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From the Wires
OMT Reports Annual Results for 2006
OMT Reports Annual Results for 2006
By: Marketwire .
May. 1, 2007 07:42 PM
WINNIPEG, MANITOBA -- (MARKET WIRE) -- 05/01/07 -- OMT Inc. (TSX VENTURE: OMT) announced today the Company's consolidated results for the year ended December 31, 2006. 2006 Highlights: - The Company delivered strong growth in its key target area of recurring revenue streams, which were up by 32% over the previous year. - Leading radio groups such as Saga Communications and retailers such as Holt Renfrew chose OMT products, strengthening our position in the market. - OMT became cash flow positive in 2006 with a $540,000 improvement in cash generated from operations, over the previous year. Description of Business OMT Inc. (TSX VENTURE: OMT) is a digital media content and technology solution provider to radio broadcasters and retailers with two business units. Intertain Media, the digital entertainment division, offers background music and messaging services as well as media previewing systems 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 audited consolidated financial statements for the year ended December 31, 2006 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 audited consolidated financial statements provide a comparison of the year ended December 31, 2006 to the year ended December 31, 2005.
Annual Review (numbers shown in '000s)
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December 31 December 31 December 31
2006 2005 2004
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Total Sales $3,726 $4,176 $3,482
Gross Profit $2,492 $2,595 $2,217
Gross Profit % 66.9% 62.1% 63.7%
Total Operating Expenses $2,340 $2,392 $2,378
Other Expenses $800 $872 $723
Net Income (Loss) ($648) ($669) ($884)
Net Income (Loss) per share
(basic & diluted) ($0.02) ($0.02) ($0.07)
Dividends declared Nil Nil Nil
Total Assets $1,357 $1,594 $2,395
Total Long-term liabilities $3,476 $3,222 $2,981
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Results for the year ended December 31, 2006 reflect the total business of the OMT Technologies and Intertain Media divisions. OMT Technologies includes our iMediaTouch radio automation and related products. Intertain Media includes our Retail Radio and Retail Preview product offerings. Overall sales were 11% lower in 2006, as compared to 2005. The OMT Technologies division represented $226,000 of the decrease in sales while the Intertain Media division represented $224,000. The reduced revenue in the Technology division is attributed to an overall reduction in capital spending within the radio automation sector in 2006. Management believes that reduced activity in this sector is short term and expects a return to normal levels in the future. The revenue reduction in the Intertain division was a result of lower sales of new Retail Preview music kiosks to media retailers. There continues to be a shift in consumer purchasing trends of CD's, requiring both our retail customers and Intertain to evolve in response. Intertain's In-store music system subscription revenue from Retail Radio increased in 2006 at a rate of over 500% and shows a strong continuing upward trend. The 2004, 2005 and 2006 sales results reflect the Company's strategy to build stronger recurring revenues. As a result of this focus, recurring revenues increased from approximately $636,000 in 2004 to $789,000 in 2005 and $1,048,000 in 2006, and now represents 28% (2005-19%) of total revenues. This growth reflects the positive change in the Company's shift towards recurring subscription revenue from core OMT Technologies and Intertain Media products. Gross profit decreased by $103,000 from $2,595,000 in 2005 to $2,492,000 in 2006. The OMT Technologies division represented $85,000 or 83% of the decrease in gross profit in 2006 over 2005 while the Intertain division represented $18,000 or 17% of the decrease. As a percentage of total sales, gross profit increased from 62.1% in 2005 to 66.9% in 2006. The increase in gross profit is attributed to a decrease of lower margin hardware sales across both divisions from 2005 to 2006. In previous years, gross profit increased by $378,000 from $2,217,000 in 2004 to $2,595,000 in 2005. The OMT Technologies division represented $275,000 or 73% of the increased gross profit in 2005 over 2004 while the Intertain division represented $103,000 or 27% of the increase. As a percentage of total sales, gross profit declined slightly from 63.7% in 2004 to 62.1% in 2005. The decrease in gross profit is attributed to an increase of lower margin hardware sales across both divisions from 2004 to 2005. The Company operates with tight control on expenses, and as a result operating expenses in 2006 of $2,340,000 were $52,000 less than in 2005. Operating expenses increased $14,000 in 2005 over 2004. In 2006, greater emphasis in the Intertain division sales area caused sales expenses to increase by $79,000 while administrative expenses decreased $136,000 primarily due to a reduction in professional fees. In other areas, expenses were generally consistent with previous years. Other expenses were reduced in 2006 by $72,000 over 2005, as compared to a $149,000 increase in 2005 over 2004. In 2005, interest expenses increased by $85,000 and previously capitalized financing costs of $65,000 were included. In 2006, other expenses, which include $260,000 of non-cash amortized interest as a result of debt financing requirements on the $3,995,000 of convertible debt secured in December, 2004 decreased from $872,000 in 2005 to $800,000 in 2006. Payments on this debt are for interest only, and no principal payments are required until December, 2008. Many of the Company's assets are almost fully depreciated and this resulted in a decrease of $59,000 in amortization expense. The net loss in 2006 was $648,000, an improvement of $21,000 over 2005. The net loss in 2005 of $669,000 was an improvement of $215,000 over 2004 when the loss was $884,000. The 2006 improvement was a result of higher gross margin percentage and continued expense controls. In 2005, the improvement was mainly due to an increased overall gross profit of $378,000. The increase in gross profit in 2005 was offset by additional interest expenses which increased from $386,000 in 2004 to $592,000 in 2005. Loss per share of $0.02 in 2006 is calculated on an average of 28,922,090 shares issued as compared to $0.02 in 2005 calculated on an average of 28,901,131 shares issued.
Eight Quarter Review (numbers shown in '000s)
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2006 2005
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
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Total Sales $856 $867 $1,074 $929 $1,139 $1,105 $1,044 $888
Gross Profit $620 $579 $668 $625 $661 $695 $611 $628
Gross
Profit % 72% 67% 62% 67% 58% 63% 58% 70%
Operating
Expenses $586 $573 $599 $582 $622 $598 $633 $539
EBITDA $34 $6 $69 $43 $39 $97 ($22) $89
Other
Expenses $213 $197 $196 $194 $229 $214 $214 $215
Net Income
(Loss) ($179) ($191) ($127) ($151) ($190) ($117) ($236) ($126)
Net Income
(Loss) per
share
(basic &
diluted)
($0.006)($0.007)($0.004)($0.004)($0.007)($0.004)($0.008)($0.004)
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Sales in the third and fourth quarters in 2006 were $238,000 and $283,000 lower than the same period of the previous year. The decreases, as indicated above, are largely related to fewer new music kiosk system deployments. Management expects the slower new music kiosk deployment trend to continue and is focused on developing revenue in higher growth areas such as Retail Radio. Sales of the Retail Radio product have demonstrated a growth trend, as subscription revenue sales in the third and fourth quarter of 2006 were $18,000 and $21,000 higher respectively than in 2005. Gross Profit percentages always fluctuate because of the mix of hardware and software sales and recurring revenue. Recurring revenue is growing and the trend is expected to continue. This has caused overall gross margins to rise. 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. EBITDA was positive in all quarters of 2006 and in three quarters in 2005 and amounted to $147,000 in 2006 and $203,000 in 2005.
Other expenses that reduce EBITDA to arrive at net loss include: 2006 2005
---- ----
Interest, bank charges, non-cash interest accretion and
amortization of deferred costs $658 $658
Amortization $136 $195
Other $ 6 $ 19
---- ----
Total $800 $872
Fourth Quarter Fourth quarter revenue at $856,000 was $283,000 lower than the same quarter last year and $11,000 lower than the third quarter this year. The decrease in sales in the fourth quarter as compared to last year was primarily due to fewer new installations of the Retail Preview in-store kiosks. This kiosk is a low margin product, and as a result the gross profit percentage for the quarter was up 14% over the same quarter last year, and the gross profit for the quarter was down only $41,000 from last year. Operating expenses at $586,000 remained generally consistent compared to previous quarters in 2006. Fourth quarter 2005 had operating expenses of $622,000, which were $36,000 higher than 2006. Last year's fourth quarter expenses included an allowance for bad debt losses, which was not needed this year. Customer accounts are current and no significant losses are anticipated. Cash flow in the fourth quarter of 2006 was positive $135,000. This compares to a negative cash flow in the fourth quarter of 2005 of $74,000. The Company normally invoices customers for the purpose of receiving a deposit on approved orders. This results in increased deferred revenue, and the cash flow is increased when these "deposit invoices" are collected. Deferred revenue at December 31, 2006 amounted to $729,000 as compared to $368,000 at the end of the third quarter, which is indicative of a positive outlook in OMT Technologies revenue in 2007. Liquidity OMT was in compliance with its financial covenants with all lenders as at December 31, 2006. Working capital, as defined by the Company's principal lenders, includes all of the current liabilities except deferred revenue. Deferred revenue at December 31, 2006 and 2005 was $729,000 and $529,000 respectively. Working capital at December 31, 2006 was $722,000 as compared to $698,000, an increase of $24,000. The working capital ratio of 2.7:1 is well within the limit as set by the Company's lenders. Management does not expect to require any new funding for its operations in the coming year. At the time of writing (April 30, 2007), the Company had no borrowings on its operating line of credit of $400,000. The subordinated debt of $3,995,000 will mature on December 20, 2008. Management anticipates that the Company will not be able to generate enough cash from normal business operations and that additional financing may be required to retire this debt. Management continues to explore additional options to address this issue. 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. During the year, the Company made interest payments to its three major shareholders in the amounts of $140,000, $20,000 and $80,000 respectively. 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 $600,000 began in 2005 and at December 31, 2006 the revenue for the work completed and invoiced in 2005 and 2006 amounted to $320,000. Disclosure Controls and Procedures and Internal Controls over Financial Reporting An evaluation of the effectiveness of the Company's disclosure controls and procedures ("DC&P") and an assessment of the design of its internal control over financial reporting ("ICFR") was conducted as of the end of the period covered by this MD&A, by and under the supervision of the President and the Chief Financial Officer (CFO), pursuant to the requirements of Multilateral Instrument 52-109. Management has established and maintained DC&P for the Company in order to provide reasonable assurance that material information relating to the Company is made known to it in a timely manner, particularly during the period in which the annual filings are being prepared. Management has evaluated the effectiveness of the Corporation's DC&P as of the date of this report and believes them to be effective in providing such reasonable assurance. Management is responsible for designing internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. There are inherent weaknesses in the systems of internal control due to the small size of the company and its inability to segregate incompatible functions and the use of manual systems as a result. Management believes that this weakness has not caused any material information to be withheld in its financial disclosures, or impacted reported financial results. The Company plans to remediate these weaknesses by expanding the number of individuals involved in accounting and administrative functions as the Company grows. Effective design of internal controls over financial reporting are achieved, despite this weakness, because of management's direct involvement in the internal controls over financial reporting process. During the process of review and evaluation it was determined that the design of internal controls over financial reporting as of December 31, 2006 was adequate and provided management with the ability to fairly represent the financial affairs of OMT. Management has performed supplementary procedures in addition to the normal recurring control procedures over the above business cycles to conclude that the 2006 consolidated financial statements are fairly stated. Changes in Accounting Policies No changes in accounting policies were contemplated or implemented in 2006. Details of significant accounting policies are disclosed in the financial statements. Changes in Internal Control over Financial Reporting During fiscal 2006, the Company made changes to its systems of internal controls over financial reporting that did not materially affect internal control over financial reporting. Recent Accounting Pronouncements The following new handbook sections will be effective for fiscal years beginning on or after October 1, 2006. The Company believes that adoption of these standards will not have a material effect on the results of operations and financial positions. CICA 3855 - Financial Instruments - Recognition and Measurement This section prescribes when a financial instrument is to be recognized on the balance sheet and at what amount, either fair value or a cost-based measure. The section also provides standards for reporting gains and losses on financial instruments. CICA 1530 - Comprehensive Income This section provides a new requirement that certain gains and losses are to be temporarily presented outside of net earnings and recognized as "other comprehensive income". Comprehensive income is the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income comprises revenues, expenses, gains and losses that are recognized in comprehensive income, but are excluded from net earnings. Financial Instruments The current assets and liabilities of the Company, which are subject to normal trade terms, are financial instruments for which the recorded carrying values approximate the fair value. The long-term debt obligations of the Company, for which no ready market exists, have been evaluated on the basis of discounted cash flows and it is believed that the fair value of these obligations is approximately equal to the current carrying value. Risks and Uncertainties We are confident about OMT Inc.'s long-term prospects. However, the risks and uncertainties discussed below must be taken into account, as they may affect our 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. Revenue recognition on a large contract The $600,000 project referred to under the heading Related Party Transactions, has been delayed due to technical issues. Correction of the problems could result in additional costs over and above those originally estimated, but the amount is unknown. 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. It is unknown if additional costs due to the technical issues will be incurred, but if there are, management estimates that the difference between revenue recognized in the financial statements and that should have been recognized could amount to $50,000. 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 OMT Inc. compete successfully with its rivals. These practices could, over time, limit the prices that OMT can charge for its products. If we were 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. 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. Significant customer Sales to one customer represents 75% (2005 - 94%) of the Retail segment sales revenues and 18% (2005 - 26%) of total revenue for the year. The contract with this customer will expire in 2007. Failure to extend the contract could result in a significant loss of revenue. Capital requirements OMT Inc. will need to secure new financing or renegotiate the terms of repayment on the subordinated debt which will mature on December 20, 2008, 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 1(a) and 7 in the consolidated financial statements. Additional Information Additional information related to the Company, including all public filings, is available on SEDAR (www.sedar.com).
Consolidated Financial Statements of
OMT INC.
Years ended December 31, 2006 and 2005
AUDITORS' REPORT
To the Shareholders of
OMT Inc.
We have audited the consolidated balance sheets of OMT Inc. as at December
31, 2006 and 2005 and the consolidated statements of operations and deficit
and cash flows for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the company as at
December 31, 2006 and 2005 and the results of its operations and its cash
flows for the years ended December 31, 2006 and 2005 in accordance with
Canadian generally accepted accounting principles.
Ernst & Young LLP
Winnipeg, Canada,
April 5, 2007. Chartered Accountants
OMT INC.
Consolidated Balance Sheets
December 31, 2006 and 2005
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2006 2005
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Assets (notes 5 and 7)
Current assets:
Cash $ 366,947 $ 186,214
Accounts receivable 520,314 720,704
Inventory 81,868 175,352
Prepaid expenses 173,241 99,335
Current portion of lease receivable 7,000 7,000
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Total current assets 1,149,370 1,188,605
Lease receivable 7,000 14,000
Property and equipment (note 2) 28,215 137,252
Software and other intangible assets (note 3) 38,906 54,203
Deferred financing costs (note 4) 133,305 199,958
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Total assets $ 1,356,796 $ 1,594,018
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Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $ 423,424 $ 483,495
Current portion of deferred revenue (note 6) 728,333 527,267
Current portion of obligation under capital
lease (note 8) 3,560 7,453
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Total current liabilities 1,155,317 1,018,215
Deferred revenue (note 6) 596 2,204
Long-term debt (note 7) 3,475,865 3,216,297
Obligation under capital lease (note 8) - 3,560
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Total liabilities 4,631,778 4,240,276
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Commitments and contingency (notes 9, 14 and 16)
Shareholders' deficiency:
Capital stock (note 10) 1,278,458 1,278,458
Other paid-in capital (note 11) 693,579 693,579
Contributed surplus (note 10(c)) 197,326 178,225
Deficit (5,444,345) (4,796,520)
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Total shareholders' deficiency (3,274,982) (2,646,258)
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Total liabilities and shareholders' deficiency $ 1,356,796 $ 1,594,018
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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 and Deficit
Years ended December 31, 2006 and 2005
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2006 2005
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Sales $ 3,725,730 $ 4,175,804
Cost of sales 1,233,890 1,580,723
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Gross profit 2,491,840 2,595,081
Selling and administrative 2,113,966 2,170,405
Research and development 226,160 221,458
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2,340,126 2,391,863
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Income (loss) before the undernoted 151,714 203,218
Other expenses (income):
Amortization 136,155 195,446
Interest and bank charges 12,371 12,223
Long term interest 319,600 319,764
Non-cash interest accretion (note 7) 259,568 259,703
Foreign exchange gain (5,242) (2,816)
Stock-based compensation (note 10(c)) 19,101 20,075
Amortization of deferred financing costs
(note 4) 66,652 66,652
Miscellaneous (8,666) 1,608
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799,539 872,655
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Loss for the year (647,825) (669,437)
Deficit, beginning of year: (4,796,520) (4,127,083)
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Deficit, end of year $ (5,444,345) $ (4,796,520)
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Basic and diluted loss per share (note 10(e)) $ (0.02) $ (0.02)
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See accompanying notes to consolidated financial statements.
OMT INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2006 and 2005
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2006 2005
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Cash provided by (used in):
Operations:
Loss for the year $ (647,825) $ (669,437)
Items not involving cash:
Amortization 136,155 195,446
Non-cash interest accretion 259,568 259,703
Stock-based compensation 19,101 20,075
Amortization and write-off of deferred
financing costs 66,652 66,652
Change in non-cash operating working capital 366,358 (209,702)
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200,009 (337,263)
Financing:
Decrease in bank demand loan - (328,000)
Principal payments on capital lease (7,454) (40,297)
Principal payments on long-term debt - (179,762)
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(7,454) (548,059)
Investments:
Additions to property and equipment (7,001) (24,858)
Additions to software and other intangible assets (4,821) (25,268)
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(11,822) (50,126)
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Increase (decrease) in cash 180,733 (935,448)
Cash, beginning of year 186,214 1,121,662
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Cash, end of year $ 366,947 $ 186,214
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Supplementary information:
Interest paid $ 331,971 $ 331,987
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See accompanying notes to consolidated financial statements.
OMT INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2006 and 2005
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General: OMT Inc (TSX VENTURE: OMT) (the Company), through its subsidiaries, OMT Technologies Inc. (OMT) and I n tertain Media Inc., 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. 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 four years. The Company is not in violation of any of its covenants at December 31, 2006. 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. The 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 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 consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation. (c) Inventory: Inventory consists of custom projects in process and computers with related parts and accessories held for resale. Custom projects in process are recorded at the lower of cost, which includes direct project expenses, and net realizable value. Computers with related parts and accessories held for resale are valued at the lower of cost, determined on a specific item basis, and net realizable value. (d) Property and equipment: Assets included in property and equipment are stated at cost less accumulated amortization. Amortization is provided for over the estimated useful lives of the assets using the following annual basis and rates: --------------------------------------------------------------------------- --------------------------------------------------------------------------- Asset Basis --------------------------------------------------------------------------- Computer hardware Straight-line 3 years Furniture and equipment Straight-line 5 years Assets under capital lease Straight-line 3 years --------------------------------------------------------------------------- --------------------------------------------------------------------------- (e) Software and other intangible assets: Software and other intangible assets are stated at cost less accumulated amortization and are amortized on a straight-line basis over their estimated useful lives as follows: --------------------------------------------------------------------------- --------------------------------------------------------------------------- Asset Term --------------------------------------------------------------------------- Purchased intellectual properties 4 - 5 years Other software 2 years Other intangibles 5 years --------------------------------------------------------------------------- Impairment of property and equipment and finite life intangible assets: Impairment of property and equipment and finite life intangible assets is recognized when an event or change in circumstances causes the asset's carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the estimated fair value of the asset from its carrying value. (f) Deferred financing costs: Deferred financing costs represent the cost of the issuance of the long-term debt. Amortization is provided on a straight-line basis over the term of the debt. Costs associated with debt that has been settled is written-off in the year of settlement. (g) Income taxes: The Company uses the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and li abilities and their respective tax bases. Future tax assets and liabilities are measured using the substantively enacted tax rates expected to apply to taxable earnings in the year in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the date of enactment or substantive enactment. (h) Revenue recognition: The Company recognizes revenue when there is evidence a sales arrangement exists, the sales price is fixed and determinable, collectibility is reasonably assured and title has passed. For software, computer hardware and other product sales, these criteria are usually met upon delivery or shipment of the product. Provision is made at the time revenue is recognized for estimated product returns and warranties based on historical experience. A system sale often includes four elements: hardware, software, training and future support fees. Hardware and software revenue are normally recognized after delivery. Training revenue is recognized when completed. Support fees are deferred and recognized over the term of the contract. Custom software sales are recognized pursuant to the contract terms and on a percentage of completion basis. Service revenues are recognized over the contract life on a straight-line basis. Revenue billed in advance of its recognition is reflected as deferred revenue. (i) Government assistance: Government assistance in connection with research activities is recognized as an expense reduction in the year that the related expenditure is incurred. Government assistance in connection with capital expenditures is treated as a reduction of the cost of the applicable asset. (j) Stock-based compensation plan: The Company has a stock option plan as described in note 10(c). Under the fair-value-based method, compensation cost is measured at fair value at the date of grant using the Black-Scholes option pricing model with assumptions described in note 10(c). Compensation cost is expensed over the award's vesting period. Any consideration paid by option holders upon exercise of stock options is recorded as an increase in share capital. (k) Foreign currency: Monetary items denominated in foreign currency are translated into Canadian dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in income. (l) Use of estimates: The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. (m) Research and development expenses: Research expenses are charged to income in the year they are incurred, net of related tax credits. Development costs are charged to operations in the period of the expenditure, unless a development project meets the criteria under Canadian generally accepted accounting principles for deferral and amortization. As of December 31, 2006 and 2005, no development costs have been deferred. (n) Earnings (loss) per share: The calculation of earnings (loss) per share is based on net income divided by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect the assumed conversion of all dilutive securities using the treasury stock method. Under the treasury stock method, the weighted-average number of common shares outstanding is calculated assuming that the proceeds from the exercise of options and warrants are used to repurchase common shares at the average price during the year. For the year ended December 31, 2006, 2,012,000 options (2005 - 2,219,500) were excluded from the calculation of diluted earnings per share because the effect of including these shares would be to reduce the loss per share. (o) Leases: Leases are classified as either capital or operating. Leases which transfer substantially all the benefits and risks of ownership of the asset to the Company are accounted for as capital leases. Capital lease obligations reflect the present value of future lease payments, discounted at the appropriate interest rate. All other leases are accounted for as operating leases whereby rental payments are expensed as incurred.
2. Property and equipment:
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Accumulated Net book
2006 Cost amortization value
---------------------------------------------------------------------------
Computer hardware $ 567,552 $ 553,748 $ 13,804
Furniture and equipment 154,449 141,260 13,189
Assets under capital lease 22,000 20,778 1,222
---------------------------------------------------------------------------
$ 744,001 $ 715,786 $ 28,215
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated Net book
2005 Cost amortization value
---------------------------------------------------------------------------
Computer hardware $ 561,924 $ 467,597 $ 94,327
Furniture and equipment 165,624 131,255 34,369
Assets under capital lease 22,000 13,444 8,556
---------------------------------------------------------------------------
$ 749,548 $ 612,296 $ 137,252
---------------------------------------------------------------------------
---------------------------------------------------------------------------
3. Software and other intangible assets:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated Net book
2006 Cost amortization value
---------------------------------------------------------------------------
Purchased intellectual
properties $ 1,255,570 $ 1,254,276 $ 1,294
Other software 133,130 95,655 37,475
Other intangibles 58,696 58,559 137
---------------------------------------------------------------------------
$ 1,447,396 1,408,490 38,906
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated Net book
2005 Cost amortization value
---------------------------------------------------------------------------
Purchased intellectual
properties $ 1,255,570 $ 1,252,983 $ 2,587
Other software 128,309 78,780 49,529
Other intangibles 58,696 56,609 2,087
---------------------------------------------------------------------------
$ 1,442,575 $ 1,388,372 $ 54,203
---------------------------------------------------------------------------
---------------------------------------------------------------------------
During the year, software and other intangible assets amortization of
$16,148 (2005 - $67,737) was included in amortization expense.
4. Deferred financing costs:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------
Financing costs $ 266,610 $ 266,610
Accumulated amortization 133,305 66,652
---------------------------------------------------------------------------
$ 133,305 $ 199,958
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Deferred financing costs, relating to the issuance of the long-term debt proceeds raised in December 2004 in the amount of $266,610, has been reflected above. 5. Bank line of credit: The bank line of credit, which bears interest at bank prime rate plus 1.25% 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, as well as a letter of guarantee in favor of the bank by a major shareholder. The Company had no amounts owing at December 31, 2006 and December 31, 2005.
6. Deferred revenue:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------
Deferred revenue $ 728,929 $ 529,471
Current portion of deferred revenue 728,333 527,267
---------------------------------------------------------------------------
$ 596 $ 2,204
---------------------------------------------------------------------------
---------------------------------------------------------------------------
7. Long-term debt:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------
Convertible loans (face value at maturity of
$3,000,000), interest only at 8%, payable
monthly, due December 20, 2008 $ 2,610,162 $ 2,415,242
Convertible debentures (face value at maturity
of $995,000), interest only at 8%, payable
monthly, due December 20, 2008 865,703 801,055
---------------------------------------------------------------------------
3,475,865 3,216,297
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Convertible debentures/convertible loans (the "subordinated debt"): 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 subordinated debt. Subordinated debt is convertible into common shares at a price equal to $0.11 per share until December 20, 2007 and $0.12 per share to December 20, 2008. During the year ended December 31, 2005, convertible debentures with a face value of $5,000 were converted to common stock (note 10). The subordinated debt was originally recorded on the balance sheet at its combined discounted values of $2,960,430 and will be accreted over the four year term of the loan for imputed interest and at maturity will be equal to the face value of the debentures and loans. In 2006, imputed interest on the subordinated debt amounted to $259,568 (2005 - $259,703). Monthly interest payments of 8% are paid on the subordinated debt. When interest paid is combined with interest accretion, the effective interest rate is 14.5%. No principal repayments are required. The subordinated debt is collaterized by a general security agreement covering all assets and by an assignment of all of the book debts of the Company, subordinate only to the bank (see note 5). 8. Obligations under capital lease: The $3,560 amount owing represents payments related to one lease which matures in 2007. Interest of $1,252 (2005 - $2,568) relating to capital lease obligation has been included in interest expense. 9. Commitments: The Company has entered into a lease for premises which calls for lease payments of $51,000 per year in 2007, 2008, and $21,000 in 2009. The total commitment is $123,000. The Company has also entered into a lease on office equipment which requires lease payments of $2,256 per year from 2007 to 2011. The total commitment is $11,280. 10. 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 81/2% preferred voting shares issuable in series.
(b) Issued common shares are summarized below:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of shares Amount
---------------------------------------------------------------------------
Balance at December 31, 2005 and 2006 28,922,090 $1,278,458
---------------------------------------------------------------------------
---------------------------------------------------------------------------
During the year ended December 31, 2005, 50,000 common shares were issued upon conversion of debentures with a face value of $5,000 (note 7). This increased share capital by $3,836 for that period. (c) Options: At the 2005 annual general meeting of shareholders a new stock option plan was ratified. Under the new 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, the options 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. The Company has stock options outstanding to directors and officers to purchase up to 1,975,000 common shares and to employees to purchase up to 37,000 common shares. Information related to the stock options outstanding at December 31 is presented below:
2006 2005
-------------------------------------------------------
Number Weighted- Number Weighted-
of average of average
shares exercise price shares exercise price
$ $
---------------------------------------------------------------------------
Outstanding at
beginning of year 2,219,500 0.14 733,500 0.20
Granted - - 1,848,500 0.10
Exercised - -
Cancelled (207,500) 0.16 (362,500) 0.16
---------------------------------------------------------------------------
Outstanding at
end of year 2,012,000 0.12 2,219,500 0.14
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Options
exercisable at
end of year 1,395,832 0.12 962,166 0.18
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The following table summarizes information about share options outstanding
at December 31, 2006:
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) $ $
---------------------------------------------------------------------------
0.25 2003 100,000 1.1 0.25 100,000 0.25
0.12 2003 35,000 1.4 0.12 35,000 0.12
0.12 2003 28,500 1.7 0.12 28,500 0.12
0.11 2005 448,500 3.1 0.11 299,000 0.11
0.11 2005 1,400,000 3.8 0.11 933,332 0.11
---------------------------------------------------------------------------
0.14 2,012,000 3.4 0.12 1,395,832 0.12
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Stock based compensation has been calculated on the options vested to employees, officers and directors. The value of options granted is based on the price at the date of the grant, volatility of price in the future (based on volatility over the past twelve months), and the risk free interest rate at that time. Stock prices at the dates of the grants were $0.06, $0.06 and $0.05 respectively. The option price was $0.10 in each case. Volatility is estimated at 75% and the interest rate used was 3%. Stock based compensation in the amount of $57,304 has been calculated for the options is sued in 2005, with $19,101 expensed in the current year. The expense is added to contributed surplus. (d) Escrowed shares: On February 16, 2006 681,842 shares and on August 16, 2006, 1,363,684 shares were released from escrow. As at December 31, 2006, 681,843 (December 31, 2005 - 2,727,366) of the common shares remain held in escrow. While these common shares are held in escrow, the holder has full voting rights. The remaining common shares will be released on August 16, 2007. (e) Per share amounts: The weighted average number of common shares outstanding for the year ended December 31, 2006 was 28,922,090 (2005 - 28,901,131). 11. Other paid-in capital: Balance at December 31, 2005 and December 31, 2006 $ 693,579 $435,000 of the balance in other paid-in capital arose prior to January 1, 2003. The remaining amount arose upon a refinancing transaction that occurred during the year ended December 31, 2004 which resulted in the issuance of the debt identified in note 7. 12. 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 r ad io stations. The retail segment is primarily intended to enhance the shopping experience of customers in retail businesses. The accounting policies of the Company's operating segments are the same as those described in note 1. There are no significant inter-segment t r ansactions. The following presents identifiable assets at December 31, 2006 and December 31, 2005 and segment operating results for the years then ended.
2006 2005
--------------------------------- ---------------------------------
Commercial Retail Common Total Commercial Retail Common Total
$ $ $ $ $ $ $ $
---------------------------------------------------------------------------
(000's) (000's)
---------------------------------------------------------------------------
Revenues 2,801 925 - 3,726 3,027 1,149 - 4,176
---------------------------------------------------------------------------
Expenses
Cost of
sales 874 360 - 1,234 1,015 566 - 1,581
Selling,
general
and
adminis-
trative 976 481 662 2,119 1,241 223 725 2,189
Research
&
develop-
ment 138 88 - 226 89 132 - 221
Amorti-
zation 41 95 - 136 104 91 - 195
Interest - - 592 592 - - 592 592
Deferred
financing
costs 67 67 67 67
---------------------------------------------------------------------------
2,029 1,024 1,321 4,374 2,449 1,012 1,384 4,845
---------------------------------------------------------------------------
Net income
(loss)
for the
year 772 (99) (1,321) (648) 578 137 (1,384) (669)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Tangible
assets 7 21 - 28 39 98 - 137
Intangible
assets 1 38 - 39 7 47 - 54
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Additions
to property,
plant and
equipment
and
intangible
assets 4 8 - 12 16 34 - 50
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 lo cation as at December 31, 2006.
2006 2005
------------------------- -------------------------
Property, plant Property, plant
Revenue and equipment, Revenue and equipment,
$ (000's) $ $ (000's) $
---------------------------------------------------------------------------
Canada 1,640 67 1,891 191
United States 2,086 - 2,285 -
---------------------------------------------------------------------------
3,726 67 4,176 191
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sales to one customer represents 75% (2005 - 94%) of the Retail segment sales revenues and 18% (2005 - 26%) of total revenue for the year. 13. Income taxes: Income tax expense differs from the amount that would be computed by applying the federal and provincial statutory income tax rates of 36.62% (2005 - 37.1%) to income before income taxes. The reasons for the differences are as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------
Computed income tax recovery $ (237,000) $ (248,000)
In
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