MAVRIX FUND MANAGEMENT INC. ANNUAL REPORT

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MAVRIX FUND MANAGEMENT INC. ANNUAL REPORT

  1. 1. MAVRIX FUND MANAGEMENT INC. ANNUAL REPORT December 31, 2008 Fund Management Inc.
  2. 2. TABLE OF CONTENTS 2 Message from Management 3 Management’s Discussion and Analysis 13 Management’s Responsibility for the Consolidated Financial Statements 14 Auditor’s Report 15 Consolidated Financial Statements 19 Notes to the Consolidated Financial Statements 31 Board of Directors and Officers 32 Corporate Information Mavrix Fund Management Inc. Annual Report 2008 1
  3. 3. MESSAGE FROM MANAGEMENT Dear Fellow Shareholders, Not only was 2008 the worst sales year for the Canadian mutual fund industry, it was also the year of an unstoppable global credit crisis, rooted in the bursting of the housing bubble in 2007. By the end of 2008, the S&P/TSX Composite Index and the Dow Jones Index were down to approximately 70% of their value at January 2007. During the first half of 2008, equity markets worldwide experienced heightened volatility, leading Canadian investors to redeem equity funds in favour of safer alternatives such as money market funds. Mavrix assets under management (“AUM”), although steady for the first three months of 2008, fell 15.2% from the beginning of the year to $539.1 million as at June 30th, 2008. It became clear in September and October that several major economies were moving into or closer to recession. Investors worldwide went on a major sell-off while the global credit crisis culminated with a series of financial disasters including the collapse of Lehman Brothers. Our assets under management were deeply affected and declined to $395.8 million as at September 30th, 2008 as markets continued to depreciate. We nonetheless improved our gross sales by 8.3% to $11.8 million in the third quarter over the second quarter while net redemptions declined over the same time period. The months of October and November were particularly challenging for Mavrix as we continued to face net redemptions on the back of unprecedented volatility and steep declines in market valuations. As at December 31st, 2008 our assets under management were reduced by 3.0% from the previous month to $257.4 million while our Specialty Funds saw assets under management lift 9.3% to $38 million from the previous month due to improved valuations in the resource sector. For the year, our total AUM at December 31st, 2008 decreased by 59.5 % due to the startling volatility of financial markets and the decline in market valuations. Our Mavrix Mutual Funds, which totaled $219.4 million AUM as at December 31st, 2008, recorded net redemptions of $56.6 million on gross sales of $111.0 million in fiscal 2008 as baffled investors grew weary of market depreciation. During 2008, investors gradually focused their investments on money market funds instead, shifting away from niche mutual funds causing our company’s net sales to under-perform in comparison to the industry. Like all asset managers, our revenues were deeply affected by lowered sales and market value depreciation. For the year ending December 31st, 2008, our revenues totaled $10.0 million compared to $12.8 million in 2007. Throughout fiscal 2008, your management actively and diligently implemented cost control measures at all levels in an effort to meet the challenges of our reduced revenues. Our cost containment efforts led to a decrease of our selling, general, administration and other expenses by 16.5% year-on-year to $8.6 million in 2008 compared to $10.3 million in 2007. In keeping with our cost control measures, we merged the Mavrix Canada Fund and Mavrix Diversified Fund into the Mavrix Income Fund, now renamed Mavrix Balanced Monthly Pay Fund managed by our veteran Portfolio Manager Jackee Pratt. During fiscal 2008 and despite the deteriorating investment climate, we raised $32.0 million in the Mavrix Explore 2008-I FT LP, $12.5 million in the Mavrix Explore 2008-II FT LP and $15.0 million in the Mavrix Explore Quebec 2008 FT LP. Although 2008 offered unprecedented challenges to your company as well as to the whole mutual fund industry, the negative factors in 2008 coupled with the precipitous declines in both equity and fixed income suggests that the worst may be behind us. Thank you for investing with us. The Management Team March 4, 2009 Mavrix Fund Management Inc. Annual Report 2008 2
  4. 4. MANAGEMENT’S DISCUSSION AND ANALYSIS Summary of Financial Highlights – Years Ended December 31, 2008 2007 2006 INCOME STATEMENT DATA Revenue Management fees $ 9,299,121 $ 11,943,791 $ 10,448,349 Fund accounting fees - - 531,025 Redemption fees 700,121 710,322 823,688 Investment income 40,647 125,900 33,158 Total revenues 10,039,889 12,780,013 11,836,220 Expenses Selling, general, administration and other 8,609,308 10,281,325 8,227,170 Fund accounting and systems 2,035,290 2,167,982 2,054,124 Expenses recovered from funds (3,336,307) (3,539,426) (3,200,829) Trailer fees 2,483,833 3,510,437 3,185,491 Amortization 1,986,106 2,307,894 2,132,508 Interest on corporate debt 1,051,318 796,943 520,366 Total expenses 12,829,548 15,525,155 12,918,830 Net loss before unusual item (2,789,659) (2,745,142) (1,082,610) Unusual item - (595,430) - Net Loss $ (2,789,659) $ (3,340,572) $ (1,082,610) Basic and diluted loss per share $ (0.32) $ (0.39) $ (0.13) EBITDA* 247,765 359,695 1,570,264 EBITDA* per share 0.03 0.04 0.18 Dividends per share** $ - $ - $ - FINANCIAL POSITION DATA Total assets, end of year $ 9,013,942 $ 12,476,414 $ 13,680,023 Corporate debt, end of year 8,569,034 8,325,056 4,622,590 Shareholders' equity, end of year $ (966,261) $ 2,025,685 $ 7,391,023 Shares outstanding, end of year 8,651,006 8,540,553 8,714,228 ASSET MANAGEMENT DATA Mavrix Mutual Funds $ 219,430,243 $ 457,522,479 $ 493,202,188 Specialty Funds 38,000,417 178,429,473 193,223,889 Total assets under management (“AUM”) $ 257,430,660 $ 635,951,952 $ 686,426,077 *References to EBITDA are to earnings before interest, income taxes, depreciation and amortization. EBITDA is not a standardized earnings measure under GAAP. Management believes that in addition to net earnings, EBITDA is a useful supplemental measure as it provides investors with an indication of cash available for distribution, income taxes, working capital needs and capital expenditures. Investors should be cautioned, however, that EBITDA should not be construed as an alternative measure of liquidity and cash flows. The Company’s method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to similarly titled measures used by other issuers. **There have been no dividends declared in the history of Mavrix Fund management Inc. Selected Quarterly Information – Years Ended December 31, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($ millions except per share amounts) 2007 2007 2007 2007 2008 2008 2008 2008 AUM 720.0 735.6 719.8 635.9 543.9 539.1 395.8 257.4 Revenue 3.2 3.3 3.1 3.1 2.6 3.0 2.9 1.6 EBITDA 0.2 0.0 0.0 0.2 (0.5) 0.5 0.4 (0.2) Net loss (0.5) (0.7) (0.9) (1.3) (1.1) (0.2) (0.4) (1.0) Net loss per share (0.06) (0.08) (0.11) (0.15) (0.13) (0.03) (0.05) (0.11) Mavrix Fund Management Inc. Annual Report 2008 3
  5. 5. MANAGEMENT’S DISCUSSION AND ANALYSIS Overview of Mavrix Fund Management Inc.’s Business The Management’s Discussion and Analysis (MD&A) that follows should be read in conjunction with the audited financial statements for the year-ended December 31, 2008 including the notes attached thereto. The following review and discussion has been prepared by management as of January 26, 2009. Mavrix Fund Management Inc. (“Mavrix” or the “Company”) is an independent asset management company sponsoring and managing the Mavrix Mutual Funds as well as providing portfolio management services to a series of Mavrix Flow Through Limited Partnerships. The key factor affecting the results of the Company is the level of AUM as Mavrix earns revenue as a percentage of AUM. AUM has been adversely impacted in 2008 due to the challenging year in equity markets. In the longer term key factors affecting AUM are retained market appreciation and net asset inflows. Retained market appreciation is primarily the result of the investment performance of the underlying funds, which is largely driven by capital market returns. Mavrix has actively reduced costs in response to reduced revenues as a result of the decline in AUM. Any recovery of financial markets in 2009, although uncertain, will contribute favorably to the company’s future success. At Mavrix, we expect that the asset management industry will grow through 2009 after a very difficult year in 2008. Capital markets are inherently volatile. A significant portion of the company’s revenue is management fees, which is derived from market values of the funds that are managed. We also plan to grow our business with solid performance in our existing products, by expanding our business with existing and new advisors, and by gaining new mandates for Specialty Funds. Our belief has remained unchanged from prior years – we believe that successful smaller fund companies are well suited to deliver products to more sophisticated advisors and that the mutual fund market will reward this approach. At December 31, 2008, total AUM was $257.4 million, as shown in the table below, represented by $219.4 million in Mavrix Mutual Funds and $38.0 million in Specialty Funds. During the year, AUM declined from $635.9 million as at December 31, 2007 to $257.4 million at December 31, 2008 or 60%. During the three months ended December 31, 2008, AUM declined by 35%. The asset decline for the year and the three months ended December 31, 2008, was the result of the negative returns from the financial markets in 2008. The Company offers various series of mutual fund shares. You will find a list of all the Mavrix Mutual Funds and the classes of units or shares they offer on the front cover of the Simplified Prospectus, issued on July 7, 2008, and in the Mavrix Strategic Small Cap Fund semi-annual report of June 30, 2008. DECEMBER 31, SEPTEMBER 30, DECEMBER 31, Asset Management Data 2008 2008 2007 Mavrix Mutual Funds $ 219,430,243 $ 333,131,093 $ 457,522,479 Specialty Funds 38,000,417 62,682,914 178,429,473 Total AUM $ 257,430,660 $ 395,814,007 $ 635,951,952 Business Strategy There are four core principles to our business strategy: • Differentiated, niche investment products • Investment management culture • Targeted marketing to investment advisors & financial planners • Development of the Mavrix brand Differentiated, Niche Investment Products At Mavrix, we offer differentiated, niche investment products and portfolios that complement the standard mutual fund offerings from the large fund companies. As at December 31, 2008 we had 18 Mavrix Mutual Funds and 7 Specialty Funds. Investment Management Culture At Mavrix, we actively manage our portfolios. Also, we may carry out more focused investing in a portfolio than our competitors, over-weighting favoured sectors as appropriate. We consider our corporate culture to be an investment culture as opposed to a sales culture. All of our Mavrix funds are managed in-house except for the Mavrix Global Fund, our international equity fund, which is managed by London, England based Pictet Asset Management Limited. Mavrix Fund Management Inc. Annual Report 2008 4
  6. 6. MANAGEMENT’S DISCUSSION AND ANALYSIS Overview of Mavrix Fund Management Inc.’s Business (continued) Targeted Marketing to Investment Advisors and Financial Planners. We target our sales and marketing efforts at investment advisors and financial planners versus the public at large. We do this because we believe that these industry professionals are able to identify the benefits of our differentiated products and the value of having direct access to our portfolio managers. Mavrix provides independent advice targeted to advisors to assist them in making investment decisions for their clients. Development of the Mavrix Brand Each of the above elements of our strategy reinforces the continued development of the “Mavrix Brand” to investment advisors and financial planners. We seek to create an image and reputation as an independent provider of differentiated, actively- managed portfolios that create added value for client portfolios. Revenues Mavrix’s revenues are earned from the management services we provide as fund manager of the Mavrix Mutual Funds and Specialty Funds, and are reported as management fees. The key determinant of our management fee revenue is AUM, which is affected by both market returns and net sales of these funds. We charge a lower management fee on certain classes because our distribution and servicing costs are reduced. Also included in management fees are other management fees, typically earned from third parties, in relation to the financing of publicly traded issuers. Mavrix also earns revenues from redemption fees. Investors in our funds pay redemption fees when funds are purchased on a deferred sales charge (“DSC”) basis and the investment is redeemed within the applicable redemption period, either seven or three years, depending on which DSC option was selected (regular or low-load). Redemption fees are calculated as a percentage of the initial value of the funds sold, and have rates that start as high as 6.0% and decline to Nil over the redemption period. We have earned investment income from investments in marketable securities. We invest in marketable securities to generate interest income and capital gains. Expenses Our expenses are comprised primarily of selling, general, administration and other expenses (“S,G,A&O”), fund accounting and systems expenses, and trailer fees. Some of these expenses are offset by expenses recovered from funds. S,G,A&O expenses include costs related to portfolio management, sales, marketing, and general corporate overhead. The Mavrix Mutual Funds are responsible for payment of their operating expenses incurred by Mavrix including legal, audit, record keeping and unit holder communication costs, for example. Mavrix reports gross expenses on this line in the financial statements. We have reduced expenses in this area and continue to do so as a response to lower revenues caused by the volatile nature of markets in 2008. The second category of expenses we incur on behalf of the funds is fund accounting and systems expenses. Fund accounting and systems costs are a significant expense for asset management companies and require consistent investment to maintain operating efficiency. The recovery of the expenses paid by the funds is shown as “Expenses Recovered from Funds”. To maintain competitive Management Expense Ratios for the Mavrix Mutual Funds, the amount of expenses recovered from the funds has been capped. Therefore, as the Mavrix Mutual Funds grow in size, a larger recovery will occur until such time as all recoverable expenses are borne by the funds. Trailer fees are paid to dealers in respect of services provided by dealers to clients who hold Mavrix Mutual Funds. These expenses are a direct function of AUM with no fixed cost element. Trailer fees vary by fund, and by sales charge option. Other expenses that we incur include amortization and interest on corporate debt. Amortization reflects both the amortization of DSC and property and equipment. The portion of amortization expense for DSCs is highly correlated with growth in AUM. Mavrix has historically financed its capital requirements for DSC commissions with either debt or equity financing. Other Items References to EBITDA are to earnings before interest, income taxes, depreciation and amortization. EBITDA is not a standardized earnings measure under GAAP. Management believes that in addition to net earnings, EBITDA is a useful supplemental measure as it provides investors with an indication of cash available for distribution, income taxes, working capital needs and capital expenditures. Investors should be cautioned, however, that EBITDA should not be construed as an alternative measure of liquidity and cash flows. The Company’s method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to similarly titled measures used by other issuers. Mavrix Fund Management Inc. Annual Report 2008 5
  7. 7. MANAGEMENT’S DISCUSSION AND ANALYSIS Year Ended December 31, 2008 Compared with Year Ended December 31, 2007 Market Review The S&P/TSX Composite Index had a total return of (33.0)% for the calendar year 2008 and the S&P 500 Index had a total return of (21.9)%, also as expressed in Canadian dollars. According to the Investment Funds Institute of Canada (“IFIC”), industry net sales of mutual funds were negligible for 2008. Assets for the industry decreased by $130 billion to $507 billion at December 31, 2008, down from $637 billion at December 31, 2007. Though sales and assets reported by IFIC do not give a comprehensive view of Mavrix’s sales and assets, they are helpful as an indicator of trends impacting our business. Operating Review Our total AUM at December 31, 2008 was $257.4 million, down 60% from $635.9 million at December 31, 2007. The year over year decrease is primarily due to volatility in world financial market concerned about a global economic slowdown and affected by a global credit crisis. At December 31, 2008, our AUM was comprised of $219.4 million of Mavrix Mutual Funds and $38.0 million of Specialty Funds, compared to $457.5 million and $178.4 million respectively at December 31, 2007. The $219.4 million for Mavrix Mutual Funds represents the total for our 18 core funds. Mavrix Mutual Funds had net redemptions of $56.6 million on gross sales of $111.0 million for the year-ended December 31, 2008. This compares to $10.0 million in net redemptions on $228.1 million gross sales for Mavrix Mutual Funds for 2007. We attribute the net redemptions in our Mavrix Mutual Funds during 2008 to investor concerns regarding credit markets and recession fears. Because of the above noted concerns investors continued to cautiously invest, focusing their investments on money market funds; shifting away from niche mutual funds which have caused the Company’s net sales to under-perform in comparison to the industry. Due to the fact that a significant proportion of revenue is based on the daily value of mutual fund AUM, Mavrix is not subject to significant seasonal swings that impact earnings. Generally, the industry experiences somewhat higher mutual fund sales during the months of February and March as a result of the RSP season. Significant developments at Mavrix during 2008 are outlined below, by quarter. First Quarter Developments On February 20, 2008, Mavrix renewed the Normal Course Issuer Bid for the purchase for cancellation from time to time of up to 500,815 of our common shares through the facilities of the TSX. The facility will expire on February 21, 2009. As at December 31, 2008, 23,800 shares were repurchased and cancelled. Second Quarter Developments On April 2, 2008, Mavrix announced that it had executed an Acknowledgement and Undertaking in favour of the Ontario Securities Commission resolving all matters related to the previously announced inquiry by the Commission into trades of asset- backed commercial paper between funds managed by Mavrix. On May 12, 2008, Mavrix announced the final closing of the Mavrix Quebec 2008 Flow Through LP. Total units sold were 1,499,000 for total proceeds of $15.0 million. On June 27, 2008, the Mavrix Canada Fund and the Mavrix Diversified Fund merged into the Mavrix Income Fund. Also on June 27, 2008, the Mavrix Income Fund changed its name to the Mavrix Balanced Monthly Pay Fund. This fund pays a fixed monthly distribution and seeks to provide a high investment return to its unitholders. Merging the three funds will result in lower costs for unitholders and for the Company. Third Quarter Developments On July 17, 2008, Mavrix announced the final closing of the Mavrix Explore 2008 – I FT Limited Partnership. Total units sold were 3,198,299 for gross proceeds of $32.0 million. Fourth Quarter Developments On November 20, 2008, Mavrix announced the final closing of the Mavrix Explore 2008 – II FT Limited Partnership. Total units sold were 1,251,353 for gross proceeds of $12.5 million Mavrix did not acquire any entities during 2008, nor did we enter into any joint ventures. Three wholly owned subsidiaries were created during 2008, being Mavrix Québec 2008 Ltd., Mavrix Explore 2008 – I FT Management Limited, and Mavrix Explore 2008 – II FT Management Limited. In 2008, as in prior years, Mavrix operated as one reportable segment. Mavrix Fund Management Inc. Annual Report 2008 6
  8. 8. MANAGEMENT’S DISCUSSION AND ANALYSIS Year Ended December 31, 2008 Compared with Year Ended December 31, 2007 (continued) Revenues For the year-ended December 31, 2008, revenue totaled $10.0 million compared to $12.8 million for 2007. The decrease of 21% was primarily the result of a 22% decrease in management fees. The decrease in management fees was the result of the decrease in AUM partially offset by other management fees earned. Redemption fees in fiscal 2008 were $700 thousand compared to $710 thousand in fiscal 2007. Redemption fees are driven by the level of gross redemptions, as well as by the time period that clients hold the funds prior to redemption. The longer a client holds the funds, the lower the redemption fee charge. Investment income decreased to $41 thousand in 2008 compared to $126 thousand in fiscal 2007. Interest income in both years came from our marketable securities holdings. Revenues YEAR ENDED DECEMBER 31, 2008 YEAR ENDED DECEMBER 31, 2007 Management fees $ 9,299,121 $ 11,943,791 Redemption fees 700,121 710,322 Investment income 40,647 125,900 Total revenues $ 10,039,889 $ 12,780,013 Expenses Gross S,G,A&O expenses totaled $8.6 million in fiscal 2008 compared to $10.3 million in 2007. This was a decrease of $1.7 million or 16% from the prior year. The primary driver of this decrease was an organizational effort to reduce costs to meet the challenge of reduced revenues. Fund accounting and systems expenses remained relatively flat at $2.0 million for the year-ended December 31, 2008 compared to $2.2 million for the year-ended December 31, 2007. Expenses recovered from funds decreased to $3.3 million in fiscal 2008 from $3.5 million in fiscal 2007. Expense recovery is negatively impacted by a reduction in AUM. Trailer fees declined to $2.5 million in fiscal 2008 compared to $3.5 million for fiscal 2007. This represented a decrease of 29% and is the result of the decline in AUM in 2008. Expenses YEAR ENDED DECEMBER 31, 2008 YEAR ENDED DECEMBER 31, 2007 S,G,A&O $ 8,609,308 $ 10,281,325 Fund accounting and systems 2,035,290 2,167,982 Expenses recovered from funds (3,336,307) (3,539,426) Trailer fees 2,483,833 3,510,437 Total expenses $ 9,792,124 $ 12,420,318 EBITDA was $248 thousand for the year-ended December 31, 2008, compared to $360 million for 2007. This decline was the result of the decline in revenues of 21% offset by the reduction in expenses achieved by the organization’s effort to reduce costs. The following reconciles EBITDA to the net loss for the fiscal years presented. EBITDA Reconciliation YEAR ENDED DECEMBER 31, 2008 YEAR ENDED DECEMBER 31, 2007 EBITDA $ 247,765 $ 359,695 Amortization (1,986,106) (2,307,894) Interest on corporate debt (1,051,318) (796,943) Net loss before unusual item (2,789,659) (2,745,142) Unusual item - (595,430) Net loss $ (2,789,659) $ (3,340,572) The largest element of amortization represents amortization of the DSC and the customer list. It declined from $2.3 million in fiscal 2007 to $2.0 million in fiscal 2008, or a 14% decrease from year to year. Interest on corporate debt increased 32% from $797 thousand in fiscal 2007 to $1,051 thousand in fiscal 2008. The increase is due to the debenture financing issued in June, 2007 being in place for the entire year of 2008. Mavrix reported a loss before unusual items for the year-ended December 31, 2008 of $(2.8) million or $(0.32) per share, compared to a loss before unusual items for the year-ended December 31, 2007 of $(2.7) million. Mavrix Fund Management Inc. Annual Report 2008 7
  9. 9. MANAGEMENT’S DISCUSSION AND ANALYSIS Year Ended December 31, 2008 Compared with Year Ended December 31, 2007 (continued) Unusual Item On November 27, 2007 the initial public offering of the Mavrix TSX Venture Graduation Fund was withdrawn from the market. In general, investor uncertainty negatively affected interest in the fund. To proceed with an offering that would result in operating expenses being too high on a per unit basis was unacceptable to Mavrix and the underwriting syndicate. As a result of our withdrawal, we wrote off our receivable balance of $595,430 from Mavrix Venture Graduation Fund for the year ended December 31, 2007. There were no unusual items in 2008. Mavrix reported a net loss including the unusual item, for the year- ended December 31, 2007 of $(3.3) million or $(0.39) per share. Quarter Ended December 31, 2008 Compared with Quarter Ended December 31, 2007 Market Review The S&P/TSX Composite Index had a total return for the fourth quarter of 2008 of (22.7)%. The S&P 500 Index return adjusted for Canadian dollars was (9.8)%. According to IFIC, the Canadian investment funds industry’s total industry assets were $634 billion at September 30, 2008, and decreased to $507 billion at December 31, 2008, for a total decrease of $127 billion during the fourth quarter of 2008 or a percentage decrease of 20%. Operating Review Our total AUM at December 31, 2008 was $257.4 million, down 60% from $635.9 million at December 31, 2007, and down 35% from $395.8 million at September 30, 2008. The decrease is due primarily to volatility in world financial markets. Investors are concerned about a global economic slowdown affected by the global credit crisis. At December 31, 2008, our AUM was comprised of $219.4 million of Mavrix Mutual Funds, and $38.0 million of Specialty Funds compared to $333.1 million and $62.7 million respectively at September 30, 2008. The $219.4 million for Mavrix Mutual Funds represented the total for our 18 core funds. Mavrix Mutual Funds had net redemptions of $17.1 million on gross sales of $6.4 million for the fourth quarter of 2008. This compares to $29.3 million in net redemption on $16.3 million of gross sales for Mavrix Mutual Funds for the same period in 2007. We believe that the fall in gross sales in the fourth quarter of 2008 in our Mavrix Mutual Funds is due to increasing investor concerns and continued turbulence in equity markets. Revenues For the three months ended December 31, 2008, revenue was down 49% at $1.6 million compared to $3.1 million in 2007 primarily as a result of the decline in management fees. Details are provided in the table below. Management fees for the fourth quarter of 2008 declined by 50% or $1.4 million from the amount earned in the same period in 2007. The decrease was mainly due to the decline in 2008 of AUM. Redemption fees for the three months ended December 31, 2008 were $137 thousand compared to $218 thousand in the fourth quarter of 2007; a decrease of 37%. Gross redemptions were $23.5 million in 2008 compared to $45.7 million in 2007. Investment income decreased to $5.4 thousand in the fourth quarter 2008 compared to $29.2 thousand in the same period of 2007. Interest income was earned on marketable securities. THREE MONTHS ENDED DECEMBER THREE MONTHS ENDED DECEMBER Revenues 31, 2008 31, 2007 Management fees $ 1,437,165 $ 2,876,428 Redemption fees 137,190 218,430 Investment income 5,359 29,153 Total revenues $ 1,579,714 $ 3,124,011 Expenses S,G,A&O expenses before expense recovery decreased by $812 thousand or 33% compared to the fourth quarter of 2007, due to decreases in compensation costs and professional fees. Mavrix employee numbers decreased to 43 at December 31, 2008 from 56 at December 31, 2007. During the three months ended December 31, 2008, fund accounting and systems expenses were $486 thousand compared to $564 thousand for the three-month period of 2007. This represents a 14% decrease due to lower fees associated with reduced AUM and fewer transactions. Mavrix Fund Management Inc. Annual Report 2008 8
  10. 10. MANAGEMENT’S DISCUSSION AND ANALYSIS Quarter Ended December 31, 2008 Compared with Quarter Ended December 31, 2007 (continued) Expenses (continued) Expenses recovered from funds totaled $761 thousand in fourth quarter 2008, compared to $908 thousand in the same period in 2007. This decrease of 16% was due to the decrease in AUM in 2008. As Mavrix Mutual Funds AUM decreases the expense recovery decreases. Trailer fees declined to $401 thousand in the three months ended December 31, 2008 compared to $802 thousand for the same three-month period in 2007. This decrease of 50% is attributable to lower AUM which determines trailer fees paid. THREE MONTHS ENDED DECEMBER THREE MONTHS ENDED DECEMBER Expenses 31, 2008 31, 2007 S,G,A&O $ 1,660,074 $ 2,472,167 Fund accounting and systems 485,601 564,244 Expenses recovered from funds (761,168) (907,917) Trailer fees 400,817 802,056 Total expenses $ 1,785,324 $ 2,930,550 EBITDA was $(206) thousand for the three months ended December 31, 2008, compared to $193 thousand for the three months in 2007. The following reconciles EBITDA to the net loss for the three-month period presented THREE MONTHS ENDED DECEMBER THREE MONTHS ENDED DECEMBER EBITDA Reconciliation 31, 2008 31, 2007 EBITDA $ (205,610) $ 193,461 Amortization (509,205) (607,703) Interest on corporate debt (270,189) (266,311) Net loss before unusual item (985,004) (680,553) Unusual item - (595,430) Net loss $ (985,004) $ (1,275,983) Amortization for the three months ended December 31, 2008 was $509 thousand compared to $608 thousand for the same three-month period in 2007. This represents a decrease of 16% and is attributable to the decline in unamortized DSC. On a three-month basis, interest expense was relatively constant compared to three months ending December 31, 2007 as both periods represent interest costs related to the same debt instruments. Mavrix reported a net loss before unusual item for the three months ended December 31, 2008 of $(985) thousand, compared to a $(680) thousand for the same period last year. Unusual Item On November 27, 2007 the initial public offering of the TSX Venture Graduation Fund was withdrawn from the market, creating an unusual item reported in our results for the year-ended December 31, 2007. This item is fully described above in the results for the twelve-month period. Mavrix reported a net loss for the three months ended December 31, 2008 of $(985) thousand or $(0.11) per share, compared to a net loss for the three months ended December 31, 2007 of $(1.3) million or $(0.15) per share. Liquidity and Capital Resources Cash flow used by operating activities (before the net change in non-cash balances related to operations) was $(426) thousand for the year-ended December 31, 2008, compared to $(581) thousand in the same period in 2007. The net change in non-cash operating working capital for the year-ended December 31, 2008 was $(823) thousand compared to $963 thousand in the prior year. In the current year, current liabilities decreased by $973 thousand, compared to an increase of $459 thousand in prior year. The variance in current liabilities from year to year is not the result of a change in purchase or payment policies, but rather the result of timing of purchases and the elimination of an employee benefit as part of recent cost cutting initiatives. The accounts payable and accrued liabilities balances at December 31, 2008 were incurred in the normal course of business operations. Spending on prepaids went from an increase of $155 thousand in fiscal 2007, to a decrease of $105 thousand in 2008. Current receivables increased by $256 thousand in fiscal 2008, compared to an increase of $348 thousand in 2007. Prepaids and accounts receivables balances at December 31, 2008 were incurred in the normal course of business operations. Mavrix Fund Management Inc. Annual Report 2008 9
  11. 11. MANAGEMENT’S DISCUSSION AND ANALYSIS Liquidity and Capital Resources (continued) Cash flow used by operating activities (before the net change in non-cash balances related to operations) was $(392) thousand for the three months ended December 31, 2008, compared to $(562) thousand in the same period in 2007. The net change in non-cash operating working capital for the three-month period ended December 31, 2008 was $(303) thousand compared to $640 thousand in the prior year. In the fourth quarter of 2008, current liabilities decreased by $378 thousand, compared to a decrease in liabilities of $179 thousand in 2007. The decrease in 2008 resulted from the timing of transactions and does not reflect a change in payment policies. In the fourth quarter of 2008, accounts receivable decreased by $18 thousand, compared to a decrease of $653 thousand in 2007. The change in current receivables is the result of the timing of cash receipts. Current assets net of current liabilities were $958 thousand at December 31, 2008, down from $2.6 million as at December 31, 2007. Consolidated cash and marketable securities was $815 thousand at December 31, 2008, down from $3.5 million as at December 31, 2007. Our consolidated cash and marketable securities at December 31, 2008 will be used to finance the payment of DSC commissions to advisors, to facilitate the development of new products, and to acquire additional assets if and when appropriate. We realized a net cash inflow of $2.2 million on the disposition of marketable securities during fiscal 2008, compared to a net inflow of $118 thousand in 2007 on the disposition of securities. We purchase and sell marketable securities as we actively manage our free cash balance to meet on-going business requirements. Additions to deferred sales commissions created cash outflows of $634 thousand in fiscal 2008 and $1.5 million in fiscal 2007. We spent $511 thousand on capital assets in 2008, primarily for leasehold improvements the new office at 212 King Street West in Toronto and an upgrade to our phone system. The cost of the leasehold improvement was offset mostly by receipt of a leasehold inducement from the property owner. Management has made cash projections for 2009 using a variety of assumptions. The more pessimistic assumptions indicate the potential need for cash resources. As a result, subsequent to year end, we have available an additional loan facility to fund operations should it be required. The Company has convertible debt, due June 30, 2010, that will become a current liability at the end of the second quarter. This debt will need to be refinanced prior to June 30, 2009 as the Company’s registration with securities commissions in Canada requires it to maintain a minimum working capital of $50,000. The company is exploring options to refinance this debt. Contractual Obligations The Company is committed to future minimum lease payments for premises and equipments for the next 5 years as follows: 2009 $ 490,559 2010 522,051 2011 489,597 2012 468,689 2013 459,733 Risks and Uncertainties and Forward-Looking Statements The sharp decline in market values experienced in 2008 had a significant negative impact on revenue since revenue is earned as a percentage of AUM. Should there be further declines in AUM in 2009, there will be a further adverse on revenue. If expenses cannot be reduced accordingly, the impact on the company may be significant. A significant portion of Mavrix Mutual Funds AUM is attributable to a small number of the Mavrix Mutual Funds. If investors modified their portfolios by transferring their investments out of these funds where there is also a decline in sales, this would result in a materially adverse effect on the Company’s results of operations and prospects. This may result if the Mavrix Mutual Funds were unable to achieve returns that are competitive with or superior to those achieved by other comparable investment products offered by its competitors or if its products otherwise fall out of favour with investors. AUM growth relies largely on net asset inflows, which is affected materially by access to the third-party distribution channels. These channels are very competitive and access may be adversely affected by acquisitions of dealers by the Company’s competitors who may limit or eliminate the Company’s access to such distribution channels. The Company’s focus is on the development of differentiated products that complement mainstream equity and fixed income products. Competitive pressures may impact the fees that the Company may charge for its services, as well as the expenses properly payable by the Mavrix Mutual Funds that are waived or “absorbed” by the Company. There can be no assurance that prevailing management fee rates will continue to be available in the future or that the Company will be able to reduce the portion of fund expenses absorbed by the Company. The following section contains forward-looking statements, as may other portions of this document. These statements are based on the judgment of management on a basis deemed reasonable given the current circumstances. These judgments are subject to risks and uncertainties beyond the control of management such as general economic conditions, the state of capital markets, political events, regulatory changes and competitive developments. Investors should carefully consider these risks and uncertainties when evaluating the Company. Mavrix Fund Management Inc. Annual Report 2008 10
  12. 12. MANAGEMENT’S DISCUSSION AND ANALYSIS Critical Accounting Estimates The following is a summary of Mavrix’s critical accounting estimates. Mavrix’s accounting policies are in accordance with GAAP and are described in the notes to the audited consolidated financial statements for the year-ended December 31, 2008. The accounting policies described below required estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses recorded in the financial statements. Because of their nature, estimates require judgment based on available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the financial statements. Deferred Costs Selling commissions paid on mutual fund securities sold on a deferred load basis are recorded at cost and are amortized on a straight-line basis. DSC assets relating to the sales of mutual fund securities sold on a deferred low load basis are amortized over 3 years. DSC assets relating to the sales of mutual fund securities sold on a deferred regular load basis are amortized over 7 years. Deferred exchange costs represent expenses incurred by the Company on the issue of equity instruments in a Fund managed by the company. These costs are amortized on a straight-line basis over 3 years. The unamortized DSC and deferred exchange costs would be written down to fair value if carrying value exceeded expected future undiscounted cash flow. Customer List The customer list is recorded at cost and is amortized on a straight-line basis over a period of 7 years. Customer list is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the undiscounted future cash flows expected from use and residual value is less than carrying amount, the long-lived asset is considered impaired. An impairment loss is measured as the amount by which the carrying value of the long-lived assets exceeds its fair value. Management Contracts Management contracts are recorded at cost less accumulated amortization prior to 2003. Management contracts are no longer amortized as they were determined to have an indefinite life; however, they are subject to impairment tests on an annual basis or more frequently if events and circumstances indicate a potential impairment. Management annually assesses the carrying values of its management contracts for impairment by considering the future economic benefit associated with the revenue- generating capacity of the contracts. If any potential impairment is indicated, then it is quantified by comparing the carrying value of the asset to its fair value. Any impairment would be recognized when determined. Contingent Liability On December 12, 2007, the Company agreed to backstop any loss from the Asset-Backed Commercial Paper (“ABCP”) held in certain funds it manages. As at December 31, 2008, these funds have in aggregate approximately $108 million in assets of which just under $4 million is ABCP. Subsequent to December 31, 2008 the ABCP was restructured and a series of new notes were issued to replace the ABCP. The Company continues to believe that the investments in question will mature at par. However, the Company has agreed to reimburse the Funds for any shortfall should the ABCP realize less than par value at maturity upon sale. A liability of $157,681 was recognized in the financial statements as at December 31, 2007. The new notes were reviewed and an update was provided by an independent appraiser regarding valuation. The Company’s policy is to not account for changes in value of the guarantee in the financial statements. Management, after reviewing the update from the independent appraiser, has concluded that $157,681 remains a satisfactory contingency as at December 31, 2008. A number of assumptions were relied upon to formulate the estimate. Two of the more important assumptions are that the notes are being held to maturity, the value of the guarantee is not determinable if the notes are not held to maturity, and that default rates follow historical patterns. The default rate assumption is based on the historical defaults rates as derived from a rating agency for like rated securities. The weighted average default rate for the non cash component is approximately 4%. A variance of 2% would impact plus or minus the estimated liability by $50,769. The notes are assumed to be held to maturity. The discount for the time value of money would change plus or minus by $18,244 for each 2 year change in the average duration of the non cash portion of the securities. Mavrix Fund Management Inc. Annual Report 2008 11
  13. 13. MANAGEMENT’S DISCUSSION AND ANALYSIS Accounting Changes Effective January 1, 2008 the Company adopted CICA Handbook section 1535 – Capital Disclosures. This section establishes standards for disclosing information about the Company’s capital and how it is managed (Note 12). This section is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The adoption of this standard had no effect on the Company’s financial position, operations or cash flows. Effective January 1, 2008 the Company adopted CICA Handbook sections concerning Financial Instruments: section 3862 – Financial Instruments – Disclosures and section 3863 – Financial Instruments – Presentation. Section 3862 describes disclosures required to enable users to evaluate the significance of financial instruments for the entity’s financial position and performance, and the nature and extent of risks arising from financial instruments to which the entity is exposed (Note 10). Section 3863 establishes the standards for presentation of financial instruments. These sections replace section 3861 and are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The adoption of these standards had no effect on the Company’s financial position, operations or cash flows. Effective January 1, 2008, the Company adopted the amendments to Section 1400, General Standards of Financial Presentation. The amended standards establish new requirements relating to the assessment of an entity’s ability to continue as a going concern. The adoption of these amendments have had no material impact on the financial statements of the Company. Future Accounting and Reporting Changes Effective January 1, 2009 the company adopted CICA Handbook section 3064 - Goodwill and Intangible Assets, replacing Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. This Section provides new guidelines for recognition, measurement, presentation and disclosure of goodwill and intangible assets. The Section also issued amendments to Section 1000, Financial Statement Concepts. These changes are effective for fiscal years beginning on or after October 1, 2008, with earlier adoption encouraged. Adoption of this standard has no impact on the recognition and measurement of amounts included in the financial statements and no additional disclosure is necessary. International Financial Reporting Standards In February 2008 the Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards (“IFRS”) will be required in Canada for publicly accountable profit-oriented enterprises for fiscal years beginning on or after January 1, 2011. While the Company has begun assessing the adoption of IFRS for 2011, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time. Disclosure Controls and Procedures and Internal Controls over Financial Reporting The Company maintains a set of disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”). The DC&P has been designed to provide reasonable assurance that material information relating to the company is made known to us by others, particularly during the period in which the annual filings are being prepared; and information required to be disclosed by the company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. The ICFR has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the company’s GAAP. Consistent with National Instrument 52-109 the Company’s Chief Executive Officer and Chief Financial Officer have evaluated our DC&P and ICFR as of December 31, 2008 and concluded that the controls are effective. Mavrix Fund Management Inc. Annual Report 2008 12
  14. 14. MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management of Mavrix Fund Management Inc. is responsible for the integrity and objectivity of the consolidated financial statements and all other information contained in this report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and are based on management’s best judgement. In fulfilling its responsibilities, management has developed internal control systems and procedures designed to provide reasonable assurance that the Corporation’s assets are safeguarded, that transactions are executed in accordance with appropriate authorization, and that accounting records may be relied upon to properly reflect the Corporation’s business transactions. The Audit Committee of the Board of Directors is composed of outside directors who meet periodically and independently with management and the auditors to discuss the Corporation’s financial reporting and internal control. The Audit Committee reviews the results of the audit by the auditors and their audit report prior to submitting the consolidated financial statements to the Board of Directors for approval. The external auditors have unrestricted access to the Audit Committee. Management recognizes its responsibility to conduct the Corporation’s affairs in the best interests of its shareholders. Malvin C. Spooner Raymond M. Steele President & Chief Executive Officer Chief Financial Officer January 26, 2009 Mavrix Fund Management Inc. Annual Report 2008 13
  15. 15. AUDITOR’S REPORT To the Shareholders of Mavrix Fund Management Inc. We have audited the consolidated balance sheets of Mavrix Fund Management Inc. as at December 31, 2008 and 2007 and the consolidated statements of loss and deficit, comprehensive loss and accumulated other comprehensive loss and cash flows for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Licensed Public Accountants Chartered Accountants Toronto, Ontario January 26, 2009 Mavrix Fund Management Inc. Annual Report 2008 14
  16. 16. CONSOLIDATED FINANCIAL STATEMENTS MAVRIX FUND MANAGEMENT INC. Consolidated Balance Sheets As at December 31, 2008 and 2007 2008 2007 ASSETS Current Assets Cash $ 131,228 $ 284,305 Marketable securities 683,549 3,257,246 Accounts receivable (Note 3) 679,463 672,871 Prepaid expenses 615,933 510,505 2,110,173 4,724,927 Other Assets Property and equipment (Note 4) 613,881 221,690 Deferred costs (Note 5) 4,842,036 6,060,955 Intangible assets (Note 6) 1,447,852 1,468,842 6,903,769 7,751,487 $ 9,013,942 $ 12,476,414 LIABILITIES Current Liabilities Accounts payable and accrued liabilities (Notes 11(b)) $ 1,152,425 $ 2,125,673 Corporate Debt (Note 7) 8,569,034 8,325,056 Deferred Lease Inducement (Note 14) 258,744 - 9,980,203 10,450,729 SHAREHOLDERS’ EQUITY Capital Stock (Note 8) 18,184,278 17,945,697 Equity Portion of Corporate Debt (Note 7) 198,821 235,481 Contributed Surplus (Note 8(d)) 861,269 964,227 Deficit (19,856,729) (17,067,070) Accumulated Other Comprehensive Loss (353,900) (52,650) (966,261) 2,025,685 $ 9,013,942 $ 12,476,414 The accompanying notes are an integral part of these consolidated financial statements. Commitments and Contingencies (Note 11) Signed on Behalf of the Board Malvin C. Spooner Raymond M. Steele Director Director Mavrix Fund Management Inc. Annual Report 2008 15
  17. 17. CONSOLIDATED FINANCIAL STATEMENTS MAVRIX FUND MANAGEMENT INC. Consolidated Statements of Loss and Deficit For the Years Ended December 31, 2008 and 2007 2008 2007 Revenues Management fees $ 9,299,121 $ 11,943,791 Redemption fees 700,121 710,322 Investment income 40,647 125,900 10,039,889 12,780,013 Expenses Selling, general, administration and other 8,609,308 10,281,325 Fund accounting and systems 2,035,290 2,167,982 Expenses recovered from funds (3,336,307) (3,539,426) Trailer fees 2,483,833 3,510,437 9,792,124 12,420,318 Profit before the undernoted items 247,765 359,695 Amortization (1,986,106) (2,307,894) Interest on corporate debt (1,051,318) (796,943) Loss before unusual item (2,789,659) (2,745,142) Unusual item (Note 16) - (595,430) Net Loss (2,789,659) (3,340,572) Deficit – beginning of year (17,067,070) (13,059,831) Loss on prepayment of debt (Note 7(c)) - (666,667) Deficit – end of year $ (19,856,729) $ (17,067,070) Weighted average number of shares – basic and diluted 8,631,690 8,639,682 Basic and diluted loss per share $ (0.32) $ (0.39) The accompanying notes are an integral part of these consolidated financial statements. Mavrix Fund Management Inc. Annual Report 2008 16
  18. 18. CONSOLIDATED FINANCIAL STATEMENTS MAVRIX FUND MANAGEMENT INC. Consolidated Statements of Comprehensive Loss and Accumulated Other Comprehensive Loss For the Years Ended December 31, 2008 and 2007 2008 2007 Net loss $ (2,789,659) $ (3,340,572) Other comprehensive loss, net of tax Available-for-sale investments Unrealized losses arising during the year (320,150) (52,650) Realized losses (gains) (Note 2(c)) 18,900 (49,050) Other comprehensive loss (301,250) (101,700) Comprehensive loss $ (3,090,909) $ (3,442,272) Accumulated other comprehensive loss – beginning of year $ (52,650) $ - Transitional adjustment - 49,050 Other comprehensive loss (301,250) (101,700) Accumulated other comprehensive loss – end of year $ (353,900) $ (52,650) The accompanying notes are an integral part of these consolidated financial statements. Mavrix Fund Management Inc. Annual Report 2008 17
  19. 19. CONSOLIDATED FINANCIAL STATEMENTS MAVRIX FUND MANAGEMENT INC. Consolidated Statements of Cash Flows For the Years Ended December 31, 2008 and 2007 2008 2007 Cash from operations Net loss $ (2,789,659) $ (3,340,572) Items not affecting cash - Amortization 1,982,462 2,307,894 Loss (gain) on sale of assets 25,583 (42,309) Accretion expense 207,318 167,186 Stock-based compensation expense (Notes 8(c)(i) and (iii)) 148,312 327,288 (425,984) (580,513) Net change in non-cash working capital - Account receivable 255,796 348,007 Prepaid expenses (105,428) 155,236 Accounts payable and accrued liabilities (973,249) 459,263 (1,248,865) 381,993 Financing Activities Corporate debt repayment (Note 7(c)) - (2,666,667) Corporate debt issuance, net of transaction costs - 5,783,452 Employee partnership loans (Note 8(e)) - (1,179,000) Share repurchase transactions (Note 8(b)) (12,688) (734,034) (12,688) 1,203,751 Investing Activities Purchase of marketable securities (527,552) (7,766,775) Disposition of marketable securities 2,781,100 7,885,058 Purchase of property and equipment (510,594) (70,179) Additions to deferred costs (634,478) (1,492,027) 1,108,476 (1,443,923) Net change in cash during the year (153,077) 141,821 Cash – beginning of year 284,305 142,484 Cash – end of year $ 131,228 $ 284,305 Supplementary Information Cash paid for interest $ 844,140 $ 593,640 The accompanying notes are an integral part of these consolidated financial statements. Mavrix Fund Management Inc. Annual Report 2008 18
  20. 20. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MAVRIX FUND MANAGEMENT INC. Notes to the Consolidated Financial Statements Years Ended December 31, 2008 and 2007 1. Summary of Significant Accounting Policies These consolidated financial statements, which have been prepared by management in accordance with Canadian generally accepted accounting policies, include estimates and assumptions made by management that affect the reported amounts of assets, liabilities, income and expenses during the reporting periods. Actual results could materially differ from these estimates. Key areas of estimation, where management has made difficult, complex or subjective judgements are the provision of useful lives of depreciable assets, stock-based compensation, recoverability of deferred costs and intangible assets, the value of the contingent liabilities and the going concern assumption. Certain comparative figures have been reclassified to conform to the current period's presentation. Net loss previously reported has not been affected. The significant accounting policies are as follows: (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Mavrix Explore Québec 2007 – I Ltd., Mavrix Explore 2007 – I FT Management Limited, Mavrix Québec 2007 – II Ltd., Mavrix Explore 2007 – II FT Management Limited, Mavrix Explore 2008 – I FT Management Limited, Mavrix Québec 2008 Ltd., and Mavrix Explore 2008 – II FT Management Limited. (b) Property and Equipment Property and equipment are amortized on the diminishing balance method at the following rates per annum: Computer equipment – 30% Computer software – 100% Furniture and fixtures – 20% Leasehold improvements are amortized on a straight-line basis over the term of the lease. Property and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the undiscounted future cash flows expected from use and residual value is less than carrying amount, the long-lived asset is considered impaired. An impairment loss is measured as the amount by which the carrying value of the long-lived assets exceeds its fair value. (c) Deferred Costs Selling commissions paid on mutual fund securities sold on a deferred load basis (“DSC”) are recorded at cost and are amortized on a straight-line basis. DSC assets relating to the sales of mutual fund securities sold on a deferred low load basis are amortized over 3 years. DSC assets relating to the sales of mutual fund securities sold on a deferred regular load basis are amortized over 7 years. Deferred exchange costs represent expenses incurred by the Company on the issue of equity instruments in a Fund managed by the Company. These costs were amortized on a straight-line basis over 3 years. The unamortized DSC and deferred exchange costs would be written down to fair value if carrying value exceeded expected future undiscounted cash flow. (d) Customer List The customer list is recorded at cost and is amortized on a straight-line basis over a period of 7 years. The customer list is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the undiscounted future cash flows expected from use and residual value is less than carrying amount, the long-lived asset is considered impaired. An impairment loss is measured as the amount by which the carrying value of the long-lived assets exceeds its fair value. (e) Management Contracts Management contracts were recorded at cost less accumulated amortization prior to 2003. Management contracts are no longer amortized as they were determined to have an indefinite life; however, they are subject to impairment tests on an annual basis or more frequently if events and circumstances indicate a potential impairment. Management annually assesses the carrying values of its management contracts for impairment by considering the future economic benefit associated with the revenue-generating capacity of the contracts. If any potential impairment is indicated, then it is quantified by comparing the carrying value of the asset to its fair value. Any impairment would be recognized when determined. Mavrix Fund Management Inc. Annual Report 2008 19
  21. 21. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (continued) (f) Revenue Recognition Management fees are calculated as a percentage of the net asset value of the respective mutual funds and flow through limited partnerships being managed and are recognized on an accrual basis. Also included in management fees are other management fees, earned from third parties, in relation to of the financing of publicly traded issuers. Revenue from other management fees is recognized when the financing is completed. Redemption fees paid by unitholders of mutual funds purchased on a deferred sales charge basis, the sales commission of which was financed by the Company, are recognized as revenue on the settlement date of the redemption of the applicable mutual fund units. The redemption fees, under the deferred sales charge option, are charged at rates ranging between 6.0% – 2.0% of the cost of units or shares being sold. The rates decline over the years that the units or shares are held, with no redemption fees charged after seven years. The redemption fees, under the low load deferred sales charge option, are charged at rates ranging between 3.5% – 2.0% of the cost of units or shares being sold. The rates decline over the years that the units or shares are held, with no redemption fees charged beyond the third year. Investment income and realized gains or losses are recognized as earned. (g) Income Taxes The Company follows the asset and liability method of accounting for income taxes. Under this method, future income taxes are recognized for the future income tax consequences attributable to temporary differences between the financial statement carrying values and their respective income tax bases as well as for the benefit of tax losses available to be carried forward to reduce taxable income in future years. Future income tax assets and liabilities are measured using the substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the period in which the change occurs. The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized. (h) Management Agreements The Company has agreements to manage the Mavrix Funds (the “Funds”) and the Mavrix Flow Through Limited Partnerships (the “LPs”). Under the terms of the agreements, the Company is responsible for the management of the day-to-day operations and distribution of the Funds and LPs, for which it receives an annual fee, payable weekly and monthly, respectively, based on the daily average net asset value of each fund and the month-end value of each limited partnership. The Company also is entitled to recover expenses incurred for the operations of the Funds and LPs, which includes unitholder administration, fund accounting, legal, audit, transaction and custodial fees. These recoveries are reported as a separate line item on the statement of loss. (i) Stock-Based Compensation The Company uses the fair value method for options, warrants and Restricted Stock Units (“RSUs”) granted to employees and non-employees. The fair value of stock options and warrants is determined by the Black-Scholes option pricing model with assumptions for risk-free interest rates, dividend yields, volatility factors of the expected market price of the Company’s common shares and an expected life of the options and warrants. The fair value of the RSUs is determined to be the equivalent of the Company’s common shares’ trading price on the date of the grant. The fair value of the options and RSUs granted to employees is amortized over their vesting period. Upon exercise of any option or warrant for which contributed surplus was recognized, the value assigned to the option or warrant will be adjusted to capital stock. When RSUs vest and are settled, any related portion of compensation expense previously credited to contributed surplus when compensation costs were charged against income is credited to capital stock. The Company also operates a Deferred Bonus Plan (“DBP”), similar to stock appreciation rights, offered to employees and non-employees. Under the DBP a cash bonus is deferred and paid on the third anniversary date following the year in which the Reference Shares are granted. The Company recognizes compensation expense for the DBP as the amount by which the quoted market value of the Company’s common shares exceeds the specified value of the reference shares changes in the quoted market value of those shares between date of grant and measurement date are recorded as stock-based compensation. The accrued compensation for a right that is forfeited or cancelled is adjusted by decreasing compensation cost in the period of forfeiture. Mavrix Fund Management Inc. Annual Report 2008 20
  22. 22. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies (continued) (j) Loss Per Share The Company uses the treasury stock method to compute the dilutive effect of options, warrants and RSUs. Under this method the dilutive effect on loss per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants, RSUs and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the year. The Company also uses the “if converted” method to compute the diluted effect of the convertible debenture. For loss per share, the dilutive effect has not been computed, as it would prove to be anti-dilutive. Basic and diluted loss per common share is calculated using the weighted-average number of common shares outstanding during the year. (k) Financial Instruments All financial instruments are classified into one of the following five categories: held-for-trading assets or liabilities, held-to- maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Held-for-trading financial instruments are measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are measured at fair value with revaluation gains and losses included in accumulated other comprehensive income until the instruments are derecognized or impaired. Loans and receivables, investments held-to-maturity and other financial liabilities are measured at amortized cost using the effective interest method. Previously, the Company used the straight-line method. The Company has made the following classifications: Cash Held-for-trading Marketable securities Available-for-sale Accounts receivable Loans and receivables Accounts payable and accrued liabilities Other liabilities Corporate debt Other liabilities Transaction costs are capitalized on initial recognition of financial instruments. The Company accounts for regular purchases and sales of financial assets using trade-date accounting. (l) Comprehensive Loss Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss comprises revenues, expenses, gains and losses that, in accordance with GAAP, are recognized in comprehensive loss but excluded from net loss. Amounts included in accumulated other comprehensive loss are reclassified to net loss when realized. Unrealized gains and losses on financial instruments that are held as available-for-sale are recognized in other comprehensive loss and accumulated other comprehensive loss, net of tax. 2. Changes in Accounting Policies (a) Capital Management Effective January 1, 2008 the Company adopted CICA Handbook section 1535 – Capital Disclosures. This section establishes standards for disclosing information about the Company’s capital and how it is managed (Note 12). This section is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The adoption of this standard had no effect on the Company’s financial position, operations or cash flows. (b) Financial Instruments Effective January 1, 2008 the Company adopted CICA Handbook sections concerning Financial Instruments: section 3862 – Financial Instruments – Disclosures and section 3863 – Financial Instruments – Presentation. Section 3862 describes disclosures required to enable users to evaluate the significance of financial instruments for the entity’s financial position and performance, and the nature and extent of risks arising from financial instruments to which the entity is exposed (Note 10). Section 3863 establishes the standards for presentation of financial instruments. These sections replace section 3861 and are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The adoption of these standards had no effect on the Company’s financial position, operations or cash flows. (c) Going Concern Effective January 1, 2008, the Company adopted the amendments to Section 1400, General Standards of Financial Presentation. The amended standards establish new requirements relating to the assessment of an entity’s ability to continue as a going concern. The adoption of these amendments have had no material impact on the financial statements of the Company. Mavrix Fund Management Inc. Annual Report 2008 21
  23. 23. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Changes in Accounting Policies (continued) (d) International Financial Reporting Standards In February 2008 the Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards (“IFRS”) will be required in Canada for publicly accountable profit-oriented enterprises for fiscal years beginning on or after January 1, 2011. While the Company has begun assessing the adoption of IFRS for 2011, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time. 3. Accounts Receivable Included in accounts receivable are amounts due from the Funds and LPs managed by the Company, deemed to be related parties, of $375,202 (2007 – $640,176). These amounts are in the normal course of business, are non-interest bearing and are due on demand. 4. Property and Equipment 2008 Accumulated Cost Amortization Net Computer equipment $ 166,263 $ 97,690 $ 68,573 Computer software 62,608 62,608 - Furniture and fixtures 426,048 217,698 208,350 Leasehold improvements 341,809 4,851 336,958 $ 996,728 $ 382,847 $ 613,881 2007 Accumulated Cost Amortization Net Computer equipment $ 151,645 $ 94,343 $ 57,302 Computer software 62,608 45,200 17,408 Furniture and fixtures 303,737 184,197 119,540 Leasehold improvements 309,861 282,421 27,440 $ 827,851 $ 606,161 $ 221,690 Amortization of property and equipment, included in amortization expense, is $111,719 (2007 – $122,392). 5. Deferred Costs 2008 Accumulated Cost Amortization Net Deferred sales commissions $ 13,951,167 $ 9,109,131 $ 4,842,036 2007 Accumulated Cost Amortization Net Deferred sales commissions $ 13,316,689 $ 7,255,734 $ 6,060,955 Deferred exchange costs 384,838 384,838 - $ 13,701,527 $ 7,640,572 $ 6,060,955 Amortization of deferred sales commissions, included in amortization expense, is $1,853,397 (2007 – $1,940,551). Amortization of deferred exchange costs, included in amortization expense, is $Nil (2007 – $191,891). Mavrix Fund Management Inc. Annual Report 2008 22
  24. 24. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. Intangible Assets 2008 Accumulated Cost Amortization Net Management contracts $ 1,416,482 $ - $ 1,416,482 Customer list 141,626 110,256 31,370 $ 1,558,108 $ 110,256 $ 1,447,852 2007 Accumulated Cost Amortization Net Management contracts $ 1,416,482 $ - $ 1,416,482 Customer list 141,626 89,266 52,360 $ 1,558,108 $ 89,266 $ 1,468,842 Amortization of customer list, included in amortization expense, is $20,990 (2007 – $20,933). 7. Corporate Debt 2008 2007 $3.05 million – 8% subordinated convertible debenture due June 30, 2010 $ 2,899,771 $ 2,769,145 $6.0 million – 10% subordinated debenture due July 2, 2011 5,669,263 5,555,911 $ 8,569,034 $ 8,325,056 (a) $3,050,000 – 8% Subordinated Convertible Debenture Subordinated convertible debenture bearing interest at 8% per annum issued on May 31, 2005 is repayable upon maturity on June 30, 2010, and is subordinated to all senior indebtedness. The debenture is convertible, at the option of the holder, into common shares at a price of $3.50 per share. Effective June 30, 2008, the Company has the option to redeem 100% of the convertible debenture. The fair value of the equity component of the debenture was deemed to be $208,866. The subordinated convertible debenture, is presented in the financial statements in its component parts, measured using the residual value method at the time of issue. The initial value of the debt component was calculated as the present value of the required interest and principal payments, discounted at a rate approximating the interest rate that would have been applicable to non-convertible debt at the time the debenture was issued. The difference of $208,866 between the debt component and the face value of the debenture is classified as equity. Transaction costs of $318,113 are amortized over the term of the debenture using the effective interest rate method, and amortization is included in amortization expense. Amortization expense included in amortization expense for 2008 is $65,021 (2007 - $68,866). The effective rate is 13.1%. The debt component of the convertible debenture will be accreted to its face value over the five-year term using the effective interest method; with the resulting charge recorded to interest expense. Accretion expense, included in interest expense, for the subordinated convertible debenture for the year ended December 31, 2008 was $54,039 (2007 – $47,096). The Company engaged an agent for this debenture financing. In addition to a commission, which has been included in the cost of issuance, the Agent received compensation warrants exercisable for 150,000 common shares of the Company until May 31, 2007, at an exercisable price of $3.50 per share. The warrants expired without being exercised. The components of the subordinated convertible debenture are as follows: 2008 2007 Debt component $ 2,851,179 $ 2,814,519 Equity component 198,821 235,481 Face value of convertible debenture 3,050,000 3,050,000 Deferred transaction costs (90,903) (167,040) Balance to be accreted (59,326) (113,815) Net convertible debenture $ 2,899,771 $ 2,769,145 Mavrix Fund Management Inc. Annual Report 2008 23
  25. 25. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. Corporate Debt (continued) (b) $6,000,000 – 10% Subordinated Debenture In June 2007, the Company obtained debenture financing in the form of a $6,000,000 subordinated debenture bearing interest at 10% per annum. The debt is repayable upon maturity on July 2, 2011 and is subordinated to all senior indebtedness. Transaction costs of $495,312 are amortized over the term of the debenture using the effective interest method, and amortization is included in amortization expense. Amortization expense included in amortization expense for 2008 is $113,352 (2007 – $55,244). The effective interest rate is 12.8%. The lender also received warrants exercisable into 600,000 shares of the Company until July 2, 2011 at an exercise price of $2.20 per share. The estimated fair value of $280,296 for the warrants, has been included in the deferred transaction costs (Note 8(c)(ii)). The components of the subordinated debenture are as follows: 2008 2007 Face value of subordinated debenture $ 6,000,000 $ 6,000,000 Deferred transaction costs (330,737) (444,089) Net subordinated debenture $ 5,669,263 $ 5,555,911 (c) $2,000,000 – 8% Convertible Debenture The convertible debenture bore interest at 8% per annum, was repayable upon maturity on January 6, 2009, and the Company has secured by a general security agreement over the assets of the Company. The debenture was convertible, at the option of the holder, into common shares at a price of $1.50 per share. In the event that the market price per share exceeded $3.00 for more than 20 consecutive days the Company had the right to force conversion. The fair value of the equity component of the debenture at issue was deemed undeterminable and as such was recorded at $Nil. In June 2007, the Company prepaid the convertible debenture for a cash payment of $2,666,667, resulting in a charge to amortization of $32,126 and a charge to deficit of $666,667. 8. Capital Stock (a) Authorized Unlimited number of common shares (b) Issued and Outstanding The following transactions occurred with respect to common shares during 2008 and 2007: Shares Amount Balance – December 31, 2006 8,714,228 $ 19,764,308 Stock options and warrants exercised 325,000 487,500 Shares issued under RSU plan – (Note 8(c)(iii)) 92,025 199,478 Shares repurchased (590,700) (1,221,534) Contributed surplus from excess average cost over repurchase price - (105,055) Employee partnership loans (Note 8(e)) - (1,179,000) Balance – December 31, 2007 8,540,553 17,945,697 Shares issued under RSU plan – (Note 8(c)(iii)) 134,253 291,859 Shares repurchased (23,800) (12,688) Contributed surplus from excess average cost over repurchase price - (40,590) Balance – December 31, 2008 8,651,006 $ 18,184,278 Mavrix Fund Management Inc. Annual Report 2008 24

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