OMT Reports Results for Three Months Ended September 30, 2008
- Press Release
- Source: OMT Inc.
- On 3:39 pm EST, Thursday December 4, 2008
WINNIPEG, MANITOBA--(MARKET WIRE)--Dec 4, 2008 -- OMT Inc. (CDNX:OMT.V - News) announced today the Company's consolidated results for the period ended September 30, 2008.
Third Quarter Highlights
- The company continues to develop its mid and long-term debt refinancing solutions for the existing $3,995,000 convertible debt instrument, which currently matures on July 15, 2009, and is reviewing its cash management options.
- OMT's leading iMediaTouch radio automation system won opportunities to expand our existing relationship into a third marker of Mid-West Family Broadcasting, and was selected as initial deployments for Verstandig Broadcasting, Jamieson-Wolf Enterprises and Real Media.
- The Intertain division was expanded to new locations with several existing clients and began initial deployments on the Newfoundland Labrador Liquor Corporation agreement previously announced.
Description of Business
OMT Inc. (CDNX:OMT.V - News) is a digital media content and technology solution provider to radio broadcasters and retailers with two business units. Intertain Media, the digital entertainment division, offers commercial music, messaging and digital signage services to major retailers. The OMT Technologies division 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.
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, 2008 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 nine months ended September 30, 2008 to the nine months ended September 30, 2007. The eight quarter review figures have been adjusted to reflect the discontinued operations.
Eight Quarter Review (numbers shown in '000s) (unaudited)
The Eight Quarter Review figures have been adjusted to reflect the
discontinued retail preview operations.
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2008
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Q3 Q2 Q1
-- -- --
Total Sales $ 671 $ 877 $ 816
Gross Profit $ 449 $ 538 $ 487
Gross Profit % 67% 61% 60%
Operating Expenses $ 453 $ 607 $ 501
EBITDA ($4) ($69) ($14)
Other Expenses $ 155 $ 148 $ 144
Net Loss ($159) ($217) ($158)
Net Loss per share
(basic & diluted) (0.006) ($0.007) ($0.006)
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2007 2006
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Q4 Q3 Q2 Q1 Q4
-- -- -- -- --
Total Sales $ 794 $ 637 $ 1,008 $ 781 $ 737
Gross Profit $ 492 $ 446 $ 463 $ 533 $ 517
Gross Profit % 62% 70% 46% 68% 70%
Operating Expenses $ 461 $ 500 $ 605 $ 596 $ 586
EBITDA $ 31 ($54) ($142) ($63) ($69)
Other Expenses $ 171 $ 187 $ 169 $ 176 $ 213
Net Loss ($140) ($241) ($311) ($239) ($282)
Net Loss per share
(basic & diluted) ($0.005) ($0.008) ($0.011) ($0.008) ($0.010)
----------------------------------------------------------------------------Results for the quarters ended in 2008, 2007 and 2006 reflect the total business of the Company, which includes OMT Technologies and the Intertain Media divisions. Sales and cost of sales for Intertain's discontinued Retail Preview Segment (RPS) in May, 2007 have been removed to allow proper comparison between the periods and are not shown on this chart. Expenses of the discontinued operation have not been segregated and remain in the normal operating expenses. OMT Technologies includes the iMediaTouch radio automation and related products. Intertain Media now includes music, messaging and digital signage services.
Sales in the third quarter of this year are $34,000 higher than the same quarter last year. The increase is attributed to the retail segment where subscription revenue is $10,000 higher and installation services are $24,000 higher than the same quarter last year. Commercial sector sales remained relatively constant. Sales in the third quarter this year were $206,000 lower than in the second quarter. In the second quarter, while sales were generally higher than the third quarter, the hardware components of several large commercial customers accounted for increased sales of $144,000. The weakening US economy continues to negatively impact the financial performance of the radio industry, causing an increased focus on capital expenditure reduction. Some clients have decided to postpone annual technical maintenance contract renewals. As a consequence, recurring revenue in the commercial segment has been negatively affected and is $48,000 (11%) lower than last year ($12,000 this quarter).
Gross profit at 67% in the third quarter of this year was $89,000 (17%) lower than the second quarter this year and $38,000 (6%) lower than the first quarter of this year. The reduction is a direct result of the lower commercial sales. Gross margin percentages for the three quarters this year are all within the normal range of 60-70%. Gross profit margins fluctuate when the mix of sales between hardware, software and services changes in any specific period. Last year, the gross profit margin in Q2 was abnormally low as a result of the large audio installation in the retail sector and the technical difficulties experienced in the large custom project in the commercial sector.
Operating expenses in the third quarter this year were $47,000 less than the same period last year. The savings were achieved by reductions in convention costs and small staff level adjustments.
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.
Other expenses that reduce EBITDA to arrive at net loss
include: Q3-2008 Q3-2007
------- -------
Interest, finance and related expense $ 151 $ 175
Amortization $ 4 $ 12
------- -------
Total $ 155 $ 187
------- -------The net loss of $159,000 for Q3-2008 is an improvement of $82,000 (34%) over the Q3-2007 net loss of $241,000, and $58,000 (27%) over the Q2-2008 net loss of $217,000. The loss per share, in all quarters, is based on 28,922,090 shares issued and outstanding.
Cash Flow
Cash flow from operations, net of financing, in the third quarter was a positive $1,000. For the year to date, cash flow, net of financing, was a negative $105,000. Last year the cash flow from operations, net of financing, in the third quarter was a positive $12,000 and a negative $167,000 year to date. Management projections for the fourth quarter continue to show negative cash flows, but well within the established bank line of credit.
Contractual Obligations
A lease for premises and a lease for office equipment as detailed in the notes to the financial statements at December 31, 2007 remain unchanged.
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 September 30, 2008 and December 31, 2007 was $343,000 and $314,000 respectively. Working capital at September 30, 2008 was negative $3,914,000 as compared to a positive $150,000 at December 31, 2007. This significant apparent deterioration in the company's working capital has occurred because the convertible debt is now due in less than a year and is now shown on the balance sheet as a current liability, as required by GAAP.
The convertible debt due on July 15, 2009 will require deferred interest and principal repayments of $360,000 and $3,995,000 respectively. Management anticipates that the Company will not be able to generate enough cash from normal business operations and that additional financing will be required to retire this debt, or a maturity debt extension agreed to by the lenders. Management continues to explore several options to address this issue, but there is no assurance that the Company will be successful in this endeavor. If the company is unable to acquire new financing, or extend the debt, then this would have serious implications on its ability to meet its obligations and to continue as a going concern.
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 subject to a 30 day notice of cancellation by the major shareholder 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 $550,000 (US $505,000) began in 2005 and as at September 30, 2008 the cumulative revenue for the work completed and recognized to date amounted to $415,000.
The project has been delayed due to technical and client issues. Completion of the project will result in additional costs over and above those originally estimated. 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 $70,000.
Changes in Accounting Policies
Section 1535 - Capital Disclosures
Effective January 1, 2008, the Company adopted the CICA Handbook Section 1535, Capital Disclosures which establishes standards for disclosing information regarding an entity's capital and its management. The information provided by an entity should focus in particular on its objectives, policies and processes for managing capital, and disclose whether it complies with capital requirements to which it is subject and also what the consequences are in case of non-compliance. The Company has determined that the application of this section had no effect on the Company's financial position or the results of its operations.
Sections 3862 and 3863 - Financial Instruments, Disclosure and Presentation
Effective January 1, 2008, the Company adopted the CICA Handbook Sections 3862 and 3863 - Financial Instruments, Disclosure and Presentation. These sections which will replace section 3861, "Financial Instruments - Disclosure and Presentation", require the disclosure of additional detail of financial asset and liability categories as well as detailed discussion on the risks associated with the company's financial instruments, including how it manages these risks. These standards harmonize disclosures with International Financial Reporting Standards ("IFRS"). The Company has determined that the application of this section had no effect on the Company's financial position or the results of its operations.
Section 3031 - Inventories
Effective January 1, 2008, the Company adopted the CICA Handbook Section 3031 - Inventories which replaces section 3030 with the same title and will harmonize accounting for inventories under Canadian GAAP with IFRS. This standard requires that inventories should be measured at the lower of cost and net realizable value, and includes guidance on the determination of cost, including allocation of overheads and other costs. The section also requires that similar inventories within a consolidated group be measured using the same method. It also requires the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. The Company has determined that the application of this section had no effect on the Company's financial position or the results of its operations.
Recent accounting pronouncements not yet adopted
Goodwill and Intangible Assets
These sections establish guidance for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. Management is reviewing the requirement and will implement them on January 1, 2009.
International Financial Reporting Standards (IFRS)
The changeover date for implementation of IFRS has been set for January 1, 2011. Management is reviewing the requirements; especially where they could affect data processing changes which must be in place in order to meet reporting guidelines.
Internal Controls
During fiscal 2007, the Company made changes to its systems of internal controls over financial reporting that did not materially affect internal control over financial reporting.
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. will need to secure new financing or renegotiate the terms of repayment on the subordinated debt which will mature on July 15, 2009, as it is anticipated that cash flow from operations will not be sufficient to repay the subordinated debt. As such, the ability of the Company to continue operating as a going concern is dependant on obtaining new financing and/or renegotiating the repayment terms of the subordinated debt. Readers should refer to notes 2(c) and 6(i) in the consolidated financial statements.
Custom Contract in progress
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 $550,000 began in 2005 and at September 30, 2008 the revenue for the work completed amounted to $415,000. The project has been delayed due to technical and client issues. Completion of the project will result in additional costs over and above those originally estimated. 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 $70,000.
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.
Credit 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. 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.
Fair value
The carrying amounts of cash, accounts receivable, inventory, accounts payable and accrued liabilities approximate their fair values because of the short term maturity of these instruments. As such, all are grouped within the current assets or current liabilities sections of the balance sheet. The fair value of the long-term debt can not be reliably measured because there is no market for this financial instrument. The carrying value of the long-term debt is as described in note 7. This liability is shown as a long-term liability on the balance sheet.
Growth management and market development
There can be no assurance that OMT Inc. will be able to significantly develop its market, which would affect its profitability. On the other hand, rapid growth would put significant pressure on management, operations and technical resources. To manage growth, the Company would have to increase its technical and operational complement and manage its staff while effectively maintaining numerous relationships with third parties.
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, 2008 and 2007
(unaudited)
These interim consolidated financial statements have not been audited or reviewed by the Company's independent external auditors, Ernst & Young LLP.
2008 Third Quarter Report
OMT INC.
Consolidated Balance Sheets
September 30, 2008 and December 31, 2007
(unaudited)
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September December
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Assets (notes 4, and 5)
Current assets:
Cash $ 82,378 $ 42,047
Accounts receivable 305,986 257,514
Contracts in progress (note 5a) 107,016 60,132
Inventory 37,151 72,467
Prepaid expenses 48,002 48,556
Current portion of lease receivable - 7,000
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Total current assets 580,533 487,716
Long-term receivable 4,815 8,637
Property and equipment 11,020 17,671
Software and other intangible assets 3,064 4,518
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$ 599,432 $ 518,542
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Liabilities and Shareholders' Deficiency
Current liabilities:
Bank demand loan (note 4) $ 145,000 $ -
Accounts payable and accrued liabilities 406,302 337,759
Deferred revenue 343,315 313,830
Long-term debt (notes 1 and 7) 3,943,225 -
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Total current liabilities 4,837,842 651,589
Long-term debt (notes 1 and 7) - 3,571,430
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Total liabilities 4,837,842 4,223,019
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Commitments and contingency (notes 5 and 9)
Shareholders' deficiency:
Capital stock (note 2) 1,278,458 1,278,458
Other paid-in capital 693,579 693,579
Contributed surplus 216,427 216,427
Deficit (6,426,874) (5,892,941)
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Total shareholders' deficiency (4,238,410) (3,704,477)
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Total liabilities and shareholders' deficiency $ 599,432 $ 518,542
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See accompanying notes to consolidated financial statements.
On behalf of the Board:
"Bill Baines" Director "Laurie Goldberg" Director
OMT INC.
Consolidated Statements of Operations, Comprehensive Income (Loss) and
Deficit
Three and Nine Month Periods ended September 30, 2008 and 2007
(unaudited)
-------------- ---------------
2008 2007
-------------- ---------------
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Q3 YTD Q3 YTD
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Sales $ 671,441 $ 2,364,022 $ 636,599 $ 2,425,352
Cost of sales 222,625 890,019 190,780 983,820
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Gross profit 448,816 1,474,003 445,819 1,441,532
Selling and
administrative 392,422 1,369,982 448,756 1,528,547
Research and
development 46,633 159,397 49,622 162,732
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439,055 1,529,379 498,378 1,691,279
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Profit(Loss) before
the undernoted 9,761 (55,376) (52,559) (249,747)
Other expenses:
Amortization 4,183 12,328 11,500 33,950
Interest on
long-term debt
(note 5) 148,742 431,341 174,678 496,275
Interest on
short-term debt 1,992 2,595 13 436
Foreign exchange
loss 13,743 32,293 1,968 9,617
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168,660 478,557 188,159 540,278
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Loss before
discontinued
operations (158,899) (533,933) (240,718) (790,025)
Discontinued
operations, net of
tax of nil (note
8) - - - 359,498
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Net loss and
comprehensive loss
for the period (158,899) (533,933) (240,718) (430,527)
Deficit, beginning
of period (6,267,975) (5,892,941) (5,511,228) (5,321,419)
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Deficit, end of
period $ (6,426,874) $ (6,426,874) $ (5,751,946) $ (5,751,946)
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Loss per share
before discontinued
operations $ (0.006) $ (0.018) $ (0.008) $ (0.027)
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Earnings per share
from discontinued
operations - - - $ 0.012
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Total loss per share $ (0.006) $ (0.018) $ (0.008) $ (0.015)
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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, 2008 and 2007
(unaudited)
-------------- ---------------
2008 2007
-------------- ---------------
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Q3 YTD Q3 YTD
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Cash provided by (used in):
Operations:
Net loss for the period $ (158,899) $ (533,933) $ (240,718) $ (790,025)
Items not involving cash:
Amortization 4,183 12,328 11,500 33,950
Non-cash interest
accretion (note 7) 128,679 371,795 94,122 257,232
Discontinued operations
(note 8) - - - 359,498
Stock-based compensation - - - 19,101
Change in non-cash
operating working capital 27,164 49,364 151,579 (59,936)
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1,127 (100,446) 16,483 (180,180)
Financing:
Increase in bank demand loan 60,000 145,000 - -
Principal payments on
capital lease - - - (3,560)
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60,000 145,000 - (3,560)
Investments:
Additions to property and
equipment - (2,975) 4,730 (13,573)
Additions to software and
intangible assets - (1,248) - -
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- (4,223) 4,730 (13,573)
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Change in cash position 61,127 40,331 11,753 (170,167)
Cash position, beginning of
period 21,251 42,047 185,027 366,947
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Cash position, end of period $ 82,378 $ 82,378 $ 196,780 $ 196,780
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Supplementary information:
Interest paid $ 22,055 $ 62,141 $ 79,681 $ 158,909
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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, 2008 and 2007
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----------------------------------------------------------------------------General:
OMT Inc. (CDNX:OMT.V - News) (the Company), through its subsidiaries, OMT Technologies Inc. (OMT) and Intertain Media Inc.(Intertain), provides media delivery systems and technology, and solutions to the media, broadcast and retail 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 and the long-term debt is now due in less than a year.
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 obtain additional financing from other sources when its existing financing becomes due on July 15, 2009. The long-term debt, which is now due in less than a year, has been reclassified from long-term to current on the balance sheet. This has reduced working capital to negative figures. Management believes that the working capital deficiency is temporary because efforts are ongoing to rectify this, and therefore 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, 2007. In management's opinion, the interim consolidated financial statements include all the adjustments necessary to present fairly such information. On January 1, 2008 the company adopted the following Canadian Institute of Chartered Accountants (CICA) handbook sections.
Certain comparative figures have been reclassified to conform to the current years' presentation.
Significant accounting standard and policy changes
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Date and method Impact
Description of adoption on adoption
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Sections 3862- Presentation of, and 3863 January 1, 2008; Additional
- Disclosure of, Financial Instruments prospective disclosure
These sections which replace section provided
3861 require the disclosure of (note 6)
additional detail of financial asset
and liability categories as well as
detailed discussion of the risks
associated with financial instruments
and how those risks are managed.
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Section 1535 - Capital Disclosures January 1, 2008 Additional
This section establishes standards for prospective disclosure
disclosing information regarding an provided
entity's capital and its management. The (note 2c)
information provided by an entity
should focus in particular on its
objectives, policies and processes for
managing its capital structure.
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Date and method Impact
Description of adoption on adoption
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Section 3031 - Inventories January 1, 2008 No material
This section replaces section 3030 with prospective impact on
the same title and harmonizes Earnings or
accounting for inventories under financial
Canadian GAAP with International position
Financial Reporting Standards (IFRS).
Under this standard, inventories are
measured at the lower of cost and net
realizable and it includes guidance
on the determination of cost, including
allocation of overheads and other
costs. The section also requires that
similar inventories within a
consolidated group be measured using
the same method. It also requires
the reversal of previous write-downs
to net realizable value when
there is a subsequent increase in the
value of the inventories. The new
requirement is consistent with the old
and has not resulted in changes to
company accounting.
Recent accounting pronouncements not yet adopted
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Date and method Impact
Description of adoption on adoption
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Goodwill and Intangible Assets January 1, 2009; Currently being
These sections establish guidance for prospective reviewed
the recognition, measurement,
presentation and disclosure of goodwill
and intangible assets.
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International Financial Reporting January 1, 2011 Currently being
Standards (IFRS) in accordance reviewed
The CICA has published its strategic with IFRS
plan for convergence of GAAP with IFRS
as issued by the International
Accounting Standards Board. The
changeover date for Canadian publicly
accountable enterprises is January 1,
2011 and will require restatement of
comparative figures.
----------------------------------------------------------------------------2. Capital stock:
(a) Authorized:
Authorized share capital consists of an unlimited number of common voting shares with no par value and an unlimited number of redeemable, cumulative, convertible 8.5% preferred voting shares issuable in series.
(b) Issued common shares are summarized below:
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Number of shares Amount
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Balance at September 30, 2008 and 2007 28,922,090 $ 1,278,458
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----------------------------------------------------------------------------(c) Capital management:
The Company's objective in managing capital is to ensure sufficient liquidity to finance its research and development activities, general and administrative expenses, working-capital and growth opportunities.
Initially the company had funded its activities through public offerings of common shares and preferred shares. Subsequently, the preferred shares and accrued interest on the preferred shares were replaced by the issue of common shares and long-term, subordinated long-term debt.
Presently, OMT Inc. follows no formal written policy or process concerning capital management. Rather, management and the Board of Directors are addressing the need to secure new financing or renegotiate the terms of repayment on the long-term debt which will mature on July 15, 2009, as it is anticipated that cash flow from operations will not be sufficient to repay the debt. As such, the ability of the Company to continue operating as a going concern is dependant on obtaining new financing and/or renegotiating the repayment terms of the debt.
(d) Options:
At the 2005 annual general meeting of shareholders a revised stock option plan was approved. Under the revised plan 4,330,813 options for purchase of common shares are reserved. Terms of the options will be determined by the Board of Directors, but in any case, must expire no more than 5 years from the date of the grant. Normal vesting is one third upon issue and one third in each of the following two years. No new options have been granted to date in 2008.
The Company has stock options outstanding to directors and officers to purchase up to 1,990,000 common shares and to employees to purchase up to 432,500 common shares.
Information related to the stock options outstanding at September 30, 2008 and September 30, 2007 is presented below:
2008 2007
-------------------- -------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
$ $
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Outstanding at beginning of
period 2,442,500 0.12 2,012,000 0.12
Granted - - - -
Exercised - - - -
Cancelled (20,000) - (15,000) 0.12
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Outstanding at end of period 2,422,500 0.12 1,997,000 0.12
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Options exercisable at
September 30 2,055,833 0.12 1,530,332 0.12
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----------------------------------------------------------------------------The following table summarizes information about share options outstanding at September 30, 2008:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------
Weighted-
average Weighted- Weighted-
Year remaining average average
Exercise of Number contractual exercise Number exercise
price grant outstanding life price outstanding price
$ (years) $ $
0.12 2004 24,000 0.9 0.12 24,000 0.12
0.12 2005 448,500 1.4 0.12 448,500 0.12
0.12 2005 1,400,000 2.1 0.12 1,400,000 0.12
0.12 2007 550,000 4.1 0.12 183,333 0.12
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0.12 2,422,500 2.4 0.12 2,055,833 0.12
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----------------------------------------------------------------------------(e) Per share amounts:
The weighted average number of common shares outstanding for the 3 months ended September 30, 2008 was 28,922,090 (2007 - 28,922,090).
3. Segment Information:
The Company manages its business and evaluates performance based on two operating segments. The commercial segment is primarily intended for automation of commercial radio stations. The retail segment provides retailers with supporting media services that enhance the shopping experience. The accounting policies of the Company's operating segments are the same as those described in note 1 to the annual financial statements. There are no significant inter-segment transactions. The following charts present results of operations for both the nine and three month periods ended September 30, 2008 and September 30, 2007 and identifiable assets at September 30, 2008 and December 31, 2007.
Three months ended September 30, 2008 and September 30, 2007
2008 2007
------------------------------ --------------------------------
Commercial Retail Common Total Commercial Retail Common Total
$ $ $ $ $ $ $ $
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(000's) (000's)
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Revenues 571 100 - 671 577 59 - 636
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Expenses
Cost of
sales 178 45 - 223 161 30 - 191
Selling,
general
and
admin-
istrative 179 62 164 405 227 61 162 450
Research &
development 29 17 - 46 32 18 - 50
Amortization 1 4 - 5 4 7 - 11
Interest - - 151 151 - - 175 175
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387 128 315 830 424 116 337 877
----------------------------------------------------------------------------
Net income
(loss) 184 (28) (315) (159) 153 (57) (337) (241)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended September 30, 2008 and September 30, 2007
2008 2007
------------------------------- ---------------------------------
Commercial Retail Common Total Commercial Retail Common Total
$ $ $ $ $ $ $ $
----------------------------------------------------------------------------
(000's) (000's)
----------------------------------------------------------------------------
Revenues 2,120 244 - 2,364 1,926 499 - 2,425
----------------------------------------------------------------------------
Expenses
Cost of
sales 775 115 - 890 643 341 - 984
Selling,
general
and
admini-
strative 593 206 603 1,402 722 294 521 1,537
Research &
development 99 60 - 159 105 58 - 163
Amortization 3 10 - 13 15 19 - 34
Interest - - 434 434 - - 497 497
----------------------------------------------------------------------------
1,470 391 1,037 2,898 1,485 712 1,018 3,215
----------------------------------------------------------------------------
Net income
(loss)
before
discontinued
operations 650 (147) (1,037) (534) 441 (213) (1,018) (790)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, 2008 December 31, 2007
------------------------------ -------------------------------
Commercial Retail Common Total Commercial Retail Common Total
$ $ $ $ $ $ $ $
(000's) (000's)
----------------------------------------------------------------------------
Net book value:
Tangible assets 2 9 - 11 4 14 - 18
Intangible assets 1 2 - 3 1 4 - 5
Additions to:
Tangible assets - - - - 4 9 - 13
Intangible assets - - - - 1 2 - 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------Geographic information about the Company's revenue is based on the product shipment destination or the location of the contracting organization. Assets are based on their physical location as at September 30, 2008 and December 31, 2007.
2008 2007
--------------------------- ----------------------------
Property and Property and
Revenue equipment Revenue equipment
$ (000's) $ $ (000's) $
----------------------------------------------------------------------------
Canada 573 14 958 20
United States 1,791 - 1,467 -
----------------------------------------------------------------------------
2,364 14 2,425 20
----------------------------------------------------------------------------
----------------------------------------------------------------------------Sales to one significant customer in Q3 represents 10% (2007 - no customers represented more than 10%) of the total revenue.
4. Bank demand loan
The bank line of credit, which bears interest at a floating rate of prime plus 1%, is limited to a maximum of $400,000 against which a general security agreement covering all present and future assets as well as an assignment of book debts and inventory is pledged as collateral. Security on the loan is also provided through a guarantee by a major shareholder. With the establishment of the guarantee, the bank no longer holds any covenants should the Company draw funds against the line which is now available to the full amount of $400,000 of which $145,000 has been drawn as of September 30, 2008. If the bank should exercise the guarantee and receive funds from the guarantor, then the major shareholder would have first rank under its guarantor general security agreement (note 5b).
5. 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 OMT's directors is also an officer and director. The project which is valued at approximately $575,000 (US$505,000)began in 2005 and at September 30, 2008 the revenue for the work completed to date and recognized was $415,000.
The project continues to be delayed due to technical and client issues. Completion of the project will result in additional costs over and above those originally estimated. 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 $70,000.
(b) Bank line guarantee:
In October 2005 a major shareholder of OMT Inc., 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. The guarantee is subject to a 30 day notice of cancellation by the major shareholder 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.
(c) Interest on long-term debt:
During the nine months ended September 30, 2007, the Company made interest payments to its three major shareholders in the amounts of $105,000, $15,000 and $60,000 for a total of $180,000. In an agreement effective January 1, 2008, the three major shareholders, who together hold $3,000,000 of the Company's long-term debt (note 7), have provided the company with a signed waiver to defer the monthly interest payments (unpaid to date $180,000). The effect of the waiver is to defer monthly interest payments of approximately $20,000 per month, until such time that the Company's cash reserves grow to $500,000 or the debt maturity date, whichever is earlier.
Related party transactions are recorded at the exchange amount which is the rate agreed upon by the related parties.
6. Financial instruments - disclosure and presentation:
(i) Liquidity risk:
The long-term debt due on July 15, 2009 will require deferred interest and principal repayments of $360,000 and $3,995,000 respectively. Management anticipates that the Company will not be able to generate enough cash from normal business operations and that additional financing will be required to retire this debt. Management continues to explore several options to address this issue, but there is no assurance that the Company will be successful in this endeavor. If the company is unable to acquire new financing, or extend the debt, then this would have serious implications on its ability to meet its obligations and to continue as a going concern.
(ii) Fair value:
The carrying amounts of cash, accounts receivable, inventory, accounts payable, and accrued liabilities approximate their fair values because of the short term maturity of these instruments. As such, all are grouped within the current assets or current liabilities sections of the balance sheet. The fair value of the long-term debt can not be reliably measured because there is no market for this financial instrument. The carrying value of the long-term debt is as described in note 7. This liability which was previously shown as a long-term liability on the balance sheet is now shown as a current liability because the maturity date is less than one year into the future.
(iii) Credit risk:
Management believes that the Company is not exposed to significant credit risk because it follows a policy of collecting a deposit before any project is commenced. The Company also bills in advance for service and support contracts.
(iv) Interest rate risk:
The bank line of credit bears interest at a floating rate of prime plus 1%. If the prime rate of interest were to rise significantly, then the company would be obligated to pay the high rate.
(v) Foreign exchange risk:
The Company contracts for projects denominated in foreign currencies as well as accounts receivable in foreign currencies potentially subjects the Company to foreign exchange risk, as collateral is generally not required and exchange rates to US funds can change significantly. Sales denominated in foreign currency amounted to approximately $1.8 million in 2008. A sharp fluctuation in the value of the foreign currency as denominated in Canadian dollars could result in foreign currency losses to the company. The company accepts this risk as a normal part of operations and has not implemented any processes to protect itself from this risk.
7. Long-term debt:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Long-term loans (face value at maturity of
$3,000,000, plus deferred interest of $360,000
for a total of $3,360,000), due July 15, 2009 $ 3,000,003 $ 2,678,574
Long-term debentures (face value at maturity of
$995,000), interest only at 8%, payable monthly,
due July 15, 2009 943,222 892,856
----------------------------------------------------------------------------
3,943,225 3,571,430
----------------------------------------------------------------------------
----------------------------------------------------------------------------Long-term debentures/long-term loans:
On December 20, 2004, OMT obtained new financing and also completed a financial restructuring, which was comprised of the issuance of $4,000,000 in long-term debt. The debt, which now matures in less than a year, can no longer be classified as long-term and is classified as a current liability on the balance sheet. Long-term debt is convertible into common shares at a price equal to $0.12 per share.
The long-term debt was originally recorded on the 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. In 2008, for the 3 months ended September 30, imputed interest on the long-term debt amounted to $128,679 (2007 - $94,122). These amounts are shown separately on the Consolidated Statements of Cash Flows as "Non-cash interest accretion". No principal repayments are required until maturity.
An amending agreement signed on April 11, 2008 with the principal debt holders has changed the date of maturity of all of the debt to July 15, 2009. No principal payments will be required until that date. In a separate agreement signed April 11, 2008, the principal debt holders, who together hold $3,000,000 of OMT's long-term debt, have provided OMT with a signed waiver to defer the monthly interest payments, representing approximately $20,000 per month, until such time that OMT's cash reserves grow to $500,000 or the maturity date of the debt, whichever is earlier. When interest paid is combined with interest accretion, the effective interest rate on this portion of the debt is 15.2% . Interest will continue to be paid monthly on the remaining debt of $995,000 represented by CIBC Mellon Trust Company. The effective interest rate on this portion of the debt is 16.1%.
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 (see note 4).
8. Discontinued Operations - Sale of the Retail Preview Business:
On May 28, 2007 OMT executed a sale of its Retail Preview asset and related business operations. In addition, Intertain is entitled to receive quarterly royalties beginning January 1, 2008 and ending December 31, 2011 on any ongoing subscription revenues from the current customers of Retail Preview. In the third quarter of this year, royalties of $6,000 were received. Going forward Intertain does not anticipate receiving any further royalty payments. Sales and cost of sales eliminated and included in discontinued operations are as follows:
2008 2007
---- ----
Q3 YTD Q3 YTD
-- --- -- ---
Sales $ 215,533
Cost of sales 37,447
---------
Gross profit 178,086
Initial gain on sale 181,412
---------
Total nil nil nil $ 359,498
---------9. Contingencies:
(a) The financing transaction that was concluded by the Company in December 2004 involved the outstanding preferred shares, and was initially described as a redemption of preferred shares. The intent of all parties was to repurchase the preferred shares on a tax neutral basis. Unfortunately, the wording used did not support the original intent and could result in a possible tax liability. Correcting this required a rectification order (the "Order"), with the proper wording, to be issued by the Manitoba Court of Queen's Bench. The rectification order with the proper wording has been issued in our favor on April 22, 2005. It is possible that Canada Revenue Agency (CRA) might appeal the Order, but management does not expect this to happen because the original intent was for the transaction to be tax neutral. If CRA were to appeal the order or the revised transaction and, if such appeals were successful, the Company could face a potential income tax liability of approximately $600,000. If such appeals were filed by CRA, the Company would vigorously defend its position.
(b) 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 5 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 "Letter of Credit" (LOC), which is supported by 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 LOC is valid until December 31, 2008 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 September 30, 2008 there is a contingent liability for the 5% PSI deductible or US $13,151 which has not been recorded in the financial statements.
Contact:
Contacts:
OMT Inc.
Bill Baines
Executive Chairman
(204) 786-3994
(204) 783-5805 (FAX)
Email: bbaines@omt.net
Website: http://www.omt.net
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