IONIC RARE EARTHS LIMITED — Audit Report / Information 2008

Apr 13, 2009

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Ezestream Pty Ltd

Business Valuation

Effective Date of Valuation 5[th] March 2009

www.brv.com.au

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CERTIFICATION AND CONDITIONS	3
STATEMENT OF CONTINGENT AND LIMITING CONDITIONS	4
PURPOSE & OBJECTIVE	6
FAIR MARKET VALUE	6
GOING CONCERN	6
THE BUSINESS	7
OWNERSHIP & CAPITAL STRUCTURE	7
PRODUCTS & SERVICES	7
COMPETITORS	8
BUSINESS VALUATION APPROACHES	9
INCOME APPROACH	9
ASSET BASED APPROACH	10
MARKET APPROACH	10
PER ROOMS SERVICED METHOD	10
ADJUSTMENTS AND ADD BACKS TO FINANCIALS	11
MARKET APPROACH	13
PER ROOMS SERVICED METHOD	13
CONCLUSION	14

APPENDICES

Balance sheet ratios Profit & Loss Statements Balance Sheets

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1. CERTIFICATION AND CONDITIONS

Lee Goldstein of Business Reports & Values hereby certifies the following statements regarding this business valuation:

• I have personally inspected the assets, properties, or business interests encompassed by this appraisal.

• I have no present or prospective future interest in the assets, properties, or business interests that are the subject of this business valuation.

• I have no personal interest or bias with respect to the subject matter of this report or the parties involved.

• The consideration received for making the appraisal is in no way contingent upon the value reported or upon any predetermined value.

• To the best of my knowledge and belief, the statements and facts contained in this report, upon which the analyses, conclusions, and opinions expressed herein are based, are true and correct.

• I have not performed a historical analysis of the business’s financial statements. I assume that the financial and related information supplied reflect the normal operations of the business. To the extent this is not an accurate representation, the analysis and conclusions drawn are not valid and shall not be represented in any context that implicitly or explicitly suggests that Business Reports & Values and its representatives believe the business valuation to be accurate.

• I have made all the enquiries that I believe are desirable and appropriate and that no matters of significance that I regard as relevant have to my knowledge, been withheld.

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1. CONDITIONS & ASSUMPTIONS

2. This appraisal is made subject to the following general contingent and limiting conditions:

3. Neither the facts of any legal case nor the question of liability are within the scope of my report. This report is solely concerned with addressing the limited terms of reference and should not be used for any other purpose.

4. I have relied entirely upon the documentation and items provided for my examination together with discussions on relevant aspects.

5. I assume no responsibility for the legal description or matters including legal or title considerations. Title to the subject assets, properties, or business interests is assumed to be good and marketable unless otherwise stated.

6. The subject assets, properties, or business interests are appraised free and clear of any or all liens or encumbrances unless otherwise stated.

7. I assume responsible ownership and competent management with respect to the subject assets, properties, or business interests.

8. The information furnished by David Ward is believed to be reliable and I have not undertaken any audit procedures to verify its veracity. I therefore issue no warranty or other form of assurance regarding its accuracy.

9. I reserve the right to amend this report in the light of further information.

10. I assume that there is full compliance with all applicable federal, state, and local regulations and laws unless the lack of compliance is stated, defined, and considered in the appraisal report.

11. I assume that all required licenses, certificates, consents, or legislative or administrative authority from any local, state, or national government, or private entity or organisation have been or can be obtained or reviewed for any use on which the opinion contained in this report is based.

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• Unless otherwise stated in this report, I did not observe, and I have no knowledge of, the existence of hazardous materials with regard to the subject assets, properties, or business interests. However, I am not qualified to detect such substances. I assume no responsibility for such conditions or for any expertise required to cover them.

• The analyses, opinions, and conclusions presented in this report apply to this engagement only and may not be used out of context presented herein. This report is valid only for the effective date(s) specified herein and only for the purpose(s) specified herein.

• This report has been prepared with care and due diligence. However, except for that responsibility which by law cannot be excluded, no responsibility arising in any way whatsoever for errors or omissions (including responsibility to any party for negligence) is assumed by the author, Business Reports and Values, its employees or consultants, for the preparation of this report.

• The conclusions contained in the valuation and the report will be subject to review upon presentation of data, which is undisclosed or not available at the date of this report.

• The Principal of Business Reports & Values Lee G. Goldstein has been involved in the valuing and sale of businesses since 1986. He holds a double major degree in Accounting and Finance and the Advanced Certificate of Business (Real Estate). He has been the Triennial Certificate holder and Licensee of a business broking company since 1992.

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PURPOSE & OBJECTIVE:

This report has been commissioned by the directors to appraise and to advise on the value of the business carried on by ‘Ezestream Pty Ltd’ for a possible sale.

FAIR MARKET VALUE

The mostly recognised and accepted standard of value is fair market value. The definition of fair market value is the cash, or cash equivalent, price for which property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both being adequately informed of the relevant facts.

GOING CONCERN

Our opinion of Fair Market Value relies on a “value in use” or going concern premise. This premise assumes that the business is an ongoing enterprise with management operating in a rational way with a goal of maximising the value of the business.

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THE BUSINESS

A wholly owned subsidiary of Ezenet Limited, Ezestream Pty Ltd carries on business as a dedicated complete service provider to the hospitality market, providing:

•Digital video on demand and broadband internet systems

•Scheduled pay movie systems

•Free to guest movie systems

•Movie content

OWNERSHIP & CAPITAL STRUCTURE

The business structure is one of a Pty Ltd Company.

PRODUCTS & SERVICES

Ezestream has successfully contracted 23,500 rooms throughout Australia and New Zealand with its various free to guest and pay movie systems and is recognized as a key provider of movie entertainment. More recently, Ezestream has licensed a low cost of capital guest pay movie and high speed internet system that has enabled the company to tap into the significant pay internet market in 4-5 star hotels.

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The company remains focused on growing its market share in the supply

of movie entertainment and internet services to its three target markets;

1. Hospitality

2. Mining Camps

3. Health Care

COMPETITORS

There is no shortage of competitors in this highly competitive industry.

Amongst the larger companies are Movielink, Video on Demand (VOD), Maginet and Intetouch

Telcos will have to invest in video on demand (VoD) services for future revenue, according to IT analyst Ovum.

Ovum predicts that VoD revenues will reach $12.7 billion worldwide in 2011, making it one of the fastest growing digital content services over the forecast period.

Starting from a base of $2.7 billion in 2007, the analyst expects to see more telcos across the globe launching their on-demand content propositions, moving themselves into content distribution.

The company's forecast suggests that while VoD is not a short-term revenue generator, it will play a substantial role in telcos' future income.

Telcos are facing competition from all kinds of players - from old pay TV media to new digital distribution entrants - and the pressures of network convergence. This, coupled with challenges around content acquisition costs and finding the winning VoD business model formula, will mean that it is not a source of cash for the moment.

"VoD is not a revenue generator at the moment but a 'must have' vision of the future in terms of both cash flow and telcos' content business survival," said Aleksandra Bosnjak, content and media analyst at Ovum*

*Source voiceanddata.com.au

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BUSINESS VALUATION APPROACHES

There are three generally accepted approaches to valuations. These are the income approach, the asset based approach and the market approach. Within each approach are the methods used to estimate value. The approaches and methods used may or may not be applicable to a particular valuation. Sometimes the valuation will dictate the approach and method. With respect to Ezestream a further valuation approach is applicable, that of per room serviced.

INCOME APPROACH

The theory of the income approach is that the value of the business is the present value of the future economic benefits (income stream) it’s expected to provide. The economic benefits can be determined from historical results or future projections. When using the discounted future cash flow method, forecasts are typically prepared for five years and then these economic benefits are converted to the present value using a discount rate.

The discount rate is a rate of return required by an investor for the risk involved. This method is normally appropriate when economic benefits are not stable. Another method utilised for the income approach is the capitalisation method. This method capitalises a single income stream using a capitalisation rate. This rate is the discount rate minus the longterm sustainable growth rate. Generally the capitalisation method is used when a company’s historical results are expected to continue in the future with a relatively stable growth rate.

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ASSET BASED APPROACH

The asset-based approach utilises the Company’s adjusted balance sheet as the primary focus of fair market value. This approach is important where the fair market value of a company’s assets is significantly greater than its book value. The asset-based approach may be considered when valuing a controlling interest with significantly appreciated assets such as real estate.

THE MARKET APPROACH

The market approach draws comparisons to publicly traded companies or private companies that are similar to the subject company. The market approach uses empirical evidence of value using databases for private businesses and companies.

PER ROOMS SERVICED METHOD

Similar to the process of valuing child care centres by the number of children enrolled at the centre, or real estate agencies by a factor applied to the rent roll, the method of valuing Ezestream is by applying a value to the number of rooms serviced.

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ADJUSTMENTS & ADD BACKS TO FINANCIALS

The Profit & Loss Statement presented by the vendor does not indicate to a prospective purchaser what income they might expect from the business. The preparation of an add back statement is necessary to bring the financial accounts back to a level playing field and represents the first stage in arriving at a value of the business based on its financial performance. The second stage is to apply an appropriate multiple based on industry standards to the adjusted net profit. To arrive at an adjusted profit the businesses profits and benefits plus one of the owners or managers salaries are added back including the non-cash expenses (mainly depreciation).

The Owner Benefit formula to use is:

Pre-Tax Profit + Owners Salary + Additional Owner benefits + Interest + Depreciation.

Depreciation is an expense that allows a business to deduct a certain amount of money each year from an asset so that its purchase value is reduced by its overall useful life. However, it is not an actual cash transaction. No money is physically leaving the business or changing hands. As well, when you purchase a business, it will likely be an asset sale whereby the assets come to you free and clear. You may be able to “step up” the assets’ value and depreciate them again for tax purposes. Therefore, this amount is usually added back. With a business in this industry however, depreciation is not added back, as technological changes necessitate constant upgrades and replacements. Once these adjustments have been made, a multiple, based upon a variety of factors, is applied to this number and a valuation is established.

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Profit and Loss adjustments
Item	Dec-08 2008 2007
	(6 Months)
Total Trading Income	2,251,916 4,024,241 3,271,565
Cost of Sales	662,063 1,268,201 942,305
Gross Profit	1,589,853 70.60% 2,756,040 68.49% 2,329,260 71.20%
Expenses	1,386,539 2,418,901 2,086,250
Operating Profit	203,314 337,139 243,010
Add backs
Amortisation	28,345 58,926 69,352
Interest Paid	20,164 19,902 177
Legal Costs	8,959 1,358
Total Add-backs	48,509 87,787 70,887
Adjusted OperatingProfit	251,823 424,926 313,897

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THE MARKET APPROACH

This is the most common approach used when valuing SME’s (small and medium enterprises). A return on investment (ROI) percentage is applied to the averaged adjusted profit figure derived from the add-back statement. The figure arrived at includes plant & equipment, stock and goodwill.

With regard to Ezestream an average of the eighteen months is taken. $255,760 + $366,000 = $621,760/18 x12 = $414,506.

Allowing for the increase of business and applying a ratio accordingly (15%) gives the following value $414,506 /.15 = $2,763,377. As mentioned earlier, this industry is not a short term revenue raiser. A company already in the industry may well be willing to pay a premium for Ezestream, due to the infrastructure and the number of rooms contracted. Accordingly, a figure in the region of $3,000,000 would be justifiable. As this figure is less than the written down value of the plant and equipment, which as at 30 June 2008 was $3,049,043, it could be argued that the WDV of plant and equipment should be the value

PER ROOMS SERVICED METHOD

As mentioned earlier, this industry is not a short term revenue raiser. Accordingly, a more justifiable valuation is the per rooms serviced method. Recent sales of VOD businesses in the United States have ranged from $96 US to $455 US per room. These sales are for much larger operations, and consequently achieved higher rates. Additionally they are for solely for Hotel rooms rather than the split of rooms Ezestream service. Accordingly if a value based on the method above were to be utilised, a per room valuation for Ezestream would be $ 3,000,000/23,500 = $127.66 AUS per room. This figure is very close to the lower end of the recent sales in the United States.

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CONCLUSION

Ezestream is a is a dedicated complete service provider to the hospitality market, providing digital video on demand and broadband internet systems, scheduled pay movie systems and free to guest movie systems The value of Ezestream is between $3,000,000 and $3,049,043 and a sale at a price equal to this or greater is fair and reasonable,

,

Lee Goldstein

For Business Reports and Values

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Balance sheet ratios

Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance sheet, using financial ratios (like the debt-to-equity ratio) can show you a better idea of the company’s financial condition along with its operational efficiency. It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet and the income statement.

The main types of ratios that use information from the balance sheet are financial strength ratios and activity ratios. Financial strength ratios, such as the working capital and debt-to-equity ratios, provide information on how well the company can meet its obligations and how they are leveraged. This can give investors an idea of how financially stable the company is and how the company finances itself. Activity ratios focus mainly on current accounts to show how well the company manages its operating cycle (which include receivables, inventory and payables). These ratios can provide insight into the operational efficiency of the company. There are a wide range of individual financial ratios that investors use to learn more about a company.

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Working capital ratio

This ratio is also known as "the current ratio", and is one of the bestknown measures of financial strength. The main question this ratio addresses is: "Does the business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as stock shrinking or uncollectable debtors?"

A generally acceptable current ratio is 2:1; but whether or not a specific ratio is satisfactory, depends on the nature of the business and the characteristics of its current assets and liabilities.

The minimum acceptable current ratio is obviously 1:1 but that relationship is usually playing it too close for comfort.

Because there is a time lag between paying for materials and labour used to produce your goods and the receipt of the cash for those goods, the business needs money to fund its day-to-day operations. This money is referred to as working capital and is represented by the difference between current assets and current liabilities.

The formula for working out your working capital ratio is as follows: Current Assets ($1,183,475) / Current Liabilities ($4,503,007) = $.26: 1.0

In this case it means that there is $.26 available in current assets to meet every $1 of current liability.

Liquidity Ratio

This ratio is also called "the quick ratio", and is known as the "acid test ratio" because it is one of the best measures of liquidity. This ratio is used to determine the solvency of the business or its ability to meet its immediate commitments. The liquid ratio is a much more exacting

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measure than the current ratio. By leaving out stocks and other non-cash assets, it concentrates clearly on assets that are liquid with a value that is fairly certain. It will answer the question of: "If all sales revenue should disappear, could my business meet its current obligations with the funds on hand or that can be easily accessed?"

A ratio of 1:1 is considered satisfactory unless the majority of your quick assets are in debtors and there is a pattern of debtors lagging behind rather than paying their accounts on time.

It is often referred to as the acid test. In calculating this ratio it is

important to bring in only those current assets that are in cash or can be converted readily into cash. Similarly current liabilities brought in must only be those that need to be met quickly.

The formula for this ratio is:

Current Assets – (Stock & other non-cash assets)

Current Liabilities – (Liabilities not payable in the short-term)

= $1,170,434 / 766,106 = $1.53 *

This means that there is $1.53 in cash or near cash assets to meet every $1.00 of immediate commitment.

Assuming the amounts payable to Parent Company are not payable in the short term. Debt Ratio*

This ratio measures the proportion of the total asset financed by creditors.

The debt ratio is a measure of the relationship between total liabilities and total assets and is calculated thus:

Total liabilities ($4,561,309) / Total assets ($4,248,998)

= 1.07

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Since this ratio is a measure of the margin of safety in the event of

liquidation, the lower, the greater the asset protection

Receivables Turnover

The receivables turnover is a measure of how many times the average receivables balance is converted into cash during the year. It is calculated as follows:

Receivables turnover = Net sales revenue / Average receivables balance

= $4,024,241 / (700,937 + 439,672)/2 = 7.06 times

The average collection period is 365 / 7.06 = 51.7 days

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Ezestream Profit & Loss Statements
Six Months		Dec-08
Sales	2,251,916
Convertible note-gain on extension
Research & Development Refund
Interest Rec'd	7,218
	2,259,134
Cost of Sales
Film Licence Fees & Movie Costs	468,382
Installation Costs	28,288
Cost of Equipment Sold	165,393
	662,063
Gross Profit	1,597,071
Expenses
Advertising	9,898
Amortisation Film Library	28,345
Bad Debts	855
Bank Fees	2,000
Car Expenses	4,945
Commission	144,939
Company Secretarial Fees
Computer Expenses - General	2,464
Depreciation	473,911
Digital Movies Hotel Guides	16,079
Entertainment	3,178
	-
Exchange Rate Fluctuations	1,045
Insurance	16,471
Internet Services	20,711
- Banks	20,164
Other Employee Expenses	4,157
Payroll Tax Expense	2,064

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Post, Couriers & Drive Delivery	71,577
Printing Stationery & Office Supplies	4,735
Professional Fees
Prov for Hol Pay	14,757
Prov for Long Service Leave	806
Rent	38,057
Repairs & Maintenance	5,713
Security	182
Superannuation	36,117
Telephone	19,777
Travelling	66,417
Wages & Salaries	367,908
Wages & Salaries - Contractors	11,356
	1,386,539
	-
Operating (Profit) /Loss	210,532

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