Exhibit 99.1
Envoy Capital Group Inc.
Third Quarter Report 2009
Dear Shareholders
During the three month period from April 1, 2009 through June 30, 2009, we continued to experience recessionary economic conditions including negative growth rates, high unemployment and weak consumer confidence. On the back of an improved outlook for financial institutions, stock markets rebounded during this period. However, there remains considerable uncertainty surrounding the rate and timing of a global economic recovery.
For the three months ended June 30, 2009, Envoy incurred a net loss of ($1.8) million or ($.21) per share compared with a loss of ($1.3) million or ($.14) per share for the same period last year. For the nine month period ended June 30, 2009, the loss was ($4.1) million or ($.48) per share, compared with ($1.9) million or ($.21) per share last year. The per share calculations are based on fully diluted weighted average shares outstanding of approximately 8.6 million for the current year and 9.3 million shares last year.
The Merchant Banking Division incurred a pre-tax loss of ($860,000) during the third quarter of this year compared to a pre-tax loss of ($1.4) million during the same quarter last year. Entering the third quarter we had conservatively positioned our investment portfolio to guard against the volatility of the stock markets which we had experienced in prior periods. During the period the Merchant Banking operations had revenue of approximately $400,000 from its investment portfolio which was offset by approximately ($600,000) in foreign currency losses as the Canadian dollar improved significantly against most major currencies.
The Consumer and Retail Branding Division, Watt International Inc., incurred a pre-tax loss of ($647,000) in the third quarter of this year compared with a pre-tax profit of $670,000 during the same period last year. The recessionary market conditions negatively impacted spending at many of Watt’s major retail clients such that projects have been deferred, scaled back or cancelled. All of Watt’s geographic markets have been impacted, in particular the Middle East and Asian markets. As a result, revenue earned during the third quarter decreased from $4.5 million last year to $3.1 million this year. This revenue reduction, as well as non-recurring operating expenses of $325,000 relating to severance payments and other restructuring charges associated with downsizing our international operations resulted in a loss during the period.
Since June 30, 2009, stock markets have continued to move higher. Although the recovery in the stock markets is encouraging, there are still major obstacles to overcome before the world’s major economies stabilize and eventually recover from the current recessionary environment. In the intervening months we expect to see continued volatility in the stock markets and conservative spending by our retail and consumer branding clients. We will monitor these spending patterns and continue to make adjustments to our operating costs as necessary.
Thank you for your continued support.
Envoy Capital Group Inc.
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements; they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company’s management.
The Company’s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditor.
Envoy Capital Group Inc. | |
Consolidated Balance Sheets | |
Unaudited - Prepared by Management | |
(Expressed In Canadian dollars) | |
| | | | | | | |
As at: | | | June 30 2009 | | | September 30 2008 | |
| | | | | | | |
Assets | | | | | | | |
| | | | | | | |
Current | | | | | | | |
Cash | | | $ | 4,636,719 | | | $ | 4,576,771 | |
Investments held for trading | note 3 | | | 14,251,818 | | | | 14,453,468 | |
Accounts receivable | | | | 3,954,055 | | | | 8,387,477 | |
Future income taxes | | | | 650,791 | | | | 650,791 | |
Prepaid expenses | | | | 432,537 | | | | 388,736 | |
Loans receivable | note 4 | | | — | | | | 365,625 | |
| | | | 23,925,920 | | | | 28,822,868 | |
| | | | | | | | | |
Investments | note 3 | | | 216,385 | | | | 224,250 | |
Real estate | note 5 | | | 1,545,848 | | | | 1,539,592 | |
Property, plant and equipment | | | | 754,119 | | | | 1,150,465 | |
Goodwill | | | | 4,407,434 | | | | 4,407,434 | |
Future income taxes | | | | 337,435 | | | | 337,435 | |
| | | $ | 31,187,141 | | | $ | 36,482,044 | |
| | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | |
| | | | | | | | | |
Current | | | | | | | | | |
Accounts payable and accrued liabilities | | | $ | 2,199,759 | | | $ | 3,521,264 | |
Derivatives held for trading | note 8 | | | 594,595 | | | | — | |
Deferred revenue | | | | 373,037 | | | | 731,860 | |
Loan payable | note 9 | | | — | | | | 69,599 | |
| | | | 3,167,391 | | | | 4,322,723 | |
| | | | | | | | | |
Minority interest | note 10 | | | 11,852 | | | | — | |
| | | | | | | | | |
Shareholders’ equity | | | | | | | | | |
Share capital | note 11 | | | 9,340,990 | | | | 9,370,741 | |
Contributed surplus | | | | 22,415,875 | | | | 22,445,601 | |
Warrants | | | | 6,542,456 | | | | 6,542,456 | |
Stock based compensation | | | | 864,533 | | | | 864,533 | |
Deficit | | | | (11,155,956 | ) | | | (7,064,010 | ) |
| | | | 28,007,898 | | | | 32,159,321 | |
| | | $ | 31,187,141 | | | $ | 36,482,044 | |
| | | | | | | | | |
On behalf of the Board: | | | | | | | | | |
(signed) | | | (signed) | | | | | |
Geoffrey B. Genovese, | | | John H. Bailey, | | | | | |
Director | | | Director | | | | | |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. | |
Consolidated Statements of Operations | |
Unaudited - Prepared by Management | |
(Expressed In Canadian dollars) | |
| |
For the nine months ended: | | | June 30 2009 | | | June 30 2008 | |
| | | | | | | |
Net revenue from consumer branding business | | | $ | 10,130,534 | | | $ | 12,054,545 | |
Net investment losses | note 3 | | | (481,738 | ) | | | (1,095,490 | ) |
Interest and dividend income | note 3 | | | 233,533 | | | | 602,841 | |
| | | | 9,882,329 | | | | 11,561,896 | |
| | | | | | | | | |
Operating expenses: | | | | | | | | | |
Salaries and benefits | | | | 10,346,738 | | | | 9,939,468 | |
General and administrative | | | | 2,493,198 | | | | 2,500,075 | |
Occupancy costs | | | | 570,551 | | | | 442,679 | |
| | | | 13,410,487 | | | | 12,882,222 | |
| | | | | | | | | |
Depreciation | | | | 517,573 | | | | 551,396 | |
| | | | | | | | | |
Interest expense and financing costs | | | | 50,660 | | | | 59,793 | |
| | | | 13,978,720 | | | | 13,493,411 | |
| | | | | | | | | |
Loss before income taxes and minority interest | | | | (4,096,391 | ) | | | (1,931,515 | ) |
| | | | | | | | | |
Income tax recovery | | | | — | | | | (25,780 | ) |
| | | | | | | | | |
Loss before minority interest | | | | (4,096,391 | ) | | | (1,905,735 | ) |
| | | | | | | | | |
Minority interest | | | | (4,445 | ) | | | — | |
| | | | | | | | | |
Net loss | | | $ | (4,091,946 | ) | | $ | (1,905,735 | ) |
| | | | | | | | | |
Loss per share | | | | | | | | | |
Basic | | | $ | (0.48 | ) | | $ | (0.21 | ) |
Diluted | | | $ | (0.48 | ) | | $ | (0.21 | ) |
| | | | | | | | | |
| | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | | 8,558,496 | | | | 9,268,345 | |
Weighted average number of common shares outstanding - fully diluted | | | | 8,558,496 | | | | 9,268,345 | |
| | | | | | | | | |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. | |
Consolidated Statements of Comprehensive Income (Loss) | |
Unaudited - Prepared by Management | |
(Expressed In Canadian dollars) | |
| | | | |
For the nine months ended: | June 30 2009 | | June 30 2008 | |
| | | | | | |
Net loss | | $ | (4,091,946 | ) | | $ | (1,905,735 | ) |
| | | | | | | | |
Other comprehensive income: | | | | | | | | |
Gain on foreign currency translation | | | — | | | | 7,996 | |
| | | | | | | | |
Comprehensive loss | | $ | (4,091,946 | ) | | $ | (1,897,739 | ) |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. |
Consolidated Statements of Retained Earnings (Deficit) |
Unaudited - Prepared by Management |
(Expressed In Canadian dollars) |
|
For the nine months ended: | June 30 2009 | | June 30 2008 | |
| | | | |
(Deficit) retained earnings, beginning of period | | $ | (7,064,010 | ) | | $ | 3,094,135 | |
| | | | | | | | |
Net loss | | | (4,091,946 | ) | | | (1,905,735 | ) |
| | | | | | | | |
(Deficit) retained earnings, end of period | | $ | (11,155,956 | ) | | $ | 1,188,400 | |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. | |
Consolidated Statements of Cash Flows | |
Unaudited - Prepared by Management | |
(Expressed In Canadian dollars) | |
| |
For the nine months ended: | | June 30 2009 | | | June 30 2008 | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (4,091,946 | ) | | $ | (1,905,735 | ) |
Items not involving cash: | | | | | | | | |
Depreciation | | | 517,573 | | | | 551,396 | |
Minority interest | | | 11,852 | | | | — | |
Change in fair value of held for trading investments | | | 477,813 | | | | 13,421 | |
| | | | | | | | |
Net change in non-cash working capital balances: | | | | | | | | |
Accounts receivable | | | 4,433,422 | | | | (2,777,666 | ) |
Prepaid expenses | | | (43,801 | ) | | | 26,980 | |
Investments held for trading | | | (280,088 | ) | | | 2,366,894 | |
Accounts payable and accrued liabilities | | | (1,321,505 | ) | | | (586,199 | ) |
Derivatives held for trading | | | 594,595 | | | | — | |
Deferred revenue | | | (358,823 | ) | | | 59,545 | |
Cash held in escrow | | | — | | | | 2,803,549 | |
Net cash provided by (used in) operating activities | | | (60,908 | ) | | | 552,185 | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Operating line of credit | | | — | | | | (830,000 | ) |
Loan payable repayments | | | (69,599 | ) | | | (65,621 | ) |
Issuance of common shares | | | — | | | | 16,666 | |
Share buy back under normal course issuer bid | | | (59,477 | ) | | | (2,561,417 | ) |
Net cash provided by (used in) financing activities | | | (129,076 | ) | | | (3,440,372 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Loans receivable | | | 365,625 | | | | 870,302 | |
Purchase of capital assets | | | (121,227 | ) | | | (299,996 | ) |
Investment in real estate | | | (6,256 | ) | | | — | |
Investments | | | 7,865 | | | | 2,527,830 | |
Net cash provided by (used in) investing activities | | | 246,007 | | | | 3,098,136 | |
| | | | | | | | |
Change in cash balance due to foreign exchange | | | 3,925 | | | | 7,996 | |
| | | | | | | | |
Net change in cash | | | 59,948 | | | | 217,945 | |
| | | | | | | | |
Cash, beginning of period | | | 4,576,771 | | | | 759,475 | |
| | | | | | | | |
Cash, end of period | | $ | 4,636,719 | | | $ | 977,420 | |
| | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Interest paid | | $ | 50,660 | | | $ | 59,793 | |
Income taxes (received) paid | | | — | | | | (25,780 | ) |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. | |
Consolidated Statements of Operations | |
Unaudited - Prepared by Management | |
(Expressed In Canadian dollars) | |
| |
For the three months ended: | | | June 30 2009 | | | June 30 2008 | |
| | | | | | | |
Net revenue from consumer branding business | | | $ | 3,134,035 | | | $ | 4,521,386 | |
Net investment losses | note 3 | | | (226,762 | ) | | | (1,164,758 | ) |
Interest and dividend income | note 3 | | | 25,378 | | | | 165,784 | |
| | | | 2,932,651 | | | | 3,522,412 | |
Operating expenses: | | | | | | | | | |
Salaries and benefits | | | | 3,508,366 | | | | 3,531,981 | |
General and administrative | | | | 856,744 | | | | 940,285 | |
Occupancy costs | | | | 180,316 | | | | 122,248 | |
| | | | 4,545,426 | | | | 4,594,514 | |
| | | | | | | | | |
Depreciation | | | | 166,341 | | | | 182,950 | |
| | | | | | | | | |
Interest expense and financing costs | | | | 33,401 | | | | 29,752 | |
| | | | 4,745,168 | | | | 4,807,216 | |
| | | | | | | | | |
Loss before income taxes and minority interest | | | | (1,812,517 | ) | | | (1,284,804 | ) |
| | | | | | | | | |
Income tax expense | | | | — | | | | — | |
| | | | | | | | | |
Loss before minority interest | | | | (1,812,517 | ) | | | (1,284,804 | ) |
| | | | | | | | | |
Minority interest | | | | (1,415 | ) | | | — | |
| | | | | | | | | |
Net loss | | | $ | (1,811,102 | ) | | $ | (1,284,804 | ) |
| | | | | | | | | |
Loss per share | | | | | | | | | |
Basic | | | $ | (0.21 | ) | | $ | (0.14 | ) |
Diluted | | | $ | (0.21 | ) | | $ | (0.14 | ) |
| | | | | | | | | |
| | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | | 8,558,377 | | | | 8,882,658 | |
Weighted average number of common shares outstanding - fully diluted | | | | 8,558,377 | | | | 8,882,658 | |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. |
Consolidated Statements of Comprehensive Income (Loss) |
Unaudited - Prepared by Management |
(Expressed In Canadian dollars) |
|
For the three months ended: | June 30 2009 | | June 30 2008 | |
| | | | | | |
Net loss | | $ | (1,811,102 | ) | | $ | (1,284,804 | ) |
| | | | | | | | |
Other comprehensive income: | | | | | | | | |
Gain on foreign currency translation | | | — | | | | 127 | |
| | | | | | | | |
Comprehensive loss | | $ | (1,811,102 | ) | | $ | (1,284,677 | ) |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. |
Consolidated Statements of Retained Earnings (Deficit) |
Unaudited - Prepared by Management |
(Expressed In Canadian dollars) |
|
For the three months ended: | June 30 2009 | | June 30 2008 | |
| | | | | | |
(Deficit) retained earnings, beginning of period | | $ | (9,344,854 | ) | | $ | 2,473,204 | |
| | | | | | | | |
Net loss | | | (1,811,102 | ) | | | (1,284,804 | ) |
| | | | | | | | |
(Deficit) retained earnings, end of period | | $ | (11,155,956 | ) | | $ | 1,188,400 | |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. | |
Consolidated Statements of Cash Flows | |
Unaudited - Prepared by Management | |
(Expressed In Canadian dollars) | |
| |
For the three months ended: | | June 30 2009 | | | June 30 2008 | |
Cash flows from operating activities: | | | | | | |
| | | | | | |
Net loss | | $ | (1,811,102 | ) | | $ | (1,284,804 | ) |
| | | | | | | | |
Items not involving cash: | | | | | | | | |
Depreciation | | | 166,341 | | | | 182,950 | |
Minority interest | | | (2,164 | ) | | | — | |
Change in fair value of held for trading investments | | | 216,422 | | | | 1,515 | |
| | | | | | | | |
Net change in non-cash working capital balances: | | | | | | | | |
Accounts receivable | | | 2,344,900 | | | | (1,285,466 | ) |
Prepaid expenses and deferred charges | | | 42,562 | | | | 302,652 | |
Investments held for trading | | | 4,727,805 | | | | 2,305,939 | |
Accounts payable and accrued liabilities | | | (670,755 | ) | | | 69,190 | |
Derivatives held for trading | | | (841,058 | ) | | | — | |
Deferred revenue | | | (1,003,554 | ) | | | (150,251 | ) |
Cash held in escrow | | | — | | | | — | |
Net cash provided by (used in) operating activities | | | 3,169,397 | | | | 141,725 | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Operating line of credit | | | — | | | | 385,000 | |
Loan payable repayments | | | (24,492 | ) | | | (22,065 | ) |
Share buy back under normal course issuer bid | | | — | | | | (1,277,657 | ) |
Net cash provided by (used in) financing activities | | | (24,492 | ) | | | (914,722 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Loans receivable | | | — | | | | 623,429 | |
Purchase of capital assets | | | (99,339 | ) | | | (140,489 | ) |
Investment in real estate | | | 11,466 | | | | — | |
Investments | | | 3,945 | | | | 1,256,731 | |
Net cash provided by (used in) investing activities | | | (83,928 | ) | | | 1,739,671 | |
| | | | | | | | |
Change in cash balance due to foreign exchange | | | 10,340 | | | | 127 | |
| | | | | | | | |
Net change in cash | | | 3,071,317 | | | | 966,801 | |
| | | | | | | | |
Cash, beginning of period | | | 1,565,402 | | | | 10,619 | |
| | | | | | | | |
Cash, end of period | | $ | 4,636,719 | | | $ | 977,420 | |
| | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Interest paid | | $ | 33,401 | | | $ | 29,752 | |
Income taxes paid | | | — | | | | — | |
The accompanying notes are an integral part of these statements
Envoy Capital Group Inc. Consolidated Statement of Shareholders Equity Unaudited - Prepared by Management (Expressed In Canadian dollars) |
| | Share capital | | | Contributed surplus | | | Warrants | | | Stock based compensation | | | Retained earnings | | | Total shareholders’ equity | |
| | | | | | | | | | | | | | | | | | |
Balance, October 1, 2008 | | $ | 9,370,741 | | | $ | 22,445,601 | | | $ | 6,542,456 | | | $ | 864,533 | | | $ | (7,064,010 | ) | | $ | 32,159,321 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Share repurchases pursuant to normal course issuer bid | | | (29,751 | ) | | | (29,726 | ) | | | | | | | | | | | | | | | (59,477 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | | | | | | | | | | | | | | | | | | | (4,091,946 | ) | | | (4,091,946 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2009 | | $ | 9,340,990 | | | $ | 22,415,875 | | | $ | 6,542,456 | | | $ | 864,533 | | | $ | (11,155,956 | ) | | $ | 28,007,898 | |
The accompanying notes are an integral part of these statements
1. Basis of presentation
These unaudited interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in Canada. These interim financial statements do not include all the note disclosure required for annual financial statements and therefore should be read in conjunction with Envoy’s annual consolidated financial statements for the year ended September 30, 2008.
In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period.
Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for 2009.
2. Significant accounting policies
Accounting policies followed in the preparation of the June 30, 2009 interim consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements, except for the following:
Effective October 1, 2008, the Company adopted Canadian Institute of Chartered Accountants’ Handbook Section 3064, Goodwill and Intangible Assets, which clarifies that costs can be deferred only when they relate to an item that meets the definition of an asset. As a result, start-up costs must be expensed as incurred. Section 1000, Financial Statement Concepts, was also amended to provide consistency with this new standard. The Company has determined that the impact of these standards on its consolidated financial statements is immaterial.
Pursuant to the Canadian Institute of Chartered Accountants’ Handbook Section 3855 Financial Instruments – Recognition and Measurement, derivative liabilities have been classified as held-for-trading and measured at fair value at the balance sheet date. Fair value is based on quoted market prices at the consolidated balance sheet dates or the closing price on the last day the security traded if there were no trades at the consolidated balance sheet date.
3. Investments
| | | | | | |
| | June 30 2009 | | | September 30 2008 | |
Investments held for trading | | | | | | |
| | | | | | |
Cash equivalents | | $ | 6,964,683 | | | $ | 2,700,000 | |
| | | | | | | | |
Publicly-traded investments | | | | | | | | |
Fixed income | | | — | | | | 99,434 | |
Equities | | | 6,924,558 | | | | 7,051,786 | |
Derivatives | | | 362,577 | | | | — | |
Discount securities | | | — | | | | 4,602,248 | |
| | | 7,287,135 | | | | 11,753,468 | |
| | | | | | | | |
Total investments held for trading | | $ | 14,251,818 | | | $ | 14,453,468 | |
3. Investments (continued)
| | | | | | |
| | June 30 2009 | | | September 30 2008 | |
Investments | | | | | | |
| | | | | | |
Investment in Capital Pool Company | | $ | 192,135 | | | $ | 200,000 | |
Available for sale investments in private equity | | | 24,250 | | | | 24,250 | |
| | | | | | | | |
Total investments | | $ | 216,385 | | | $ | 224,250 | |
| | | | | | | | |
As at June 30, 2009 the portfolio of investments held for trading was invested in marketable securities, including common shares. The specific investments within the portfolio will vary depending on market conditions.
At June 30, 2009, cash equivalents consisted of interest-bearing term deposits maturing within 30 days. Derivative investments consisted of market index put options expiring in December, 2009.
In April 2007, Envoy founded Sereno Capital Corporation (“Sereno”), a Capital Pool Company, under the specific provisions of the TSX-V program. During fiscal 2007, the Company invested $200,000 in Sereno and at June 30, 2009 Envoy owned an approximate 28% interest. Members of Envoy’s management group are also officers and directors of Sereno and exercise significant influence. The investment in Sereno has been accounted for using the equity method. Accordingly, the Company has recognized a loss of ($7,865) on its investment, representing its share of Sereno’s operating losses to date. Sereno is currently in the process of evaluating opportunities and has not yet completed a qualifying transaction.
4. Loans receivable
Effective June 30, 2005, the Company completed the sale of its John Street, Inc. subsidiary and related assets to the management of John Street. The Company financed a portion of the sale through loans receivable, secured by a general security agreement and collateralized by the underlying shares. All loans were paid in full on February 28, 2009.
| | | | | | |
| | June 30 2009 | | | September 30 2008 | |
Loan receivable, 8.0% per annum, due June 30, 2009, repayable in monthly installments of $28,125, plus interest | | $ | — | | | $ | 253,125 | |
| | | | | | | | |
Loan receivable, 8.0% per annum, due June 30, 2009, repayable in monthly installments of $12,500, plus interest | | | — | | | | 112,500 | |
| | $ | — | | | $ | 365,625 | |
5. Real estate
The Company currently owns two investment properties on Queen St. in Toronto, which it plans to develop for resale. The properties have been valued at cost, representing the cost of acquisition plus related development costs.
6. Related party transactions
During the first quarter of fiscal 2009, one of the Company’s directors charged the Company $7,500 for legal services. In November 2008, this director became an employee of the Company.
In November, 2008, the company established a new subsidiary in the principality of Monaco, Envoy Capital Group Monaco, S.A.M. (“ECGM”). As part of the local requirements of incorporation, each of the two directors of ECGM, who are residents of Monaco, acquired a 0.1% share interest in ECGM (total of 0.2%) at a cost 5,000 Euros (see note 10 minority interest).
These transactions were recorded at the exchange amount, being the amount agreed to by the related parties, as the transactions were considered to be in the ordinary course of business.
7. Bank indebtedness
The Company has access to a revolving demand credit facility of $1 million in order to manage day-to-day operating requirements. Amounts borrowed under the facility bear interest at the bank prime rate. Drawings under the credit facility are secured by the Company’s investment portfolio. There were no borrowings under the facility at June 30, 2009. The credit facility has no set maturity date.
The Company also has access to a revolving demand credit facility of $1.5 million in order to provide working capital to its consumer and retail branding division. Amounts borrowed under the facility bear interest at bank prime plus 1%. Drawings under this credit facility are secured by accounts receivable. There were no borrowings under the facility at June 30, 2009 and no set maturity date.
8. Derivatives held for trading
During the first nine months of fiscal 2009, the Company established an investment position in derivative instruments by writing a number of put options on large cap U.S. publicly-traded companies. The put options have an expiry date of January 2010 and an underlying share purchase price of approximately USD $4,314,000.
The put option contracts are publicly traded and transacted on the Chicago Board Options Exchange. The options have been recorded at their fair value at June 30, 2009. Changes in fair value of the options have been recorded in investment income for the period.
9. Loan payable
| | June 30 2009 | | | September 30 2008 | |
| | | | | | |
Loan payable to landlord, 3.5% per annum, due July 1, 2009, repayable in blended monthly instalments of $7,666. | | $ | — | | | $ | 69,599 | |
On November 25, 2008, the Company established a new foreign subsidiary, Envoy Capital Group Monaco, S.A.M (“ECGM”). The mandate for ECGM is mainly to attract new investment opportunities and promote the services of the Company in the European market.
As part of the requirements of incorporation, a small interest in the Company is owned by two directors of ECGM who are residents of Monaco. The ownership of 0.2% has been reflected in the financial statements as minority interest
Authorized: Unlimited common shares without par value
Issued:
| | Nine months ended June 30, 2009 | | | Fiscal year ended September 30, 2008 | |
| | Number of shares | | | Amount | | | Number of shares | | | Amount | |
| | | | | | | | | | | | |
Balance, beginning of period | | | 8,585,636 | | | $ | 9,370,741 | | | | 9,637,233 | | | $ | 10,516,344 | |
| | | | | | | | | | | | | | | | |
Common shares issued (cancelled) pursuant to: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Stock options exercised | | | — | | | | — | | | | 13,333 | | | | 16,666 | |
| | | | | | | | | | | | | | | | |
Repurchase of shares under normal course issuer bid | | | (27,259 | ) | | | (29,751 | ) | | | (1,064,930 | ) | | | (1,162,269 | ) |
| | | | | | | | | | | | | | | | |
Balance, end of period | | | 8,558,377 | | | $ | 9,340,990 | | | | 8,585,636 | | | $ | 9,370,741 | |
On April 27, 2009, the Company announced acceptance by the Toronto Stock Exchange (the “TSX”) of its Notice of Intention to Make a Normal Course Issuer (“NCIB”). Pursuant to the NCIB, Envoy proposes to purchase from time to time over the next 12 months, if considered advisable, up to an aggregate of 682,723 Common Shares, being 10% of the public float. Purchases were approved to commence on May 1, 2009 and conclude on the earlier of the date on which purchases under the NCIB have been completed and April 30, 2010. No purchases have yet been made under this issuer bid.
11. | Share capital (continued) |
Pursuant to the normal course issuer bid which began on February 7, 2008 and ended on February 6, 2009, the Company was authorized to repurchase and cancel up to 10% of the public float of the shares. In fiscal 2009, under this normal course issuer bid, the Company repurchased and cancelled 27,259 common shares for cash consideration of $59,477, including related costs.
During fiscal 2008, the Company repurchased and cancelled 1,064,930 common shares for cash consideration of $2,932,720. The Company repurchased 188,309 shares for cash consideration of $572,942 pursuant to the terms of a normal course issuer bid which began on February 7, 2007 and ended on February 6, 2008. In addition, during fiscal 2008, the Company repurchased 876,621 shares for cash consideration of $2,359,778 pursuant to the terms of the normal course issuer bid which began on February 7, 2008 and ended on February 6, 2009.
The Company includes the following in its definition of capital:
| | June 30 2009 | | | September 30 2008 | |
| | | | | | |
Loan payable | | $ | — | | | $ | 69,599 | |
Shareholders’ equity comprised of | | | | | | | | |
Share capital | | | 9,340,990 | | | | 9,370,741 | |
Contributed surplus | | | 22,415,875 | | | | 22,445,601 | |
Warrants | | | 6,542,456 | | | | 6,542,456 | |
Stock based compensation | | | 864,533 | | | | 864,533 | |
(Deficit) Retained earnings | | | (11,155,956 | ) | | | (7,064,010 | ) |
| | $ | 28,007,898 | | | $ | 32,228,920 | |
The Company’s objectives when managing capital are:
| (a) | to allow the Company to respond to changes in economic and/or marketplace conditions by maintaining the Company’s ability to purchase new investments; |
| (b) | to give shareholders sustained growth in shareholder value by increasing shareholders’ equity; |
| (c) | to ensure that the Company maintains the level of capital necessary to meet the requirements of its bank; and |
| (d) | to maintain a flexible capital structure which optimizes the cost of capital at acceptable levels of risk. |
The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its underlying assets. The Company maintains or adjusts its capital level to enable it to meet its objectives by:
| (a) | realizing proceeds from the disposition of its investments; |
12. | Management of capital (continued) |
| (b) | utilizing leverage in the form of third party debt and the Company’s bank credit line (bank indebtedness); |
| (c) | raising capital through equity financings; and |
| (d) | purchasing the Company’s own shares for cancellation pursuant to its normal course issuer bid. |
The Company is not subject to any capital requirements imposed by a regulator. There were no changes in the Company’s approach to capital management during the period. To date, the Company has not declared any cash dividends to its shareholders as part of its capital management program. The Company’s management is responsible for the management of capital and monitors the Company’s use of various forms of leverage on a daily basis. The Company’s current capital resources are sufficient to discharge its liabilities as at June 30, 2009.
The investment operations of the Company’s business involve the purchase and sale of securities and, accordingly, the majority of the Company’s assets are currently comprised of financial instruments. The use of financial instruments can expose the Company to several risks, including market, credit and liquidity risks. A discussion of the Company’s use of financial instruments and its risk management is provided below.
Liquidity risk is the risk that the Company will have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if the Company’s access to the capital markets is hindered, whether as a result of a downturn in stock market conditions generally or related to matters specific to the Company, or if the value of the Company’s investments declines, resulting in losses upon disposition.
The Company generates cash flow primarily from its financing activities and proceeds from the disposition of its investments, in addition to interest and dividend income earned on its investments. From time to time, the Company will invest in private equities which have no immediate market and would be illiquid until one is created. Investments in private equities tend to be relative small, comprising less than 5% of available capital and the Company has sufficient marketable securities which are freely tradable and relatively liquid to fund its obligations as they become due under normal operating conditions.
Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments, including derivatives, will significantly fluctuate because of changes in market prices. The value of the financial instruments can be affected by changes in interest rates, foreign exchange rates, and equity and
13. Financial instruments (continued)
commodity prices. Derivative instruments will obtain value, positive or negative, as relevant interest rates, foreign exchange rates, equity, commodity or credit prices or indices change, such that the previously contracted terms of the derivative transactions have become more or less favourable than what can be negotiated under current market conditions for contracts with the same terms and the same remaining period to expiry.
The Company manages market risk by having a portfolio which is not singularly exposed to any one issuer or class of issuers. The Company also has set thresholds on purchases of investments over which the approval of the board of directors is required.
The following table shows the estimated sensitivity of the Company’s after-tax net income (loss) for the quarter ended June 30, 2009 from a change in the closing price of the Company’s investments with all other variables held constant as at June 30, 2009:
Percentage change in closing price | | Change in net after-tax income (loss) from % increase in closing price | Change in net after-tax income (loss) from % decrease in closing price |
| 2 | % | | $ | 133,851 | | | $ | (133,851 | ) |
| 4 | % | | | 267,702 | | | | (267,702 | ) |
| 6 | % | | | 401,552 | | | | (401,552 | ) |
| 8 | % | | | 535,403 | | | | (535,403 | ) |
| 10 | % | | | 669,254 | | | | (669,254 | ) |
The Company is subject to currency risk through its activities in Europe, the Middle East and the United States. The Company invoices a substantial portion of its consumer branding customers in foreign currency and, as such, changes in the exchange rate affect the operating results of the Company. The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk. However, dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may from time to time enter into foreign currency contracts to mitigate the associated risks. The net liability of approximately $225,000 arising from these contracts has been included in accounts payable and accrued liabilities. The gains and losses from these contracts have been included in investment income for the period.
13. | Financial instruments (continued) |
The following assets and liabilities were denominated in foreign currencies at June 30, 2009:
| | June 30 2009 | | | September 30 2008 | |
| | | | | | |
Denominated in U.S. dollars | | | | | | |
Cash | | $ | (2,588,986 | ) | | $ | 951,929 | |
Investments held for trading | | | 6,991,691 | | | | 1,486,504 | |
Accounts receivable | | | 568,482 | | | | 2,052,966 | |
Accounts payable | | | (143,102 | ) | | | (136,945 | ) |
Derivatives held for trading | | | (594,595 | ) | | | — | |
Deferred revenue | | | (28,219 | ) | | | — | |
Net assets denominated in U.S. dollars | | $ | 4,205,271 | | | $ | 4,354,454 | |
| | | | | | | | |
Denominated in U.A.E dirham | | | | | | | | |
Cash | | $ | 40,355 | | | $ | 41,338 | |
Accounts receivable | | | 774,262 | | | | 2,723,905 | |
Accounts payable | | | (643,661 | ) | | | (872,975 | ) |
| | | | | | | | |
Net assets denominated in U.A.E dirham | | $ | 170,956 | | | $ | 1,892,268 | |
| | | | | | | | |
Denominated in British pounds | | | | | | | | |
Accounts receivable | | $ | 958 | | | $ | 143,254 | |
Accounts payable | | | — | | | | (104,493 | ) |
| | | | | | | | |
Net assets denominated in British pounds | | $ | 958 | | | $ | 38,761 | |
| | | | | | | | |
Denominated in Euro dollars | | | | | | | | |
Cash | | $ | 84,703 | | | $ | — | |
Investments held for trading | | | 6,085 | | | | — | |
Accounts payable | | | (119,100 | ) | | | (83,600 | ) |
| | | | | | | | |
Net assets denominated in Euro dollars | | $ | (28,312 | ) | | $ | (83,600 | ) |
| | | | | | | | |
The following table shows the estimated sensitivity of the Company’s after-tax net income (loss) for the quarter ended June 30, 2009 from a change in all foreign currencies (U.S. dollars, U.A.E. dirham, British pounds and Euro dollars) with all other variables held constant as at June 30, 2009:
Percentage change in foreign currencies | | Change in net after-tax income (loss) from % increase in foreign currency | Change in net after-tax income (loss) from % decrease in foreign currency |
| | | | | | | | | |
| 2 | % | | $ | 12,365 | | | $ | (12,365 | ) |
| 4 | % | | | 24,731 | | | | (24,731 | ) |
| 6 | % | | | 37,096 | | | | (37,096 | ) |
| 8 | % | | | 49,462 | | | | (49,462 | ) |
| 10 | % | | | 61,827 | | | | (61,827 | ) |
13. | Financial instruments (continued) |
The Company manages its credit risk with respect to accounts receivable by dealing primarily with large creditworthy customers and by billing whenever possible in advance of rendering services.
At June 30, 2009, the composition of trade receivables was as follows:
| | June 30 2009 | | September 30 2008 |
| | | | | | |
Current | | $ | 1,316,470 | | $ | 2,580,171 |
Past due 1-30 | | | 138,950 | | | 1,338,149 |
Past due 31-90 | | | 234,632 | | | 1,747,837 |
More than 90 days past due | | | 776,710 | | | 533,569 |
| | | | | | |
Total trade receivables | | $ | 2,466,762 | | $ | 6,199,726 |
| | | | | | |
Certain of the Company’s financial assets, including cash and cash equivalents are exposed to the risk of financial loss occurring as a result of default of a counterparty on its obligations to the Company. The Company may, from time to time, invest in debt obligations. The Company may also be exposed, in the normal course of business, to credit risk from advances to investee companies.
Credit risk on derivative financial instruments is the risk of a financial loss occurring as a result of a default of a counterparty on its obligation to the Company. Derivative-related credit risks are subject to the same credit approval, limit and monitoring standards that are used for managing other transactions that create credit exposure. This includes evaluation of counterparties as to creditworthiness, and managing the size, diversification and maturity structure of the portfolio.
Interest risk is the impact that changes in interest rates could have on the Company’s earnings and liabilities. All of the Company’s interest-bearing investments are at fixed rates, hence there is no exposure to interest rate fluctuations while investments are held. The Company has a credit facility which bears interest at the bank prime rate and can be repaid by the Company at any time, without notice or penalty. It is management’s opinion that the Company is not exposed to significant interest rate risk.
Summary of financial information concerning the Company’s operating segments is shown in the following tables:
| (a) | Nine months operating results |
| | | | For the nine months ended June 30, 2009 | |
| | Consumer and Retail Branding | | Merchant Banking | | Corporate | | Total | |
| | | | | | | | | | | | |
Net revenue | | $ | 10,130,534 | | ($248,205) | | $ | — | | $ | 9,882,329 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Salaries and benefits | | | 8,461,764 | | 1,284,684 | | | 600,290 | | | 10,346,738 | |
General and administrative | | | 1,538,460 | | 237,502 | | | 717,236 | | | 2,493,198 | |
Occupancy costs | | | 655,789 | | 166,296 | | | (251,534) | | | 570,551 | |
| | | | | | | | | | | | |
Depreciation | | | 259,277 | | 9,411 | | | 248,885 | | | 517,573 | |
| | | | | | | | | | | | |
Interest expense | | | — | | 45,355 | | | 5,305 | | | 50,660 | |
| | | | | | | | | | | | |
Loss before income taxes and minority interest | | | (784,756) | | (1,991,453) | | | (1,320,182) | | | | (4,096,391) | |
| | | | | | | | | | | | |
Income tax expense | | | | | | | | | | | — | |
| | | | | | | | | | | | |
Loss before minority interest | | | | | | | | | | | (4,096,391) | |
| | | | | | | | | | | | |
Minority interest | | | | | | | | | | | (4,445) | |
| | | | | | | | | | | | |
Net loss | | | | | | | | | | $ | (4,091,946) | |
14. Segmented information (continued)
| | | | For the nine months ended June 30, 2008 | |
| | Consumer and Retail Branding | | Merchant Banking | | Corporate | | Total | |
| | | | | | | | | | | | |
Net revenue | | $ | 12,054,545 | | ($492,649) | | $ | — | | $ | 11,561,896 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Salaries and benefits | | | 8,099,184 | | 862,882 | | | 977,402 | | | 9,939,467 | |
General and administrative | | | 1,352,300 | | 348,226 | | | 799,549 | | | 2,500,075 | |
Occupancy costs | | | 641,070 | | 56,493 | | | (254,884 | ) | | 442,679 | |
| | | | | | | | | | | | |
Depreciation | | | 289,012 | | 9,814 | | | 252,170 | | | 551,396 | |
| | | | | | | | | | | | |
Interest expense | | | 21,666 | | — | | | 38,127 | | | 59,793 | |
| | | | | | | | | | | | |
Earnings (loss) before income taxes | | | 1,650,913 | | (1,770,063) | | | (1,812,364 | ) | | (1,931,515) | |
| | | | | | | | | | | | |
Income tax recovery | | | | | | | | | | | (25,780) | |
| | | | | | | | | | | | |
Net loss | | | | | | | | | | $ | (1,905,735) | |
14. Segmented information (continued)
| (b) | Three months operating results |
| | | | For the three months ended June 30, 2009 | |
| | Consumer and Retail Branding | | Merchant Banking | | Corporate | | Total | |
| | | | | | | | | | | |
Net revenue | | $ | 3,134,035 | | $(201,384) | | $ | — | | $2,932,651 | |
| | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | |
Salaries and benefits | | | 2,881,448 | | 474,153 | | | 152,765 | | 3,508,366 | |
General and administrative | | | 603,561 | | 79,752 | | | 173,431 | | 856,744 | |
Occupancy costs | | | 222,273 | | 62,865 | | | (104,822) | | 180,316 | |
| | | | | | | | | | | |
Depreciation | | | 73,722 | | 7,171 | | | 85,448 | | 166,341 | |
| | | | | | | | | | | |
Interest expense | | | — | | 34,896 | | | (1,495) | | 33,401 | |
| | | | | | | | | | | |
Loss before income taxes and minority interest | | | (646,969) | | (860,221) | | | (305,327) | | (1,812,517) | |
| | | | | | | | | | | |
Income tax expense | | | | | | | | | | — | |
| | | | | | | | | | | |
Loss before minority interest | | | | | | | | | | (1,812,517 | ) |
| | | | | | | | | | | |
Minority interest | | | | | | | | | | (1,415 | ) |
| | | | | | | | | | | |
Net loss | | | | | | | | | | $(1,811,102 | ) |
14. Segmented information (continued)
| | For the three months ended June 30, 2008 |
| | Consumer and Retail Branding | | Merchant Banking | | Corporate | | Total |
| | | | | | | | | | |
Net revenue | | $ | 4,521,386 | | ($998,974) | | $ | — | | $3,522,412 |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Salaries and benefits | | | 2,978,586 | | 243,117 | | | 310,277 | | 3,531,981 |
General and administrative | | | 561,918 | | 124,867 | | | 253,500 | | 940,285 |
Occupancy costs | | | 198,889 | | 18,898 | | | (95,539) | | 122,248 |
| | | | | | | | | | |
Depreciation | | | 99,355 | | 1,832 | | | 81,763 | | 182,950 |
| | | | | | | | | | |
Interest expense | | | 13,133 | | — | | | 16,619 | | 29,752 |
| | | | | | | | | | |
Earnings (loss) before income taxes | | | 669,505 | | (1,387,687) | | | (566,621) | | (1,284,804) |
| | | | | | | | | | |
Income tax expense | | | | | | | | | | — |
| | | | | | | | | | |
Net loss | | | | | | | | | | $(1,284,804) |
| (c) | Summary of total assets |
| Consumer and Retail Branding | | Merchant Banking | | Corporate | | Total | |
| | | | | | | | | | | | |
June 30, 2009 | | $ | 10,128,932 | | | $ | 21,023,739 | | | $ | 34,470 | | | $ | 31,187,141 | |
| | | | | | | | | | | | | | | | |
September 30, 2008 | | $ | 14,252,978 | | | $ | 21,476,157 | | | $ | 752,909 | | | $ | 36,482,044 | |
Envoy Capital Group Inc.
Management Discussion and Analysis
Third Quarter of Fiscal 2009
August 13, 2009
This section of our interim report sets forth Management’s Discussion and Analysis (“MD&A”) of the financial performance of Envoy Capital Group Inc. (“Envoy,”, “the Company”, “we” or “us”) for the three and nine month periods ended June 30, 2009 compared to the three and nine month periods ended June 30, 2008.
The analysis should be read in conjunction with the unaudited interim consolidated financial statements (the “Financial Statements”) for the period ended June 30, 2009, including the accompanying notes, which are presented elsewhere in this report as well as the annual audited consolidated financial statements and the MD&A presented in the Annual Report to Shareholders for the year ended September 30, 2008.
The consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in Canada, which vary in certain significant respects from generally accepted accounting principles in the United States. A description of the significant differences, as applicable to the Company, is included in Note 22 to the September 30, 2008 year end audited financial statements.
The discussion, analysis and financial review are presented in the following sections:
3. | Summary of Quarterly Results |
4. | Commitments and Contractual Obligations |
5. | Liquidity and Capital Resources |
6. | Related Party Transactions |
7. | Critical Accounting Policies |
8. | Risks and Uncertainties |
9. | Evaluation of Disclosure Controls and Procedures |
10. | Updated Share Information |
12. | Forward Looking Statements |
Envoy conducts its business through two reportable operating segments: the Consumer and Retail Branding Group and the Merchant Banking Group. In addition, Envoy has a “Corporate Group” which provides certain administrative, accounting, financial, regulatory reporting and legal functions.
Corporate Overview
At the Company’s annual general meeting held on March 30, 2007 the shareholders voted to amend the Company’s articles of incorporation by changing its name to Envoy Capital
Group Inc. and removing the maximum number of common shares that the Company is authorized to issue. In addition, the shareholders also voted to reduce the stated capital of the Company’s common shares by $40.3 million for the purpose of eliminating the deficit on the consolidated balance sheet of the Company as at September 30, 2006.
On November 25, 2008, the Company established a new foreign subsidiary, Envoy Capital Group Monaco, S.A.M (“ECGM”). The mandate for ECGM is mainly to attract new investment opportunities and promote the services of the Company in the European market.
On April 27, 2009, the Company announced that the Toronto Stock Exchange had accepted its notice of intention to purchase from time to time, if considered advisable, up to an aggregate of 682,723 common shares over the next twelve month period. Purchases were approved to commence on May 1, 2009 and to conclude on the earlier of the date on which purchases under the bid have been completed and April 30, 2010. To date, no shares have been purchased under this issuer bid.
On February 6, 2008, the Company initiated a normal course issuer bid whereby the Company was authorized to purchase from time to time, if considered advisable, up to an aggregate of 903,880 common shares over the ensuing twelve month period. As of October, 2008, the Company had repurchased and cancelled all 903,880 common shares for cash consideration of $2,419,396, an average of $2.59 per share.
On February 7, 2007, the Company commenced a normal course issuer bid under which it was authorized to purchase an aggregate of 1,001,818 common shares over the next twelve month period. During the reporting year ending September 30, 2007 Envoy repurchased and cancelled 813,466 common shares for cash consideration of $2.8 million. The average price of the shares repurchased during this period was $3.47 per share. In fiscal 2008, the Company completed the purchases under this normal course issuer bid, repurchasing and cancelling 188,309 shares for cash consideration of $572,942, or an average price of $3.04 per share.
On September 15, 2006, the Company announced its intention to repurchase its common shares under a substantial issuer bid in the form of a modified “Dutch Auction” tender offer. On January 25, 2007, pursuant to this Dutch Auction tender offer, the Company announced that it would take up and pay for the shares at a purchase price of US$2.70 (CDN$3.19) per share for a total purchase price of US$24.4 million (CDN$28.7 million). Costs relating to the offering totaled approximately $1.5 million. On January 30, 2007, the Company took up and paid for 9,002,383 shares. Payment for the shares was made from available cash on hand.
Based on the 2008 year-end financial statements, the Company confirms that it will be characterized as a passive foreign investment company (“PFIC”) under the U.S. Internal Revenue Code for the fiscal year ended September 30, 2008, and may be a PFIC for subsequent fiscal years.
The application of the PFIC rules is complex. U.S. shareholders are urged to consult their own tax advisors about the U.S. federal income tax consequences of owning and disposing of stock in a PFIC, and about the advisability, procedure and timing of their
making any of the available tax elections, including a “qualified electing fund” or “mark-to-market” elections. U.S. shareholders who choose to make a QEF election should refer to the Envoy website at www.envoy.to following Envoy’s fiscal year end in order to receive the necessary financial information.
Consumer and Retail Branding Overview
The operations of the Branding segment are carried out through Envoy’s wholly owned Canadian subsidiary, Watt International Inc. (“Watt”). Watt’s services, including brand strategy and design, retail consulting and package design, are provided to a broad range of customers in various segments of the market. Watt’s business model is that of a strategically driven agency which is well positioned to retain and service existing clients by providing innovative solutions in domestic and international markets.
Operating costs for the Branding business are comprised of salaries and benefits, general and administrative expenses and occupancy costs. Salaries and benefits expenses include salaries, employee benefits, incentive compensation, contract labour and other payroll related costs, which are expensed as incurred. General and administrative costs include business development, office costs, technology, professional services and foreign exchange. Occupancy costs represent the costs of leasing and maintaining company premises.
Because the Branding business operates in a service business, management monitors these operating costs on a percentage of revenue basis. Salaries and benefits tend to fluctuate in conjunction with revenues. To avoid adding permanent overhead, management uses contract labour whenever possible to manage the business through short term periods of heavy workflow. Occupancy costs and general and administrative expenses are not directly related to servicing clients and therefore tend not to increase or decrease in direct proportion to revenue fluctuations because a significant portion of these expenses are relatively fixed.
Merchant Banking Overview
Envoy’s merchant banking business model is to focus on providing financial services as well as equity and debt capital to small and mid-cap companies. Envoy believes that there is a need for merchant banking services in this segment of the market and Envoy is uniquely positioned to satisfy this need. Envoy has made several successful equity investments in recent years and has demonstrated an ability to identify and to add value to small and mid-cap companies in need of capital.
The Merchant Banking investments currently consist of a blend of large cap public company holdings and derivative instruments, direct investments in growth stage public companies, as well as interest-bearing term deposits. The Merchant Bank business earnings consist of both realized and unrealized gains in the fair value of its investments, plus dividends and interest income.
Operating costs for the Merchant Banking segment are comprised of salaries and benefits, general and administrative expenses and occupancy costs. Salaries and benefits expenses include salaries, employee benefits, incentive compensation, contract labour and other payroll related costs, which are expensed as incurred. General and administrative costs include business development, office costs, technology, professional services and foreign exchange gains and losses. Occupancy costs represent the costs of leasing and maintaining company premises.
2. RESULTS OF OPERATIONS
Three Months Ended June 30, 2009 Compared To Three Months Ended June 30, 2008
On a consolidated basis, the net loss for the third quarter of fiscal 2009 was ($1.8) million compared with a net loss of ($1.3) million for the third quarter of fiscal 2008.
On a fully diluted per share basis the net loss for this year’s third quarter was ($0.21) per share compared to net loss of ($0.14) per share last year.
Consumer and Retail Branding Segment
Net revenue for the Branding Segment represents compensation for services rendered, net of any pass-through costs such as production costs incurred on behalf of clients in acting as agent for them.
The breakdown of net revenue is as follows:
| | Net revenue for the three months ended June 30 | |
| | (in millions) | |
By type of service: | | 2009 | | | % of total | | | 2008 | | | % of total | |
Consumer and retail branding | | $ | 3.1 | | | | 100 | % | | $ | 4.5 | | | | 100 | % |
By customer location: | | 2009 | | | % of total | | | 2008 | | | % of total | |
Canada | | $ | 1.6 | | | | 52 | % | | $ | 1.4 | | | | 32 | % |
USA and South America | | | 0.9 | | | | 27 | % | | | 1.9 | | | | 42 | % |
Middle East and Asia | | | 0.6 | | | | 21 | % | | | 1.2 | | | | 26 | % |
| | $ | 3.1 | | | | 100 | % | | $ | 4.5 | | | | 100 | % |
Net revenue for the three months ended June 30, 2009 was $3.1 million, compared to $4.5 million for the three months ended June 30, 2008, a decrease of $1.4 million or 30.7%.
The decrease in net revenue from last year to this year was principally the result of the recessionary economic environment which exists globally and has lead to reduced client spending in most geographic regions. Net revenue from the U.S. and South America region, as well as Middle East and Asia region declined by $1.0 million and $0.5 million,
respectively, in the third quarter of fiscal 2009 as compared to the same quarter last year. In Canada revenue was up by approximately $0.2 quarter over quarter.
Revenue from the Middle East and Asia region continues to be negatively affected by the economic slowdown as large scale retail development projects are on hold or have been delayed indefinitely. In the U.S. and other major markets retailers have reduced their capital spending programs because of the uncertain economic environment and the impact it has had on consumer spending. Although we have not lost any major clients our revenue has been impacted by the reduced spending by many of our clients.
Salaries and benefits expense for the current quarter was $2.8 million compared to $2.9 million for the third quarter last year, a decrease of $0.1 million. Salaries and benefits expense as a percentage of net revenue was 88.4% for this year’s third quarter compared to 64.5% for the same period last year. In response to reduced revenue and an uncertain economic environment this year, management made further reductions to the labour force. Approximately $0.2 in termination costs are included in salary and benefits expense this quarter and continued efforts are being made by management to bring labour costs in line with lower revenues.
General and administration expenses were $0.5 million in the third quarter of fiscal 2009 compared to $0.5 million for the same period last year. The current year’s general and administrative expenses include $0.1 million in foreign exchange losses resulting from a weaker U.S. dollar compared to the Canadian dollar. General and administration expenses as a percentage of net revenue for 2009 was 15.5% compared to 11.0% in 2008. To a large extent most of the general and administration expenses are fixed in nature making it more difficult to reduce in reaction to the decline in revenue.
Occupancy Costs for both the current quarter and the same period last year were $0.2 million. Occupancy costs as a percentage of net revenue were 7.1% this year compared to 4.4% last year, due to a decline in revenue.
Depreciation expense for the three months ended June 30, 2009 and the three months ended June 30, 2008 was $0.1 million.
Interest income for the three months ended June 30 for both years was negligible.
Merchant Banking Segment
Investment income from merchant banking activities includes realized and unrealized gains and losses from the Company’s investments plus interest and dividend income earned during the period.
Net investment losses for the Merchant Banking segment were ($0.2) million for the three month period ended June 30, 2009, compared to net investment losses of ($1.0) million for the same period last year. Envoy entered fiscal 2009 with a substantial portion of its investment capital in the form of cash or cash equivalents. As a result, the Company was able to minimize the impact of a most turbulent period for the capital
markets. During the first and second quarters of fiscal 2009, the focus of the merchant banking segment was to preserve capital and assess potential opportunities that may arise once the market showed signs of stabilizing. Beginning in the second quarter, management began to selectively redeploy capital as credit markets eased and fear in the market subsided. A strong third quarter for the markets was tempered considerably by the loss in value of the underlying currency. While the U.S. markets made significant strides in constant dollar terms, the weakness in the U.S. dollar relative to the Canadian dollar wiped out most of those gains. The Company’s third quarter saw increases of 11.0% for the Dow Jones Industrial Average, 15.2% for the S&P 500 Index and 18.9% for the TSX Composite, however, the U.S. dollar weakened (7.8%) during the same period. The Company was able to generate approximately $0.3 million in investment gains but these were more than offset by a loss of over ($0.5) million on foreign currency losses. The net investment losses of ($0.2) million were still significantly lower than the ($1.2) million in net investment losses for the same period last year.
Envoy closed out several positions in stock option derivatives during the third quarter. As the market began to strengthen, put option premiums shrunk making it attractive to close out the position. The Company was able to eliminate the liability while still earning the bulk of the premium.
Going forward, investment gains will be a function of general market and economic conditions as well as the success of individual securities selected for investment. Accordingly, the income generated from such investment activity is unlikely to be consistent from period to period.
Operating expenses, excluding depreciation, were $0.6 million for the current quarter, compared to $0.4 million for the same period last year. Much of the operating expenses are fixed in nature, thus profitability is typically a function of revenue generated.
Salaries and benefits expenses for the current quarter were $0.5 million, compared to $0.2 million for the third quarter last year. Salary allocations between the merchant banking and corporate segments were adjusted in the second and third quarters as a result of a realignment of management responsibilities. The increase in merchant banking salaries were offset by a similar reduction in corporate expenses.
General and administrative expenses were slightly lower but comparable to the same period last year at approximately $0.1 million.
Occupancy costs and depreciation expense were minimal for both the current quarter and the same period last year.
Corporate
Corporate expenses include salaries and benefits for the accounting, financial and administrative functions of Envoy. In addition, the corporate expenses include the costs of regulatory compliance such as audit and legal expenses, board fees, listing fees and shareholder relations. Costs incurred by the corporate component during the quarter
totaled approximately $0.3 million, compared to $0.6 million for the third quarter last year.
Income Taxes
There was no income tax expense or recovery for the current period. The reason for the disparity from the substantially enacted tax rate of 33% was an adjustment to the future value of the tax asset based on the Company’s results for the third quarter. The current value of the tax asset reflects management’s assessment of those timing differences and loss carryforwards which are more likely than not to be used in future periods.
Net loss
The net loss for the three months ended June 30, 2009 was ($1.8) million, compared to a net loss of ($1.3) million for the three months ended June 30, 2008. On a per share basis the net loss in the current quarter was ($0.21) per share compared to a loss of ($0.14) per share last year.
The earnings per share calculations are based on fully diluted weighted average shares outstanding of 8,558,377 for the current quarter compared to 8,882,658 in the same period last year.
Nine Months Ended June 30, 2009 Compared To Nine Months Ended June 30, 2008
On a consolidated basis, the net loss for the first nine months of fiscal 2009 was ($4.1) million compared with a net loss of ($1.9) million for the first nine months of fiscal 2008.
On a fully diluted per share basis the net loss for this year’s first nine months was ($0.48) per share compared to a net loss of ($0.21) per share for the same period last year.
Consumer and Retail Branding Segment
Net revenue for the Branding Segment represents compensation for services rendered, net of any pass-through costs such as production costs incurred on behalf of clients in acting as agent for them.
The breakdown of net revenue is as follows:
| | Net revenue for the nine months ended June 30 | |
| | (in millions) | |
By type of service: | | 2009 | | | % of total | | | 2008 | | | % of total | |
Consumer and retail branding | | $ | 10.1 | | | | 100 | % | | $ | 12.1 | | | | 100 | % |
By customer location: | | 2009 | | | % of total | | | 2008 | | | % of total | |
Canada | | $ | 4.2 | | | | 41 | % | | $ | 4.0 | | | | 33 | % |
USA and South America | | | 4.1 | | | | 40 | % | | | 4.9 | | | | 40 | % |
Middle East and Asia | | | 1.8 | | | | 19 | % | | | 3.2 | | | | 27 | % |
| | $ | 10.1 | | | | 100 | % | | $ | 12.1 | | | | 100 | % |
Net revenue for the nine months ended June 30, 2009 was $10.1 million, compared to $12.0 million for the nine months ended June 30, 2008, a decrease of $1.9 million or 16.0%. The principal reason for the decline in net revenue from last year to this year is recessionary economic conditions that started in the second quarter of fiscal 2009 and has continued into the third quarter.
Net revenue from the Middle East and Asia region dropped by $1.1 million from the first nine months of 2008 to the same period in 2009, while the U.S. and Latin America regions dropped by $0.8 million for the same periods. Revenue in Canada was up by approximately $0.1 million year on year.
Salaries and benefit expense for the first three quarters in 2009 was $8.1 million compared to $7.9 million for the same period last year, an increase of $0.2 million. Salaries and benefits as a percentage of net revenue was 80.0% for this year’s first nine months compared to 65.3% for the same period last year. Labour ratios are significantly higher in the current fiscal period as the labour cost reductions that have been implemented lag the decline in revenue. A drop in revenue was anticipated due to the economic environment but at levels less than currently being experienced. Management continues to look for solutions and ways to optimize the labour ratio.
General and administration expenses were $1.4 million for the current year compared to $1.2 million for the previous year. The increase relates to foreign exchange losses as the Canadian dollar strengthened against the US dollar in the current year and additional administration costs associated with the Dubai branch. General and administration expenses as a percentage of net revenue for the current period was 14.0% compared to last year at 10.1%
Occupancy costs for both the current year to date and the same period last year were $0.7 million and $0.6 million respectively. The slight increase from 2008 to 2009 of $0.1 million was as a result of annual rent increases. Occupancy costs as a percent of net revenue were 6.5% this year compared to 5.3% last year.
Depreciation expense for the nine months ended June 30, 2009 and the nine months ended June 30, 2008 was $0.3 million.
Interest income for the nine months ended June 30, 2008 was $0.2 million and negligible in 2009.
Merchant Banking Segment
Net investment losses for the Merchant Banking segment were ($0.2) million for the nine month period ended June 30, 2009, compared to investment losses of ($0.5) million for the same period last year.
Envoy adopted a somewhat defensive stance in its investments going into the current fiscal year in order to preserve capital and minimize its exposure to volatile markets. This investment approach continued through the first half of the year as there was considerable uncertainty in the markets. While the Company’s conservative approach paid off in the downturn, it also meant that as stocks started to move higher in the third quarter, the Company’s returns underperformed the overall markets. While the Company was able to earn good returns on its investments in derivatives in the third quarter and acceptable returns on its long securities positions, foreign exchange movements negatively impacted results.
The Company performed reasonably well with respect to capital preservation during a turbulent fiscal 2009, restricting its losses to approximately (1.2%) of investment assets in the first nine months. A comparison to general market indices show that the S&P/TSX Composite Index had a negative return of (13.3%) for the first nine months of fiscal 2009, while the Dow Jones Industrial Average and S&P 500 had negative returns of (22.1%) and (21.1%), respectively. Going forward, investment gains will be a function of general market and economic conditions as well as the success of individual securities selected for investment. Accordingly, the income generated from such investment activity is unlikely to be consistent from period to period.
Operating expenses, excluding depreciation, were $1.7 million for the current year and $1.3 for the same period last year. Much of the operating expenses are fixed in nature, thus profitability is typically a function of revenue generated.
Salaries and benefits expenses were $1.3 million for the first nine months of fiscal 2009 and $0.9 million for the same period last year, mainly due to a change in salary allocations between the Merchant bank and Corporate segments, as referenced in the discussion on the current quarter’s results. Combined salaries costs for the two segments are similar for the current and prior year to date.
Occupancy costs for the current fiscal year to date are slightly higher than the same period last year at $0.2 million and $0.1 million, respectively, due to the opening of an office in Monaco. Depreciation expense was minimal for both the current nine month period and the same period last year.
Corporate
Costs incurred by the Corporate component during the first nine months of fiscal 2009 totaled approximately $1.3 million, compared to $1.8 million for the first nine months last year. Salaries and benefits expenses were lower by approximately $0.4 million in the current period as a result of a realignment of management responsibilities.
Income Taxes
There was no income tax expense or recovery for the current period. The reason for the disparity from the substantially enacted tax rate of 33% was an adjustment to the future value of the tax asset based on the Company’s results for the first nine months. The current value of the tax asset reflects management’s assessment of those timing differences and loss carryforwards which are more likely than not to be used in future periods.
Net loss
Net loss for the nine months ended June 30, 2009 was ($4.1) million, compared to a loss of ($1.9) million for the nine months ended June 30, 2008. On a per share basis, the net loss in the current period was ($.48) per share compared to a loss of ($.21) per share for the same period last year.
The earnings per share calculations are based on fully diluted weighted average shares outstanding of 8,558,556 for the current year compared to 9,268,345 for the same period last year.
3. SUMMARY OF QUARTERLY RESULTS
| | | Q3 2009 | | | | Q2 2009 | | | | Q1 2009 | | | | Q4 2008 | |
| | | | | | | | | | | | | | | | |
Net revenue | | $2.9 million | | | $3.3 million | | | $3.7 million | | | ($0.3) million | |
| | | | | | | | | | | | | | | | |
Net loss: | | | | | | | | | | | | | | | | |
From continuing operations | | ($1.81) million | | | ($1.24) million | | | ($1.04) million | | | ($8.25) million | |
Including discontinued operations | | ($1.81) million | | | ($1.24) million | | | ($1.04) million | | | ($8.25) million | |
| | | | | | | | | | | | | | | | |
Net loss per share | | | | | | | | | | | | | | | | |
From continuing operations | | | | | | | | | | | | | | | | |
Basic | | $ | (0.21 | ) | | $ | (0.15 | ) | | $ | (0.12 | ) | | $ | (0.95 | ) |
Diluted | | $ | (0.21 | ) | | $ | (0.15 | ) | | $ | (0.12 | ) | | $ | (0.95 | ) |
Including discontinued operations | | | | | | | | | | | | | | | | |
Basic | | $ | (0.21 | ) | | $ | (0.15 | ) | | $ | (0.12 | ) | | $ | (0.95 | ) |
Diluted | | $ | (0.21 | ) | | $ | (0.15 | ) | | $ | (0.12 | ) | | $ | (0.95 | ) |
| | | Q3 2008 | | | | Q2 2008 | | | | Q1 2008 | | | | Q4 2007 | |
| | | | | | | | | | | | | | | | |
Net revenue | | $3.5 million | | | $3.3 million | | | $4.7 million | | | $4.5 million | |
| | | | | | | | | | | | | | | | |
Net earnings (loss): | | | | | | | | | | | | | | | | |
From continuing operations | | ($1.28) million | | | ($0.98) million | | | $0.36 million | | | ($0.01) million | |
Including discontinued operations | | ($1.28) million | | | ($0.98) million | | | $0.36 million | | | $0.36 million | |
| | | | | | | | | | | | | | | | |
Net earnings (loss) per share | | | | | | | | | | | | | | | | |
From continuing operations | | | | | | | | | | | | | | | | |
Basic | | $ | (0.14 | ) | | $ | (0.10 | ) | | $ | 0.04 | | | $ | 0.00 | |
Diluted | | $ | (0.14 | ) | | $ | (0.10 | ) | | $ | 0.04 | | | $ | 0.00 | |
Including discontinued operations | | | | | | | | | | | | | | | | |
Basic | | $ | (0.14 | ) | | $ | (0.10 | ) | | $ | 0.04 | | | $ | 0.04 | |
Diluted | | $ | (0.14 | ) | | $ | (0.10 | ) | | $ | 0.04 | | | $ | 0.04 | |
4. COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Set out below is a summary of the amounts due and committed under contractual obligations at June 30, 2009:
| | Total | | | Due in year 1 | | | Due in year 2 | | | Due in year 3 | |
Operating leases | | $ | 667,499 | | | $ | 555,205 | | | $ | 73,144 | | | $ | 39,150 | |
Long term debt | | | — | | | | — | | | | — | | | | — | |
Total contractual cash obligations | | $ | 667,499 | | | $ | 555,205 | | | $ | 73,144 | | | $ | 39,150 | |
Amounts due beyond year 1 are significantly lower than in periods due to the fact that the Company has not yet committed to an extension of its lease for premises at the Consumer and Retail branding unit. The Company is currently in negotiation to extend the lease which expires April 1, 2010.
5. | LIQUIDITY AND CAPITAL RESOURCES |
As at June 30, 2009, Envoy had working capital of $20.8 million, compared to approximately $24.5 million as at September 30, 2008. Included in working capital is an investment portfolio of marketable securities, the current portion of which was $14.3 million at June 30, 2009 and $14.5 million at September 30, 2008.
The net change in cash for the current period was a net increase of $0.1 million, compared to a net increase of $0.2 million last year.
The Company used approximately $3.1 million to fund cash operating losses for the first nine months of the fiscal year, compared to a use of approximately $1.3 million in the same period last year.
The net change in non-cash working capital balances was a increase of approximately $3.0 million for the current period, compared to an increase of $1.9 million for the same period last year. Accounts receivable in the current period provided approximately $4.4 million of cash as a result of collecting some large accounts from major customers. Approximately $1.3 million of this cash was used to reduce accounts payable, with the balance being used to fund cash operating losses.
The Company’s investment portfolio is highly liquid and currently includes a large cash component. The Company also maintains a revolving credit facility which is available up to a maximum of $2.5 million, none of which was utilized at June 30, 2009. The Company may use the operating line for day-to-day requirements only and has no current or expected future requirements for access to additional credit.
The Company has no significant commitments for future capital expenditures.
6. | TRANSACTIONS WITH RELATED PARTIES |
In November, 2008, the company established a new subsidiary in the principality of Monaco, Envoy Capital Group Monaco, S.A.M (“ECGM”). As part of the local requirements of incorporation, each of the two directors of ECGM, who are residents of Monaco, acquired a 0.1% share interest in ECGM (total of 0.2%) at a cost of 5,000 Euros. Related party transactions are recorded at the exchange amount, being the amount agreed to by the related parties.
7. | CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The significant accounting policies used by Envoy in preparing its Financial Statements are described in Note 2 to the Financial Statements and should be read to ensure a proper understanding and evaluation of the estimates and judgments made by management in preparing those Financial Statements. Envoy’s Financial Statements are prepared in accordance with Canadian generally accepted accounting principles. Envoy also prepared a reconciliation to United States generally accepted accounting principles, which is included in Note 22 to the annual consolidated financial statements.
Inherent in the application of some of these policies is the judgment by management as to which of the various methods allowed under generally accepted accounting principles is the most appropriate to apply in the case of Envoy. As well, management must take appropriate estimates at the time the Financial Statements are prepared.
Although all of the policies identified in Note 2 to the Financial Statements are important in understanding the Financial Statements, the policies discussed below are considered by management to be central to understanding the Financial Statements, because of the higher level of measurement uncertainties involved in their application.
Goodwill
Goodwill represents the price paid for acquisitions in excess of the fair market value of net tangible and intangible assets acquired. Goodwill is carried at cost, less impairment losses if any.
The Company uses a two-step impairment test on an annual basis, or when significant business changes have occurred that may have had an adverse impact on the fair value of the goodwill. To determine whether impairment has occurred, the fair value of the reporting unit is compared to its carrying amounts, including goodwill. When the fair value is in excess of its carrying amount, the goodwill is not considered to be impaired, and the second step of the impairment test is not necessary.
When the carrying amount of the reporting unit as determined in the first step exceeds the fair value, then the fair value of the goodwill is determined in the same manner as followed on a business combination. An impairment loss is recognized when the carrying amount of the goodwill of a reporting unit exceeds its fair value. It is not reversed in the event that the fair value subsequently increases.
Income Taxes
Envoy accounts for income taxes using the asset and liability method. Under this method, future income taxes are recognized at the enacted or substantially enacted tax rate expected to be applicable at the anticipated date of the reversal for all significant temporary differences between the tax and accounting bases of assets and liabilities and for certain tax carryforward items. Future income tax assets and liabilities are recognized only to the extent that, in the opinion of management, it is more likely than not that the future income tax assets will be realized. Future operating results and future tax rates could vary materially, and accordingly the value of income tax assets and liabilities could change by material amounts.
Revenue Recognition – Branding segment
The Company presents as net revenue its net commission and fee income earned as compensation for its services. Further, the balance sheet reflects the following:
| (i) | deferred revenue representing fees billed and collected in advance of such fees being earned; |
| (ii) | unbilled accounts receivable representing fees earned but not yet billed as well as well as reimbursable pass-through costs; and |
| (iii) | work in process represents costs incurred on projects for which revenue has not yet been recognized for accounting purposes. |
Included in work in process are charges for staff time at standard cost and third party charges. The standard cost rate provides for the recovery of actual labour and overhead costs incurred. The third party charges are for actual costs related to outsourced goods and services for specific projects.
The Company recognizes net revenue and profits for Consumer and Retail Branding on the completed contract basis, and accordingly revenue and profit are recognized only when the contract or contract milestone is substantially complete. Anticipated losses are provided for when the estimate of total costs on a contract indicates a loss.
Net revenue for the Consumer and Retail Branding segment represents compensation for services rendered, net of any pass-through costs such as production costs incurred on behalf of clients in acting as agent for them. In circumstances where the Company retains subcontractors, such as architects or engineers, to perform services as an agent to the Company, the revenue for such services is included in net revenue and the cost of the subcontractor’s services is included in salaries and benefits expense or general and administrative expenses, as appropriate.
Revenue Recognition – Merchant banking segment
Securities transactions are recorded on a trade-date basis. Changes in fair value of held-for-trading investments are reflected in the consolidated statements of operations. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis.
Financial Instruments
Financial assets and financial liabilities are initially recognized at fair value and their subsequent measurement is dependent on their classification as described below. Their classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Company’s designation of such instruments. The standards require that all financial assets be classified either as held-for-trading (“HFT”), available-for-sale (“AFS”), held-to-maturity (“HTM”), or loans and receivables. The standards require that all financial assets, including all derivatives, be measured at fair value with the exception of loans and receivables, debt securities classified as HTM, and AFS financial assets that do not have quoted market prices in an active market.
HFT financial assets are financial assets typically acquired for resale prior to maturity. They are measured at fair value at the balance sheet date. Interest and dividends earned, gains and losses realized on disposal and unrealized gains and losses from market fluctuations are included in net revenue for the period.
HTM financial assets are those non-derivative financial assets with fixed or determinable payments and a fixed maturity, other than loans and receivables that an entity has the positive intention and ability to hold to maturity. These financial assets are measured at amortized cost.
AFS financial assets are those non-derivative financial assets that are designated as AFS, or that are not classified as loans and receivables, HTM investments or HFT. AFS financial assets are carried at fair value with unrealized gains and losses included in Other Comprehensive Income until realized when the cumulative gain or loss is recognized in net income.
Loans and receivables are accounted for at amortized cost using the effective interest method.
At each financial reporting period, the Company’s management estimates the fair value of investments based on the criteria below and reflects such valuations in the consolidated financial statements.
(i) Publicly-traded investments:
Securities which are traded on a recognized securities exchange and for which no sales restrictions apply are recorded at fair values based on quoted market prices at the consolidated balance sheet dates or the closing price on the last day the security traded if there were no trades at the consolidated balance sheet dates.
Securities which are traded on a recognized securities exchange but which are escrowed or otherwise restricted as to sale or transfer may be recorded at amounts discounted from market value. In determining whether a discount is appropriate for such investments, the Company considers the nature and length of the restriction, the business risk of the investee company, its stage of development, market potential, relative trading volume and price volatility and any other factors that may be relevant to the ongoing and realizable value of the investments.
(ii) Privately-held investments:
Securities in privately-held companies are recorded at fair value based on objective evidence including recent arm’s length transactions between knowledgeable, willing parties, such as significant subsequent equity financing by an unrelated, professional investor, discounted cash flow analysis, operational results, forecasts and other developments since acquisition.
8. | RISKS AND UNCERTAINTIES |
Envoy management monitors, understands and manages the risks associated with its business transactions and the general economic environment in which it operates. Risks reflect uncertainty regarding potential outcomes from changes in political, economic and capital market conditions. Envoy is subject to these risks and uncertainties and actively manages them as follows:
General economic conditions
The marketing and communication industry is cyclical and as a result it is subject to downturns in general economic conditions and changes in client business and marketing budgets. These fluctuations may affect the ability of the branding segment to generate consistent returns. However, a significant portion of our business is with large multinational businesses, including large packaged goods companies and large food retailers who are less impacted by downturns in the economy. In an effort to offer our clients services on an international scale, and to manage our exposure to broad economic conditions, Envoy has diversified geographically, operating in over 30 countries around the world. However, despite the Company’s attempts to mitigate risk through diversification, it is widely accepted that the current economic conditions are the most severe in almost 80 years.
The merchant banking industry is subject to general market conditions and investment returns may vary significantly from period to period. Envoy attempts to manage its business with a focus on wealth protection while maintaining steady growth. Investments are usually very liquid and investment horizons consistently monitored. Recent turmoil in the markets has created significant uncertainty for investors and volatility levels are at all time highs. While there have been recent signs of improvement in the market, there is no assurance that this trend will continue.
Client concentration
The Company receives a significant portion of its revenues from a limited number of large clients. The loss of any such clients could adversely impact the Company’s prospects, business, financial condition and results of operations. For the nine months ended June 30, 2009, the Company’s top three clients accounted for 52% of its consolidated net revenue, compared to 43% concentration in the top three clients for the first nine months of fiscal 2008. The Company expects reliance on a limited number of its clients to continue into the future. The failure to achieve continued design wins from one
or more of these significant clients, without adding new sources of net revenue, could have an adverse effect on the Company’s financial results.
Market risk
Market risk is the risk of loss of value in Envoy’s portfolios resulting from changes in interest rates, foreign exchange rates, credit spreads, and equity prices. The Company mitigates this risk by employing a professional investment manager and by ensuring that the portfolio is well diversified.
Foreign currency risk
Envoy is subject to currency risk through its activities in Europe, the Middle East and the United States. Unfavorable changes in the exchange rate may adversely affect the operating results of Envoy. Envoy may, at times, use derivative instruments and foreign currency contracts to reduce its exposure to foreign currency risk, although the use of these instruments may not eliminate all risk of foreign currency fluctuations.
International exposure
The Company’s international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to risks regarding restrictions on repatriation of earnings and changes in the political or economic conditions of a specific country or region, particularly in emerging markets. The occurrence of any of these events or conditions could adversely affect the Company’s ability to increase or maintain its operations in various countries.
Key personnel
Envoy’s success depends in part upon its ability to hire and retain key senior management and skilled technical, client service and creative personnel able to create and maintain solid relationships with clients. An inability to hire or retain qualified personnel could have a material adverse effect on Envoy. To reduce the risk of losing valued employees, Envoy strives to maintain a positive work environment that values the contributions of its employees.
Credit risk
Envoy manages its credit risk with respect to accounts receivable by acting as an agent for its customers, by dealing primarily with large creditworthy customers and by billing whenever possible in advance of rendering services or making commitments. Management believes that Envoy is not subject to significant concentration of credit risk. As at June 30, 2009, Envoy had one customer, who represented 22% of accounts receivable and one customer who represented 32% of accounts receivable as at September 30, 2008.
Future investments
The Company identifies, assesses and reviews potential investment opportunities on an ongoing basis. As part of the review, the Company conducts business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite the Company’s efforts, it may be unsuccessful in ascertaining or evaluating all such risks. As a result, it might not realize the intended advantages of any given investment and may not identify all of the risks relating to the investment which could adversely impact the Company’s business, operating results and financial condition.
9. | EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES |
The Company has established, and is maintaining, disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is disclosed in annual filings, interim filings or other reports and recorded, processed, summarized and reported within the time periods specified as required by securities regulations. Management has evaluated the effectiveness of the Company’s disclosure controls and procedures as at June 30, 2009 and, given the size of the Company and the involvement at all levels of the Chief Executive Officer, Chief Financial Officer and other senior officers, believes that they are sufficient to provide reasonable assurance that the Company’s disclosures are compliant with securities regulations.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP, and reconciled to US GAAP, as applicable.
Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect all possible misstatements or frauds. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting and concluded that such internal control over financial reporting is effective as of June 30, 2009.
10. | UPDATED SHARE INFORMATION |
As at June 30, 2009, there were 8,558,377 common shares of Envoy issued and outstanding, compared to 8,585,636 issued and outstanding at September 30, 2008.
Additional information relating to Envoy, including our Annual Information Form is available on SEDAR at www.sedar.com.
12. | FORWARD LOOKING STATEMENTS |
All statements in this MD&A that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of that term in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. These statements represent Envoy’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, many of which are beyond the control of Envoy. These factors could cause actual results to differ materially from such forward-looking statements. These factors include but are not restricted to the timing and size of contracts, acquisitions and other corporate developments; the ability to attract and retain qualified employees; market competition in our industry; general economic and business conditions, foreign exchange and other risks identified in the MD&A, in Envoy’s Annual Report or Form 20-F filed with the U.S. Securities and Exchange Commission, or Envoy’s Annual Information Form filed with the Canadian securities authorities. The words “believe”, “estimate”, “expect”, “intend”, “anticipate”, “foresee”, “plan”, and similar expressions identify certain of such forward looking statements, which are valid only as of the date on which they are made. In particular, statements relating to future growth are forward looking statements. Envoy disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements
Shareholder Information | | |
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HEAD OFFICE | | OFFICERS | | AUDITORS |
| | | | |
30 St. Patrick St., Ste. 301 | | J. Joseph Leeder | | BDO Dunwoody LLP |
Suite 301 | | President and | | 60 Columbia Way, Suite 400 |
Toronto, Canada M5T 3A3 | | Chief Executive Officer | | Markham, Canada L3R 0C9 |
| | | | |
Telephone: (416) 593-1212 | | Andrew Patient | | BANKERS |
Facsimile: (416) 593-4434 | | Chief Financial Officer | | |
| | | | RBC Royal Bank |
DIRECTORS | | Darlene Soper | | 200 Bay Street |
| | Secretary | | Toronto, Canada M5J 2J5 |
John H. Bailey | | | | |
B.Comm, J.D., LL.M | | AUDIT COMMITTEE | | LEGAL COUNSEL (CANADA) |
Director, Envoy Capital Group | | | | |
Monaco S.A.M. | | David Parkes (Chair) | | Blake, Cassels & Graydon LLP |
| | Linda Gilbert | | Box 25, Commerce Court West |
Geoffrey B. Genovese | | David Hull | | Toronto, Canada M5L 1A9 |
President and Director, | | | | |
Envoy Capital Group | | COMPENSATION COMMITTEE | | LEGAL COUNSEL (USA) |
Monaco S.A.M. | | | | |
| | David Hull (Chair) | | Skadden, Arps, Slate, Meagher & |
Linda Gilbert, C.A. | | Linda Gilbert | | Flom LLP |
Consultant, Corporate | | David Parkes | | PO Box 258, Suite 1750 |
Reporting and Compliance | | | | Toronto, Canada M5K 1J5 |
| | NOMINATING AND CORPORATE | | |
David I. Hull (Chair) | | GOVERNANCE COMMITTEE | | INVESTOR RELATIONS |
President, Hull Life Insurance | | | | |
Agencies Inc. | | Linda Gilbert (Chair) | | E-mail: info@envoy.to |
| | David Hull | | Additional information is |
David Parkes | | David Parkes | | available on our website |
President, David Parkes and | | | | at www.envoy.to |
Associates Inc. | | TRANSFER AGENT | | |
| | | | STOCK TRADING INFORMATION |
| | Computershare Trust Company | | |
| | of Canada | | Toronto Stock Exchange: ECG |
| | 100 University Avenue, 9th Floor | | NASDAQ Stock Market: ECGI |
| | Toronto, Canada M5J 2Y1 | | |