Cell-Loc Location Technologies Inc.
TSX VENTURE : LTI

Cell-Loc Location Technologies Inc.

April 19, 2007 03:27 ET

Cell-Loc Location Technologies Reports 2006 Results

CALGARY, ALBERTA--(CCNMatthews - April 19, 2007) - Cell-Loc Location Technologies Inc. (TSX VENTURE:LTI):

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") of Cell-Loc Location Technologies Inc. (the "Company" or "CLTI") for the periods ended December 31, 2006 and December 31, 2005 should be read in conjunction with the audited annual consolidated financial statements and the accompanying notes (the "Financial Statements and Notes"). All financial amounts are expressed in thousands of Canadian dollars, except per share dates and where otherwise indicated.

Forward-Looking Information

The MD&A has been prepared from the Financial Statements and Notes and 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.



Financial Highlights
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(in thousands of Canadian dollars) 2006 2005 2004
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STATEMENT OF OPERATION INFORMATION
Revenue $ 1,507 $ 41 $ 101
Cost of sales 600
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Gross margin 907 41 101
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Operating expenses
General and administration 3,372 2,681 2,299
Operations 1,486 270 432
Marketing and business development 86 20 63
Depreciation, amortization and write-down
of assets 1,835 317 409
Foreign exchange, net interest and other
income (240) 355 (11)
------------------------
Net loss $(5,632) $(3,602) $(3,091)
------------------------
------------------------
Loss per share ($ per share) (diluted and
non-diluted) $ (0.06) $ (0.06) $ (0.09)
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CASH FLOW INFORMATION
Operating (including non-cash working capital
changes) $(4,584) $(3,252) $(2,450)
Financing 5,571 7,026 2,355
Investment (1,167) (3,775) (98)
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Cash flow (180) (1) (193)
Cash, beginning of period 420 421 614
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Cash, end of period $ 240 $ 420 $ 421
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BALANCE SHEET INFORMATION
Working capital $ 1,426 $ 597 $ 365
Network, capital and intellectual property
assets 7,852 8,338 4,880
Total Assets 9,853 9,929 5,414
Government assistance and Long-term debt 220 508 3,889
Shareholders' equity 9,058 8,427 1,355



Corporate Strategy

The Company is the developer of a family of network-based wireless location products that enable location-based services. Networks are currently deployed in Sao Paulo, Brazil, Calgary, Alberta and Saskatoon, Saskatchewan.

CLTI has focused its efforts during the past two years on constructing its network in Sao Paulo and developing the commercial operation and business model. Through the deployment of its network and commencement of commercial operations in a world-class city such as Sao Paulo, the Company has proved the application of its technology and the economics of its business. The Company plans to further enhance revenue opportunities in the stolen vehicle market in Sao Paulo beyond the number of vehicles committed under initial agreements, as well as develop additional vertical markets utilizing the existing network. The Sao Paulo network has also been used to showcase the technology potential to other international prospective customers.

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.

Corporate Overview

During the year, the main activity of the Company was the completion and commercialization of a major wireless location network in S?o Paulo, Brazil. The Company invested $1,167 in completing the network and acquiring capital assets during 2006 (2005 - $3,659). The network passed a third party audit and was deemed commercial in June 2006, when the Company began installing beacons and earning revenues.

The Company financed the cost of operations and the deployment of the network in Sao Paulo through issuance of common stock for net proceeds of $5,517.

Sao Paulo Network

CLTI designed and deployed the Sao Paulo wireless location network using its proprietary technology. The network is designed to provide coverage throughout a specified area of approximately 3000 square km. in Greater Sao Paulo. Antenna attached to base stations, are installed on towers and rooftops throughout the coverage area. The Company has entered into lease agreements with several tower companies and other landlords with terms varying from one month to five years.

The Company has contracted a Brazilian manufacturer to cost-effectively produce the proprietary beacons for the network. The Company has been responsible for the design and operations of the manufacturing process and test procedures.

CLTI has established a call centre to contact customers and schedule installation of beacon devices. It also has established installation centres at several locations throughout the coverage area at which beacons are installed in customer vehicles.

The Company entered into an agreement with Itau Seguros S.A. ("Itau Seguros"), the insurance subsidiary of Investimentos Itau S.A., under which an initial predefined number of the insurer's vehicles will be equipped with a beacon. Itau Seguros pays an annual fee for each beacon in the month following its installation. Subject to achieving the installation targets, the contract will provide minimum guaranteed revenue of $4.6 million per year. The Company's network is responsible for providing real time location of stolen vehicles, and if required, remote immobilization. Itau Seguros has contracted separately with a security company to perform vehicle recovery actions when an incident occurs. The security company uses CLTI technology to effect the recovery.

During 2006, the Company installed 10,272 beacons in vehicles insured by Itau Seguros. The installation rate in 2006 was lower than expected by both parties. There were 4,583 beacons installed in the first quarter of 2007 but the rate is expected to reach 3,000 per month in April. Additional opportunities exist for stolen vehicle monitoring as well tracking and asset monitoring. The Company believes that market demand is robust given the security environment in Brazil and the competitive cost advantage of the beacon relative to other devices.

Other Networks

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) 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.

During the year, CLTI received $500 from LSSI under a license agreement for the Greater Vancouver territory. The Vancouver network will be built and operated through a jointly owned entity, which will be owned 51% CLTI and 49% LSSI.

The Company operated its network in Saskatoon through its 75% subsidiary, Citytrac Ltd.

Results of Operations

During the year ended December 31, 2006 the Company incurred a net loss of $5,632 (six cents per share) compared to a net loss of $3,602 (six cents per share) for the year ended December 31, 2005.

Revenues



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December 31, 2006 December 31, 2005
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($000's) Canada Brazil Total Canada Brazil Total
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License revenue $ 500 $ 0 $ 500 $ 0 $ 0 $ 0
Service revenue 2 1,005 1,007 41 0 41
Cost of sales 0 600 600 0 0 0
Units installed 10 10,272 10,282 4 0 0


During the year the Canadian operation licensed the Vancouver territory for a fee of $500. The Brazil operation installed 10,272 beacons and realized revenue of $1,005 beacon revenue. An additional $115 of revenue was received but recognition was deferred as it relates to services to be provided in the future.

Operating Expenses

Following is a summary of the comparative financial information for the past two fiscal years:



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December 31, 2006 December 31, 2005
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Canada Brazil Total Canada Brazil Total
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General and
administrative $ 2,522 $ 850 $ 3,372 $ 2,195 $ 486 $ 2,681
Operations 257 1,229 1,486 270 - 270
Marketing and
business development 86 - 86 20 - 20
Depreciation and
write-down of assets 1,278 557 1,835 301 16 317



General and Administrative

Expenses for general and administrative costs for the twelve-month period were $3,372. The expenses were incurred to operate and staff the corporate office ($2,522) and the administrative cost of the Brazilian venture ($850). Corporate office costs consist mainly of personnel, office rent and administration and travel costs. Included in this cost is a charge for stock based compensation of $564 (2005 - $308) relating to the Company's stock option plan. Administrative costs for Brazil increased during the year as the network was completed and commercial operations commenced in June 2006. The Brazilian subsidiary operates the office in Sao Paulo in support of the operations in Brazil.

Operations

Operations expenses for 2006 of $1,486 resulted from operating the Brazil network ($1,229), the Calgary network ($220) and Saskatoon network ($37). Operating costs for the networks in Canada have remained relatively constant during the past two years. The Brazil operating costs that were deferred prior to the commencement of commercial operations are now being depreciated.

Marketing and business development

Marketing and business development expenses for 2006 of $86 resulted from activities in Calgary ($50) and Saskatoon ($36). Business development activities consist mainly of travel costs incurred by company officials in order to meet with potential technology partners and customers.

Depreciation and write-down of network assets

Upon commencement of commercial operations in Brazil in June, the Company began depreciating the network costs and amortizing the deferred costs associated with establishing operations. The Company periodically reviews its inventory of network components to identify obsolete items and removes or disposes of these assets. In addition, the valuation is reviewed to determine whether any impairment exists for the valuation of these assets. As a result of this review, it was determined that a charge should be taken against these assets for $961. While these assets remain available for use in future deployments, it was deemed appropriate to adjust the valuation as described.

Other

Gain on reduction of government assistance

Under the terms of the contract with the National Research Council, the amount recorded as government assistance payable has been reduced to the amount originally advanced less repayments made to date. The benefit of the reduced principal of $238 results in income from forgiveness of debt.

Financing expense

During 2005, the Company reached a settlement with a lender relative to a debenture agreement between the parties. The settlement amount of $466 was recorded in 2005 and paid in full in 2006. There was no additional expense or liability in 2006.

Financial Condition, Liquidity and Requirements

The Company had a cash balance of $240 at December 31, 2006. Cash declined in the year by $180 as the cash used in operations of $4,584 (2005 - $3,252); invested in the Brazil network $1,167 (2005 - 3,775) exceeded the funds received through the issuance of shares $5,571 (2005 - $7,026). The company's working capital increased by $829 to $1,426 (2005 - $597).

Subsequent to the year-end, the Company closed a private placement for net proceeds of approximately $3,700. It is expected that this financing will provide sufficient working capital to allow the Company to continue to pursue its business strategy in 2007. The planned increase in Brazil beacon installations for the second quarter of 2007 should significantly reduce cash funding requirements.



SUMMARY OF QUARTERLY RESULTS ($,000)

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(in thousands of Three Months Ended
Canadian dollars)
-----------------------------------
Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2006 2006 2006 2006
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BEACONS INSTALLED 5,039 5,136 102 10
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STATEMENT OF OPERATIONS
Revenue - geographic
Canada $ 0 $ 1 $ 500 $ 1
Brazil 514 470 21 -
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Total 514 471 521 $ 1
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Cost of sales - Brazil 331 264 5 0
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Margin 183 207 516 1
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Operating expenses
General and administration 1,105 648 760 859
Operations 669 629 123 65
Marketing and business
development 63 8 7 8
Foreign exchange,
interest expense
and other income (178) (170) 2 106
Depreciation and
amortization and
write down of network
assets 1,472 238 64 61
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Net loss $(2,948) $(1,146) $ (440) $(1,098)
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Loss per share ($ per share)
(diluted and non-diluted) $ (0.04) $ (0.01) $(0.00) $ (0.01)
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CASH FLOW INFORMATION
Operations (including
non-cash working
capital changes) $(2,713) $(1,121) $ (311) $ (439)
Financing 63 3,308 130 2,070
Investing 1,112 (477) (496) (1,306)
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Cash flow (1,538) 1,710 (677) 325
Cash, beginning of
period 1,778 68 745 420
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Cash, end of period $ 240 $ 1,778 $68 $745
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BALANCE SHEET INFORMATION
Working capital $ 1,426 $ 2,796 $ 666 $ 584
Network, capital and
intellectual assets 7,852 9,532 9,293 9,583
Long-term debt,
government assistance 220 588 650 511
Shareholders' equity 9,058 11,740 9,309 9,656



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(in thousands of Three Months Ended
Canadian dollars)
-----------------------------------
Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2005 2005 2005 2005
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BEACONS INSTALLED
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STATEMENT OF OPERATIONS
Revenue - geographic
Canada $ 1 $ 38 $ 0 $ 2
Brazil
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Total 1 38 0 2
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Cost of sales - Brazil 0 0 0 0
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Margin 1 38 0 2
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Operating expenses
General and administration 769 809 524 579
Operations 24 108 68 70
Marketing and business development (74) 47 21 26
Foreign exchange,
interest expense
and other income 441 21 (109) 2
Depreciation and
amortization and
write down of network assets 84 78 77 78
-----------------------------------
Net loss $(1,243) $(1,025) $ (581) $ (753)
-----------------------------------
-----------------------------------
Loss per share ($ per share)
(diluted and non-diluted) $ (0.01) $ (0.02) $ (0.01) $(0.02)
-----------------------------------
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CASH FLOW INFORMATION
Operations (including
non-cash working
capital changes) $(1,340) $ 258 $(1,656) $ (514)
Financing 2,555 3,525 946
Investing (1,993) (741) (546) (495)
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Cash flow (778) (483) 1,323 (63)
Cash, beginning of period 1,198 1,681 358 421
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Cash, end of period $ 420 $ 1,198 $ 1,681 $ 358
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BALANCE SHEET INFORMATION
Working capital $600 $ 1,059 $ 2,648 $ 254
Network, capital and
intellectual assets 8,338 6,429 5,766 5,297
Long-term debt,
government assistance 511 554 555 3,893
Shareholders' equity 8,427 6,934 7,859 1,658


Discsussion of Quarterly Results

The quarterly results reflect the transformation of the Company from the development stage into one with significant commercial operations. With the commencement of commercial operations in June 2006, revenue reflected customer sales of beacons and related service rather than only license revenue as was recorded earlier.

Operating expenses have also increased with the level of activity. General and administration expenses now average $702 per quarter exclusive of non-cash stock based compensation charges. Operations expenses have now increased significantly with the costs of operating the network in Brazil averaging approximately $590. Depreciation and amortization has also increased to reflect the commencement of the network operations in Brazil and the resulting amortization of the capitalized costs. Also at year-end, the Company took an additional charge of $961 to reflect an impairment in value of network assets available for deployment.

Operating results in the fourth quarter reflect the increased general and administrative expenses resulting from the increase in activity in Brazil. Also, the impairment charge and year-end depreciation and amortization charges are reflected in the quarterly loss.

Changes in Accounting Policies

Revenue recognition - As a result of the commencement of commercial operations, the Company adopted new policies relating to revenue recognition and inventory valuation. The Company began to recognize revenue from the sale and installation of wireless location beacon devices and from monthly revenue earned by providing ongoing vehicle location services. Revenue from beacon sales and installation revenue is recognized when the beacon is installed. Revenue from location services is recognized on a monthly basis as the services are provided to the customers.

Foreign exchange - Due to the commencement of operations, the Company adopted a new policy for the conversion of the financial statements of the Company's self-sustaining foreign subsidiary. The financial statements are translated to Canadian dollars using the exchange rate in effect at the balance sheet date for all assets and liabilities, and at average rates of exchange during the year for revenues and expenses. Gains of $182 resulting from these translation adjustments are included in the cumulative translation adjustment account in shareholders' equity.

Financial instruments - The CICA has adopted a new accounting standard, Section 3855, Financial Instruments - Recognition and Measurement, effective for fiscal years beginning on or after October 1, 2006. This section describes the standards for recognizing and measuring financial instruments on the balance sheet and the standards for reporting gains and losses in the financial statements. Financial assets available for sale, assets and liabilities held for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured at fair value. Also, a new location for recognizing certain unrealized gains and losses - other comprehensive income - has been introduced. This provides the ability for certain unrealized gains and losses arising from changes in fair value to be temporarily recorded outside the statement of earnings but in a transparent manner. The new standards are effective for the Company beginning January 1, 2007. Management is in the process of evaluating the effect of the adoption of the new standards on the Company's financial statements but does not expect any material impact.

Disclosure Controls and Procedures

We have assessed the design of our internal controls over financial reporting and during this process we identified certain weaknesses in internal controls over financial reporting which are set out below. The weaknesses in the Company's internal controls over financial reporting discussed below result in a more than remote likelihood that a material misstatement would not be prevented or detected. Management and the Board of Directors work to mitigate the risk of material misstatement, as described more fully below, however, there can be no assurance that the risk can be reduced to less than a remote likelihood of a material misstatement.

Common with many small companies, internal control deficiencies have been identified within the Company's accounting and finance department as a result of a limited number of staff. Two deficiencies were identified:

1. The Company does not have the personnel with all the technical knowledge to identify and address the accounting and reporting implications of complex and non-routine transactions that may arise; and

2. There are an insufficient number of accounting and administrative staff to properly segregate certain duties which require segregation in order to have good internal control.

Management has implemented processes to mitigate the risks arising from these weaknesses. Members of the senior management team oversee material, complex and nonroutine transactions and third-party expert advisors are consulted as needed in connection with the accounting and other implications. Management reporting and detailed working papers are prepared and regularly reviewed by the senior management team. On a quarterly basis, consolidated financial statements are reviewed by the Chief Executive Officer, Chief Financial Officer and the Audit Committee of the Board of Directors.

Business Risks

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.

In order to execute its strategy, the Company may require additional financing for its business development activities, its network deployments and to fund its operations. To date, CLTI has been successful in acquiring financing through private placement of its common shares.

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 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 offers 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 commercial service business. The Company's ability to generate net income and positive cash flow in the future is dependent upon various factors, including:

- technological change and market acceptance of the Company's 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;

- the Company's ability to manage growth; and

- the changes in currency exchange rates in countries where the Company has currency exposure.

Contact Information

  • Cell-Loc Location Technologies Inc.
    Dave Guebert
    Vice President, Finance and CFO
    (403) 569-5796
    Website: www.cell-loc.com