2017 ANNUAL REPORT
Equipment Finance Company
Serving U.S. and Canada
TSX: CHW
Executive Office:
Chesswood Group Limited
156 Duncan Mill Road, Suite 15
Toronto, Ontario, Canada M3B 3N2
Tel. 416.386.3099 • Fax. 416.386.3085
email:investorrelations@chesswoodgroup.com
www.chesswoodgroup.com
124387 Chesswod 2017 AR Cover.indd 1
2018-03-08 9:34 AM
Through its two wholly-owned subsidiaries in the U.S. and Canada, Chesswood Group Limited is North America’s only publicly-
traded commercial equipment finance company focused on small and medium-sized businesses. Our Colorado-based Pawnee
Leasing Corporation, founded in 1982, finances a highly diversified portfolio of commercial equipment leases and loans through
established relationships with over 600 independent brokers in the lower 48 states. In Canada, Blue Chip Leasing Corporation has
been originating and servicing commercial equipment leases and loans since 1996, and today operates through a nationwide
network of more than 50 independent brokers.
Based in Toronto, Canada, Chesswood’s shares trade on the Toronto Stock Exchange under the symbol CHW. Learn more at
www.ChesswoodGroup.com, www.PawneeLeasing.com and www.BlueChipLeasing.com.
CONTENTS
PRESIDENT'S MESSAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS, OFFICERS AND OTHER INFORMATION
3
4
38
87
This Annual Report is intended to provide shareholders and other interested persons with selected information concerning Chesswood Group
Limited (“Chesswood”). For further information, shareholders and other interested persons should consult Chesswood’s other disclosure
documents, such as its Annual Information Form and quarterly reports. Copies of Chesswood’s continuous disclosure documents can be obtained
at www.chesswoodgroup.com, from www.sedar.com, or from Investor Relations at the addresses shown at the end of this Annual Report. Readers
should also review the notes further in this Annual Report, in the section titled Management's Discussion and Analysis, concerning the use of
Non-GAAP Measures and Forward-Looking Statements, which apply to the entirety of this Annual Report.
All figures mentioned in this Report are in Canadian dollars, unless otherwise noted.
FOR THE YEAR ENDED DECEMBER 31, 2017
TO OUR SHAREHOLDERS
Chesswood delivered another year of record performance in
2017. We achieved record results in most of our key financial
measures, including: gross finance receivables of $691
million, total revenues of $95.3 million, finance margin of
$59 million and operating income of $32.1 million. Our net
income was also a record, helped significantly by a year-end
recovery of deferred taxes as a result of the new U.S. tax laws.
We posted very strong 4th quarter results as well, with
operating income of $8 million versus $6 million in the 4th
quarter of 2016. And of course we paid monthly dividends
to our shareholders that totaled $15.1 million and provided
an average annual yield of 6.75% based on our average share
price in 2017.
We continued to focus on prudent growth in 2017. At Pawnee
Leasing in the U.S., which represents roughly 68% of our
consolidated assets, we generated strong earnings from our
non-prime portfolio while our expanding product and
portfolio mix continued its shift towards a greater mix from
our growing prime (A-rated) originations. We also continued
to leverage our market position as a small but well-established
player at Blue Chip Leasing in Canada, where 90% of our
portfolio is in the prime segment.
Our risk-centric approach to our markets is captured in the
theme of this year’s annual report: Prudent Growth. We
manage our growth while carefully managing risk. In 2017
this is in part reflected by slower originations in our highest
risk portfolio segment in the U.S., following our tightening
of credit standards for this segment, in the spring of 2017.
The net charge-offs in our U.S. business, Pawnee, totaled
U.S.$13.7 million in 2017, up from U.S.$11.0 million in
2016. Some of this increase reflects that, while charge-offs
in our prime portfolio were modest, that portfolio grew to
well over U.S.$100 million by the end of 2017. Some of the
increase also stems from a return to historic charge-off levels
for our non-prime portfolio after years of extremely high
credit quality in that segment, following the contraction of
credit in the financial crisis. While we still enjoy extremely
strong risk-adjusted returns from this segment of our
business, we have tightened our credit standards in the highest
risk portion of this portfolio segment.
Our assets are well-diversified across more than 85
industries, 70 equipment types, and over 30,000 loans and
leases across Canada and the U.S. Moreover, the overall
composition of our portfolios is increasingly shifting towards
lower-risk, prime-rated credits. Today, approximately 57%
of our consolidated portfolio is comprised of prime-rated
credits.
infrastructure,
including upgraded
In 2017, our team grew to 120 people in Canada and the U.S.
and we continued to invest in state-of-the-art software and
internal
front-end
management systems. These investments are designed to
strengthen customer relationships, propel efficiencies in
operating costs, marketing, and risk management. Our
infrastructure
and
technology, slowed in the last quarter of the year as expected.
Our continuing growth will of course come with ongoing
investment in these areas but we believe the larger steps
necessary to support our entry into the prime market over the
last few years are behind us.
expansion,
personnel
including
The growth in our prime portfolio has opened our access to
the U.S. securitization market,
to
successfully complete its first-ever securitized financing in
October. Pawnee now has a U.S.$75 million non-recourse
asset backed facility with Capital One. We welcome the
greater diversification of funding sources, in support of our
future growth.
leading Pawnee
To further support growth, we renewed Chesswood’s
revolving credit facility in 2017 for a term of three years, and
exercised the accordion feature of this credit facility to
increase it to U.S.$250 million from U.S.$170 million. We
used part of the increased facility in January 2018 to redeem
all $20 million of Chesswood’s 6.5% convertible debentures,
almost a year ahead of the December 31, 2018 maturity date.
This should generate approximately $400,000 in pre-tax
interest savings in 2018.
Another significant financial highlight for us in 2017 relates
to the new U.S. Tax Cuts and Jobs Act. Chesswood recorded
a one-time net tax benefit of $9.4 million due to the re-
measurement of net deferred tax liabilities in our U.S.
businesses at a future corporate tax rate of approximately
27% versus the previous approximately 41%. We expect to
continue to benefit from the new tax laws in 2018 and beyond.
Based on Chesswood’s pre-tax U.S. income in 2017, the
effective tax rate reduction would have generated tax savings
of approximately $3.0 million in fiscal 2017, or $0.17 per
share based on 18 million shares outstanding.
Looking ahead, our prospects are bright. The economic
climate in the U.S. is optimistic and business confidence is
running high. The financial injection from the new tax act is
expected to fuel spending in the broader U.S. economy,
including equipment purchases and leasing by small
businesses. It should also improve the capacity of those
businesses to service financings, which may have the dual
impact of boosting our originations as well as our credit
quality.
3
FOR THE YEAR ENDED DECEMBER 31, 2017
In 2018, we will continue to prudently expand and tightly
manage our business with the overriding objective of again
delivering superior, reliable returns to stakeholders. Our
growing teams in Canada and the U.S. look forward to the
challenge of achieving an eighth consecutive year of record
results.
Barry Shafran,
President & CEO
MANAGEMENT'S DISCUSSION AND ANALYSIS
This management’s discussion and analysis (this "MD&A")
is provided to enable readers to assess the financial condition
and results of operations of Chesswood Group Limited
(“Chesswood” or the "Company”) as at and for the year ended
December 31, 2017. This discussion should be read in
conjunction with the 2017 audited consolidated financial
statements and accompanying notes of the Company. Unless
otherwise indicated, all financial information in this MD&A
has been prepared in accordance with Generally Accepted
Accounting Principles ("GAAP") and International Financial
Reporting Standards ("IFRS"), and all amounts are expressed
in Canadian dollars, unless specifically denoted otherwise.
This MD&A is dated March 8, 2018.
Additional information relating to the Company, including
its Annual Information Form, is available: on SEDAR at
www.sedar.com, at the www.chesswoodgroup.com website,
email to investorrelations@chesswoodgroup.com, or via
phone at 416-386-3099.
MD&A Table of Contents
Forward-Looking Statements
Non-GAAP Measures
Company Overview
Pawnee
Blue Chip
Discontinued Operations
Selected Financial information
Adjusted EBITDA, Free Cash Flow
Results of Operations
4
5
6
6
10
11
12
14
15
Statement of Financial Position
Liquidity and Capital Resources
Outlook
Risk Factors
Critical Accounting Policies and Estimates
Future Accounting Standards
Related Party Transactions
Controls & Procedures
Market for Securities
19
22
26
26
33
35
35
35
37
FORWARD-LOOKING STATEMENTS
In this document and in other documents filed with Canadian
regulatory authorities or in other communications, the
Company may from time to time make written or oral
forward-looking statements within the meaning of applicable
securities legislation. Forward-looking statements include,
but are not limited to, statements regarding the Company’s
business plan and financial objectives. The forward-looking
statements contained in this MD&A are used to assist readers
in obtaining a better understanding of the Company's
financial position and the results of operations as at and for
the periods ended on the dates presented and may not be
appropriate for other purposes.
4
FOR THE YEAR ENDED DECEMBER 31, 2017
Forward-looking statements typically use the conditional, as
well as words such as prospect, believe, estimate, forecast,
project, expect, anticipate, plan, may, should, could and
would, or the negative of these terms, variations thereof or
similar terminology. By their very nature, forward-looking
statements are based on assumptions and involve inherent
risks and uncertainties, both general and specific in nature.
The Company operates in a dynamic environment that
involves various risks and uncertainties, many of which are
beyond its control and which could have an effect on the
Company’s business, revenues, operating results, cash flow
and financial condition. It is therefore possible that the
forecasts, projections and other forward-looking statements
will not be achieved or will prove to be inaccurate. Although
the Company believes the expectations reflected in these
forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to be correct.
The Company cautions readers against placing undue
reliance on forward-looking statements when making
decisions, as actual results could differ considerably from the
opinions, plans, objectives, expectations, forecasts, estimates
and intentions expressed in such forward-looking statements
due to various material factors. Among others, these factors
include: continuing access to required financing, continuing
NON-GAAP MEASURES
This MD&A makes reference to certain non-GAAP measures
as supplementary information and to assist in assessing the
Company’s financial performance. Management believes
EBITDA and Adjusted EBITDA, as defined below, are useful
measures in evaluating the performance of the Company.
EBITDA and Adjusted EBITDA are not earnings measures
recognized by GAAP and do not have standardized meanings
prescribed by GAAP. Therefore, EBITDA and Adjusted
EBITDA may not be comparable to similarly titled measures
presented by other issuers. Readers are cautioned that
EBITDA and Adjusted EBITDA should not be construed as
an alternative to net income determined in accordance with
GAAP as indicators of performance or to cash flows from
operating, investing and financing activities as measures of
liquidity and cash flows.
“EBITDA” is defined as net income adjusted to exclude
interest, income taxes, depreciation and amortization.
“Adjusted EBITDA” is EBITDA further adjusted for
(i) interest on debt facilities, (ii) non-cash gain (loss) on
interest rate derivatives,
investments and convertible
debentures, (iii) non-cash unrealized gain (loss) on foreign
exchange, (iv) non-cash share-based compensation expense,
(v) acquisition costs, (vi) contingent consideration accretion
5
access to products that allow the Company and its subsidiaries
to hedge exposure to changes in interest rates; risks of
increasing default rates on leases, loans and advances; the
adequacy of the Company’s provisions for credit losses;
increasing competition (including, without limitation, more
aggressive
increased
risk pricing by competitors);
governmental regulation of the rates and methods we use in
financing and collecting on our equipment leases or loans;
dependence on key personnel; disruption of business models
due to the emergence of new technologies; fluctuations in the
Canadian dollar and U.S. dollar exchange rate; and general
economic and business conditions. The Company further
cautions that the foregoing list of factors is not exhaustive.
For more information on the risks, uncertainties and
assumptions that would cause the Company’s actual results
to differ from current expectations, please also refer to “Risk
Factors” in this MD&A and in the Company's annual
information form, as well as to other public filings of the
Company available at www.sedar.com. The Company does
not undertake to update any forward-looking statements,
whether oral or written, made by itself or on its behalf, except
to the extent required by securities regulations.
or reduction, (vii) any unusual and material one-time gains
or expenses and (viii) actual interest attributable to the period
in respect of the convertible debentures.
"Free Cash Flow" or "FCF" is defined as Adjusted EBITDA
less maintenance capital expenditures and tax expense.
"FCF L4PQ" is defined as FCF for the most recently
completed four financial quarters for which the Company has
publicly filed its consolidated financial statements (including
its annual consolidated financial statements in respect of a
fourth quarter).
"Maximum Permitted Dividends"
is defined under
Chesswood's credit facility as the maximum amount for cash
dividends and purchases under its normal course issuer bid
that the Company is permitted to pay in respect of a month,
being 1/12 of 90% of the FCF L4PQ.
"Operating Income" is defined as "income before undernoted
items" as presented in the consolidated statement of income.
FOR THE YEAR ENDED DECEMBER 31, 2017
COMPANY OVERVIEW
Chesswood is North America’s only public company focused exclusively on commercial equipment finance for small and medium-
sized businesses. As at December 31, 2017, its primary operations consisted of two wholly-owned subsidiaries:
•
Pawnee Leasing Corporation ("Pawnee"), which finances micro and small-ticket commercial equipment for small and
medium-sized businesses in the lower 48 U.S. states; and
• Blue Chip Leasing Corporation ("Blue Chip"), which provides commercial equipment financing to small and medium-
sized businesses across Canada.
PAWNEE
The Company’s U.S. operations are primarily conducted by
Pawnee, which accounted for 82.3% of consolidated revenue
and 82.0% of consolidated income from continuing
operations before corporate overhead in the year ended
December 31, 2017.
48 U.S. states, with a wide range of credit profiles from start-
up entrepreneurs to more established businesses, in prime and
non-prime market segments,
through a network of
approximately 600 independent equipment finance broker
firms.
Established in Fort Collins, Colorado in 1982, Pawnee
specializes in providing equipment financing of up to U.S.
$250,000 to small and medium-sized businesses in the lower
As of December 31, 2017, Pawnee employed 87 full-time
equivalent employees.
Pawnee Key Portfolio Statistics (in U.S.$ thousands except # of leases/loans and %’s)
Number of leases and loans
outstanding (#)
Mar 31
2016
June 30
2016
Sep 30
2016
Dec 31
2016
Mar 31
2017
June 30
2017
Sep 30
2017
Dec 31
2017
11,881
12,636
13,479
14,259
14,943
15,616
16,226
16,627
Gross lease and loan receivable (“GLR”) (1)
$209,007
$228,984
$255,791
$280,929
$309,120
$337,276
$362,846
$398,053
Residual receivable
$15,112
$15,393
$15,659
$15,906
$16,041
$16,512
$16,849
$16,977
Net investment in leases and loans receivable,
before allowance (4)
Security deposits (nominal value)(4)
Allowance for doubtful accounts
Over 31 days delinquency
(% of GLR) (2)
Net charge-offs for the three-months ended (3)
Provision for credit losses for the three-months
ended
$165,885
$181,681
$203,189
$224,522
$248,557
$273,390
$296,655
$327,608
$10,480
$10,519
$10,575
$10,812
$11,135
$11,510
$11,915
$12,325
$4,958
$4,662
$6,044
$7,240
$6,555
$6,848
$8,602
$8,482
2.69%
2.19%
2.59%
2.74%
2.19%
2.21%
2.69%
2.30%
$2,809
$2,357
$2,373
$3,478
$3,698
$2,962
$3,101
$3,912
$2,685
$2,112
$3,804
$4,740
$3,229
$3,334
$4,923
$3,857
Notes:
(1) Excludes residual receivable.
(2) Over 31-days delinquency includes non-accrual gross lease and loan receivables.
(3) Excludes the “charge-offs” of interest revenue on finance leases and loans on non-accrual leases recognized under IFRS.
(4) Excludes adjustment for discounting security deposits and increasing unearned income for interest savings on security deposits.
Pawnee defines “start-up” businesses as those with less than
two years of operating history. Start-up businesses do not fall
into traditional credit categories because of their lack of
business credit history. “B” credit businesses are those with
two or more years of operating history that have some unique
aspect to their overall credit profile such that they are not
6
FOR THE YEAR ENDED DECEMBER 31, 2017
afforded an A-rated credit score, and/or that the business
owner(s) do not have an A-rated personal or business/
commercial credit history.
up to U.S.$500,000 in the prime market. At December 31,
2017, approximately 42% of Pawnee's gross
lease
receivables are in the prime segment.
These non-prime market niches are not usually considered
by most conventional financing sources, and generally have
a higher risk profile. To manage the incremental risk
associated with financing businesses in these niches,
Pawnee’s management has built a stringent operating model
that has historically enabled Pawnee to achieve higher net
margins than many typical finance companies.
In September 2008, prior to the financial crisis and in pursuit
of growth, Pawnee leveraged its existing sales channel of
equipment finance brokers by expanding its range of products
to include the B credit market. This market consists of higher
quality credits than Pawnee's historical market segment and
is also a significantly larger segment. This was the first
meaningful expansion from Pawnee's "core" suite of
products.
As the financial crisis took hold in late 2008, Pawnee's
portfolio also experienced more stress; however, it remained
profitable by having maintained risk-adjusted pricing in the
years leading up to the crisis that were in excess of most of
its competitors. A large majority of Pawnee's competitors in
both its traditional and B markets were gone by January 2009
having either retreated to their core markets, lost their funding
and/or closed their operations.
Pawnee was fortunate, therefore, to be able to take advantage
of its strong market position and continued access to capital
to grow significantly while building a portfolio which, in each
product “bucket”, enjoyed unprecedented credit quality due
to the also unprecedented contraction in credit markets,
especially from 2009 through 2013. With the gradual
normalization of credit markets, loss rates in Pawnee's higher
yielding market segments are returning to more typical levels.
Pawnee continues to generate excellent risk-adjusted returns,
but at levels below the years immediately following the crisis,
the same pattern seen in past economic cycles.
Beginning in 2015, Pawnee expanded its product line once
more, by entering the prime or A-rated equipment finance
market. Just as in 2008, when Pawnee entered the "B" market,
this new market segment is much larger than the markets
Pawnee had served previously. Pawnee now offers equipment
financing to small and medium sized businesses across
America in all credit classes with transactions up to U.S.
$250,000, and it may, in the future, finance equipment costing
These gradual expansions in Pawnee's product offerings have
allowed it to become a much more important source of
funding to its broker customers as well as expanding its
overall market to include brokers with whom it did not have
a prior business relationship. Many brokers concentrate on
prime equipment finance customers, and therefore did not
consider Pawnee as a source for the funding of leases and
loans prior to its entry into the prime market.
Funding
The majority of Pawnee’s leases and loans are presently
funded through Chesswood’s revolving corporate credit
facility. The credit facility was increased on August 2017 to
allow borrowings of up to U.S.$250.0 million (2016: U.S.
$170.0 million) subject to, among other things, threshold
levels of eligible finance receivables, and renewed to
December 8, 2020 (previously December 8, 2019).
On October 16, 2017, Pawnee closed its first non-recourse
U.S.$75 million asset-backed facility, which is secured by a
portfolio of Pawnee's prime equipment leases and loans. The
repayment terms are based on the cash flow of the underlying
portfolio. The proceeds from this non-recourse facility were
applied to Chesswood's existing credit facility.
Key Aspects of Business Model
Management believes Pawnee’s long track-record of success
is attributable to several key aspects of its business model,
including:
1. high-level credit parameters designed to mitigate risk;
2. a relationship-driven approach to origination through a
well-established and trained network of reputable
broker firms;
3. portfolio diversification across geographies, industries,
equipment classes, origination source, vendors,
equipment cost, and credit classes; and
4. risk management resources that include credit analyst
reviews of all applications, a proprietary credit matrix
to guide consistent analysis and decision-making, and
effectively price for risk; and a dedicated and efficient
servicing and collection effort.
These four aspects are discussed in greater detail below.
7
FOR THE YEAR ENDED DECEMBER 31, 2017
Pawnee Lease and Loan Application, Approval and Origination Volume (in U.S.$ thousands)
1.
Asset quality at Pawnee begins with high-level
parameters that define a conservative approach
to doing business and mitigating risk. Generally:
the lease or loan, with site inspections conducted for
financings as low as U.S.$15,000 or more (U.S.
$100,000 for A-rated credits); and
•
•
that
Pawnee
is
finances only equipment
fundamental to the core operations of the lessee/
borrower’s business, reflecting management’s view
that payments on “business essential” equipment are
among the least susceptible to default except in the
case of business failure;
Pawnee operates only in select market segments,
excluding certain industries such as agriculture and
hazardous materials;
• A personal guarantee of at least the major
shareholder(s)/owner(s) and generally all owners
are obtained for non-prime credits, with acceptable
personal credit scores a prerequisite for credit
approval;
• Business owners are interviewed by Pawnee for
verification purposes prior to the commencement of
• All scheduled payments for non-prime financings
are paid by direct debit from the lessee’s/borrower's
account, allowing Pawnee’s collection team to take
immediate action on delinquencies.
2.
Pawnee originates finance receivables through a
network of over 600 independent broker firms
across the U.S., with a relationship-driven
approach and service capabilities that have
distinguished it as first-choice funder.
Risk management begins with the selection and training of
broker firms and their staff. Broker principals must have an
acceptable personal credit profile, industry references, and
preferably a minimum one-year track record in the equipment
finance industry. Pawnee’s Business Development managers
train new and existing brokers and their staff, and develop a
knowledge base on Pawnee’s underwriting policies and
procedures. The training process is instrumental in reducing
8
FOR THE YEAR ENDED DECEMBER 31, 2017
broker and Pawnee's time spent reviewing applicants unable
to meet Pawnee's
credit qualifications. Business
Development managers also monitor broker efficiencies in
credit application
including
applications submitted, approved and ultimately funded.
reviews and closings,
Pawnee's service-driven focus strengthens the relationships
with its customers, helping to support and expand origination
volumes. It has become a funder of choice as a result of unique
capabilities that improve efficiency and save time for its
broker customers, such as consistent credit decisions; rapid
response time, and one-stop shopping for all credit-classes.
3.
Pawnee’s portfolio of leases and loans is well
brokers,
diversified
equipment types, industries and credit classes.
geography,
across
As of December 31, 2017, Pawnee's portfolio of 16,627
leases and loans, representing U.S.$415.0 million in gross
finance receivables (including residual receivable), was
diversified, with:
•
•
•
•
•
over 70 equipment categories, with the five largest
- restaurant, titled trucks, construction, medical and
trailers - accounting for 37.4% of the total number
of active leases and loans;
over 85 industry segments, with no industry
representing more than 14.9% of the number of
active financings;
no lessee/borrower accounting for more than 0.08%
of the total;
48 U.S. states, with no state representing more than
8.3% of the number of total active leases and loans
(with the exception of California and Texas, which
represented 13.0% and 12.4%, respectively); and
the largest originator accounting for 8.4% of gross
lease and loan receivables, and the ten largest
accounting for 39.4%.
Portfolio diversification is maintained, and rebalanced as
necessary, through management’s regular review of Pawnee's
portfolio performance and lease and loan application,
approval and origination volumes, for trends that may
indicate changes in the economic or competitive landscape
and that may necessitate adjustments in Pawnee's approach
to doing business in specific market segments. Significant
changes in these and other metrics may result in a detailed
review of specific brokers, industry or equipment type,
equipment cost, and/or geographic areas.
4.
Risk management resources include a credit
analyst’s personal review of all applications, a
proprietary credit matrix to guide consistent
decision-making and effectively pricing for risk,
9
efficient servicing and collection processes, and
other risk management tools.
Pawnee’s credit process is not the automated scoring
procedure typical of high volume equipment finance
companies. Its success in selecting credit-worthy businesses
is based on a model that engages both human expertise and
the latest technology to meet clearly defined standards for
asset quality. A credit analyst personally reviews all
applications and completes a proprietary matrix designed to
ensure all analysts are consistent in their credit reviews and
to provide guidance in reaching prudent credit decisions.
Additionally, analysts are available to directly assist brokers
submitting applications and personally communicate credit
decisions, including information on how to improve the
likelihood of approval, such as obtaining a business owner’s
personal credit information and/or guarantee.
Given the importance of limiting defaults to the greatest
extent possible, Pawnee emphasizes the employment and
retention of experienced personnel, and clearly delineated
collection and portfolio servicing processes.
•
Pawnee had 87 full-time equivalent employees at
2017 fiscal year-end, of which more than a third
were engaged in the collection and servicing
processes. Collection and servicing activities are
structured to systematically and quickly resolve
delinquent leases and loans whenever possible,
mitigate losses, and collect post-default recovery
dollars.
• Owing to Pawnee’s requirement that most lease and
loan payments be made by direct debit, it can
immediately recognize a delinquent account when
a direct debit payment is not received on the required
due date.
Generally, when a payment falls 31 days past due,
or earlier if investigation reveals an underlying issue
at the borrower/lessee level, the account is referred
to
the appropriate negotiation, repossession/
remarketing, bankruptcy or legal specialist on
Pawnee’s Advanced Collection Team. Through a
combination of collecting payments,
issuing
forbearances, repossessing and selling financed
equipment, initiating lawsuits and negotiating
settlements, Pawnee regularly remediates a high
percentage of past due accounts.
After 154 days of delinquency, or earlier if Pawnee
deems the account uncollectible, the debt is written
off. However, collection efforts continue when
FOR THE YEAR ENDED DECEMBER 31, 2017
prospects for recovery through a personal guarantor
or other remedy warrant. Otherwise, the account is
normally assigned to an independent collection
agency for further collection efforts, where the
primary sources of recovery include payments on
restructured accounts, settlements with guarantors,
equipment sales, litigation, and bankruptcy court
distributions.
Risk management tools and processes are continually
monitored and improved to address changes in portfolio
performance and in the equipment finance industry, and
periodically assessed by outside professionals with statistical
expertise.
BLUE CHIP
Pawnee’s static pool loss analysis measures finance
receivable loss performance by identifying a finite pool of
transactions and segmenting it into quarterly or annual
vintages according to origination date. Performance by
industry,
brokers, geographic area, equipment
transaction size, and product
the
Under-
in
characteristics examined
performing portfolio segments are further examined to
identify areas for underwriting adjustment and/or a change
in funding guidelines or for other identifiable causes on which
corrective action can be taken.
type,
type are among
these analyses.
Chesswood’s Canadian operations are conducted by Blue
Chip, a specialist in micro and small-ticket equipment finance
for small and medium-sized businesses since 1996. Blue
Chip accounted for 16.4% of consolidated revenue and 16.6%
of consolidated income from continuing operations before
corporate overhead in the year ended December 31, 2017.
Blue Chip had 28 full-time equivalent employees at
December 31, 2017.
Located in Toronto, Blue Chip provides equipment financing
across Canada, through a nationwide network of more than
50 independent equipment finance broker firms and through
direct, in-house origination efforts via equipment vendors.
Blue Chip’s portfolio risk is mitigated by its diversification
across geography, industry, equipment type, equipment cost
and credit class.
Blue Chip Portfolio Statistics (in $ thousands except # of leases/loans and %)
Number of leases and loans
outstanding (#)
Mar 31
2016
June 30
2016
Sep 30
2016
Dec 31
2016
Mar 31
2017
June 30
2017
Sep 30
2017
Dec 31
2017
10,479
11,142
11,551
11,883
12,278
12,910
13,345
13,781
Gross lease and loan receivable (“GLR”)
$129,851
$139,692
$144,984
$148,250
$152,502
$162,164
$166,505
$170,183
Net investment in leases and loans
receivable ("NIL"), before allowance
$114,185
$123,022
$127,841
$130,965
$134,777
$143,310
$147,436
$150,951
Allowance for doubtful accounts
$888
$1,076
$1,363
$1,342
$1,438
$1,621
$1,702
$1,284
Over 31 days delinquency
(% of NIL)
0.39%
0.67%
0.87%
0.72%
0.66%
0.46%
0.36%
0.16%
Key Aspects of Business Model
Management believes Blue Chip's track record of success is
attributable to several key aspects of its business model,
including those described below.
equipment, and by Blue Chip’s nimbleness in addressing
customer needs as an efficient and consistent "one-stop"
funding source.
Blue Chip has successfully grown originations and
earnings by filling a market void created by the tendency
of Canadian bank competitors to have slower small ticket
processes and a preference to finance larger-ticket
• The micro-ticket segment is a high-volume, low-
touch business. Blue Chip has invested in software
to streamline the application process, speed credit
decisions and automate the preparation of secure
10
FOR THE YEAR ENDED DECEMBER 31, 2017
documents to meet market demand for rapid funding
and customer service excellence.
Effective risk management has made Blue Chip a solid
performer in its markets throughout business cycles.
• Blue Chip also has the expertise in financial analysis
and detailed documentation
the
underwriting requirements of the small-ticket
segment.
to meet
• Like Pawnee, Blue Chip's value proposition to
originators is relationship and service based, with
fast and predictable credit decision-making and the
convenience of one-stop shopping for commercial
equipment financing needs across all credit classes.
Blue Chip’s portfolio risk
its
diversification across geography, origination sources,
industry, equipment type, equipment cost and credit
class.
is mitigated by
As at December 31, 2017, Blue Chip's gross finance
receivables portfolio of $170.2 million (2016: $148.3
million) consisting of 13,781 leases and loans (2016: 11,883)
was well diversified:
• Ontario
finance
represented 47.2% of net
receivables, Alberta represented 20.7% and 32.1%
were from the other provinces;
the five largest equipment categories by volume -
industrial, computers, photographic, truck and
trailers - accounted for 50% of net finance
receivables;
of its network of more than 50 originators, the largest
originator by dollar volume during 2017 accounted
for 25% originations; and
the four largest brokers by dollars financed
accounted for approximately 63% of originations
during 2017.
•
•
•
•
In line with Pawnee, Blue Chip has an intense focus
on thorough credit analysis, consistent decision-
making, risk-based pricing, careful broker selection
and education, a strong collection effort, and
management’s continual evaluation of portfolio
performance against key performance indicators.
Blue Chip’s performance has been enhanced by its
success in negotiating a competitive cost of funds.
• The majority of Blue Chip’s leases and loans are
financed by securitization and bulk lease financing
facilities, whereby it sells or assigns the future
payment stream of a tranche of leases/loans, on a
discounted basis, to a third-party such as a life
insurance company or bank. A small percentage of
the proceeds is held back in a loss reserve pool or
supported by Blue Chip through a letter of guarantee
in favour of the funder.
• Blue Chip’s multiple funding partners have rigorous
monitoring and audit processes, including thorough
initial portfolio reviews; site visits; file audits to
validate credit decisions, documentation accuracy
and security perfection; and monthly compliance
certificates attesting to the correctness of portfolio
and financial statistics.
• Blue Chip also uses Chesswood's revolving credit
facility to provide some operational and warehouse
funding.
• Blue Chip recognizes its revenue over the full-term
of its finance receivables and not through "gain-on-
sale" accounting.
DISCONTINUED OPERATIONS AND WINDSET
WINDSET
For accounting purposes, Windset Capital Corporation
("Windset") is not considered a discontinued operation and
its results continue to be grouped with Pawnee in the segment
reporting note to the consolidated financial statements (see
Note 27 - Segment Information).
Chesswood launched Windset in September 2013, to provide
working capital loans of up to U.S.$125,000 to tenured small
businesses in the U.S., leveraging Pawnee's broker channel
and back-office support to originate and service loans under
a managed services agreement between the two companies.
In 2016, Windset’s originations were reduced by the effect
of new regulations in California that require brokers to have
a state lenders’ license, and Windset’s relatively cautious
underwriting practices in a market where many competitors
were demonstrating higher appetites for risk. In September
2016, Windset ceased accepting loan applications, but
continues to service its existing portfolio for the full-term of
the loans.
At December 31, 2017, Windset had nine loans outstanding,
11
FOR THE YEAR ENDED DECEMBER 31, 2017
• Case Funding Inc. ("Case Funding"), a specialty
provider of loans and funding solutions to attorneys and
law firms, that sold its assets in 2015, except for a small
portfolio of receivables. At December 31, 2017, there
were 180 advances and loans outstanding totaling $3.4
million (December 31, 2016 - 298 advances and loans
totaling $5.9 million).
See Note 5 - Discontinued Operations in the audited
consolidated financial statements for the year ended
December 31, 2017 for further information.
with approximately U.S.$92,100 in gross loan receivables
outstanding (December 31, 2016 - 404 loans - U.S.$8.9
million).
DISCONTINUED OPERATIONS
The Company’s financial results include the results of the
following operations, which were sold and/or discontinued
in keeping with the Company’s strategic decision to focus on
the commercial equipment finance market:
• EcoHome Financial Inc. ("EcoHome"), a consumer
financing company, which was sold in February 2016
for approximately $35.0 million resulting in a gain of
$6.7 million (net of taxes and costs); and
SELECTED FINANCIAL INFORMATION
($ thousands, except per share figures)
Average foreign exchange rate for the year
Revenue (1)
Finance margin
Income from continuing operations
Net income
Basic earnings per share - continuing operations (1)(3)
Diluted earnings per share - continuing operations (1)(3)
Basic earnings per share (3)
Diluted earnings per share (3)
Foreign exchange rate as at year end
Total assets
Long-term financial liabilities
Adjusted EBITDA (2)
Dividends declared (4)(5)
Dividends declared per share (4)(5)
For the years ended December 31,
2017(6)
2016(5)
2015
1.2787
76,577 $
49,885 $
12,363 $
19,804 $
$0.74
$0.72
$1.19
$1.16
1.384
565,510 $
316,375 $
32,429 $
13,062 $
$0.78
1.3248
91,583 $
55,940 $
17,317 $
24,278 $
$0.97
$0.95
$1.36
$1.33
1.3427
527,937 $
354,800 $
31,031 $
22,963 $
$1.29
1.2986
95,324
58,972
25,751
25,431
$1.43
$1.39
$1.41
$1.37
1.2545
643,612
447,412
31,860
15,147
$0.84
$
$
$
$
$
$
$
$
(1) It was determined that Sherway LP (the assets of which were sold in 2015), Case Funding and EcoHome meet the criteria of discontinued operations. The
comparative figures have been reclassified as if their respective operations had been discontinued from the start of the comparative periods. See Note 5 -
Discontinued Operations in the 2017 audited consolidated financial statements.
(2) Adjusted EBITDA and Operating Income are non-GAAP measures. See “Non-GAAP Measures” above for the definitions.
(3) Based on weighted average shares outstanding during the period for income attributable to common shareholders.
(4) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial Position").
(5) In Q1 2016, a special dividend of $0.50 per share, or $8.9 million in total, was declared following the sale of EcoHome and was paid on March 15, 2016.
(6) As a result of the 2017 U.S. Tax Cuts and Jobs Act, the U.S. subsidiaries’ net deferred tax liabilities were revalued, resulting in a $9.4 million reduction in
future taxes expense and deferred tax liabilities.
12
FOR THE YEAR ENDED DECEMBER 31, 2017
As at and for the quarter-ended
($ thousands, except per share figures)
Revenue (1)
Finance margin before expenses(1)
Income before tax and other items
(Operating Income (1)(2))
Income before tax (1)
Provision for taxes (1)(7)
Income from continuing operations (1)
Income from discontinued operations (1)
Q1 (5)(6)
Q2
Q3
Q4
Q1
Q2
Q3
2016
2017
Q4(7)
$
22,892 $
21,825 $ 23,195 $ 23,671 $
23,051 $
24,286 $
23,355 $
24,632
14,289
14,979
13,698
12,974
14,859
16,130
13,014
14,969
8,095
5,616
2,650
2,966
7,141
9,016
7,179
3,233
3,946
39
7,220
7,594
2,375
5,219
5,979
7,731
2,545
5,186
(136)
(83)
8,049
7,452
2,768
4,684
12
9,290
7,026
3,080
3,946
6,718
5,527
2,220
3,307
(197)
(119)
8,018
7,806
(6,008)
13,814
(16)
Net income
$
10,107 $
3,985 $
5,083 $
5,103 $
4,696 $
3,749 $
3,188 $
13,798
(1)(3)
Basic EPS - continuing operations
Diluted EPS - continuing operations (1)(3)
Basic earnings per share (3)
Diluted earnings per share (3)
$0.17
$0.16
$0.57
$0.56
$0.22
$0.22
$0.22
$0.22
$0.29
$0.28
$0.29
$0.27
$0.29
$0.29
$0.28
$0.28
$0.26
$0.25
$0.26
$0.25
$0.22
$0.21
$0.21
$0.20
$0.19
$0.19
$0.18
$0.18
$0.76
$0.74
$0.76
$0.74
Total assets
Long-term liabilities
Other Data
Adjusted EBITDA (2)
Dividends declared (4)
Dividends declared - special (4)(5)
Dividends declared per share (4)(5)
$ 453,553 $ 473,750 $ 500,202 $ 527,937 $ 547,686 $ 573,414 $ 593,065 $ 643,612
$ 291,437 $ 309,350 $ 330,468 $ 354,800 $ 377,735 $ 404,784 $ 428,752 $ 447,412
$
$
$
8,700 $
9,066 $
7,168 $
6,097 $
8,092 $
9,089 $
6,669 $
3,461 $
3,470 $
3,479 $
3,678 $
3,779 $
3,787 $
3,790 $
8,010
3,791
8,875
$0.695
$0.195
$0.195
$0.205
$0.210
$0.210
$0.210
$0.210
(1) It was determined that Case Funding and EcoHome meet the criteria of discontinued operations. The comparative figures have been reclassified as if their
respective operations had been discontinued from the start of the comparative periods. See Note 5 - Discontinued Operations in the 2017 audited consolidated
financial statements.
(2) Adjusted EBITDA and Operating Income are non-GAAP measures. See “Non-GAAP Measures” above for the definitions.
(3) Based on weighted average shares outstanding during the period for income attributable to common shareholders.
(4) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial Position").
(5) In Q1 2016, a special dividend of $0.50 per share, or $8.9 million in total, was declared following the sale of EcoHome and was paid on March 15, 2016.
(6) The Q1 2016 unaudited condensed consolidated interim financial statements, accompanying notes and MD&A filed on May 12, 2016 were refiled and amended
on August 11, 2016. The effect of the restatement was a $2.1 million reduction in the net gain on the sale of EcoHome, which was included in income from
discontinued operations, and a corresponding increase in taxes payable included in accounts payable and other liabilities. The restatement did not affect income
from continuing operations. The restatement had no effect on Adjusted EBITDA.
(7) As a result of the 2017 U.S. Tax Cuts and Jobs Act, the U.S. subsidiaries’ net deferred tax liabilities were revalued, resulting in a $9.4 million reduction in
future taxes expense and deferred tax liabilities.
13
FOR THE YEAR ENDED DECEMBER 31, 2017
ADJUSTED EBITDA, FREE CASH FLOW, MAXIMUM PERMITTED DIVIDENDS (1)
For the quarter-ended
($ thousands)
Net income
Interest expense - continuing
Interest expense - discontinued
Provision for taxes - continuing (6)
Provision for taxes - discontinued
Amortization and depreciation - continuing
EBITDA (1)
Q1 (4)(5)
Q2
Q3
Q4
Q1
Q2
Q3
2016
2017
Q4(6)
$
10,107 $
3,985 $
5,083 $
5,103 $
4,696 $
3,749 $
3,188 $
13,798
2,335
462
2,650
43
398
2,209
2,522
—
—
3,233
2,375
—
402
—
419
2,758
—
2,545
—
430
3,131
3,538
3,868
4,731
—
—
—
—
2,768
3,080
2,220
(6,008)
—
421
—
449
—
626
—
636
15,995
9,829
10,399
10,836
11,016
10,816
9,902
13,157
Interest expense
(2,797)
(2,209)
(2,522)
(2,758)
(3,131)
(3,538)
(3,868)
(4,731)
Share-based compensation expense
Financing costs - convertible debenture
509
100
266
750
326
300
271
510
Interest expense on convertible debenture
(324)
(324)
(328)
(328)
266
(20)
(321)
206
710
(324)
280
(100)
(328)
213
540
(328)
Contingent consideration accretion
(reduction), acquisition costs & gain on
sale of assets
Unrealized loss (gain) on investments
Foreign exchange unrealized loss (gain)
Unrealized loss (gain) – interest rate
derivatives
Adjusted EBITDA (1)
(6,538)
510
(278)
41
31
19
(363)
(241)
(181)
389
544
(11)
1,117
3
99
876
31
332
95
(124)
(730)
1,523
663
(444)
(1,757)
(251)
8,700
9,066
7,168
6,097
8,092
9,089
6,669
8,010
41
(885)
—
—
—
(538)
Maintenance capital expenditures
(55)
—
(27)
(30)
(7)
(102)
(6)
(68)
Provision for taxes
Free Cash Flow ("FCF") (1)
FCF L4PQ divided by 4 (1)
Maximum Permitted Dividends (1)(3)
Dividends declared (2)
Dividends declared - special (2)(4)
$
$
$
$
$
(2,693)
(3,233)
(2,375)
(2,545)
(2,768)
(3,080)
(2,220)
6,008
5,952 $
5,833 $
4,766 $
3,522 $
5,317 $
5,907 $
4,443 $
13,950
5,211 $
5,482 $
5,540 $
5,454 $
5,268 $
4,912 $
4,871 $
4,824
4,690 $
4,933 $
4,986 $
4,909 $
4,741 $
4,421 $
4,384 $
4,342
3,461 $
3,470 $
3,479 $
3,678 $
3,779 $
3,787 $
3,790 $
3,791
8,875
(1) Adjusted EBITDA, EBITDA, Free Cash Flow, FCF L4PQ (Free Cash Flow for the last four published quarters) and Maximum Permitted Dividends
are non-GAAP measures. See “Non-GAAP Measures” above for the definitions.
(2) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial Position").
(3) Based on 90% of FCF L4PQ. On January 25, 2016, the rate was changed from 80% to 90%.
(4) In Q1 2016, the Company declared a special dividend of $0.50 per share, or $8.9 million in total, was declared following the sale of EcoHome and
was paid on March 15, 2016.
(5) The Q1 2016 unaudited condensed consolidated interim financial statements, accompanying notes and MD&A filed on May 12, 2016 were refiled
and amended on August 11, 2016. The effect of the restatement was a $2.1 million reduction in the net gain on the sale of EcoHome, which was included
in income from discontinued operations, and a corresponding increase in taxes payable included in accounts payable and other liabilities. The
restatement did not affect income from continuing operations. The restatement had no effect on Adjusted EBITDA or Free Cash Flow.
(6) As a result of the 2017 U.S. Tax Cuts and Jobs Act, the U.S. subsidiaries’ net deferred tax liabilities were revalued, resulting in a $9.4 million
reduction in future taxes expense and deferred tax liabilities.
14
FOR THE YEAR ENDED DECEMBER 31, 2017
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2017 AND 2016
U.S. dollar results for the three months ended December 31, 2017 were converted at an exchange rate of 1.2713, which was the
average exchange rate for Q4 2017 (Q4 2016 - 1.3341).
($ thousands)
Equipment
Financing -
U.S.
Three months ended December 31, 2017
Corporate
Equipment
Overhead
Financing -
- Canada
Canada
Discontinued
Operations
(Note 5)
Interest revenue on leases and loans
$
17,509
$
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation - property and equipment
Income before undernoted items
Amortization - intangible assets and
contingent consideration reversal
Fair value adjustments - convertible
debentures and investments
Unrealized gain on interest rate derivatives
Unrealized loss on foreign exchange
Income before taxes
Tax (recovery) expense
Income from continuing operations
Loss from discontinued operations
Net income
Net cash used in operating activities
Net cash used in investing activities
Net cash from financing activities
Property and equipment expenditures
$
$
$
$
$
3,010
(3,610)
(4,666)
12,243
2,435
64
2,124
117
7,503
—
—
192
—
7,695
(6,596)
14,291
—
14,291
$
(39,640) $
(144) $
87,826
144
$
$
2,926
1,040
(1,121)
(266)
2,579
770
(37)
408
6
1,432
(513)
—
—
—
919
35
884
— $
$
884
(1,233) $
— $
3,128
$
$
— $
147
—
—
147
300
186
578
—
(917)
538
(872)
538
(95)
(808)
553
(1,361)
—
(1,361) $
(4,786) $
— $
(51,648) $
(16)
(16) $
482
$
— $
— $
Total
20,435
4,197
(4,731)
(4,932)
14,969
3,505
213
3,110
123
8,018
25
(872)
730
(95)
7,806
(6,008)
13,814
(16)
13,798
(45,177)
(144)
39,306
— $
— $
— $
144
The Company reported consolidated net income of $13.8 million for the three months ended December 31, 2017 compared to $5.1
million in the same period of 2016, an increase of $8.7 million year-over-year. The increase in net income year-over-year
predominantly related to the 2017 fourth quarter future tax recovery of $9.4 million as a result of the revaluation of our U.S.
subsidiaries’ net deferred tax liabilities due to the U.S. Tax Cuts and Jobs Act which was passed in December 2017. Our operating
income increased by $2.0 million compared to the same period in the prior year, predominantly from a drop in the provision for
credit losses in the three month period. The net decrease in other items compared to the same period in the prior year, including
amortization of intangibles, changes in contingent consideration, unrealized foreign exchange, and non-cash mark-to-market
adjustments on interest rate derivatives, investment in Dealnet common shares, and our convertible debentures, led to a decrease
in net income of $2.0 million in the three month period compared to the same period in the prior year.
15
FOR THE YEAR ENDED DECEMBER 31, 2017
Equipment
Financing -
U.S.
Three months ended December 31, 2016
Corporate
Equipment
Overhead
Financing -
- Canada
Canada
Discontinued
Operations
(Note 5)
($ thousands)
Interest revenue on leases and loans
$
17,116
$
$
— $
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation - property and equipment
Income before undernoted items
Amortization - intangible assets, contingent
consideration reversal
Fair value adjustments - convertible
debentures and investments
Unrealized gain on interest rate derivatives
Unrealized loss on foreign exchange
Income before taxes
Tax expense
Income from continuing operations
Loss from discontinued operations
Net income
Net cash used in operating activities
Net cash from investing activities
Net cash from financing activities
Property and equipment expenditures
$
$
$
$
$
2,509
(1,834)
(7,490)
10,301
2,701
60
2,206
87
5,247
—
—
—
—
5,247
1,148
4,099
—
4,099
$
(8,267) $
(77) $
— $
2,698
1,245
(924)
(449)
2,570
556
20
418
4
1,572
(339)
—
—
—
1,233
408
825
— $
$
825
(1,452) $
— $
3,054
$
Total
19,814
3,857
(2,758)
(7,939)
12,974
3,588
271
3,045
91
5,979
713
(329)
1,757
(389)
7,731
2,545
5,186
(83)
5,103
103
—
—
103
331
191
421
—
(840)
1,052
(329)
1,757
(389)
1,251
989
262
—
262
$
(83)
(83) $
(26) $
— $
— $
(727) $
$
3,532
9,828
$
(10,472)
3,455
12,882
77
$
— $
— $
— $
77
Pawnee and Windset's operating income increased by $2.3
million compared to the same period in the prior year,
predominantly as a result of the $1.4 million decrease in
Windset's provision for credit losses as it winds down and
the $1.4 million decrease in Pawnee's provision for credit
losses due to decreased delinquency rates and strong
collection efforts.
Pawnee and Windset's revenue increased $894,000 in the
three months ended December 31, 2017 compared to the
same period in the prior year. The $2.7 million growth in
Pawnee's revenue compared to the prior year is offset by the
$1.8 million decrease in Windset's revenue.
Pawnee and Windset's finance income (finance margin before
provision for credit losses) decreased $882,000 in the three
months ended December 31, 2017 compared to the same
period in the prior year. The $846,000 growth in Pawnee's
finance income compared to the same period in the prior year
is offset by the $1.7 million decrease in Windset's finance
income. Interest expense increased $1.8 million year-over-
year in the three month period compared to an increase in
Pawnee's revenue of $2.7 million, of which $544,000 relates
to increased commitment fees and other loan fees year-over-
year.
The provision for credit losses at Pawnee and Windset
decreased by $2.8 million for the three month period year-
over-year. Both Windset and Pawnee experienced a $1.4
million drop/recovery in their provision for credit losses year-
over-year. Pawnee's actual net charge-offs increased by
$347,000 reflecting, in part, a larger portfolio compared to
the same quarter last year. A strong collections effort in Q4
helped generate a decrease in Pawnee's delinquency markers
16
FOR THE YEAR ENDED DECEMBER 31, 2017
compared to the prior year, which led to a $1.74 million
decrease in Pawnee's allowance for doubtful accounts and
provision for credit losses compared to the same period in
the prior year.
Personnel and other expenses at Pawnee and Windset
decreased by $314,000 in the quarter compared to the same
period last year, predominantly as a result of a decrease in
Windset's expenses of $416,000.
Blue Chip generated operating income of $1.4 million in the
quarter compared to $1.6 million in the same period last year,
a decrease of $140,000 due primarily to a decrease in ancillary
finance and other fee income in the three month period
compared to the prior year and increased interest costs from
the prior year.
Corporate overhead before other items increased by $77,000
year-over-year, mainly from a $157,000 increase in
professional fees and other expenses, offset by a $44,000
increase in interest income on Chesswood's loans to Dealnet
Capital Corp. ("Dealnet") and EcoHome and a $36,000
decrease in personnel and share-based compensation
expense.
At December 31, 2017, the Company's investment in Dealnet
common shares had decreased in market value by $332,000
in three months ended December 31, 2017 compared to an
increase in value of $181,000 in the same period of 2016
resulting in a decrease in net income of $513,000 year-over-
year.
The non-cash unrealized mark-to-market adjustment on the
Company's convertible debentures was an unrealized loss of
$540,000 compared to an unrealized loss of $510,000 in the
prior year, translating to a decrease in net income of $30,000
year-over-year.
The non-cash unrealized mark-to-market adjustment on
interest rate derivatives for the three months ended
December 31, 2017 totaled a gain of $730,000 compared to
$1.8 million in the same period in the prior year, translating
to a decrease in net income of $1.0 million year-over-year.
The recovery of taxes for the three months ended
December 31, 2017 totaled $6.0 million compared to
provision of taxes of $2.5 million in the same period in the
prior year. The $6.0 million recovery of taxes for the three
months ended December 31, 2017 is comprised of $602,000
in current tax recovery, future tax expense of $3.8 million,
and a future tax recovery of $9.4 million as a result of the
revaluation of our U.S. subsidiaries’ net deferred tax
liabilities due to the U.S. Tax Cuts and Jobs Act passed in
December 2017. The effective tax rate differs from the
Canadian statutory
to higher foreign
tax rate due
jurisdictional tax rates and permanent differences between
accounting and taxable income, which primarily include
share-based
contingent
consideration accretion or reduction and non-deductible
acquisition costs.
compensation
expense,
The loss from discontinued operations in the three months
ended December 31, 2017 totaled $16,000 compared to a loss
of $83,000 recorded in the same period in 2016. The loss
from discontinued operations relates to the wind-down of
Case Funding's remaining legal finance receivables.
RESULTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 2017 AND 2016
See Note 27 - Segment Information in the notes to the
Company’s 2017 audited consolidated financial statements
for a breakdown of operating results and other information
by industry segment and geographic location.
U.S. dollar results for the year ended December 31, 2017
were converted at an exchange rate of 1.2986, which was the
average exchange rate for 2017 (2016 - 1.3248).
Consolidated operating income (“income before undernoted
items”) from continuing operations was $32.1 million,
compared to $30.3 million in the prior year, an increase of
$1.8 million, or 5.8%, before being normalized for the effects
of Windset's wind-down and foreign exchange. Our
operating income was up 12.6% after normalizing for those
affects as the table below illustrates.
Operating income by segment (see Note 27)
Segment
Equip finance - U.S.
Normalization adjustments:
Windset's operating
income
Impact of exchange
rate
2017
2016
($ thousands)
Change
$ 29,616 $ 28,845 $
771
(514)
(1,604)
1,090
—
(688)
688
Equip finance - U.S.
Normalized
$ 29,102 $ 26,553 $
2,549
Equip finance - CDN
5,887
5,039
Corp overhead
(3,428)
(3,574)
848
146
2017 vs 2016
Normalized
17
$ 31,561 $ 28,018 $
3,543
FOR THE YEAR ENDED DECEMBER 31, 2017
Pawnee and Windset's operating income increased by
$771,000 compared to the prior year. The $2.5 million
increase in Pawnee's operating income was offset by a $1.1
million decrease in operating income from Windset as
Windset winds down and a decrease of $688,000 due to the
drop in the exchange rate year-over-year.
Pawnee and Windset's revenue increased $2.8 million year-
over-year. The $13.7 million growth in Pawnee's revenue due
to growth in its portfolio is offset by a $10.9 million decrease
in Windset's revenue as Windset's portfolio continues to wind
down.
The provision for credit losses at Pawnee and Windset
decreased by $4.3 million year-over-year. The $6.6 million
drop in Windset's provision for credit losses year-over-year
was offset by a $2.3 million increase in Pawnee's provision
for credit losses during 2017 compared to the prior year. The
$3.2 million increase in Pawnee's actual net charge-offs,
along with a decrease in Pawnee's allowance for doubtful
accounts of $911,000, led to the net increase in Pawnee's
provision for credit losses for the year ended December 31,
2017 compared to the prior year.
Personnel and other expenses at Pawnee and Windset
increased by $1.5 million, reflecting support for the growth
in new business volumes and for the strategic initiatives to
improve future efficiency, and to enhance Pawnee's
technology. Pawnee's personnel and other expense increased
by approximately $3.2 million while revenues increased by
$13.7 million. Windset's personnel and other expenses
decreased by $1.7 million compared to the prior year. Pawnee
and Windset's combined employee headcount increased by
14 employees during the year ended December 31, 2017 to
bring the total to 87, and up from 73 employees at
December 31, 2016.
Blue Chip generated operating income of $5.9 million in the
year ended December 31, 2017 compared to $5.0 million in
the prior year, an increase of $848,000 due to growth in the
finance receivable portfolio while maintaining effective cost
controls.
Corporate overhead before other items decreased by
$146,000 year-over-year, mainly from a $245,000 reduction
in share-based compensation expense, a $25,000 reduction
in general expenses and professional fees, which were offset
by a $62,000 increase in personnel expenses and a $62,000
decrease in interest income on Chesswood's loans to Dealnet
and EcoHome.
The Company reported consolidated net income of $25.4
million in the year ended December 31, 2017 compared to
$24.3 million in 2016, an increase of $1.2 million year-over-
18
year. The prior year results included a $6.7 million net gain
on the sale of EcoHome whereas 2017 results include a future
tax recovery of $9.4 million as a result of the revaluation of
our U.S. subsidiaries’ net deferred tax liabilities due to the
U.S. Tax Cuts and Jobs Act passed in December 2017. The
$2.1 million decrease in net unrealized fair value adjustments
and other items in 2017 compared to the prior year led to a
decrease in net income year-over-year.
At December 31, 2017, the Company's investment in Dealnet
common shares had decreased in market value by $2.9
million in the year ended December 31, 2017 compared to a
increase in value of $3,000 in 2016 resulting in a decrease
in net income of $2.9 million year-over-year.
The non-cash unrealized mark-to-market adjustment on the
Company's convertible debentures was an unrealized loss of
$1.1 million compared to an unrealized loss of $1.7 million
in the prior year, translating to an increase in net income of
$530,000 year-over-year.
The non-cash unrealized mark-to-market adjustment on
interest rate derivatives for the year ended December 31,
2017 totaled a gain of $1.0 million compared to a gain of
$15,000 in the prior year, translating to an increase in net
income of $1.0 million year-over-year.
The provision for taxes for the year ended December 31, 2017
totaled $2.1 million compared to $10.8 million in the prior
year. The $2.1 million provision for taxes for the year ended
December 31, 2017 is comprised of $6.0 million in current
tax expense, future tax expense of $6.1 million, a future tax
recovery of $9.4 million due to the U.S. Tax Cuts and Job
Act and $448,000 in withholding tax on inter-company
dividends. The effective tax rate differs from the Canadian
statutory tax rate due to higher foreign jurisdictional tax rates
and permanent differences between accounting and taxable
income, which primarily include share-based compensation
expense, contingent consideration accretion or reduction and
non-deductible acquisition costs.
The loss from discontinued operations in the year ended
December 31, 2017 totaled $320,000 compared to income of
$7.0 million recorded in 2016. The loss from discontinued
operations in 2017 included income from the wind-down of
Case Funding's remaining legal finance receivables. The
income from discontinued operations for 2016 included the
$6.7 million net gain on the sale of EcoHome and 1.5 months
of operating results for EcoHome prior to the sale.
FOR THE YEAR ENDED DECEMBER 31, 2017
STATEMENT OF FINANCIAL POSITION
total consolidated assets of
the Company at
The
December 31, 2017 were $643.6 million. This is an increase
of $115.7 million from December 31, 2016. The U.S. dollar
exchange rate on December 31, 2017 was 1.2545, compared
to 1.3427 at December 31, 2016. The decrease in the foreign
exchange rate represents a decrease of $22.2 million in assets,
which was offset by an increase in finance receivables.
Cash totaled $3.6 million at December 31, 2017 compared
to $11.4 million at December 31, 2016, a decrease of
approximately $7.8 million. The Company’s objective is to
maintain low cash balances, investing any free cash in finance
receivables as needed and using any excess to pay down debt
on the primary financing facilities. Please see the Liquidity
and Capital Resources Overview section of this MD&A for
a discussion on cash movements during the years ended
December 31, 2017 and 2016.
Assets held for sale consist of Case Funding's legal finance
receivables for funds advanced to plaintiffs, attorneys, and
for the purchase of medical liens relating to plaintiff cases.
At December 31, 2017, there were 184 advances and loans
outstanding totaling $3.4 million (December 31, 2016 - 298
advances and loans totaling $5.9 million). The advances and
loans are due when the underlying cases are settled. The
number of days the receivable is outstanding does not
necessarily indicate the likelihood of impairment. It is normal
for receivables in the legal finance industry to be outstanding
anywhere from six months to 48 months (or longer). The
collectability of loans and/or advances made by Case Funding
depends on litigation outcomes in the form of judgments and/
or settlements. Once an advance/loan is made, the timing of
the collection cycle is out of Case Funding's control.
Therefore, the timing of actual collections will be irregular.
Other assets totaled $17.6 million at December 31, 2017, an
increase of $3.1 million from December 31, 2016. Other
assets included in this total relate to the sale of EcoHome in
2016 and totaled $10.3 million at December 31, 2017
compared to $10.7 million at December 31, 2016. In relation
to the sale of EcoHome, the non-cash consideration received
included a $2.5 million convertible note and 6,039,689
Dealnet common shares. The fair value of the common shares
represents the trading price at each reporting date, and the
value at December 31, 2017 totaled $634,000. Other assets
also includes a loan receivable from EcoHome representing
the inter-company warehouse funding for leases and loans
that had not yet been securitized with EcoHome funders prior
to the sale. The value at December 31, 2017 totaled $7.1
million. In Q4 2017, Chesswood advanced EcoHome an
additional $5.5 million under this loan and the secured note
was restated to extend the maturity date to October 2020
19
secured by specific leases and loans as well as a general
security agreement over all of the assets of EcoHome. The
loan has fixed monthly principal payments, and related
interest based on a floating interest rate plus a fixed margin.
See Note 6 - Other Assets in the 2017 audited consolidated
financial statements for further details.
Finance receivables consist of the following:
U.S. equip. - Pawnee
Canada equip. - Blue Chip
Working capital loans - Windset
December 31,
2017
December 31,
2016
($ thousands)
398,969
$
151,574
107
550,650
$
290,681
130,778
9,589
431,048
$
$
Finance receivables increased by $119.6 million, or 28%,
during the year ended December 31, 2017. The decrease in
the foreign exchange rate led to a $19.7 million decrease in
finance receivables since December 31, 2016. In U.S. dollars,
Pawnee's finance receivables increased by U.S.$101.5
million. At the same time, Windset's net investment in
working capital loans decreased by U.S.$7.1 million due to
Windset's wind-down. Blue Chip's finance receivables
increased by $20.8 million during the year ended December
31, 2017 as a result of expanded product lines and enhanced
relationships with its brokers.
The $550.7 million in net investment in leases and loans is
net of $11.9 million in allowance for doubtful accounts
(compared to $12.3 million in allowance for doubtful
accounts at December 31, 2016). Under IFRS, an allowance
can only be set up if there is objective evidence that an
impairment has already occurred. Potential losses expected
as a result of future events, no matter how likely based on
past historical evidence, are not allowed to be recognized.
Pawnee charges off leases and loans when they become 154
days contractually past due, unless information indicates that
an earlier charge-off is warranted. Windset charges off loans
when they become 60 days contractually past due. A high
percentage of charge-offs are recognized before the subject
leases/loans reach 154 days (Windset - 60 days) contractually
past due. As only a small percentage of the total lease and
loan receivable portfolio have monthly payments that are past
due at any one reporting date, the portion of the receivables
that shows observable objective evidence of impairment at
any one reporting date is quite small, despite historical
experience that indicates that future charge-offs with respect
to the current lease and loan receivable will typically exceed
the level of observable impairment in a matter of months.
Blue Chip charges off leases and loans on an individual basis.
FOR THE YEAR ENDED DECEMBER 31, 2017
On January 1, 2018, the Company adopted the new
impairment and measurement requirements under IFRS 9.
The Company estimates the IFRS 9 transition amount will
increase
for doubtful accounts by
approximately $10.0 million. Please see Note 2 - Accounting
Standards Issued But Not Yet Effective in the audited
consolidated financial statements for the year ended
December 31, 2017.
the allowance
Intangible assets totaled $19.7 million at December 31, 2017.
Of the $2.2 million decrease in intangible assets from
December 31, 2016, $1.7 million reflects amortization and
$511,000 relates to the decrease in the foreign exchange rate.
The significant intangible assets of broker relationships and
trade names do not require any outlay of cash to be
maintained, as the creation of lease and loan receivables does
not require an outlay of cash, other than commissions, which
are separately expensed over the terms of the lease and loan
receivables.
Goodwill totaled $39.9 million at December 31, 2017
compared to $40.8 million at December 31, 2016. The
$949,000 decrease in goodwill relates to the decrease in the
foreign exchange rate. Goodwill is typically tested annually
for impairment unless certain circumstances arise that would
require an assessment prior to an annual review. The
Company's annual goodwill impairment assessment did not
indicate any impairment as at December 31, 2017 and 2016.
Accounts payable and other liabilities totaled $14.9 million
at December 31, 2017 compared to $15.2 million at
December 31, 2016, a decrease of $354,000. See Note 11 -
Accounts Payable and Other Liabilities in the audited
consolidated financial statements for more detail on the
balances that comprise accounts payable and other liabilities.
Taxes payable at December 31, 2016 included $3.5 million
in taxes relating to the sale of EcoHome in 2016, which was
paid in the three months ended March 31, 2017.
On December 16, 2013, the Company issued a total of $20.0
million principal amount of convertible debentures. The
debentures were to mature on December 31, 2018, and bore
interest at a rate of 6.5% per annum, paid semi-annually. The
Company announced on December 12, 2017 that it would
exercise its right to early redemption of the debentures. On
January 17, 2018, Chesswood paid, in cash, $20 million in
outstanding principal and the accrued and unpaid interest to
the debenture holders as the redemption amount.
The debentures had several embedded derivative features
which were determined to not meet the criteria for treatment
as equity components and would otherwise be required to be
recognized as separate financial instruments, measured at fair
value through profit or loss. The Company elected under IAS
20
39.11A to designate the entire debentures (and all the
embedded derivatives) as a combined financial liability at
fair value through net income or loss. The fair value of the
debentures was based on their trading price on the Toronto
Stock Exchange as at the end of each reporting period.
Borrowings totaled $412.2 million at December 31, 2017
compared to $293.1 million at December 31, 2016, an
increase of $119.1 million. The $119.1 million increase in
borrowings is supporting $119.6 million of growth in our net
finance receivables. The decrease in the foreign exchange
rate since December 31, 2016, led to a $12.9 million decrease
in the borrowings amount.
Chesswood was utilizing U.S.$165.0 million of its credit
facility at December 31, 2017 compared to U.S.$144.3
million at December 31, 2016. The corporate credit facility
allows Chesswood to internally manage the allocation of
capital to its various financial services businesses in Canada
and the United States. The credit facility supports growth in
finance receivables, provides for Chesswood’s working
capital needs and for general corporate purposes. The
facility, available in U.S. or Canadian dollars, also improves
the Company's financial flexibility by centralizing treasury
management and making the provision of capital to
individual businesses more efficient.
On November 30, 2016, the Company announced that it had
expanded and renewed its corporate revolving credit facility.
Chesswood’s credit facility allowed borrowings of up to U.S.
$170.0 million subject to, among other things, certain
percentages of eligible gross finance receivables. The facility
can be expanded, subject to certain conditions, to U.S.$250.0
million and matures on December 8, 2019.
On April 13, 2017, the Company announced that it had
exercised U.S.$30.0 million of the U.S.$80.0 million
available accordion under its corporate revolving credit
facility, expanding allowable borrowings to U.S.$200.0
million.
On August 29, 2017, the Company announced that it had
exercised U.S.$50.0 million of the available accordion under
its corporate revolving credit facility, expanding allowable
borrowings to U.S.$250.0 million.
On December 12, 2017, the Company announced that it had
extended the facility to December 2020 from December 2019
and had obtained approval to use the credit facility to redeem
its convertible debentures.
The Company's borrowings under the credit facility are
subject to, among other things, adhering to certain
percentages of eligible gross lease/loan receivables. The
FOR THE YEAR ENDED DECEMBER 31, 2017
credit facility is secured by substantially all of the Company’s
assets and contains covenants (including the maintaining of
leverage and interest coverage ratios). Chesswood was in
full compliance with all its bank covenants at December 31,
2017 and December 31, 2016 (and throughout the periods).
On October 16, 2017, Pawnee announced that it had closed
its first U.S. non-recourse U.S.$75.0 million asset-backed
facility secured by a portion of Pawnee's prime equipment
finance receivable portfolio. The repayment terms are based
on the cash flow of the underlying leases and loans. Proceeds
from this non-recourse facility were applied to Chesswood's
existing credit facility. Pawnee is to comply with leverage
ratio, interest coverage ratio, and tangible net worth
covenants. At December 31, 2017 and throughout the period
from October to December 2017, the Company was in
compliance with all covenants. The facility requires the
Company to mitigate its interest rate risk by entering into
interest rate cap for a notional amount not less than 80% of
the aggregate outstanding balance. The interest rate cap is
tied to the repayment terms of the underlying finance
receivables portfolio supporting the facility, through the
maturity date of October 13, 2021, with a floating index rate
based on USD-LIBOR-BBA, but subject to a capped fixed
rate of 2.25%. At December 31, 2017, the fair value of the
cap was an asset of $185,000 (2016 - n/a).
Blue Chip has entered into master purchase and servicing
agreements and bulk lease financing facilities with various
financial institutions and life insurance companies (referred
to collectively as the “Funders”). The funding facilities are
advanced to Blue Chip on a tranche-by-tranche basis, with
each tranche collateralized by a specific group of underlying
finance receivables and any related security provided
thereunder. Interest rates are fixed at the time of each advance
and are based on Government of Canada Bond yields with
maturities comparable to the term of the underlying leases
plus a premium. Blue Chip maintains either certain cash
reserves as credit enhancements or provides letters of
guarantee in return for release of cash reserves. Blue Chip
continues to service these finance receivables on behalf of
the Funders. As at December 31, 2017, Blue Chip had access
to at least $96.4 million of committed bulk financing lines of
funding from both financial and insurance companies, in
addition to access to Chesswood's revolving facility. Blue
Chip must meet certain financial covenants to support these
securitization and bulk lease financing facilities. As at
December 31, 2017 and December 31, 2016 (and throughout
the periods), Blue Chip was in compliance with all covenants.
The $14.0 million (December 31, 2016 - $13.6 million) in
customer security deposits relates to security deposits
predominantly held by Pawnee. Pawnee’s non-prime
contracts require that the lessees\borrowers provide two
21
payments as security deposit (not advance payments), which
are held for the full term of the lease/loan and then returned
or applied to the purchase option of the equipment at the
lessee’s/borrower's request, unless the contract is in default
(in which case the deposit is applied against the receivable).
Historically, a very high percentage of such deposits are either
applied to the purchase option of the leased equipment at the
end of the lease term or used to offset charge-offs.
The Company entered into interest rate swap agreements that
provide for payment of an annual fixed rate, in exchange for
a LIBOR-based floating rate amount. The interest rate swaps
are intended to offset a portion of the variable interest rate
risk on the credit facility. The cost to terminate the interest
rate swaps would have been $43,000 at December 31, 2017
(December 31, 2016 - $850,000).
Future taxes payable at December 31, 2017 totaled $21.2
million compared to $27.0 million at December 31, 2016, a
decrease of $5.8 million. As a result of the U.S. Tax Cuts and
Jobs Act of 2017 (which was enacted December 22, 2017),
Chesswood was required to revalue its U.S. subsidiaries’ net
deferred tax liabilities to account for the future impact of
lower corporate tax rates on those deferred amounts. Based
on the reduction in the federal corporate tax rate from 35%
to 21%, there was a reduction in the future taxes payable of
$9.4 million. There was also a $1.2 million decrease in future
taxes payable due to the change in the foreign exchange rate
offset by a $4.5 million increase in future tax expense, and
$259,000 reclassified from future tax asset. Taxes at Pawnee,
Windset and Blue Chip are provided for using the asset and
liability method of accounting. This method recognizes
future tax assets and liabilities that arise from differences
between the accounting basis of the subsidiary’s assets and
liabilities and their corresponding tax basis.
At December 31, 2017, there were 16,575,367 common
shares outstanding (excluding the shares issuable in exchange
for the Exchangeable Securities, as defined below) with a
book value of $105.2 million. Including the Exchangeable
Securities, Chesswood would have had 18,053,904 common
shares outstanding.
In August 2017, the Company's Board of Directors approved
the repurchase for cancellation of up to 1,085,981 of the
Company’s outstanding common shares for the period
commencing August 25, 2017 and ending on August 24,
2018. No common shares were repurchased under this
normal course issuer bid during the year ended December 31,
2017. Subsequent to year end (up to and including March 8,
2018), the Company repurchased 76,918 of its common
shares under the normal course issuer bid at an average cost
of $10.2128.
FOR THE YEAR ENDED DECEMBER 31, 2017
In August 2016, the Company's Board of Directors approved
the repurchase for cancellation of up to 1,078,096 of the
Company’s outstanding common shares for the period
commencing August 25, 2016 and ending on August 24,
2017. No common shares were repurchased under this
normal course issuer bid during the year ended December 31,
2017. From August 25, 2016 to December 31, 2016, 6,000
common shares were repurchased under this normal course
issuer bid at an average cost of $10.9877. The excess of the
purchase price over the average stated value of common
shares purchased for cancellation is charged to retained
earnings.
Additionally, the Company has entered into an automatic
share purchase plan with a broker for the purpose of
permitting us to repurchase our common shares under the
normal course issuer bid at times when we would not be
permitted to trade in our own shares during internal blackout
periods, including during regularly scheduled quarterly
blackout periods. Such purchases will be determined by the
broker in its sole discretion based on parameters the Company
has established.
Non-controlling interest consists of 1,274,601 Class B
common shares and 203,936 Class C common shares (the
"Exchangeable Securities") of Chesswood US Acquisitionco
Ltd. (“U.S. Acquisitionco”), which were issued as partial
consideration for the acquisition of Pawnee and are fully
exchangeable at any time for the Company's common shares,
on a one-for-one basis, through a series of steps. Attached to
the Exchangeable Securities are Special Voting Shares of the
Company which provide the holders of the Exchangeable
Securities voting equivalency to holders of common shares.
Under IFRS, the Exchangeable Securities must be shown as
non-controlling interest because they are equity in a
subsidiary not attributable, directly or indirectly, to the parent
(even though they have no voting powers in the subsidiary,
have voting powers only in the parent company, and are fully
exchangeable into the equity of the parent for no additional
consideration and receive the same dividends as the common
shares of the parent company). When the non-controlling
interest was moved from Other Liabilities back to the
shareholders’ equity section on January 1, 2011 (the date
Chesswood Income Fund was converted into the Company),
per IFRS, the value attributed to the non-controlling interest
was just the fair value of the equivalent common shares
(closing value of the units of Chesswood Income Fund on the
Toronto Stock Exchange on December 31, 2010) as the
Exchangeable Securities are fully exchangeable into the
Company's common shares. Their portion of the cumulative
income and dividends from May 2006 to January 1, 2011 was
not allocated to non-controlling interest; however, their
portion of income and dividends has since been allocated to
non-controlling interest.
On January 1, 2018, the Company was required to adopt IFRS
9. The Company estimates the IFRS 9 transition amount will
reduce retained earnings and non-controlling interest by
approximately $7.0 million after-tax. Please see Note 2 -
Accounting Standards Issued But Not Yet Effective in the
audited consolidated financial statements for the year ended
December 31, 2017.
the
represent
accumulated
Reserves
share-based
compensation expensed over the vesting term for options and
restricted share units unexercised at December 31, 2017.
There were 2,155,989 options and 70,000 restricted share
units outstanding at December 31, 2017.
Accumulated other comprehensive income is the cumulative
translation difference between the exchange rate on
January 1, 2010, the IFRS adoption date, and the exchange
rate on December 31, 2017 of self-sustaining foreign
operations net assets.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash for the Company and its
subsidiaries have been cash flows from operating activities,
and borrowings under its, and its various subsidiaries' credit
and securitization and bulk lease financing facilities. The
primary uses of cash for the Company and its subsidiaries are
to fund business operations, equipment leases and loans,
support working capital, long-term debt principal repayments
and dividends.
At December 31, 2017, the Company's continuing operations
had approximately U.S.$50.4 million
in additional
borrowings available under the corporate credit facility and
at least $96.4 million under Blue Chip's securitization and
bulk lease financing facilities to fund business operations.
The Chesswood credit facility allows borrowings up to U.S.
$250.0 million. The Chesswood credit facility is used to
provide funding for operations (i.e. to provide financing for
the purchase of assets that are to be the subject of leases and
loans and support working capital). The financing facilities
are not intended to directly fund dividends by the Company.
Under the facility, the maximum amount of cash dividends
and purchases under its normal course issuer bid in respect
of a month is 1/12 of 90% of Free Cash Flow (see Dividend
Policy below) for the most recently completed four financial
quarters for which Chesswood has publicly filed its
consolidated financial statements (including its annual
consolidated financial statements in respect of a fourth
quarter). Free Cash Flow is defined as the consolidated
22
FOR THE YEAR ENDED DECEMBER 31, 2017
Adjusted EBITDA less maintenance capital expenditures and
tax expense. Please refer to the definitions of Non–GAAP
Measures provided in this MD&A.
On October 16, 2017, Pawnee closed its first U.S. non-
recourse U.S.$75.0 million facility which is secured by a
portion of Pawnee's prime equipment finance receivable
portfolio. The repayment terms are based on the cash flow
of the underlying leases and loans. The proceeds from this
non-recourse facility were applied to Chesswood's existing
credit facility.
Cash Sources and Uses
The statement of cash flows, which is compiled using the
indirect method, shows cash flows from operating, investing,
and financing activities, and the Company’s cash at the
beginning and end of the period. Cash flows in foreign
currencies have been translated at the average exchange rate
for the period. Cash flow from operating activities comprises
net income (loss) adjusted for non-cash items, changes in
working capital and operational net assets. IFRS deems
changes in finance receivables as operating assets for
financial companies. Receipts and payments with respect to
tax are included in cash from operating activities. Interest
revenue and interest expense are included in operating
activities and not investing or financing activities. Cash flow
from investing activities comprises payments relating to the
acquisition of companies, net of cash proceeds from the sale
of discontinued operations, and payments relating to the
purchase of property and equipment. Cash flow from
financing activities comprises changes in borrowings,
payment of dividends, proceeds from stock issues, exercise
of stock options, and the purchase and sale of treasury stock.
For the year ended December 31, 2017
In the year ended December 31, 2017, there was a decrease
in cash of $7.8 million compared to a decrease in cash of $4.5
million in the prior year as a result of reasons discussed below.
The Company’s continuing operations utilized $126.9
million of cash during the year ended December 31, 2017
compared to $44.0 million in the prior year, an increase in
the utilization of cash of $82.8 million.
The net cash utilized to fund the growth in finance receivables
(funds advanced, origination costs, security deposits,
restricted cash, less principal payments) totaled $196.3
million in the year ended December 31, 2017 compared to
$123.6 million in the prior year, an increase of $72.7 million.
The Company funded the growth in finance receivables from
excess opening cash, cash from operations and $137.7 million
23
in net borrowings in the year ended December 31, 2017 (2016
- $42.7 million).
In the year ended December 31, 2017, the Company made
tax payments of $12.5 million compared to $5.4 million in
the year ended December 31, 2016, an increase of $7.2
million year-over-year. The Company paid $3.5 million in
taxes in Q1 2017 on the gain on sale of EcoHome, which
was sold in Q1 2016.
If the cash utilized to fund the growth in finance receivables
and net tax payments (discussed above) is excluded from cash
from operating activities,
the continuing operations
generated $81.9 million in cash from net income, non-cash
items and other working capital changes compared to $84.9
million in the prior year, a decrease of $3.0 million from the
prior year, predominantly from the change in other net
operating assets.
In 2016, from the $29.0 million in net cash proceeds from
the sale of EcoHome, $6.0 million was used to pay contingent
consideration as provided in the Blue Chip and EcoHome
acquisition agreement, $8.9 million for a special dividend,
and approximately $10.0 million was applied to Chesswood's
credit facility during the first quarter of 2016.
Capital expenditures totaled $943,000 (2016 - $844,000)
during the year ended December 31, 2017. The majority of
the capital expenditures relate to the expenditures for
furniture and equipment for Pawnee as its staffing numbers
increased.
The Company paid dividends to the holders of its common
shares and Exchangeable Securities in the amount of $15.1
million during the year ended December 31, 2017 compared
to $22.9 million in the prior year, a decrease of $7.7 million,
due to the $8.9 million special dividend in Q1 2016, offset
by an increase in the monthly dividend per share starting in
December 2016 and a higher number of shares outstanding.
The Company received $162,000 (2016 - $2.0 million) from
the exercise of options by employees during the year ended
December 31, 2017.
For the three months ended December 31, 2017
In the three months ended December 31, 2017, there was a
decrease in cash of $5.7 million compared to $6.0 million in
the same period in the prior year as a result of reasons
discussed below.
The Company’s continuing operations utilized $45.7 million
of cash during the three months ended December 31, 2017
compared to $10.3 million in the same period in the prior
year, an increase in the utilization of cash of $35.4 million.
FOR THE YEAR ENDED DECEMBER 31, 2017
The net cash utilized to fund the growth in finance receivables
(funds advanced, origination costs, restricted cash, security
deposits, less principal payments) totaled $61.1 million in the
three months ended December 31, 2017 compared to $30.5
million in the same period in the prior year, an increase of
$30.6 million. The Company funded the growth in finance
receivables from excess opening cash, cash from operations
and $46.5 million in net borrowings in the three months ended
December 31, 2017 (2016 - $16.5 million).
In the three months ended December 31, 2017, the Company
made tax payments of $3.1 million compared to $708,000 in
the three months ended December 31, 2016, an increase of
$2.4 million year-over-year.
If the cash utilized to fund the growth in finance receivables
and net tax payments (discussed above) is excluded from cash
from operating activities, the Company generated $18.5
million in cash from net income, non-cash items and other
working capital changes compared to $21.0 million in the
same period in the prior year, a decrease of $2.5 million from
the prior year, predominantly from the decrease in change in
other net operating assets.
Capital expenditures totaled $144,000 (2016 - $77,000)
during the three months ended December 31, 2017, the
majority of the capital expenditures relate to the expenditures
for furniture and equipment for Pawnee as its staffing
numbers increased.
The Company paid dividends to the holders of its common
shares and Exchangeable Securities in the amount of $3.8
million during the three months ended December 31, 2017
compared to $3.6 million in the same period in the prior year,
an increase of $212,000, due to an increase in the monthly
dividend per share starting in December 2016 and a higher
number of shares outstanding. The Company received
$39,000 (2016 - $1.2 million) from the exercise of options
by employees during the three months ended December 31,
2017.
Chesswood expects that current operations and planned
capital expenditures for the foreseeable future of its
subsidiaries will be financed using funds generated from
operations, existing cash, and funds available under existing
and/or new credit and financing facilities. Chesswood may
require additional funds to finance future acquisitions and
support significant internal growth initiatives relating to
finance receivable portfolio growth. It will seek such
additional funds, if necessary, through public or private
equity, debt financings or securitizations from time to time,
as market conditions permit.
24
Financial Covenants, Restrictions and Events of Default
The Company and its operating subsidiaries are subject to
bank and/or funder covenants relative to leverage and/or
working capital.
The Company’s ability to access funding at competitive rates
through various economic cycles enables it to maintain the
liquidity necessary to manage its businesses, and its ability
to continue to access funding is an important condition to its
future success.
The Company’s secured borrowing agreement and its
subsidiaries' securitization and bulk lease financing facility
agreements have financial covenants and other restrictions
to obtain continued funding and avoid default.
Advances on the Chesswood revolving facility may be drawn
at any time, subject to compliance with borrowing base
calculations and compliance with the covenants set out
therein. As of December 31, 2017, U.S.$165.0 million was
outstanding under the U.S.$250.0 million facility and the
Company had capacity to draw up to U.S.$50.4 million and
remain within the borrowing base under the facility. The
Company had U.S.$5.3 million of letters of credit outstanding
under the Chesswood credit facility.
Dividends to Shareholders
The Company declared monthly cash dividends of $0.07 per
common share from January 2017 to December 2017.
Dividend Policy
The Company’s policy is to pay monthly dividends to
shareholders of record on the last business day of each month
by the 15th of the following month (or the next business day
thereafter if the 15th is not a business day).
Under the Chesswood credit facility, the maximum amount
of monthly cash dividends and repurchases under its normal
course issuer bid is 1/12 of 90% of Free Cash Flow (as defined
under Non–GAAP Measures in this MD&A) for the most
recently completed four financial quarters for which
Chesswood has publicly filed its consolidated financial
statements.
On January 25, 2016, the Company got approval to declare
special dividends and/or make repurchases under normal
course issuer bids to an aggregate of $17.7 million as a result
of completing the EcoHome sale (and the Company declared
a special dividend on February 18, 2016 of $0.50 per share,
for an aggregate special dividend of $8.9 million, which was
paid on March 15, 2016).
FOR THE YEAR ENDED DECEMBER 31, 2017
The amount of any dividends payable by Chesswood is at the
discretion of its Board of Directors, is evaluated on an
ongoing basis, and may be revised subject to business
circumstances and expected capital requirements depending
on, among other things, Chesswood’s earnings, financial
requirements for its operating entities, growth opportunities,
the satisfaction of applicable solvency tests for the
declaration and payment of dividends and other conditions
existing from time to time.
Minimum Payments The following are the contractual payments and maturities of financial liabilities and other commitments
as at December 31, 2017 (including interest):
($ thousands)
2018
2019
2020
2021
2022
2023 and
beyond
Total
Accounts payable and other
liabilities
Borrowings (a)
Customer security deposits (b)
Convertible debentures
Interest rate swaps
Other financial commitments (c)
$
14,889 $
— $
— $
— $
— $
— $
14,889
86,790
3,492
20,061
—
125,232
843
72,745
3,693
—
76,438
816
256,076
3,812
—
(8)
259,880
742
29,016
2,728
—
51
31,795
555
1,711
1,870
—
—
3,581
461
576
446,914
25
—
—
601
150
15,620
20,061
43
497,527
3,567
Total commitments
$
126,075 $
77,254 $
260,622 $
32,350 $
4,042 $
751 $
501,094
a. Borrowings are described in Note 13 - Borrowings in the audited consolidated financial statements, and include Chesswood's
credit facility which is a line-of-credit; as such the balance can fluctuate. The credit facility matures in December 2020. The
amount above includes fixed interest payments on Pawnee and Blue Chip's facilities and estimated interest payments on the
corporate credit facility, assuming the interest rate, debt balance and foreign exchange rate at December 31, 2017 remain the
same until December 2020, which is the date of expiry of the credit facility.
b. The Company’s experience has shown the actual contractual payment streams will vary depending on a number of variables
including: prepayment rates, charge-offs and modifications. Accordingly, the scheduled contractual payments of customer
security deposits shown in the table above are not to be regarded as a forecast of future cash payments.
c. The Company and its subsidiaries are committed to future minimum rental payments under existing leases for premises,
excluding occupancy costs and property tax, expiring in 2020 and 2023, which represent the bulk of other financial
commitments.
The Company has no material “off-balance sheet” financing obligations, except for long-term premises lease agreements and U.S.
$5.3 million in letters of guarantee. Other commitments are disclosed in Note 18 - Contingent liabilities and other financial
commitments in the 2017 audited consolidated financial statements.
25
FOR THE YEAR ENDED DECEMBER 31, 2017
OUTLOOK
We expect that with lower corporate tax rates in the U.S. our
business should experience higher demand for equipment
financing in most if not all credit segments, as well as some
improvement in portfolio performance.
The lower tax rates also apply to Chesswood and our U.S.
businesses, which are taxpayers in the U.S. Our effective tax
rate in the U.S. will decrease by approximately 13% which
is a meaningful reduction that we estimate, based on 2017
figures, to be a tax savings of approximately CDN$3.0
million. It is important to note that the regulations required
to more fully understand the many changes in the tax code
are not written as yet and it is therefore not possible to fully
assess the impact of the changes on Chesswood and our U.S.
businesses.
That said, we also expect 2018 to be a year of rising interest
rates in both Canada and the U.S. While a significant portion
of our overall debt is at a fixed cost, we have debt that is
floating as well. The majority of our floating rate debt
supports our non-prime portfolio however, which has strong
risk-adjusted yields and is less sensitive to a change in interest
rates.
We expect to see portfolio growth continue in 2018, most
notably in our prime portfolio in the U.S. We do not expect
to see any growth in our highest yielding U.S. portfolio
segment following our credit tightening in the spring of 2017.
This segment of our portfolio - start-up and “C” credit-rated
business - grew very consistently for many years, from 2009
through to the spring of 2017. We believe that the risk-
adjusted yields required for this market segment’s long-term
performance are now under competitive pressure that is
irrational and we have chosen not to follow the market’s
behavior.
Chesswood continues to have a strong balance sheet, multiple
banking partners and modest leverage that has us well
positioned to take advantage of opportunities, organic and/
or acquisitively. In addition, and most importantly, our
tenured, committed and proven management team and staff
are dedicated to driving Chesswood’s success well into the
future, just as they have in the past.
RISK FACTORS
An investment in the Company's common shares entails
certain risk factors that should be considered carefully.
Chesswood operates in a dynamic environment that involves
various risks and uncertainties, many of which are beyond
our control and which could have an effect on our business,
revenues, operating results, cash flow and financial
condition. Readers should carefully review the risk factors
in the Company’s annual information form filed with various
Canadian securities regulatory authorities through SEDAR
(the System for Electronic Document Analysis and Retrieval)
at www.sedar.com, a summary of which are set out below.
Dependence on Key Personnel
Our operating companies depend to a large extent upon the
abilities and continued efforts of their key operating
personnel and senior management teams.
Relationships with Brokers and Other Origination
Sources
Pawnee and Blue Chip have formed relationships with
hundreds of origination sources, comprised primarily of
equipment finance brokerage firms. They rely on these
relationships to generate applications and originations. The
failure to maintain effective relationships with their brokers
and other origination sources or decisions by them to refer
transactions to, or to sign contracts with, other financing
sources could impede their ability to generate transactions,
including Canada where Blue Chip gets a substantial portion
of its origination volume from a few large equipment
brokerage firms.
Risk of Future Legal Proceedings
Our operating companies are threatened from time to time
with, or are named as defendants in, or may become subject
to, various legal proceedings, fines or penalties in the ordinary
their respective businesses. A
course of conducting
significant judgment or the imposition of a significant fine
or penalty on an operating company (or on a company
engaged in a similar business, to the extent the operating
company operates in a similar manner) could have a material
adverse impact on our business, financial condition and
results of operations, and on the amount of cash available for
dividends to our shareholders.
Interest Rate Fluctuations
The Company and our operating companies are exposed to
fluctuations in interest rates under their borrowings. Increases
in interest rates (to the extent not mitigated by interest
hedging arrangements or fixed rate securitizations) may have
a material adverse impact on our businesses, financial
condition and results of operations, and on the amount of cash
available for dividends to our shareholders.
26
FOR THE YEAR ENDED DECEMBER 31, 2017
The leases and loans are written at fixed interest rates and
terms. Generally, the Company finances the activities of its
operating companies with both fixed rate and floating rate
funds. To the extent the operating companies finance fixed
rate leases and loans with floating rate funds, they are exposed
to fluctuations in interest rates such that an increase in interest
rates could narrow or eliminate the margin between the yield
on a lease and loan and the effective interest rate paid by the
borrower.
At the customer level, non-prime segments of the micro and
small-ticket equipment finance market have historically and
typically been, and continue to be, more sensitive to monthly
lease/loan payment amounts than to the effective rates of
interest charged.
Portfolio Delinquencies; Inability to Underwrite Lease
and Loan Applications
Pawnee’s receivables consist primarily of lease and loan
receivables originated under programs designed to serve
small and medium-sized, often owner-operated businesses
that have limited access to traditional financing. There is a
high degree of risk associated with equipment financing for
such parties. A portion of Pawnee’s portfolio are start-up
businesses that have not established business credit or a more
established business that has experienced some business or
personal credit difficulty at some time in its history. As a
result, such leases or loans entail a relatively higher risk and
may be expected to experience higher levels of delinquencies
and
the
levels. Pawnee cannot guarantee
delinquency and loss levels of its receivables will correspond
to the historical levels Pawnee has experienced on its
portfolio and there is a risk that delinquencies and losses
could increase significantly.
loss
that
Analogous risks are faced by Blue Chip in its business.
In addition, since defaulted leases and loans and certain
delinquent leases and loans cannot be used as collateral under
our variable rate financing facilities, higher than anticipated
lease defaults and delinquencies could adversely affect our
liquidity by reducing the amount of funding available to us
under our financing arrangements. Furthermore, increased
rates of delinquencies or loss levels could result in adverse
changes to the terms of future financing arrangements,
including increased interest rates payable to lenders and the
imposition of more burdensome covenants and increased
credit enhancement requirements.
Deterioration in Economic or Business Conditions;
Impact of Significant Events and Circumstances
The results of the Company's subsidiaries may be negatively
impacted by various economic factors and business
27
conditions, including the level of economic activity in the
markets in which they operate. To the extent that economic
activity or business conditions deteriorate, delinquencies and
credit losses may increase. Delinquencies and credit losses
generally increase during economic slowdowns or recessions
such as that experienced in the United States from 2008-2013.
As our operating companies extend credit primarily to small
businesses, many of their customers may be particularly
susceptible to economic slowdowns or recessions, and may
be unable to make scheduled lease or loan payments during
these periods. Unfavourable economic conditions may also
make it more difficult for our operating companies to
maintain new origination volumes and the credit quality of
new leases and loans at levels previously attained.
Unfavourable economic conditions could also increase
funding costs or operating cost structures, limit access to
credit facilities, securitizations and other capital markets or
result in a decision by lenders not to extend further credit.
In addition, the equipment finance industry generally may be
affected by changes in accounting treatment for leases and
loans, and negative publicity with respect to, among other
things, fraud or deceptive practices by certain participants in
the industry. Greater governmental scrutiny is also a risk,
especially as to the tax treatment of certain transaction
structures or other aspects of these transactions that, if
changed, could result in additional tax, fee or other revenue
to that governmental authority. Any of these factors may
make leasing less attractive or diminish the profitability of
the existing financing alternatives offered by our operating
companies.
In addition to being impacted by factors or conditions in the
United States or Canada, political, economic or other
significant events or circumstances outside of North America
(whether political unrest which impacts upon the prices of
oil and other commodities or otherwise) can ultimately
significantly
impact upon North American economic
conditions which, in turn, could result in the adverse
implications described in the first paragraph under this
heading. Similarly, natural disasters in any part of the world
may directly (through impact on supplies of goods or
equipment
impact
Chesswood's operations or results.
to our businesses) or
indirectly
Losses from Leases and Loans; The Risk/Yield Trade-off
Losses from leases and loans in excess of our operating
companies' expectations would have a material adverse
impact on our businesses, financial condition and results of
operations, and on the amount of cash available for dividends
to our shareholders.
FOR THE YEAR ENDED DECEMBER 31, 2017
Changes in economic conditions, the risk characteristics and
composition of the portfolio, bankruptcy laws, and other
factors could impact our operating companies’ actual and
projected net credit losses and the related allowance for credit
losses. Should there be a significant change in the above noted
factors, then our operating companies may have to set aside
additional reserves which could have a material adverse
impact on their respective business, financial condition and
results of operations and on the amount of cash available for
dividends to our shareholders.
Determining the appropriate level of the allowance is an
inherently uncertain process and therefore the determination
of this allowance may prove to be inadequate to cover losses
in connection with a portfolio of leases and loans. Factors
that could lead to the inadequacy of an allowance for credit
losses may include the inability to appropriately underwrite
credit risk of new originations, effectively manage
collections, or anticipate adverse changes in the economy or
discrete events adversely affecting specific customers,
industries or geographic areas.
Pawnee began offering its prime product in 2015 - financing
for higher credit rated lessees and borrowers, and this product
represents an increasing part of the composition of Pawnee’s
portfolio. While it is expected that the losses and allowance
for doubtful accounts in respect of this part of Pawnee’s
portfolio will be lower - commensurate with the prime credit
rating of the lessees/borrowers - the spread between the rates
that Pawnee can charge over our cost of funds is also
considerably smaller.
in such form including the loss of preferred creditor status
(which would impact upon Pawnee’s rights to recover on its
claim), limitations on finance charges and other fees that can
be enforced, and additional federal, state and other (income
or sales) taxes payable by Pawnee.
Case Funding’s non-recourse advances may be re-
characterized in certain jurisdictions as loans, or determined
to be improper fee-splitting, which would adversely affect
the collectability of the advances.
Defenses to Enforcement of a Significant Number of
Leases and Loans
Certain defenses and recovery impediments are more
common in micro and small-ticket equipment finance
transactions than with respect to equipment finance providers
in other segments of the equipment finance industry.
Management believes that certain of these risks are
sufficiently addressed in the existing documentation and
related business practices of our operating companies.
However, there are other risks that they have not addressed
for various reasons, including that certain of these risks are
not susceptible to being addressed either at all or without
incurring cost inefficiencies or taking other measures deemed
unacceptable by management based on a risk-reward
assessment. Our operating companies have never
experienced any material occurrence of these risks nor have
these risks historically had a material adverse impact on them.
However, there is no assurance that these risks will not have
a material adverse impact on their business, financial
condition and results of operations in the future.
Adverse Events or Legal Determinations in Areas with
High Geographic Concentrations of Leases or Loans
Origination, Funding and Administration of
Transactions
If judicial or other governmental rulings or actions or
interpretations of laws adverse to the equipment finance
industry and\or the working capital loan industry in general
or to business practices engaged in by our operating
companies, or adverse economic conditions or the occurrence
of other significant events such as natural disasters and
terrorist attacks, were to occur in a geographic region with a
high concentration of leases/loans or equipment financed
from our operating companies, there could be a material
adverse impact on our business, financial condition and
results of operations, and the amount of cash available for
dividends to our shareholders.
“Characterization” Risks
If an applicable court or regulatory authority were to make
an adverse finding, or take an adverse action on the basis that
one of Pawnee’s form of lease is not a true lease for
commercial law, tax law, or other legal purposes, adverse
consequences could result with respect to leases entered into
28
Our operating companies' origination,
funding and
transaction administration practices could result in certain
vulnerabilities in their enforcement rights. For example,
certain leases and loans are assignments of transactions
already documented by brokers. Acquiring leases/loans by
this “indirect” process subjects our operating companies to
various risks, including risks that might arise by reason of
the broker’s insolvency, administrative inadequacies or
fraudulent practices, as well as any third party claims against
the broker or its rights with respect to the assigned lease or
loan. Our operating companies may be subject to risks related
to broker practices, whether or not our operating companies
have actual legal responsibility for broker conduct. Any of
these broker related risks can impair our operating
companies’ rights with respect to recovering the rents and/or
property under leases and loans. Pawnee has not been
involved in any claims or litigation in relation to such risks
and Pawnee does not conduct lien searches in the name of,
FOR THE YEAR ENDED DECEMBER 31, 2017
require lien releases from, or file financing statements against
the lease broker.
If the lessee/borrower or broker is the party to whom the
vendor of the equipment has agreed to sell the property at the
time of its delivery, then under applicable commercial law,
the lessee/borrower or broker, as applicable, may be deemed
to have acquired title to the property prior to our operating
companies having funded the transaction. It has not been their
practice to ensure that the title to the leased property has not
already passed or to obtain assurances that it is acquiring good
title to that property free of liens and other third party claims.
The manner in which our operating companies purchase the
equipment is typical in this market segment, especially with
respect to similarly situated equipment financing providers.
They have not yet faced any meaningful challenge or adverse
consequence from this practice, but there can be no assurance
that such a challenge or consequence will not occur in the
future.
In most circumstances where the equipment is less than U.S.
$15,000 (or U.S.$10,000 if for a home business) for Pawnee’s
core product and U.S.$35,000 for the “B” product, and U.S.
$100,000 for "A", Pawnee’s practice of requiring only a
verbal confirmation that the property has been delivered and
irrevocably accepted under the subject lease or loan, and/or
inspecting the property to confirm the same, could make
Pawnee vulnerable to certain defenses. By way of example,
Pawnee’s deemed failure to deliver conforming property
under the lease or loan documents could be a defense to a
lessee/borrower’s “unconditional” obligation to pay the rents
and certain other amounts. Pawnee has not suffered any
material losses relating to these practices, however, there can
be no assurance that it would not in the future.
Analogous risks are faced by Blue Chip.
Changes in Governmental Regulations, Licensing and
Other Laws and Industry Codes of Practice
Finance companies are subject to laws and regulations
relating to extending financing generally and are also
members of industry associations which have adopted,
among other things, codes of business practice. Laws,
regulations and codes of business practice may be adopted
with respect to existing leases and loans or the leasing,
marketing, selling, pricing, financing and collections
processes which might increase the costs of compliance, or
require them to alter their respective business, strategy or
operations, in a fashion that could hamper the ability to
conduct business in the future.
Licensing Requirements
If an applicable court or regulatory authority were to make
an adverse finding or otherwise take adverse action with
respect to our operating companies based on their failure to
have a finance lender’s or other license or registration
required in the applicable jurisdiction, our operating
companies would have to change business practices and
could be subject to financial or other penalties. Further,
certain jurisdictions may enact or change administrative
practices in respect of licensing requirements for our
operating companies or their referring brokers. For example,
California requires that referring brokers have a lenders'
license, which may impact loan referrals from certain brokers
for funding to California residents.
Fees, Rates and Charges
Some of our operating companies’ documents require
payment of late payment fees, late charge interest, and other
charges either relating to the non-payment under, or
enforcement, of their leases and loans. It could be determined
that these fees and/or the interest rates charged exceed
applicable statutory or other legal limits. If the charges are
deemed to be punitive and not compensatory, or to have other
attributes that are inconsistent with, or in violation of,
applicable laws, they could be difficult to enforce. A number
of charges payable with respect to equipment finance
transactions in the micro and small-ticket equipment finance
market have been the subject of litigation by customers
against financing parties
the past. Although our
in
subsidiaries are not currently the subject of any such
litigation, there can be no assurance that a lessee/borrower
or a group of lessees/borrowers will not attempt to bring a
lawsuit against our subsidiaries in relation to fees and
charges, which our subsidiaries may or may not be successful
in defending.
Our operating companies believe that their fee programs are
designed and administered so as to comply with legal
requirements and are within the range of industry practices
in their market segments. Nevertheless, certain attributes of
these fees or charges, and their practices, including that their
leases and loans typically provide for several different fees
and charges resulting in a substantial amount of fee income
and the possibility that the fees and charges may exceed actual
costs involved or may otherwise be deemed excessive, could
attract litigation, including class actions, that would be costly
even if our subsidiaries were to prevail and as to which no
assurance can be given of their successful defense. In addition
to the risk of litigation, fee income is important to our
subsidiaries and the failure of our subsidiaries to continue to
collect most of these fees could have a material adverse
impact on our business, financial condition and results of
29
FOR THE YEAR ENDED DECEMBER 31, 2017
operations, and on the amount of cash available for dividends
to our shareholders.
Insurance
To ensure that the lessor or lender of the leased or financed
property suffering a loss receives the related insurance
proceeds, the lease or loan also requires that the lessor or
lender be named as a loss payee under the requisite casualty
coverage. However, each lessee/borrower is ultimately relied
upon to obtain and maintain the required coverage for
financed equipment but there is no certainty that they will
obtain the requisite coverage either conforming to the
requirements of the lease or loan, or at all. Additionally, there
are often policy provisions including exclusions, deductibles
and other conditions that by their terms, or by reason of a
breach, could limit, delay or deny coverage. There can be no
assurance that any insurance will protect our operating
companies interests in the equipment, and the failure by the
lessee/borrower to obtain insurance or the failure by the
operating companies to receive the proceeds from such
insurance policies could have a material adverse impact on
our business, financial condition and results of operations,
and on the amount of cash available for dividends to our
shareholders.
Lessor Liability
the
There is a risk that a lessor, such as Pawnee or Blue Chip,
could be deemed liable for harm to persons or property in
connection with, among other things, the ownership or
leasing of
the conduct or
leased property, or
responsibilities of the parties to the lease relating to that
property. The liability may be contractual (such as warranties
regarding the equipment), statutory (such as federal, state or
provincial environmental liability) or pursuant to various
legal theories (such as negligence). There have been cases in
which a lessor has been held responsible for damage caused
by leased property without a showing of negligence or wrong-
doing on the lessor’s part. Even if a lessor ultimately succeeds
in defending itself or settling any related litigation, the related
costs and any settlement amount could be significant.
Liability for Misuse of Leased Equipment
There is no practical manner to ensure that leased equipment
or a leased vehicle will be used, maintained or caused to
comply with applicable law. Pawnee and Blue Chip require
its lessees to deliver evidence of compliance with same as a
condition to funding but have no assurance that a lessee will
take the appropriate actions during the lease term to address
any use, maintenance or compliance issues which may arise.
A lessee’s conduct (or lack thereof) could subject Pawnee or
Blue Chip, as applicable, to liability to third parties.
Estimates Relating to Value of Leases
Based on the particular terms of a lease, equipment finance
companies estimate the residual value of the financed
equipment, which is recorded as an asset on its statement of
financial position. At the end of the lease term, equipment
finance companies seek to realize the recorded residual for
the equipment by selling the equipment to the lessee or in the
secondary market or through renewal of the lease by the
lessee. The ultimate realization of the recorded residual
values depends on numerous factors, including: accurate
initial estimate of the residual value; the general market
conditions and interest rate environment at the time of
expiration of the lease; the cost of comparable new
equipment; the obsolescence of the leased equipment; any
unusual or excessive wear and tear on or damage to the
equipment; and the effect of any additional or amended
government regulations.
If Pawnee or Blue Chip (in connection with those leases
where the lessee is not obligated to either purchase the
equipment or guarantee the residual value of the equipment
at the end of the term of the lease) is unable to accurately
estimate or realize the residual values of the leased equipment
subject to their leases, the amount of recorded assets on its
statement of financial position will have been overstated.
Competition from Alternative Sources of Financing
The business of micro and small-ticket equipment finance in
the United States is highly fragmented and competitive.
Pawnee focuses some its business on the segment of the micro
and small-ticket equipment finance market involving start-
up businesses that have not established business credit or
established businesses that have experienced some credit
difficulty in their history that do not meet the credit standards
of more traditional financing sources. Pawnee’s main
competition comes from equipment finance companies,
banks, commercial lenders, home equity loans, and credit
cards.
As Pawnee expands its suite of products to target potential
lessees with higher credit scores or if the creditworthiness of
its potential customers increases for various external reasons,
it expects to face competition from more traditional financing
sources as well, including: national, regional and local
finance companies; captive finance and equipment finance
companies affiliated with major equipment manufacturers;
and financial services companies, such as commercial banks,
thrifts and credit unions.
Many of the firms and institutions providing financing
alternatives are substantially larger than Pawnee and have
considerably greater financial, technical and marketing
resources. Some of them may have a lower cost of funds and
30
FOR THE YEAR ENDED DECEMBER 31, 2017
access to funding sources that are unavailable to Pawnee. A
lower cost of funds could enable a competitor to offer leases
and loans with pricing lower than that of Pawnee, potentially
forcing Pawnee to decrease its prices or lose origination
volume. In addition, some financing sources may have higher
risk tolerances or different risk assessments, which could
allow them to establish more origination sources and
customer relationships to increase their market share.
Further, because there are fewer barriers to entry with respect
to the micro and small-ticket equipment finance market, new
competitors could enter this market at any time, especially if
an improvement in the economy leads to a greater ability of
small and medium-sized businesses to establish improved
levels of creditworthiness.
Similarly, competition from a variety of other funding sources
may result in a decrease in demand for Blue Chip's financing
products.
With the ever advancing improvements in technology,
financial-technology ("Fintech") firms have been emerging
with new business models, based on new technology that
often includes an internet component, for offering financial
services to businesses and consumers. It is possible that
advancements by Fintech firms could negatively impact
Pawnee and/or Blue Chips' business in a significant manner.
Fraud by Lessees, Borrowers, Vendors or Brokers
While our operating companies make every effort to verify
the accuracy of information provided to them when making
a decision whether to underwrite a lease or loan and have
implemented systems and controls to protect against fraud,
in a small number of cases in the past our operating companies
have been a victim of fraud by lessees/borrowers, vendors
and brokers. In cases of fraud, it is difficult and often unlikely
that our operating companies will be able to collect amounts
owing under a lease or loan or repossess the related
equipment. Our operating companies may be subject to risks
related to broker practices whether or not our operating
companies have actual legal responsibility for broker
conduct. Increased rates of fraud could have a material
adverse impact on our business, financial condition and
results of operations, and on the amount of cash available for
dividends to our shareholders.
Protection of Intellectual Property
Chesswood's operating subsidiaries continually develop and
improve their brand recognition and proprietary systems and
processes, which is an important factor in maintaining a
competitive market position. No assurance can be given that
competitors will not independently develop substantially
31
similar branding, systems or process. Despite the efforts of
our operating subsidiaries to protect their proprietary rights,
unauthorized parties may attempt to obtain and use
information the subsidiaries regard as proprietary. Preventing
unauthorized use of such proprietary rights may be difficult,
time-consuming and costly, and without any assurance of
success.
Uncertainty of Outcome of Cases
The returns on loans and/or advances made by Case Funding,
and thus the returns for Chesswood, depend on litigation
outcomes in the form of judgments or settlements. Litigation
of individual cases entails a large degree of uncertainty. It is
also possible that a claimant may die or abandon his or her
case, that the lawyer may abandon the plaintiff’s case, or that
the defendant, the law firm, or the defendant’s insurance
carrier may declare bankruptcy. Case Funding is also reliant
on the capabilities of the attorneys handling the cases in which
it provides funding to effectively litigate claims with due skill
and care. Although Case Funding sought to weigh such
uncertainties in the due diligence conducted before making
its funding decisions, and intended to reduce risk by funding
in a broad array of cases, there can be no assurance that the
outcome of any given litigated claim or basket of claims can
be predicted, whether or not the probabilities were correctly
assessed by Case Funding.
Uncertainty in the Timing of Litigation Settlements and
Awards
The nature of litigation recoveries, including the timing and
amounts recovered, are outside the control of Case Funding.
Individual claims may be resolved over drastically varying
times: for example, as short as one month, or longer than three
years. Case Funding will be required to wait for an
indeterminate period of time after an advance/loan is made
to fully collect money from judgment recoveries.
Case Funding May Have Difficulty Collecting on its
Investments
If plaintiffs or law firms to which Case Funding has advanced
or loaned funds do not pay Case Funding pursuant to the terms
of the advances/loans made, Case Funding may be required
to pursue costly legal actions to collect. It is also possible that
a plaintiff’s attorney or a law firm may attempt to renegotiate
the ultimate amount owed to Case Funding or that there is
not enough proceeds from the case to repay Case Funding in
full. In these situations, Case Funding may have to accept a
smaller return than anticipated in order to accommodate and
maintain business relationships or avoid litigation. In either
event, the inability of Case Funding to collect or the necessity
of legal action to collect, could harm or reduce the potential
cash flow.
Failure of Computer and Data Processing Systems
Leverage, Restrictive Covenants
FOR THE YEAR ENDED DECEMBER 31, 2017
Our operating companies are dependent upon the successful
and uninterrupted functioning of their computer and data
processing systems. The failure of these systems could
interrupt operations or materially impact the ability of our
operating companies to originate and service their lease and
loan portfolio and broker networks. If sustained or repeated,
a system failure could negatively affect these operations. Our
operating companies maintain confidential information
regarding lessees and borrowers in their computer systems.
This infrastructure may be subject to physical break-ins,
computer viruses, programming errors, attacks by third
parties or similar disruptive problems. A security breach of
computer systems could disrupt operations, damage
reputation and result in liability.
Security Risks
Despite implementation of network security measures, the
infrastructure of our subsidiaries' websites and our
management network is potentially vulnerable to computer
break-ins and similar disruptive problems.
Risks Related to our Structure and Exchange Rate
Fluctuations
The dividends expected to be paid to our shareholders will
be denominated in Canadian dollars. However, a significant
percentage of our revenues are expected to be derived from
the revenues of our U.S. operations, which are received in
U.S. dollars. Changes in the value of the U.S. dollar could
have a negative impact on our Canadian dollar results, and
in turn, on the amount in Canadian dollars available for
dividends to our shareholders.
The Company and its subsidiaries have third party debt
service obligations under their respective credit and
securitization and bulk lease financing facilities. The degree
to which our subsidiaries are leveraged could have important
consequences to our shareholders, including: (i) the ability
to obtain additional financing for working capital in the future
may be limited; (ii) a portion of the cash flow from the assets
of such subsidiaries may be dedicated to the payment of the
principal of and interest on their respective indebtedness,
thereby reducing funds available for distribution to the
Company; and (iii) certain of the respective borrowings of
such subsidiaries will be at variable rates of interest, which
will expose them to the risk of increased interest rates. The
ability of such subsidiaries to make scheduled payments of
the principal of or interest on, or to refinance, their
indebtedness will depend on their future cash flow, which is
subject to their respective assets, prevailing economic
conditions, prevailing interest rate levels, and financial,
competitive, business and other factors, many of which are
beyond their control.
Possible Acquisitions
Acquisitions, if they occur, may increase the size of the
operations as well as increase the amount of indebtedness
that may have to be serviced by Chesswood and its
subsidiaries. There is no assurance that such acquisitions can
be made on satisfactory terms, or at all. The successful
integration and management of acquired businesses involve
numerous risks that could adversely affect the growth and
profitability of Chesswood and its subsidiaries. There is no
assurance that such acquisitions will be successfully
integrated.
Unpredictability and Volatility of Share Price
Restrictions on Potential Growth
A publicly-traded company will not necessarily trade at
values determined by reference to the underlying value of its
business. The prices at which our common shares will trade
cannot be predicted. The market price of the common shares
could be subject to significant fluctuations in response to
variations in quarterly operating results and other factors. The
annual yield on the common shares as compared to the annual
yield on other financial instruments may also influence the
price of common shares in the public trading markets. In
addition, the securities markets have experienced significant
price and volume fluctuations from time to time in recent
years that often have been unrelated or disproportionate to
the operating performance of particular issuers. These broad
fluctuations may adversely affect the market price of the
common shares.
The payout by our operating companies of a significant
portion of their earnings available for distribution will make
additional capital and operating expenditures dependent
upon increased cash flow or additional financing in the future.
Lack of those funds could limit the future growth of our
operating companies and their cash flow.
Canadian Income Tax Matters
The income of the Company's operating companies must be
computed in accordance with applicable Canadian, U.S, or
foreign tax laws, and the Company is subject to Canadian tax
laws, all of which may be changed in a manner that could
adversely affect the amount of distributable cash.
United States Income Tax Matters
There can be no assurance that U.S. federal and state income
32
FOR THE YEAR ENDED DECEMBER 31, 2017
tax laws and administrative policies will not develop or be
changed in a manner that adversely affects our shareholders.
On December 22, 2017, the U.S. government enacted new
tax legislation effective January 1, 2018. However, the
legislation makes broad and complex changes to the U.S. tax
code and, accordingly, it will take time to assess and interpret
the changes. Consequently, the provisional recovery recorded
by the Company in our financial statements may change in
the future following a more comprehensive review of the
legislation, including implementation of the associated rules
and regulations and supporting guidance from the Internal
Revenue Service and other bodies, and as a result of any future
changes or amendments to this legislation.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Understanding the Company’s accounting policies is
essential to understanding the results of the Company’s
operations and financial condition. The preparation of these
consolidated financial statements requires us to make
estimates and judgments that affect reported amounts of
assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of
our consolidated financial statements. We base our estimates
on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources.
Net Investment in Leases
The leases entered into are considered to be finance leases in
nature, based on an evaluation of all the terms and conditions
and the determination that substantially all the risks and
rewards of legal ownership of the asset has been transferred
to the lessee. Interest revenue on finance leases is recognized
under the effective interest method. The effective interest
method of income recognition applies a constant rate of
interest equal to the internal rate of return on the lease.
Allowance for Doubtful Accounts
The carrying value of net investment in leases and loans is
net of allowance for doubtful accounts. Quantifying the
impairment is based on the estimates of the carrying value
that will ultimately not be collected where there is objective
evidence of impairment.
The finance receivables are each composed of a large number
of homogenous leases and loans, with relatively small
balances made to inherently risky borrowers. Pawnee
charges-off leases and loans when they become 154 days
contractually past due, unless information indicates that an
earlier charge-off is warranted. A high percentage of charge-
offs are made before the subject leases and loans reach 154
days contractually past due.
Pawnee’s allowance for doubtful accounts on Chesswood’s
consolidated financial statements is comprised of the net
investment in leases and loans value that is over 30 days
delinquent, plus any leases or loans identified as impaired
less than 30 days delinquent and approximately 15% of the
1-30 day delinquent leases (those considered most likely to
fall into the over 30 days delinquent category by the next
month). A similar approach is taken for Windset and Blue
Chip.
Under IFRS, an allowance can only be set up if there is
objective evidence that the impairment has already occurred;
potential losses expected as a result of future events, no matter
how likely based on past historical evidence, are not allowed
to be recognized. As only a small percentage of the total lease
and loan receivable portfolio have monthly payments that are
past due at any one reporting date, the portion of the lease
and loan receivables that shows observable objective
evidence of impairment at any one reporting date is quite
small, despite long-term historical experience that indicates
that future charge-offs with respect to the current lease and
loan receivable will typically exceed the level of observable
impairment, in a matter of months.
Projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the
risk characteristics and composition of the portfolio,
bankruptcy laws, and other factors could impact the actual
and projected net credit losses and the related allowance for
doubtful accounts.
As of January 1, 2018, the Company adopted IFRS 9 which
introduces a new expected credit loss impairment method for
calculating allowance for doubtful accounts. Please see Note
2 - Accounting Standards Issued But Not Yet Effective in the
2017 audited consolidated financial statements for further
disclosure.
Legal Finance Receivables
Attorney loans and medical lien financing are deemed to be
a financial asset as they are a contractual right to receive cash
from another entity and are considered to be loans and
receivables for accounting purposes, based on an evaluation
33
FOR THE YEAR ENDED DECEMBER 31, 2017
of all the terms and conditions of the contracts. The contracts
are deemed to have fixed or determinable payments, in that
the payments are due when the underlying cases are settled
however the date as to which that will happen is not known
and is estimated. Loans and receivables are accounted for at
amortized cost using the effective interest method; however
the effective interest rate is calculated using estimated cash
flows based on an estimated settlement dated.
Plaintiff advances are deemed to be a financial asset as they
are a contractual right to receive cash from another entity and
are considered to be available-for-sale financial assets for
accounting purposes, based on an evaluation of all the terms
and conditions of the contracts. The terms of the plaintiff
advances are on a non-recourse basis, and payment depends
on the success and potential claim size. Thus, the terms may
limit the expected cash flows and other than for credit
deterioration, they are deemed not to be loans and receivables.
Available-for-sale financial assets are valued at fair value,
the accretion or reduction in value is recognized based on the
effective interest method and recognized into finance income.
Once an advance/loan is made, the timing of the collection
cycle is out of Case Funding's control. Therefore, the timing
of actual collections will be irregular.
Impairment of Goodwill
restructuring activities and
Goodwill is evaluated for impairment on an annual basis, or
more frequently if certain events or circumstances exist. The
Company’s impairment test of goodwill is based on the value-
in-use which is estimated using a discounted cash flow model.
The cash flows are derived from budgets for the next five
years, excluding
future
investments. Impairment testing is applied on an individual
asset basis unless an asset does not generate cash inflows that
are largely independent of the cash inflows generated by other
assets or groups of assets. None of the Company’s non-
financial assets generate independent cash inflows and
therefore all non-financial assets are allocated to cash
generating units (“CGU”) for purposes of assessing
impairment.
CGUs are defined as the smallest identifiable group of assets
that generate cash inflows that are largely independent of the
cash inflows from other assets or groups of assets.
Impairment losses are recognized when the carrying amount
of a CGU exceeds the recoverable amount, which is the
greater of the CGU’s fair value less cost to sell and its value
in use. Value-in-use is the present value of the estimated
future cash flows from the CGU discounted using a pre-tax
rate that reflects current market rates and the risks inherent
in the business of each CGU. If the recoverable amount of
the CGU is less than its carrying amount, the CGU is
34
considered impaired and is written down to its recoverable
amount. The impairment loss is allocated to reduce the
carrying amount of the assets of the CGU, first to reduce the
carrying amount of the CGU’s goodwill and then to the other
assets of the CGU allocated pro-rata on the basis of the
carrying amount of each asset. Other than the cash flow
estimates, the value-in-use is most sensitive to the discount
rate used and the growth rate applied beyond the five year
estimate. Changes in these estimates and assumptions could
have a significant impact on the value-in-use and/or goodwill
impairment.
Contingent Consideration
The estimated fair value of contingent consideration required
very subjective assumptions to be made of various potential
operating result scenarios and discount rates. The Company
periodically reviewed expected operating results and an
updated assessment of various probability weighted
projected scenarios.
Convertible Debentures
The convertible debentures had several embedded derivative
features which were determined to not meet the criteria for
treatment as equity components and would otherwise be
required as separate financial instruments, measured at fair
value through the profit or loss. The Company had elected
under IAS 39.11A to designate the entire convertible
debentures (and all the embedded derivatives) as a combined
financial liability at fair value through profit or loss. As the
convertible debentures were fair valued based on the trading
price on the Toronto Stock Exchange every reporting period,
there may have been increased volatility in our reported net
income. As result of the election to value the convertible
debentures at fair value, the expenses related to the issuance
of the convertible debenture were expensed when incurred.
Share-based Payments
The Black-Scholes model is used to fair value options issued
by the Company. The model requires the use of subjective
assumptions including the expected share price volatility. In
addition, the options issued have characteristics different
from those of traded options so the Black-Scholes option-
pricing model may not provide a reliable single measure of
the fair value of options issued. Changes in the subjective
assumptions can have a material effect on the fair value
estimate.
Interest rate derivatives
Financial instruments accounting requires recognition of the
fair value of all derivative instruments on the statement of
financial position as either assets or liabilities. Changes in a
derivative’s fair value are recognized currently in earnings
FOR THE YEAR ENDED DECEMBER 31, 2017
unless specific hedge accounting criteria are met. Gains and
losses on derivative hedging instruments must be recorded
in either other comprehensive income or current earnings,
depending on the nature and designation of the instrument.
Interest rate derivatives are not considered
trading
instruments as the Company intends to hold them until
maturity. Nonetheless, interest rate derivatives do not qualify
as a hedge for accounting purposes, and are therefore
recorded as separate derivative financial instruments.
Accordingly, the estimated fair value of interest rate
derivatives is recorded as an asset or a liability on the
accompanying consolidated statement of financial position.
Payments made and received pursuant to the terms of the
interest rate derivatives are recorded as an adjustment to
interest expense, and adjustments to the fair value of the
interest rate derivatives are recorded as gain or loss on interest
rate derivatives. The fair value of interest rate derivatives is
based upon the estimated net present value of cash flows.
Taxes
Pawnee and Blue Chip use the asset and liability method to
account for taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for future
tax benefits for which realization is not considered more
likely than not. Pawnee and Blue-Chip account for their lease
arrangements as operating leases for federal tax reporting
purposes. This results in temporary differences between
financial and tax reporting for which deferred taxes have been
provided.
Significant management judgment is required in determining
the provision for taxes, deferred tax assets and liabilities and
any necessary valuation allowance recorded against net
deferred tax assets. The process involves summarizing
temporary differences resulting from the different treatment
of items, for example, leases for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included within the consolidated statements of
financial position. Management must then assess the
likelihood that deferred tax assets will be recovered from
future taxable income or tax carry-back availability and, to
the extent management believes recovery is not probable, a
valuation allowance must be established. To the extent that
we establish a valuation allowance in a period, an expense
must be recorded within the tax provision in the statement of
income. The Company’s estimate of its future taxes will
vary based on actual results of the factors described above,
and such variations may be material.
FUTURE ACCOUNTING STANDARDS
A listing of the recent accounting pronouncements not yet
adopted by the Company is included in Note 2 - Accounting
Standards Issued But Not Yet Effective in the audited
consolidated financial statements for the year ended
December 31, 2017.
RELATED PARTY TRANSACTIONS
See Note 25 - Related Party Transactions in the 2017 audited
consolidated financial statements for the disclosure of key
management compensation.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and the Director of Finance (the
“Certifying Officers”), along with other members of
management, have designed, or caused to be designed under
their supervision, Disclosure Controls and Procedures
(“DC&P”) to provide reasonable assurance that (i) material
information relating to the Company is made known to them
by others, particularly during the period in which the annual
filings are being prepared; and (ii) information required to be
disclosed by the Company in its annual filings, interim filings
or other reports filed or submitted by it under securities
legislation is recorded, processed, summarized and reported
within the time periods specified in securities legislation.
The Certifying Officers have assessed the design and
operating effectiveness of the Company’s DC&P as at
December 31, 2017 and have concluded that the design and
the operation of the Company’s DC&P are effective as at that
date.
Internal Control over Financial Reporting
The Certifying Officers, along with other members of
management, have also designed, or caused to be designed
under their supervision, Internal Control over Financial
35
FOR THE YEAR ENDED DECEMBER 31, 2017
Reporting (“ICFR”)
to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes
prepared in accordance with IFRS. The Certifying Officers
have used the Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in 2013, to design the
Company’s ICFR.
The Certifying Officers have assessed the design and
operating effectiveness of the Company’s ICFR as at
December 31, 2017 and have concluded that the design and
the operation of the Company’s ICFR are effective as at that
date.
Changes in the Company’s ICFR
During 2017, with the oversight of the Audit and Governance
Committee,
the Certifying Officers commenced a
comprehensive Internal Control Program to address the
remediation of Material Weaknesses as previously reported.
The Program was managed by external advisers, and among
other items, included the design and implementation of
specific policies, procedures and controls to address the
control weaknesses as discussed below:
1) Segregation of Duties
Given the Company’s size, it has limited resources within the
finance department at head office to adequately segregate
duties and to permit or necessitate the comprehensive
documentation of all policies and procedures that form the
basis of an effective design of ICFR. The Company is reliant
on the knowledge of a limited number of employees and on
the performance of mitigating procedures during its financial
close process to ensure the consolidated financial statements
are presented fairly in all material respects. Management
believes the staffing level of Pawnee's finance department is
appropriate in the context of the scope of Pawnee’s
operations, and that the individuals comprising the members
of the Company’s management and Pawnee’s management
responsible for financial reporting are considered to have
appropriate proficiency and experience to effectively perform
their respective duties. However, the nature and size of the
Company’s operations are such that the duties are performed
by a small number of persons with limited segregation of
duties.
In order to mitigate the risk of material misstatement in the
financial statements and to remediate the previously
disclosed control weakness, management has established
additional review and monitoring controls at head office on
a monthly basis, and at Pawnee on a quarterly basis. The
Company has also engaged the services of external resources
36
to perform independent reviews of the Company's financial
close, consolidation and reporting processes and schedules
to create further segregation of duties.
Furthermore, documentation of policies and procedures at
the Head Office Finance Group has been enhanced and
formalized.
2) Information Technology Controls
Due to the relatively small size of the Company, the Company
had not been able to maintain effective controls over certain
key end user computing applications, such as spreadsheets,
used in the Company’s financial reporting process and
appropriate security controls to manage access to key
information. Controls pertaining to access profiles and
password protocols required revision to mitigate the risk of
inappropriate access to systems and applications. In
addition, improvements to exception reporting were required
to ensure any unauthorized modification of the data or
formulas within spreadsheets is identified and reported. It
should be noted that the foregoing weaknesses related to the
Company and its systems. Pawnee’s systems are believed to
be more commensurate with the scope of its operations.
Given the above noted weaknesses, the Company has
established additional analyses and other post-closing
procedures to ensure the consolidated financial statements
are prepared accurately and completely and the disclosed data
is in accordance with IFRS. Furthermore, through the use of
external resources to conduct independent reviews and
establishment of a sub-certification process, management has
taken further remediation steps to ensure the integrity of the
Company's disclosure documents.
Management has also focused on its General Computer
Controls to ensure that access to financial reporting systems
and data is underpinned by password protocols and the access
granted is appropriate and authorized, changes to these
systems are made in accordance with management’s intent
and approval and the security over the internal networks is
adequately protected and monitored. Outsourced service
providers regularly attest, through third party reports and
management bridge letters, to the design and operating
effectiveness of controls over the systems managed by them.
In the area of Spreadsheet Controls, management has
remediated the control weaknesses through:
•
•
•
Issuance of a Spreadsheet Control Policy
Providing Spreadsheet Control Training to staff
Performance of Risk Assessment on Spreadsheets
FOR THE YEAR ENDED DECEMBER 31, 2017
risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
MARKET FOR SECURITIES
The Company's common shares are traded on the Toronto
Stock Exchange under the symbol CHW. The following table
summarizes the high and low sales prices of the common
shares and the average daily trading volume for each month
in the year ended December 31, 2017.
Common Shares
January
February
March
April
May
June
July
August
September
October
November
December
High
$12.34
$12.80
$13.69
$14.60
$13.72
$12.53
$13.58
$13.82
$12.70
$13.00
$13.00
$11.75
Low
$11.60
$11.88
$12.55
$12.62
$11.70
$11.21
$11.23
$11.75
$12.01
$12.10
$11.17
$11.17
$14.60
$11.17
Average Daily
Volume
16,349
15,274
19,960
22,843
13,592
15,195
11,268
13,669
11,563
9,620
19,082
14,763
15,524
3) Anti-Fraud Controls
As a result of the lack of segregation of duties at the Company
level as described above, anti-fraud controls were limited.
While management found no evidence of fraudulent activity,
the Director of Finance has access to both accounting records
and corporate assets, principally the operating bank account,
and prepares journal entries without any independent review.
Management felt the existing signing authorities and current
review of bank balances were sufficient to mitigate the risk.
Management has remediated the above weakness through a
complete review of its treasury cycles and implementation
of segregated roles and responsibilities and engagement of
external resources to perform a complete review of the journal
entries on a quarterly basis, thus reducing the risk of error
and fraud in the Company's financial close process at the
Corporate Office. Furthermore, management has issued a
Journal Entry Policy and Procedure which has been rolled
out to employees and has segregated the journal entry
preparation, review and approval roles.
Limitations of an Internal Control System
The Certifying Officers believe that any DC&P or ICFR, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs.
Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues,
including instances of fraud, if any, within the Company have
been prevented or detected. These inherent limitations
include, amongst other items: (i) that management’s
assumptions and judgments could ultimately prove to be
incorrect under varying conditions and circumstances; (ii)
breakdowns could occur because of undetected errors; and
(iii) controls may be circumvented by the unauthorized acts
of individuals, by collusion of two or more people, or by
management override.
The design of any system of controls is also based in part
upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential
(future) conditions.
Accordingly, because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud
may occur and not be detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the
37
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Chesswood Group Limited and all of the information in this Annual Report are the
responsibility of Management and have been approved by the Board of Directors.
The consolidated financial statements have been prepared by Management in accordance with International Financial Reporting Standards
("IFRS"). These statements include some amounts that are based on best estimates and judgment. Management has determined such amounts
on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial
information used elsewhere in the Annual Report is consistent with that in the consolidated financial statements. The MD&A also includes
information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and
uncertainties. Actual results in the future may differ materially from our present assessment of this information because future events and
circumstances may not occur as expected.
The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial reporting and is ultimately responsible
for approving the consolidated financial statements. The Board carries out this responsibility principally through its Audit and Governance
Committee.
The Chief Executive Officer and the Director of Finance (the “Certifying Officers”), along with other members of management, have designed,
or caused to be designed under their supervision, Disclosure Controls and Procedures (“DC&P”) to provide reasonable assurance that (i) material
information relating to the the Company is made known to them by others, particularly during the period in which the annual filings are being
prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted
by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.
The Certifying Officers, along with other members of management, have also designed, or caused to be designed under their supervision,
Internal Control over Financial Reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes prepared in accordance with IFRS. The Certifying Officers have used the Internal
Control - Integrated Framework (“2013 COSO Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) to design the Company’s ICFR.
As more fully detailed in the accompanying MD&A, the Certifying Officers have evaluated, or caused to be evaluated under their supervision,
the design and operating effectiveness of the Company’s DC&P and ICFR as at December 31, 2017 and have concluded that the Company’s
DC&P and ICFR are effective as at financial year end.
The Audit and Governance Committee is appointed by the Board and is comprised of independent Directors. The committee meets periodically
with Management and the independent external auditors, to discuss disclosure controls and internal control over the financial reporting process,
auditing matters and financial reporting issues to satisfy itself that each party is properly discharging its responsibilities. The Audit and
Governance Committee reviews the Company’s annual consolidated financial statements, the external auditors’ report and other information
in the Annual Report. The committee reports its findings to the Board for consideration by the Board when it approves the consolidated financial
statements for issuance to the shareholders.
The consolidated financial statements have been audited by BDO Canada LLP, the independent external auditors, in accordance with Canadian
generally accepted auditing standards on behalf of the Shareholders. The Independent Auditor's Report outlines the nature of their examination
and their opinion on the consolidated financial statements. BDO Canada LLP has full and unrestricted access to the Audit and Governance
Committee to discuss their audit and related findings as to the integrity of the financial reporting.
Barry Shafran
President & CEO
March 8, 2018
38
Independent Auditor’s Report
To the Shareholders of
Chesswood Group Limited
We have audited the accompanying consolidated financial statements of Chesswood Group Limited, which comprise the
consolidated statements of financial position as at December 31, 2017 and December 31, 2016, and the consolidated statements
of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2017 and December 31,
2016, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards 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.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Chesswood
Group Limited as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the years
ended December 31, 2017 and December 31, 2016 in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
March 8, 2018
Toronto, Ontario
39
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of dollars)
ASSETS
Cash
Restricted funds
Assets held for sale
Other assets
Finance receivables
Deferred tax assets
Interest rate derivatives
Property and equipment
Intangible assets
Goodwill
TOTAL ASSETS
LIABILITIES
Accounts payable and other liabilities
Convertible debentures
Borrowings
Customer security deposits
Interest rate derivatives
Deferred tax liabilities
SHAREHOLDERS' EQUITY
Common shares
Non-controlling interest
Share-based compensation reserve
Accumulated other comprehensive income
Retained earnings
$
$
$
Note
13 (d)
5
6
7
16
15
8
9
10
11
12
13
14
15
16
20
21
22
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
Approved by the Board of Directors
Fred Steiner, Chairman
Clare R Copeland
December 31,
December 31,
2017
3,640
5,971
3,371
17,564
550,650
755
185
1,935
19,684
39,857
643,612
14,889
20,090
412,155
14,012
43
21,202
482,391
105,208
13,230
5,295
10,776
26,712
161,221
643,612
$
$
$
$
2016
11,443
—
5,903
14,468
431,048
962
—
1,434
21,873
40,806
527,937
15,243
20,260
293,081
13,603
850
27,006
370,043
104,596
13,049
4,780
18,196
17,273
157,894
527,937
Please see notes to the consolidated financial statements.
40
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(in thousands of dollars, except per share amounts)
Finance revenue
Interest revenue on finance leases and loans
Ancillary finance and other fee income
Finance expenses
Interest expense
Provision for credit losses
Finance margin
Expenses
Personnel expenses
Other expenses
Depreciation - property and equipment
Income before undernoted items
Acquisition related items
Amortization - intangible assets
Unrealized gain (loss) on investments held
Financing costs - convertible debentures
Unrealized gain on interest rate derivatives
Unrealized gain (loss) on foreign exchange
Income before taxes
Tax expense
Income from continuing operations
Income (loss) from discontinued operations
Net income
Attributable to:
Common shareholders
Non-controlling interest
Basic earnings per share
Diluted earnings per share
Note
2017
2016
$
79,693
$
15,631
95,324
15,268
21,084
36,352
58,972
14,757
11,699
441
26,897
32,075
538
(1,691)
(2,869)
(1,130)
1,006
(118)
27,811
(2,060)
25,751
(320)
25,431
23,345
2,086
1.41
1.37
$
$
$
$
$
7
8
11
9
6
12
15
16
5
24
24
$
$
$
$
$
77,465
14,118
91,583
9,824
25,819
35,643
55,940
13,931
11,387
312
25,630
30,310
678
(1,337)
3
(1,660)
15
111
28,120
(10,803)
17,317
6,961
24,278
22,265
2,013
1.36
1.33
Please see notes to the consolidated financial statements.
41
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(in thousands of dollars)
Net income
Other comprehensive income:
Unrealized loss on translation of foreign operations
Comprehensive income
Attributable to:
Common shareholders
Non-controlling interest
2017
2016
25,431
$
24,278
(8,083)
17,348
$
(3,042)
21,236
15,925
1,423
$
$
19,474
1,762
$
$
$
$
Please see notes to the consolidated financial statements.
42
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(in thousands of dollars)
Note
Common
shares
Common
shares
(# '000s)
Non-
controlling
interest
Share-based
compensation
reserve
Accumulated
other
comprehensive
income
Retained
earnings
2017 Total
Shareholders' equity -
December 31, 2016
Net income
Dividends declared
Share-based compensation
Exercise of restricted share units
Exercise of options
Unrealized loss on translation of
foreign operations
Shareholders' equity -
December 31, 2017
23
22
22
22
16,514 $ 104,596 $
13,049 $
4,780 $
18,196 $ 17,273 $ 157,894
—
—
—
38
23
—
—
—
—
386
226
—
2,086
(1,242)
—
—
—
(663)
—
—
965
(386)
(64)
—
23,345
—
— (13,906)
—
—
—
—
(7,420)
—
—
—
25,431
(15,148)
965
—
162
(8,083)
16,575 $ 105,208 $
13,230 $
5,295 $
10,776 $ 26,712 $ 161,221
Note
Common
shares
Common
shares
Non-controlling
interest
(# '000s)
Share-based
compensation
reserve
Accumulated
other
comprehensive
income
Retained
earnings
2016 Total
Shareholders' equity -
December 31, 2015
Shares issued
Net income
Dividends declared
Share-based compensation
Exercise of restricted share units
Exercise of options
Repurchase of common shares
under issuer bid
Unrealized loss on translation of
foreign operations
Shareholders' equity -
December 31, 2016
20
23
22
22
22
20
16,264 $ 101,726 $
13,194 $
4,434 $
20,987 $ 16,214 $ 156,555
10
—
—
—
38
236
(34)
—
100
—
—
—
466
2,520
(216)
—
—
2,013
(1,907)
—
—
—
—
(251)
—
—
—
1,372
(466)
(560)
—
—
—
—
—
22,265
— (21,056)
—
—
—
—
—
—
—
100
24,278
(22,963)
1,372
—
1,960
(150)
(366)
(2,791)
—
(3,042)
16,514 $ 104,596 $
13,049 $
4,780 $
18,196 $ 17,273 $ 157,894
Please see notes to the consolidated financial statements.
43
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(in thousands of dollars)
OPERATING ACTIVITIES
Income from continuing operations
Non-cash items included in net income
Amortization and depreciation
Provision for credit losses (excluding recoveries)
Amortization of origination costs
Tax expense
Other non-cash items
Cash from operating activities before change in net operating assets
Funds advanced on origination of finance receivables
Origination costs paid on finance receivables
Principal collections of finance receivables
Change in other net operating assets
Cash used in operating activities before undernoted
Interest paid on convertible debentures
Income taxes paid - net
Cash used in operating activities - continuing operations
Cash from (used in) operating activities - discontinued operations
Cash used in operating activities
INVESTING ACTIVITIES
Acquisition, net of cash acquired
Proceeds from sale of discontinued operations, net of costs
Purchase of property and equipment
Cash from (used in) investing activities
FINANCING ACTIVITIES
Borrowings, net
Payment of financing costs
Proceeds from exercise of options
Repurchase of common shares under issuer bid
Cash dividends paid
Cash from financing activities - continuing operations
Cash used in financing activities - discontinued operations
Cash from financing activities
Unrealized foreign exchange loss on cash
Net decrease in cash
Cash, beginning of year
Cash, end of year
Note
2017
2016
$
25,751
$
17,317
7
26
26
12
5
11(a)
5
8
26
13
22
20
23
5
$
2,132
29,154
18,786
2,060
5,068
57,200
82,951
(343,614)
(30,072)
182,252
(4,550)
(113,033)
(1,300)
(12,532)
(126,865)
1,899
(124,966)
—
—
(943)
(943)
137,725
(4,320)
162
—
(15,143)
118,424
—
118,424
(318)
(7,803)
11,443
3,640
$
1,649
31,981
19,400
10,803
2,692
66,525
83,842
(294,253)
(28,601)
199,162
2,479
(37,371)
(1,300)
(5,372)
(44,043)
(2,600)
(46,643)
(6,000)
30,964
(844)
24,120
42,733
(1,411)
1,960
(366)
(22,857)
20,059
(1,703)
18,356
(310)
(4,477)
15,920
11,443
Please see notes to the consolidated financial statements.
44
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
TABLE OF NOTES
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
NATURE OF BUSINESS AND BASIS OF PREPARATION
ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
FINANCIAL INSTRUMENTS
FINANCIAL RISK MANAGEMENT
DISCONTINUED OPERATIONS
OTHER ASSETS
FINANCE RECEIVABLES
PROPERTY AND EQUIPMENT
INTANGIBLE ASSETS
GOODWILL
ACCOUNTS PAYABLE AND OTHER LIABILITIES
CONVERTIBLE DEBENTURES
BORROWINGS
CUSTOMER SECURITY DEPOSITS
INTEREST RATE DERIVATIVES
TAXES
17 MINIMUM PAYMENTS
18
19
20
21
22
23
24
25
26
27
28
CONTINGENT LIABILITIES AND OTHER FINANCIAL COMMITMENTS
CAPITAL MANAGEMENT
COMMON SHARES
EXCHANGEABLE SECURITIES
COMPENSATION PLANS
DIVIDENDS
EARNINGS PER SHARE
RELATED PARTY TRANSACTIONS
CASH FLOW SUPPLEMENTARY DISCLOSURE
SEGMENT INFORMATION
SUBSEQUENT EVENTS
45
46
48
49
53
55
59
60
63
64
66
68
68
69
71
71
72
75
76
76
77
77
78
80
82
83
84
85
86
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
1. NATURE OF BUSINESS AND BASIS OF PREPARATION
Chesswood Group Limited (the “Company” or "Chesswood") is incorporated under the laws of the Province of Ontario. The
Company’s head office is located at 156 Duncan Mill Road, Unit 16, Toronto, Ontario, M3B 3N2, and its shares trade on the
Toronto Stock Exchange under the symbol CHW.
The Company holds a 100% interest in Chesswood Holdings Ltd. Chesswood Holdings Ltd. owns 100% of the shares of the
operating companies: Blue Chip Leasing Corporation ("Blue Chip"), Lease-Win Limited, Case Funding Inc. ("Case Funding"),
as well as 100% of the shares of Chesswood U.S. Acquisition Co Ltd. (“U.S. Acquisitionco”), a corporation which owns 100% of
the shares of the operating company Pawnee Leasing Corporation (“Pawnee”), incorporated in Colorado, United States, and
Windset Capital Corporation ("Windset"), incorporated in Delaware, United States.
Through its subsidiaries, the Company operates in the following businesses:
•
Pawnee - micro and small-ticket equipment financing to small and medium-sized businesses in the lower 48 states of the
United States.
• Windset - provided working capital loans to small businesses in 33 states of the United States. The company ceased
accepting loan applications in September 2016, but does not meet the criteria for a discontinued operation.
• Blue Chip - commercial equipment financing to small and medium businesses in Canada.
Discontinued operations include:
• EcoHome Financial Inc. ("EcoHome") - consumer financing solutions to the heating, ventilating and air conditioning
("HVAC") and home improvement markets which was sold in February 2016.
• Case Funding - holds a portfolio of legal finance receivables in the United States.
The consolidated financial statements, including comparatives:
•
•
•
have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International
Accounting Standards Board (“IASB”). The term IFRS also includes all International Accounting Standards (“IAS”) and
all interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).
have been prepared on the going concern and historical cost bases, except for derivative financial instruments and hybrid
financial liabilities designated as at fair value through net income or loss, which have been measured at fair value.
include the financial statements of the Company and its subsidiaries as noted above. Subsidiaries are consolidated using
the purchase method from the date of acquisition, being the date on which the Company obtains control, and continue to
be consolidated as long as control is held. The financial statements of all subsidiaries are prepared for the same reporting
period as the Company, using uniform accounting policies in accordance with IFRS 10, Consolidated Financial Statements.
All intra-group balances and items of income and expense resulting from intra-group transactions are eliminated in full.
Transaction costs in connection with business combinations are expensed as incurred.
In order to improve clarity, certain items have been combined on the statements of financial position with detail provided separately
in the Notes to the consolidated financial statements and certain of the comparative figures have been reclassified to conform to
the presentation adopted in the current year's consolidated financial statements.
The Company’s consolidated financial statements were authorized for issue on March 8, 2018 by the Board of Directors.
Foreign currency transactions
The financial statements of consolidated entities which are prepared in a foreign currency are translated using the functional
currency concept of IAS 21, The Effects of Changes in Foreign Exchange Rates. The functional currency of a subsidiary is
determined on the basis of the primary economic environment in which it operates and typically corresponds to the local currency.
The reporting currency is the Canadian dollar and the financial statements are presented in thousands of Canadian dollars except
per share amounts and as otherwise noted. The functional currency of the Company, Chesswood Holdings Ltd., Blue Chip, and
Lease-Win Limited is the Canadian dollar. The functional currency of U.S. Acquisitionco, Pawnee, Windset and Case Funding is
the United States dollar. Income and expenses of subsidiaries with a different functional currency than the Company’s presentation
currency are translated in the Company’s consolidated financial statements at the average U.S. dollar exchange rate for the reporting
period [for the year ended December 31, 2017 - 1.2986; 2016 - 1.3248], and assets and liabilities are translated at the closing rate
[as at December 31, 2017 - 1.2545; December 31, 2016 - 1.3427]. Exchange differences arising from the translation are recognized
in other comprehensive income. Foreign currency payables and receivables in the statement of financial position are recorded at
46
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
the transaction date at cost. Exchange gains and losses arising from conversion of monetary assets and liabilities at exchange rates
at the end of the reporting period are recognized as income or expense.
Statement of cash flows
The statement of cash flows, which is compiled using the indirect method, shows cash flows from operating, investing and financing
activities, and the Company’s cash at the beginning and end of the year. Cash flows in foreign currencies have been translated at
the average rate for the period. Exchange rate differences affecting cash items are presented separately in the statement of cash
flows.
Cash flow from operating activities comprises net income adjusted for non-cash items, changes in working capital and operational
net assets. Receipts and payments with respect to tax are included in cash from operating activities.
Cash flow from investing activities comprises payments relating to business acquisitions and property and equipment.
Cash flow from financing activities comprises payment of dividends, net proceeds from borrowings, proceeds from convertible
debentures and stock issues, and the purchase and sale of treasury stock.
Exercise of judgment and use of accounting estimates and assumptions
The preparation of the Company’s consolidated financial statements in accordance with IFRS requires management to apply a
significant degree of judgment in applying the Company’s financial accounting policies and to make certain assumptions and
estimates that have a material effect on the reported amounts of assets, liabilities, revenue and expenses.
The assumptions and estimates are based on premises that reflect the facts that are known at any given time. Future economic
factors are inherently difficult to predict and are beyond management’s control. If the actual development differs from the
assumptions and estimates, the premises used and, if necessary, the carrying amounts for the assets and liabilities in question are
adjusted accordingly. The exercise of judgment is based on management’s experience and also on past history. As a result, actual
amounts could differ from these estimates.
The fair value of interest rate derivatives, certain assets acquired and consideration paid in business acquisitions, contingent
consideration, and available for sale financial assets are estimated using valuation techniques based on assumptions of, for example,
estimated future cash flows, future interest rate movements, the probability of success of legal claims and the timing of collections.
The estimated fair values are sensitive to changes in these assumptions.
There were no significant changes in estimates made in the interim periods that have been adjusted in the final quarter.
Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized
in the consolidated financial statements are presented in the following Notes: Legal Finance Receivables - Note 5(c) , Net Investment
in Leases - Note 7, and Taxes - Note 16.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within
the next financial year are presented in the following Notes: Legal Finance Receivables - Note 5(c), Contingent Consideration -
Note 11, Impairment of Financial Asset Receivables - Note 7, Impairment of Intangibles and Goodwill - Note 9 and Note 10, and
Taxes - Note 16.
New accounting pronouncements adopted in 2017
The Company adopted the following amendment effective January 1, 2017.
IAS 7 Statement of Cash Flows
In January 2016, the IASB issued amendments to IAS 7 Statement of Cash Flows that require additional disclosures for changes
in liabilities arising from financing activities, including cash flow and non-cash changes. There was no impact to the consolidated
financial statements other than the expanded disclosure in Note 13 - Borrowings.
47
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
2. ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE
IFRS 9 Financial Instruments
The IASB issued the final complete standard during 2014. The Company plans to adopt the standard when it becomes effective,
for the year ending December 31, 2018, retrospectively, but without restatement of prior periods.
IFRS 9 uses a single principles-based approach to determine the classification and measurement of financial assets (either fair
value or amortized cost) based on the entity’s business model and the nature of the contractual cash flows derived from the asset.
This new approach is not expected to have any significant effect on the Company’s classification of financial assets.
The new standard introduces an expected credit loss impairment ("ECL") model for all financial instruments except those measured
at fair value through profit and loss. Application of the model will depend on the following credit stages of the financial assets:
(i)
(ii)
(iii)
Stage 1 - for new leases and loans recognized and for existing leases or loans that have not experienced a significant
increase in credit risk since initial recognition, a loss allowance is recognized equal to the credit losses expected to
result from defaults occurring in the next 12 months;
Stage 2 - for those leases or loans that have experienced a significant increase in credit risk since initial recognition,
a loss allowance is recognized equal to the credit losses expected over the remaining life of the lease or loan; and
Stage 3 - for leases or loans that are considered to be credit-impaired, a loss allowance equal to full life time expected
credit losses is recognized.
The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers
information about past events and current conditions, as well as reasonable and supportable forecasts of future events and economic
conditions. The estimation and application of forward-looking information will also require judgment.
An option is available to recognize a lifetime ECL on initial recognition of lease and loans. The Company is not exercising this
option because sufficient credit risk information is available for application of the general requirements of the standard which,
because of the duration of the Company’s lease and loan agreements, will result in higher quality financial information.
For financial receivables in Stages 1 and 2, interest revenue is recognized using the effective interest rate applied to the gross
carrying amount of the asset. Interest is recognized for financial receivables in Stage 3 at the effective interest rate applied to the
net carrying amount of the asset.
We are in the process of testing and validating the Company’s methodology. The effects of adoption will be recognized as an
adjustment to the Company's consolidated statement of financial position as at January 1, 2018. The adjustment primarily relates
to adoption of the new ECL model and to the U.S. equipment financing segment.
The Company estimates the IFRS 9 transition amount will reduce shareholders' equity and non-controlling interest by approximately
$7 million after-tax.
The Company’s banking agreement includes a provision for the mutual agreement of new covenant calculations between
management and the lender in the event of a material change in the financial reporting framework.
IFRS 9 also requires an entity choosing to measure a liability at fair value to present the portion of the change in fair value due to
changes in the entity’s own credit risk in other comprehensive income or loss in the entity’s statement of comprehensive income,
rather than within profit or loss. The standard also includes revised guidance related to de-recognition of financial instruments.
These requirements are not expected to have a material impact on the Company’s financial position or performance.
IFRS 15 Revenue from Contracts with Customers
The standard establishes principles for recognizing revenues based on a five-step model which is to be applied to all contracts with
customers. Revenue arising from lease contracts accounted for under IAS 17 is outside of the scope of the new standard. The
Company plans to adopt the new standard for the year ending December 31, 2018. Management does not anticipate any significant
changes to ancillary finance and other fee revenue from adoption.
48
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
IFRS 16 Leases
IFRS 16 replaces IAS 17 and is effective for periods beginning on or after 1 January 2019. IFRS 16’s approach to lessor accounting
is substantially unchanged from its predecessor, IAS 17. The standard provides a single lessee accounting model, requiring lessees
to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.
The Company plans to adopt the standard for the year ending December 31, 2019.
The Company does not expect any significant or substantive changes to the Company's finance receivables. The Company will
be required to recognize new assets and liabilities for the operating leases of its office premises at the Pawnee and Blue Chip
locations. In addition, the nature of expenses related to those leases will now change from straight-line operating lease expense
to a depreciation charge for right-of-use assets and interest expense on the lease liabilities. The expected amount for the new asset
and liabilities would be the net present value amount of the lease commitments included in Note 17 - Minimum Payments.
3. FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the
instrument. Financial assets and financial liabilities are recognized initially at fair value plus transaction costs, except for financial
assets and financial liabilities carried at fair value through net income or loss, which are measured initially at fair value.
Financial assets are derecognized when the contractual rights to the cash flows from the asset expire or when the asset and
substantially all related risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged,
canceled or expires.
Financial assets
The subsequent measurement of financial assets depends on the following classifications:
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. The Company’s cash, restricted funds, net investment in leases, loan receivables, and convertible note receivable (included
in Other Assets on the consolidated statement of financial position) are classified as loans and receivables. Cash is comprised of
cash and highly liquid investments with original maturities of three months or less. Broker commissions related to the origination
of finance leases are deferred and recorded as an adjustment to the yield of the net investment in finance leases. Such financial
assets are carried at amortized cost using the effective interest rate method. Gains and losses are recognized in the statement of
income when the loans or receivables are derecognized or impaired.
Financial assets at fair value through net income or loss
Financial assets at fair value through net income or loss include financial assets that are either classified as held for trading or that
meet certain conditions and are designated at fair value through net income or loss upon initial recognition. All the Company's
derivative financial instruments are included in this category. Upon initial recognition, attributable transaction costs are recognized
in net income or loss as incurred.
Assets in this category are subsequently measured at fair value with gains or losses recognized in net income or loss. The fair
values of derivative financial instruments are based on changes in observable prices in active markets or by a valuation technique
where no market exists.
The Company's investment in Dealnet common shares (included in Other Assets on the consolidated statement of financial position)
are classified in this category.
Held to maturity investments
Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity other
than loans and receivables. Financial instruments are classified as held to maturity investments if the Company has the intention
and ability to hold them to maturity.
49
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Subsequent to initial recognition, held to maturity investments are measured at amortized cost using the effective interest method.
If there is objective evidence that the investment is impaired, determined, for example, by reference to external credit ratings, the
financial asset is measured at the present value of estimated future cash flows. Any changes to the carrying value of the investment,
including impairment losses, are recognized in net income or loss.
The Company had no financial instruments in this category at December 31, 2017 and December 31, 2016.
Available for sale financial assets
Available for sale financial assets are non-derivative financial assets that are either designated as available for sale or do not qualify
for inclusion in any other category.
Available for sale financial assets, for which fair value cannot be estimated reliably, are measured at cost and any impairment
losses are recognized in net income or loss. All other available for sale financial assets are measured at fair value. Gains and losses
are recognized in other comprehensive income and presented in the available for sale reserve within equity, except for the accretion
in value based on the effective interest method, impairment losses and foreign exchange differences on monetary assets, which
are recognized in net income or loss. Upon initial recognition, attributable transaction costs are recognized in net income or loss
as incurred. When the asset is disposed of or is determined to be impaired, the cumulative gain or loss recognized in other
comprehensive income is reclassified from equity to net income or loss and presented as a reclassification adjustment within other
comprehensive income.
The Company’s plaintiff advances are designated as available for sale financial assets.
Financial liabilities
The categories of financial liabilities and their subsequent measurement are as follows:
Financial liabilities at fair value through net income or loss
Financial liabilities at fair value through net income or loss include financial liabilities that are either classified as held for trading
or in defined circumstances, are designated at fair value through net income or loss upon initial recognition. When certain conditions
are satisfied, IAS 39, Financial Instruments: Measurement and Recognition, requires embedded derivatives to be separately
recognized and measured at fair value; whereas, changes in fair value in periods subsequent to initial recognition are recognized
in net income. In order to avoid the measurement inconsistencies that would result from separate accounting for multiple embedded
derivatives, IAS 39 allows an entity to designate the entire hybrid contract as at fair value through net income or loss. All contingent
consideration payable is also included in this category. Derivative financial instruments that are designated as effective hedge
instruments are excluded from this category.
The Company’s interest rate swap contracts are classified as held for trading for accounting purposes. The convertible debentures
and contingent consideration are designated as at fair value through net income or loss. The Company has not designated any
financial instruments as hedges for accounting purposes.
Liabilities in this category are measured at fair value with gains or losses recognized in net income or loss. The fair values of
derivative financial instruments are based on changes in observable prices in active markets or by a valuation technique where no
market exists. Transaction costs attributable to the issuance of financial liabilities at fair value through net income or loss are
recognized in net income or loss as incurred.
Loans and borrowings
Interest bearing loans and borrowings not otherwise categorized as financial liabilities at fair value through net income or loss are
subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in net income
or loss when the liabilities are derecognized. Transaction costs incurred in connection with the issuance of loans and borrowings
are capitalized and recorded as a reduction of the carrying amount of the related financial liabilities and amortized using the
effective interest method.
The Company’s financial liabilities designated as loans and borrowings include borrowings, accounts payable and other liabilities,
and customer security deposits.
(a) Categories and measurement hierarchy
50
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The categories to which the financial instruments are allocated under IAS 39, Financial Instruments: Recognition and Measurement
are:
AFS
L&R
L&B
Available for sale
Loans and receivables
Loans and borrowings
HFT
FVTP
Held for trading
Fair value through net income or loss
All financial instruments measured at fair value and for which fair value is disclosed are categorized into one of three hierarchy
levels. Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities:
(i)
(ii)
(iii)
Level 1 Inputs - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date;
Level 2 Inputs - inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
Level 3 Inputs - techniques which use inputs which have a significant effect on the recorded fair value for the
asset or liability that are not based on observable market data (unobservable inputs).
The fair values of financial instruments are classified using the IFRS 13, Fair Value Measurement, hierarchy as follows:
ASSETS
Cash (iii)
Restricted funds (iii)
Other assets
Other assets
Loan receivables (i)
Interest rate derivatives (v)
LIABILITIES
Accounts payable and other liabilities (iii)
Borrowings (ii)
Customer security deposits
Convertible debentures (iv)
Interest rate derivatives (v)
Category
Level 1
Level 2
Level 3
Carrying Value
December 31, 2017
L&R
L&R
L&R
FVTP
L&R
HFT
L&B
L&B
L&B
FVTP
HFT
$
3,640 $
5,971
—
634
—
—
— $
—
9,629
—
177,879
185
—
—
—
(20,090)
—
(14,889)
(412,155)
(14,012)
—
(43)
— $
—
—
—
—
—
—
—
—
—
—
($ thousands)
3,640
5,971
9,629
634
177,879
185
(14,889)
(412,155)
(14,012)
(20,090)
(43)
51
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
ASSETS
Cash (iii)
Other assets
Other assets
Loan receivables (i)
LIABILITIES
Accounts payable and other liabilities (iii)
Contingent consideration
Borrowings (ii)
Customer security deposits
Convertible debentures (iv)
Interest rate derivatives (v)
Category
Level 1
Level 2
Level 3
December 31, 2016
Carrying Value
($ thousands)
L&R
L&R
FVTP
L&R
L&B
FVTP
L&B
L&B
FVTP
HFT
$ 11,443 $
— $
—
3,503
—
7,198
—
108,744
— $
—
—
—
11,443
7,198
3,503
108,744
—
—
—
—
(20,260)
—
(14,705)
—
(293,081)
(13,603)
—
(850)
—
(538)
—
—
—
—
(14,705)
(538)
(293,081)
(13,603)
(20,260)
(850)
(i) There is no organized market for the finance receivables. Therefore the carrying value is the amortized cost using the effective
interest rate method. The contractual interest rates approximate current market rates.
(ii) The stated value of the borrowings approximates fair values, as the interest rates attached to these instruments are representative
of current market rates, for loans with similar terms, conditions and maturities.
(iii) Carrying amounts are expected to be reasonable approximations of fair value for cash, restricted funds and for financial
instruments with short maturities, including accounts payable and other liabilities.
(iv) The convertible debentures have several embedded derivative features which were determined to not meet the criteria for
treatment as equity components and would otherwise be required to be recognized as separate financial instruments, measured
at fair value through net income or loss. The Company has elected under IAS 39.11A to designate the entire convertible
debentures (and all the embedded derivatives) as a combined financial liability at fair value through net income or loss. The
fair value of the convertible debentures is based on their trading price on the Toronto Stock Exchange every reporting period;
as a result, there may be increased volatility in the reported net income.
(v) The Company determines the fair value of its interest rate derivatives under the income valuation technique using a discounted
cash flow model. Significant inputs to the valuation model include the contracted notional amount, LIBOR rate yield curves
and the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative is included in the Level
2 fair value hierarchy because all of the significant inputs are directly or indirectly observable.
Transfers between levels are considered to occur on the date that the fair valuation methodology changes. There were no transfers
between levels during the current or comparative periods.
(b) Gains and losses on financial instruments
The following table shows the net gains and losses arising for each IAS 39, category of financial instruments:
52
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Loans and receivables:
Provision for credit losses
Designated as at fair value through net income or loss:
Convertible debentures
Contingent consideration
Fair value through net income or loss:
Investment in Dealnet common shares
Interest rate derivatives
Net loss
For the years ended
December 31,
2017
2016
($ thousands)
$
(21,084) $
(25,819)
(1,130)
538
(2,869)
1,006
(23,539) $
$
(1,660)
678
3
15
(26,783)
4. FINANCIAL RISK MANAGEMENT
In the normal course of business, the Company manages risks that arise as a result of its use of financial instruments. These risks
include credit, liquidity and market risk. Market risks can include interest rate risk, foreign currency risk and other price risk.
There have been no material changes in the Company’s objectives and policies or processes for measuring and managing risk
while our processes and analysis for managing and measuring credit risk are continually evolving as our product range grows and
as the markets in which we operate change, over time.
i) Credit risk
Credit risk stems primarily from the potential inability of a customer or counterparty to a financial instrument to meet its contractual
obligations. The Company’s maximum exposure to credit risk is represented by the carrying amounts of cash, EcoHome loan
receivable and finance receivables.
The Company’s excess cash is held in accounts with several major Canadian chartered banks and a few U.S. banks with the majority
at J.P. Morgan Chase. Management has estimated credit risk with respect to such balances to be nominal and monitors changes in
the status of these financial institutions to mitigate potential credit risk.
Pawnee and Blue Chip's investment in finance receivables are originated with smaller, often owner-operated businesses, some of
whom have limited access to traditional financing. A portion of Pawnee's lessees and borrowers are either start-up businesses that
have not established business credit or more tenured businesses that have experienced some business credit difficulty at some time
in their history ("non-prime"). As a result, such leases and loans entail higher credit risk than our prime customers (reflected in
higher than expected levels of delinquencies and loss) relative to the prime commercial equipment finance market. The typical
Blue Chip borrower is a tenured small business with a strong credit profile.
Pawnee's credit risk is mitigated by: funding only “business essential” commercial equipment, where the value of the equipment
is less than U.S.$200,000, typically obtaining at least the personal guarantee of the majority owners of the lessee\borrower for
each lease or loan, and by diversification on a number of levels, including: geographical across the United States, type of equipment,
equipment cost, industries in which Pawnee’s lessees\borrowers operate and through the number of lessees\borrowers, none of
which is individually significant. Furthermore, Pawnee’s credit risk in its non-prime portfolio is mitigated by the fact that the
standard lease\loan contract most often requires that the lessee\borrower provide two months payments as a security deposit, which,
in the case of default, is applied against the lease\loan receivable; otherwise the deposit is held for the full term of the lease\loan
and is then returned or applied to the purchase option of the equipment at the lessee’s option.
Pawnee and Blue Chip are entitled to repossess leased equipment if the lessee defaults on their lease contract in order to minimize
any credit losses. When an asset previously accepted as collateral is to be repossessed, it undergoes a process of physical repossession
53
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
and disposal in accordance with the legal provisions of the relevant market. See Note 7 - Finance Receivables, for a further
discussion on the repossession of collateral.
The finance receivables consist of a large number of homogenous leases and loans, with relatively small balances, and as such,
the evaluation of the allowance for credit losses is performed collectively for the lease and loan receivable portfolio. More detailed
information regarding this methodology and on finance receivables that are considered to be impaired is provided in Note 7 -
Finance Receivables.
Blue Chip, in a similar segment of the Canadian equipment finance market as Pawnee’s market segment in the U.S., mitigates
credit risk in similar fashion to Pawnee including the small average size of each lease, diversification in multiple asset categories
and industries, very low lessee concentration and personal guarantees of the business principals on certain leases.
The credit risk on the Dealnet convertible note is deemed to be low as the cash was received subsequent to year-end. The credit
risk on the EcoHome loan is mitigated by the security held by the Company against EcoHome; the loan is secured by specific
leases and loans as well as a general security agreement in favour of Chesswood over all the assets of EcoHome.
ii) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that
are settled by delivering cash or another financial asset.
The Company’s objective is to maintain low cash balances, investing any free cash in finance receivables as needed and using any
excess to pay down debt on the primary financing facilities. At December 31, 2017, the Company's continuing operations has at
least $159.6 million (2016 - $127.0 million) in additional borrowings available under various credit facilities to fund business
operations.
The Company’s operations and growth are financed through a combination of the cash flows from operations, borrowings under
existing credit facilities, and through non-recourse asset-backed bulk lease\loan transactions (ofter referred to as securitization).
Prudent liquidity risk management requires managing and monitoring liquidity on the basis of a rolling cash flow forecast and
ensuring adequate committed credit facilities are in place, to the extent possible, to meet funding needs.
The Company has a corporate credit facility that allows borrowings of up to U.S. $250.0 million (U.S.$215.4 million available
based on borrowing base as at December 31, 2017), subject to certain percentages of eligible gross lease receivables, of which
U.S.$165.0 million was utilized at December 31, 2017 (2016 - U.S.$144.3 million). See Note 13 - Borrowings. In addition, the
Company has several bulk financing lines available to its Canadian business and recently completed the first of such financing for
its U.S. prime portfolio. At this time, however, management believes that the syndicate of financial institutions that provides
Chesswood’s credit facility and the banks and life insurance company that provides financing to our subsidiaries are financially
viable and will continue to provide the facilities, however there are no guarantees.
Under the corporate credit facility, the maximum cash dividends that the Company can pay in respect of a month is 1/12 of 90%
of free cash flow for the most recently completed four financial quarters in which the Company has publicly filed its consolidated
financial statements less cost of any repurchases under normal course issuer bid.
The maturity structure for undiscounted contractual cash flows is presented in Note 17 - Minimum payments.
iii) Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market
prices. Market price risks faced by the Company relate to the trading price of convertible debentures and Dealnet common shares,
interest rates and foreign currency.
a) Trading prices
The Company's convertible debentures were being measured at fair value at each reporting date with changes in fair value recognized
in net income or loss. Fair value was based on the trading price of the debentures on the Toronto Stock Exchange. Therefore
changes in trading price had a direct impact on net assets and net income or loss. The Company did not hedge this fair value price
exposure. Subsequent to year-end, the convertible debentures were redeemed, see Note 12 - Convertible debentures.
54
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The Company's investment in Dealnet common shares (included in Other Assets on the statement of financial position) are measured
at fair value at each reporting date with changes in fair value recognized in net income or loss. Fair value is based on the trading
price of the shares on the Toronto Stock Exchange. Therefore changes in trading price has a direct impact on net assets and net
income or loss. The Company does not hedge this fair value price exposure.
b) Interest rate risk
The finance receivables are written at fixed effective interest rates. To the extent the Company finances its fixed rate finance
receivables with floating rate funds, there is exposure to fluctuations in interest rates such that an increase in interest rates could
narrow the margin between the yield on a lease/loan receivable and the interest rate paid by the Company to finance working
capital. The Company elects to lock in the majority of its credit facility at the LIBOR based interest rate.
The following table presents a sensitivity analysis for a reasonable fluctuation in interest rates and the effect on the Company for
the years ended December 31, 2017 and 2016:
For the years ended
December 31, 2017
December 31, 2016
+100 bps
-100 bps
+100 bps
-100 bps
($ thousands)
Increase (decrease) in interest expense
Increase (decrease) in net income and equity
$
$
1,627 $
(1,001) $
(1,627)
1,001
$
$
1,130 $
(695) $
(1,130)
695
c) Foreign currency risk
The Company is exposed to fluctuations in the U.S. dollar exchange rate because significant operating cash inflows are generated
in the U.S. while dividends are paid to shareholders in Canadian dollars. For the year-ended December 31, 2017, dividends paid
totaled $15.1 million (2016 - $14.0 million, excluding the special dividend paid in 2016 which was supported by Canadian dollar
cash flow).
The following table presents a sensitivity analysis for a hypothetical fluctuation in U.S. dollar exchange rates and the effect on the
Company as at December 31, 2017 and 2016:
Year-end exchange rate
U.S. denominated net assets in U.S.$ held in Canada
Effect of a 10% increase or decrease in the Canadian/U.S.
dollar on U.S. denominated net assets
$
$
December 31,
2017
December 31,
2016
($ thousands)
1.2545
115
14
$
$
1.3427
1,376
185
5. DISCONTINUED OPERATIONS
In the fourth quarter of 2015, the Company made a strategic decision to focus on the growth and development of the Company's
specialty finance companies, in particular, commercial equipment finance. This led to the sale of the assets of Sherway in November
2015, the sale of EcoHome in February 2016 and the potential sale of the remainder of Case Funding including the remaining
legal finance receivables. It was determined that these decisions met the criteria of discontinued operations.
55
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(a) Assets and liabilities that are classified as held-for-sale
Legal finance receivables (Case Funding) consist of:
Attorney loans and medical liens
Plaintiff advances
Legal finance receivables (net of allowance)
Current portion
Long-term portion
December 31,
2017
($ thousands)
December 31,
2016
68
$
3,303
3,371
838
2,533
$
136
5,767
5,903
1,955
3,948
$
$
Categories and measurement hierarchy
All financial instruments are categorized in accordance with IAS 39, Financial Instruments: Recognition and Measurement and
those that are measured at fair value or for which fair value is disclosed are categorized into one of three hierarchy levels for
disclosure purposes. The categories and hierarchies are described in Note 3 - Financial Instruments of these consolidated financial
statements.
The fair values of financial instruments are classified using the measurement hierarchy as follows:
($ thousands)
Category
Level 1
Level 2
Level 3
Carrying
Value
ASSETS HELD FOR SALE
Attorney loans and medical liens (i)
Plaintiff advances
L&R
AFS
$
— $
—
68 $
—
— $
3,303
68
3,303
December 31, 2017
($ thousands)
Category
Level 1
Level 2
Level 3
Carrying
Value
ASSETS HELD FOR SALE
Attorney loans and medical liens (i)
Plaintiff advances
L&R
AFS
$
— $
—
136 $
—
— $
5,767
136
5,767
December 31, 2016
(i) There is no organized market for the finance receivables. Therefore the carrying value is the amortized cost using the effective
interest rate method. The contractual interest rates approximate current market rates.
56
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(b) Results from discontinued operations
For the year ended
December 31, 2017
For the year ended December 31, 2016
($ thousands, except per share amounts)
Case Funding
Case Funding
EcoHome
Total
(c)
(c)
(d)
Interest revenue on leases and loans
$
308
$
759 $
949
$
1,708
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Income (loss) before undernoted items
Gain on sale, net of costs and taxes
Income (loss) before taxes
Tax expense
Income (loss) from discontinued operation
Basic earnings per share from discontinued operations
Diluted earnings per share from discontinued operations
Cash flow from discontinued operations
Net cash from (used in) operating activities
Net cash from (used in) financing activities
$
$
$
$
$
—
—
(403)
(95)
—
—
225
(320)
—
(320)
—
—
—
(359)
400
—
—
124
276
—
276
—
(320) $
276 $
(0.02)
(0.02)
85
(481)
(8)
545
181
148
151
65
6,663
6,728
(43)
6,685
$
$
$
85
(481)
(367)
945
181
148
275
341
6,663
7,004
(43)
6,961
0.39
0.38
1,899
$
1,494 $
(4,094) $
— $
— $
(1,703) $
(2,600)
(1,703)
c) Case Funding
On February 3, 2015, Case Funding sold certain assets and operations to a private equity firm (the "Purchaser") for proceeds of
$6.2 million. The gain on sale, net of costs, totaled $840,000 and resulted in the utilization of tax losses which were not previously
recognized as a deferred tax asset of Case Funding.
Case Funding retained approximately $9.4 million in finance receivables with a current balance of $3.4 million and pays a servicing
fee of 5% of collections to administer the remaining portfolio.
In the fourth quarter of 2015, the Company made a strategic decision to dispose of the retained legal finance receivables. An
active search is still underway for a buyer. During 2016 and 2017, certain external events delayed the search for a buyer.
At Case Funding, management reviews each attorney loan and medical lien receivable on an individual basis for collectability and
for allowance requirements, if any. At December 31, 2017, it was determined an allowance of $207,000 (December 31, 2016 -
$162,000) was required.
Significant judgments
Attorney loans are collateralized loans to contingency fee-based law firms based on a combination of an assessment of the likelihood
of a successful outcome for a pool of cases put forward by the law firm, and the creditworthiness of the borrowers. Plaintiff
advances are structured as a purchase of an interest in the proceeds of a legal claim and are made (or declined) based on the
probability of success and potential claim size, not the plaintiff’s credit. Advances are on a non-recourse basis where Case Funding
57
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
forfeits its entire advance and any related fees if the plaintiff is not successful in the claim. Such advances are not characterized
as loans because there is no promise to repay in the event the plaintiff does not succeed in his/her claim. Medical lien financing
refers, generally, to the purchase of existing medical debt obligations of patients involved in existing litigation that is the result of
an injury or multiple injuries.
Attorney loans and medical lien financing are deemed to be a financial asset as they are a contractual right to receive cash from
another entity and are considered to be loans and receivables for accounting purposes, based on an evaluation of all the terms and
conditions of the contracts. The contracts are deemed to have fixed or determinable payments, in that the payments are due when
the underlying cases are settled, the date of which cannot be known and is therefore estimated. Loans and receivables are accounted
for at amortized cost using the effective interest method; however, the effective interest rate is calculated using estimated cash
flows based on an estimated settlement date.
Plaintiff advances are deemed to be a financial asset as they are a contractual right to receive cash from another entity and are
considered to be available-for-sale financial assets for accounting purposes, based on an evaluation of all the terms and conditions
of the contracts. The plaintiff advances are on a non-recourse basis, and repayment depends on the success and potential size of
claims. Thus, the terms may limit the expected cash flows and, other than for credit deterioration, they were deemed not to be
loans and receivables. Available-for-sale financial assets are valued at fair value, the accretion in value is recognized based on the
effective interest method and recognized in finance income.
Reconciliation of Level 3 Financial Instruments - The following table sets forth a summary of changes in the carrying value of
plaintiff advances:
For the years ended
December 31,
2017
2016
($ thousands)
Balance, beginning of year
$
5,767
$
Originations
Fair value accretion (i)
Losses and provision for losses
Collections
Foreign exchange impact (ii)
Balance, end of year
—
308
(403)
(2,071)
(298)
$
3,303
$
7,031
—
752
(359)
(1,433)
(224)
5,767
(i) Management considered that the change in fair value for plaintiff advances, which are carried at fair value, related to the
amortization of interest or successful settlement of advances during the year. The fair value accretion on plaintiff advances
is included in interest revenue on finance leases and loans in the consolidated statement of income.
(ii) Difference between year-end foreign exchange rate and average exchange rate; the amount is included in other comprehensive
income.
Significant Estimates
Fair value measurements are based on level 3 inputs of the three-level hierarchy system which indicates inputs for the assets that
are not based on observable market data (unobservable inputs). Plaintiff advances are initially recorded at their fair value, equivalent
to the funds advanced. Subsequent measurement of plaintiff advances is at fair value utilizing a fair value model developed by
the Company.
The principal assumptions used in the fair value model are as follows:
• Estimated duration of each plaintiff advance;
• Best estimate of anticipated outcome;
• Monthly fee per advance contract on nominal value of each plaintiff advance; and
• Market interest rate at which estimated cash flows are discounted.
58
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Successful and unsuccessful judgments of claims in which the Company has a plaintiff advance;
The fair value of plaintiff advances is reviewed quarterly on an individual case basis. Events that may trigger changes to the fair
value of each plaintiff advance include the following:
•
• Outstanding appeals against both successful and unsuccessful judgments;
• Receipt of funds to settle plaintiff advances;
• A case is dismissed with prejudice (meaning, it can never be re-filed anywhere);
• Change in monthly fee assessed on plaintiff advances;
• Market interest rate at which estimated cash flows are discounted.
Inherent to the underwriting process is the approval for funding of cases that have a high probability of success, to be achieved
either in pre-trial settlement or as a result of a judgment by a court. The fair value estimate is inherently subjective being based
largely on an estimate of the duration of plaintiff advance and its potential settlement. In the Company’s opinion there is no useful
alternative valuation that would better quantify the market risk inherent in the portfolio and there are no other inputs or variables
to which the value of the plaintiff advances are correlated.
A 10% change in the estimated duration of plaintiff advances, while all other variables remain constant, would have no significant
impact on the Company’s net income and net assets.
d) EcoHome Financial Inc.
On February 18, 2016, the Company sold EcoHome for approximately $35.0 million, of which $29.0 million was paid in cash.
Chesswood also received 6,039,689 common shares of Dealnet Capital Corp. ("Dealnet") with a value of $3.5 million and a $2.5
million convertible note which matured in February 2018, bore interest at 6% per annum and was convertible (at the Company's
option), in whole or in part at any time, into common shares of Dealnet at a conversion price of $0.64 per share. See Note 6 -
Other Assets and Note 28 - Subsequent Events.
The net gain, after $1.3 million in costs and $3.5 million in taxes, was approximately $6.7 million and is included in income from
discontinued operations for 2016. In conjunction with the sale of EcoHome, the stock options held by the employees immediately
vested and thus the remaining $137,600 in unrecognized share-based compensation was expensed on February 18, 2016 and is
included in income from discontinued operations.
6. OTHER ASSETS
Other assets comprise:
Property tax receivable
Tax receivable
Sales tax receivable
Other prepaid expenses and current assets
Loan receivable - EcoHome
Common shares - Dealnet
Escrow funds - Dealnet
Convertible note - Dealnet
Other assets
Current portion
Long-term portion
December 31,
2017
December 31,
2016
($ thousands)
527
$
5,763
342
669
7,129
634
—
2,500
17,564
9,801
7,763
$
629
2,377
45
716
3,000
3,503
1,698
2,500
14,468
11,968
2,500
$
$
a
b
c
d
(a) Loan receivable - The loan receivable is carried at amortized cost. In Q4 2017, the Company advanced EcoHome an additional
$5.5 million secured by specific EcoHome leases and loans and a general security agreement over all the assets of EcoHome. The
59
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
loan was restated to extend the maturity date to October 2020, with fixed monthly principal payments, and related interest based
on a floating interest rate plus a fixed margin. At December 31, 2017, it was determined no allowance against the loan receivable
was required.
(b) Common shares - as partial consideration for the sale of EcoHome (Note 5(d)), the Company received 6,039,689 common
shares of Dealnet. The Dealnet shares are measured at fair value through net income or loss. The fair value represents the trading
price at each reporting date. Dealnet shares trade on the TSX Venture Exchange under the stock symbol "DLS".
(c) Escrow funds - $2.75 million of the proceeds from the sale of EcoHome (Note 5(d)) were held back in escrow; $1.0 million
was released in Q3 2016 and $1.75 million was released in Q4 2017.
(d) Convertible note - as partial consideration for the sale of EcoHome (Note 5(d)), the Company received a $2.5 million convertible
note of Dealnet, bearing interest at 6% per annum, which matured in February 2018 and the Company has since received the $2.5
million.
7. FINANCE RECEIVABLES
Description and accounting policy
The net investment in finance receivables arises from the Company’s equipment financing operations. For the Company's lease
receivables, the Company uses standard lease contracts which are non-cancelable finance leases and provide for monthly lease
payments for periods of one to six years. Leases are accounted for as finance leases because substantially all of the risks and
rewards incidental to legal ownership of the property are transferred to the lessee. The total present value of minimum lease
payments to be received over the lease term is recognized at the commencement of the lease. The difference between this total
value, net of incremental execution costs, such as broker commission, and the cost of the leased asset is deferred income and is
recognized as a reduction of the lease receivable, with the net result shown as net investment in leases. The deferred income is
then recognized over the life of the lease using the effective interest method, which provides a constant rate of return on the net
investment throughout the lease term.
For the Company's loan receivables, interest is recognized using the effective interest rate method over the term of the loan. Initial
loan acquisition costs are capitalized and amortized using the effective interest rate method over the term of the loan.
Significant judgments
The leases entered into by the Company are considered to be finance leases in nature, based on an evaluation of all the terms and
conditions and the determination that the Company has transferred substantially all risks and rewards of legal ownership of the
asset to the lessee.
Finance receivables comprise:
Net investment in leases
Loan receivables
December 31,
2017
December 31,
2016
($ thousands)
372,771
177,879
550,650
$
$
322,304
108,744
431,048
$
$
The Company finances its leases and loan receivables by pledging such receivables as security for amounts borrowed from lenders
under bulk lease facilities and the general corporate credit facility. The Company retains ownership and servicing responsibilities
of the pledged lease and loan receivables; however, the lenders have the right to enforce their security interest in the pledged lease
and loan receivables if the Company defaults under these facilities.
60
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(a) Net investment in finance receivables includes the following:
Total minimum payments
Residual values of leased equipment
Unearned income, net of initial direct costs of acquisition
Net investment in finance receivables before allowance for doubtful accounts
Allowance for doubtful accounts (b)
Reserve receivable on securitized financial contracts
Net investment in finance receivables
Current portion
Long-term portion
(b) Allowance for doubtful accounts
December 31,
2017
($ thousands)
December 31,
2016
$
669,656
$
21,482
691,138
(130,469)
560,669
(11,926)
548,743
1,907
550,650
194,919
$
355,731
$
537,383
21,527
558,910
(116,784)
442,126
(12,253)
429,873
1,175
431,048
163,329
267,719
Description and accounting policy
The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial
assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence
of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”)
and the event has a negative impact on the present value of estimated cash flows of the financial asset and the loss can be reliably
estimated. Potential losses expected as a result of future events, no matter how likely based on past historical evidence, are not
allowed to be recognized.
The carrying amount of the financial asset is reduced through the use of an allowance for doubtful accounts and the amount of
loss is recognized as a provision for credit losses. Individually significant loans and receivables are considered for impairment
when they are past due or when other objective evidence is received that a specific counterparty will default. Loans and receivables
that are not considered to be individually impaired are reviewed for impairment on a group basis, determined by reference to the
shared credit and delinquency characteristics.
Lease and loan receivables at Pawnee, Windset and Blue Chip are composed of a large number of homogenous leases and loans,
with relatively small balances. Thus, the evaluation of the allowance for credit losses is performed collectively for the lease and
loan receivable portfolios.
Significant estimates
Quantifying the impairment of finance receivables is based on: for receivables that are in default, estimates of the carrying value
that will ultimately not be collected, and for finance receivables that are in default, the application of current delinquency rates at
each reporting date. Quantifying the impairment utilizes several assumptions and estimation uncertainties about the amount and
timing of cash that is expected to be collected.
61
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The activity in the allowance for doubtful accounts is as follows:
For the years ended
December 31,
2017
2016
Balance, beginning of year
Provision for credit losses
Impact of change in foreign exchange rates
Charge-offs
Recoveries
($ thousands)
$
12,253
$
21,084
(733)
(28,748)
8,070
Balance, end of year
$
11,926
$
10,647
25,819
(272)
(30,102)
6,161
12,253
(c) Finance receivables past due
The following aging represents the total carrying amount of the lease and loan receivables and not just the payments that are past
due. The balances presented exclude the $14.0 million (December 31, 2016 - $13.6 million) of security deposits received from
lessees/borrowers and the collateral held (including potential proceeds from repossessed equipment, and potential recoveries from
personal guarantees) that would offset any charge-offs. An estimate of fair value for the collateral and personal guarantees cannot
reasonably be determined.
($ thousands)
Equipment lease receivables
Loan receivables
Impaired
Past due but not impaired
($ thousands)
Equipment lease receivables
Loan receivables
Impaired
Past due but not impaired
$
$
$
$
Current 1-30 days
366,436 $
175,859
542,295
1,029
7,356 $
3,209
10,565
585
9,980 $
— $
As of December 31, 2017
31 - 60
days
2,220 $
753
2,973
2,233
61 - 90
days
849 $
335
1,184
1,050
Over 90
days
2,802 $
850
3,652
3,585
740 $
134 $
67 $
Total
379,663
181,006
560,669
8,482
10,921
As of December 31, 2016
Current 1-30 days
315,995 $
107,185
423,180
546
— $
7,692 $
2,887
10,579
992
9,587 $
31 - 60
days
2,367 $
866
3,233
2,524
61 - 90
days
1,008 $
262
1,270
1,089
Over 90
days
3,214 $
650
3,864
3,671
709 $
181 $
193 $
Total
330,276
111,850
442,126
8,822
10,670
(d) Collateral
Pawnee and Blue Chip are entitled to repossess financed equipment if the borrower defaults on their lease or loan contract. When
a lease or loan is charged-off, the related equipment no longer has a carrying value on the consolidated financial statements. Any
amounts recovered from the sale of equipment after a charge-off, are credited to the allowance for doubtful accounts when received.
In the year-ended December 31, 2017, the proceeds from the disposal of repossessed equipment that was charged-off totaled $3.3
million (2016 - $1.9 million). Repossessed equipment is held at various warehouses by the company's contracted to repossess and
sell the equipment.
62
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(e) Minimum scheduled collections of finance receivables at December 31, 2017 are presented in the following table. The
Company’s experience has shown that the actual contractual payment streams will vary depending on a number of variables
including: prepayment rates, charge-offs and modifications. Accordingly, the following minimum scheduled collections are not
to be regarded as a forecast of future cash collections.
2018
2019
2020
2021
2022
2023 and thereafter
Total minimum payments
Minimum
payments
Present value
($ thousands)
$
248,947
$
196,174
129,829
69,805
24,239
662
189,406
157,661
108,867
61,211
21,604
438
$
669,656
$
539,187
8. PROPERTY AND EQUIPMENT
Description and accounting policy
Property and equipment are measured at acquisition or purchase cost less scheduled depreciation based on the useful economic
lives of the assets. No components (those parts of individual property and equipment assets having different economic lives than
the remainder of the asset) have been identified. Scheduled depreciation is based on the following annual rates, which are reassessed
annually:
Furniture and equipment
Computer hardware
20% to 30% declining balance
20% to 30% declining balance
Furniture
and
equipment
Computer
hardware
($ thousands)
Total
$
1,217
$
1,764
Cost:
December 31, 2015
Additions
Disposals
Translation
December 31, 2016
Additions
Disposals
Translation
December 31, 2017
$
$
547
581
(218)
(7)
903
302
—
5
1,210
$
263
(11)
43
1,512
641
(41)
3
2,115
$
844
(229)
36
2,415
943
(41)
8
3,325
The expenditures in 2017 reflects acquisitions related to the growth in Pawnee staff numbers during the year. The change in the
carrying amount of property and equipment during 2016 relates to the expenditures and disposals for furniture and equipment for
the new premises of Pawnee, which they moved into in June 2016.
63
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Accumulated depreciation:
Furniture
and
equipment
Computer
hardware
($ thousands)
Total
December 31, 2015
Depreciation
Disposals
Translation
December 31, 2016
Depreciation
Disposals
Translation
December 31, 2017
Carrying amount:
December 31, 2015
December 31, 2016
December 31, 2017
$
$
383
87
(153)
30
347
138
—
3
488
Furniture
and
equipment
$
$
$
164
556
722
$
$
$
$
$
486
225
(11)
(66)
634
303
(41)
6
902
Computer
hardware
($ thousands)
731
878
1,213
$
$
$
$
$
869
312
(164)
(36)
981
441
(41)
9
1,390
Total
895
1,434
1,935
9.
INTANGIBLE ASSETS
Description and accounting policy
Purchased intangible assets are recognized as assets in accordance with IAS 38, Intangible Assets, where it is probable that the
use of the asset will generate future economic benefits and where the cost of the asset can be determined reliably. Intangible assets
acquired are initially recognized at cost of purchase and are subsequently carried at cost less accumulated amortization and, if
applicable, accumulated impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite. Management has determined that trade names have
indefinite lives. The broker relationships are considered to have a finite life and are amortized on a scheduled straight-line basis
over their estimated useful life of seven to fifteen years. The non-compete agreements are amortized on a scheduled straight-line
basis over their three-year life.
The amortization period and method of amortization for intangible assets with finite lives are reassessed annually. Changes in the
useful life or in the pattern of economic benefits derived are accounted for by changing the amortization period or method, as
appropriate, and are treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortized but
are tested for impairment annually at the cash generating unit ("CGU") level and are reviewed annually to determine whether the
indefinite life continues to be applicable. Any change from indefinite life to finite life would be accounted for prospectively. CGUs
are defined as the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows
from other assets or groups of assets.
A previously recognized impairment loss for non-financial assets is reversed if there has been a change in the assumptions used
to determine recoverable amount since the previous impairment loss was recognized. The carrying amount after the reversal cannot
exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for
the asset in prior years.
64
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Significant estimates
The impairment testing utilizes several assumptions and estimation uncertainties that have a significant risk of resulting in a material
adjustment within the next financial year as a result of the value-in-use being derived from an estimated discounted cash flow
model. Value-in-use ("VIU") is the present value of the estimated future cash flows from the CGU discounted using a pre-tax rate
that reflects current market rates and the risks inherent in the business of each CGU. The cash flows are derived from budgets for
the next five years, excluding restructuring activities and future investments. Other than the cash flow estimates, the value-in-use
is most sensitive to the discount rate used and the growth rate applied beyond the five-year estimate.
Indefinite
useful life
Finite useful life
Trade names
Broker
relationships
Non-
Compete
Total
Cost:
($ thousands)
December 31, 2015
$
7,889
$
19,440
$
1,309
$
28,638
Additions
Translation
December 31, 2016
Adjustment
Translation
December 31, 2017
—
(224)
7,665
—
(476)
7,189
$
99
—
19,539
(22)
—
19,517
$
—
—
1,309
—
—
1,309
$
Trade names
Broker
relationships
Non-
Compete
Accumulated amortization:
December 31, 2015
Amortization
December 31, 2016
Amortization
December 31, 2017
$
$
127
—
127
—
127
($ thousands)
$
4,970
$
1,075
6,045
1,087
7,132
$
206
262
468
604
1,072
$
99
(224)
28,513
(22)
(476)
28,015
Total
5,303
1,337
6,640
1,691
8,331
$
$
$
Trade
names
Broker
relationships
Non-
Compete
Total
Carrying amount:
December 31, 2015
December 31, 2016
December 31, 2017
$
$
$
7,762
7,538
7,062
$
$
$
($ thousands)
14,470
13,494
12,385
$
$
$
1,103
841
237
$
$
$
23,335
21,873
19,684
Trade names were recognized in the acquisitions of Pawnee and Blue Chip and can be renewed annually, at nominal cost and for
an indefinite period. There is no legal limit to the life of these trade names. The businesses to which these intangible assets relate
have established names in the market and, given the stability in the demand for their products and services, management expects
to be able to derive economic benefit from these intangible assets for an indefinite period of time and has therefore determined
them to be of indefinite life.
65
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The following table shows the carrying amount of indefinite-life intangible assets by CGU as at:
Pawnee
Blue Chip
Total indefinite-life intangible assets
10. GOODWILL
December 31,
2017
December 31,
2016
$
$
($ thousands)
6,774
288
7,062
$
$
7,250
288
7,538
Description and accounting policy
Goodwill is initially measured at cost which represents the excess of the fair value of consideration paid for a business acquisition
over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. After initial
recognition, goodwill is measured at cost less any accumulated impairment losses.
Impairment testing is applied on an individual asset basis unless an asset does not generate cash inflows that are largely independent
of the cash inflows generated by other assets or groups of assets. None of the Company’s non-financial assets generate independent
cash inflows and therefore all non-financial assets are allocated to CGU for purposes of assessing impairment.
Impairment losses are recognized when the carrying amount of a CGU exceeds the recoverable amount, which is the greater of
the CGU’s fair value less cost to sell and its VIU. If the recoverable amount of the CGU is less than its carrying amount, the CGU
is considered impaired and is written down to its recoverable amount. The impairment loss is allocated to reduce the carrying
amount of the assets of the CGU, first to reduce the carrying amount of the CGU’s goodwill and then to the other assets of the
CGU allocated pro-rata on the basis of the carrying amount of each asset. Impairment losses of continuing operations are recognized
in the statement of income.
CGUs to which goodwill and intangible assets with indefinite lives have been allocated are tested for impairment annually as at
December 31, and all CGUs are tested for impairment more frequently when there is an indication that the CGU may be impaired.
Significant judgments
The impairment testing utilizes several assumptions and estimation uncertainties that have a significant risk of resulting in a material
adjustment within the next financial year as a result of the VIU being derived from an estimated discounted cash flow model. The
cash flows are derived from budgets for the next five years, excluding restructuring activities and future investments. Other than
the cash flow estimates, the VIU is most sensitive to the discount rate used and the growth rate applied beyond the five year
estimate.
The goodwill allocated to each CGU and movements in goodwill consist of the following:
Pawnee
Blue Chip
Total
($ thousands)
$
50,198
$ 26,365
$
(1,498)
48,700
(2,475)
46,225
—
26,365
—
$ 26,365
$
$
76,563
(1,498)
75,065
(2,475)
72,590
Cost:
December 31, 2015
Translation
December 31, 2016
Translation
December 31, 2017
66
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Accumulated impairment:
December 31, 2015
Translation
December 31, 2016
Translation
December 31, 2017
Carrying amount:
December 31, 2015
December 31, 2016
December 31, 2017
$
$
$
$
Pawnee
Blue Chip
($ thousands)
Total
$
35,313
$
— $
(1,054)
34,259
(1,526)
32,733
—
$
— $
35,313
(1,054)
34,259
(1,526)
32,733
Pawnee
Blue Chip
Total
14,885
14,441
13,492
($ thousands)
$ 26,365
$ 26,365
$ 26,365
$
$
$
41,250
40,806
39,857
The Company completed its annual goodwill impairment test as at December 31, 2017 and 2016 and determined that no impairment
had occurred. Goodwill is considered impaired to the extent that its carrying amount exceeds its recoverable amount. The
recoverable amounts of the Company’s CGUs were determined based on their VIU. The calculation of VIU incorporated five
years of cash flow estimates plus a terminal value and was based on the following key variables:
i) The five years of cash flow estimates were based on achieving key operating metrics and drivers based on management
estimates, past history and the current economic outlook, and were approved by Chesswood management. The VIU for Pawnee
and Blue Chip is most sensitive to assumptions of lease origination volumes and net charge-offs.
ii) Terminal value incorporated into the VIU calculations was estimated by applying the growth rates in the following chart to
cash flow estimates for the fifth year. The growth rates reflect the historical average core inflation rate which does not exceed
the long-term average growth rate for the industry.
Terminal value growth rates:
December 31, 2016
December 31, 2017
Pawnee
Blue Chip
3.0%
3.0%
3.0%
3.0%
iii) The following pre-tax discount rates were applied in determining the recoverable amount of the CGUs. The discount rates
were based on the weighted average cost of capital, adjusted for a liquidity and a risk premium.
Pre-tax discount rates:
December 31, 2016
December 31, 2017
Pawnee
Blue Chip
30.82%
27.60%
23.27%
21.98%
Significant estimates
The Company believes that any reasonably possible change in the key assumptions on which its CGU’s recoverable amounts are
based would not cause the CGU’s carrying amounts to exceed their recoverable amounts. If the future were to adversely differ
from management’s best estimate of key assumptions, including associated cash flows, the Company could potentially experience
future material impairment charges in respect of its goodwill and intangible assets with indefinite lives.
67
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
11. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities comprise:
Dividend payable
Accounts payable
Sales tax payable
Customer deposits and prepayments
Unfunded finance receivables
Taxes payable
Payroll related payables and accruals
Accrued expenses and other liabilities
Contingent consideration (a)
December 31,
2017
($ thousands)
December 31,
2016
$
1,264
$
1,598
761
704
5,610
2,174
1,068
1,710
—
1,259
1,099
1,020
695
3,636
4,600
1,026
1,370
538
$
14,889
$
15,243
(a) The contingent consideration represented management's estimate of additional consideration payable with respect to the
acquisition of EcoHome and Blue Chip in 2015 which was contingent upon the future performance targets of Blue Chip. The
estimate of the fair value of contingent consideration required subjective assumptions to be made of various potential operating
result scenarios and discount rates. The Company periodically reviewed expected operating results and updated assessments of
various probability weighted projected scenarios. As a result of the sale of EcoHome (see Note 5 - Discontinued Operations) in
February 2016, the $6.0 million contingent consideration associated with Blue Chip and EcoHome's normalized net income before
taxes ("NIBT") for 2015 and 2016 became payable within 10 days of the sale of EcoHome.
12. CONVERTIBLE DEBENTURES
On December 12, 2017, the Company exercised its right to redeem the debentures on January 17, 2018. Subsequent to year end,
the Company paid, in cash, to the debenture holders $20.0 million in outstanding principal and $60,548 in accrued and unpaid
interest up to the redemption date.
The debentures (symbol TSX: CHW.DB), issued in December 2013, were to mature on December 31, 2018, and bore interest at
a rate of 6.5% per annum, paid semi-annually. The outstanding principal under the debentures, at the option of the holders, could
have been converted into common shares of the Company at a conversion price of $20.19 per share at any time (reduced from
$21.25 as a result of the special dividend declared in February 2016).
The Company had the following options to redeem the convertible debentures prior to maturity:
• After December 31, 2016 and prior to December 31, 2017, the Company had the option to redeem the debentures, provided
the current market price for the purposes of the debentures was at least 125% of the conversion price of $20.19 (reduced from
$21.25 as result of special dividend declared in February 2016).
• Subsequent to December 31, 2017 and prior to December 31, 2018, the Company had the option to redeem the debentures,
provided the redemption price was at a price equal to the principal amount including accrued and unpaid interest.
The debentures, per accounting guidelines, had several embedded derivative features which were determined to not meet the
criteria for treatment as equity components and would otherwise be required to be recognized as separate financial instruments,
measured at fair value through net income or loss. The Company had elected under IAS 39.11A to designate the entire convertible
debentures (and all the embedded derivatives) as a combined financial liability at fair value through net income or loss. The fair
value of the convertible debentures was based on their trading price on the Toronto Stock Exchange every reporting period.
68
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The convertible debentures balance was composed of:
Principal amount recognized on issuance
Fair value adjustment
Balance, end of year
Fair value adjustment for the year
Interest paid during the year
Financing costs - convertible debentures
December 31,
2017
($ thousands)
December 31,
2016
20,000
90
20,090
$
$
20,000
260
20,260
For the year ended
December 31,
2017
2016
($ thousands)
$
170
(1,300)
(1,130) $
(360)
(1,300)
(1,660)
$
$
$
$
13. BORROWINGS
Borrowings are comprised of:
Chesswood credit facility
Deferred financing costs
Borrowings - Chesswood
Pawnee credit facility
Deferred financing costs – Pawnee
Borrowings – Pawnee
Securitization and bulk lease financing facilities - Blue Chip
December 31,
2017
December 31,
2016
($ thousands)
(a) $
(b)
(c)
$
200,405
(2,536)
197,869
87,241
(2,142)
85,099
129,187
$
412,155
$
187,978
(2,015)
185,963
—
—
—
107,118
293,081
69
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Movements in borrowings:
Chesswood
credit
facility (a)
Chesswood
deferred
financing
costs
Pawnee
credit
facility (b)
Pawnee
deferred
financing
costs
Securitization
and bulk lease
financing
facilities (c)
Total
($ thousands)
Net as of December 31, 2015
$
164,250 $
(1,524) $
— $
— $
92,447
$
255,173
Proceeds or draw-downs
Repayments
Payment of financing costs
Amortization of deferred
financing costs -continuing
operations
Amortization of deferred
financing costs - discontinued
operations
Foreign currency translation
adjustment
Net as of December 31, 2016
Proceeds or draw-downs
Repayments
Payment of financing costs
Amortization of deferred
financing costs
Foreign currency translation
adjustment
Net as of December 31, 2017
176,121
(148,059)
—
—
—
(4,334)
187,978
222,219
(196,871)
—
—
—
—
(1,411)
743
177
—
(2,015)
—
—
(1,838)
1,317
—
—
—
—
—
—
—
97,097
(6,789)
—
—
—
—
—
—
—
—
—
—
(2,482)
66,298
(51,627)
—
242,419
(199,686)
(1,411)
—
—
—
107,118
82,209
(60,140)
—
743
177
(4,334)
293,081
401,525
(263,800)
(4,320)
—
265
—
1,582
(12,921)
200,405 $
$
—
(2,536) $
(3,067)
87,241 $
75
(2,142) $
—
129,187
$
(15,913)
412,155
(a) The Chesswood credit facility allows borrowings of up to U.S.$250.0 million subject to, among other things, certain percentages
of eligible gross finance receivables. This credit facility is secured by substantially all of the Company’s assets, contains covenants
including maintaining leverage and interest coverage ratios, and expires on December 8, 2020. At December 31, 2017, the Company
was utilizing U.S.$165.0 million (December 31, 2016 - U.S.$144.3 million) of its credit facility and had approximately U.S.$50.4
million in additional borrowings available under the corporate credit facility. At December 31, 2017 and December 31, 2016, and
throughout the periods presented, the Company was in compliance with all covenants. Based on average debt levels, the effective
interest rate during the year ended December 31, 2017 was 4.62% (year-ended December 31, 2016 - 3.89%).
(b) In October 2017, Pawnee obtained a U.S.$75 million non-recourse asset-backed facility with Capital One ("Pawnee facility"),
through a new subsidiary, Pawnee Receivable Fund I LLC. The Pawnee facility was secured by U.S.$93.6 million in gross
receivables from Pawnee's prime portfolio of equipment leases and loans and repayment terms are based on the cash flow of the
underlying portfolio. The proceeds were used to pay down Chesswood's existing revolving credit facility. The facility requires
Pawnee to mitigate its interest rate risk by entering into interest rate caps for a notional amount not less than 80% of the aggregate
outstanding balance (See Note 15(b) - Interest Rate Derivatives). Pawnee is to comply with leverage ratio, interest coverage ratio,
and tangible net worth covenants. At December 31, 2017 and throughout the period from October to December 2017, Pawnee
was in compliance with all covenants. Based on average debt levels, the effective interest rate during the period from October
2017 to December 31, 2017 was 4.87% (2016 - n/a).
(c) Blue Chip has master purchase and servicing agreements with various financial institutions and life insurance companies
(referred to collectively as the “Funders”). The Funders make advances to Blue Chip on a tranche-by-tranche basis, with each
tranche collateralized by a specific group of underlying finance receivables and any related security provided thereunder. The
facilities have limited recourse to other assets in the event that lessees\borrowers fail to make payments when due. Blue Chip
either maintains certain cash reserves as credit enhancements or provides letters of guarantee in return for release of the cash
reserves. Blue Chip continues to service these finance receivables on behalf of the Funders.
70
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
At December 31, 2017, Blue Chip had access to the following committed lines of funding: (i) $60.0 million annual limit from a
life insurance company; (ii) $80.0 million rolling limit from a financial institution; and (iii) approved funding from another financial
institution with no annual or rolling limit. As at December 31, 2017, Blue Chip had $129.2 million (December 31, 2016 - $107.1
million) in securitization and bulk lease financing facilities debt outstanding, was utilizing $73.6 million (December 31, 2016 -
$57.5 million) of their available financing and had access to at least $96.4 million (December 31, 2016 - $92.5 million) of additional
financing from the Funders.
Interest rates are fixed at the time of each advance and are based on Government of Canada Bond yields with maturities comparable
to the term of the underlying leases plus a premium. Based on average debt levels, the effective interest rate during the year ended
December 31, 2017 was 3.15% (for the year ended December 31, 2016 - 3.20%). As at December 31, 2017, Blue Chip had
provided $6.6 million in outstanding letters of guarantee through Chesswood's credit facility. Blue Chip must meet certain financial
covenants, including leverage ratio, interest coverage ratio, and tangible net worth covenants, to support these securitization and
bulk lease financing facilities. As at December 31, 2017 and December 31, 2016, and throughout the periods presented, Blue Chip
was in compliance with all covenants.
(d) Restricted funds
Restricted funds represent cash reserve accounts which are held in trust as security for secured borrowings (Pawnee facility in (b)
above) and cash collection accounts required by the lenders of certain financial assets that can only be used to repay these debts
on specific dates.
Restricted - cash in collection accounts
Restricted - cash reserves
Restricted funds
14. CUSTOMER SECURITY DEPOSITS
December 31,
2017
December 31,
2016
$
$
($ thousands)
2,939
3,032
5,971
$
$
—
—
—
Customer security deposits are held for the full term of the lease and then returned or applied to the purchase option of the equipment
at the lessee’s request, unless the lessee has previously defaulted in which case the deposit is applied against the lease receivable
at that time. Past experience suggests that a very high percentage of the customer deposits are applied to the purchase option of
the leased equipment at the end of the lease term, or as an offset against outstanding lease receivables.
Security deposits that will be utilized within one year
Security deposits that will be utilized in future years
15. INTEREST RATE DERIVATIVES
December 31,
2017
December 31,
2016
$
$
($ thousands)
3,492
10,520
14,012
$
$
4,072
9,531
13,603
Interest rate derivatives, which comprise interest rate swaps and caps, are not considered trading instruments as the Company
intends to hold them until maturity. The instruments do not qualify as hedges for accounting purposes, and are therefore recorded
as separate derivative financial instruments. Accordingly, the estimated fair values are recorded on the accompanying consolidated
statement of financial position. The fair values are based on the estimated net present value of cash flows and represent the
consideration the Company would receive (pay) if a derivative was terminated on the reporting date.
Payments made and received pursuant to the terms of the instruments are recorded as an adjustment to interest expense. Fair value
adjustments are recorded separately on the statement of income.
71
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(a) Derivative swaps
The Company enters into interest rate swap agreements that provide for payment of an annual fixed rate, in exchange for a LIBOR
based floating rate amount. The interest rate swaps are intended to offset a portion of the variable interest rate risk on Chesswood's
credit facility (see Note 13(a) - Borrowings). At December 31, 2017, the fair value of the swaps was a liability of $43,000 (December
31, 2016 - a liability of $850,000).
The following swap agreements were outstanding at December 31, 2017:
Effective Date
August 15, 2016
August 15, 2016
Notional Amount
U.S.$
$20 million
$20 million
Annual Fixed Rate
Maturity Date
1.985%
2.120%
August 13, 2020
August 13, 2021
(b) Derivative cap
In October 2017, Pawnee obtained a U.S.$75 million non-recourse asset-backed facility (see Note 13(b) - Borrowings) which
requires Pawnee to mitigate its interest rate risk by entering into interest rate cap for a notional amount not less than 80% of the
aggregate outstanding balance. The interest rate cap is tied to the repayment terms of the underlying finance receivables portfolio
supporting the Pawnee facility, through the maturity date of October 13, 2021, with a floating index rate based on USD-LIBOR-
BBA, but subject to a capped fixed rate of 2.25%. At December 31, 2017, the fair value of the cap was an asset of $185,000 (2016
- n/a).
16. TAXES
Description and accounting policy
Taxes are accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the deferred tax consequences attributable to differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates applicable to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising from investments
in subsidiaries that are not expected to reverse in the foreseeable future are not recognized.
Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those
instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related
tax benefit will be realized.
Tax expense reflects the mix of taxing jurisdictions in which pre-tax income and losses were recognized. However, because the
geographical mix of pre-tax income and losses in interim periods may not be reflective of full year results, this may distort the
Company’s interim period effective tax rate.
Significant estimates and judgments
The Company is subject to income tax laws in the various jurisdictions that it operates in and the complex tax laws are potentially
subject to different interpretations by the Company and the relevant tax authority. Management's judgment is applied in interpreting
the relevant tax laws and estimating the expected timing and the amount of the provision for current and deferred income taxes.
Determining the value of deferred tax assets recognized requires an estimate of the value of tax benefits that will eventually be
realized by the Company which utilizes several assumptions and estimation uncertainties that have a significant risk of resulting
in a material adjustment within the next financial year.
72
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
On December 22, 2017, the U.S. government enacted new tax legislation effective January 1, 2018. However, the legislation makes
broad and complex changes to the U.S. tax code and, accordingly, it will take time to assess and interpret the changes. Consequently,
the provisional recovery recorded in section (b) below, may change in the future following a more comprehensive review of the
legislation, including implementation of the associated rules and regulations and supporting guidance from the Internal Revenue
Service and other bodies, and as a result of any future changes or amendments to this legislation.
U.S. federal tax legislation enacted in 2004 addresses perceived U.S. tax concerns over “corporate inversion” transactions. A
“corporate inversion” generally occurs when a non-U.S. entity acquires “substantially all” of the equity interests in, or the assets
of, a U.S. corporation or partnership, if, after the acquisition, former equity holders of the U.S. corporation or partnership own a
specified level (referred to as the “percentage identity”) of equity in the non-U.S. entity, excluding equity interests acquired in the
acquiring entity in public offerings associated with the acquisition. Adverse U.S. tax consequences are only triggered if:
(i) Pawnee sells or licenses any of its assets as part of its acquisition by the Company, or licenses any assets to a related
non-U.S. entity during the subsequent 10 years; or
(ii) If Pawnee does sell or license any such assets, it does not offset its U.S. tax arising from such sales or licenses with
loss carry-forwards, foreign tax credits or certain tax amounts with similar attributes.
Management has concluded that neither of these conditions will be triggered.
(a) Tax expense consists of the following:
Current tax expense
Deferred tax (recovery) expense
Tax expense
For the years ended
December 31,
2017
December 31,
2016
$
$
($ thousands)
6,468
(4,408)
2,060
$
$
9,580
1,223
10,803
(b) The table below shows the reconciliation between tax expense reported in the consolidated statements of income and the tax
expense that would have resulted from applying the combined Canadian Federal and Ontario tax rate of 26.5% (2016 - 26.5%) to
income before income taxes.
For the years ended
December 31,
2017
December 31,
2016
($ thousands)
Income from continuing operations before taxes
$
27,811
$
28,120
Canadian tax rate
Theoretical tax expense
Tax cost of non-deductible items
Utilization of tax loss carry-forwards
Withholding tax on inter-company dividends
Higher effective tax rates in foreign jurisdictions
Change in substantively enacted tax rates of future periods
Other
Tax expense
(i)
$
26.5%
7,370
124
(22)
448
3,353
(9,379)
166
2,060
$
26.5%
7,452
154
—
202
2,696
—
299
10,803
73
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(i) - The future tax recovery of $9.4 million was a result of the revaluation of the U.S. subsidiaries’ net deferred tax liabilities due
to the U.S. Tax Cuts and Jobs Act passed on December 22, 2017. The U.S. federal corporate tax rate decreased from 35% to 21%.
Chesswood’s U.S. subsidiaries’ effective tax rate for 2018 and beyond will be comprised of the new, lower federal tax rate plus a
blended state tax rate.
(c) Deferred tax balances within the consolidated statements of financial position were comprised of the following:
Deferred tax assets (c)
Deferred tax liabilities (d)
Net deferred tax liabilities
Reconciliation of net deferred tax liabilities:
December 31,
2017
December 31,
2016
(d) $
(e)
$
($ thousands)
755
(21,202)
(20,447)
$
$
962
(27,006)
(26,044)
Balance, beginning of year
Deferred tax recovery (expense) in the statements of income
(a)
Translation
Net change in net deferred tax liabilities during the year
Balance, end of year
For the years ended
December 31,
2017
2016
($ thousands)
$
$
(26,044)
4,408
1,189
5,597
(20,447)
$
$
(25,374)
(1,223)
553
(670)
(26,044)
(d) The tax effects of the temporary differences giving rise to the Company’s deferred tax assets are as follows:
Deferred tax assets:
Financing costs
Tax losses carried forward
December 31,
2017
December 31,
2016
$
$
($ thousands)
598
157
755
$
$
827
135
962
Deferred tax assets are recognized to the extent that realization of the related tax benefit through future taxable profits is probable.
At December 31, 2017, Case Funding had U.S.$570,000 (2016 - U.S.$957,000) in tax losses carried forward and taxable timing
differences of U.S.$570,000 (2016 - $957,000).
The Company has determined that it is probable that all other deferred tax assets will be realized through a combination of future
reversals of temporary differences and taxable income.
74
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(e) The tax effects of the significant components of temporary differences giving rise to the Company’s net deferred tax liabilities
are as follows:
December 31,
2017
December 31,
2016
Deferred tax assets:
Leased assets
Allowance for doubtful accounts
Tax losses carried forward
Accrued liabilities
Deferred tax liabilities:
Finance receivables
Difference in goodwill and intangible asset base
($ thousands)
$
38,425
$
2,680
—
51
41,156
59,462
2,896
62,358
21,202
9,343
$
$
80,470
4,438
15
475
85,398
108,946
3,458
112,404
27,006
12,763
Deferred taxes liabilities, net
Deferred taxes liabilities to be realized in the next 12 months
$
$
The Company has determined that it is probable that all recognized deferred tax assets will be realized through a combination of
future reversals of temporary differences and taxable income.
The Company has not recognized deferred tax liabilities in respect of unremitted earnings in foreign subsidiaries, totaling $17.1
million (2016 - $1.6 million), as it is not considered probable that this temporary difference will reverse in the foreseeable future.
17. MINIMUM PAYMENTS
The following are the contractual payments and maturities of financial liabilities and other commitments (including interest):
($ thousands)
2018
2019
2020
2021
2022
2023 +
Total
Accounts payable and other liabilities
$
14,889
$
— $
— $
— $
— $ — $
14,889
Borrowings
Customer security deposits
Convertible debentures
Interest rate swaps
(i)
(ii)
86,790
3,492
20,061
—
72,745
256,076
3,693
3,812
29,016
2,728
—
—
—
(8)
259,880
—
51
31,795
555
1,711
1,870
—
—
3,581
461
125,232
76,438
Other financial commitments
(iii)
843
816
742
Total commitments
$ 126,075
$ 77,254
$ 260,622
$ 32,350
$ 4,042
$
576
25
—
—
601
150
751
446,914
15,620
20,061
43
497,527
3,567
$ 501,094
i. Borrowings are described in Note 13, and include the Chesswood credit facility, which is a line-of-credit and, as such, the
balance can fluctuate. The amount above includes fixed interest payments on Pawnee and Blue Chip's credit facilities and
estimated interest payments on the Chesswood credit facility, assuming the interest rate, debt balance and foreign exchange
rate at December 31, 2017 remain the same until December 8, 2020, which is the date of expiry of the credit facility.
ii. The Company’s experience has shown the actual contractual payment streams will vary depending on a number of variables
including: prepayment rates, charge-offs and modifications. Accordingly, the scheduled contractual payments of customer
security deposits shown in the table above are not to be regarded as a forecast of future cash payments.
75
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
iii. The Company and its subsidiaries are committed to future minimum rental payments under existing leases for premises,
excluding occupancy costs and property tax, expiring in 2020 and 2023, which represent the bulk of other financial
commitments.
The Company has no material “off-balance sheet” financing obligations, except for long-term premises lease agreements and U.S.
$5.3 million in letters of guarantee. For contingent liabilities and other commitments, refer to Note 18 - Contingent Liabilities and
Other Financial Commitments.
18. CONTINGENT LIABILITIES AND OTHER FINANCIAL COMMITMENTS
Contingent liabilities
The Company is subject to various claims and legal actions in the normal course of its business, from various customers, suppliers
and others. The individual value of each claim and the total value of all claims as at December 31, 2017 and 2016 were not material
or a possible outflows are considered remote, additional disclosure is not required.
Other financial commitments
The Company has entered into retention agreements with certain employees whereby such employees shall be entitled to certain
retention severance amounts upon the occurrence of events identified in each respective agreement.
19. CAPITAL MANAGEMENT
The Company’s capital consists of shareholders’ equity, which at December 31, 2017 amounted to $161.2 million (December 31,
2016 - $157.9 million). The Company’s objectives when managing capital are to safeguard the Company’s long-term ability to
continue as a going concern and to provide adequate returns for shareholders. The Company's share capital is not subject to external
restrictions.
The Company manages the capital structure and makes adjustments in light of changes in economic conditions and the risk profile
of the underlying assets. The Company uses various measures including the amount of dividends paid to shareholders.
Chesswood's three-year revolving senior secured U.S.$250 million credit facility supports growth in finance receivables, provides
the Company’s working capital needs and for general corporate purposes. The facility, available in U.S. or Canadian dollars, also
improves the Company's financial flexibility by centralizing treasury management and making the provision of capital to individual
businesses more efficient. This credit facility is secured by substantially all of the Company’s assets, contains covenants including
maintaining leverage and interest coverage ratios, and expires on December 8, 2020. At December 31, 2017 and December 31,
2016, and throughout the periods presented, the Company was in compliance with all covenants.
Financing facilities of operating subsidiaries are used to provide funding for the respective subsidiary’s operations (namely to
provide financing for the purchase of assets which are to be the subject of leases and loans or to support working capital). The
financing facilities are not intended to directly fund dividends paid by the Company.
76
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
20. COMMON SHARES
Balance, December 31, 2015
Exercise of restricted share units (Note 22(b))
Exercise of options (Note 22(a))
Other
Repurchase of common shares under issuer bid
(a)
Common shares
(# '000s)
Amount
($ thousands)
16,264
$
101,726
38
236
10
(34)
466
2,520
100
(216)
Balance, December 31, 2016
16,514
$
104,596
Exercise of restricted share units (Note 22(b))
Exercise of options (Note 22(a))
38
23
386
226
Balance, December 31, 2017
16,575
$
105,208
(a) Normal course issuer bids
In August 2015, the Board of Directors approved the repurchase and cancellation of up to 1,078,741 of the Company’s outstanding
Common Shares for the period commencing August 25, 2015 and ending on August 24, 2016. During August 2016, 28,356
Common Shares were repurchased under this normal course issuer bid at an average cost of $10.5710.
In August 2016, the Board of Directors approved the repurchase and cancellation of up to 1,078,096 of the Company’s outstanding
Common Shares for the period commencing August 25, 2016 and ending on August 24, 2017. From August 25, 2016 to December
31, 2016, 6,000 Common Shares were repurchased under this normal course issuer bid at an average cost of $10.9877. The excess
of the purchase price over the average stated value of Common Shares purchased for cancellation is charged to retained earnings.
In August 2017, the Board of Directors approved the repurchase and cancellation of up to 1,085,981 of the Company’s outstanding
Common Shares for the period commencing August 25, 2017 and ending on August 24, 2018. No common shares were repurchased
under this normal course issuer bid during the year ended December 31, 2017.
Additionally, the Company has entered into an automatic share purchase plan with a broker for the purpose of permitting the
Company to purchase its Common Shares under the normal course issuer bid at such times when the Company would not be
permitted to trade in its own shares during internal blackout periods, including during regularly scheduled quarterly blackout
periods. Such purchases will be determined by the broker in its sole discretion based on parameters the Company has established.
Subsequent to year end (up to and including March 8, 2018), the Company repurchased 76,918 of its shares under the normal
course issuer bid at an average cost of $10.2128.
21. EXCHANGEABLE SECURITIES
As partial consideration for the acquisition of Pawnee in May 2006, 1,274,601 Class B shares and 203,936 Class C shares of U.S.
Acquisitionco were issued (“Exchangeable Securities”). The Exchangeable Securities are non-voting shares of U.S. Acquisitionco
and are fully exchangeable for Common Shares of the Company, on a one-for-one basis, for no additional consideration, through
a series of steps and entitle the holders to receive the same dividends as the Common Shares. Attached to the Exchangeable
Securities are Special Voting Units of the Company which provide the holders of the Exchangeable Securities voting equivalency
to Company Shareholders. The Exchangeable Securities are reflected as non-controlling interest. Under IFRS 10, Consolidated
Financial Statements, the Exchangeable Securities must be shown as non-controlling interest because they are equity in a subsidiary
not attributable, directly or indirectly, to the parent even though they have no voting powers in the subsidiary. There are no
restrictions to the Company’s ability to access or use assets and settle liabilities of U.S. Acquisitionco as a result of the non-
controlling interest. The non-controlling interest share of the Company’s consolidated net assets and net income is presented on
the consolidated financial statements.
77
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
22. COMPENSATION PLANS
From time to time, the Company compensates certain members of management in the form of share-based compensation. The cost
of equity-settled transactions with employees is recognized, together with a corresponding increase in equity, over the period
during which the performance and or service conditions are fulfilled and ending on the vesting date at which point the employees
become fully entitled to the award. The cumulative expense also takes into account the number of equity instruments that the
Company expects will ultimately vest.
The fair-value of option grants are calculated using the Black-Scholes option pricing model and recognized as compensation
expense over the vesting period of those grants and a corresponding adjustment is made to Reserves in Shareholders’ Equity. Any
consideration received on exercise of options together with amounts previously credited to Reserves for these options is credited
to Common Shares.
The fair-value of Restricted Share Units (“RSUs”) granted is calculated based on the market price of the Common Shares on the
day of the grant. RSUs granted are considered to be in respect of future services and are recognized as compensation expense over
the vesting period with a corresponding adjustment credited to Reserves in Shareholders’ Equity. On exercise of the RSUs the
amounts previously credited to Reserves is credited to Common Shares. Where the terms of an equity-settled award are modified,
the minimum expense recognized is the expense determined as if the terms had not been modified. Additional expense is recognized
for any modification which increases the total fair value of the share-based compensation arrangement, or is otherwise beneficial
to the employee at the date of the modification.
When an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation and any expense not yet
recognized is recognized immediately.
The dilutive effect of outstanding options is reflected as additional equity in the computation of diluted earnings per share.
(a) Share options
During the year ended December 31, 2017, personnel expenses and the share-based compensation reserve included $532,600 (2016
- $751,800) relating to option expense. In the year ended December 31, 2016, an additional $148,100 in share-based compensation
expense is included in income from discontinued operations.
As of December 31, 2017, unrecognized non-cash compensation expense related to the outstanding options was $489,100
(December 31, 2016 - $605,200), which is expected to be recognized over the remaining vesting period.
A summary of the number of options outstanding is as follows:
Balance, beginning of year
Granted
Exercised
Forfeited
Balance, end of year
For the years ended
December 31,
2017
1,837,989
362,500
(23,500)
(21,000)
2,155,989
2016
1,853,917
395,000
(235,928)
(175,000)
1,837,989
During the year ended December 31, 2017, 23,500 options were exercised (2016 - 235,928) for total cash consideration of $161,735
(2016 - $2.0 million). On exercise, the fair value of options that had been expensed to date during the vesting period of $64,000
(2016 - $560,400) was transferred from reserve to Common Share capital (Common Share capital was also increased by the cash
consideration received upon exercise). For the options exercised in the year ended December 31, 2017, the weighted average
share price at the date of exercise was $12.40 (2016 - $10.83).
78
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
At December 31, 2017, the weighted average exercise price is $10.24 (December 31, 2016 - $9.82) and the weighted average
remaining contractual life for all options outstanding is 6.5 years (December 31, 2016 - 6.9 years). The 1,415,489 options exercisable
at December 31, 2017 have a weighted average exercise price of $9.58 (December 31, 2016 - 1,112,239 options at $8.80).
An analysis of the options outstanding at December 31, 2017 is as follows:
Grant date
April 13, 2010
April 25, 2011
June 10, 2011
December 6, 2011
June 25, 2012
December 6, 2012
April 29, 2014
April 16, 2015
April 29, 2015
August 15, 2016
June 19, 2017
Number of options
outstanding
Vested
Expiry date
Exercise
price
74,000
197,500
50,000
180,000
178,489
125,000
265,000
193,000
150,000
380,500
362,500
74,000
197,500
50,000
180,000
178,489
125,000
265,000
130,000
97,500
118,000
—
April 13, 2020
April 24, 2021
June 9, 2021
December 6, 2021
June 24, 2022
December 6, 2022
April 29, 2024
April 16, 2025
April 29, 2025
August 15, 2026
June 19, 2027
$
$
$
$
$
$
$
$
$
$
$
4.49
7.79
7.73
6.14
7.45
8.86
14.12
12.53
12.24
10.17
12.15
2,155,989
1,415,489
The option exercise price is equal to the 10-day volume weighted average price of the Shares prior to the day such options were
granted. The options vest 30% at the end of the first year, another 35% at the end of the second year, and the remaining 35% at
the end of the third year and expire on the 10th anniversary of the grant date.
The value of the options granted during the period was determined using the Black-Scholes Option Pricing model with the following
assumptions:
June 19, 2017
August 15, 2016
Number of options granted
Weighted average share price at date
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rates
Weighted average fair value of options granted
362,500
$12.15
30% - 34%
7 - 9
7.48%
1.1%
$1.31
395,000
$10.17
30% - 32%
5 - 7
7.41%
0.62% - 0.86%
$1.09
The risk free rate was based on the Government of Canada benchmark bond yield on the date of grant for a term equal to the
expected life of the options. Expected volatility was determined by calculating the historical volatility of the Company’s share
price over a period equal to the expected life of the options. The expected life was based on the contractual life of the awards and
adjusted, based on management’s best estimate and historical redemption rates.
The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options, which have no
black-out or vesting restrictions and are fully transferable. In addition, the Black-Scholes Option Pricing Model requires the use
of subjective assumptions, including the expected stock price volatility. As a result of the Company’s Stock Option Plan having
characteristics different from those of traded options, and because changes in the subjective assumptions can have a material effect
on the fair value estimates, the Black-Scholes Option Pricing model does not necessarily provide a single measure of the fair value
of options granted.
79
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
(b) Restricted share units
A summary of the restricted share units ("RSUs") outstanding is as follows:
Balance, beginning of year
Granted
Exercised
Balance, end of year
For the years ended
December 31,
2017
2016
70,000
38,000
(38,000)
70,000
66,000
42,000
(38,000)
70,000
During the year ended December 31, 2017, personnel expenses and share-based compensation reserve included $433,100 (2016
- $471,900) relating to RSUs. As of December 31, 2017, unrecognized non-cash compensation expense related to non-vested
RSUs was $198,300 (December 31, 2016 - $169,700).
During the year ended December 31, 2017, an aggregate of 38,000 (2016 - 42,000) RSUs were granted to directors and expire in
ten years. The grantees of such RSUs are not entitled to dividends before the RSUs are exercised. Such RSUs typically vest one
year from the date of issue and are to be settled by the issue of Common Shares. RSUs granted are in respect of future services
and are expensed over the vesting period. Compensation cost is measured based on the weighted average market price of the
Common Shares for the 10 days prior to the date of the grant of the RSUs, which was $12.15 (2016 - $10.17).
During the year ended December 31, 2017, 38,000 RSU's were exercised (2016 - 38,000), upon exercise, the fair value of RSU's
that had been expensed during the vesting period of $386,500 (2016 - $466,300) was transferred from reserve to Common Share
capital. For the RSUs exercised in the year ended December 31, 2017, the weighted average share price at the date of exercise
was $10.41 (2016 - $10.48).
The weighted average remaining contractual life for all RSUs outstanding is 5.8 years (December 31, 2016 - 7.0 years).
An analysis of the RSUs outstanding at December 31, 2017 is as follows:
Grant date
April 25, 2011
June 25, 2012
May 22, 2013
May 23, 2014
May 25, 2015
August 15, 2016
June 19, 2017
Number of
RSUs
outstanding
Vested
Expiry date
Value on
grant date
4,000
6,000
6,000
6,000
6,000
4,000
4,000
6,000
6,000
6,000
6,000
4,000
May 16, 2019
May 16, 2019
May 16, 2019
May 16, 2019
May 16, 2019
May 10, 2020
38,000
— June 19, 2027
$
$
$
$
$
$
$
7.79
7.45
11.65
14.07
12.27
10.17
12.15
70,000
32,000
23. DIVIDENDS
Under the Chesswood credit facility (see Note 13(a) - Borrowings), the maximum amount of cash dividends (and/or cost of any
repurchases under normal course issuer bids) that the Company can pay in respect of a month is 1/12 of 90% (prior to January 25,
2016 - 1/12 of 80%) of free cash flow for the most recently completed four financial quarters in which Chesswood has publicly
filed its consolidated financial statements (including its annual consolidated financial statements in respect of a fourth quarter).
80
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
In conjunction with the sale of EcoHome, the Company received approval to declare a special dividend and/or make repurchases
under normal course issuer bids to an aggregate of $17.7 million, of which the Company declared a special dividend of $0.50 per
share on February 18, 2016 for shareholders of record on February 29, 2016 and was paid on March 15, 2016, totaling $8.9 million.
The following dividends were paid to Common Shareholders and Exchangeable Securities holders (included as non-controlling
interest) during the year ended December 31, 2017:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2016
January 31, 2017
February 28, 2017
March 31, 2017
April 28, 2017
May 31, 2017
June 30, 2017
July 31, 2017
August 31, 2017
September 29, 2017
October 31, 2017
November 30, 2017
January 16, 2017
February 15, 2017
March 15, 2017
April 17, 2017
May 15, 2017
June 15, 2017
July 17, 2017
August 15, 2017
September 15, 2017
October 16, 2017
November 15, 2017
December 15, 2017
$
$
$
$
$
$
$
$
$
$
$
$
$
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
1,259
1,260
1,260
1,260
1,260
1,263
1,263
1,263
1,264
1,263
1,264
1,264
$
15,143
The following dividend was declared but not paid to Common Shareholders and Exchangeable Securities holders during the year-
ended December 31, 2017 and was included in accounts payable and other liabilities (Note 11):
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 29, 2017
January 15, 2018
$
0.070
$
1,264
The following dividends were declared before the financial statements were authorized for issue but not recognized during the
year ended December 31, 2017:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
January 31, 2018
February 28, 2018
February 15, 2018
March 15, 2018
$
$
0.070
0.070
$
$
1,264
1,264
2,528
The following dividends were paid to Common Shareholders and Exchangeable Securities holders (included as non-controlling
interest) during the year ended December 31, 2016:
81
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2015
January 29, 2016
February 29, 2016 - special
February 29, 2016
March 31, 2016
April 29, 2016
May 31, 2016
June 30, 2016
July 29, 2016
August 31, 2016
September 30, 2016
October 31, 2016
November 30, 2016
January 15, 2016
February 16, 2016
March 15, 2016
March 15, 2016
April 15, 2016
May 16, 2016
June 15, 2016
July 15, 2016
August 15, 2016
September 15, 2016
October 17, 2016
November 15, 2016
December 15, 2016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.065
0.065
0.500
0.065
0.065
0.065
0.065
0.065
0.065
0.065
0.065
0.065
0.070
1,153
1,154
8,874
1,154
1,154
1,154
1,158
1,158
1,158
1,161
1,161
1,161
1,257
$
22,857
The following dividend was declared but not paid to Common Shareholders and Exchangeable Securities holders during the year
ended December 31, 2016 and was included in accounts payable and other liabilities (Note 11):
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 30, 2016
January 16, 2017
$
0.070
$
1,259
The following dividends were declared before the financial statements were authorized for issue but not recognized during the
year-ended December 31, 2016:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
January 31, 2017
February 28, 2017
February 15, 2017
March 15, 2017
$
$
0.070
0.070
$
$
1,259
1,259
2,518
24. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income for the year attributed to common shareholders by the weighted
average number of common shares outstanding during the year. Diluted earnings per share is calculated using the same method
as for basic earnings per share and adjusted for the weighted average number of common shares outstanding during the year to
reflect the dilutive impact, if any, of any options, RSUs, or other commitments and instruments assuming they were exercised for
that number of common shares calculated by applying the treasury stock method. The treasury stock method assumes that all
proceeds received by the Company when options are exercised will be used to purchase common shares at the average market
price during the reporting period.
82
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Basic earnings per share is computed by dividing net income for the year by the weighted average number of common shares
outstanding during the year.
Weighted average number of common shares outstanding
Dilutive effect of options
Dilutive effect of restricted share units
For the years ended
December 31,
2017
2016
16,550,400
16,345,328
428,094
67,496
357,950
60,339
Weighted average common shares outstanding for diluted earnings per share
17,045,990
16,763,617
Options and convertible debentures excluded from calculation of diluted
shares for the year due to their anti-dilutive effect
1,448,589
1,605,589
25. RELATED PARTY TRANSACTIONS
a) The Company has no parent or other ultimate controlling party.
b) The Company’s key management consists of the President & Chief Executive Officer, Chief Financial Officer and the Board
of Directors. Key management compensation is as follows:
Salaries, fees and other short-term employee benefits
Share-based compensation
Compensation expense of key management
For the years ended
December 31,
2017
2016
($ thousands)
1,128
678
1,806
$
$
1,144
929
2,073
$
$
c) In February 2016, $6.0 million was paid to a related party entity as contingent consideration payable in respect of the acquisition
of Blue Chip and EcoHome in 2015 (see Note 3 - Business Acquisition in the 2016 annual audited consolidated financial statements).
The entity was deemed a related party because a former Director of the Company is a shareholder of that entity and the entity
owns more than 10% of the outstanding common shares of the Company. The Director was also an officer of the Company and
Blue Chip at the time of the payment. No payments were made in 2017.
d) The Company paid fees to a related party for consulting services subsequent to his resignation as an officer of the Company
and Blue Chip. The individual is deemed a related party because he was a Director and owns more than 10% of the outstanding
common shares of the Company. The expense incurred during the year ended December 31, 2017 was nil (2016 - $150,000) and
is included in other expenses in the consolidated statements of income. The consulting arrangement was completed during 2016
and no further fees are expected.
83
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
26. CASH FLOW SUPPLEMENTARY DISCLOSURE
For the years ended
December 31,
Note
2017
2016
Other non-cash items included in net income
Share-based compensation expense
Amortization of deferred financing costs
Financing costs - convertible debentures
Unrealized loss (gain) on investments
Escrow receivable fair value adjustment
Contingent consideration reversal
Unrealized gain on interest rate derivatives
Unrealized loss (gain) on foreign exchange
Change in other net operating assets
Restricted funds
Other assets
Accounts payable and other liabilities
Customer security deposits
Borrowings – continuing operations
Draw-downs or proceeds from borrowings
Payments - borrowings
13
13
Non-cash transactions
Common shares issued on exercise of restricted share units
($ thousands)
965
$
1,582
1,130
2,869
(52)
(538)
(1,006)
118
5,068
$
(6,181)
(2,579)
2,876
1,334
(4,550)
401,525
(263,800)
137,725
$
$
$
$
1,224
743
1,660
(3)
(128)
(678)
(15)
(111)
2,692
—
654
1,719
106
2,479
242,419
(199,686)
42,733
386
$
466
$
22
13
$
$
$
$
$
$
27. SEGMENT INFORMATION
Segments are identified on the same basis that is used internally to manage and to report on performance, taking into account
materiality and the products and services of each segment and the organizational structure of the Company. The Company’s
operations consist of the following reportable segments: Equipment Financing - U.S. and Equipment Financing - Canada.
The Company’s U.S. Equipment Financing business is located in the United States and is involved in small-ticket equipment
leasing and lending to small and medium-sized businesses. Windset's information is aggregated with Chesswood's U.S. Equipment
Financing segment as both Pawnee and Windset offer lending solutions to small businesses in the United States and Windset
continues to leverage off Pawnee's experience, processes, broker channel and "back-office" support for collections and
documentation. The Canadian Equipment Financing segment provides commercial equipment financing to small and medium-
sized businesses in Canada and includes Blue Chip.
84
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Segment information is prepared in conformity with the accounting policies adopted for the Company’s consolidated financial
statements. The role of the “chief operating decision maker” with respect to resource allocation and performance assessment is
embodied in the position of Chief Executive Officer. The performance of the segments is measured on the basis of net income or
loss before tax. Net assets, which are defined as total segment assets less total segment liabilities, are used as the basis of assessing
the allocation of resources. When compared with the last annual consolidated financial statements, there are no differences in the
basis of segmentation or in the basis of measuring segment results.
Selected information by segment and geographically is as follows:
($ thousands)
Year ended December 31, 2017
Equipment
Financing -
U.S.
Equipment
Financing -
Canada
Discontinued
Operations
(Note 5)
Corporate
Overhead
- Canada
11,479
4,172
(4,215)
(1,326)
10,110
2,635
17
1,550
21
5,887
(1,691)
—
—
—
4,196
974
3,222
— $
$
3,222
(15,957) $
(13) $
$
22,044
192,210
139,683
151,574
39,275
13
$
$
$
$
$
Interest revenue on leases and loans
$
68,214
$
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation - property and equipment
Income before undernoted items
Amortization - intangible assets, contingent
consideration reversal
Fair value adjustments - convertible
debentures and investments
Unrealized gain on interest rate derivatives
Unrealized loss on foreign exchange
Income before taxes
Tax expense (recovery)
Income from continuing operations
Loss from discontinued operations
Net income
Net cash used in operating activities
Net cash used in investing activities
Net cash from financing activities
Total assets
Total liabilities
Finance receivables
Goodwill and intangible assets
Property and equipment expenditures
$
$
$
$
$
$
$
$
$
11,102
(11,053)
(19,758)
48,505
9,718
242
8,509
420
29,616
—
—
192
—
29,808
(453)
30,261
—
30,261
$
(101,870) $
(930) $
87,826
435,579
122,637
399,076
20,266
930
$
$
$
$
$
$
85
(3,999)
(3,999)
$
— $
357
—
—
357
1,439
706
1,640
—
(3,428)
538
814
(118)
(6,193)
1,539
(7,732)
—
(7,732) $
(9,038) $
— $
8,554
$
$
$
(320)
(320) $
1,899
$
— $
— $
3,371
$
12,452
— $
220,071
— $
— $
— $
— $
— $
— $
Total
79,693
15,631
(15,268)
(21,084)
58,972
13,792
965
11,699
441
32,075
(1,153)
1,006
(118)
27,811
2,060
25,751
(320)
25,431
(124,966)
(943)
118,424
643,612
482,391
550,650
59,541
943
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
($ thousands)
Year ended December 31, 2016
Equipment
Financing -
U.S.
Equipment
Financing -
Canada
Discontinued
Operations
(Note 5)
Corporate
Overhead
- Canada
Interest revenue on leases and loans
$
67,033
$
10,432
$
— $
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation - property and equipment
Income before undernoted items
Amortization - intangible assets, contingent
consideration reversal
Fair value adjustments - convertible
debentures and investments
Unrealized gain on interest rate derivatives
Unrealized gain on foreign exchange
Income before taxes
Tax expense
Income from continuing operations
Income from discontinued operations
Net income
Net cash used in operating activities
Net cash from investing activities
Net cash from in financing activities
Total assets
Total liabilities
Finance receivables
Goodwill and intangible assets
Property and equipment expenditures
$
$
$
$
$
$
$
$
$
9,440
(6,178)
(24,063)
46,232
8,719
206
8,169
293
28,845
—
—
—
—
28,845
8,498
20,347
—
20,347
4,259
(3,646)
(1,756)
9,289
2,611
67
1,553
19
5,039
(1,337)
—
—
—
3,702
1,032
2,670
— $
$
2,670
$
(26,048) $
(844) $
— $
330,549
39,655
300,269
21,691
844
$
$
$
$
$
(12,772) $
— $
$
14,623
172,073
117,734
$
$
130,779
40,988
$
$
— $
Total
77,465
14,118
(9,824)
(25,819)
55,940
12,707
1,224
11,387
312
30,310
(659)
419
—
—
419
1,377
951
1,665
—
(3,574)
678
(1,657)
(1,657)
15
111
(4,427)
1,273
(5,700)
—
(5,700) $
(5,223) $
$
24,964
$
5,436
19,412
212,654
$
$
— $
— $
— $
15
111
28,120
10,803
17,317
6,961
24,278
(46,643)
24,120
18,356
527,937
370,043
431,048
62,679
844
6,961
6,961
$
(2,600) $
— $
(1,703) $
5,903
$
— $
— $
— $
— $
28. SUBSEQUENT EVENTS
Subsequent to year end:
a) On January 17, 2018, the Company redeemed its $20.0 million convertible debentures. See Note 12 - Convertible Debentures.
b) On February 16, 2018, the Company received $2.5 million upon the maturity of the Dealnet convertible note receivable. See
Note 6 - Other Assets.
c) In 2018 (up to and including March 8, 2018), the Company repurchased 76,918 of its shares under the normal course issuer bid
at an average cost of $10.2128. See Note 20 - Common Shares.
86
Chesswood Group Limited
DIRECTORS, OFFICERS AND OTHER INFORMATION
Directors
Executive Team
Frederick W. Steiner
Director, Chairman of Chesswood Group Limited
C.E.O., Imperial Coffee and Services Inc.
Barry Shafran
President & C.E.O.
Samuel Leeper
Director , Chairman, Audit and Governance Committee
Former C.E.O., Pawnee Leasing Corporation
Lisa Stevenson
Chief Financial Officer
Clare Copeland
Director, Chairman, Compensation Committee
Vice-Chair, Falls Management Company
Other Information
Auditors
BDO Canada LLP
David Obront
Director
President, Carpool Two Ltd.
Transfer Agent
TSX Trust Company
Robert Day
Director
Former Chairman, Pawnee Leasing Corporation
Corporate Counsel
McCarthy Tétrault LLP
Barry Shafran
Director
President & C.E.O., Chesswood Group Limited
Toronto Stock Exchange Symbol
CHW
Chesswood Group Limited
156 Duncan Mill Road, Unit 16
Toronto, Ontario, Canada M3B 3N2
Tel. 416.386.3099 Fax. 416.386.3085
e-mail:investorrelations@chesswoodgroup.com
www.chesswoodgroup.com
2017 ANNUAL REPORT
Equipment Finance Company
Serving U.S. and Canada
TSX: CHW
Executive Office:
Chesswood Group Limited
156 Duncan Mill Road, Suite 15
Toronto, Ontario, Canada M3B 3N2
Tel. 416.386.3099 • Fax. 416.386.3085
email:investorrelations@chesswoodgroup.com
www.chesswoodgroup.com
124387 Chesswod 2017 AR Cover.indd 1
2018-03-08 9:34 AM