Letter from the CEO - 2012

With a number of significant contracts in our backlog, our primary focus in 2012 is on business execution to significantly improve our financial position.

Overview

Although sales for our fiscal year ended September 30, 2011 (“2011”) increased by 6.6% to $8,467,618 from $7,941,498 for the year ended September 30, 2010 (“2010”), our gross profit decreased to 29.7% of sales in 2011 from 38.7% in 2010, which resulted in a net loss of $761,550, or loss per share of $0.07, in 2011 compared to a net loss of $335,332, or a loss per share of $0.03, in 2010. This significant decline in net operating results was due primarily to the decrease in gross profit percentage from our Manufacturing operations resulting from the combined effect of a very competitive market environment, which contributed to significantly reduce pricing and margins on sales of our larger play structures, and the strengthening of the Canadian dollar against the U.S. dollar.

Progress by Operation

We operate in two business segments: We design, manufacture and install customized indoor and outdoor play structures for children (“Manufacturing Operations”); and we own and operate a family entertainment centre ("FEC")

Manufacturing Operations

The time required to manufacture, deliver, and install 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 a few weeks to a few months. 

Our products are sold and installed worldwide. Our customer base includes family entertainment centres, theme parks, shopping malls, day care centres, fitness clubs, municipalities and not for profit organizations. 

Over the past few years there has been an increase in customer demand for larger and more complex play structures however the general state of the economy has had a significant impact on the volume of orders for our larger and more complex play structures.

Sales generated by our Manufacturing operations increased by 6.7% to $7,033,071 in 2011 from $6,588,467 in 2010. This increase is due primarily to higher sales to our customers located outside of the Americas, who accounted for $2,630,417 (or 37.4% of total Manufacturing sales) in 2011, compared to $1,504,457 (or 22.8%) in 2010, partially offset by lower sales to our customers in the Americas, including Canada, who accounted for $4,402,654 (or 62.6% of total Manufacturing sales) in 2011, compared to $5,084,010 (or 77.2%) in 2010.

We generate a significant portion of our total sales from the United States of America (“U.S.”) therefore our Manufacturing operations continue to be affected by the challenging economic environment in the U.S. To manage this risk, we are increasing our efforts to rationalize productions costs in order to improve our competitive pricing, and we are increasing our marketing activities in an effort to increase sales and broaden our customer base, particularly in markets outside of North America. In 2011, we broadened our customer base by increasing sales to customers located outside of the Americas to 31.1% of total sales in 2011 from 18.9% of total sales in 2010.

Gross profit percentage decreased to 26.4% of sales from our Manufacturing operations in 2011 from 37.5% in 2010.  This decrease was due primarily to the combined effect of very challenging economic conditions in our industry, particularly during the first nine-months of our 2011 fiscal year, which contributed to significantly reduce pricing and margins, fixed overhead production costs, which reduced margins due to the low sales volume, and the strengthening of the Canadian dollar against the U.S. dollar.

Our Manufacturing operations generated a net loss of $780,259 in 2011 compared to a net loss of $328,984 in 2010.  Net losses in 2011 and 2010 were due primarily to low sales volumes and weak gross profit margins generated during the first nine-months of 2011 and 2010.

On November 17, 2011 we entered into a significant sales agreement of U.S. $1,750,000, which along with the agreements of U.S. $1,752,000 and U.S. $1,358,000, previously announced on July 26, 2011 and September 6, 2011, respectively, are expected to favorably impact our operating results in 2012.

FEC

Our FEC began operating in December 2008. Our decision to enter into the consumer entertainment business was to create a new sales stream that would stabilize earnings from our Manufacturing operations, which as described above, are inherently subject to fluctuations from certain market risks.

Sales generated by our FEC operations increased by 6.0% to $1,434,547 in 2011 from $1,353,031 in 2010 due to higher admission fee revenues resulting from increased marketing efforts, new party packages, and the introduction of new games. 

Looking Ahead

Despite three consecutive years of operating losses, we have had a number of accomplishments which we expect will ultimately translate into improved operating results and increased shareholder value:

• Since May 2011, we have entered into five significant sales agreements: U.S. $898,000, U.S. $1,225,000, U.S. $1,752,000, U.S. $1,358,000, and $1,750,000. This is a tribute to the hard work of our employees who continue to provide innovative designs and products to our customers.

• Our continued focus on quality has minimized warranty claims and insurance costs. These costs can be very significant in our industry due to child safety concerns. Despite a number of vendors in our industry with low-cost and low-quality solutions, our strategy to focus on quality has significantly built our brand over the years. We believe that once the business cycle strengthens, we will be well positioned to gain significant market share.

• Our continued focus on customer service has translated into strong repeat business. Over our past four fiscal years, approximately 70% of our sales have been generated from repeat customers.

• In 2011 we established an interactive play division which offers mission based structures, interchangeable content, dramatic role play environment, play houses, early childhood development and play-ON exhibits. This division has already entered into a significant sales agreement to design, manufacture and install a very large educational play structure for a Museum in the United States.  We expect significant growth in this market segment with a number of proposals for museums, hospitals and parks.

• In 2011 our Manufacturing operations moved into a new facility and the combination of lower rent, as compared to our previous facility, and capital expenditures for production software and equipment are expected to improve efficiency and reduce our production costs starting in 2012.

• Since we sell worldwide we are exposed to foreign currency fluctuations because a significant portion or our sales are denominated in U.S. dollars and a significant portion of our expenses are incurred in Canadian dollars. Starting in 2010 we have significantly reduced our foreign exchange losses by improving our management of foreign currency risk.

We are forecasting modest to moderate growth in our sales in 2012 as compared to 2011 due primarily to an expected increase in sales from our Manufacturing operations. Although we expect our gross profit percentage to continue to fluctuate due to sales mix from our Manufacturing operations, we are forecasting a moderate increase in gross profit percentage in 2012 as compared to 2011 due primarily to expected margins from our larger sales orders. With expected increases in sales and gross profit, we are forecasting a significant improvement in our net operating results in 2012 as compared to 2011.

For our FEC operations, we expect our net operating results to continue to fluctuate from quarter to quarter based on seasonality factors, primarily, weather conditions and school holidays.  Since our FEC began operating in December 2008, seasonality trends have developed in sales and net operating results, with Q2 historically generating the strongest operating results, due primarily to winter weather conditions that are generally conducive to indoor activities for children, resulting in a higher number of customer visits at our FEC.  Conversely, our Q4 operating results have historically been the weakest due to summer weather conditions that are generally conducive to outdoor activities for children, resulting in a lower number of visits at our FEC.

Our near-term cash requirements are primarily related to funding our operations, repayment of our operating loan, leases, and funding of capital expenditures. We believe that based on our current business plan, our sources of cash which include cash on hand, accounts receivable, cash from customer deposits, cash from operations, and up to $500,000 from our operating loan facility, will be sufficient to fund our expected working capital requirements for at least the next twelve months.

We will continue to search for new growth opportunities for our FEC operations.  Our decision to expand will depend on finding appropriate facilities and obtaining additional financing. In order to continue our growth strategy, we will require additional financing to open new FECs, however, should our expansion plans succeed, it is our belief that our Manufacturing operations would benefit by supplying play structures for the new FECs and in turn, these FECs would serve as a valuable showcase for our new play structures.

Executing Our Strategy

We continue to focus on business execution in a challenging environment and building on the continued success of our FEC. I remain confident that when the business cycle strengthens, we will be well positioned with our exciting new designs, our high quality and high capacity manufacturing capabilities, and our great FEC customer service team.

In closing, I would like to thank our shareholders for their continued support and patience as we look forward to turning the corner in 2012 and returning to profitability.

Sincerely,

Franco Aquila
Chief Executive Officer & Director

IPLAYCO CORPORATION LTD.

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Iplayco Corporation Ltd. is traded on the TSX Venture Exchange, under the symbol IPC.

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Annual Reports

• 2011 Annual Report (PDF)
• 2010 Annual Report (PDF)
• 2009 Annual Report (PDF)

Quarterly Reports

• Q2-2012 (PDF)
• Q1-2012 (PDF)
• Q3-2011 (PDF)
• Q2-2011 (PDF)