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)
------------
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
----------------------------------------------------------------------------
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)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
Contacts: OMT Inc. Bill Baines Executive Chairman (204) 786-3994
(204) 783-5805 (FAX) bbaines@omt.net www.omt.net
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