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RS Technologies Reports Second Quarter 2010 Results
12 Aug, 2010 @ 11:22 pm EDT
About RS
RS is an ISO 9001:2008 certified technology innovator that develops advanced composite material products for infrastructure markets. The composite products manufactured using the company's proprietary resins and processes are typically lighter, more durable and longer-lasting than competing products made from the traditional building blocks of wood, steel or concrete. RS's flagship product is its award-winning RStandard(R) composite pole. The pole is used as transmission and distribution poles to carry electric grids and as communication structures for various uses including wireless networks and microwave communications systems.
For the latest on RS's developments, go to the company's website at www.grouprsi.com.
"RStandard" is a registered trademark of RS.
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RS TECHNOLOGIES INC. (formerly Resin Systems Inc.)
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010
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The following Management's Discussion and Analysis ("MD&A"), dated
Unless otherwise disclosed, all information in this section has been prepared in accordance with Canadian generally accepted accounting principles and is presented in Canadian dollars. Additional information relating to RS, including the Company's annual information form and continuous disclosure documents are available on the Company's website at www.grouprsi.com and on SEDAR at www.sedar.com.
I. Caution Regarding Forward Looking Statements
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Certain information set forth in this MD&A, including management's assessment of the Company's future plans and operations, contains forward-looking statements which are based on the Company's current internal expectations, estimates, projections, assumptions and beliefs, and which may prove to be incorrect. Some of the forward-looking statements may be identified by words such as "anticipate", "believe", "plan", "estimate", "expect", "predict", "intend", "will", "may", "could", "would", "should" and similar expressions intended to identify forward-looking statements. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the unpredictability of future revenues; the uncertainty of the profitability of existing and contemplated products of the Company; the Company's future capital requirements; the Company's future labour requirements; competition from established competitors with greater resources; the uncertainty of developing a market for the Company's products or for third party products incorporating its products; the Company's reliance on third parties to develop, manufacture and/or sell its products in North American and international markets; the risks associated with rapidly changing technology; the Company's reliance on third parties to supply raw materials in amounts and at such prices so as to allow the Company to make its patented polyurethane resin and RStandard composite products; intellectual property risks; risks associated with international operations, foreign exchange rate fluctuations and changes in general economic, market and business conditions. Many of these risks and uncertainties are described in the Company's annual information form for the year ended
II. RS Technologies Inc.
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RS was incorporated on
RS is traded on the Toronto Stock Exchange (the "TSX") under the symbol RS.
Vision
To be a world-class, diversified manufacturer of composite products for infrastructure markets.
III. Overview of the Business and Strategy
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RS is an ISO 9001:2008 certified technology innovator that develops advanced composite material products for infrastructure markets. The composite products manufactured using the Company's proprietary resins and processes are typically lighter, more durable and longer-lasting than competing products made from the traditional building blocks of wood, steel or concrete. RS is a leader in the successful integration of composite poles into the utility and communications industries. RS is currently the only manufacturer, on a commercial scale, of composite utility structures for transmission lines over 100 feet (30.5 metres) in height. This is currently the fastest growing segment in the industry due to the need to connect renewable generation sources, such as wind energy, to the existing power grid. RS is also the only manufacturer, on a commercial scale, of composite telecommunication structures over 100 feet (30.5 metres) in height.
RS's strategy is to leverage its technological advantage by applying its expertise to the specific requirements of large and carefully selected infrastructure markets and develop and manufacture products. The Company accomplishes this by being a composite product developer and manufacturer that sells its products through distributors and direct sales to strategic customers.
The Company targets its product development and manufacturing expertise on products that:
- have very compelling and undisputed advantages for customers;
- have large, and where possible, global markets;
- have appropriate market entry ability for RS;
- allow RS's products to create significant and sustained barriers to
entry for competitors; and
- provide above average profit margins.
RS's short-term strategy is to increase the market share of its composite pole within the North American utility and communications markets, and internationally on an opportunistic basis. In order for the Company to meet its short and long-term strategies, additional financing is required as described in the Liquidity and Ongoing Operations sections of this MD&A.
i. Utility and Communication Structures
The RStandard modular utility pole emerged from the research and development phase in mid-2006 and is currently being used in both the electric power and communications industries.
The modular utility pole fits RS criterion to address large global markets. In
The market for composite utility poles is very broad, and can be divided into the three primary segments of electric power, communications and other (small wind generators, sirens and lighting). Capital assets such as utility poles are incorporated into the electricity rate base at reconstruction value, and as such, are linked directly to the utility's annual revenue. New transmission projects are unique among electric utility applications because the capital structure is negotiated with the regulating entity during the planning phase. RS has successfully sold RStandard poles into a number of new transmission projects.
RS has aligned its strategy according to the key market segments of Transmission (New), Transmission (Reconstruction), Distribution, Communications, and Other. Commercially, RS will continue to focus its sales and marketing efforts on the Transmission (New) market segment, which is currently the fastest growing segment in the industry due to the need to connect renewable generation sources, such as wind energy, to the existing power grid. Transmission projects generally require larger modules which have greater than average gross margins for the company.
Whenever the opportunity exists, our strategy is to ensure that all stakeholders who are involved in the decision making process regarding the maintenance and building of the electric grid are made aware of the advantages of RS's products. This includes senior managers who are responsible for managing costs and operations throughout the life cycle of a utility pole, including the stages of acquisition, storage, transportation, installation, inspection, maintenance, replacement, remediation and ultimately disposal. The Company's marketing strategy includes aligning with regulators and promoting its products for consideration within engineering, procurement and construction companies.
RS has met some success in penetrating the communications industry in
Our goals in 2010 for our RStandard composite pole business unit is to build on our 2009 achievements and continue to:
- increase our North American market share by working with our
distribution partner to add key North American customers and increase
the number of repeat orders from existing customers;
- focus on new transmission projects which generally have greater gross
margin potential;
- increase the composite pole production rate and production
efficiencies to meet the anticipated increase in demand;
- improve the manufacturing process to achieve positive gross margins;
- develop the RStandard product line based on the needs and experiences
of customers; and
- support and oversee the design and engineering of next generation
turnkey production cells to meet the growing market demand.
ii. Material Handling Products
The Company continues to evaluate the product development, technical and market introduction strategies of its Veylon polyurethane composite tubing for conveyor idler rolls (formerly RStandard composite idler roll tube). Specifically, RS is in the process of developing a total non-metallic solution that incorporates all components of an idler roll, including the Company's composite roller tube and third party hubs and seals.
IV. Business Operations
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i. RS Operations
a. Manufacturing
Management has identified key areas of focus in order to improve its gross margin including process optimization, equipment improvements and the qualification of new suppliers.
During the period, RS continued to focus on process optimization and equipment improvements. In
The agreement with HDSU includes an initial purchase order in excess of
During the quarter, RS continued its process of qualifying new suppliers of its raw materials in an effort to mitigate supply chain management risks.
Management tracks production efficiency and processes on a weekly basis, and is continuing to develop benchmarks to evaluate financial and non-financial measures such as production rate, material waste, scrap and cost of goods sold. RS's unique manufacturing process does not allow for relevant comparison of industry statistics that may be available to the Company on these metrics.
b. Sales and Marketing
RS directly employs a number of corporate and field commercial staff in a variety of roles, including sales, marketing, product management and customer service. The commercial sales team manages and executes direct sales with strategic customers and through distributors and manufacturers' representatives in various geographic regions. These distributors include HDSU in
In support of RS's strategic focus on the North American market, the Company employs account executives in
RStandard composite poles are currently installed and used by 145 utility companies across
c. Corporate
i. Private placement
On March 19, 2010, the Company issued 22,465,396 common shares as
part of a private placement at $0.33 per share for net proceeds of
$7.3 million.
ii. Bank loans
On February 19, 2010, the Company obtained an additional $3 million
of demand loans from a Canadian chartered bank at an interest rate of
bank prime plus one percent due March 31, 2010. A commitment fee of
$30,000 was paid to the bank upon acceptance of the loan.
On March 19, 2010, the Company obtained an extension on the demand
loans from March 31, 2010 to October 1, 2010. An extension fee of
$35,000 was paid and a general security agreement over all the assets
of the Company was provided to the bank as part of the agreement,
giving the bank a first charge over the Company's assets, subject to
certain permitted encumbrances.
The members of the Board of Directors have agreed to provide, and
subsequently extend, limited liability guarantees ("Guarantees") in
favour of the bank guaranteeing all the obligations of the Company to
the bank up to October 1, 2010. During the quarter, a third party
advisor to the Company completed their analysis of the guarantee
compensation. The Directors will be compensated for the provision of
the guarantees at a weighted average annual rate of 8.46% for the
originally contemplated timeframes for each loan. The Company has
agreed to compensate the directors for the extension of the
guarantees and will retain an independent third party valuator to
provide a fair market valuation of the provision. As at August 12,
2010, this valuation has not been completed. An estimate of $0.1M for
the additional compensation has been included in the financial
statements.
iii. Shares issued for interest
In an effort to conserve cash, RS issued shares in lieu of cash
interest on its unsecured $25M 8.5% debenture on January 7 and June
30, 2010. 9,486,668 common shares were issued with a weighted average
price of $0.224 during the period, conserving approximately $2.1M in
cash used to fund operations.
V. Financial and Operating Results
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RS's financial information and the related discussion of financial results in the MD&A are for the three and six month period ended
Thousands of
Canadian
dollars except
per share
amounts which
are in Three Months Ended June 30 Six Months Ended June 30
thousands of
shares 2010 2009 % change 2010 2009 % change
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Product
revenues $ 3,341 $ 4,940 (32) $ 6,330 $ 5,940 7
Gross margin $ (1,565) $ (1,834) 15 $ (3,030) $ (2,766) 10
Net loss $ (6,221) $ (7,186) 13 $(12,607) $(13,458) 6
Net loss per
share $ (0.03) $ (0.05) 40 $ (0.06) $ (0.09) 33
Funds from
opera-
tions(1) $ (4,140) $ (5,515) 25 $ (9,406) $(10,234) 8
Total assets $ 16,089 $ 12,724 26 $ 16,089 $ 12,724 26
Convertible
debent-
ures(2) $ 31,304 $ 28,024 12 $ 31,304 $ 28,024 12
Basic and
diluted
weighted
average shares
outstanding 214,035 147,133 46 204,160 147,117 39
(1) Funds from operations is defined as "Cash used in operating
activities", as reflected in the Consolidated Statements of Cash
Flows before change in non-cash operating working capital. Management
believes that the presentation of this non-generally accepted
accounting principle measure provides useful information about the
Company's ability to fund future operations.
Funds from operations is not a recognized measure under Canadian
generally accepted accounting principles. Investors are cautioned
that funds from operations should not be construed as an alternative
to net earnings or loss determined in accordance with Canadian
generally accepted accounting principles as an indicator of the
financial performance of the Company or as a measure of the Company's
liquidity and cash flows. The Company's method of calculating funds
from operations may differ from other issuers and may not be
comparable to similar measures presented by other issuers.
(2) Includes both current and long-term portions of the Convertible
debentures. For detailed convertible debenture information, please
see the Company's 2009 annual financial statements.
Discussion of Consolidated Financial Results for the Three Months Ended
Product revenues for the three months ended
Negative gross margin for the three months ended
Selling, general and administrative ("SG&A") expenses for the three months ended
Depreciation of property, plant and equipment for the three months ended
Financing charges for the three months ended
Stock-based compensation for the three months ended
The net loss for the three months ended
Discussion of Consolidated Financial Results for the Six Months Ended
Product revenues for the six months ended
Negative gross margin for the six months ended
SG&A expenses for the six months ended
Depreciation of property, plant and equipment for the six months ended
Financing charges for the six months ended
Stock-based compensation for the six months ended
The net loss for the six months ended
VI. Financial Position
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The following table outlines the significant changes in RS's consolidated balance sheet from
Increase/
(Decrease)
Cash and cash $(2.3) Decrease is due to production costs
equivalents million being greater than selling cost.
Accounts receivable $(0.5) Decrease is due to the timing of current
million quarter sales and receipt of prior
quarter receivables.
Inventory $1.4 Increase is due to the build up of
million finished goods inventory and raw
materials on hand.
Prepaid expenses and $0.3 Increase is due to the prepayment of
deposits million raw materials, the renewal of insurance
and an increase in other deposits.
Property, plant and ($0.1) Decrease is due to the amortization of
equipment million property, plant and equipment.
Current liabilities $1.5 Increase is due to the addition of bank
million debt; increased accretion expense on the
debentures; offset by a reduction in
accounts payable and accrued liabilities
and a reduction in the value of the
deferred share units issued and
outstanding.
Secured and $0.2 Increase is due to the accretion on the
unsecured million secured debentures.
convertible
debentures
Other long-term ($0.1) Decrease is due to the repayment of the
liabilities million mortgage on the Tilbury, Ontario land
and building.
VII. Financial Instruments
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At
The fair values of the convertible debentures are not materially different from the carrying value.
The carrying value of the mortgage payable approximates fair value as the interest rate of the mortgage is consistent with interest rates available to the Company from other lenders with the same terms.
The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks the Company is exposed to are described below.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. Management uses internally prepared cash flow forecasts to seek to ensure that the Company has sufficient liquidity to meet its liabilities when due. The Company will continue its cost cutting strategies as well as seeking to complete a financing discussed in the Future Operations section to ensure that it has sufficient funds to discharge its current obligations.
The following are the contractual maturities of financial liabilities as at
Contr-
Thousands of Carrying actual 0 to 3 3 to 6
Canadian dollars amount cash flow months months
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Accounts payable and
accrued liabilities $ 3,129 $ 3,129 $ 3,129 $ -
Bank loans 7,000 7,000 - 7,000
Other liabilities 4,292 3,633 2,431 61
Unsecured debentures i) 24,179 25,000 - 25,000
Secured debenture i) 7,125 10,000 - -
Debenture interest i) - 6,650 - 2,076
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$ 45,725 $ 55,412 $ 5,560 $ 34,137
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Thousands of 6 to 12 12 to 24 After 24
Canadian dollars months months months
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Accounts payable and
accrued liabilities $ - $ - $ -
Bank loans - - -
Other liabilities 124 247 770
Unsecured debentures i) - - -
Secured debenture i) - - 10,000
Debenture interest i) 1,500 1,500 1,574
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$ 1,624 $ 1,747 $ 12,344
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i) These instruments allow the Company to choose whether it settles the
financial liabilities by delivering cash or issuing common shares.
VIII. Related Party Transactions
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On
Please refer to the Business Operations section under "Bank loans" and the Subsequent Events section for further information on related party transactions.
These transactions are considered to be in the normal course of operations and have been recorded at the exchange amount.
IX. Commitments
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The Company has a contract with its North American distributor until
The Company has a 41-year warranty and limited lifetime guarantee on its RStandard modules. The warranty will provide for a replacement module in the event that a manufacturing defect is discovered, reported and verified within 41 years of its delivery date to the customer. Under the limited lifetime guarantee, the Company will replace any module that fails as a result of the physical loads imposed by ice, snow, wind or lightning strikes. The Company has not included a provision for the warranty or guarantee in these financial statements, as there is insufficient historical information to estimate the future cost of the warranty and guarantee to the Company.
To date, the Company has not had any successful warranty or guarantee claims.
X. Liquidity and Capital Resources
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The Company has experienced working capital deficiencies since it resumed direct manufacturing at its
During the period, the Company issued 22.5 million common shares for net proceeds of
The interim consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles, which assumes RS will realize its assets and discharge its liabilities and commitments in the normal course of business. The application of the going concern concept is dependent upon RS successfully completing a financing arrangement and operating profitably. See the discussion of "Future Operations" under the Critical Accounting Estimates section for further details.
To date, the Company's main source of cash flow has been through the issuance of debt and equity securities. This dependence on the public market to fund its cash flow needs has resulted in management including a "Future Operations" note in the interim consolidated financial statements.
i. Cash From Operations
For the six months ended
ii. Financing Activities
Financing activities for the six months ended
iii. Investing Activities
Net cash used in investing activities for the six months ended
In the remainder of 2010, the Company has budgeted for an additional
XI. Share Capital
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Authorized
RS's authorized share capital consists of an unlimited number of Common Shares and an unlimited number of preferred shares issuable in series whose designation, rights, privileges, restrictions and conditions are determined when issued.
Issued
The issued and outstanding Common Shares as at
Stock options
The number of stock options outstanding as at
XII. Summary of Eight Recently Completed Quarters
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The following table highlights RS's performance for the quarterly reporting periods from
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2010 2009
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Jun Mar Dec Sept
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(Thousands of Canadian dollars except per share amounts)
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Product revenue 3,341 2,989 3,222 1,409
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Net loss (6,221) (6,386) (6,803) (8,250)
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Basic and diluted loss per
common share (0.03) (0.03) (0.04) (0.05)
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Total cash and cash
equivalents 738 3,939 3,048 1,879
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Total assets 16,089 21,498 17,371 15,575
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Total long-term liabilities 8,691 8,605 9,083 30,975
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2009 2008
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Jun Mar Dec Sept
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(Thousands of Canadian dollars except per share amounts)
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Product revenue 4,940 1,000 101 446
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Net loss (7,186) (6,272) (8,369) (12,013)
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Basic and diluted loss per
common share (0.05) (0.04) (0.06) (0.08)
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Total cash and cash
equivalents 415 2,005 7,964 7,111
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Total assets 12,724 14,960 19,548 20,071
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Total long-term liabilities 29,880 28,011 27,321 20,384
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XIII. Disclosure Controls and Procedures and Internal Controls over
Financial Reporting
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RS's chief executive officer and interim chief financial officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to RS is made known to RS's chief executive officer and interim chief financial officer by others, particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by RS in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and accurately reported within the time period specified in securities legislation.
There have been no changes in the Company's disclosure controls or internal control over financial reporting during the six months ended
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even when those systems are determined to be designed effectively, they can provide only reasonable assurance with respect to financial statement preparation and presentation.
XIV. Future Accounting Changes
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International Financial Reporting Standards
The Company has completed the development of its conversion plan for the conversion of its financial statements from Canadian generally accepted accounting principles to International Financial Reporting Standards ("IFRS") which will be required in its financial reporting for the 2011 fiscal year. The conversion plan has six stages: (1) identification of differences between current generally accepted accounting principles and IFRS; (2) analysis of IFRS 1 exemptions; (3) analysis of impact of differences between current generally accepted accounting principles and IFRS; (4) preparation of
During 2010, RS will complete its conversion plan and Implementation which will include, among other things, the project structure and governance, resourcing requirements, training plans, a communications plan, and a review of the impact on data systems and internal controls.
Management is currently working through the first three stages of the conversion plan. As management's review and analysis is not yet complete, no estimate of the impact of the adoption of IFRS on the transition date can be made. As a result of the preliminary work on the first and third stages of the conversion plan, the Company has identified the following areas where it is expected that significant changes and/or adjustments as a result of adopting IFRS will be required:
- Property, plant and equipment
- Impairment of assets
- Financial Instruments recognition and measurement
- Financial Instruments presentation
Once these stages have been finalized, the impact of adoption will be disclosed.
The Company has yet to finalize the accounting policy choices available to it. Management expects that as they finalize the accounting policies during stage five of the conversion plan, disclosures surrounding the choices, rationale, and impact will be made as completed.
It is expected that the conversion plan, up to Implementation, will be complete during the third quarter of 2010, and the impacts of IFRS adoption will be disclosed as they are known.
Implementation is expected to begin during the third quarter and continue through to year end. The results of changes in comparative information and other impacts of implementing IFRS will be disclosed as they are known.
XV. Critical Accounting Estimates
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Since a determination of the value of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of RS's consolidated financial statements requires the use of estimates and assumptions which have been made using careful judgement by management. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and its independent auditors, who have reviewed and approved RS's disclosure relating to critical accounting estimates in this MD&A.
RS's significant accounting policies are described in the notes to the audited consolidated financial statements of RS for the year ended
Future operations
These interim consolidated financial statements have been prepared on a going concern basis in accordance with Canadian GAAP, which assumes that the Company will realize its assets and discharge its liabilities and commitments in the normal course of business. The application of the going concern concept is dependent upon, amongst other things, the continued support and cooperation of shareholders, lenders, suppliers, and the ability to generate profitable operations.
For the six months ended
Additional financing by way of debt and/or equity will be required for the Company to continue as a going concern. Management is perusing a number of actions in an effort to ensure that RS will continue as a going concern until additional financing is obtained, including but not limited to:
1) The engagement of Macquarie Capital Advisors as a financial advisor,
to assist the Company in securing funds for both its near term
working capital needs and manufacturing improvements. The Company,
with its financial advisor is actively, engaged in seeking debt
and/or equity financing in order to raise the funds necessary to
pursue management's plan of operation, to fund the working capital
deficit, and in order pay its accounts payable and accrued
liabilities, and make capital improvements to enhance manufacturing.
The Company does not currently have any arrangements in place for the
completion of any debt and/or equity financing and there is no
assurance that RS will be successful in completing any debt and/or
equity financing.
RS's ability to continue operations will be entirely dependent upon
the Company's ability to obtain bridge financing until such time as
long-term financing is obtained. The Company has obtained $2.0M of
bridge financing from a related party (see the Subsequent Events
section) and will require additional funds in the event that a long-
term financing arrangement is not completed prior to August 31, 2010.
It is anticipated that changes to the Company's outstanding
indebtedness and/or equity will be required in conjunction the
completion of with any long-term financing arrangement. The structure
and timing of these changes remain unknown until an arrangement is
finalized, subject to the approval of such changes by the applicable
securityholders and regulatory agencies. In addition, the Company may
choose to begin changing its outstanding indebtedness and/or equity
prior to reaching a long-term financing arrangement in order to ease
the current debt burden.
2) Continuing to implement plans to reduce operational costs. In order
to extend the availability of current capital resources, a focus on
cash management including detailed weekly budgets, the negotiation of
more favourable terms with the Company's suppliers, and a reduction
of discretionary spending, has been implemented. Management has made
every effort to ensure that these changes have not and will not
impact the Company's ability to meet its current and future customer
obligations.
Management believes that the foregoing actions, together with the continued support and cooperation of securityholders, lenders and suppliers, and securing the required long-term financing, will enable RS to continue as a going concern. There can be no assurance that management's plans will be successful as such plans will be entirely dependent upon the completion of a long-term financing arrangement, market acceptance of the Company's products, and the implementation of manufacturing improvements. Should the Company be unsuccessful in raising additional financing, it may have no choice but to seek protection from its creditors. These financial statements do not reflect any adjustments should RS be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities outside the normal course of business.
Impairment of long-lived assets
Long-lived assets, including property, plant and equipment, and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the assets exceeds the fair value of the asset.
Stock-based compensation plans
The Company applies the fair-value method of accounting to all stock-based compensation arrangements, using the Black-Scholes option pricing model, for both employees and non-employees. Compensation cost of equity-classified awards to employees are measured at fair value at the grant date and expensed over the awards' vesting period with a corresponding increase to contributed surplus. Upon the exercise of the award, consideration received together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. Compensation cost of equity-classified awards to non-employees, initially measured at fair value and periodically re-measured to fair value until the non-employees' performance is complete, are expensed over the vesting period. The Company accounts for actual forfeitures as they occur for unvested options.
The Company has a restricted share unit plan whereby restricted share units are granted to participants at the discretion of management. Compensation expense, equal to the fair market value of the shares on the grant date, is recorded as an increase to contributed surplus over the vesting period. Once vested, the amount previously recognized in contributed surplus is recorded as an increase to share capital.
The Company has a cash settled deferred share unit plan, where the directors' fees are tied to the market value of the Company's common shares and payment is elected to be deferred until the director resigns from the Board. Deferred share units are recorded as a liability and are initially recognized at the fair value of the Company's shares on the grant date. The liability relating to the deferred share unit plan is revalued quarterly based on the market value of the Company's Common Shares and the resulting adjustment is recorded in income.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of substantive enactment. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized.
XVI. Risk and Uncertainties
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This document contains forward-looking statements based on current expectations that involve a number of business risks and uncertainties. The factors that could cause results to differ materially from future results expressed or implied include, but are not limited to the following: the Company's overall level of indebtedness; amount of debt maturity and potential dilution within the next year; the lack of revenues and unpredictability of future revenues; the uncertainty of the profitability of existing and contemplated products of the Company; the Company's future capital requirements; the Company's future labour requirements; competition from established competitors with greater resources; the uncertainty of developing a market for the Company's products or for third party products incorporating its products; the Company's reliance on third parties to develop, and/or sell RStandard products in North American and international markets; the risks associated with rapidly changing technology; the Company's reliance on third parties to supply raw materials in amounts and at such prices so as to allow the Company to make its patented polyurethane resin and RStandard composite products; intellectual property risks; risks associated with international operations, foreign exchange rate fluctuations and changes in general economic, market and business conditions. A detailed discussion of the Company's risk factors can be found in its annual information form for the year ended
XVII. Outlook
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Management continues to believe that the current economic climate will not have a significantly negative impact on its operations. However, even though the general economy is improving, access to credit is going to continue to be difficult and costly in the near term for RS and its customers.
Management believes that the Company's RStandard composite poles for the utility and communication markets are well positioned to take advantage of the estimated demand of
In the long-term, it is well known that
Company Outlook
In 2010, RS will continue with its short-term business strategy to increase market share of its composite pole within the North American utility and communications markets, and internationally on an opportunistic basis. RS will focus on this strategy until it can fund future operations from internally generated cash flows from existing business units.
Based on RS's contract with HDSU and the efforts of its own commercial team, the number of sales leads and projects being quoted, management believes that an increase in the sales of RStandard composite poles in both the utility and the communications markets will occur during 2010.
In addition to obtaining adequate financing for both short-term and long-term objectives, RS's goals in 2010 are to build on its 2009 achievements and continue to:
- increase our North American pole market share by working with our
distribution partner to add key North American customers and increase
the number of repeat orders from existing customers;
- focus on new transmission projects which generally have greater gross
margin potential;
- increase the composite pole production rate and production
efficiencies to meet the anticipated increase in demand;
- improve the manufacturing process to achieve positive gross margins;
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26th, 2012
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