2018 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
Through its two wholly-owned subsidiaries in the U.S. and Canada, Chesswood Group Limited ("Chesswood") 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. In early 2019, Chesswood launched Tandem Finance Inc. which will
provide small and medium sized businesses of all credit profiles with financing for their equipment purchases through equipment
vendors and distributors in the U.S.
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, www.TandemFinance.com and www.BlueChipLeasing.com.
CONTENTS
PRESIDENT'S MESSAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS, OFFICERS AND OTHER INFORMATION
3
3
37
85
This Annual Report is intended to provide shareholders and other interested persons with selected information concerning 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, 2018
TO OUR SHAREHOLDERS
This year was another record year for Chesswood Group by
almost all measures! Portfolio size, originations, operating
income and pre-tax earnings were all records for Chesswood,
once again. If not for the “Trump Bump” which generated a
tax recovery and increased earnings by $9.4 million in 2017,
as a one-time effect, our net income would also have hit a
new milestone. Furthermore, our pre-tax return on equity
increased to almost 20% for 2018, from 17.2% in 2017.
We earned $32.7 million before tax in 2018, compared to
$27.8 million for 2017, for an increase of 18%, while our
operating income totaled $33.7 million versus $32.1 million
in 2017. This $1.6 million improvement in operating income
would have been larger by approximately $900,000 had we
not retired our convertible debenture at the start of 2018 by
using our bank debt. Interest expense on our bank debt is
deducted in the calculation of operating income whereas
interest on our now retired convertible debenture was not part
of operating income in prior years.
This past year included two important accomplishments for
Chesswood’s treasury resources and future growth. We
completed our second U.S. securitization in June, followed
by completing our new U.S.$250 million warehouse facility
in the second half of the year. This new warehouse facility
provides us with appropriate treasury for our U.S. prime
originations by improving our advance rates and cost of funds
to better match our treasury resources with our prime
originations activity. The warehouse line will hold most of
our prime originations before they are bundled together and
securitized.
Our shareholders have relied on us for sustainable dividends,
for more than a decade. In 2018 we paid out $15.1 million in
dividends, providing our shareholders with an annual yield
of 7.65% based on our average share price in 2018 of $10.98.
Just as importantly, our payout ratio - the percentage of our
permitted free cash flow that we pay out in dividends - is
approximately 65% following the release of these year-end
financial statements. Our share price in 2018 provided us with
an opportunity to repurchase some of our shares through our
normal course issuer bid at values we considered to be
MANAGEMENT'S DISCUSSION AND ANALYSIS
advantageous for shareholders. We purchased 499,436 shares
at an average cost of $10.41 per share.
finance business, Tandem Finance
Late in 2018 we began the work necessary to launch our new
Inc.
equipment
Headquartered
in Houston, Texas, Tandem provides
equipment financing programs to equipment vendors and
distributors in the U.S. and offers a truly unique value
proposition to this largest channel of equipment finance -
direct funding for most credit tiers. In this channel, we will
be the only funder that can approve, fund, hold and administer
equipment finance contracts for small and medium sized
businesses with credit profiles from “A” through ”C”, using
our decades of experience with these multiple credit
segments. Today, other funders in this space generally resell
transactions that are not prime as they do not have the
expertise or treasury necessary to fund this type of business.
This results in poorer service, lower approval rates and less
equipment sales for the equipment sellers. Tandem is led by
an experienced team from this channel, who are focused on
bringing our proven expertise in small-ticket equipment
finance in most credit categories, to the much larger vendor
channel, in 2019.
Lastly, our decade long record of success in the growth of
our earnings and portfolio is a testament to the great team
members we have in the U.S. and Canada. Money is
ubiquitous but a consistent commitment to the customer is
hard to find and we are very grateful to our team of more than
130 employees for their passion, dedication and delivery of
superior service, each and every day.
Barry Shafran
President & CEO
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,
2018. This discussion should be read in conjunction with the 2018 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
3
FOR THE YEAR ENDED DECEMBER 31, 2018
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 5, 2019.
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, by 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
5
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
23
26
26
33
35
35
35
36
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.
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.
4
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
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
increased
risk pricing by competitors);
aggressive
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.
FOR THE YEAR ENDED DECEMBER 31, 2018
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.
“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) non-cash change in finance receivable allowance for
credit losses (effective Q1 2018), (vi) acquisition costs, (vii)
contingent consideration accretion or reduction, (viii) any
unusual and material one-time gains or expenses and (ix)
COMPANY OVERVIEW
actual interest attributable to the period in respect of the
convertible debentures.
“EBITDA” is defined as net income adjusted to exclude
interest, income taxes, depreciation and amortization.
"Free Cash Flow" ("FCF") is defined as Adjusted EBITDA
less maintenance capital expenditures, tax effect of the non-
cash change in the allowance for credit losses (effective Q1
2018) 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).
is defined under
"Maximum Permitted Dividends"
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.
Chesswood is North America’s only public company focused exclusively on commercial equipment finance for small and medium-
sized businesses. As at December 31, 2018, 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 U.S.; and
• Blue Chip Leasing Corporation ("Blue Chip"), which provides commercial equipment financing to small and medium-
sized businesses across Canada.
In early 2019, the Company launched Tandem Finance Inc., which will provide small and medium sized businesses of all credit
profiles with financing for their equipment purchases through equipment vendors and distributors in the U.S.
5
FOR THE YEAR ENDED DECEMBER 31, 2018
PAWNEE
The Company’s U.S. operations are primarily conducted by
Pawnee, which accounted for 83.9% of consolidated revenue
and 80.8% of consolidated operating income from continuing
operations before corporate overhead in the year ended
December 31, 2018.
Established in Fort Collins, Colorado in 1982, Pawnee
specializes in providing equipment financing of up to U.S.
$250,000 to small and medium-sized businesses in the U.S.,
with a wide range of credit profiles from start-up
entrepreneurs to more established businesses, in prime and
non-prime market segments,
through a network of
approximately 600 independent equipment finance broker
firms. At December 31, 2018, approximately 52% of
Pawnee's gross finance receivables were in the prime market
segment.
As of December 31, 2018, Pawnee employed 94 full-time
equivalent employees.
Pawnee Key Portfolio Statistics (in U.S.$ thousands except # of leases/loans and %’s)
Number of leases and loans
outstanding (#)
Gross lease and loan receivable (“GLR”) (1)
Mar 31
2017
June 30
2017
Sep 30
2017
Dec 31
2017
Mar 31
2018(5)
June 30
2018
Sep 30
2018
Dec 31
2018
14,943
15,616
16,226
16,627
17,037
17,604
17,974
18,179
$309,120
$337,276
$362,846
$398,053
$427,100
$465,526
$493,370
$515,439
Residual receivable
$16,041
$16,512
$16,849
$16,977
$17,101
$17,617
$18,175
$18,725
Net investment in leases and loans receivable,
before allowance (4)
Security deposits (nominal value)(4)
Allowance for credit losses(5)
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 (5)
$248,557
$273,390
$296,655
$327,608
$352,431
$384,643
$408,957
$426,065
$11,135
$11,510
$11,915
$12,325
$12,734
$13,330
$13,763
$13,787
$6,555
$6,848
$8,602
$8,482
$15,309
$15,895
$15,489
$15,904
2.19%
2.21%
2.69%
2.30%
2.10%
1.97%
1.83%
1.89%
$3,698
$2,962
$3,101
$3,912
$3,765
$3,131
$3,208
$3,986
$3,229
$3,334
$4,923
$3,857
$3,379
$3,717
$2,802
$4,059
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 prior to 2018.
(4) Excludes adjustment for discounting security deposits and increasing unearned income for interest savings on security deposits.
(5) Provision for credit losses and allowance for credit losses included in the key portfolio statistics for the three months ended and as at March 31, 2018
and subsequent periods, were prepared in accordance with IFRS 9, Financial Instruments ("IFRS 9"). Prior period comparatives were prepared in accordance
with IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39") and have not been restated. Refer to Note 2 and Note 7 of the consolidated
financial statements for further details.
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
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. “C” rated businesses have a credit
profile that is weaker than “B” credit businesses. Pawnee
further limits the transaction size for “C” businesses as one
measure of mitigating risk.
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
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FOR THE YEAR ENDED DECEMBER 31, 2018
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
up to U.S.$500,000 in the prime market.
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
Pawnee’s leases and loans are presently funded through the
following facilities:
• Chesswood’s revolving corporate credit facility
allows borrowings of up to U.S.$250.0 million subject
to, among other things, threshold levels of eligible
finance receivables, and is renewed to December 8,
2020.
• 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. A second U.S.$50 million facility was
closed during 2018. The repayment terms are based on
the cash flow of the underlying portfolio. The proceeds
from these non-recourse facilities were applied to
Chesswood's revolving corporate credit facility.
•
In August 2018, Pawnee closed its new U.S.$250
million warehouse facility with a syndicate of three
major banks which expires in August 2023. The
warehouse facility is used to fund most of Pawnee’s
prime originations before they are securitized.
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. credit underwriting 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
scorecard 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.
1. Asset quality at Pawnee begins with underwriting
parameters that define a conservative approach to
doing business and mitigating risk. Generally:
•
•
Pawnee finances equipment that is fundamental to
lessee/borrower’s
the core operations of
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;
the
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
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FOR THE YEAR ENDED DECEMBER 31, 2018
are obtained for non-prime credits, with acceptable
personal credit profiles a prerequisite for credit
approval;
• Business owners are interviewed by Pawnee for
verification purposes prior to the commencement of
the lease or loan, with site inspections conducted for
financings as low as U.S.$15,000 or more (U.S.
$100,000 for A-rated credits); and
• All scheduled payments for non-prime financings
are paid by direct debit from the lessee’s/borrower's
account, allowing Pawnee’s collection team to take
immediate action on delinquencies.
2. Pawnee originates finance receivables through a
network of over 600 independent broker firms across
the U.S., with a relationship-driven approach and
service capabilities that have distinguished it as first-
choice funder.
Risk management begins with the selection and training of
broker firms and their staff. Broker principals must have an
acceptable personal credit profile, industry references, and
preferably a minimum one-year track record in the equipment
finance industry. Pawnee’s Business Development managers
train new and existing brokers and their staff, and develop a
knowledge base on Pawnee’s underwriting policies and
procedures. The training process is instrumental in reducing
broker and Pawnee's time spent reviewing applicants unable
to meet Pawnee's
credit qualifications. Business
Development managers also monitor broker efficiencies in
credit application
including
applications submitted, approved and ultimately funded.
reviews and closings,
Pawnee's service-driven focus strengthens the relationships
with its customers, helping to support and expand origination
volumes. It has become a funder of choice as a result of unique
capabilities that improve efficiency and save time for its
broker customers, such as consistent credit decisions; rapid
response time, a customized broker portal (for application
submissions,
loan status and
documentation) and one-stop shopping for all credit-classes.
tracking of
lease and
Pawnee Lease and Loan Application, Approval and Origination Volume (in U.S.$ millions)
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FOR THE YEAR ENDED DECEMBER 31, 2018
3. Pawnee’s portfolio of leases and loans is well
diversified across geography, equipment types,
industries, brokers, vendors, equipment cost, and
credit classes.
As of December 31, 2018, Pawnee's portfolio of 18,179
leases and loans, representing U.S.$515.4 million in gross
finance receivables (excluding residual receivable), was
diversified, with:
•
•
•
•
•
over 86 equipment categories, with the five largest
- restaurant, titled trucks, construction, medical and
trailers - accounting for 47.0% of the total number
of active leases and loans;
over 229 industry segments, with no industry
representing more than 15.1% of the number of
active financings;
no lessee/borrower accounting for more than 0.07%
of the total;
48 U.S. states, with no state representing more than
10.0% of the number of total active leases and loans
(with the exception of California and Texas, which
represented 16.9% and 12.8%, respectively); and
the largest originator accounting for 8.3% of gross
lease and loan receivables, and the ten largest
accounting for 39.1%.
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 scorecard to guide consistent decision-making
and effectively pricing for risk, 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 in an efficient manner. A credit analyst
personally reviews all applications and completes a
proprietary scorecard 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 94 full-time equivalent employees at
2018 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.
• Because of 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
prospects for recovery through a personal guarantor,
sale of equipment 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
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FOR THE YEAR ENDED DECEMBER 31, 2018
periodically assessed by outside professionals with statistical
expertise.
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
BLUE CHIP
type,
type are among
industry,
brokers, geographic area, equipment
the
transaction size, and product
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.
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 16.1% of consolidated revenue and 18.0% of consolidated
operating income from continuing operations before corporate overhead in the year ended December 31, 2018.
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 geographies, industries, equipment types, equipment cost and
credit classes. Blue Chip had 32 full-time equivalent employees at December 31, 2018.
Blue Chip Portfolio Statistics (in $ thousands except # of leases/loans and %)
Number of leases and loans
outstanding (#)
Mar 31
2017
June 30
2017
Sep 30
2017
Dec 31
2017
Mar 31
2018 (1)
June 30
2018
Sep 30
2018
Dec 31
2018
12,278
12,910
13,345
13,781
14,188
14,587
14,494
14,253
Gross lease and loan receivable (“GLR”)
$152,502
$162,164
$166,505
$170,183
$175,681
$190,466
$191,365
$189,917
Net investment in leases and loans receivable
("NIL"), before allowance
Allowance for credit losses(1)
Over 31 days delinquency
(% of NIL)
$134,777
$143,310
$147,436
$150,951
$155,930
$168,745
$169,657
$168,631
$1,438
$1,621
$1,702
$1,284
$1,731
$1,974
$2,127
$2,233
0.66%
0.46%
0.36%
0.16%
0.34%
0.46%
0.19%
0.25%
(1) Allowance for credit losses as at March 31, 2018 and subsequent periods (included in the portfolio statistics above) were prepared in accordance with
IFRS 9. Prior period comparatives were prepared in accordance with IAS 39 and have not been restated. Refer to Note 2 and Note 7 of the consolidated
financial statements for further details.
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.
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
equipment, and by Blue Chip’s nimbleness in addressing
customer needs as an efficient and consistent "one-stop"
funding source.
• The micro-ticket segment is a high-volume, low-
touch business. Blue Chip has an application,
10
approval and funding process designed to speed up
credit decisions and automate the preparation of
secure documents to meet market demand for rapid
funding and customer service excellence.
• 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.
FOR THE YEAR ENDED DECEMBER 31, 2018
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, 2018, Blue Chip's gross finance
receivables portfolio of $189.9 million (2017: $170.2
million) consisting of 14,253 leases and loans (2017: 13,781)
was well diversified:
• Ontario
finance
represented 45.4% of net
receivables, Alberta represented 20.9% and 33.7%
were from the other provinces;
the five largest equipment categories by volume -
industrial, construction, photographic, truck and
trailers - accounted for 55.8% of net finance
receivables;
of its network of more than 50 originators, the largest
originator by dollar volume during 2018 accounted
for 15% originations; and
the four largest brokers by dollars financed
accounted for approximately 52% of originations
during 2018.
•
•
•
Effective risk management has made Blue Chip a solid
performer in its markets throughout business cycles.
•
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
DISCONTINUED OPERATIONS
Case Funding Inc. ("Case Funding"), a specialty provider of
loans and funding solutions to attorneys and law firms, sold
its assets in 2015, except for a small portfolio of receivables.
At December 31, 2018, there were 110 advances and loans
outstanding totaling $1.9 million (December 31, 2017 - 180
advances and loans totaling $3.4 million).
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).
Windset ceased accepting loan applications in September
2016, but continued to service its existing portfolio for the
full-term of the loans. Almost all of the portfolio was
collected in 2017, with the remaining $107,000 collected in
2018.
11
FOR THE YEAR ENDED DECEMBER 31, 2018
SELECTED FINANCIAL INFORMATION
($ thousands, except per share figures)
Average foreign exchange rate for the year
Revenue (1)
Finance margin
Income before tax and other items (Operating Income)(2)
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)
2016(5)
2017(6)
2018(7)
1.3248
91,583 $
55,940 $
30,310 $
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 $
32,075 $
25,751 $
25,431 $
$1.43 $
$1.39 $
$1.41 $
$1.37 $
1.2545
643,612 $
447,412 $
31,860 $
15,147 $
$0.84
1.2957
110,586
64,516
33,704
23,343
22,885
1.31
1.28
1.28
1.25
1.3642
818,187
639,092
35,013
15,044
$0.84
$
$
$
$
$
$
$
$
$
(1) It was determined that Case Funding meets the criteria of discontinued operations for each of the years displayed above. See
Note 5 - Discontinued Operations in the 2018 audited consolidated financial statements. EcoHome Financial Inc. ("EcoHome"),
a consumer financing company, was sold in February 2016 for approximately $35.0 million resulting in a gain of $6.7 million (net
of taxes and costs). The gain on sale and its operating results for a month and half are included in 2016 income from discontinued
operations, see the 2016 Annual Report for more details.
(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 $9.4 million reduction in future taxes expense and deferred tax liabilities.
(7) Provision for credit losses and allowance for credit losses included in the selected financial information for 2018 were prepared
in accordance with IFRS 9. Prior period comparatives were prepared in accordance with IAS 39, and have not been restated. Refer
to Note 2 - New Accounting Standards and Note 7 - Finance Receivables of the consolidated financial statements for further details.
12
FOR THE YEAR ENDED DECEMBER 31, 2018
As at and for the quarter-ended
($ thousands, except per share figures)
Revenue (6)
Finance margin before expenses
Income before tax and other items
(Operating Income) (1)
Income before tax
Provision for taxes (4)
Income from continuing operations
Income from discontinued operations
Q1
Q2
Q3
2017
Q4(4)
Q1
Q2
Q3
2018 (5)
Q4
$
23,051 $ 24,286 $
23,355 $
24,632 $
25,185 $
27,012 $
28,898 $
29,491
14,859
16,130
13,014
14,969
15,409
15,736
17,574
15,797
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)
8,339
8,427
2,529
5,898
2
8,046
8,221
2,572
5,649
9,415
9,280
3,007
6,273
7,904
6,788
1,265
5,523
(33)
(181)
(246)
Net income
$
4,696 $
3,749 $
3,188 $
13,798 $
5,900 $
5,616 $
6,092 $
5,277
(2)
Basic EPS - continuing operations
Diluted EPS - continuing operations (2)
Basic earnings per share (2)
Diluted earnings per share (2)
$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
$0.33
$0.32
$0.33
$0.32
$0.31
$0.31
$0.31
$0.31
$0.35
$0.34
$0.34
$0.33
$0.32
$0.31
$0.30
$0.29
$ 547,686 $ 573,414 $ 593,065 $ 643,612 $ 685,593 $ 748,732 $ 766,310 $ 818,187
$ 377,735 $ 404,784 $ 428,752 $ 447,412 $ 515,590 $ 575,289 $ 589,702 $ 639,092
Total assets
Long-term liabilities
Other Data
Adjusted EBITDA (1)
Dividends declared (3)
Dividends declared per share
$0.21
$0.21
$0.21
$0.21
$0.21
$0.21
$0.21
$
$
8,092 $
9,089 $
6,669 $
8,010 $
8,033 $
9,476 $
9,224 $
3,779 $
3,787 $
3,790 $
3,791 $
3,784 $
3,764 $
3,759 $
8,280
3,737
$0.21
(1) Adjusted EBITDA and Operating Income are non-GAAP measures. See “Non-GAAP Measures” above for the definitions.
(2) Based on weighted average shares outstanding during the period for income attributable to common shareholders.
(3) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial
Position").
(4) 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 $9.4 million reduction in future taxes expense and deferred tax liabilities which was recorded in Q4 2017.
(5) Provision for credit losses and allowance for credit losses included in the selected financial information for 2018 were prepared
in accordance with IFRS 9. Prior period comparatives were prepared in accordance with IAS 39, and have not been restated. Refer
to Note 2 and Note 7 of the consolidated financial statements for further details.
13
FOR THE YEAR ENDED DECEMBER 31, 2018
ADJUSTED EBITDA, FREE CASH FLOW, MAXIMUM PERMITTED DIVIDENDS (1)
For the quarter-ended
($ thousands)
Net income (5)
Interest expense
Provision for taxes (4)
Amortization and depreciation
EBITDA (1)
Interest expense
Q1
Q2
Q3
2017
Q4(4)
Q1
Q2
Q3
Q4
2018 (5)
$
4,696 $
3,749 $
3,188 $ 13,798 $
5,900 $
5,616 $
6,092 $
5,277
3,131
2,768
421
3,538
3,080
449
3,868
2,220
626
4,731
(6,008)
636
5,257
2,529
632
6,211
2,572
450
7,213
3,007
458
7,966
1,265
478
11,016
10,816
9,902
13,157
14,318
14,849
16,770
14,986
(3,131)
(3,538)
(3,868)
(4,731)
(5,257)
(6,211)
(7,213)
(7,966)
Non-cash change in finance receivables allowance
for credit losses(6)
Share-based compensation expense
Financing costs - convertible debenture
Interest expense on convertible debenture
Contingent consideration reduction
Unrealized loss (gain) on investments
Foreign exchange unrealized loss (gain)
Unrealized loss (gain) – interest rate derivatives
Adjusted EBITDA (1)
266
(20)
(321)
—
544
(11)
(251)
206
710
(324)
—
1,117
3
99
280
(100)
(328)
—
876
31
213
540
(328)
(538)
332
95
(628)
262
(29)
(61)
—
151
36
982
364
—
—
—
—
52
(368)
233
—
—
—
—
58
(124)
(730)
(759)
(560)
(256)
242
235
—
—
—
30
(117)
870
8,092
9,089
6,669
8,010
8,033
9,476
9,224
8,280
Maintenance capital expenditures
(7)
(102)
(6)
(68)
(69)
166
(10)
(263)
(56)
98
(50)
(53)
Tax impact of change in allowance for credit
losses(6)
Provision for taxes
Free Cash Flow(1)
FCF L4PQ divided by 4 (1)(3)
Maximum Permitted Dividends (1)(3)
Dividends declared (2)
(2,768)
(3,080)
(2,220)
6,008
(2,529)
(2,572)
(3,007)
(1,265)
$
$
$
$
5,317 $
5,907 $
4,443 $ 13,950 $
5,601 $
6,631 $
6,259 $
6,912
5,268 $
4,912 $
4,871 $
4,824 $
5,666 $
7,452 $
7,596 $
7,959
4,741 $
4,421 $
4,384 $
4,342 $
5,100 $
6,707 $
6,837 $
7,163
3,779 $
3,787 $
3,790 $
3,791 $
3,784 $
3,764 $
3,759 $
3,737
(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) The FCF L4PQ is calculated on a monthly basis as required by the terms of Chesswood's revolving credit line. This calculation
uses Chesswood's most recent four quarters’ published results at any one point in time, divided by twelve. The FCF L4PQ, in any
one quarter, is the basis for the Maximum Permitted Dividends in that quarter (90% of FCF L4PQ) and will not include the FCF
for the currently published quarter as they are released/published after the final month of the respective reporting period.
(4) 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 which was recorded in Q4 2017.
(5) Provision for credit losses included in the net income for 2018 was prepared in accordance with IFRS 9. Prior period comparatives
were prepared in accordance with IAS 39 and have not been restated. Refer to Note 2 and Note 7 of the consolidated financial
statements for further details.
(6) Effective for Q1 2018, and in keeping with the revised calculation of Free Cash Flow as agreed upon with our lenders, the
formulas for Consolidated Adjusted EBITDA and Free Cash Flow have been amended to adjust for the non-cash change in finance
receivables' allowance for credit losses included in the provisions for credit losses in the income statement as well as the related
tax effect of this non-cash change. As a result of this, on a go-forward basis since the first quarter of 2018, Consolidated Adjusted
EBITDA and Free Cash Flow includes only the actual net credit losses incurred in the quarter. Management believes that this
change enhances the usefulness of Adjusted EBITDA and Free Cash Flow as performance measures and is a more appropriate
method of calculation as it removes the volatility associated with the effect of estimates and assumptions for a non-cash item.
14
FOR THE YEAR ENDED DECEMBER 31, 2018
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2018 AND 2017
The Company reported consolidated net income of $5.3 million for the three months ended December 31, 2018 compared to $13.8
million in the same period of 2017, a decrease of $8.5 million year-over-year. The Q4 2017 results includes a one-time future tax
recovery of $9.4 million resulting from 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, which accounts for the majority of the decrease in net income for the three month
period year-over-year. Net unrealized fair value adjustments and other items also decreased $904,000 compared to 2017, quarterly
operating income decreased $114,000 year-over-year, and tax expense (other than the one-time item in Q4 2017) was down $2.1
million due to the decreased in tax rates in the U.S. year-over-year. U.S. dollar results for the three months ended December 31,
2018 were converted at an exchange rate of 1.3204, which was the average exchange rate for Q4 2018 (Q4 2017 - 1.2713).
($ thousands)
Interest revenue on leases and loans
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
Fair value adjustments - investments
Unrealized loss on interest rate
derivatives
Unrealized gain 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 used in investing activities
Net cash from financing activities
Property and equipment expenditures
$
$
$
$
$
Equipment
Financing
- U.S.
$
22,823
Three months ended December 31, 2018
Corporate
Overhead
- Canada
$
Equipment
Financing -
Canada
Discontinued
Operations
(Note 5)
3,484
$
— $
2,104
(6,586)
(5,626)
12,715
2,673
64
2,682
144
7,152
—
—
(380)
—
6,772
802
5,970
—
5,970
1,001
(1,380)
(102)
3,003
647
5
548
1
1,802
(333)
—
—
—
1,469
274
1,195
— $
$
1,195
(246)
(246) $
$
(22,499) $
1,965
$
62
$
Total
26,307
3,184
(7,966)
(5,728)
15,797
3,714
235
3,799
145
7,904
(333)
(30)
(870)
117
6,788
1,265
5,523
(246)
5,277
79
—
—
79
394
166
569
—
(1,050)
—
(30)
(490)
117
(1,453)
189
(1,642)
—
(1,642) $
— $
1,166
$
— $
— $
— $ (45,347) $
(908) $ (21,380)
(50)
19,105
— $
— $
— $
50
(50) $
63,286
50
$
$
15
FOR THE YEAR ENDED DECEMBER 31, 2018
($ thousands)
Equipment
Financing -
U.S.
Three months ended December 31, 2017
Equipment
Financing -
Canada
Discontinued
Operations
(Note 5)
Corporate
Overhead
- Canada
Interest revenue on leases and loans
$
18,642
$
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 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
Property and equipment expenditures
$
$
$
$
$
1,877
(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
$
$
In the three months ended December 31, 2018, consolidated
operating income (“income before undernoted items”) from
continuing operations was $7.9 million, compared to $8.0
million in the same period in the prior year, a decrease of
$114,000, or 1.4%.
By segment, Pawnee and Windset's operating income for the
quarter decreased by $351,000 compared to the same period
in the prior year. Pawnee's revenue totaled $24.9 million in
the three months ended December 31, 2018, an increase of
$4.4 million compared to the same period in the prior year,
due to growth in the finance receivables. As part of the
process of reviewing and adopting IFRS 15, Revenue from
Contracts with Customers, we have reclassified $1.0 million
of certain revenue items from Ancillary finance and other fee
income to Interest revenue on leases and loans in 2018 and
$1.1 million in 2017.
16
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
21,568
3,064
(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
Pawnee's interest expense totaled $6.6 million in the three
months ended December 31, 2018, compared to $3.6 million
in the same period of the prior year, an increase of $3.0
million. The increased interest expense is as a result of three
factors: a much larger portfolio of finance receivables and a
corresponding increase in debt, rising interest rates and some
significant fees incurred in the execution of Pawnee's first
securitizations and warehousing facilities. Higher fees are
expected when initially entering the securitization markets,
in order to build out the structures and processes needed to
support this type of treasury activity.
The change in Pawnee's portfolio delinquency rate from the
third quarter was very modest for what is usually a cyclically
weak quarter due to the holiday season (Q4 2018 1.89% vs
Q3 2018 1.83%). Actual net charge-offs in the three month
period were relatively flat year-over-year, even though our
finance receivable portfolio was much larger. Of the
FOR THE YEAR ENDED DECEMBER 31, 2018
$960,000 increase in provision for credit losses, $365,000
was the result of an increase in the foreign exchange rate year-
over-year. Pawnee's provision for credit losses, prepared
under IFRS 9, would have been $190,000 higher in the three
months ended December 31, 2018 if it were prepared in
accordance with the IAS 39 standard used in the 2017
comparative results.
Personnel and other expenses at Pawnee increased by
$796,000 in the quarter compared to the same period last year
due to increased headcount (approx. 10 more employees year-
over-year) and other expenses related to the growth in the
finance receivables. Of the $558,000 increase in other
expenses, collection related costs increased by $200,000 in
the three month period; however, the increased funds
recovered is netted against the provision for credit losses.
Blue Chip generated operating income of $1.8 million in the
quarter compared to $1.4 million in the same period last year,
an increase of $370,000. Blue Chip's provision for credit
losses in the three months ended December 31, 2018 would
have been $155,000 higher if using the same accounting
method that was used in the 2017 comparative results.
Corporate overhead before other items increased by $133,000
year-over-year, mainly from a $94,000 increase in personnel
expenses, a $68,000 decrease in interest income on loans to
EcoHome offset by a $9,000 decrease in general and
administrative expenses and a $20,000 decrease in share-
based compensation.
The market value of the Company's investment in Dealnet
Capital Corp. ("Dealnet") common shares decreased $30,000
in the three months ended December 31, 2018 compared to
a decrease in value of $332,000 in the same period of 2017
resulting in an increase in net income of $302,000 year-over-
year.
As the Company's convertible debentures were redeemed in
January 2018, there was no non-cash unrealized mark-to-
market adjustment in Q4 2018 compared to an unrealized loss
of $540,000 in the same period in the prior year, translating
to an increase in net income of $540,000 year-over-year.
The non-cash unrealized mark-to-market adjustment on
interest rate derivatives for the three months ended
December 31, 2018 totaled a loss of $870,000 compared to
a gain of $730,000 in the same period in the prior year,
translating to a decrease in net income of $1.6 million year-
over-year.
The provision for taxes for the three months ended
December 31, 2018 totaled $1.3 million compared to the
recovery of taxes of $6.0 million in the same period in the
17
prior year. The Q4 2017 tax expense includes a future tax
recovery of $9.4 million resulting from 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 $1.3
million for the three months ended December 31, 2018 is
comprised of current tax expense of $856,000, future tax
expense of $232,000, and $177,000 in withholding tax
expense on inter-company dividends. The effective tax rate
differs from the Canadian statutory tax rate due to permanent
differences between accounting and taxable income, which
primarily include share-based compensation expense.
The loss from discontinued operations in the three months
ended December 31, 2018 totaled $246,000 compared to a
loss of $16,000 recorded in the same period in 2017. 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, 2018 AND 2017
The Company reported consolidated net income of $22.9
million in the year ended December 31, 2018 compared to
$25.4 million in 2017, a decrease of $2.5 million year-over-
year. The decrease is mostly comprised of a $7.3 million
increase in tax expense, the 2017 results included 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; without
that one-time recovery, tax expense is actually down $2.1
million year-over-year. The increase in taxes was partially
offset by a $3.3 million increase in net unrealized fair value
adjustments and other items compared to 2017 and a $1.6
million increase in operating income.
the change
The adoption of IFRS 9, the repayment of our convertible
debentures and
in exchange rates have
significantly impacted our results from a comparative
perspective, and therefore the table below adjusts for these
factors for a more meaningful comparison of our operating
income for 2018:
Average FX rate
1.2957
1.2986
For the years ended
December 31,
($ thousands)
2018
2017
Change
Operating income
$
33,704 $
32,075 $
1,629
IFRS 9 impact (a)
Impact of FX rate (b)
Interest exp on conv deb (c)
573
100
(61)
—
—
(1,300)
Operating income normalized
$
34,316 $
30,775 $
573
100
1,239
3,541
FOR THE YEAR ENDED DECEMBER 31, 2018
For 2018, consolidated operating income (“income before
undernoted items”) from continuing operations was $33.7
million, compared to $32.1 million in the same period in the
prior year, an increase of $1.6 million, or 5.1%, before
considering the items noted in the chart above.
(a) While the provision for credit losses is down $1.7 million
year-over-year, the Company's provision for credit losses
would have been a further $573,000 lower in the year ended
December 31, 2018 if the same accounting guidelines used
in the prior year had been used in 2018. The provision for
credit losses for the year ended December 31, 2018 was
calculated in accordance with IFRS 9. Prior period
comparatives were prepared in accordance with IAS 39, and
have not been restated.
(b) U.S. dollar results for the year ended December 31, 2018
were converted at an exchange rate of 1.2957, which was the
average exchange rate for the period (2017 - 1.2986). This
lower exchange rate compared to 2017 understates the
improvement in 2018 U.S. operating results compared in
2017 by $100,000.
(c) Prior to redemption in January 2018, convertible
debenture interest expense was not part of operating income
whereas the interest expense on the funds used to repay the
debentures (from Chesswood's corporate revolving credit
facility) is deducted as an expense in calculating operating
income in 2018.
By segment, Pawnee and Windset's operating income
increased by $1.1 million compared to the same period in the
prior year. Pawnee's revenue totaled $92.5 million, an
increase of $13.1 million year-over-year. A $14.0 million
growth in Pawnee's revenue due to growth in its portfolio was
offset by an $893,000 decrease in Windset's revenue as
Windset's portfolio completes its wind down. As part of the
process of reviewing and adopting IFRS-15, Revenue from
Contracts with Customers, we have reclassified $4.4 million
of certain revenue items from Ancillary finance and other fee
income to Interest revenue on leases and loans in 2018 and
$4.1 million in 2017.
Pawnee's interest expense totaled $21.6 million in the year
ended December 31, 2018, compared to $11.1 million in the
same period of the prior year. The increased interest expense
is as a result of three factors: a much larger portfolio of finance
receivables and a corresponding increase in debt, rising
interest rates and some significant fees incurred in the
execution of Pawnee's first securitizations and warehousing
facilities. Higher fees are expected when initially entering
the securitization markets, in order to build out the structures
and processes needed to support this type of treasury activity.
18
The delinquencies in Pawnee's non-prime portfolio improved
at December 31, 2018 compared to the prior year, which
helped contribute to a $1.9 million decrease in the provision
for credit losses year-over-year. Windset's provision for
credit losses was $532,000 lower in 2018 compared to the
prior year, due to the wind down of its portfolio. Pawnee's
provision for credit losses, prepared under IFRS 9, would
have been $172,000 higher in 2018 if it were prepared in
accordance with the IAS 39 standard used in the 2017
comparative results.
Personnel and other expenses at Pawnee and Windset
increased by $3.4 million year-over-year, reflecting support
for the growth in new business volumes and size of the
portfolio. Pawnee had approximately 10 more staff during
the year ended December 31, 2018, compared to the prior
year, when Pawnee was still building out its resources to
support its very strong growth and customer service levels.
Year-over-year therefore, the increased staffing level resulted
in an increase in personnel expenses of $1.4 million. The
largest increase in other expenses was collection related costs,
which increased $640,000 in the year ended December 31,
2018 compared to the prior year; however, the increased
funds recovered is netted against the provision for credit
losses. The effects of a lower foreign exchange rate this year
lowered operating income by $100,000 year-over-year.
Blue Chip generated operating income of $6.8 million in the
year ended December 31, 2018, compared to $5.9 million in
the prior year, an increase of $872,000 due to growth in the
finance receivable portfolio while maintaining effective cost
controls, and after being impacted by the effects of IFRS 9
adoption. Blue Chip's provision for credit losses is $745,000
higher in the year ended December 31, 2018 as a result of the
new requirements under IFRS 9.
Corporate overhead before other items increased by $345,000
year-over-year, as a result of a $246,000 increase in personnel
expenses, an $83,000 increase in share-based compensation
expense, and a $23,000 increase in general and administrative
expenses, offset by a $7,000 increase in interest income on
Chesswood's loan to EcoHome.
The Company's investment in Dealnet common shares
decreased in market value by $181,000 in the year ended
December 31, 2018 compared to a $2.9 million decrease in
the prior year resulting in an increase in net income of $2.7
million year-over-year.
The non-cash unrealized mark-to-market adjustment gain on
the Company's convertible debentures was an unrealized gain
of $29,000 compared to an unrealized loss of $1.1 million in
the prior year, translating to an increase in net income of $1.2
FOR THE YEAR ENDED DECEMBER 31, 2018
million year-over-year. The convertible debentures were
redeemed in January 2018.
The non-cash unrealized mark-to-market adjustment on
interest rate derivatives for the year ended December 31,
2018 totaled a gain of $705,000 compared to a gain of $1.0
million in the prior year, translating to a decrease in net
income of $301,000 year-over-year.
The provision for taxes for the year ended December 31, 2018
totaled $9.4 million, compared to $2.1 million in the prior
year. The 2017 tax expense included a one-time future tax
recovery of $9.4 million resulting from 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.
Without that one-time recovery in 2017, tax expense would
have been lower by $2.1 million year-over-year. The $9.4
million provision for taxes for the year ended December 31,
2018 is comprised of $6.4 million in current tax expense,
future tax expense of $2.2 million, and $795,000 in
withholding tax expense on inter-company dividends. The
effective tax rate differs from the Canadian statutory tax rate
due to withholding taxes and permanent differences between
accounting and taxable income, which include share-based
compensation expense.
See Note 27 - Segment Information in the notes to the
for a
Company’s consolidated
breakdown of operating results and other information by
industry segment and geographic location.
financial statements
STATEMENT OF FINANCIAL POSITION
total consolidated assets of
The
the Company at
December 31, 2018 were $818.2 million, an increase of
$174.6 million from December 31, 2017. The U.S. dollar
exchange rate on December 31, 2018 was 1.3642, compared
to 1.2545 at December 31, 2017. The increase in the foreign
exchange rate represents an increase of $38.2 million in
assets.
Cash totaled $2.3 million at December 31, 2018 compared
to $3.6 million at December 31, 2017, a decrease of
approximately $1.3 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 of cash movements during the periods ended
December 31, 2018 and 2017.
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, 2018, there were 110 advances and loans
outstanding totaling $1.9 million (December 31, 2017 - 180
advances and loans totaling $3.4 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 $8.8 million at December 31, 2018, a
decrease of $8.8 million from December 31, 2017. The
receipt of $4.7 million in tax refunds in 2018 account for
approximately half of the decrease year-over-year. Other
assets included in this total relate to the sale of EcoHome in
2016 and totaled $5.4 million at December 31, 2018
compared to $10.3 million at December 31, 2017. In relation
to the sale of EcoHome, the non-cash consideration received
included a $2.5 million convertible note (repaid in Q1 2018)
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, 2018 totaled $453,000.
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. The value at December 31, 2018 totaled $4.9
million. This loan matures in October 2020 and is secured by
specific leases and loans as well as a general security
agreement over all of the assets of EcoHome. The loan has
fixed monthly principal payments, and related interest based
on a floating interest rate plus a fixed margin. See Note 6 -
Other Assets in the consolidated financial statements for
further details.
Finance receivables consist of the following:
U.S. equipment - Pawnee
Canada equipment - Blue Chip
Working capital loans - Windset
December 31,
2018
December 31,
2017
($ thousands)
559,542
$
169,382
—
728,924
$
398,969
151,574
107
550,650
$
$
Finance receivables increased by $178.3 million, or 32%,
during the year ended December 31, 2018. The increase in
19
FOR THE YEAR ENDED DECEMBER 31, 2018
the foreign exchange rate led to a $34.9 million increase in
finance receivables since December 31, 2017. In U.S.
dollars, Pawnee's finance receivables increased by U.S.$92.1
million, or 29.0%, since December 31, 2017. Blue Chip's
finance receivables increased by $17.8 million, or 11.7%,
during the year ended December 31, 2018.
The $728.9 million in net investment in leases and loans is
net of $23.9 million in allowance for credit losses based on
IFRS 9 (compared to $11.9 million in allowance for credit
losses at December 31, 2017). The allowance for credit
losses at December 31, 2017 is calculated based on IAS 39
and has not been restated.
On January 1, 2018, the Company adopted the new
impairment and measurement requirements under IFRS 9.
Upon the adoption of IFRS 9, the allowance for credit losses
increased by $10.0 million. IFRS 9 introduces an expected
credit loss impairment ("ECL") model in determining the
losses for finance
appropriate allowance for credit
receivables. Application of the ECL 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 net 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 net 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 net credit losses is
recognized.
Finance receivables at Pawnee 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.
The Company determined the previous methodology under
IAS 39 covered Stages 2 and 3 and retained that methodology
for those stages. For Stage 2, the Company considers leases
and loans to have experienced a significant increase in credit
risk since initial recognition if they are delinquent for over
30 days and further includes approximately 15% of the non-
prime 1-30 day delinquent leases and loans.
20
For Stage 3, the Company considers leases and loans to be
credit impaired if they are delinquent for more than 90 days
or if the individual leases and loans are classified as non-
accrual.
For Stage 1, the Company utilized static pool loss data applied
to recent origination levels along with forward-looking
macroeconomic assumptions under the ECL methodology.
The measurement of expected credit losses for Stage 1 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.
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 recognized before the subject leases/loans
reach 154 days contractually past due. Blue Chip charges off
leases and loans on an individual basis when there is no
realistic prospect of recovery. Financial receivables that are
charged-off could still be subject to collection efforts, with
future recoveries possible.
Intangible assets totaled $18.8 million at December 31, 2018.
Of the $919,000 decrease in intangible assets from
December 31, 2017, $1.5 million reflects amortization and
$593,000 relates to the increase 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 $41.0 million at December 31, 2018
compared to $39.9 million at December 31, 2017. The $1.18
million increase in goodwill relates to the increase 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, 2018.
Accounts payable and other liabilities totaled $15.6 million
at December 31, 2018 compared to $14.9 million at
December 31, 2017, an increase of $711,000. See Note 11 -
Accounts Payable and Other Liabilities in the consolidated
financial statements for more detail on the balances that
comprise accounts payable and other liabilities.
FOR THE YEAR ENDED DECEMBER 31, 2018
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, the $20 million
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
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 $601.5 million at December 31, 2018
compared to $412.2 million at December 31, 2017, an
increase of $189.4 million. The $189.4 million increase in
borrowings is supporting $178.3 million of growth in our net
finance receivables, and the Company utilized $20.0 million
of its credit facility to redeem the convertible debenture in
January 2018. The increase in the foreign exchange rate since
December 31, 2017, led to a $32.0 million increase in the
borrowing amount.
Chesswood was utilizing U.S.$178.7 million of its U.S.
$250.0 million revolving credit facility at December 31, 2018
compared to U.S.$165.0 million at December 31, 2017. 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. The facility matures in December 2020.
The Company's borrowings under the corporate credit facility
are subject to, among other things, adhering to certain
percentages of eligible gross lease/loan receivables. The
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,
2018 and December 31, 2017 (and throughout the periods).
21
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. On June 4, 2018, Pawnee
obtained another U.S. non-recourse U.S.$50.0 million asset-
backed facility with the same financial institution 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 these non-
recourse facilities were applied to Chesswood's corporate
credit facility. As part of the servicing agreements related to
Pawnee's non-recourse facilities, Pawnee is to comply with
leverage ratio, interest coverage ratio, and tangible net worth
covenants. At December 31, 2018 and throughout the period
from October 2017 to December 31, 2018, Pawnee was in
compliance with its covenants. The non-recourse facilities
interest rate risk is mitigated by interest rate caps for an
amount that is not less than 80% of the aggregate outstanding
balance. The interest rate caps are tied to the repayment terms
of the underlying finance receivables portfolios supporting
the facilities, through the maturity dates, with a floating index
rate which is subject to a capped fixed rate. At December 31,
2018, the fair value of the interest rate caps was an asset of
$441,000 (December 31, 2017 - $185,000).
On August 20, 2018, Pawnee announced that it had closed a
U.S.$250 million warehouse facility specifically to fund its
growing prime portfolio. The warehouse facility will hold
Pawnee’s prime receivables before they are securitized and
provides an improved cost of capital and better advance rate
than the Company’s revolving facility, which was primarily
structured for non-prime commercial leases and loans and
will continue to be utilized for those originations. At
December 31, 2018, Pawnee was utilizing U.S.$83.0 million
of this facility.
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”). Funds under each
securitization facility 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,
2018, Blue Chip had access to at least $93.8 million of
committed bulk financing lines of funding from both
financial and insurance companies, in addition to access to
FOR THE YEAR ENDED DECEMBER 31, 2018
Chesswood's revolving facility. Blue Chip must meet certain
financial covenants to support these securitization and bulk
lease financing facilities. As at December 31, 2018 and
December 31, 2017 (and throughout the periods), Blue Chip
was in compliance with all covenants.
The $16.8 million (December 31, 2017 - $14.0 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
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. If the Company had terminated the
swaps at December 31, 2018, the Company would have
realized a gain of $455,000 compared to a cost to terminate
of $43,000 at December 31, 2017.
Pawnee's non–recourse asset–backed facility requires
Pawnee to mitigate interest rate risk by entering into an
interest rate cap for a notional amount of 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, with a floating index rate based on USD–
LIBOR–BBA, but subject to a capped fixed rate. At
December 31, 2018, the fair value of the interest rate caps
was an asset of $441,000 (2017 - $185,000).
Future taxes payable at December 31, 2018 totaled $20.8
million compared to $21.2 million at December 31, 2017, a
decrease of $408,000. The tax impact of the IFRS 9 and 15
adoption led to a decrease of $3.5 million in future taxes
payable. Offsetting this decrease was a $1.3 million increase
in future taxes payable due to the change in the foreign
exchange rate, and a $1.8 million increase in future tax
expense. 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, 2018, there were 16,229,066 common
shares outstanding (excluding the shares issuable in exchange
for the Exchangeable Securities, as defined below) with a
book value of $103.6 million. Including the Exchangeable
Securities, Chesswood would have had 17,707,603 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. During the period from January 1, 2018 to August 24,
2018, the Company repurchased 293,096 of its common
shares under this normal course issuer bid at an average cost
of $10.5277 per share.
In August 2018, the Company's Board of Directors approved
the repurchase for cancellation of up to 1,043,895 of the
Company’s outstanding common shares for the period
commencing August 25, 2018 and ending on August 24,
2019. From August 25, 2018 to December 31, 2018, the
Company repurchased 206,340 of its common shares under
this normal course issuer bid at an average cost of $10.2412
per share.
Subsequent to December 31, 2018 (up to and including March
5, 2019), the Company repurchased 48,360 of its shares under
the normal course issuer bid at an average cost of $10.7452
per share.
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
22
FOR THE YEAR ENDED DECEMBER 31, 2018
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 IFRS 9 transition amount reduced retained earnings
and non-controlling interest by $7.6 million after-tax. Please
see Note 2 - New Accounting Standards and Note 7 - Finance
Receivables in the consolidated financial statements for the
year ended December 31, 2018. As part of the process of
reviewing and adopting IFRS-15, Revenue from Contracts
with Customers, we have reclassified certain revenue items
from Ancillary finance and other fee income on the Statement
of Income to the Interest revenue on leases and loans. These
revenue items will also now be recognized on an effective
interest basis versus our historical method of recognizing
items as revenue when received. As part of this transition,
unearned income, included in finance receivables, was
increased by $3.4 million and a reduction in shareholders'
equity and non-controlling interest of approximately $2.7
million, on an after-tax basis, was recorded.
the
represent
accumulated
Reserves
share-based
compensation expensed over the vesting term for options and
restricted share units unexercised at December 31, 2018.
There were 2,384,354 options and 44,000 restricted share
units outstanding at December 31, 2018.
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, 2018 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
23
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, share repurchases and dividends.
At December 31, 2018, the Company's continuing operations
had approximately U.S.$71.3 million
in additional
borrowings available under the corporate credit facility, U.S.
$167.0 million under Pawnee's warehouse facility and at least
$93.8 million under Blue Chip's securitization and bulk lease
financing facilities to fund business operations.
The Chesswood corporate 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
Adjusted EBITDA less maintenance capital expenditures,
and tax expense, plus or minus the tax effect of change in the
allowance for credit losses (effective Q1 2018). Please refer
to the definitions of Non–GAAP Measures provided in this
MD&A.
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,
FOR THE YEAR ENDED DECEMBER 31, 2018
payment of dividends, proceeds from stock issues, exercise
of stock options, and the purchase and sale of treasury stock.
$571,000 (2017 - $162,000) from the exercise of options by
employees during the year ended December 31, 2018.
For the year ended December 31, 2018
For the three months ended December 31, 2018
In the year ended December 31, 2018, there was a decrease
in cash of $1.3 million compared to a decrease in cash of $7.8
million in the prior year as a result of reasons discussed below.
The Company’s continuing operations utilized $117.4
million of cash during the year ended December 31, 2018
compared to $126.9 million in the prior year, a decrease in
the utilization of cash of $9.5 million.
The net cash utilized to fund the growth in finance receivables
(funds advanced, origination costs, security deposits,
restricted cash, less principal payments) totaled $207.2
million in the year ended December 31, 2018 compared to
$196.3 million in the prior year, an increase of $10.9 million.
The Company funded the growth in finance receivables from
excess opening cash, cash from operations and $158.5 million
in net borrowings (included in finance activities) in the year
ended December 31, 2018 (2017 - $137.7 million).
In the year ended December 31, 2018, the Company made
tax payments of $3.6 million compared to $12.5 million in
the year ended December 31, 2017, a decrease of $8.9 million
year-over-year. The decrease in taxes paid, year-over-year,
is predominantly a result of the $3.5 million in taxes paid in
Q1 2017 on the gain on sale of EcoHome which was sold in
Q1 2016, and $3.5 million in net tax refunds received in Q3
2018.
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 $93.5 million in cash from net income, non-cash
items and other working capital changes compared to $81.9
million in the prior year, an increase of $11.5 million from
the prior year.
Capital expenditures totaled $212,000 (2017 - $943,000)
during the year ended December 31, 2018.
The Company repurchased 499,436 of its common shares
under normal course issuer bids at an average cost of
$10.4094 during the year ended December 31, 2018 totaling
$5.2 million (2017 - nil).
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, 2018 relatively
unchanged from the prior year. The Company received
24
In the three months ended December 31, 2018, there was a
decrease in cash of $2.3 million compared to a decrease in
cash of $5.7 million in the same period in the prior year as a
result of reasons discussed below.
The Company’s continuing operations utilized $21.4 million
of cash during the three months ended December 31, 2018
compared to $45.7 million in the same period in the prior
year, a decrease in the utilization of cash of $24.2 million.
The net cash utilized to fund the growth in finance receivables
(funds advanced, origination costs, security deposits,
restricted cash, less principal payments) totaled $42.5 million
in the three months ended December 31, 2018 compared to
$61.1 million in the same period in the prior year, a decrease
of $18.5 million. The Company funded the growth in finance
receivables from excess opening cash, cash from operations
and $25.4 million in net borrowings (included in finance
activities) in the three months ended December 31, 2018 (Q4
2017 - $46.5 million).
In the three months ended December 31, 2018, the Company
made net tax payments of $1.4 million, compared to net tax
payments of $3.1 million in the same period in the prior 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 continuing operations
generated $22.5 million in cash from net income, non-cash
items and other working capital changes compared to $18.5
million in the same period in the prior year, an increase of
$4.0 million from the prior year.
Capital expenditures totaled $50,000 (Q4 2017 - $144,000)
during the three months ended December 31, 2018.
The Company repurchased 206,340 of its common shares
under its normal course issuer bid at an average cost of
$10.2412 during the three months ended December 31, 2018
totaling $2.1 million (2017 - nil).
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, 2018
relatively unchanged from the same period in the prior year.
The Company received $nil (2017 - $39,000) from the
exercise of options by employees during the three months
ended December 31, 2018.
FOR THE YEAR ENDED DECEMBER 31, 2018
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.
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' warehousing, securitization and bulk lease
financing facility agreements have financial covenants and
other restrictions which must be met in order to obtain
continued funding and avoid default.
Advances on the Chesswood revolving corporate credit
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, 2018, U.S.
$178.7 million was outstanding under the U.S.$250.0 million
facility and the Company had capacity to draw another U.S.
$28.5 million and remain within the borrowing base under
the facility. The Company had U.S.$7.7 million of letters of
credit outstanding under the Chesswood corporate credit
facility.
Dividends to Shareholders
The Company declared monthly cash dividends of $0.07 per
common share from January 2018 to December 31, 2018.
Dividend Policy
The Company’s policy is to pay monthly dividends to
shareholders of record on the last business day of each month
by the 15th of the following month (or the next business day
thereafter if the 15th is not a business day).
Under the Chesswood credit facility, the maximum amount
of monthly cash dividends and repurchases under its normal
course issuer bid is 1/12 of 90% of Free Cash Flow (as defined
under Non–GAAP Measures in this MD&A) for the most
recently completed four financial quarters for which
Chesswood has publicly filed its consolidated financial
statements.
The amount of any dividends payable by Chesswood is at the
discretion of its Board of Directors, is evaluated on an
ongoing basis, and may be revised subject to business
circumstances and expected capital requirements depending
on, among other things, Chesswood’s earnings, financial
requirements for its operating entities, growth opportunities,
the satisfaction of applicable solvency tests for the
declaration and payment of dividends and other conditions
existing from time to time.
Minimum Payments The following are the contractual payments and maturities of financial liabilities and other commitments
as at December 31, 2018 (including interest):
($ thousands)
Accounts payable and other
liabilities
2018
2019
2020
2021
2022
2023 and
beyond
Total
$
15,600 $
— $
— $
— $
— $
— $
15,600
Borrowings (a)
123,815
353,368
Customer security deposits (b)
3,884
4,655
95,544
4,678
143,299
358,023
100,222
Other financial commitments (c)
805
717
739
56,416
3,293
59,709
748
26,746
2,296
29,042
757
91
58
149
790
655,980
18,864
690,444
4,556
Total commitments
$
144,104 $
358,740 $
100,961 $
60,457 $
29,799 $
939 $
695,000
a. Borrowings are described in Note 13 - Borrowings in the consolidated financial statements, and include Chesswood's corporate
25
FOR THE YEAR ENDED DECEMBER 31, 2018
credit facility and Pawnee's warehousing facility which are lines-of-credit; as such the balances can fluctuate. The amount
above includes fixed interest payments on Pawnee and Blue Chip's facilities and estimated interest payments on the Chesswood
corporate credit facility, assuming the interest rate, debt balance and foreign exchange rate at December 31, 2018 remain the
same until its expiry date of December 2020.
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, with expirations up to 2025, 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.
$7.7 million in letters of guarantee. Other commitments are disclosed in Note 18 - Contingent liabilities and other financial
commitments in the 2018 audited consolidated financial statements.
OUTLOOK
As we cautioned at the end of our third quarter, it is our view
that market behavior has once again become irrational. Led
by many bank owned equipment finance companies that have
lower cost of funds and balance sheets that allow them to be
less sensitive to the risk-reward balance while in pursuit of
volume, the market today is very aggressive.
As a non-bank independent finance company, we have passed
on more of the recent rate increases to our customers than
have our bank-owned competitors, which puts some pressure
on our originations. We are focused more on the quality of
those originations rather than the volumes we are generating
at this later stage in the economic cycle when conventional
wisdom holds that we are closer to a correction. We believe
this is a prudent approach.
We are excited by the launch of Tandem Finance, which is a
long-term investment in our future. Tandem operates in a
market segment that is much larger than the market served
by our equipment brokers, while sales cycles are longer than
in our traditional channel. Therefore, we have modest
expectations for Tandem in its first year and accordingly we
will incur net operating expenses in that business in 2019 that
will be significant and could total as much as $2.0 - $3.0
million.
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,
26
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
FOR THE YEAR ENDED DECEMBER 31, 2018
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.
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 financing facilities, higher than anticipated lease defaults
27
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
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 or loaning 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
FOR THE YEAR ENDED DECEMBER 31, 2018
to our businesses) or
heading. Similarly, natural disasters in any part of the world
may directly (through impact on supplies of goods or
impact
equipment
Chesswood's operations or results. Further, tariffs or duties
imposed by a country could adversely impact upon industries
in which companies to which our operating companies have
provided financing or seek to provide financing which may
impact Chesswood's operations or results.
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.
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 credit losses 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.
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
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
Our operating companies' origination,
funding and
transaction administration practices could result in certain
28
FOR THE YEAR ENDED DECEMBER 31, 2018
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,
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
the past. Although our
in
against financing parties
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
29
FOR THE YEAR ENDED DECEMBER 31, 2018
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
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
the conduct or
leased property, or
leasing of
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
30
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.
FOR THE YEAR ENDED DECEMBER 31, 2018
As Pawnee expands its suite of products and targets potential
it faces
lessees/borrowers with better credit scores,
competition from more traditional financing sources,
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 Blue
Chip and have considerably greater financial, technical and
marketing resources. Some of them may have a lower cost
of funds and access to funding sources that are unavailable
to Pawnee and Blue Chip. A lower cost of funds could enable
a competitor to offer leases and loans with pricing lower than
that of Pawnee and/or Blue Chip, potentially forcing Pawnee
and Blue Chip 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.
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
31
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
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
FOR THE YEAR ENDED DECEMBER 31, 2018
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
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.
Unpredictability and Volatility of Share Price
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
32
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.
Leverage, Restrictive Covenants
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.
Restrictions on Potential Growth
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.
FOR THE YEAR ENDED DECEMBER 31, 2018
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
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. The legislation
made broad and complex changes to the U.S. tax code. The
tax provision recorded by the Company in our financial
statements may change in the future following a more
comprehensive
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.
review of
legislation,
the
Environmental risk
Chesswood and its activities have no direct significant impact
on the environment.
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
33
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 Credit Losses
The carrying value of net investment in leases and loans is
net of allowance for credit losses. 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.
As of January 1, 2018, the Company adopted IFRS 9 which
introduces a new expected credit loss impairment method for
calculating allowance for credit losses. Please see Note 2(a)
- New Accounting Standards in the 2018 audited consolidated
financial statements for further disclosure.
At December 31, 2017, Pawnee’s allowance for credit losses
on Chesswood’s consolidated financial statements was
comprised of the net investment in leases and loans value that
were 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 was taken
for Windset and Blue Chip.
In 2017 and prior, under IFRS, an allowance could only be
set up if there was 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, were 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
FOR THE YEAR ENDED DECEMBER 31, 2018
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
credit losses.
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
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
future
years, excluding
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.
34
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
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.
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.
FOR THE YEAR ENDED DECEMBER 31, 2018
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
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.
trading
Interest rate derivatives are not considered
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,
35
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
FUTURE ACCOUNTING STANDARDS
A listing of the recent accounting pronouncements not yet
adopted by the Company is included in Note 2(b) - New
Accounting Standards in the audited consolidated financial
statements for the year ended December 31, 2018.
RELATED PARTY TRANSACTIONS
See Note 25 - Related Party Transactions in the 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
effectiveness of the Company’s DC&P as at December 31,
2018 and have concluded that the design of the Company’s
DC&P is effective as at that date.
The Certifying Officers have also evaluated the operating
effectiveness of the Company’s DC&P and have concluded
that the Company's DC&P was effective as at December 31,
2018.
FOR THE YEAR ENDED DECEMBER 31, 2018
may occur and not be detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the
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, 2018.
Common Shares
January
February
March
April
May
June
July
August
September
October
November
December
High
$12.49
$11.60
$11.45
$10.88
$10.80
$11.20
$11.75
$12.59
$12.25
$12.14
$10.93
$10.66
$12.59
Low
$11.33
$9.83
$9.04
$10.49
$10.01
$10.30
$11.00
$11.64
$11.56
$9.96
$9.95
$8.81
$8.81
Average Daily
Volume
13,221
17,700
32,225
19,643
20,146
15,396
11,558
19,662
12,601
22,665
17,135
25,582
18,961
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
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”), to design the Company’s
ICFR.
The Certifying Officers have also evaluated the operating
effectiveness of the Company’s ICFR and have concluded
that the Company's ICFR was effective as at December 31,
2018.
During the quarter ended December 31, 2018, there has been
no significant change in the Company's ICFR that would have
materially affected, or would be reasonably likely to
materially affect, the Company's ICFR.
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
36
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 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, 2018 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, and 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 5, 2019
37
Independent Auditor’s Report
To the Shareholders of
Chesswood Group Limited
Opinion
We have audited the consolidated financial statements of Chesswood Group Limited and its subsidiaries (the "Group"), which
comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of
income, comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Group as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of
our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
• The information, other than the financial statements and our auditor’s report thereon, included in the Annual Report, and
• The information included in the Management’s Discussion and Analysis for the year ended December 31, 2018.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified
above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained the Management’s Discussion and Analysis and Annual Report prior to the date of this auditor’s report. If, based on
the work we have performed on this other information, we conclude that there is a material misstatement of this other information,
we are required to report that fact in this auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing
standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of these consolidated financial statements.
38
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves
fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision
and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Kerri Plexman.
Chartered Professional Accountants, Licensed Public Accountants
March 5, 2019
Toronto, Ontario
39
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of dollars)
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
Note
2018
2,326
13,598
1,852
8,786
728,924
375
896
1,628
18,765
41,037
818,187
15,600
—
601,525
16,773
—
20,794
654,692
103,576
13,713
5,414
18,350
22,442
163,495
818,187
$
$
$
$
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
$
$
$
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
Sam L Leeper
Please see notes to the consolidated financial statements.
40
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(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 loss on investments held
Financing costs - convertible debentures
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
Attributable to:
Common shareholders
Non-controlling interest
Income from continuing operations per share:
Basic
Diluted
Note
2018
2017
$
97,927
$
12,659
110,586
26,647
19,423
46,070
64,516
16,497
13,809
506
30,812
33,704
—
(1,512)
(181)
29
705
(29)
32,716
(9,373)
23,343
(458)
22,885
20,996
1,889
1.31
1.28
$
$
$
$
$
7
8
9
6
12
15
16
5
24
24
$
$
$
$
$
83,775
11,549
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
1.43
1.39
Please see notes to the consolidated financial statements.
41
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(in thousands of dollars)
Net income
Other comprehensive income:
Unrealized gain (loss) on translation of foreign operations
Comprehensive income
Attributable to:
Common shareholders
Non-controlling interest
2018
2017
22,885
$
25,431
8,255
31,140
$
28,570
2,570
$
$
(8,083)
17,348
15,925
1,423
$
$
$
$
Please see notes to the consolidated financial statements.
42
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(in thousands of dollars)
Note
Common
shares
Common
shares
(# '000s)
Non-
controlling
interest
Share-based
compensation
reserve
Accumulated
other
comprehensive
income
Retained
earnings
2018 Total
Shareholders' equity -
December 31, 2017
16,575 $ 105,208 $
13,230 $
5,295 $
10,776 $ 26,712 $ 161,221
Impact of adopting IFRS 9 & 15
on January 1, 2018
2
Restated balance at January 1, 2018
—
—
16,575
105,208
Net income
Dividends declared
Share-based compensation
Exercise of restricted share units
Exercise of options
Repurchase of common shares
under issuer bid
Unrealized gain on translation of
foreign operations
Shareholders' equity -
December 31, 2018
23
22
22
22
20
—
—
—
70
83
—
—
—
806
741
(499)
(3,179)
—
—
(845)
12,385
1,889
(1,242)
—
—
—
—
681
—
5,295
—
—
1,094
(806)
(169)
—
—
—
10,776
(9,444)
17,268
—
20,996
— (13,802)
—
—
—
—
—
—
—
(10,289)
150,932
22,885
(15,044)
1,094
—
572
(2,020)
(5,199)
7,574
—
8,255
16,229 $ 103,576 $
13,713 $
5,414 $
18,350 $ 22,442 $ 163,495
Note
Common
shares
Common
shares
Non-controlling
interest
(# '000s)
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
Please see notes to the consolidated financial statements.
43
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(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 operating activities - discontinued operations
Cash used in operating activities
INVESTING ACTIVITIES
Purchase of property and equipment
Cash used in investing activities
FINANCING ACTIVITIES
Borrowings, net
Payment of financing costs
Redemption of convertible debentures
Proceeds from exercise of options
Repurchase of common shares under issuer bid
Cash dividends paid
Cash from financing activities
Unrealized foreign exchange gain (loss) on cash
Net decrease in cash
Cash, beginning of year
Cash, end of year
Note
2018
2017
$
23,343
$
25,751
7
26
26
12
5
8
26
13
12
22
20
23
2,018
28,493
23,269
9,373
3,345
66,498
89,841
(400,725)
(34,354)
233,193
(1,600)
(113,645)
(61)
(3,645)
(117,351)
1,259
(116,092)
(212)
(212)
158,513
(3,967)
(20,000)
571
(5,199)
(15,067)
114,851
139
(1,314)
3,640
2,326
$
$
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
(318)
(7,803)
11,443
3,640
Please see notes to the consolidated financial statements.
44
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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
NEW ACCOUNTING STANDARDS
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
47
49
53
55
58
58
62
63
65
67
67
68
70
70
70
74
74
74
75
75
76
78
80
81
81
83
84
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. In addition, Pawnee holds, through
45
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
consolidated, wholly-owned Special Purpose Entities ("SPEs"), a portfolio of leases and loans which are financed through arm's
length financial institutions. See Note 7 - Finance Receivables and Note 13(b) - Borrowings.
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 United States.
• Windset - provided working capital loans to small businesses in the United States. Windset 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:
• 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 details provided separately
in the Notes to the Consolidated Financial Statements, and certain 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 5, 2019 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, 2018 - 1.2957; 2017 - 1.2986], and assets and liabilities are translated at the closing rate
[as at December 31, 2018 - 1.3642; December 31, 2017 - 1.2545]. 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
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.
46
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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, net 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, 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, Impairment of Financial Asset
Receivables - Note 7, Impairment of Intangibles and Goodwill - Note 9 and Note 10, and Taxes - Note 16.
2. NEW ACCOUNTING STANDARDS
(a) New accounting standards and amendment adopted in 2018
IFRS 9 Financial Instruments
The Company adopted IFRS 9 on January 1, 2018, retrospectively, but without restatement of prior periods. The accounting policy
for financial instruments is described in detail in Note 3 - Financial Instruments and Note 7(c) - Finance Receivables: allowance
for credit losses. The effects of adoption of IFRS 9 on the Company's financial position are described below. For financial risk
management disclosure, see Note 4 - Financial Risk Management.
The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the
contractual cash flow characteristics of the financial assets. Based upon the analysis of its business model and contractual cash
flow characteristics of its financial instruments, the Company’s loan receivables will continue to be measured at amortized cost
with the adoption of IFRS 9. Accounting for the Company’s net investment in leases continues to be within the scope of IAS 17,
at amortized cost. There are no material changes in the classification or measurement of the Company’s net investment in financial
contracts from IAS 39 to IFRS 9, other than impairment losses of financial receivables.
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 had no material effect on the Company's financial statements.
47
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Under IAS 39, Financial Instruments: Measurement and Recognition, the predecessor to IFRS 9, a financial asset or group of
financial assets was deemed to be impaired if, and only if, there was objective evidence of impairment at the reporting date as a
result of one or more events that had occurred after initial recognition of the asset (an incurred loss event). Measurement of
impairment of financial assets under IFRS 9 is based on an Expected Credit Loss (“ECL”) model which also takes into account
reasonable and supportable forecasts of future events and economic conditions. Transition to the new model resulted in an increase
in the allowance for credit losses against finance receivables as at January 1, 2018 of approximately $10.0 million and a reduction
in shareholders' equity and non-controlling interest of approximately $7.6 million after-tax. The reconciliation of the Company's
closing allowance for credit losses under IAS 39 at December 31, 2017 and the opening allowance for credit losses in accordance
with IFRS 9 at January 1, 2018 is as shown in the following table:
As reported
under IAS 39 as
at December 31,
2017
As reported
under IFRS 9 as
at January 1,
2018
Transition
adjustments
Allowance for credit losses
$
11,926 $
10,047 $
21,973
Stage 1 - 12-month ECL (Performing)
Stage 2 - Lifetime ECL not credit-impaired (Under-Performing)
Stage 3 - Lifetime ECL credit-impaired (Non-Performing)
Total
$
$
10,607
4,150
7,216
21,973
An option is available to recognize a lifetime ECL on initial recognition of leases. The Company has not exercised 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 agreements, will result in higher quality financial information. This option is not available
to loan receivables and the Company wanted consistent treatment for all of its financial receivables.
Calculation of interest income
For financial receivables in Stages 1 and 2 (see Note 7(c) for description), 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. If the asset is no longer credit-impaired, then the calculation of interest
income reverts to the gross basis.
IFRS 15 Revenue from Contracts with Customers (“IFRS 15”)
In May 2014, the IASB issued IFRS 15, which replaces IAS 11 - Construction Contracts, IAS 18 - Revenue and IFRIC 13 -
Customer Loyalty Programs, as well as various other interpretations regarding revenue. IFRS 15 outlines a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers, except for contracts that are within the
scope of the standards on leases, insurance contracts and financial instruments. IFRS 15 also contains enhanced disclosure
requirements. On adopting IFRS-15, the Company reclassified $4.4 million of certain revenue items from ancillary finance and
other fee income to interest revenue on leases and loans in 2018 and $4.1 million in 2017. With effect from January 1, 2018, these
revenue items will be recognized on an effective interest basis versus recorded when received. As part of this transition, unearned
income in finance receivables increased by $3.4 million and a reduction in shareholders' equity and non-controlling interest of
approximately $2.7 million, on an after-tax basis, was recorded. This change should not materially affect annual results on a go-
forward basis and had no material impact on net income for 2018.
IFRS 2 Share-based Payments, amendment
The Company adopted the amendments to IFRS 2, Share-based Payments with no impact on the Company’s financial statements.
48
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(b) Accounting standard not yet effective
IFRS 16 Leases
IFRS 16 replaces IAS 17, Leases, and is effective for periods beginning on or after January 1, 2019. IFRS 16’s approach to lessor
accounting is substantially unchanged from its predecessor. 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 is of low
value.
The Company does not expect any substantive changes to the Company's finance receivables. The Company will be required to
recognize new right-to-use asset and lease liability 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 lease liability will also be amortized
under the effective interest rate method using the interest rate inherent in the underlying leases and lease payments will include
both a principal and interest component.
The Company plans to adopt the standard using the modified retrospective method commencing January 1, 2019. Under this
method the Company will not restate the 2018 financial statements for the application of IFRS 16. The Company will elect to use
the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial
application, and lease contracts for which the underlying asset is of low value. The Company has leases of certain office equipment
that are considered of low value.
The estimated impact on the Company's financial position as at the January 1, 2019 date of adoption is a right-of-use asset of
approximately $4 million and a lease liability of $4 million.
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, which occurs
when it is either discharged, canceled or expires.
Financial assets
Financial assets are categorized for subsequent measurement as follows:
Amortized cost
Financial assets that are held in a business model with the objective of collecting contractual cash flows where those cash flows
represent solely payments of principal and interest ("SPPI") are measured at amortized cost ("AC"). The Company’s cash, restricted
funds, net investment in leases, and loan receivables are measured at amortized cost. 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 as part of the
effective interest rate. 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 that are held for trading and derivative assets are required to be measured at fair value through net income or loss
("FVTP"). Financial assets that meet certain conditions may be designated at fair value through net income or loss upon initial
recognition. 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.
49
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
The Company's investment in Dealnet common shares (included in Other assets on the consolidated statements of financial position)
is classified in this category. The convertible note receivable (included in Other assets) was also included in this measurement
category.
Fair value through other comprehensive income
Financial assets that are held to both collect contractual cash flows and for sale are required to be measured at fair value through
other comprehensive income ("FVOCI"). Other financial assets, provided they are not held for trading and have not been designated
as at fair value through net income or loss, can be designated as at fair value through other comprehensive income on initial
recognition.
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. Financial assets measured at fair value through other comprehensive income
for which fair value cannot be estimated reliably, are measured at cost and any impairment losses 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 at fair value through other comprehensive income. See Note 5 - Discontinued
Operations.
Financial liabilities
Financial liabilities are categorized as follows for subsequent measurement:
Amortized cost
Financial liabilities that are not otherwise measured as at fair value through net income or loss or designated at fair value are
measured at amortized cost using the effective interest rate method. Any host contract in a hybrid instrument is also measured at
amortized cost. 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 measured at amortized cost include borrowings, accounts payable, other liabilities and customer
security deposits.
Financial liabilities at fair value through net income or loss
Financial liabilities that are held for trading and stand-alone derivative liabilities are required to be measured at fair value through
net income or loss ("FVTP"). When certain conditions are satisfied, embedded derivatives are required to be separately recognized
and measured at fair value with subsequent changes in fair value recognized in net income or loss.
A designation can be made at initial recognition for financial liabilities that include one or more embedded derivatives, provided
the host contract is not a financial asset, to measure the entire hybrid instrument at fair value. Where certain criteria are met, for
example measurement at amortized cost would create measurement inconsistencies, the financial liability can also be designated
at fair value. For such designated financial liabilities, the amount of the change in fair value that relates to changes in the entity’s
own credit risk is recognized in other comprehensive income and the remaining amount of the change in fair value is recognized
in 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 required to be measured at fair value through net income or loss. The convertible
debentures were designated as at fair value on initial recognition. The Company has not designated any financial instruments as
hedges for accounting purposes.
The fair values of financial liabilities 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.
50
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(a) Categories and measurement hierarchy
The categories to which the financial instruments are allocated are:
Financial instrument
IAS 39 Classification
IFRS 9 Classification
December 31, 2017
December 31, 2018
ASSETS
Cash
Restricted funds
Other assets
Other assets
Loan receivables
Interest rate derivatives
LIABILITIES
Accounts payable and other liabilities
Borrowings
Customer security deposits
Convertible debentures
Interest rate derivatives
Loans and receivables
Loans and receivables
Loans and receivables
FVTP
Loans and receivables
Held for trading
Loans and borrowings
Loans and borrowings
Loans and borrowings
FVTP
Held for trading
Amortized cost
Amortized cost
Amortized cost
FVTP
Amortized cost
FVTP
Amortized cost
Amortized cost
Amortized cost
n/a
FVTP
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:
Level 1
Level 2
Level 3
Carrying Value
December 31, 2018
ASSETS
Cash (iii)
Restricted funds (iii)
Other assets - Note 6
Other assets - Note 6
Loan receivables (i)
Interest rate derivatives (v)
LIABILITIES
$
2,326 $
13,598
—
453
—
—
— $
—
4,900
—
293,131
896
Accounts payable and other liabilities (iii)
Borrowings (ii)
Customer security deposits
—
—
—
(15,600)
(601,525)
(16,773)
— $
—
—
—
—
—
—
—
—
($ thousands)
2,326
13,598
4,900
453
293,131
896
(15,600)
(601,525)
(16,773)
51
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Level 1
Level 2
Level 3
December 31, 2017
Carrying Value
($ thousands)
ASSETS
Cash (iii)
Restricted funds (iii)
Other assets
Other assets
Loan receivables (i)
Interest rate derivatives (v)
$
3,640 $
5,971
—
634
—
—
— $
—
9,629
—
177,879
185
LIABILITIES
Accounts payable and other liabilities (iii)
Borrowings (ii)
Customer security deposits
Convertible debentures (iv)
Interest rate derivatives (v)
—
—
—
(20,090)
—
(14,889)
(412,155)
(14,012)
—
(43)
— $
—
—
—
—
—
—
—
—
—
—
3,640
5,971
9,629
634
177,879
185
(14,889)
(412,155)
(14,012)
(20,090)
(43)
(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. Prior to January 1, 2018, 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 at December 31, 2017, is based on their trading price on the
Toronto Stock Exchange. The debentures were designated as at fair value through net income or loss under IFRS 9 until they
were repaid in January 2018.
(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 category of financial instruments:
52
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Amortized cost:
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,
2018
2017
($ thousands)
$
(19,423) $
(21,084)
29
—
(181)
705
(18,870) $
$
(1,130)
538
(2,869)
1,006
(23,539)
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, policies or processes for measuring and managing any of the
risks to which it is exposed since the previous year end, other than the adoption of a new accounting policy for allowances for
credit losses and the repayment of convertible debentures during the year.
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, restricted funds,
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.$250,000, 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,
vendor, 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 may require 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 financed equipment if the lessee\borrower defaults on their 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
53
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
repossession and disposal in accordance with the legal provisions of the relevant market. See Note 7(f) - 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\loan, diversification in multiple asset
categories and industries, very low lessee\borrower concentration and personal guarantees of the business principals on certain
finance contracts.
The Dealnet convertible note was repaid in cash during the year and was considered to be of nominal credit risk. The credit risk
on the EcoHome loan is mitigated by the security held by the Company, which includes: the specific leases and loans and a general
security agreement 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, 2018, the Company's continuing operations has at
least $419.0 million (2017 - $159.6 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 (often 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.$207.1 million available
based on borrowing base as at December 31, 2018), subject to certain percentages of eligible gross lease receivables, of which
U.S.$178.7 million was utilized at December 31, 2018 (2017 - U.S.$165.0 million). See Note 13 - Borrowings. In addition, the
Company has several bulk financing lines available to its Canadian business and similar 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 any 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 the cost of any repurchases under normal course issuer bids, if any.
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
54
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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. The convertible debentures were redeemed during the current year, see Note 12 - Convertible debentures.
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, 2018 and 2017:
For the years ended
December 31, 2018
December 31, 2017
+100 bps
-100 bps
+100 bps
-100 bps
($ thousands)
Increase (decrease) in interest expense
Increase (decrease) in net income and equity
$
$
3,109 $
(2,240) $
(3,109)
2,240
$
$
1,627 $
(1,001) $
(1,627)
1,001
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, 2018, dividends paid
totaled $15.1 million (2017 - $15.1 million).
The following table presents a sensitivity analysis for a hypothetical fluctuation in U.S. dollar exchange rates and the effect on the
Company as at December 31, 2018 and 2017:
Year-end exchange rate
December 31,
2018
December 31,
2017
($ thousands)
1.3642
1.2545
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
$
$
68
9
$
$
115
14
5. DISCONTINUED OPERATIONS
On February 3, 2015, Case Funding sold certain assets and operations to a private equity firm. Case Funding retained approximately
$9.4 million in finance receivables with a current balance of $1.9 million and pays a servicing fee of 5% of collections to administer
the remaining portfolio.
Case Funding's net loss, included in loss from discontinued operations, for the year ended December 31, 2018 totaled $458,000
compared to $320,000 recorded in the prior year, which represented a basic and diluted loss per share of $0.026 and $0.025 (2017
- $0.018 and $0.017) respectively. For the year ended December 31, 2018, Case Funding generated cash flows from operations
of $1.3 million compared to $1.9 million recorded in the prior year.
55
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
At Case Funding, management reviews each attorney loan and medical lien receivable on an individual basis for collectability and
for reserve requirements, if any. At December 31, 2018, it was determined an allowance of $85,000 (December 31, 2017 - $207,000)
was required.
(a) Assets and liabilities that are classified as held-for-sale
Legal finance receivables (Case Funding) consist of:
Attorney loans and medical liens
Plaintiff advances
Legal finance receivables (net of allowance)
Current portion (i)
Long-term portion
December 31,
2018
($ thousands)
December 31,
2017
52
$
1,800
1,852
459
1,393
$
68
3,303
3,371
838
2,533
$
$
(i) The contracts are due when the underlying cases are settled which cannot be known and is therefore estimated. Plaintiff
advances are made on a non-recourse basis, and repayment depends on the success and potential size of respective claims. The
current portion of legal finance receivables is subject to estimation.
The fair values are classified using the measurement hierarchy (described in Note 3 - Financial Instruments) as follows:
ASSETS HELD FOR SALE
($ thousands)
Attorney loans and medical liens (ii)
Plaintiff advances
Category
AC
FVOCI
ASSETS HELD FOR SALE
($ thousands)
Attorney loans and medical liens (ii)
Plaintiff advances
Category
AC
FVOCI
$
$
Level 1
Level 2
Level 3
— $
—
52 $
—
December 31, 2018
Carrying Value
52
1,800
— $
1,800
Level 1
Level 2
Level 3
— $
—
68 $
—
December 31, 2017
Carrying Value
68
3,303
— $
3,303
(ii) 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.
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
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.
Plaintiff advances are deemed to be a financial asset as they are a contractual right to receive cash from another entity. These
instruments do not meet the SPPI test based on an evaluation of all the terms and conditions of the contracts and are therefore
measured at fair value, with the accretion in value, calculated based on the effective interest method.
Reconciliation of Level 3 Financial Instruments - The following table sets forth a summary of changes in the carrying value of
plaintiff advances:
56
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
For the years ended
December 31,
2018
2017
($ thousands)
Balance, beginning of year
$
3,303
$
Originations
Fair value accretion
Losses and provision for losses
Collections
Foreign exchange impact (i)
Balance, end of year
—
95
(720)
(1,079)
201
$
1,800
$
5,767
—
308
(403)
(2,071)
(298)
3,303
(i) 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.
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.
57
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
6. OTHER ASSETS
Other assets comprise:
Property tax receivable
Tax receivable
Sales tax receivable
Prepaid expenses and other current assets
Loan receivable - EcoHome
Common shares - Dealnet
Convertible note - Dealnet
Other assets
Current portion
Long-term portion
December 31,
2018
December 31,
2017
($ thousands)
782
991
589
1,071
4,900
453
—
8,786
6,106
2,680
$
$
527
5,763
342
669
7,129
634
2,500
17,564
9,801
7,763
$
$
a
b
c
(a) Loan receivable - EcoHome - On February 18, 2016, the Company sold EcoHome Financial Inc. ("EcoHome") to Dealnet
Capital Corp. ("Dealnet"). The loan represented the inter-company warehouse funding to EcoHome of leases and loans that had
not yet been securitized with EcoHome funders prior to the sale of EcoHome. In 2017, the Company advanced EcoHome another
$5.5 million. The loan receivable is secured by specific EcoHome leases and loans and a general security agreement over all the
assets of EcoHome. The loan matures in October 2020, with fixed monthly principal payments, and related interest based on a
floating interest rate plus a fixed margin. The loan receivable is carried at amortized cost. At December 31, 2018 and December
31, 2017, it was determined no material allowance for expected credit losses was required.
(b) Common shares - Dealnet - as partial consideration for the sale of EcoHome, 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) Convertible note - Dealnet - as partial consideration for the sale of EcoHome, the Company received a $2.5 million convertible
note, bearing interest at 6% per annum, which matured in February 2018 and was repaid.
7. FINANCE RECEIVABLES
Finance receivables comprise:
Net investment in leases
Loan receivables
December 31,
2018
December 31,
2017
($ thousands)
435,793
293,131
728,924
$
$
372,771
177,879
550,650
$
$
The Company finances its leases and loan receivables by pledging such receivables as security for amounts borrowed from lenders
under various facilities, as described in Note 13 - Borrowings. The lenders have the right to enforce their security interest in the
pledged lease and loan receivables if the Company defaults under these facilities. Therefore, the Company retains ownership (in
some cases through consolidated SPE's and servicing responsibilities of the pledged lease and loan receivables and continues to
recognize them on the consolidated statement of financial position.
58
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(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 credit losses
Allowance for credit losses (c)
Reserve receivable on securitized financial contracts
Net investment in finance receivables
Current portion
Long-term portion
December 31,
2018
($ thousands)
December 31,
2017
$
893,080
$
25,735
918,815
(168,946)
749,869
(23,929)
725,940
2,984
728,924
255,906
$
473,018
$
669,656
21,482
691,138
(130,469)
560,669
(11,926)
548,743
1,907
550,650
194,919
355,731
(b) Minimum scheduled collections of finance receivables at December 31, 2018 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.
2019
2020
2021
2022
2023
2024 and thereafter
Total minimum payments
Minimum
payments
Present value
($ thousands)
$
333,194
$
260,182
173,756
94,968
30,700
280
250,141
209,931
148,957
85,849
28,983
273
$
893,080
$
724,134
(c) Allowance for credit losses
The Company measures loss allowances based on an expected credit loss ("ECL") impairment model for all financial instruments
except those measured at fair value through profit and loss. Application of the model depends 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 ECLs
is recognized.
Lease and loan receivables at Pawnee 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. The Company segregated the portfolio into prime and non-prime for the purpose of this analysis.
59
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
For the purpose of measuring ECL, a default event is defined as:
•
•
For prime finance receivables, leases and loans that have missed one payment and are not subsequently rectified within
30 days.
For non-prime finance receivables, leases and loans that have missed one payment.
ECLs are measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the
financial instrument and consider reasonable and supportable information about past events, current conditions, and forecasts of
future events and economic conditions that impact the Company's credit risk assessment.
For Stage 1, the Company utilized recent static pool data applied to recent origination levels and the inclusion of forward-looking
macroeconomic assumptions under the ECL methodology.
For Stage 2, the Company considers leases and loans to have experienced a significant increase in credit risk since initial recognition
if they are delinquent for over 30 days and further includes approximately 15% of 1-30 day delinquent non-prime receivables.
For Stage 3, the Company considers lease and loans to be credit impaired if they are delinquent for more than 90 days or if the
individual leases and loans have otherwise been classified as non-accrual.
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. Customer security deposits
on hand were considered when estimating future ECLs.
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 credit losses when received.
Repossessed equipment is generally held at various warehouses by the Company's third party contractors prior to selling the
equipment. As Pawnee and Blue Chip finance a wide range of small equipment, it is difficult to estimate the fair value of the
potential collateral when estimating future ECLs.
The measurement of ECL's 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.
Forecasts of future events and economic conditions are incorporated by adjusting losses from the static pool data. The estimation
and application of forward-looking information requires judgment.
The following table show the gross carrying amount of the finance receivables by credit categories:
Stage 1
Stage 2
Stage 3
Total
As of December 31, 2018
Performing
Under-
Performing
Non-
Performing
Prime
Non-prime
Total
$
$
472,036 $
264,035
736,071 $
($ thousands)
965 $
5,311
6,276 $
2,442 $
5,080
7,522 $
475,443
274,426
749,869
60
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
The following tables show reconciliations from the opening to the closing balance of the allowance for credit losses:
For the year ended December 31, 2018
Stage 1
Stage 2
Stage 3
12-month
ECL(i)
Lifetime ECL
not credit-
impaired
Lifetime ECL
credit-
impaired
2018 Total
Balance, January 1, 2018 per IFRS 9 (Note 2)
Transfer to 12-month ECL (Stage 1)
Transfer to lifetime ECL non credit-impaired (Stage 2)
Transfer to ECL credit-impaired (Stage 3)
Net remeasurement of loss allowance
New receivables originated
Provision for credit losses
Charge-offs
Recoveries of amounts previously charged off
Net charge-offs
$
10,608 $
1,633
(20,746)
(2,238)
10,230
10,613
(508)
—
—
—
($ thousands)
4,150 $
(812)
20,759
(18,632)
240
—
1,555
—
—
—
Impact of change in foreign exchange rates
Balance, end of year
779
10,879 $
436
6,141 $
$
7,216 $
(821)
(13)
20,870
(1,660)
—
18,376
(28,283)
9,070
(19,213)
530
6,909 $
21,974
—
—
—
8,810
10,613
19,423
(28,283)
9,070
(19,213)
1,745
23,929
Comparative amounts for 2017 represent the allowance account for impairment measured under IAS 39.
Balance, beginning of year, per IAS 39
Provision for credit losses
Impact of change in foreign exchange rates
Charge-offs
Recoveries
Balance, end of year, per IAS 39
For the year ended
December 31,
2017
($ thousands)
$
$
12,253
21,084
(733)
(28,748)
8,070
11,926
(d) 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 $16.8 million (December 31, 2017 - $14.0 million) of security deposits received from
lessees/borrowers and the collateral held (including potential proceeds from repossessed equipment, and potential recoveries from
personal guarantees) that would offset any charge-offs. An estimate of fair value for the collateral and personal guarantees cannot
reasonably be determined.
Pawnee charges off leases and loans when they become 154 days contractually past due, unless information indicates that an earlier
charge-off is warranted. A high percentage of charge-offs are recognized before the subject leases/loans reach 154 days contractually
past due, due to insolvency or non-responsiveness of the lessee or borrower. Blue Chip charges off leases and loans on an individual
basis when there is no realistic prospect of recovery. Loan and lease receivables that are charged-off during the period are all
61
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
subject to continued collection efforts.
($ thousands)
Equipment lease receivables
Loan receivables
Credit impaired
Past due but not impaired
($ thousands)
Equipment lease receivables
Loan receivables
Impaired
Past due but not impaired
$
$
$
$
$
$
$
$
As of December 31, 2018
8,757 $
3,189
Current 1-30 days
434,231 $
296,429
730,660 $ 11,946 $
544 $
273 $
— $ 11,673 $
31 - 60
days
2,551 $
200
2,751 $
1,985 $
766 $
61 - 90
days
1,102 $
545
1,647 $
1,554 $
93 $
Over 90
days
2,653 $
212
2,865 $
2,553 $
312 $
Total
449,294
300,575
749,869
6,909
12,844
7,356 $
3,209
Current 1-30 days
366,436 $
175,859
542,295 $ 10,565 $
585 $
9,980 $
1,029 $
— $
As of December 31, 2017
31 - 60
days
2,220 $
753
2,973 $
2,233 $
740 $
61 - 90
days
849 $
335
1,184 $
1,050 $
134 $
Over 90
days
2,802 $
850
3,652 $
3,585 $
67 $
Total
379,663
181,006
560,669
8,482
10,921
(e) Modifications
In cases where a borrower experiences financial difficulties, Pawnee and Blue Chip may grant certain concessionary modifications
to the terms and conditions of a lease or loan. Modifications may include payment deferrals, extension of amortization periods,
and other modifications intended to minimize the economic loss and to avoid repossession of collateral. Pawnee and Blue Chip
have policies in place to determine the appropriate remediation strategy based on certain conditions. Significant increase in credit
risk (Stage 2 categorization) is assessed based on the risk of default at initial recognition of the original asset. Expected cash flows
arising from the modified contractual terms are considered when calculating the ECL for the modified asset. For finance receivables
that were modified while having a lifetime ECL, the leases and loans can revert to having 12-month ECL after a period of
performance and improvement in the borrower's financial condition.
The net investment in finance receivables that have been modified (in 2018 or prior) and are current at December 31, 2018 is $14.8
million (December 31, 2017 - $14.1 million). On average the terms have been modified to extend the contracts by approximately
one to three months, depending on the modification. Finance receivables modified during the year ended December 31, 2018 had
a total net investment in finance receivable balance at the time of modification of $25.6 million (2017 - $28.9 million). These
amounts reflect the net investment in finance receivable balances prior to payments collected since modification, or leases that
terminated early after modifications or leases charged-off after modification.
(f) 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 credit losses when received. In
the year-ended December 31, 2018, the proceeds from the disposal of repossessed equipment that was charged-off totaled $3.3
million (2017 - $3.2 million). Repossessed equipment is held at various warehouses by the companies contracted to repossess and
sell the equipment.
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 20% to 30% declining balance annual rates,
which are reassessed annually.
62
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Cost:
December 31, 2016
Additions
Disposals
Translation
December 31, 2017
Additions
Disposals
Translation
December 31, 2018
Furniture
and
equipment
Computer
hardware
Total
$
$
903
302
—
5
1,210
37
(44)
9
1,212
$
1,512
$
2,415
641
(41)
3
2,115
175
(63)
(21)
2,206
$
943
(41)
8
3,325
212
(107)
(12)
3,418
$
The expenditures in 2018 and 2017 reflects acquisitions related to the growth in Pawnee staff numbers during the year.
Accumulated depreciation:
December 31, 2016
Depreciation
Disposals
Translation
December 31, 2017
Depreciation
Disposals
Translation
December 31, 2018
Carrying amount:
December 31, 2016
December 31, 2017
December 31, 2018
Furniture
and
equipment
Computer
hardware
Total
$
$
347
138
—
3
488
120
(41)
11
578
Furniture
and
equipment
$
$
$
556
722
634
$
$
$
$
$
634
303
(41)
6
902
386
(63)
(13)
1,212
Computer
hardware
($ thousands)
878
1,213
994
$
$
$
$
$
981
441
(41)
9
1,390
506
(104)
(2)
1,790
Total
1,434
1,935
1,628
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
63
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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.
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 ("VIU") being derived from an estimated discounted cash
flow model. 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, 2016
$
7,665
$
19,539
$
1,309
$
—
(476)
7,189
593
7,782
$
(22)
—
19,517
—
19,517
$
—
—
1,309
—
1,309
$
Trade names
Broker
relationships
Non-
Compete
($ thousands)
127
$
6,045
$
—
127
—
127
$
1,087
7,132
1,275
8,407
$
468
604
1,072
237
1,309
$
$
$
$
$
28,513
(22)
(476)
28,015
593
28,608
Total
6,640
1,691
8,331
1,512
9,843
Trade
names
Broker
relationships
Non-
Compete
Total
7,538
7,062
7,655
$
$
$
($ thousands)
13,494
12,385
11,110
$
$
$
841
$
237
$
— $
21,873
19,684
18,765
Adjustment
Translation
December 31, 2017
Translation
December 31, 2018
Accumulated amortization:
December 31, 2016
Amortization
December 31, 2017
Amortization
December 31, 2018
Carrying amount:
December 31, 2016
December 31, 2017
December 31, 2018
$
$
$
64
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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.
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,
2018
December 31,
2017
$
$
($ thousands)
7,367
288
7,655
$
$
6,774
288
7,062
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:
65
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Cost:
December 31, 2016
Translation
December 31, 2017
Translation
December 31, 2018
Accumulated impairment:
December 31, 2016
Translation
December 31, 2017
Translation
December 31, 2018
Carrying amount:
December 31, 2016
December 31, 2017
December 31, 2018
Pawnee
Blue Chip
Total
($ thousands)
$
48,700
$ 26,365
$
(2,475)
46,225
3,255
49,480
—
26,365
—
$ 26,365
$
$
75,065
(2,475)
72,590
3,255
75,845
Pawnee
Blue Chip
($ thousands)
Total
$
34,259
$
— $
(1,526)
32,733
2,075
34,808
—
$
— $
34,259
(1,526)
32,733
2,075
34,808
Pawnee
Blue Chip
Total
14,441
13,492
14,672
($ thousands)
$ 26,365
$ 26,365
$ 26,365
$
$
$
40,806
39,857
41,037
$
$
$
$
The Company completed its annual goodwill impairment test as at December 31, 2018 and 2017 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, 2017
December 31, 2018
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.
66
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Pre-tax discount rates:
December 31, 2017
December 31, 2018
Pawnee
Blue Chip
27.60%
27.87%
21.98%
21.41%
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.
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
December 31,
2018
($ thousands)
December 31,
2017
$
1,240
$
2,187
874
845
5,984
742
1,176
2,552
1,264
1,598
761
704
5,610
2,174
1,068
1,710
$
15,600
$
14,889
12. CONVERTIBLE DEBENTURES
On December 12, 2017, the Company exercised its right to redeem the debentures on January 17, 2018. 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.
67
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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,
2018
($ thousands)
— $
—
— $
December 31,
2017
20,000
90
20,090
For the years ended
December 31,
2018
2017
($ thousands)
90
(61)
29
$
$
170
(1,300)
(1,130)
13. BORROWINGS
Chesswood
credit
facility (a)
Chesswood
deferred
financing
costs
Pawnee
credit
facilities (b)
Pawnee
deferred
financing
costs
Blue Chip
financing
facilities (c)
Total
($ thousands)
Net as of December 31, 2016
$
187,978 $
(2,015) $
— $
— $
107,118
$
293,081
Proceeds or draw-downs
Repayments
Payment of financing costs
Amortization of deferred
financing costs
Foreign currency translation
adjustment
Net as of December 31, 2017
Proceeds or draw-downs
Repayments
Payment of financing costs
Amortization of deferred
financing costs
Foreign currency translation
adjustment
Net as of December 31, 2018
222,219
(196,871)
—
—
—
—
(1,838)
1,317
97,097
(6,789)
—
—
(12,921)
—
(3,067)
(2,536)
87,241
—
—
(425)
172,288
(45,606)
—
200,405
242,806
(227,950)
—
—
—
—
(2,482)
265
75
(2,142)
—
—
(3,542)
82,209
(60,140)
—
—
—
129,187
84,029
(67,054)
—
401,525
(263,800)
(4,320)
1,582
(15,913)
412,155
499,123
(340,610)
(3,967)
1,254
—
1,521
—
2,775
18,017
233,278 $
$
—
(1,707) $
14,326
228,249 $
(294)
(4,457) $
—
146,162
$
32,049
601,525
(a) The Chesswood revolving 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, 2018,
the Company was utilizing U.S.$178.7 million (December 31, 2017 - U.S.$165.0 million) of its credit facility and had approximately
U.S.$71.3 million in additional borrowings available under the corporate credit facility. At December 31, 2018 and December 31,
68
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
2017, and throughout the periods presented, the Company was compliant with all covenants. Based on average debt levels, the
effective interest rate during the year ended December 31, 2018 was 5.12% (year-ended December 31, 2017 - 4.62%).
(b) Pawnee credit facilities:
(i) Pawnee has a U.S.$250 million revolving warehouse loan facility specifically to fund its growing prime portfolio, through its
subsidiary, Pawnee Portfolio Fund ("PPF"). The warehouse facility will hold Pawnee’s prime receivables before they are securitized.
This credit facility is secured by PPF’s assets, and contains covenants including maintaining leverage and interest coverage ratios,
and expires in August 2023. At December 31, 2018, Pawnee was utilizing U.S.$83.0 million of this facility. At December 31,
2018 and throughout the period from August 2018, Pawnee was compliant with all covenants. Based on average debt levels, the
effective interest rate during the year ended December 31, 2018 was 7.54% (2017 - n/a).
(ii) Pawnee has a combined U.S.$125 million non-recourse asset-backed facilities with Capital One ("CapOne facility"), through
subsidiaries, Pawnee Receivable Fund I and II LLC. The CapOne facilities are secured by U.S.$154.2 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 facilities require 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. Pawnee is to comply with leverage ratio, interest coverage ratio, and tangible net worth covenants. At December 31,
2018 and throughout the period from October 2017 (the inception of the CapOne facility), Pawnee was compliant with all covenants.
Based on average debt levels, the effective interest rate during the year ended December 31, 2018 was 5.61% (2017 - 4.87%).
(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.
At December 31, 2018, 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, 2018, Blue Chip had $146.2 million (December 31, 2017 - $129.2
million) in securitization and bulk lease financing facilities debt outstanding, was utilizing $76.2 million (December 31, 2017 -
$73.6 million) of their available financing and had access to at least $93.8 million (December 31, 2017 - $96.4 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, 2018 was 3.37% (for the year ended December 31, 2017 - 3.15%). As at December 31, 2018, Blue Chip had
provided $10.5 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, 2018 and December 31, 2017, and throughout the periods
presented, Blue Chip was compliant 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.
December 31,
2018
December 31,
2017
$
$
($ thousands)
9,063
4,535
13,598
$
$
2,939
3,032
5,971
Restricted - cash in collection accounts
Restricted - cash reserves
Restricted funds
69
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
14. CUSTOMER SECURITY DEPOSITS
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,
2018
December 31,
2017
$
$
($ thousands)
3,884
12,889
16,773
$
$
3,492
10,520
14,012
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.
(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, 2018, the fair value of the swaps was an asset of $455,000 (December
31, 2017 - a liability of $43,000).
The following swap agreements were outstanding at December 31, 2018:
Effective Date
August 15, 2016
August 15, 2016
Notional Amount
U.S.$
$20 million
$20 million
Annual Fixed Rate
Maturity Date
1.985%
2.120%
August 13, 2020
August 13, 2021
(b) Derivative caps
Pawnee's non-recourse asset-backed facilities (see Note 13(b)(ii) - Borrowings) requires Pawnee to mitigate interest rate risk by
entering into an interest rate cap for a notional amount of 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, with a floating index rate based on USD-LIBOR-BBA, but subject to a capped fixed rate of 2.25% and 2.75%. At
December 31, 2018, the fair value of the interest rate caps was an asset of $441,000 (2017 - $185,000).
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.
70
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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.
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.
On December 22, 2017, the U.S. government enacted new tax legislation effective January 1, 2018. The legislation made broad
and complex changes to the U.S. tax code. The tax provision 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,
2018
December 31,
2017
$
$
($ thousands)
7,206
2,167
9,373
$
$
6,468
(4,408)
2,060
71
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(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% (2017 - 26.5%) to
income before income taxes.
For the years ended
December 31,
2018
December 31,
2017
($ thousands)
Income from continuing operations before taxes
$
32,716
$
27,811
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
(i)
True-up of prior year
Other
Tax expense
26.5%
8,670
311
(108)
795
666
(1,033)
(87)
159
$
9,373
$
26.5%
7,370
124
(22)
448
3,353
(9,379)
—
166
2,060
(i) - The future tax recovery in 2017 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 is 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
Deferred tax liabilities
Net deferred tax liabilities
Reconciliation of net deferred tax liabilities:
December 31,
2018
December 31,
2017
(d) $
(e)
$
($ thousands)
375
(20,794)
(20,419)
$
$
755
(21,202)
(20,447)
For the years ended
December 31,
2018
2017
($ thousands)
$
$
(20,447)
(2,167)
3,453
(1,258)
28
(20,419)
$
$
(26,044)
4,408
—
1,189
5,597
(20,447)
Balance, beginning of year
Deferred tax recovery (expense) in the statements of income
(a)
Adoption of IFRS 9 & 15
Translation
Net change in net deferred tax liabilities during the year
Balance, end of year
72
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(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,
2018
December 31,
2017
$
$
($ thousands)
375
—
375
$
$
598
157
755
Deferred tax assets are recognized to the extent that realization of the related tax benefit through future taxable profits is probable.
At December 31, 2018, Case Funding had U.S.$455,000 (2017 - U.S.$570,000) in tax losses carried forward and taxable timing
differences of U.S.$455,000 (2017 - $570,000) that have not been recognized.
The Company has determined that it is probable that all other deferred tax assets will be realized through a combination of future
reversals of temporary differences and taxable income.
(e) The tax effects of the significant components of temporary differences giving rise to the Company’s net deferred tax liabilities
are as follows:
December 31,
2018
December 31,
2017
Deferred tax assets:
Leased assets
Allowance for credit losses
Tax losses carried forward
Accrued liabilities
Deferred tax liabilities:
Finance receivables
Difference in goodwill and intangible asset base
($ thousands)
$
41,195
$
7,482
3,357
—
52,034
70,169
2,659
72,828
20,794
5,946
$
$
38,425
2,680
—
51
41,156
59,462
2,896
62,358
21,202
9,343
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 $56.1
million (2017 - $17.1 million), as it is not considered probable that this temporary difference will reverse in the foreseeable future.
73
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
17. MINIMUM PAYMENTS
The following are the contractual payments and maturities of financial liabilities and other commitments (including interest):
($ thousands)
2019
2020
2021
2022
2023
2023 +
Total
Accounts payable and other liabilities
$
15,600
$
— $
— $
— $
— $ — $
15,600
Borrowings
Customer security deposits
(i)
(ii)
123,815
353,368
3,884
4,655
95,544
4,678
143,299
358,023
100,222
Other financial commitments
(iii)
805
717
739
56,416
3,293
59,709
748
26,746
2,296
29,042
757
Total commitments
$ 144,104
$ 358,740
$ 100,961
$ 60,457
$ 29,799
$
91
58
149
790
939
655,980
18,864
690,444
4,556
$ 695,000
i. Borrowings are described in Note 13 - Borrowings, and include fixed payments for Pawnee and Blue Chip's securitization
facilities and Chesswood's corporate credit facility and Pawnee's warehouse facility, which are lines-of-credit and, as such,
the balances can fluctuate. The amount above includes fixed interest payments on Pawnee and Blue Chip's credit facilities
and estimated interest payments on the Chesswood corporate credit facility, assuming the interest rate, debt balance and foreign
exchange rate at December 31, 2018 remain the same until its expiry date of December 8, 2020.
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.
iii. The Company and its subsidiaries are committed to future minimum rental payments under existing leases for premises,
excluding occupancy costs and property tax, with expirations up to 2025, 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.
$7.7 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, 2018 and 2017 were not material
or possible outflows are considered remote.
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 borrowings and shareholders’ equity. 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 share repurchases through the normal course issuer bid
and the amount of dividends paid to shareholders.
Chesswood's three-year revolving senior secured U.S.$250 million credit facility supports growth in finance receivables, provides
the Company’s working capital needs and for general corporate purposes. The facility, available in U.S. or Canadian dollars, also
improves the Company's financial flexibility by centralizing treasury management and making the provision of capital to individual
74
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
businesses more efficient. This credit facility is secured by substantially all of the Company’s assets, contains covenants including
maintaining leverage and interest coverage ratios, and expires on December 8, 2020. At December 31, 2018 and December 31,
2017, and throughout the periods presented, the Company was compliant with all covenants.
Financing facilities of operating subsidiaries are used to provide funding for the respective subsidiary’s operations (namely to
provide financing for the purchase of assets which are to be the subject of leases and loans or to support working capital). The
financing facilities are not intended to directly fund dividends paid by the Company.
20. COMMON SHARES
Common shares
(# '000s)
Amount
($ thousands)
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
Exercise of restricted share units (Note 22(b))
Exercise of options (Note 22(a))
Repurchase of common shares under issuer bid
(a)
70
83
(499)
806
741
(3,179)
Balance, December 31, 2018
16,229
$
103,576
(a) Normal course issuer bids
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. No Common Shares were repurchased
in 2017 under this normal course issuer bid.
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. During 2017, no Common Shares
were repurchased under this normal course issuer bid. From January 1, 2018 to August 24, 2018, the Company repurchased
293,096 of its shares under the normal course issuer bid at an average cost of $10.5277 per share. The excess of the purchase price
over the average stated value of Common Shares purchased for cancellation was charged to retained earnings.
In August 2018, the Board of Directors approved the repurchase and cancellation of up to 1,043,895 of the Company’s outstanding
Common Shares for the period commencing August 25, 2018 and ending on August 24, 2019. From August 25, 2018 to December
31, 2018, the Company repurchased 206,340 of its shares under the normal course issuer bid at an average cost of $10.2412 per
share. The excess of the purchase price over the average stated value of Common Shares purchased for cancellation was charged
to retained earnings.
See Note 28 - Subsequent Event.
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.
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
75
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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.
22. COMPENSATION PLANS
(a) Share options
During the year ended December 31, 2018, personnel expenses and the share-based compensation reserve included $528,000 (2017
- $532,600) relating to option expense.
As of December 31, 2018, unrecognized non-cash compensation expense related to the outstanding options was $395,700
(December 31, 2017 - $489,100), 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,
2018
2,155,989
405,000
(83,135)
(93,500)
2,384,354
2017
1,837,989
362,500
(23,500)
(21,000)
2,155,989
During the year ended December 31, 2018, 83,135 options were exercised (2017 - 23,500) for total cash consideration of $571,000
(2017 - $162,000). On exercise, the fair value of options that had been expensed to date during the vesting period of $169,000
(2017 - $64,000) 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, 2018, the weighted average
share price at the date of exercise was $11.20 (2017 - $12.40).
At December 31, 2018, the weighted average exercise price is $10.43 (December 31, 2017 - $10.24) and the weighted average
remaining contractual life for all options outstanding is 6.1 years (December 31, 2017 - 6.5 years). The 1,643,354 options exercisable
at December 31, 2018 have a weighted average exercise price of $10.07 (December 31, 2017 - 1,415,489 options at $9.58).
An analysis of the options outstanding at December 31, 2018 is as follows:
76
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
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
March 28, 2018
Number of options
outstanding
Vested
Expiry date
Exercise
price
32,415
197,500
50,000
180,000
164,489
125,000
265,000
160,000
150,000
334,950
355,000
370,000
32,415
197,500
50,000
180,000
164,489
125,000
265,000
160,000
150,000
212,450
106,500
—
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
March 28, 2028
$
$
$
$
$
$
$
$
$
$
$
$
4.49
7.79
7.73
6.14
7.45
8.86
14.12
12.53
12.24
10.17
12.15
10.96
2,384,354
1,643,354
The option exercise price is equal to the 10-day volume weighted average price of the Common 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:
Number of options granted
Weighted average share price at date
405,000
$10.96
362,500
$12.15
March 28, 2018
June 19, 2017
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rates
Weighted average fair value of
options granted
30% - 32%
30% - 34%
7 - 9
7.40%
2.05%
$1.23
7 - 9
7.48%
1.1%
$1.31
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.
77
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
(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,
2018
2017
70,000
44,000
(70,000)
44,000
70,000
38,000
(38,000)
70,000
During the year ended December 31, 2018, personnel expenses and share-based compensation reserve included $566,000 (2017
- $433,100) relating to RSUs.
As of December 31, 2018, unrecognized non-cash compensation expense related to non-vested RSUs was $115,000 (December 31,
2017 - $198,300).
During the year ended December 31, 2018, an aggregate of 44,000 (2017 - 38,000) 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 $10.96 (2017 - $12.15).
During the year ended December 31, 2018, 70,000 RSU's were exercised (2017 - 38,000). Upon exercise, the fair value of RSU's
that had been expensed during the vesting period of $806,200 (2017 - $386,500) was transferred from reserve to Common Share
capital. For the RSUs exercised during the year ended December 31, 2018, the weighted average share price at the date of exercise
was $10.48 (2017 - $10.41).
The weighted average remaining contractual life for all RSUs outstanding is 9.2 years (December 31, 2017 - 5.8 years).
An analysis of the RSUs outstanding at December 31, 2018 is as follows:
Grant date
Number of
RSUs
outstanding
Vested
Expiry date
Value on
grant date
March 28, 2018
44,000
— March 28, 2028
$
10.96
23. DIVIDENDS
Under the Chesswood revolving 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% 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).
The following dividends were paid to Common Shareholders and Exchangeable Securities holders (included as non-controlling
interest) during the year ended December 31, 2018:
78
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 29, 2017
January 31, 2018
February 28, 2018
March 29, 2018
April 30, 2018
May 31, 2018
June 29, 2018
July 31, 2018
August 31, 2018
September 28, 2018
October 31, 2018
November 30, 2018
January 15, 2018
February 15, 2018
March 15, 2018
April 16, 2018
May 15, 2018
June 15, 2018
July 16, 2018
August 15, 2018
September 17, 2018
October 15, 2018
November 15, 2018
December 17, 2018
$
$
$
$
$
$
$
$
$
$
$
$
$
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
0.070
1,264
1,264
1,260
1,260
1,254
1,257
1,252
1,252
1,253
1,254
1,252
1,245
$
15,067
The following dividend was declared but not paid to Common Shareholders and Exchangeable Securities holders during the year-
ended December 31, 2018 and was included in accounts payable and other liabilities (Note 11):
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2018
January 15, 2019
$
0.070
$
1,240
The following dividends were declared before the financial statements were authorized for issue but not recognized during the
year ended December 31, 2018:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
January 31, 2019
February 28, 2019
February 15, 2019
March 15, 2019
$
$
0.070
0.070
$
$
1,236
1,236
2,472
The following dividends were paid to Common Shareholders and Exchangeable Securities holders (included as non-controlling
interest) during the year ended December 31, 2017:
79
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 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
24. EARNINGS PER SHARE
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. 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.
80
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Weighted average number of common shares outstanding
Dilutive effect of options
Dilutive effect of restricted share units
For the years ended
December 31,
2018
2017
16,439,392
16,550,400
311,347
60,608
428,094
67,496
Weighted average common shares outstanding for diluted earnings per share
16,811,347
17,045,990
Options (and in 2017 convertible debentures) excluded from calculation of
diluted shares for the period due to their anti-dilutive effect
930,000
1,448,589
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,
2018
2017
($ thousands)
1,525
757
2,282
$
$
1,128
678
1,806
$
$
26. CASH FLOW SUPPLEMENTARY DISCLOSURE
Non-cash transactions
Common shares issued on exercise of RSUs
$
806
$
386
For the years ended
December 31,
Note
2018
2017
($ thousands)
81
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Other non-cash items included in net income
Share-based compensation expense
Amortization of deferred financing costs
Financing costs - convertible debentures
Unrealized loss on investments
Escrow receivable fair value adjustment
Contingent consideration reversal
Unrealized gain on interest rate derivatives
Unrealized loss 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
For the years ended
December 31,
Note
2018
2017
22
13
12
13
13
$
1,094
$
2,775
(29)
181
—
—
(705)
29
3,345
$
(6,749)
4,238
(556)
1,467
(1,600)
499,123
(340,610)
158,513
$
$
$
$
$
$
$
$
$
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
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.
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.
82
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
Selected information by segment and geographically is as follows:
($ thousands)
Year ended December 31, 2018
Equipment
Financing -
U.S.
Equipment
Financing -
Canada
Discontinued
Operations
(Note 5)
Corporate
Overhead
- Canada
Interest revenue on leases and loans
$
84,452
$
$
— $
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
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 used in investing activities
Net cash from financing activities
Total assets
Total liabilities
Finance receivables
Goodwill and intangible assets
Property and equipment expenditures
$
$
$
$
$
$
$
$
$
Total
97,927
12,659
(26,647)
(19,423)
64,516
15,403
1,094
13,809
506
33,704
(1,512)
(152)
705
(29)
32,716
9,373
23,343
(458)
22,885
364
—
—
364
1,685
789
1,663
—
(3,773)
—
(152)
477
(29)
(3,477)
2,209
(5,686)
—
(5,686) $
(458)
(458) $
1,259
$
— $
— $
(277) $
— $
(25,214) $
(116,092)
(212)
114,851
1,852
$
7,169
$
— $
— $
— $
— $
233,800
$
— $
— $
— $
818,187
654,692
728,924
59,802
212
13,475
4,284
(5,043)
(1,594)
11,122
2,592
20
1,735
16
6,759
(1,512)
—
—
—
5,247
1,260
3,987
8,011
(21,604)
(17,829)
53,030
11,126
285
10,411
490
30,718
—
—
228
—
30,946
5,904
25,042
—
25,042
— $
$
3,987
$
(100,770) $
(212) $
(16,304) $
— $
123,140
600,652
267,999
559,542
22,039
212
$
$
$
$
$
$
16,925
208,514
152,893
169,382
37,763
$
$
$
$
$
— $
83
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
($ thousands)
Year ended December 31, 2017
Equipment
Financing -
U.S.
Equipment
Financing -
Canada
Discontinued
Operations
(Note 5)
Corporate
Overhead
- Canada
Interest revenue on leases and loans
$
72,296
$
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
$
$
$
$
$
$
$
$
$
7,020
(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
$
$
$
$
$
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
$
$
$
$
$
$
— $
357
—
—
357
1,439
706
1,640
—
(3,428)
Total
83,775
11,549
(15,268)
(21,084)
58,972
13,792
965
11,699
441
32,075
538
(1,153)
(3,999)
(3,999)
814
(118)
(6,193)
1,539
(7,732)
—
(7,732) $
(9,038) $
— $
$
8,554
(320)
(320) $
1,899
$
— $
— $
3,371
$
12,452
$
— $
— $
— $
— $
220,071
$
— $
— $
— $
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
28. SUBSEQUENT EVENT
Subsequent to December 31, 2018 (up to and including March 5, 2019), the Company repurchased 48,360 of its shares under the
normal course issuer bid (See Note 20 - Common Shares) at an average cost of $10.7452 per share.
84
Chesswood Group Limited
DIRECTORS, OFFICERS AND OTHER INFORMATION
Directors
Executive Team
Frederick W. Steiner
Director, Chairman of Chesswood Group Limited
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
C.E.O., 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
2018 ANNUAL REPORT
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