MD&A Sept. 30, 2023
Management's Discussion and Analysis
For the nine months ended
Management Discussion and Analysis
For the nine months ended
Introduction
The following management discussion and analysis ("MD&A") has been prepared as of
Certain information included in this MD&A contains forward-looking statements within the meaning of applicable securities laws, including, among other things, statements concerning our objectives and our strategies to achieve those objectives, statements with respect to management's beliefs, plans, estimates and intentions and statements concerning anticipated future events, circumstances, expectations, results, operations or performance that are not historical facts. Forward-looking statements can be identified generally by the use of forward-looking terminology, such as "indicators", "outlook", "objective", "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "should", "plans", "continue" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management.
The forward-looking statements in this MD&A are not guarantees of future results, operations or performance and are based on estimates and assumptions that are subject to risks and uncertainties, including those described below in this MD&A under "Risks and Uncertainties", which could cause actual results, operations or performance to differ materially from the forward-looking statements in this MD&A. Those risks and uncertainties include risks associated with property ownership, tenant termination and financial stability, liquidity, competition for real property investments, general uninsured losses and environmental matters. Historical results and percentage relationships contained in the Company's financial statements and MD&A, including trends that might appear, should not be taken as indicative of our future results, operations or performance.
Although the forward-looking statements contained in this MD&A are based on what management believes are reasonable assumptions, there can be no assurance that actual results, operations or performance will be consistent with these statements. All forward-looking statements in this MD&A are qualified by this forward-looking disclaimer. These statements are made as of
Business Overview
Starrex was established in 1982, pursuant to the provisions of the Canada Business Act under the name
Credit Reporting Services
2 | P a g e
Management Discussion and Analysis
For the nine months ended
The Company acquired four title insurance entities in
Selected Financial Information
The following table provides selected balance sheet information as at the date indicated:
|
|
|||
2023 |
2022 |
|||
Cash |
$ |
5,181,664 |
$ |
7,856,519 |
Accounts receivable |
882,984 |
479,346 |
||
Escrowed receivable |
50,000 |
350,000 |
||
Prepaid expenses |
165,049 |
42,791 |
||
Notes receivable |
3,760,734 |
1,716,889 |
||
Property and equipment, net of depreciation |
$ |
283,429 |
$ |
263,749 |
Intangible assets |
2,305,053 |
575,648 |
||
|
6,318,546 |
- |
||
Right-of-use assets |
600,448 |
169,883 |
||
Total assets |
19,547,907 |
11,454,825 |
||
Accounts payable and accrued liabilities |
$ |
1,110,179 |
$ |
772,586 |
Income taxes payable |
- |
1,458,607 |
||
Note payable |
9,195,486 |
850,000 |
||
Convertible note payable |
1,115,468 |
- |
||
Lease liabilities - current portion |
257,015 |
93,503 |
||
Lease liabilities - non-current portion |
402,703 |
85,515 |
||
Total liabilities |
12,080,851 |
3,260,211 |
||
Total equity |
7,467,056 |
8,194,614 |
Trade and Other Receivables
As reflected in the selected balance sheet information above, between
The Company entered into four agreements effective
The Company measures loss allowances based on an expected credit loss impairment ("ECL") model for all financial instruments measured at amortized cost or fair value through other comprehensive income with recycling into income. Application of the model depends on the following credit stages of the financial assets.
Stage 1 |
For new loans recognized and for existing loans that have not experience a significant |
increase in credit risk since initial recognition, a loss allowance is recognized equal to the |
|
lifetime credit losses expected to result from defaults occurring in the next 12 months. |
|
Stage 2 |
For those loans that have experienced a significant increase in credit risk since initial |
recognition, a loss allowance is recognized equal to the credit losses expected over the |
|
remaining life of the loan; and |
3 | P a g e
Management Discussion and Analysis
For the nine months ended
Stage 3 |
For loans that are considered to be credit-impaired, a loss allowance equal to full lifetime |
credit losses is recognized. |
Significant judgement is required in making assumptions and estimates used to calculate the ECL, including movements between the three stages and the use of forward looking information. The measurement of ECL for each stage and the criteria used to determine a significant increase in credit risk uses information about past events and current conditions as well as reasonable and supportable projections of future events.
ECLs are measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the financial instrument and consider reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions that impact the Company's credit risk assessment.
As at
The following table reconciles the carrying value of the loans receivable:
|
|
|||
2023 |
2022 |
|||
Loans |
$ |
4,768,128 |
$ |
1,716,889 |
Allowance for expected credit losses |
(1,007,394) |
- |
||
Total |
$ |
3,760,734 |
$ |
1,716,889 |
Property and equipment remained materially unchanged while intangible assets increased to
Liabilities
The balance in notes payable increased from
On
Review of Cash Flows
The following section provides an overview analysis of cash flows for the respective periods as indicated:
Nine months ended |
2023 |
2022 |
||
Cash, beginning of period |
$ |
7,856,519 |
$ |
2,172,169 |
Cash provided by (used in): |
||||
Operating activities |
(1,643,467) |
(532,913) |
||
Investing activities |
(4,860,301) |
(42,128) |
||
Financing activities |
3,828,913 |
(88,857) |
||
Cash, end of period |
$ |
5,181,664 |
$ |
1,508,271 |
Cash used in Operating Activities
Cash used in operating activities at
4 | P a g e
Management Discussion and Analysis
For the nine months ended
included in the total of
Cash used in Investing Activities
The company used
Cash used in Financing Activities
Proceeds in the amount of
Capital Resources and Liquidity
As at
On
On
The liability portion of this financial instrument was elected to be measured using FVTPL through profit or loss. On initial recognition, the Company valued the entire financial instrument at a fair value of
2023 |
|
Share price ($USD) |
1.20 |
Expected dividend yield |
Nil |
Risk free interest rate (%) |
3.55 |
Expected stock volatility (%) |
96.64 - 122.38 |
Expected life (years) |
3 |
Weighted Average Cost of Capital |
24.71% |
Market Interest Rate |
7% |
5 | P a g e
Management Discussion and Analysis
For the nine months ended
As at
2023 |
|
Share price ($USD) |
0.75 |
Expected dividend yield |
Nil |
Risk free interest rate (%) |
4.83 |
Expected stock volatility (%) |
182 - 238.19 |
Expected life (years) |
2.6 |
Weighted Average Cost of Capital |
24.71% |
Market Interest Rate |
7% |
The Company also entered into a secured promissory note in the amount of
The loan is valued at the present value of anticipated future repayments of the funds at each reporting date using a discount rate of 7%. The Company incurred
Share Capital
As at
The Company is authorized to issue an unlimited number of common shares.
Issued |
Number of Common |
Amount $ |
Shares |
||
Balance, |
16,296,113 |
8,275,933 |
Shares issued |
250,000 |
300,000 |
Balance, |
16,546,113 |
8,575,933 |
On
Share-based payments
The Company has a Plan that enables its directors, officers, employees, consultants and advisors to acquire common shares of the Company. Options are granted at the discretion of the Board of Directors. Under the terms of the Plan, options totaling up to 10% of the common shares outstanding from time to time are issuable. The exercise price, vesting period and expiration period are fixed at the time of grant at the discretion of the Board of Directors.
Weighted |
Grant |
||||||
average |
Date |
||||||
Number of |
exercise |
Fair |
|||||
options |
price $ |
Value |
|||||
Outstanding and exercisable, |
600,000 |
0.64 |
0.59 |
||||
Options issued |
300,000 |
1.20 |
0.99 |
||||
Outstanding and exercisable, |
900,000 |
0.81 |
0.77 |
||||
Weighted |
|||||||
Number of |
Number of |
Average |
|||||
Options |
Options |
Exercise |
Remaining |
||||
Outstanding |
Exercisable |
Price |
Expiry Date |
Life |
|||
Granted |
75,000(2) |
75,000 |
$ |
1.40(3) |
|
0.01 |
|
Granted |
50,000(4) |
50,000 |
$ |
0.60(5) |
|
0.60 |
|
Granted |
25,0002) |
25,000 |
$ |
0.57(6) |
|
1.15 |
|
Granted, |
450,000(1) |
450,000 |
$ |
0.52(7) |
|
1.27 |
|
Granted, |
300,000(2) |
300,000 |
$ |
1.20(9) |
|
4.47 |
|
Total |
900,000 |
900,000 |
2.19 |
6 | P a g e
Management Discussion and Analysis
For the nine months ended
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(9)
(10)
An Executive Officer or Directors of the Company holds these options. They are fully vested. Key employees hold these options. They are fully vested.
The exercise price is CAD
A consultant of the Company holds these options. They are fully vested. The exercise price is
The exercise price is
These options vest over three years.
Related Party Transactions
The Company had the following transactions with officers and directors of the Company and private companies controlled by officers and directors of the Company for management consulting and other services required:
The Company incurred
Selected Quarterly Information
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
|||
2023 |
2023 |
2023 |
2022 |
2022 |
2022 |
2022 |
2021 |
|||
Revenues |
2,354,976 |
2,085,376 |
||||||||
|
240,365 |
- |
- |
- |
- |
- |
||||
Credit Services |
602,147 |
711,706 |
846,835 |
489,764 |
850,356 |
1,021,714 |
1,265,532 |
1,089,058 |
||
Consulting Income |
151,923 |
192,076 |
146,992 |
80,418 |
37,500 |
37,500 |
12,500 |
- |
||
Other revenue |
35,656 |
53,254 |
41,711 |
13,327 |
- |
- |
- |
- |
||
Interest income |
55,877 |
|||||||||
Revenues, continuing operations Revenues, discontinued operations
Net income (loss), continuing operations
Net income (loss), discontinued operations
Total assets
Total liabilities
Shareholders' Equity
Net income (loss) per share, continuing operations
Diluted net income (loss) per share, continuing operations
Net income (loss) per share, discontinued operations
Diluted net income (loss) per share, discontinued operations
Basic weighted average number of shares outstanding
Basic weighted average number of shares outstanding
3,200,579 |
3,042,412 |
1,275,902 |
583,529 |
887,856 |
1,059,214 |
1,278,032 |
1,089,058 |
- |
760,593 |
2,466,987 |
3,402,772 |
3,593,912 |
3,737,545 |
||
(236,986) |
(949,873) |
(440,940) |
(918,314) |
(133,695) |
(79,298) |
(89,982) |
(330,476) |
- |
- |
- |
5,441,387 |
(174,430) |
14,760 |
95,548 |
(22,920) |
19,547,907 |
17,833,361 |
20,095,605 |
11,454,825 |
4,581,604 |
5,068,639 |
5,736,233 |
5,699,044 |
12,080,851 |
10,692,596 |
11,682,770 |
3,260,211 |
1,478,498 |
1,657,221 |
2,260,461 |
2,228,838 |
7,467,056 |
7,140,765 |
8,412,835 |
8,194,614 |
3,103,106 |
3,411,418 |
3,475,772 |
3,470,206 |
(0.01) |
(0.06) |
(0.03) |
0.48 |
(0.01) |
(0.01) |
(0.01) |
(0.02) |
(0.01) |
(0.06) |
(0.03) |
0.47 |
(0.01) |
(0.01) |
(0.01) |
(0.02) |
- |
- |
||||||
- |
0.34 |
(0.01) |
0.00 |
0.01 |
(0.00) |
||
- |
- |
- |
0.34 |
(0.01) |
0.00 |
0.01 |
(0.00) |
16,431,045 |
16,368,031 |
15,976,571 |
15,832,968 |
15,752,525 |
15,752,525 |
15,752,525 |
15,741,840 |
16,431,045 |
16,368,031 |
15,976,571 |
16,097,776 |
15,752,525 |
15,752,525 |
15,752,525 |
15,917,469 |
7 | P a g e
Management Discussion and Analysis
For the nine months ended
Acquisitions
Effective
- a cash payment of
$1,800,000 ; - secured non-interest bearing promissory notes in the aggregate amount of
$4,500,000 due and payable 12 months following the closing date. These notes are secured pursuant to a Pledge and Security Agreement whereby the membership interests represented by the amount of the note are pledged as security until the particular promissory note is paid in full (See note 15). The proportion of membership interests that were represented by the cash amount have not been pledged as security for these notes. In addition, the indebtedness has been guaranteed by Starrex; - secured convertible notes in the amount of
$2,700,000 (See Note 15) bearing interest at 6% per annum and due 36 months from the closing date conditional upon eaout provisions based on a target EBITDA for the entities acquired. To the extent annual EBITDA targets are met, the holders will be entitled to receive a pro-rated payment. If the annual targets are not met the holders are not entitled to receive a prepayment. At the end of the three year term, the principal amount of the notes outstanding will be adjusted downwards by an amendment to the notes or by cancellation depending on the average performance achieved by the entities over the term of the notes. Interest is payable in cash semi-annually in arrears unless such interest amount is converted at the option of the holder and payable in common shares of Starrex based on the closing price of Starrex shares on the trading day prior to the conversion date. In addition, the holder of the notes may elect to convert all or any part of the principal amount into Starrex shares at a price of$2.09 (See Note 15). These notes are secured pursuant to a Pledge and Security Agreement whereby the membership interests represented by the amount of the note are pledged as security until the particular promissory note is pain in full. The proportion of membership interests that were represented by the cash amount have not been pledged as security for these notes. In addition, the indebtedness has been guaranteed by Starrex.; - the issuance of 250,000 shares of Starrex common stock
$1.20 per share (See Note 13); and. - Starrex also provided
$1,000,000 of working capital as of the closing date of the transaction.
All
The following table sets forth the final allocation of the purchase price to assets acquired, based on estimates of fair value, including a summary of major classes of consideration transferred, and the recognized amounts of assets acquired at the acquisition date:
Consideration Paid |
|
|
Working capital |
1,000,000 |
|
Accounts receivable |
4,000 |
|
Property and equipment |
50,575 |
|
Other assets |
32,391 |
|
Customer relationships |
1,281,000 |
|
Non-competition agreements |
653,000 |
|
Accounts payable |
(44,934) |
|
Right-of-use Assets |
602,578 |
|
Lease liabilities |
(651,787) |
|
|
6,318,546 |
|
|
The following table sets forth the final allocation of the purchase price to assets acquired, based on estimates of fair value, including a summary of major classes of consideration transferred, and the recognized amounts of assets acquired at the acquisition date:
Nine Months Ended |
Acquisition Date through |
|||
|
|
|||
Revenue |
$ |
5,744,722 |
$ |
4,680,717 |
Net Income (loss) |
$ |
157,268 |
$ |
422,219 |
8 | P a g e
Management Discussion and Analysis
For the nine months ended
Results of Operations, Overall Performance and Trends
As at
Revenue associated with
The title division continued to outperform the overall market and remained profitable despite record high
Since the acquisition of
Our credit reporting segment,
The Corporate segment generated
Revenue
Consolidated revenue increased by
Expenses
Consolidated operating expenses for the nine months ended
See Liquidity and Capital Resources.
Depreciation and Amortization
Most of the Company's assets, which consist of property and equipment, software, customer relationships and non- compete agreements, are amortized over 4-5 years for equipment and 5-10 years for customer relationships. For the nine months ended
Income Taxes
Net income taxes of
9 | P a g e
Management Discussion and Analysis
For the nine months ended
Trends
Mortgage interest rates have been experiencing an upward trend, primarily influenced by the
As rates increase, mortgage application volume typically declines, since higher borrowing costs often deter potential homebuyers and make refinancing less attractive. In addition, the housing market has cooled due to the higher rates, which contributes to the reduction in the number of applications.
Net income (loss)
The consolidated loss reported for continuing operations for the first nine months of 2023 was
Accretion expense |
(148,860) |
Gain on fair value of asset / liability |
117,202 |
Expected credit loss |
(1,007,394) |
Net income (loss) per weighted average share, basic and diluted
Basic and diluted net loss per share has been calculated based on the weighted average number of common shares outstanding as at
Discontinued Operations
As a result, the operating results of
The purchase price paid by the purchaser to the Company for
To conform with the current period classification of the discontinued operations, prior year results have been reclassified to discontinued operations.
10 | P a g e
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