ANNUAL REPORT
2011
ANNUAL REPORT
2011
2011 HIGHLIGHTS
Increased year over year system
sales by 15% and service related
system sales by 10%, total system
sales in 2011 were $14.9 million.
Generated $71,000 in operating
income before onetime costs
during the fourth quarter of 2011.
Generated $2,012,000 in revenue
corporate
and
location
(including
income
interest related to the purchase
locations) for the 12
of the
months ended December 31,
2011.
$364,000
in
Our Indianapolis, IN franchisee
commenced operations during
the second quarter of 2011.
Awarded three new franchises in
the fourth quarter of 2011 in
Atlanta, GA, Phoenix, AZ and
Dallas, TX.
Opened
first
international
location, in Doha, Qatar in the
third quarter of 2011.
SYSTEM SALES GROWTH (in millions - USD)
CAGR 36%
$14.9
$12.9
$9.6
$8.6
$4.4
2007
2008
2009
2010
2011
SYSTEM SALES BY TYPE - 2011
27%
73%
Service
Recycling
ANNUAL REPORT
2011
TO OUR SHAREHOLDERS
On behalf of the Board of Directors, I am pleased to present the 2011 Annual Report for Redishred
Capital Corp. (“Redishred” or “Company”).
Redishred is a publicly traded investment company listed on the TSX Venture Exchange focused on the
document shredding and recycling industry. Redishred currently owns and operates the PROSHRED®
franchise system in the United States. PROSHRED® is the pioneer of on-site document destruction and
has 19 locations in operation throughout the United States and one location in operation in the Middle
East.
PROSHRED® is focused on maximizing revenue and profit growth by:
(1) Supporting our franchisees by facilitating programs aimed at growing their sales and in turn the cash
flows generated.
(2) Expanding our location footprint in North America by way of continued franchising and by
conducting strategically located acquisitions.
(3) Increasing sales and marketing activities and focusing on route optimization in all locations.
Our management team is committed to building the PROSHRED® brand, with the view to maximizing
shareholder return on investment.
ABOUT PROFESSIONAL SHREDDING CORPORATION AND PROSHRED ®
Professional Shredding Corporation (“PSC”) is a fully owned subsidiary of Redishred that franchises the
right in the United States and internationally, outside of Canada, to sell on-site services for the
destruction and disposal of documents and other sensitive and confidential materials under the
trademark PROSHRED®. Its customers are businesses, households and other organizations that have a
need to maintain the confidentiality of their proprietary information, whether for competitive reasons,
to comply with legal requirements or otherwise. The PROSHRED® system allows businesses and
individual customers to witness the destruction of their selected paper documents, computer disks, hard
drives and other media that contain sensitive and confidential proprietary information.
ANNUAL REPORT
2011
PROSHRED® is a pioneer in the onsite document destruction industry, commencing operations in
Toronto in 1986. In 2008, Redishred purchased PSC and the brand PROSHRED® from Heron Capital
Corporation. With this acquisition, Redishred immediately obtained a solid platform that could support
future footprint growth in the US and Internationally. The platforms that were purchased included,
operating manuals, ISO manuals, software systems, and the sales and marketing materials.
As at December 31, 2011, PROSHRED® has 16 operating franchisees and 3 corporate locations in the
United States as well as an international license agreement with Averda International LLZ. to operate
throughout the Middle East region.
Locations – World Wide
30
25
20
15
10
5
0
6
6
3
13
9
1
3
2
16
17
16
16
4
5
19
2003
2004
2005
2006
2007
2008
2009
2010
2011
F2012
US Domestic - franchised
US Domestic - corporate
International
ANNUAL REPORT
2011
2011 SUCCESSES
During the challenging economic environment of the last few years we saw opportunities to continue to
grow our businesses, not only in the United States, but internationally. Some of our key successes from
last year include:
Increased year over year system sales by 15% versus the previous year;
Service related system sales increased by 10% versus the previous year;
Recycling related system sales increased by 31% versus the previous year;
Saved 328,000 trees by way of recycling shredded paper;
One new Franchisee commenced operations (Indianapolis);
Awarded three new franchises in Atlanta, Phoenix and Dallas;
Opened our first international location in Doha, Qatar, and
Generated $2,012,000 in revenue and $364,000 in corporate location income (including
interest related to the purchase of the locations) for the 12 months ended December 31,
2011.
Continued Growth in Service Revenue – The PROSHRED® system continued to grow in 2011, with total
system sales growing at a rate of 15% over the previous year. More encouraging, service related system
sales (revenues generated from providing secure shredding service to customers and does not include
recycling related revenues) grew by 10% over the prior year. This strong growth in service related
system sales is due to PROSHRED®’s focus on strong customer service and education of clients on the
security benefits of using the PROSHRED® service on a regular basis. It is PROSHRED®’s plan to continue
building service related revenue by focusing on client education at the local level, by way of initiating
new outbound lead generation programs and by enhancing our web presence in the areas of social
media and search engine optimization.
Quality and Brand – PROSHRED® continues to be the only national onsite document destruction
company in the United States to be ISO 9001 - 2008 certified for international standards in quality and
customer satisfaction, this certification was renewed in 2011. In addition, all of our franchise and
corporate locations in operation more than one year are NAID AAA certified.
Commitment to Communities and the Environment – PROSHRED®’s core values include commitment to
the communities we serve and a commitment towards a cleaner and greener environment. During
2011, PROSHRED® franchisees and corporate locations conducted 146 community shredding events.
ANNUAL REPORT
2011
These events are aimed at educating consumers on the serious ramifications of identity theft while
simultaneously allowing consumers to destroy their confidential documents on site. Our community
shredding events are often conducted in association with local charities raising funds for their worthy
causes. An important byproduct of the PROSHRED® service is the shredded paper, all paper that is
shredded is also recycled, and as a result, PROSHRED® locations shred 21,900 tons of paper in 2011,
saving 328,000 trees.
2011 CHALLENGES
Paper Prices – During the first three quarters of 2011, driven by overseas demand, recycled paper prices
continued to increase to near record highs (close to $250 per ton). This dramatic price increase caused
increased price competition as some competitors reduced prices for the service as they relied heavily on
revenues from the recycled products. PROSHRED®’s response to this challenge has been and will be to
focus its sales strategy on building strong route densities. By building strong route densities, we can
increase our truck utilization, thereby reducing our cost per stop and remaining competitive during
upward paper pricing cycle. In the last quarter of 2011, paper prices fell by more than $100 per ton,
driven by reduced demand in both overseas and domestic markets. This reduction in paper prices was
offset by slightly stronger prices for our unscheduled and one-time purge services.
PROSHRED® remains committed to our core values of honesty and transparency in our pricing
communications with our customers, as a result we do not typically include fuel, insurance or
administrative surcharges in the price of our on-site shredding services.
Franchise Development – The PROSHRED® franchise model is capital intensive, as it requires significant
investment in equipment and human resources to launch. The typical franchisee candidate has a net
worth of at least $1M. The United States credit markets continue to be poor, restricting access to
capital for potential franchisees, hence reducing the pool of qualified candidates. In order to respond to
this situation, PROSHRED® has implemented a temporary discount on initial franchise fees in order to
reduce the amount of cash required to enter the system for qualified candidates. In addition to the
franchise fee incentives, PROSHRED® management continues to work with various financing brokers and
advisors with the goal to open new financing channels for new and existing franchisees.
ANNUAL REPORT
2011
Litigation – Redishred has been working diligently to resolve the litigation brought against it by four of
its PROSHRED® franchisees. In late 2010, Redishred purchased the Wisconsin franchise, settling their
claim. On January 1, 2012, Redishred purchased the New York City franchise, settling their claim against
the Company. The Company has and will continue to work to resolve the remaining litigation in 2012.
REDISHRED CAPITAL CORP AND PROSHRED ® MOVING FORWARD
Industry Update
The following highlights the shredding market in 2011:
The shredding market continues to be a $4 billion dollar market, of which 45% ($1.8 Billion) is
outsourced to providers like PROSHRED®, and 55% ($2.2 Billion) of the market continues to
shred in-house or not at all. The market continues to grow at about 10% per annum.
The shredding market is highly fragmented, with 42% of the market being serviced by the 5
largest operators. 58% of the market is being operated by independent “mom and pop”
operators, whose revenues are under $1.5 million per annum.
Future growth is anticipated to be driven by small and medium sized enterprises who have been
late adopters of outsourced shredding services.
Total Shredding Market
Adoption by Business Size
Total: $4 billion
45%
55%
Outsourced
In-house
100%
80%
60%
40%
20%
0%
Using in house shredding
10 or less 11 to 50 51 to 100 101 to 500 500 or
more
Source: BofAML Global Research estimates (2011), Morgan Stanley (2005), Northcoast Research (2011)
ANNUAL REPORT
2011
Strategy
PROSHRED® will spend the next fiscal year focusing on our core strategies as follows:
Continuing to enhance the PROSHRED® system with the view of increasing franchisees’ sales
and profits by providing sales and marketing support to all franchisees and corporate locations;
Recruiting and awarding new franchise locations in the United States by continuing to invest in
franchise marketing activities and develop stronger relationships with business brokers;
Continuing to acquire document destruction businesses in strategically located markets that
generate recurring cash flows in select markets across the United States;
Implement a new workflow management software with enhanced routing capabilities;
By being involved in our communities by way of supporting local charities, conducting shredding
events and continuing to recycle the paper and other materials collected and destroyed; and
Achieving a minimum of $1 million in earnings before interest, taxes and depreciation from
existing corporate locations by increasing sales and marketing activities in the local market and
by continued focus on route optimization.
These activities are aimed at (1) increasing our national footprint in the United States, (2) continuing to
grow system sales, (3) enhancing Redishred’s cash flows, and (4) contributing to the communities we
operate in.
ANNUAL REPORT
2011
We believe that our strategy, combined with an improving US economy will allow us to continue to grow
our revenue, expand our footprint via franchising and acquisitions and further move towards
profitability.
In closing, the management team of Redishred Capital Corp. would like to thank our hard working and
dedicated franchisees and employees for their efforts and support in growing the PROSHRED® brand.
Furthermore, we would like to thank our board of directors, shareholders, suppliers and most
importantly our customers for their ongoing support. PROSHRED® continues to demonstrate that it is
the system of choice for on-site document destruction, and we are looking forward to continuing our
growth in 2012 and onwards.
“Jeffrey Hasham”
Jeffrey Hasham
Chief Executive Officer
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Overview of the Structure of the MD&A
The following management’s discussion and analysis (“MD&A”) for Redishred Capital Corp. (the “Company” or
“Redishred”) has been prepared by management and focuses on key statistics from the consolidated financial
report and pertains to known risks and uncertainties. To ensure that the reader is obtaining the best overall
perspective, this MD&A should be read in conjunction with material contained in the Company’s audited
consolidated financial report for the year ended December 31, 2011 and 2010. Additional information on
Redishred, including these documents and the Company’s 2011 annual report are available on SEDAR at
www.sedar.com. The discussions in this MD&A are based on information available as at April 30, 2012.
Forward Looking Statements
Certain information included in this discussion may constitute forward-looking statements. Often, but not always,
forward-looking reports can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is
expected”, “estimates”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words
and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur
or be achieved. Forward-looking reports involve known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by the forward-looking statements.
In particular, certain reports in this document discuss Redishred’s anticipated outlook of future events. These
reports include, but are not limited to:
(i)
the Company’s ability to achieve certain levels of cash flow, which may be impacted by:
a.
the number of new franchises awarded,
b.
the size of the franchise territories awarded,
c.
the growth of the system sales achieved by existing and new locations,
d.
the economic circumstances in certain regions of the United States,
e.
the number and size of acquisitions,
f.
the growth of sales achieved in corporate locations,
g.
the level of corporate overhead,
h.
the outcome of current litigation,
(ii)
(iii)
(iv)
(v)
(vi)
franchise development or the awarding of franchises, which is subject to the identification and recruitment
of candidates with the financial capacity and managerial capability to own and operate a Proshred
franchise;
acquisition activity may be impacted by the identification of appropriate assets and agreement of suitable
terms;
anticipated system sales and royalty revenue which may be impacted by industry growth levels which to
date have been driven by favourable legislation and favourable media coverage on the impacts of identity
theft;
recycling revenues may be impacted by commodity paper prices which will vary with market conditions;
and
the commencement of new franchise operations which may be delayed by the inability of the franchisee to
comply with the franchise agreement terms and conditions post execution.
1
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
These forward-looking reports should not be relied upon as representing the Company’s views as of any date
subsequent to the date of this document. Although the Company has attempted to identify important factors that
could cause actual actions, events or results to differ materially from those described in forward-looking statements,
there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended.
There can be no assurance that forward-looking reports will prove to be accurate, as actual results and future
events could differ materially from those anticipated in such statements. Accordingly, readers should not place
undue reliance on forward-looking statements. The factors identified above are not intended to represent a
complete list of the factors that could affect the Company.
Non-GAAP Measures
There are measures included in this MD&A that do not have a standardized meaning under International Financial
Reporting Standards (“IFRS”) and therefore may not be comparable to similarly titled measures presented by other
publicly traded companies. The Company includes these measures as a means of measuring financial performance.
(cid:2) System sales are revenues generated by franchisees, licensees and corporately operated locations. The
system sales generated by franchisees and licensees drive the Company’s royalty and information
technology fee revenues. The system sales generated by corporate locations are included in the
Company’s revenues.
(cid:2) Same store system sales results are indicators of performance of franchisees, licensee locations and
corporately operated locations that have been in the system for equivalent periods in 2011 and 2010.
(cid:2) Corporate operating income is the income generated by corporately operated locations. The operating
income generated is inclusive of depreciation on tangible equipment, primarily tucks and containers; it does
not include amortization related to intangibles assets or allocations for corporate overhead.
(cid:2) Operating income (loss) is defined as revenues less operating costs, interest expense, depreciation and
amortization related to the tangible assets. Depreciation and amortization for intangible assets has not been
included in this calculation.
Basis of Presentation
On January 1, 2011, under Canadian GAAP, all public reporting companies in Canada were required to adopt
International Financial Reporting Standards (“IFRS”) as GAAP. All financial information reported in this MD&A is
presented under IFRS excluding 2009 information. Please refer to the section called Adoption of International
Financial Reporting Standards on page 20 of this MD&A for a description of the impact of adopting IFRS on the
Company. The Company’s presentation currency is the Canadian dollar. The functional currency of the Company’s
foreign subsidiaries is the U.S. dollar, as it is the currency of the primary economic environment in which it operates.
Overview of Redishred Capital Corp.
Redishred Capital Corp., based in Mississauga, Ontario, Canada operates the Proshred franchising business
(defined as the business of granting and managing franchises in the United States and by way of license
arrangement in the Middle East) as well as corporate shredding businesses directly. The Company’s plan is to grow
its business by way of both franchising and the acquisition and operation of document destruction businesses that
generate stable and recurring cash flow through a scheduled client base, continuous paper recycling, and
concurrent unscheduled shredding service. As of December 31, 2011 there were 22 Proshred locations in the
United States comprised of 91.8 territories, and one international license to operate in the Middle East1. A territory in
the United States is defined as a geographic area with 7,000 businesses having 10 or more employees. A franchise
is defined as the right, granted by the Company, to operate a Proshred business in a certain geographic area(s).
During the year ended December 31, 2011, the Company announced the addition of the Indianapolis, IN, Atlanta,
GA, Phoenix, AZ and Dallas, TX franchises to the system. These franchises comprise 2.6, 6.3, 4.2 and 6.3
territories respectively. The Indianapolis franchise commenced operations in June of 2011 and the Atlanta, Phoenix
and Dallas operations are expected to commence in the first quarter of 2012. The Company also operates the
Syracuse, Albany and Milwaukee locations directly.
2
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
In addition, the Middle East licensee currently has one location in operation in Doha, Qatar. On January 1, 2012, the
Company purchased the Proshred New York City business from an existing franchisee and will operate the location
directly in 2012.
1 Middle East license includes Gulf Cooperation Council countries of Saudi Arabia, Kuwait, Bahrain, Qatar, The United Arab Emirates, the
Sultanate of Oman and the Republic of Yemen, in addition to, the Eastern Mediterranean Levant Countries of Turkey, Syria, Lebanon, Palestine,
Jordan, Iraq, and Egypt including the islands of Crete, Cyprus, Rhodes, Chios and Lesbos.
The Company’s location list is as follows:
No.
Franchise locations
Operating since
Territories
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
SPRINGFIELD, MA
TAMPA BAY, FL
DENVER, CO
CHARLOTTE, NC
PHILADELPHIA, PA
KANSAS CITY, MO
NEW HAVEN, CT
CHICAGO, IL
RALEIGH, NC
BALTIMORE, MD (includes Washington, DC)
NEW YORK CITY, NY (includes Long Island, NY)
MIAMI, FL
N. VIRGINIA, VA
ORANGE COUNTY, CA
SAN DIEGO, CA
INDIANAPOLIS, IN
June 2003
March 2004
August 2004
April 2006
September 2006
December 2006
April 2007
April 2007
June 2007
November 2007
January 2008 (1)
June 2008
July 2008
September 2009
October 2010
June 2011
Franchises in operation
2.3
2.1
3.8
3.3
5.0
4.0
3.6
3.8
4.7
6.7
11.3
5.7
3.8
3.0
2.9
2.6
68.6
No.
Corporate locations
Operating since
Territories
17.
18.
19.
SYRACUSE, NY
ALBANY, NY
MILWAUKEE, WI
March, 2004(2)
April, 2003(2)
August 2003(2)
Corporate locations in operation
Grand Total
2.5
1.2
2.7
6.4
75.0
No.
Pending franchise locations
Expected Operation
Territories
20.
21.
22.
ATLANTA, GA
PHOENIX, AZ
DALLAS, TX
3
January, 2012
January, 2012
1st quarter of 2012
Pending
6.3
4.2
6.3
16.8
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
No.
International locations
1.
DOHA, QATAR
Operating since
September 2011
Territories
-
No.
Pending international locations
Operating since
Territories
2.
DUBAI, UAE
January, 2012
-
(1) New York City was purchased by the Company on January 1, 2012, to be operated corporately.
(2) Syracuse has been corporately operated since May 1, 2010; Albany has been corporately operated since July 1, 2010; Milwaukee has been
corporately operated since January 1, 2011.
Worldwide locations
Operating Locations - World Wide
30
25
20
15
10
5
0
1
3
2
16
17
16
16
4
5
19
6
6
3
13
9
2003
2004
2005
2006
2007
2008
2009
2010
2011
F2012
US Domestic - franchised
US Domestic - corporate
International
4
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Performance Compared to 2011 Goals and Objectives
In the Company’s 2010 Annual Report, management stated its 2011 goals and objectives. A review of the
Company’s performance in meeting these goals and objectives is included below:
2011 Goals and Objectives
Performance to December 31,
2011
Comments
Grow system sales from existing
locations by 15% to $14.8M USD
compared to 2010.
Establish two new franchise
locations.
Redishred’s system sales from
all locations grew by 15% over
the year ended December 31,
2010 to a total of $14.9M. Same
store system sales grew by 16%
for the same period.
During 2011, Redishred awarded
four new franchise locations. On
May 16, 2011, Redishred
awarded the Indianapolis, IN
franchise. During the 4th quarter
of 2011, Redishred awarded the
Atlanta, GA, Phoenix, AZ and
Dallas, TX franchises.
Establish two new corporate
locations by way of acquisition or
by way of starting new locations.
Redishred had not conducted
any acquisitions or initiated any
new locations during the year
ended December 31, 2011.
Achieve a minimum of $450,000
in EBITDA from existing
Corporate locations (Syracuse,
Albany and Milwaukee).
Redishred earned $781,652 in
EBITDA (and $364,201 in
operating income) from its
Corporate locations during the
year ended December 31, 2011.
Redishred attained the annual goal.
Redishred has exceeded the annual
goal.
Redishred did not attain the annual
goal of establishing two new
corporate locations. Subsequent to
year-end, on January 1, 2012, the
Company completed the acquisition
of the New York City business from
an existing franchisee. The Company
continues to monitor the industry for
acquisition opportunities.
The Company has exceeded the
annual goal.
5
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Goals and Objectives for 2012
Management has set new objectives for 2012 as follows:
1. Grow system sales from existing locations by 10% over fiscal 2011 to a total of $16.4 million USD.
2. Award at least two franchise locations.
3. Conduct three acquisitions in 2012.
4. Generate $1 million in earnings before interest, taxes, depreciation and amortization (“EBITDA”) from our
current corporate locations, Syracuse, Albany, Milwaukee and NYC.
2012 Goals and Objectives
Strategy for Achieving Goals
Grow system sales from existing locations by
10% to $16.4M USD compared to 2011.
Award at least four franchise locations.
Conduct three acquisitions in 2012.
Provide sales support to all franchisees and corporate
locations in their sales growth efforts. Sales support will
include on-site field visits, lead generation programs and
enhanced marketing tools.
Continue to invest in franchise development marketing
activities and develop stronger relationships with business
brokers.
Will actively contact small and medium size independent
shredding operators with the view to purchase their
operations.
The Company will specifically target acquisitions in close
proximity to existing corporate locations.
Achieve a minimum of $1 million in EBITDA
from existing Corporate locations (Syracuse,
Albany, Milwaukee and New York City).
Management will focus on two key areas that drive
profitability, (1) increased sales and marketing activities in
the local market and (2) continued focus on route
optimization.
6
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Overall Performance
Selected Financial Data and Results of Operations
The following table shows selected financial data for the years ended December 31, 2011, 2010 and 2009.
For the years ended,
(in CDN except where noted)
December 31, 2011 December 31, 2010
$
$
December 31, 2009(3)
$
14,936,708
12,937,195
9,662,060
3,379,383
433,396
934,192
2,003,763
355,413
934,639
Franchise related revenue
1,367,588
1,290,052
968,827
139,883
828,944
968,827
-
-
-
(1,884,664)
-
(210,000)
(67,000)
2,011,795
(1,647,594)
364,201
(1,608,218)
(121,612)
(599,355)
(103,320)
713,711
(635,983)
77,728
(1,571,196)
(25,527)
-
(35,811)
Franchise sales and revenue data:
System sales (USD)
Total Revenue
Franchise and license fees
Royalties and service fees
Corporate location data:
Corporate location revenue
Corporate location costs(1)
Operating income from corporate
locations
On-going operating costs
Broker fees
One-time costs(2)
Bad debt expense
Depreciation and
amortization- equipment
(3,014)
(6,520)
(198,681)
Total operating costs
(2,435,519)
(1,639,054)
(2,360,345)
Operating income (loss)
(703,730)
(278,725)
(1,391,518)
Net income (loss)
(455,083)
(274,100)(4)
(2,003,043)
Loss per share
Total assets
(0.02)
(0.01) (4)
(0.09)
9,006,024
6,631,248(4)
6,279,555
Total non-current financial liabilities
5,544,805
2,790,000
-
(1) Corporate location costs include operating costs, interest expense for the use of the Company’s line of credit and depreciation and
amortization on tangible assets.
(2) One-time costs incurred in 2011 are primarily legal fees related to the defence of the current franchisee litigation against the Company and
accounting costs related to the adoption of IFRS. As of January 1, 2012, only two franchisees remained in the litigation.
(3) The year-ended December 31, 2009 is not reported under International Financial Reporting Standards.
(4) The Company has restated 2010 net loss, loss per share and total assets as the Company reversed a portion of impairment originally
incurred at the January 1, 2010 opening balance sheet. Further information can be found on page 21 under “Impact of adoption of IFRS.”
7
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
The Company operates the Proshred system, and derives revenues from franchise and other fees as well as royalty
and service related fees. In addition to operating the Proshred franchise system, the Company operates three
corporate locations in Syracuse, Albany, and Milwaukee. These corporate locations generate shredding service
revenue and recycling revenue as well as incur costs related to the marketing to and servicing of customers. The
Company also incurs costs related to managing the Proshred system, including salaries and administration.
Total Revenues
Franchising and licensing:
3 months ended December 31
12 months ended December 31
2011
$
2010
$
% Ch
2011
$
2010
$
%Ch
Franchise and license fees
371,381
246,249
51%
433,396
355,413
22%
Royalty and service fees
229,033
220,895
4%
934,192
934,639
0%
Total franchise and license related
revenue
600,414
467,144
29%
1,367,588
1,290,052
6%
During the 4th quarter of 2011, the Company entered into three franchise agreements to operate the “Proshred”
platform in Atlanta, GA, Phoenix, AZ and Dallas, TX. As a result, the Company earned $371,381 in franchise fees.
The Company derives all franchise and license related revenues in US dollars which are translated at the average
exchange rate for the period. Royalties and service fees are charged for use of the trademarks and system,
franchise and license fee revenue is generated when a franchise or license is awarded
For the three months ended December 31, 2011, royalty and fee revenues were $598,085 USD. For the year ended
December 31, 2011, royalty and fee revenues were $1,383,078 USD. Total franchise and license related revenue
for the year ended December 31, 2011 remained consistent with the prior year due to the conversion of three
franchise locations to corporate locations, which was offset by the increase in system sales. The twelve month
average depreciation of the Canadian dollar versus the US Dollar also impacted the total franchise and license
related revenue unfavourably.
Corporate Operations:
%Ch
69%
65%
3 months ended December 31
12 months ended December 31
2011
$
20101
$
2011
$
20101
$
%Ch
Shredding services
368,038
218,401
Recycling
115,145
69,734
1,437,817
544,373
164%
573,978
169,338
239%
Total shredding related revenue
483,183
288,135
68%
2,011,795
713,711
182%
1 The results for the three and twelve months ended December 31, 2010 include the corporate operations of Syracuse, which began May 1,
2010. Albany has been corporately operated since July 1, 2010; Milwaukee has been corporately operated since January 1, 2011.
Shredding service and recycling revenue is generated by our corporate locations in Albany, Syracuse and
Milwaukee. These revenues are generated in US dollars which are translated at the average exchange rate for the
period. For the three months ended December 31, 2011, shredding service and recycling revenues, denominated
in US dollars were $470,465 USD. For the twelve months ended December 31, 2011, shredding service and
recycling revenues, denominated in US dollars were $2,034,582 USD.
8
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
System Sales
Franchisees and corporate locations derive revenue by providing shredding services to their customers, and by
selling recycled paper and other recyclable by-products. These sales are commonly referred to as “system sales,”
and are the key driver of royalty and service fee revenue. System sales are denominated and reported in US dollars
during the reported periods as follows:
3 months ended December 31
2010
2011
%Ch
12 months ended December 31
2011
2010
%Ch
Total operating locations at
period end
Territories
19
75.0
18
72.4
Total system sales (USD)
$ 3,474,657
$ 3,253,687
Total system sales (CDN)
$ 3,555,269
$ 3,297,840
6%
4%
7%
8%
19
75.0
18
72.4
6%
4%
$ 14,936,708 $ 12,937,195
15%
$ 14,769,417 $ 13,335,014
11%
The following chart illustrates system sales growth by quarter since 2009.
System Sales Growth
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
Total system sales - all locations
Total system sales - same stores
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
9
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
System Sales Quarter Over Quarter:
System sales are broken into three categories, scheduled service sales, unscheduled service sales and recycling.
System Sales by Quarter (USD)
$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
4Q09
1Q10
Scheduled
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
Unscheduled
Recycling
Service related system sales, scheduled and unscheduled, were $2,641,341 for the fourth quarter of 2011, growing
by $264,806 over the fourth quarter of 2010. Same store sales for the analysis above has not been broken out as
only one new location was opened in each of 2010 and 2011. Their sales did not have a material impact.
Scheduled sales:
Scheduled sales are defined as the revenue generated from customers with regular service that may occur on a
weekly, bi-weekly, or monthly basis. Proshred sales and marketing strategies have been and continue to be focused
on this particular sales category, as this provides our franchisees and corporate locations with stable and recurring
cash flows. This resulted in continued growth in this category in the fourth quarter of 2011 versus the same quarter
in 2010.
3 months ended December 31
2011
2010
$1,733,851
$1,598,440
%Ch
8%
12 months ended December 31
2011
2010
%Ch
$ 6,866,676
$ 6,203,715
11%
Scheduled service sales
(USD)
Unscheduled sales:
Unscheduled sales are defined as the revenue generated from customers who have one-time or seasonal
requirements for document destruction. An example of unscheduled sales is when an accounting firm is required to
destroy an abundance of confidential working papers and documents after their tax season.
3 months ended December 31
12 months ended December 31
2011
2010
%Ch
2011
2010
%Ch
Unscheduled service sales
(USD)
$ 907,490
$ 778,095
17%
$ 3,565,415
$ 3,285,974
9%
10
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Recycling sales:
Recycling sales are defined as the revenue generated from the shredded paper and other material that is sold to
various recycling companies. This sales category is driven by global supply and demand for shredded paper. From
the last quarter of 2009 to the third quarter of 2011, prices for recycled paper products increased and grew to near
record highs. During the fourth quarter of 2011, prices decreased substantially from the prior quarter’s record highs.
3 months ended December 31
2011
2010
Recycling sales (USD)
$ 833,316
$ 877,152
Mix of business:
%Ch
(5)%
12 months ended December 31
2011
2010
%Ch
$ 4,504,617
$ 3,447,506
31%
Scheduled sales account for 46% of total sales for the twelve months ended December 31, 2011 and 50% of total
sales for the fourth quarter of 2011. Unscheduled sales account for 24% of total sales for the twelve months ended
December 31, 2011 and 26% of total sales for the fourth quarter of 2011. Recycling sales account for 30% of total
sales for the twelve months ended December 31, 2011 and 24% of total sales for the fourth quarter of 2011.
System Sales Mix
3 months ended December 31 2011
System Sales Mix
3 months ended December 31 2010
Scheduled
Unscheduled
Recycling
Scheduled
Unscheduled
Recycling
$ 833,316
$ 877,152
24%
26%
50%
27%
24%
49%
$ 907,490
$ 778,095
$ 1,733,851
$ 1,598,440
System Sales Mix
12 months ended December 31, 2011
System Sales Mix
12 months ended December 31, 2010
Scheduled
Unscheduled
Recycling
Scheduled
Unscheduled
Recycling
30%
24%
46%
$ 3,447,506
27%
25%
$ 6,866,676
$ 3,285,974
48%
$ 6,203,715
$ 4,504,617
$ 3,565,415
11
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
The system as a whole has continued to shred and recycle increased volumes of paper. During the twelve months
ended December 31, 2011, the system shredded and recycled 21,900 (20,400 – December 31, 2010) tonnes of
paper, which equates to 328,000 (306,500 – December 31, 2010) trees being saved.
Recycling Revenue and Tonnage
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
Total Tons
Recycling Revenue
Number of Trees Saved
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
6,000
5,000
r
e
p
a
P
f
o
s
n
o
T
4,000
3,000
2,000
1,000
-
s
e
e
r
t
f
o
r
e
m
u
N
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
12
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Operating Expenses
3 months ended December 31
12 months ended December 31
2011
$
2010
$
%Ch
2011
$
2010
$
%Ch
Salaries
General, administrative and
marketing – on-going
General, administrative and
marketing – one-time costs
Bad debt expense
Broker fees
Depreciation and
amortization - equipment
212,286
207,172
(2)%
842,155
876,349
4%
226,427
202,704
(12)%
766,063
694,847
(10)%
151,525
59,341
98,197
-
20,263
-
(100)%
(193)%
(100)%
599,355
103,320
121,612
-
(100)%
35,811
(189)%
25,527
(376)%
(2,539)
2,328
209%
3,014
6,520
54%
Total operating expenses
745,237
432,467
(72)%
2,435,519
1,639,054
(49)%
Operating expenses for the twelve months ended December 31, 2011 include expenses to support 22 Proshred
locations in operation, training and initial support for pending locations, the costs to develop new markets by way of
franchising, licensing and acquisition and the amortization of office equipment and furniture and fixtures. Also
included in operating expenses are ongoing stock exchange listing and regulatory costs, professional services,
occupancy costs and management salaries and benefits. The Company continues to closely monitor and control all
operating expenses. General, administration and marketing costs have increased over 2010 on a quarterly and year
to date basis, primarily as a result of increased accounting costs related to the adoption of IFRS and due to legal
costs associated with the defence of the current litigation against the Company.
Corporate Operations
The Company operates three shredding operations in Syracuse, NY, Albany, NY and Milwaukee, WI. These
locations represent the Company’s corporately owned and operated locations. The New York City business was
acquired on January 1, 2012 and will be included in the Company’s 2012 results.
3 months ended
December 31
12 months ended
December 31
% of
revenue
2011
$
20101
$
% of
revenue
% of
revenue
2011
$
% of
revenue
20101
$
368,038
115,145
483,183
316,774
166,411
34,271
78,240
76%
24%
100%
66%
34%
7%
16%
218,401
69,734
288,135
231,462
56,673
34,246
32,523
76%
24%
100%
80%
20%
12%
11%
1,437,817
573,978
2,011,795
71%
29%
100%
544,373
169,338
713,711
77%
23%
100%
1,230,143
61%
491,558
781,652
39%
222,153
130,536
286,915
6%
14%
71,343
73,082
69%
31%
10%
10%
53,900
11%
(10,096)
(4)%
364,201
18%
77,728
11%
Revenue:
Shredding service
Recycling
Total revenue
Operating costs
EBITDA
Depreciation – tangible
assets
Interest expense
Corporate operating
income
1 The results for the three and twelve months ended December 31, 2010 include the corporate operations of Syracuse, which began
May 1, 2010 and of Albany, which began July 1, 2010.
13
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
The following chart illustrates the last 7 quarters of results from the corporate locations:
Corporate Store Income
$550,000
$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
-$50,000
-$100,000
Q2-2010 (1)
Q3-2010 (2)
Q4-2010
Q1-2011 (3)
Q2-2011
Q3-2011
Q4-2011
Revenue
Operating income (4)
(1) Syracuse, NY was purchased on April 30, 2010.
(2) Albany, NY was purchased on June 30, 2010, operations did not commence until July 1, 2010.
(3) Milwaukee, WI was purchased on December 31, 2010, operations did not commence until January 1, 2011.
(4) Operating income is defined as revenue less operating costs, less depreciation associated with shredding trucks and other tangible assets utilized by the operation and interest expense.
Operating income (loss)
The Company posted an operating loss of $80,292 for the three months ended December 31, 2011 and an
operating loss of $693,449 for the twelve months ended December 31, 2011. The operating loss was driven by
increased professional fees offset by the continued growth of the Company’s corporate locations, which have been
accretive to Redishred’s cash flows. In addition to the cash generated from the corporate locations, the Company
generated additional revenues from awarding the Atlanta, GA, Phoenix, AZ and Dallas, TX franchises.
3 months ended December 31
2011
$
2010
$
%Ch
12 months ended December 31
%Ch
2011
$
2010
$
Operating income (loss)
(90,563)
24,681
(468)%
(703,730)
(278,725)
(159)%
Operating income (loss) –
excluding one-time costs
60,602
24,681
148%
(101,952)
(278,725)
62%
Foreign exchange
Foreign exchange (gain) loss was as follows:
3 months ended December 31
2011
$
2010
$
%Ch
12 months ended December 31
%Ch
2011
$
2010
$
Foreign exchange (gain) loss
(130,580)
186,464
170%
(66,163)
143,600
146%
14
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
All of Redishred’s revenues are denominated in US Dollars; this dependency on US dollar revenues causes foreign
exchange gains when the Canadian Dollar depreciates versus the US Dollar or when the Company incurs
significant U.S. dollar costs.
Interest income and expense
Interest income is derived from cash savings accounts held by the Company and by way of finance income related
to the financing of franchise fees. Interest expense is attributed to the use of the Company’s line of credit facility,
which bears interest at 10% per annum as well as interest on the loan agreements, which bears interest at 8.14%
per annum. All interest costs have been attributed to the acquisition of corporate locations to date.
3 months ended December 31
12 months ended December 31
2011
$
2010
$
%Ch
2011
$
2010
$
%Ch
Interest income
586
1,357
(57)%
2,946
4,945
(40)%
Interest expense
(78,240)
(32,523)
(141)%
(286,915)
(73,082)
(293)%
Depreciation and Amortization
Depreciation and amortization for the twelve months ended December 31, 2011 can be broken into two main
classes, (1) related to the purchase of PSC and the Proshred franchise business in 2008 and (2) the assets
purchased in relation to the Syracuse, Albany and Milwaukee corporate locations.
Depreciation and Amortization
Depreciation and amortization are as follows:
Franchise and license
operations
Depreciation and amortization –
equipment
Depreciation and amortization –
intangibles
3 months ended December 31
12 months ended December 31
2011
$
2010
$
%Ch
2011
$
2010
$
%Ch
(2,539)
1,630
256%
3,014
6,520
54%
263,529
69,242
(273)%
338,141
276,967
(22)%
Depreciation and amortization
260,990
70,872
260%
341,155
283,487
20%
Corporate operations
Depreciation and amortization –
equipment
Depreciation and amortization –
intangibles
34,271
34,246
0%
130,536
71,342
(83)%
41,021
4,326
(848)%
158,553
34,390
(361)%
Depreciation and amortization
75,292
38,572
(95)%
289,089
105,732
(173)%
Total
330,762
109,444
202%
630,244
389,219
62%
For the three and twelve months ended December 31, 2011, depreciation and amortization of intangibles related to
the franchise and license operations increased over the prior periods due to the reversal of a portion of impairment
at December 31, 2010. An impairment loss was recorded at January 1, 2010 with the adoption of IFRS. Refer to
page 21 under the “Impact of adoption of IFRS” for further information. For the three and twelve months ended
December 31, 2011, depreciation and amortization related to corporate operations increased significantly as a result
of the acquisition of the Milwaukee location on December 31, 2010.
15
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Income Tax
On March 17, 2008 the Company booked a future tax liability relating to the purchase of PSC and PFC. During the
twelve months ended December 31, 2011, the Company booked a tax recovery of $109,086. The recovery is
primarily due to the reversal of timing differences related to the future tax liability that was recorded upon the
acquisition of PSC as well as the reversal of impairment of intangible assets.
Net Income (Loss)
Net income (loss)
Net income (loss) –
excluding one-time
costs
3 months ended December 31
2011
$
2010
$
%Ch
12 months ended December 31
%Ch
2011
$
20101
$
423,409
213,022
99%
(455,083)
(274,100)
(66)%
574,933
213,022
170%
144,272
(274,100)
153%
The Company posted a net income of $423,409 for the three months ended December 31, 2011 as a result of the
reversal of a portion of the previous impairment related to intangible assets recorded at January 1, 2010 in the
amount of $836,919 offset by an impairment of goodwill of $247,688 (2010 reversal of impairment related to
intangible assets - $598,603). The Company also recorded a tax recovery of $109,086 in the fourth quarter of 2011.
In addition, the increase in net income in the fourth quarter of 2011 versus the fourth quarter of 2010 was driven by
franchise fees earned from three new franchisees as well as increased growth of the Company’s corporate
locations. For the twelve months ended December 31, 2011, the increase in net loss was attributable to increased
professional fees related to the defence of the current litigation against the Company and accounting costs related
to the conversion to IFRS. Refer to page 21 under the “Impact of adoption of IFRS” for further information.
16
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Selected Quarterly Results
(in CDN except where
noted)
Q4
$
2011
Q3
$
Q2
$
Q1
$
Q4
$
2010
Q3
$
Q2
$
Q1
$
System sales (USD)
3,474,657
3,978,639
3,951,035
3,530,693
3,253,687
3,371,135
3,202,222
3,108,481
Total Company revenue
1,083,597
757,315
827,278
711,192
755,279
670,695
335,777
242,013
Franchise and license
fees
371,381
-
61,989
-
246,249
109,164
-
-
Royalty and service fees
229,033
243,535
242,222
219,428
220,895
236,639
235,092
242,013
Total revenue from
franchising and
licensing
600,414
243,535
304,211
219,428
467,144
345,803
235,092
242,013
On-going operating costs
(495,516)
(409,908)
(391,075)
(415,641)
(432,367)
(415,894)
(412,077)
(360,609)
One-time costs
(151,525)
(315,541)
(87,680)
(44,609)
Broker fees
(98,197)
-
(23,406)
-
-
-
-
(25,675)
-
-
-
-
(745,237)
(725,449)
(502,161)
(460,250)
(432,367)
(441,569)
(412,077)
(360,609)
(144,823)
(481,914)
(197,950)
(240,822)
34,777
(95,766)
(176,985)
(118,596)
483,183
513,780
523,068
491,764
288,135
324,892
100,685
Corporate locations costs
(351,043)
(321,058)
(339,315)
(349,262)
(265,708)
(213,409)
(83,678)
Interest expense
(78,240)
(70,322)
(69,559)
(68,795)
(32,523)
(31,361)
(9,198)
53,900
122,400
114,194
73,707
(10,096)
80,122
7,809
-
-
-
-
60,602
(43,973)
3,925
(122,506)
24,681
(15,644)
(169,176)
(118,596)
324,925
(312,605)
(245,583)
(330,908)
196,369(1)
(81,362)
(222,006)
(217,110)
423,409
(309,946)
(244,583)
(325,908)
213,022(1)
(60,006)
(216,006)
(211,110)
574,933
5,595
(156,903)
(281,297)
213,022(1)
(60,006)
(216,006)
(211,110)
.01
(.01)
(.01)
(.01)
.01(1)
(.00)
(.01)
(.01)
(1) The Company has restated 2010 net loss and loss per share as the Company reversed a portion of impairment at December 31, 2010. The
impairment originally recorded at the January 1, 2010 opening balance sheet. Further information can be found on page 21 under “Impact
of adoption of IFRS.”
17
Total operating
expenses
Total operating income
(loss) – franchising and
licensing
Corporate locations
revenue
Total operating income
(loss) - corporate
Total operating income
(loss) – excluding one-
time costs
Income (loss) before
taxes
Profit (loss) attributable to
owners of the parent
Profit (loss) excluding
one-time costs
Basic and diluted net
income (loss) per share
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
2011
System sales experienced double digit growth in 2011 over 2010. System sales have been driven by growth in
scheduled sales and by revenues generated from the recycling of the paper by-product. As shredding customers
are serviced during business days, the quarterly system sales are impacted by the number of business days in any
given quarter. Therefore, the Company experiences higher system sales and related royalty fees and corporate
revenues in the 2nd and 3rd quarters of every year and lower system sales and related royalty fees and corporate
revenues in the 1st and 4th quarters of every year. The lower royalty fees in the 4th quarters of 2011 and 2010 have
been offset by franchise fees collected related to awarding new franchisees or licensees. The quarterly reduction in
royalty revenues in 2011 over 2010 were driven by the conversion of three franchise locations to corporate
locations, partially offset by the increase in system sales. For the 4th quarter of 2011, on-going operating costs
related to franchising and licensing include bad debt expense of $59,341 related to one franchisee.
2010
System sales have seen upward momentum since the second quarter of 2009, due to continued growth in service
related system sales, and due to very strong growth in recycling related system sales. The Company also operated
two corporate locations, resulting in increased income from this business segment. The Company in 2010 has
continued to minimize operating overheads, resulting in a 22% reduction in costs versus fiscal 2009. For the
majority of 2010, the Canadian dollar continued to strengthen versus the US dollar, resulting in tempered growth in
royalty revenues reported versus 2009.
Balance Sheet
Working capital
Total assets(1)
Total liabilities(1)
December 31, 2011
December 31, 2010
$ 2,982,233
$ 840,301
9,006,024
6,631,248
6,726,456
3,921,632
The Company entered into a line of credit facility on November 27, 2009 for a maximum amount of $4 million,
repayable on November 27, 2014, bearing interest at a fixed rate of 10% per annum, and secured by a general
security agreement over the Company’s assets. On October 31, 2011, the line of credit was increased to $5.37
million; all other terms of the agreement remained unchanged. On November 11, 2011, the Company entered into a
loan and security agreement in the amount of $240,000 denominated in US dollars, repayable on a monthly basis
until October 3, 2015. The loan bears interest at 8.14% per annum and is secured by two shredding vehicles. As of
December 31, 2011, the Company has utilized $5.37 million of the line of credit to purchase the Syracuse, Albany
and Milwaukee businesses in 2010 and the New York City business on January 1, 2012. In March 2012, the line of
credit was increased by $0.63 million to $6.0 million; all other terms of the agreement remained unchanged.
The Company issued no dividends during the year.
(1) The Company has restated 2010 total assets and total liabilities as the Company reversed a portion of impairment originally incurred at the
January 1, 2010 opening balance sheet. Further information can be found on page 21 under “Impact of adoption of IFRS.”
18
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Financial Condition / Capital Resources / Liquidity
As of December 31, 2011, the Company has working capital of $2,982,233 (December 31, 2010 - $840,301). The
Company also has access to a $5.37 million line of credit, of which $5.37 million has been drawn as of December
31, 2011. $2.5 million of the cash was used to purchase the New York City business from a current franchisee on
January 1, 2012.
The Company monitors its cash balances and cash flows generated from operations to meet its requirements.
Based on overall cash generation capacity and overall financial position, while there can be no assurance,
management believes the Company will be able to meet financial obligations as they come due over the next twelve
months. During 2010, the Company used $2.79 million of its line of credit facility to acquire the Syracuse, Albany
and Milwaukee franchises, two shredding trucks and initial working capital for the acquired businesses. On October
31, 2011, the line of credit was increased to $5.37 million and the funds were used to acquire the New York City
franchise on January 1, 2012. Subsequent to year-end, in March 2012, the line of credit was increased by $0.63
million to $6.0 million. The line of credit is repayable on November 27, 2014 with interest payments due semi-
annually, all other terms of the agreement remained unchanged. The accounts payable, accrued liabilities and notes
payable of $708,195 at December 31, 2011 (December 31, 2010 - $641,400) are due to be settled within one year
from the balance sheet date. It is management’s plan to continue its core business strategy of (1) conducting
accretive acquisitions, and (2) continuing to franchise in the United States. The Company estimates that it will be
necessary to conduct one acquisition and to award between two and four new franchise locations over the next 12
months in order to achieve a breakeven level of cash-flows. One-time franchise fees from new franchises have
historically generated between $35,000 and $100,000 per franchise location. Additionally, new franchise locations
add to recurring royalty and fee revenues.
The Company has the following lease commitments:
Less than 1 year
Between 1 and 5 years
More than 5 years
Total
Capital Assets
As at,
$
156,372
140,232
-
296,604
December 31, 2011 December 31, 2010
% Ch
$
$
Net book value
565,294
660,506
(14)%
Capital assets (not including intangible assets) decreased to $565,294 as a result of additional depreciation
expense that was offset by the purchase of additional bins and shredding containers during the year.
Off-Balance Sheet Financing Arrangements
The Company has no off-balance sheet financing arrangements.
19
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Adoption of International Financial Reporting Standards
Impact of Adoption of IFRS
Redishred has adopted IFRS effective January 1, 2010 (the transition date) and has prepared its opening balance
sheet as at that date. Prior to the adoption of IFRS the Company prepared its financial report in accordance with
previous Canadian GAAP. The Company’s consolidated financial report for the year ended December 31, 2011 is
the first annual financial report that complies with IFRS.
IFRS is premised on a conceptual framework similar to previous Canadian GAAP, however, there are significant
differences in certain matters of recognition, measurement, presentation and disclosures. While the adoption of
IFRS did not have an impact on Redishred’s reported net cash flows, it did have a material impact on the
Company’s consolidated balance sheets and statements of income.
The three months ended March 31, 2011 unaudited consolidated interim financial report was the Company’s first
financial statements reported under IFRS. As these statements represented the Company’s initial presentation of its
results and financial position in accordance with IFRS, the Company presented its opening IFRS balance sheet at
January 1, 2010. In addition, the Company disclosed the equity reconciliations of the effect of the transition from
Canadian GAAP to IFRS at January 1, 2010, March 31, 2010 and December 31, 2010 as well as the
comprehensive loss reconciliation for the three months ended March 31, 2010 and the year ended December 31,
2010. At December 31, 2011, Redishred re-stated certain balance sheet accounts in its IFRS balance sheet at
January 1, 2010 and December 31, 2010 as well as its financial results for the year ended December 31, 2010. The
impact and substance of the re-statement is described below.
Balance Sheet Impact
The most significant balance sheet impact of IFRS relates to the valuation of Redishred’s tangible and intangible
assets, and in particular the method of measuring impairment. Under previous Canadian GAAP, an impairment loss
is recognized when the asset’s carrying amount is not recoverable and exceeds its fair value. The carrying amount
is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from its
use and eventual disposition. The impairment loss is then measured as the amounts by which the carrying amount
of a long-lived asset exceeds its fair value.
Under IFRS, an impairment loss is the amount by which the carrying amount of an asset or a cash generating unit
(“CGU”) exceeds its recoverable amount. A CGU is defined as the smallest group of assets that generates cash
inflows that are largely independent of the cash flows of other assets. The recoverable amount is the higher of its
fair value less costs to sell and its value-in-use. If the recoverable amount is less than the carrying amount, then the
carrying amount is reduced to the recoverable amount. The cash inflows of a CGU are inflows of cash and cash
equivalents received from third parties. Impairment losses for assets other than goodwill are reversed in future
periods if the circumstances that led to the impairment no longer exist. The reversal is limited to restoring the
carrying amount such that it does not exceed the carrying amount that would have been determined, net of
amortization, had no impairment loss been recognized in prior periods.
Redishred measures its cash flows from individual franchisee royalty streams and from individual corporate
locations. Additionally, IFRS measures the recoverability of the carrying value of assets using discounted cash
flows. As a result, the impact of this accounting change resulted in a $2,388,818 decrease in the value of
Redishred’s tangible and intangible assets at the opening IFRS balance sheet date of January 1, 2010, which was a
52% decrease in the carrying value under previous Canadian GAAP at December 31, 2009. In its interim unaudited
financial statements for the 3 months ended March 31, 2011, Redishred reported a decrease in the value of its’
tangible and intangible assets of $3,150,000 at the opening IFRS balance sheet date.
These changes to the opening balance sheet required a corresponding tax adjustment. The tax adjustment resulted
in a $94,551 decrease in the Company’s future income tax liability as at January 1, 2010 compared to December
31, 2009 under previous Canadian GAAP. In its first quarter 2011 unaudited financial statements, the Company
reported a $477,983 decrease in the Company’s future income tax liability at January 1, 2010. The deferred tax
liability was originally recognized as the difference between the accounting value of the intangible assets and their
related tax values. The change in the impairment of intangible assets directly impacted the corresponding tax
adjustment.
20
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
The Company’s accounting for stock options was also impacted by the change to IFRS. The change resulted in a
$30,548 increase in contributed surplus at January 1, 2010.
The net difference of these adjustments flowed through Shareholders’ Equity, which decreased by $2,294,268 at
the transition date. Redishred’s previous deficit of $3,642,286 at December 31, 2009 was adjusted by $2,183,195,
resulting in a deficit of $5,825,481 under IFRS as at January 1, 2010. In its first quarter 2011 unaudited financial
statements, the Company reported a decrease of $2,672,017 to Shareholders’ Equity at the transition date and an
adjustment of $2,560,943 to the deficit at December 31, 2009, resulting in a deficit of $6,203,229 at January 1,
2010.
At December 31, 2010, the Company recovered $416,814 in depreciation recorded under previous Canadian GAAP
as a result of the impairment loss taken at the opening IFRS balance sheet. In its 2011 first quarter unaudited
financial statements, Redishred reported a $389,809 recovery in amortization directly a result of the previously
reported impairment loss at January 1, 2010.
At December 31, 2010, the Company assessed its indicators for impairment and reversals of previously recorded
impairment and determined that the recoverable amount of certain CGUs was higher than their carrying amounts
and recorded a reversal of impairment of intangible assets of $599,032. In its first quarter 2011 unaudited financial
statements, the Company did not report a reversal of impairment of intangible assets. The reversal of previously
recorded impairment and the recovery of amortization directly impacted the deferred tax liability. The deferred tax
liability was increased by $47,422 at December 31, 2010. Redishred previously reported an increase of $40,487 to
the deferred tax liability.
Please refer to note 25 of Redishred’s 2011 audited consolidated financial statements for a reconciliation of equity
from previous Canadian GAAP to IFRS as at January 1, 2010 and December 31, 2010.
Income Statement Impact
In adopting IFRS, Redishred restated its income statement for the year ended December 31, 2010. The accounting
changes resulted in a net loss based under IFRS of $274,100, compared to a net loss of $1,217,490 under previous
Canadian GAAP. This change was primarily attributable to a $416,814 decrease in amortization as a result of the
impairment impact at the transition date as well as an increase in future income tax expense of $47,558. The
Company also adjusted its share-based payments in order to comply with IFRS standards, which resulted in a
$28,322 decrease in general and administrative expense. Lastly, the acquisition costs related to the business
combinations entered into in 2010 were expensed rather than capitalized as previously required under Canadian
GAAP. This resulted in an increase in general and administrative expense of $53,352. In its first quarter 2011
unaudited financial statements, the Company reported a net loss based under IFRS of $890,614 due to the
reduction of impairment loss determined at the opening balance sheet which directly impacted the amortization and
deferred tax liability during the year ended December 31, 2010.
Please refer to note 25 of Redishred’s 2011 audited consolidated financial statements for a reconciliation of
comprehensive loss as reported under previous Canadian GAAP to IFRS for the year ended December 31, 2010.
Variability of Results with IFRS
Redishred’s consolidated operating results may vary substantially from year to year for a number of reasons,
including the following: the current economic environment including volatility of currency exchange rates; the
change in value of stock-based compensation; changes in tax legislation or in the application of tax legislation; and
activities at Redishred’s operating subsidiaries. These activities may include the purchase of businesses;
fluctuations in customer demand and employee related costs; changes in the mix of revenue earned; changes in the
financing of the business; impairments of goodwill, intangible assets or long lived assets; and litigation.
21
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Elections Applied in Adopting IFRS
In preparing this consolidated financial report in accordance with IFRS 1, First-time Adoption of International
Financial Reporting Standards (“IFRS 1”), the Company has applied certain of the optional exemptions from full
retrospective application of IFRS. The optional exemptions applied are described below.
Business combinations – IFRS 1 allows for the guidance under IFRS 3 (revised), Business Combinations, to be
applied either retrospectively or prospectively. Redishred has elected to adopt IFRS 3 (revised) prospectively.
Accordingly, all business combinations on or after January 1, 2010 will be accounted for in accordance with IFRS 3
(revised).
Cumulative translation differences – IAS 21, The Effects of Changes in Foreign Exchange Rates, requires an entity
to determine the translation differences in accordance with IFRS from the date on which a subsidiary was formed or
acquired. IFRS 1 allows cumulative translation differences for all foreign operations to be deemed zero at the date
of transition to IFRS, with future gains or losses on subsequent disposal of any foreign operations to exclude
translation differences arising from periods prior to the date of transition to IFRS. Redishred deemed all cumulative
translation differences to be zero on transition to IFRS.
In preparing this consolidated financial report in accordance with IFRS 1 the Company has applied certain
mandatory exceptions from full retrospective application of IFRS. The mandatory exceptions applied from full
retrospective application of IFRS are described below.
Estimates – Hindsight is not used to create or revise estimates. The estimates previously made by the Company
under Canadian GAAP will not be revised for the application of IFRS except where necessary to reflect any
differences in accounting policies between IFRS and Canadian GAAP.
Future Accounting Policy Changes
The following revised standards and amendments are effective for annual periods beginning on or after January
1, 2013 with earlier application permitted unless otherwise noted. The Company has not yet assessed the impact
of these standards and amendments or determined whether it will early adopt them.
(i) IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple category and measurement models in IAS 39
for debt instruments with a new mixed measurement model having only two categories: amortized cost
and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments.
Such instruments are either recognized at fair value through profit or loss or at fair value through
other comprehensive income. Where equity instruments are measured at fair value through other
comprehensive income, dividends are recognized in profit or loss to the extent that they do not clearly
represent a return of investment; however, other gains and losses (including impairments) associated
with such instruments remain in accumulated comprehensive income indefinitely. This standard is
effective on or after January 1, 2015.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried
forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement,
except that fair value changes due to credit risk for liabilities designated at fair value through profit
and loss are generally recorded in other comprehensive income.
(ii)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has
power over the investee, is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee. Unde r existing
IFRS, consolidation is required when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12, Consolidation—
Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements.
22
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
(iii) IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint
venture or joint operation. Joint ventures will be accounted for using the equity method of accounting
whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and
expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately
consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint
Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions by Venturers.
(iv) IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in
other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured
entities. The standard carries forward existing disclosures and also introduces significant additional
disclosure that address the nature of, and risks associated with, an entity’s interests in other entities.
(v)
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and
disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that
would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market
participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair
value is dispersed among the specific standards requiring fair value measurements and does not always
reflect a clear measurement basis or consistent disclosures.
(vi) There have been amendments to existing standards, including IAS 27, Separate Financial Statements
(IAS 27), and IAS 28, Investments in Associates and Joint Ventures (IAS 28). IAS 27 addresses
accounting for subsidiaries, jointly controlled entities and associates in non -consolidated financial
statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes
in IFRS 10 – 13.
(vii) IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items
presented in OCI into two groups, based on whether or not items may be recycled in the future. Entities
that choose to present OCI items before tax will be required to show the amount of tax related to the two
groups separately.
(viii)
IFRS 7, Financial Instruments: Disclosures, has been amended to include additional disclosure
requirements in the reporting of transfer transactions and risk exposures relating to transfers of financial
assets and the effect of those risks on an entity’s financial position, particularly those involving
securitization of financial assets. The amendment is applicable for annual periods beginning on or after
July 1, 2011, with earlier application permitted.
Transactions with Related Parties
Mr. Mark MacMillan, a Director of the Company is the owner of the Tampa, Florida Proshred franchise. Included in
accounts and notes receivable at December 31, 2011, is $1,592 (December 31, 2010 - $9,141) due from the
Director’s franchise. During the year ended December 31, 2011, the Company earned royalty and service fee
amounts of $87,165 (December 31, 2010 - $79,560) from the Director’s franchise.
Included in selling, general and administrative expenses for the year ended December 31, 2011 are insurance
premium amounts of $15,317 (December 31, 2010 - $16,929) paid to Alfred J. Bell & Grant Ltd, owned by a Director
of the Company.
All related party transactions have been recorded at their exchange amounts.
23
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Risks and Uncertainties
The Company’s financial performance is likely to be subject to the following risks:
Competition
The Company competes with numerous owners and operators in the document destruction business, some of which
own or may in the future own, businesses that compete directly with the Company and some of which may have
greater resources. Direct competitors to the Company include Iron Mountain Incorporated, Recall, Shred-It America,
Inc., Cintas, Brinks and other small, independent mobile shredding businesses.
Negative Near-Term Cash Flow
The Company is still in its early stage of development and has not yet reached the size and scale to generate
sufficient royalty and fee revenues to produce a positive cash flow from its franchise system. Accordingly, the
Company may require additional capital to operate and grow so as to reach this necessary critical mass.
Additionally, the Company will continue to identify and evaluate other shredding businesses or related assets with a
view to acquiring such businesses or assets that are accretive to the cash flows of the Company. In order to
complete these acquisitions, the Company may be required to seek additional financing.
Franchising Strategy
The Company’s business strategy involves the establishment of new Franchises. The Company may not be
successful in establishing new Franchises and the failure to do so will slow the Company’s growth. Furthermore,
even if the Company were successful in establishing new Franchises, these new Franchises may fail to perform as
expected and management of the Company may underestimate the difficulties, costs, management time and
financial and other resources associated with terminating these Franchises or ensuring their continued operation. If
the new Franchises fail to perform as expected or incur significant increases in projected costs, the Company’s
revenues could be lower, and its operating expenses higher, than expected.
Acquisition Strategy
The Company’s business strategy involves expansion through acquisitions and business development projects.
These activities require the Company to identify acquisition or development candidates or investment opportunities
that meet its criteria and are compatible with its growth strategy. The Company may not be successful in identifying
document destruction businesses that meet its acquisition or development criteria or in completing acquisitions,
developments or investments on satisfactory terms. Failure to complete acquisitions or developments will slow the
Company’s growth. The Company could also face significant competition for acquisitions and development
opportunities. The Company may also require additional financing to conduct acquisitions. Some of the Company’s
competitors have greater financial resources than the Company and, accordingly, have a greater ability to borrow
funds to acquire businesses.
These competitors may also be willing and/or able to accept more risk than the Company can prudently manage,
including risks with respect to the geographic concentration of investments and the payment of higher prices. This
competition for investments may reduce the number of suitable investment opportunities available to the Company,
may increase acquisition costs and may reduce demand for document destruction services in certain areas where
the Company’s business is located and, as a result, may adversely affect the Company’s operating results.
Corporate Locations
The Company’s newly acquired businesses may fail to perform as expected and management of the Company may
underestimate the difficulties, costs, management time and financial and other resources associated with the
integration of the acquired businesses. In addition, any business expansions the Company undertakes is subject to
a number of risks, including, but not limited to, having sufficient ability to raise capital to fund future expansion, and
having sufficient human resources to convert, integrate and operate the acquired businesses. If any of these
problems occur, expansion costs for a project will increase, and there may be significant costs incurred for projects
that are not completed.
24
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
In deciding whether to acquire or expand a particular business, the Company will make certain assumptions
regarding the expected future performance of that business. If the Company’s acquisition or expansion businesses
fail to perform as expected or incur significant increases in projected costs, the Company’s revenues could be
lower, and its operating expenses higher, than expected.
International Strategy
The Company’s business strategy involves expansion into international markets through licensing. These activities
require the Company to identify international candidates and meet its criteria and are compatible with its growth
strategy. The Company may not be successful in identifying licensees that meet its licensing criteria. Failure to
expand internationally will slow the Company’s growth. Additionally, the international licensee under the Companies
current license agreement may fail to perform as expected and management of the Company may underestimate
the difficulties, costs, management time and financial and other resources associated with ensuring their continued
growth. If the international licensee fails to perform as expected, the Company’s revenues could be lower.
Currency Fluctuations
The Company’s principal executive office is in Canada, all the directors and officers of the Company are Canadian
and many significant expenses of the Company are in and will be for the foreseeable future in Canadian dollars,
while revenues will be measured in US dollars or other currency. Accordingly, the financial results of the Company
will be impacted by fluctuations in currencies and rates.
Expansion to New Markets
It is the plan of management to continue expanding the Proshred Franchise Business in the United States and
internationally including areas where customers are unfamiliar with the Proshred brand. The Company will need to
build brand awareness in those markets through greater investments in advertising and promotional activity than in
existing markets, and those activities may not promote the Proshred brand as effectively as intended, if at all. Many
of the United States and international markets into which management intends to expand will have competitive
conditions, consumer tastes and discretionary spending patterns that differ from existing markets. Franchises in
those markets may have lower sales and may have higher operating or other costs than existing Franchises. Sales
and profits at Franchises opened in new markets may take longer to reach expected levels or may never do so.
Litigation
The Company may become subject to disputes with employees, franchisees, customers, commercial parties with
whom it maintains relationships or other parties with whom it does business. Any such dispute could result in
litigation between the Company and the other parties. Whether or not any dispute actually proceeds to litigation, the
Company may be required to devote significant resources, including management time and attention, to its
successful resolution (through litigation, settlement or otherwise), which would detract from management’s ability to
focus on the Company’s business. Any such resolution could involve the payment of damages or expenses by the
Company, which may be significant. In addition, any such resolution could involve the Company’s agreement to
certain settlement terms that restrict the operation of its business. Further details on pending or current litigation
may be found in note 20 to the 2011 audited financial statements.
Use of estimates and judgements
The preparation of the financial report in conformity with IFRS requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.
These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of
the revision and future periods if the revision affects both current and future periods.
25
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Subjects that involve critical assumptions and estimates and that have a significant influence on the amounts
recognized in the consolidated financial report are further described as follows:
i) Business combinations
In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at the
date of acquisition at their respective fair values, which represents a significant estimate. If any intangible assets are
identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent
valuation expert may develop the fair value, using appropriate valuation techniques, which are generally based on a
forecast of the total expected future net cash flows. These valuations are linked closely to the assumptions made by
management regarding the future performance of the assets concerned and any changes in the discount rate
applied. In certain circumstances where estimates have been made, the Company may obtain third-party valuations
of certain assets, which could result in an amendment of the fair value allocation.
ii) Impairment
The Company reviews goodwill at least annually and other non-financial assets when there is any indication that the
asset might be impaired. The determination of the value in use and fair value of a CGU to which goodwill is
allocated to involves the use of estimates by management. The Company uses discounted cash flow based
methods to determine these values. These discounted cash flow calculations typically use five-year projections that
are based on the operative plans approved by management. Cash flow projections take into account past
experience and represent management’s best estimate of future developments. Cash flows after the planning
period are extrapolated using estimated growth rates. Key assumptions on which management has based its
determination of fair value less costs to sell and value-in-use include estimated growth rates, discount rates, future
cash flows, margins and tax rates. These estimates, including the methodology used, can have a material impact on
the respective values and ultimately the amount of any impairment.
Investor Relations Activities
The Company does not have any investor relations arrangements.
Share Data
The Company’s authorized share capital is unlimited common shares without par value. As at December 31, 2011,
there were 28,884,658 issued and outstanding common shares. As at December 31, 2011 there were 1,677,500
options to acquire common shares and 4,000,000 warrants to acquire common shares. There have been 150,000
options granted during the twelve months ended December 31, 2011 (December 31, 2010 – 350,000). As of April
30, 2012 there are 28,884,658 issued and outstanding common shares, 1,677,500 options to acquire common
shares and 4,000,000 warrants to acquire common share.
Governance
We maintain a set of disclosure controls and procedures designed to ensure that information required to be
disclosed in filings made pursuant to National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and
Interim Filings (“NI 52-109”) is recorded, processed, summarized and reported within the time periods specified in
the Canadian Securities Administrators’ rules and forms. Our Chief Executive Officer and Chief Financial Officer
have evaluated the design and effectiveness of our disclosure controls and procedures as of December 31,
2011. They have concluded that our current disclosure controls and procedures are designed to provide, and do
operate to provide, reasonable assurance that (i) information required to be disclosed by the Company in its annual
filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed,
summarized and reported within the prescribed time periods, and (ii) material information regarding the Company is
accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief
Financial Officer to allow timely decisions regarding required disclosure.
26
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Additionally, the Chief Executive Officer and the Chief Financial Officer are responsible for establishing and
maintaining Internal controls over financial reporting (“ICFR”). ICFR are designed to provide reasonable assurance
regarding the reliability of the Company’s financial reporting and its preparation of financial statements for external
purposes in accordance with IFRS. There have been no changes in the Company's ICFR during the year ended
December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our ICFR.
Contingencies
On June 18, 2010, three franchisees filed a complaint with the United States District Court, South District of New
York, which management of the Company believes is without merit. The complaint has listed the following causes
of action, (1) breach of contract and breach of the implied covenant of good faith and fair dealing by PFC, (2)
fraudulent misrepresentation by PFC, (3) negligent misrepresentation by PFC, and (4) violation of various state laws
by PFC. These franchisees are located in Florida, North Carolina and Wisconsin. On July 13, 2010, one additional
franchisee located in New York State joined the aforementioned complaint. On December 31, 2010, in conjunction
with the purchase of the Proshred Wisconsin business by the Company, the Wisconsin franchisee permanently
withdrew from the legal complaint. Subsequent to year-end, on January 1, 2012, in conjunction with the purchase of
the Proshred New York City business by the Company, the New York City franchisee permanently withdrew from
the legal complaint. As of January 1, 2012, two franchisees remain in the legal complaint.
The Company intends to vigorously defend against this claim. The Company is strongly of the view that it (1) has
not breached any contracts or agreements with its franchisees and has acted in good faith with all franchisees, (2)
has not made any fraudulent misrepresentations to any franchisees, (3) has not made any negligent
misrepresentations to any franchisees, and (4) has complied with all state laws as well as Federal Trade
Commission rules and regulations regarding franchising.
The final outcome with respect to this claim cannot be predicted nor can the costs to defend this claim be quantified
with certainty and therefore there can be no assurance that its resolution will not have an adverse effect on the
Company’s consolidated financial position. No amounts, other than legal costs, have been accrued in these
consolidated financial statements relating to this claim.
Subsequent Events
On January 1, 2012, the Company completed the acquisition of the Proshred New York City business from an
existing franchisee for an aggregate purchase price of $2,569,000 USD’s. The Company withdrew from its line of
credit facility and has obtained vendor financing relating to the purchase of the New York City assets. In conjunction
with the purchase of the business, the exiting franchisee withdrew from the legal complaint filed against the
Company in June 2010. The New York City operating results will be included in the 2012 financial statements.
On January 31, 2012, the Company announced that it has entered into an agreement with its Chicago South
franchisee to franchise the Chicago North territory. The Chicago South franchisee has also renewed his Franchise
Agreement for an additional five year period. The Company will recognize $93,300 USD’s in franchise fee revenue
in the 1st quarter of 2012.
In March 2012, the line of credit was increased by $0.63 million to $6.0 million; all other terms of the agreement
remained unchanged.
Dated: April 30, 2012
27
RediShred Capital Corp.
Consolidated Financial Statements
December 31, 2011 and 2010 and January 1, 2010
(expressed in Canadian dollars)
April 30, 2012
Management’s Responsibility for the Financial Statements
The accompanying consolidated financial statements of RediShred Capital Corp. have been prepared by
the Company’s management. The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards and contain estimates based on management’s
judgment. Internal control systems are maintained by management to provide reasonable assurances
that assets are safeguarded and financial information is reliable.
The Board of Directors of the Company are responsible for ensuring that management fulfils its
responsibilities for financial reporting and is ultimately responsible for reviewing and approving the
financial statements and the accompanying management discussion and analysis. The Board carries out
this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board of Directors. It meets with the Company’s management
and auditors and reviews internal control and financial reporting matters to ensure that management is
properly discharging its responsibilities before submitting the financial statements to the Board of Directors
for approval.
PricewaterhouseCoopers LLP, appointed as the Company’s auditors by the shareholders, has audited
these consolidated financial statements and their report follows.
(signed) “Jeffrey Hasham”
Chief Executive Officer
Mississauga, Ontario
(signed) “Kasia Pawluk”
Chief Financial Officer
Mississauga, Ontario
April 30, 2012
Independent Auditor’s Report
To the Shareholders of
RediShred Capital Corp.
We have audited the accompanying consolidated financial statements of RediShred Capital Corp. and its
subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2011,
December 31, 2010 and January 1, 2010 and the consolidated statements of comprehensive loss,
changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and
the related notes, which comprise a summary of significant accounting policies and other explanatory
information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of RediShred Capital Corp. and its subsidiaries as at December 31, 2011, December 31, 2010
and January 1, 2010 and their financial performance and their cash flows for the years ended December
31, 2011 and December 31, 2010, in accordance with International Financial Reporting Standards.
(signed) “PricewaterhouseCoopers LLP”
Chartered Accountants
PricewaterhouseCoopers LLP, Chartered Accountants
Summit Place, 1601 Lower Water Street, Suite 400, Halifax, Nova Scotia, Canada B3J 3P6
T: +1 (902) 491 7400, F: +1 (902) 422 1166, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
RediShred Capital Corp.
Consolidated Statements of Financial Position
As at December 31, 2011 and 2010 and January 1, 2010
(expressed in Canadian dollars)
Assets
Current assets
Cash
Cash attributable to Ad Fund (note 5)
Trade receivables (note 6)
Prepaid expenses
Notes receivable from franchisees (note 7)
Income taxes recoverable
Total current assets
Non-current assets
Notes receivable from franchisees (note 7)
Equipment (note 9)
Deferred financing charges (note 10)
Intangible assets (note 11)
Goodwill (notes 12 and 13)
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 14)
Notes payable
Deferred revenue
Current portion of long-term debt (note 15)
Total current liabilities
Non-current liabilities
Long-term debt (note 15)
Deferred tax liability (note 19)
Total liabilities
Shareholders’ Equity
Total liabilities and shareholders’ equity
Commitments and contingency (note 20)
December 31,
2011
$
December 31,
2010
$
January 1,
2010
$
3,011,786
137,818
460,114
63,596
62,859
17,603
3,753,776
183,619
565,294
66,259
3,558,806
878,270
9,006,024
686,167
22,028
10,170
53,176
771,541
5,544,805
410,110
6,726,456
2,279,568
9,006,024
988,592
–
414,910
45,021
33,178
–
1,086,036
–
321,588
16,850
24,445
11,062
1,481,701
1,459,981
108,705
660,506
88,345
3,179,759
1,112,232
139,781
4,505
110,431
2,176,038
–
6,631,248
3,890,736
513,559
127,841
–
–
641,400
2,790,000
490,232
3,921,632
340,021
–
–
–
340,021
–
551,449
891,470
2,709,616
2,999,266
6,631,248
3,890,736
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the Board of Directors
(signed) “Phillip H. Gaunce” Director
(signed) “Brad Foster” Director
RediShred Capital Corp.
Consolidated Statements of Comprehensive Loss
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
Revenue
Corporate operating locations expenses (note 17)
Selling, general and administrative expenses (note 18)
Reversal of impairment of intangible assets (note 13)
Impairment of goodwill (note 13)
Interest expense
Interest income
Loss before income taxes
Income taxes (note 19)
Net loss for the year
Other comprehensive income (loss), net of tax
Foreign currency translation gain (loss)
Comprehensive loss for the year
Net loss per share
Basic and diluted
2011
$
2010
$
3,379,383
(1,519,232)
(2,729,582)
836,919
(247,688)
(286,915)
2,946
2,003,763
(747,065)
(2,081,707)
598,603
–
(73,082)
4,945
(564,169)
(294,543)
109,086
20,443
(455,083)
(274,100)
7,927
(74,450)
(447,156)
(348,550)
(0.02)
(0.01)
Weighted average number of commons shares outstanding – basic
and diluted
28,884,658
28,884,658
The accompanying notes are an integral part of these consolidated financial statements.
RediShred Capital Corp.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
Capital
stock
and
warrants
$
(note 16)
Contributed
surplus
$
Accumulated
other
comprehensive
income (loss)
$
Total
shareholders’
equity
$
Deficit
$
Balance – January 1, 2010
8,585,808
238,939
Net loss for the year
Other comprehensive income
Foreign currency translation
loss
Comprehensive loss for the year
Stock-based compensation
(note 16)
–
–
–
–
–
–
–
58,900
–
–
(5,825,481)
2,999,266
(274,100)
(274,100)
(74,450)
–
–
–
–
–
(74,450)
(348,550)
58,900
Balance – December 31, 2010
8,585,808
297,839
(74,450)
(6,099,581)
2,709,616
Net loss for the year
Other comprehensive income
Foreign currency translation
gain
Comprehensive loss for the year
Stock-based compensation
(note 16)
–
–
–
–
–
–
–
17,108
–
(455,083)
(455,083)
7,927
–
–
–
–
–
7,927
(447,156)
17,108
Balance – December 31, 2011
8,585,808
314,947
(66,523)
(6,554,664)
2,279,568
The accompanying notes are an integral part of these consolidated financial statements.
RediShred Capital Corp.
Consolidated Statements of Cash Flows
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
Cash provided by (used in)
Operating activities
Net loss for the year before income taxes
Items not affecting cash
Amortization of equipment and intangible assets
Stock-based compensation
Unrealized foreign currency loss (gain)
Impairment of goodwill
Reversal of impairment intangibles
Allowance for doubtful receivables
Impairment of note receivable
Loss on settlement of pre-existing relationship
Interest income
Interest expense
Interest received
Interest paid
Income taxes paid
Net change in non-cash working capital balances
Decrease (increase) in trade receivables
Decrease (increase) prepaid expenses
Decrease (increase) in income taxes recoverable
Increase (decrease) in deferred revenue
Increase (decrease) in accounts payable and accrued liabilities
Increase (decrease) in notes payable
Financing activities
Borrowings from long-term debt
Investing activities
Cash paid on acquisition of franchises
Cash held by Ad Fund
Payment of notes payable related to the acquisition of assets
Purchase of capital assets
Increase in notes receivable from franchisees
Collection of notes receivable from franchisees
Effect of foreign exchange rate changes on cash
Net change in cash for the year
Cash – Beginning of year
Cash – End of year
2011
$
2010
$
(564,169)
652,330
17,108
(59,474)
247,688
(836,919)
43,992
59,328
–
(2,946)
286,915
2,938
(267,367)
(17,115)
(437,691)
(79,197)
(17,555)
–
9,888
165,288
(106,424)
(465,691)
(294,543)
411,307
58,900
101,434
–
(598,603)
23,883
11,929
149,775
(4,945)
73,082
3,472
(60,263)
(1,445)
(126,017)
(127,246)
(29,546)
10,543
–
173,021
–
(99,245)
2,802,902
2,790,000
–
(135,122)
–
(29,821)
(196,706)
38,284
(2,259,490)
–
(35,135)
(473,205)
(25,765)
28,677
(323,365)
(2,764,918)
9,348
2,023,194
(23,281)
(97,444)
988,592
1,086,036
3,011,786
988,592
The accompanying notes are an integral part of these consolidated financial statements.
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
1 Corporate information and nature of operations
RediShred Capital Corp. (“Redishred” or the “Company”) was incorporated under the Canada Business
Corporations Act on October 18, 2006 and is domiciled in Canada. The Company’s common shares were listed
for trading on the TSX Venture Exchange on September 5, 2007, as a Capital Pool Company. The Company’s
business, until March 17, 2008, was the identification and evaluation of shredding businesses that could qualify
as a Qualifying Transaction under TSX Venture Exchange policies. On March 17, 2008, the Company acquired
the shares of Professional Shredding Corporation (“PSC”), which directly and indirectly carries on the business
of granting and managing shredding business franchises under the “Proshred” trademark. The acquisition
served as the Company’s “Qualifying Transaction” pursuant to the policies of the TSX Venture Exchange and
was approved by the TSX Venture Exchange. Redishred’s common shares are listed for trading on the TSX
Venture Exchange under the symbol “KUT”. The registered address of the Company is 6790 Century Avenue,
Suite 200, Mississauga, Ontario, L5N 2V8.
Redishred manages and operates the Proshred brand and business platform (“system”) in the United States
and internationally (with the exception of Canada). Redishred operates the Proshred system under three
business models, (1) franchising in the United States, (2) via direct ownership of shredding trucks and facilities
in three locations in the United States, as of December 31, 2011 and, (3) licensing internationally.
These consolidated financial statements comprise the financial statements of Redishred and its subsidiaries as
at December 31, 2011. Together, Redishred and its subsidiaries are referred to as “the Company.”
The consolidated financial statements of the Company for the year ended December 31, 2011 were authorized
for issue in accordance with a resolution of the Directors on April 30, 2012.
2 Basis of presentation and adoption of IFRS
The Company prepares its financial statements in accordance with Canadian generally accepted accounting
principles as defined in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In
2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”) and to require publicly accountable enterprises
to apply these standards effective for years beginning on or after January 1, 2011. Accordingly, these are the
Company’s first annual consolidated financial statements prepared in accordance with IFRS as issued by the
IASB. In the financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of
IFRS.
The annual consolidated financial statements have been prepared in compliance with IFRS. Subject to certain
transition elections and exceptions disclosed in note 25, the Company has consistently applied the accounting
policies used in the preparation of its opening IFRS statement of financial position at January 1, 2010 and
throughout all periods presented, as if these policies had always been in effect. Note 25 discloses the impact of
the transition to IFRS on the Company’s reported financial position, financial performance and cash flows,
including the nature and effect of significant changes in accounting policies from those used in the Company’s
consolidated financial statements for the year ended December 31, 2010, prepared under Canadian GAAP.
(1)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies
The significant accounting policies used in the preparation of these consolidated financial statements are as
follows:
Basis of measurement
These consolidated financial statements were prepared on a going concern basis, under the historical cost
convention. The consolidated financial statements are presented in Canadian dollars, which is Redishred’s
presentation currency.
Basis of consolidation
These consolidated financial statements include the accounts of Redishred and its subsidiaries, which are
entities controlled by Redishred. Control exists when the Company has the power, directly or indirectly, to
govern the financial and operating policies of an entity so as to obtain benefit from its activities. The financial
statements of subsidiaries are included in the consolidated financial statements from the date that control
commences until the date control ceases. All significant intercompany balances and transactions have been
eliminated.
The Company’s wholly-owned subsidiaries include:
Subsidiary name:
Professional Shredding Corporation
Proshred Franchising Corp.
Redishred Holdings US Inc.
Redishred Acquisition Inc.
Incorporated in:
Ontario, Canada
Delaware, United States
Delaware, United States
Delaware, United States
Functional currency:
Canadian Dollar
US Dollar
US Dollar
US Dollar
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision-maker. The chief operating decision-maker is responsible for allocating resources and
assessing performance of the operating segments and has been identified as the chief executive officer of
Redishred.
Foreign currency translation
The Company has elected to use the Canadian dollar as its presentation currency. The functional currency of
the Company’s foreign subsidiaries, Proshred Franchising Corp. (“PFC”), Redishred Holdings US Inc. (“RHI”)
the primary economic
and Redishred Acquisition Inc. (“RAI”) is the US dollar, as it
environment in which it operates. These consolidated financial statements have been translated to the Canadian
dollar in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates.
is the currency of
(2)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Foreign currency translation (continued)
The financial statements of subsidiaries that have a functional currency different from that of Redishred Capital
Corp. (“foreign operations”) are translated into Canadian dollars as follows: assets and liabilities - at the closing
rate at the date of the statements of financial position and income and expenses - at the average rate of the
period (as this is considered a reasonable approximation of actual rates prevailing at the transaction dates). All
resulting changes are recognized in other comprehensive income as foreign currency translation adjustments.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at
the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign
currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities
denominated in currencies other than an entities’ functional currency are recognized in the statement of income
in foreign exchange gain (loss).
Cash
The Company’s cash balances are held in bank accounts in Canada and the United States, which the Company
has full access to. Refer to note 23 for cash balances by operating segment.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions
of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have
expired or have been transferred and the Company has transferred substantially all risks and rewards of
ownership. Financial
liabilities are derecognized when the obligation specified in the contract is discharged,
cancelled or expires. Financial assets and liabilities are initially recognized at fair value and are subsequently
accounted for based on their classification as described below. Transaction costs in respect of an asset or
liability not recorded at fair value through net earnings are added to the initial carrying amount. The classification
depends on the purpose for which the financial instruments were acquired and their characteristics. Except in
very limited circumstances, the classification is not changed subsequent to initial recognition.
i.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. The Company’s financial instruments categorized as loans and receivables are
comprised of cash, trade receivables and note receivables from franchisees. Loans and receivables are
initially recognized at the amount expected to be received, less, when material, a discount to reduce the
loans and receivables to fair value. Subsequently, these instruments are accounted for at amortized cost
using the effective interest rate method less a provision for impairment.
(3)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Financial instruments
ii)
Financial liabilities at amortized cost
Financial liabilities at amortized cost include accounts payable and accrued liabilities and long-term debt.
Accounts payable and accrued liabilities are initially recognized at the amount required to be paid, less,
when material, a discount to reduce the payables to fair value. Subsequently, accounts payable and
accrued liabilities are measured at amortized cost using the effective interest method. Long-term debt is
recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost
using the effective interest method. These are classified as current liabilities if payment is due within
twelve months. Otherwise, they are presented as non-current liabilities.
Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is
impaired.
The criteria used to determine if objective evidence of an impairment loss include:
(i) significant financial difficulty of the obligor;
(ii) delinquencies in interest or principal payments; and
(iii) it becomes probable that the borrower will enter bankruptcy or other financial reorganization.
If such evidence exists, the Company recognizes an impairment loss as follows:
Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or
receivable and the present value of the estimated future cash flows, discounted using the instrument’s original
effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly
through the use of an allowance account.
Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the
amount of the loss decreases and the decrease can be related objectively to an event occurring after the
impairment was recognized.
(4)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Equipment and amortization
Equipment is stated at cost less accumulated depreciation and accumulated impairment losses. The cost
consists of expenditures directly attributable to the acquisition of the asset including costs directly attributable to
bringing the asset to the location and condition necessary for its intended use. Subsequent costs are included in
the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Company and the cost can be measured
reliably. Maintenance and repair costs are expensed as incurred.
Depreciation is provided for on a straight-line basis over the estimated useful lives of the assets as follows:
Computer equipment
Furniture and fixtures
Bins and shredding containers
Shredding vehicles – chassis
Shredding vehicles – box
Recycling equipment
Vehicles
2 years
3 years
5 years
3-10 years
3-10 years
2 years
3 years
The Company allocated the amount initially recognized in respect of an item of equipment to its significant
parts and depreciates separately each such part. The estimated useful lives and amortization method are
reviewed annually, with the effect of any changes in estimate accounted for on a prospective basis.
Intangible assets
Identifiable intangible assets
The Company’s identifiable intangible assets are stated at cost less accumulated amortization and impairment
losses. These assets are capitalized and amortized on a straight-line basis in the statement of comprehensive
loss over their estimated useful lives over the term of up to 10 years as follows:
Trademarks and intellectual property
Franchise agreements
Re-acquired franchise rights
Proshred system
Customer relationships
Computer software
Up to 10 years
Up to 10 years
Up to 10 years
Up to 10 years
Up to 10 years
Up to 3 years
The assessment of the useful lives of the identifiable intangible assets is reviewed annually. Changes in useful
lives or the useful life from indefinite to finite are made on a prospective basis.
(5)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Intangible assets (continued)
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the
is carried at cost less
identifiable net assets of the acquired subsidiary at the date of acquisition. Goodwill
accumulated impairment losses. Goodwill is allocated to each cash-generating unit (“CGU”) or group of CGUs
that are expected to benefit from the related business combination.
Impairment of non-financial assets
Equipment and identifiable definite life intangible assets (other than goodwill) are tested for impairment when
events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose
of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately
identifiable cash flows (cash-generating units or “CGUs”). An impairment loss is recognized when the carrying
value of an asset or CGU exceeds the recoverable amount. The recoverable amount of an asset or CGU is the
greater of its value-in-use and its fair value less costs to sell. In assessing value-in-use and fair value less costs
to sell, the estimated future cash flows are discounted to their present value using a discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset.
Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists. Impairment of
goodwill is tested at a level where goodwill is monitored for internal management purposes. Therefore, goodwill
may be assessed for impairment at the level of either an individual CGU or a group of CGUs which are expected
to benefit from the synergies of the combination. The carrying amount of a CGU is compared to its recoverable
amount, which is the higher of its value-in-use or fair value less costs to sell, to determine if an impairment
exists. Impairment losses for goodwill are not reversed in future periods.
Impairment losses are recognized in the Statement of Comprehensive Loss. Impairment losses recognized in
respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then
to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. Impairment
losses for assets other than goodwill are reversed in future periods if
led to the
impairment no longer exist. The reversal is limited to restoring the carrying amount such that it does not exceed
the carrying amount that would have been determined, net of amortization, had no impairment loss been
recognized in prior periods.
the circumstances that
Provisions
Provisions for legal claims are recognized in other liabilities when the Company has a present
legal or
constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be
required to settle the obligation; and the amount can be reliably estimated. Provisions are measured at
management’s best estimate of the expenditure required to settle the obligation at the end of the reporting
period, and are discounted where the effect is material.
(6)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Income tax
Income tax comprises current and deferred tax. Income tax is recognized in the statement of comprehensive
loss except to the extent that it relates to items recognized directly in other comprehensive loss or direct in
equity,
in which case the income tax is also recognized directly in other comprehensive loss or equity,
respectively.
(i) Current income tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted, at the end of the reporting period, and any adjustments to tax payable in respect of
previous years.
(ii) Deferred income taxes
Deferred income taxes is provided on all temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts in the consolidated financial statements, except
where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a
transaction that
the transaction, affects neither
accounting nor taxable profit or loss.
is not a business combination that, at
the time of
Deferred income taxes are measured at the tax rates that are expected to apply to the year when the
asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the date of the statement of financial position. Deferred income tax assets and
liabilities are presented as non-current and determined on a non-discounted basis. Deferred income taxes
are recognized only to the extent that it is probable that taxable profit will be available against which
deductible temporary differences, carried forward tax credits or tax losses can be utilized. The carrying
value of deferred income tax assets are reviewed at the end of the reporting period and reduced to the
extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the
income tax asset to be recovered.
(7)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3
Significant accounting policies (continued)
Revenue recognition
(i) Franchising and licensing business
The Company earns revenue from initial franchise and license fees paid to secure territories for a specific
period and from royalties and service fees paid as a percentage of the franchisees monthly sales volumes.
The initial franchise fee is recognized as revenue when the franchisee has paid their initial franchise fee,
has fully executed a franchise agreement and has been provided the required training.
Initial licence fees
are recognized as revenue when the licensee has fully executed a licence agreement. Royalties and
service fees revenue is accrued monthly based on sales reported by franchisees or licensees. Franchise
fees, royalties and service fees are recognized when collection is reasonably assured. Interest income on
notes receivable is recognized in the month earned.
(ii) Corporate operations – shredding and recycling services
The Company earns revenue from providing shredding services to clients and by way of the sale of
recycled paper to recycling facilities. Shredding service revenue is recorded when the shredding service
has been performed and the Company has provided a certificate of destruction and an invoice to the
client, and collections are reasonably assured. Recycling revenue is recognized when the collected paper
has been delivered to the recycling facility and collections are reasonably assured.
Share-based payments
The Company issues share-based awards to certain employees and non-employee directors whereby
employees render services as consideration for equity instruments (equity-settled transactions). The cost of
equity-settled transactions is recognized, together with a corresponding increase in contributed surplus in equity,
over the period in which the performance and/or service conditions are fulfilled. Each tranche in an award is
considered a separate award with its own vesting period and grant date fair value. The fair value of each
tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense
is recognized over the tranche’s vesting period by increasing contributed surplus based on the number of
awards expected to vest. This number is reviewed at least annually, with any changes in estimate recognized
immediately in compensation expense with a corresponding adjustment to contributed surplus.
Where an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any
expense not yet recognized for the award is recognized immediately. This includes any award where non-
vesting conditions within the control of either the entity or the employee are not met. However, if a new award is
substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the
cancelled and new awards are treated as if they were a modification of the original award, as described in the
previous paragraph. All cancellations of equity-settled transaction awards are treated equally.
(8)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Business combinations
Acquisitions of subsidiaries and businesses (other than entities which were under the control of the parent) are
accounted for using the acquisition method. The cost of the business combination is measured as the aggregate
of the fair value (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments
issued by the Company in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and
the conditions for recognition under IFRS 3, Business Combinations are
contingent
recognized at their fair value at the acquisition date except for noncurrent assets that are classified as held for
sale in accordance with IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, which are
recognized and measured at fair value less cost to sell.
liabilities that meet
Deferred financing charges
Deferred financing charges consist of costs incurred relating to the issuance of a revolving line of credit obtained
on December 23, 2009 and are amortized over the term of the facility which expires on November 27, 2014.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net loss for the year attributable to equity owners of the
Company by the weighted average number of common shares outstanding during the reporting period. Diluted
loss per share is calculated by adjusting the weighted average number of common shares outstanding for
dilutive instruments such as options and warrants. The number of shares included with respect to options,
warrants and similar instruments is computed using the treasury stock method. Since the Company has losses,
the exercise of outstanding stock options has not been included in the calculation of diluted loss per share as it
would be anti-dilutive.
Accounting standards and amendments issued but not yet adopted
Unless otherwise noted, the following revised standards and amendments are effective for annual periods
beginning on or after January 1, 2013 with earlier application permitted. The Company has not yet assessed
the impact of these standards and amendments or determined whether it will early adopt them.
(i)
IFRS 9, Financial
Instruments, was issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple category and measurement models in IAS 39 for
debt instruments with a new mixed measurement model having only two categories: amortized cost and
fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such
instruments are either recognized at fair value through profit or loss or at fair value through other
comprehensive income. Where equity instruments are measured at fair value through other comprehensive
income, dividends are recognized in profit or loss to the extent that they do not clearly represent a return of
investment; however, other gains and losses (including impairments) associated with such instruments
remain in accumulated comprehensive income indefinitely. This standard is effective on or after January
1, 2015.
(9)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Accounting standards and amendments issued but not yet adopted (continued)
liabilities were added to IFRS 9 in October 2010 and they largely carried
Requirements for financial
forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, except
that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are
generally recorded in other comprehensive income.
(ii)
(iii)
(iv)
(v)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has
power over the investee, is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee. Under existing
IFRS, consolidation is required when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12, Consolidation -
Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements.
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint
venture or joint operation. Joint ventures will be accounted for using the equity method of accounting
whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and
expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately
consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint
Ventures, and SIC-13, Jointly Controlled Entities - Non-monetary Contributions by Venturers.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in
joint arrangements, associates, and unconsolidated structured
other entities, such as subsidiaries,
entities. The standard carries forward existing disclosures and also introduces significant additional
disclosure that address the nature of, and risks associated with, an entity’s interests in other entities.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and
disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that
would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market
participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair
value is dispersed among the specific standards requiring fair value measurements and does not always
reflect a clear measurement basis or consistent disclosures.
(vi) There have been amendments to existing standards, including IAS 27, Separate Financial Statements
(IAS 27), and IAS 28, Investments in Associates and Joint Ventures (IAS 28). IAS 27 addresses
accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial
statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes
in IFRS 10 – 13.
(vii) IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items
presented in OCI into two groups, based on whether or not items may be recycled in the future. Entities
that choose to present OCI items before tax will be required to show the amount of tax related to the two
groups separately.
(10)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Accounting standards and amendments issued but not yet adopted (continued)
(viii)
IFRS 7, Financial Instruments: Disclosures, has been amended to include additional disclosure
requirements in the reporting of
transfer transactions and risk exposures relating to transfers of
financial assets and the effect of those risks on an entity’s financial position, particularly those
involving securitization of financial assets. The amendment is applicable for annual periods beginning
on or after July 1, 2011, with earlier application permitted.
4 Critical accounting estimates and judgements
The preparation of
financial statements requires management to use judgment in applying its accounting
policies and estimates and assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ materially
from those estimates and assumptions. These estimates and underlying assumptions are reviewed on an
ongoing basis and are based on management’s experience and other factors, including expectations about
future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates
are recognized in the period in which the estimate is revised if the revision affects only that period or in the
period of the revision and future periods if the revision affects both current and future periods.
The following discusses the most significant accounting judgments and estimates that the Company has made
in the preparation of the financial statements:
i)
Impairment and reversals of impairment
The Company reviews goodwill at least annually and other non-financial assets when there is any indication
that the asset might be impaired. The determination of the value in use and fair value of a CGU to which
goodwill is allocated to involves the use of estimates by management. The Company uses discounted cash
flow based methods to determine these values. These discounted cash flow calculations typically use five-
year and seven-year projections that are based on the operative plans approved by management. Cash flow
future
projections take into account past experience and represent management’s best estimate of
developments. Cash flows after the planning period are extrapolated using estimated growth rates.
Key assumptions on which management has based its determination of fair value less costs to sell and
value-in-use include estimated growth rates, discount rates, future cash flows, margins and tax rates. These
estimates, including the methodology used, can have a material
impact on the respective values and
ultimately the amount of any impairment or reversal of impairment. Refer to note 13 for estimates and
assumptions made.
(11)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
5 Cash attributable to Ad Fund
The Company manages an advertising fund (the “Ad Fund”) established to collect and administer funds
contributed for use in regional and national advertising and marketing programs, and amongst other things,
initiatives designed to increase sales and enhance general public recognition, acceptance and use of the
Proshred System. Contributions to the Ad Fund are required to be made from both franchised and Company
owned and operated locations and are based on a percentage of each location’s revenue. As at December 31,
2011, the Ad Fund was in a net surplus position of $160,100 (December 31, 2010 - $51,728; January 1, 2010 -
deficit of $36,486), with cash attributable to the Ad Fund amounting to $137,818 (December 31, 2010 - $51,728,
included in the Company’s cash balance; January 1, 2010 - $nil), offset by a corresponding amount included in
accounts payable and accrued liabilities.
6 Trade receivables
Trade receivables include receivables from franchisees and receivables from shredding customers. The trade
receivables as at December 31, 2011, December 31, 2010 and January 1, 2010 are as follows:
Trade receivables
Less: Allowance for doubtful accounts
Trade receivables – net
7 Notes receivable from franchisees
549,713
89,599
460,114
December 31,
2011
$
December 31,
2010
$
January 1,
2010
$
321,588
–
455,672
40,762
414,910
321,588
Notes receivable arise from the financing of the initial franchise fee by franchisees, are guaranteed by the
respective owners of the franchises, bear interest rates ranging from 5.25% to 10.25% per annum with monthly
blended payments of principal and interest ranging from US$526 to US$3,060, commenced between dates
ranging from November 1, 2008 to April 1, 2011 and mature between dates ranging from March 15, 2012 to
March 15, 2015.
The amounts receivable as at December 31, 2011, December 31, 2010 and January 1, 2010 are as follows:
Principal
Less: Allowance for impairment
Less: Current portion
December 31,
2011
$
December 31,
2010
$
361,264
114,786
62,859
183,619
194,670
52,787
33,178
108,705
January 1,
2010
$
207,559
43,333
24,445
139,781
(12)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
7 Notes receivable from franchisees (continued)
The Company has recorded an allowance for impairment against one note receivable based on the present
value of expected future cash flows using a discount rate equal to the effective interest rate on the note
receivable prior to the Company ceasing to accrue interest charges. Judgment was exercised by management
in making this estimate. As such, actual losses could differ from the estimate.
Notes receivable from franchisees past due but not impaired comprise:
At December 31, 2011
At December 31, 2010
At January 1, 2010
Up to 30
days
$
Up to 60
days
$
–
2,759
2,618
3,086
2,736
2,596
60 days
or more
$
31,878
48,002
24,785
Total
$
34,964
53,497
29,999
Under the franchise agreement, the Company has the right of first refusal to purchase the business of a
franchisee at fair market value. Since the value of the notes receivable past due, but not impaired, is lower than
the value of the respective franchisee’s business, no impairment has been recorded.
The following is a reconciliation of the allowance for credit losses related to the notes receivable from one
franchisee:
Opening balance
Additions
Closing balance
8 Acquisition of franchises
December 31,
2011
$
December 31,
2010
$
52,787
61,999
114,786
43,333
9,454
52,787
During the year ended December 31, 2010, the Company, through its wholly-owned subsidiary, Redishred
Acquisition Inc., acquired the following franchises:
(cid:2)
(cid:2)
(cid:2)
Proshred Syracuse, on April 30, 2010;
Proshred Albany, on June 30, 2010; and
Proshred Milwaukee, on December 31, 2010.
The Company conducted the acquisitions noted above to increase the Company’s cash flows, and to establish
regional headquarters in the markets chosen to allow for further expansion by way of additional acquisitions or
by way of establishing satellite offices in nearby cities.
(13)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
8 Acquisition of franchisees (continued)
The business combinations resulted in the recognition of goodwill of $1,117,888, determined on the basis of an
allocation of the purchase price to the assets acquired (including all identifiable intangible assets arising from
the purchases) based on their estimated fair value at the date of each respective acquisition.
Goodwill from each business combination represents synergies the Company is expected to generate; the
assembled workforces of skilled employees that are knowledgeable about the Company’s procedures and
possess expertise in certain fields that are important to continued profitability and growth; the rights to the entire
geographical areas of Syracuse, Albany and the state of Wisconsin; the growth potentials in outlying areas; and
the ability to secure regional contracts.
The following table outlines the assets purchased and consideration given on the closing date of each
acquisition.
Assets acquired
Equipment
Customer relationships
Re-acquired franchise rights
Goodwill
Other current assets
Consideration given
Cash
Contingent consideration
Settlement of contingency
Promissory notes
Settlement of pre-existing relationship (note 20)
Syracuse
$
65,113
25,140
80,448
131,035
1,203
302,939
277,743
35,196
(10,000)
–
–
Albany
$
6,659
62,880
272,480
95,192
1,769
438,980
401,794
37,186
–
–
–
Milwaukee
$
199,800
189,715
189,715
891,661
12,626
1,483,517
1,535,439
–
–
97,853
(149,775)
Total
$
271,572
277,735
542,643
1,117,888
15,598
2,225,436
2,214,976
72,382
(10,000)
97,853
(149,775)
302,939
438,980
1,483,517
2,225,436
Acquisition costs (expensed in statement of
comprehensive loss)
12,216
10,381
29,171
51,768
The Company translated the fair values of all assets acquired using the exchange rate on the date of each
respective acquisition. The Syracuse acquisition was translated at $1USD = $1.0056CAD;
the Albany
acquisition was translated at $1USD = $1.0480CAD; the Milwaukee acquisition was translated at $1USD =
$0.9985CAD.
The Company is committed to pay contingent consideration in respect of both the Syracuse and Albany
acquisitions, if either of the businesses achieves certain performance targets on a quarterly basis for a period
of one year.
In accordance with IFRS 3, the Company has recorded a liability for the estimated fair value of the
contingent consideration at the respective acquisition dates. Subsequent to the acquisitions, the Company
settled the Syracuse contingent consideration with a payment of US$25,000. The Albany contingent
consideration is based on actual results of the business and paper prices on a quarterly basis from the second
quarter of 2010 to the second quarter of 2011. The Company made one payment toward the Albany contingent
consideration totalling US$9,091 in October 2010. The remaining two out of three payments were made in
2011 and were determined using actual tonnage produced by the Albany location multiplied by the increase in
paper prices over the one-year period following the acquisition.
(14)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
8 Acquisition of franchisees (continued)
The fair values of the assets were determined on the basis of observable market prices, where possible. The
fair values of intangible assets and goodwill were determined using income-oriented approaches involving (1)
estimating the level of future cash flows anticipated from the customer relationships in excess of the cash flow
that might otherwise be expected to be generated by the franchise if it did not have access to these existing
customer relationships, (2) using a multi-period excess earnings method to value reacquired franchise rights,
and (3) the replacement cost method to value the assembled workforce as at the valuation dates.
9 Equipment
Computer
Furniture &
shredding
vehicles -
vehicles -
Recycling
Bins &
Shredding
Shredding
Cost
equipment
fixtures
containers
chassis
box
equipment Vehicles
Total
As at January 1, 2010
Additions
Acquisitions
Foreign exchange
$
77,436
6,608
6,500
–
$
48,354
–
5,500
(744)
As at December 31, 2010
90,544
53,110
Additions
Foreign exchange
702
122
–
93
$
–
11,145
19,750
(42)
30,853
19,728
903
$
–
$
–
139,259
74,000
305,710
159,000
(320)
(697)
212,939
464,013
2,691
3,991
–
8,597
$
–
–
6,356
–
6,356
–
106
$
–
–
–
–
–
6,700
114
$
125,790
462,722
271,106
(1,803)
857,815
29,821
13,926
As at December 31, 2011
91,368
53,203
51,484
219,621
472,610
6,462
6,814
901,562
Accumulated
Bins &
Shredding
Shredding
depreciation and
Computer
Furniture &
shredding
vehicles -
vehicles -
Recycling
impairment
equipment
fixtures
containers
chassis
box
equipment Vehicles
Total
As at January 1, 2010
Depreciation
Foreign exchange
As at December 31, 2010
Depreciation
Foreign exchange
$
$
75,983
5,421
–
81,404
6,808
252
45,302
2,883
–
48,185
1,811
43
$
–
2,449
–
2,449
8,396
87
$
–
19,039
(29)
19,010
37,387
1,184
$
–
44,739
(67)
44,672
75,474
1,988
$
–
1,589
–
1,589
3,177
81
$
–
–
–
–
$
121,285
76,120
(96)
197,309
2,233
135,286
38
3,673
As at December 31, 2011
88,464
50,039
10,932
57,581
122,134
4,847
2,271
336,268
Net book value
As at January 1, 2010
1,453
3,052
–
–
–
–
As at December 31, 2010
9,140
4,925
28,404
193,929
419,341
4,767
–
–
4,505
660,506
As at December 31, 2011
2,904
3,164
40,552
162,040
350,476
1,615
4,543
565,294
(15)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
9
Equipment (continued)
The Company acquired equipment as part of the franchise acquisitions entered into during the year ended
December 31, 2010 (see note 8). The Company purchased bins, shredding containers and a vehicle during the
year ended December 31, 2011. The Company purchased computer equipment, bins and shredding containers
and shredding vehicles during the year ended December 31, 2010. The foreign exchange adjustment is a result
of
from US dollars to Canadian dollars at December 31, 2011,
December 31, 2010 and January 1, 2010. Depreciation related to the corporate stores is included in the
statement of comprehensive loss in “corporate operating expenses.” Depreciation related to the franchising and
licensing business is included in the statement of comprehensive loss in “selling, general & administrative
expenses.”
the translation of corporate equipment
10 Deferred financing charges
Effective November 27, 2009, the Company arranged a $4 million revolving line of credit facility with a five-year
term (see note 15). Costs associated with this facility of $110,431, including warrants issued (see note 16 (e)),
are being charged to expenses over the five-year term of the facility.
(16)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
11 Intangible assets
Cost
agreements
system
software
property
franchise rights
relationships
Franchise
Proshred
Computer
intellectual
Re-acquired
Customer
Trademarks
and
$
$
$
$
As at January 1, 2010
2,883,800
978,000
432,534
1,672,500
Acquisitions
–
Foreign exchange
(139,873)
–
–
–
–
–
–
As at December 31,
2010
2,743,927
978,000
432,534
1,672,500
Foreign exchange
As at December 31,
46,649
–
–
–
$
–
530,000
(795)
529,205
9,805
2011
2,790,576
978,000
432,534
1,672,500
539,010
279,676
6,692,296
Accumulated
Trademarks
and
amortization and
Franchise
Proshred
Computer
intellectual
Re-acquired
Customer
impairment
agreements
system
software
property
franchise rights
relationships
$
$
$
$
As at January 1, 2010
Amortization
999,177
219,302
878,256
12,214
411,437
18,083
Reversal of impairment
(118,525)
(201,815)
Foreign exchange
(48,528)
–
–
–
1,501,926
20,887
(274,637)
–
As at December 31,
2010
Amortization
1,051,426
688,655
429,520
1,248,176
236,445
40,374
3,014
Reversal of impairment
(75,546)
(322,860)
Foreign exchange
As at December 31,
17,425
–
–
–
59,208
(439,359)
–
$
–
28,571
–
(244)
28,327
132,857
–
2,783
2011
1,229,750
406,169
432,534
868,025
163,967
33,045
3,133,490
Net book value
As at January 1, 2010
1,884,623
99,744
21,097
170,574
–
–
2,176,038
As at December 31,
2010
1,692,501
289,345
3,014
424,324
500,878
269,697
3,179,759
As at December 31,
2011
1,560,826
571,831
–
804,475
375,043
246,631
3,558,806
(17)
Total
$
5,966,834
$
–
275,000
805,000
(412)
(141,080)
274,588
6,630,754
5,088
61,542
Total
$
3,790,796
$
–
4,746
303,803
–
(594,977)
145
(48,627)
4,891
3,450,955
27,492
499,390
–
(837,765)
662
20,870
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
11 Intangible assets (continued)
As a result of the acquisition of the Syracuse, Albany, and Milwaukee locations, customer relationships and re-
acquired franchise rights were recorded as intangible assets in 2010. There were no additions to intangible
the
assets during the year ended December 31, 2011. The foreign exchange adjustment
translation of intangible assets denominated in US dollars to Canadian dollars at December 31, 2011 and
December 31, 2010.
is a result of
Amortization of reacquired franchise rights and customer relationships for the year is included in the statement
of comprehensive loss in “corporate operating expenses” and amortization of the remaining intangible assets is
included in the statement of comprehensive loss in “selling, general and administrative expenses.” The
Company’s franchise agreements, customer lists and re-acquired franchise rights are attributed to the
Company’s operations in the US.
Intangible assets with a finite life are tested for impairment when events or changes in circumstances indicate
Impairment losses for assets other than goodwill are reversed in
their carrying value may not be recoverable.
future periods if the circumstances that led to the impairment no longer exist. At December 31, 2011, the
Company recorded a reversal of a portion of the previously reported impairment of $836,919 (December 31,
2010 - $598,603). At January 1, 2010, the Company recorded an impairment loss of $2,388,818.
12 Goodwill
The following table presents goodwill for the years ended December 31, 2011 and 2010:
Opening balance
Acquisitions
Impairment of goodwill (note 13)
Foreign currency translation
Closing balance
December 31,
2011
December 31,
2010
$
$
1,112,232
–
(250,494)
16,532
–
1,113,082
–
(850)
878,270
1,112,232
13 Impairment of goodwill and long-lived assets
The Company performs an impairment test of long-lived assets when there is an indication of impairment,
which includes indicators such as when actual sales are less than budgeted, profits are less than prior years’
profits, and when significant events and circumstances indicate that
the carrying amount may not be
recoverable. Goodwill is tested for impairment at least annually.
(18)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
13 Impairment of goodwill and long-lived assets (continued)
The Company has identified each franchise and corporate location as being a CGU and has completed an
impairment test for each CGU, comparing the carrying amount of the CGU with the recoverable amount of the
CGU. The Company’s unallocated assets consist of computer equipment, furniture, computer software, the
Proshred system, trademarks and intellectual property. The carrying amount of the group of CGUs that include
the unallocated corporate assets is compared with the recoverable amount of the group of CGUs in testing for
impairment.
The Company performed its annual test for goodwill impairment in accordance with its policy described in note
3. The Company compared the aggregate recoverable amount of the assets included in the CGUs of the
Syracuse, Albany and Milwaukee locations to their respective carrying amounts. The recoverable amount of
the Milwaukee CGU was less than its carrying amount and the Company recorded an impairment loss of
$247,688 at December 31, 2011. The impairment loss was allocated to the goodwill of the Milwaukee CGU.
Based on sensitivity analysis, a reasonable possible change in assumptions would cause the impairment loss
to increase or decrease by a range of 16% to 30%.
The carrying value of goodwill for each CGU is identified as follows:
Cash Generating Unit
Syracuse
Albany
Milwaukee
Total goodwill
December 31,
2011
$
132,465
92,376
653,429
December 31,
2010
$
130,055
90,696
891,481
878,270
1,112,232
The Company assessed its impairment indicators at January 1, 2010, December 31, 2010 and December 31,
2011. The Company also assessed its indicators of reversals of impairment at December 31, 2010 and 2011.
At each reporting period, there was an indication of impairment or reversal of impairment on certain CGUs to
warrant an analysis to be performed.
The recoverable amount of each CGU has been determined based on a fair value less cost to sell (“FVLCTS”)
calculation, as this was determined to be higher than value-in-use. The FVLCTS calculation uses cash flow
projections based on financial budgets approved by management, less estimated costs to sell. The Company
then performed the impairment test for the unallocated corporate assets by aggregating the unallocated
corporate assets, and assessed whether impairment exists at a Company-wide level. The recoverable amount
was determined using FVLCTS, as this was determined to be higher than the value-in-use. The FVLCTS
calculation uses cash flow projections based on financial budgets approved by management, less estimated
costs to sell.
The key assumptions included the following:
i. Revenue growth of each franchise and corporate location, which reflect the past experience of each
location. Management has used growth rate ranges of 2.5% to 30% based on prior results of existing
franchisees and the franchisees time in the system. During the first five years of a franchisee’s operation,
higher growth rates are typically achieved.
(19)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
13 Impairment of goodwill and long-lived assets (continued)
ii. Post-tax discount rates between 16% to 20% (December 31, 2010 and January 1, 2010 – 18% to 22%)
were used and reflect the risks specific to each relevant CGU depending on factors such as period of
establishment in the respective market, nature of customer base and degree of competition.
iii. Cash flows from franchising are based on the current royalty rate charged to each franchise, as the rates
are expected to continue in the future.
iv. For franchise CGUs, a cash flow period of up to 7 years was used, covering the remaining useful life of the
franchise agreements. Management believes that this period is reasonable in light of the contractual terms
of the franchise agreements as this is consistent with the assessed remaining useful life of the franchise
agreements as originally determined.
v. For corporate location CGUs, a 5 year cash flow period was used based on financial budgets approved by
management including growth rates of 2.5% and a perpetual growth rate of 2.5%. Revenue growth was
determined based on the Company’s internal budget and considered past experience, and economic,
industry and market
trends. The growth rate does not exceed the long-term average growth rates
projected for the document destruction industry.
vi. For corporate location CGUs, budget operating margins, which were determined using average operating
margins achieved in the periods immediately before the budget period. Management believes the operating
margins are reasonably achievable.
Based on the impairment review performed at January 1, 2010, the recoverable amount of certain CGUs was
less than their carrying amounts and the Company recorded an impairment loss of $2,388,818. At December
31, 2010 and December 31, 2011, the Company determined the recoverable amount of certain CGUs was
impairment of $598,603 and $836,919,
higher than their carrying amounts and recorded a reversal of
respectively. The reversals of impairment were limited to restoring the carrying amounts such that they did not
exceed the carrying amounts that would have been determined, net of amortization, had no impairment loss
been recognized in prior periods.
14 Accounts payable and accrued liabilities
As at December 31, 2011, December 31, 2010 and January 1, 2010, accounts payable and accrued liabilities
are comprised of:
Accounts payable
Accrued liabilities
Accounts payable and accrued liabilities
December 31,
2011
$
December 31,
2010
$
January 1,
2010
$
370,936
315,231
686,167
329,845
183,714
157,506
182,515
513,559
340,021
(20)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
15 Long-term debt
As at December 31, 2011 and December 31, 2010 long-term debt is comprised of:
Line of credit
Truck loans
Total long-term debt
Less: current portion
Total
December 31,
2011
December 31,
2010
$
$
5,370,000
227,981
5,597,981
53,176
2,790,000
-
2,790,000
-
5,544,805
2,790,000
The line of credit was entered into on November 27, 2009 for a maximum amount of $4 million, repayable on
November 27, 2014, bearing interest at a fixed rate of 10% per annum, and secured by a general security
agreement over the Company’s assets. Deferred financing charges in respect of this facility will be charged to
expense over the term of the facility (see note 10). During the year ended December 31, 2010, the Company
drew from its line of credit in order to finance the purchase of the Syracuse, Albany and Milwaukee businesses;
new shredding vehicles for the Syracuse and Albany markets; and initial working capital for the acquired
businesses. On October 31, 2011, the line of credit limit was increased to $5.37 million repayable on November
27, 2014; all other terms of the agreement remained unchanged. During December 2011, the Company drew
from its line of credit in order to finance the purchase of the New York City business on January 1, 2012.
in the amount of
On November 11, 2011,
US$240,000, repayable on a monthly basis in the amount of US$5,690 principal and interest until October 3,
2015. The loan bears interest at 8.14% per annum and is secured by two shredding vehicles with a carrying
value of US$331,967.
the Company entered into a loan and security agreement
16 Capital stock
a) Authorized
Unlimited number of common shares, without nominal or par value.
Unlimited number of preferred shares, without nominal or par value.
b)
Issued and fully paid
For the years ended December 31, 2011 and December 31, 2010, there were no changes in issued
common shares of the Company.
(21)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
16 Capital stock (continued)
b)
Issued and fully paid (continued)
The following are the balances of issued common shares of the Company:
Common stock
Warrants
Number
$
Number
$
Total
$
Balance, January 1, 2010,
December 31, 2010 and
December 31, 2011
28,884,658
8,297,602
4,000,000
288,206
8,585,808
c) Weighted average common shares
The basic weighted average number of common shares outstanding for the years ended December 31,
2011, was 28,884,658 (December 31, 2010 - 28,884,658).
d) Stock options
Under the terms of the stock option plan:
i)
ii)
From time to time, the Company designates eligible participants to whom options will be granted
and the number of shares to be optioned to each;
Eligible participants are persons who are directors, officers, employees and technical consultants of
the Company;
iii) Options to purchase shares are non-transferable and are exercisable for a period of up to five years
from the date of grant;
iv) Shares to be optioned shall not exceed 2,888,465 and the total number of shares to be optioned to
any eligible participant shall not exceed 10% of the issued and outstanding shares of the class as at
the date such option is granted;
v)
The option price for the shares is determined at the time of granting of the option but cannot be less
than the fair market value of the shares at the time the option is granted less any applicable
discount permitted by the Toronto Venture Exchange; and
vi) The term during which any option granted may be exercised is determined by the Company at the
time the option is granted but may not exceed the maximum period permitted from time to time by
the Toronto Venture Exchange.
(22)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
16 Capital stock (continued)
d) Stock options (continued)
The following table summarizes the movements in the Company’s stock options during the years ended:
December 31, 2011
December 31, 2010
Weighted
average
exercise
price
$
0.26
0.12
0.35
0.24
Number of
options
1,687,500
150,000
(160,000)
1,677,500
Number of
options
1,673,349
360,000
(345,849)
1,687,500
Weighted
average
exercise
price
$
0.34
0.14
0.50
0.26
Outstanding – Beginning of year
Granted
Expired
Outstanding – End of year
The following table summarizes the stock options outstanding as at:
December 31, 2011
December 31, 2010
Number of
options
outstanding
Issue date
Exercise
price
$
Aug 29, 2007
0.20
0.52
Mar 17, 2008
0.14 May 27, 2010
Oct 19, 2010
0.15
May 2, 2011
0.12
Sept 26, 2011
0.10
Oct 26, 2011
0.10
975,000
262,500
280,000
10,000
140,000
5,000
5,000
1,677,500
Weighted
average
remaining
contractual
life (yrs)
Options
exercisable
Number of
options
outstanding
Weighted
average
remaining
contractual
life (yrs)
0.66
1.21
2.40
3.81
3.34
4.74
4.82
1.31
975,000
197,500
280,000
2,500
140,000
–
–
975,000
352,500
350,000
10,000
–
–
–
1,595,000
1,687,500
1.66
2.21
3.40
4.81
–
–
–
2.16
Options
exercisable
975,000
177,500
350,000
–
–
–
–
1,502,500
(23)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
16 Capital stock (continued)
d) Stock options (continued)
The compensation charge for the options issued was determined based on the fair value of the options at
the date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions:
Expected option life
Risk-free interest rate
Expected dividend yield
Expected volatility
2011
2010
4 years
2.28%
$nil
200%
4 years
2.78%
$nil
214%
150,000 options were granted during the year ended December 31, 2011 (2010 - 360,000). The weighted
average grant-date fair value of options granted during 2011 amounted to $0.12 per option. The net stock
compensation charge, after adjusting for stock option forfeitures, amounted to $17,108 (2010 - $58,900).
e) Warrants
The Company issued two tranches of warrants in 2009. The first tranche was issued in connection with
the private placement and the second related to the line of credit obtained. Details are as follows:
Number of
warrants
outstanding
or to be
issued
Remaining
contractual
life
Exercise
price
$
Tranche 1
Tranche 2
0.25 to 0.45
0.25 to 0.45
3,000,000
1,000,000
2.98 years
2.90 years
2011
Assigned
value
$
204,406
83,800
The fair values for both tranches of warrants were determined using the following assumptions under the
Black-Scholes option pricing model:
Expected warrant life
Risk-free interest rate
Expected dividend yield
Expected volatility
3 years
1.06%
$nil
234%
(24)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
16 Capital stock (continued)
e) Warrants (continued)
In connection with the line of credit, 1,000,000 warrants were issued on April 28, 2010 when the line of
credit was first drawn upon in accordance with the line of credit agreement. These warrants were recorded
in the consolidated financial statements in 2009 as performance by the counterparty was complete at that
date. The fair value of these warrants has been recorded as deferred financing charges and is being
amortized into income over the term of the facility and is also subject to a two-year holding period
commencing on the date of issuance. This is a non-cash transaction and has been excluded from the
consolidated statements of cash flows.
Tranches 1 and 2 of warrants expire on November 27, 2014 and December 23, 2014, respectively.
17 Corporate operating locations expenses by nature
The corporate operating locations expenses of the Company are broken down as follows:
Shredding vehicle and related expenses
Employee wages expense
Employee benefit expense
Office and administration expense
Depreciation – equipment
Amortization – intangible assets
Loss on settlement of pre-existing
relationship
2011
$
358,915
572,507
92,303
206,418
130,536
158,553
2010
$
147,850
215,203
29,095
99,410
71,342
34,390
–
149,775
Total corporate operating expenses
1,519,232
747,065
During the year ended December 31, 2011, the Company operated three corporate locations – Syracuse,
Albany and Milwaukee. During the year ended December 31, 2010, the Company operated two corporate
locations – Syracuse and Albany. The Syracuse location operated for the 8 months ended December 31,
2010 and the Albany location operated for the 6 months ended December 31, 2010.
(25)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
18 Selling, general and administrative expenses by nature
The selling, general and administrative expenses of the Company are broken down as follows:
Employee wages expense
Employee benefits expense
Share-based compensation
Professional fees
Technology
Rent and office expense
Advertising
Selling and development
Bad debt expense
Amortization of deferred financing charges
Depreciation – equipment
Amortization – intangible assets
Foreign exchange gain/(loss)
Other
2011
$
770,867
54,179
17,108
854,674
111,558
75,302
76,083
203,793
103,320
22,086
3,014
338,141
(66,163)
165,620
2010
$
755,312
62,136
58,900
268,875
108,091
63,429
44,368
64,234
35,811
22,086
6,520
276,967
143,600
171,378
Total selling, general and administrative expenses
2,729,582
2,081,707
Compensation of key management
Included in employee wages and benefits expense above are key management personnel compensation as
follows:
Wages and benefits
Share-based compensation
Total
2011
$
658,336
16,234
674,570
2010
$
638,926
44,109
683,035
Key management personnel are comprised of the Company’s Board of Directors, Chief Executive Officer,
Chief Financial Officer, President, Vice President of Operations, and former Chief Operating Officer.
(26)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
19 Income taxes
Reconciliation of total tax recovery
The effective rate on the Company’s loss before income tax differs from the expected amount that would arise
using the statutory income tax rates. A reconciliation of the difference is as follows:
Loss before income taxes
Income tax rate
Expected income tax recovery based on above rates
Non-deductible expenses
Unrecognized deductible temporary differences and other
Income tax recovery
2011
$
(564,169)
28%
(159,000)
12,000
37,914
(109,086)
2010
$
(294,543)
31%
(91,300)
22,000
48,857
(20,443)
The Company’s statutory tax rate decreased to 28.25% in 2011 from 31% in 2010 as a result of a change in tax
legislation.
Provision for (recovery of) income taxes is comprised of:
Current income taxes
Deferred income taxes
Deferred tax
Components of the net deferred income tax liability are as follows:
2011
$
(17,603)
(91,483)
(109,086)
2010
$
20,000
(40,443)
(20,443)
Deferred income tax liability:
Intangible assets
Equipment
Deferred income tax asset:
Other
Net deferred income tax liability
December 31,
2011
$
December 31,
2010
$
January 1,
2010
$
(468,110)
–
58,000
(410,110)
(508,232)
(33,000)
(565,449)
–
51,000
14,000
(490,232)
(551,449)
(27)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
19 Income taxes (continued)
The following reflects the balance of temporary differences for which no deferred income tax asset has been
recognized as realization is not considered probable:
Non-capital losses
Intangible assets and equipment
Tax deductible share issue costs
December 31,
2011
$
5,815,000
835,000
153,000
December 31,
2010
$
4,917,000
1,597,000
223,000
January 1,
2010
$
3,764,000
2,073,000
270,000
The Company has incurred Canadian non-capital losses of $5,629,000 that can be carried forward to reduce
taxes payable in Canada. The losses expire at various times through December 31, 2031. The Company has
incurred US non-capital losses of $186,000 that can be carried forward to reduce taxes payable in the US. The
losses expire at various times through December 31, 2031.
20 Commitments and contingency
Commitments
The Company leases office premises in Mississauga, Ontario, Canada. The lease expires on September 30,
2013. Additionally, the Company leases facilities in Albany, which expires on March 31, 2013, Syracuse, which
expires on August 31, 2015 and Milwaukee, which expires on May 31, 2013. Certain contracts include renewal
options for various periods of time. For the year ended December 31, 2011, the Company incurred $116,458
in lease payments as an expense included in ’selling, general and
(December 31, 2010 - $83,809)
administrative expenses’ and ‘corporate operating expenses’.
Non-cancellable operating lease rentals are payable as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
Total
$
156,372
140,232
–
296,604
(28)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
20 Commitments and contingency (continued)
Contingency
On June 18, 2010, three franchisees filed a complaint with the United States District Court, South District of
New York, which management of the Company believes is without merit. The complaint has listed the following
causes of action, (1) breach of contract and breach of the implied covenant of good faith and fair dealing by
PFC, (2) fraudulent misrepresentation by PFC, (3) negligent misrepresentation by PFC, and (4) violation of
various state laws by PFC. These franchisees are located in Florida, North Carolina and Wisconsin. On July
13, 2010, one additional franchisee located in New York State joined the aforementioned complaint. On
December 31, 2010, in conjunction with the purchase of the Proshred Wisconsin business by the Company, the
Wisconsin franchisee permanently withdrew from the legal complaint. On January 1, 2012, in conjunction with
the purchase of
the New York City franchisee
permanently withdrew from the legal complaint. As of January 1, 2012, two franchisees remain in the legal
complaint.
the Proshred New York City business by the Company,
The Company intends to vigorously defend against this claim. The Company is strongly of the view that it (1)
has not breached any contracts or agreements with its franchisees and has acted in good faith with all
franchisees, (2) has not made any fraudulent misrepresentations to any franchisees, (3) has not made any
negligent misrepresentations to any franchisees, and (4) has complied with all state laws as well as Federal
Trade Commission rules and regulations regarding franchising.
The final outcome with respect to this claim cannot be predicted nor can the costs to defend this claim be
quantified with certainty and therefore there can be no assurance that its resolution will not have an adverse
effect on the Company’s consolidated financial position. No amounts, other than legal costs, have been
accrued in these consolidated financial statements relating to this claim.
21 Financial instruments and fair values
The Company has various financial assets that consist of: cash, trade receivables and notes receivable from
franchisees. The Company’s financial liabilities include accounts payable and accrued liabilities, notes payable
and long-term debt.
The Company, through its financial assets and liabilities, has exposure to the following risks from its use of
financial instruments: interest rate risk, credit risk, foreign exchange risk and liquidity risk. Senior management
is responsible for setting acceptable levels of risk and reviewing risk management activities as necessary.
Interest rate risk
The Company’s cash is subject to cash flow risk, as it earns interest at prevailing and fluctuating market rates.
The fixed rate notes receivable from franchisees, and the line of credit facility that has a fixed interest rate of
10% per annum and truck loans that have a fixed interest rate of 8.14% per annum, are subject to interest rate
fair value risk, as their fair values will fluctuate as a result of changes in market rates.
(29)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
21 Financial instruments and fair values (continued)
Credit risk
In accordance with its investment policy, the Company maintains cash deposits with banks. The credit risk on
cash is limited because the counterparties are banks with high-credit ratings assigned by international credit-
rating agencies.
Receivables from franchisees
The accounts receivable from franchisees are exposed to credit risk from the possibility that franchisees may
experience financial difficulty. The Company mitigates the risk of credit loss by limiting its exposure to any one
franchisee. Credit assessments were conducted with respect to all new franchisees and existing franchisees. In
addition, the receivable balances are monitored on an ongoing basis. As of December 31, 2011, 6 franchisees
accounted for 73% of the accounts receivable balance (December 31, 2010 - 6 franchises accounted for 61%).
the Company’s revenues
For the year ended December 31, 2011, 3 franchisees accounted for 28% of
(December 31, 2010 - 3 franchisees accounted for 32%). As of December 31, 2011, 37% of accounts
receivable were over 90 days old and related to two franchises (December 31, 2010 – 26% of accounts
receivable were over 90 days old and related to one franchise). Subsequent to year-end, a significant portion of
the accounts receivable over 90 days old was settled as a result of the purchase of the New York City
franchise, see note 26.
The aging analysis for trade accounts receivable from franchisees past due but not impaired and impaired is as
follows:
December 31, 2011
$
December 31, 2010
$
January 1, 2010
$
Past due but not impaired
Up to 3 months
3 to 6 months
Over 6 months
Impaired
Up to 3 months
3 to 6 months
Over 6 months
10,420
83,580
–
6,912
12,049
67,803
–
21,462
–
–
–
40,762
2,332
5,922
–
–
–
–
(30)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
21 Financial instruments and fair values (continued)
The following is a reconciliation of the allowance for credit losses from trade receivables from franchisees:
Opening balance
Additions
Foreign exchange
Closing balance
December 31, 2011
$
December 31, 2010
$
40,762
44,552
1,450
86,764
–
40,823
(61)
40,762
Also refer to note 7 for details of notes receivable from franchisees and impairments recorded.
Receivables from shredding customers
The accounts receivable are exposed to credit risk from the possibility that customers may experience financial
difficulty. The Company mitigates the risk of credit loss by limiting its exposure to any one customer. All new
customers are required to make payments for services by way of preapproved credit card, and credit is
extended only after a credit assessment is conducted.
In addition, the receivable balances with customers are
monitored on an ongoing basis with the result that the Company’s exposure to bad debt is not significant. At
December 31, 2011 and December 31, 2010, no customer accounted for more than 10% of the accounts
receivable balance. For the years ended December 31, 2011 and December 31, 2010, no customer accounted
for more than 10% of the Company’s revenues in this category. As of December 31, 2011, 10% of accounts
receivable in this category was over 90 days old. The Company has recorded an allowance of $2,834 for credit
losses from accounts receivable from shredding customers. The Company does not have any reason to
believe it will not collect all remaining balances.
The aging analysis for accounts receivable from shredding customers past due is as follows:
Past due but not impaired
Up to 3 months
3 to 6 months
Over 6 months
Impaired
3 to 6 months
Over 6 months
December 31, 2011
$
December 31, 2010
$
18,194
33,663
–
2,834
–
16,658
9,321
–
–
–
(31)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
21 Financial instruments and fair values (continued)
Foreign exchange risk
Since the Company operates internationally, it is exposed to currency risks as a result of potential exchange
rate fluctuations related to non-intragroup transactions. Fluctuations in the Canadian dollar (CAD) and the US
dollar (USD) exchange rates could have a potentially significant impact on the Company’s results of operations.
If there were a foreign exchange rate variation of -5% (depreciation of the USD) and +5% (appreciation of the
USD) against the CAD, from a period-end rate of USD$1.00 = CAD$1.0170, the total impact to net loss would
be a decrease/increase of approximately $150,000.
Liquidity risk
The Company’s objective is to have sufficient liquidity to meet liabilities when due. The Company has incurred
significant losses to date, and has a deficit of $6.8 million at December 31, 2011. Cash flow forecasting is
performed by management, which monitors rolling forecasts of the Company’s liquidity requirements to ensure
it has sufficient cash to meet operational needs at all times. Although management considers its assumptions
used in its cash flow forecasts to be reasonable, there is no assurance that the cash flow forecasts will be
achieved. The Company monitors its cash balances and cash flows generated from operations to meet
requirements. Based on overall cash generation capacity and overall financial position, while there can be no
assurance, management believes the Company will be able to meet financial obligations as they come due.
The Company does not have any financial covenants to comply with.
The current liabilities of $771,541 at December 31, 2011 (December 31, 2010 - $641,400), are due to be
settled within one year from the balance sheet date.
At December 31, 2011,
the Company has cash of $3,011,786 and working capital of $2,982,235. The
Company also has access to a $5.37 million line of credit, of which $5.37 million has been drawn as of
December 31, 2011. $2.5 million of the cash was used to purchase the New York City business from a current
franchisee on January 1, 2012. The line of credit is repayable on November 27, 2014 and interest payments
are due semi-annually. Subsequent to year-end, the Company increased its line of credit to $6 million
(see note 26).
(32)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
21 Financial instruments and fair values (continued)
The table below analyzes the Company’s non-derivative financial
liabilities into relevant maturity groupings
based on the remaining period from the statement of financial position date to the contractual maturity date.
The amounts disclosed in the table are the contractual undiscounted cash flows. The analysis is based on
foreign exchange and interest rates in effect at the consolidated statement of financial position date, and
includes both principal and interest cash flows for notes payable and long-term debt.
Principal
Less than 3
months
$
3 months
to 1 year
$
2 – 5
years
$
Over 5 years
$
Accounts payable and accrued liabilities
Notes payable
Long-term debt
686,167
–
17,358
–
–
52,075
–
20,340
5,566,729
–
–
–
Interest
Notes payable
Long-term debt
Liquidity risk
Less than 3
months
$
3 months
to 1 year
$
2 – 5
years
$
–
4,427
–
581,101
1,688
1,581,946
Over 5 years
$
–
–
Total principal and interest
Less than 3
months
$
3 months
to 1 year
$
2 – 5
years
$
Over 5 years
$
Accounts payable and accrued liabilities
Notes payable
Long-term debt
686,167
–
21,785
–
–
633,176
–
22,028
7,148,675
–
–
–
Fair value of financial instruments
The carrying value amounts of many of the Company’s financial instruments, including cash, trade receivables,
trade payables and accrued liabilities, which are all carried at amortized cost, approximate their fair value due
primarily to the short-term maturity of the related instruments. The fair value estimates of the Company’s notes
receivable from franchisees (note 7), are made as at a specific point in time based on estimates using present
value or other valuation techniques. The carrying value of the Company’s notes payable and long-term debt
approximates fair value as the rates are similar to rates currently available to the Company.
These techniques involve uncertainties and are affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows,
future expected loss experience and other factors. The carrying value of the Company’s notes receivable from
franchisees at December 31, 2011, amounted to $246,477 (December 31, 2010 - $141,883; January 1, 2010 -
$164,226) with fair value estimated to amount to $225,081 (December 31, 2010 - $121,008; January 1, 2010 -
$130,399), respectively.
(33)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
22 Capital management
The Company defines capital as shareholders’ equity. The primary objective of
the Company’s capital
management is to ensure that it maintains the appropriate capital levels to support its business and maximize
shareholder value. The Company manages its capital structure and makes adjustments to it in light of changes
in economic conditions. To maintain or adjust the capital structure, the Company may issue new shares or
issue debt securities.
23 Segment reporting
The business segments presented reflect the management structure of the Company and the way in which the
Company’s management reviews business performance. Prior to April 30, 2010, the Company operated one
business segment, (1) the granting and managing of shredding business franchises under the “Proshred”
trademark (Franchising and licensing). Upon the acquisition of Syracuse, Albany and Milwaukee, the Company
operates two reportable operating segments, (1) the granting and managing of shredding business franchises
under the “Proshred” trademark (Franchising and licensing), and (2) the operation of corporately owned
shredding businesses (Corporate locations).
(34)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
23 Segment reporting (continued)
Total assets and liabilities by reportable operating segment are as follows:
Franchising and licensing
Corporate locations
Total
December 31,
2011
$
December 31,
2010
$
December 31,
2011
$
December 31,
2010
$
December 31,
2011
$
December
31, 2010
$
ASSETS
Current assets
Cash
Cash attributable to Ad
Fund
Trade receivables
Prepaid expenses
Notes receivable from
franchisees
Income tax recoverable
218,286
824,269
2,793,500
164,323
3,011,786
988,592
137,818
201,972
22,789
62,859
17,603
–
282,064
12,598
33,178
–
–
258,142
40,807
–
–
–
132,846
32,423
–
–
137,818
460,114
63,596
62,859
17,603
–
414,910
45,021
33,178
–
Total current assets
661,327
1,152,109
3,092,449
329,592
3,753,776
1,481,701
183,619
–
108,705
4,584
66,259
88,345
2,937,129
2,409,181
–
–
–
565,294
–
621,677
878,270
–
655,922
–
770,578
1,112,232
183,619
565,294
108,705
660,506
66,259
3,558,806
878,270
88,345
3,179,759
1,112,232
3,848,334
3,762,924
5,157,690
2,868,324
9,006,024
6,631,248
370,980
10,170
–
413,062
–
–
–
–
315,187
–
22,028
53,176
390,391
100,497
–
127,841
–
228,338
686,167
10,170
22,028
53,176
771,541
513,559
–
127,841
–
641,400
Total current liabilities
381,150
413,062
Non-current liabilities
Long-term debt
Deferred tax liability
Total liabilities
–
410,110
791,260
–
5,544,805
2,790,000
5,544,805
2,790,000
490,232
903,294
–
–
410,110
490,232
5,935,196
3,018,338
6,726,456
3,921,632
(35)
Non-current assets
Notes receivable from
franchisees
Equipment
Deferred financing
charges
Intangible assets
Goodwill
Total assets
LIABILITIES
Current liabilities
Accounts payable and
accrued liabilities
Deferred revenue
Notes payable
Current portion of long-
term debt
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
23 Segment reporting (continued)
The Company incurred $29,821 in capital expenditures relating to its corporate operations during the year
ended December 31, 2011 (December 31, 2010- $468,941). The Company did not have any capital
expenditures related to its franchising operations for the year ended December 31, 2011 (December 31, 2010-
$6,608).
Geographic information
Canada
Equipment
Deferred financing charges
Intangible assets
United States
Notes receivable from franchisees
Equipment
Intangible assets
Goodwill
Total
Notes receivable from franchisees
Equipment
Deferred financing charges
Intangible assets
Goodwill
Revenue
December 31,
2011
$
December 31,
2010
$
–
66,259
1,376,307
246,477
565,294
2,182,499
878,270
246,477
565,294
66,259
3,558,806
878,270
4,584
88,345
716,683
141,883
655,922
2,463,075
1,112,232
141,883
660,506
88,345
3,179,759
1,112,232
January 1,
2010
$
4,505
110,431
120,841
164,226
–
2,055,197
–
164,226
4,505
110,431
2,176,038
–
All revenues were attributed to the United States, with the exception of a $nil license fee (2010 - $250,000),
which was attributed to the Middle East.
(36)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
23 Segment reporting (continued)
Net loss by operating segment
Total net loss by reportable operating segment is as follows:
Revenue
Direct costs
Corporate overhead
Reversal of impairment
Impairment of goodwill
Depreciation and amortization
Foreign currency gain, net
Interest expense
Interest income
Income tax recovery
For the year ended December 31, 2011
Franchising
and licensing
$
1,367,588
–
(1,831,960)
836,919
–
(363,241)
–
–
2,946
109,086
Corporate
locations
$
2,011,795
(1,230,144)
(173,372)
–
(247,688)
(289,089)
–
(286,915)
–
–
Corporate
overhead
$
–
–
(427,171)
–
–
–
66,163
–
–
–
Total
$
3,379,383
(1,230,144)
(2,432,503)
836,919
(247,688)
(652,330)
66,163
(286,915)
2,946
109,086
Net income (loss)
121,338
(215,413)
(361,008)
(455,083)
For the year ended December 31, 2010
Franchising
and licensing
$
Corporate
locations
$
1,290,052
–
(1,056,649)
598,603
(305,573)
–
–
–
4,945
20,443
713,711
(491,556)
(90,340)
–
(105,734)
–
(149,775)
(73,082)
–
–
Corporate
overhead
$
–
–
(485,545)
–
–
(143,600)
–
–
–
–
Total
$
2,003,763
(491,556)
(1,632,534)
598,603
(411,307)
(143,600)
(149,775)
(73,082)
4,945
20,443
Revenue
Direct costs
Corporate overhead
Reversal of impairment
Depreciation and amortization
Foreign currency loss, net
Loss on settlement of pre-existing
relationship
Interest expense
Interest income
Recovery of income taxes
Net income (loss)
551,821
(196,776)
(629,145)
(274,100)
(37)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
23 Segment reporting (continued)
For the year ended December 31, 2011, the Company operated three corporate locations from January 1,
2011 to December 31, 2011. For the year ended December 31, 2010, the Company operated two corporate
locations. The operating results included for 2010 are from May 1, 2010 to December 31, 2010.
24 Related party balances and transactions
the Company is the owner of
A Director of
Included in trade
receivables and notes receivable from franchisees at December 31, 2011, is $1,592 (December 31, 2010 -
$9,141) due from the Director’s franchise. During the year ended December 31, 2011, the Company earned
royalty and service fee amounts of $87,165 (December 31, 2010 - $79,560) from the Director’s franchise.
the Tampa, Florida Proshred franchise.
Included in selling, general and administrative expenses for the year ended December 31, 2011 are insurance
premium amounts of $15,317 (December 31, 2010 - $16,929) paid to an insurance brokerage firm owned by a
Director of the Company.
All related party transactions have been recorded at their exchange amounts.
25 Transition to IFRS
The Company’s consolidated financial statements for the year ended December 31, 2011 have been prepared
in accordance with IFRS. IFRS 1 requires that comparative financial information be provided for the first date at
which the Company has applied IFRS, which was January 1, 2010 (“transition date”). In accordance with IFRS
1, the Company has also retrospectively applied all published IFRS standards effective as of December 31,
2011 and applied certain optional exemptions and mandatory exceptions as applicable for first time IFRS
adopters.
The effect of the Company’s transition to IFRS, described in note 2, is summarized in this note as follows:
(a) Elected exemptions from full retrospective application;
(b) Mandatory exceptions to retrospective application;
(c) Reconciliations of Canadian GAAP to IFRS; and
(d) Notes to the reconciliations.
(38)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
25 Transition to IFRS (continued)
(a) Elected exemptions from full retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1, the Company has applied
certain of the optional exemptions from full retrospective application of IFRS. The optional exemptions
applied are described below.
Business combinations – IFRS 1 allows for the guidance under IFRS 3 (revised), Business Combinations,
to be applied either retrospectively or prospectively from the transition date. The retrospective basis would
require restatement of all business combinations that occurred prior to its transition date. The Company
has elected to adopt IFRS 3 (revised) prospectively and has not restated its business combinations prior to
its transition date. Accordingly, all business combinations that occurred prior to January 1, 2010 have not
been restated.
Cumulative translation differences – IAS 21, The Effects of Changes in Foreign Exchange Rates, requires
an entity to determine the translation differences in accordance with IFRS from the date on which a
subsidiary was formed or acquired.
foreign
operations to be deemed zero at the date of transition to IFRS, with future gains or losses on subsequent
disposal of any foreign operations to exclude translation differences arising from periods prior to the date of
transition to IFRS. RediShred deemed all cumulative translation differences to be zero on transition to
IFRS.
IFRS 1 allows cumulative translation differences for all
(b) Mandatory exceptions to retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1 the Company has applied
certain mandatory exceptions from full retrospective application of
IFRS. The mandatory exceptions
applied from full retrospective application of IFRS are described below.
Estimates – Hindsight is not used to create or revise estimates. The estimates previously made by the
Company under Canadian GAAP will not be revised for the application of IFRS except where necessary to
reflect any differences in accounting policies between IFRS and Canadian GAAP.
(39)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
25 Transition to IFRS (continued)
(c) Reconciliations of Canadian GAAP to IFRS
IFRS 1 requires an entity to reconcile equity and comprehensive loss for prior periods. The following is the
reconciliation of the Company’s total equity reported in accordance with Canadian GAAP to its total equity
in accordance with IFRS at the transition date of January 1, 2010 and December 31, 2010:
Notes
December 31,
2010
Total equity as reported under Canadian GAAP
Impairment of assets, net of reversals
Depreciation
Deferred taxes
Business combinations
(i)
(ii)
(iii)
(iv)
$
4,088,948
(1,790,216)
416,814
47,422
(53,352)
January 1,
2010
$
5,293,534
(2,388,818)
–
94,550
–
Total adjustments to equity
(1,379,332)
(2,294,268)
Total equity as reported under IFRS
2,709,616
2,999,266
The following is the reconciliation of the Company’s comprehensive loss reported in accordance with
Canadian GAAP to its comprehensive loss in accordance with IFRS for the year ended December 31,
2010:
Notes
For the year ended
December 31, 2010
Comprehensive loss as reported under Canadian GAAP
Reversal of impairment
Depreciation
Deferred taxes
Business combinations
Share-based payments
Total adjustments to comprehensive loss
Comprehensive loss as reported under IFRS
(i)
(ii)
(iii)
(iv)
(v)
$
(1,291,808)
599,032
416,814
(47,558)
(53,352)
28,322
943,258
(348,550)
(40)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
25 Transition to IFRS (continued)
Notes to the reconciliations
(i)
Impairment of assets
Under Canadian GAAP, impairment testing of long-lived assets is based on a two-step approach, in which
an asset group’s carrying value is compared to the group’s undiscounted cash flows. If the undiscounted
cash flows are less than the carrying value, the asset group is impaired by an amount equal to the
difference between the fair value and the carrying value. Under Canadian GAAP impairments are not
subsequently reversed. Under IAS 36 Impairment of Assets (“IAS 36”) the impairment test is based on a
one-step approach, in which a review of impairment indicators is performed and if there is an indication of
impairment, an assets carrying value is compared to its recoverable amount, which is estimated as the
higher of the asset’s or cash generation units (“CGUs”) fair value less costs to sell and its value-in-use. The
fair value less costs to sell and the value-in-use is calculated based on discounted cash flows. Impairment
losses for assets other than goodwill are reversed in future periods if the circumstances that led to the
impairment no longer exist. The reversal is limited to restoring the carrying amount such that it does not
exceed the carrying amount that would have been determined, net of amortization, had no impairment loss
been recognized in prior periods.
The Company assessed its impairment indicators at January 1, 2010 and December 31, 2010. The
Company also assessed its indicators of reversals of impairment at December 31, 2010. At each reporting
period, there was an indication of impairment or reversal of impairment on certain CGUs to warrant an
analysis to be performed. Based on the impairment review performed at January 1, 2010, the recoverable
amount of certain CGUs was less than their carrying amounts and the Company recorded an impairment
loss of $2,388,818, which was recorded as an impairment of intangible assets of $2,357,257 and an
impairment of equipment of $31,561. At December 31, 2010, the Company determined the recoverable
amount of certain CGUs was higher than their carrying amounts and recorded a reversal of impairment of
intangible assets of $598,603. Refer to note 13 for assumptions used.
(ii) Depreciation
The adjustments to the depreciation are a result of the impairment loss recognized at January 1, 2010. The
asset’s amortization amounts for fiscal 2010 were impacted and reduced accordingly, to reflect the lower
carrying value.
(iii) Deferred tax liability
Upon initial recognition of the Company’s intangible assets, a deferred tax liability was recognized as the
difference between the accounting value of
the intangible assets and their related tax values. The
Company has adjusted the deferred tax liability for the related impact as a result of the impairment loss
recognized at January 1, 2010, the related impact as a result of the reversal of impairment previously
recorded at December 31, 2010 and the revised depreciation recorded in 2010.
(41)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
25 Transition to IFRS (continued)
The following table highlights the changes to the deferred tax liability:
Deferred Tax Liability – Canadian GAAP
Changes to accounting values
December 31,
2010
$
(533,000)
42,768
January 1,
2010
$
(646,000)
94,551
Deferred Tax Liability – IFRS
(490,232)
(551,449)
(iv) Business combinations
Under Canadian GAAP, contingent consideration is not recorded until the conditional element has been
resolved. Furthermore, acquisition related costs are capitalized as part of the cost of the acquisition. Under
IFRS 3, the Company is required to value the cost of its business combinations at fair value at the
liabilities and contingent consideration incurred and equity
acquisition date of assets transferred,
instruments issued by the acquirer as well as expense all acquisition related costs. As a result, the
Company has estimated the fair value of the contingent consideration related to the business combinations
completed in 2010 and capitalized them as part of the cost of the acquisitions. In addition, all acquisition
related costs have been expensed in the respective period.
(v) Share-based payments
Under IFRS 2, Share-based payments, the Company is required to treat each tranche within an award as a
separate award and calculate compensation expense for each tranche over its own distinct vesting period.
IFRS 2 also requires an estimate of the forfeiture rate in the calculation of periodic compensation expense,
as opposed to being optional under Canadian GAAP. As a result, the Company has estimated a forfeiture
rate and calculated its compensation expense in accordance with IFRS 2 resulting in an adjustment at the
transition date between two accounts within equity and during the year ended December 31, 2010.
(vi) Adjustments to the statements of cash flows
The transition from Canadian GAAP to IFRS had no significant impact on cash flows generated by the
Company except that, under IFRS, cash flows relating to interest, dividends and income taxes are required
to be disclosed separately on the statement of cash flows. Cash flows relating to interest are classified in a
consistent manner as operating, investing or financing each period. Under Canadian GAAP, cash flows
relating to interest payments were classified as operating.
(42)
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(expressed in Canadian dollars)
25 Transition to IFRS (continued)
(vii) Cumulative translation differences
Under IFRS 1, the Company elected to set the cumulative translation amount of $161,067 under Canadian
GAAP to $nil upon transition to IFRS. This has been reflected as a reclassification between accumulated
other comprehensive income (loss) and deficit and thus does not affect reported total equity. There was an
immaterial impact on the cumulative translation amount for the year ended December 31, 2010.
26 Subsequent events
On January 1, 2012, the Company completed the acquisition of the Proshred New York City business from an
existing franchisee for an aggregate purchase price of US$2,569,000. The Company withdrew funds from its
line of credit facility and has obtained vendor financing relating to the purchase of the New York City assets. In
conjunction with the purchase of the business, the exiting franchisee withdrew from the legal complaint filed
against the Company in June 2010. The New York City operating results will be included in the 2012 financial
statements.
The Company is in the process of valuing the assets and liabilities acquired. The preliminary purchase price
allocation is as follows.
Assets acquired
Equipment
Customer lists
Franchise intangibles
Goodwill
Consideration given
Cash
Promissory notes
Settlement of accounts receivable
Acquisition costs (expensed in statement of comprehensive loss)
$
651,334
231,835
1,087,685
652,866
2,623,720
2,246,860
280,858
96,002
2,623,720
44,755
On January 31, 2012, the Company announced that it has entered into an agreement with its Chicago South
franchisee for the franchisee to purchase the Chicago North territories. The Chicago South franchisee has also
renewed his existing franchise agreement for an additional five year period. The Company will recognize
US$93,300 in franchise fee revenue in the first quarter of 2012.
In March 2012, the line of credit limit (see note 15) was increased by $0.63 million to $6.0 million, repayable on
November 27, 2014; all other terms of the agreement remained unchanged.
(43)