Cymax’ financial position questioned

Auditor’s report RETAIL

With aspirations of becoming the Amazon. com of furniture, Burnaby, B.C.- based Cymax Stores Inc. has grown into something of a darling in Canada’s tech scene. The online home furnishings retailer was named to last year’s Profit 500 list of fastest growing companies in Canadian Business magazine, and received glowing profiles in that publication and local media.

But a 2015 financial audit of Cymax, issued May 26 by Deloitte and obtained by the Financial Post, paints a troubling picture of the company’s financial posi tion. The auditor found “significant doubt” about the company’s ability to stay in business, which it said could be stemmed by significant outside investment or improvements to sales and margins.

Cymax was founded in 2004 by CEO Arash Fasihi.

According to press reports last fall, the privately held company expected revenues to rise to $ 180 million in 2015, up from $ 100 million in 2013. However, Deloitte’s audit says 2015 revenue was $156 million.

With as many as 2.5 million visitors a month to its f l agship website, Cymax benefits from 97 per cent of its sales being made in the U.S. and in U.S. dollars.

A report by brokerage firm Haywood Securities in June said it generates 61 per cent of its revenue through direct sales.

“We have close to 300 vendors now and we have a virtual distribution model,” Fasihi told the Vancouver Sun in October, 2015. “We don’t stock anything, we have no inventory risk.”

That month brought news of a $ 33 million Seri es A f unding round in Cymax led by BDC Capital and PlentyOfFish founder Markus Frind, who sold his online dating service months earlier for US$575 million.

With all these apparent advantages of its capital position, Haywood analyst Pardeep Sangha wrote that Cymax had gone as far as testing the waters for an initial public offering in 2016, but ultimately pulled back because of weak capital markets.

The Deloitte documents show Cymax nearly doubled its debt level in 2015 alone. The company incurred net losses over the two-year period ending Dec. 31, 2015, of $ 17,436,761, leading to an accumulated deficit of $ 31,192,365 — compared to an accumulated deficit of $ 14,778,670 at the end of 2014. The documents also raise the issue of a working capital deficiency of $7,080,192.

“These conditions indicate the existence of material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern,” wrote Deloitte.

“The ability of the Company to continue as a going concern is dependent upon improving its gross margins realized on sales, continuing to increase its sales volume and cash flows from operations, and reducing its general and administrative expenses, and on the ability of the Company to continue to obtain further financing to fund ongoing operations.”

Cymax began eliminating jobs over the summer and continued through at least September, according to employees who left the company during that period who spoke on condition of anonymity, Bloomberg News reported.

However, one of the company’s lead investors says it isn’t concerned about the numbers in Deloitte’s audit. “As an early- stage software investor, many of our companies run losses,” Robert Simon, Managing Partner at BDC Capital’s IT Venture Fund, said in an interview. “What’s important to us in this case is we have a company that generates cash flow through sales, and Cymax is doing great with cash flow. A good comparison is Amazon, which posted losses for many years and focused on growth.”

Simon said that Cymax has not laid off any staff, but that there have been terminations for performance issues. He said the company is continuing to hire and that growing its business is its chief priority.

BDC Capital also confirmed that Cymax’s investors will be putting additional funds into the company, a sign that “we’re pleased with the progress being made,” Simon said.

The capital risk the company is facing could also pose concerns for Cymax’s customers, as the upcoming holiday season will coincide with an increase in online retail sales but also require that Cymax continue to meet its financial obligations, industry sources said.

Cymax’s l ead competitor, Boston- based Wayfair Inc., posted a net revenue of US$ 2.25 billion in 2015, up from US$ 1.3 billion in 2014. Wayfair is the largest online home furnishing retailer in North America with more than 7,000 suppliers and more than seven million products on offer. Wayfair, which raised US$300 million via an IPO on the New York Stock Exchange, has a market capitalization of US$ 3.2 billion.

Cymax and Frind did not reply to requests for comment. Deloitte declined to comment.