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Letter from the CEO - 2016

On the Path of Continued Growth

Overview

On November 19, 2014, we completed a non-brokered private placement, with Saudi FAS Holding Company and its wholly-owned British Columbia subsidiary, FAS Entertainment B.C. Ltd., (collectively “FAS”) pursuant to which FAS purchased 10,650,000 units of Iplayco (the “Units”) at a purchase price of $0.83 per Unit for gross proceeds to the Corporation of $8,839,500. Each Unit consists of one common share of Iplayco and one tenth of a share purchase warrant, with each whole warrant being exercisable until October 1, 2016 to acquire one additional common share at a price of $0.85 per common share. FAS owns 51.03% of Iplayco’s issued and outstanding common shares, and 53.41% on a fully diluted basis, assuming full conversion of the warrants.

The closing of this private placement demonstrates FAS’ commitment to Iplayco and solidifies plans to place orders with Iplayco for the expansion of FAS’ Billy Beez family entertainment centres. This partnership with FAS constitutes a historical milestone for Iplayco and significantly strengthens Iplayco’s financial position and future growth prospects.

FAS is a private company incorporated pursuant to the laws of the Kingdom of Saudi Arabia. All of the outstanding securities of FAS are held beneficially by three individuals. FAS controls various entities which own and operate family entertainment centers under the Billy Beez brand in the Middle East and in the United States of America. Billy Beez has been Iplayco’s largest customers over the past three years. FAS also controls Fawaz Abdulaziz Al Hokair & Co., a retail conglomerate listed on the Saudi stock exchange (Tadawul), with a market capitalization of 8.7 billion Saudi Riyal (or approximately $3 billion in Canadian dollars). With its private placement, FAS has invested in Iplayco to secure supply of play structures for its Billy Beez expansion. For more information on FAS, please visit the company’s website at: www.fawazalhokair.com.

Progress by Operation

Manufacturing Operations

The time required to supply playgrounds is largely dependent on the size and complexity of the play structures ordered by our customers. Factors such as customer location, capital expenditure budgets, and theme requirements, may cause project completion timelines to vary from several weeks to several months.  Our products are sold and installed worldwide. Our customer base includes family entertainment centres, theme parks, shopping malls, daycare centres, fitness clubs, municipalities and not-for-profit organizations.

Sales generated by our Manufacturing operations increased by 4.2% to $15,950,637 in 2015 from $15,314,171 in 2014. This increase is due primarily to higher sales to our customers located in the Americas, including Canada, who accounted for sales of $11,705,172 (or 73.4% of total Manufacturing sales) in 2015 compared to $5,125,282 (or 33.5%) in 2014, partially offset by lower sales to our customers located outside of the Americas, who accounted for sales of $4,245,465 (or 26.6% of total Manufacturing sales) in 2015 compared to $10,188,889 (or 66.5%) in 2014.

Sales to Billy Beez accounted for 50.2% of sales by our Manufacturing operations in 2015 as compared to 29.9% of sales by our Manufacturing operations in 2014. Should Billy Beez end their relationship with us, reduce or postpone current or expected purchase orders or suffer from business failure, our sales and profitability would decline materially. We expect continued business concentration from Billy Beez for the foreseeable future.

Gross profit percentage decreased to 36.5% of sales by our Manufacturing operations in 2015 from 38.2% in 2014 due primarily to unfavorable sales-mix in 2015 as compared to 2014.

Our Manufacturing operations generated net income of $578,008 in 2015 compared to net income of $1,067,289 in 2014. The decrease in net income is due primarily to the combined effect of the severance charge of $581,186 from the retirement of the Corporation’s former Chief Executive Officer on August 11, 2015 and higher finance costs from the extinguishment of the subordinate debt on November 24, 2014, partially offset by an increase in foreign exchange gains in 2015 as compared to 2014.

FEC

Sales generated by our FEC operations increased by 2.3% to $1,252,351 in 2015 from $1,223,801 in 2014 due primarily to an increase in the number of customer visits to our FEC. Our FEC operations generated a net loss of $60,946 in 2015, compared to a net loss of $60,775 in 2014.

The net operating results from our FEC operations will continue to fluctuate from quarter to quarter based on seasonality factors, such as weather conditions and school holidays. Seasonality trends have developed in sales and net operating results, with Q2 historically generating the strongest operating results, due primarily to a higher number of customer visits during the winter months.  Conversely, our Q4 operating results have historically been the weakest due to a lower number of customer visits during the summer months.

Looking Ahead

We are anticipating sales to increase moderately and net income to increase significantly in 2016 as compared to 2015, due primarily to an increase in anticipated orders from customers other than Billy Beez, and lower administrative expenses. 

We expect our gross profit percentage to continue to fluctuate from quarter to quarter due primarily to sales mix and purchase costs for our Manufacturing operations. We are expecting our gross profit percentage in 2016 to remain in-line with 2015.

We also expect that our operating expenses will generally continue to fluctuate from quarter to quarter however on an annual basis we are expecting the following in 2016 as compared to 2015:

  • Selling and administrative expenses to remain in-line with 2015, excluding depreciation and the severance charge of $581,186 from the retirement of the Corporation’s former Chief Executive Officer.
  • Moderate increase in depreciation expense due to the combined effect of a complete year of depreciation of the capital expenditures made in 2015 and anticipated capital expenditures in 2016.
  • Significant decrease in net foreign exchange gain due to our forecast stabilization of the Canadian dollar against the U.S. dollar.
  • Significant decrease in finance costs due primarily to the extinguishment of the subordinate debt on November 24, 2014. 

Our near-term cash requirements are primarily related to funding our operations, repaying our operating loans, and funding our capital expenditures. We expect our working capital requirements to continue to increase due to the anticipated increase in sales. Our sources of cash include cash on hand, trade receivables, customer deposits, cash from operations, and funding from our credit facilities.

We will build on the successes of 2015 by continuing to focus on quality, customer service and sound business practices.

In closing, I would like to thank all of our stakeholders for their continued support as we look to continued growth for Iplayco.

Sincerely,

IPLAYCO CORPORATION LTD.

Scott C. Forbes
President, Chief Executive Officer & Director

 

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