A&W Revenue Royalties Income Fund
Annual Report 2021

Plain-text annual report

Gross Sales reported by A&W restaurants in the Royalty Pool (1) Distributions to Unitholders Regular Distributions Special Distributions in millions of dollars $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 2013 2014 2015 2016 2017 2018 2019 2020 2021 2013 2014 2015 2016 2017 2018 2019 2020 2021 (1) "Gross Sales reported by A&W restaurants in the Royalty Pool” is a non-IFRS supplementary financial measure. See the “Non-IFRS Measures” section of the Fund’s MD&A for the fourth quarter ended December 31, 2021, for further details on how this measure is calculated and used to assess the Fund’s performance. Royalty Pool Same Store Sales Growth (2) Comparison of Total Unitholders' Return (3) A&W Revenue Royalties Income Fund S&P/TSX Total Return Composite Index 16.0% 12.0% 8.0% 4.0% 0.0% -4.0% -8.0% -12.0% -16.0% 14.0% 7.6% 6.3% 9.8% 3.4% 2.0% 4.1% 0.4% 2013 2014 2015 2016 2017 2018 2019 2020 2021 -14.3% (2) "Royalty Pool Same Store Sales Growth” is a non-IFRS supplementary financial measure. See the “Non-IFRS Measures” section of the Fund’s MD&A for the fourth quarter ended December 31, 2021, for further details on how this measure is calculated and used to assess the Fund’s performance. $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $1,634 $483 Feb 2002 Dec 2003 Dec 2005 Dec 2007 Dec 2009 Dec 2011 Dec 2013 Dec 2015 Dec 2017 Dec 2019 Dec 2021 (3) Assuming an investment of $100 on February 15, 2002 and reinvestment of distributions through 2021. Chairman’s Report to Unitholders On behalf of the Trustees of the A&W Revenue Royalties Income Fund (the “Fund”), I am pleased to report the results for the year ended December 31, 2021. The Fund’s royalty income increased by 12.0% in the fourth quarter of 2021 as compared to the fourth quarter of 2020 and increased by 16.5% year over year. The increase in royalty income was driven by the Royalty Pool Same Store Sales Growth(1) of 13.8% for the fourth quarter and 14.0% for the year, and the additional gross sales from the 23 net new restaurants that were added to the Royalty Pool on January 5, 2021. The growth in Royalty Pool same store sales was primarily driven by a Canada-wide easing of COVID-19 related public health restrictions which led to a reduction in the number of A&W restaurants that were temporarily closed or were not able to offer dine-in services, as compared to 2020. I am delighted to report that as at December 31, 2021 and February 15, 2022, all of the A&W restaurants that had been temporarily closed due to COVID-19 related restrictions had reopened. Due to the strong performance of the A&W restaurants in the Royalty Pool in 2021, the Fund increased its distribution rate three times. Including the 5¢ per unit special distribution that was paid to unitholders on December 31, 2021, the distributions declared by the Fund in 2021 were 14.6% higher than the distributions declared in 2020. The current distribution rate translates to an annualized distribution rate of $1.86 per unit. On behalf of the Trustees, I would like to express my sincere gratitude for the continued trust and confidence that unitholders have placed in the Fund and commend the resilience and loyalty that A&W guests, franchisees and employees continue to exemplify. (signed) John R. McLernon Chairman A&W Revenue Royalties Income Fund (1) “Royalty Pool Same Store Sales Growth” is a non-IFRS supplementary financial measures. See the “Non-IFRS Measures” section of the Fund’s MD&A for the fourth quarter ended December 31, 2021, for further details on how this measure is calculated and used to assess the Fund’s performance. 1 Report to Fund Unitholders We are very pleased with our sales results in 2021, achieving Royalty Pool Same Store Sales Growth(1) of 14.0%. While COVID-19 related public health restrictions continue to ease, many A&W restaurants, particularly those located in shopping centres and urban centres, are still recovering from the adverse impacts caused by COVID-19. The resilience our restaurant operators, their teams, and our guests, has been remarkable. Food Services and its Franchisees have worked together throughout the pandemic on initiatives to help accelerate sales recovery. Key initiatives included promotional activity, strengthening and expanding partnerships with third party delivery service providers, increasing the speed of service for drive-thru and continuing to evolve the technology we need to be highly convenient for our guests. We opened 33 new A&W restaurants during the year, bringing the total number of restaurants in the chain to 1,028 as at December 31, 2021. In 2021, we remained focused on menu innovation and launched a national rollout of the A&W Brew BarTM, which offers a variety of frozen beverages as well as hot and cold espresso-based drinks. Guests can now enjoy the A&W Brew Bar at over 110 A&W restaurants across the country and can expect to see more as the roll out continues in 2022. In August, A&W was proud to once again partner with the Multiple Sclerosis Society of Canada and Christine Sinclair on its annual Burgers to Beat MS Day. Through the generosity of our guests and the commitment of our restaurant teams, the campaign raised $1.4 million in 2021 and has raised more than $17 million since inception. These funds help support world-class MS research, programs, services, and advocacy efforts that improve the quality of life for Canadians living with and affected by the disease. Ensuring that A&W restaurants are able to operate safely and emerge from this time of uncertainty in a financial condition that enables them to compete effectively and grow their business remains our main objective. Our strategic initiatives, including differentiating the A&W brand through the use of natural ingredients, continued new restaurant growth, and delivering an industry leading guest experience, have all contributed to A&W’s strong brand appeal and the trust it has built with Canadian consumers. As we reflect on 2021, we have been inspired by how our Franchisees, our employees, and our strong partner network have found courageous and creative ways to work together and support one another. The leadership of our operators and their commitment to our guests, their restaurant teams and pandemic safety, have been world class. We sincerely appreciate your dedication and hard work. To everyone who has been a part of A&W’s success in 2021 – thank you. (signed) Susan Senecal President and Chief Executive Officer, A&W Food Services of Canada Inc. TM trademark of A&W Trade Marks Limited Partnership, used under license. (1) “Royalty Pool Same Store Sales Growth” is a non-IFRS supplementary financial measures. See the “Non-IFRS Measures” section of the Fund’s MD&A for the fourth quarter ended December 31, 2021, for further details on how this measure is calculated and used to assess the Fund’s performance. 2 A&W Revenue Royalties Income Fund Management Discussion and Analysis This Management Discussion and Analysis (“MD&A”) covers the fourth quarter period from September 13, 2021 to December 31, 2021 and the year ended December 31, 2021. This MD&A is dated February 15, 2022. This MD&A should be read in conjunction with the audited annual consolidated financial statements of the A&W Revenue Royalties Income Fund (the “Fund”) for the year ended December 31, 2021. Readers are also referred to the audited annual consolidated financial statements of A&W Food Services of Canada Inc. (“Food Services”) for the 52-week period ended January 2, 2022. Such financial statements and additional information about the Fund and Food Services are available at www.sedar.com or www.awincomefund.ca. The financial results reported in this MD&A are derived from the audited annual consolidated financial statements of the Fund, which are prepared in accordance with International Financial Reporting Standards (“IFRS”). The accounting policies applied in the audited annual consolidated financial statements for the year ended December 31, 2021 and this report have been consistently applied to all years presented. The Fund uses a fiscal year ending December 31. Food Services uses a fiscal year comprising a 52- or 53-week period ending on the Sunday nearest December 31. Food Services’ fiscal 2021 year was 52 weeks and ended January 2, 2022 (2020 – 53 weeks ended January 3, 2021). The Fund aligns its quarterly financial reporting with that of Food Services. Readers should be aware that the 2021 annual and quarterly results are not directly comparable to the 2020 quarterly and annual results. There were 87 days in the first quarter of 2021 compared to 82 days in first quarter of 2020. The second and third quarters of both years had 84 days. The fourth quarter of 2021 had 110 days compared to 116 days in the fourth quarter of 2020. The year ended December 31, 2021 had 365 days compared to 366 days in the year ended December 31, 2020. Royalty Pool Same Store Sales Growth is based on an equal number of days in the quarter and year. HIGHLIGHTS  Royalty income increased by 16.5% year over year and by 12.0% in Q4 2021 as compared to Q4 2020.  Royalty Pool Same Store Sales Growth(i) was +14.0% for the year and +13.8% for Q4  2021. Including the 5¢ per Unit special distribution that was paid to unitholders on December 31, 2021, the distributions declared by the Fund in 2021 increased by 14.6% from 2020. The current distribution rate translates to an annualized distribution rate of $1.86 per Unit. (i) “Royalty Pool Same Store Sales Growth” is a non-IFRS supplementary financial measure. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how this measure is calculated and used to assess the Fund’s performance. 3 SELECTED INFORMATION The following selected information, other than “Royalty Pool Same Store Sales Growth”, “Gross sales reported by A&W restaurants in the Royalty Pool”, “Distributable cash generated”, “Distributable cash per equivalent unit”, “Distributions and dividends declared per equivalent unit” and information with respect to numbers of restaurants and equivalent units have been derived from financial statements prepared in accordance with IFRS and all dollar amounts are reported in Canadian currency. See “Non-IFRS Measures”. (dollars in thousands except per unit amounts) Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 Royalty Pool Same Store Sales Growth(i) Number of restaurants in the Royalty Pool Gross sales reported by A&W restaurants in the Royalty Pool(i) 13.8% -9.3% 14.0% -14.3% 994 971 994 971 $498,558 $444,977 $1,569,377 $1,347,387 Royalty income $14,956 $13,350 $47,081 $40,422 General and administrative expenses Term loan and other interest (net) Current income tax provision Distributable cash generated(ii) $412 $717 $1,265 $12,387 $463 $681 $2,798 $9,408 $817 $2,514 $7,277 $994 $2,177 $7,242 $36,298 $30,009 Number of equivalent units(iii) 19,258,184 18,551,185 19,258,184 18,551,185 Distributable cash per equivalent unit(iv) Distributions and dividends declared per equivalent unit(iv) Payout ratio(iv) Net cash generated from operating activities Net income(v) $0.643 $0.508 $1.885 $1.618 $0.665 $0.900 81.5% 162.0% $1.740 92.3% $1.518 93.8% $11,713 $14,629 $34,113 $30,409 $14,124 $11,194 $37,854 $28,374 (i) “Royalty Pool Same Store Sales Growth” and “Gross sales reported by A&W restaurants in the Royalty Pool” are non-IFRS supplementary financial measures. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how these measures are calculated and used to assess the Fund’s performance. (ii) “Distributable cash generated” is a non-IFRS financial measure. Refer to the table on the following page for a reconciliation of this measure to the most comparable IFRS measure and the “Non-IFRS Measures” section of this MD&A for further details on how it is used to assess the Fund’s performance. (iii) Equivalent units include Units and Limited Voting Units of the Fund (“Limited Voting Units” and together with the Units, the “Trust Units”) and common shares of Trade Marks (as defined below) that are exchangeable for Trust Units. The number of equivalent units and Distributable cash per equivalent unit in 2021 are calculated on a fully- diluted basis and include the 241,683 LP units (as defined below) exchanged for 483,366 common shares of Trade Marks representing the remaining consideration paid in December 2021 for the January 5, 2021 adjustment to the Royalty Pool (as defined below). The number of equivalent units and Distributable cash per equivalent unit in 2020 are calculated on a fully-diluted basis and include 147,772 LP units exchanged for 295,544 common shares of Trade Marks representing the remaining consideration paid in December 2020 for the January 5, 2020 adjustment to the Royalty Pool. See “Adjustment to the Royalty Pool”. 4 (iv) “Distributable cash per equivalent unit”, “Distributions and dividends declared per equivalent unit” and “Payout Ratio” are non-IFRS ratios. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how these ratios are calculated and used to assess the Fund’s performance. (v) Net income includes unrealized gains and losses on interest rate swaps, amortization of financing fees and deferred income taxes. These non-cash items have no impact on the Fund’s ability to pay distributions to unitholders. The following table provides a reconciliation of “Distributable cash generated” to “Net cash generated from operating activities”, the most comparable IFRS measure, for the periods indicated. (dollars in thousands) Net cash generated from operating activities Interest expense Current income tax provision Net changes in items of non-cash working capital Financing fees paid Interest paid Income tax paid Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 $11,713 $14,629 $34,113 $30,409 (717) (1,265) (1,045) (175) 1,195 2,681 (681) (2,798) (7,881) - 1,099 5,040 (2,514) (7,277) (159) (175) 2,520 9,790 (2,177) (7,242) 35 - 1,933 7,051 Distributable cash generated $12,387 $9,408 $36,298 $30,009 NON-IFRS MEASURES This MD&A makes references to certain non-IFRS measures. The Fund believes that disclosing these non-IFRS measures provides readers of this MD&A with important information regarding the Fund’s financial performance and its ability to pay distributions to unitholders. By considering these measures in combination with IFRS measures, the Fund believes that readers are provided with additional and more useful information about the Fund than readers would have if they simply considered IFRS measures alone. The non-IFRS measures reported by the Fund do not have a standardized meaning prescribed by IFRS and the Fund’s method of calculating these measures may differ from those of other issuers or companies and may not be comparable to similar measures used by other issuers or companies. Non-IFRS financial measures The following non-IFRS financial measure is disclosed in this MD&A: Distributable cash generated. Distributable cash generated is a non-IFRS financial measure and is calculated as royalty income less cash expenses. Distributable cash generated can be reconciled to net cash flows generated from operating activities by adjusting for interest, current income taxes, financing fees paid and net changes in items of working capital. Changes in items of working capital are excluded as the Fund’s working capital requirements are not permanent and are primarily due to the timing of payments between related parties. Financing fees are deducted as they are capitalized and amortized over the term of the credit facility. No deduction is made for capital expenditures as the Fund has no capital expenditures. As discussed under “Income Taxes”, A&W Trade Marks Inc.’s (“Trade Marks”) provision for income taxes includes refundable income tax paid or recoverable. This refundable income tax is not deducted in 5 calculating the amount of Distributable cash generated, in order to more accurately reflect the actual amount of cash generated by the business to pay distributions to unitholders and dividends to Food Services. The Fund expects that net refundable income tax paid in prior years will be recovered in future years when sufficient dividends are paid by Trade Marks. The Fund believes that Distributable cash generated is a useful measure for investors as it reflects the amount of actual cash generated to pay distributions to unitholders and dividends to Food Services. Refer to the “Selected Information” and “Selected Annual Information” sections for reconciliations of Distributable cash generated to net cash generated from operating activities, the most comparable IFRS measure, for the current and comparable reporting periods. Non-IFRS ratios The following non-IFRS ratios are disclosed in this MD&A: Distributable cash per equivalent unit. Distributable cash per equivalent unit is a non-IFRS ratio and is calculated as distributable cash generated divided by the number of equivalent units outstanding during the relevant period on a fully diluted basis. The Fund believes that Distributable cash per equivalent unit is a useful measure for investors as it reflects the amount of actual cash generated per equivalent unit to pay distributions to unitholders and dividends to Food Services. Distributions and dividends declared per equivalent unit. Distributions and dividends declared per equivalent unit is a non-IFRS ratio and is calculated as the sum of the distributions and dividends divided by the number of equivalent units outstanding during the relevant period on a fully diluted basis. The Fund believes that Distributions and dividends declared per equivalent unit is a useful measure for investors as it provides them with the amount of total cash distributions declared during the reporting period. Distributions and dividends declared and accrued per equivalent unit. Distributions and dividends declared and accrued per equivalent unit is a non-IFRS ratio and is calculated as the sum of (i) distributions and dividends declared per equivalent unit in respect of each full calendar month in the applicable period, and (ii) the aggregate run-rate amount of the current monthly distribution for the remainder of the calendar year, with the sum of (i) and (ii) pro-rated based on the number of days in the reporting period. The Fund believes that Distributions and dividends declared and accrued per equivalent unit is a useful measure for investors as it provides them with the amount per equivalent unit of distributions paid to date and payable for the balance of the year, at the distribution rate in effect at the end of the reporting period, prorated based on the number of days in the reporting period. Payout ratio. Payout ratio is a non-IFRS ratio and is calculated by dividing total distributions declared and accrued per equivalent unit, by the Distributable cash per equivalent unit generated in that period. The Fund believes that the Payout ratio provides investors with useful information on the extent to which the Fund distributes the Distributable cash generated. 6 Non-IFRS supplementary financial measures: The following non-IFRS supplementary financial measures are disclosed in this MD&A: Gross sales reported by A&W restaurants in the Royalty Pool. Gross sales reported by A&W restaurants in the Royalty Pool (the “Royalty Pool”) reflects the sum of (i) the gross sales reported to Food Services by franchisees of A&W restaurants that are in the Royalty Pool without audit, verification or other form of independent assurance and (ii) the gross sales of A&W restaurants owned and operated by Food Services that are in the Royalty Pool. The Gross sales reported by A&W restaurants in the Royalty Pool reflect sales after deducting amounts for discounts for coupons and other promotional offerings and applicable sales taxes. Gross sales reported by A&W restaurants in the Royalty Pool is the basis for which the royalty is payable by Food Services to A&W Trade Marks Limited Partnership (the “Partnership”) and therefore is a key performance indicator for the Fund. Royalty Pool Same Store Sales Growth. Royalty Pool Same Store Sales Growth reflects the change in gross sales of A&W restaurants in the Royalty Pool that operated, or were temporarily closed at any point due to COVID-19, during the entirety of the fourth quarters and years ending December 31, 2021 and December 31, 2020 and is based on an equal number of days in each quarter. This measure is a key performance indicator for the Fund as it highlights the performance of the existing A&W restaurants in the Royalty Pool. SALES PERFORMANCE Royalty Pool Same Store Sales Growth(i) for the fourth quarter of 2021 was +13.8% as compared to the same quarter of 2020. Annual Royalty Pool Same Store Sales Growth(i) for 2021 was +14.0% as compared to 2020. The Royalty Pool Same Store Sales Growth in the quarter was primarily driven by there being fewer public health restrictions related to COVID-19 in place across Canada which led to a reduction in the number of A&W restaurants that were temporarily closed or were not able to offer dine-in services, as compared to the fourth quarter of 2020. As at December 31, 2021 and February 15, 2022, all of the A&W restaurants that had been temporarily closed due to COVID-19 related restrictions had reopened. See “Impact of COVID-19”. The actions required in 2020 and 2021 in response to COVID-19 have adversely impacted A&W restaurant operations across Canada, particularly for those restaurants located on urban street fronts and in shopping centres. However, since the second quarter of 2020 when COVID-19 impacts on A&W were at their peak, the impact of COVID-19 on Royalty Pool Same Store Sales Growth has lessened. 7 The chart below shows the Royalty Pool Same Store Sales Growth by A&W restaurants in the Royalty Pool for the eight most recently completed quarters and two most recently completed years. Gross sales reported by A&W restaurants in the Royalty Pool(i) for the fourth quarter of 2021 were $498,558,000, a 12.0% increase against gross sales of $444,977,000 for the fourth quarter of 2020. Annual Gross sales reported by A&W restaurants in the Royalty Pool(i) for 2021 were $1,569,377,000, a 16.5% increase from annual Gross sales reported by A&W restaurants in the Royalty Pool(i) of $1,347,387,000 for 2020. The increase in Gross sales reported by A&W restaurants in the Royalty Pool for the quarter and year is driven by the Royalty Pool Same Store Sales Growth in addition to the gross sales from the 23 net new restaurants added to the Royalty Pool on January 5, 2021. The increase in the quarter was partially offset by there being six fewer days in the fourth quarter of 2021 as compared to the fourth quarter of 2020. The increase in the year was partially offset by there being one less day in 2021 than in 2020. See “Impact of COVID-19” and “Adjustment to the Royalty Pool”. (i) “Royalty Pool Same Store Sales Growth” and “Gross sales reported by A&W restaurants in the Royalty Pool” are non-IFRS supplementary financial measures. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how these measures are calculated and used to assess the Fund’s performance. OVERVIEW The Fund is a limited purpose trust established in 2001 under the laws of the Province of British Columbia pursuant to the Amended and Restated Declaration of Trust (the “Declaration of Trust”). The Units trade on the Toronto Stock Exchange under the symbol AW.UN. The Fund’s place of business is located at 300 – 171 West Esplanade, North Vancouver, BC. The Fund was established to invest in Trade Marks, which through its ownership interest in the Partnership, 8 owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The Partnership has granted Food Services a licence (the “Amended and Restated Licence and Royalty Agreement”) to use the A&W trade-marks in Canada for a term expiring December 30, 2100, for which Food Services is required to pay a royalty of 3% of the gross sales reported to Food Services by A&W restaurants in the Royalty Pool. Food Services is a leading franchisor of hamburger quick service restaurants in Canada. The Partnership distributes its available cash, after satisfaction of any debt service, provision for operating and other expenses and any amounts retained as reserves, by way of distributions on limited partnership units (“LP units”) held by Trade Marks. Trade Marks subsequently distributes its available cash, after satisfaction of debt service and income tax obligations, provisions for administrative expenses of Trade Marks and the Fund, and retention of reasonable reserves, by way of dividends on its common shares held by the Fund and Food Services and one special share held by Food Services. The Fund in turn makes distributions to unitholders, after allowing for reasonable reserves. Trade Marks’ general and administrative expenses include the expenses of the Fund as the Fund has entered into an administration agreement with Trade Marks whereby Trade Marks, at its expense, provides or arranges for the provision of services required in the administration of the Fund. A key attribute of the Fund is that the distributable cash available to make distributions to unitholders is based on the Gross sales of the A&W restaurants in the Royalty Pool, less operating expenses associated with operating the Fund, interest and taxes and an allowance for reasonable reserves. The Fund is a top-line fund, meaning it is not subject to variability of earnings or expenses associated with an operating business, but is subject to variability in revenues of the A&W restaurants in the Royalty Pool. Another important aspect of the Fund is that, as at December 31, 2021, Food Services owned the equivalent of 24.3% (December 31, 2020 – 24.2%) of the Units on a fully-diluted basis through its ownership of Limited Voting Units and common shares of Trade Marks, both of which are exchangeable, at the option of Food Services, for Units. As a result, the interests of Food Services are closely aligned with the interests of unitholders. Growth in the Fund is achieved in two ways: first, and most importantly, by growing same store sales of the A&W restaurants in the Royalty Pool, and second by increasing the number of A&W restaurants in the Royalty Pool each year. The Royalty Pool is adjusted annually to reflect Gross sales from new A&W restaurants added to the Royalty Pool, net of the gross sales of any A&W restaurants that have permanently closed. Food Services is paid for the additional royalty stream related to the gross sales of the net new restaurants add to the Royalty Pool, based on a formula set out in the Amended and Restated Licence and Royalty Agreement. The formula provides for a payment to Food Services based on 92.5% of the amount of estimated gross sales from the net new A&W restaurants and the current yield on the Units, adjusted for income taxes payable by Trade Marks. The consideration is paid to Food Services in the form of additional units in the Partnership. The additional LP units are, at the option of Food Services, exchangeable for additional common shares of Trade Marks, which are in turn exchangeable for Trust Units on the basis of two common shares for one Trust Unit. 9 IMPACT OF COVID-19 The effects of COVID-19 on many businesses, especially restaurants, have been unexpected, sudden and unprecedented. The future effect of COVID-19 on Canadians, in general, continues to be uncertain. Since the onset in March 2020, jurisdictions across Canada have had varying levels of COVID-19 related restrictions in place and many of those restrictions have been modified multiple times in response to the fluctuating number of COVID-19 cases. Actions required in response to the COVID-19 pandemic have adversely affected A&W restaurant operations in Canada, including the temporary closure of A&W restaurants. At its peak impact in the second quarter of 2020, a total of 230 A&W restaurants (out of the then 971 restaurants in the Royalty Pool) were temporarily closed due to public health measures in response to COVID-19. The COVID-19 related public health restrictions began to ease in the second quarter of 2021, and as at December 31, 2021 all of the restaurants that were temporarily closed due to restrictions had reopened (42 as at December 31, 2020). The chart below shows the reported number of A&W restaurants that were temporarily closed due to COVID-19 restrictions at specified dates in 2020 and 2021. Throughout the pandemic, Food Services and its franchisees have worked together on initiatives to help accelerate sales recovery. These initiatives include, but are not limited to promotional activity, strengthening and expanding partnerships with third party delivery service providers, increasing the speed of service for drive-thru and enhancing the A&W mobile app. Food Services and its franchisees also continue to take and maintain significant measures in their restaurants and broader operations to protect the health of employees and guests in compliance with physical distancing recommendations and other mandates of relevant public health authorities, such as the requirement for dine-in guests to show proof of vaccination in jurisdictions where required and the requirement for restaurant staff who have contracted, or been exposed to, COVID-19 to self- isolate. During the pandemic to date, various levels of government have offered a number of important financial programs which have helped support individual restaurant businesses, 10 including A&W franchisees; however, the eligibility criteria for most of those programs has become stricter and some programs have ceased. See “Risks and Uncertainties”. In March 2020, and as a response to the sudden onset of COVID-19, the Fund temporarily suspended monthly distributions on the Units; accordingly, no distributions were declared by the Fund in the second quarter of 2020. Regular monthly distributions to unitholders resumed at 10¢ per Unit in the third quarter of 2020 and special distributions totaling 50¢ per Unit were paid in the fourth quarter of 2020. In 2021, the monthly distribution rate was increased three times. It was first increased to 13.5¢ per Unit beginning with the February distribution that was paid March 31, 2021 and secondly to 15.0¢ per Unit beginning with the July distribution that was paid on August 31, 2021. The monthly distribution rate was increased for a third time to 15.5¢ per Unit beginning with the October distribution that is payable on November 30, 2021. The Fund also paid a special distribution of 5.0¢ per Unit on December 31, 2021 to Unitholders of record as at December 15, 2021. Trade Marks is currently, and based upon projections, expects to remain, in compliance with all covenants related to its term loan. ADJUSTMENT TO THE ROYALTY POOL The 2021 annual adjustment to the Royalty Pool took place on January 5, 2021. The number of A&W restaurants in the Royalty Pool was increased by 34 new restaurants, less 11 restaurants that permanently closed. The Partnership paid Food Services $13,271,000, by issuance of 465,316 LP units to Food Services, representing 80% of the initial consideration based on the estimated annual sales of the net new restaurants. The LP units were subsequently exchanged for 930,632 non-voting common shares of Trade Marks. The final adjustment to the number of LP units issued was made on December 9, 2021, based on the actual annual sales reported by the new restaurants. The actual annual sales of the 34 new A&W restaurants were $53,842,000, compared to the original estimate of $45,248,000, resulting in total consideration of $20,164,000 payable to Food Services. The remaining consideration of $6,893,000 was paid to Food Services by issuance of 241,683 additional LP units, which were exchanged for 483,366 non-voting common shares of Trade Marks. On January 5, 2022, the number of A&W restaurants in the Royalty Pool was increased by 34 new restaurants, less 13 restaurants that permanently closed. The initial consideration for the estimated royalty revenue from the net 21 restaurants added to the Royalty Pool is $21,472,000. The Partnership paid Food Services $17,178,000 by issuance of 444,327 LP units, representing 80% of the initial consideration. The LP units were exchanged for 888,654 non-voting common shares of Trade Marks. The remaining 20% or $4,294,000 and a final adjustment to the consideration based on the actual annual sales reported by the new restaurants will be paid in December 2022 by issuance of additional LP units, which may be exchanged for non voting common shares of Trade Marks. 11 COMMON SHARES OF TRADE MARKS The common shares of Trade Marks are owned by the Fund and Food Services, with their respective ownership as at the end of the three most recently completed financial years as follows: (dollars in thousands) Fund Food Services Total Number of shares Trade Marks’ book value $ % Number of shares Trade Marks’ book value $ % Number of shares Trade Marks’ book value $ Balance as at December 31, 2019 28,129,271 164,605 79.1 7,453,763 95,339 20.9 35,583,034 259,944 January 5, 2020 adjustment to the Royalty Pool(1) Balance as at December - - (3.3) 1,519,260 28,881 3.3 1,519,260 28,881 31, 2020 28,129,271 164,605 75.8 8,973,023 124,220 24.2 37,102,294 288,825 January 5, 2021 adjustment to the Royalty Pool(2) April 16, 2021 exchange of common shares for Trust Units Balance as at December - - (2.9) 1,413,998 20,164 2.9 1,413,998 20,164 4,056,040 63,193 10.6 (4,056,040) (63,193) (10.6) - - 31, 2021 32,185,311 227,798 83.5 6,330,981 81,191 16.5 38,516,292 308,989 (1) The number of common shares includes the 147,772 LP units exchanged for 295,544 common shares of Trade Marks representing the remaining consideration paid in December 2020 for the January 5, 2020 adjustment to the Royalty Pool. (2) The number of common shares includes the 241,683 LP units exchanged for 483,366 common shares of Trade Marks representing the remaining consideration paid in December 2021 for the January 5, 2021 adjustment to the Royalty Pool. On April 16, 2021, A&W of Canada Inc. ("A&W Canada"), an indirect shareholder of Food Services, completed a reorganization to provide liquidity for some of its shareholders and to simplify the indirect ownership of Food Services (the "Reorganization"). As part of the Reorganization, and pursuant to the Declaration of Trust and the Amended and Restated Exchange Agreement, Food Services exchanged 1,042,000 common shares of Trade Marks for 521,000 Units, which Units were then purchased by shareholders of A&W Canada at a price of $36.42 per Unit. The 521,000 Units sold are subject to a four-month statutory hold period under applicable securities laws. After the exchange and sale of these Units, and as at June 20, 2021 and July 27, 2021, there were 14,585,673 Units outstanding. The shareholders who purchased the 521,000 Units also entered into an agreement with three individuals (each a “Designated Representative”), which agreement provides that any two of the 12 Designated Representatives are entitled to exercise the voting rights attached to the 521,000 Units while they remain held by those shareholders. There is no agreement, arrangement, commitment or understanding among the Designated Representatives themselves or amongst the Designated Representatives and those shareholders as to how the voting rights attached to the 521,000 Units will be exercised in any particular circumstance. The Designated Representatives, individually, therefore do not have control or direction over any of the 521,000 Units. In addition, Food Services exchanged 3,014,040 of its common shares of Trade Marks for 1,507,020 Limited Voting Units. Limited Voting Units may be converted to Units and have equal rights and privileges to Units except that holders of the Limited Voting Units, together with the common shares of Trade Marks that are exchangeable for Trust Units, are not entitled in the aggregate to cast more than 40% of the votes cast upon a resolution with respect to the appointment or removal of Trustees of the Fund (the “Trustees”) and are not entitled to cast votes upon a resolution to amend the Declaration of Trust. Prior to the Reorganization, Food Services owned 26.0% of the common shares of Trade Marks which are exchangeable into 26.0% of the total outstanding voting securities of the Fund on a fully diluted basis. Following the Reorganization, but excluding the issuance of the excess exchangeable LP units that represented the remaining 20% of the initial consideration for the January 5, 2021 Adjustment to the Royalty Pool that were paid in December 2021, Food Services owned 15.4% of the exchangeable common shares of Trade Marks and 9.4% of the Fund’s Trust Units. Taken together, Food Services’ ownership of exchangeable common shares of Trade Marks and Trust Units equated to Food Services owning 23.3% of the total outstanding voting securities of the Fund on a fully diluted basis, before the inclusion of the issuance of the excess exchangeable LP units. The Fund did not receive any proceeds from the Reorganization and Food Services paid for the expenses of the Reorganization. The Reorganization does not constitute a change of control of Food Services, as the existing shareholders will continue to maintain majority control of Food Services. There is no change in management or the operations of the Food Services' business in connection with the Reorganization. OWNERSHIP OF THE FUND The table below shows the ownership of the Fund as of December 31, 2021 and December 31, 2020 on a fully-diluted basis. Units held by public unitholders Limited Voting Units held by Food Services(1) Number of Trust Units issuable upon exchange of securities of Trade Marks held by Food Services(2) December 31, 2021 December 31, 2020 Number of units 14,585,673 1,507,020 % 75.7 7.8 Number of units 14,064,673 - % 75.8 - 3,165,491 16.5 4,486,512 24.2 Total equivalent units 19,258,184 100.0 18,551,185 100.0 The chart below shows the ownership of the Fund, on a fully-diluted basis, after the initial consideration for the January 5, 2022 adjustment to the Royalty Pool but before the issuance of 13 the excess exchangeable LP units that represent the remaining 20% of the initial consideration for the January 5, 2022 adjustment to the Royalty Pool that are payable in December 2022. Units held by public unitholders Limited Voting Units held by Food Services(1) Number of Trust Units issuable upon exchange of securities of Trade Marks held by Food Services(2) Total equivalent units Number of units 14,585,673 1,507,020 % 74.0 7.6 3,609,818 18.4 19,702,511 100.0 (1) Limited Voting Units in the Fund held by Food Services may be exchanged for Units on the basis of one Limited Voting Unit for one Unit. (2) Common shares of Trade Marks held by Food Services may be exchanged for Trust Units on the basis of two common shares for one Trust Unit. FINANCIAL RESULTS INCOME Royalty income for the fourth quarter of 2021 was $14,956,000 based on Gross sales reported by restaurants in the Royalty Pool(i) of $498,558,000, compared to royalty income of $13,350,000 and Gross sales reported by A&W restaurants in the Royalty Pool(i) of $444,977,000 for the fourth quarter of 2020. Annual royalty income for 2021 was $47,081,000 based on Gross sales reported by restaurants in the Royalty Pool(i) of $1,569,377,000, compared to royalty income of $40,422,000 and Gross sales reported by A&W restaurants in the Royalty Pool(i) of $1,347,387,000 for 2020. The increase in royalty income for the quarter and year is driven by the Royalty Pool Same Store Sales Growth and the gross sales from the 23 net new restaurants added to the Royalty Pool on January 5, 2021. The increase in the quarter was partially offset by there being six fewer days in the fourth quarter of 2021 as compared to the fourth quarter of 2020. The increase in the year was partially offset by there being one less day in 2021 than in 2020. See “Sales Performance”, “Impact of COVID-19”, “Risks and Uncertainties” and “Outlook”. (i) “Gross sales reported by A&W restaurants in the Royalty Pool” is a non-IFRS supplementary financial measure. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how this measure is calculated and used to assess the Fund’s performance. EXPENSES The Fund’s cash expenses excluding income taxes were as follows: (dollars in thousands) General and administrative expenses Term loan and other interest (net) Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 $412 $717 $463 $681 $817 $2,514 $994 $2,177 General and administrative expenses for the fourth quarter of 2021 decreased by $51,000 to 14 $412,000 from $463,000 for the fourth quarter of 2020. General and administrative expenses for the year were $817,000 compared to $994,000 for 2020. The decrease in general and administrative expenses in 2021 is primarily attributable to additional costs incurred in 2020 for special meetings attended by the Trustees and advisory services related to COVID-19 that were non-recurring in 2021. In response to the onset of COVID-19, Food Services deferred royalty payments totaling $7,448,000 payable to the Fund for gross sales reported by restaurants in the royalty pool for the period from February 24, 2020 to May 17, 2020. As contemplated in the Amended and Restated Licence and Royalty Agreement, late payments of royalties accrue interest at the rate of 2% per annum over the prime rate. The Fund recognized $79,000 in interest income related to the deferred royalty payments in the fourth quarter of 2020 and $184,000 during the year ended December 31, 2020. On December 3, 2020, Food Services paid the previously deferred royalty payments totaling $7,448,000 plus accrued interest of $184,000. Food Services did not defer any royalty payments in 2021. Term loan and other interest (net) was $717,000 for the fourth quarter of 2021, $36,000 higher compared to the fourth quarter of 2020. The increase in the quarter is primarily due to the interest income on deferred royalties of $79,000 that was recognized in the fourth quarter of 2020. The $337,000 year over year increase in term loan and other interest (net) was due to a higher effective interest rate on the term loan as well as the $184,000 in interest income on deferred royalties that was recognized in 2020. Interest rate swap agreements are used to manage risks from fluctuations in interest rates and facilitate uniform monthly distributions when paid. See “Unrealized (Gain) Loss on Interest Rate Swaps” and “Liquidity and Capital Resources”. UNREALIZED (GAIN) LOSS ON INTEREST RATE SWAPS Trade Marks uses interest rate swap agreements to manage risks from fluctuations in interest rates. To manage the interest rate risk associated with the $60,000,000 term loan Trade Marks has entered into two interest rate swap arrangements, one swap with an effective date of December 22, 2015 and a maturity date of December 22, 2022 (the “Existing Swap”) and another swap, which was entered into simultaneously with the renewal of Trade Marks’ Credit Facility on September 10, 2021, with an effective date of December 22, 2022 and a maturity date of September 10, 2026 (the “Forward Start Swap”). See “Liquidity and Capital Resources”. The Fund’s net income included unrealized gains and losses on the two interest rate swaps that are equal to the change in the fair value of the swaps. These non-cash items had no impact on the Fund’s cash available to pay distributions. (dollars in thousands) (Gain) loss on Existing Swap (Gain) on Forward Start Swap Total (gain) loss on interest rate swaps Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 ($675) (931) ($342) - ($1689) (560) $1,362 - ($1,606) ($342) ($2,249) $1,362 15 INCOME TAXES The Fund’s provision for income taxes was as follows: (dollars in thousands) Current Current income tax provision Refundable income tax Deferred Total provision for income taxes Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 $1,265 (1,794) 1,817 $1,288 $2,798 (1,165) (290) $1,343 $7,277 (1,090) 1,914 $8,101 $7,242 310 (71) $7,481 The Fund as a legal entity is not subject to the Specified Investment Flow-Through (“SIFT”) tax as its only source of income is dividends from Trade Marks which are not subject to SIFT tax. The provision for income taxes on the Fund’s consolidated statement of income is the expected current and deferred tax payable by Trade Marks as a legal entity. Trade Marks’ taxable income is taxed at an effective rate of 20.0% (2020 – 20.0%), plus an additional tax of 30.67% (2020 – 30.67%) on investment income which is refundable at a rate of 38.33% (2020 – 38.33%) for each dollar Trade Marks pays out in taxable dividends to its shareholders. Trade Marks’ provision for income taxes for 2021 includes a recovery of refundable income tax of $1,388,000 based on its taxable income and dividends paid in 2021, partially offset by an adjustment of $298,000 related to refundable income tax paid related to the 2020 taxation year. Under IFRS, refundable income tax is recognized on the income statement when it is paid or payable and subsequently when it is received or receivable. Management expects that the net refundable income tax paid in prior years will be recovered in future years when sufficient dividends are paid by Trade Marks. Deferred income tax is recorded on the temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is a non-cash item and has no impact in the current year on the Fund’s cash available to pay distributions. 16 NET INCOME AND COMPREHENSIVE INCOME Net income and comprehensive income was as follows: (dollars in thousands) Net income and comprehensive income attributable to public unitholders of the Fund Net income and comprehensive income attributable to Food Services’ ownership of Limited Voting Units Net income and comprehensive income attributable to Food Services’ non- controlling interest that arises from Food Services’ ownership of common shares of Trade Marks Total net income and comprehensive income DISTRIBUTABLE CASH (dollars in thousands) Distributable cash generated(ii) Number of equivalent units Distributable cash per equivalent unit(iv) Distributions and dividends declared per equivalent unit(i) (iv) Distributions and dividends declared and accrued per equivalent unit(iv) Payout ratio(iv) Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 $9,851 $8,382 $27,825 $21,508 1,018 - 2,226 - 3,255 2,812 7,803 6,866 $14,124 $11,194 $37,854 $28,374 Period from Sep 13, 2021 to Dec 31, 2021 Period from Sep 7, 2020 to Dec 31, 2020 Period from Jan 1, 2021 to Dec 31, 2021 Period from Jan 1, 2020 to Dec 31, 2020 $12,387 $9,408 $36,298 $30,009 19,258,184 18,551,185 19,258,184 18,551,185 $0.643 $0.508 $1.885 $1.618 $0.665 $0.900 $1.740 $1.518 $0.524 $0.823 81.5% 162.0% $1.740 92.3% $1.518 93.8% Distributable cash generated(ii) in the fourth quarter of 2021 to pay distributions to unitholders and dividends to Food Services was $12,387,000 compared to $9,408,000 in the fourth quarter of 2020. Distributable cash generated(ii) in 2021 to pay distributions to unitholders and dividends to Food Services was $36,298,000 compared to $30,009,000 in 2020. The $6,289,000 year over year increase in Distributable cash generated(i) was attributable to the $6,659,000 increase in royalty income and the $177,000 decrease in general and administrative expenses, partially offset by the $337,000 increase in term loan and other interest (net) and the $175,000 in financing fees paid in 2021. Distributable cash per equivalent unit(iv) increased by 13.5¢ to 64.3¢ per Unit in the fourth quarter of 2021 from 50.8¢ per Unit for the fourth quarter of 2020. Distributable cash per equivalent unit(iv) for the year increased by 26.7¢ to $1.885 per Unit for 2021 from $1.618 per Unit for 2020. 17 The increase in Distributable cash per equivalent unit is a result of the increase in Distributable cash generated discussed above, partially offset by the increase in the number of equivalent units that is a result of the annual adjustment to the Royalty Pool. (See “Adjustment to the Royalty Pool”). Four monthly distributions totaling 61.5¢ per Unit and one special distribution of 5.0¢ per Unit were declared in the fourth quarter of 2021 compared to four monthly distributions totaling 40.0¢ per Unit and two special distributions totaling 50.0¢ per Unit in the fourth quarter of 2020. Twelve monthly distributions totaling $1.690 per Unit and one special distribution of 5.0¢ per Unit were declared in 2021 compared to nine monthly distributions totaling $1.018 per Unit and two special distributions totaling 50.0¢ per Unit in 2020. No monthly distributions were declared in the second quarter of 2020 as the Trustees had temporarily suspended monthly distributions on the Units commencing with the March 2020 distribution that would ordinarily have been declared in April 2020. The Trustees approved the resumption of monthly distributions on July 7, 2020 commencing with the June distribution of 10¢ per Unit that was paid on July 31, 2020 to unitholders of record as of the close of business on July 15, 2020. Total monthly distributions and special distributions declared in 2021 were $1.740 per Unit as compared to total monthly distributions and special distributions of $1.518 per Unit in 2020. The payout ratio for the fourth quarter of 2021 was 81.5% compared to 162.0% for the fourth quarter of 2020. The annual payout ratio for 2021 was 92.3% compared to 93.8% for 2020. The Fund’s long-term objective is to maintain an annual payout ratio at or below 100%; however, as the Fund strives to provide unitholders with regular monthly distributions (absent unique circumstances, such as those resulting in the declaration of special distributions or a temporary suspension due to COVID-19), and as a result of seasonality of sales in A&W restaurants, the Fund historically experiences seasonal fluctuations in its payout ratio. The following table shows the trailing four quarter Payout ratios for 2019, 2020 and 2021. (i) In accordance with the Fund’s Declaration of Trust, the Fund declares and records distributions in respect of any particular calendar month at the beginning of the immediate subsequent month, with the exception of the distribution for December of each year, which is declared and recorded in December of each year. Distributions in respect of any particular calendar month are paid on the last business day of the immediate subsequent month. The distributions declared in the first quarter of each year are in respect of the calendar months January and February. (ii) “Distributable cash generated” is a non-IFRS financial measure. Refer to the table in the “Selected Information” section for a reconciliation of this measure to the most comparable IFRS measure and the “Non-IFRS Measures” section of this MD&A for further details on how it is used to assess the Fund’s performance. 18 (iv) “Distributable cash per equivalent unit”, “Distributions and dividends declared per equivalent unit”, “Distributions and dividends declared and accrued per equivalent unit” and “Payout ratio” are non-IFRS ratios. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how these ratios are calculated and used to assess the Fund’s performance. DISTRIBUTIONS TO UNITHOLDERS Distributions declared during 2021 were as follows: (dollars in thousands except per unit amounts) February 15, 2021 March 15, 2021 April 15, 2021 May 15, 2021 June 15, 2021 July 15, 2021 August 15, 2021 September 15, 2021 Month Record date January February March April May June July August October 15, 2021 September November 15, 2021 October November December 15, 2021 Special Distribution December 15, 2021 December 31, 2021 December Amount paid/payable to public Unitholders $1,406 1,898 1,898 1,969 1,970 1,970 2,188 2,188 2,188 2,260 2,260 731 2,260 Per Trust Unit $0.100 0.135 0.135 0.135 0.135 0.135 0.150 0.150 0.150 0.155 0.155 0.050 0.155 Amount paid/payable to Food Services n/a n/a n/a 204 203 203 226 226 226 234 234 75 234 Total amount paid/payable $1,406 1,898 1,898 2,173 2,173 2,173 2,414 2,414 2,414 2,494 2,494 806 2,494 $1.740 $25,186 $2,065 $27,251 The December 2021 distribution of $2,494,000 was declared on December 9, 2021 and paid subsequent to year end on January 31, 2022, and is reported as a current liability as at December 31, 2021. On February 4, 2022, the Fund declared a distribution to Unitholders of 15.5¢ per Trust Unit or $2,494,000, payable on February 28, 2022 to Unitholders of record as at February 15, 2022. TAX TREATMENT OF DISTRIBUTIONS All of the distributions declared in 2021 are designated as non-eligible dividends. 19 DIVIDENDS ON TRADE MARKS’ COMMON SHARES Trade Marks declared and paid non-eligible dividends on its voting and non-voting common shares during 2021 as follows: (dollars in thousands except per unit amounts) Month declared/paid January February March April May June July August September October November Special Distribution December Amount paid/payable to the Fund $1,406 1,898 1,898 2,173 2,173 2,173 2,414 2,414 2,414 2,494 2,494 806 2,494 $27,251 Amount paid/payable to Food Services $495 669 669 394 394 394 439 439 439 453 491 157 491 $5,924 Per Share $0.0500 0.0675 0.0675 0.0675 0.0675 0.0675 0.0750 0.0750 0.0750 0.0775 0.0775 0.0250 0.0775 $0.870 Total amount paid/payable $1,901 2,567 2,567 2,567 2,567 2,567 2,853 2,853 2,853 2,947 2,985 963 2,985 $33,175 In addition to the dividends on voting and non-voting common shares above, Trade Marks declared and paid to Food Services a special dividend of $334,000 on December 9, 2021 representing the dividends that Food Services would have received on the 483,366 non-voting common shares issued to Food Services on December 9, 2021 in relation to the final consideration for the January 5, 2021 adjustment to the Royalty Pool, had such shares been issued on January 5, 2021. On February 4, 2022, Trade Marks declared dividends on its voting and non-voting common shares equal to $0.775 per share, or $3,054,000, payable to Food Services and the Fund on February 28, 2022. 20 SUMMARY OF QUARTERLY RESULTS The following selected quarterly results, other than “Distributable cash generated”, “Distributable cash per equivalent unit”, “Distributions and dividends declared per equivalent unit” and information with respect to numbers of restaurants, equivalent units and days have been prepared in accordance with IFRS and all dollar amounts are reported in Canadian currency. See “Non- IFRS Measures”. (dollars in thousands except per unit amounts) Number of restaurants in the Royalty Pool Royalty income General and administrative expenses Term loan and other interest (net) Amortization of financing fees (Gain) loss on interest rate swaps Current income tax provision Refundable income tax expense (recovery) Deferred income tax expense (recovery) Net income Net cash generated from operating activities Distributable cash generated(ii) Number of equivalent units Distributable cash per equivalent unit(iv) Distributions and dividends declared per equivalent unit(iv) Number of days in the quarter (dollars in thousands except per unit amounts) Number of restaurants in the Royalty Pool Royalty income General and administrative expenses Term loan and other interest (net) Amortization of financing fees (Gain) loss on interest rate swaps Current income tax provision Refundable income tax expense (recovery) Deferred income tax expense (recovery) Net income Net cash generated from (used in) operating activities Distributable cash generated(ii) Number of equivalent units Distributable cash per equivalent unit(iv) Distributions and dividends declared per equivalent unit(iv) Number of days in the quarter Q4 2021 994 $14,956 412 717 21 (1,606) 1,265 (1,794) 1,817 $14,124 11,713 12,387 19,258,184 $0.643 $0.665 110 Q4 2020 971 $13,350 463 681 11 (342) 2,798 (1,165) (290) $11,194 Q3 2021 Q2 2021 Q1 2021 994 $12,284 103 580 8 102 2,087 296 212 $8,896 9,042 9,514 19,132,830 $0.497 $0.435 84 Q3 2020 971 $10,216 124 444 7 (232) 1,447 507 527 $7,392 994 $10,519 96 611 7 (381) 1,893 54 144 $8,095 8,540 $7,919 19,132,830 $0.414 994 $9,322 206 606 8 (364) 2,032 354 (259) $6,739 4,818 $6,478 19,132,830 $0.339 $0.405 84 Q2 2020 971 $7,596 214 543 8 99 1,967 1,145 (620) $4,240 $0.235 87 Q1 2020 971 $9,260 193 509 8 1,837 1,030 (177) 312 $5,548 14,629 $9,408 18,551,185 $0.508 $9,211 $8,201 18,556,378 $0.442 $(716) $4,872 18,556,378 $0.262 $7,285 $7,528 18,556,378 $0.406 $0.900 116 $0.300 - $0.318 84 84 82 (ii) “Distributable cash generated” is a non-IFRS financial measure. Refer to the table on the following page for a reconciliation of this measure to the most comparable IFRS measure and the “Non-IFRS Measures” section of 21 this MD&A for further details on how it is used to assess the Fund’s performance. (iv) “Distributable cash per equivalent unit” and “Distributions and dividends declared per equivalent unit” are non- IFRS ratios. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how these ratios are calculated and used to assess the Fund’s performance. (iii) The distribution for December of each year, which is paid on the last business day of January of the following year, is declared and recorded in the year in which it is earned. Therefore, four monthly distributions are declared in the fourth quarter of each year, and two monthly distributions are declared in the first quarter of each year. No distributions were declared in the third quarter of 2020 due to the impact of COVID-19. The Trustees approved the resumption of monthly distributions on July 7, 2020 commencing with the June distribution of 10¢ per Unit that was paid on July 31, 2020 to unitholders of record as of the close of business on July 15, 2020. The following table provides a reconciliation of “Total distributable cash generated” to “Net cash generated from (used in) operating activities”, the most comparable IFRS measure, for the periods indicated. (dollars in thousands) Net cash generated from operating activities Interest expense Current income tax provision Net changes in items of non-cash working capital Financing fees paid Interest paid Income tax paid Q4 2021 $11,713 (717) (1,265) (1,045) (175) 1,195 2,681 Q3 2021 $9,042 (580) (2,087) 490 Q2 2021 $8,540 (611) (1,893) 516 - 636 2,013 - 26 1,341 Q1 2021 $4,818 (606) (2,032) (119) - 661 3,756 Distributable cash generated $12,387 $9,514 $7,919 $6,478 (dollars in thousands) Net cash generated from (used in) operating activities Interest expense Current income tax provision Net changes in items of non-cash working capital Financing fees paid Interest paid Income tax paid Q4 2020 $14,629 (681) (2,798) (7,881) - 1,099 5,040 Q3 2020 $9,211 (444) (1,447) 535 - 346 - Q2 2020 $(716) (543) (1,967) 7,684 - 414 - Q1 2020 $7,285 (509) (1,030) (303) - 74 2,011 Distributable cash generated $9,408 $8,201 $4,872 $7,528 22 SELECTED ANNUAL INFORMATION The following selected annual information, other than “Royalty Pool Same Store Sales Growth”, “Distributable cash generated”, “Distributions and dividends declared per equivalent unit” and information with respect to numbers of restaurants has been prepared in accordance with IFRS and all dollar amounts are reported in Canadian currency. See “Non-IFRS Measures”. (dollars in thousands except per unit amounts) Royalty Pool Same Store Sales Growth(i) Number of restaurants in the Royalty Pool Gross sales reported by A&W restaurants in the Royalty Pool(i) Royalty income Distributable cash generated(ii) Distributions and dividends declared per equivalent unit(iv) Net income Basic and diluted income per weighted average Trust Unit outstanding Total assets Trade Marks’ term loan 2021 14.0% 994 2020 -14.3% 971 2019 +4.1% 934 $1,569,377 $1,347,387 $1,482,323 $47,081 $36,298 $1.740 $37,854 $40,422 $30,009 $1.518 $28,374 $44,470 $33,143 $1.853 $32,558 $1.938 $1.529 $1.859 $377,374 $352,976 $322,717 $59,806 $59,935 $59,901 (i) ““Royalty Pool Same Store Sales Growth” and “Gross sales reported by A&W restaurants in the Royalty Pool” are non-IFRS supplementary financial measures. Refer to the “Non-IFRS Measures” section of this MD&A for further details on how these measures are calculated and used to assess the Fund’s performance. (ii) “Distributable cash generated” is a non-IFRS financial measure. Refer to the table on the following page for a reconciliation of this measure to the most comparable IFRS measure and the “Non-IFRS Measures” section of this MD&A for further details on how it is used to assess the Fund’s performance. (iv) “Distributions and dividends declared per equivalent unit” is a non-IFRS financial measure. Refer to the “Non- IFRS Measures” section of this MD&A for further details on how it is used to assess the Fund’s performance. The following table provides a reconciliation of “Total distributable cash generated” to “Net cash generated from (used in) operating activities”, the most comparable IFRS measure, for the years indicated. (dollars in thousands) Net cash generated from operating activities Interest expense Current income tax provision Net changes in items of non-cash working capital Financing fees paid Interest paid Income tax paid 2021 $34,113 (2,514) (7,277) (159) (175) 2,520 9,790 2020 $30,409 (2,177) (7,242) 35 - 1,933 7,051 2019 $35,111 (2,267) (8,269) (38) - 2,195 6,411 Distributable cash generated $36,298 $30,009 $33,143 23 SEASONALITY Sales at A&W restaurants typically fluctuate seasonally however in 2021 and 2020, due to COVID-19, the impact of seasonality was less pronounced. In typical years for A&W restaurants in shopping centres, sales tend to fluctuate due to, among other things, higher traffic during the back-to-school, “Black Friday” and Christmas shopping seasons. In the freestanding and other concepts of A&W restaurants, weather and summer travel, among other things, typically impact sales. LIQUIDITY AND CAPITAL RESOURCES Modifications to the operations of A&W restaurants in the Royalty Pool in response to COVID- 19, as well as temporary restaurant closures, have impacted and are expected to continue to impact system sales at A&W restaurants and therefore, gross sales of A&W restaurants in the Royalty Pool and royalty income of the Fund. There is the potential that COVID-19 and related restrictions imposed on restaurant operations will drive future reductions of system sales which have a direct impact on the amount of royalties payable to and earned by the Fund, and correspondingly, funds available to distribute to unitholders of the Fund. The Fund’s normal policy is to distribute all available cash, after allowing for reasonable reserves, in order to maximize returns to unitholders over time. In light of seasonal variances inherent to the restaurant industry and fluctuations in business performance, the Fund’s normal policy is to make equal distribution payments to unitholders on a monthly basis (absent unique circumstances, such as those resulting in the declaration of special distributions or a temporary suspension due to COVID-19) in order to smooth out these fluctuations. The Trustees review distribution levels on a regular basis and any change in monthly distributions is expected to be implemented with a view to maintain the continuity of uniform monthly distributions. It is expected that any future distributions will be funded entirely by cash flow from operations and the cash reserve. Trade Marks has a $60,000,000 term loan, $2,000,000 demand operating loan, and an interest rate swap facility (collectively the “Credit Facility”) with HSBC Bank Canada (the “Bank”). On September 10, 2021, Trade Marks renewed and extended the Credit Facility for an additional five years on terms and conditions substantially consistent with those of the previous credit facility in place with the Bank and entered into the Forward Start Swap simultaneously. The $2,000,000 demand operating loan facility is used to fund working capital requirements and for general corporate purposes. Amounts advanced under the facility bear interest at the Bank’s prime rate plus 0.4% and are repayable on demand. As at December 31, 2021, the amount of the facility available was $2,000,000 (December 31, 2020 - $2,000,000). The $60,000,000 term loan with the Bank is in the form of a banker’s acceptance. The term loan is repayable on September 10, 2026. The term loan contains covenants including the requirement to meet certain earnings before interest, taxes, depreciation, amortization and non-cash charges/income (“EBITDA”) levels and debt to EBITDA ratios during each trailing four quarter period. Interest only is payable monthly, providing that Trade Marks’ EBITDA tested quarterly on a trailing four quarter basis is not less than specified amounts. In the event that EBITDA is less than these specified amounts, the term loan will be fully amortized over the greater of three years and the remaining term and repayment will be by way of blended monthly instalments of 24 principal and interest. Trade Marks was in compliance with all of its financial covenants as at February 15, 2022, December 31, 2021 and December 31, 2020. Financing fees of $175,000 that were incurred related to the September 10, 2021 Credit Facility amendment were capitalized and are presented as a reduction to the carrying amount of the $60,000,000 term loan. The financing fees will be amortised over the remainder of the five-year term of the amended Credit Facility. Trade Marks uses interest rate swap agreements to manage risks from fluctuations in interest rates. To manage the interest rate risk associated with the $60,000,000 term loan, Trade Marks has entered into two interest rate swaps. The Existing Swap has an effective date of December 22, 2015 and a maturity date of December 22, 2022 and the Forward Start Swap, which was entered into simultaneously with the renewal of the Credit Facility on September 10, 2021, has an effective date of December 22, 2022 and a maturity date of September 10, 2026. Under the Existing Swap, as at December 31, 2021, the term loan’s effective interest rate was 3.95% per annum (December 31, 2020 – 4.20%), comprising 2.80% per annum which is fixed under the swap agreement until December 22, 2022 plus a 0.90% per annum stamping fee. Depending on the performance of the business of Trade Marks, the stamping fee can range between 0.90% and 1.40% in accordance with the following: Debt to EBITDA Ratio < 1.00:1 > 1:00:1 and < 1:50:1 > 1:50:1 Credit Charge 0.90% per annum 1.15% per annum 1.40% per annum The fair value of the Existing Swap as at December 31, 2021 was $983,000 unfavourable (December 31, 2020 - $2,671,000 unfavourable) and the change in fair value is recorded in the consolidated statements of income and comprehensive income. Under the Forward Start Swap, effective December 22, 2022, the term loan’s effective interest rate will be 1.74% per annum which is fixed under the Forward Start Swap agreement until September 10, 2026 plus a stamping fee that ranges from 0.90% and 1.40%, depending on Trade Marks’ debt to EBITDA ratio in accordance with the table above. . The fair value of the Forward Start Swap as at December 31, 2021 was $560,000 favourable (December 31, 2020 – n/a) and the change in fair value is recorded in the consolidated statements of income and comprehensive income. A general security agreement over the assets of Trade Marks has been provided as collateral for the demand operating loan facility and term loan. The Partnership has provided its guarantee in favour of the Bank of all of the indebtedness, covenants and obligations of Trade Marks to the Bank. 25 The following is a summary of contractual obligations payable by the Fund: Payments due by period (dollars in thousands) Term loan Total $60,000 Less than 1 year $0 1 – 3 years $0 4 – 5 years $60,000 After 5 years $0 The Fund, Trade Marks and the Partnership have no other contractual or purchase obligations except as described under the section “Related Party Transactions and Balances”. The Fund, Trade Marks and the Partnership do not have any capital expenditures; their operating and administrative expenses are expected to be stable and reasonably predictable and are considered to be in the ordinary course of business. OFF-BALANCE SHEET ARRANGEMENTS The Fund, Trade Marks and the Partnership have no off-balance sheet arrangements. RELATED PARTY TRANSACTIONS AND BALANCES During the year, royalty income of $47,081,000 (2020 – $40,422,000) was earned from Food Services, of which $3,332,000 (2020 – $3,452,000) is receivable from Food Services as at December 31, 2021. Royalty income earned during the quarter was $14,956,000 (2020 - $13,350,000). In 2020, in response to the onset of COVID-19, Food Services deferred royalty payments totaling $7,448,000 payable to the Fund for gross sales reported by restaurants in the royalty pool for the period from February 24, 2020 to May 17, 2020. As contemplated in the Amended and Restated Licence and Royalty Agreement, late payments of royalties accrue interest at the rate of 2% per annum over the prime rate. In 2020, the Fund recognized $184,000 in interest income related to the deferred royalty payments. On December 3, 2020, Food Services paid the previously deferred royalty payments totaling $7,448,000 plus accrued interest of $184,000. Food Services did not defer any royalty payments in 2021. During the year, Trade Marks paid dividends to Food Services of $6,258,000 (2020 – $6,811,000). The dividends paid to Food Services in 2021 include special dividends of $334,000 representing the dividends that Food Services would have received on the 483,366 non-voting common shares issued to Food Services on December 9, 2021 in relation to the final consideration for the January 5, 2021 adjustment to the Royalty Pool, had they been issued on January 5, 2021. In 2020, Trade Marks paid special dividends of $165,000 to Food Services representing the dividends that Food Services would have received on the 295,544 non-voting common shares issued to Food Services on December 11, 2020 in relation to the final consideration for the January 5, 2020 adjustment to the Royalty Pool, had they been issued on January 5, 2020. During the year, the Fund declared distributions payable to Food Services of $2,065,000 (2020 – n/a) as a result of Food Services’ ownership of Limited Voting Units in the Fund. The $234,000 distribution declared on December 9, 2021 was paid to Food Services subsequent to the period end on January 31, 2022 is reported as a current liability as at December 31, 2021 (December 31, 2020 – n/a). 26 During the year, Trade Marks recognized an expense of $40,000 (2020 - $ nil) related to administrative and advisory services received from Food Services, all of which is reported in accounts payable and accrued liabilities as at December 31, 2021 (December 31, 2020 - $nil). Other related party transactions and balances are referred to elsewhere in this MD&A, including, without limitation, under the headings “Adjustment to the Royalty Pool”, “Common Shares of Trade Marks” and “Ownership of the Fund”. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Significant areas requiring the use of a management estimate are the fair value of the interest rate swaps and of the indefinite life intangible assets. The fair value of the interest rate swaps is not a “critical accounting estimate” as (i) it does not require the Fund to make assumptions about matters that are highly uncertain at the time the estimate is made, and (ii) a different estimate that could have been used, or changes in the accounting estimates that are reasonably likely to occur from period to period, would not have had a material impact on the Fund’s financial condition, changes in financial condition or financial performance. The fair value of the Existing Swap as at December 31, 2021 was $983,000 unfavourable (December 31, 2020 - $2,671,000 unfavourable) and the fair value of the Forward Start Swap as at December 31, 2021 was $560,000 favourable (December 31, 2020 – n/a). The change in fair value of both swaps is recorded in the consolidated statements of income and comprehensive income. FINANCIAL INSTRUMENTS The Fund’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, dividends payable to Food Services, distributions payable to unitholders, income taxes payable/recoverable, the demand operating loan facility, the term loan, and interest rate swaps. The Fund classifies its financial instruments as follows:  Cash and cash equivalents and accounts receivable as financial assets at amortized cost, which are initially measured at the amount expected to be received, less, when material, a discount to reduce the assets to fair value. Subsequently, financial assets at amortized cost are measured at amortized cost using the effective interest method less a provision for impairment.  Accounts payable and accrued liabilities, income taxes payable, distributions payable to unitholders, and the term loan as financial liabilities at amortized cost. Accounts payable and accrued liabilities and income taxes payable are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, accounts payable and accrued liabilities are measured at amortized cost using the effective interest method. Dividends payable to Food Services and distributions payable to unitholders are recognized at the amount required to be paid. The term loan is recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.  Derivatives as a financial asset at fair value through profit or loss. The Fund’s derivatives are interest rate swaps with changes in fair value recorded in the consolidated statements of income. 27 Management estimates that the fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, dividends payable to Food Services, distributions payable to unitholders, income taxes payable, and the term loan approximate their carrying values given the short term to maturity of these instruments. The fair value of the Existing Swap as at December 31, 2021 was $983,000 unfavourable (December 31, 2020 - $2,671,000 unfavourable) and the fair value of the Forward Start Swap as at December 31, 2021 was $560,000 favourable (December 31, 2020 – n/a). The Trustees have oversight responsibilities for risk management policies. The Trustees closely monitor the cash position and internal controls, along with the level of distributions of the Fund. The Fund, through dividends from Trade Marks, is expected to have sufficient financial resources to pay future distributions. The Fund’s exposure to credit risk is as indicated by the carrying amount of its accounts receivable. All of the accounts receivable as at December 31, 2021 relate to royalties due from Food Services to the Partnership which were paid in full by Food Services on January 28, 2022. The primary sources of liquidity risk are the monthly distributions to unitholders and dividends to Food Services. The Fund’s primary source of funds to pay distributions and dividends is the 3% royalty income it receives from Food Services. Additionally, the Fund manages liquidity risk by actively monitoring forecast and actual cash flows. The demand operating loan facility and the term loan bear floating rates of interest. Trade Marks has used interest rate swaps to fix the rate of interest on the term loan. Cash and cash equivalents earn interest at market rates. All of the Fund’s other financial instruments are non-interest bearing. CAPITAL DISCLOSURE The Fund’s capital consists of unitholders’ equity and the term loan. The Fund’s capital management objectives are to have sufficient cash and cash equivalents to pay distributions to its unitholders, after satisfaction of its debt service and income tax obligations; provisions for general and administrative expenses; retention of reasonable working capital reserves; and amounts that may be paid by the Fund in connection with any cash redemptions of Units. The Fund manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Fund may adjust the amount of distributions paid to its unitholders. DISCLOSURE CONTROLS Disclosure controls and procedures have been designed, established and maintained to provide reasonable assurance that (i) material information relating to the Fund is made known to the Fund’s management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by the Fund in its annual filings, interim filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. As at December 31, 2021, an evaluation of the effectiveness of the Fund’s disclosure controls and procedures, as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ 28 Annual and Interim Filings (NI 52-109) issued by the Canadian Securities Administrators, was carried out under the supervision of and with the participation of management, including the CEO and CFO. Based upon that evaluation, the CEO and the CFO have concluded that as at December 31, 2021, the design and operation of these disclosure controls and procedures were effective in providing reasonable assurance that (i) material information relating to the Fund is made known to the Fund’s management, including its CEO and CFO particularly during the period in which the annual filings are being prepared; and (ii) information required to be disclosed by the Fund in its annual filings, interim filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. INTERNAL CONTROL OVER FINANCIAL REPORTING The CEO and the CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Fund’s financial reporting and the preparation of its financial statements for external purposes in accordance with the Fund’s generally accepted accounting principles. The control framework used to design the Fund’s internal control over financial reporting is “Internal Control – Integrated Framework: 2013” which was released in May 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As at December 31, 2021, an evaluation of the effectiveness of the Fund’s internal controls over financial reporting, as defined in NI 52-109, was carried out under the supervision of and with the participation of management, including the CEO and CFO. Based upon that evaluation, the CEO and the CFO have concluded that as at December 31, 2021, that the Fund’s internal controls over financial reporting were operating effectively. There has been no change in the Fund’s internal controls over financial reporting during the period covered by this MD&A that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. RISKS AND UNCERTAINTIES COVID-19 Since March 2020, the COVID-19 pandemic has had significant impacts on the Canadian economy, the QSR industry, and the willingness of the general public to dine outside their homes and travel. These have negatively impacted Food Services, its franchisees and the Fund (including Trade Marks and the Partnership), and have adversely affected each of their respective investments, results of operations and financial condition. Restrictions on the operations of A&W restaurants in response to COVID-19, as well as temporary restaurant closures and vaccine passport mandates, continue to impact system sales at A&W restaurants in 2021. System sales drive the fees payable to Food Services by its franchisees and the amount of royalties payable to the Fund (through the Partnership), and correspondingly, the funds available to be paid as dividends by Trade Marks to Food Services and the Fund and available to distribute to unitholders of the Fund. Food Services may become liable for the lease obligations of certain of 29 its franchisees, if such franchisees default on their leases as a result of the impacts of COVID-19 or otherwise, and such obligations may be significant and Food Services may be unsuccessful in seeking recovery from such franchisees, all of which may adversely affect Food Services’ investments, results of operations and financial condition. Food Services’ projections may be inaccurate, and do not represent a financial forecast and actual results may differ materially from those anticipated by the projections. Monthly distributions on Units are not guaranteed and may be reduced, suspended or terminated at any time. Recent sales improvements for restaurants in the Royalty Pool may not continue and may slow or regress. A&W restaurant locations may close temporarily or permanently due to the impacts of COVID-19. Government restrictions related to COVID-19 may have their durations extended, or may be reinstated in the case of those that have recently been lifted, which measures may restrict the ability of A&W restaurants to operate, or result in forced closures, further reduced guest traffic, supply interruptions or staff shortages. The government programs that have been helpful to A&W franchisees are winding down and are expected to eventually cease and may not be available to some franchisees, and may not be available in amounts expected for those franchisees. In addition, it is unknown if and to what extent the COVID-19 pandemic will alter consumer behaviour and demand for QSR services. Health epidemics or pandemics can adversely affect consumer spending and confidence levels and supply availability and costs, as well as the local operations in impacted markets, all of which can adversely affect the financial results, condition and outlook of Food Services and A&W franchisees. Importantly, the global pandemic resulting from COVID-19 has disrupted global health, economic and market conditions, consumer behavior and A&W restaurant operations beginning in early 2020. Local and national governmental mandates or recommendations and public perceptions of the risks associated with the COVID-19 pandemic have caused, and may continue to cause, consumer behavior to change, which could continue to adversely affect Food Services’ and A&W franchisees’ business. Food Services and A&W franchisees could also be adversely impacted by the worsening or increased volatility of economic conditions. The COVID-19 pandemic may also heighten other risks disclosed herein, such as, but not limited to, those related to consumer behavior, consumer perceptions of the A&W brand, supply chain interruptions, inflation, interest rates, commodity costs and labor availability and cost. See “Impact of COVID-19”. Information regarding the other risks and uncertainties applicable to the business operations of the Fund is contained elsewhere in this MD&A, including under the heading “Forward-Looking Information”, and in the Fund’s most recent Annual Information Form under the heading “Risk Factors”. Additional risks and uncertainties not currently known to the Trustees or that are currently not considered to be material may also impair the Fund’s business operations. If any of the risks actually occur, the Fund’s business, results of operations and financial condition, and the amount of cash available for distribution to unitholders, could be adversely affected. OUTLOOK Food Services believes that the food service industry, and more particularly the quick service restaurant (QSR) segment of the industry, will recover from the impact of COVID-19. However, the timing and strength of the recovery cannot yet be predicted with any degree of certainty. Against this backdrop, the success of the A&W brand and individual franchised A&W restaurants is paramount to the long-term success of the overall A&W system and, in turn, to the 30 Fund. Both Food Services and its franchisees have worked diligently to develop and implement plans and programs to mitigate the effects of the COVID-19 pandemic. Food Services’ objective is to ensure that A&W’s 1,028 restaurants (as at December 31, 2021) are able to safely operate (as permitted by health authorities and government regulations mandated from time to time) and have the ability to emerge from this period of uncertainty in a financial condition that enables them to compete effectively and grow their businesses. Food Services believes that its mission “To become #1 with millennial burger lovers, chosen and trusted for truly good food and the convenience they crave” will help it to continue to rebound from the impact of COVID-19. Strategic initiatives, including repositioning and differentiating the A&W brand through the use of natural ingredients; continued new restaurant growth, and delivering an industry leading guest experience, have all contributed to A&W’s strong appeal and the trust it has built with Canadian consumers over many years. These strengths will be key to delivering strong results and improved market share as the QSR industry and the QSR burger market resume growth. A&W is proud to be a Canadian company, 100% Canadian owned and operated, and a leader in sourcing simple, great-tasting ingredients, farmed with care. In 2013, Food Services launched an initiative to focus on using natural ingredients and became the first and only national burger chain in Canada to serve beef raised without artificial hormones or steroids. This was then followed by the introduction of countless other natural ingredient firsts; including chicken raised without the use of antibiotics, Organic Fairtrade coffee, bacon from pork raised without the use of antibiotics, real cheese on all burgers and breakfast sandwiches, and A&W Root Beer served in restaurants made from natural cane sugar and all-natural flavours. In 2018, A&W further strengthened its positioning as a leader in food and innovation with the introduction of the Beyond Meat(1) branded plant-based burger. Food Services was very excited to be the first national burger chain in Canada to offer burger lovers across Canada this burger patty made using 100% plant-based protein with peas, rice, mung beans, coconut oil, pomegranates, potatoes, apples and beets. A&W continues to enhance its position as a leader in great tasting plant-based options with regular introductions of new recipes and products to its plant-based line-up, including a limited time offer of Beyond Meat(1) Nuggets in 2021. (1) Trademark of Beyond Meat, Inc., used under license. In 2020, A&W announced that all of its beef is grass-fed and grass-finished, from cattle that graze on grass and other forage, like hay. A&W continues to innovate to serve the increasing number of guests that are mobile app users and offered its mobile app users unlimited free coffee for the month of March 2021 through a trial of the A&W ‘Sipscription’, a coffee subscription program. On April 1, 2021 Food Services announced that it is expanding the beverage offerings at A&W restaurants with the phased rollout of the A&W Brew BarTM. The A&W Brew Bar offers a variety of frozen beverages as well as hot and cold espresso-based beverages. The A&W Brew Bar is now available in over 110 A&W restaurants across the country. TM trademark of A&W Trade Marks Limited Partnership, used under license. 31 A&W is also committed to reducing its environmental impact through conscious use of packaging, waste, energy and water, and high-efficiency equipment is being introduced into A&W restaurants to use less energy. Food Services has continued to grow new A&W restaurants, particularly in the key Ontario and Quebec markets. Thirty three new restaurants opened across the country in 2021, thirteen of which opened in the fourth quarter, and an additional twelve restaurants were under construction as at December 31, 2021. The health and safety of A&W’s customers and restaurant team members remains a top priority. A&W has implemented stringent protocols in its dining rooms to limit contact and ensure physical distancing. Other services that encourage physical distancing such as drive-thru, third party delivery and pickup through A&W’s mobile app are available to A&W’s guests. A&W’s brand positioning is strong. Growth of new locations, industry leading innovation, a safe and stable supply chain, and continued efforts to consistently deliver great food and a better guest experience are all expected to contribute to building loyalty and enhancing performance over the long term. Food Services remains committed to the long-term health and success of its franchise network and the Fund. On October 25, 2021 Food Services announced that it had entered into a non-binding term sheet reflecting an agreement in principle (the "Agreement") with UK-based Pret A Manger (Europe) Limited ("Pret"), which sets forth the general terms and conditions of a proposed Country Agreement with Pret that would grant Food Services master franchisor rights to Canada (the "Country Agreement"). Pursuant to the Agreement, Food Services will be granted the exclusive right to use the Pret brand in Canada for a two-year pilot (the “Trial Phase”) during which Food Services will introduce the Pret brand within A&W restaurants in select markets in Canada. If the Trial Phase is successful, Food Services will have the exclusive right to expand the Pret brand across Canada (the "Expansion Phase") pursuant to an agreed development plan. The proposed exclusive Canadian rights to be granted to Food Services during both the Trial Phase and Expansion Phase remains subject to the negotiation and completion of the definitive Country Agreement, which is subject to Board approval. The royalty payable to the Fund will apply to Pret products sold within A&W restaurants during the Trial Phase to the extent that such restaurants are in the Royalty Pool. Should the Trial Phase prove successful, the Royalty will also be earned by the Fund on the sales of any Pret products made within A&W restaurants thereafter. FORWARD LOOKING INFORMATION Certain statements in this MD&A contain forward-looking information within the meaning of applicable securities laws in Canada (forward-looking information). The words “anticipates”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “might”, “plans”, “projects”, “schedule”, “should”, “will”, “would” and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. 32 The forward-looking information in this MD&A includes, but is not limited to: the expectation that the Trustees will continue to review distribution levels on a regular basis and that any change in monthly distributions will be implemented with a view to maintain the continuity of uniform monthly distributions; the impact of COVID-19, including its impact on the global economy in general and on the businesses of Food Services and A&W franchisees in particular; statements with respect to government restrictions on business operations, and in particular restaurants; statements regarding the extent to which COVID-19 will alter consumer behaviour and demand for QSR services; expectations regarding improvements in sales trends at the A&W restaurants in the Royalty Pool; statements regarding the duration of various government support programs; Food Services’ expectation that the food service industry, and more particularly the QSR segment, will recover; the success of the A&W brand and individual franchised restaurants being paramount to the long-term success of the overall A&W system and, in turn, to the unitholders of the Fund; Food Services’ objectives with respect to the A&W restaurants and its planned strategies to achieve those objectives; statements regarding future restrictions on the operations of A&W restaurants as well as temporary restaurant closures and the corresponding reductions to the amounts of royalties payable to and earned by the Fund, as well as funds available to distribute to unitholders of the Fund; the expectation that Trade Marks will remain in compliance with all covenants related to its term debt based on current projections; management’s expectation that its refundable income tax will be recovered in future years when sufficient dividends are paid by Trade Marks; the Fund’s long-term objective to maintain an annual payout ratio at or below 100%; Food Services’ belief that its mission “to become #1 with millennial burger lovers, chosen and trusted for truly good food and the convenience they crave” will help it to continue to rebound from the impact of COVID-19; Food Services’ belief that strategic initiatives will be key to delivering strong results and improved market share as the QSR industry and the QSR burger market resume growth; growth of new locations, industry leading innovation, a safe and stable supply chain, and continued efforts to consistently deliver great food and a better guest experience are all expected to contribute to building loyalty and enhancing performance over the long term; Food Services remaining committed to the long-term health and success of its franchise network and the Fund; the expectation that Food Services will open Pret locations and that the Fund will earn royalty income from the sale of Pret products; the expectation that the Trial Phase will be successful and that Food Services will expand the Pret brand across Canada; the Fund’s expectations that future distributions will continue to be funded entirely by cash flow from operations and the cash reserve; and statements regarding the stability and predictability of the operating and administrative expenses of the Fund, Trade Marks and the Partnership.   The forward-looking information is based on various assumptions that include, but are not limited to:  the general risks that affect the restaurant industry will not arise, other than those related to COVID-19; there are no changes in availability of experienced management and hourly employees; there are no material changes in government regulations concerning menu labelling and disclosure and drive-thru restrictions;  no publicity from any food borne illness;  no material changes in competition;  no material increases in food and labour costs;  the continued availability of quality raw materials; 33  continued additional franchise sales and maintenance of franchise operations;  Food Services is able to maintain and grow the current system of franchises;  Food Services is able to locate new retail sites in desirable locations;  Food Services is able to obtain qualified operators to become A&W franchisees;  no material impact from new or increased sales taxes upon gross sales;  continued availability of key personnel;  continued ability to preserve intellectual property;  no material litigation from guests at A&W restaurants;  Food Services continues to pay the royalty;  Food Services can continue to comply with its obligations under its credit arrangements;  Trade Marks can continue to comply with its obligations and covenants under its credit arrangements;  current store closures will be temporary and restaurant performance will continue to    improve; the Fund will receive sufficient revenue in the future (in the form of royalty payments from Food Services) to maintain the payment of monthly distributions; the projections for the A&W business provided by Food Services are accurate; the impacts of the COVID-19 pandemic on the A&W system will not significantly worsen; and  Food Services will be successful in executing on its business strategies and such strategies will achieve their intended results. The forward-looking information is subject to risks, uncertainties and other factors related to the quick service restaurant industry that include, but are not limited to:  the general risks that affect the restaurant industry in general and the quick service segment in particular, including competition with other well-capitalized franchisors and operators of quick service restaurants;  changes in consumer preferences that adversely affect the consumption of quick service restaurant hamburgers, chicken, fries, breakfast items or soft drinks;  negative publicity, litigation or complaints from perceived or actual food safety events or other events involving the foodservice industry in general or A&W restaurants in particular;  changes in the availability and quality of raw materials, including A&W’s natural ingredients; the possible lack of success of new products and advertising campaigns;   changes in climate or increases in environmental regulation;  changes in Food Services’ ability to continue to grow same store sales, locate new retail sites in desirable locations and obtain qualified operators to become A&W franchisees; increases in closures of A&W restaurants adversely affecting the royalty;   decreases in traffic at shopping centres and other retail modes;  changes in Food Services’ ability to pay the royalty due to changes in A&W franchisees’ ability to generate sales and pay franchise fees and other amounts to Food Services;  changes in government regulation that affect the restaurant industry in general or the quick service restaurant industry in particular, including franchise legislation and sales tax legislation;  changes in the availability of key personnel, including qualified franchise operators; 34  changes in the ability to enforce or maintain intellectual property;  technological breakdowns, cybersecurity breaches and the security of consumer and personal information; the amplificatory effects of media and social media; risks related to global health crises, disease outbreaks (including COVID-19), and other unexpected events which could affect Food Services’ and A&W franchisees’ supply chains, business continuity, and financial results; the availability and adequacy of insurance coverage;     occurrence of catastrophic events; and  risks related to COVID-19 set forth in this MD&A, including under the headings “Risks and Uncertainties – COVID-19” and “Impact of COVID-19”. The forward-looking information is subject to risks, uncertainties and other factors related to the structure of the Fund that include, but are not limited to:  dependence of the Fund on Trade Marks, Partnership and Food Services;  dependence of the Partnership on Food Services;  risks related to leverage and restrictive covenants;  the risk that cash distributions are not guaranteed and will fluctuate with the Partnership’s performance and could be reduced or suspended at any time; risks related to the unpredictability and volatility of Unit prices; risks related to the nature of Units; risks related to the distribution of securities on redemption or termination of the Fund; risks related to the Fund issuing additional Units diluting existing unitholders’ interests; risks related to income tax matters and investment eligibility; risks related to the limitations of internal controls over financial reporting; risks related to COVID-19 set forth in this MD&A, including under the headings “Risks and Uncertainties – COVID-19” and “Impact of COVID-19”; and risks related to Food Services not meeting its objectives, and the possibility that its strategies to meet its objectives may not be successful.         These risks, uncertainties and other factors are more particularly described above under the heading “Risks and Uncertainties” and in the Fund’s most recent Annual Information Form under the heading “Risk Factors”. All forward-looking information in this MD&A is qualified in its entirety by this cautionary statement and, except as required by law, the Fund undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof. 35 A&W Revenue Royalties Income Fund Consolidated Financial Statements December 31, 2021 and 2020 (in thousands of dollars) 36 Independent auditor’s report To the Unitholders of A&W Revenue Royalties Income Fund Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of A&W Revenue Royalties Income Fund and its subsidiaries (together, the Fund) as at December 31, 2021 and 2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Fund’s consolidated financial statements comprise: (cid:3511) (cid:3511) (cid:3511) (cid:3511) (cid:3511) the consolidated balance sheets as at December 31, 2021 and 2020; the consolidated statements of income and comprehensive income for the years then ended; the consolidated statements of unitholders’ equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Fund in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2021. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7 T: +1 604 806 7000, F: +1 604 806 7806 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 37 Key audit matter How our audit addressed the key audit matter Our approach to addressing the matter included the following procedures, among others: (cid:120) Tested how management determined the recoverable amount of the intangible assets as at December 31, 2021 which, included the following: (cid:16) (cid:16) Evaluated the appropriateness of the method applied and the value-in-use model. Tested the reasonableness of the projected royalties from the gross sales of A&W restaurants in the Royalty Pool which include when dining rooms would reopen and at what capacity, revenue growth rates, and terminal growth rate by comparing them to the current and past performance of the A&W restaurants in the Royalty Pool. (cid:16) With the assistance of professionals with specialized skill and knowledge in the field of valuation, assessed the appropriateness of the discount rate applied. (cid:16) Tested underlying data used in the value- in-use model. (cid:120) Examined the disclosures made in the consolidated financial statements related to the intangible assets. Impairment assessment of the intangible assets Refer to note 3 - Significant accounting policies, judgments and estimation uncertainty and note 4 - Intangible assets to the consolidated financial statements. The Fund had $360.87 million of intangible assets as at December 31, 2021. The intangible assets are the A&W trade-marks which have an indefinite life. An impairment assessment is conducted annually at the year-end balance sheet date or earlier if events and circumstances dictate. An impairment loss is recognized if the carrying amount of the intangible assets exceeds its recoverable amount. The recoverable amount is the higher of the intangible assets’ fair value less costs to sell and value in use. Management used a value-in-use model to determine the recoverable amount of the intangible assets. The assumptions applied by management in estimating the recoverable amount included projected royalties from the gross sales of A&W restaurants in the Royalty Pool which include when dining rooms would reopen and at what capacity, the revenue growth rates, terminal growth rate and the discount rate. No impairment loss was recorded during the year. We considered this a key audit matter due to the significant judgments made by management in developing assumptions to determine the recoverable amount as at December 31, 2021. This in turn resulted in significant audit effort and subjectivity in performing audit procedures to test the recoverable amount determined by management. Professionals with specialized skill and knowledge in the field of valuation assisted us in performing our procedures. 38 Other information Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Fund’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Fund’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards 39 will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: (cid:3511) (cid:3511) (cid:3511) (cid:3511) (cid:3511) (cid:3511) Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Fund to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Fund to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 40 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Robert Coard. /s/PricewaterhouseCoopers LLP Chartered Professional Accountants Vancouver, British Columbia February 15, 2022 41 A&W Revenue Royalties Income Fund Consolidated Balance Sheets As at December 31, 2021 and 2020 (in thousands of dollars) Assets Current assets Cash and cash equivalents Accounts receivable Prepaid interest Income taxes recoverable Non-current assets Derivative financial assets Intangible assets Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Distributions payable to Unitholders Derivative financial liabilities Income taxes payable Non-current liabilities Term loan Derivative financial liabilities Deferred income tax liabilities Unitholders’ Equity Trust Units Accumulated deficit Non-controlling interest Total equity Total liabilities and equity Subsequent events Note 2021 $ 2020 $ 10,064 3,332 197 2,350 15,943 560 360,871 377,374 631 2,494 983 - 4,108 59,803 - 15,866 79,777 398,884 (181,527) 217,357 80,240 297,597 377,374 8,548 3,530 191 - 12,269 - 340,707 352,976 670 1,406 - 1,253 3,329 59,935 2,671 13,953 79,888 332,950 (181,586) 151,364 121,724 273,088 352,976 14 5 4 14 12, 14 5 5 5 7 8 17 On behalf of the Board of Trustees (signed) John R. McLernon Trustee (signed) Richard N. McKerracher Trustee The accompanying notes are an integral part of these consolidated financial statements. 42 A&W Revenue Royalties Income Fund Consolidated Statements of Income and Comprehensive Income For the years ended December 31, 2021 and 2020 (in thousands of dollars except per Unit amounts) Note 14 6 5 7 7 7 Royalty income Expenses General and administrative Interest expense Term loan and other Amortization of financing fees Operating income Unrealized (gain) loss on interest rate swaps Income before income taxes Provision for (recovery of) income taxes Current Current income tax provision Refundable income tax Deferred Net income and comprehensive income for the year Net income and comprehensive income attributable to Unitholders of A&W Revenue Royalties Income Fund A&W Food Services of Canada Inc.’s non-controlling interest in A&W Trade Marks Inc. 2021 $ 47,081 817 2,514 44 3,375 43,706 (2,249) 45,955 7,277 (1,090) 1,914 8,101 37,854 30,051 7,803 37,854 2020 $ 40,422 994 2,177 34 3,205 37,217 1,362 35,855 7,242 310 (71) 7,481 28,374 21,508 6,866 28,374 Basic and diluted income per weighted average Trust Unit outstanding 1.938 1.529 Weighted average number of Trust Units outstanding 15,509,290 14,064,673 The accompanying notes are an integral part of these consolidated financial statements. 43 A&W Revenue Royalties Income Fund Consolidated Statements of Unitholders’ Equity For the years ended December 31, 2021 and 2020 (in thousands of dollars) Note Trust Units $ Accumulated deficit $ Non- controlling interest $ Total $ Total equity $ Balance as at December 31, 2019 Net income and comprehensive income for the year Distributions on Trust Units Dividends on common shares Issue of common shares Balance as at December 31, 2020 Net income and comprehensive income for the year Distributions on Trust Units Dividends on common shares Issue of common shares Common shares exchanged for Trust Units Balance as at December 31, 2021 4 12 14 4 8 332,950 (181,744) 151,206 92,788 243,994 - - - - 21,508 (21,350) - - 21,508 (21,350) - - 6,866 - (6,811) 28,881 28,374 (21,350) (6,811) 28,881 332,950 (181,586) 151,364 121,724 273,088 - - - - 30,051 (27,251) - - 30,051 (27,251) - - 7,803 - (6,258) 20,164 37,854 (27,251) (6,258) 20,164 65,934 (2,741) 63,193 (63,193) - 398,884 (181,527) 217,357 80,240 297,597 The accompanying notes are an integral part of these consolidated financial statements. 44 A&W Revenue Royalties Income Fund Consolidated Statements of Cash Flows For the years ended December 31, 2021 and 2020 (in thousands of dollars) Note 2021 $ 2020 $ Cash provided by (used in) Operating activities Net income and comprehensive income for the year Adjustments for: Unrealized (gain) loss on interest rate swaps Amortization of financing fees Interest expense Deferred income tax expense (recovery) Refundable income tax (recovery) expense Current income tax provision Net changes in items of non-cash working capital Interest paid Income taxes paid Net cash provided by operating activities Financing activities Financing fees paid Dividends paid to non-controlling interest Distributions paid to Unitholders Net cash used in financing activities Increase in cash and cash equivalents during the year Cash and cash equivalents – Beginning of year Cash and cash equivalents – End of year 5 6 7 7 7 11 5 14 37,854 28,374 (2,249) 44 2,514 1,914 (1,090) 7,277 159 (2,520) (9,790) 1,362 34 2,177 (71) 310 7,242 (35) (1,933) (7,051) 34,113 30,409 (176) (6,258) (26,163) (32,597) 1,516 8,548 10,064 - (6,811) (22,180) (28,991) 1,418 7,130 8,548 The accompanying notes are an integral part of these consolidated financial statements. 45 A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) 1 General information A&W Revenue Royalties Income Fund (the Fund) is a limited purpose trust established on December 18, 2001 with an unlimited number of Units and Limited Voting Units (collectively the Trust Units), under the laws of the Province of British Columbia pursuant to the Declaration of Trust. The Fund is listed on the Toronto Stock Exchange under the symbol AW.UN. The Fund’s place of business is located at 300 – 171 West Esplanade, North Vancouver, British Columbia. The Fund was established to invest in A&W Trade Marks Inc. (Trade Marks) which, through its ownership interest in A&W Trade Marks Limited Partnership (the Partnership), owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The Partnership has granted A&W Food Services of Canada Inc. (Food Services) a licence (the Amended and Restated Licence and Royalty Agreement) to use the A&W trade-marks in Canada for a term expiring December 30, 2100, for which Food Services pays a royalty of 3% of the gross sales reported to Food Services by A&W restaurants in the Royalty Pool. Food Services is a leading franchisor of quick service restaurants in Canada. 2 Basis of preparation The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented unless otherwise stated. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC). The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3. These consolidated financial statements were authorized for issue by the Board of Trustees of the Fund on February 15, 2022. 3 Significant accounting policies, judgments and estimation uncertainty Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of the interest rate swaps to fair value through the consolidated statements of income and comprehensive income. 46 (1) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) Consolidation The consolidated financial statements include the accounts of the Fund and its 83.6% interest in Trade Marks and its subsidiary, the Partnership (together the subsidiaries). The Fund controls its subsidiaries when it is exposed to or it has rights to variable returns from its involvement with its subsidiaries and has the ability to affect those returns through its power over the subsidiaries. Changes in the Fund’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions. Non-controlling interest The non-controlling interest represents an equity interest in Trade Marks owned by Food Services. The share of net assets of the Fund’s subsidiary attributable to non-controlling interest is presented as a component of equity. Food Services’ share of net income and comprehensive income is recognized directly in equity. Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Fund and its subsidiaries. Use of estimates The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant areas requiring the use of management estimates are the fair value of the interest rate swaps and in the impairment of testing of intangible assets. The fair value of the interest rate swaps estimate is not a “critical accounting estimate” as (i) it does not require the Fund to make assumptions about matters that are highly uncertain at the time the estimate is made, and (ii) a different estimate that could have been used, or changes in the accounting estimate that are reasonably likely to occur from period-to-period, would not have had a material impact on the Fund’s financial condition, changes in financial condition or financial performance. Estimates may differ from actuals and may be further impacted by COVID-19. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments with an original maturity date of three months or less. Accounts receivable Accounts receivable are amounts due from Food Services for services performed in the ordinary course of business. These amounts are classified as current because collection is expected in one year or less. Accounts receivable are recognized initially at the amount expected to be received, less, when material, a discount to reduce the recoverable amount to fair value. Subsequently, accounts receivable are measured at amortized cost using the effective interest method less a provision for the impairment. 47 (2) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) Intangible assets – trade-marks The intangible assets are the A&W trade-marks, which have an indefinite useful life that was originally recorded at fair value at the date of acquisition. The assets are subject to an impairment test annually or earlier if events and circumstances dictate as required by International Accounting Standards (IAS) 36, Impairment of Assets. An impairment loss is recognized whenever the carrying amount of the intangible assets exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Impairment losses are recognized in the consolidated statements of income and comprehensive income. Impairment of financial assets At each reporting date, the Fund assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Fund recognizes an impairment loss. The amount of the loss, if any, is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated statements of income and comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in the consolidated statements of income and comprehensive income. Income per Fund Trust Unit The Fund’s income per Trust Unit is based on the net income and comprehensive income attributable to Fund Unitholders and the weighted average number of Trust Units outstanding during the period. Interest rate swaps The Fund uses interest rate swap agreements to manage risks from fluctuations in interest rates. All such instruments are used only for risk management purposes. Changes in the fair value of the Fund’s interest rate swap agreements are recognized in the consolidated statements of income and comprehensive income (note 5). 48 (3) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) Income taxes Income tax comprises current and deferred tax and is recognized in the consolidated statements of income and comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the consolidated balance sheet dates, and any adjustment to tax payable in respect of previous years. The Fund uses the weighted average tax rate of its subsidiaries. The Fund, as a legal entity, is not currently taxed on its income, as it receives dividends from Trade Marks which are not subject to the Specified Investment Flow-Through (SIFT) tax. Therefore, Trade Marks’ substantively enacted tax rate is used. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the consolidated balance sheet dates and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax assets and liabilities are presented as non-current. Revenue recognition Revenue is recognized on an accrual basis in accordance with the relevant agreements. It comprises royalty income equal to 3% of the gross sales reported to Food Services by A&W restaurants in the Royalty Pool. Interest Cash flows relating to interest paid have been classified as operating activities in the consolidated statements of cash flows. Interest paid on the term loan is netted with other interest income on the consolidated statements of cash flows. As contemplated in the Amended and Restated Licence and Royalty Agreement, late payments of royalties accrue interest at the rate of 2% per annum over the prime rate. Financial instruments Financial assets and liabilities are recognized when the Fund becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are derecognized when the rights to receive or obligation to pay cash flows from the assets or liabilities have expired or been settled or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. 49 (4) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The Fund classifies its financial instruments in the following categories: a) Financial assets and liabilities at amortized cost. The Fund classifies its financial assets at amortized cost only if both of the following criteria are met: i) the asset is held within a business model whose objective is to collect the contractual cash flows; and ii) the contractual terms give rise to cash flows that are solely payments of principal and interest. The Fund’s financial assets at amortized cost comprise cash and cash equivalents and accounts receivable and are included in current assets due to their short-term nature. Financial assets at amortized cost are initially recognized at the amount expected to be received less, when material, a discount to reduce the assets to fair value. Subsequently, financial assets at amortized cost are measured at amortized cost using the effective interest method less a provision for impairment. Financial liabilities at amortized cost include accounts payable and accrued liabilities, distributions payable to Unitholders, income taxes payable, the demand operating loan facility and the term loan. Accounts payable and accrued liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce payables to fair value. Subsequently, accounts payable and accrued liabilities are measured at amortized cost using the effective interest method. Distributions payable are recognized at the amount required to be paid. The demand operating loan facility and the term loan are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities. Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the drawdown occurs at which point it is netted against proceeds as a transaction cost. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates. b) Financial assets at fair value through other comprehensive income (FVOCI): Financial assets at FVOCI comprise: i) ii) equity securities which are not held for trading and which the Fund has irrevocably elected at initial recognition to recognize in this category; and debt securities where the contractual cash flows are solely principal and interest and the objective of the Fund’s business model is achieved both by collecting contractual cash flows and selling financial assets. 50 (5) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The Fund currently has not classified any of its financial instruments as FVOCI. c) Financial assets at fair value through profit or loss (FVPL): The Fund classifies the following financial assets at FVPL: i) debt instruments that do not qualify for measurement at either amortized cost or FVOCI; ii) equity instruments that are held for trading; and iii) equity instruments for which the Fund has not elected to recognize fair value gains and losses through other comprehensive income. The Fund’s financial assets classified as FVPL include derivative financial instruments. The Fund utilizes derivative financial instruments in the normal course of its operations as a means to manage risks from fluctuations in interest rates. The Fund’s policy is to not utilize derivative financial instruments for trading or speculative purposes. The Fund’s derivatives are interest rate swaps with changes in fair value recorded in the consolidated statements of income and comprehensive income. 4 Intangible assets Number of new restaurants Number of closed restaurants Number of restaurants in Royalty Pool Balance as at December 31, 2019 Annual adjustment January 5, 2020 Balance as at December 31, 2020 Annual adjustment January 5, 2021 Balance as at December 31, 2021 1,073 44 1,117 34 1,151 (139) (7) (146) (11) (157) 934 37 971 23 994 Amount $ 311,826 28,881 340,707 20,164 360,871 Annual gross sales reported by the 994 (2020 – 971) A&W restaurants in the Royalty Pool were $1,569,377,000 (2020 – $1,347,387,000). The intangible assets are the A&W trade-marks used in the A&W quick service restaurant business in Canada. 51 (6) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The Royalty Pool is adjusted annually to reflect sales from new A&W restaurants, net of the sales of any A&W restaurants that have permanently closed. The consideration paid to Food Services for the additional royalty stream related to the sales of the net new restaurants is based on a formula set out in the Amended and Restated Licence and Royalty Agreement. The formula provides for a payment to Food Services based on 92.5% of the amount of estimated sales from the net new restaurants and the current yield on the Units of the Fund, adjusted for income taxes payable by Trade Marks. The consideration is paid to Food Services in the form of additional partnership units (LP units). The additional LP units are, at the option of Food Services, exchangeable for additional shares of Trade Marks, which are in turn exchangeable for Trust Units of the Fund on the basis of two common shares for one Trust Unit of the Fund. The consideration paid for the annual adjustment to the Royalty Pool is recorded as an increase in the value of the A&W trade-marks. The 2021 annual adjustment to the Royalty Pool took place on January 5, 2021. The number of A&W restaurants in the Royalty Pool was increased by 34 new restaurants less 11 restaurants that permanently closed. The Partnership paid Food Services $13,271,000, by issuance of 465,316 LP units to Food Services, representing 80% of the initial consideration based on the estimated annual sales of the net new restaurants. The LP units were subsequently exchanged for 930,632 non-voting common shares of Trade Marks. The final adjustment to the number of LP units issued was made on December 9, 2021, based on the actual annual sales reported by the new restaurants. The actual annual sales of the 34 new A&W restaurants were $53,842,000, compared to the original estimate of $45,248,000, resulting in total consideration of $20,164,000 payable to Food Services. The remaining consideration of $6,893,000 was paid to Food Services by issuance of 241,683 additional LP units, which were exchanged for 483,366 non-voting common shares of Trade Marks. The Fund performed its annual impairment test on the indefinite life intangible asset as at December 31, 2021, using a value-in-use model to determine the recoverable amount of the indefinite life intangible assets. The calculations were based on the Fund’s and Food Services’ internal forecasts and represent management’s best estimates at a specific point in time, and as a result are subject to estimation uncertainty. In arriving at its estimated future cash flows, the Fund and Food Services considered past experience, economic trends and forecasted industry trends. The Fund projected royalties from the gross sales of A&W restaurants in the Royalty Pool, gross profit and cash flows for a period of five years and extrapolated cash flows beyond that using an estimated terminal growth rate of 2%. The Fund assumed a pre-tax discount rate of 10.2% in order to calculate the present value of its projected cash flows. As a result of this test, it was concluded that no impairment was required. The Fund performed a sensitivity analysis on the most sensitive assumptions, which were revenue growth rates (2%) and the discount rate. A 1% increase in the discount rate would have decreased the amount by which the recoverable amount exceeded the carrying amount by approximately $62,000,000, and would not have resulted in impairment. A 1% decrease in the estimated revenue growth rate would have decreased the amount by which the recoverable amount exceeded the carrying amount by approximately $63,000,000, and would not have resulted in impairment. 52 (7) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) 5 Term loan and operating loan facility Trade Marks has a $60,000,000 term loan, a $2,000,000 demand operating loan and an interest rate swap facility (collectively the Credit Facility) with HSBC Bank Canada (the Bank). On September 10, 2021, Trade Marks renewed and extended the Credit Facility for an additional five years on terms and conditions substantially consistent with those of the previous credit facility in place with the Bank. The $2,000,000 demand operating loan facility is used to fund working capital requirements and for general corporate purposes. Amounts advanced under the facility bear interest at the Bank’s prime rate plus 0.4% and are repayable on demand. As at December 31, 2021, the amount of the facility available was $2,000,000 (December 31, 2020 – $2,000,000). The $60,000,000 term loan with the Bank is in the form of a banker’s acceptance. The term loan is repayable on September 10, 2026. The term loan contains covenants including the requirement to meet certain earnings before interest, taxes, depreciation, amortization and non-cash charges/income (EBITDA) levels and debt to EBITDA ratios during each trailing four-quarter period. Interest only is payable monthly, providing that Trade Marks’ EBITDA tested quarterly on a trailing four-quarter basis is not less than specified amounts. In the event that EBITDA is less than these specified amounts, the term loan will be fully amortized over the greater of three years and the remaining term and repayment will be by way of blended monthly instalments of principal and interest. Trade Marks was in compliance with all of its financial covenants as at February 15, 2022, December 31, 2021 and December 31, 2020. Financing fees of $176,000 that were incurred relating to the September 10, 2021 Credit Facility amendment were capitalized and are presented as a reduction to the carrying amount of the $60,000,000 term loan. The financing fees will be amortized over the remainder of the five-year term of the amended Credit Facility. Trade Marks uses interest rate swap agreements to manage risks from fluctuations in interest rates. To manage the interest rate risk associated with the $60,000,000 term loan, Trade Marks has entered into two interest rate swap arrangements, one swap with an effective date of December 22, 2015 and a maturity date of December 22, 2022 (the Existing Swap) and one forward start swap with an effective date of December 22, 2022 and a maturity date of September 10, 2026 (the Forward Start Swap). Under the Existing Swap, as at December 31, 2021, the term loan’s effective interest rate was 3.95% per annum (December 31, 2020 – 4.20%), comprising 2.80% per annum, which is fixed under the Existing Swap agreement until December 22, 2022 plus a 1.15% per annum stamping fee. The stamping fee ranges from 0.90% to 1.40%, depending on Trade Marks’ debt to EBITDA ratio. The fair value of the Existing Swap as at December 31, 2021 was $983,000 unfavourable (December 31, 2020 – $2,671,000 unfavourable) and the change in fair value is recorded in the consolidated statements of income and comprehensive income. Under the Forward Start Swap, effective December 22, 2022, the term loan’s effective interest rate will be 1.74% per annum, which is fixed under the Forward Start Swap agreement until September 10, 2026 plus a stamping fee that ranges from 0.90% to 1.40%, depending on Trade Mark’s debt to EBITDA ratio. The fair value of the Forward Start Swap as at December 31, 2021 was $560,000 favourable (December 31, 2020 – n/a) and the change in fair value is recorded in the consolidated statements of income and comprehensive income. 53 (8) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The following gains and losses, representing the change in the fair value of the interest rate swaps, is recorded in the consolidated statements of income and comprehensive income: (Gain) loss on Existing Swap Gain on Forward Start Swap 2021 $ (1,689) (560) (2,249) 2020 $ 1,362 - 1,362 A general security agreement over the assets of Trade Marks has been provided as collateral for the demand operating loan facility and term loan. The Partnership has provided its guarantee in favour of the Bank of all of the indebtedness, covenants and obligations of Trade Marks to the Bank. The term loan comprises: Term loan Financing fees 6 Term loan and other interest Interest on cash Interest on deferred royalties (note 14) Standby fees Interest expense – term loan Interest expense – other 2021 $ 60,000 (197) 59,803 2021 $ (16) - 5 2,495 30 2,514 2020 $ 60,000 (65) 59,935 2020 $ (33) (184) 5 2,389 - 2,177 (9) 54 A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) 7 Income taxes a) The provision for income taxes shown in the consolidated statements of income and comprehensive income is equal to the amount obtained by applying statutory tax rates to the income before income taxes: Statutory combined federal and provincial income tax rates on investment income Provision for income taxes based on statutory income tax rates Refundable tax Provision for income taxes b) Deferred income tax liabilities comprise the following: Timing difference of income of A&W Trade Marks Limited Partnership Fair value of interest rate swaps Intangible assets 8 Trust Units 2021 20% $ 9,191 (1,090) 8,101 2021 $ (1,605) 85 (14,346) (15,866) 2020 20% $ 7,171 310 7,481 2020 $ (476) 534 (14,011) (13,953) The Trust Units are comprised of two classes, Units and Limited Voting Units. Both Units and Limited Voting Units have equal undivided beneficial interests in any distributions of the Fund and in the net assets of the Fund. Limited Voting Units and Units have equal rights and privileges except that holders of the Limited Voting Units, together with the common shares of Trade Marks that are exchangeable for Limited Voting Units, are not entitled in the aggregate to cast more than 40% of the votes cast upon a resolution with respect to the appointment or removal of Trustees of the Fund and are not entitled to cast votes upon a resolution to amend the Declaration of Trust. The Trust Units issued are not subject to future calls or assessments. Units are redeemable at any time at the option of the holder at amounts related to market prices at the time, subject to a maximum of $50,000 in total cash redemptions by the Fund in any one month. The limitation may be waived at the discretion of the Trustees of the Fund. Redemption in excess of these amounts, assuming no limitation, shall be paid by way of distribution of a pro rata number of securities of Trade Marks held by the Fund. On April 16, 2021, A&W of Canada Inc. (A&W Canada), an indirect shareholder of Food Services, completed a reorganization to provide liquidity for some of its shareholders and to simplify the indirect ownership of Food Services (the Reorganization). 55 (10) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) As part of the Reorganization, and pursuant to the Amended and Restated Declaration of Trust and the Amended and Restated Exchange Agreement, Food Services exchanged 1,042,000 common shares of Trade Marks for 521,000 Units, which were then purchased by shareholders of A&W Canada at a price of $36.42 per Unit. The 521,000 Units sold were subject to a four-month statutory hold period under applicable securities laws. This hold period expired on August 16, 2021. After the exchange and sale of these Units, and as at December 31, 2021, there were 14,585,673 Units outstanding. In addition, Food Services exchanged 3,014,040 of its common shares of Trade Marks for 1,507,020 Limited Voting Units. The 4,056,040 common shares of Trade Marks exchanged by Food Services for 2,028,020 Trust Units had a book value of $63,193,000 and the 2,028,020 Trust Units issued by the Fund had a book value of $65,934,000. The difference of $2,741,000 was recognized in accumulated deficit as the exchange reduced Food Services’ proportional ownership in Trade Marks, which resulted in a $63,193,000 decrease in non-controlling interest. Balance as at December 31, 2019 and 2020 Trust Units issued in exchange for common shares of A&W Trade Marks Inc. Number of Units 14,064,673 Number of Limited Voting Units Total number of Trust Units - 14,064,673 521,000 1,507,020 2,028,020 Balance as at December 31, 2021 14,585,673 1,507,020 16,092,693 Balance as at December 31, 2019 and 2020 Trust Units issued in exchange for common shares of A&W Trade Marks Inc. Balance as at December 31, 2021 Equity – Units 332,950 18,975 351,925 Equity – Limited Voting Units Total equity – Trust Units - 46,959 46,959 332,950 65,934 398,884 Prior to the Reorganization, Food Services owned 26.0% of the common shares of Trade Marks, which were exchangeable into 26.0% of the total outstanding voting securities of the Fund on a fully diluted basis. Following the Reorganization, but excluding the issuance of the excess exchangeable LP units that represented the remaining 20% of the initial consideration for the January 5, 2021 Adjustment to the Royalty Pool that were paid in December 2021, Food Services owned 15.4% of the exchangeable common shares of Trade Marks and 9.4% of the Trust Units. Taken together, Food Services’ ownership of exchangeable common shares of Trade Marks and Trust Units equated to Food Services owning 23.3% of the total outstanding voting securities of the Fund on a fully diluted basis, before the inclusion of the issuance of the excess exchangeable LP units. Overall, the Reorganization was not dilutive to unitholders of the Fund because the calculation of the number of the fully diluted Trust Units did not change. Post Reorganization, Food Services holds both Limited Voting Units and exchangeable common shares of Trade Marks, whereas prior to the Reorganization, Food Services only held exchangeable common shares of Trade Marks. 56 (11) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The Fund did not receive any proceeds from the Reorganization and Food Services paid for the expenses of the Reorganization. 9 A&W Trade Marks Inc. The common shares of Trade Marks are owned by the Fund and Food Services as follows: The Fund Food Services Number of shares Amount $ % Number of shares Amount $ % Number of shares Total Amount $ Balance as at December 31, 2019 January 5, 2020 adjustment to the Royalty Pool Balance as at December 31, 2020 January 5, 2021 adjustment to the Royalty Pool 28,129,271 164,605 79.1 7,453,763 95,339 20.9 35,583,034 259,944 - - (3.3) 1,519,260 28,881 3.3 1,519,260 28,881 28,129,271 164,605 75.8 8,973,023 124,220 24.2 37,102,294 288,825 - - (2.8) 1,413,998 20,164 2.8 1,413,998 20,164 April 16, 2021 exchange of common shares for Trust Units 4,056,040 63,193 10.6 (4,056,040) (63,193) (10.6) - - Balance as at December 31, 2021 32,185,311 227,798 83.6 6,330,981 81,191 16.4 38,516,292 308,989 The common shares of Trade Marks owned by Food Services may be exchanged for Trust Units on the basis of two common shares for one Trust Unit. 57 (12) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The summarized financial information of Trade Marks is as follows: Current assets Non-current assets Current liabilities Non-current liabilities Revenue Net income and comprehensive income 10 Ownership of the Fund 2021 $ 13,466 361,431 1,614 75,670 47,081 37,854 The ownership of the Fund, on a fully diluted basis, as at December 31 is as follows: Number of units 2021 % Number of units 2020 $ 10,880 340,707 1,923 76,559 40,422 28,374 2020 % Units held by public unitholders (note 8) 14,585,673 75.7 14,064,673 75.8 1,507,020 7.8 - - Limited Voting Units held by Food Services (note 8) Number of Trust Units issuable upon exchange of securities of Trade Marks held by Food Services (note 9) 3,165,491 16.5 4,486,512 Total equivalent units 19,258,184 100.0 18,551,185 11 Working capital Net changes in items of non-cash working capital are as follows: Accounts receivable Accounts payable and accrued liabilities 2021 $ 198 (39) 159 58 24.2 100.0 2020 $ (204) 169 (35) (13) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) 12 Distributions During the year ended December 31, 2021, the Fund declared distributions to its Unitholders of $27,251,000 or $1.740 per Unit (2020 – $21,350,000 or $1.518 per Unit). The record dates and amounts of these distributions are as follows: Month January 2021 February 2021 March 2021 April 2021 May 2021 June 2021 July 2021 August 2021 September 2021 October 2021 November 2021 Special Distribution December 2021 Record date Amount $ Per Unit $ February 15, 2021 March 15, 2021 April 15, 2021 May 15, 2021 June 15, 2021 July 15, 2021 August 15, 2021 September 15, 2021 October 15, 2021 November 15, 2021 December 15, 2021 December 15, 2021 December 31, 2021 1,406 1,898 1,898 2,173 2,173 2,173 2,414 2,414 2,414 2,494 2,494 806 2,494 27,251 0.100 0.135 0.135 0.135 0.135 0.135 0.150 0.150 0.150 0.155 0.155 0.050 0.155 1.740 The December 2021 distribution was declared on December 9, 2021 and paid on January 31, 2022, and is reported as a current liability as at December 31, 2021. The December 2020 $1,406,000 distribution was declared on December 11, 2020 and paid on January 29, 2021, and is reported as a current liability as at December 31, 2020. 13 Compensation to key management Key management personnel are the Trustees of the Fund and Directors of Trade Marks. During the year, the Trustees and Directors earned $128,000 (2020 – $175,000). 14 Related party transactions and balances During the year, royalty income of $47,081,000 (2020 – $40,422,000) was earned from Food Services, of which $3,332,000 (2020 – $3,452,000) is receivable from Food Services as at December 31, 2021. In 2020, in response to the onset of COVID-19, Food Services deferred royalty payments totalling $7,448,000 payable to the Fund for gross sales reported by restaurants in the royalty pool for the period from February 24, 2020 to May 17, 2020. As contemplated in the Amended and Restated Licence and Royalty Agreement, late payments of royalties accrue interest at the rate of 2% per annum over the prime rate. In 2020, the Fund recognized $184,000 in interest income related to the deferred royalty payments. On December 3, 2020, Food Services paid the previously deferred royalty payments totalling $7,448,000 plus accrued interest of $184,000. Food Services did not defer any royalty payments in 2021. 59 (14) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) During the year, Trade Marks paid dividends to Food Services of $6,258,000 (2020 – $6,811,000). The dividends paid to Food Services in 2021 include special dividends of $334,000 representing the dividends that Food Services would have received on the 483,366 non-voting common shares issued to Food Services on December 9, 2021 in relation to the final consideration for the January 5, 2021 adjustment to the Royalty Pool (note 4), had they been issued on January 5, 2021. In 2020, Trade Marks paid special dividends of $165,000 to Food Services representing the dividends that Food Services would have received on the 295,544 non-voting common shares issued to Food Services on December 11, 2020 in relation to the final consideration for the January 5, 2020 adjustment to the Royalty Pool, had they been issued on January 5, 2020. During the year, the Fund declared distributions payable to Food Services of $2,065,000 (2020 – n/a) as a result of Food Services’ ownership of Limited Voting Units in the Fund. The $234,000 distribution declared on December 9, 2021 paid to Food Services subsequent to the period-end on January 31, 2022 is reported as a current liability as at December 31, 2021 (December 31, 2020 – n/a). During the year, Trade Marks recognized an expense of $40,000 (2020 – $nil) related to administrative and advisory services received from Food Services, all of which is reported in accounts payable and accrued liabilities as at December 31, 2021 (December 31, 2020 – $nil). Other related party transactions and balances are referred to in note 8. 15 Financial instruments and financial risk management Fair values Management estimates that the fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, distributions payable to Unitholders, the demand operating loan facility and the term loan approximate their carrying values given the short term to maturity of these instruments. The fair value of the Existing Swap as at December 31, 2021 was $983,000 unfavourable (December 31, 2020 – $2,671,000 unfavourable) and the fair value of the Forward Start Swap as at December 31, 2021 was $560,000 favourable (December 31, 2020 – n/a). Fair value estimation The Fund analyzes financial instruments carried at fair value by the valuation method. The different levels have been identified as follows: (cid:120) (cid:120) (cid:120) Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly derived from prices; and Level 3 – Inputs from the asset or liability that are not based on observable market data (that is, unobservable inputs). 60 (15) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) The interest rate swaps are measured at fair value as Level 3 financial instruments and are measured using valuation techniques. These valuation techniques utilize significant inputs that are not based on observable market data. Credit risk The Fund’s exposure to credit risk is as indicated by the carrying amount of its accounts receivable. All of the accounts receivable relate to royalties due from Food Services to the Partnership, which were paid on January 28, 2022. Liquidity risk The primary sources of liquidity risk are the monthly distributions to Unitholders and dividends to Food Services. The Fund’s primary source of funds to pay distributions and dividends is the 3% royalty income it receives from Food Services. Additionally, the Fund manages liquidity risk by actively monitoring forecast and actual cash flows. Interest rate risk The demand operating loan facility and the term loan bear floating rates of interest as disclosed in note 5. Trade Marks has used interest rate swaps to fix the rate of interest on the term loan. Cash and cash equivalents earn interest at market rates. All of the Fund’s other financial instruments are non-interest bearing. 16 Capital disclosures The Fund’s capital consists of Unitholders’ equity and the term loan. The Fund’s capital management objectives are to have sufficient cash and cash equivalents to pay distributions to its Unitholders, after satisfaction of its debt service and income tax obligations; provisions for general and administrative expenses; retention of reasonable working capital reserves; and amounts that may be paid by the Fund in connection with any cash redemption of Units. The Fund manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Fund may adjust the amount of its distributions paid to Unitholders. 61 (16) A&W Revenue Royalties Income Fund Notes to Consolidated Financial Statements December 31, 2021 and 2020 (figures in tables are expressed in thousands of dollars) 17 Subsequent events On January 5, 2022, the number of A&W restaurants in the Royalty Pool was increased by 34 new restaurants less 13 restaurants that permanently closed. The initial consideration for the estimated royalty revenue from the net 21 restaurants added to the Royalty Pool is $21,472,000. The Partnership paid Food Services $17,178,000 by issuance of 444,327 LP units, representing 80% of the initial consideration. The LP units were exchanged for 888,654 non-voting common shares of Trade Marks. The remaining 20% or $4,294,000 and a final adjustment to the consideration based on the actual annual sales reported by the new restaurants will be paid in December 2022 by issuance of additional LP units, which may be exchanged for non-voting common shares of Trade Marks. On February 4, 2022, Trade Marks declared dividends on its voting and non-voting common shares of $3,054,000 payable to Food Services and the Fund on February 28, 2022. On February 4, 2022, the Fund declared a distribution to Unitholders of $0.155 per Trust Unit or $2,494,000, payable on February 28, 2022 to Unitholders of record as at February 15, 2022. 62 (17) Market Information Units Listed: Toronto Stock Exchange Symbol: AW.UN Registrar and Transfer Agent Computershare Investor Services Inc. Investor Enquiries Kelly Blankstein Chief Financial Officer Tel: 604-988-2141 Fax: 604-988-5531 E-mail: investorrelations@aw.ca Website: www.awincomefund.ca Unitholder Information Corporate Head Office A&W Trade Marks Inc. Registered Office and Records Office: Mailing and Delivery Address: 2200 HSBC Building, 885 West Georgia Street, Vancouver, BC Canada V6C 3E8 Mailing Address A&W Revenue Royalties Income Fund 300 – 171 West Esplanade North Vancouver, BC, V7M 3K9 A&W Revenue Royalties Income Fund Board of Trustees John R. McLernon (1) Richard N. McKerracher (1) Fern Glowinsky (1) A&W Trade Marks Inc. Board of Directors John R. McLernon Chairman (2) Richard N. McKerracher (2) Fern Glowinsky (2) Paul F.B. Hollands David A. Mindell Committees of the Board (1)Audit Committee and (2) Governance Committee 

Continue reading text version or see original annual report in PDF format above