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Total current liabilities 682,363 767,182
Liabilities of discontinued operations - 80,254
Long-term debt (note 4) 4,074,825 4,071,940
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Total liabilities 4,757,188 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 (6,557,065) (6,525,302)
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Total shareholders' deficiency (4,368,601) (4,336,838)
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Total liabilities and shareholders' deficiency $ 388,587 $ 582,538
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See accompanying notes to consolidated financial statements.
On behalf of the Board:
Bill Baines, Director Murray Bamforth, Director
OMT INC.
Consolidated Statements of Operations, Comprehensive Income (Loss)
and Deficit
Three and Six Month periods Ended June 30, 2009 and 2008
(Unaudited)
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2009 2008
-------------------------- ------------------------
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Q2 YTD Q2 YTD
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Sales $ 557,843 $ 1,042,868 $ 802,561 $ 1,548,170
Cost of sales 150,041 277,636 300,788 597,562
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Gross profit 407,802 765,232 501,773 950,608
Selling
and administrative 431,455 733,946 470,347 833,702
Research
and development 26,724 58,990 38,240 70,423
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458,179 792,936 508,587 904,125
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Income (loss)
for the period
before the undernoted (50,377) (27,704) (6,814) 46,483
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Other expenses (gains):
Amortization 548 1,097 865 1,729
Interest on long-term
debt (note 4) 100,323 247,545 143,717 282,599
Gain on extension
of debentures (note 4) (205,197) (205,197) - -
Interest on short-
term debt 2,428 4,465 236 603
Foreign exchange
loss (gain) (5,047) (20,495) 4,192 18,430
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(106,945) 27,415 149,010 303,361
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Income (loss) for
the period before
discontinued operations 56,568 (55,119) (158,824) (256,878)
Discontinued operations
net of tax of
nil (note 5) 35,100 23,356 (58,483) (118,156)
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Net income (loss)
and comprehensive
income (loss)
for the period 91,668 (31,763) (217,307) (375,034)
Deficit, beginning
of period (6,648,733) (6,525,302) (6,050,668) (5,892,941)
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Deficit, end of period $ (6,557,065) $(6,557,065) $(6,267,975) $(6,267,975)
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Income (loss)
per share before
discontinued operations $ 0.002 $ (0.002) $ (0.005) $ (0.010)
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Income (loss) per
share from
discontinued operations $ 0.001 $ 0.001 $ (0.002) $ (0.003)
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Total income (loss)
per share $ 0.003 $ (0.001) $ (0.007) $ (0.013)
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Income (loss) per share
(diluted for 1,967,500
outstanding options) $ 0.003 $ (0.001) $ (0.007) $ (0.012)
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See accompanying notes to consolidated financial statements.
OMT INC.
Consolidated Statements of Cash Flows
Three and Six Month Periods ended June 30, 2009 and 2008
(Unaudited)
---------------------- ----------------------
2009 2008
---------------------- ----------------------
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Q2 YTD Q2 YTD
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Cash provided by (used in):
Operations:
Comprehensive income
(loss) for the period $ 91,688 $ (31,763) $(217,307) $(375,034)
Items not involving cash:
Amortization 548 1,097 865 1,729
Amortization of
discontinued operations - - 3,263 6,416
Non-cash interest
accretion (note 4) 80,488 208,082 123,871 243,116
Gain on extension of
long-term debt (205,197) (205,197) - -
Gain on sale of discontinued
operations (note 5) (63,958) (63,958) - -
Change in non-cash
operating working capital 77,936 138,477 (2,760) 22,199
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(18,495) 46,738 (92,068) (101,574)
Financing:
Increase (decrease) in
bank demand loan (55,000) (80,000) 80,000 85,000
Cash received on sale of
discontinued operations
(note 5) 50,000 50,000 - -
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(5,000) (30,000) 80,000 85,000
Investments:
Disposal of (addition to)
property and equipment
from discontinued operations 4,916 4,916 (1,990) (4,222)
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Increase (decrease) in cash (18,579) 21,654 (14,058) (20,796)
Cash position,
beginning of period 72,048 31,815 35,309 42,047
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Cash position, end of period $ 53,469 $ 53,469 $ 21,251 $ 21,251
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Supplementary information:
Interest paid $ 22,263 $ 43,927 $ 20,082 $ 40,086
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See accompanying notes to consolidated financial statements.
OMT INC.
Notes to Consolidated Financial Statements (Unaudited)
Three and Six Month Periods ended June 30, 2009 and 2008
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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 six month periods ended June 30, 2009 and 2008
2009 Revenue 2008 Revenue
---------------- -----------------
$ (000's) $ $ (000's) $
Q2 YTD Q2 YTD
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Canada 242 485 149 254
United States 316 558 654 1,294
--- --- --- -----
Totals 558 1,043 803 1,548
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Sales to three significant customers in Q2 represents 51% (2008 - one customer
representing 21%) of the total revenue. Sales to five significant customers,
year to date, represents 39% (2008 - two customers represent 29%) of the total
revenue.
3. Related party transactions and measurement uncertainty:
(a) Custom Contract in progress:
The Company has contracted to supply Radio Automation Software and Services to a
company of which one of the Company's directors is also an officer and director.
The project which is valued at approximately $526,000 began in 2005 and as at
June 30, 2009 the cumulative revenue for the work completed and recognized to
date amounted to $468,000. At June 30, 2009, revenue recognized but not billed
amounted to $156,075 (December 31, 2009 - $141,581).
The project has been delayed due to technical matters and the ongoing customer
acceptance process. Revenue has been recorded on this contract under the
percentage of completion method based upon management's best estimate of costs
still to be incurred. Management estimates that costs still to be incurred to
complete the project will be approximately $61,000.
The Company is providing additional services to this same related party customer
outside of the scope of the contract. At June 30, 2009 accounts receivable for
this work amounted to less than $1,000 and no revenue was earned in this
reporting period for these additional services.
(b) 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.
(c) 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.
4. Long-term debt:
----------------------------------------------------------------------------
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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%. $ 3,282,016 $ 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%) 792,809 969,488
----------------------------------------------------------------------------
4,074,825 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 3 (b)).
Detail of interest paid and interest accreted is as follows:
2009 2008
---- ----
Q2 YTD Q2 YTD
-- --- -- ---
Interest paid $ 19,835 $ 39,463 $ 19,846 $ 39,483
Interest accreted 80,488 208,082 123,871 243,116
------ ------- ------- -------
Interest on long-term debt 100,323 247,545 143,717 282,599
------- ------- ------- -------
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, are 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
---- ----
Q2 YTD Q2 YTD
-- --- -- ---
Sales $ 34,219 $ 172,594 $ 79,973 $ 144,411
------ ------- ------ -------
Operating loss (28,858) (40,602) ($ 58,483) ($ 118,156)
------ -------
Initial gain on sale 63,958 63,958
------ ------
Discontinued operations $ 35,100 $ 23,356
------ ------
Taxes payable in 2009 Nil (2008-Nil). Cash proceeds received in the second
quarter amounted to $50,000.
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 June 30, 2009 four
customers accounted for 61% (December 31, 2009 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 June 30,
2009 the overdue accounts receivable from customers amounted to $47,000
(December 31, 2008 - $105,000) and the allowance for doubtful accounts was set
at $11,000 (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(a) 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 December
31, 2009 or completion of the project, whichever comes sooner, but the insurance
would be extended should the project be incomplete at that time. At June 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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