ANNUAL REPORT
2012
ANNUAL REPORT
2012
2012 HIGHLIGHTS
Service related system sales for 2012
increased by 14% over 2011, as the
system continued to invest in sales
and marketing activities.
Total system sales in 2012 were
$14.9 million, which was consistent
with 2011’s results despite a 33%
drop in recycling revenue driven by
softness in the paper markets.
SYSTEM SALES GROWTH (in millions - USD)
$16.0
$14.0
$12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$-
CAGR = 28%
Service
System Sales
2007 2008 2009 2010 2011 2012
Corporate locations generated $2.9
million in revenue and $603,000 in
EBITDA for the 12 months ended
December 31, 2012.
Conducted two acquisitions: New
York City, NY and Miami, FL, which
brings the total number of corporate
locations to 5.
in
two
2012,
Awarded
Opened four new locations in 2012,
including Atlanta, GA, Phoenix, AZ,
Dallas, TX and Houston, TX. Awarded
and opened an additional location in
Chicago.
new
including
franchises
Houston, TX and Richmond, VA.
international
in
Dubai, UAE, Abu Dhabi, UAE, Riyadh,
KSA and Jeddah, KSA. This brings the
international total to 5 locations.
Commenced the implementation of
handhelds/GPS and new routing
platform, with the view to enhance
route efficiencies.
Opened
locations
Modernized the truck fleet in New
York City, with a view to reducing
to maximize
repair costs and
customer service response times.
ANNUAL REPORT
2012
TO OUR SHAREHOLDERS
On behalf of the Board of Directors, I am pleased to present the 2012 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 23 locations in operation throughout the United States and five locations in operation in the Middle
East, as of December 31, 2012.
3669131617161618F23235F515F6051015202530352003200420052006200720082009201020112012F2013Operating PROSHRED Locations-World WideUS Domestic - franchisedUS Domestic - corporateInternational
ANNUAL REPORT
2012
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 they generate.
(2) Expanding our location footprint in North America by way of continued franchising and by
location footprint
located acquisitions. We will also expand our
conducting strategically
internationally by way of licensing.
(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.
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.
ANNUAL REPORT
2012
2012 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 service related system sales by 14% versus the previous year;
Recycling related system sales decreased by by 33% versus the previous year, causing
overall system sales to be flat versus 2011;
Saved 350,000 trees by way of recycling shredded paper;
Four new Franchisee commenced operations including Atlanta, Phoenix, Dallas and
Houston;
The existing franchisee in Chicago South purchased the Chicago North rights.
Awarded 2 new franchises in 2012, including Houston, TX and Richmond, VA, and
Opened four additional International locations in 2012 under the License Agreement signed
with Averda LLZ in 2010. (Dubai, UAE, Abu Dhabi, UAE, Riyadh, KSA and Jeddah, KSA.
Continued Growth in Service Revenue – The PROSHRED® system continued to grow in 2012, with
service related system sales (revenues generated from providing secure shredding service to customers
and does not include recycling related revenues) growing at a rate of 14% over the previous year. This
strong growth in service related system sales is due to PROSHRED®’s focus on strong customer service
and the 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 2012. In addition, all of our franchise and
corporate locations in operation more than one year are NAID AAA certified.
ANNUAL REPORT
2012
Commitment to Communities and the Environment – PROSHRED®’s core values includes commitment
to the communities we serve and a commitment towards a cleaner and greener environment. During
2012, PROSHRED® franchisees and corporate locations conducted 180 community shredding events.
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 23,300 tons of paper in 2012,
saving 350,000 trees.
2012 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 was and still is to focus
its sales strategy on building strong route densities and peerless customer service. By building strong
route densities, we can increase our truck utilization, thereby reducing our cost per stop and remaining
competitive during the 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. In
2012, paper prices remained at these lower levels. The PROSHRED® system responded by continuing to
educate our customers on the benefits of our on-site service which allowed PROSHRED® to grow its
service related system sales.
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.
ANNUAL REPORT
2012
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 continued 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 invested in a new franchise oriented web site, invested in building
stronger relationships with business brokers with the aim to increase the quantity of quality candidates
that explore the PROSHRED® business opportunity. Additionally, PROSHRED® management continues to
work with various financing brokers and advisors with the goal to open new financing channels for new
and existing franchisees.
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, and on July 13, 2013 Redishred purchased the Miami franchise, settling their claim against
the Company. The Company has and will continue to work to resolve the remaining litigation in 2013.
New York City Corporate Location – The New York City location was purchased on January 1, 2012, and
required significant incremental investment in human resources and shredding equipment to ensure
that the PROSHRED® standard of customer service was delivered. As a result, this location did not
perform to the level management had expected when purchased. With a new management team and a
new fleet of shredding trucks, management expects better cash flow results from the New York location
in 2013 and onward.
ANNUAL REPORT
2012
REDISHRED CAPITAL CORP AND PROSHRED ® MOVING FORWARD
Industry Update
The following highlights the shredding market in 2012:
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
2012
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;
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 $800,000 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 and customer service.
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
2012
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 and information destruction, and we are looking forward to
continuing our growth in 2013 and onwards.
“Jeffrey Hasham”
Jeffrey Hasham
Chief Executive Officer
ANNUAL REPORT
2012
INFORMATION
Redishred Capital Corp. – Home Office
Proshred Franchising Corp.
Toronto
6790 Century Avenue, suite 200
Mississauga, Ontario, Canada, L5N 2V8
Syracuse
6519 Towpath Road
East Syracuse, NY 13057
Redishred Acquisition Inc. – US Offices:
New York City
5 West Main Street Suite #200
Elmsford, NY 10523
Syracuse
6519 Towpath Road
East Syracuse, NY 13057
Albany
164 Montgomery Street
Albany, NY 12207
Milwaukee
1425 Commerce Ave
Brookfield, WI 53045
MANAGEMENT
Jeffrey Hasham
John Prittie
Kasia Pawluk
Andrew Parry
Chief Executive Officer
President
Chief Financial Officer
Vice President of Operations
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Table of Contents
Forward Looking Statements ................................................................................................................. 2
Non-IFRS Measures ................................................................................................................................. 3
Basis of Presentation .............................................................................................................................. 3
Overview of Redishred Capital Corp. ..................................................................................................... 4
Worldwide locations ................................................................................................................................ 6
Performance Compared to 2012 Goals and Objectives ........................................................................ 7
Overall Performance ............................................................................................................................... 9
Franchising & Licensing ....................................................................................................................... 10
System Sales ........................................................................................................................................................... 10
Total Revenues ........................................................................................................................................................ 15
Operating Expenses ................................................................................................................................................ 15
Depreciation and Amortization – Franchising .......................................................................................................... 16
Corporate Operations ........................................................................................................................... 16
Same Store Corporate Operations ....................................................................................................... 17
Miami Operations .................................................................................................................................. 17
Operating loss (income)........................................................................................................................ 18
Foreign exchange .................................................................................................................................. 19
Interest income and expense................................................................................................................ 19
Income Tax............................................................................................................................................. 19
Net Loss (Income) ................................................................................................................................. 20
Selected Quarterly Results ................................................................................................................... 21
Balance Sheet ........................................................................................................................................ 22
Impairment of Goodwill and Intangible Assets ................................................................................... 23
Financial Condition, Capital Resources and Liquidity ........................................................................ 23
Capital Assets ........................................................................................................................................ 24
Off-Balance Sheet Financing Arrangements ....................................................................................... 24
Transactions with Related Parties ....................................................................................................... 24
Risks and Uncertainties ........................................................................................................................ 25
Use of estimates and judgements ........................................................................................................ 27
Investor Relations Activities ................................................................................................................. 28
Share Data ............................................................................................................................................. 28
Disclosure controls and procedures and internal controls ................................................................ 28
Contingencies ........................................................................................................................................ 29
1
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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 statements for the year ended December 31, 2012 and 2011. Additional information on
Redishred, including these documents and the Company’s 2012 annual report are available on SEDAR at
www.sedar.com. The discussions in this MD&A are based on information available as at April 29th, 2013.
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 and earnings before interest, taxes,
depreciation and amortization (“EBITDA”) as well as meet its financial obligations as they come due over
the next twelve months, 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)
(vii)
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 level of financing that can be obtained, the identification of
appropriate assets and agreement of suitable terms;
anticipated system sales, royalty revenue and corporate store 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
both in the United States and Internationally;
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;
the anticipated corporate results which may be impacted by the ability of the Company to attain the
anticipated cost savings and by the performance of the local economies; and
2
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
(viii)
the Company’s ability to sell the Miami business at the valuation level forecasted and within the next 12
months.
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 on the previous page are not intended to
represent a complete list of the factors that could affect the Company.
Non-IFRS 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.
System sales are revenues generated by franchisees, licensees and corporately operated locations. The
system sales generated by franchisees and licensees drive the Company’s royalties. The system sales
generated by corporate locations are included in the Company’s revenues.
Same store system sales results, royalty fees and corporate operational results are indicators of
performance of franchisees, licensees and corporately operated locations that have been in the system for
equivalent periods in 2012 and 2011.
EBITDA is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is a
performance measure used to assess our corporate locations’ performance.
Corporate operating income (loss) is the income (loss) generated by corporately operated locations. The
operating income (loss) generated is inclusive of depreciation on tangible equipment, primarily trucks and
containers. It does not include amortization related to intangibles assets or allocations for corporate
overhead. The corporate operating income (loss) also includes the interest related to the Company’s line of
credit utilized to purchase the corporately operated locations.
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
All financial information reported in this MD&A is presented under IFRS as Generally Accepted Accounting
Principles (“GAAP”). 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.
3
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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 master 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, 2012, there were 23 operating Proshred locations in the United States comprised of 100.9
territories. 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, 2012, the Company announced the addition of 3 new franchisees to the
system, which include Chicago North, Illinois; Houston, Texas; and Richmond, Virginia. These franchises comprise
3.4, 5.7 and 3.2 territories respectively. The Chicago North franchise commenced operations in September 2012,
the Houston franchise commenced operations in November 2012 and the Richmond franchise commenced
operation subsequent to year-end in March 2013.
During the year ended December 31, 2012, the Company purchased the Proshred New York City and the Proshred
Miami franchises from existing franchisees. The Proshred New York City business was acquired on January 1, 2012
and the Proshred Miami business was acquired on July 13, 2012. The Company operates the Syracuse, Albany,
Milwaukee and New York City locations directly. The Miami business is currently jointly operated by one of the
Company’s franchise locations (refer to ‘Transactions with Related Parties’ and ‘Miami Operations’). The Company
has committed to a plan to sell the Miami business and is reviewing a Letter of Intent to purchase the business by
the franchise in Tampa Bay, Florida.
As of December 31, 2012, the Company also has one international master license to operate in the Middle East1.
There were 5 Proshred locations in the Middle East in operation, including Doha, Qatar, Dubai, UAE, Abu Dhabi,
UAE, Riyadh, Saudi Arabia and Jeddah, Saudi Arabia.
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.
4
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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.
17.
18.
SPRINGFIELD, MA
TAMPA BAY, FL
DENVER, CO
CHARLOTTE, NC
PHILADELPHIA, PA
KANSAS CITY, MO
NEW HAVEN, CT
CHICAGO, IL (includes North and South Territories)
RALEIGH, NC
BALTIMORE, MD (includes Washington, DC)
N. VIRGINIA, VA
ORANGE COUNTY, CA
SAN DIEGO, CA
INDIANAPOLIS, IN
ATLANTA, GA
PHOENIX, AZ
DALLAS, TX
HOUSTON, TX
June 2003
March 2004
August 2004
April 2006
September 2006
December 2006
April 2007
April 2007
June 2007
November 2007
July 2008
September 2009
October 2010
June 2011
January 2012
January 2012
March 2012
November 2012
No.
Corporate locations
19.
20.
21.
22.
23.
SYRACUSE, NY
ALBANY, NY
MILWAUKEE, WI
NEW YORK CITY, NY (includes Long Island, NY)
MIAMI, FL
Franchised territories in operation
Operating since
March 2004(1)
April 2003(1)
August 2003(1)
January 2008(1)
June 2008(1)
Corporate territories in operation
2.3
2.1
3.8
3.3
5.0
4.0
3.6
7.2
4.7
6.7
3.8
3.0
2.9
2.6
6.3
4.2
6.3
5.7
77.5
Territories
2.5
1.2
2.7
11.3
5.7
23.4
No.
Pending franchise locations
Expected operation
Territories
1
RICHMOND, VA
March 2013
Grand Total
3.2
104.1
(1) 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 and New York City has been corporately operated since January 1, 2012. The Miami, FL
business is operated by the Company’s franchise location in Tampa Bay, FL, since July 13, 2013.
5
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
No.
International locations
1.
2.
3.
4.
5.
DOHA, QATAR
DUBAI, UAE
ABU DHABI, UAE
RIYADH, SAUDI ARABIA
JEDDAH, SAUDI ARABIA
Worldwide locations
Operating since
September 2011
January 2012
June 2012
December 2012
December 2012
Territories
-
-
-
-
-
(1) The information prior to the March 17th, 2008 qualifying transaction was obtained from the predecessor Company.
6
3669131617161618F23235F515F6051015202530352003200420052006200720082009201020112012F2013Operating Locations -World WideUS Domestic - franchisedUS Domestic - corporateInternational
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Performance Compared to 2012 Goals and Objectives
In the Company’s 2011 Annual Report, management stated its 2012 goals and objectives. A review of the
Company’s performance in meeting these goals and objectives is included below:
2012 Goals and Objectives
Performance during the year ended
December 31, 2012
Comments
Grow system sales from existing
locations by 10% to $16.4M USD
compared to 2011.
Due to the decline in the paper
prices, at September 30, 2012,
the Company revised its goal to
$14.6M USD.
During 2012, in comparison to 2011, Redishred’s:
Redishred attained the revised
annual goal.
scheduled system sales grew by 10%
(same store sales grew by 9%);
unscheduled system sales grew by 22%
(same store sales grew by 21%);
recycling system sales declined by 33% as
a result of the drastic paper price decline in
the 4th quarter of 2011 (same store sales
declined by 34%).
The Company experienced growth of 14% in
service related system sales during the year ended
December 31, 2012 when compared to the year
ended December 31, 2011.
The price of recycled paper products declined
significantly in 2012 in comparison to 2011,
resulting in overall system sales of $14.9M,
consistent with the prior year total system sales.
Award at least four franchise
locations.
At September 30, 2012, the
Company revised its goal to
awarding at least three franchise
locations.
During 2012, Redishred awarded three new
franchise locations. On January 31, 2012,
Redishred awarded the Chicago North, IL franchise
to its Chicago South franchisee. On August 13,
2012, Redishred awarded the Houston, TX
franchise. On October 24, 2012, the Company
awarded the Richmond, Virginia franchise.
Redishred attained the revised
annual goal.
Redishred acquired the New York City franchise
from an existing franchisee in the first quarter of
2012. On July 13, 2012, Redishred acquired the
Miami franchise from an existing franchisee.
Redishred attained the revised
annual goal.
Redishred earned $603,582 in EBITDA from its
Corporate locations during the year ended
December 31, 2012.
Redishred attained the revised
annual goal.
Conduct three acquisitions in
2012.
At September 30, 2012, the
Company revised its goal to
conducting two acquisitions in
2012.
Achieve a minimum of $1 million
in EBITDA from existing
Corporate locations (Syracuse,
Albany, Milwaukee and New York
City).
Due to continued weakness in the
paper markets, at September 30,
2012, the Company revised its
goal to a minimum of $600,000 in
EBITDA from existing Corporate
locations.
7
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Goals and Objectives for 2013
Management has set new objectives for 2013 as follows:
1. Grow system sales from all locations by 10% over fiscal 2012 to a total of $16.4 million USD.
2. Award at least four franchise locations.
3. Generate $800,000 in earnings before interest, taxes, depreciation and amortization (“EBITDA”) from
current corporate locations, Syracuse, Albany, Milwaukee and NYC.
2013 Goals and Objectives
Strategy for Achieving Goals
Grow system sales from all locations by 10%
to $16.4M USD compared to 2012.
Award at least four franchise locations.
Achieve a minimum of $800,000 in EBITDA
from existing Corporate locations (Syracuse,
Albany, Milwaukee and New York City).
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. In addition, leverage newly developed dedicated
franchising web site (www.proshredfranchise.com).
Management will focus on three key areas to drive
profitability, (1) increased sales and marketing activities in
the local markets (2) continued focus on route
optimization using GPS and Handheld technologies and
(3) overall cost reductions, including the elimination of the
baling facility in New York City.
8
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Overall Performance
Selected Financial Data and Results of Operations
The following table shows selected financial data for the 12 months ended December 31, 2012, 2011 and 2010.
(in CDN except where noted)
Franchise sales and revenue data:
System sales (USD)
Total Revenue
Franchise and license fees
Royalties and service fees
2012
$
2011
$
2010
14,890,134
14,936,708
12,937,195
4,059,977
3,379,383
2,003,763
304,478
823,577
433,396
934,192
355,413
934,639
Franchise related revenue
1,128,055
1,367,588
1,290,052
Corporate location data:
Corporate location revenue
Corporate location operating costs
Corporate location EBITDA
Depreciation – tangible assets
Interest expense
Operating income (loss) from
corporate locations
On-going operating costs
One-time costs(1)
Broker fees
Bad debt expense
Depreciation and
amortization- equipment
2,931,922
(2,328,340)
603,582
(231,018)
(591,983)
2,011,795
(1,230,143)
781,652
(130,536)
(286,915)
713,711
(491,558)
222,153
(71,343)
(73,082)
(219,419)
364,201
77,728
(1,587,389)
(231,498)
(68,089)
–
(1,608,218)
(599,355)
(121,612)
(103,320)
(1,571,196)
-
(25,527)
(35,811)
–
(3,014)
(6,520)
Total operating costs
(1,886,976)
(2,435,519)
(1,639,054)
Operating loss
Operating loss – excluding
one-time costs
(978,326)
(703,730)
(278,725)
(746,829)
(104,375)
(278,725)
Net loss excluding reversals of impairment(2)
(2,802,536)
(1,044,314)
(274,100)
Net loss – excluding
one-time costs(2)
(1,459,444)
(444,959)
(274,100)
Loss per share
(0.10)
(0.02)
(0.01)
(1)
(2)
One-time costs incurred in 2012 and 2011 are primarily legal fees related to the defence of the current franchisee litigation against the Company. As of December 31, 2012, only one
franchise remained in the litigation.
For the year ended December 31, 2012, net loss excluding reversals of impairment and net loss – excluding one-time costs includes amortization of intangible assets of $751,517
(December 31, 2011 - $496,694). Net loss – excluding one-time costs excludes $712,566 of the loss on settlement of the pre-existing relationships related to the NYC and Miami
acquisitions, one-time costs related to the franchisee litigation of $160,248, impairment of goodwill and intangible assets of $545,008 and the gain on re-acquired rights of $138,439. For
the year ended December 31, 2011, net loss excluding reversals of impairment and net loss – excluding one-time costs excludes $589,231 of reversal of impairment.
9
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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 four
corporate locations in Syracuse, Albany, Milwaukee and New York City. These corporate locations generate
shredding service revenue and recycling revenue as well as incur costs related to marketing and servicing of
customers. The Company also incurs costs related to managing the Proshred system, including salaries and
administration.
The Company posted a net loss of $2,802,536 for the year ended December 31, 2012. The net loss was driven by
the following major factors:
(a) the settlement of the pre-existing franchise relationships as part of the New York City and Miami
acquisitions of $712,567;
(b) the impairment of goodwill and other intangible assets of $545,008;
(c) one-time legal costs associated with the defence of the past and current litigation of $160,248;
(d) increased amortization for intangible assets due to the reversal of a portion of the previous impairment
recorded at January 1, 2010 of $186,112;
(e) increased amortization on tangible and intangible corporate location assets due to the acquisition of the
New York City business of $162,100; and
(f) un-realized foreign exchange loss of $132,505 due to the appreciation of the Canadian dollar.
These factors resulted in $1,898,540 of the total net loss or 68% of the total net loss. On July 13, 2012, in
conjunction with the purchase of the Proshred Miami business, the Miami franchisee permanently withdrew from the
legal complaint. As of April 30th, 2013, one franchisee remains in the litigation.
Franchising & Licensing
System Sales
Franchisees, corporate and international 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
2012
2011
%Ch
12 months ended December 31
%Ch
2012
2011
Total operating locations at period
end; US and International
Operating territories (US only)
28
100.9
21
75
Total system sales (USD)
$ 3,754,629
$ 3,474,657
Total system sales (CDN)
$ 3,721,213
$ 3,555,269
33%
35%
8%
5%
28
100.9
21
75
33%
35%
$ 14,890,134 $ 14,936,708
0%
$ 14,884,178 $ 14,769,417
1%
10
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
The following chart illustrates system sales growth by quarter since 2009.
System Sales Quarter Over Quarter:
System sales are broken into three categories, scheduled service sales, unscheduled service sales and recycling.
Service related system sales, scheduled and unscheduled, were US$3,062,623 for the fourth quarter of 2012,
growing by US$421,282 or 16% over the fourth quarter of 2011. For the year ended December 31, 2012, service
related system sales were US$11,867,142, growing by US$1,435,051 or 14% over the same period in 2011.
11
- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,0002Q093Q094Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q12System Sales GrowthTotal system sales - all locationsTotal system sales - same stores$0$500,000$1,000,000$1,500,000$2,000,000$2,500,0004Q101Q112Q113Q114Q111Q122Q123Q124Q12System Sales by Quarter (USD)ScheduledUnscheduledRecycling
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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 focus resulted in continued growth in this category in the fourth quarter of 2012 versus the same
quarter in 2011. For the three months ended December 31, 2012, scheduled sales reached a record high of
US$1,930,088.
3 months ended December 31
%Ch
2012
$
2011
$
12 months ended December 31
%Ch
2012
$
2011
$
Scheduled service sales (USD)
1,930,088
1,733,851
11%
7,525,895
6,866,676
10%
Same store scheduled service
sales (USD)
Unscheduled sales:
1,913,596
1,731,837
10%
7,484,062
6,852,120
9%
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. For the year ended
December 31, 2012, unscheduled sales reached a high of $4,341,247, growing 22% over the same period in 2011.
3 months ended December 31
12 months ended December 31
2012
$
2011
$
%Ch
2012
$
2011
$
% Ch
1,132,535
907,490
25%
4,341,247
3,565,415
22%
1,093,003
888,487
23%
4,213,689
3,492,915
21%
Unscheduled service sales
(USD)
Same store unscheduled
service sales (USD)
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 the price of paper, which is impacted by global supply
and demand for shredded paper and the volume of paper recycled which is measured in tons. From the last quarter
of 2009 to the third quarter of 2011, the price of recycled paper products increased and grew to near record highs of
$247 per ton, on average, in the Proshred system. From the third quarter of 2011 to the second quarter of 2012,
paper prices decreased 52% to an average low of $118 per ton, in the Proshred system. For the year ended
December 31, 2012, the average price of paper in the Proshred system was $126 per ton. During 2012, paper
prices attained by the system decreased by 39% over the prior year. The decrease in paper prices has been
slightly offset by a 6% increase in tonnage recycled within the system.
3 months ended December 31
2012
$
2011
$
%Ch
12 months ended December 31
%Ch
2012
$
2011
$
Recycling sales (USD)
692,006
833,316
(17)%
3,022,992
4,504,617
Same store recycling sales (USD)
671,368
823,054
(18)%
2,947,225
4,443,324
(33)%
(34)%
12
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
The system as a whole has continued to shred and recycle increased volumes of paper. During the year ended
December 31, 2012, the system shredded and recycled 23,300 (December 31, 2011 – 21,900) tons of paper, an
increase of 6% over the prior year, which equates to 350,000 (December 31, 2011 - 328,000) trees being saved.
13
$0$50$100$150$200$250$3004Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q12Average Price of Paper per Ton4Q101Q112Q113Q114Q111Q122Q123Q124Q12$0$200,000$400,000$600,000$800,000$1,000,000$1,200,000$1,400,000$1,600,000 - 1,000 2,000 3,000 4,000 5,000 6,000 7,0004Q101Q112Q113Q114Q111Q122Q123Q124Q12Tons of PaperRecycling Revenue and TonnageTotal TonsRecycling Revenue
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Mix of business:
Scheduled sales account for 51% of total sales for the quarter ended December 31, 2012 (December 31, 2011 –
50%). Unscheduled sales account for 30% of total sales for the three months ended December 31, 2012 (December
31, 2011 – 26%). Recycling sales account for 19% of total sales for the quarter ended December 31, 2012
(December 31, 2011 – 24%).
Scheduled sales account for 51% of total sales in 2012 (2011 – 46%). Unscheduled sales account for 29% of total
sales in 2012 (2011 – 24%). Recycling sales account for 20% of total sales in 2012 (2011 – 30%).
14
010,00020,00030,00040,00050,00060,00070,00080,00090,000100,0004Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q12Numer of treesNumber of Trees Saved51%30%19%System Sales Mix3 months ended December 31, 2012ScheduledUnscheduledRecycling$ 692,006$ 1,132,535$ 1,930,08850%26%24%System Sales Mix3 months ended December 31, 2011ScheduledUnscheduledRecycling$ 907,490$ 833,316$ 1,733,85151%29%20%System Sales Mix12 months ended December 31, 2012ScheduledUnscheduledRecycling$ 4,341,247$ 3,022,992$ 7,525,89546%24%30%System Sales Mix12 months ended December 31, 2011ScheduledUnscheduledRecycling$ 6,866,676$4,504,617$ 3,565,415
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Total Franchising Revenues
3 months ended December 31
12 months ended December 31
2012
$
2011
$
% Ch
2012
$
2011
$
%Ch
Franchise and license fees
70,595
371,355
(81)%
304,478
433,396
(30)%
Royalty and service fees
210,420
229,059
(8)%
823,577
934,192
(12)%
Total franchise and license
related revenue
281,015
600,414
(53)%
1,128,055
1,367,588
(18)%
During the fourth quarter of 2012, the Company entered into an agreement with a new franchisee to operate a
“Proshred” shredding franchise in the Richmond, Virginia market. As a result, the Company earned US$66,920 in
franchise fees. 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 and training is completed. Royalty and service
fees earned in 2012 were lower than in 2011 due to the conversion of the New York City franchise location to a
corporate location as well as the 39% decline in paper prices which resulted in lower system sales. The royalty and
service fees include royalties and service fees from the Miami business (refer to ‘Miami Operation’).
The Company derives all franchise and license related revenues in US dollars which are translated at the average
exchange rate for the period. For the three months ended December 31, 2012, royalty and fee revenues were
US$281,127. For the year ended December 31, 2012, royalty and fee revenues were US$1,128,507.
Operating Expenses
Salaries
General, administrative and
marketing – on-going
General, administrative and
marketing – one-time costs
Broker fees
Bad debt expense
Depreciation and
amortization - equipment
3 months ended December 31
12 months ended December 31
2012
$
2011
$
%Ch
2012
$
2011
$
217,731
212,286
(3)%
817,856
842,155
224,041
226,427
1%
769,533
766,063
22,222
24,139
–
–
151,521
98,197
85%
75%
59,341
100%
(2,539)
100%
231,498
68,089
599,355
121,612
–
–
103,320
100%
3,014
100%
%Ch
5%
0%
61%
44%
Total operating expenses
488,133
745,237
34%
1,886,976
2,435,519
23%
Operating expenses for the year ended December 31, 2012 include expenses to support 23 Proshred franchise and
corporate locations in operation, training and initial support for pending locations, and the costs to develop new
markets by way of franchising, licensing and acquisition. 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. For the year ended
December 31, 2012, one-time general, administration and marketing costs of $160,248 relate to the defence of the
past and current litigation and $71,250 in severance related to one terminated employee. As of April 24th, 2013, one
franchisee remains a party to the legal complaint.
15
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Depreciation and Amortization – Franchising
Depreciation and amortization relate to the purchase of Professional Shredding Corporation (“PSC”) and the
Proshred franchise business in 2008. For the year ended December 31, 2012, depreciation and amortization of
intangibles related to the franchise and license operations increased over the prior year due to the reversal of a
portion of impairment as at December 31, 2011. An impairment loss was recorded at January 1, 2010 with the
adoption of IFRS. Depreciation and amortization are as follows:
3 months ended December 31
12 months ended December 31
2012
$
2011
$
%Ch
2012
$
2011
$
%Ch
–
(2,539)
(100)%
–
3,014
100%
168,295
263,529
36%
36%
524,253
338,141
(55)%
524,253
341,155
(55)%
Depreciation and amortization –
equipment
Depreciation and amortization –
intangibles
Depreciation and amortization
168,295
260,990
Corporate Operations
The Company operates four shredding operations in Syracuse, Albany, Milwaukee, and New York City. These
locations represent the Company’s corporately owned locations. The Miami business is currently operated by one of
the Company’s franchise locations. Refer to ‘Miami Operations’ and ‘Transactions with Related Parties.’
3 months ended December 31
12 months ended December 31
% of
revenue
2012
$
% of
revenue
20111
$
% of
revenue
2012
$
% of
revenue
20111
$
518,208
120,586
638,794
509,561
129,233
39,044
161,915
81%
19%
100%
80%
20%
6%
25%
368,038
115,145
483,183
316,774
166,411
34,271
78,240
76%
24%
100%
66%
34%
7%
16%
2,363,002
568,920
2,931,922
81%
19%
100%
1,437,817
573,978
2,011,795
2,328,340
79%
1,230,143
603,582
21%
781,652
71%
29%
100%
61%
39%
231,018
591,983
8%
20%
130,536
286,915
6%
14%
(71,726)
(11)%
53,900
11%
(219,419)
(7)%
364,201
18%
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, 2011 include the corporate operations of Syracuse, Albany and Milwaukee.
Shredding service and recycling revenue is generated by our corporate locations in Albany, Syracuse, Milwaukee
and New York City. Total shredding related revenue for the three and twelve months ended December 31, 2012
increased substantially over the prior comparative periods in 2011 due to the acquisition of the New York City
franchise on January 1, 2012. 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, 2012, shredding service and recycling
revenues, denominated in US dollars were US$640,140. For the twelve months ended December 31, 2012,
shredding service and recycling revenues, denominated in US dollars were US$2,932,150.
16
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Operating costs increased over the same periods in the prior year as a result of higher truck repair and maintenance
costs in New York City, which led to increased costs of operation and client service. In particular, the New York City
location incurred $142,623 in repairs and maintenance costs during the year ended December 31, 2012. During the
third quarter, the Company replaced two of its existing shredding vehicles with new shredding equipment with a
view to minimize service disruptions and repair costs. Subsequent to year-end, the Company replaced two more of
its existing shredding vehicles with new shredding equipment. The Company continues to assess its truck fleet to
ensure that customer service levels are maintained at high levels, and operational efficiencies are maximized. The
corporate operations also experienced a 38% decline in recycling revenue as a result of the decline in paper prices.
This resulted in a decrease of $215,941 in recycling revenue for the three corporate locations in operation in 2011
and 2012.
Same Store Corporate Operations
Same store corporate operational results are indicators of performance of corporate stores that have been in the
system for equivalent periods in 2012 and 2011. Same store corporate results include the operations of Syracuse,
Albany and Milwaukee. For the three and twelve months ended December 31, 2012, recycling revenues decreased
by 33% and 38% respectively as a result of the significant decline in paper prices. This led to the decline in EBITDA
and operating income for both periods.
3 months ended December 31
12 months ended December 31
% of
revenue
2012
$
% of
revenue
2011
$
% of
revenue
2012
$
% of
revenue
2011
$
300,260
77,213
377,473
271,591
105,882
27,658
73,707
79%
21%
100%
72%
28%
7%
20%
368,038
115,145
483,183
316,774
166,409
34,271
78,240
76%
24%
100%
66%
34%
7%
16%
1,377,672
358,035
1,735,707
79%
21%
100%
1,437,817
573,978
2,011,795
1,187,963
68%
1,230,143
547,744
32%
781,652
71%
29%
100%
61%
39%
136,286
296,457
8%
17%
130,536
286,915
6%
14%
4,517
1%
53,900
11%
115,001
7%
364,201
18%
Revenue:
Shredding service
Recycling
Total revenue
Operating costs
EBITDA
Depreciation – tangible
assets
Interest expense
Corporate operating
income
Miami Operations
On December 31, 2012, the Company committed to a plan to sell the Miami business acquired on July 13, 2012.
Given the geographic location of the business in relation to the Company’s other corporate locations, the Company
decided that the customers would be best served by locations in closer proximity to Miami. The Company also
determined that the Miami location might also be required to invest in infrastructure and additional staff to run the
operations effectively, which would result in lower cash flow margins. The Company is currently reviewing a Letter of
Intent to purchase the business by the franchise in Tampa Bay. Florida. At December 31, 2012 the Company
classified the Miami business as a disposal group held for sale and as a discontinued operation. The Company
earns royalty and service fees on the gross Miami revenues and rental revenue for the use of the shredding truck.
The Company incurs finance costs on the monthly truck loan payments and depreciation and amortization on the
Miami tangible and intangible assets. The Company’s rental revenues and expenses from the Miami business that
are associated with the disposal group are presented below:
17
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Revenue
Expenses
Operating expenses
Depreciation and amortization
Income from discontinued operations
Finance costs
Income for the year associated with the disposal group
For the year ended
December 31, 2012
$
29,410
(1,828)
(20,142)
(21,970)
7,440
(3,164)
4,276
Depreciation and Amortization
Depreciation and amortization relates to the assets purchased in relation to the Syracuse, Albany, Milwaukee, New
York City and Miami corporate locations. For the twelve months ended December 31, 2012, depreciation and
amortization increased significantly as a result of the acquisition of the New York City and Miami locations.
Depreciation and amortization are as follows:
3 months ended December 31
%Ch
2012
$
2011
$
12 months ended December 31
2012
$
2011
$
%Ch
Depreciation and amortization –
equipment
39,044
34,271
(14)%
231,018
130,536
(77)%
Depreciation and amortization –
intangibles
(25,640)
41,021
163%
227,264
158,553
(43)%
Depreciation and amortization
13,404
75,292
(82)%
458,282
289,089
(59)%
Operating loss (income)
The Company posted an operating loss of $278,851 for the three months ended December 31, 2012 and an
operating loss of $978,326 for the twelve months ended December 31, 2012. Immediately after the purchase of the
New York City business, the Company commenced a review of the New York City operations. As a result, the
Company implemented a cost reduction program, a truck refurbishment and replacement program and a route
optimization program with a view towards improved results. For the twelve months ended December 31, 2012 the
operating loss was also driven by professional fees of $160,248 related to litigation. Furthermore, for the twelve
months ended December 31, 2012, paper prices attained by the system decreased by 39% over the same period in
2011. This resulted in lower royalty revenue from franchisees and lower recycling revenue from corporate locations.
During the year ended December 31, 2012, the Company generated revenues from awarding the North Chicago, IL
franchise, the Houston, TX franchise and the Richmond, VA franchise.
3 months ended December 31
%Ch
12 months ended December 31
%Ch
2012
$
2011
$
2012
$
2011
$
Operating loss (income)
Operating loss (income) –
278,851
90,563
(207)%
978,326
703,730
(39)%
excluding one-time costs
256,629
(60,602)
(524)%
746,829
104,375
(635)%
18
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Foreign exchange
Foreign exchange (gain) loss was as follows:
3 months ended December 31
%Ch
12 months ended December 31
%Ch
2012
$
2011
$
2012
$
2011
$
Foreign exchange (gain) loss
(78,112)
(130,580)
(40)%
132,505
(66,163)
(300)%
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
US dollar costs. The Company has significant dollar value assets denominated in US dollars which are revalued at
the exchange rate at the date of the statement of financial position, which results in unrealized foreign exchange
gains or losses.
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 bear interest at 6.502% to
8.14% per annum. All interest costs have been attributed to the acquisition of corporate locations, the financing of
shredding vehicles and for general business purposes. Interest expense increased in 2012 as a result of the use of
the line of credit to acquire the New York City business on January 1, 2012, the Miami business on July 13, 2012
and for general business purposes.
3 months ended December 31
12 months ended December 31
2012
$
2011
$
%Ch
2012
$
2011
$
%Ch
Interest income
(925)
(586)
58%
(4,785)
(2,946)
62%
Interest expense
161,915
78,240
(107)%
591,983
286,915
(106)%
Income Tax
On March 17, 2008 the Company booked a future tax liability relating to the purchase of PSC and Proshred
Franchising Corp. (“PFC”). During the year ended December 31, 2012, the Company booked a tax recovery of
$195,268. 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.
19
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Net Loss (Income)
3 months ended December 31
2012
$
2011
$
%Ch
12 months ended December 31
%Ch
2012
$
2011
$
Net loss (income)
Net loss (income) –
969,287
(423,409)
(329)%
2,802,536
455,083
(516)%
excluding one-time costs
179,960
14,298
(1159)%
1,459,444
444,959
(228)%
The Company posted a net loss of $2,802,536 for the year ended December 31, 2012. The net loss was driven by
the following major factors:
(a) the settlement of the pre-existing franchise relationships as part of the New York City and Miami
acquisitions of $712,567;
(b) the impairment of goodwill and other intangible assets of $545,008;
(c) one-time legal costs associated with the defence of the past and current litigation of $160,248;
(d) increased amortization for intangible assets due to the reversal of a portion of the previous impairment
recorded at January 1, 2010 of $186,112;
(e) increased amortization on tangible and intangible corporate location assets due to the acquisition of the
New York City business of $162,100; and
(f) un-realized foreign exchange loss of $132,505 due to the appreciation of the Canadian dollar.
These factors resulted in $1,898,540 of the total net loss or 68% of the total net loss. On July 13, 2012, in
conjunction with the purchase of the Proshred Miami business, the Miami franchisee permanently withdrew from the
legal complaint. As of April 30th, 2013, one franchisee remains in the litigation.
Net loss (income) excluding one-time costs excludes the impairment of goodwill and other intangible assets, the
loss on settlement of the pre-existing franchise relationships, the gain on re-acquired rights, the gain on the sale of
assets and one-time legal costs associated with the defence of the past and current litigation and in severance
related to one terminated employee.
20
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Selected Quarterly Results
(in CDN except where
noted)
Q4
2012
Q3
$
Q2
$
Q1
$
Q4
$
2011
Q3
$
Q2
$
Q1
$
System sales (USD)
3,754,629
3,738,939
3,751,552
3,622,856
3,474,657
3,978,639
3,951,035
3,530,693
Total Company revenue
919,809
1,073,287
965,831
1,101,050
1,083,597
757,315
827,278
711,192
Franchise and license
fees
70,595
140,033
-
93,487
371,381
-
61,989
-
Royalty and service fees
210,420
203,609
208,285
201,627
229,033
243,535
242,222
219,428
Total revenue from
franchising and
licensing
281,015
343,642
208,285
295,114
600,414
243,535
304,211
219,428
On-going operating costs
(441,772)
(343,330)
(420,524)
(402,470)
(495,516)
(409,908)
(391,075)
(415,641)
One-time costs
(22,222)
(62,223)
(55,254)
(69,262)
(151,525)
(315,541)
(87,680)
(44,609)
Broker fees
(24,139)
(43,950)
-
-
(98,197)
-
(23,406)
-
Total operating
expenses
Total operating income
(loss) – franchising and
licensing
Corporate locations
revenue
Corporate locations
operating costs
Corporate locations
EBITDA
Depreciation – tangible
assets
(488,133)
(449,503)
(475,778)
(471,732)
(745,237)
(725,449)
(502,161)
(460,250)
(207,118)
(105,861)
(267,493)
(176,618)
(144,823)
(481,914)
(197,950)
(240,822)
638,794
729,645
757,546
805,936
483,183
513,780
523,067
491,764
(509,561)
(611,075)
(601,950)
(605,545)
(316,772)
(288,551)
(305,339)
(319,478)
129,233
118,570
155,596
200,391
166,411
225,229
217,728
172,286
(39,044)
(67,667)
(62,291)
(62,219)
(34,271)
(32,507)
(33,975)
(29,783)
Interest expense
(161,915)
(151,488)
(140,199)
(138,367)
(78,240)
(70,322)
(69,559)
(68,795)
Total operating income
(loss) - corporate
Total operating income
(loss) – excluding one-
time costs - Company
Income (loss) before
taxes from continuing
operations
Profit (loss) attributable to
owners of the parent
Profit (loss) excluding
one-time costs
Basic and diluted net
income (loss) per share
21
(71,726)
(100,585)
(47,894)
(195)
53,900
122,400
114,194
73,708
(256,629)
(144,223)
(260,133)
(107,551)
60,602
(43,973)
3,925
(122,505)
(1,127,760)
(598,083)
(434,076)
(842,160)
324,925
(312,605)
(245,583)
(330,908)
(969,287)
(591,396)
(418,385)
(823,470)
423,409
(309,946)
(244,583)
(325,908)
(179,960)
(561,643)
(363,131)
(403,508)
(14,297)
5,595
(156,903)
(281,299)
(.04)
(.02)
(.01)
(.03)
.00
(.01)
(.01)
(.01)
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
Selected Quarterly Results (continued)
Scheduled and unscheduled system sales continue to grow each quarter, driven by the Company’s sales and
marketing programs that are aimed at educating clients on the legislative requirements to destroy confidential
information using a secure on-site solution. 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 2 nd 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.
From the last quarter of 2009 to the third quarter of 2011, the price of recycled paper products increased and grew
to near record highs to $247 per ton, on average, in the Proshred system. From the third quarter of 2011 to the
second quarter of 2012, paper prices decreased 52% in the Proshred system. Refer to ‘Recycling Sales’ on page
12.
Royalty fees in 2012 decreased over the prior 2011 quarters as a result of the conversion of the New York City
franchise location to a corporate location as well as the drastic decline in paper prices. This has been offset by the
franchise fee earned related to awarding the North Chicago franchise in the first quarter of the year, the Houston,
TX franchise in the third quarter of 2012 and the Richmond, VA franchise in the fourth quarter of the year.
The Company continues to closely monitor and control on-going operating costs across the Company. During 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, which was recovered as a reduction to the purchase price for the Miami acquisition on
July 13, 2012.
Balance Sheet
Working capital
Total assets(1)
Total liabilities(1)
December 31, 2012
$
December 31, 2011
$
442,340
2,982,235
7,307,860
8,939,765
7,782,856
6,660,196
(1) Total asset and liabilities include assets held for sale of $286,952 and liabilities held for sale of $105,178 related to the Miami business.
On December 31, 2012, the Company issued $375,000 convertible, unsecured subordinated, debentures. The
debentures have a five year term and a coupon of 7.5% interest per annum. Each $1,000 principal amount of
debenture entitles the holder to convert to approximately 3,333 common shares at a conversion price of $0.30 per
share.
The Company entered into two loan and security agreements in the third quarter of 2012 for a total amount of
US$246,556 in order to replace two of its existing shredding vehicles with new shredding equipment with a view to
minimize service disruptions and repair costs. The Company also entered into a loan and security agreement on
July 13, 2012 to finance a shredding vehicle in conjunction with the Miami acquisition. The current portion of these
truck loans is included in current liabilities.
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. During the year ended December 31, 2011, the line of credit was
increased to $5.37 million; all other terms of the agreement remained unchanged. During the year ended December
31, 2012, the line of credit limit was increased to $6.03 million, repayable on November 27, 2014; all other terms of
the agreement remained unchanged. The Company has drawn from its line of credit in order to finance the
purchase of its’ corporate locations including Syracuse, Albany, and Milwaukee in 2010 and New York City and
Miami in 2012 as well as for general business purposes.
22
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
On November 11, 2011, the Company entered into a loan and security agreement in the amount of US$240,000,
repayable with monthly blended payments of principal and interest of US$5,690 maturing 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$266,636.
The value of the loan on December 31, 2012 is $171,356.
On August 3, 2012, the Company entered into a loan and security agreement in the amount of US$125,556,
repayable with monthly blended payments of principal and interest of US$2,545 maturing August 13, 2017. The loan
bears interest at 8% per annum and is secured by one shredding vehicle with a carrying value of $180,357. The
value of the loan on December 31, 2012 is $118,047.
On August 8, 2012, the Company entered into a loan and security agreement in the amount of US$121,000,
repayable with monthly blended payments of US$2,379 maturing August 8, 2017. The loan bears interest at 6.506%
per annum and is secured by one shredding vehicle with a carrying value of $176,675. The value of the loan on
December 31, 2012 is $113,818.
The Company issued no dividends during the year.
Impairment of Goodwill and Intangible Assets
The Company performs an impairment test of its tangible and intangible assets when there is an indication of
permanent 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. At December 31, 2012, there was sufficient indication of impairment, such as significantly reduced
recycling revenue driven by a massive drop in paper prices over 2011. This fact indicated that certain franchisees
and corporate locations warranted an analysis to be performed. Based on the impairment review, the Company
recorded an impairment loss of $312,904 which was allocated to three of its’ intangible assets including the
Franchise agreements, the Proshred system and the Trademarks and intellectual property.
Goodwill is tested for impairment on an annual basis. Upon performing its annual goodwill impairment test, it was
assessed that the goodwill related to the New York City business was impaired by $232,103. The impairment loss
was driven by poor operating performance in our New York City location driven by significant truck repairs related to
legacy truck fleet. These truck issues caused significant truck down time, which negatively impacted sales and cash
flows generated. The Company as at April 30, 2013 has fully replaced its New York City Fleet with new equipment.
Financial Condition, Capital Resources and Liquidity
The Company closely monitors its cash balances and cash flows generated from operations to meet its
requirements. The Company has drawn from its line of credit in order to finance the purchase of its’ corporate
locations including Syracuse, Albany, Milwaukee in 2010 and New York City and Miami in 2012 as well as for
general business purposes. The line of credit is repayable on November 27, 2014 with interest payments due semi-
annually. 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.
On December 31, 2012, the Company obtained equity and debt funding from the Company’s insiders. The
Company issued $375,000 convertible, unsecured subordinated, debentures. The debentures have a five year term
and a coupon of 7.5% interest per annum. Each $1,000 principal amount of debenture entitles the holder to convert
to approximately 3,333 common shares at a conversion price of $0.30 per share. The convertible debentures
contain two components: liability and equity elements. The liability component net of transaction costs is $333,119
and the equity component net of transaction costs is $27,710.
23
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
In addition, the Company has implemented a cost reduction strategy which includes the elimination of its baling
facility in New York City and reducing costs throughout its corporate locations. Subsequent to year-end the
Company sold its baling equipment and intends to sell the remaining equipment related to the baling facility closure.
The Company has taken a strong sales focus approach and has dedicated sales leads in each corporate location to
grow revenues and cash flows. The Company is also negotiating the sale of its Miami business as referred to under
the section ‘Miami Operations.’
The accounts payable, accrued liabilities and current portions of the notes payable and long-term debt of $700,509
at December 31, 2012 ($771,541 – December 31, 2011) 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) growing its corporate locations, (2)
continuing to franchise in the United States and (3) conducting accretive acquisitions. The Company estimates that
it will be necessary 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
$
227,599
208,136
–
435,735
Capital Assets
As at,
December 31, 2012 December 31, 2011
% Ch
$
$
Net book value
1,112,105
565,294
97%
Capital assets (not including intangible assets) increased as a result of the acquisition of the New York City
business on January 1, 2012. This increase was partially offset by additional depreciation expense. The Company
acquired shredding vehicles, recycling equipment, computer equipment, furniture and shredding containers as part
of the New York City. The Company currently has $286,952 in capital assets held for sale related to the Miami
acquired assets, which is not included in the figure above.
Off-Balance Sheet Financing Arrangements
The Company has no off-balance sheet financing arrangements.
Transactions with Related Parties
A Director of the Company is the owner of the Tampa Bay, Florida Proshred franchise. Included in accounts
receivable at December 31, 2012, is $1,945 (2011 - $1,592) due from this franchise. During the year ended
December 31, 2012, the Company earned royalty and service fees amounting to $78,289 (2011 - $87,165) from this
franchise.
The Director’s franchise is currently managing on the Company’s behalf the Proshred Miami business acquired by
the Company. The Company earned royalty and service fees of $10,828 during the year ended December 31, 2012
from the Miami operations. Included in accounts receivable at December 31, 2012 is $2,528 due from the Miami
operations.
24
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
The Company has a line of credit facility with a related party entity, the Company’s main shareholder, for a
maximum of $6.03 million, repayable on November 27, 2014, bearing interest at a fixed rate of 10% per annum. The
Company has drawn from its line of credit in order to finance the purchase of its’ corporate locations including
Syracuse, Albany, Milwaukee in 2010 and New York City and Miami in 2012 as well as for general business
purposes.
Included in selling, general and administrative expenses for the nine months ended December 31, 2012 are
insurance premium amounts of $13,037 (December 31, 2011 - $15,317) paid to an insurance brokerage firm owned
by a Director of the Company and $3,142 in recruiting services paid to a recruiting firm owned by a Director of the
Company.
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.
Financing
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 will 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.
25
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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.
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.
26
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
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 22 to the 2012 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.
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 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.
iii) Useful lives of tangible and intangible assets
Management estimates the useful lives of tangible and definite life intangible assets based on the period during
which the assets are expected to be available for use. The amounts and timing of recorded expenses for
amortization of these assets for any period are affected by these estimated useful lives. On an annual basis, the
Company assesses the useful lives of its tangible and intangible assets with definite lives and the useful lives are
updated if expectations change as a result of physical wear and tear, technical or commercial obsolescence and
legal or other limits to use. It is possible that changes in these factors may cause significant changes in the
estimated useful lives of the Company’s tangible and definite life intangible assets in the future.
27
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
iv) Assets held for sale
On December 31, 2012, the Company committed to a plan to sell the Miami business acquired on July 13, 2012 and
therefore classified it as a disposal group held for sale. The Company considered the subsidiary met the criteria to
be classified as held for sale at that date for the following reasons. The business is difficult to manage and support
given its current geographical location relative to the Company’s other corporate locations and head office. The
Company would also be required to invest in infrastructure and additional staff to run the operations effectively,
which would result in lower margins. The Company expects negotiations to be finalized and the sale to be
completed by the summer of 2013.
v) Deferred income taxes
The Company, including its subsidiaries, operate and earn income in multiple countries and is subject to changing
tax laws in multiple jurisdictions within these countries. Significant judgements are necessary in determining income
tax assets and liabilities. Although management believes that it has made reasonable estimates about the final
outcome of tax uncertainties, no assurance can be given that the final outcome of these tax matters will be
consistent with what is reflected in the historical income tax provisions. Such differences could have an effect on the
deferred tax assets and liabilities in the period in which such determinations are made. At each date of Statement of
Financial Position, the Company assesses whether the realization of future tax benefits is sufficiently probable to
recognize deferred tax assets and liabilities. This assessment requires the exercise of judgement on the part of
management with respect to, among other things, benefits that could be realized from available tax strategies and
future taxable income, as well as other positive and negative factors. The recorded amount of total deferred tax
assets and liabilities could be materially affected if changes in current tax regulations are enacted.
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, 2012,
there were 28,884,658 issued and outstanding common shares. As at December 31, 2012 there were 1,691,250
options to acquire common shares and 4,000,000 warrants to acquire common shares. During the year ended
December 31, 2012, 978,750 stock options expired. There have been 992,500 stock options granted during the year
ended December 31, 2012 (2011 – 150,000). On November 23, 2012 the Company granted options to certain
Directors of the Company to purchase an aggregate of 975,000 common shares. The granting of new stock options
follows the expiry of their original Stock Option Agreements dated August 29, 2007. The new stock option grants are
on substantially the same terms as those that have expired. The options were granted at an exercise price of $0.20,
with 100% of the options vesting upon execution, and with a term of five years. As of April 30, 2013 there are
28,884,658 issued and outstanding common shares, 1,691,500 options to acquire common shares and 4,000,000
warrants to acquire common share.
Disclosure controls and procedures and internal controls
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,
2012. 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.
28
REDISHRED CAPITAL CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2012
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that
the Company’s Disclosure Controls and Procedures and Internal Controls will prevent or detect all errors and all
fraud. Due to the inherent limitations in all control systems, an evaluation of controls can provide only reasonable,
not absolute, assurance that all control issues and instances of fraud or error, if any, within the Company have been
detected. During the year ended December 31, 2012, there have been no changes in the Company’s policies and
procedures and other processes that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Contingencies
During the second quarter of 2010, four 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 Proshred Franchising Corp. (“PFC”), (2) fraudulent misrepresentation by PFC, (3) negligent misrepresentation by
PFC, and (4) violation of various state laws by PFC. On July 13, 2012, in conjunction with the purchase of the
Proshred Miami business, the Miami franchisee permanently withdrew from the legal complaint. As of December 31,
2012 and April 30, 2013, one franchisee remains in the legal complaint and three franchisees have permanently
withdrawn.
The Company intends to vigorously defend against this remaining 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.
Dated: April 30, 2013
29
RediShred Capital Corp.
Consolidated Financial Statements
December 31, 2012 and 2011
(expressed in Canadian dollars)
April 30, 2013
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.
Grant Thornton 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
Grant Thornton LLP
Suite 300
3600 Dundas Street
Burlington, ON
L7M 4B8
T +1 289 313 0300
F +1 289 313 0355
www.GrantThornton.ca
Independent auditor’s report
To the Shareholders of RediShred Capital Corp.
We have audited the accompanying consolidated financial statements of RediShred Capital Corp. which comprise the consolidated statement of
financial position as at December 31, 2012, and the statements of consolidated comprehensive income/loss, changes in equity and cash flows for
the year ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of 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 financial statements based on our audit. We conducted our audit in accordance with Canadian
generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair
presentation of the 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 company’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 financial
statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of RediShred Capital Corp. as at December 31,
2012 and its financial performance and its cash flows for the year ended December 31, 2012 in accordance with International Financial Reporting
Standards.
Other matter
The financial statements of RediShred Capital Corp. for the year ended December 31, 2011 and 2010 were audited by another auditor who
expressed an unqualified opinion on those financial statements on April 30, 2012.
Burlington, Canada
April 30, 2013
Chartered Accountants
Licensed Public Accountants
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
RediShred Capital Corp.
Consolidated Statements of Financial Position
As at December 31, 2012 and 2011
(expressed in Canadian dollars)
Assets
Current assets
Cash
Cash attributable to the Advertising Fund (note 5)
Trade receivables (note 6)
Prepaid expenses
Notes receivable from franchisees (note 7)
Income taxes recoverable
Non-current assets
Notes receivable from franchisees (note 7)
Equipment (note 9)
Intangible assets (note 10)
Goodwill (notes 11 and 12)
Assets classified as held for sale (note 13)
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 14)
Current portion of notes payable
Deferred revenue
Current portion of long-term debt (note 15)
Contingent consideration (note 8)
Non-current liabilities
Long-term debt (note 15)
Long-term notes payable
Deferred tax liability (note 21)
Convertible debenture (note 17)
Liabilities directly associated with the assets
classified as held for sale (note 13)
Total liabilities
Shareholders’ (Deficiency) Equity
Total liabilities and shareholders’ equity
Commitments and contingency (note 22)
December 31,
2012
$
December 31,
2011
$
December 31,
2010
$
532,040
48,031
424,064
97,949
40,765
–
1,142,849
193,669
1,112,105
3,210,580
1,361,705
7,020,908
286,952
7,307,860
504,510
81,383
–
99,692
14,924
700,509
6,292,452
137,410
214,188
333,119
7,677,678
105,178
7,782,856
(474,996)
7,307,860
3,011,786
137,818
460,114
63,596
62,859
17,603
3,753,776
183,619
565,294
3,558,806
878,270
8,939,765
–
988,592
–
414,910
45,021
33,178
–
1,481,701
108,705
660,506
3,179,759
1,112,232
6,542,903
–
8,939,765
6,542,903
686,167
22,028
10,170
53,176
–
771,541
5,478,546
–
410,110
–
6,660,196
513,559
127,841
–
–
–
641,400
2,701,655
–
490,232
–
3,833,287
–
–
6,660,196
3,833,287
2,279,568
2,709,616
8,939,765
6,542,903
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, 2012 and 2011
(expressed in Canadian dollars)
Continuing operations
Revenue (note 18)
Corporate operating locations expenses (note 19)
Selling, general and administrative expenses (note 20)
2012
$
2011
$
4,049,150
(2,786,617)
(2,565,820)
3,379,383
(1,519,232)
(2,729,582)
Loss before interest, income taxes and other items
(1,303,287)
(869,431)
(Impairment) reversal of impairment of intangible assets (note 12)
Impairment of goodwill (note 12)
Gain on re-acquired rights (note 8)
Loss on settlement of pre-existing litigation (note 8)
Gain on sale of assets (note 9)
Loss before interest and income taxes
Interest expense
Interest income
Loss before income taxes
Income tax recovery (note 21)
(312,904)
(232,103)
138,439
(712,567)
7,540
836,919
(247,688)
–
–
–
(2,414,882)
(280,200)
(591,983)
4,785
(286,915)
2,946
(3,002,080)
(564,169)
195,268
109,086
Net loss for the year from continuing operations
(2,806,812)
(455,083)
Discontinued operations
Income after tax from discontinued operations (note 13)
4,276
–
Net loss for the year
(2,802,536)
(455,083)
Other comprehensive (loss) income, net of tax
Foreign currency translation (loss) income
Comprehensive loss for the year
Net loss per share
Basic and diluted
(5,038)
7,927
(2,807,574)
(447,156)
(0.10)
(0.02)
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, 2012 and 2011
(expressed in Canadian dollars)
Capital
stock
and
warrants
$
(note 16)
Contributed
surplus
$
Accumulated
other
comprehensive
income (loss)
$
Total
shareholders’
equity/(deficiency)
$
Deficit
$
Balance – January 1, 2011
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
Net loss for the year
Other comprehensive income
Foreign currency translation
loss
Comprehensive loss for the year
Issue of convertible debentures
(net of costs) (note 17)
Stock-based compensation
(note 16)
–
–
–
–
–
–
–
20,077
–
32,933
–
(2,802,536)
(2,802,536)
(5,038)
–
–
–
–
–
–
–
(5,038)
(2,807,574)
20,077
32,933
Balance – December 31, 2012 8,585,808
367,957
(71,561)
(9,357,200)
(474,996)
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, 2012 and 2011
(expressed in Canadian dollars)
Cash provided by (used in)
Operating activities
Net loss for the year
Items not affecting cash
Amortization of equipment and intangible assets
Stock-based compensation
Unrealized foreign currency loss (gain)
Impairment of goodwill
Impairment (reversal) of impairment of intangibles
Impairment of note receivable
Loss on settlement of pre-existing litigation
Gain on re-acquired rights
Gain on sale of assets
Income tax recovery
Income taxes paid
Net change in non-cash working capital balances
Decrease (increase) in trade receivables
(Increase) decrease in prepaid expenses
(Increase) decrease in notes receivable from franchisees
Decrease in income taxes recoverable
(Decrease) Increase in deferred revenue
(Decrease) increase in accounts payable and accrued liabilities
Repayment of notes payable
Net cash used in continuing operations
Net cash from discontinued operations
Financing activities
Borrowings from long-term debt
Repayment of long-term debt
Proceeds from notes payable
Repayment of notes payable
Convertible debentures (net of transaction costs)
Investing activities
Cash paid on acquisition of franchises
Cash held by advertising fund
Purchase of capital assets
2012
$
2011
$
(2,802,536)
(455,083)
1,004,616
32,933
11,836
232,103
312,904
–
712,566
(138,439)
(7,540)
195,268
–
(841,101)
36,050
(12,355)
12,043
17,603
(10,170)
(239,009)
–
652,330
17,108
(59,474)
247,688
(836,919)
59,328
–
–
–
109,086
(17,115)
(501,223)
(35,205)
(17,555)
(158,422)
–
9,888
184,828
(106,424)
(1,036,939)
(624,113)
7,233
–
(1,029,706)
(624,113)
909,651
(73,653)
–
(19,366)
353,198
1,169,830
(2,414,260)
89,787
(285,349)
(2,609,822)
2,802,902
–
–
–
–
2,802,902
–
(135,122)
(29,821)
(164,943)
Effect of foreign exchange rate changes on cash
(10,048)
9,348
Net change in cash for the year
Cash – Beginning of year
Cash – End of year
(2,479,746)
2,023,194
3,011,786
988,592
532,040
3,011,786
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, 2012 and 2011
(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. 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 five
locations in the United States, as of December 31, 2012 and, (3) licensing internationally.
2 Basis of presentation
These annual consolidated financial statements have been prepared in compliance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The Company has
consistently applied the accounting policies used in the preparation of its IFRS statement of financial position at
December 31, 2012 and December 31, 2011.
These consolidated financial statements comprise the financial statements of Redishred and its subsidiaries as
at December 31, 2012. Together, Redishred and its subsidiaries are referred to as “the Company.”
The consolidated financial statements of the Company for the year ended December 31, 2012 were authorized
for issue in accordance with a resolution of the Directors on April 30, 2013.
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.
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
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’s functional currency is Canadian dollars and 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”) and Redishred Acquisition Inc. (“RAI”) is the US
dollar, as it is the currency of the primary economic environment in which they operate. These consolidated
financial statements have been translated to the Canadian dollar in accordance with IAS 21, The Effects of
Changes in Foreign Exchange Rates.
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 25 for cash balances by operating segment.
2
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
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.
ii)
Financial liabilities at amortized cost
Financial liabilities at amortized cost include accounts payable, accrued liabilities, notes payable,
convertible debentures 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, notes payable and convertible debentures are recognized initially at fair
value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest
method. They 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 exists include:
(i) significant financial difficulty of the obligor;
(ii) delinquencies in interest or principal payments; and
(iii) if it becomes probable that the borrower will enter bankruptcy or other financial reorganization.
3
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Impairment of financial assets (continued)
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.
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
2-5 years
3 years
5 years
3-10 years
3-10 years
5 years
3-5 years
The Company allocates 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. The re-acquired franchise rights are amortized over the remaining term of
the initial Franchise Agreements.
4
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
The estimated useful lives of these assets are as follows:
Trademarks and intellectual property
Franchise agreements
Re-acquired franchise rights
Proshred system
Customer relationships
Computer software
10 years
10 years
2-8 years
10 years
10 years
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.
Goodwill
Goodwill represents the excess of the business acquisition over the fair value of the Company’s share of the
identifiable net assets of the acquired business at the date of acquisition. Goodwill is carried at cost less
accumulated impairment losses. Goodwill is allocated on the date of acquisition 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 impairment exists.
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 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.
5
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Provisions
Provisions 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.
Income tax
Income tax comprises current and deferred income tax. Income tax is recognized in the statement of
comprehensive income (loss) except to the extent that it relates to items recognized directly in other
comprehensive income (loss) or directly 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 is
not a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or
loss.
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 tax assets are recognized only to the
extent that it is considered 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 each reporting period and increased or reduced to the extent it is determined
probable that sufficient taxable profits will, or will not, be available to allow all or part of the income tax asset to be
recovered.
6
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(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, license and service fees paid as a percentage of the franchisees monthly sales
volumes. The initial franchise or license fee is recognized as revenue when the franchisee or licensee has
fully executed a franchise or license agreement has been provided the required training and the collection
of the initial fee is reasonably assured. Royalties, license and service revenue is accrued monthly based
on sales reported by franchisees or licensees if 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 paper
to recycling facilities. Shredding service revenue is recorded when the shredding service has been
performed, 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,. All cancellations of
equity-settled transaction awards are treated equally.
7
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Convertible debentures
Convertible debentures are separated into liability and equity components based on the terms of the contract. On
issuance of the convertible debentures, the fair value of the liability component is determined using a market rate
for an equivalent non-convertible debenture. This amount is classified as a financial liability measured at
amortized cost (net of transaction costs) until it is extinguished on conversion or redemption. The remainder of the
proceeds is allocated to the conversion option and is recognised and included in equity. Transaction costs are
deducted from equity, net of associated income tax. The carrying amount of the conversion option is not re-
measured in subsequent years. Transaction costs are apportioned between the liability and equity components of
the convertible debenture based on the allocation of proceeds to the liability and equity components when the
instruments are initially recognized.
Non-current assets and liabilities held for sale
The Company classifies non-current assets and liabilities as held for sale if their carrying amounts will be
recovered principally through a sale transaction rather than through continuing use. Non-current assets and
liabilities classified as held for sale are measured at the lower of their carrying amount and fair value less costs to
sell. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the
asset or disposal group is available for immediate sale in its present condition. Management must be committed
to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date
of classification. Discontinued operations are excluded from the results of continuing operations and are
presented as a single amount as profit or loss after tax from discontinued operations in the Statement of
Comprehensive Loss. Property, plant and equipment and intangible assets are not depreciated or amortized once
classified as held for sale.
Interest in a joint operation
The Company has a joint arrangement, which is an arrangement between two or more parties that are bound by a
contractual agreement which gives the parties joint control of the arrangement. The arrangement requires
unanimous consent for the decisions about the relevant activities of the joint arrangement. The arrangement
establishes the parties’ rights to the assets, and obligations for the liabilities, relating to the arrangement, and the
parties’ rights to the corresponding revenues and obligations for the corresponding expenses. As such, the
Company recognizes the assets and liabilities used for the specific tasks and recognizes its share of the revenues
and expenses in accordance to the contractual agreement. The Company earns rental revenue for the use of the
shredding vehicle and royalty revenues and service fees based on a percentage of total monthly gross revenues.
The Company incurs monthly finance costs on the truck loan payments and incurs depreciation and amortization
expense on the tangible and intangible assets.
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
contingent liabilities that meet the conditions for recognition under IFRS 3, Business Combinations are 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.
8
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
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 income (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 effective
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 fully
assessed the impact of these standards and amendments.
(i)
(ii)
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.
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.
9
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Accounting standards and amendments issued but not yet adopted (continued)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
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 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.
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.
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
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.
jointly controlled entities and associates
for subsidiaries,
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.
IAS 19, Employee Benefits (Revised) has had numerous amendments. These range from
fundamental changes such as removing the corridor mechanism and the concept of expected returns
on plan assets to simple clarifications and re-wording. The Group made a voluntary change in
accounting policy to recognise actuarial gains and losses in other comprehensive income in the
current period. However, the amended standard will impact the net benefit expense as the expected
return on plan assets will be calculated using the same interest rate as applied for the purpose of
discounting the benefit obligation. The amendment becomes effective for annual periods beginning on
or after 1 January 2013.
IAS 32, Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 clarify the
meaning of “currently has a legally enforceable right to set-off”. The amendments also clarify the
application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house
systems) which apply gross settlement mechanisms that are not simultaneous. These amendments
are not expected to impact the Group’s financial position or performance and become effective for
annual periods beginning on or after 1 January 2014.
10
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
3 Significant accounting policies (continued)
Accounting standards and amendments issued but not yet adopted (continued)
(x)
(xi)
IFRS 1 Government Loans – Amendments to IFRS 1 amendments require first-time adopters to apply
the requirements of IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, prospectively to government loans existing at the date of transition to IFRS. Entities may
choose to apply the requirements of IFRS 9 (or IAS 39, as applicable) and IAS 20 to government
loans retrospectively if the information needed to do so had been obtained at the time of initially
accounting for that loan. The exception would give first-time adopters relief from retrospective
measurement of government loans with a below-market rate of interest. The amendment is effective
for annual periods on or after 1 January 2013. The amendment has no impact on the Group.
IFRS 7 Disclosures — Offsetting Financial Assets and Financial Liabilities — Amendments to IFRS 7
amendments require an entity to disclose information about rights to set-off and related arrangements
(e.g., collateral agreements). The disclosures would provide users with information that is useful in
evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are
required for all recognised financial instruments that are set off in accordance with IAS 32 Financial
Instruments: Presentation. The disclosures also apply to recognised financial instruments that are
subject to an enforceable master netting arrangement or similar agreement, irrespective of whether
they are set off in accordance with IAS 32. These amendments will not impact the Group’s financial
position or performance and become effective for annual periods beginning on or after 1 January
2013.
4 Critical accounting estimates and judgements
The preparation of financial statements requires management to use judgment in applying its accounting policies
and in developing 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 judgements and estimates that the Company has made in the preparation of the financial
statements.
Significant accounting judgements
i)
Legal contingencies
The Company’s subsidiary, PFC is party to litigation with one franchisee. The outcome of this matter may
have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
Management regularly analyzes current information about this matter to determine whether provisions for
the estimate of legal expenses to resolve the matter can be reasonably estimated. External lawyers are
used for this assessment. In making the decision regarding the need for provisions, management considers
the degree of probability of an unfavourable outcome and the ability to make a sufficiently reliable estimate
of the amount of loss. The filing of a suit or formal assertion of a claim or disclosure of any such suit or
assertion does not automatically indicate that a provision may be appropriate.
11
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
4 Critical accounting estimates and judgements (continued)
Significant accounting judgements (continued)
ii) Assets held for sale
On December 31, 2012, the Company committed to a plan to sell the Miami business acquired on July 13,
2012 and therefore classified it as a disposal group held for sale. The Company considered that the
subsidiary met the criteria to be classified as held for sale at that date for the following reasons: the business
was available for immediate sale in its present condition; management committed to a plan to sell the
business, including actively advertising on its website to locate a buyer and complete the sale; and lastly, the
Board of Director’s approved the plan to sell the business. The Company would also be required to invest in
infrastructure and additional staff to run the operations effectively, which would result in lower margins. The
Company expects negotiations to be finalized and the sale to be completed by the summer of 2013. For
more details on the assets held for sale, refer to note 13.
Significant accounting estimates
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
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 or reversal of impairment. Refer to note 12 for estimates and
assumptions made.
ii) Deferred income taxes
The Company, including its subsidiaries, operate and earn income in multiple countries and is subject to
changing tax laws in multiple jurisdictions within these countries. Significant judgements are necessary in
determining income tax assets and liabilities. Although management believes that it has made reasonable
estimates about the final outcome of tax uncertainties, no assurance can be given that the final outcome of
these tax matters will be consistent with what is reflected in the historical income tax provisions. Such
differences could have an effect on the deferred tax assets and liabilities in the period in which such
determinations are made. At each date of Statement of Financial Position, the Company assesses whether
the realization of future tax benefits is sufficiently probable to recognize deferred tax assets and liabilities.
This assessment requires the exercise of judgement on the part of management with respect to, among
other things, benefits that could be realized from available tax strategies and future taxable income, as well
as other positive and negative factors. The recorded amount of total deferred tax assets and liabilities could
be materially affected if changes in current tax regulations are enacted. Refer to note 21 for estimates and
assumptions used.
12
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
4 Critical accounting estimates and judgements (continued)
Significant accounting estimates (continued)
iii) Useful lives of tangible and intangible assets
Management estimates the useful lives of tangible and definite life intangible assets based on the period
during which the assets are expected to be available for use. The amounts and timing of recorded expenses
for amortization of these assets for any period are affected by these estimated useful lives. On an annual
basis, the Company assesses the useful lives of its tangible and intangible assets with definite lives and the
useful lives updated if expectations change as a result of physical wear and tear, technical or commercial
obsolescence and legal or other limits to use. It is possible that changes in these factors may cause
significant changes in the estimated useful lives of the Company’s tangible and definite life intangible assets
in the future. Refer to note 9, 10 and 11 for estimates and assumptions used.
5 Advertising fund
The Company manages an advertising fund (the “Ad Fund”) established to collect and administer funds
contributed for use in regional and national advertising 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. In accordance with IAS 18 – Revenue, the
revenue, expenses and cash flows of the Ad Fund are not included in the Company’s Statements of
Comprehensive Loss because the contributions to the Ad Fund are segregated, designated for a specific
purpose, and the Company acts, in substance, as an agent with regard to these contributions. As at December
31, 2012, the Ad Fund was in a net surplus position of $121,469 (2011 – $160,100), including cash attributable
to the Ad Fund amounting to $48,031 (2011 - $137,818).
6 Trade receivables
Trade receivables include receivables from franchisees and receivables from shredding customers. The trade
receivables as at December 31, 2012, December 31, 2011 are as follows:
Trade receivables
Less: Allowance for doubtful accounts
Trade receivables – net
December 31, 2012
$
426,927
(2,863)
424,064
December 31, 2011
$
549,713
(89,599)
460,114
13
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
7 Notes receivable from franchisees
Notes receivable arise from the financing of the initial franchise fee by franchisees and are guaranteed by the
respective owners of the franchises. The notes receivable bear interest rates ranging from 4.25% to 8.25% per
annum with monthly blended payments of principal and interest ranging from US$670 to US$2,278. The
payments on the notes commence between dates ranging from October 1, 2010 to March 1, 2014 and mature
between dates ranging from March 1, 2013 to August 15, 2017.
The notes receivable as at December 31, 2012 and December 31, 2011 are as follows:
Principal
Less: Allowance for impairment
Less: Current portion
December 31, 2012
$
December 31, 2011
$
234,434
-
(40,765)
193,669
361,264
(114,786)
(62,859)
183,619
At December 31, 2012, there are no past due notes receivable from franchisees. As such, the Company has not
recorded an allowance for credit losses related to the notes receivable.
Notes receivable from franchisees past due but not impaired comprise:
Up to 30
days
$
Up to 60
days
$
60 days
or more
$
Total
$
At December 31, 2012
At December 31, 2011
-
-
-
3,089
-
31,878
-
34,964
8 Acquisition of franchises
During the year ended December 31, 2012, the Company, through its wholly-owned subsidiary, Redishred
Acquisition Inc., acquired the following franchises:
Proshred New York City, on January 1, 2012;
Proshred Miami, on July 13, 2012.
The Company conducted the New York City acquisition to (1) settle the legal complaint filed against the
Company, (2) increase the Company’s long term cash flows, and (3) to enter into a strong market and establish
regional headquarters to allow for further expansion by way of additional acquisitions or by way of establishing
satellite offices in nearby cities. The Company conducted the Miami acquisition to settle the legal complaint filed
against the Company and to maintain a loyal customer base.
14
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
8 Acquisition of franchisees (continued)
The business combinations resulted in the recognition of goodwill of $743,927, 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 the New York City 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. In
addition, the reacquired rights to the entire geographical areas of New York City, Long Island and surrounding
counties; 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
Working capital
Equipment
Indemnification asset
Customer relationships
Re-acquired franchise rights
Goodwill
Liabilities acquired
Loan
Unfavourable lease
Settlement of pre-existing litigation
Removal of original franchise agreement
(Gain) loss on franchise agreement
New York City
$
22,198
496,882
45,406
676,030
272,430
743,927
Miami
$
–
171,175
–
91,359
50,755
–
Total
$
22,198
668,057
45,405
767,389
323,185
743,927
2,256,873
313,289
2,570,161
–
(57,049)
(122,957)
–
676,030
(126,666)
(145,764)
43,620
(56,815)
6,060
(122,957)
(57,048)
719,650
(183,481)
(139,704)
403,600
(7,135)
396,465
Total
2,603,424
183,197
2,786,621
Consideration given
Cash
Forgiveness of accounts receivable
Contingent consideration
Notes payable
2,292,448
94,846
–
216,130
121,812
46,158
15,227
–
2,414,260
141,004
15,227
216,130
2,603,424
183,197
2,786,621
Acquisition costs (expensed in statement of
comprehensive loss)
39,594
10,945
50,539
15
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
8 Acquisition of franchisees (continued)
The Company translated the fair values of all assets acquired and consideration given using the exchange rate
on the date of each respective acquisition. In the above table, the New York City acquisition was translated at
$1USD = $1.0090CAD and the Miami acquisition was translated at $1USD = $1.0151CAD. On December 31,
2012, the assets and liabilities acquired are converted at the year-end rate at $1USD = $0.9949CAD in the
Statement of Financial Position.
As part of the purchase price, on January 1, 2012, the Company committed to make three payments of
US$75,000 over the next three years, due on an annual basis, referred to as the Notes payable. Redishred has
recorded the notes payable at fair value in accordance with IAS 39 Financial Instruments: Recognition and
Measurement. Subsequent to the acquisition date, the Company has measured the notes payable at amortized
cost using the effective interest method.
The Company is committed to pay contingent consideration in respect of the Miami acquisition, if the business
achieves certain performance targets on a quarterly basis for a period of nine months. In accordance with IFRS
3, the Company has recorded a liability for the estimated fair value of the contingent consideration at the
acquisition date. The fair values of the assets were determined on the basis of observable market prices, where
possible. The fair values of the re-acquired franchise rights were determined by discounting the cash flows from
the franchise royalty stream over the remaining contractual term of the franchise agreement. The fair values of
the customer relationships were determined by estimating the discounted level of future cash flows anticipated
from the recurring customer relationships purchased.
The Company has earned $1,196,215 in revenues and incurred a loss of $505,677 from the New York City
business during the year ended December 31, 2012 since the acquisition date. Refer to note 13 for revenues
and loss related to the Miami business.
16
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
9 Equipment
Computer
Furniture &
shredding
vehicles -
vehicles -
Recycling
Bins &
Shredding
Shredding
Cost
equipment
fixtures
containers
chassis
box
equipment
Vehicles
As at January 1, 2011
90,544
53,110
$
$
Additions
Foreign exchange
As at December 31, 2011
Additions
Acquisitions
Sale of assets
Assets held for sale (note 13)
702
122
91,368
28,062
7,500
–
–
–
93
53,203
921
5,750
–
–
Foreign exchange
(731)
(389)
$
30,853
19,728
903
51,484
16,206
87,750
–
(17,750)
(877)
$
$
212,939
464,013
2,691
3,991
–
8,597
$
6,356
–
106
$
–
6,700
114
Total
$
857,815
29,821
13,926
219,621
123,696
125,875
(43,144)
(39,375)
(2,056)
472,610
257,034
301,290
(102,559)
(84,790)
(4,819)
6,462
6,814
901,562
–
90,000
(3,000)
–
46,200
425,919
664,365
–
(148,703)
–
(30,000)
(171,915)
(561)
(304)
(9,737)
As at December 31, 2012
126,199
59,485
136,813
384,617
838,766
92,901
22,710
1,661,491
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, 2011
Depreciation
Foreign exchange
As at December 31, 2011
Depreciation
Sale of assets
Assets held for sale (note 13)
81,404
6,808
252
88,464
8,174
–
–
48,185
1,811
43
50,039
3,793
–
–
Foreign exchange
(577)
(359)
2,449
8,396
87
10,932
28,500
–
(1,650)
(285)
19,010
37,387
1,184
57,581
55,712
(3,664)
(3,662)
(570)
44,672
75,474
1,988
122,134
121,351
(9,009)
(7,885)
(1,280)
1,589
3,177
81
–
197,309
2,233
135,286
38
3,673
4,847
2,271
336,268
21,539
9,125
248,194
(3,000)
–
(15,673)
–
(2,790)
(15,987)
(203)
(142)
(3,146)
As at December 31, 2012
96,061
53,473
37,497
105,397
225,311
23,183
8,464
549,386
Net book value
As at December 31, 2011
2,904
3,164
40,552
162,040
350,476
1,615
4,543
565,294
As at December 31, 2012
30,138
6,012
99,316
279,220
613,455
69,718
14,246 1,112,105
The Company acquired equipment as part of the franchise acquisitions entered into during the year ended
December 31, 2012 (see note 8). During the year ended December 31, 2012, the Company also purchased
computers, bins, shredding containers and handheld devices. During the twelve months ended December 31,
2012, the Company sold two of its’ shredding vehicles and purchased two new shredding vehicles obtaining
vendor financing (refer to note 15). The foreign exchange adjustment is a result of the translation of corporate
equipment from US functional currency dollars to Canadian presentation dollars at December 31, 2012, and
December 31, 2011. 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.”
17
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
10 Intangible assets
Trademarks
and
Cost
agreements
system
software
property
franchise rights
relationships
Franchise
Proshred
Computer
intellectual
Re-acquired
Customer
$
$
$
$
$
$
Total
$
As at January 1, 2011
2,743,927
978,000
432,534
1,672,500
Foreign exchange
46,649
–
–
–
As at December 31, 2011
2,790,576
978,000
432,534
1,672,500
Acquisitions
–
Removal of original franchise
agreements (note 8)
Assets held for sale (note 13)
Foreign exchange
(372,000)
–
(53,215)
–
–
–
–
–
–
–
–
–
–
–
–
529,205
9,805
539,010
320,000
–
(50,000)
(13,344)
274,588
6,630,754
5,088
61,542
279,676
6,692,296
760,000
1,080,000
–
(372,000)
(90,000)
(140,000)
(9,954)
(76,514)
As at December 31, 2012
2,365,361
978,000
432,534
1,672,500
795,666
939,722
7,183,783
Accumulated
amortization and
impairment
Trademarks
and
Franchise
Proshred
Computer
intellectual
Re-acquired
Customer
agreements
system
software
property
franchise rights
relationships
Total
$
$
$
$
$
$
$
As at January 1, 2011
1,051,426
688,655
429,520
1,248,176
Amortization
236,445
40,374
3,014
Reversal of impairment
(75,546)
(322,860)
Foreign exchange
17,425
–
–
–
As at December 31, 2011
1,229,750
406,169
432,534
Amortization
248,700
92,725
Removal of original franchise
agreements (note 8)
Impairment (note 12)
(190,493)
–
158,757
64,237
Assets held for sale (note 13)
Foreign exchange
–
(22,463)
–
–
–
–
–
–
–
59,208
(439,359)
–
868,025
130,453
–
89,974
–
–
28,327
132,857
–
2,783
163,967
183,768
–
–
(4,625)
(4,500)
4,891
3,450,955
27,492
499,390
–
(837,765)
662
20,870
33,045
3,133,490
98,655
754,301
–
–
(4,163)
(1,312)
(190,493)
312,968
(8,788)
(28,275)
As at December 31, 2012
1,424,251
563,131
432,534
1,088,452
338,610
126,225
3,973,203
Net book value
As at December 31, 2011
1,560,826
571,831
As at December 31, 2012
941,110
414,869
–
–
804,475
584,048
375,043
457,056
246,631
3,558,806
813,497
3,210,580
18
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
10 Intangible assets (continued)
As a result of the acquisition of the New York City and Miami locations, customer relationships and re-acquired
franchise rights were recorded as intangible assets in 2012. There were no additions to intangible assets during
the year ended December 31, 2011. The foreign exchange adjustment is a result of the translation of foreign
operation intangible assets in US dollars to Canadian dollars at December 31, 2012 and December 31, 2011.
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 franchises and corporately owned locations in the US. At December 31, 2012, the Company has
determined that there is an impairment of intangible assets of $312,904. The Company has allocated the
impairment loss on a pro-rata basis to its corporate assets including the franchise agreements, Proshred
system, Trademarks and intellectual property. At December 31, 2011 the Company recorded a reversal of a
portion of the previously reported impairment of $836,919.
11 Goodwill
The following table presents goodwill for the years ended December 31, 2012 and 2011:
Opening balance
Acquisitions
Impairment of goodwill (note 12)
Foreign currency translation
Closing balance
December 31, 2012
December 31, 2011
$
878,270
737,292
(232,196)
(21,661)
1,361,705
$
1,112,232
–
(250,494)
16,532
878,270
12
Impairment of goodwill and long-lived assets
The Company performs an impairment test of long-lived assets when there is an indication of permanent
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.
The Company has identified each franchise and corporate location as being a CGU and has completed a
review for impairment 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.
19
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
12 Impairment of goodwill and long-lived assets (continued)
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
corporate locations to their respective carrying amounts. The recoverable amount of the corporate location
CGU’s were more than the carrying amounts except for New York City. Therefore the Company recorded an
impairment loss of $232,103 at December 31, 2012, which was allocated to the goodwill of the New York City
CGU. The Company recorded an impairment loss of $247,688 at December 31, 2011 which was allocated to
the goodwill of the Milwaukee CGU. Based on sensitivity analysis, a reasonable possible change in
assumptions would not cause an impairment loss.
The carrying value of goodwill for each CGU is identified as follows:
Cash Generating Unit
Syracuse
Albany
Milwaukee
New York City
Total goodwill
December 31, 2012
$
129,587
90,369
639,229
502,520
December 31, 2011
$
132,465
92,376
653,429
–
1,361,705
878,270
The Company assessed its impairment indicators related to its long-lived assets at December 31, 2012. At
December 31, 2012, there was sufficient indication of impairment on certain CGUs to warrant an analysis to be
performed.
The recoverable amount of each CGU has been determined based on a value-in-use calculation. The value-in-
use calculation uses cash flow projections based on financial budgets approved by management. The Company
then performed the impairment test for the unallocated, aggregate corporate assets and assessed whether
impairment exists at a Company-wide level. The recoverable amount was determined using value-in-use. The
value-in-use calculation uses cash flow projections based on financial budgets approved by management.
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 53% 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.
ii. Post-tax discount rates ranging from 16% to 17% (December 31, 2011– 16% to 20%) was used and
reflects the risks specific to each CGU.
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 5 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.
20
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
12 Impairment of goodwill and long-lived assets (continued)
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% to 20% 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 December 31, 2012, the recoverable amount of certain CGUs
was lower than the carrying amounts at the Company-wide level and the Company recorded an impairment loss
of $312,904. At December 31, 2011, the Company determined the recoverable amount of certain CGUs was
higher than their carrying amounts and recorded a reversal of impairment of $836,919. The reversal of
impairment was 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.
13 Assets classified as held for sale
On December 31, 2012, the Company committed to a plan to sell the Miami business acquired on July 13,
2012. Given the geographic location of the business in relation to the Company’s other corporate locations, the
Company decided that the customers would be best served by locations in closer proximity to Miami. The
Company also determined that the Miami location might also be required to invest in infrastructure and
additional staff to run the operations effectively, which would result in lower cash flow margins. The Company
currently has a joint arrangement with the franchise in Tampa Bay, Florida to operate the Miami business
(please refer to Note 26). The Company is currently reviewing a Letter of Intent to purchase the business by the
franchise in Tampa Bay. Florida. At December 31, 2012 the Company classified the Miami business as a
disposal group held for sale and as a discontinued operation. The Company is in a joint operation with the
Tampa franchise to operate the Miami business. The results of the Miami business for the year have been
accounted for as a joint arrangement with the Tampa Bay franchise. Within the joint arrangement, the Company
earns royalty and service fees on the gross Miami revenues and rental revenue for the use of the shredding
truck. The Company incurs finance costs on the monthly truck loan payments and depreciation and amortization
on the Miami tangible and intangible assets. The Company’s rental revenues and expenses from the Miami
business that are associated with the disposal group are presented below:
Revenue
Expenses
Operating expenses
Depreciation and amortization
Income from discontinued operations
Finance costs
Income for the year associated with the disposal group
For the year ended
December 31, 2012
$
29,410
(1,828)
(20,142)
(21,970)
7,440
(3,164)
4,276
21
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
13 Assets classified as held for sale (continued)
The major classes of assets and liabilities of the Miami business classified as held for sale as at December 31,
2012 are as follows:
Assets
Equipment
Intangible assets
Liabilities
Truck loan (details below)
Net assets directly associated with disposal group
December 31, 2012
$
155,740
131,212
286,952
105,178
181,774
On July 5, 2012, the Company entered into a loan and security agreement in the amount of US$121,128,
repayable with monthly blended payments of principal and interest of US$3,718 maturing July 5, 2015. The loan
bears interest at 6.502% per annum and is secured by one shredding vehicle with a carrying value of $112,044.
The value of the loan on December 31, 2012 is $105,178.
The net cash flows incurred by the Miami business are as follows:
Operating activities
Profit for the year associated with disposal group
Adjustments not affecting cash:
Depreciation and amortization
Financing activities
Repayment of truck loan
Borrowings from related parties
Net change in cash for the year
Cash –beginning of the year
Cash – end of the year
December 31, 2012
$
4,276
20,151
24.427
(15,411)
(1,783)
7,233
–
7,233
22
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
14 Accounts payable and accrued liabilities
As at December 31, 2012 and December 31, 2011, accounts payable and accrued liabilities are comprised of:
Accounts payable
Accrued liabilities
Accounts payable and accrued liabilities
15 Long-term debt
December 31, 2012
$
December 31, 2011
$
235,903
268,607
504,510
370,936
315,231
686,167
As at December 31, 2012 and December 31, 2011 long-term debt is comprised of:
December 31, 2012
December 31, 2011
Line of credit (i)
Less: deferred financing charges
Line of credit net of deferred financing charges
Truck loans (ii)
Total long-term debt
Less: current portion
Total
$
6,033,094
(44,172)
5,988,922
403,222
6,392,144
(99,692)
$
5,370,000
(66,259)
5,303,741
227,981
5,553,722
(53,176)
6,292,452
5,478,546
(i) The line of credit was entered into on November 27, 2009 with a related party entity (refer to note 26) for a
maximum amount of $4 million. The line of credit is 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 are charged to expense over the term of the facility. During the year
ended December 31, 2011, the line of credit limit was increased to $5.37 million. During the year ended
December 31, 2012, the line of credit was increased to $6.03 million. The terms of the agreement remained
unchanged upon increasing the line of credit. The Company has drawn from its line of credit in order to finance
the purchase of its’ corporate locations including Syracuse, Albany, Milwaukee in 2010 and New York City and
Miami in 2012 and for general business purposes.
(ii) On November 11, 2011, the Company entered into a loan and security agreement in the amount of
US$240,000, repayable with monthly blended payments of principal and interest of US$5,690 maturing 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$266,636. The value of the loan on December 31, 2012 is $171,357.
(ii) On August 3, 2012, the Company entered into a loan and security agreement in the amount of US$125,556,
repayable with monthly blended payments of principal and interest of US$2,545 maturing August 13, 2017. The
loan bears interest at 8% per annum and is secured by one shredding vehicle with a carrying value of $180,357.
The value of the loan on December 31, 2012 is $118,047.
23
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
15 Long-term debt (continued)
(ii) On August 8, 2012, the Company entered into a loan and security agreement in the amount of US$121,000,
repayable with monthly blended payments of US$2,379 maturing August 8, 2017. The loan bears interest at
6.506% per annum and is secured by one shredding vehicle with a carrying value of $176,675. The value of the
loan on December 31, 2012 is $113,818.
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, 2012 and December 31, 2011, there were no changes in issued
common shares of the Company.
The following are the balances of issued common shares of the Company:
Common stock
Warrants
Number
$
Number
$
Total
$
Balance, December 31, 2011
and December 31, 2012
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,
2012, was 28,884,658 (December 31, 2011 - 28,884,658).
d) Stock options
Under the terms of the stock option plan:
i)
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;
ii) 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;
24
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
16 Capital stock (continued)
d) Stock options (continued)
vi) 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
vii) 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.
The following table summarizes the movements in the Company’s stock options during the years ended:
December 31, 2012
December 31, 2011
Number of
options
1,677,500
992,500
(978,750)
1,691,250
Weighted
average
exercise price
$
Number of
options
Weighted
average
exercise price
$
0.24
0.20
0.20
0.24
1,687,500
150,000
(160,000)
1,677,500
0.26
0.12
0.35
0.24
Outstanding – Beginning of year
Granted
Expired
Outstanding – End of year
The following table summarizes the stock options outstanding as at:
Number of
options
outstanding
Issue date
Exercise
price
$
December 31, 2012
December 31, 2011
Weighted
average
remaining
contractual
life (yrs)
Options
exercisable
Number of
options
outstanding
Weighted
average
remaining
contractual
life (yrs)
Options
exercisable
Aug 29, 2007
0.20
0.52 Mar 17, 2008
0.14 May 27, 2010
0.15
Oct 19, 2010
May 2, 2011
0.12
0.10 Sept 26, 2011
Oct 26, 2011
0.10
0.10
Jan 2, 2012
0.10 May 31, 2012
July 9, 2012
0.10
0.10
Aug 1, 2012
0.20 Nov 23, 2012
–
262,500
280,000
10,000
140,000
5,000
5,000
5,000
5,000
5,000
2,500
975,000
0.00
0.21
1.40
2.81
2.34
3.74
3.82
3.01
4.42
9.53
2.58
4.90
–
262,500
280,000
5,000
140,000
1,250
1,250
1,250
5,000
1,250
2,500
975,000
975,000
262,500
280,000
10,000
140,000
5,000
5,000
–
–
–
–
–
0.66
1.21
2.40
3.81
3.34
4.74
4.82
–
–
–
–
–
975,000
197,500
280,000
2,500
140,000
–
–
–
–
–
–
–
1,694,500
3.35
1,675,000
1,677,500
1.31
1,595,000
25
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(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
2012
5.00 years
1.27%
$nil
193%
2011
4 years
2.28%
$nil
200%
992,500 options were granted during the year ended December 31, 2012 (2011 - 150,000). The weighted
average grant-date fair value of options granted during 2012 amounted to $0.03 per option. The net stock
compensation charge, after adjusting for stock option forfeitures, amounted to $32,933 (2011 - $17,108).
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
1.98 years
1.90 years
2012
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
2 years
1.06%
$nil
234%
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.
26
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
17 Convertible debentures
On December 31, 2012, the Company issued $375,000 convertible, unsecured subordinated, debentures. The
debentures have a five year term and a coupon of 7.5% interest per annum. Each $1,000 principal amount of
debenture entitles the holder to convert to approximately 3,333 common shares at a conversion price of $0.30
per share at any time prior to maturity.
Conversion may occur at any time prior to the maturity date of December 31, 2017. The Company may, at its
option, redeem the debentures, in whole or in part, at a redemption price equal to the principal amount plus
accrued interest and unpaid interest. Interest of 7.5% per annum will be paid annually on the anniversary of the
grant date. Debenture holders may defer interest otherwise due and payable until the next interest payment
date, in which case such deferred interest payment shall accrue additional interest at 7.5% per annum.
The convertible debentures contain two components: liability and equity elements. The equity element is
presented in equity under the label of ‘issue of convertible debentures’ as contributed surplus. The effective
interest rate of the liability element on initial recognition is 9.5% per annum.
Proceeds of issue
Less: Liability component at the date of issue
Equity component
Transaction costs
Liability component of transaction costs
Equity component of transaction costs
Total Transaction costs
Liability component net of transaction costs
Equity component net of transaction costs
Deferred tax liability related to the equity component
Equity component net of transaction costs and tax
December 31, 2012
$
375,000
(346,202)
28,798
(13,083)
(1,088)
(14,171)
333,119
27,710
7,633
20,077
27
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
18 Revenue
The revenue earned by the Company is broken down as follows:
Royalties
Franchise fees
License fees
Shredding services
Sale of paper products
2012
$
812,750
300,100
4,378
2,363,002
568,920
2011
$
934,192
433,396
-
1,437,817
573,978
Total revenue
4,049,150
3,379,383
On January 1, 2012 the Company acquired the New York City franchise location. In 2012, the Company earned
revenue from shredding services and through the sale of paper products related to the New York City corporate
location. In 2011 the Company earned royalty revenue from the New York City franchise location.
19 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
2012
$
712,470
997,022
200,957
417,891
231,018
227,264
2011
$
358,915
572,507
92,303
206,418
130,536
158,553
Total corporate operating expenses
2,786,617
1,519,232
During the year ended December 31, 2012, the Company operated four corporate locations – Syracuse,
Albany, Milwaukee and New York City. During the year ended December 31, 2011, the Company operated
three corporate locations – Syracuse, Albany and Milwaukee.
28
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
20 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
Selling and development
Bad debt expense
Amortization of deferred financing charges
Depreciation – equipment
Amortization – intangible assets
Foreign exchange loss/(gain)
Other
2012
$
820,726
35,447
32,933
379,494
154,491
73,604
160,334
-
22,086
-
524,253
132,505
229,947
2011
$
770,867
54,179
17,108
854,674
111,558
75,302
203,793
103,320
22,086
3,014
338,141
(66,163)
241,703
Total selling, general and administrative expenses
2,565,820
2,729,582
Compensation of key management
Included in employee wages and benefits expense above is key management personnel compensation as
follows:
Wages and benefits
Severance pay
Share-based compensation
Total
2012
$
593,033
71,250
32,933
697,216
2011
$
658,336
-
17,108
675,444
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.
29
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
21
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:
Statutory income tax rate
Expected income tax recovery based on above rates
Non-deductible expenses
Unrecognized deductible temporary differences and other
Effect of foreign tax rates
2012
$
26.5%
(795,552)
329,088
425,164
(153,968)
2011
$
28%
(159,000)
12,000
37,914
–
Income tax recovery
(195,268)
(109,086)
The enacted tax rate in Canada, where the Company operates, is 26.50% (28.00% in 2011) and has been
applied in the tax provision calculation. The combined Canadian federal and provincial statutory rate has
decreased from the prior period due to a scheduled enacted rate reduction. This decrease has not materially
affected the measurement of deferred tax obligations arising from temporary differences as these scheduled
reductions were enacted at December 31, 2011.
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:
2012
$
–
(195,268)
2011
$
(17,603)
(91,483)
(195,268)
(109,086)
Deferred income tax liability:
Intangible assets
Deferred income tax asset:
Non-capital losses
Net deferred income tax liability
December 31, 2012
$
December 31, 2011
$
(249,620)
(468,110)
35,432
(214,188)
58,000
(410,110)
30
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
21 Income taxes (continued)
The following temporary differences and non-capital losses have not been recognized as realization is not
considered probable:
Non-capital losses
Property, plant and equipment
Intangible assets
Tax deductible share issue costs
Financing costs
Other
December 31, 2012
$
6,462,591
December 31, 2011
$
5,815,000
20,565
1,851,816
33,400
17,083
176,343
835,000
–
153,000
–
–
The Company has incurred Canadian non-capital losses of $6,112,000 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 $745,000 that can be carried forward to reduce taxes payable in the US. The
losses expire at various times through December 31, 2031.
22 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, 2014, Syracuse, which
expires on August 31, 2015, Milwaukee, which expires on August 31, 2016 and New York City, which expires
on April 30, 2013 and September 30, 2015. During the year ended December 31, 2012, the Company entered
into three new leases in Milwaukee, Albany and New York City. Certain contracts include renewal options for
various periods of time. For the year ended December 31, 2012, the Company incurred $248,314 (December
31, 2011 - $116,458) in lease payments as an expense included in ’selling, general and administrative
expenses’ and ‘corporate operating expenses’.
Non-cancellable operating lease rentals are payable as follows:
Less than 1 year
Between 1 and 5 years
Total
$
227,599
208,136
435,735
31
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
22 Commitments and contingency
Contingency
During the second quarter of 2010, four 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. On July 13, 2012, in conjunction with the purchase of the Proshred Miami
business, the Miami franchisee permanently withdrew from the legal complaint. As of December 31, 2012, one
franchisee remains in the legal complaint and three franchisees have permanently withdrawn.
The Company intends to vigorously defend against this remaining 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
reliably estimated 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.
23 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, accrued liabilities, notes payable,
long-term debt and convertible debenture liability.
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 Company has a fixed rate on notes receivable from franchisees ranging from 4.25% to 8.25% per annum,
and the line of credit facility has a fixed interest rate of 10% per annum. The truck loans have fixed interest rates
ranging from 6.502% to 8.14% per annum. These financial instruments are subject to interest rate fair value
risk, as their fair values will fluctuate as a result of changes in market rates.
32
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
23 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 related to franchising and licensing
The accounts and notes 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 are 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, 2012, 6 franchisees accounted for 83% of the accounts receivable and notes receivable balance related to
franchising and licensing (December 31, 2011 - 6 franchises accounted for 73%). For the year ended December
31, 2012, 3 franchisees accounted for 36% of the Company’s revenues related to franchising and licensing
(December 31, 2011 - 3 franchisees accounted for 28%). As of December 31, 2012, there are no accounts and
notes receivable over 90 days old (December 31, 2011 – 37% of accounts receivable were over 90 days old
and related to two franchises). The over 90 day old accounts and notes receivable at December 31, 2011 were
settled as a result of the purchase of the New York City and Miami franchises on January 1, 2012 and July 13,
2012, respectively.
At December 31, 2012, all trade accounts receivable and notes receivable were current. The aging analysis for
trade accounts receivable from franchisees is as follows:
December 31, 2012
$
December 31, 2011
$
Past due but not impaired
60 to 90 days
91 days to 180 days
Over 181 days
Impaired
60 to 90 days
91 days to 180 days
Over 181 days
–
–
–
–
–
–
10,420
83,580
–
6,912
12,049
67,803
33
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
23 Financial instruments and fair values (continued)
Credit risk (continued)
Receivables related to franchising and licensing (continued)
The following is a reconciliation of the allowance for credit losses from trade receivables from franchisees:
December 31, 2012
$
December 31, 2011
$
Opening balance
Additions
Recovery of trade receivables
Foreign exchange
Closing balance
86,764
(86,764)
–
–
40,762
44,552
–
1,450
86,764
Also refer to note 7 for details of notes receivable from franchisees.
Receivables related to corporate operations
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,
one-time customers are required to make payments for services by way of preapproved credit card. In addition,
the receivable balances with customers are monitored on an ongoing basis and collection efforts are dedicated
on an ongoing basis to limit the Company’s exposure to bad debt. At December 31, 2012 and December 31,
2011, no customer accounted for more than 10% of the accounts receivable balance. For the years ended
December 31, 2012 and December 31, 2011, no customer accounted for more than 10% of the Company’s
revenues in this category. As of December 31, 2012, 13% of accounts receivable in this category was over 90
days old. The Company has recorded an allowance of $2,682 for credit losses from accounts receivable from
shredding customers (December 31, 2011 - $2,835). The Company does not have any reason to believe it will
not collect all remaining balances.
The aging analysis for accounts receivable past due related to corporate operations is as follows:
Past due but not impaired
60 to 90 days
91 days to 180 days
Impaired
60 to 90 days
91 days to 180 days
December 31, 2012
$
December 31, 2011
$
22,130
39,133
2,863
–
18,194
33,663
2,834
–
34
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
23 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) or a +5% (appreciation of the
USD) against the CAD, from an average rate of USD$1.00 = CAD$0.9996, the total impact to net loss would be
a decrease/increase of approximately $77,000.
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 $9.4 million at December 31, 2012. 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 $700,509 at December 31, 2012 (December 31, 2011 - $771,541), are due to be settled
within one year from the date of the Statement of Financial Position.
At December 31, 2012, the Company has cash of $532,040 and working capital of $440,707.
35
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
23 Financial instruments and fair values (continued)
Liquidity risk (continued)
Principal
Less than 3
months
$
3 months
to 1 year
$
Accounts payable and accrued liabilities
Notes payable
Contingent consideration
Convertible debentures
Long-term debt(1)
504,510
74,231
4,975
–
24,537
2 – 5
years
$
–
148,984
–
–
4,937
9,949
–
75,066
333,119
6,336,269
Over 5 years
$
–
–
–
–
–
Interest
Notes payable
Convertible debentures
Long-term debt(1)
Liquidity risk
Less than 3
months
$
194
–
9,241
3 months
to 1 year
$
452
28,125
630,558
2 – 5
years
$
308
112,500
642,991
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
Contingent consideration
Convertible debentures
Long-term debt(1)
504,510
74,425
4,975
–
43,215
–
5,389
9,949
28,125
734,797
–
149,292
–
445,619
7,002,392
–
–
–
–
–
(1) Long-term debt includes a truck loan of $105,178 currently classified as part of a disposal group held for
sale.
36
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
23 Financial instruments and fair values (continued)
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, estimate 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, 2012, amounted to $234,434 (December 31, 2011 - $246,478) with fair value
estimated to amount to $212,694 (December 31, 2011 - $225,081), respectively.
24 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.
25 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, Milwaukee and New York
City, 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).
37
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
25 Segment reporting (continued)
Total assets and liabilities by reportable operating segment are as follows:
Franchising and
licensing
December 31, 2012
$
Corporate
locations
December 31, 2012
$
Corporate
Overhead
December 31, 2012
$
Total
December 31, 2012
$
ASSETS
Current assets
Cash
Cash attributable to the Ad
Fund
Trade receivables
Prepaid expenses
Notes receivable from
franchisees
Total current assets
Non-current assets
Notes receivable from
franchisees
Equipment
Intangible assets
Goodwill
Assets held for sale
Total assets
LIABILITIES
Current liabilities
Accounts payable and
accrued liabilities
Current portion of notes
payable
Current portion of long-term
debt
Contingent consideration
47,781
48,031
117,373
31,059
40,765
285,010
193,669
–
941,110
–
–
1,419,789
144,610
15,213
–
–
96,716
387,543
–
295,503
46,562
–
438,781
–
1,109,993
1,270,551
1,361,705
286,952
4,468,651
–
11,188
20,328
–
419,059
–
2,112
998,919
–
–
1,420,090
248,085
111,815
66,170
99,692
14,924
428,871
–
–
–
111,815
532,040
48,031
424,064
97,949
40,765
1,142,849
193,669
1,112,105
3,210,580
1,361,705
286,952
7,307,860
504,510
81,383
99,692
14,924
700,509
Total current liabilities
159,823
Non-current liabilities
Long-term debt
Current portion of notes
payable
Convertible debenture
Deferred tax liability
Liabilities associated with
assets held for sale
Total liabilities
–
6,292,452
–
6,292,452
–
–
214,188
–
374,011
137,410
–
–
105,178
6,963,911
–
333,119
–
–
444,934
137,410
333,119
214,188
105,178
7,782,856
38
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
25 Segment reporting (continued)
ASSETS
Current assets
Cash
Cash attributable to the Ad
Fund
Trade receivables
Prepaid expenses
Notes receivable from
franchisees
Income tax recoverable
Total current assets
Non-current assets
Notes receivable from
franchisees
Equipment
Intangible assets
Goodwill
Total assets
LIABILITIES
Current liabilities
Accounts payable and
accrued liabilities
Deferred revenue
Current portion of notes
payable
Current portion of long-term
debt
Non-current liabilities
Long-term debt
Deferred tax liability
Total liabilities
Franchising and
licensing
December 31, 2011
$
Corporate
locations
December 31, 2011
$
Corporate
overhead
December 31, 2011
$
Total
December 31, 2011
$
119,399
2,793,500
137,818
165,310
7,115
62,859
17,603
510,104
183,619
–
1,560,823
–
–
258,142
40,807
–
–
3,092,449
–
565,294
621,677
878,270
98,887
–
36,662
15,674
–
–
151,223
–
–
1,376,306
–
2,254,546
5,157,690
1,527,529
370,013
10,170
–
–
111,006
–
22,028
53,176
186,210
–
5,478,546
–
410,110
790,293
5,664,756
205,148
205,148
–
–
–
205,148
–
–
3,011,786
137,818
460,114
63,596
62,859
17,603
3,753,776
183,619
565,294
3,558,806
878,270
8,939,765
686,167
10,170
22,028
53,176
771,541
5,478,546
410,110
6,660,196
Total current liabilities
380,183
The Company incurred $423,726 in capital expenditures relating to its corporate operations during the year
ended December 31, 2012 (December 31, 2011 - $29,821). The Company incurred $661,342 in capital
acquisitions relating to its corporate operations during the year ended December 31, 2012 (December 31, 2011
– $nil). The Company incurred $4,059 in capital expenditures related to its franchising operations for the year
ended December 31, 2012 (December 31, 2011 - $nil).
39
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
25 Segment reporting (continued)
Geographic information
Canada
Equipment
Intangible assets
United States
Notes receivable from franchisees
Equipment
Intangible assets
Goodwill
Assets held for sale
Total
Notes receivable from franchisees
Equipment
Intangible assets
Goodwill
Assets held for sale
Revenue
December 31,
2012
$
2,112
998,916
December 31,
2011
$
–
1,376,307
234,434
1,109,993
2,211,661
1,361,705
286,952
234,434
1,112,105
3,210,580
1,361,705
286,952
246,477
565,294
2,182,499
878,270
–
246,477
565,294
3,558,806
878,270
–
All revenues were attributed to the United States, with the exception of license fees, which were attributed to the
Middle East.
40
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
25 Segment reporting (continued)
Net loss by operating segment
Total net loss by reportable operating segment is as follows:
Revenue
Direct costs
Corporate overhead
Depreciation and amortization
Foreign currency loss, net
Interest expense
Interest income
Gain on franchise agreements
Gain on sale of assets
Loss on settlement of pre-existing
litigation
Impairment of intangible assets
Impairment of goodwill
Income tax recovery
For the year ended December 31, 2012
Franchising
and licensing
$
1,117,228
–
(653,889)
(546,339)
–
–
4,785
138,439
–
(712,567)
(158,757)
–
195,268
Corporate
locations
$
2,931,922
(2,328,342)
(302,793)
(458,276)
–
(591,983)
–
–
7,540
–
–
(232,103)
–
Corporate
overhead
$
–
–
(930,293)
–
(132,505)
–
–
–
–
–
(154,147)
–
–
Total
$
4,049,150
(2,328,342)
(1,886,975)
(1,004,615)
(132,505)
(591,983)
4,785
138,439
7,540
(712,567)
(312,904)
(232,103)
195,268
Net loss from continuing operations
(615,832)
(974,035)
(1,216,945)
(2,806,812)
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
Net income (loss) from continuing
operations
For the year ended December 31, 2011
Franchising
and licensing
$
1,367,588
–
(819,128)
–
–
(363,241)
–
–
2,946
109,086
Corporate
locations
$
2,011,795
(1,230,140)
(173,372)
–
(247,688)
(289,089)
–
(286,915)
–
–
Corporate
overhead
$
–
–
(1,440,007)
836,919
–
–
66,163
–
–
–
Total
$
3,379,383
(1,230,140)
(2,432,507)
836,919
(247,688)
(652,330)
66,163
(286,915)
2,946
109,086
297,251
(215,409)
(536,925)
(455,083)
For the year ended December 31, 2012, the Company operated four corporate locations. For the year ended
December 31, 2011, the Company operated three corporate locations.
41
RediShred Capital Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(expressed in Canadian dollars)
26 Related party balances and transactions
A Director of the Company is the owner of the Tampa Bay, Florida Proshred franchise. Included in accounts
receivable at December 31, 2012, is $1,945 (2011 - $1,592) due from this franchise. During the year ended
December 31, 2012, the Company earned royalty and service fees amounting to $78,289 (2011 - $87,165) from
this franchise.
The Director’s franchise is currently managing on the Company’s behalf the Proshred Miami business acquired
by the Company. The Company earned royalty and service fees of $10,828 during the year ended December
31, 2012 from the Miami operations. Included in accounts receivable at December 31, 2012 is $2,528 due from
the Miami operations.
The Company has a line of credit facility with a related party entity, the Company’s main shareholder, for a
maximum of $6.03 million, repayable on November 27, 2014, bearing interest at a fixed rate of 10% per annum.
The Company has drawn from its line of credit in order to finance the purchase of its’ corporate locations
including Syracuse, Albany, Milwaukee in 2010 and New York City and Miami in 2012 as well as for general
business purposes. Refer to Note 15 for additional information.
Included in selling, general and administrative expenses for the nine months ended December 31, 2012 are
insurance premium amounts of $13,037 (December 31, 2011 - $15,317) paid to an insurance brokerage firm
owned by a Director of the Company and $3,142 in recruiting services paid to a recruiting firm owned by a
Director of the Company.
27 Comparative figures
Certain prior period amounts have been reclassified to conform to the current period’s presentation. The
deferred financing charges classified as a non-current asset in the prior year has been netted against long-term
debt in the Statement of Financial Position in the current year. The increase and collection of notes receivable
from franchisees classified as investing activities in the Statement of Cash Flows in the prior year have been re-
classified as an (increase) decrease in notes receivable from franchisees in the ‘Net change in non-cash
working capital’ section. The corporate overhead costs previously classified under franchising and licensing in
the ‘Total assets and liabilities by reportable operating segment’ has been segregated as a separate reportable
operating segment in the current year.
42