CHESSWOOD GROUP LIMITED
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2021
Through three wholly owned subsidiaries in the United States and five subsidiaries in Canada, two of which is wholly owned,
Chesswood Group Limited is a North American specialty finance company publicly traded on the Toronto Stock Exchange.
Colorado-based Pawnee Leasing Corporation, founded in 1982, finances a highly diversified portfolio of commercial
equipment leases and loans through relationships with over 600 brokers in the United States. Tandem Finance Inc. provides
financing in the U.S. through the equipment vendor channel. 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 brokers. Vault Credit Corporation specializes in equipment leases and commercial loans across Canada, allowing for
customizable financing solutions while catering to a wide spectrum of credit tiers, equipment types and sectors by offering
industry-leading service levels, experienced underwriters, and account administrators. Vault Home was acquired in September
2021 and focuses on providing home improvement and other consumer financing solutions in Canada. Rifco Inc. is focused on
being the best alternative auto finance company, with the mission to help Canadians own automobiles. Rifco seeks to create
sustainable long term competitive advantages through personalized partnerships with dealers, innovative products, the use of
industry-leading data and analytics, and leading collections practices. Chesswood Capital Management will provide private
credit alternatives to investors seeking exposure to loan receivables, including those originated by Chesswood subsidiaries.
Based in Toronto, Canada, Chesswood’s shares trade on the Toronto Stock Exchange under the symbol CHW. Learn more at
www.BlueChipLeasing.com,
www.PawneeLeasing.com,
www.ChesswoodGroup.com,
www.VaultCredit.com, www.VaultPay.ca, and www.Rifco.net.
www.TandemFinance.com,
CONTENTS
PRESIDENT'S MESSAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS, OFFICERS AND OTHER INFORMATION
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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, by email to investorrelations@chesswoodgroup.com, or by calling Chesswood at 416-386-3099, at
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, 2021
TO OUR SHAREHOLDERS
2021 Year in Review
Chesswood Group achieved record financial results across all key metrics in 2021. Originations in our U.S businesses were
US$554 million, nearly double the previous peak. Our Canadian businesses, on the strength of our merger of Blue Chip Leasing
with Vault Credit Corporation, had record originations of CAD$239 million. Excellent portfolio performance along with strong
incremental operating margins generated diluted earnings per share of $1.59 and diluted free cash flow per share of $1.72.
The return on average equity for the full year was 19.0% as a result of improved operating margins by credit program, asset
growth and an efficient use of balance sheet leverage. The profitability of prime versus near-prime receivables is driven by
different factors, ultimately affecting returns on equity. The prime business focuses on origination cost efficiency and the use
of balance sheet leverage while profitability on near-prime receivables is predominantly driven by credit spread. Chesswood’s
overall return on equity has benefited from the achievement of scale in our prime business in 2021, which has resulted in a
higher quality funding mix as well as the improved fixed cost absorption required to first enter this channel.
Financial Highlights
(C$000)
Average Equity
Revenue
Net income (loss)
Free Cash Flow ("FCF")(1)
Return on Average Shareholders' Equity
FCF Return on Average Shareholders' Equity
2017
2018
2019
2020
2021
$159,558
$162,358
$160,089
$148,750
$164,399
$95,324
$25,431
$29,617
15.9%
18.6%
$110,586
$126,975
$117,056
$138,083
$22,885
$25,403
14.1%
15.6%
$12,691
$22,361
7.9%
14.0%
$(8,525)
$19,606
(5.7)%
13.2%
$31,169
$33,573
19.0%
20.4%
(1) Free Cash Flow is a non-GAAP measure which is based on the significant banking and lending agreements for the purposes of calculating permitted
dividends and cash required for purchases of shares under the Company's normal course issuer bid. For further information, reference should be made to Non-
GAAP Measures in this MD&A.
Chesswood’s net investment portfolio of leases and loans grew 94% to CAD$1.4 billion in 2021. The composition of this
portfolio is approximately 2/3rd US and 1/3rd Canadian with average yields of 11.8% and 10.2% respectively. The portfolio
credit weighting continues towards prime, ending the year with 75% of the portfolio in prime receivables and 25% in near-
prime. Lease and loan charge-offs were exceptionally low at only 1.1% on a gross basis due to a greater mix of prime
receivables, increasing exposure to the vendor channel and an accommodative monetary policy backdrop.
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2020 Equipment Finance Receivables bySegment (C$mm)73%27%Prime Equipment ReceivablesNear-Prime Equipment Receivables2021 Equipment Finance Receivables bySegment (C$mm)75%25%Prime Equipment ReceivablesNear-Prime Equipment Receivables
FOR THE YEAR ENDED DECEMBER 31, 2021
Operating expenses increased 60% year over year due to increasing staff counts required to process higher origination volumes.
At the end of the year, Chesswood’s operating divisions employed 299 people versus 144 in 2020. Similarly, the number of
individual leases and loans increased 60% to 45,000 contracts.
The underwriting and funding process for small ticket commercial credit is complex and therefore certain underwriting costs
scale with origination volumes. Most of the costs associated with a lease or loan are recognized upfront versus the interest
revenue which is recognized over time. These costs include underwriting, funding, and loss provisioning. We grew our team
throughout the year in anticipation that existing levels of origination would continue into 2022.
In addition to strong operating results, Chesswood made meaningful progress towards its key strategic initiatives. Last year, we
outlined key areas of focus to evolve Chesswood into a specialty finance company with a diverse source of funding, diverse
asset base and a technology-centric operating system. We target these three areas as we believe they will ultimately drive the
most value for Chesswood shareholders. Our platform approach to niche lending verticals provides us with the scale to be more
efficient and therefore competitive in the marketplace.
Funding Updates & Strategy
Our U.S. team completed a US$356 million Asset Backed Securitization (“ABS”) financing towards the end of last year that
was broadly marketed and oversubscribed by fixed income investors. Our ABS program provides us with a competitive cost of
funds for our prime programs and allows us to offer customers lower financing rates. This was the largest ABS issue in the
company’s history and solidifies our presence as an issuer in this funding channel.
After year-end, we announced the renewal of our revolving credit facility that was upsized and repriced with a new syndicate of
lenders. This facility is used to fund the originations of our operating entities prior to selling the assets into securitization
conduits, warehouse facilities, or the ABS markets. This renewal reduced our cost of funds by 75bps and increased our
revolving base borrowing capacity to US$300 million (from US$250 million) and also provides for a US$100 million accordion
feature (US$50 million previously).
Lastly, we incorporated Chesswood Capital Management, the asset management arm of Chesswood Group Limited. In 2021,
we began a search process to identify off-balance sheet funding partners to finance the growth in originations from
Chesswood’s subsidiaries. Instead of spread income, Chesswood Capital Management will receive recurring asset management
fees on capital invested by these funding partners. We are particularly excited by this initiative as it is expected to be accretive
to our return on equity and leverages the growing origination pipeline of our operating subsidiaries.
Asset Diversification & Acquisitions
Chesswood successfully entered two new asset verticals in 2021 and early 2022 – Vault Home and Rifco Automotive Finance.
Both of these opportunities leverage the existing treasury management function at Chesswood and benefit from strong
established management teams with significant tenure and industry experience.
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2020 Equipment Finance Receivables byGeography (C$mm)83%17%U.S. Equipment ReceivablesCanadian Equipment Receivables2021 Equipment Finance Receivables byGeography (C$mm)71%29%U.S. Equipment ReceivablesCanadian Equipment Receivables
FOR THE YEAR ENDED DECEMBER 31, 2021
As a result of these acquisitions, Chesswood now provides financing in the areas of commercial equipment finance, automotive
finance, and home improvement finance. Although the industry verticals are different, they share common attributes. All are
small ticket, geographically diversified, regulated credit markets that can be securitized with our existing funding partners.
Substantial data and regulation exist in each of these categories for the purposes of maximizing portfolio returns, evaluating
portfolio risk and loss mitigation.
The added diversification from these verticals reduces the overall volatility of Chesswood’s business model, introduces new
categories to drive revenue and earnings growth and strengthens our existing origination and treasury management expertise.
Technology Driving Efficiency
We are investing in the deployment of advanced automation technologies to drive operating leverage as we continue to scale
our businesses. Repeated manual processes such as contract validation, ID validation, booking, data validation, credit triage,
funding, and post-funding activities drive unnecessary overhead costs. The deployment of advanced Artificial Intelligence, and
Machine Learning platforms against key operational processes will reduce unnecessary headcount and costs as the businesses
continue to grow. These systems verify the accuracy of data extracted from our loan and lease documents at scale, and in real-
time, within key operational processes. This provides Chesswood with a competitive advantage to meet rigorous compliance
and data verification standards. We expect these investments will save significant labour hours, reduce operating costs, and
improve process quality as we move forward.
We are so fortunate to have the teams that drove our successes in 2021 and to date in 2022, and are excited to continue our
initiatives.
Sincerely,
Ryan Marr,
President & CEO
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FOR THE YEAR ENDED DECEMBER 31, 2021
MANAGEMENT'S DISCUSSION AND ANALYSIS
This management’s discussion and analysis (this "MD&A") is provided to enable readers to assess the financial condition and
results of operations of Chesswood Group Limited (“Chesswood” or the "Company”) as at and for the three months and year
ended December 31, 2021. This discussion should be read in conjunction with the 2021 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 International Financial Reporting Standards ("IFRS"), and all amounts are expressed in
Canadian dollars, unless specifically noted otherwise. This MD&A is dated March 9, 2022.
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 by calling
Chesswood at 416-386-3099.
MD&A Table of Contents
Forward-Looking Statements
Non-GAAP Measures
Company Overview
U.S. Equipment Financing Segment
U.S. Portfolio Metrics
Canadian Equipment Financing Segment
Canadian Portfolio Metrics
Results of Operations
Adjusted EBITDA, Free Cash Flow
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13
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19
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Statement of Financial Position
Liquidity and Capital Resources
Outlook
Risk Factors
Critical Accounting Policies and Estimates
Changes in Accounting Policies and
Disclosures
Related Party Transactions
Controls & Procedures
Market for Securities
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42
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53
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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.
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 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
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FOR THE YEAR ENDED DECEMBER 31, 2021
losses; increasing competition (including, without limitation, more aggressive risk pricing by competitors and financing options
provided by manufacturers); increased governmental regulation of the rates and methods we use in financing and collecting on
our 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; the successful launch of Vault Home Credit Corporation;
factors that impact on the decision to acquire a motor vehicle; and general economic and business conditions (including the
continuing effect of the COVID-19 pandemic). 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 regulation.
NON-GAAP MEASURES
This MD&A refers to certain non-Generally Accepted Accounting Principles ("GAAP") measures as supplementary
information and to assist in assessing the Company’s financial performance. These measures are based primarily on the
significant banking and lending agreements for the purposes of determination of compliance with financial covenants as well as
calculation of permitted dividends and cash available for purchases of shares under the Company's normal course issuer bid.
Management believes EBITDA and Adjusted EBITDA, as defined below, are useful measures in evaluating the performance of
the Company. EBITDA is a well understood non-GAAP measure; however, Adjusted EBITDA provides information that is
even more relevant given the business in which the Company operates. EBITDA and Adjusted EBITDA are not earnings
measures recognized by GAAP and do not have standardized meanings prescribed by GAAP. Therefore, EBITDA, Adjusted
EBITDA and the other non-GAAP measures listed may not be comparable to similarly labelled measures presented by other
companies. Readers are cautioned that EBITDA, Adjusted EBITDA and the other non-GAAP measures listed should not be
construed as an alternative to net income determined in accordance with GAAP as indicators of performance, or to cash flows
from operating, investing and financing activities as measures of liquidity and cash flows.
“EBITDA” is Net Income (Loss) as presented in the consolidated statements of income, adjusted to exclude interest expense,
income taxes, depreciation and amortization, and goodwill and intangible asset impairment. EBITDA is included in one of the
Company’s significant bank agreements where it is used for financial covenant purposes.
“Adjusted EBITDA” is EBITDA as further adjusted for inclusion of interest on debt facilities as a deduction from net income
(loss), and further removal of other non-cash or non-recurring items such as (i) non-cash gain (loss) on interest rate derivatives
and investments, (ii) non-cash unrealized gain (loss) on foreign exchange, (iii) non-cash share-based compensation expense,
(iv) non-cash change in finance receivable allowance for credit losses ("ACL"), (v) restructuring and other transaction costs,
and (vi) any unusual and material one-time gains or expenses. Adjusted EBITDA is a measure of performance defined in one of
the Company’s significant bank agreements and is the basis for the Company's Free Cash Flow calculation. Adjusted EBITDA
is therefore included as a non-GAAP measure that is relevant for a wider audience of users of the Company’s financial
reporting.
"Adjusted Operating Income" is Operating Income (Loss), as presented in the consolidated statements of income, adjusted to
exclude amortization of intangible assets and the change in ACL. Adjusted Operating Income is intended to reflect the recurring
income from the Company’s businesses. Amortization of intangible assets, which includes the expense related to broker
relationships and non-compete clauses, is a function of acquisitions. The cost of maintaining the broker relationships after
acquisition, being internally generated intangible assets, cannot be measured and is therefore not recognized as an asset,
meaning that once these acquisition-related intangibles have been fully amortized they are not replenished, and the amortization
expense will cease. The change in the ACL can be calculated from continuity of the ACL in Note 7(c) - Finance Receivables in
the audited consolidated financial statements as the difference between the provision for credit losses and the net charge-offs
during a period. The change in ACL is a non-cash item and reflects our creditor approved formulas for Adjusted EBITDA and
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FOR THE YEAR ENDED DECEMBER 31, 2021
Free Cash Flow that drives our Maximum Permitted Dividends, both relevant measures for users of the Company's financial
reporting.
"Free Cash Flow" or "FCF" is defined as Adjusted EBITDA less maintenance capital expenditures, tax effect of the non-cash
change in the allowance for credit losses and tax expense. Cash receives significant attention from primary users of financial
reporting. Free Cash Flow provides an indication of the cash the Company generates which is available for servicing and
repaying debt, investing for future growth and providing dividends to our shareholders. The FCF measure provides information
relevant to assessing the resilience of the Company to shocks and the ability to act on opportunities. Free Cash Flow is a
calculation that reflects the agreement with one of the Company's significant lenders as to a measure of the cash flow produced
by the Company's businesses in a period. It is also management’s concurrent view that the measure significantly reduces the
impact of large non-cash charges and/or recoveries that do not reflect actual cash flows of the businesses and can vary greatly in
amounts from period to period. See the "EBITDA, Adjusted EBITDA, Free Cash Flow, Maximum Permitted Dividends"
section of this MD&A for a reconciliation of Free Cash Flow to Net Income (Loss).
"Free Cash Flow per diluted share" is defined as FCF divided by the weighted average number of shares outstanding during the
period for income attributable to common shares and Exchangeable Securities (as defined below in the "Statement of Financial
Position" section) on a fully diluted basis.
"FCF L4PQ" is calculated monthly as required by the terms of the Company’s revolving credit facility using the published
results for the four immediately preceding quarters and is the basis for the Maximum Permitted Dividends.
"Maximum Permitted Dividends" for a month is defined (consistent with the definitions included in one of the Company's
significant bank agreements) as 1/12 of 90% of the FCF L4PQ and is the maximum total amount of cash that can be distributed
as dividends and paid for purchases of shares under the Company's normal course issuer bid. This measure is useful for
investors to assess the potential future returns from an investment in the Company and the risk of the dividend component of
those returns becoming constrained.
COMPANY OVERVIEW
As at December 31, 2021, Chesswood's operations consisted of three wholly-owned subsidiaries in the United States and four
subsidiaries in Canada (one of which is wholly-owned):
•
•
•
•
•
•
Pawnee Leasing Corporation ("Pawnee"), which finances micro and small-ticket commercial equipment for small and
medium-sized businesses in the U.S. through the third-party broker channel;
Tandem Finance Inc. ("Tandem"), which sources micro and small-ticket commercial equipment originations to small
and medium-sized businesses through the equipment vendor channel in the U.S.;
Blue Chip Leasing Corporation ("Blue Chip"), which provides commercial equipment financing to small and medium-
sized businesses across Canada;
Vault Credit Corporation ("Vault Credit"), which provides commercial equipment financing and loans to small and
medium-sized businesses across Canada; and
Vault Home Credit Corporation ("Vault Home"), which provides home improvement and other consumer financing
solutions in Canada.
Chesswood Capital Management Inc. ("CCM") and Chesswood Capital Management USA Inc. ("CCM USA") (each
of which are wholly-owned by the Company) will provide private credit alternatives to investors seeking exposure to
loan receivables, including those originated by Chesswood subsidiaries. Each of these entities was incorporated in
December 2021.
On a consolidated basis, at December 31, 2021, the Company had 299 employees (144 employees at December 31, 2020).
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FOR THE YEAR ENDED DECEMBER 31, 2021
As described below (see "Canadian Equipment Financing Segment"), on April 30, 2021, Blue Chip was merged with Vault
Credit under CHW/Vault Holdco Corp. ("Canadian Holdco"). On September 14, 2021, Chesswood Holdings Ltd. acquired 51%
of Vault Home Credit Corporation ("Vault Home") for a subscription price of $1.0 million and also committed to provide an
additional $1.5 million of capital contribution upon request of the Vault Home board of directors, which was advanced in
November 2021.
On January 14, 2022, the Company acquired a 100% ownership interest in Rifco Inc. ("Rifco"), which provides financing for
motor vehicle purchasers in Canada. Through a plan of arrangement under the Business Corporations Act (Alberta).
U.S. EQUIPMENT FINANCING SEGMENT
Pawnee and Tandem are together referred to in the MD&A as the "U.S. Equipment Financing Segment".
The Company’s largest operations are conducted by Pawnee, which, along with Tandem, accounted for 76% of consolidated
revenue in the year ended December 31, 2021. As at December 31, 2021, the U.S. Equipment Financing Segment employed
153 full-time equivalent employees (112 employees at December 31, 2020).
Established in 1982, and located in Fort Collins, Colorado, Pawnee specializes in providing equipment financing of generally
up to US$350,000 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 equipment finance broker firms (also referred to as the "third-party market" or "third-party channel").
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 limits the transaction size for non-
prime businesses as one measure of risk mitigation.
These non-prime market niches are not usually served by most conventional financing sources, as they have a generally 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.
Pawnee’s brokers predominantly originate prime (with "A" credit score) equipment finance transactions versus “B”, "C", and
“Start-up” rated customers. Pawnee’s reliability, ease of service, focus on the broker-channel business and offering of
competitive products has made Pawnee a top tier funding partner to its brokers relative to its competitors for prime originations.
Given the sheer size of the market opportunity, prime originations represent greater than 73% of new originations, and these
volumes are expected to continue to grow as Pawnee’s prime credit products further penetrate Pawnee’s broad broker network.
Tandem offers equipment financing for small and medium-sized businesses of all credit profiles through equipment
manufacturers, distributors and dealers in the U.S. (the "vendor market" or "vendor channel"). Annual originations in the
vendor small-ticket market are estimated to be five times larger than the third-party small-ticket market. In addition to the
overall size of opportunity afforded in the vendor vs. third party originations channel, the vendor originations channel provides
the lessor/lender the opportunity to directly negotiate and partner with the equipment manufacturer or their distribution channel
to enhance the financing offerings through the inclusion of lender risk mitigation, customer rate subsidy, and formal equipment
remarketing arrangements. This channel also provides preferential access to all of the manufacturers' customer financing
requests. Tandem's operations have heightened levels of control, direct access and influence with the equipment sales
organization and their customers in the application process, vendor ongoing assistance in assuring collection effectiveness, and
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FOR THE YEAR ENDED DECEMBER 31, 2021
direct vendor originations. This provides Tandem the ability to make meaningful impacts in the underwriting and portfolio
management activities, resulting in a higher level of throughput efficiency and, to date, reduced portfolio charge offs.
As at December 31, 2021, Tandem’s portfolio represented 31% of Chesswood's overall receivables' portfolio in the U.S.
Tandem leverages the expertise of Pawnee’s operating team and takes a diversified portfolio approach with teams organized
across commercial transportation, construction, healthcare, light industrial and franchise segments. Tandem’s ability to address
the equipment supplier’s wide range of end user credit profiles through a single process is a unique value proposition that
improves the customer financing experience. Tandem focuses its development efforts on equipment manufacturers seeking to
improve their equipment financing experience at the point of sale. The vendor channel generally has a longer business
development and sales cycle than the third-party channel. As a result, equipment vendors and distributors generally form long-
term partnerships with funding partners, documented on long-term program agreements, which are expected to result in
programs that generate originations and revenues over many years.
Tandem is supported by Pawnee's credit, documentation, collection and administrative departments, which provide "back-
office" support to Tandem. Tandem is managed by a highly experienced senior leadership team to guide its ongoing growth
strategy.
Key Aspects of Business Model
Management believes the U.S. Equipment Financing Segment’s long track-record of success is attributable to several key
aspects of its business model, including:
•
•
Credit underwriting parameters designed to mitigate and appropriately price for risk;
A relationship-driven approach to origination through both a well-established and trained network of reputable broker
firms, as well as tenured vendor channel sales representatives soliciting customer relationships through targeted equipment
dealers, manufacturers and vendors;
Portfolio diversification across geographies, industries, equipment classes, brokers, vendors, equipment cost, and credit
classes;
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; a dedicated and efficient servicing and collection
effort; utilization of program and transactional risk mitigation to include risk sharing with equipment vendors and borrower
down payments; and
Tenured, experienced and proven senior management teams.
•
•
•
These five aspects are discussed in greater detail below.
1. Asset quality at the U.S. Equipment Financing Segment begins with underwriting parameters that define a careful
approach to doing business and mitigating risk:
•
•
•
•
•
Generally, the U.S. Equipment Financing Segment finances equipment that is fundamental to the core operations of the
lessee/borrower’s business, reflecting management’s view that payments on “business essential” equipment are among the
least susceptible to default except in the case of business failure;
The U.S. Equipment Financing Segment operates only in select market segments, excluding certain industries considered
higher risk;
Generally, the personal guarantee of at least the major shareholder(s)/owner(s) or all owners are obtained, with acceptable
personal credit profiles a prerequisite for credit approval. For very tenured, usually larger businesses, “corp-only”
consideration may be granted;
Business owners are routinely interviewed for verification purposes prior to the commencement of the lease or loan, with
site inspections conducted for financings as low as US$15,000 (US$100,000 for A-rated credits); and
All scheduled payments for non-prime financings, as well as a majority of prime financings, are paid by direct debit from
the lessee’s/borrower's account, allowing the U.S. Equipment Financing Segment’s collection team to take immediate
action on delinquencies.
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FOR THE YEAR ENDED DECEMBER 31, 2021
2. The U.S. Equipment Financing Segment originates finance receivables through a network of over 600 broker firms
across the U.S., with a relationship-driven approach and service capabilities that have distinguished Pawnee as a first-
choice funder. In addition, through Tandem Finance, originations are developed by experienced equipment finance
professionals directly through manufacturer engaged equipment financing program relationships and endorsed
referrals from Tandem’s dealer, manufacturer and vendor arrangements.
Broker 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. Vendor risk management is accomplished through the specific, pre-identified vendor-channel market
segments, and subsequent development of vendor agreements with individual vendors that provide Tandem with first-right-of-
refusal, loss pools, vendor remarketing and finance subsidies, among other revenue enhancing and loss mitigation strategies.
The U.S. Equipment Financing Segment's service-driven focus strengthens the relationships with its customers, brokers and
vendors, helping to support and expand origination volumes. It has become a funder of choice as a result of its unique
underwriting capabilities that improve efficiency and save time for its brokers and vendors' customers, such as consistent credit
decisions, higher approval rates, rapid response time, a customized online broker portal (for application submissions, tracking
of lease and loan status, documentation, and more) and one-stop shopping for all credit-classes, the latter of which serves as a
distinct, competitive advantage for both Pawnee and Tandem.
3. The U.S. Equipment Financing Segment’s portfolio of leases and loans is well diversified across geography,
equipment types, industries, brokers, vendors, equipment cost, and credit classes.
As at December 31, 2021, the U.S. Equipment Financing Segment's portfolio of 22,396 leases and loans, representing
US$956.9 million in gross finance receivables (excluding residual receivable), was diversified, with:
•
Over 110 equipment categories, with the five largest - construction, auto repair, restaurant, beauty salons, and medical -
accounting for an aggregate of 32.5% of the total number of active leases and loans;
Over 256 industry segments, with no industry representing more than 8.3% of the number of active financings;
No lessee/borrower accounting for more than 0.07% of the total finance receivable balance;
50 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 14.3% and 11.9%, respectively);
The largest broker (excluding Tandem) accounting for 4.8% of gross lease and loan receivables, and the ten largest
(excluding Tandem) accounting for an aggregate of 28.7%; and
Tandem’s vendor channel originations accounted for 31% of gross receivables.
•
•
•
•
•
Portfolio diversification is maintained, and rebalanced as necessary, through management’s regular review of the U.S.
Equipment Financing Segment's portfolio performance for trends that may indicate changes in the economic or competitive
landscape that may necessitate adjustments in the U.S. Equipment Financing Segment's approach to doing business in specific
ticket sizes, credit products, market segments or asset categories. Significant changes in these and other metrics may result in a
detailed review of data, including (among others) specific vendors, brokers, industry or equipment type, equipment cost,
product mix 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 effective pricing for risk, efficient servicing and collection processes,
and other risk management tools.
The U.S. Equipment Financing Segment’s credit process is not the automated scoring procedure typical of high volume
equipment finance companies, although it does use a significant amount of automation, technology and data for efficiencies and
to assist its analysts. Its success in correctly pricing selected credit-worthy businesses is based on a model that engages both
human expertise and 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 thorough credit decisions, including appropriate pricing.
11
FOR THE YEAR ENDED DECEMBER 31, 2021
Additionally, analysts are available to directly assist brokers and vendor-channel sales members 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, the U.S. Equipment Financing Segment emphasizes
the employment and retention of experienced personnel, and clearly delineated collection and portfolio servicing processes.
•
•
The U.S. Equipment Financing Segment had 153 full-time equivalent employees at 2021 fiscal year-end, of which
approximately 30 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 the U.S. Equipment Financing Segment’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 the U.S. Equipment Financing Segment’s Advanced Collection Team. Through a
combination of collecting payments, soliciting broker and vendor remediation assistance, issuing forbearances,
repossessing and selling financed equipment, initiating lawsuits and negotiating settlements, the U.S. Equipment
Financing Segment typically remediates a high percentage of past due accounts.
After 154 days of delinquency, or earlier if the U.S. Equipment Financing Segment 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 periodically assessed by outside professionals with statistical expertise.
The U.S. Equipment Financing Segment’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
vendors, brokers, geographic area, equipment type, industry, transaction size, and product type are among the characteristics
examined in these analyses. Under-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.
5. A tenured senior management team
The U.S. Equipment Financing Segment’s 5-member senior management team has a combined 114 years in the equipment
finance industry and the Pawnee leadership team has been together for over 12 years. The U.S. Equipment Financing
Segment’s President was directly responsible for building out its broker network and credit underwriting in the segment's earlier
years and continues to play an important role in both of these areas. Tandem’s President, has been in the vendor-channel
equipment finance for over 35 years and is highly experienced in equipment finance sales leadership and organization-building.
12
FOR THE YEAR ENDED DECEMBER 31, 2021
U.S. Equipment Financing Segment Finance Receivable Portfolio Statistics
(in US$ thousands except # of leases/loans and %’s)
Number of leases and loans outstanding (#)
Gross lease and loan receivables (“GLR”)
(1)(5)
Residual receivables
Net investment in leases and loans
receivables ("Net Finance Receivables" or
"NFR"), before allowance (6)
Mar 31
2020
19,730
June 30
2020
18,184
Sep 30
2020
17,104
Dec 31
2020
17,211
Mar 31
2021
17,870
June 30
2021
19,042
Sep 30
2021
20,552
Dec 31
2021
22,396
$658,562
$606,309
$556,456
$574,991
$632,262
$709,461
$809,317
$956,936
$21,061
$19,303
$17,883
$17,428
$17,268
$17,595
$17,965
$18,323
$557,064
$518,544
$479,908
$497,982
$547,204
$611,603
$696,041
$822,671
Security deposits ("SD") (nominal value)(4)
$9,123
$8,009
$6,986
$5,965
$5,323
$4,643
$4,124
$3,577
ACL
$32,464
$28,146
$19,259
$16,552
$13,499
$12,125
$12,599
$13,544
ACL as % of NFR net of SD
5.92%
5.51%
4.07%
3.36%
2.49%
2.00%
1.82%
1.65%
Over 31 days delinquency (% of GLR) (2)
2.61%
1.60%
1.91%
1.85%
1.07%
0.87%
0.80%
0.94%
Net charge-offs (recoveries) for the three
months ended (3)
Provision for credit losses for the three
months ended
$5,800
$6,975
$3,762
$4,150
$3,774
$(726)
$(1,253)
$(704)
$17,069
$2,784
$(5,044)
$1,509
$761
$(2,083)
$(748)
$282
Notes:
(1) Excludes residual receivables
(2) Over 31-days delinquency includes non-accrual GLR.
(3) Excludes the “charge-offs” of interest revenue on finance leases and loans on non-accrual leases recognized under IFRS.
(4) Excludes adjustment for discounting security deposits and increasing unearned income for interest savings on security deposits.
(5) At December 31, 2021, approximately 64% of U.S. GLR (excluding residuals) were in the prime market segment.
(6) Excludes unearned income for interest on security deposits
U.S. Equipment Financing Segment Net Finance Receivable Aging Analysis
(US$ thousands)
As at December 31, 2021
As at December 31, 2020
31 - 60
Current 1-30 days
810,698 $
481,547 $
7,790 $
9,789 $
days 61 - 90 days
2,174 $
3,072 $
542 $
1,691 $
$
$
Over 90
days
1,393 $
1,514 $
Total
822,597
497,613
U.S. Equipment Financing Segment Minimum Scheduled Collection of Finance Receivables
(US$ thousands)
0 - 1 year
1 - 2 years
2 - 3 years
3 - 4 years
4 - 5 years
Over 5 years
As at December
31, 2021
As at December
31, 2020
$
316,970
$
257,134
192,836
127,029
58,736
4,231
218,934
166,674
110,296
60,622
17,813
652
Total minimum payments
$
956,936
$
574,991
13
FOR THE YEAR ENDED DECEMBER 31, 2021
U.S. Equipment Financing Segment Lease and Loan Application, Approval and Origination Volumes (in US$ millions)
“Received” reflects all applications for equipment financing received by Pawnee and Tandem, “Approved” are those received
applications that receive an approval by Pawnee and Tandem's credit department and “Funded” refers to previously approved
applications that become actual lease or loan transactions through Pawnee's financing of the customers’ equipment purchase or
lease. Management regularly reviews 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 its approach to doing business in its
market segments. Management reviews application approval data to analyze and predict shifts in the credit quality of applicants.
Pawnee and Tandem refer to total originations Funded, as a percentage of leases and loans Approved, as the “closing ratio”.
CANADIAN EQUIPMENT FINANCING SEGMENT
Blue Chip, Vault Credit, and Vault Home are together referred to in the MD&A as the "Canadian Equipment Financing
Segment".
Chesswood’s Canadian operations have been conducted by Blue Chip, a specialist in micro and small-ticket equipment finance
for small and medium-sized businesses, since 1996. Located in Toronto, Blue Chip provides equipment financing across
Canada, primarily through a nationwide network of more than 60 equipment finance broker firms.
On April 30, 2021, Blue Chip merged with its primary competitor in the Canadian equipment finance sector, Vault Credit. The
merger was achieved through the sales of each of Blue Chip and Vault Credit into the Canadian Holdco, a subsidiary of
Chesswood in which Chesswood owns 51%. Chesswood exercises control of Blue Chip and Vault Credit through the board of
directors of the Canadian Holdco. The change of ownership interest in Blue Chip as a result of the merger was a common
control reorganization accounted for at consolidated book value. The Canadian Holdco is managed by Vault Credit's senior
management team and the integration and alignment of its processes and controls with that of Chesswood was complete as of
December 31, 2021. Figures for our Canadian operations shown in this MD&A and our Financial Statements for any period
prior to the merger only reflect Blue Chip. Vault Credit figures are only accounted for the period following the merger.
The merger with Vault Credit increased the Company’s receivables portfolio in Canada by approximately $194 million (based
on gross contractual receivable amounts as at April 30, 2021) and enables the Company's continued expansion of the Canadian
14
FundedApprovedReceivedQ1 2020Q2 2020Q3 2020Q4 2020Q1 2021Q2 2021Q3 2021Q4 2021$0$50$100$150$200$250$300$350$400$450$500$550$600$650$700$750 FOR THE YEAR ENDED DECEMBER 31, 2021
equipment financing operations by removing a competitor and benefits through the use of Vault Credit’s proprietary
technology. Vault Credit is included in the Canadian Equipment Financing Segment.
On September 14, 2021, Chesswood Holdings Ltd. acquired a number of common shares of Vault Home which constitutes 51%
of the currently outstanding common shares, for a subscription price of $1.0 million and a commitment to provide an aggregate
of $1.5 million of capital contributions upon the request of the Vault Home board of directors (which was fully advanced in
November 2021).Vault Home is incorporated in Ontario and had not yet earned revenue as at the date of acquisition. The
Company exercises control over Vault Home through the ability to control the decisions of Vault Home’s board of directors,
through a priority vote, related to those activities that are most relevant to determining returns. Subsequent to the acquisition,
integration and alignment of Vault Home's processes and controls with that of Chesswood was completed as of December 31,
2021. Vault Home enables the Company to expand into the consumer financing industry.
The Canadian Equipment Financing Segment accounted for 24% of consolidated revenue in the year ended December 31, 2021.
The Canadian Equipment Financing Segment's portfolio risk is mitigated by its diversification across geographies, industries,
equipment types, equipment cost, vendors, brokers and credit classes. The Canadian Equipment Financing Segment had 137
full-time equivalent employees at December 31, 2021 (27 employees at December 31, 2020).
Key Aspects of Business Model
Management believes the Canadian Equipment Financing Segment's track record of success is attributable to several key
aspects of its business model, including:
•
•
•
•
Strong originations by targeting small and medium-sized businesses across Canada;
Portfolio diversification across geographies, industries, equipment classes, origination source, vendors, equipment
cost, and credit classes;
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; and
Strong negotiations securing a competitive cost of funds.
1. The Canadian Equipment Financing Segment has successfully generated originations and earnings by filling a market
void created by the tendency of Canadian bank competitors to have slower processes and a preference to finance larger-
ticket equipment, and by the Canadian Equipment Financing Segment’s nimbleness in addressing customer needs as an
efficient and consistent funding source.
•
•
•
•
The Canadian Equipment Financing Segment's value proposition to equipment leasing 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.
Enhanced by a customized software system, the Canadian Equipment Financing Segment has a digitized application,
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.
The Canadian Equipment Financing Segment also has the expertise in financial analysis and detailed documentation to
meet the underwriting requirements of both small and mid-ticket market segments. The Canadian Equipment
Financing Segment is intended to prudently increase its average loan amount while still maintaining its focus on
portfolio stratification and industry leading service levels as its equipment leasing portfolio continues to grow.
In addition to increasing market share and a focus on mid-sized transactions, the Canadian Equipment Financing
Segment’s other growth initiatives are its non-equipment leasing products. The Canadian Equipment Financing
Segment has originated, underwritten and funded a well performing $53.5 million portfolio of business loans and in
September launched a consumer finance division.
2. The Canadian Equipment Financing Segment’s portfolio risk is mitigated by its diversification across geography,
origination sources, industry, equipment type, equipment cost and credit class.
As at December 31, 2021, the Canadian Equipment Financing Segment's gross finance receivables portfolio of $442.5 million,
consisting of 22,696 leases and loans, was well diversified:
15
FOR THE YEAR ENDED DECEMBER 31, 2021
•
•
•
•
Ontario represented 45.2% of net finance receivables, Quebec represented 17.8% and 37.0% were from other
provinces/territories;
The five largest equipment categories by volume - construction, industrial, trucks, trailers, miscellaneous equipment,
and machine tools - accounted for an aggregate of 61.5% of net finance receivables;
Of its network of more than 60 originators, the largest originator by dollar volume during 2021 accounted for 25.1% of
originations; and
The four largest brokers by dollars financed accounted for and aggregate of approximately 58.3% of originations
during 2021.
3. Effective risk management has made the Canadian Equipment Financing Segment a solid performer in its markets
throughout business cycles.
•
The Canadian Equipment Financing Segment has a focus on thorough credit analysis, consistent decision-making,
risk-based pricing, careful originator selection and education, a strong collection effort, and management’s continual
evaluation of portfolio performance against key performance indicators.
4. The Canadian Equipment Financing Segment’s performance has been enhanced by its success in negotiating a
competitive cost of funds.
•
•
•
•
The majority of the Canadian Equipment Financing Segment’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 the Canadian Equipment Financing Segment through a letter of guarantee
in favour of the funder.
The Canadian Equipment Financing Segment’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.
The Canadian Equipment Financing Segment also uses Chesswood's revolving credit facility to provide operational
and warehouse funding.
The Canadian Equipment Financing Segment recognizes its revenue over the full term of its finance receivables and
not through "gain-on-sale" accounting.
16
FOR THE YEAR ENDED DECEMBER 31, 2021
Canadian Equipment Financing Segment Equipment Finance Receivable Portfolio Statistics
(in $ thousands except # of leases/loans and %)
Number of leases and loans
outstanding (#)
Gross lease and loan receivables (“GLR”)
(1)
Mar 31
2020
June 30
2020
Sep 30
2020
Dec 31
2020
Mar 31
2021
June 30
2021
Sep 30
2021
Dec 31
2021
12,793
12,000
11,345
10,561
9,759
20,310
21,441
22,696
$169,185
$154,501
$143,370
$134,878
$120,762
$331,375
$377,054
$434,983
Residual Receivables
$150
$139
$131
$121
$105
$5,988
$6,798
$7,537
Net Finance Receivables, before
allowance(2)
ACL
$151,307
$138,812
$128,846
$121,085
$108,591
$300,726
$343,668
$397,915
$2,950
$3,331
$3,672
$3,289
$2,715
$4,229
$5,472
$5,216
ACL as % of NFR
1.95%
2.40%
2.85%
2.72%
2.50%
1.41%
1.59%
1.31%
Over 31 days delinquency
(% of NFR)
Net charge-offs (recoveries) for the three
months ended
Provision for credit losses for the three-
months ended
Notes:
(1) Excludes residual receivables
(2) Excludes cash reserve account
0.63%
0.54%
1.22%
0.73%
0.63%
0.27%
0.44%
0.24%
$668
$863
$822
$485
$71
($29)
$104
$355
$1,246
$1,244
$1,162
$102
($433)
$1,400
$1,362
$99
Canadian Equipment Financing Segment Finance Receivable Aging Analysis
($ thousands)
As at December 31, 2021
As at December 31, 2020
31 - 60
Current 1-30 days
394,240 $
118,954 $
2,682 $
891 $
$
$
days 61 - 90 days
548 $
571 $
356 $
286 $
Over 90
days
89 $
383 $
Total
397,915
121,085
Canadian Equipment Financing Segment Minimum Scheduled Collection of Finance Receivables
($ thousands)
0 - 1 year
1 - 2 years
2 - 3 years
3 - 4 years
4 - 5 years
Over 5 years
As at December
31, 2021
As at December
31, 2020
$
183,416
$
110,200
75,104
43,873
20,812
1,578
59,782
40,985
21,823
9,386
2,677
225
Total minimum payments
$
434,983
$
134,878
17
Canadian Equipment Financing Segment Lease and Loan Application, Approval and Origination Volume (in $ millions)
FOR THE YEAR ENDED DECEMBER 31, 2021
“Received” reflects all applications for equipment financing received by the Canadian Equipment Financing Segment,
“Approved” are those received applications that receive an approval by the Canadian Equipment Financing Segment's credit
department and “Funded” refers to previously approved applications that become actual lease or loan transactions through
Canadian Equipment Financing Segment's financing of the customers’ equipment purchase or lease. Management regularly
reviews 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 its approach to doing business in its market segments.
Management reviews application approval data to analyze and predict shifts in the credit quality of applicants. The Canadian
Equipment Financing Segment refers to total originations Funded, as a percentage of leases and loans Approved, as the “closing
ratio”. Vault Credit and Vault Home applications only included applications subsequent to April 30, 2021 and September 14,
2021, respectively.
18
FundedApprovedReceivedQ1 2020Q2 2020Q3 2020Q4 2020Q1 2021Q2 2021Q3 2021Q4 2021$25$50$75$100$125$150$175$200$225$250$275 FOR THE YEAR ENDED DECEMBER 31, 2021
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2021 AND 2020
U.S. dollar results for the year ended December 31, 2021 were converted at an exchange rate of 1.2535, which was the average
exchange rate for the year (2020 - 1.3415).
Financial Highlights
•
•
•
•
•
•
The successful merger with Vault Credit on April 30, 2021 has expanded the Canadian Equipment Financing Segment
and its exposure in the Canadian market. Subsequent to the acquisition, Blue Chip and Vault Credit have contributed
total originations of $233.9 million.
On September 14, 2021, Chesswood acquired a controlling interest in Vault Home, expanding its product offerings by
entering into the consumer financing industry.
On October 22, 2021, Pawnee completed a fixed-rate US$356.1 million asset-backed term securitization that is
collateralized by receivables from Pawnee's portfolio of equipment leases and loans. Proceeds from the securitization
were used to repay Pawnee's warehouse line and Chesswood's senior revolving credit facility. The effective interest
rate was approximately 2.01% (including amortization of origination costs).
On October 27, 2021, Chesswood announced its proposed acquisition of Rifco, a key player in the Canadian
alternative auto financing industry. The acquisition closed subsequent to year end, on January 14, 2022.
Both the U.S. and Canadian Equipment Financing Segments continued to experience strong originations with total
annual originations of $934.0 million, an increase of 232.7% from the prior year. The increase is mainly due to the
expansion of both the Canadian and U.S. segments.
Chesswood's strong 2021 returns has achieved a return on equity of 19.0%.
19
Summary of Financial Results and Key Measures
FOR THE YEAR ENDED DECEMBER 31, 2021
($ thousands, except per share figures)
Revenue
Finance margin before expenses
Operating income
Income (loss) before taxes
Provision for tax expense
Net income (loss)
Basic earnings (loss) per share (1)
Diluted earnings (loss) per share (1)
Total assets
Long-term liabilities
Other Data
Adjusted Operating Income (2)
EBITDA (2)
Adjusted EBITDA (2)
Free Cash Flow(2)
Free Cash Flow per diluted share(2)
Return on Equity (5)
Dividends declared (3)
Dividends declared per share (4)
Segment Financials
Year ended December 31,
2021
2020
$
138,083
$
117,056
106,224
41,061
42,071
10,902
31,169
1.75
1.59
1,604,947
1,385,201
$
41,010
$
76,642
44,920
33,573
1.72
19.0 %
6,143
0.32
62,891
21,601
(8,118)
407
(8,525)
(0.48)
(0.48)
827,436
669,089
17,204
43,780
19,341
19,606
1.10
(5.7) %
5,053
0.285
91,481
23,936
11,415
1,494
612,487
243,044
13.2 %
4.1 %
128,391
37,709
8.2 %
2.0 %
U.S. Equipment Financing Segment interest revenue
$
94,220
$
U.S. Equipment Financing Segment operating income
Canadian Equipment Financing Segment interest revenue
Canadian Equipment Financing Segment operating income
42,933
25,892
4,513
Portfolio Metrics
U.S. Equipment Financing Segment finance receivables
$
1,025,567
$
U.S. Equipment Financing Segment originations
U.S. Equipment Financing Segment interest revenue yield
U.S. Equipment Financing Segment net charge-offs as a
percentage of finance receivables
694,699
11.8 %
0.2 %
Canadian Equipment Financing Segment finance receivables
$
414,160
$
Canadian Equipment Financing Segment originations
Canadian Equipment Financing Segment interest revenue yield
Canadian Equipment Financing Segment net charge-offs as a
percentage of finance receivables
239,335
10.2 %
0.2 %
(1) Based on weighted average number of common shares outstanding (basic and diluted respectively) during the year for income attributable to
common shareholders.
(2) Adjusted Operating Income, EBITDA, Adjusted EBITDA, and Free Cash Flow are non-GAAP measures. See “Non-GAAP Measures” above for
the definitions.
(3) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial Position") and special
warrants.
(4) Dividends declared on common shares, special warrants and Exchangeable Securities.
20
FOR THE YEAR ENDED DECEMBER 31, 2021
(5) Return on equity is the sum of the current quarter and prior three quarters' Net Income (Loss) divided by the yearly average of total Equity, as
presented on the consolidated statements of financial position.
The Company reported consolidated net income of $31.2 million in the year ended December 31, 2021, compared to a net loss
of $8.5 million recorded in 2020, an increase of $39.7 million. The increase was primarily a result of a lower provision for
credit losses of $25.5 million which was due to a decrease in net charge-offs and lower provisions from improved collections
and a stronger portfolio performance, respectively. In addition, the absence of goodwill impairment and restructuring charges of
$20.9 million and $9.3 million, respectively, which were the result of COVID-19 and management retirements at Chesswood in
2020, increased current year net income in comparison.
Net income was negatively impacted by strengthening of the Canadian dollar and an increase in interest expense of
$3.2 million. In addition, there was an increase in personnel and other expenses of $23.5 million, and a higher tax expense of
$10.5 million in the year ended December 31, 2021, compared to 2020.
Return on equity increased during the year ended December 31, 2021 by 24.7% year over year, primarily due to the increase in
net income of $39.7 million offset partially by an increase in average equity in 2021 of $15.6 million primarily related to the
equity issuances from the merger of Blue Chip with Vault Credit.
($ thousands)
Net income (loss)
Average equity
Return on equity
Year ended December 31,
2021
2020
$
31,169
164,399
$
19.0 %
(8,525)
148,750
(5.7) %
The table below is primarily provided to illustrate the results of operations for Chesswood before any change to the non-cash
allowance for credit losses and amortization of intangible assets - referred to below as Adjusted Operating Income. In
management’s opinion, this measure provides users with a more meaningful comparison of our operating results from period to
period as it eliminates the often large swing in results due to IFRS 9 - the non-cash allowance for credit losses.
21
FOR THE YEAR ENDED DECEMBER 31, 2021
Average FX rate
($ thousands)
Revenue
Interest expense
Net charge-offs
Expenses:
Personnel expenses
Other expenses
Depreciation
Adjusted operating income(1)
Decrease in ACL
Amortization - intangible assets
Operating Income
Restructuring and other transaction costs(2)
Goodwill and intangible asset impairment(3)
Mark-to-market gain (loss) on interest rate derivative
Other non-cash FMV charges and unrealized FX
Income (loss) before taxes
Tax expense
Net Income (Loss)
1.2535
1.3415
Year ended December 31,
2021
2020
Change
$
138,083 $
117,056 $
21,027
(31,671)
(2,028)
104,384
(35,813)
(26,450)
(1,111)
41,010
1,840
(1,789)
41,061
—
—
344
666
42,071
10,902
(28,521)
(31,374)
57,161
(20,123)
(18,618)
(1,216)
17,204
5,730
(1,333)
21,601
(9,250)
(20,828)
(118)
477
(8,118)
407
$
31,169 $
(8,525) $
(3,150)
29,346
47,223
(15,690)
(7,832)
105
23,806
(3,890)
(456)
19,460
9,250
20,828
462
189
50,189
10,495
39,694
(1) Adjusted Operating Income is a non-GAAP measures. See “Non-GAAP Measures” above for the definitions. See the Adjusted EBITDA, Free
Cash Flow, Maximum Permitted Dividend section of this MD&A for a reconciliation of Free Cash Flow to net income (loss).
(2) Within the COVID-19 induced restructuring and other transaction costs, the Company recorded $3.2 million in severance costs resulting from
employee voluntary retirements and staff reductions and $0.7 million in transaction costs. The Company also incurred $2.0 million in amendment
fees specific to COVID-19 issues related to its revolving credit facility. The Company expensed $2.5 million in financing costs related to
restructuring Pawnee's debt facilities in the third quarter of 2020.
(3) As a result of the unfavorable economic operating conditions caused by uncertainties relating to COVID-19, an interim impairment test was
performed at March 31, 2020. Based on this assessment, management recorded an $11.9 million goodwill impairment. An additional $8.96 million
in goodwill and intangible asset impairment was also recorded at December 31, 2020.
By segment, the U.S. Equipment Financing Segment's interest revenue on leases and loans totaled $94.2 million, an increase of
$2.7 million year-over-year. The increase was caused by a US$118.0 million increase in the average portfolio size due to lower
originations in Q4 2020 caused by COVID-19 and continuously growing originations since the last quarter of 2020. As a result,
the December 31, 2021 net portfolio size (before ACL) was US$324.7 million higher than at December 31, 2020. The impact of
the portfolio growth was offset by a 6.6% decrease in foreign exchange year-over-year and a 1.4% decrease in the interest
revenue yield during the year. The average annualized interest revenue yield earned on U.S. based net finance receivables was
11.8% in the year ended December 31, 2021, compared to 13.2% in prior year, reflecting an increase in the overall percentage
of lower yield prime receivables.
(US$ thousands)
Interest revenue on finance leases and loans
Average NFR, before allowance
Interest revenue yield
$
$
Year ended December 31,
2021
2020
75,166
635,100
$
$
11.8 %
68,193
517,072
13.2 %
22
FOR THE YEAR ENDED DECEMBER 31, 2021
For U.S. Equipment Financing Segment, the non-prime portfolio continued to generate strong risk-adjusted returns and
profitability, while the continued expansion of the prime portfolio influences the overall weighted-average portfolio yield.
Ancillary finance and other fee income increased by $0.7 million year-over-year and was negatively impacted by foreign
exchange.
The U.S. Equipment Financing Segment's interest expense increased by $0.1 million compared to the same period in the prior
year. The increase in interest expense is driven primarily by a 5.7% increase in average debt outstanding throughout the year.
This increase was offset by the decrease in average foreign exchange (approximately $1.7 million of the decrease) and a lower
cost of funds on the Chesswood revolving credit facility, the segment's life insurance and warehouse facilities, and the 2021
asset backed securitization.
The U.S. Equipment Financing Segment's provision for credit losses decreased by $24.1 million in the year ended December
31, 2021, compared to the prior year as a result of a decrease in the change in ACL of US$1.9 million as well as a better
performing portfolio, as evidenced by a decrease of US$20.1 million in actual net charge offs. In the year ended December 31,
2021, the U.S. segment's actual net charge-offs were 0.2% of average finance receivables (before ACL) compared to 4.1% in
the prior year. The improved performance was reflected in the provision rate, resulting in a $10.2 million decrease.
(US$ thousands)
Impact of loan book growth
Impact of change in provision rate during the
period
Change in ACL
Net charge-offs
Provision for credit losses
Average NFR, before allowance
Charge-offs as a percentage of finance
receivables
$
$
$
Year ended December 31,
2021
2020
10,806
$
(1,358)
(13,814)
(3,008)
1,220
(1,788)
635,100
$
$
(3,597)
(4,955)
21,272
16,317
517,072
0.2 %
4.1 %
The U.S. segment's 31 days past due delinquency at December 31, 2021 decreased by 0.9% year-over-year (compared to a year-
over-year decrease of 0.5% in 2020), which contributed to the decrease in the ACL at December 31, 2021. The ACL for new
finance receivables increased by $12.2 million due to higher originations year-over-year. The decrease in the foreign exchange
rate decreased the provision for credit losses by $0.2 million compared to the prior year.
The U.S. Equipment Financing Segment's personnel expenses (including share-based compensation) increased by $7.2 million
year-over-year, primarily due to having 41 more staff during the year ended December 31, 2021 compared to the prior year and
a one-time issuance of restricted share units ("RSUs") to the segment's personnel in the fourth quarter.
During the year ended December 31, 2021, the operating income from the U.S. Equipment Financing Segment's operations
increased by $19.0 million compared with the prior year, mainly due to higher average NFR, before allowance, and lower
provision for credit losses partially offset by lower interest revenue yield, increased personnel expenses (including higher share-
based compensation), and the strengthening of the Canadian dollar.
The Canadian Equipment Financing Segment generated revenue of $32.8 million during the year ended December 31, 2021
compared to $15.2 million in the prior year, an increase of $17.6 million, or 116%. The Canadian Equipment Financing
Segment 's average net investment in finance receivables (before ACL) increased approximately $114.6 million in the year
ended December 31, 2021, compared to the prior year, largely due to the Blue Chip and Vault Credit merger and Vault Credit's
continued expansion in the Canadian equipment leasing market. In addition, the average number of finance receivable contracts
outstanding increased by 4,979 in the year ended December 31, 2021 compared to the prior year. In the year ended December
31, 2021, the interest revenue yield of 10.2% earned on the Canadian Equipment Financing Segment 's net finance receivables
has increased from 8.2% in 2020.
23
FOR THE YEAR ENDED DECEMBER 31, 2021
($ thousands)
Interest revenue
Average NFR, before allowance
Interest revenue yield
Year ended December 31,
2021
2020
$
25,892
254,397
$
10.2 %
11,415
139,778
8.2 %
The Canadian Equipment Financing Segment's interest expense increased by $3.8 million due to higher average debt
outstanding by approximately $105.3 million despite a lower cost of funds on its securitization facilities.
The Canadian Equipment Financing Segment 's provision for credit loss decreased by $1.3 million in the year ended December
31, 2021, compared to the prior year as a result of a better performing portfolio, as evidenced by a decrease in actual net charge-
offs. This was offset by the recognition of the expected credit losses on leases acquired through the merger with Vault Credit.
($ thousands)
Impact of loan book growth
Impact of change in provision rate during the
year
Change in ACL
Net charge-offs
Provision for credit losses
Average NFR, before allowance
Charge-offs as a percentage of finance
receivables
$
$
$
Year ended December 31,
2021
2020
7,514
$
(556)
(5,587)
1,927
501
2,428
254,397
$
$
1,472
916
2,838
3,754
139,778
0.2 %
2.0 %
The Canadian Equipment Financing Segment's operating income totaled $4.5 million in the year ended December 31, 2021,
compared to $1.5 million in the prior year, an increase of $3.0 million, primarily due to the increase in revenue on leases and
lower provision for credit losses offset by higher interest expense and increases in personnel expenses and other general
expenses. The increase in personnel expenses of $6.9 million was primarily due to the merger of Blue Chip with Vault Credit,
which resulted in an increase of 110 employees during the year ended December 31, 2021, compared to the prior year, and the
segment's continued expansion into the Canadian equipment leasing market. The increase in other expenses of $4.6 million is a
function of increased originations, the segment's technology upgrades, and dividend payment to the non-controlling
shareholders of $0.8 million.
On a consolidated basis, the provision for taxes for the year ended December 31, 2021, was $10.9 million, compared to
$0.4 million expense in the prior year. The change was driven by the improvement in the results of operations. The effective tax
rate differs from the Canadian statutory tax rate due to withholding taxes and permanent differences between accounting and
taxable income, which include share-based compensation expense.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020
U.S. dollar results for the three months ended December 31, 2021, were converted at an exchange rate of 1.2600, which was the
average exchange rate for Q4 2021 (Q4 2020 - 1.3321).
24
Summary of Financial Results and Key Measures
FOR THE YEAR ENDED DECEMBER 31, 2021
As at and for the quarter-ended
2020
2021
($ thousands, except per share figures)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Revenue
$ 33,313
$ 30,011
$ 27,337
$ 26.395
$ 26,309
$ 30,524
$ 37,007
$ 44,243
Finance margin before expenses
1,047
17,249
26,139
18,456
19,954
23,926
27,752
34,592
Operating income
Income (loss) before tax
Provision for taxes expense (recovery)
Net income (loss)
Basic earnings (loss) per share (1)
Diluted earnings (loss) per share (1)
(9,868)
7,784
16,448
(22,527)
2,160
13,681
(2,700)
(19,827)
(1.12)
(1.10)
753
1,407
0.08
0.06
3,877
9,804
0.55
0.56
7,237
(1,432)
(1,523)
91
0.01
0.00
8,879
10,610
11,000
10,572
8,979
11,036
12,335
2,666
6,313
0.36
0.35
3,224
7,812
0.43
0.40
3,187
9,148
0.49
0.45
9,721
1,825
7,896
0.46
0.40
Total assets
Long-term liabilities
1,011,698
907,987
844,920
827,436
868,715
1,188,925
1,391,782
1,604,947
852,448
749,765
681,167
668,749
707,962
995,837
1,184,647
1,385,201
Other Data
Adjusted operating income (2)
EBITDA (2)
Adjusted EBITDA (2)
Free Cash Flow(2)
Free Cash Flow per diluted share(2)
Return on Equity (5)
Dividends declared (3)
Dividends declared per share (4)
Segment Financials
U.S. Equipment Financing Segment interest
revenue
U.S. Equipment Financing Segment operating
income
Canadian Equipment Financing Segment
interest revenue
Canadian Equipment Financing Segment
operating income
Portfolio Metrics
U.S. Equipment Financing Segment finance
receivables
U.S. Equipment Financing Segment
originations
U.S. Equipment Financing Segment interest
revenue yield
U.S. Equipment Financing Segment net
charge-offs as a percentage of finance
receivables
Canadian Equipment Financing Segment
finance receivables
Canadian Equipment Financing Segment
originations
Canadian Equipment Financing Segment
interest revenue yield
Canadian Equipment Financing Segment net
charge-offs as a percentage of finance
receivables
$ 5,780
$ 2,823
$ 5,016
$ 3,585
$ 4,773
$ 10,819
$ 13,376
$ 12,042
(1,963)
10,190
21,393
14,160
15,445
19,397
22,006
19,794
6,266
4,243
0.24
(53.4)%
3,723
0.21
3,295
3,833
0.22
4.0%
620
0.035
5,343
4,591
0.26
27.6%
—
—
4,437
6,939
0.39
0.3%
710
0.04
5,266
11,324
13,992
14,338
3,756
0.21
8,143
10,188
11,486
0.42
0.51
0.56
17.8%
20.0%
20.9%
17.1%
1,055
0.06
1,566
0.08
1,766
0.09
1,756
0.09
$26,181
$23,712
$21,641
$19,947
$20,597
$21,623
$24,279
$27,721
(8,864)
8,235
17,156
7,409
8,509
11,947
12,601
9,876
3,166
2,925
2,710
2,614
2,322
5,439
7,887
10,244
93
118
(37)
1,320
1,602
147
418
2,346
$743,308
$667,534
$613,632
$612,487
$670,742
$742,628
$870,449
$1,025,567
103,447
19,799
25,493
94,305
128,791
147,670
178,613
239,625
14.3 %
12.7 %
13.0 %
12.2 %
11.9 %
12.0 %
11.9 %
11.7 %
4.4 %
5.3 %
2.5 %
3.4 %
2.9 %
(0.5) %
— %
(0.3) %
$152,647
$144,214
$134,468
$128,391
$112,169
$313,076
$357,379
$414,160
12,993
6,117
8,509
10,090
4,707
49,748
83,325
101,555
8.2 %
8.1 %
8.1 %
8.3 %
8.1 %
10.6 %
9.8 %
11.1 %
1.7 %
2.4 %
2.4 %
1.5 %
0.2 %
(0.1) %
0.1 %
0.4 %
(1) Based on weighted average shares outstanding during the period for income attributable to common shareholders.
25
FOR THE YEAR ENDED DECEMBER 31, 2021
(2) Adjusted EBITDA, EBITDA, and Free Cash Flow are non-GAAP measures. See “Non-GAAP Measures” above for the definitions.
(3) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial Position").
(4) Dividends declared on common shares and Exchangeable Securities.
(5) Return on equity is the current quarter Net Income (Loss) annualized (multiplied by four) divided by the quarterly average of total Equity, as
presented on the consolidated statements of financial position.
The calculation of the basic and diluted earnings (loss) per share for three months ended is based on the following table:
Weighted average number of common shares
outstanding
Dilutive effect of options
Dilutive effect of restricted share units
Dilutive effect of special warrants
Weighted average common shares outstanding for
diluted earnings per share
Options and RSUs excluded from calculation of
diluted shares for the period due to their anti-dilutive
effect
For the three months ended
December 31,
2021
2020
16,571,698
16,286,486
462,696
393,225
1,466,667
27,209
24,630
—
18,894,286
16,338,325
265,000
2,538,939
The Company reported consolidated net income of $7.9 million for the three months ended December 31, 2021, compared to
$0.1 million in the same period of 2020, an increase of $7.8 million year-over-year.
Higher revenue levels were considerably offset by increased interest expense, higher personnel costs arising from the growth in
the Company and restricted share unit issuances during the quarter, and greater other expenses related to technology upgrades.
In addition, the absence of a $9.0 million goodwill and intangible asset impairment charge due to COVID-19 recorded in the
same period in 2020,also contributed to the improvement in net income.
Return on equity increased for the three months ended December 31, 2021 by 16.8% compared to the same period in 2020,
primarily due to the increase in net income of $7.8 million offset by an increase in average equity of $40.5 million primarily
related to the equity issuances as part of the merger of Blue Chip with Vault Credit.
($ thousands)
Net income (loss)
Annualized
Average equity
Return on equity
Three months ended December 31,
2021
2020
$
7,896
$
x 4
184,179
17.1 %
91
x 4
143,667
0.3 %
The table below is primarily provided in order to illustrate the results of operations for Chesswood before any change to the
non-cash allowance for credit losses, and amortization of intangible assets - referred to below as Adjusted Operating Income. In
management’s opinion, this measure provides readers with a more meaningful comparison of our operating results from period
to period as it eliminates the often large swings in results due to IFRS 9 - the non-cash allowance for credit losses.
26
FOR THE YEAR ENDED DECEMBER 31, 2021
Average FX rate
($ thousands)
Revenue
Interest expense
Net recoveries (net charge-offs)
Expenses:
Personnel
Other expenses
Depreciation
Adjusted operating income(1)
Decrease (increase) in ACL
Amortization of intangible assets
Operating income
Restructuring and other transaction costs
Goodwill and intangible impairment(2)
Mark-to-market gain (loss) on interest rate derivative
Other non-cash FMV charges and unrealized FX
Income before taxes
Tax recovery (expense)
Net income
1.2603
1.3030
Three months ended December 31,
2021
2020
Change
$
44,243 $
26,395 $
17,848
(9,202)
472
35,513
(14,207)
(8,942)
(322)
12,042
(921)
(549)
10,572
—
—
—
(851)
9,721
(1,825)
(6,000)
(6,140)
14,255
(5,625)
(4,962)
(298)
3,370
4,201
(334)
7,237
—
(8,960)
133
158
(1,432)
1,523
(3,202)
6,612
21,258
(8,582)
(3,980)
(24)
8,672
(5,122)
(215)
3,335
—
8,960
(133)
(1,009)
11,153
(3,348)
$
7,896 $
91 $
7,805
(1) Adjusted Operating Income is a non-GAAP measures. See “Non-GAAP Measures” above for the definitions. See Adjusted EBITDA,
Free Cash Flow, Maximum Permitted Dividend section of this MD&A for a reconciliation of Free Cash Flow to net income.
(2) As a result of the unfavorable economic operating conditions caused by uncertainties relating to COVID-19, the Company recorded intangible
asset impairment of $4.7 million and an additional goodwill impairment of $4.3 million in the fourth quarter of 2020.
The U.S. Equipment Financing Segment's interest revenue on leases and loans totaled $27.7 million, an increase of $7.8 million
year-over-year in the three-month period, as a result of a 55.3% increase in average net investment in finance receivables
(before ACL), an increase of US$270.4 million to US$759.4 million in the three months ended December 31, 2021 compared to
the same period in the prior year. This was partially offset by the decrease in the average yield earned during the period (11.7%
compared to 12.2% in the same period in the prior year). The decrease in overall yield percentage was due to the continuing
growth in the lower yield prime segment of the portfolio that changes the overall product mix toward prime from non-prime.
The U.S. non-prime portfolio continues to be a very important component of the business that generates strong earnings and
cash flow while the expanding suite of products and portfolio mix continues its shift towards a greater concentration in the
prime market. The decrease in the foreign exchange rate also decreased interest revenue in the period by $0.9 million over the
same quarter in the prior year.
(US$ thousands)
Interest revenue on finance leases and loans
Annualized
Average NFR, before allowance
Interest revenue yield
$
$
Three months ended December 31,
2021
2020
22,115
x 4
759,356
11.7 %
$
$
14,869
x 4
488,945
12.2 %
27
FOR THE YEAR ENDED DECEMBER 31, 2021
The U.S. Equipment Financing Segment's interest expense increased by $2.0 million in the three months ended December 31,
2021 compared to the same period in the prior year as a result of increased average debt outstanding throughout the period
($219.0 million higher compared to the same period in 2020) as well as a higher cost of funds on the Chesswood revolving
credit facility. This increased interest expense was partially offset by the asset-backed securitization in October 2021, which
lowered Chesswood's overall cost of funds.
The U.S. Equipment Financing Segment's provision for credit losses decreased by US$1.2 million in the three months ended
December 31, 2021 compared to the same period in the prior year as a result of the reversal of provision for credit losses
recorded in the fourth quarter of 2020 resulting in an increase of US$3.7 million in the change in ACL compared to the same
quarter in the prior year, offset by a decrease in net charge-offs of US$4.9 million.
(US$ thousands)
Impact of loan book growth
Impact of change in provision rate during the
period
Change in ACL
Net charge-offs
Provision for credit losses
Net charge-offs annualized (x4)
Average NFR, before allowance
Charge-offs as a percentage of finance
receivables
$
$
$
$
Three months ended December 31,
2021
2020
4,214
$
742
(3,269)
945
(663)
282
(2,652)
759,356
(0.3) %
$
$
$
(3,449)
(2,707)
4,216
1,509
16.864
488,945
3.4 %
Personnel expenses in the U.S. Equipment Financing Segment increased by $1.8 million compared to the same period in the
prior year due to an increase in the number of staff of 41 during the three months ended December 31, 2021. There was also an
increase in share based compensation expense of $2.3 million compared to the same period in 2020 due to a one-time grant of
300,000 RSUs to the U.S. segment's personnel in November 2021. The U.S. Equipment Financing Segment's other expenses
also increased by $1.2 million mainly related to technology upgrade costs for Tandem.
The Canadian Equipment Financing Segment's results for the quarter ended December 31, 2021 were significantly impacted by
the acquisition of Vault Credit on April 30, 2021. The segment generated revenue of $13.1 million during the three months
ended December 31, 2021, an increase of $9.6 million from the same period in the prior year. The Canadian Equipment
Financing Segment's average net investment in finance receivables (before ACL) increased approximately $245.5 million in the
three months ended December 31, 2021, compared to the same period in the prior year. The average annualized interest revenue
yield earned on the Canadian Equipment Financing Segment 's net finance receivables increased by 2.8%, to 11.1%, during the
period compared to the same period in the prior year. The Canadian Equipment Financing Segment's interest expense increased
by $2.0 million due to approximately $232.4 million higher average debt outstanding.
($ thousands)
Interest revenue
Annualized
Average NFR, before allowance
Interest revenue yield
Three months ended December 31,
2021
2020
$
$
10,244
x 4
370,792
11.1 %
$
$
2,614
x 4
125,303
8.3 %
The Canadian Equipment Financing Segment's provision for credit losses was consistent with the same period in the prior year.
The change in the provision for credit losses is the result of a decrease in the change in ACL of $0.1 million, partially offset by
a decrease in net charge offs of $0.1 million.
28
FOR THE YEAR ENDED DECEMBER 31, 2021
($ thousands)
Impact of loan book growth
Impact of change in provision rate during the
period
Change in ACL
Net charge-offs
Provision for credit losses
Net charge-offs annualized (x4)
Average NFR, before allowance
Charge-offs as a percentage of finance
receivables
$
$
$
$
Three months ended December 31,
2021
2020
$
$
$
$
1,468
(1,724)
(256)
355
99
1,420
370,792
0.4 %
(116)
(267)
(383)
485
102
1,940
125,303
1.5 %
The Canadian Equipment Financing Segment's personnel expenses also increased by $4.1 million compared to the same period
in the prior year to $4.9 million as a result of the merger with Vault Credit. The number of employees in the three months ended
December 31, 2021, increased by 110 compared to the same period in 2020. The increase in other expenses of $2.1 million is a
function of increased originations, the segment's technology upgrades, and dividend payment to the non-controlling
shareholders of $0.8 million.
Overall, the Canadian Equipment Financing Segment 's operating income totaled $2.3 million in the three months ended
December 31, 2021, compared to income of $1.3 million in the same period in the prior year. The increased operating income is
the result of higher revenue levels being partially offset by increased interest, personnel, and other expenses. The main drivers
of the expenses were related to the merger of Blue Chip with Vault Credit, the segment's continued expansion into the Canadian
equipment leasing market, and an increase in the average number of staff during the three months ended December 31, 2021.
The provision for taxes for the consolidated entity during the three months ended December 31, 2021 was an expense of $1.8
million compared to a recovery of $1.5 million in the same period in the prior year. The increase of $3.3 million is primarily
driven by the higher income before taxes generated in the quarter. The effective tax rate differs from the Canadian statutory tax
rate due to permanent differences between accounting and taxable income.
29
($ 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
Amortization - intangible assets
Operating income (loss)
Gain on interest rate derivative
FOR THE YEAR ENDED DECEMBER 31, 2021
Three months ended December 31, 2021
Equipment
Financing -
U.S.
27,721 $
$
Equipment
Financing -
Canada
Corporate
Overhead
- Canada
$
Total
— $ 37,965
3,384
(7,369)
(350)
23,386
5,686
2,345
5,257
222
—
9,876
—
—
9,876
10,244
2,894
(2,632)
(99)
10,407
4,930
(5)
2,487
100
549
2,346
—
111
2,457
202
2,255
—
799
—
799
872
379
1,198
—
—
(1,650)
—
(962)
(2,612)
(422)
$
(2,190) $
6,278
(9,202)
(449)
34,592
11,488
2,719
8,942
322
549
10,572
0
(851)
9,721
1,825
7,896
Unrealized gain (loss) on foreign exchange
Income (loss) before taxes
Tax expense (recovery)
Net income (loss)
2,045
7,831 $
$
Net cash from (used in) operating activities $ (115,228) $
(678) $
Net cash used in investing activities
Net cash from (used in) financing activities $ 235,097 $
$
(54,235) $ (21,104) $ (190,567)
(93) $
— $
(771)
(22,472) $ (14,094) $ 198,531
Property and equipment expenditures
(678) $
(93) $
— $
(771)
30
FOR THE YEAR ENDED DECEMBER 31, 2021
($ thousands)
Three months ended December 31, 2020
Equipment
Financing -
U.S.
Equipment
Financing -
Canada
Corporate
Overhead
- Canada
Total
Interest revenue on leases and loans
$
19,947 $
2,614 $
— $
22,561
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation
Amortization - intangible assets
Operating income (loss)
Goodwill and intangible asset impairment
Fair value adjustments - investments
Gain (loss) on interest rate derivative
Unrealized gain (loss) on foreign exchange
Income (loss) before taxes
Tax expense (recovery)
Net income (loss)
Net cash from (used in) operating activities
Net cash used in investing activities
Net cash from (used in) financing activities
Property and equipment expenditures
$
$
$
$
$
2,870
(5,397)
(1,837)
15,583
3,872
16
4,042
244
—
7,409
—
—
1
964
(603)
(102)
2,873
820
6
349
44
334
1,320
(8,960)
—
—
—
—
—
—
379
532
571
10
—
(1,492)
—
60
132
—
7,410
(760)
8,170 $
—
(7,640)
(891)
(6,749) $
98
(1,202)
128
(1,330) $
3,834
(6,000)
(1,939)
18,456
5,071
554
4,962
298
334
7,237
(8,960)
60
133
98
(1,432)
(1,523)
91
(21,014) $
7,970 $
(600) $
(13,644)
(93) $
— $
— $
(93)
(12,132) $
(5,980) $
32,154 $
14,042
93 $
— $
— $
93
31
FOR THE YEAR ENDED DECEMBER 31, 2021
EBITDA, ADJUSTED EBITDA, FREE CASH FLOW, MAXIMUM PERMITTED DIVIDENDS (1)
Free Cash Flow is a calculation that reflects the agreement with one of the significant lenders as to a measure of the cash flow
produced by the businesses in a period, as well as management’s view that the measure eliminates often significant non-cash
charges and/or recoveries that do not reflect actual cash flows of the businesses, and can vary greatly in amounts from period to
period.
For the quarter-ended
($ thousands)
Net income (loss)
Interest expense
2020
2021
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
$ (19,827) $ 1,407 $ 9,804 $
91 $ 6,313 $ 7,812 $ 9,148 $ 7,896
8,063
7,374
7,084
6,000
5,895
7,739
8,835
9,202
Provision for (recovery of) taxes
(2,700)
753
3,877
(1,523)
2,666
3,224
3,187
1,825
Goodwill and intangible asset impairment
11,868
Amortization and depreciation
EBITDA (1)
Interest expense
—
656
—
8,960
628
632
—
571
—
622
—
836
—
871
633
$ (1,963) $ 10,190 $ 21,393 $ 14,160 $ 15,445 $ 19,397 $ 22,006 $ 19,794
(8,063)
(7,374)
(7,084)
(6,000)
(5,895)
(7,739)
(8,835)
(9,202)
Non-cash interest income on option liability
—
—
—
—
—
—
—
(745)
Non-cash change in finance receivables
allowance for credit losses(2)
15,315
(5,293) (11,765)
(3,986)
(4,439)
(152)
1,830
921
Share-based compensation expense
186
148
32
Restructuring and transaction costs
—
5,776
3,474
Unrealized (gain) loss on investments
Unrealized (gain) loss on foreign exchange
(Gain) loss on interest rate derivative
Adjusted EBITDA (1)(2)
Maintenance capital expenditures
Tax impact of non-cash change in allowance for
credit losses(2)
Provision for taxes
Free Cash Flow(1)(2)
FCF per diluted share
FCF L4PQ divided by 4 (1)(3)
Maximum Permitted Dividends (1)(3)
Dividends declared (4)
—
(544)
(19)
51
121
72
598
554
—
(60)
(98)
255
244
326
2,719
—
—
26
—
—
—
—
(294)
(1,249)
—
—
851
—
(133)
(214)
(133)
(126)
(132)
(86)
$ 6,266 $ 3,295 $ 5,343 $ 4,437 $ 5,266 $ 11,324 $ 13,992 $ 14,338
(575)
(156)
(56)
(93)
(40)
(79)
(112)
(771)
(4,148)
1,447
3,181
1,072
1,196
122
(505)
(256)
2,700
(753)
(3,877)
1,523
(2,666)
(3,224)
(3,187)
(1,825)
$ 4,243 $ 3,833 $ 4,591 $ 6,939 $ 3,756 $ 8,143 $ 10,188 $ 11,486
$
0.24 $
0.22 $
0.26 $
0.39 $
0.21 $
0.42 $
0.51 $
0.56
$ 5,745 $ 5,326 $ 4,932 $ 4,709 $ 4,743 $ 4,820 $ 5,498 $ 7,256
$ 5,170 $ 4,793 $ 4,438 $ 4,238 $ 4,268 $ 4,338 $ 4,948 $ 6,530
$ 3,723 $
620 $
0 $
710 $ 1,055 $ 1,566 $ 1,766 $ 1,756
(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) The formulas for Adjusted EBITDA and Free Cash Flow 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. 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 and reflects the agreement with Chesswood's main corporate credit facility.
(3) The FCF L4PQ is calculated on a monthly basis as required by the terms of Chesswood's revolving credit facility. 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) Includes dividends on Exchangeable Securities (non-controlling interest, as described below under "Statement of Financial Position") and Special Warrants.
On May 6, 2021, the Company announced a 50% monthly dividend increase to $0.03 per share ($0.36 per share annualized).
See 'Liquidity and Capital Resources - Dividends to Shareholders' below.
32
FOR THE YEAR ENDED DECEMBER 31, 2021
STATEMENT OF FINANCIAL POSITION
The total consolidated assets of the Company at December 31, 2021 were $1.6 billion, an increase of $777.5 million from
December 31, 2020. The U.S. dollar exchange rate on December 31, 2021 was 1.2678, compared to 1.2732 at December 31,
2020. The decrease in the foreign exchange rate represents a decrease of $2.9 million in assets.
Cash totaled $12.4 million at December 31, 2021 compared to $9.7 million at December 31, 2020, an increase of $2.7 million.
The Company’s objective is to maintain low cash balances, investing any excess 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 years ended December 31, 2021 and 2020.
Restricted funds represent cash reserve accounts which are held in trust as security for the U.S. Equipment Financing Segment's
secured borrowings and cash collection accounts required by its lenders of certain financial assets that can only be used to repay
these debts on specific dates. The 'cash in collections accounts' will be applied to the outstanding borrowings in the following
month. See Note 13(d) - Borrowings in the audited consolidated financial statements for further details.
Other assets totaled $11.3 million at December 31, 2021, an increase of $8.4 million from December 31, 2020. The increase
results from an increase in sales tax receivable of $2.8 million as well as an increase in prepaid expenses and other assets of
$1.0 million in the Canadian Equipment Financing Segment which has grown substantially as a result of the merger of Blue
Chip with Vault Credit. In addition, there was an increase in deferred tax asset of $5.3 million in the Corporate Overhead -
Canada and Canadian Equipment Financing segments. See Note 6 - Other Assets in the audited consolidated financial
statements for further details.
Net Finance receivables consist of the following:
Period end FX rate
($ thousands)
U.S. equipment finance receivables
Canadian equipment finance receivables
($ thousands)
Opening gross finance receivables
Gross loan originations
Gross loans acquired from business
combination
Principal payments and adjustments
Charge-offs
Ending gross finance receivables
1.2678
1.2732
Year ended December 31,
2020
2021
1,025,567
414,160
1,439,727 $
612,487
128,391
740,878
Year ended December 31,
2021
2020
890,418 $
934,034
194,018
(323,800)
(15,718)
1,678,952 $
1,026,635
280,753
—
(370,565)
(46,405)
890,418
$
$
$
Finance receivables saw an increase of $698.8 million, or 94%, during the year ended December 31, 2021. In U.S. dollars, the
U.S. Equipment Financing Segment's net finance receivables increased by US$327.8 million and the decrease in the foreign
exchange rate compared to December 31, 2020 decreased finance receivables by $2.6 million since December 31, 2020, thus
reflecting an increase in U.S. based finance receivables of $413.1 million since December 31, 2020. The Canadian Equipment
Financing Segment's finance receivables increased by $285.8 million during the year ended December 31, 2021, largely due to
the Blue Chip - Vault Credit merger.
The $1.4 billion in finance receivables is net of $22.4 million (or 1.6%) in ACL compared to $24.4 million (or 3.3%) in ACL at
33
FOR THE YEAR ENDED DECEMBER 31, 2021
December 31, 2020. The $2.0 million decrease in the ACL is related to the better performing portfolio, as evidenced by the
decrease in net charge-offs and provision for credit losses, resulting in a 1.7% decrease in ACL as a percentage of the net
finance receivables. Finance receivables are composed of a large number of homogenous leases and loans, with relatively small
balances. As such, the evaluation of the allowance for credit losses is performed collectively for the lease and loan receivable
portfolios. The measurement of expected credit losses and the assessment of 'significant increase' (per IFRS 9) in credit risk
considers information about past events and current conditions, as well as reasonable and supportable forecasts of future events
and economic conditions. The estimation and application of forward-looking information also requires judgment when
calculating the ACL. The Company’s ACL was determined as at December 31, 2021.
($ thousands)
Opening allowance for credit losses
Net charge-offs
Provision for credit losses
Foreign exchange
Ending allowance for credit losses
Finance receivables
ACL as a percentage of finance receivables
$
$
Year ended December 31,
2021
24,363
(2,028)
188
(130)
22,393
1,439,727
$
$
2020
30,305
(31,374)
25,644
(212)
24,363
740,878
1.6 %
3.3 %
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 and Vault Credit charge off leases and loans on an individual basis when there is no realistic
prospect of recovery. Many finance receivables that are charged-off are subject to collection efforts, with future recoveries
possible.
Intangible assets totaled $26.9 million at December 31, 2021 compared to $10.9 million at December 31, 2020. The $16.0
million increase in intangible assets consists mainly of the broker relationship and trade name intangibles recognized from the
Blue Chip - Vault Credit merger and the acquisition of a controlling interest in Vault Home. See Note 29 - Business
Combinations in the audited consolidated financial statements for more detail. This increase is net of amortization of $1.8
million. 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. The Company's annual intangible asset impairment
assessment as at December 31, 2021 indicated no impairment of the Canadian Equipment Financing Segment's intangible
assets, compared to the prior year where an impairment of $4.7 million was recognized. The prior year impairment was due to a
combination of projected decreases in originations in the coming months due to continued impact of COVID-19 lockdowns and
forecasted increases in the level of charge-offs.
Goodwill totaled $43.1 million at December 31, 2021, compared to $23.9 million at December 31, 2020. The $19.2 million
increase was primarily due to the Blue Chip - Vault Credit merger and the acquisition of a controlling interest in Vault Home.
See Note 29 - Business Combinations in the audited consolidated financial statements for more detail.
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, 2021 compared to December 31, 2020, where an impairment of $16.1 million was recorded. The Company is required to
test its assets, such as intangible assets and goodwill, for impairment when facts and circumstances indicate that impairment
may have occurred.
Based on this assessment, in the prior year management concluded that the carrying value of goodwill for the Canadian
Equipment Financing Segment exceeded its recoverable amount and recorded an impairment loss for the excess of $16.1
million. The impairment was due to a combination of: projected decreases in originations in the coming months; forecasted
increases in the level of charge-offs; and increased competitive pressures compared to the December 31, 2019 projection. The
34
FOR THE YEAR ENDED DECEMBER 31, 2021
Canadian Equipment Financing Segment's recoverable amount was determined using discounted cash flows, incorporating
several assumptions and estimation uncertainties. Measurements were particularly sensitive, due to the inherently unknowable
effects of COVID-19, not least of which being the duration of those effects and the degree of success of the current measures to
contain the pandemic's effects on our businesses. See Note 11 - Goodwill to the audited consolidated financial statements for
further detail.
Accounts payable and other liabilities totaled $31.8 million at December 31, 2021, compared to $17.5 million at December 31,
2020, an increase of $14.3 million. This is predominately related to an increase in accruals as well as accrued expenses and
other liabilities of $5.3 million in the Canadian Equipment Financing Segment, which has grown substantially as a result of the
merger of Blue Chip with Vault Credit. In addition, there was an increase in unfunded finance receivables of $5.6 million and
customer deposits and prepayments of $1.3 million as a result of an increase in originations compared to 2020. See Note 12 -
Accounts Payable and Other Liabilities in the audited consolidated financial statements for more detail on the balances that
comprise accounts payable and other liabilities.
On August 13, 2021, the Company's US$20.0 million interest rate swap matured. In addition, on May 17, 2021, the U.S.
Equipment Financing Segment terminated its US$40.0 million interest rate cap agreement that provided for payment of an
annual fixed rate, in exchange for a LIBOR based floating rate amount. The interest rate cap agreement was originally
anticipated to mature on July 25, 2022. The company does not have any derivative positions as at December 31, 2021. In
addition, an option liability in the amount of $11.6 million at December 31, 2021 was established as a result of the merger of
Blue Chip with Vault Credit (December 31, 2020 - nil). See Note 29 - Business Combinations to the audited consolidated
financial statements for further detail on the option liability.
Borrowings totaled $1.3 billion at December 31, 2021 compared to $639.0 million at December 31, 2020, an increase of $700.7
million. The increase is primarily a function of the increased level of originations and inclusion of Vault Credit. The U.S.
Equipment Financing Segment's US dollar debt is up US$268.3 million and the Canadian Equipment Financing Segment 's debt
increased by $285.8 million since December 31, 2020. The U.S. Equipment Financing Segment completed a fixed-rate
US$356.1 million asset-backed term securitization and is collateralized by receivables from the U.S. Equipment Financing
Segment's portfolio of equipment leases and loans. Proceeds from the securitization were used to pay off the U.S. Equipment
Financing Segment's warehouse line and to pay down Chesswood's senior revolving credit facility. Please see the discussion
under 'Liquidity and Capital Resources' for further details on borrowings.
The $4.4 million (December 31, 2020 - $7.2 million) in customer security deposits relates to security deposits predominantly
held by the U.S. Equipment Financing Segment. Historically, the U.S. Equipment Financing Segment’s non-prime contracts
typically required that the lessees/borrowers provide one or 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). Beginning in
January 2019, the U.S. Equipment Financing Segment discontinued requiring security deposits due to changing market
conditions and now require advance payments (first and last months).
Future taxes payable at December 31, 2021 totaled $27.1 million compared to $20.4 million at December 31, 2020, an increase
of $6.7 million. Taxes 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 subsidiaries' assets and liabilities and their
corresponding tax basis.
At December 31, 2021, there were 16,574,864 common shares outstanding (excluding the shares issuable in exchange for the
Exchangeable Securities, as defined below) with a book value of $109.7 million. Including the common shares issuable in
exchange for the Exchangeable Securities, Chesswood had 18,053,401 common shares outstanding. A total of 133,333 shares
and 1,466,667 special warrants were issued as part of the consideration for the Blue Chip-Vault Credit merger on April 30,
2021. Each special warrant is exchangeable for one common share.
In November 2020, the Company's Board of Directors approved the repurchase for cancellation of up to 932,296 of the
Company’s outstanding common shares for the period commencing December 2, 2020 and ending on December 1, 2021. From
December 2, 2020 to December 31, 2021, the Company repurchased 488,040 of its common shares under the normal course
issuer bid at an average cost of $10.06 per share. The excess of the purchase price over the average stated value of common
35
FOR THE YEAR ENDED DECEMBER 31, 2021
shares purchased for cancellation was charged to retained earnings. Decisions regarding the timing of purchases are based on
market conditions and other factors.
In December 2021, the Company's Board of Directors approved the repurchase for cancellation of up to 980,230 of the
Company’s outstanding common shares for the period commencing January 24, 2022 and ending on January 23, 2023.
Decisions regarding the timing of purchases are based on market conditions and other factors.
Additionally, the Company has entered into an automatic share purchase plan with a broker for the purpose of permitting the
Company to purchase its Common Shares under the normal course issuer bid at times when the Company would otherwise 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.
Non-controlling interest consists of 1,274,601 Class B common shares and 203,936 Class C common shares (the "Exchangeable
Securities") of Chesswood U.S. 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, for no
additional consideration, through a series of steps and entitle the holders to receive the same dividends as the common shares.
Attached to the Exchangeable Securities are Special Voting 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.
The Exchangeable Securities are fully exchangeable into the Company's common shares. Their portion of income and dividends
is allocated to non-controlling interest. As a result of the Blue Chip - Vault Credit merger and prior to the exercise of the option
liability, the non-controlling interest in Canadian Holdco has a right to 49% of the income and distributions of Canadian
Holdco, which are recognized under the non-controlling interest section of the Shareholder's Equity. See Note 29 - Business
Combinations.
Contributed surplus includes the accumulated share-based compensation expensed over the vesting term for options and
restricted share units unexercised at December 31, 2021. There were 2,041,439 options and 479,000 restricted share units
outstanding at December 31, 2021.
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' revolvers, warehouses, asset-backed securitizations and bulk lease financing
facilities. The primary uses of cash for the Company and its subsidiaries are to fund originations of equipment leases and loans,
support working capital, long-term debt principal repayments, share repurchases and dividends.
The Company and its subsidiaries were compliant with all covenants as at and through the year ended December 31, 2021.
At December 31, 2021, the Company had the following facilities:
(a) The Chesswood revolving credit facility allows borrowings of up to US$250.0 million, subject to, among other things,
certain percentages of eligible gross finance receivables. This credit facility includes a US$50 million accordion feature that can
increase the overall revolver to US$300 million, is secured by substantially all of the Company’s assets, contains covenants,
including maintaining leverage, interest coverage and delinquency ratios, and expires on December 8, 2022. At December 31,
2021, the Company was utilizing US$153.5 million (December 31, 2020 - US$71.9 million) of its credit facility and had
approximately US$96.5 million in additional borrowings available under the corporate credit facility. Based on average debt
levels, the effective interest rate during the year ended December 31, 2021 was 4.50% (year ended December 31, 2020 -
5.42%). The effective interest rate for the three months ended December 31, 2021 was 4.27% (December 31, 2020 - 3.02%).
Since the current credit facility expires within the next 12 months, it is a current liability. On January 14, 2022, the revolving
credit facility was renewed at improved terms to Chesswood. Refer to Note 30 - Subsequent Events in the audited consolidated
financial statements for further details.
36
FOR THE YEAR ENDED DECEMBER 31, 2021
This revolving credit facility allows Chesswood to internally manage the allocation of capital to its 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 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 non-cash change in the allowance for credit losses. Please refer to
the definitions of Non–GAAP Measures provided in the MD&A.
(b) U.S. Equipment Financing Segment:
(i) The U.S. Equipment Financing Segment has a credit facility, with a US$200 million annual capacity, with a life insurance
company to be renewed annually in October. The funder makes approved advances to the segment 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 facility has recourse only to the assets financed. The cost of each loan advance is fixed at the time of each
tranche. The segment maintains certain cash reserves as credit enhancements or provides letters of guarantee in lieu of cash
reserves. The segment retains the servicing of these finance receivables. The balance of this facility at December 31, 2021 was
US$95.1 million (December 31, 2020 - US$45.1 million). Based on average debt levels, the effective interest rate for the year
ended December 31, 2021 was 3.72% (including amortization of origination costs) (December 31, 2020 – 4.94%).
(ii) In October 2019, the U.S. Equipment Financing Segment completed a US$254 million asset-backed securitization which
has fixed term and fixed interest rate and is collateralized by receivables from the U.S. Equipment Financing Segment's
portfolio of equipment leases and loans. Proceeds from the securitization were used to pay down the U.S. Equipment Financing
Segment's previously existing warehouse line and Chesswood's senior revolving credit facility. The balance of this facility at
December 31, 2021 was US$83.1 million (December 31, 2020 - US$150 million). Based on average debt levels, the effective
interest rate was 3.24% for the year ended December 31, 2021 (including amortization of origination costs) (December 31,
2020 – 2.78%).
(iii) On September 30, 2020, the U.S. Equipment Financing Segment completed a US$183.5 million asset-backed securitization
which has a fixed term and fixed interest rate and is collateralized by receivables from the U.S. Equipment Financing Segment
portfolio of equipment leases and loans. Proceeds from the securitization were used to pay off the U.S. Equipment Financing
Segment's previously existing warehouse line, and CapOne facilities, and to pay down Chesswood's senior revolving credit
facility. The balance of this facility at December 31, 2021 was US$89.8 million (December 31, 2020 - US$163.5 million). The
effective interest rate was approximately 2.61% for the year ended December 31, 2021 (including amortization of origination
costs) (December 31, 2020 – 2.21%).
(iv) On October 22, 2021, the U.S. Equipment Financing Segment completed a US$356.1 million asset-backed securitization
which has a fixed term and a fixed interest rate and is collateralized by receivables from the U.S. Equipment Financing
Segment's portfolio of equipment leases and loans. Proceeds from the securitization were used to pay off the U.S. Equipment
Financing Segment's warehouse line and to pay down Chesswood's senior revolving credit facility. The effective interest rate
was approximately 2.01% (including amortization of origination costs). The balance of this facility at December 31, 2021 was
US$333.9 million.
(v) The U.S. Equipment Financing Segment has a US$250 million revolving warehouse loan facility specifically to fund its
growing prime portfolio that was established in May 2021. The warehouse facility holds the U.S. Equipment Financing
Segment's prime receivables before they are securitized and is secured by the U.S. Equipment Financing Segment's assets,
contains covenants, including maintaining leverage, interest coverage, and delinquency ratios. This facility has a revolving
period until January 2024 followed by an optional amortizing period for an additional 36 months. At December 31, 2021, the
U.S. Equipment Financing Segment was not utilizing this facility (December 31, 2020 - nil). Pawnee paid off the remaining
balance of this facility utilizing proceeds from its asset-backed securitization in October 2021. The effective interest rate for the
year ended December 31, 2021 was approximately 2.09% (December 31, 2020 - 7.31%) (including amortization of origination
costs).
(vi) The U.S. Equipment Financing Segment entered into arrangements on April 29, 2021 under which an investment fund
managed by Waypoint Investment Partners Inc. ("Waypoint") provides loan funding to a special purpose vehicle and thereby
receives returns based on the performance of a specific group of finance receivables. The investment fund is structured as a
37
FOR THE YEAR ENDED DECEMBER 31, 2021
limited partnership, and Chesswood has a small minority ownership interest in the general partner of the fund. The U.S.
Equipment Financing Segment receives origination fees and fees for administering the portfolio, and Waypoint receives fees for
managing the investment fund. Chesswood will be entitled to its proportionate share of any amounts earned by the fund's
general partner. The facility has recourse only to the assets financed. The cost of each loan advance is fixed at the time of each
tranche. The balance of this facility at December 31, 2021 was US$19.0 million. Based on average debt levels, the effective
return provided to the private credit investors for the year ended December 31, 2021 was 12.48% (including amortization of
origination costs). See Note 25 - Related party transactions.
As at December 31, 2021, the U.S. Equipment Financing Segment had provided US$500,000 in outstanding letters of guarantee
through Chesswood's revolving credit facility in lieu of cash reserves (December 31, 2020 - US$500,000).
(c) Canadian Equipment Financing Segment:
Blue Chip and Vault Credit have 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 and Vault Credit 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 and Vault Credit either maintain certain cash reserves as credit enhancements or provide letters
of guarantee in return for release of the cash reserves. Blue Chip and Vault Credit continue to service these finance receivables
on behalf of the Funders.
(i) At December 31, 2021, Blue Chip and Vault had access to the following committed lines of funding:
•
Blue Chip and Vault Credit: (i) $200 million annual limit from a life insurance company; (ii) $150 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, 2021, Blue Chip and Vault Credit had $57.6 million and $302.1 million, respectively (December 31, 2020 -
$103.4 million and n/a, respectively) in securitization and bulk lease financing facilities debt outstanding. Blue Chip and Vault
Credit together had access to at least $247.5 million of additional financing from its securitization partner (December 31, 2020 -
$124.9 million).
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, 2021 was 3.37% and 2.61% for Blue Chip and Vault Credit, respectively (December 31, 2020 -
3.58% and n/a, respectively).
(ii) The Canadian Equipment Financing Segment entered into arrangements on December 14, 2021 under which Vault Credit
Opportunities Fund ("VCOF") provides loan funding to Vault Credit and thereby receives returns based on the performance of a
specific group of finance receivables. The Canadian Equipment Financing Segment receives fees for servicing the portfolio.
The facility has recourse only to the assets financed. The cost of each loan advance is fixed at the time of each tranche. The
balance of this facility at December 31, 2021 was $2.2 million. VCOF earns a yield equivalent to the interest on the underlying
loans.
As at December 31, 2021, Blue Chip had provided $3.8 million in outstanding letters of guarantee through Chesswood's
revolving credit facility in lieu of cash reserves (December 31, 2020 - $5.6 million). Blue Chip and Vault Credit 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, 2021 and December 31, 2020, and throughout the periods
presented, the Canadian Equipment Financing segment was compliant with all covenants, with certain covenants in 2020 being
waived or amended to accommodate COVID-19 circumstances.
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
38
FOR THE YEAR ENDED DECEMBER 31, 2021
translated at the average exchange rate for the period. Cash flow from operating activities comprises net income adjusted for
non-cash items, and changes in 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. Cash flow from investing activities comprises payments relating to the
acquisition of companies, cash acquired on business combinations, and payments relating to the purchase of property and
equipment. Cash flow from financing activities comprises changes in borrowings, payment of dividends, proceeds from stock
issues, exercise of stock options, and the purchase and sale of treasury stock.
For the year ended December 31, 2021
In the year ended December 31, 2021, there was an increase in cash of $2.7 million compared to a decrease in cash of $1.4
million in the prior year as a result of the reasons discussed below.
The Company's finance receivables have an average term of approximately 45 months at the time of origination. The finance
receivables will generate earnings over the next 45 months, with only a portion in the current operating period. Chesswood's
ability to borrow under its various credit facilities is directly linked to its finance receivable portfolio. The funds borrowed (or
repaid) to support the growth (retraction) in the finance receivables is shown under Financing Activities.
The Company’s operations utilized $499.2 million of cash during the year ended December 31, 2021, compared to $79.9
million cash generated in the prior year, an increase in cash utilization of $579.1 million year-over-year.
The net cash utilized to fund the growth in finance receivables (funds advanced, origination costs, security deposits, restricted
cash, and principal payments) totaled $589.1 million in the year ended December 31, 2021, compared to the utilization of $16.3
million in the prior year, an increase of $572.8 million in cash utilized year-over-year.
The Company funded growth in finance receivables from cash from operating activities, and net borrowings of $510.9 million
in the year ended December 31, 2021. In the prior year, the Company utilized cash from operating activities to pay down net
borrowings of $69.1 million.
In the year ended December 31, 2021, the Company had net tax payments of $12.1 million compared to net tax refunds of $3.5
million in the prior year, an increase in cash utilization of $15.6 million year-over-year.
Proceeds from the exercise of options of $5.2 million were partially offset by the repurchase of common shares under the
Company's normal course issuer bid of $4.9 million. Similar amounts for the year ended December 31, 2020, were nil and $0.8
million respectively.
The Company paid $5.6 million of dividends to the holders of its common shares and Exchangeable Securities, as well as its
non-controlling interests in Canadian Holdco, during the year ended December 31, 2021 compared with $5.9 million paid in the
prior year.
Capital expenditures totaled $1.0 million (2020 - $0.9 million) during the year ended December 31, 2021 predominantly related
to the U.S Equipment Financing Segment's upgrade of its computer network infrastructure offset by disposals during the year.
Cash from investing activities also included $2.8 million of cash acquired from business combinations.
For the three months ended December 31, 2021
In the three months ended December 31, 2021, there was an increase in cash of $2.7 million compared to the same period in
prior year, which had an insignificant movement in cash as a result of the reasons discussed below.
The Company’s operations utilized $190.6 million of cash during the three months ended December 31, 2021 compared to
utilizing $13.6 million in the same period in the prior year, an increase in cash utilization of $177.0 million year-over-year.
39
FOR THE YEAR ENDED DECEMBER 31, 2021
The net cash utilized to fund the growth in finance receivables (funds advanced, origination costs, security deposits, restricted
cash, and principal payments) totaled $213.8 million in the three months ended December 31, 2021 compared to utilizing $38.4
million in the same period in the prior year, an increase of $175.4 million in cash utilized year-over-year.
The Company funded growth in finance receivables from excess opening cash, cash from operating activities, and net
borrowings of $204.7 million in the three months ended December 31, 2021. In the same period of the prior year, the Company
utilized the funds from the collection of finance receivables, excess opening cash, and cash from operating activities to pay
down net borrowings of $16.9 million.
Capital expenditures totaled $0.8 million (2020 - $0.1 million) during the three months ended December 31, 2021
predominantly related to Pawnee's upgrade of its computer network infrastructure.
In the three months ended December 31, 2021, the Company had a net tax payable of $5.4 million compared to $5.1 million of
net tax refunds in the same period in the prior year, an increase in cash utilization of $10.5 million year-over-year.
The Company paid $0.5 million for the repurchase of common shares under its normal course issuer bid and paid $1.6 million
of dividends to the holders of its common shares and Exchangeable Securities, as well as its non-controlling interests in the
Canadian Holdco, during the three months ended December 31, 2021. The Company paid $0.8 million for the repurchases of
common shares and $0.4 million of dividends in the same period in the prior year.
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 originations, 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. The Company was compliant with all
of its covenants on all facilities as at December 31, 2021.
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. This ability to continue to access funding is an important condition to its future
success.
The Company’s secured borrowing agreement and its subsidiaries' warehousing, asset-backed securitization, securitizations and
bulk lease financing facility agreements have financial covenants and other restrictions which must be met in order to obtain
continued funding.
Advances on the Chesswood revolving credit facility may be drawn at any time, subject to compliance with borrowing base
calculations and required representations and warranties. As at December 31, 2021, US$96.5 million was available under the
US$250.0 million facility (utilizing US$153.5 million), which included US$3.5 million of letters of credit.
Dividends to Shareholders
On May 6, 2021, the Company announced it would increase its monthly dividend by 50% to $0.03 per share ($0.36 per share
annualized) and would target a payout ratio including dividends and share repurchases of 40% of Free Cash Flow.
Dividend Policy
The Company’s policy has been to pay monthly dividends to shareholders of record on the last business day of each month by
the 15th of the following month (or the next business day thereafter if the 15th is not a business day).
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FOR THE YEAR ENDED DECEMBER 31, 2021
Under the Chesswood credit facility, the maximum amount of monthly cash dividends and repurchases under its normal course
issuer bid is 1/12 of 90% of Free Cash Flow (as defined under Non–GAAP Measures in this MD&A) for the most recently
completed four financial quarters for which Chesswood has publicly filed its consolidated financial statements.
The amount of any dividends payable by Chesswood is at the discretion of its Board of Directors, is evaluated on an ongoing
basis, and may be revised subject to business circumstances and expected capital requirements depending on, among other
things, Chesswood’s earnings, financial requirements for its operating entities, growth opportunities, the satisfaction of
applicable solvency tests for the declaration and payment of dividends and other conditions existing from time to time.
Minimum Payments
The following are the contractual payments and maturities of financial liabilities and other commitments as at December 31,
2021 (including interest):
($ thousands)
Accounts payable and other
liabilities
2022
2023
2024
2025
2026
2027 and
beyond
Total
$
31,764 $
— $
— $
— $
— $
— $
31,764
Premises leases payable (a)
364
705
699
669
357
316
3,110
Borrowings (b)
477,518
572,741
220,825
133,553
13,685
600 1,418,922
Customer security deposits (c)
1,979
1,825
374
156
201
—
4,535
Service contracts
Total commitments
511,625
575,271
221,898
134,378
14,243
916 1,458,331
1,580
212
46
47
23
—
1,908
$ 513,205 $ 575,483 $ 221,944 $ 134,425 $
14,266 $
916 $ 1,460,239
a. 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 2028. The amounts above exclude adjustment for
discounting premise lease payable.
b. Borrowings are described in Note 13 - Borrowings in the audited consolidated financial statements and include fixed
payments for the U.S. Equipment Financing Segment, Blue Chip, and Vault Credit’s securitization facilities and
Chesswood's corporate revolving credit facility which is a line-of-credit and, as such, the balance can fluctuate. The
amounts above include fixed interest payments on the U.S. Equipment Financing Segment, Blue Chip, and Vault Credit'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, 2021 remain the same until its expiry date of December 2022. The
amount owing under Chesswood's revolving corporate credit facility is shown in year of maturity, all other expected
payments for borrowings are based on the underlying finance receivables supporting the borrowings. On January 14, 2022,
the revolving credit facility was re-negotiated. Refer to Note 30 - Subsequent Events in the audited consolidated financial
statements. In 2020, the Company was restricted from paying dividends and limited quarterly equipment financing
originations during the period that the temporary COVID-19 related amendments were required.
c. 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.
Please see Note 7(b) - Finance Receivables for the expected collections of finance receivables over the same time period. See
Note 13(d) - Borrowings - for the amount of restricted cash in collections accounts that will be applied to debt in the following
month.
The Company has no material “off-balance sheet” financing obligations, except for US$3.5 million in letters of guarantee.
Other commitments are disclosed in Note 18 - Contingent Liabilities in the 2021 audited consolidated financial statements.
41
FOR THE YEAR ENDED DECEMBER 31, 2021
OUTLOOK
Chesswood exited 2021 with record originations and the largest receivables portfolio in the Company’s history. We expect this
momentum to continue throughout 2022 with the added benefit of contributions from our newly acquired automobile finance
entity, Rifco.
The equipment finance subsidiaries continue to see strong origination volumes in both Canada and the United States. Changes
in the general interest rate environment are expected to impact pricing for prime credits as the industry passes through increases
in funding cost. Historically, we have been successful in maintaining credit spreads in a rising rate environment. Any negative
impact from rising rates will likely be seen in weaker industry wide origination volumes.
Portfolio losses and recoveries throughout 2021 were the strongest in Chesswood’s history due to several economic factors.
For 2022, we expect these metrics to begin normalizing towards levels more consistent with our underwriting expectations.
Furthermore, the addition of near-prime receivables, from our Rifco acquisition, will increase overall portfolio provisioning and
losses. On a net basis, we expect to maintain strong credit margins, consistent with Chesswood's historical performance.
Our acquisition of Rifco will begin to contribute to overall results in Q1 of 2022. As a reminder, the accounting treatment for
acquisitions of loan portfolios requires that the allowance for doubtful accounts be taken as a provision in the quarter for which
the portfolio is acquired. Therefore, Q1 results will be impacted by this one-time charge, flowing through the income statement.
Rifco is expected to build on the results achieved in 2021 after adjusting for this one-time provision.
Chesswood’s funding sources for the year will be augmented with off-balance sheet investments arranged by Chesswood
Capital Management. In addition to managing Chesswood's on balance sheet facilities and access to the ABS markets,
Chesswood Capital Management will structure off-balance sheet funding partnerships as well as manage investor capital
seeking direct exposure to the underlying originations of Chesswood’s operating subsidiaries. Chesswood and its subsidiaries
will earn management fees, servicing fees and origination fees associated with these programs. We are excited about these new
funding relationships and expect them to be accretive to Chesswood's profitability and return on equity.
RISK FACTORS
An investment in the Company's common shares entails certain risk factors that should be considered carefully.
Chesswood operates in a dynamic environment that involves various risks and uncertainties, many of which are beyond our
control and which could have an effect on our business, revenues, operating results, cash flow and financial condition. Readers
should carefully review the risk factors in the Company’s annual information form filed with various Canadian securities
regulatory authorities through SEDAR (the System for Electronic Document Analysis and Retrieval) at www.sedar.com, a
summary of which are set out below.
Deterioration in Economic or Business Conditions; Impact of Significant Events and Circumstances; COVID-19
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, originations may decrease; and 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 (and for Rifco and Vault Home, individual
consumers), 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.
42
FOR THE YEAR ENDED DECEMBER 31, 2021
In addition, the equipment or consumer product finance industries 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 war or political unrest which impact upon the prices of oil and other
commodities or otherwise) can ultimately significantly impact upon North American economic conditions which, in turn, could
result in the adverse implications described in the first paragraph under this heading. Similarly, natural disasters in any part of
the world may directly (through impact on supplies of goods or equipment to our businesses) or indirectly impact 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.
As of December 31, 2021, Canada and the U.S. were approximately 21 months into the COVID-19 pandemic. Financial
markets and businesses across many industries have experienced significant challenges and it will likely be some time before
the duration and ultimate severity of the impact, and any going forward adverse effects on originations, delinquencies, and
change offs, will be known.
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 loss levels. Pawnee cannot guarantee that the 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.
Analogous risks are faced by Tandem, Blue Chip, Vault Credit, Vault Home, and Rifco in their businesses.
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 and loan defaults and delinquencies could adversely affect our liquidity by
reducing the amount of funding available to us under our financing arrangements. Furthermore, increased rates of delinquencies
or loss levels could result in adverse changes to the terms of future financing arrangements, including increased interest rates
payable to lenders and the imposition of more burdensome covenants and increased credit enhancement requirements.
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, Dealers, and Other Origination Sources
The U.S. and Canadian operations have formed relationships with hundreds of origination sources, comprised primarily of
equipment finance brokerage firms, vendors/distributors (and for Rifco, motor vehicle dealerships). 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 in Canada where the segment gets a substantial portion of their
origination volume from a few large equipment brokerage firms.
43
FOR THE YEAR ENDED DECEMBER 31, 2021
Tandem is forming relationships with origination partners, comprised primarily of equipment dealers. It will rely on the
relationships it creates to generate lease and loan applications and originations. Many of these relationships may not be
formalized in written agreements, and those that are formalized may be terminable at will. The decision by a significant number
of Tandem’s origination partners to refer their transactions to other companies would impede Tandem’s ability to generate
transactions. Analogous risks are faced by Vault Home and Rifco.
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 course of conducting their respective businesses. A significant
judgment or the imposition of a significant fine or penalty on an operating company (or on a company engaged in a similar
business, to the extent the operating company operates in a similar manner) could have a material adverse impact on our
business, financial condition and results of operations, and on the amount of cash available for dividends to our shareholders.
Interest Rate Fluctuations
The Company and our operating companies are exposed to fluctuations in interest rates under their borrowings. Increases in
interest rates (to the extent not mitigated by interest hedging arrangements or fixed rate securitizations) may have a material
adverse impact on our businesses, financial condition and results of operations, and on the amount of cash available for
dividends to our shareholders.
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 credit quality than to the effective rates of interest charged.
For interest rate risk sensitivities, please refer to Refer to Note 5 - Financial Risk Management in the audited consolidated
financial statements.
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.
44
Adverse Events or Legal Determinations in Areas with High Geographic Concentrations of Leases or Loans
FOR THE YEAR ENDED DECEMBER 31, 2021
If judicial or other governmental rulings or actions or interpretations of laws adverse to the equipment and consumer finance
industries in general or to business practices engaged in by our operating companies, or adverse economic conditions or the
occurrence of other significant events such as natural disasters and terrorist attacks, were to occur in a geographic region with a
high concentration of leases/loans or equipment/vehicles 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.
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 (and in
particular consumer product 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.
Origination, Funding and Administration of Transactions
Our operating companies' origination, funding and transaction administration practices could result in certain vulnerabilities in
their enforcement rights. For example, certain leases and loans are assignments of transactions already documented by brokers.
Acquiring leases/loans by this “indirect” process subjects our operating companies to various risks, including risks that might
arise by reason of the broker’s insolvency, administrative inadequacies or fraudulent practices, as well as any third party claims
against the broker or its rights with respect to the assigned lease or loan. Our operating companies may be subject to risks
related to broker or motor vehicle dealer practices, whether or not our operating companies have actual legal responsibility for
broker/dealer conduct. Any of these broker/dealer related risks can impair our operating companies’ rights with respect to
recovering the rents and/or property under leases and loans.
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 US$15,000 (or US$10,000 if for a home business) for Pawnee’s "C" or
"Start-up" product and US$50,000 for the “B” product, and US$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”
45
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.
FOR THE YEAR ENDED DECEMBER 31, 2021
Analogous risks are faced by Tandem, Blue Chip, Vault Credit, Vault Home, and Rifco.
Changes in Governmental Regulations, Licensing and Other Laws and Industry Codes of Practice
Finance companies are subject to laws and regulations relating to extending financing generally and are also members of
industry associations which have adopted, among other things, codes of business practice. Laws, regulations and codes of
business practice may be adopted with respect to existing leases and loans or the leasing, marketing, selling, pricing, financing
and collections processes which might increase the costs of compliance, or require them to alter their respective business,
strategy or operations, in a fashion that could hamper the ability to conduct business in the future.
Licensing Requirements
If an applicable court or regulatory authority were to make an adverse finding or otherwise take adverse action with respect to
our operating companies based on their failure to have a finance lender’s or other license or registration required in the
applicable jurisdiction, our operating companies would have to change business practices and could be subject to financial or
other penalties. Further, certain jurisdictions may enact or change administrative practices in respect of licensing requirements
for our operating companies or their referring brokers. For example, California requires that referring brokers have a lenders'
license, which may impact loan referrals from certain brokers for funding to California residents.
Fees, Rates and Charges
Some of our operating companies’ documents require payment of late payment fees, late charge interest, and other charges
either relating to the non-payment under, or enforcement, of their leases and loans. It could be determined that these fees and/or
the interest rates charged exceed applicable statutory or other legal limits. If the charges are deemed to be punitive and not
compensatory, or to have other attributes that are inconsistent with, or in violation of, applicable laws, they could be difficult to
enforce. A number of charges payable with respect to equipment finance transactions in the micro and small-ticket equipment
finance market have been the subject of litigation by customers against financing parties in the past. Although our subsidiaries
are not currently the subject of any such litigation, there can be no assurance that a lessee/borrower or a group of lessees/
borrowers will not attempt to bring a lawsuit against our subsidiaries in relation to fees and charges, which our subsidiaries may
or may not be successful in defending.
Our operating companies believe that their fee programs are designed and administered so as to comply with legal requirements
and are within the range of industry practices in their market segments. Nevertheless, certain attributes of these fees or charges,
and their practices, including that their leases and loans typically provide for several different fees and charges resulting in a
substantial amount of fee income and the possibility that the fees and charges may exceed actual costs involved or may
otherwise be deemed excessive, could attract litigation, including class actions, that would be costly even if our subsidiaries
were to prevail and as to which no assurance can be given of their successful defense. In addition to the risk of litigation, fee
income is important to our subsidiaries and the failure of our subsidiaries to continue to collect most of these fees could have a
material adverse impact on our business, financial condition and results of 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 property 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 financed property, 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.
46
Lessor Liability
FOR THE YEAR ENDED DECEMBER 31, 2021
There is a risk that a lessor, such as the U.S Equipment Financing Segment, Blue Chip, or Vault Credit, could be deemed liable
for harm to persons or property in connection with, among other things, the ownership or leasing of the leased property, or the
conduct or responsibilities of the parties to the lease relating to that property. The liability may be contractual (such as
warranties regarding the equipment), statutory (such as federal, state or provincial environmental liability) or pursuant to
various legal theories (such as negligence). There have been cases in which a lessor has been held responsible for damage
caused by leased property without a showing of negligence or wrong-doing on the lessor’s part. Even if a lessor ultimately
succeeds in defending itself or settling any related litigation, the related costs and any settlement amount could be significant.
Liability for Misuse of Leased Equipment
There is no practical manner to ensure that leased equipment or a leased vehicle will be used, maintained or caused to comply
with applicable law. The U.S Equipment Financing Segment, Blue Chip, and Vault Credit require their 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 the U.S Equipment Financing Segment, Blue Chip, or Vault Credit, 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 the U.S Equipment Financing Segment, Blue Chip, or Vault Credit (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. The U.S
Equipment Financing Segment focuses some of their lending on the segment of the micro and small-ticket equipment finance
market involving start-up businesses that have no 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. The U.S
Equipment Financing Segments main competition comes from equipment finance companies, banks, commercial lenders, home
equity loans, and credit cards.
As the U.S Equipment Financing Segment expands their suite of products and targets potential lessees/borrowers with better
credit scores, it will face 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.
Analogous risks are faced by Blue Chip, Vault Credit, Vault Home, and Rifco.
Many of the firms and institutions providing financing alternatives are substantially larger than our U.S. and Canadian
operations, 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 our U.S. and Canadian operations. A lower cost of funds could
enable a competitor to offer leases and loans with pricing lower than that of our U.S. and Canadian operations, potentially
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FOR THE YEAR ENDED DECEMBER 31, 2021
forcing them to decrease 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, small-ticket, and consumer product finance markets,
new competitors could enter these markets 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 the U.S. and Canadian
Financing Segments businesses in a significant manner.
Fraud by Lessees, Borrowers, Vendors or Brokers/Dealers
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 or
dealers. 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 property. Our operating companies may be subject to risks related to broker/dealer
practices whether or not our operating companies have actual legal responsibility for broker conduct. Increased rates of fraud
could have a material adverse impact on our business, financial condition and results of operations, and on the amount of cash
available for dividends to our shareholders.
Protection of Intellectual Property
Chesswood's operating subsidiaries continually develop and improve their brand recognition and proprietary systems and
processes, which is an important factor in maintaining a competitive market position. No assurance can be given that
competitors will not independently develop substantially 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.
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.
48
Unpredictability and Volatility of Share Price
FOR THE YEAR ENDED DECEMBER 31, 2021
A publicly-traded company will not necessarily trade at values determined by reference to the underlying value of its business.
The prices at which our common shares will trade cannot be predicted. The market price of the common shares could be subject
to significant fluctuations in response to variations in quarterly operating results and other factors. The annual yield on the
common shares as compared to the annual yield on other financial instruments may also influence the price of common shares
in the public trading markets. In addition, the securities markets have experienced significant price and volume fluctuations
from time to time in recent years that often have been unrelated or disproportionate to the operating performance of particular
issuers. These broad fluctuations may adversely affect the market price of the common shares.
Leverage, Restrictive Covenants
The Company and its subsidiaries have third party debt service obligations under their respective revolver, 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.
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.
Environmental risk
Chesswood and its operating subsidiaries, and their activities, have no direct significant impact on the environment, although
there can be no assurance that they will not be the subject of claims in this regard (see for example, "Lessor Liability" above).
49
FOR THE YEAR ENDED DECEMBER 31, 2021
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Understanding the Company’s accounting policies is essential to understanding the results of operations and financial condition.
The preparation of these audited 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 audited consolidated financial statements. Estimates are based on historical experience and on various other
assumptions that we believe are 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 underlying assets have been transferred
to the lessee. Interest revenue on finance leases is recognized using 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 an allowance for credit losses.
Application of the Expected Credit Loss ("ECL") 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 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 credit-impaired, a loss allowance equal to full life-time expected
net credit losses is recognized.
Finance receivables at Pawnee, Tandem, Blue Chip, Vault Credit, and Vault Home are composed of a large number of
homogenous leases and loans, all with relatively small balances. Thus, the evaluation of the allowance for credit losses is
performed collectively for the lease and loan receivable portfolios.
For Stage 2, leases and loans are considered to have experienced a significant increase in credit risk since initial recognition if
they are delinquent for over 30 days and further includes approximately 14% of the non-prime 1-30 day delinquent leases and
loans.
For Stage 3, leases and loans are considered credit impaired if they are delinquent for more than 90 days or if the individual
leases and loans are otherwise classified as non-accrual.
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 Company utilizes static pool loss data applied to recent origination levels along with forward-looking
macroeconomic assumptions under the ECL methodology. The estimation and application of forward-looking information also
requires judgment.
Pawnee and Tandem 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, Vault Credit, and Vault Home charge off leases and loans on an individual
basis when there is no realistic prospect of recovery. Finance receivables that are charged-off could still be subject to collection
efforts, with future recoveries possible.
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FOR THE YEAR ENDED DECEMBER 31, 2021
The resulting projections of probable net credit losses are inherently uncertain, and as a result we cannot predict with certainty
the amount of such losses. Changes in economic conditions, the risk characteristics and composition of the portfolio,
bankruptcy laws, and other factors could impact the actual and projected net credit losses and the related allowance for credit
losses.
The U.S. Equipment Financing Segment, Blue Chip, and Vault Credit 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 expected resale value of the related
equipment is recorded on the consolidated financial statements so that the total charge-off is net of expected recoveries. Any
amounts recovered from the sale of equipment after a charge-off in excess of the expected resale value, are credited to the
allowance for credit losses when received.
Impairment of Goodwill
Goodwill is evaluated for impairment on an annual basis, or more frequently if certain events or circumstances exist. The
Company’s impairment test of goodwill is based on the value-in-use which is estimated using a discounted cash flow model.
The cash flows are derived from budgets for the next five years, excluding restructuring activities and future investments.
Impairment testing is applied on an individual asset basis unless an asset does not generate cash inflows that are largely
independent of the cash inflows generated by other assets or groups of assets. None of the Company’s non-financial assets
generate independent cash inflows and therefore all non-financial assets are allocated to cash generating units (“CGUs”) for
purposes of assessing impairment.
CGUs are defined as the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash
inflows from other assets or groups of assets. Impairment losses are recognized when the carrying amount of a CGU exceeds
the recoverable amount, which is the greater of the CGU’s fair value less cost to sell and its value in use. Value-in-use is the
present value of the estimated future cash flows from the CGU discounted using a pre-tax rate that reflects current market rates
and the risks inherent in the business of each CGU. If the recoverable amount of the CGU is less than its carrying amount, the
CGU is 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.
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 expected share price volatility. In addition, the options issued have characteristics different from those
of traded options so the Black-Scholes option-pricing model may not provide a reliable single measure of the fair value of
options issued. Changes in the subjective assumptions can have a material effect on the fair value estimate.
Interest rate derivatives
Financial instruments accounting requires recognition of the fair value of all derivative instruments on the statement of financial
position as either assets or liabilities. Changes in a derivative’s fair value are recognized currently in earnings unless specific
hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other
comprehensive income or current earnings, depending on the nature and designation of the instrument.
Interest rate derivatives are not considered trading instruments as the Company intends to hold them until maturity.
Nonetheless, interest rate derivatives do not qualify as a hedge for accounting purposes, and are therefore recorded as separate
derivative financial instruments. Accordingly, the estimated fair value of interest rate derivatives is recorded as an asset or a
liability on the accompanying consolidated statement of financial position. Payments made and received pursuant to the terms
of the interest rate derivatives are recorded as an adjustment to interest expense, and adjustments to the fair value of the interest
rate derivatives are recorded as gain or loss on interest rate derivatives. The fair value of interest rate derivatives is based upon
the estimated net present value of cash flows.
51
Taxes
FOR THE YEAR ENDED DECEMBER 31, 2021
Accounting for tax requires the resolution of many complexities and the exercise of significant management judgement,
including the following: (a) Pawnee, Tandem, Blue Chip, Vault Credit, and Vault Home 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 base. 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. In contrast, 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.
(b) Deferred tax assets are only recognized to the extent that they are more than 50% likely to be realized. (c) Pawnee, Blue
Chip and Vault Credit account for their lease arrangements as operating leases for tax reporting purposes. This results in
temporary differences between financial and tax reporting for which deferred taxes have been provided.
CHANGES IN ACCOUNTING POLICY AND DISCLOSURES
New standards effective for the Company’s December 31, 2021 year
(a) Phase 2 of the Interest Rate Benchmark Reform amendments made to IFRSs: 7 Financial Instruments: Disclosures; 9
Financial Instruments; and 16 Leases, that provide relief for issues that may arise on transition to an alternative benchmark, for
example, changes to contractual cash flows for financial instruments. The current terms of Chesswood's credit facilities in Note
13 - Borrowings are immaterially impacted by the interest rate benchmark reform. In addition, the company does not have any
interest rate hedge relationships. Therefore, these amendments had no impact on the consolidated financial statements of the
Company.
(b) COVID-19 rent concession amendment made to IFRS 16 Leases, provides lessees with an exemption from assessing
whether or not a rent concession related to COVID-19 is a lease modification. Chesswood has not received any rent concessions
related to COVID-19. Therefore, this amendment had no impact on the consolidated financial statements of the Company.
Standards issued but not yet effective
Management is currently considering the effect of the following amendments but that are not yet effective:
(a) Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, to clarify which costs to include in the
assessment of whether a contract is onerous. The Company will adopt the amendment when it becomes effective in the
Company’s December 31, 2022 year.
(b) AIP 2018-2020 Cycle amendment to IFRS 1 First-time adoption of International Financial Reporting Standards, allows
subsidiaries that adopt IFRS at a later date than its parent to measure cumulative translation differences using the amounts
reported by the parent based on the parent's date of transition to IFRS. The Company will adopt the amendment when it
becomes effective in the Company’s December 31, 2022 year.
(c) AIP 2018-2020 Cycle amendment to IFRS 9 Financial Instruments, provides a clarification on the fees that an entity is
allowed to include when applying the '10 per cent' test when assessing whether to derecognize a financial liability. The
Company will adopt the amendment when it becomes effective in the Company’s December 31, 2022 year.
(d) Amendment to IFRS 3 Business Combinations, updating the standard to reference the 2018 conceptual framework when
determining what constitutes an asset or liability in a business combination, a new exception requiring reference to IAS 37 and
IFRIC 21 for certain liabilities and contingent liabilities, and a clarification that acquirers should not recognize contingent
assets. The Company will adopt the amendment when it becomes effective in the Company’s December 31, 2022 year.
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FOR THE YEAR ENDED DECEMBER 31, 2021
RELATED PARTY TRANSACTIONS
Ryan Marr, CEO of Chesswood, is the chief investment officer and a minority shareholder of Waypoint, which established an
investment fund through which a subsidiary of Pawnee established a credit facility with on April 29, 2021 . The Company has a
small minority ownership interest in the general partner of such fund. The facility has recourse only to the assets financed. The
cost of each loan advance is fixed at the time of each tranche. Pawnee retains the servicing of these finance receivables in
exchange for a fee. The balance of this facility at December 31, 2021 was US$19.0 million. Based on average debt levels, the
effective return provided to the private credit investors is 12.5% (including amortization of origination costs).
See Note 25 - Related Party Transactions in the audited consolidated financial statements for the disclosure of key management
compensation and other related party transactions related to the Canadian Equipment Financing Segment.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer (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 or interim 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, 2021 and have
concluded that the design of the Company’s DC&P was 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 operating effectively as at December 31, 2021.
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 assessed the design effectiveness of the Company’s ICFR as at December 31, 2021 and have
concluded that the design of the Company’s ICFR was effective as at that date.
The Certifying Officers have also evaluated the operating effectiveness of the Company’s ICFR and have concluded that the
Company's ICFR was operating effectively as at December 31, 2021.
Other than the completion of the integration and alignment process of the newly acquired entities discussed below, during the
quarter ended December 31, 2021, 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.
Scope of Design
Effective April 30, 2021, through a newly created entity, Canadian Holdco, the Company carried out the merger of its Canadian
equipment leasing subsidiary, Blue Chip, with Vault Credit, a provider of equipment lease and commercial loan financing to
small and medium businesses across Canada. Canadian Holdco effectively acquired 100% of the shares of Blue Chip and Vault
53
FOR THE YEAR ENDED DECEMBER 31, 2021
Credit and in return Chesswood received 51% ownership of Canadian Holdco as well as control of the Canadian Holdco board,
through a priority vote. For further information, reference should be made to Note 29 – Business Combinations - in the audited
consolidated financial statements for the year ended December 31, 2021.
Following the merger, Vault Credit, a privately held organization, substantially assumed management of Blue Chip, processing
all of its transactions through its own personnel, controls, policies and procedures, resulting in the then existing Blue Chip
environment effectively ceasing to exist or not relevant for certification purposes.
On September 14, 2021, Chesswood Holdings Ltd. acquired shares providing a 51% ownership interest in Vault Home post
acquisition for a subscription price of $1.0 million and committed to also provide capital contributions of $1.5 million upon
request of the Vault Home board of directors. Vault Home is incorporated in Ontario and had not yet earned revenue as at the
date of acquisition. The Company exercises control over Vault Home through the ability to control the decisions of Vault
Home’s board of directors, through a priority vote, related to those activities that are most relevant to determining returns.
Following the acquisition, Vault Credit, substantially assumed management of Vault Home, processing all of its transactions
through its own personnel, controls, policies and procedures.
Following the acquisitions, management of Chesswood commenced the process of integrating and aligning Canadian Holdco's
and Vault Home's controls, policies and procedures with those of Chesswood. In order to allow time for completion of this
integration and alignment, for the quarters ended, June 30, 2021 and September 30, 2021, Chesswood availed itself of the scope
limitation permitted under section 3.3(1)(b) of National Instrument 52-109 which allows an issuer to limit its design of DC&P
and ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the
end of the fiscal period. Given the completion of the integration and alignment process, the scope limitation discussed above
was lifted as at December 31, 2021.
Limitations of an Internal Control System
The Certifying Officers believe that any DC&P or ICFR, no matter how well designed 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 control is also based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions.
Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
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FOR THE YEAR ENDED DECEMBER 31, 2021
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, 2021.
January
February
March
April
May
June
July
August
September
October
November
December
Common Shares
High
$9.30
$9.28
$9.44
$12.85
$13.89
$13.75
$13.35
$12.18
$12.29
$13.66
$14.50
$14.55
$14.55
Low
$8.38
$8.78
$8.90
$9.34
$12.30
$12.54
$10.94
$10.95
$11.32
$11.57
$12.46
$13.35
$8.38
Average Daily Volume
11,296
10,860
13,320
60,988
57,007
22,599
17,890
16,700
12,214
16,254
20,139
12,158
22,567
55
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Chesswood Group Limited (the "Company") 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 (the "Board") 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 Risk Committee.
The Chief Executive Officer and the Chief Financial Officer (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, 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, 2021 and have
concluded that the Company’s DC&P and ICFR are effective as at financial year end.
The Audit and Risk 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 Risk 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 Risk Committee to discuss their audit and related findings as to the integrity of the financial
reporting.
(signed) Ryan Marr
President & CEO
March 9, 2022
56
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 statement of financial position as at December 31, 2021 and 2020, 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, 2021 and 2020, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRSs).
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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Business Combinations
During the year ended December 31, 2021, the Group completed two acquisitions for aggregated consideration of
approximately $33million. Business combinations were determined to be a key audit matter requiring special audit
consideration given there are significant estimates and judgement over the measurement of the transaction price as well as the
determination of the allocation of the transaction price to the acquired assets and liabilities based on their respective fair values.
Refer to Note 29 of the Consolidated Financial Statements for details on the Group’s business combinations during the year.
How the Audit Matter was Addressed in the Audit
We reviewed the share purchase agreements for the acquisitions, reviewed management’s estimates of the measurement of the
transaction price, including the accounting treatment of and the estimated fair value of the option liability, as well as the fair
value allocation to the assets and liabilities acquired in each acquisition.
We utilized our valuation specialists to assist in the assessment of the reasonableness of management’s valuation methodology
as well as the significant assumptions used in measuring any contingent consideration. The assessment included the
reasonableness of the allocation to various individual identifiable intangible assets, including evaluating the estimates
surrounding discount rates, forecast growth and terminal growth rates where applicable. We also performed sensitivity analysis
around the key inputs and assumptions and considered the likelihood of reasonably possible movements in those key
assumptions in the context of the scope and size of the acquisitions.
Allowance for Expected Credit Losses (ECL)
The Group has an allowance for expected credit losses (‘ECL’) of $22M recorded against its finance receivables. The Group’s
assessment of the allowance involves significant estimates and judgements relating to the application of the ECL model
prescribed in IFRS 9, in particular, with respect to the timing and amount of the credit loss as well as considerations for
forward-looking information. In addition, and partly as a result of the ongoing COVID-19 pandemic, the economic environment
is still experiencing significant volatility and uncertainty, which has a direct impact on forward-looking macroeconomic
variables, probability weights and overlays. As a result, we identified the loss allowance measurement for expected credit losses
as a significant risk, requiring special audit consideration. Refer to Note 7 of the Consolidated Financial Statements for details
of the Group’s finance receivables and allowance for expected credit losses.
57
How the Audit Matter was Addressed in the Audit
Our audit procedures included, among others, an assessment of the appropriateness of the ECL model developed by
management. We performed an independent assessment of the significant inputs and assumptions used by management such as
historical loss rate, segmentation and staging of the lease and loan portfolio, assessment of significant increase in credit risk and
forward-looking macroeconomic factors. We also focused on the adequacy of the Group’s disclosures over the description of its
methodology and the related significant inputs and assumptions.
Other Information
Management is responsible for the other information. The other information comprises:
•
•
The information, other than the consolidated 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, 2021.
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 the 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
IFRSs, 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.
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,
58
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.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when,
in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Bradley Tagieff.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
March 9, 2022
59
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of Canadian dollars)
December 31,
December 31,
Note
2021
2020
ASSETS
Cash
Restricted funds
Other assets
Finance receivables
Right-to-use assets
Property and equipment
Intangible assets
Goodwill
TOTAL ASSETS
LIABILITIES
Accounts payable and other liabilities
Premise leases payable
Option liability
Borrowings
Customer security deposits
Interest rate derivative
Deferred tax liabilities
EQUITY
Common shares
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Non-controlling interest
$
13(d)
6
4, 7
12,379
67,069
11,254
1,439,727
2,089
2,348
26,938
43,143
$
9,668
35,714
2,904
740,878
1,697
1,736
10,919
23,920
$
1,604,947
$
827,436
$
31,764
$
8
9
10
11
12
8
4, 29
4, 13
4, 14
4, 15
16
20
22, 29
21,29
2,522
11,560
1,339,674
4,362
—
27,083
1,416,965
109,672
23,875
10,961
28,815
173,323
14,659
187,982
17,531
2,163
—
638,976
7,210
340
20,400
686,620
104,236
5,605
11,733
7,445
129,019
11,797
140,816
827,436
TOTAL LIABILITIES AND EQUITY
$
1,604,947
$
Subsequent events
30
Approved by the Board of Directors
(signed) Edward Sonshine, O. Ont., Q.C.
(signed) Raghunath Davloor
Chairman, Board of Directors
Chairman, Audit and Risk Committee
Please see notes to the consolidated financial statements.
60
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(in thousands of Canadian 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
Amortization
Operating income
Restructuring and other transaction costs
Goodwill and intangible asset impairment
Gain on investments
Gain (loss) on interest rate derivative
Unrealized gain (loss) on foreign exchange
Income (loss) before taxes
Current tax expense
Deferred tax recovery
Tax expense
Net income (loss)
Attributable to:
Common shareholders
Non-controlling interest
Income (loss) from operations attributable to common shareholders per
share:
Basic
Diluted
Year ended December 31,
Note
2021
2020
$
120,112
$
102,896
17,971
138,083
31,671
188
31,859
106,224
35,813
26,450
1,111
1,789
65,163
41,061
—
—
—
344
666
42,071
(13,849)
2,947
(10,902)
14,160
117,056
28,521
25,644
54,165
62,891
20,123
18,618
1,216
1,333
41,290
21,601
(9,250)
(20,828)
483
(118)
(6)
(8,118)
(2,723)
2,316
(407)
$
$
$
$
$
31,169
$
(8,525)
28,796
2,373
1.75
1.59
$
$
$
$
(7,814)
(711)
(0.48)
(0.48)
4, 7
9
10
11
4
4
16
16
24
24
Please see notes to the consolidated financial statements.
61
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(in thousands of Canadian dollars)
Net income (loss)
Other comprehensive income items which may be reclassified subsequently to the
consolidated statements of income:
Unrealized loss on translation of foreign operations
Comprehensive income (loss)
Attributable to:
Common shareholders
Non-controlling interest
Year ended December 31,
2021
2020
$
31,169
$
(8,525)
(841)
(2,424)
30,328
$
(10,949)
28,024
2,304
$
$
(10,037)
(912)
$
$
$
Please see notes to the consolidated financial statements.
62
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(in thousands of Canadian dollars)
Note
Common
shares
Common
shares
Contributed
Surplus
(# '000s)
Accumulated
other
comprehensive
income
Retained
earnings
Total
shareholders'
equity
Non-
controlling
interest
2021 Total
Shareholders' equity -
December 31, 2020
Net income
Dividends declared
Share-based compensation
Exercise of restricted share
units
Exercise of options
Repurchase of common
shares under issuer bid
Unrealized loss on translation
of foreign operations
Acquisition of subsidiary
Special warrants issued on
business combination
Shares issued on business
combination
Shareholders' equity -
December 31, 2021
23
22
22
22
20
29
29
29
16,255 $ 104,236 $
—
—
—
—
—
—
5,605 $
—
—
3,544
11,733 $ 7,445 $ 129,019 $ 11,797 $ 140,816
2,373 31,169
(6,143)
(473)
3,544
—
— 28,796
(5,670)
—
—
—
28,796
(5,670)
3,544
7
668
71
6,855
(71)
(1,612)
—
—
—
—
—
5,243
—
—
—
5,243
—
—
—
(488)
(3,157)
—
—
—
—
—
—
16,409
133
1,667
—
—
(1,756)
(4,913)
—
(4,913)
(772)
—
—
—
—
—
(772)
—
(69)
1,031
(841)
1,031
—
16,409
— 16,409
—
1,667
—
1,667
16,575 $ 109,672 $
23,875 $
10,961 $ 28,815 $ 173,323 $ 14,659 $ 187,982
Note
Common
shares
Common
shares
Contributed
Surplus
(# '000s)
Accumulated
other
comprehensive
income
Retained
earnings
Total
shareholders'
equity
Non-
controlling
interest
2020 Total
Shareholders' equity -
December 31, 2019
Net loss
Dividends declared
Share-based compensation
Exercise of restricted share
units
Repurchase of common
shares under issuer bid
Unrealized loss on translation
of foreign operations
Shareholders' equity -
December 31, 2020
23
22
22
20
16,248 $ 103,963 $
5,509 $
13,956 $ 20,125 $ 143,553 $ 13,130 $ 156,683
—
—
—
—
—
—
—
—
920
93
824
(824)
(86)
(551)
—
—
—
—
—
—
—
—
(7,814)
(7,814)
(711)
(8,525)
(4,632)
(4,632)
(421)
(5,053)
—
—
920
—
920
—
—
—
—
(234)
(785)
—
(785)
(2,223)
—
(2,223)
(201)
(2,424)
16,255 $ 104,236 $
5,605 $
11,733 $ 7,445 $ 129,019 $ 11,797 $ 140,816
Please see notes to the consolidated financial statements.
63
CHESSWOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(in thousands of Canadian dollars)
OPERATING ACTIVITIES
Net income (loss)
Non-cash items included in net income
Amortization and depreciation
Goodwill and intangible asset impairment
Provision for credit losses
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
Recoveries of amounts previously charged off
Change in other net operating assets
Cash from (used in) operating activities before tax
Income taxes paid
Income tax refund
Cash from (used in) operating activities
INVESTING ACTIVITY
Purchase of property and equipment
Business combinations, cash acquired
Cash from (used in) investing activity
FINANCING ACTIVITIES
Borrowings, net
Payment of financing costs
Payment of lease obligations
Proceeds from exercise of options
Repurchase of common shares under issuer bid
Cash dividends paid
Cash from (used in) financing activities
Unrealized foreign exchange gain (loss) on cash
Net increase (decrease) in cash
Cash, beginning of period
Cash, end of period
Year ended December 31,
Note
2021
2020
$
31,169
$
(8,525)
10, 11
4, 7
16
27
7
27
29
27
13
8
22
20
23
2,900
—
188
29,141
10,902
5,554
48,685
79,854
(934,034)
(57,074)
434,362
13,690
(23,918)
(487,120)
(13,312)
1,208
(499,224)
(1,003)
2,796
1,793
510,872
(4,922)
(683)
5,243
(4,913)
(5,571)
500,026
116
2,711
9,668
$
12,379
$
2,549
20,828
25,644
24,725
407
7,584
81,737
73,212
(280,753)
(20,523)
304,988
15,031
(15,525)
76,430
(10,198)
13,648
79,880
(880)
—
(880)
(69,147)
(3,645)
(711)
—
(785)
(5,939)
(80,227)
(137)
(1,364)
11,032
9,668
Please see notes to the consolidated financial statements.
64
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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
SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
FINANCIAL INSTRUMENTS
FINANCIAL RISK MANAGEMENT
OTHER ASSETS
FINANCE RECEIVABLES
RIGHT-TO-USE ASSETS AND PREMISE LEASES PAYABLE
PROPERTY AND EQUIPMENT
INTANGIBLE ASSETS
GOODWILL
ACCOUNTS PAYABLE AND OTHER LIABILITIES
BORROWINGS
CUSTOMER SECURITY DEPOSITS
INTEREST RATE DERIVATIVES
TAXES
17 MINIMUM PAYMENTS
18
19
20
21
22
23
24
25
26
27
28
29
30
CONTINGENT LIABILITIES AND OTHER FINANCIAL COMMITMENTS
CAPITAL MANAGEMENT
COMMON SHARES
EXCHANGEABLE SECURITIES
COMPENSATION PLANS
DIVIDENDS
EARNINGS PER SHARE
RELATED PARTY TRANSACTIONS
SUBSIDIARIES
CASH FLOW SUPPLEMENTARY DISCLOSURE
SEGMENT INFORMATION
BUSINESS COMBINATIONS
SUBSEQUENT EVENTS
65
66
75
76
77
80
80
84
85
86
87
88
89
92
92
93
94
95
95
95
96
96
99
101
101
103
103
105
107
109
1. NATURE OF BUSINESS
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 1133 Yonge Street, Suite 603, Toronto, ON, M4T 2Y7, and its shares trade on the Toronto
Stock Exchange under the symbol CHW.
Through its subsidiaries (ownership interests described in Note 26 - Subsidiaries), the Company operates in the following
businesses:
•
Pawnee Leasing Corporation (“Pawnee”) - micro and small-ticket equipment financing to small and medium-sized
businesses in the United States.
Tandem Finance Inc. ("Tandem") - small-ticket equipment financing originations through equipment vendors and
distributors in the United States.
•
65
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
•
Blue Chip Leasing Corporation ("Blue Chip") - commercial equipment financing to small and medium-sized
businesses in Canada.
• Vault Credit Corporation ("Vault Credit") - commercial equipment financing and loans to small and medium-sized
businesses in Canada.
• Vault Home Credit Corporation ("Vault Home") - home improvement and other consumer financing solutions in
Canada.
Chesswood Capital Management Inc. ("CCM") and Chesswood Capital Management USA Inc. ("CCM USA") will provide
private credit alternatives to investors seeking exposure to lease and loan receivables originated by Chesswood subsidiaries.
These entities were incorporated December 2021.
In order to improve clarity, certain items have been combined in the consolidated financial statements with details provided
separately in the notes to the consolidated financial statements.
The Company’s audited consolidated financial statements were authorized for issue on March 9, 2022 by the Board of
Directors.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
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.
Certain prior year amounts have been reclassified on the consolidated statements of cash flows and consolidated statements of
income to conform with current year presentation.
Basis of consolidation
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.
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., CCM,
Blue Chip, Vault Credit, Vault Home, and Lease-Win Limited is the Canadian dollar. The functional currency of Chesswood
U.S. Acquisition Co Ltd., Pawnee, Windset, Tandem, the Special Purpose Entities (SPEs), CCM USA, and Case Funding is the
United States dollar. Refer to Note 26 - Subsidiaries for additional information on the subsidiaries. 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, 2021 - 1.2535; December 31, 2020 - 1.3415), and assets and liabilities are translated at the closing rate (as at December 31,
2021 - 1.2678; December 31, 2020 - 1.2732). Exchange differences arising from the translation are recognized in other
66
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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
Cash consists of bank balances adjusted for items such as deposits in transit.
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 and changes in net operating assets.
Receipts and payments with respect to tax are included in cash from operating activities.
Cash flow from investing activities comprises payments relating to business acquisitions and purchase of property and
equipment net of cash acquired on business combinations.
Cash flow from financing activities comprises payment of dividends, lease obligations, and financing costs, net proceeds from
borrowings, stock issues, and the purchase and sale of treasury stock.
Restricted funds
Restricted funds represent cash reserve accounts which are held in trust as security for secured borrowings (facilities described
in Note 13 - Borrowings), cash related to early terminations on securitized finance receivables, and cash collection accounts
required by the lenders of certain financial assets that can only be used to repay these debts on specific dates. The 'cash in
collections accounts' will be applied to the outstanding borrowings in the following month.
Revenue Recognition
Interest revenue on finance leases and loans is recognized using the effective interest rate method. Ancillary finance and other
fee income is recognized when earned.
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 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. 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 ("FVTPL"). 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.
67
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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.
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.
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, option liability, accounts payable and other
liabilities, premise leases payable, 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 ("FVTPL"). 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 derivative is required to be measured at fair value through net income or loss. 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.
68
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
The categories to which the financial instruments are allocated are:
Financial instrument
Classification
ASSETS
Cash
Restricted funds
Other assets - loan receivable
Other assets - investments
Finance receivables
LIABILITIES
Accounts payable and other liabilities
Borrowings
Customer security deposits
Interest rate derivative
Premise leases payable
Option liability
Amortized cost
Amortized cost
Amortized cost
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
Amortized cost
Amortized cost
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).
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.
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 net income 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 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,
segregated into prime and non-prime.
69
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
Definitions of default have been selected to eliminate the judgement that may otherwise be necessary, given the diversity within
the finance receivable portfolio, the lack of individual drivers of changes in credit risk across assets and over time, and the
resulting inability to assess which specific assets will be rectified. For the purposes of measuring ECL, a default 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 based on the following inputs by credit stage:
•
•
•
For Stage 1, the Company utilized recent static pool data applied to recent origination levels and included forward-
looking macroeconomic assumptions. Recent static pool data includes historical loss rates by credit class and by
originating quarter and therefore includes all knowable credit and economic conditions up to the reporting date.
For Stage 2, the Company considers prime leases and loans to have experienced a significant increase in credit risk
since initial recognition if they are delinquent for over 30 days. Non-prime leases and loans that have experienced a
significant increase in credit risk include: those instruments that are delinquent for over 30 days; and an estimate of
those assets that will subsequently become delinquent calculated as approximately 14% (December 31, 2020 - 15%) of
non-prime assets that are in default but have been delinquent for less than 30 days at the reporting date.
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 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.
The Company is entitled to repossess financed equipment if the borrower defaults on their lease or loan contract. When a lease
or loan is charged-off, the expected resale value of the related equipment is recorded on the consolidated financial statements so
that the total charge-off is net of expected recoveries. Any amounts recovered from the sale of equipment after a charge-off in
excess of the expected resale value, 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 to repossess and sell the equipment. As the U.S.
Equipment Financing Segment, Blue Chip and Vault Credit finance a wide range of small equipment, it is difficult to estimate
the fair value of the potential collateral when estimating future ECLs.
In addition to internal weighted average static pool data, the process of estimating ECLs uses the following inputs and
assumptions to reflect information about past events, current conditions and forecasts of future conditions that are not already
captured in the inputs:
•
•
•
•
•
Security deposits held;
Recoveries of amounts previously charged off in the last 12 months, as an estimate of recoveries for the next 12
months;
An estimate of the effects on credit losses in the next 12 months of natural disasters and economic shocks,
including the COVID-19 pandemic;
The stage of the business cycle for the industry, which considers: the competitive environment, GDP growth,
prevailing interest rates and expectations of future rates, fiscal policy and inflation rates; and
Current delinquency trends of non-accrual and greater than 30 days delinquency rates.
In cases where a borrower experiences financial difficulties, the U.S. Equipment Financing Segment, Blue Chip and Vault
Credit 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. The U.S. Equipment Financing Segment, Blue Chip and Vault Credit 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
70
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
performance and improvement in the borrower's financial condition.
Right-of-use assets and premise leases payable
Under IFRS 16, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys the
right to control the use of an identified asset for a period of time in exchange for consideration. Included in right-to-use assets
and premise leases payable are the Company’s leased offices at Pawnee and Tandem, as well as Vault Credit and Blue Chip
locations. For such agreements, the Company recognizes a right-to-use asset and a lease liability at the lease commencement
date. Measurement requires the lease term to be determined which includes optional extension periods only if they are
reasonably certain to be exercised. Determining the lease term is judgmental.
The lease liability is initially measured at the present value of the lease payments that are unpaid at the commencement date,
discounted using the Company’s incremental borrowing rate because the rate implicit in the lease is not known. The right-to-
use asset is measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset
or to restore the underlying asset or the site on which it is located, less any lease incentives received.
The right-to-use assets are depreciated over the respective lease term using the straight-line method as this most closely reflects
the expected pattern of consumption of the future economic benefits. Lease terms range from 1 to 7 years, and the optional
extension periods have been excluded. Right-to-use assets are reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability. The lease liability is subsequently accounted for at amortized cost using the effective
interest rate method.
The lease liability for the Company’s leases will be remeasured in a future period if there is a change in future lease payments
arising from a change in the likelihood that extension options or termination options are exercised. A sublet of leased space is
treated as a disposal of the associated right-to-use asset with any resulting gain or loss recognized in net income. On
remeasuring a lease agreement, a corresponding adjustment is made to the carrying amount of the right-to-use asset.
Property and equipment
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.
Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets as follows:
Asset class
Computer hardware
Furniture and equipment
Useful life
3 - 7 years
2 - 12 years
Intangible assets
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 the Blue Chip
and Pawnee trade names have indefinite lives. The broker relationships and Vault Credit trade name are considered to have a
finite life and are amortized on a scheduled straight-line basis over their estimated useful life of seven to fifteen years. All
computer software is amortized on a scheduled straight-line basis over their estimated useful life of three to fifteen years
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
71
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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. The Company has determined its CGUs to be at
the segment level, with the exception of Vault Home which is its own CGU and aggregated within the Canadian segment.
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.
Goodwill
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 CGUs 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 value-in-use ("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 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.
Taxes
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 bases.
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.
Share-based compensation plans
The Company issues share options and restricted share units ("RSUs"), which are accounted for as equity-settled awards. The
equity instruments granted are measured by reference to the fair value of the options and RSUs using the Black-Scholes Option
Pricing model and fair value of the Company's share price without incorporating dividends, respectively.
72
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
The expense associated with the compensation plans is charged to net income, with a corresponding increase in contributed
surplus over the vesting period.
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.
Exercise of judgment and use of accounting estimates and assumptions
The preparation of the Company’s audited 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, revenues 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 are estimated
using valuation techniques based on assumptions of, for example, estimated future cash flows, and future interest rate
movements. The estimated fair values are sensitive to changes in these assumptions.
(a) Allowance for credit losses
ECLs are measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the
financial instrument based on inputs by credit stage.
Forecasts of future events and conditions are incorporated by adjusting losses from the static pool data, which is consistent with
prior periods. Determining the inputs listed and ECLs requires significant estimation uncertainty. In particular, determining the
COVID-19 effects to be layered over the static pool data at December 31, 2021 to estimate the effect on ECLs at that date -
which requires assessing the direction of macroeconomic variables in the forward-looking scenarios, the duration of lock-down
conditions, the effectiveness of relief programs at mitigating the effects on our lessees and borrowers, amongst other factors -
are subject to significant measurement uncertainty. Determining which finance receivables have seen a significant increase in
credit risk is also subject to significant judgement.
(b) Business combination and goodwill
Information about critical judgments, assumptions, and estimation uncertainties in applying business combination accounting
policies that have the most significant effect on the amounts recognized in the audited consolidated financial statements are
presented in Note 29 - Business Combinations.
In the Vault Credit Corporation business combination, the Company obtained a call option on the non-controlling interest
("NCI") and the holders of the NCI has a similar put option exercisable by the non-controlling interest. Chesswood exercised
judgement by applying IAS 32 to recognize a 100% ownership interest in the acquiree. In addition, the Company recognized a
financial liability under amortized cost for the present value of the amount payable upon exercise of the NCI option. No NCI is
recognized on acquisition and all dividends paid to the NCI is recognized as an expense through the consolidated statements of
income.
(c) Impairment of intangibles and goodwill
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
73
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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 VIU is most
sensitive to the discount rate used and the growth rate applied beyond the five-year estimate.
The Company performs an annual goodwill impairment test. The Company is also required to test its assets for impairment,
including goodwill and intangible assets with indefinite lives, between the annual assessments when facts and other
circumstances indicate that impairment may have occurred.
The impairment test is performed at the CGU level because none of the Company’s non-financial assets generate independent
cash inflows. 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 the
operating segments are most sensitive to assumptions of lease origination volumes and net charge-offs. The cash flow
inputs used represent management’s current best estimates and are consistent with changes seen in the finance receivable
portfolio and with readily available external sources of information. Each of those variables will ultimately be determined
by the duration of restrictions that are currently in place to contain the pandemic, the effects and ultimate success of which
are inherently unknowable.
ii) A terminal value incorporated into the VIU calculation which was estimated by applying a 3.0% growth rate to the cash
flow forecast for the fifth year. The growth rate reflects the historical average core inflation rate which does not exceed the
long-term average growth rate for the industry.
iii) A discount rate of approximately 53% was applied to the Canadian CGU forecasted cash flows (December 31, 2020 -
27%). The change in the estimated discount rate is due to the inclusion of a higher risk premium to reflect the high growth
and origination expectations subsequent to the Vault Credit business combination. A discount rate of approximately 31%
was applied to the U.S. CGU forecasted cash flows (December 31, 2020 - 35%). The change in the estimated discount rate
reflects the lowered risks present in the finance receivables in the current environment as the CGU continues to experience
strong originations, collections, and growth.
The estimation of VIU is subject to considerable measurement uncertainty.
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.
Refer to Note 10 and Note 11 for additional information.
(d) Taxes
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.
(e) Fair value of share-based compensation
The value of the options granted was determined using the Black-Scholes Option Pricing model. The model utilized the
weighted average share price at grant date, expected volatility, expected life, expected dividend yield, and risk-free interest as
inputs to the model.
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.
74
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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.
3. NEW ACCOUNTING STANDARDS
New standards effective for the Company’s December 31, 2021 year
(a) Phase 2 of the Interest Rate Benchmark Reform amendments made to IFRSs: 7 Financial Instruments: Disclosures; 9
Financial Instruments; and 16 Leases, that provide relief for issues that may arise on transition to an alternative benchmark, for
example, changes to contractual cash flows for financial instruments. The current terms of Chesswood's credit facilities in Note
13 - Borrowings are immaterially impacted by the interest rate benchmark reform. In addition, the company does not have any
interest rate hedge relationships. Therefore, these amendments had no impact on the consolidated financial statements of the
Company.
(b) COVID-19 rent concession amendment made to IFRS 16 Leases, provides lessees with an exemption from assessing
whether or not a rent concession related to COVID-19 is a lease modification. Chesswood has not received any rent concessions
related to COVID-19. Therefore, this amendment had no impact on the consolidated financial statements of the Company.
Standards issued but not yet effective
Management is currently considering the effect of the following amendments that are issued by the IASB but that are not yet
effective:
(a) Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, clarifies which costs to include in the
assessment of whether a contract is onerous. The Company will adopt the amendment when it becomes effective in the
Company’s December 31, 2022 year.
(b) Annual Improvements Project (AIP) 2018-2020 Cycle amendment to IFRS 1 First-time adoption of International Financial
Reporting Standards, allows subsidiaries that adopt IFRS at a later date than its parent to measure cumulative translation
differences using the amounts reported by the parent based on the parent's date of transition to IFRS. The Company will adopt
the amendment when it becomes effective in the Company’s December 31, 2022 year.
(c) AIP 2018-2020 Cycle amendment to IFRS 9 Financial Instruments, provides a clarification on the fees that an entity is
allowed to include when applying the '10 per cent' test when assessing whether to derecognize a financial liability. The
Company will adopt the amendment when it becomes effective in the Company’s December 31, 2022 year.
(d) Amendment to IFRS 3 Business Combinations, updates the standard to reference the 2018 conceptual framework when
determining what constitutes an asset or liability in a business combination, a new exception requiring reference to IAS 37 and
IFRIC 21 for certain liabilities and contingent liabilities, and a clarification that acquirers should not recognize contingent
assets. The Company will adopt the amendment when it becomes effective in the Company’s December 31, 2022 year.
75
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
4. FINANCIAL INSTRUMENTS
(a) Categories and measurement hierarchy
The fair values of other financial instruments are classified using the IFRS 13, Fair Value Measurement, hierarchy as follows:
($ thousands)
ASSETS
Finance receivables (i)
LIABILITIES
Borrowings (ii)
Customer security deposits (iii)
Option liability (iv)
($ thousands)
ASSETS
Level 1
Level 2
Level 3
Fair Value
Carrying Value
December 31, 2021
—
1,439,727
—
1,439,727
1,439,727
—
—
—
(1,339,674)
(4,362)
(11,560)
—
—
—
(1,339,674)
(4,362)
(1,339,674)
(4,362)
(11,560)
(11,560)
Level 1
Level 2
Level 3
Fair Value
Carrying Value
December 31, 2020
Finance receivables (i)
—
740,878
—
740,878
740,878
LIABILITIES
Borrowings (ii)
Customer security deposits (iii)
Interest rate derivative (v)
—
—
—
(638,976)
(7,210)
(340)
—
—
—
(638,976)
(7,210)
(340)
(638,976)
(7,210)
(340)
i.
There is no organized market for the finance receivables. The carrying value is the amortized cost using the effective
interest rate method which approximates fair value because 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. There is no organized market for customer security deposits. The carrying value is the amortized cost using the effective
interest rate method which approximates fair value because contractual interest rates approximate current market rates.
iv. The option liability is initially measured at fair value at the discounted cash outflow expected on exercise. The call option
exercise price is equal to 105% of the value of the unowned portion of Canadian Holdco's receivables portfolio net of any
related debt. The option is subsequently held at amortized cost. The non-controlling interest in Vault Credit has a put
option on the shares with an exercise price equal to 95% of the value of the unowned portion of receivables portfolio net of
any related debt, creating a demand liability. The liability is valued at the greater of the call and put option. The carrying
value of the option approximates fair value because contractual interest rates approximate current market rates and the
exercise price is based on the fair market value of the underlying assets. All of the significant inputs are directly or
indirectly observable.
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.
76
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
(b) Gains and losses on financial instruments
The following table shows the net gains and losses arising for each category of financial instruments:
($ thousands)
Amortized cost:
Provision for credit losses
Interest on option liability
Fair value through net income or loss:
Gain on investments
Interest rate derivative
Net gain (loss)
For the year ended
December 31,
2021
2020
$
(188) $
(25,644)
745
—
—
344
901
483
(118)
$
(25,279)
$
5. 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.
The Company's 2021 objectives, policies or processes for measuring and managing any of the risks to which it is exposed to no
longer accounts for the 2020 effects of COVID-19 on credit and liquidity risk as described in the following paragraphs.
In 2020, due to COVID-19, modifications to the terms of finance receivables were granted to a higher volume of receivables
than usual, as described in Note 7(e), as a means to avert economic losses. To manage the increased credit risk and minimize
future losses and charge offs, measures had been put in place at all operating subsidiaries. Those measures included a tightening
of underwriting, including limiting the type of equipment, industry, dollar value and receivable term and also required higher
credit ratings, which dampened originations. The Company’s subsidiaries also granted deferrals on portions of their respective
portfolios of leases and loans as a result of the COVID-19 pandemic. In addition, various credit facilities were amended to
better reflect COVID-19 related experiences and expectations.
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 restricted
funds 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.
The U.S. and Canadian Equipment Financing Segment'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 U.S. Equipment Financing
Segment'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 Canadian Equipment Financing Segment
borrower is a tenured small business with a strong credit profile.
77
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
The U.S. and Canadian Equipment Financing Segment's credit risk is mitigated by: funding only “business essential”
commercial equipment, where the value of the equipment is generally less than US$350,000, 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 and Canada respectively, type of equipment, vendor, equipment cost,
industries in which the segments' lessees/borrowers operate and through the number of lessees/borrowers, none of which is
individually significant. Furthermore, the U.S. Equipment Financing Segment’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 or advance payments, 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.
The subsidiaries 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 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.
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, 2021, the Company's operations have at least
$756.4 million (2020 - $485.2 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 net cash utilized to fund the growth in finance receivables (funds advanced, origination costs, security deposits, restricted
cash, and principal payments) is shown in Operating Activities in the Consolidated Statements of Cash Flows. The Company's
finance receivables have an average term of approximately 45 months. The finance receivables will generate earnings
approximately over the next 45 months, with only a portion in the current operating period. Our ability to borrow under our
various credit facilities is directly linked to our finance receivable portfolio. The funds borrowed to support the growth in the
finance receivables is shown under Financing Activities in the Consolidated Statements of Cash Flows. Presentation of cash
outflows for investment in a long-term asset in Operating Activities and the direct financing thereof under another category
(Financing Activities) results in a 'cash flow from operations' in the current period that is distorted. Management assesses 'cash
flow from operations' by excluding the net cash utilized to fund the growth in finance receivables (funds advanced, origination
costs, security deposits, restricted cash, and principal payments).
The Company has a corporate credit facility that allows borrowings of up to US$250.0 million with a US$50 million accordion
feature, subject to certain percentages of eligible gross lease receivables, of which US$153.5 million was utilized at
December 31, 2021 (2020 - US$71.9 million). See Note 13 - Borrowings. On January 14, 2022, the revolving credit facility
was re-negotiated. Refer to Note 30 - Subsequent Events. 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.
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
78
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
financial statements less the cost of any repurchases under normal course issuer bids, if any. The Company's 2020 dividend
payments were suspended during the year as disclosed in Notes 13(a) and 23 - Dividends.
The maturity structure for undiscounted contractual cash flows is presented in Note 17 - Minimum payments. Please see Note
7(b) - Finance Receivables for the expected collections of finance receivables over the same time period. See Note 13(d) -
Borrowings - for the amount of restricted cash in collection accounts that will be applied to debt in the following month.
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 interest rates and foreign currency.
a) Trading prices
The Company's investment in Dealnet common shares was measured at fair value at each reporting date with changes in fair
value recognized in net income or loss. The Dealnet common shares were sold during 2020.
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 following table presents a sensitivity analysis for a reasonable fluctuation in interest rates and the effect on the financial
position and performance as at and for the years ended December 31, 2021 and 2020:
($ thousands)
For the years ended
December 31, 2021
December 31, 2020
+100 bps
-100 bps
+100 bps
-100 bps
Increase (decrease) in interest expense
Increase (decrease) in net income and equity
$
$
2,637 $
(2,637) $
1,418
(1,936) $
1,936 $
(1,283)
$
$
(1,418)
1,283
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 United States, while dividends are paid to shareholders in Canadian dollars. For the year-ended December 31,
2021, dividends paid totaled $5.6 million (2020 - $5.9 million).
The following table presents a sensitivity analysis for a hypothetical fluctuation in U.S. dollar exchange rates and the effect on
the financial position and performance as at and for the years ended December 31, 2021 and 2020:
($ thousands)
Year-end exchange rate
U.S. denominated net assets in U.S.$ held in Canada
Effect of a 10% increase or decrease in the Canadian/U.S.
dollar on U.S. denominated net assets
December 31,
2021
December 31,
2020
1.2678
1.2732
$
$
528
$
67
$
125
16
79
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
6. OTHER ASSETS
($ thousands)
Tax receivable
Sales tax receivable
Prepaid expenses and other assets
Deferred tax asset
Other assets
Current
Long-term
Note
December 31,
2021
December 31,
2020
16
$
$
$
—
$
2,853
3,094
5,307
11,254
$
5,947
5,307
$
1,503
29
1,372
—
2,904
2,904
—
7. FINANCE RECEIVABLES
All lease and loan receivables have been pledged 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. The Company retains significant risks and rewards of ownership (in
some cases through consolidated special purpose entities ("SPEs")) and servicing responsibilities of the pledged lease and loan
receivables, and therefore continues to recognize them on the consolidated statement of financial position. None of our facilities
meet the requirements for gain-on-sale or de-recognition treatment for accounting purposes and none of the receivables have
been derecognized.
($ thousands)
Net investment in leases
Loan receivables
(a) Net investment in finance receivables includes the following:
($ thousands)
Total minimum finance receivables payments (b)
Residual values of leased equipment
Unearned income, net of initial direct costs
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,
2021
December 31,
2020
$
609,292
$
830,435
$
1,439,727
$
335,814
405,064
740,878
December 31,
2021
December 31,
2020
$
1,648,185
$
868,107
30,767
1,678,952
(238,299)
1,440,653
(22,393)
1,418,260
21,467
1,439,727
481,801
22,311
890,418
(135,772)
754,646
(24,363)
730,283
10,595
740,878
274,309
$
957,926
$
466,569
(b) Minimum scheduled collections of finance receivables at December 31, 2021, 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
80
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
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.
($ thousands)
2022
2023
2024
2025
2026
2027 and thereafter
Total minimum payments
Minimum
payments
Present value
$
585,270
$
436,194
319,582
204,920
95,277
6,942
476,703
367,927
280,765
187,336
90,508
6,646
$
1,648,185
$
1,409,885
(c) Allowance for credit losses
The Company’s ECL was determined as at December 31, 2021 based on forecasts and other information available at that date.
The impact of COVID-19 on the economy and the timing of recovery will continue to evolve with the subsequent effect
reflected in the measurement of ECLs in future quarters as appropriate. This may add significant volatility to ECL.
If the expected loss rates increased or decreased by 10% the provision for credit loss and the allowance for credit losses would
increase or decrease by approximately $0.4 million (December 31, 2020 - $2.2 million).
The following table shows the gross carrying amount of the finance receivables by credit category:
As at December 31, 2021
Stage 1
Performing
Stage 2
Under-
Performing
Stage 3
Non-
Performing
Total
$
1,069,280 $
359,742
$
1,429,022 $
2,674 $
3,459
6,133 $
2,640 $
1,074,594
2,858
366,059
5,498 $
1,440,653
As at December 31, 2020
Stage 1
Performing
Stage 2
Under-
Performing
Stage 3
Non-
Performing
Total
$
$
545,048 $
195,505
740,553 $
3,241 $
3,872
7,113 $
3,105 $
3,875
6,980 $
551,394
203,252
754,646
($ thousands)
Prime
Non-prime
Total
($ thousands)
Prime
Non-prime
Total
81
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
The following tables show reconciliations from the opening to the closing balance of the allowance for credit losses:
Year ended December 31, 2021
($ thousands)
Balance, January 1, 2021
Acquisition of Vault Credit leases
Transfer to Performing (Stage 1)
Transfer to Under-Performing (Stage 2)
Transfer to Non-Performing (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
Foreign exchange translation
Balance, end of year
Stage 1
Performing
Stage 2
Under-
Performing
Stage 3
Non-
Performing
$
10,832 $
6,831 $
6,700 $
2,169
2,459
(358)
(540)
(12,982)
12,329
3,077
—
—
—
(21)
—
(1,866)
798
(4,409)
3,162
—
(2,315)
—
—
—
(56)
—
(593)
(440)
4,949
(4,490)
—
(574)
13,690
(2,028)
(53)
$
13,888 $
4,460 $
4,045 $
Total
24,363
2,169
—
—
—
(14,310)
12,329
188
13,690
(2,028)
(130)
22,393
(15,718)
(15,718)
($ thousands)
Balance, January 1, 2020
Transfer to Performing (Stage 1)
Transfer to Under-Performing (Stage 2)
Transfer to Non-Performing (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
Foreign exchange translation
Balance, end of year
Year ended December 31, 2020
Stage 1
Performing
Stage 2
Under-
Performing
Stage 3
Non-
Performing
Total
$
11,914 $
8,072 $
10,319 $
30,305
7,112
(345)
(260)
(11,923)
4,446
(970)
—
—
—
(112)
(4,380)
755
(8,346)
10,811
—
(1,160)
—
—
—
(81)
(2,732)
(410)
8,606
22,310
—
27,774
(46,405)
15,031
(31,374)
(19)
—
—
—
21,198
4,446
25,644
(46,405)
15,031
(31,374)
(212)
$
10,832 $
6,831 $
6,700 $
24,363
Certain prior year amounts have been re-classed to conform with current year presentation.
(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 $4.4 million (December 31, 2020 - $7.2 million) of security deposits received
from lessees/borrowers and the collateral held (including potential proceeds from repossessed equipment, and potential
recoveries from personal guarantees) that would offset any charge-offs. An estimate of fair value for the collateral and personal
guarantees cannot reasonably be determined.
82
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(in Canadian dollars except where otherwise indicated)
The U.S. Equipment Financing Segment charges off leases and loans when they become 154 days contractually past due, unless
information indicates that an earlier charge-off is warranted. A high percentage of charge-offs are recognized before the subject
lease/loan reaches 154 days contractually past due, due to insolvency or non-responsiveness of the lessee or borrower. Blue
Chip and Vault Credit charge off leases and loans on an individual basis when there is no realistic prospect of recovery. Loan
and lease receivables that are charged-off during the period are all subject to continued collection efforts.
($ thousands)
Finance receivables
Credit impaired
Past due but not impaired
($ thousands)
Finance receivables
Credit Impaired
Past due but not impaired
As of December 31, 2021
Current 1-30 days
$ 1,421,895 $ 12,557 $
219 $
$
399 $
— $ 12,158 $
$
31 - 60
days
3,304 $
2,163 $
1,141 $
61 - 90
days
1,043 $
687 $
356 $
Over 90
Total
days
1,854 $ 1,440,653
5,291
1,823 $
13,686
31 $
As of December 31, 2020
Current 1-30 days
732,061 $ 13,354 $
115 $
664 $
— $ 12,690 $
$
$
$
31 - 60
days 61 - 90 days
4,481 $
1,560 $
2,921 $
2,439 $
2,179 $
260 $
Over 90
days
2,311 $
2,182 $
129 $
Total
754,646
6,700
16,000
(e) Modifications
The net investment in finance receivables that have been modified (in 2021 or prior) and are current at December 31, 2021 is
$103.7 million (December 31, 2020 - $183.0 million). On average the terms have been modified to extend the contracts by
approximately one to three months, depending on the modification. Modified finance receivables as at December 31, 2021 had
a total net investment in finance receivable balance of $109.0 million (December 31, 2020 - $218.0 million). The majority of
the modifications were related to COVID-19 deferrals. 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
The U.S. Equipment Financing Segment, Blue Chip and Vault Credit 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 expected resale value of the related
equipment is recorded on the consolidated financial statements so that the total charge-off is net of expected recoveries. Any
amounts recovered from the sale of equipment after a charge-off in excess of the expected resale value, are credited to the
allowance for credit losses when received. In the year ended December 31, 2021, the proceeds from the disposal of repossessed
equipment that was charged-off totaled $3.8 million (December 31, 2020 - $5.7 million). Repossessed equipment is held at
various warehouses by the companies contracted to repossess and sell the equipment.
83
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
8. RIGHT-TO-USE ASSETS AND PREMISE LEASES PAYABLE
The following table presents the right-to-use assets for the Company:
($ thousands)
Premises:
Balance, beginning of year
Business combinations
Additions
Reductions - sublet and termination
Depreciation
Foreign exchange translation
Balance, end of year
For the year ended
December 31,
2021
December 31,
2020
$
1,697
$
3,024
939
—
—
(532)
(15)
—
55
(726)
(645)
(11)
$
2,089
$
1,697
The contractual undiscounted cash flows for the related lease obligations are disclosed in Note 17 - Minimum payments. The
effective interest expense on these lease obligations for the year ended December 31, 2021 was $0.6 million (December 31,
2020 - $0.1 million) and is included in interest expense. Total outflow for leases for the year ended December 31, 2021 was
$0.7 million (December 31, 2020 - $0.7 million). Expenses for leases of low-dollar value items are not material. Pawnee's two
options to extend the premises lease term for two additional periods of 60 month each are not reasonably certain to be exercised
and have therefore been excluded from the measurement of lease obligations.
($ thousands)
Premise Leases Payable
Balance, beginning of year
Business combinations
Additions
Reduction - termination
Principal payments
Foreign exchange translation
Balance, end of year
For the year ended
December 31,
2021
December 31,
2020
$
2,163
$
3,222
922
—
—
(549)
(14)
—
55
(513)
(571)
(30)
$
2,522
$
2,163
84
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
9. PROPERTY AND EQUIPMENT
($ thousands)
Cost:
Furniture
and
equipment
Computer
hardware
Total
December 31, 2019
$
1,397
$
2,309
$
3,706
Additions
Disposals
Foreign exchange translation
December 31, 2020
Business combinations
Additions
Disposals
Foreign exchange translation
162
—
18
1,577
19
259
(17)
28
718
(17)
(14)
2,996
57
833
(733)
59
880
(17)
4
4,573
76
1,092
(750)
87
December 31, 2021
$
1,866
$
3,212
$
5,078
($ thousands)
Accumulated depreciation:
Furniture
and
equipment
Computer
hardware
Total
December 31, 2019
$
Depreciation
Disposals
Foreign exchange translation
December 31, 2020
Depreciation
Disposals
Foreign exchange translation
694
157
—
2
853
187
(17)
(5)
$
1,585
$
2,279
414
(17)
2
1,984
392
(644)
(20)
571
(17)
4
2,837
579
(661)
(25)
December 31, 2021
$
1,018
$
1,712
$
2,730
($ thousands)
Carrying amount:
December 31, 2019
December 31, 2020
December 31, 2021
Furniture
and
equipment
Computer
hardware
Total
$
$
$
703
724
848
$
$
$
724
1,012
1,500
$
$
$
1,427
1,736
2,348
85
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
10. INTANGIBLE ASSETS
The Company assessed its intangibles for impairment for the year ended December 31, 2021. The test identified no impairment.
Refer to Note 2 - Significant Accounting Policies for the Exercise of judgment and use of accounting estimates and
assumptions.
In 2020, based on the annual assessment of intangible assets, management determined that the carrying value of Blue Chip's
broker network exceeded its estimated fair value and recorded a $4.7 million impairment charge due to projected decreases in
future originations compared to the prior year end projection. The fair value was determined based primarily on discounted cash
flows, utilizing several assumptions and estimation uncertainties, especially as it relates to COVID-19.
($ thousands)
Cost:
December 31, 2019
Foreign exchange translation
December 31, 2020
Business combinations
Foreign exchange translation
December 31, 2021
($ thousands)
Accumulated amortization:
December 31, 2019
Impairment
Amortization
December 31, 2020
Amortization
December 31, 2021
($ thousands)
Carrying amount:
December 31, 2019
December 31, 2020
December 31, 2021
Indefinite useful
life
Trade names
Finite useful life
Broker relationships
& trade names
Total
$
$
$
$
$
$
$
7,429 $
(138)
7,291
—
(30)
7,261 $
19,517
$
—
19,517
17,838
—
37,355
$
26,946
(138)
26,808
17,838
(30)
44,616
Trade names
Broker relationships
& trade names
Total
127 $
—
—
127
—
$
9,739
4,690
1,333
15,762
1,789
127 $
17,551
$
9,866
4,690
1,333
15,889
1,789
17,678
Trade names
Broker relationships
& trade names
Total
7,302
7,164
7,134
$
$
$
9,778
3,755
19,804
$
$
$
17,080
10,919
26,938
The indefinite life 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.
86
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
The following table shows the carrying amount of indefinite-life intangible assets by CGU as at:
($ thousands)
U.S. Equipment Financing Segment
Canadian Equipment Financing Segment
Total indefinite-life intangible assets
December 31,
2021
December 31,
2020
$
$
6,846
288
7,134
$
$
6,876
288
7,164
11. GOODWILL
Goodwill totaled $43.1 million at December 31, 2021 compared to $23.9 million at December 31, 2020. The $19.2 million
increase was mainly due to the merger with Vault Credit and the acquisition of Vault Home as discussed in Note 29 - Business
Combinations. As at December 31, 2021, all Goodwill has been allocated to the Company's two CGUs.
The Company last performed its annual impairment tests at December 31, 2021, which identified no impairment.
In 2021, despite COVID-19, collections stay strong and with the acquisition of Vault Credit, the Canadian Equipment
Financing Segment entered growth mode with significant growth in applications and originations. In 2020, the economic
environment was unfavorable due to the various effects of the COVID-19 pandemic: applications and approvals of new finance
receivables had dropped compared to the same period in the previous year; economic measures indicated a reduced level of
activity, including spending and employment; and the Company’s dividend and share price had decreased. Total goodwill
impairment related to the Canadian Equipment Financing Segment recognized in 2020 was $16.1 million.
Management's sensitivity of the key assumptions discussed in Note 2 - Significant Accounting Policies, indicated there are no
reasonably possible changes that could cause the carrying value of the CGUs to exceed its recoverable value.
($ thousands)
Cost:
U.S.Equipment
Financing Segment
Canadian Equipment
Financing Segment
Total
December 31, 2019
$
47,109
$
26,365
$
Foreign exchange translation
December 31, 2020
Business combinations
Foreign exchange translation
(929)
46,180
—
(196)
December 31, 2021
$
45,984
$
—
26,365
19,280
—
45,645
($ thousands)
Accumulated impairment:
December 31, 2019
Impairment
Foreign exchange translation
December 31, 2020
Foreign exchange translation
U.S.Equipment
Financing Segment
Canadian Equipment
Financing Segment
$
33,140
$
—
(653)
32,487
(139)
—
16,138
—
16,138
—
$
$
$
Total
December 31, 2021
$
32,348
$
16,138
$
73,474
(929)
72,545
19,280
(196)
91,629
33,140
16,138
(653)
48,625
(139)
48,486
87
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
($ thousands)
Carrying amount:
December 31, 2019
December 31, 2020
December 31, 2021
U.S.Equipment
Financing Segment
Canadian Equipment
Financing Segment
Total
$
$
$
13,969
13,693
13,636
$
$
$
26,365
10,227
29,507
$
$
$
40,334
23,920
43,143
12. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities comprise:
($ thousands)
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,
2021
December 31,
2020
$
927 $
5,218
863
2,262
10,284
2,792
3,310
6,108
355
1,554
1,219
992
4,731
2,549
1,671
4,460
$
31,764 $
17,531
88
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
13. BORROWINGS
The Company and its subsidiaries were compliant with all covenants attached to the following facilities at December 31, 2021
and throughout the year then ended.
Chesswood
credit facility
(a)
Chesswood
deferred
financing
costs
U.S.
Equipment
Financing
Segment
credit
facilities (b)
U.S.
Equipment
Financing
Segment
deferred
financing costs
Canadian
Equipment
Financing
Segment
financing
facilities (c)
Total
($ thousands)
Net as at December 31, 2019
$
189,105 $
(2,178) $
395,743 $
(7,331) $
139,352 $
714,691
Proceeds or draw-downs
200,194
—
373,526
Repayments
(305,644)
—
(301,229)
—
—
—
1,642
—
1,050
—
—
—
—
—
(11,459)
11
—
—
(3,645)
3,342
2,491
35,353
609,073
(71,347)
(678,220)
—
—
—
—
(3,645)
4,392
2,491
(9,806)
85,297
(1,128)
456,581
(5,132)
103,358
638,976
Payment of financing costs
Amortization of deferred
financing costs
Debt restructuring
Foreign exchange translation
Net as at December 31, 2020
Assumed in business
combination
Proceeds or draw-downs
990,122
—
—
—
—
755,294
—
—
188,629
188,629
192,834
1,938,250
Repayments
(885,830)
—
(418,975)
—
(122,573)
(1,427,378)
Payment of financing costs
Amortization of deferred
financing costs
Foreign exchange translation
Net as at December 31,
2021
—
—
554
(437)
597
—
—
(4,485)
3,062
—
1,900
6
(4,922)
3,659
2,460
—
—
$
190,143 $
(968) $
794,800 $
(6,549) $
362,248 $ 1,339,674
(a) The Chesswood revolving credit facility allows borrowings of up to US$250.0 million, subject to, among other things,
certain percentages of eligible gross finance receivables. This credit facility includes a US$50 million accordion feature that can
increase the overall revolver to US$300 million, is secured by substantially all of the Company’s assets, contains covenants,
including maintaining leverage, interest coverage, and delinquency ratios, and expires on December 8, 2022. At December 31,
2021, the Company was utilizing US$153.5 million (December 31, 2020 - US$71.9 million) of its credit facility and had
approximately US$96.5 million in additional borrowings available under the corporate credit facility. Based on average debt
levels, the effective interest rate during the year ended December 31, 2021 was 4.50% (year ended December 31, 2020 -
5.42%). The effective interest rate for the three months ended December 31, 2021 was 4.27% (December 31, 2020 - 3.02%).
Since the current credit facility expires within the next 12 months, it is a current liability. On January 14, 2022, the revolving
credit facility was re-negotiated. Refer to Note 30 - Subsequent Events. In 2020, the Company was restricted from paying
dividends and limited quarterly equipment financing originations during the period that the temporary COVID-19 related
amendments were required.
This revolving credit facility allows Chesswood to internally manage the allocation of capital to its 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 financing facilities are not intended to directly fund dividends by the Company. Under the
89
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
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 non-cash change in the allowance for credit losses. Please refer to
the definitions of Non–GAAP Measures provided in the MD&A.
(b) U.S. Equipment Financing Segment:
(i) The U.S. Equipment Financing Segment has a credit facility, with a US$200 million annual capacity, with a life insurance
company to be renewed annually in October. The funder makes approved advances to the segment 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 facility has recourse only to the assets financed. The cost of each loan advance is fixed at the time of each
tranche. The segment maintains certain cash reserves as credit enhancements or provides letters of guarantee in lieu of cash
reserves. The segment retains the servicing of these finance receivables. The balance of this facility at December 31, 2021 was
US$95.1 million (December 31, 2020 - US$45.1 million). Based on average debt levels, the effective interest rate for the year
ended December 31, 2021 was 3.72% (including amortization of origination costs) (December 31, 2020 – 4.94%).
(ii) In October 2019, the U.S. Equipment Financing Segment completed a US$254 million asset-backed securitization which
has fixed term and fixed interest rate and is collateralized by receivables from the U.S. Equipment Financing Segment's
portfolio of equipment leases and loans. Proceeds from the securitization were used to pay down the U.S. Equipment Financing
Segment's previously existing warehouse line and Chesswood's senior revolving credit facility. The balance of this facility at
December 31, 2021 was US$83.1 million (December 31, 2020 - US$150 million). Based on average debt levels, the effective
interest rate was 3.24% for the year ended December 31, 2021 (including amortization of origination costs) (December 31,
2020 – 2.78%).
(iii) On September 30, 2020, the U.S. Equipment Financing Segment completed a US$183.5 million asset-backed securitization
which has a fixed term and fixed interest rate and is collateralized by receivables from the U.S. Equipment Financing Segment
portfolio of equipment leases and loans. Proceeds from the securitization were used to pay off the U.S. Equipment Financing
Segment's previously existing warehouse line, and CapOne facilities, and to pay down Chesswood's senior revolving credit
facility. The balance of this facility at December 31, 2021 was US$89.8 million (December 31, 2020 - US$163.5 million). The
effective interest rate was approximately 2.61% for the year ended December 31, 2021 (including amortization of origination
costs) (December 31, 2020 – 2.21%).
(iv) On October 22, 2021, the U.S. Equipment Financing Segment completed a US$356.1 million asset-backed securitization
which has a fixed term and a fixed interest rate and is collateralized by receivables from the U.S. Equipment Financing
Segment's portfolio of equipment leases and loans. Proceeds from the securitization were used to pay off the U.S. Equipment
Financing Segment's warehouse line and to pay down Chesswood's senior revolving credit facility. The effective interest rate
was approximately 2.01% (including amortization of origination costs). The balance of this facility at December 31, 2021 was
US$333.9 million.
(v) The U.S. Equipment Financing Segment has a US$250 million revolving warehouse loan facility specifically to fund its
growing prime portfolio that was established in May 2021. The warehouse facility holds the U.S. Equipment Financing
Segment's prime receivables before they are securitized and is secured by the U.S. Equipment Financing Segment's assets,
contains covenants, including maintaining leverage, interest coverage, and delinquency ratios. This facility has a revolving
period until January 2024 followed by an optional amortizing period for an additional 36 months. At December 31, 2021, the
U.S. Equipment Financing Segment was not utilizing this facility (December 31, 2020 - nil). Pawnee paid off the remaining
balance of this facility utilizing proceeds from its asset-backed securitization in October 2021. The effective interest rate for the
year ended December 31, 2021 was approximately 2.09% (December 31, 2020 - 7.31%) (including amortization of origination
costs).
(vi) The U.S. Equipment Financing Segment entered into arrangements on April 29, 2021 under which an investment fund
managed by Waypoint Investment Partners Inc. ("Waypoint") provides loan funding to a special purpose vehicle and thereby
receives returns based on the performance of a specific group of finance receivables. The investment fund is structured as a
limited partnership, and Chesswood has a small minority ownership interest in the general partner of the fund. The U.S.
Equipment Financing Segment receives origination fees and fees for administering the portfolio, and Waypoint receives fees for
managing the investment fund. Chesswood will be entitled to its proportionate share of any amounts earned by the fund's
general partner. The facility has recourse only to the assets financed. The cost of each loan advance is fixed at the time of each
tranche. The balance of this facility at December 31, 2021 was US$19.0 million. Based on average debt levels, the effective
return provided to the private credit investors for the year ended December 31, 2021 was 12.48% (including amortization of
origination costs). See Note 25 - Related party transactions.
90
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
As at December 31, 2021, the U.S. Equipment Financing Segment had provided US$500,000 in outstanding letters of guarantee
through Chesswood's revolving credit facility in lieu of cash reserves (December 31, 2020 - US$500,000).
(c) Canadian Equipment Financing Segment:
Blue Chip and Vault Credit have 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 and Vault Credit 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 and Vault Credit either maintain certain cash reserves as credit enhancements or provide letters
of guarantee in return for release of the cash reserves. Blue Chip and Vault Credit continue to service these finance receivables
on behalf of the Funders.
(i) At December 31, 2021, Blue Chip and Vault had access to the following committed lines of funding:
•
Blue Chip and Vault Credit: (i) $200 million annual limit from a life insurance company; (ii) $150 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, 2021, Blue Chip and Vault Credit had $57.6 million and $302.1 million, respectively (December 31, 2020 -
$103.4 million and n/a, respectively) in securitization and bulk lease financing facilities debt outstanding. Blue Chip and Vault
Credit together had access to at least $247.5 million of additional financing from its securitization partner (December 31, 2020 -
$124.9 million).
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, 2021 was 3.37% and 2.61% for Blue Chip and Vault Credit, respectively (December 31, 2020 -
3.58% and n/a, respectively).
(ii) The Canadian Equipment Financing Segment entered into arrangements on December 14, 2021 under which Vault Credit
Opportunities Fund ("VCOF") provides loan funding to Vault Credit and thereby receives returns based on the performance of a
specific group of finance receivables. The Canadian Equipment Financing Segment receives fees for servicing the portfolio.
The facility has recourse only to the assets financed. The cost of each loan advance is fixed at the time of each tranche. The
balance of this facility at December 31, 2021 was $2.2 million. VCOF earns a yield equivalent to the interest on the underlying
loans.
As at December 31, 2021, Blue Chip had provided $3.8 million in outstanding letters of guarantee through Chesswood's
revolving credit facility in lieu of cash reserves (December 31, 2020 - $5.6 million). Blue Chip and Vault Credit must meet
certain financial covenants, including leverage ratio, interest coverage ratio, and tangible net worth covenants, to support these
securitization and bulk lease financing facilities. As at December 31, 2021 and December 31, 2020, and throughout the periods
presented, the Canadian Equipment Financing segment was compliant with all covenants, with certain covenants in 2020 being
waived or amended to accommodate COVID-19 circumstances.
(d) Restricted funds
($ thousands)
Restricted - cash in collection accounts
Restricted - cash reserves
Restricted funds
December 31,
2021
December 31,
2020
$
$
47,201
$
19,868
67,069
$
15,516
20,198
35,714
91
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
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.
($ thousands)
Security deposits that will be utilized within one year
Security deposits that will be utilized in future years
December 31,
2021
December 31,
2020
$
$
1,873
2,489
4,362
$
$
2,950
4,260
7,210
15. INTEREST RATE DERIVATIVES
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 revolving credit facility (see Note 13(a) - Borrowings). There were no derivative swaps outstanding as at
December 31, 2021. At December 31, 2020, the fair value of the swap was $0.3 million.
The following swap agreement matured during the year ended December 31, 2021:
Effective Date
August 15, 2016
Notional Amount
US$
Annual Fixed Rate
Maturity Date
$20 million
2.120%
August 13, 2021
(b) Derivative caps
During the third quarter of 2019, the U.S. Equipment Financing Segment entered into a US$40.0 million interest rate cap
agreement that provided for payment of an annual fixed rate, in exchange for a LIBOR based floating rate amount. The interest
rate cap agreement was expected to mature on July 25, 2022; however, Pawnee elected for early termination on May 17, 2021.
At December 31, 2020, the fair value of the swap was insignificant.
92
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
16. TAXES
(a) The table below shows the reconciliation between tax expense reported in the consolidated statements of income and the tax
expense that would have resulted from applying the combined Canadian Federal and Ontario tax rate of 26.5% (2020 - 26.5%)
to income before income taxes.
($ thousands)
Income (loss) before taxes
Canadian tax rate
Theoretical tax expense (recovery)
Tax cost of non-deductible items
Tax benefit on U.S. loss carry-back rate change
Unrecognized tax losses, net
Withholding tax on inter-company dividends
Higher effective tax rates in foreign jurisdictions
Other
Tax expense
For the year ended
December 31,
2021
December 31,
2020
$
42,071
$
(8,118)
26.5 %
11,149
(30)
—
21
—
37
(275)
$
10,902
$
26.5 %
(2,151)
4,635
(3,560)
697
221
524
41
407
(b) The net deferred tax balances within the consolidated statements of financial position were comprised of the following:
($ thousands)
Deferred tax assets
Deferred tax liabilities
Net deferred tax liabilities
Reconciliation of net deferred tax liabilities:
($ thousands)
Balance, beginning of year
Deferred recovery in the statements of income
Business combinations
Foreign exchange translation
Net change in net deferred tax liabilities during the year
December 31,
2021
(c) $
(c)
5,307
(27,083)
$
(21,776) $
December 31,
2020
—
(20,400)
(20,400)
For the year ended
December 31,
2021
(20,400) $
$
2020
(23,087)
2,947
(4,369)
46
(1,376)
2,316
—
371
2,687
Balance, end of year
$
(21,776) $
(20,400)
93
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(c) The tax effects of the significant components of temporary differences giving rise to the Company’s net deferred tax
liabilities are as follows:
($ thousands)
Deferred tax assets:
Leased assets
Allowance for credit losses
Tax losses carried forward
Financing costs and accrued liabilities
Deferred tax liabilities:
Finance receivables
Difference in goodwill and intangible asset base
December 31,
2021
December 31,
2020
$
129,336
$
4,324
1,826
721
136,207
152,669
5,314
157,983
57,654
5,149
141
188
63,132
82,549
983
83,532
20,400
Deferred tax liabilities, net
$
21,776
$
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.
Deferred tax assets are recognized to the extent that realization of the related tax benefit through future taxable income is
probable.
At December 31, 2021, Case Funding had US$2.3 million (2020 - US$2.2 million) in tax losses carried forward and taxable
timing differences that have not been recognized. At December 31, 2021, Chesswood had $0.3 million (2020 - $0.3 million) in
deferred tax assets related to an allowable capital tax losses carried forward that has not been recognized.
The Company has not recognized deferred tax liabilities in respect of unremitted earnings in foreign subsidiaries, totaling $41.3
million (2020 - $29.3 million), as it is not considered probable that this temporary difference will reverse in the foreseeable
future.
17. MINIMUM PAYMENTS
The following are the contractual payments and maturities of financial liabilities and other commitments (including interest):
($ thousands)
2022
2023
2024
2025
2026
2027+
Total
Accounts payable and other liabilities
$ 31,764 $ — $ — $ — $ —
$ — $
31,764
Premises leases payments
(i)
364
705
699
669
357
316
3,110
Borrowings
(ii)
477,518
572,741
220,825
133,553
13,685
600
1,418,922
Customer security deposits
(iii) 1,979
1,825
374
156
201
—
4,535
Service contracts
Total commitments
511,625
575,271
221,898
134,378
14,243
916
1,458,331
1,580
212
46
47
23
—
1,908
$ 513,205 $ 575,483 $ 221,944 $ 134,425 $ 14,266
$
916 $ 1,460,239
i.
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 2028. The amounts above exclude adjustment for
discounting premise lease payable.
ii. Borrowings are described in Note 13 - Borrowings, and include fixed payments for the U.S. Equipment Financing
Segment, Blue Chip, and Vault Credit's securitization facilities and Chesswood's corporate revolving credit facility which
94
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
is a line-of-credit and, as such, the balance can fluctuate. The amounts above includes fixed interest payments on U.S.
Equipment Financing Segment, Blue Chip, and Vault Credit'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,
2021 remain the same until the expiry date of December 2022. The amount owing under Chesswood's revolving corporate
revolving credit facility is shown in year of maturity, all other expected payments for borrowings are based on the
underlying finance receivables supporting the borrowings. Since the current credit facility expires within the next 12
months, the Chesswood revolving credit facility is a current liability. On January 14, 2022, the revolving credit facility was
re-negotiated. Refer to Note 30 - Subsequent Events.
iii. 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.
Please see Note 7(b) - Finance Receivables for the expected collections of finance receivables over the same time period. See
Note 13(d) - Borrowings - for the amount of restricted cash in collections accounts that will be applied to debt in the following
month.
The Company has no material liabilities that have not been recognized and presented on the statements of financial position,
other than US$3.5 million in letters of guarantee. For contingent liabilities and other commitments, refer to Note 18 -
Contingent Liabilities and Other Financial Commitments.
18. 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, 2021 and 2020
were not material or possible outflows are considered remote.
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 to
meet or exceed the targeted return on equity set by the Board of Directors. The Company's share capital is not subject to
external restrictions. There have been no changes since the prior year.
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.
Refer to Note 13 - Borrowings for further details on the Company’s revolving credit facility. On January 14, 2022, the
revolving credit facility was re-negotiated. Refer to Note 30 - Subsequent Events.
20. COMMON SHARES
At December 31, 2021, there were 16,574,864 common shares outstanding (excluding the shares issuable in exchange for the
Exchangeable Securities) (2020 - 16,255,071) with a book value of $109.7 million (2020 - $104.2 million).
The Company is authorized to issue an unlimited number of common shares, with no par value. Each common share entitles the
holder thereof to receive notice of, to attend, and to one vote at all meetings of the shareholders. The holders of common shares
will be entitled to receive any dividends, if, as and when declared by the Company's directors. The Shareholders will also be
entitled to share equally, share-for-share, in any distribution of the assets of the Company upon the liquidation, dissolution or
winding-up of the Company or other distribution of its assets among its Shareholders for the purpose of winding-up its affairs.
Additional information relevant to the common shares, the rights of holders thereof and the operation and conduct of the
Company can be found in the Company’s Articles and by-laws, which have been filed under the Company’s profile on SEDAR
at www.sedar.com.
95
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(a) Normal course issuer bids
In November 2020, the Company's Board of Directors approved the repurchase for cancellation of up to 932,296 of the
Company’s outstanding common shares for the period commencing December 2, 2020 and ending on December 1, 2021. From
December 2, 2020 to December 31, 2021, the Company repurchased 488,040 of its shares under the normal course issuer bid at
an average cost of $10.06 per share. The excess of the purchase price over the average stated value of common shares
purchased for cancellation was charged to retained earnings. Decisions regarding the timing of purchases are based on market
conditions and other factors.
In December 2021, the Company's Board of Directors approved the repurchase for cancellation of up to 980,230 of the
Company’s outstanding common shares for the period commencing January 24, 2022 and ending on January 23, 2023.
Decisions regarding the timing of purchases will be based on market conditions and other factors. Refer to Note 30 -
Subsequent Events.
Additionally, the Company has entered into an automatic share purchase plan with a broker for the purpose of permitting the
Company to purchase its Common Shares under the normal course issuer bid at such times when the Company would not be
permitted to trade in its own shares during internal blackout periods, including during regularly scheduled quarterly blackout
periods. Such purchases will be determined by the broker in its sole discretion based on parameters the Company has
established.
21. EXCHANGEABLE SECURITIES
As partial consideration for the acquisition of Pawnee in May 2006, 1,274,601 Class B shares and 203,936 Class C shares of
U.S. Acquisitionco were issued (“Exchangeable Securities”). The Exchangeable Securities are non-voting shares of U.S.
Acquisitionco and are fully exchangeable for Common Shares of the Company, on a one-for-one basis, for no additional
consideration, through a series of steps and entitle the holders to receive the same dividends as the Common Shares. Attached to
the Exchangeable Securities are Special Voting Units of the Company which provide the holders of the Exchangeable Securities
voting equivalency to Company Shareholders. The Exchangeable Securities are reflected as non-controlling interest. Under
IFRS 10, Consolidated Financial Statements, the Exchangeable Securities must be shown as non-controlling interest because
they are equity in a subsidiary not attributable, directly or indirectly, to the parent even though they have no voting powers in
the subsidiary. There are no restrictions to the Company’s ability to access or use assets and settle liabilities of U.S.
Acquisitionco as a result of the non-controlling interest. The non-controlling interest share of the Company’s consolidated net
assets and net income is presented on the consolidated financial statements. These non-voting shares represent 99.3% (2020 -
99.3%) of the outstanding shares of US Acquisitionco. Dividends paid to Exchangeable Securities holders during the year were
$0.5 million (2020 - $0.4 million).
22. COMPENSATION PLANS
Contributed surplus includes the accumulated share-based compensation expensed over the vesting term for options and
restricted share units unexercised at December 31, 2021. There were 2,041,439 options and 479,000 restricted share units
outstanding at December 31, 2021 (December 31, 2020 - 2,708,939 and 57,000 respectively).
(a) Share options
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 options settle in Common Shares and have an
exercise price equal to the fair value the Common Shares on the grant date of the options. The cost of options is measured
using the Black-Scholes option pricing model and is expensed over the vesting period of each tranche with an increase in
contributed surplus.
96
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
A summary of changes in the number of options outstanding is as follows:
Balance, beginning of year
Granted
Exercised
Forfeited
Balance, end of year
For the year ended
December 31,
2021
2020
2,708,939
—
(667,500)
—
2,041,439
2,553,939
175,000
—
(20,000)
2,708,939
During the year ended December 31, 2021, personnel expenses and contributed surplus included $0.2 million (December 31,
2020 - $0.2 million) relating to option expense. As at December 31, 2021, unrecognized non-cash compensation expense
related to the outstanding options was $0.2 million (December 31, 2020 - $0.4 million), which is expected to be recognized over
the remaining vesting period.
During the year ended December 31, 2021, 667,500 options were exercised (December 31, 2020 - nil) for total cash
consideration of $5.2 million (December 31, 2020 - nil). On exercise, the accumulated amount in contributed surplus related to
these exercised options was transferred to Common Share capital (Common Share capital was also increased by the cash
consideration received upon exercise). For the options exercised during the year ended December 31, 2021, the weighted
average share price at the date of exercise was $11.76 (2020 - n/a) and the weighted average exercise price was $7.85 (2020 -
n/a).
At December 31, 2021, the weighted average exercise price is $11.04 (December 31, 2020 - $10.25) and the weighted average
remaining contractual life for all options outstanding is 4.0 years (December 31, 2020 - 4.2 years). The 1,864,064 options
exercisable at December 31, 2021 have a weighted average exercise price of $11.30 (December 31, 2020 - 2,297,689 options at
$10.47).
An analysis of the options outstanding at December 31, 2021 is as follows:
Range of
exercise prices
$ 7.45
$ 8.01 - $ 8.95
$10.17 - $10.96
$12.15 - $12.53
$14.12
Weighted
average
remaining life
(in years)
0.48
7.44
4.19
3.21
2.00
3.96
Vested #
Total #
118,989
196,125
618,950
665,000
265,000
118,989
373,500
618,950
665,000
265,000
1,864,064
2,041,439
97
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
The value of the options granted during 2020 was determined using the Black-Scholes Option Pricing model with the following
assumptions:
Number of options granted
Weighted average share price at date
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rates
Weighted average fair value of options granted
2020
100,000
$8.01
62%
2
2.68%
0.28%
$2.27
2020
75,000
$8.11
62%
2
2.68%
0.28%
$2.30
(b) Restricted share units
Restricted share units ("RSUs") are to be settled by the issue of Common Shares and expire in ten years. The vesting period for
the remaining unvested RSUs are typically one year from the date of issue or evenly during the three years from the issue date.
RSUs granted are in respect of future services and are expensed over the vesting period with an increase in contributed surplus.
Compensation cost is measured based on the fair value of the Common Shares on the grant date of the RSUs. Holders of RSUs
are not entitled to dividends before the RSUs are exercised.
A summary of changes in the number of RSUs outstanding is as follows:
Balance, beginning of year
Granted
Exercised
Balance, end of year
For the year ended
December 31,
2021
2020
57,000
429,000
(7,000)
479,000
44,000
106,000
(93,000)
57,000
During the year ended December 31, 2021, personnel expenses and contributed surplus included $3.3 million (December 31,
2020 - $0.7 million) relating to RSUs.
As at December 31, 2021, unrecognized non-cash compensation expense related to non-vested RSUs was $2.9 million
(December 31, 2020 - $0.3 million). The weighted average remaining contractual life for all RSUs outstanding is 9.6 years
(December 31, 2020 - 9.4 years).
During the year ended December 31, 2021, 7,000 RSUs were exercised (December 31, 2020 - 93,000). On exercise, the
accumulated balance in contributed surplus related to the RSUs of $0.1 million (December 31, 2020 - $0.8 million) was
transferred to common share capital. For the RSUs exercised during the year ended December 31, 2021, the weighted average
share price at the date of exercise was $11.58 (December 31, 2020 - $6.40).
98
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
An analysis of the RSUs outstanding at December 31, 2021, is as follows:
Grant date
November 30, 2020
August 5, 2021
November 5, 2021
Number of
RSUs
outstanding
50,000
129,000
300,000
Vested
Expiry date
June 29, 2030
50,000
10,000
August 5, 2031
$ 11.69
150,000 November 5, 2031
$ 14.27
Value on
grant date
$
8.01
479,000
210,000
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). Free Cash Flow is
defined in the MD&A.
The following dividends were paid to Common Shareholders and Exchangeable Securities holders (included as non-controlling
interest) during the year ended December 31, 2021:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2020
January 29, 2021
February 26, 2021
March 31, 2021
April 30, 2021
May 31, 2021
June 30, 2021
July 30, 2021
August 31, 2021
September 30, 2021
October 29, 2021
November 30, 2021
January 15, 2021
February 16, 2021
March 15, 2021
April 15, 2021
May 17, 2021
June 15, 2021
July 15, 2021
August 16, 2021
September 15, 2021
October 15, 2021
November 15, 2021
December 15, 2021
$
$
$
$
$
$
$
$
$
$
$
$
$
0.020
0.020
0.020
0.020
0.020
0.030
0.030
0.030
0.030
0.030
0.030
0.030
0.310
$
355
353
347
350
358
545
546
546
545
543
541
542
$
5,571
99
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
Dividends of $0.8 million were also paid to the non-controlling interest of CHW/Vault Holdco Corp. ("Canadian Holdco"). The
dividend was recognized through net income and loss on the consolidated statements of income. Special warrants issued to the
non-controlling interest for the merger of Vault are entitled to a dividend equivalent prior to the special warrants becoming
exercisable, paid on the date of exercise. As at December 31, 2021, dividends payable of $0.4 million has been accrued on the
special warrants.
The following dividend was declared but not paid to Common Shareholders and Exchangeable Securities holders during the
year-ended December 31, 2021 and was included in accounts payable and other liabilities (Note 12 - Accounts payable and
other liabilities):
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2021
January 17, 2022
$
0.030
$
542
The following dividends were declared before the financial statements were authorized for issue but not recognized during the
year ended December 31, 2021:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
January 31, 2022
February 28, 2022
February 15, 2022
March 15, 2022
$
$
$
0.030
0.030
0.060
$
$
550
518
1,068
The following dividends were paid to Common Shareholders and Exchangeable Securities holders (included as non-controlling
interest) during the year ended December 31, 2020:
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2019
January 31, 2020
February 28, 2020
March 31, 2020
April 30, 2020
November 30, 2020
January 15, 2020
February 18, 2020
March 16, 2020
April 15, 2020
May 15, 2020
December 15, 2020
$
$
$
$
$
$
$
0.070
0.070
0.070
0.070
0.035
0.020
0.335
$
$
1,241
1,241
1,241
1,241
620
355
5,939
The following dividend was declared but not paid to Common Shareholders and Exchangeable Securities holders during the
year-ended December 31, 2020 and was included in accounts payable and other liabilities (Note 12 - Accounts payable and
other liabilities):
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
December 31, 2020
January 15, 2021
$
0.020
$
355
The following dividends were declared before the financial statements were authorized for issue but not recognized during the
year ended December 31, 2020:
100
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
Record date
Payment date
Cash dividend
per share ($)
Total dividend
amount
($ thousands)
January 29, 2021
February 26, 2021
February 16, 2021
March 15, 2021
$
$
$
0.020
0.020
0.040
$
353
322
675
24. EARNINGS PER SHARE
Weighted average number of common shares
outstanding
Dilutive effect of options
Dilutive effect of restricted share units
Dilutive effect of special warrants
Weighted average common shares outstanding for
diluted earnings per share
Options and RSUs excluded from calculation of
diluted shares for the period due to their anti-dilutive
effect
For the year ended
December 31,
2021
2020
16,473,934
16,269,894
428,963
178,340
984,475
6,651
26,883
—
18,065,712
16,303,428
930,000
2,538,939
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:
($ thousands)
For the year ended
December 31,
2021
2020
Salaries, fees and other employee benefits
$
3,197
$
Restructuring costs
Share-based compensation
—
1,028
Compensation expense of key management
$
4,225
$
1,341
2,674
713
4,728
(c) Daniel Wittlin (“Wittlin”), the CEO of Vault Credit and a Company director indirectly owns 64% of the non-controlling
interest in Canadian Holdco. Rob Trager (“Trager”), the President of Vault Credit, controls an intermediary entity which owns
the remaining 36% of the non-controlling interest. Through the entity, Trager indirectly owns 5% of the non-controlling interest
shares.
(d) Vault Credit engaged in the following transactions with related parties in the period subsequent to the Vault Credit business
combination:
101
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
•
Vault Credit signed a sub-lease commencing on April 30, 2021 for an eight year term with a company controlled by
Wittlin and Trager. The sub-lease mirrors all the terms of the head lease, which was entered into with an arm’s length
party, and requires Vault Credit to pay an allocation of the head lease rent based on head count. The sublease is
therefore considered to be on fair market value terms. The right of use asset and premise lease liability initially
recognized on the date of commencement is $0.8 million and lease payments paid during the period ended
December 31, 2021 were $0.1 million.
•
• Wittlin has significant influence over certain brokers within Vault Credit's origination network. The leases obtained
from related party brokers comprise 37% of total finance receivables of the Canadian Equipment Financing Segment
as at December 31, 2021. The total related party broker commissions capitalized during the year ended December 31,
2021 was $6.1 million. These transactions were conducted at fair market value terms.
Canadian Equipment Financing Segment also provides leases to entities over which Wittlin has significant influence.
The total capital cost of the leases is $0.6 million with a net book value of $0.2 million as at December 31, 2021. These
transactions were conducted at fair market value terms.
Vault Credit and Vault Home license proprietary leasing software from an entity controlled by Wittlin. Vault Credit
and Vault Home pay for the costs of improving and maintaining the software. The total costs expensed by Vault Credit
and Vault Home since the dates of acquisition is $2.0 million. These transactions were conducted at fair market value
terms.
•
• Wittlin and Trager are indirectly general partners, through controlled entities, of the VCOF, a limited partnership,
which Vault Credit had entered into arrangements with on December 14, 2021. Total servicing fee revenue and interest
expense for the period ended December 31, 2021 is insignificant. See Note 13 - Borrowings.
(e) Ryan Marr, CEO of Chesswood, is the chief investment officer and a minority shareholder of Waypoint, which has
established an investment fund through which a subsidiary of Pawnee established a credit facility with on April 29, 2021. The
total interest expense for the period ended December 31, 2021 was $1.3 million. See Note 13 - Borrowings.
(f) Wittlin owns 38.3% of the non-controlling interest in Vault Home.
(g) Wittlin has significant influence over Vault Credit Inc., which has begun developing Tandem's vendor system. For the
period ended December 31, 2021, Tandem paid Vault Credit Inc. $0.3 million for software development services. This
transaction was conducted at fair market value terms.
102
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
26. SUBSIDIARIES
(a) The following table contains a list of the Company's consolidated subsidiaries:
Entity's name
Chesswood Holdings Ltd.
CHW/Vault Holdco Corp.
Blue Chip Leasing Corporation
2750036 Ontario Inc.
Vault Credit Corporation
Vault Home Credit Corporation
Chesswood Capital Management Inc.
Chesswood Capital Management USA Inc.
Lease-Win Limited
Case Funding Inc.
Chesswood U.S. Acquisition Co Ltd.
Pawnee Leasing Corporation(1)
Tandem Finance Inc.
Windset Capital Corporation
Principal
place of
business
Ownership as
at December
31, 2021
Ontario
Ontario
Ontario
Ontario
Ontario
Ontario
Ontario
Delaware
Ontario
Delaware
Delaware
Colorado
Colorado
Delaware
100%
51%
51%
51%
51%
51%
100%
100%
100%
100%
100%(2)
100%
100%
100%
(1) Pawnee holds, through consolidated, wholly-owned SPEs, a portfolio of leases and loans which are financed through arm's
length financial institutions. See Note 7 - Finance Receivables and Note 13(b) - Borrowings.
(2) 100% ownership of voting shares. See Note 21 - Exchangeable Securities.
27. CASH FLOW SUPPLEMENTARY DISCLOSURE
($ thousands)
Non-cash transactions
Common shares issued for business combination
Common shares issued on exercise of RSUs
Interest paid
For the year ended
December 31,
Note
2021
2020
$
$
$
1,667
71
1,738
26,804
$
$
$
—
824
824
21,606
103
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
($ thousands)
For the year ended
December 31,
Note
2021
2020
Other non-cash items included in net income
Share-based compensation expense
Amortization of deferred financing costs and
debt restructuring
Unrealized gain on investments
Non-cash interest expense - premise leases
payable and option liability interest
Net realized and unrealized (gain) loss on interest
rate derivative
Unrealized (gain) loss on foreign exchange
22
13
4
8
4
Change in other net operating assets
Restricted funds
Other assets
Accounts payable and other liabilities
Customer security deposits
$
3,544
$
920
3,659
—
(639)
(344)
(666)
6,883
(483)
140
118
6
$
5,554
$
7,584
$
$
(29,601) $
(1,593)
10,061
(15,132)
5,197
(684)
(2,785)
(23,918) $
(4,906)
(15,525)
($ thousands)
Borrowings
For the year ended
December 31,
Note
2021
2020
Draw-downs or proceeds from borrowings
Payments - borrowings
13
13
$ 1,938,250
$
609,073
(1,427,378)
(678,220)
$
510,872
$
(69,147)
104
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
28. 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. Pawnee and Tandem's information is aggregated as Chesswood's
U.S. Equipment Financing Segment as Pawnee and Tandem offer lending solutions to small and medium-sized businesses in
the United States. Tandem leverages off Pawnee's experience, processes and "back-office" support for credit adjudication,
collections and documentation. Chesswood's Canadian Financing Segment consists of Blue Chip and Vault Credit which both
provide commercial equipment financing to small and medium-sized businesses in Canada. Vault Credit and Blue Chip
combined their operations and personnel following the merger. Vault Home is not a reportable segment and has been combined
with the Canadian Financing Segment because each have similar economic characteristics.
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, other than the acquisitions of Vault Credit
and Vault Home and their inclusion in the Canadian Financing Segment. Selected information by segment and geographically is
as follows:
105
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
($ thousands)
Year ended December 31, 2021
Equipment
Financing -
U.S.
Equipment
Financing -
Canada
Corporate
Overhead
- Canada
Total
Interest revenue on leases and loans
$
94,220 $
25,892
$
— $
120,112
11,053
(24,397)
2,240
83,116
19,912
2,378
17,047
846
—
42,933
—
—
—
42,933
11,076
31,857 $
6,918
(8,019)
(2,428)
22,363
9,619
—
6,187
255
1,789
4,513
—
—
198
4,711
907
3,804
$
(390,922) $
(103,876) $
(717) $
2,510
390,815 $
103,398
1,118,416 $
486,991
$
$
$
—
745
—
745
2,738
1,166
3,216
10
—
(6,385)
—
344
468
(5,573)
(1,081)
(4,492) $
(4,426) $
— $
5,813 $
17,971
(31,671)
(188)
106,224
32,269
3,544
26,450
1,111
1,789
41,061
—
344
666
42,071
10,902
31,169
(499,224)
1,793
500,026
(460) $ 1,604,947
835,571 $
377,556
$ 203,838 $ 1,416,965
1,025,567 $
414,160
20,481 $
49,600
$
$
(717) $
(286) $
— $ 1,439,727
— $
— $
70,081
(1,003)
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation
Amortization - intangible assets
Operating income
Gain on investments
Gain on interest rate derivative
Unrealized gain on foreign exchange
Income (loss) before taxes
Tax expense (recovery)
Net income (loss)
Net cash used in operating activities
Net cash from (used in) investing activities
Net cash from financing activities
Total assets
Total liabilities
Finance receivables
Goodwill and intangible assets
Property and equipment expenditures
$
$
$
$
$
$
$
$
$
106
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
($ thousands)
Equipment
Financing -
U.S.
Year ended December 31, 2020
Corporate
Overhead
- Canada
Equipment
Financing -
Canada
Total
Interest revenue on leases and loans
$
91,481 $
11,415 $
— $
102,896
Ancillary finance and other fee income
Interest expense
Provision for credit losses
Finance margin
Personnel expenses
Share-based compensation expense
Other expenses
Depreciation
Amortization - intangible assets
Operating income
Restructuring costs
Goodwill impairment
Fair value adjustments - investments
Loss on interest rate derivative
Unrealized loss on foreign exchange
Income before taxes
Tax expense (recovery)
Net income (loss)
Net cash from (used in) operating activities
Net cash used in investing activities
Net cash from (used in) financing activities
Total assets
Total liabilities
Finance receivables
Goodwill and intangible assets
Property and equipment expenditures
$
$
$
$
$
$
$
$
$
10,338
(24,303)
(21,890)
55,626
15,011
120
15,524
1,035
—
23,936
(2,491)
—
(61)
—
21,384
3,794
(4,218)
(3,754)
7,237
2,705
14
1,551
140
1,333
1,494
—
(20,828)
—
—
—
28
—
—
28
1,487
786
1,543
41
—
(3,829)
(6,759)
483
(57)
(6)
(19,334)
(10,168)
2,105
19,279 $
(864)
(18,470) $
(834)
(9,334) $
14,160
(28,521)
(25,644)
62,891
19,203
920
18,618
1,216
1,333
21,601
(9,250)
(20,828)
483
(118)
(6)
(8,118)
407
(8,525)
47,914 $
37,148 $
(5,182) $
79,880
(880) $
68,121 $
— $
(36,174) $
— $
(112,174) $
(880)
(80,227)
678,837 $
146,237 $
2,362 $
827,436
490,274 $
109,573 $
86,773 $
686,620
612,487 $
20,569 $
880 $
128,391 $
14,270 $
— $
— $
— $
— $
740,878
34,839
880
29. BUSINESS COMBINATIONS
(a) Vault Credit Corporation
On April 30, 2021 (the Effective Date), the Company merged its Canadian equipment leasing subsidiary, Blue Chip, with Vault
Credit, a provider of equipment lease and commercial loan financing to small and medium-size businesses across Canada.
Chesswood incorporated a new company, Canadian Holdco, that acquired 100% of the shares of Blue Chip and 2750036
Ontario Inc., Vault Credit's parent company. In return, Chesswood received 51% ownership of Canadian Holdco. Chesswood
also received a call option to acquire the remaining 49% of shares. See Note 4 - Financial Instruments. The transaction resulted,
in substance, in a 100% ownership interest at the date of acquisition and the full consolidation of Blue Chip and Vault Credit
with no non-controlling interest recognized at that date. Subsequent to the acquisition and prior to exercise of the option, the
non-controlling interest has the right to 49% of Canadian Holdco's earnings.
The Company acquired control over Vault Credit and continues to exercise control over Blue Chip through the ability to control
the decisions of Canadian Holdco’s board of directors, through a priority vote, related to those activities that are most relevant
to determining returns. The acquisition of Vault Credit was accounted for using the acquisition method, whereby the cost of
107
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
acquisition is measured as the aggregate of the acquisition-date fair value of consideration transferred. Goodwill is measured as
the excess of the aggregate of the acquisition-date fair value of consideration transferred over the net acquisition-date fair
values of the identifiable assets acquired and liabilities assumed. Costs related to the acquisition are expensed as incurred.
The ownership interest in Blue Chip was rolled into Canadian Holdco, resulting in a common control reorganization that is
accounted for at consolidated book value.
The merger with Vault Credit enables the Company’s continued expansion of the Canadian Equipment Financing Segment by
removing a competitor and obtaining access to Vault Credit’s broker relationships which is accessed through its proprietary
technology license. Vault Credit is included in the Canadian Equipment Financing Segment and the goodwill recognized is
included in the Canadian Equipment Financing cash generating unit for purposes of goodwill impairment tests. The results of
the Canadian Equipment Financing Segment consist of Blue Chip and the post-acquisition results of Vault Credit. See Note 28
– Segment information.
Recognized goodwill is attributable to synergies from combining both Vault Credit’s and the Company’s operations and the
knowledge and expertise of their leadership teams.
The consideration for the merger included:
($ thousands)
Shares of the Company
Special warrants
Option liability
a
b
c
April 30, 2021
1,667
16,409
12,305
30,381
$
$
(a) A total of 133,333 common shares of the Company were issued on April 30, 2021;
(b) A total of 1,466,667 special warrants issued, each exchangeable for one common share of the Company for no additional
consideration. The special warrants vest in equal quarterly tranches beginning December 31, 2021 with the final tranche vesting
on June 30, 2024 and are automatically exercised in two business days of vesting, unless the put or call option on the 49% of
common shares has been exercised. The special warrants are classified as equity and were measured at fair value under the
Black-Scholes Model; and
(c) On exercise of the Company’s option, the derivative is payable in cash. The Company holds a call option valued at 49% of
the fair values of the finance receivables less any direct debt, plus a 5% mark up on the date of exercise. The non-controlling
interest holders also hold an equivalent put option over the 49% of shares held in Canadian Holdco, where the exercise price is
95% of 49% of the net investment in leases less any direct debt. The option is initially recognized at the value of the put option
as the demand liability was the greater of the two option values. Distributions to be made by Canadian Holdco are at the sole
discretion of the Canadian Holdco board of directors.
During the fourth quarter of 2021, the Company finalized the estimated fair values of the assets and liabilities as at the date of
merger which resulted in a $7.0 million adjustment to the option liability and a respective increase in goodwill.
The fair values of the assets and liabilities, including the goodwill and intangibles arising on consolidation, were as follows:
($ thousands)
Cash
Restricted cash
Other assets
Finance receivables
Right-to-use assets
Property and equipment
Broker relationships
Trade name
Goodwill
108
April 30, 2021
2,758
$
1,601
2,950
183,032
919
76
15,737
2,100
17,853
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
Accounts payable and other liabilities
Premises leases payable
Borrowings
Deferred tax liabilities
2,582
922
188,629
4,512
Net assets acquired
$
30,381
The gross contractual amount of finance receivables was approximately $194 million as at April 30, 2021. Contractual cash
flows not expected to be collected on receivables are not significant. A provision for the finance receivables subsequent to
acquisition of $2.2 million was recognized.
None of the goodwill is deductible for tax purposes. No impairment on the goodwill has occurred since the date of acquisition.
The transaction costs related to the acquisition expensed during the year ended December 31, 2021 were $0.6 million.
For the period May 1 to December 31, 2021, Vault Credit contributed $21.7 million to the consolidated revenue and $0.4
million to the consolidated net income of the Company. Had the business combination occurred at the beginning of the year
ended December 31, 2021, the additional contributions of revenue made by Vault Credit would have been $6.0 million. The
additional contribution of net income would have been insignificant to the results of the Company on a consolidated basis.
Subsequent to year end the first tranche of 133,333 special warrants which vested on December 31, 2021 were automatically
exercised on January 5, 2022. On exercise, the accumulated balance in contributed surplus related to the special warrants of
$1.6 million was transferred to common share capital. For the first tranche of special warrants exercised on January 5, 2022, the
share price on the date of exercise was $14.25.
(b) Vault Home Credit Corporation
On September 14, 2021, Chesswood Holdings Ltd. acquired a number of common shares of Vault Home which comprise 51%
of the currently outstanding common shares post acquisition, for a subscription price of $1.0 million, and a commitment to
provide an aggregate of $1.5 million of capital contributions upon the request of the Vault Home board of directors. The $1.5
million was advanced in November 2021. Vault Home is incorporated in Ontario and had not yet earned revenue as at the date
of acquisition. The Company exercises control over Vault Home through the ability to control the decisions of its board of
directors, through a priority vote, related to those activities that are most relevant to determining returns. Vault Home enables
the Company to expand into the consumer financing industry. The Company elected to measure the non-controlling interest at
the proportionate share of identifiable net assets. No intangible assets were recognized on acquisition and goodwill recognized
as at September 14, 2021 was $1.4 million.
Vault Home began originations subsequent to the acquisition and is included in the Canadian Equipment Financing segment.
See Note 28 – Segment information. Revenues, net losses, and transaction costs were insignificant prior to the acquisition and
for the period of September 14, 2021 to December 31, 2021.
30. SUBSEQUENT EVENTS
Share Repurchases - Subsequent to year end (up to and including March 8, 2022), the Company repurchased 103,492 of its
shares under the normal course issuer bid at an average cost of $14.13.
Rifco Inc. Acquisition - On January 14, 2022, Chesswood completed its acquisition of Rifco Inc. ("Rifco") where the
Company acquired 100% of Rifco's outstanding shares. Rifco is a leading Canadian alternative auto finance company and
enables the Company to expand into new markets. Total consideration was $28.0 million. Rifco shareholders elected for
approximately 25% of the consideration to be paid out in Chesswood common shares and the remainder in cash. This resulted
in a total of 498,605 shares being issued.
The transaction costs related to the acquisition expensed during year ended December 31, 2021 were $0.3 million.
109
Notes to the Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
Chesswood Credit Facility - On January 14, 2022, Chesswood renegotiated the credit facility to allow borrowings of up to
US$300 million, subject to, among other things, certain percentages of eligible gross finance receivables. This credit facility
includes a US$100 million accordion feature that can increase the overall revolver to US$400 million, is secured by
substantially all of the Company’s assets, contains covenants, including maintaining leverage and interest coverage ratios, and
expires on January 14, 2025. The new credit facility has a Secured Overnight Financing Rate ("SOFR") based interest rate.
110
Chesswood Group Limited
DIRECTORS, OFFICERS AND OTHER INFORMATION
Directors
Executive Team
Edward Sonshine, O.Ont., Q.C.
Director, Chairman, Chesswood Group Limited and Chairman,
Nominating and ESG Committee
Ryan Marr
President & C.E.O.
Clare Copeland, O.Ont.
Director, Chairman, Compensation Committee
Tobias Rajchel
Chief Financial Officer
Robert Day
Director
Former Chairman, Pawnee Leasing Corporation
Other Information
Jeff Fields
Director
Chesswood Group Limited & C.E.O., Chesswood Capital
Management Inc. and Chesswood Capital Management USA
Inc.
Auditors
BDO Canada LLP
Rags Davloor
Director, Chairman, Audit and Risk Committee
Transfer Agent
TSX Trust Company
Ryan Marr
Director
President & C.E.O., Chesswood Group Limited
Corporate Counsel
McCarthy Tétrault LLP
Frederick W. Steiner
Director
Toronto Stock Exchange Symbol
CHW
Daniel Wittlin
Director
C.E.O., CHW / Vault Holdco
Chesswood Group Limited
1133 Yonge Street, Suite 603
Toronto, Ontario, Canada M4T 2Y7
Tel. 416.386.3099
e-mail:investorrelations@chesswoodgroup.com
www.chesswoodgroup.com
Chesswood Group Limited
TSX: CHW
Executive Office:
Chesswood Group Limited
1133 Yonge Street, Suite 603
Toronto, Ontario, Canada M4T 2Y7
Tel. 416.386.3099
e-mail:investorrelations@chesswoodgroup.com
www.chesswoodgroup.com