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[January 17, 2013]
RTG VENTURES INC - 10-Q - Management's Discussion and Analysis or Plan of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Readers are cautioned that certain statements contained herein are forward-looking statements and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements" on page 1. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. This discussion also should be read in conjunction with the notes to our consolidated financial statements contained in Item 8.
"Financial Statements and Supplementary Data," of this Report.
Background RTG Ventures, Inc. is an OTC:QB listed company. Subsequent to the close of the fiscal year 2011 following substantial investment, the Company conducted a structural review of its total product and services offering. The review was carried out by the Board of Directors. The result was to bring technology development being outsourced directly into the Company to steward on a daily basis and any activities which were not revenue generating in the near term were eliminated. It was unanimously agreed that the company would adopt a lean approach that focused on the relationships and partnerships built up over the year in the music arena as well as build on the early stage development of its CloudChannel product by bringing the technology in-house following product development disappointments of the technology being developed in Ukraine. Within this shift, it was agreed that a new, more appropriate name be given to the services and technology offered by RTG that reflected the change and would allow the building of brand value in its own right. Pulse Station reflected that change.
Operations Overview/Outlook Operationally, 2012 was important in evaluating the direction of the company and steering it toward a sustainable growth plan that will center on technology and digital marketing in 2013, as described below: Music & Entertainment Solutions RTG is taking its strengths including its relationships to build its business focus on music and entertainment. The Company, under very competitive global market conditions and growing development needs, continued to identify partnership opportunities using its platform, Pulse Station, and conducted a robust review of performance with excellent results.
The heart of the business is the marketing consultancy. Understanding each client and developing the model to individualize the outlook has been essential.
This kind of close relationship with the client resulted in Digital Clarity being considered a close professional advisor.
In fiscal year 2013, the Company will take the positive results of the last year and use that model to expand geographic reach with existing and new partners.
Digital Marketing Services 2012 saw a massive growth in the adoption of Social Media as a communication, marketing and engagement avenue. Through Stylar, RTG's wholly owned digital marketing agency brand, Digital Clarity, it was clear that the direction, talent and growth of the company is in its human capital and outside relationships.
The clear opportunity is at the foundation of the company, namely the need to expedite and encourage development in the digital marketing services sector. The Company must jumpstart the growth by significant capital infusion by fiscal year 2013 to grow simultaneously in multiple geographies.
As a foundation, the financial review showed that Digital Clarity continued to be revenue generating and remained cash flow positive.
Key Milestones During the latter part of 2012, Digital Clarity continued to make inroads into established and emerging markets. As part of this push, that was greatly enhanced and supported by a newly created Head of US Operations, Steven Baughman, the company won a major deal with a US based entertainment group. The group was seeking a seasoned agency that could fulfill its complex specifications and grow with its aggressive expansion plans throughout the US and beyond. Digital Clarity was awarded the contract, removing the competitors to win the design and development of the new website centered on an intelligent design as well as a strong understanding and execution of social media integration.
Further to that success, Digital Clarity has also been in deep negotiation with a Luxury Brand Group that takes established and well known global high-end fashion brands into the rapidly growing Middle East market.
Digital Clarity is working with the group due to the agency's ability to leverage on contacts within the region and the ability to deliver tangible strategy. The Middle East remains an important market for the company. These two initiatives are examples of the Company's development activities which will serve as models for the 2013 fiscal year.
Key Differentiators 2012 was about establishing strong foundations, streamlining operations and assessing activities on a cost benefit basis. 2013 will be about growth and outreach.
As the internet and mobile arena continues to mature, the need to make sense of and manage companies through this often complex market is clearly an area of massive growth. The company is confident that the talent and experience within the digital marketing team is poised for a major springboard in 2013, but must be expanded significantly in order to support the global reach intended.
Experience The company has reach and experience across a large number of vertical markets including: Automotive, Retail, Travel, Finance, Property, Recruitment, Advertising, Entertainment/Sports, B2B, Start-ups to name a few.
Relationships and Industry Contacts The team at Digital Clarity have professional and personal contacts at companies such as Google, Microsoft and Facebook, often being invited to attend strategic market briefings and insights.
Partnerships and agency management have allowed Digital Clarity to work on some of the biggest brands, sitting behind the agencies as a support and resource to deliver very high quality service and results to their clients.
Team Expertise · PPC campaign experience especially Google AdWords existed · SEO evolution from aggressive link building and onsite SEO through to strategic marketing integration of inbound marketing · Website design and development based on results driven design and planning · Brand consultancy · Social media management and advertising.Several clients have been "won" directly via Digital Clarity's internal social media strategy · Sales and account management experience from multi-disciplined backgrounds Evolution and Flexibility The market is continually changing. Digital Clarity has always remained ahead of the curve and given their clients peace of mind by remaining a true strategic partner.
Creative, Individualized Solutions and Customer Service Case Studies and testimonials reflect the client-centric approach of Digital Clarity. Being selected over larger more established firms, support that we provide the client with skills that are differentiating. The Digital Clarity Brand is being established positively.
15 Growth opportunities in the Market As the use of web mobile sites and applications grow, so do the complexities and challenges of using these sites and platforms commercially. Digital Clarity directs business through the maze of an often confusing and sophisticated set of barriers, to create a clear path for the customer to our clients product or service. As this market matures, the need for companies to rely on the services from Digital Clarity can only grow. Here we look at some of the growth areas in Digital Clarity's arsenal.
Growth & Opportunities in Design § 644,275,754- number of active web pages 1st QTR 2012 - NetCraft § 6million domain added in first QTR 2012 - Verisign § By 2015, Mobile Internet Usage Will Increase by Factor of 26 - CISCO § 665million media tablets in use worldwide By end of 2016 - Gartner Group Growth & Opportunities in Search § The North American Search industry will grow from $19.3 bn in 2011 to $26.8bn in 2013 - SEMPO § Revenue from Localized Mobile Ads to Reach $5.8 Billion in U.S. by 2016 - BIA/Kelsey § U.S. search spend grew by 11 percent Year over Year, while ROI improved by 26 percent - Adobe § 72% of Consumers Want Mobile-Friendly Sites - Google Research § 2million search queries are made on Google, every minute - Google § Growth in Corporate Search - 50% of Fortune 100 Companies have a Google+ Account Growth & Opportunities in Social Media § Fortune Global 100 companies have more accounts on each platform than ever before with an average: § 10.1 Twitter accounts § 10.4 Facebook pages § 8.1 YouTube channels § 2.6 Google Plus pages § 2.0 Pinterest accounts § Seventy-four percent of companies studied have a Facebook page.
§ Ninety-three percent of corporate Facebook pages are updated weekly.
§ Forty-eight percent of companies are now on Google Plus.
§ Twenty-five percent of companies have Pinterest accounts.
§ Each corporate Facebook page has an average of 6,101 people talking about it.
The need for RTG to reach Global Markets It is clear that the economy continues its slow recovery from the global effect of market forces which impact on all areas of commerce and trade. As the markets remain volatile, the opportunity for a company like RTG Ventures to approach new business with its proven track record, increase. The core markets remain US and English speaking European markets. Emerging markets are a target for 2013. We already have identified a partner in the Middle East and are actively developing a significant client. In addition, BRIC countries (Brazil, Russia, India and China) would be the next targets from the emerging markets.
The company intends to further extend its services in the Middle Eastern market initially then review the successes using a lean methodology and continuous improvement along the way, and then roll out to the BRIC markets.
US The US remains at the center of the entertainment, technology and digital industries and as such the emphasis looking forward to 2013 and building on the recent success in the last quarter of the 2012 calendar year means that RTG and its agency Digital Clarity are perfectly positioned to spring board into this market using the successful models established this past year.
Currently, negotiations are taking place to extend relationships with collaborative partners that have clients in the entertainment and media sectors that can leverage Digital Clarity's experience in the digital and social space.
With the appointment of Steven Baughman as Head of US Operations in June 2012, we are establishing a strong digital marketing presence in the Los Angeles area to cover the music and entertainment market and then plan to do the same later in 2013 in New York. We intended to establish the satellite office during the 2012 fiscal year but didn't have the bandwidth to do so and develop our client base as well. As California remains a key regional base from which to build and expand relationships, the need to have a New York satellite office is equally important to serve and build relationships the largest advertising market in the US.
Europe As the current base of the digital marketing agency is in London England, it is perfectly placed to reach out to the broader European market to replicate the Company's model in the stronger economies in this region. As with the relationships mentioned in the US, opportunities are being explored as to how US partners can leverage Digital Clarity's reach in this region and help take established US agencies into the European region.
Middle East The Middle East is a fertile market for heritage based US and European brands looking for entry into this lucrative market. The fastest area for growth in this sector is to leverage on the luxury arena. Digital Clarity is already in discussions with a number of different luxury groups each with different brands within the group.
Given the complexity of the region as well as the enormous potential, it is important that Digital Clarity aligns itself with established players in local markets. With this in mind, Digital Clarity will look to collaborate with some digital agency partners where there is already a relationship and create a strategy that allows the company to look at the breakdown of current digital competence of these brands focusing on various touch points such as tablets, sites, mobile & social reach in the Middle East.
Our value proposition is very much about creating digital penetration of the Middle Eastern market for a particular group and how those brands would be positioned to create brand value - a bye product of which would be sales.
Areas supporting growth in the Middle East § Leverage of trade shows - e.g. MEE in November in Dubai - World Travel & Luxury Goods § 214,000 Chinese tourists visited Dubai in 2011, a 50% increase from the previous year.
§ 25% of luxury goods sold in the Mall of the Emirates were bought by Chinese tourists 2011 § A recent survey by Chalhoub Group revealed that 70% of survey respondents shopped with friends and 40% with sisters and mothers. The survey found that having the right logo and fashion brand displayed on handbags or clothes is particularly important. For example, up to 90% of people surveyed in Riyadh, Saudi Arabia, believed it was important to have a prestigious logo displayed on their clothing or accessories.
16 Key differentiators Artist Collaboration with the head of US Operations, Steven Baughman is an area that will see exponential growth in the coming 12 months and beyond. Artists and brands that look to leverage their celebrity status will look to companies such as Digital Clarity to help drive and develop their brand in the growing and complex arena of social media.
Financial Overview/Outlook The first quarter of the 2013 fiscal year continued the Company realignment from the previous year. Cost of sales decreased further while revenues continue to increase.
In addition, by the end of the fiscal year 2012 and continuing through the first quarter of 2013, all debt is in the hands of friendly lenders who have shown their support to the Company.
However, the weakened share price remains a challenge to the Company. Having revenues of approximately $500,000 in fiscal 2012 and approximately $137,500 in the first quarter of fiscal 2013 would suggest a conservative market multiple of x10-x16, the latter being the manufacturing average. Compared to other companies in this sector, RTG is significantly undervalued. The issue will be addressed as a priority. The Company will continue to seek appropriate partnerships, joint venture and/or merger opportunities.
Going forward, RTG Ventures intends to embark on a significant capital raise to allow the Company to scale up geographically and maximize our global reach through partnered relationships. This strategy is the most efficient and effective path to grow RTG quickly into multiple revenue streams. We have proven the model in the last year. Our marketing services' offering is a labor intensive endeavor, wherein human capital is a key differentiator of knowledge and/or relationships.
The Board of Directors sees 2013 as poised for growth on multiple fronts. With capital infusion, which will allow us to bring in new clients, grow existing successful clients and service them accordingly, coupled with an offer of a deferred tax asset to attract partners with significant revenue and expansion patterns, we will have a model in place which will be sustainable.
Off-Balance Sheet Arrangements We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recently Issued Accounting Pronouncements Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, could have a material effect on the accompanying financial statements.
Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation.
Significant and Critical Accounting Policies Our discussion of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates and assumptions, which are based on historical factors and other factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions, estimates or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See "Notes to Consolidated Financial Statements" for additional disclosure of the application of these and other accounting policies.
LIQUIDITY AND CAPITAL RESOURCES After the Board's strategic review post-2011 fiscal year, we have migrated the technology in-house and are concentrating on activities which will grow Digital Clarity organically and by acquisition. We spent fiscal year 2012 establishing a client model for existing and new customers which can be exported geographically.
QUARTER ENDED NOVEMBER 30, 2012 We had $63,544 cash at November 30, 2012. Our working capital deficit amounted to approximately $1.689 million at November 30, 2012.
During the quarter ended November 30, 2012, we used cash in our operating activities amounting to approximately $65,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $217,000 adjusted for the following: · Fair value of preferred shares issued for bonus of $27,600; · Change in fair value of derivative liability of $2,883; · Amortization of debt discount of $57,115; · Gain on settlement of debt of $33,151; · Depreciation of $759; Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activity: · An increase in our accounts payable and accrued expenses of approximately $61,000, resulting from slower payment processing due to our financial condition.
· An increase in our accrued salaries of approximately $36,000, which is a significant decrease as compared to the first quarter in fiscal 2012.
· A decrease in our accounts receivable of $328 resulting from slower collections.
17 QUARTER ENDED NOVEMBER 30, 2011 We had $12,505 cash at November 30, 2011. Our working capital deficit amounted to approximately $1.877 million at November 30, 2011.
During the quarter ended November 30, 2011, we used cash in our operating activities amounting to approximately $99,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $434,000 adjusted for the following: · Fair value of shares issued of $58,500; · Change in fair value of derivative liability of $71,549; · Amortization of debt discount of $83,092; · Interest related to modification of conversion price of debt of $43,510; · Bad debt expense of $1,787; · Depreciation of $392; Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activity: · An increase in our accounts payable and accrued expenses of approximately $26,000, resulting from slower payment processing due to our financial condition.
· An increase in our accrued salaries of approximately $64,000, which is a significant decrease as compared to the first quarter in fiscal 2011.
· An increase in our accounts receivable of $12,964 resulting from slower collections.
RESULTS OF OPERATIONS Comparison of the Results for the Quarters Ended November 30, 2012 and 2011 We currently generate revenue through our Pay-Per-Click Advertising, Search Engine Marketing, Search Engine Optimization Services, Web Design, Social Media, Digital analytics and Advisory Services.
Revenue for the quarters ended November 30, 2012 and 2011 was approximately $137,000 and $83,000, respectively. For the quarter ended November 30, 2012 our primary sources of revenue are the Per-Click Advertising, Web Design and Search Engine Optimization Services. These primary sources amounted to 74% of our revenues. Our secondary sources of revenue are our Social Media and Email Media.
These secondary sources amounted to approximately 26% of our revenues. For the quarter ended November 30, 2011 our primary sources of revenue are the Per-Click Advertising, and Search Engine Optimization Services. These primary sources amounted to greater than 80% of our revenues. Our secondary sources of revenue are our Web Design Fees, Social Media and Web Design. These secondary sources amounted to approximately 20% of our revenues.
We recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists; (2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.
Cost of sales for the quarters ended November 30, 2012 and 2011 was approximately $70,000 and $97,000, respectively. For the quarter ended November 30, 2012, cost of sales included advertising, salaries and media spend. This resulted in a gross profit of approximately $67,000 for the quarter ended November 30, 2012. For the quarter ended November 30, 2011, cost of sales included advertising, salaries and media spend. This resulted in a gross loss of approximately $13,600 for the quarter ended November 30, 2011.
General and administrative costs increased 4% to approximately $64,100 from approximately $61,480 for the quarters ended November 30, 2012 and 2011, respectively. The fiscal 2013 balance which only increased by approximately $2,600 was due to the Company's continued trend of streamlining its overhead keeping its expenditures low compared to prior years.
Payroll increased for the quarter ended 2012 by only 2% to approximately $79,000. The fiscal 2013 balance which only increased by approximately $1,600.
Professional fees (which include accounting/auditing, consulting and legal fees) increased by approximately $26,000 for the quarter ended November 30, 2012. This increase in fiscal 2013 is primarily attributable to the increase in accounting and legal fees.
Amortization and depreciation for the quarters ended November 30, 2012 and 2011 was approximately $58,000 and $84,000 respectively. The decrease is due to the lower number of loans in fiscal 2013 as well as a number of existing notes which were fully amortized in fiscal 2012.
Interest expense for the quarters ended November 30, 2012 and 201 was approximately $18,000 and $15,000 respectively, an increase of approximately $3,000 or 23%.
Gain on settlement of debt totaled $33,151 and $0 for the quarters ended November 30, 2012 and 2011, respectively.
Other interest - gain on derivative liability totaled approximately $2,283 and $71,549 for the quarters ended November 30, 2012 and 2011, respectively and was due to the calculation of a derivative liability associated with the issuance of convertible note payables.
Other interest - modification expense totaled approximately $0 and $43,500 for the quarters ended November 30, 2012 and 2011, respectively and was due to the price modification associated with the calculation of convertible shares issued associated with the convertible note payables issued in 2011.
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