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
---------- ----------
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)
-------------------------- ------------------------
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
----------------------------------------------------------------------------
Canada 242 485 149 254
United States 316 558 654 1,294
--- --- --- -----
Totals 558 1,043 803 1,548
--- ----- --- -----
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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009 2008
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
Contacts: OMT Inc. Bill Baines Executive Chairman (204) 786-3994
(204) 783-5805 (FAX) bbaines@omt.net www.omt.net
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