Rare Method Interactive Corp V.RAM

V.RAM May 30 2011 - SEDAR MD & A

[BC_Budd]

SEDAR MD & A
Ticker Symbol: C:RAM

SEDAR MD & A

Rare Method Interactive Corp (C:RAM)
Shares Issued 29,055,691
Last Close 5/25/2011
.06
Monday May 30 2011 - SEDAR MD & A

This filing is available at:

https://www.stockwatch.com/nocomp/newsit/newsit_sedardoc.aspx?docid=2409741

Management Discussion & Analysis
RARE METHOD INTERACTIVE CORP.
March 31, 2011
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RARE METHOD INTERACTIVE CORP.
Management's Discussion and
Analysis
Selected Financial Information For the
Nine Months Ended
Mar 31 Mar 31 Mar 31 Mar 31 Mar 31
2011 2010 2009 2008 2007
$ $ $ $ $
Gross Revenue 2,381,609 3,571,476 7,839,117 9,511,153 5,887,799
Direct Expenses 612,418 1,243,827 2,370,796 2,640,877 1,326,430
Gross Income 1,769,191 2,327,649 5,468,321 6,870,276 4,561,369
Operating Expenses
Salaries and wages 1,494,962 2,099,924 4,353,365 4,703,639 3,463,515
General and administrative 484,274 714,762 1,064,276 1,252,980 859,641
Professional fees 51,503 74,763 130,407 104,197 77,321
Total Operating Expenses 2,030,739 2,889,449 5,548,048 6,060,816 4,400,477
EBITDA (See Non-GAAP Measure
below) (261,548) (561,800) (79,727) 809,460 160,892
Other Expenses / (Income)
Severance payment - - - 169,217 -
Depreciation 100,147 286,567 198,372 170,137 131,107
Stock based compensation 6,606 9,017 42,251 41,146 28,677
Interest on long-term debt 3,351 2,923 1,106 3,657 5,469
Loss on disposal of assets - - - 62,924 -
Goodwill impairment charge - 561,367 370,733 - -
Effect of foreign currency translation - - 17,822 - -
Current Income Taxes - - - 35,069 -
Future Income Taxes - - 65,408 - -
Earnings from Discontinued Operations - - - 294,345 70,276
Accretion on debenture - - - - -
Interest income - - - - -
Total Other Expenses 110,104 859,874 695,692 776,495 235,529
COMPREHENSIVE INCOME (LOSS) (371,652) (1,421,674) (775,419) 32,965 (74,637)
Basic earnings (loss) per share (0.013) (0.049) (0.026) 0.01 -
Diluted earnings (loss) per share (0.013) (0.049) (0.026) 0.001 (0.003)
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Weighted average shares outstanding 29,055,691 28,855,691 28,855,691 28,682,247 25,000,291
Shares outstanding as at March 31 29,055,691 28,855,691 28,855,691 28,855,691 25,420,815
Salaries and wages as a % of Gross
Income 84.5% 90.2% 79.6% 68.5% 75.9%
EBITDA as a % of Gross Income -14.8% -24.1% -1.5% 11.8% 3.5%
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Table of Contents
DATE OF MANAGEMENT'S DISCUSSION AND ANALYSIS ...............................4
BASIS OF PRESENTATION..................................................................................4
NON-GAAP MEASURES.......................................................................................4
FORWARD LOOKING STATEMENTS..................................................................5
DESCRIPTION OF BUSINESS .............................................................................5
OVERVIEW............................................................................................................6
RESULTS OF OPERATIONS................................................................................7
Revenues .......................................................................................................................................7
Direct Expenses ..............................................................................................................................7
Gross Income .................................................................................................................................7
Salaries and Wages ........................................................................................................................7
General and Administrative .............................................................................................................8
Professional Fees...........................................................................................................................8
EBITDA...........................................................................................................................................8
Comprehensive Income (Loss)........................................................................................................8
Weighted Average Number of Shares Outstanding.........................................................................8
Summary of Quarterly Results (Unaudited) .....................................................................................9
LIQUIDITY AND CAPITAL RESOURCES ...........................................................10
Liquidity ........................................................................................................................................10
Capital Resources .........................................................................................................................12
RELATED PARTY TRANSACTIONS AND OFF BALANCE SHEET
ARRANGEMENTS...............................................................................................13
SIGNIFIGANT ACCOUNTING POLICIES AND ESTIMATES..............................13
Significant Accounting Policies......................................................................................................13
New Accounting Standards Not Adopted ......................................................................................14
Accounting Estimates ....................................................................................................................15
RISK ASSESSMENT ...........................................................................................15
Dependence on Market Growth.....................................................................................................16
Dependence on Key Personnel .....................................................................................................16
Dependence on Key Clients and Concentration Risk....................................................................16
Economic Downturn.......................................................................................................................16
Undertaking Media Buying and Other Services Purchased on Behalf of Clients ..........................16
Competition ..................................................................................................................................16
Risk Associated with Pricing..........................................................................................................17
Risks Associated with International Growth ..................................................................................17
DISCLOSURE CONTROLS AND PROCEDURES & INTERNAL CONTROLS
OVER FINANCIAL REPORTING........................................................................................17
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DATE OF MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”) is prepared as of May 26, 2011.
BASIS OF PRESENTATION
The following is a discussion of the consolidated financial condition of Rare Method
Interactive Corp. (the “Company”, “Rare Method”, or “we”) as at March 31, 2011 and the
results of operations for the three months ended March 31, 2011 and 2009. It should be
read in conjunction with the Company’s audited annual financial statements and the
accompanying notes. Such audited financial statements have been prepared in
accordance with Canadian generally accepted accounting principles (“GAAP”). Unless
otherwise indicated, all amounts are expressed in Canadian dollars.
The Company’s ability to fulfil current obligations and execute its business plan may
require that the Company raise additional capital (through debt or equity) to support its
activities and grow its existing client base. Although management’s efforts to raise
capital have been successful in the past, there is no certainty that they will be able to do
so in the future. The company continues to reduce overhead levels where appropriate
and is focused on replacing lost revenues, however, the corporate restructuring is
ongoing and there can be no assurances the foregone revenues can be replaced. The
aforementioned circumstances cast significant doubt as to the ability of the Company to
meet its obligations as they come due and therefore the use of accounting principles
applicable to a going concern.
These financial statements have been prepared using generally accepted accounting
principles to a going concern which contemplates that the Company will be able to
discharge its obligations and realize its assets in the normal course of business at the
values at which they are carried in these financial statements, and the Company will be
able to continue its business activities.
If the going concern assumption were not appropriate, adjustments to the carrying
amounts of the assets and liabilities, revenues and expenses and the balance sheet
classification used may be necessary. Such adjustments may be material.
NON-GAAP MEASURES
The Company uses Earnings before Interest, Taxes, Depreciation and Amortization
(“EBITDA”) and net cash (debt) position, two non-GAAP measures, to assess the
Company’s performance and liquidity. Securities regulators require that issuers caution
readers that measure financial information adjusted to a basis other than GAAP do not
have standardized meaning under GAAP and are unlikely to be comparable to similar
measures used by other companies. These non-GAAP measures are presented solely
as a supplemental disclosure because management believes they provide useful
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information regarding operating performance and liquidity. We define EBITDA as Net
Earnings from operations before depreciation, amortization of intangibles, stock-based
compensation, severance compensation, loss on accounts receivable, current and future
taxes, interest on debt, effect of foreign currency translation, interest income, gain on
sale of investments, and extraordinary items. We define net cash (debt) position as the
total cash position (cash, cash equivalents and short-term investments) less any current
balances of purchase price of subsidiaries less any current portions of interest bearing
debt (capital leases and operating line of credit). The table presented on page 1
provides a reconciliation of EBITDA to Net Earnings.
FORWARD LOOKING STATEMENTS
Certain information contained in this MD&A may constitute forward-looking statements
under applicable securities laws. These forward-looking statements may involve, but are
not limited to, comments with respect to the Company's business or financial objectives,
its strategies or future actions, and its targets and expectations of financial condition.
Forward-looking statements are not guarantees of future performance and actual results
may differ materially from those in the forward-looking statements as a result of various
known and unknown factors, including, but not limited to, downturns in general economic
conditions and resulting changes in client business and marketing strategies, the highly
competitive nature of the advertising industry, the greater resources available to much
larger global agencies, low entry barriers for new competitors, dependence upon a
limited number of clients contributing a significant percentage of income, inability to
acquire new clients or new assignments from existing clients, and the retention of key
management, creative and technical personnel. Investors are encouraged to review the
Risk Assessment section of this MD&A for a discussion of risks that could affect the
Company’s operations and financial results. Assumptions relating to the foregoing
involve judgments and risks, all of which are difficult or impossible to predict accurately
and many of which are beyond the control of the Company. Although management
believes that the expectations reflected in the forward-looking statements are reasonable
based on information currently available, it cannot assure that the expectations will prove
to have been correct. The Company does not update forward-looking statements should
circumstances change or management’s assumptions, expectations or estimates
change, except as required by securities laws. Accordingly, undue reliance should not
be placed on forward-looking statements.
DESCRIPTION OF BUSINESS
Rare Method (TSX-V:RAM) is an integrated advertising agency that leverages
technology to make marketing more effective and accountable.
Rare Method offers a full range of interactive services including marketing strategies,
creative, technology development, media planning and management, campaign
analytics, reporting and optimization. Rare Method has approximately 30 employees in
Calgary, Alberta and Salt Lake City, Utah.
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OVERVIEW
During the three months ended March 31, 2011, we continued through our transition of
strategic adjustments in staffing and G&A levels in prior quarters to be in a better
position to profitably service clients and also gain new business. We continue to
maintain a reduced monthly cost structure with holds on any significant, new
expenditures. We continue to make the improvements we feel are necessary to operate
effectively and to be more effective at acquiring new business. Management’s focus will
be to ensure we have the operating capacity to meet client needs while maintaining the
appropriate cost structure to achieve positive operating results.
During the three months ended March 31, 2011 we generated an EBITDA of $6,407
after a loss of $128,026 in the previous quarter. The EBITDA was a result of the ability to
reduce overhead to match lower existing client revenues and to launch new client
campaigns and associated revenues. The focus on replacing lost client relations and
building on existing client relationships has begun to demonstrate positive results, but
those initiatives are not yet all resulting in client billing increase as of March 31, 2011.
We anticipate that we will realize the full effect of our focused strategy in the following
fiscal periods.
At the date of this MD&A, the company continues to complete a number of proposals to
secure significant Agency of Record type contracts in both the Canada and the US. The
outcome of these proposals could have a significant impact on the Company’s outlook
for calendar 2011 and onward. Additionally, staff have been hired or re-allocated to
sales focused positions to make new client acquisition a stronger priority.
During the third quarter of fiscal 2011, gross income decreased 1%, from
.690 million
to
.685 million compared to the corresponding period last year. This is a result of
revenues being down 17% compared to the related period last year.
As part of our continuing effort to reduce costs in relation to the aforementioned gross
income decline, salaries decreased 5% in Q3 of fiscal 2011 compared to Q3 of fiscal
2010. We will continue to look to make any adjustments necessary to maximize team
performance and in response to upcoming revenue and expense.
The concentration of gross income from our top accounts continues to be significant with
more account planning and commitment from existing clients. The Company continues
to execute its plan to grow by acquiring substantial and regular customers. Business
development is a larger focus with senior team members focused on business
development as part of their weekly responsibilities. Our emphasis around client results
and documentation of those results both online and with traditional media is improving
the accountability of their marketing programs.
New client acquisition continues to be the greatest challenge, and focus, for the growth
of Rare Method. While new clients are being added into Q4 of 2011, these accounts
take time to implement and to see the associated revenue. Management continues to
put forth a concerted effort to stimulate business development activity which will include
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increased spending in business development staff as well as other promotional activities
as compared to fiscal 2010. There is no assurance that these stated activities will result
in the addition of new clients.
On May 10 we announced our intent to conduct a non-brokered private placement of up
to 14,000,000 units at a purchase price of
.05 per “Unit” for gross proceeds of up to
$700,000 (the “Offering”). Each Unit will consist of one common share (“Common
Share”) and one share purchase warrant (“Warrant”) of the Corporation. Each Warrant
will entitle the holder to acquire one Common Share at a price of
.10 for a period of
five (5) years from the closing date of the Offering. The Offering is anticipated to close
on or about May 31, 2011. Net proceeds of the Offering will be used to fund the
Corporation’s general working capital and corporate purposes.
In conjunction with the closing of the private placement, Mr. Tom Short is expected to
resign from the board and be replaced by Mr. Chris McLean.
The Offering and the appointment of Mr. McLean to the Board are subject to acceptance
by the TSX Venture Exchange and all securities issued will be subject to a hold period
of four months from the date of closing of the Offering.
RESULTS OF OPERATIONS
Revenues
Revenue for the three months ended March 31, 2011 declined $179,499 or 17% from
the comparable period last year. This decline was expected as we experienced the loss
of a significant client with new client business development opportunities only beginning
to develop. New client business development opportunities are on the rise and
management is working towards winning new client work in the next quarter.
Direct Expenses
In relation to the aforementioned revenue decline, direct expenses decreased 51% from
$346,046 in Q3 of fiscal 2011 to $170,925 in Q3 of fiscal 2011. Direct expenses as a
percentage of revenue decreased from Q3 of fiscal 2010 to Q3 of fiscal 2011 at 33% and
20% respectively.
Gross Income
Gross income, defined as revenue less direct expenses decreased 1% from $690,338 in
Q3 of fiscal 2010 to $685,960 in Q3 of fiscal 2011. The decrease is primarily due to the
decrease in fee revenue and overall client spending as budgets continue to tighten
during uncertain economic times. As gross income fluctuates, we continue to monitor our
cost structure accordingly to ensure operations are as streamlined and efficient as
possible outsourcing costs where possible and lowering overall fixed overhead.
Salaries and Wages
Salaries and wages decreased by $27,149 or 5% from $521,752 in Q3 of fiscal 2010 to
$494,603 in Q3 of fiscal 2011. The decrease was a direct result of restructuring needed
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to adjust to the revenue and gross income declines. Efficiency in Q3 of fiscal 2011
(wages as a percentage of gross income) decreased 4% from 76% in Q3 of fiscal 2010
to 72% in Q3 2011.
General and Administrative
General and administrative expenses decreased $64,692 or 28%, from $230,534 in Q3
of fiscal 2011 to $165,842 in Q3 of fiscal 2011. G&A costs are down as a result of
reduced discretionary spending and an increased focus on cost controls and efficiency.
Professional Fees
Professional fees increased $9,240 or 94% from $9,868 in Q3 of fiscal 2010 to $19,108
in Q3 of fiscal 2011. This increase was primarily the result of an accrual for audit fees
relating to the 2010 fiscal year-end audit.
EBITDA
For the quarter ended March 31, 2011, EBITDA increased $78,223 from a loss of
$71,816 in Q3 of fiscal 2010 to an income of $6,407 in Q3 of fiscal 2011. While we are
encouraged with the EBITDA income in the current period, management believes that
we have positioned the Company to return to overall profitability in calendar 2011.
Maintaining our flexible cost structure, new client acquisitions, increased client spending
and taking a proactive approach in adjusting costs will be keys in our success.
Comprehensive Income (Loss)
Comprehensive income decreased by $121,205 or 78% from a loss of $154,968 in Q3 of
fiscal 2010 to a loss of $33,763 in Q3 of fiscal 2011. This decrease is attributable to
overhead costs restructuring that has taken place over the past several quarters.
Weighted Average Number of Shares Outstanding
The weighted average number of shares outstanding in the second quarter of fiscal 2011
was 29,055,691, compared to the same amount at June 30, 2010. As of may 26, 2011,
there were 700,000 stock options outstanding.
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Summary of Quarterly Results (Unaudited)
The following table is a summary of the Company’s unaudited quarterly consolidated
results of operations for each of the twelve most recent quarters. The information has
been derived from the Company’s unaudited consolidated financial statements that, in
management’s opinion, have been prepared on a basis consistent with the audited
consolidated financial statements and include all adjustments necessary for a fair
presentation of information when read in conjunction with the audited annual
consolidated financial statements.
Description Q1 2011 Q2 2011 Q3 2011 Q4 2011 Total
Revenue 762,160 762,565 856,885
EBITDA (1) (139,930) (128,026) 6,407
Comprehensive
Income (Loss) (166,408) (163,282) (33,763)
EPS (2) (0.006) (0.011) (0.001)
Description Q1 2010 Q2 2010 Q3 2010 Q4 2010 Total
Revenue $1,494,364 $1,040,728 $1,036,388 $1,196,156 $4,767,636
EBITDA (1) $(251,383) $(256,572) $(92,500) $74,110 $(526,345)
Comprehensive
Income (Loss) $(279,336) $(987,370) $(154,964) $(853,226) $(2,274,896)
EPS (2) $(0.01) $(0.03) $(0.01) $(0.03) $(0.08)
Description Q1 2009 Q2 2009 Q3 2009 Q4 2009 Total
Revenue $3,156,714 $2,360,907 $2,321,496 $2,270,046 $10,109,163
EBITDA (1) $160,582 $(139,799) $(110,127) $(146,688) $(236,032)
Comprehensive
Income (Loss) $5,250 $(562,964) $(217,705) $(1,706,036) $(2,481,455)
EPS (2)
.000 $(0.019) $(0.007) $(0.06) $(0.086)
(1) Non-GAAP measure.
(2) Earnings per Share (basic and diluted).
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company’s principal sources of liquidity are cash on hand, cash generated from
operations and its credit facility.
The following table presents selected balance sheet information:
March 31,
2011
$
Cash position 105,392
Line of Credit (112,150)
Current portion of lease obligation (8,712)
Net cash (debt) position (1) (15,470)
(1) Non-GAAP measure.
Cash Position and Working Capital
The Company’s net cash position as at March 31, 2011 amounted to a deficit of $15,470
compared to $253,963 as at June 30, 2010. The amount of cash on hand available to
the Company at any specific date fluctuates significantly based on the timing of the
collection of accounts receivable generated by our business operations compared to the
timing of the payments of our accounts payable and other financial obligations. As at the
time of writing, the cash position of the Company is a deficit of $55,031.
As at March 31, 2011, total current assets amounted to $417,362 compared to $667,481
as at June 30, 2010. The decrease in current assets is a result of the decrease in cash
at March 31, 2011, due to the loss incurred in the quarter.
Total current liabilities amounted to $1,022,275 compared to $952,440 as at June 30,
2010. This increase is attributable to an increase in the value of the unearned revenue.
The above resulted in a working capital deficiency of $604,913 as at March 31 2011. In
the short term the company is prepared to take advantage of its unutilized operating line
of credit. Should the company not return to profitability it will have to explore other
financings activities to meet future working capital requirements.
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Cash Flows Used in Operating Activities
Cash flows from operating activities, excluding the net change in non-cash working
capital items, increased $78,114 to $4,398 for the three months ended March 31, 2011
compared to the same period last year. The increase is primarily attributable to the
reduced operating losses as a result of overhead reductions.
Management has taken actions to improve the Company’s financial results and cash
flows.
Cash Flows Used in Financing Activities
Cash flows used in financing activities were nominal for the fiscal year 2011 as the
Company carries $147,150 of operating debt.
Cash Flows Used in Investing Activities
Cash flows used for investing activities were unchanged from the Q3 of fiscal 2010 to
the Q3 of fiscal 2011. The Company did not invest in capital expenditures during Q3 of
fiscal 2011 or in the Q3 of fiscal 2010.
Management has undertaken conservative spending in this regard and will continue to
do so in the fiscal year 2011.
Financial Risk Management
The Company has exposure to counterparty credit, market and liquidity risk.
Credit risk
The Company’s credit risk is primarily attributable to its trade accounts receivable.
Concentration of credit risk is mitigated by having a broad international, domestic and
industry-wide customer base. The allowance for credit losses is reviewed on a monthly
basis; an assessment is made whether an account is deemed impaired based on the
number of days outstanding and the likelihood of collection from the other party. When
management considers that an expected recovery is less than the actual account
receivable, a specific bad debt provision is recognized. The maximum exposure to
credit risk is represented by the net carrying amount of these financial assets.
Interest rate risk
The majority of the Company’s interest rate risk is attributable to variable interest rate
debt, which is used to finance operations. The Company mitigates its exposure to
interest rate cash flow risk through conservative management of the debt facility and
exercising short-term borrowing practices. The Company’s remaining financial
instruments are not significantly exposed to interest rate risk.
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Foreign currency risk
Foreign currency risk arises on financial instruments that are denominated in a foreign
currency. The Company’s functional currency is the Canadian dollar; however, the
Company does have operations located in the U.S. (see note 13 for geographically
segmented financial information). The Company does not hedge its foreign currency
exposure. As at March 31, 2011, portions of the Company’s cash, accounts receivable,
and accounts payable were denominated in U.S. dollars. As at December 31, the
working capital deficiency held in U.S. dollars was ($427,120) (June 30, 2010 -
$385,328) in which $327,170 (June 30, 2010 - $318,227) is made up of intercompany
balances. Based on these U.S. dollar financial instrument balances, net earnings (loss)
and comprehensive income (loss) would have decreased/increased by approximately
$3,119 for every
.01 increase/decrease in the value of the U.S./Canada dollar
exchange rate.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations
as they become due. The Company manages liquidity risk by maintaining bank credit
facilities and continuously monitoring forecast and actual cash flows and working capital.
The Company forecasts its cash needs on a regular basis and will seek additional
financing based on those forecasts. The company has had limited exposure to debt as a
result of maintaining a cash surplus. Our expenditures are expected to decrease in
fiscal 2011 as compared to fiscal 2010 due to the continued cost reduction being
implemented. The Company’s ability to accomplish all of its future strategic plans is
dependent upon obtaining additional financing or executing other strategic options,
however, there is no assurance that the Company will achieve these objectives.
Capital Resources
The Company has a revolving demand credit facility with a maximum available limit of
$500,000. (June 30, 2010 - $1,000,000). The facility bears interest at a Canadian
chartered bank’s prime rate plus 5.90% per annum. The amount available under this
facility is limited by a percentage of good accounts receivable outstanding at any monthend.
The Company had drawn $112,150 under the $335,945 available credit limit as at
March 31, 2011.
As of the date of the MD&A, the credit facility is reduced to $150,000, and the amount
available credit to the Company was $2,850. The Company recently completed the
annual renewal of the credit facility and the Bank indicated that this credit facility will
remain in place, in the current economic climate there are no assurances that all, or any
part, of this credit facility will be available should we require it.
The principal use of the Company’s cash and working capital is to provide for operating
needs, such as buying of media and production services on behalf of our clients. Other
uses of cash and capital include capital expenditures, product development and
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acquisitions. The Company does not plan to complete any acquisitions or material
capital purchases through fiscal 2011.