Cell-Loc Location Technologies Inc.
TSX VENTURE : LTI

Cell-Loc Location Technologies Inc.

May 30, 2006 22:55 ET

Cell-Loc Location Technologies Inc.: Management's Discussion and Analysis of Financial Condition and Results of Operations

CALGARY, ALBERTA--(CCNMatthews - May 30, 2006) - Management's discussion and analysis (MD&A) of Cell-Loc Location Technologies Inc. (TSX VENTURE:LTI) (the "Company" or "CLTI") for the period ended March 31, 2006 contains forward-looking statements that are not historical in nature and involve risks and uncertainties. Forward-looking statements are not guarantees as to the Company's future results since there are inherent difficulties in predicting future results. Accordingly, actual results could differ from those expressed or implied in the forward-looking statements.

Corporate Strategy

The Company is the developer of a family of network-based wireless location products that enable location-based services. After deploying networks in Calgary and Saskatoon, CLTI entered into agreements, which enabled it to build a network in Sao Paulo, Brazil. The anchor customer for this network, Itau Seguros, has signed a five year contract with the Company to provide location services to assist in the recovery of stolen vehicles. The Company plans to further enhance revenue opportunities in the stolen vehicle market in Sao Paulo beyond the number of vehicles committed under this agreement, as well as develop additional vertical markets such as fleet tracking and telemetry utilizing the existing network. In addition to the opportunities in the Sao Paulo market, the Company plans to use its success in Brazil to showcase its technology and the potential for its use on a global scale.

CLTI's strategy is to execute a large scale roll-out of its technology through qualifying potential candidates for licensing geographic territories or vertical market opportunities or partnering with parties on a joint venture basis. The Company is currently entertaining discussions with international companies with interest in utilizing the Company's intellectual property on a global basis.

Sao Paulo Network

CLTI designed and deployed a wireless location network in Sao Paulo, Brazil using its proprietary technology. In accordance with the Company's agreement with Itau Seguros S.A. ("Itau Seguros"), the insurance subsidiary of Banco Itau, the Sao Paulo network has met all accuracy and reliability specifications, and passed a technical audit conducted by an independent third party. As a result of meeting all of the conditions precedent in its preliminary agreement, Cell-Loc has signed a new five year contract with Itau Seguros.

The Company entered into lease agreements with several tower companies and other landlords to install base stations and antennas throughout the city in accordance with the network design. Lease agreements have terms varying from one month to five years, with termination rights available in certain circumstances.

A Brazilian manufacturer has been contracted to produce the proprietary beacons for the network at significantly lower price than beacons that had previously been produced in Canada. Beacons produced by this manufacturer are now complete and available for installation in vehicles in Sao Paulo.

As a result of the completion of the network, the Company expects to commence commercial operations in Sao Paulo in June 2006. Pursuant to the proposed terms of the agreement, the Company will receive minimum annual guaranteed revenue of US$4,200,000 during the first two years from one customer in the stolen vehicle market. Opportunities exist for additional revenues in the aftermarket for stolen vehicle monitoring as well as additional vertical markets such as fleet tracking and asset monitoring. The Company believes that market demand will be robust given the security environment in Brazil and the low price point for the Beacon.

Calgary Network

Due to the Company's focus on the activities in Brazil, there was little activity during the year in the Calgary network. The Company continues to assess business development activities with its partner, Location System Solutions Inc. ("LSSI"), a company controlled by Mr. Keith Bohn (a director of CLTI) and Mr. David Mullen for the Calgary wireless location network. In addition to the existing Calgary network, LSSI also owns the rights to participate in Austin, Texas and any further networks to be developed in Alberta. CLTI under a license agreement for the Greater Vancouver territory will receive $500,000 from LSSI after successful completion of the Sao Paulo, Brazil network. The Vancouver network will be built and operated through a jointly owned entity, which will be owned 51% CLTI and 49% LSSI.

General Presentation

During the three months ended March 31, 2006 the Company incurred a net loss of $1,098,000 compared to a net loss of $753,000 for the three months ended March 31, 2005.

Overview

Operations

Operations expenses for the three-month period of $65,000 resulted from operating the Calgary network ($56,000) and the Saskatoon network ($9,000) through the Company's subsidiary, CityTrac Ltd.

General and Administrative

Expenses for general and administrative costs for the three-month period were $859,000. The expenses were incurred to operate and staff the corporate office ($721,000) and to operate the office in Sao Paulo ($138,000).

Liquidity and Capital Resources

The Company had a cash balance of $745,000 at March 31, 2006. The Company's monthly use of cash continues to be scrutinized to ensure optimal use of cash resources. As noted above, CLTI has continued to raise necessary funds through private placements of equity. Further capital will be required to fund the Company's ongoing operations and development.

Business Risks and Prospects

The Company is actively negotiating commercial contracts.

The Company's ability to continue to generate revenue and achieve positive cash flow in the future is dependent upon various factors, including the level of market acceptance of its services, the degree of competition encountered by the Company, the cost of acquiring new partners, technology risks, the ability to fund continued network deployment and operations, general economic conditions and regulatory requirements.

The market for location-based services is just beginning to develop and is subject to rapid technological change. The Company's business plan is focused on attracting and contracting other entities to apply its technology in city, regional or national networks. These third parties will be required to operate the project and invest funds in the infrastructure, working capital and staff to develop the potential of their contracted area. The Company's continuing research, development and testing may cause significant strain on the Company's management, technical, financial and other resources.

To remain competitive the Company must be able to keep pace with the technological developments and change its product lines to meet new demands. The Company will depend on designing and developing products that have not been commercially tested to achieve much of its future growth.

The wireless location solution that the Company plans to offer is an emerging technology, and the application of existing, proposed or future regulation to the Company's offering cannot be reliably determined at this stage of development.

The Company's ability to continue ongoing operations is dependent upon contracting parties to license the Company's technology and then implementing a commercialized service business. The Company's ability to generate net income and positive cash flow in the future is dependent upon various factors, including:

- the level of market acceptance of its technology;

- the ability to enter into license agreements to deploy and operate the Company's proprietary wireless location network technology;

- the degree of competition encountered by the Company; and

- the Company's ability to manage growth.

Consolidated Financial Statements of

CELL-LOC LOCATION TECHNOLOGIES INC.

For the period ended March 31, 2006

Unaudited Interim Consolidated Financial Statements

In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors, KPMG LLP, have not reviewed the unaudited consolidated financial statements for the three-month period ended March 31, 2006.

Notice to the Reader of the Interim Consolidated Financial Statements

The interim consolidated financial statements of Cell-Loc Location Technologies Inc., consisting of the consolidated interim balance sheet, the consolidated interim statement of operations and deficit, and the consolidated interim statement of cash flows for the three month period ended March 31, 2006 are the responsibility of the Company's management. The interim financial statements have been prepared by management and include the appropriate accounting principles, judgments and estimates necessary to prepare these interim consolidated financial statements in accordance with Canadian generally accepted accounting principles. In addition, these interim consolidated financial statements have been reviewed and have been approved by the Company's Audit Committee and Board of Directors.



CELL-LOC LOCATION TECHNOLOGIES INC.

Consolidated Balance Sheet

March 31, December 31,
(in thousands of dollars) 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
(unaudited) (audited)

Assets

Current Assets:
Cash and cash equivalents $ 745 $ 420
Restricted cash 77 77
Accounts receivable 16 58
Deposits and Advances 898 802
Other current assets 279 234
------------------------------------------------------------------------
2,015 1,591
Network assets 9,050 7,804

Capital assets 329 311

Intellectual property and other intangible
assets 204 223
------------------------------------------------------------------------
$ 11,598 $ 9,929
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts payable and accrued liabilities $ 1,431 $ 991

Deferred revenue 3 3

Government assistance 508 508

Shareholders' equity:
Share capital (note 3 (b)) 16,704 14,634
Contributed surplus 743 486
Deficit (7,791) (6,693)
------------------------------------------------------------------------
9,656 8,427

Future operations (note 2)

------------------------------------------------------------------------
$ 11,598 $ 9,929
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CELL-LOC LOCATION TECHNOLOGIES INC.
Consolidated Statements of Operations

For the three month periods ended March 31, 2006 and
March 31, 2005.

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended
-----------------------
(in thousands of dollars March 31, March 31,
except per share data) 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
(unaudited) (unaudited)

Revenues $ 1 $ 2

Operating expenses:
Operations 65 70
Marketing and business development 8 26
General and administrative 859 579
Foreign exchange 105 3
Depreciation and amortization 61 78
------------------------------------------------------------------------
Total operating expenses 1,098 756
------------------------------------------------------------------------
Loss from operations (1,097) (754)
Less:
Interest expense 1 -
Interest income - (1)
------------------------------------------------------------------------
Net loss $ (1,098) $ (753)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net loss per share $ (0.01) $ (0.02)
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic and Diluted 87,200,057 36,742,752
Shares issued and outstanding 91,416,813 41,341,300

Consolidated Statements of Deficit

(in thousands of dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
Deficit, beginning of the period $ (6,693) $ (3,091)
Net loss for the period (1,098) (753)
------------------------------------------------------------------------
Deficit, end of period $ (7,791) $ (3,844)
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CELL-LOC LOCATION TECHNOLOGIES INC.
Consolidated Statements of Cash Flows

For the three month period ended March 31, 2006 and
March 31, 2005.

Three months ended
-------------------------
March 31, March 31,
(in thousands of dollars) 2006 2005
(unaudited) (unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash provided by (used in):
Operating:
Net loss for the period $ (1,098) $ (753)
Items not affecting cash:
Deferred revenue - 3
Depreciation and amortization 61 78
Unrealized foreign exchange
Stock based compensation (note 3 (c)) 257 110
------------------------------------------------------------------------
(780) (562)
Changes in non-cash working capital: 341 48
------------------------------------------------------------------------
(439) (514)
Financing:
Issue of common stock, net of issue costs 2,070 946
------------------------------------------------------------------------
2,070 946
------------------------------------------------------------------------
Investing:
Network assets (1,306) (495)
------------------------------------------------------------------------
(1,306) (495)
------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 325 (63)
Cash and equivalents, beginning of period 420 421
------------------------------------------------------------------------
Cash and equivalents, end of period $ 745 $ 358
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


CELL-LOC LOCATION TECHNOLOGIES INC.
Notes to Consolidated Financial Statements
Period ended March 31, 2006
(In thousands of dollars except per share data)
------------------------------------------------------------------------
(unaudited)


1. Basis of presentation

The accompanying unaudited interim consolidated financial statements for Cell-Loc Location Technologies Inc. (the "Company") have been prepared in accordance with Canadian generally accepted accounting principles for interim consolidated financial statements. These financial statements follow the same accounting policies and methods of applications as the most recent annual consolidated financial statements dated December 31, 2005. As the interim consolidated financial statements do not contain all the disclosure required in annual financial statements, they should be read in conjunction with the Company's December 31, 2005 audited annual consolidated financial statements.

2. Future operations

These financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its obligations in the normal course of operations. The Company's ability to maintain its current level of operations is dependent on its ability to generate sufficient cash to fund its strategic business plan. The Company continues to expend significant funds and has utilized its working capital in the deployment of wireless location networks. At March 31, 2006 CLTI had cash of $745 and a working capital balance of $584.

Based on the current level of expenditures and sources of funds, the Corporation will require additional cash to continue operations beyond June 2006. Management and the Board of Directors continue to develop plans to maintain the current level of operations past the current fiscal year and believe that the going concern assumption is appropriate for these financial statements. The Company's property, plant and equipment are carried at their cost less accumulated amortization, which has been charged to operations based on estimated useful lives of the assets. The recoverability of the Company's investment in these assets is dependent upon the generation of cash flow from sales of the Company's technology products.

The occurrence and timing of future sales of the Company products or technology licenses remains uncertain. There is no assurance that the Company will be able to achieve operating profitability, generate positive cash flow or obtain sufficient financing to fund operations while operating improvements are implemented. These statements have been prepared on the basis that the Company will continue to realize its assets and discharge its obligations in the ordinary course of business and do not reflect adjustments and reclassifications of balance sheet items that might otherwise be necessary if the going-concern assumption was not valid.



3. Share capital

(a) Authorized: Unlimited number common shares
(b) Issued and outstanding:

------------------------------------------------------------------------
Common shares Amount
------------------------------------------------------------------------
------------------------------------------------------------------------
Outstanding at December 31, 2005 83,003,113 $ 14,634
Issued for cash 8,413,000 2,100
Issuance costs (30)
-----------------------------------------------------------------------
Outstanding at March 31, 2005 91,416,113 $ 16,704
------------------------------------------------------------------------
------------------------------------------------------------------------


During the quarter, the Company closed non-brokered private placement equity issues of 8,413,000 units of capital of the corporation for gross proceeds of approximately $2,100 at a price of 25 cents per unit. Each unit consists of one common share and one half of one common share purchase warrant. Each warrant entitles the owner to acquire one common share at an exercise price of 40 cents per common share any time before the 24 month anniversary of the closing.

(c) Stock option plan:

During the quarter, the Company granted 2,175,958 stock options to employees and directors with an exercise price of 29.5 cents to 34 cents of which 1/3 were vested on the grant date and the remaining vesting equally at the end of one and two years of service. The exercise price was based upon the market price prevailing at the stock option grant date. The fair value of the options using a volatility of 146% was 18.4 cents to 24.1 cents for the three vesting periods.



A summary of outstanding options is shown below:

------------------------------------------------------------------------
------------------------------------------------------------------------
Options Options
Outstanding exercisable Compensation
------------------------------------------------------------------------
Weighted
average
remaining Number
Range of Number contr- Weighted exer- Weighted
exercise outstanding actual average cisable average March March
price at March life exercise at March exercise 31, 31,
outstanding 31, 2006 (months) price 31, 2006 price 2006 2005
------------------------------------------------------------------------
$0.12 $0.30 4,635,469 46 $0.20 2,229,824 $0.21 $257 $110
0.32 0.60 2,390,911 54 0.33 954,920 0.35
1.55 2.05 243,000 12 1.61 243,000 1.61
------------------------------------------------------------------------
$0.12 $2.05 7,269,380 48 $0.29 3,427,744 $0.35 $257 $110
------------------------------------------------------------------------
------------------------------------------------------------------------


(d) Share purchase warrants:

During the quarter, the Company issued 4,206,500 warrants that are
exercisable at 40 cents per common share.

A summary of outstanding warrants is shown below:
------------------------------------------------------------------------
------------------------------------------------------------------------
Range of Number Weighted Weighted
exercise outstanding average average
Year of price at March remaining exercise
Expiry outstanding 31, 2006 life (months) price
------------------------------------------------------------------------
------------------------------------------------------------------------
2006 $0.22 $2.32 13,496,498 8.2 $ 0.25
2007 0.20 1.91 8,840,200 19.9 0.30
2008 0.40 4,181,500 22.9 0.40
------------------------------------------------------------------------
$0.20 $2.32 26,518,198 14.4 $ 0.29
------------------------------------------------------------------------
------------------------------------------------------------------------



Contact Information

  • Cell-Loc Location Technologies Inc.
    Sheldon Reid
    President & Chief Executive Officer
    (403) 569-5777
    or
    Cell-Loc Location Technologies Inc.
    Dave Guebert
    VP Finance & Chief Financial Officer
    (403) 569-5796