Professional Documents
Culture Documents
Deloitte LLP
2800 - 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: 604-669-4466
Fax: 778-374-0496
www.deloitte.ca
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Cymax Stores Inc. as at December 31, 2015, and the results of its operations and its cash flows
for the year then ended in accordance with Canadian accounting standards for private enterprises.
Emphasis of Matter
Without modifying our opinion, we draw attention to Note 2 to the consolidated financial statements which
indicates that Cymax Stores Inc. has experienced net losses for the two year period ended December 31,
2015 aggregating $17,436,761, and has an accumulated deficit of $31,192,365 at December 31, 2015.
These conditions, along with a working capital deficiency of $7,080,192 as at December 31, 2015 and
other matters as set forth in Note 2, indicate the existence of a material uncertainty that may cast doubt
about Cymax Stores Inc.s ability to continue as a going concern.
Page 2
2014
$
Sales
Service revenue
Total revenue
155,865,150
156,101
156,021,251
123,640,214
47,510
123,687,724
106,666,485
111,936
106,778,421
82,102,548
39,592
82,142,140
49,198,665
44,165
49,242,830
41,537,666
7,918
41,545,584
26,768,955
16,259,790
7,313,117
2,207,776
2,121,861
785,083
751,406
749,850
452,146
223,153
186,683
57,819,820
21,778,973
13,278,055
4,191,139
2,046,318
543,905
395,292
385,173
762,077
307,262
169,356
51,667
43,909,217
(8,576,990)
(2,363,633)
166,942
321,370
805,309
2,777,375
4,070,996
85,059
253,126
426,418
1,618,395
2,382,998
(12,647,986)
24,111
(12,672,097)
(4,746,631)
18,033
(4,764,664)
(36,018)
(12,636,079)
(12,672,097)
(385,601)
(4,379,063)
(4,764,664)
(14,788,670)
(3,767,616)
(31,192,365)
(10,409,607)
(14,788,670)
Expenses
Freight expenses
Advertising and promotion
Wages and benefits
Credit card processing fees
Foreign exchange loss
Website hosting
Selling, general and administrative
Subcontractor and professional fees
Rent
Fulfillment fees
Bad debt expense
The accompanying notes to the consolidated financial statements are an integral part of
this consolidated financial statement.
Page 3
Assets
Current assets
Cash
Accounts receivable
Government remittances receivable
Claims, chargebacks and rebates receivable, net (Note 5)
Inventory
Prepaid expenses
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Government remittances payable
Current portion of capital lease obligations (Note 12)
Long-term debt (Note 13)
2015
$
2014
$
8,070,847
1,873,396
71,018
4,217,669
203,316
512,372
14,948,618
838,736
789,930
46,863
3,179,545
136,963
206,611
5,198,648
580,608
1,740,509
654,613
1,748,563
250,025
19,922,936
428,077
2,973,357
312,861
1,043,486
335,193
10,291,622
20,241,327
20,622
1,736,364
30,497
22,028,810
14,597,363
18,033
1,300,093
16,270
11,016,429
26,948,188
45,972
286,102
22,360,884
42,087
187,708
500,000
27,677,983
(417,913)
(1,427,366)
1,250,700
31,231,955
(853,824)
7,023
(2,499,296)
35,772
(31,192,365)
(2,437,948)
19,922,936
100
7,023
(1,177,448)
(14,788,670)
(17,386,361)
10,291,622
___________________________________ Director
___________________________________ Director
The accompanying notes to the consolidated financial statements are an integral part of
this consolidated financial statement.
Page 4
Investing activities
Temporary investment
Additions of property and equipment
Addition of intangible assets
Decrease (increase) in restricted cash
Financing activities
Increase (repayment) of capital lease obligations
Loan received from Frind Holdings Ltd.
Common share issuance, net of issuance costs
Preferred share issuance, net of issuance costs
Repayment to related parties
Repurchase of Medley shares
Retirement of long-term debt
Issuance of Class D common units
2014
$
(12,672,097)
(4,764,664)
166,942
321,370
253,258
85,193
98,394
2,497,257
(9,249,683)
85,059
253,126
426,418
187,708
1,065,268
(2,747,085)
(855,283)
(1,850)
(24,164)
(976,486)
(30,998)
(301,539)
3,504,301
181,758
(7,753,944)
(434,925)
18,033
(21,381)
(1,227,582)
75,607
5,441
5,701,170
1,151,273
2,520,551
(152,531)
(508,705)
(1,017,380)
1,059,240
(619,376)
(195,149)
(310,738)
(289,384)
(2,059,264)
(2,854,535)
18,111
17,837,550
1,133,663
10,113,424
(500,025)
(2,501,194)
(10,496,098)
15,605,431
(6,039)
7,232,111
838,736
8,070,847
20,334,807
50,206
35,772
7,023
984
(333,000)
1,171,736
838,736
The accompanying notes to the consolidated financial statements are an integral part of
this consolidated financial statement.
Page 5
1.
Description of business
Cymax Stores Inc. (the Company) was incorporated under the Canada Business Corporations Act.
The Company operates as an online vendor-direct retailer of furniture, and as a software services
provider to furniture manufacturers and third party furniture retailers. The Companys ecommerce sales
are primarily ready-to-assemble home, home-office, office furniture, and home decor products and are
sold mainly to consumers and businesses in the United States of America.
2.
Going concern
These consolidated financial statements have been prepared in accordance with accounting principles
that apply to a going concern. Under the going concern assumption, a company is viewed as being able
to continue its operations in the foreseeable future and realize its assets and discharge its liabilities in
the normal course of operations.
The Company has experienced losses from operations over the previous years mainly as a result of
required general, administrative and marketing expenditures made as the Company grows within the
online retail industry. The Company incurred net losses over the two-year period ended December 31,
2015 aggregating $17,436,761, with an accumulated deficit of $31,192,365 (2014 - $14,778,670) and a
working capital deficiency of $7,080,192 (2014 - $21,749,540). These conditions indicate the existence
of material uncertainty that may cast significant doubt about the Companys ability to continue as a going
concern.
The Company has existed for the past ten years by utilizing its free cash flow from sales financed by
generous terms from its vendors and some debt financing. In the past year, the Company replaced debt
with equity financing from a number of investors included among them are sophisticated e-business
investors who hold board positons with the Company.
The ability of the Company to continue as a going concern is dependent upon improving its gross
margins realized on sales, continuing to increase its sales volume and cash flows from operations, and
reducing its general and administrative expenses, and on the ability of the Company to continue to
obtain further financing to fund ongoing operations.
These consolidated financial statements do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern and therefore be required to
realize its assets and discharge its liabilities in other than the normal course of business and at the
amounts different from those reflected in the accompanying consolidated financial statements.
3.
Functional
currency
Foreign currency
translation model
US$
US$
US$
Self-sustaining
Dormant
Self-sustaining
2015
%
Ownership
2014
%
94
100
100
75
100
100
3.
Property and equipment are amortized at one-half of the annual rate in the year of acquisition.
(f) Leasehold inducements
Cash lease inducements are recorded when received and lease inducements related to rent-free
and rent-reduced periods are accrued when they occur. Leasehold inducements are deferred and
amortized as a reduction of rent expense on a straight-line basis over the term of the related lease
agreement.
(g) Intangible assets
Finite life intangible assets are amortized on the basis of their estimated useful lives using the
straight-line method and the following durations:
Domain
Internally developed software
8 years
8 years
The software is clearly identified and the related costs are itemized and reliably measured.
(ii) The Company demonstrates technical and industrial feasibility of completing the intangible
asset.
(iii) The Company indicates clear intention to complete the intangible asset and use or sell it.
(iv) The Company has the ability to use or sell the software.
(v) The software will generate probable future economic benefits.
Page 7
3.
Financial instruments
Financial assets and financial liabilities are initially recognized at fair value when the Company
becomes a party to the contractual provisions of the financial instrument. Subsequently, all financial
instruments are measured at amortized cost.
Transaction costs related to financial instruments measured at fair value are expensed as incurred.
Transaction costs related to the other financial instruments are added to the carrying value of the
asset or netted against the carrying value of the liability and are then recognized over the expected
life of the instrument using the straight-line method. Any premium or discount related to an
instrument measured at amortized cost is amortized over the expected life of the item using the
straight-line method and recognized in statement of operations as interest income or expense.
With respect to financial assets measured at cost or amortized cost, the Company recognizes in the
statement of operations an impairment loss, if any, when it determines that a significant adverse
change has occurred during the period in the expected timing or amount of future cash flows. When
the extent of impairment of a previously written-down asset decreases and the decrease can be
related to an event occurring after the impairment was recognized, the previously recognized
impairment loss is reversed in statement of operations in the period the reversal occurs.
(j)
Revenue recognition
The Company recognizes revenue from product sales when the following four criteria are met:
(i)
Product delivery has occurred, which is concurrent with shipment as the e-commerce customer
is the consignee of shipments made by the Company, or the service has been rendered.
Page 8
3.
Use of estimates
The preparation of financial statements in conformity with ASPE requires management to make
estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Significant management estimates include estimate of
the useful lives of the Companys intangible assets, accrual for foreign sales and use tax, and
assessment of the Companys ability to continue as a going concern.
Page 9
4.
Non-controlling interest
Non-controlling interests (NCI), including Canopy Capital III Investments (6% or 60 Class C common
units held in Cymax Stores USA LLC) and a minority unitholder (0.125% or 1.25 Class D common units
held in Cymax Stores USA LLC), have been included as a separate component of total equity. In
addition, the net loss on the consolidated statement of operations includes the net loss attributable to
non-controlling interests. Medley Capital Corporation (Medley) previously held a 19% interest in the
Cymax Stores USA LLC, until all 190 of the outstanding shares issued to Medley were repurchased in
2015, eliminating any related non-controlling interest at year-end.
Non-controlling interest
2015
$
(413,170)
(4,743)
(417,913)
(1,084,797)
(342,569)
(1,427,366)
2015
$
Freight claims
Vendor claims
Chargebacks
Rebates
Allowance for doubtful accounts
6.
2014
$
1,296,633
331,955
166,276
3,055,183
4,850,047
(632,378)
4,217,669
2014
$
1,577,834
225,017
298,951
1,878,833
3,980,635
(801,090)
3,179,545
Inventory
Inventory expensed during the year ended December 31, 2015 was $111,035,676 (2014 - $84,939,222)
and is included in cost of sales.
7.
Temporary investment
2015
$
2014
$
580,608
428,077
2015
$
2014
$
1,740,509
2,973,357
Restricted cash
Page 10
9.
Office furniture
Telephone equipment
Computer hardware
Computer software
Equipment under capital lease
Leasehold improvements
Cost
$
Accumulated
amortization
$
2015
Net book
value
$
2014
Net book
value
$
64,397
176,022
330,502
159,288
129,469
499,663
1,359,341
10,058
132,420
227,496
141,765
56,579
136,410
704,728
54,339
43,602
103,006
17,523
72,890
363,253
654,613
4,803
43,763
2,077
57,084
205,134
312,861
As at December 31, 2015, the cost of the leased assets was $129,469 (2014 - $105,759), with an
accumulated amortization of $56,579 (2014 - $71,184).
10.
Intangible assets
Domain
Internally developed software
Intangible assets not subject
to amortization
Trademark
Cost
$
Accumulated
amortization
$
2015
Net book
value
$
2014
Net book
value
$
117,634
3,000,707
3,118,341
15,873
1,434,073
1,449,946
101,761
1,566,634
1,668,395
5,965
991,118
997,082
80,168
3,198,509
1,449,946
80,168
1,748,563
46,404
1,043,486
During the year ended December 31, 2015, investment tax credits totaling $ NIL (2014 - $155,519) were
recorded against the intangible assets. The investment tax credits consist of Scientific Research and
Experimental Development tax credits earned on expenditures incurred under the Companys internal
software development program.
11.
2015
$
2014
$
250,025
335,193
Page 11
11.
2015
$
2014
$
500,000
During the year ended December 31, 2015 the loan with an immediate family member of the controlling
shareholder was paid off along with interest of $22,822 (2014 - $35,000).
Transactions with related parties, other than inter-corporate and shareholder loans, occur in the normal
course of operations and are measured at the exchange amount, which is the amount of consideration
established and agreed by to the related parties.
12.
$
2016
2017
2018
2019
Total minium lease payments
Less amount representing interest (at rates ranging from 2.3% to 11.5% per annum)
Present value of net minimum capital lease payments
Less: current portion
35,357
32,004
16,941
84,302
7,833
76,469
30,497
45,972
Page 12
13.
Long-term debt
2014
$
2015
$
Loan from Medley Capital Corporation (Medley)
$6,000,000 USD, bearing interest at 15% per annum,
commencing August 1, 2011. Additional $250,000 USD
debt on January 30, 2012 and $2,100,000 USD debt on
June 18, 2012. Cash interest of 11% per annum and 4%
per annum deferred interest until February 1, 2012;
after February 1, 2012 to June 18, 2012, 15% per annum
cash interest payment; thereafter, cash interest payment of 10%
per annum and 5% per annum deferred interest until maturity on
August 1, 2015. Principal and deferred interest is due and payable
at maturity. Collateralized by all assets of the consolidated
Company except first $300,000 CAD, which is security
.
Less: unamortized financing fees and transaction costs
11,265,172
(248,743)
11,016,429
During the year, the loan and the interest expense on long-term debt of $251,675 (2014 - $1,575,685)
was paid off on February 20, 2015. The remainder of the interest expense is comprised of interest
expense to Frind Holdings Ltd. of $2,497,257 and capital lease obligations of $5,621. The interest
related to Frind Holdings Ltd. relates to a long-term loan received and subsequently converted to
preferred shares during the fiscal year.
14.
Share capital
Cymax Stores USA LLC
The equity structure has changed as a result of the Class B Unit Purchase Agreement (February 20,
2015), and the Replacement Grant Agreement for the exchange of options signed with employees on
November 10, 2015 which replaced the Cymax Stores USA LLC grants, provided to all Canadian
employees, with equivalent holdings of Cymax Stores Inc. The aforementioned agreements resulted in
the following ownership of Cymax Stores USA LLC:
(a) The Company now holds 933.75 units of which 743.75 are Class A common units and 190 are
Class B common units which were repurchased by the Company from Medley Capital Corporation.
The Class B common units were repurchased for $2,501,194 plus a reduction in the deficiency
attributable to NCI of $1,266,422 resulting in a loss on repurchase of $3,767,616.
(b) The Company has outstanding 60 Class C common units held by Canopy Capital III Investments.
(c) The Company has outstanding 1.25 Class D common units as well as options to purchase 5
Class D common units held by minority unitholders.
Page 13
14.
The following common shares were converted from Cymax Stores USA LLC to the Company at
1:10,000 in 2015:
The Company converted 670 Class B common units held by Arash Fasihi from Cymax Stores USA
LLC to 6,700,000 common shares in the Company.
Number of
common shares/
options
100
6,700,000
2,251,745
8,951,845
Amount
$
100
1,250,600
1,250,700
Preferred shares
Authorized, unlimited number preferred shares without par value
Class A preferred shares accumulate a dividend at a rate of 9.25% of the issue price of $5.73 per
annum, compounded annually as and from their date of issuance. The accumulated dividend is to be
paid upon the occurrence of a liquidation event, unless the Board elects to declare and pay the dividend
prior to such an event. Unpaid dividends can be converted to common shares either on a discretionary
basis or automatically in connection with an IPO approved by the preferred A shareholders. A 15 %
increase in conversion ratio occurs upon a liquidation event or an IPO with a valuation of less than
$130,000,000.
Issued
The following preferred shares were issued in relation to the Series A investment round occurring on
August 26, 2015 with follow-on subscriptions on September 25, 2015 which in aggregate was 5,450,601
shares with no par value:
(a) The Company issued 523,560 Class A preferred shares to Frind, in addition to 3,548,830 Class A
preferred shares to convert pre-existing debt, incurred from Frind on February 20, 2015, to equity
(4,072,390 total shares issued).
(b) The Company issued 785,340 Class A preferred shares to BDC Capital Inc.
(c) The Company issued 584,109 Class A preferred shares to minority shareholders; plus, 8,274 and
488 Class A preferred shares to Salman Partners and Prodigy Capital Corporation in lieu of cash
fees for investment.
Page 14
14.
3,548,830
523,560
785,340
584,109
8,762
5,450,601
Amount
$
20,334,807
2,999,999
4,499,998
3,346,945
50,206
31,231,955
In 2015, expenses of $853,824(2014 - $Nil) were recorded as share issuance costs, a portion of which
related to the above issuance of common and preferred shares.
15.
Stock options
In 2012, the Company created a stock option plan (the Plan) whereby the subsidiary may grant stock
options to minority shareholders. The stock option plan was revised during 2015 whereby the parent
company could grant stock options to employees, minority shareholders, and board members. The
exercise price of the stock options is determined by the board of directors of the Company, but generally
will be at least equal to the market price of the share at the grant date. The stock options generally vest
over a period of four years from the date of grant and immediately become exercisable once vested. Any
stock options that do not vest as the result of a grantee leaving the Company are forfeited and the
common shares underlying them are returned to the reserve. Stock options granted generally have a
maximum contractual term of 10 years.
Canadian employee stock options granted prior to 2015 were issued by Cymax Stores USA LLC, and on
November 10, 2015, 68 of the options were exchanged for employee stock options in the Company at
1:10,000, for a total of 680,000. During the year ended December 31, 2015, the Company issued an
additional 199,640 stock options to Canadian employees and the board of directors, with an exercise
price of $3.40. Further, an employee holding stock options resigned from the Company on
December 30, 2015, forfeiting 25,000 options 30 days later on January 29, 2016. Canadian employee
stock options outstanding as at December 31, 2015 total 879,640 with a weighted average exercise
price of $1.33 (and a range between $0.55 and $3.40), and with 70,360 options remaining available to
be granted. The weighted average remaining contractual life for total outstanding options as at
December 31, 2015 and issued options during 2015 are 7.93, and 9.58 years, respectively.
Page 15
15.
Year issued
Number
issued
2012
2013
2014
2015
580,000
50,000
180,000
199,640
Average
fair value
at grant date
(per option)
Outstanding
as at
December 31,
2015
$
(i)
(i)
(i)
(i)
450,000
50,000
180,000
199,640
Year issued
2012
Number
issued
5.00
Weighted
average
fair value
at grant date
(per option)
Number
outstanding
as at
December 31,
2015
$
(i)
5.00
Total compensation cost recognized in net loss for stock-based compensation awards relating to the
options is $Nil (2014 - $Nil). The average vesting period for options granted is four years.
Key inputs into the determination of the calculated value of the stock options include the following
weighted average assumptions:
2015
Expected volatility (i)
Option life
Dividend yield
Risk free rate
(i)
16.
46.60%
3 years
1.30
2014
39.42%
4 years
1.25
The Company has determined historical volatility based comparative companies in the industry.
Warrants
Warrants issued as options in lieu of a cash fee include 4,289 to Haywood Securities Inc. and 1,954
options issues to Prodigy Capital Corp., at a value of $5.73 per option. The amount has been included
in share issuance costs and contributed surplus.
Page 16
17.
Financial instruments
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party
by failing to discharge an obligation. The Companys main credit risk relates to its accounts receivable
and claims, chargebacks and rebates receivable. The amounts disclosed in the consolidated balance
sheet are net of provision for uncollectible amounts, estimated by management based on prior
experience and their assessment of the current economic environment. As at December 31, 2015, the
balance of the Companys provision for doubtful accounts is $632,378 (2014 - $801,090). Management
reviews the receivables and provision on a monthly basis.
The Companys cash, temporary investment and restricted cash are exposed to credit risk. Cash and
temporary investment are held with a major financial institution. Restricted cash is held with reputable
credit card processors.
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates. The Company conducts its business primarily in U.S.
dollars and is exposed to foreign currency risk as the functional currency of its subsidiaries is other than
the reporting currency, the Canadian dollar. Approximately 99% of the Companys sales and purchases
are denominated in U.S. dollars. The Company is not engaged in any agreements or financial
instruments to mitigate its foreign currency risk. The following are the amounts in Canadian dollars for
which the functional currency is in U.S. dollars:
Cash
Restricted cash
Claims, chargebacks, and rebates receivable
Accounts receivable
Accounts payable and accrued liabilities
2015
$
2014
$
968,355
1,488,253
4,217,669
1,250,700
13,324,040
722,076
2,826,455
3,179,545
668,037
12,760,877
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated
with financial liabilities. The Company is exposed to this risk mainly in respect of its accounts payable
and accrued liabilities, obligations under capital leases, and operating lease commitments. Management
monitors its cash balance, and cash flows generated from operations and its free cash flow associated
with sales growth supported by generous vendor terms on a regular basis. As at December 31, 2015,
the Company has a working capital deficiency casting significant doubt on the ability to continue as a
going concern (Note 2).
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. The Companys interest rates of its capital lease
obligations and temporary investments are secured and fixed. Management monitors its interest rates
compared to market rates on a regular basis. The Company does not use derivative instruments to
reduce its exposure to interest rate risk.
Page 17
18.
Commitments
The Company has various operating leases for its premises and vehicle expiring in 2015 and thereafter.
The annual minimum lease payments are as follows:
$
2016
2017
2018
19.
1,349,732
1,296,237
1,024,872
3,670,841
Income taxes
The Company has non-capital losses totaling $23,674,374 available for carryforward for Canadian and
US income tax purposes that expire as follows:
$
2029
2030
2031
2032
2033
2034
2035
1,096,050
2,665,910
1,823,307
642,057
1,566,996
3,930,471
11,949,583
23,674,374
The Company accounts for income taxes using the taxes payable method. As a result, the Companys
income tax expense varies from the amount that would otherwise result from the application of the
statutory income tax rates as set out below.
2015
$
Loss before income taxes
Combined tax rate
Tax recovery at the applicable statutory rate
Temporary differences
Excess of amortization for accounting purposes over capital cost
allowance for income tax purposes
Non-capital losses available for future years
Permanent differences
Taxable losses available for future years
Income tax expense on unrealized intercompany profits
Income tax expense
20.
2014
$
(12,647,986)
25.92%
(3,278,358)
(98,787)
(4,746,631)
27.20%
(1,291,084)
(76,265)
82,211
3,025,877
149,425
124,079
19,664
24,111
67,755
1,047,643
269,028
956
18,033
Comparative figures
Certain comparative figures have been reclassified to conform with current years presentation. Freight
expenses for fiscal 2014 totalling $21,778,973 previously recognized in cost of sales have now been
classified as expenses.
Page 18