REKLAIM LTD.
Management's Discussion & Analysis
As of September 30, 2024, and 2023
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DATED: November 13, 2024
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis ("MD&A") should be read in conjunction with the consolidated financial statements of Reklaim("the Company") and the notes to those statements for the three and nine months ended September 30, 2024. The accompanying condensed consolidated interim financial statements have been prepared and are the responsibility of Reklaim's management. The consolidated financial statements, including comparatives, have been prepared per International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. Dollar amounts are expressed in Canadian dollars unless otherwise noted.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking information and statements. Except for statements of historical fact that address activities, events, or developments that the Company believes, expects, or anticipates will or may occur in the future, which constitute forward-looking statements. The Company cautions that this MD&A may contain forward-looking statements that involve several risks and uncertainties, including statements regarding the growth of the Company's user base, the Company's strategic partnerships, the Company's development of revenue generated, the Company's plans to scale its business, the introduction of new products and features, improvements to user experience on the Reklaim platform, and the outlook for the Company's business and results of operations. Forward-looking statements include those identified by the expressions "will," "may," "should," "continue," "anticipate," "believe," "plan(s)," "estimate," "project," "expect," "intend" and similar expressions to the extent that they relate to the Company or its management. These risks and uncertainties could cause results to differ materially from those indicated. Such risks and uncertainties include, but are not limited to: the Company may not be successful in acquiring data, adding accounts to its platform, or converting such accounts to users; the Company's active user base may not grow despite the Company's efforts; the Company may not be able to cultivate strategic partnerships in the future; the Company's revenue may not increase over time; the Company may not be able to scale its business; the Company may not be successful in obtaining opt-in from the accounts; the Company may not introduce any new products or features; the Company may not be able to improve user experience on the Reklaim platform; and the inability of the Company to implement its growth strategy. Forward-looking statements are provided to assist external stakeholders in understanding management's expectations and plans relating to the future as of the date of this MD&A and may not be appropriate for other purposes. Forward-looking statements are made as of the date of this MD&A, and Reklaim disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should not place undue reliance on the Company's forward-looking statements.
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Reklaim Highlights for the three and nine months ended September 30, 2024
- The Company achieved record Q3 revenue of $1,487,321 and $3,315,204 for the three and nine months ending September 30, 2024, an increase of 61% and 23% over the same periods last year.
- Positive cash flow from operations for the nine months ending September 30, 2024, was $260,062, an increase of $236,834 or 1,020% over the same period last year.
- The Company achieved positive EBITDA of $359,978 and $418,441 for the three and nine months ending September 30, 2024, respectively, compared to $174,586 and $489,997, an increase of 106% and a decrease of 15% compared to the same periods last year. The decline in YTD EBITDA was due to investments in the sales team in the first half of 2024.
- Gross Margins increased to 82% and 81% for the three and nine months ending September 30, 2024, improving by 2% and 3% compared to the same periods last year.
- The Company's cash position remained stable at $394,680 as of September 30, 2024, compared to $164,279 as of December 31, 2023.
Key Performance Indicators ("KPIs") for the three and nine months ended September 30, 2024
- Platform revenue, encompassing 'Audiences' and 'Deals' (Deals combine Reklaim data and publisher inventory in a vertically integrated buy), increased by 58% and 30% for the three and nine months ending September 30, 2024, compared to the same periods in 2023.
- Deal revenue increased by 3403% and 213% for the three and nine months ending September 30, 2024, compared to the same periods in 2023.
- Identity revenue, representing 21% of total revenue, increased by 62% and 1% for the three and nine months ending September 30, 2024, compared to the same periods in 2023.
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CEO Letter
Chapter 3, 2024
I often view these MD&A updates as chaptersin a book, a narrative that unfolds over time. This 'book' has six sections, starting in 2019, each year containing four chapters (quarters). When we launched this company in the shell of its predecessor, Freckle, the world was beginning to shelter in place as COVID-19 spread. Starting a nascent business during that time was challenging. Those first few years were capital-intensive and hard, and I am glad to have those years behind us. Business is never 'easy,' but evolving from concept to product to validation to now scale - all of these stages require very different tactics. I read the Berkshire,Dimon,Amazon, and otherCEO letters each quarter and model this essay around those. I have always appreciated the opinions of those CEOs, who have a better vantage point than the media and have always found more knowledge in these letters than what is typically found in a research report or media article. As it relates to this industry and privacy, I would like to think that I sit on a perch that provides more visibility than most, so these quarterly letters are meant to share with you what I see. Take what you will from these thoughts and views; they are not all facts, and some are just opinions. Hopefully, they will allow you to understand this market better and make more informed choices regarding your investment in Reklaimand other companies you may be looking at.
As we conclude Chapter 3 (Q3-2024) and work through Chapter 4 (Q4-2024), I encourage investors to look at previous chaptersto stay informed of the more prominent themes in the market that are impacting the Company today and in the future. Understanding the macro I highlight below will help you better understand the micro of Reklaim.
You have many choices as an investor; we appreciate you considering Reklaim.
The Market:
Q3 earnings reports from major advertising holding companies (Holdco's) and platforms indicate that the market continues to expand at a 'goldilocks' pace, neither too hot nor too cold. These holding companies serve as reliable indicators of the advertising sector's health, managing significant portions of corporate advertising budgets and comprising a portion of Reklaim's client base. Notably, Publicis, one of the four leading Holdco's, has raised its growth forecast for 2024 to approximately 5.5%. Recent Q3 results from Omnicom and Publicis revealed 5.6%and 6.5%growth, respectively, underscoring positive momentum across the sector. This sustained growth suggests a favourable market environment where Reklaim is positioned to outpace market averages. Reklaim's Q3 performance, with revenue growth exceeding 60%, demonstrates its ability to capture market share and adapt more swiftly to privacy-centric shifts, significantly surpassing the growth rates of established market players.
Looking ahead to Q4, the conclusion of political advertising- typically a significant driver of market activity in this quarter, though less so for Reklaim-will provide a clearer view of organic
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market growth as we approach 2025. While projections for Q4 remain positive, there are signs of concern among the seller community. Reklaim's recent surveyof 133 industry sellers highlights a potential market softening: 54% reported a slowdown in spending, 35% indicated stability, and only 11% observed growth. This is a slight improvement over our Q2 survey, which highlighted 63% of sellers thought the market was slowing. These insights from frontline sellers, who interact closely with market dynamics daily, underscore the need for cautious optimism. At Reklaim, however, we anticipate continued revenue acceleration, driven by an expanded network of sellers and increased brand recognition, positioning us to capitalize on broader market reach and deeper client engagement.
source:sellercrowd
The Open Web Is In BIG Trouble
In previous chapters, we discussed the impact of cookie removal on the open web and the advertising market. While Google has backtracked on this, there is a new threat that may turn out to be a larger risk than cookie depreciation: AI Overviews.
So, what exactly are AI overviews? Unlike traditional search results, where users enter a query and are presented with links to explore, AI overviews synthesize information from multiple sources and provide a complete answer directly in the search interface. Consumers no longer need to click through to publishers' sites to get the information they want. For publishers, this change is seismic. We're talking about a publisher model that sustains 50-70% of their traffic- and the ad revenue tied to it-being bypassed in a single AI stroke.
While AI overviews undoubtedly simplify the user experience by providing instant answers, they effectively act as a barrier, diverting traffic away from source sites and bottlenecking the flow of revenue back to publishers. The same search algorithms that once amplified publishers' reach now serve as gatekeepers, centralizing engagement at the search engine level and devaluing original content in the process.
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The impact is immediate and severe: reduced traffic means reduced revenue. Less revenue forces publishers to cut back on staff and content production, perpetuating a vicious cycle-less content leads to even lower traffic, and the spiral continues. Without intervention, this will spell the end for many publishers, leaving the only place for neutral content, Facebook and other social networks!
The above is an example of an AI overview. The AI-generated response is at the top of the page, followed by a series of links (Quora). In most cases, the result supplied by the AI overview is sufficient for the consumer, reducing the need to click through to an article.
AI's Insatiable Appetite for Data
One of the most paradoxical trends we're witnessing is the insatiable demand for data by AI systems, juxtaposed against the tightening grip of privacy laws. It's ironic, really-AI depends heavily on the very content it now threatens to render obsolete through mechanisms like AI overviews. But here's the critical question: What happens when the well runs dry? Where will it turn when powerhouse publishers like The New York Times and others have exhausted their AI licensing deals, and AI has mined all available public content? Inevitably, AI will pivot towards more personal consumer data to keep evolving (training). This is where the collision between AI's voracious appetite and the principles of privacy becomes unavoidable.
At Reklaim, we're not just preparing for this shift-we're positioned at the forefront. Our platform empowers consumers to control and monetize their data, allowing brands to access it in a privacy-compliant, transparent manner. This consumer-first approach isn't just about consent; it's about rethinking the value exchange in a data-centric world. With potential expansion into facilitating consumer-approved data for AI training, Reklaim could tap into a substantial new revenue stream while adhering to high standards of data ethics and privacy.
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Consider the scale: global investments in AI are forecasted to hit $500 billion by 2024, driven by industries scrambling for smarter, data-fueled models. Reklaim's evolution could seamlessly align with this trend, leveraging consumer empowerment to redefine how data feeds into the next generation of AI.
We look forward to providing updates on these trends and our progress in Q4.
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OVERVIEW OF THE BUSINESS
We are all consumers first. Every consumer has a data profile circulating on the open web. Unfortunately, none of us have access to it, nor do we know who has it, how it is being used, and whether it's being sold for profit. Reklaim is focused on changing this for the world's seven billion consumers. Reklaim's mission is to provide every consumer with access to their data, to view the data that is in the market, to see what companies are using it for, and to provide options regarding how they, the consumer, would like their data to be used, including direct compensation or protection. The future of data is driven by an acceleration towards privacy that includes the consumer in its decision-making. Reklaim aspires to be the brand facilitating this optionality and control for the consumer.
Consumers in North America can visit the Reklaimmobile application and add an email address or phone number to query what data is circulating on them today. Once validated, Reklaim cross- references this email address or phone number across data and security sources to show the currently available online data. With this transparency now supplied to a consumer, users can 'reclaim' this data by placing it in a Reklaim account they control. In a Reklaim account, users can edit, add or remove data from their profile. They can also opt-out or opt-in to be compensated in exchange for brands using their data. Should a user opt-in, they will be exposed to 'orders' from brands asking explicit permission to use the data the consumer has shared. If accepted by the consumer, they will receive weekly compensation that they can claim and redeem in various forms, including, but not limited to, PayPal. Orders are tied to a business model where the payment to the user goes up when Reklaim sells more data and down when it sells less. This is the royalty system Reklaim has created for users regarding their data. Reklaim earns a commission each time data is purchased. The more data in the platform, the more data can be sold. The more data sold, the more money the consumer (and Reklaim) makes, inspiring the consumer to share more data, which drives more sales. This is the Reklaim fly-wheel.
By offering compliant, zero-partydatato brands, agencies, data platforms, and data companies, Reklaim provides an environment where these firms can purchase this data directly from the user, solving relevant compliance, fidelity, privacy, and user consent issues. Privacy regulations have changed increasingly, forcing companies to ensure that they have explicit consent from users to use their data. As Reklaim has a direct connection to the user, Reklaim can provide this explicit consent, solving an increasing need in the market.
Reklaimbelieves there is currently no Direct-to-Consumer ("DTC") brand in the consumer data market that provides the services that Reklaim does. In addition to providing data transparency and compensation to consumers, Reklaim has added privacy features such as dark web monitoring to alert consumers to whether their data has been breached in a data hack. Reklaim aspires to be the brand for everything related to consumers and their data, not just compensation.
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OBJECTIVES
While the Company anticipates the growth of the number of consumer profiles and data per profile to continue, its focus is on driving increased profitable revenue by selling more of the data it currently has to more brands, agencies, and data companies while simultaneously expanding the distribution of Reklaim data. Profitability continues to be the company's focus. We are not prepared to burn cash on ego-driven metrics or initiatives that add unsustainable revenue or promotional visibility to the company. Investors should understand that the Company will grow as fast as its profitability and cash flow permit.
Key goals for 2024
- Grow topline revenue at a similar growth rate as experienced in 2023.
- Achieve continued profitability and generate positive cash flow for 2024.
- Reduce the amount of secured debentures outstanding.
- Reduce the number of outstanding warrants.
- Expand the number of B2B platforms that carry and expose Reklaim data to their clients.
- Focus on those data elements that require a higher level of compliance and opt-in, such as SPI and Ethnicity, and expand into Health data.
- Support a cash-neutral/cash-positive business by maintaining operating margins and cost controls and maximizing efficiencies in cloud hosting.
As we enter Q4, all 2024 goals mentioned above remain attainable. We have invested in the business to put us in a position to grow the top line and are confident we will maintain full-year profitability. Our market positioning of focusing on data that requires a higher level of compliance is resonating and is the foundation of our activity. We have agreed on a plan to eliminate the debentures and have seen a consistent exercise of warrants throughout 2024. Platforms that carry Reklaim data continue to grow. At the same time, we are eliminating those platforms that do not provide a suitable ROI for Reklaim so we can allocate our time and attention to those platforms that present more opportunities for Reklaim in the future.
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