Consolidated Financial Statements of
DIVERSIFIED ROYALTY CORP.
Years ended December 31, 2021 and 2020
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Diversified Royalty Corp.,
Opinion
We have audited the consolidated financial statements of Diversified Royalty Corp. (“the
Entity”), which comprise:
•
•
•
•
the consolidated statements of financial position as at December 31, 2021 and
December 31, 2020;
the consolidated statements of net income (loss) and other comprehensive income (loss)
for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended;
• and notes to the consolidated financial statements, including a summary of significant
accounting policies
(hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects,
the consolidated financial position of the Entity as at December 31, 2021 and December 31,
2020, and its consolidated financial performance and its consolidated cash flows for the years
then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards.
Our responsibilities under those standards are further described in the “Auditors’
Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the 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.
KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee.
KPMG Canada provides services to KPMG LLP.
Diversified Royalty Corp.
Page 2
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements for the year ended December 31, 2021.
These matters were addressed in the context of our audit of the financial statements as a
whole and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
We have determined the matters described below to be the key audit matters to be
communicated in our auditors’ report.
Assessment of the fair value measurement of the investment in NND LP
Description of the matter
We draw attention to Notes 3(k), 4(b), and 7 to the financial statements. The investment in
Nurse Next Door LP (“NND LP”) is a financial instrument measured at fair value and has a
carrying value of $44,467 thousand. In determining the fair value, the Entity’s significant
assumption is the discount rate used to discount the contractual cash flows receivable from
NND LP.
Why the matter is a key audit matter
We identified the assessment of the fair value measurement of the investment in NND LP as
a key audit matter. This matter represented an area of significant risk of material
misstatement as it required the Entity to determine the discount rate with reference to its
expectations about NND LP’s future operating results and financial condition. Minor changes
in the discount rate used had a significant effect on the fair value of the investment in NND
LP. As a result, specialized skills and knowledge and significant auditor judgement were
required in evaluating the results of our audit procedures.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
We evaluated the appropriateness of the Entity’s projection of NND LP’s operating results by
comparing the projected results to historical actual results of NND LP, planned business
initiatives, and external industry reports. We also compared the Entity’s historical projection
of NND LP’s operating results to actual operating results to assess the Entity’s ability to
project operating results.
We involved valuation professionals with specialized skills and knowledge, who assisted in
evaluating the discount rate assumption used in the fair value measurement of the
investment in NND LP. The valuation professionals compared the discount rate assumption
against a discount rate range that was independently developed using publicly available
reports of industry commentators for comparable entities. The valuation professionals
considered features and risks specific to the investment in NND LP.
Diversified Royalty Corp.
Page 3
Assessment of the carrying value of intangible assets
Description of the matter
We draw attention to Notes 3(e), 4(b), and 8(f) to the financial statements. The intangible
assets are measured at historical cost and have a carrying value of $320,595 thousand. The
Entity performs an impairment test over its intangible assets annually or when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Recoverable amount is the higher of fair value less costs of disposal and value in use. In
determining the recoverable amount of each intangible asset, the Entity’s significant
assumptions include the projected sales underlying the royalty payment and pre-tax discount
rate.
Why the matter is a key audit matter
We identified the assessment of the recoverable amount of intangible assets as a key audit
matter. This matter represented a significant risk of misstatement given the high degree of
estimation uncertainty in determining the recoverable amount. Minor changes in the
projected sales underlying the royalty payment and pre-tax discount rates had a significant
effect on the recoverable amount. These factors indicated a significant risk of material
misstatement. As a result, specialized skills and knowledge and significant auditor judgement
were required in evaluating the results of our audit procedures.
How the matter was addressed in the audit
The following are the primary procedures we performed to address this key audit matter:
We evaluated the appropriateness of the Entity’s projected sales underlying the royalty
payment by comparing the projected sales to historical sales and external industry reports.
When performing this assessment, we considered specific conditions and events affecting
the sales.
We compared the Entity’s historical revenue projections to actual results to assess the
Entity’s ability to accurately project future revenue.
We involved valuation professionals with specialized skills and knowledge, who assisted in
the evaluation of the pre-tax discount rate used in the determination of the recoverable
amount. The valuation professionals evaluated the pre-tax discount rate by comparing it
against a pre-tax discount rate range that was independently developed using publicly
available reports of industry commentators for comparable entities. The valuation
professionals considered features and risks specific to the intangible assets.
Other Information
Management is responsible for the other information. Other information comprises the
information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
Our opinion on the financial statements does not cover the other information and we do not
and will not express any form of assurance conclusion thereon.
In connection with our audit of the 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 financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
Diversified Royalty Corp.
Page 4
We obtained the information included in Management’s Discussion and Analysis filed with
the relevant Canadian Securities Commissions as at the date of this auditors’ 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 the auditors’
report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS), and for
such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’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 Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ 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 the 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 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.
Diversified Royalty Corp.
Page 5
• 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 Entity'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 Entity's ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditors’ report. However,
future events or conditions may cause the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
• 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.
• Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
• Determine, from the matters communicated with those charged with governance, those
matters that were of most significance in the audit of the financial statements of the
current period and are therefore the key audit matters. We describe these matters in our
auditors’ 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 auditors’ 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 auditors’ report is Arnold Singh,
CPA.
Chartered Professional Accountants
Vancouver, Canada
March 10, 2022
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
As at December 31, 2021 and 2020
Assets
Current assets:
Cash
Royalties and management fees receivable
Amounts receivable
Prepaid expenses and other
Interest rate swap assets
Right-of-use asset and other
Investment in NND LP
Intangible assets
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
Interest rate swap liabilities
Income tax payable
Convertible debentures
Long-term bank loans, net of deferred financing charges
Long-term convertible debentures
Promissory note
Exchangeable units and other
Interest rate swap liabilities
Lease obligation
Deferred income tax liability
Shareholders' equity:
Share capital
Contributed surplus
Equity component of convertible debentures
Accumulated deficit
Note
December 31, 2021 December 31, 2020
$
$
$
6
11
13
7
8
11
14
10
9
10
8(d)
12
11
13
14
15
10
$
8,939
4,911
11
297
14,158
647
897
44,467
320,595
9,218
4,293
15
342
13,868
-
-
43,627
300,901
380,764
$
358,396
$
2,544
984
2,121
55,968
61,617
109,750
-
3,109
2,008
33
829
11,893
201,972
39,450
2,938
(52,835)
191,525
1,710
1,212
755
-
3,677
98,557
54,535
3,108
878
1,158
-
6,810
198,570
39,425
2,938
(51,260)
189,673
Nature of operations (note 1)
$
380,764
$
358,396
The accompanying notes are an integral part of these consolidated financial statements.
1
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Net income (loss) and comprehensive income (loss)
(Expressed in thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2021 and 2020
Royalty income
Management fees
Expenses
Salaries and benefits
Share-based compensation
General and administration
Professional fees
Impairment (recovery) loss
Income from operations
Interest expense on credit facilities
Other finance (costs) income, net
Fair value adjustment on financial instruments
Income (loss) before income taxes
Income tax expense (recovery)
Net income (loss) and comprehensive income (loss)
Weighted average number of shares outstanding
Basic
Diluted
Income (loss) per share
Basic
Diluted
Note
5
$
16
8
18
7,11,12
14
17
17
$
$
$
Years ended December 31,
2020
2021
$
36,818
463
37,281
1,968
1,031
713
463
(1,724)
2,451
34,830
(7,299)
(1,745)
6,898
32,684
9,166
23,518
$
30,074
422
30,496
1,493
1,326
621
475
25,901
29,816
680
(7,014)
69
(5,469)
(11,734)
(2,849)
(8,885)
121,866,677
135,548,507
118,849,222
118,849,222
0.19
0.19
$
$
(0.07)
(0.07)
The accompanying notes are an integral part of these consolidated financial statements
2
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
Note
Common
shares
Share
capital
Contributed
surplus
Equity
component of
convertible
debentures
Accumulated
deficit
Total
equity
Balance, December 31, 2020
121,187,757
$
198,570
$
39,425
$
2,938
$
(51,260)
$
189,673
Common shares issued on DRIP
Restricted share units settled
Share-based compensation
Dividends declared
Comprehensive income
15
1,160,825
210,610
-
-
-
2,979
423
-
-
-
-
(883)
908
-
-
-
-
-
-
-
-
-
-
(25,093)
23,518
2,979
(460)
908
(25,093)
23,518
Balance as at December 31, 2021
122,559,192
$
201,972
$
39,450
$
2,938
$
(52,835)
$
191,525
Note
Common
shares
Share
capital
Contributed
surplus
Equity
component of
convertible
debentures
Accumulated
deficit
Total
equity
Balance as at December 31, 2019
109,501,916
$
163,174
$
40,293
$
2,938
$
(17,710)
$
188,695
Common shares issued on public offering
Common shares issued on DRIP
Restricted share units settled
Share-based compensation
Dividends declared
Comprehensive loss
15
10,810,000
465,780
410,061
-
-
-
33,038
1,012
1,346
-
-
-
-
-
(2,194)
1,326
-
-
-
-
-
-
-
-
-
-
-
-
(24,665)
(8,885)
33,038
1,012
(848)
1,326
(24,665)
(8,885)
Balance as at December 31, 2020
121,187,757
$
198,570
$
39,425
$
2,938
$
(51,260)
$
189,673
The accompanying notes are an integral part of these consolidated financial statements.
3
Note
14
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2021 and 2020
Operating activities:
Net income (loss)
Adjustments for:
Tax expense (recovery)
Impairment (recovery) loss
Depreciation expense
Share-based compensation
Fair value adjustments on financial instruments
Interest expense on credit facilities
Other finance costs (income), net
Foreign exchange (loss) gain
Interest paid
Interest received
Taxes paid
Distributions received from NND LP
Changes in non-cash operating items:
Royalties and management fees receivable
Amounts receivable
Prepaid expenses and other
Accounts payable and accrued liabilities
Cash flows generated from operating activities
Financing activities:
Debt financing costs
Equity issuance costs
Payment of dividends
Payment of lease obligations
Proceeds from issuance of debt
Proceeds from issuance of equity
Related party receivable
Repayment of debt
RSUs settled in cash
9(b)
Cash flows (used in) generated from financing activities
Investing activities:
Additions to intangible assets
Purchase of fixed assets
Cash flows (used in) investing activities
Net (decrease) increase in cash
Cash, beginning of the year
Cash, end of the year
8
(279)
9,218
8,939
$
$
The accompanying notes are an integral part of these consolidated financial statements.
4
Years ended December 31,
2020
2021
$
23,518
$
9,166
(1,724)
90
1,031
(6,898)
7,299
1,745
-
(7,299)
29
(2,717)
4,906
(618)
4
(85)
(632)
27,815
(373)
-
(22,114)
42
11,400
-
-
-
(92)
(11,138)
(16,712)
(244)
(16,956)
(8,885)
(2,849)
25,901
-
1,326
5,469
7,014
(69)
(1)
(7,047)
65
(2,447)
4,588
99
2
60
(1,124)
22,102
(107)
(2,129)
(23,653)
-
55,700
34,592
3,766
(39,700)
-
28,469
(44,321)
-
(44,321)
6,250
2,968
9,218
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
Diversified Royalty Corp. (“DIV”) is a company domiciled in Canada and governed by the Business Corporations Act (British
Columbia). The consolidated financial statements of DIV as at and for the year ended December 31, 2021 are composed of DIV
and its subsidiaries (together referred to as the “Company”). The head office of the Company is located at 330-609 Granville Street,
Vancouver, BC, V7Y 1A1. The registered office of the Company is located at the 25th Floor, 700 West Georgia Street, Vancouver,
BC V7Y 1B3. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and traded under the symbol
“DIV”.
1. Nature of operations:
The current business of DIV is to acquire royalties from well-managed multi-location businesses and franchisors in North
America (“Royalty Partners”). The Company’s Royalty Partners and the respective license and royalty arrangements are
summarized below.
Sutton Group Realty Services Ltd. (“Sutton”): SGRS Royalties Limited Partnership (“SGRS LP”) (an entity controlled by the
Company), owns the trademarks and certain other intellectual property rights utilized by Sutton in its residential real estate
franchise business (the “SGRS Rights”). The Company granted Sutton the licence to use the SGRS Rights in exchange for a
royalty payment currently equal to $63.347 per agent per month (the “Sutton Royalty Rate”) for the number of agents included
in the royalty pool (the “Sutton Royalty Pool”).
Mr. Lube Canada Limited Partnership (“Mr. Lube”): ML Royalties Limited Partnership (“ML LP”) (an entity controlled by the
Company) owns the trademarks and certain other intellectual property rights utilized by Mr. Lube in its business (the “ML
Rights”). The Company granted Mr. Lube the licence to use the ML Rights in exchange for a royalty payment currently equal
to 7.95% of non-tire system sales and 2.50% of tire system sales of Mr. Lube locations in the royalty pool (the “Mr. Lube
Royalty Pool”).
LoyaltyOne Co. (“LoyaltyOne”): AM Royalties Limited Partnership (“AM LP”) (a wholly owned subsidiary of the Company) owns
the Canadian AIR MILES® trademarks and certain Canadian intellectual property rights (collectively, the “AIR MILES® Rights”)
used by LoyaltyOne in operating the AIR MILES® reward program in Canada (the “AIR MILES® Program”). In accordance
with the terms of two license agreements with LoyaltyOne (collectively the “AIR MILES® Licenses”), LoyaltyOne has an
exclusive right to use the AIR MILES® Rights in exchange for a royalty payment equal to 1% of gross billings from the AIR
MILES® Program.
Mr. Mikes Restaurants Corporation (“Mr. Mikes”): MRM Royalties Limited Partnership (“MRM LP”) (an entity controlled by the
Company) owns the trademarks and certain other intellectual property rights utilized by Mr. Mikes in its restaurant business
(the “MRM Rights”). The Company granted Mr. Mikes the licence to use the MRM Rights in exchange for a royalty payment
currently equal to 4.35% of notional system sales of Mr. Mikes locations in the royalty pool (the “Mr. Mikes Royalty Pool”).
Nurse Next Door Professional Homecare Services Inc. (“Nurse Next Door”): NND Royalties Limited Partnership (“NND LP”)
(an entity that is majority-owned by the Company) has legal ownership of the trademarks and certain other intellectual property
rights utilized by Nurse Next Door Professional Homecare Services Inc. (“Nurse Next Door”) in its premium home care business
(the “NND Rights”) (note 6). NND LP granted Nurse Next Door the licence to use the NND Rights. The Company, through its
ownership of NND LP Class A units, is entitled to receive a cash distribution of $4.8 million per year, which grows at a fixed
rate of 2.0% per annum (the “DIV Distribution Entitlement”).
Oxford Learning Centres, Inc. (“Oxford”): OX Royalties Limited Partnership (“OX LP”) (an entity controlled by the Company)
owns the trademarks and certain other intellectual property rights utilized by Oxford Learning Centres, Inc. (“Oxford”) in its
supplemental education business (the “Oxford Rights”). The Company granted Oxford the licence to use the Oxford Rights in
exchange for a royalty payment currently equal to 7.67% of the gross sales of Oxford locations in the royalty pool (the “Oxford
Royalty Pool”).
Substantially all of the Company’s operating revenues are earned from the receipt of royalties and management fees from its
Royalty Partners. Accordingly, the revenues of the Company and its ability to pay dividends to shareholders are dependent on
the ongoing ability of its Royalty Partners to generate cash and pay royalties and management fees to the Company.
5
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
1. Nature of operations (continued):
COVID-19
Since the onset of the COVID-19 pandemic in March 2020, jurisdictions across Canada have had varying levels of COVID-19
related restrictions in place and many of those restrictions have been modified multiple times in response to the fluctuating
number of COVID-19 cases, the appearance of new COVID-19 variants, and vaccination levels. The situation remains dynamic
and the ultimate duration and magnitude of the impact on the economy, our business and the respective businesses of our
Royalty Partners (including their respective franchisees) remains uncertain. Government restrictions, which have included,
among others, the temporary closure of non-essential businesses (in most jurisdictions), restrictions on business operations,
bans on public gatherings over certain sizes and travel advisories to avoid non-essential travel, may continue or be re-imposed
at any time. These measures have triggered significant disruptions to businesses worldwide, including the businesses of DIV’s
Royalty Partners (including their respective franchisees).
DIV’s Royalty Partners (including their respective franchisees) have had, and may continue to have in the months ahead,
significant interruptions to their respective businesses, including prolonged periods of low system sales on which certain
royalties are based and low revenues on which the Royalty Partners rely to pay royalties to DIV. Certain governments have
eased some of the restrictions put in place to fight the COVID-19 pandemic. However, due to a growing concern over COVID-
19 variants in recent months, governments may re-impose certain restrictions, and in some cases have already done so.
Accordingly, DIV does not know the full extent of the financial impact of such interruptions going forward, the timeline for
restoring normal operations for its Royalty Partners (including their respective franchisees) or the potential changes in
consumer behaviors as a result of the COVID-19 pandemic. In addition, the rates of recovery for DIV’s Royalty Partners have
and will continue to be dependent upon, among other things, the availability, effectiveness and the individual take-up rate of
vaccines for the COVID-19 virus, government responses, rates of economic recovery, precautionary measures taken by
consumers and the rate at which social restrictions are lifted. Recently experienced improvement trends by certain of DIV’s
Royalty Partners may not continue and may regress, and in certain cases have regressed when COVID-19 related government
restrictions have been re-imposed. Certain government support programs which have been helpful to DIV’s Royalty Partners,
their franchisees and the general population have been terminated or modified, and those remaining government support
programs may be terminated or modified at any time. Following the termination of such programs, or the reduction of amounts
available under such programs, or other modifications, Royalty Partners and franchisees currently receiving support under
those programs may need to find alternative sources of financial support and may make requests for such support from, among
other parties, DIV and its Royalty Partners, as applicable. There is also a risk that certain Royalty Partner franchise locations
that temporarily close may not reopen, and those that are open may be required to close again in the future as a direct or
indirect result of the impacts of COVID-19 and related government restrictions. The ongoing effects of COVID-19 could impact
DIV and its Royalty Partners’ (as well as their respective franchisees’) ability to obtain debt and equity financing, and result in
an impairment in the value of the long-lived assets or investments or decreases in revenue or the profitability of DIV’s ongoing
operations.
Liquidity
As at December 31, 2021, the Company had cash of $8.9 million and a working capital deficit of $47.5 million (2020 - $9.2
million cash, positive working capital $10.2 million). The working capital deficit includes the issued convertible unsecured
subordinated debentures (“Debentures”) (note 10) which mature on December 31, 2022. The Company plans to refinance the
Debentures before the maturity date and expects that it will be able to complete the refinancing transaction in 2022. This is
based on the Company’s ability to generate positive cash flow from operations and its history of being able to successfully
refinance its debt.
2. Basis of preparation:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”). The consolidated financial statements were authorized and approved for issue by the Company’s
Board of Directors on March 10, 2022.
6
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
2. Basis of preparation (continued):
(b) Basis of measurement:
These financial statements have been prepared on the historical cost basis except for its Investment in NND LP, interest
rate swaps, the MRM Units and the ML Units, which are measured at fair value.
(c) Functional and presentation currency:
These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.
3. Significant accounting policies:
These annual consolidated financial statements have been prepared using the accounting policies described below.
(a) Basis of consolidation:
These consolidated financial statements include the accounts of DIV, SGRS LP, ML LP, AM LP, MRM LP, NND Holdings
Limited Partnership (“NNDH LP”) and OX LP and the respective general partners. All significant intercompany transactions
and balances have been eliminated on consolidation.
(b) Cash:
Cash consists of cash on hand, balances on deposit with Canadian chartered banks.
(c) Revenue recognition:
The Company has two revenue streams, royalty income and management fee revenue.
• Royalty income: The Company licenses its intellectual property rights to third parties in exchange for royalty payments.
The royalty income is recognized based on the usage or sales that have occurred during the period.
• Management fee revenue: The Company provides strategic and other services to certain royalty partners in exchange
for a fixed monthly fee. Management fee is recognized as earned over the term of the agreement.
Royalty income and management fees for Mr. Lube, Sutton and Oxford are usually receivable within 21 days after the
calendar month. Royalty income and management fees for Mr. Mikes are receivable 21 days after a specified four-week
royalty period. Royalty income from the AIR MILES Program is usually receivable within 14 days after the calendar quarter.
(d) Intangible assets:
The intangible assets are recorded at cost, which includes directly attributable acquisition costs, and are adjusted to record
the additions to the respective royalty pools. The intangible assets are not amortized as they have an indefinite life and
are assessed for impairment as described in note 3(e).
(e) Impairment of intangible assets:
Intangible assets that are not amortized are subject to an annual impairment test or when events or changes in
circumstances indicate that the carrying value may not be recoverable. For the purpose of measuring recoverable
amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating
units or “CGUs”). The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use
(being the present value of the expected future cash flows of the CGU). In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of
the time value of money and the risks specific to the asset. An impairment loss is recognized for the amount by which the
intangible asset’s carrying amount exceeds its recoverable amount.
A previously recognized impairment loss is assessed at each reporting date for any indicators that the loss has decreased
or no longer exists. An impairment loss is reversed only to the extent that the intangible asset's carrying value does not
exceed the carrying amount that would have existed had the original impairment loss not been recognized.
7
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
3. Significant accounting policies (continued):
(f) Dividends to DIV shareholders:
Dividends to the Company’s shareholders are made monthly based upon available cash at the discretion of the Board of
Directors. Dividends are recorded when declared and are subject to the Company retaining such reasonable working
capital reserves as may be considered appropriate by the Company.
(g) Earnings per share:
The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated
by dividing the net income attributable to common shareholders of the Company by the weighted average number of
common shares outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to
common shareholders and the weighted average number of common shares outstanding, adjusted for dilutive potential
common shares, which comprise share options, restricted share units, convertible debentures and exchangeable units.
(h) Employee benefits:
(i) Share options:
The Company measures the compensation cost of share-based option awards to employees at the grant date using
the Black-Scholes option pricing model to determine the fair value of the options. The compensation cost of the
options is recognized as share-based compensation expense over the relevant vesting period of the share options.
Forfeitures are estimated and are adjusted if actual forfeitures differ from the original estimate unless forfeitures are
due to market-based vesting conditions. When the equity-settled share options are exercised, share capital is
increased by the sum of the consideration paid and the carrying value of the share options recorded to contributed
surplus.
(ii) Restricted share units:
Restricted share units (“RSUs”) are settled, in accordance with the respective RSU agreements, in common shares
or cash based on the number of vested restricted share units multiplied by the fair market value of the common shares
on the vesting date.
The Company measures the cost of equity-settled RSUs based on the fair value of the underlying shares at the grant
date, and is recorded as share-based compensation expense with a corresponding increase in equity over the vesting
period.
RSUs that have a net settlement feature for withholding tax obligations are classified in their entirety as equity-settled.
(i)
Income tax:
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss
except to the extent that it relates to a business combination, or items recognized directly in equity or in other
comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted
or substantively enacted at the reporting date, and any adjustment to tax payable in respect of the previous year.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities on
the consolidated statements of financial position and the amounts attributed to the assets and liabilities for tax purposes.
Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a
transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences
relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse
in the foreseeable future.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities
are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes
levied by same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
8
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
3. Significant accounting policies (continued):
(i)
Income tax (continued):
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent
that it is probable that future taxable profits will be available against which they 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.
(j) Financial instruments:
Financial assets are classified and measured based on the business model in which they are held and the characteristics
of their cash flows. At initial recognition, all financial assets classified as amortized cost and fair value through other
comprehensive income (“FVOCI”) are measured at fair value plus transaction costs that are directly attributable to its
acquisition.
The Company classifies its financial assets in the following categories:
Financial assets at amortized cost: A financial asset is measured at amortized cost if it meets both of the following
conditions and is not designated as FVTPL: it is held in a business model whose objective is to hold the asset to collect
contractual cash flows and the contractual terms give rise on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding. Financial assets within this category are subsequently
measured at amortized cost using the effective interest method. Interest income, foreign exchange gains and losses,
impairment losses and gain or loss on de-recognition are recognized in profit or loss.
• Debt investments at FVOCI: A debt instrument is classified as FVOCI if it meets both of the following conditions and
is not designated as FVTPL: it is held in a business model whose objective is achieved by collecting contractual cash
flows and the sale of the financial asset and the contractual terms give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding. Financial assets within this category
are subsequently measured at fair value. Interest income, dividend income and foreign exchange gains and losses
are recognized in profit or loss. Other gains and losses are recognized in other comprehensive income (“OCI”) and
are reclassified to profit or loss on de-recognition.
• Equity investments at FVOCI: On initial recognition of an equity instrument that is not held for trading, the
Company may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This
election is made on an investment-by-investment basis. Financial assets within this category are subsequently
measured at fair value. Dividend income and foreign exchange gains and losses are recognized in profit or loss.
Other gains and losses are recognized in OCI and are never reclassified to profit or loss.
•
Financial assets at fair value through profit and loss (“FVTPL”): Financial assets not classified as amortized cost or
FVOCI are measured at FVTPL. This includes all derivative financial instruments. On initial recognition, the Company
may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost
or at FVOCI at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise
arise. These assets are subsequently measured at fair value, with net gains or losses, including any interest or
dividend income, recognized through profit or loss.
Financial liabilities are classified as measured at amortized cost or FVTPL. Once the classification of a financial liability
has been determined, reclassification is not permitted.
•
•
Financial liabilities at amortized cost: A financial liability is measured at amortized cost using the effective interest
method if it is not designated as FVTPL. Interest expense and foreign exchange gains and losses are recognized in
profit or loss.
Financial liabilities at FVTPL: A financial liability is classified as FVTPL if it is classified as held-for-trading, it is a
derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value
and net gains and losses, including any interest expense are recognized in profit or loss. For financial liabilities
classified as FVTPL, changes in credit risk will be recognized in other comprehensive income, with the remainder of
changes recognized in profit or loss. However, if this requirement creates or enlarges an accounting mismatch in
profit or loss, the entire change in fair value will be recognized in profit or loss.
9
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
3. Significant accounting policies (continued):
(j) Financial instruments (continued):
Financial assets and liabilities are offset and the net amount is reported in the consolidated statements of financial position
when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis
or realize the asset and settle the liability simultaneously.
The Company has elected as an accounting policy choice for non-substantial modifications of variable or fixed rate debt,
if certain criteria are met, to adjust the carrying amount of the financial liability on modification for directly attributable
transaction costs and any consideration paid to or received from the counterparty. The effective interest rate is then
adjusted to amortize the difference between the revised carrying amount and the expected cash flows over the life of the
modified instrument. No gain or loss is recognized in profit or loss. This accounting policy applies to variable or fixed rate
debt that had an insignificant original issue discount that can be prepaid at par, or prepaid with insignificant prepayment
fees, to the extent that modification has the effect of repricing the debt to a market rate of interest.
(k)
Impairment of financial assets:
The Company uses an expected credit loss (“ECL”) impairment model. The ECL impairment model applies to financial
assets measured at cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments.
The Company has elected to use the lifetime ECL approach. Under this approach, the impairment allowance is recorded
as a result of all possible default events over the expected life of the financial asset. ECLs are a probability-weighted
estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between
the cash flows due to the Company in accordance with the contract and the cash flows that the Company expects to
receive) and are discounted at the effective interest rate of the financial asset. The Company considers reasonable and
supportable information when assessing the credit risk of a financial asset and in estimating the ECLs, which includes:
• Significant financial difficulty of the Company’s counterparty;
• Delinquencies in interest or principal payments over 30 days; and
•
It becomes probable that the borrower will enter into bankruptcy or other financial reorganization.
ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash
shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows
that the Company expects to receive). ECLs are discounted at the effective interest rate of the asset.
(l) Convertible debentures:
The Company accounts for convertible debentures by allocating the proceeds of the debentures, net of financing costs,
between liability and equity based on estimated fair values of the debt and conversion option. The liability component is
valued first and the difference between the proceeds of the convertible debentures and the fair value of the liability
component is assigned to the equity component. Interest expense is recorded as a charge to earnings and is calculated
at an effective rate with the difference between the coupon rate and the effective rate being credited to the debt component
of the convertible debentures (accretion expense) such that, at maturity the debt component is equal to the face value of
the outstanding convertible debentures.
(m) Leases:
IFRS 16 has a single on-balance sheet lease accounting model for lessees. At inception of a contract, the Company
assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. A lessee recognizes a right-of-use
(“ROU”) asset representing its right to use the underlying asset and a lease liability representing its obligation to make
lease payments.
The ROU asset is initially measured at cost, which comprises 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, less any lease incentives received. The
ROU asset is subsequently depreciated using the straight-line method from the commencement date to the end of the
lease term. The lease liability is initially measured at the present value of the lease payments that are not paid at the
10
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
3. Significant accounting policies (continued):
(m) Leases (continued):
commencement date, discounted using the Company’s incremental borrowing rate. The lease liability is measured at
amortized cost using the effective interest method.
The lease obligation is measured at amortized cost using the effective interest method and remeasured when there is a
change in future lease payments. Changes in future lease payments can arise from a change in an index or rate, if there
is a change in the Company’s estimate of the expected payable under a residual value guarantee, or if the Company
changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease obligation
is remeasured, a corresponding adjustment is made to the carrying amount of the ROU asset or is recorded in profit or
loss if the carrying amount of the ROU asset has been reduced to zero.
4. Use of estimates and judgments:
The preparation of the consolidated financial statements requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates.
(a) Critical judgments:
• Consolidation:
In applying the criteria outlined in IFRS 10, Consolidated Financial Statements, judgment is required in determining
whether DIV controls SGRS LP, ML LP, MRM LP, NND LP and OX LP. Making this judgment involves taking into
consideration the concepts of power over these entities, exposure and rights to variable returns, and the ability to use
power to direct the relevant activities of these entities to generate economic returns.
Using these criteria, management has determined that DIV ultimately controls SGRS LP, ML LP, MRM LP and OX
LP through its majority ownership of the respective general partners.
Although DIV has 99% ownership over the general partner of NND LP, management has determined that the definition
of control pursuant to IFRS 10 is not met as DIV does not have the ability to direct the activities that most significantly
affect the returns of NND LP.
• Control of NND Rights:
In determining whether the Company controls an asset, the Company takes into consideration the control model in
IFRS 15, Revenues (“IFRS 15”), and if there is an agreement to repurchase the asset. If an entity has a right to
repurchase the asset, the buyer does not obtain control of the asset because the buyer is limited in its ability to direct
the use of, and obtain substantially all of the remaining benefits from, the assets even though the buyer may have
physical possession of the asset.
Nurse Next Door has the ability to repurchase the NND Rights from NND LP (the “NND Buy-Out Option”) at any time
after November 15, 2026. Due to the NND Buy-Out Option, in accordance with IFRS 15, NND LP does not have
control over the NND Rights and cannot recognize the NND Rights as an intangible asset on its books. Instead, the
transaction is accounted for as a financing arrangement.
• Capitalization of acquisition costs:
At the time of acquisition, the Company considers whether or not it represents a business combination or an asset
acquisition. This requires the Company to make certain judgments as to whether or not the assets acquired include
the inputs, processes and outputs necessary to constitute a business. Under a business combination, acquisition-
related costs are recognized as an expense. When the acquisition does not represent a business combination, it is
accounted as an asset acquisition, where the costs are capitalized to the respective asset. The Company has
determined that the transactions related to the SGRS Rights, ML Rights, AM Rights, MRM Rights and Oxford Rights
were asset acquisitions and the acquisition-related costs were capitalized to the intangible asset.
11
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
4. Use of estimates and judgments (continued):
(a) Critical judgments (continued):
•
Fair value of exchangeable partnership units in SGRS LP, ML LP, MRM LP and OX LP (“Exchangeable Partnership
Units”):
The Company does not assign any value to the Exchangeable Partnership Units as they do not currently meet the
relevant criteria for exchange into common shares of DIV (note 8); however, once the relevant criteria has been met,
they convert into exchangeable units which are then fair valued so long as they remain outstanding (note 12).
(b) Key estimates and assumptions:
•
Intangible assets:
The Company carries the intangible assets at cost and are not amortized as they have an indefinite life.
The Company tests intangible assets for impairment annually or when there is any indication that an asset may be
impaired. This requires the Company to use a valuation technique, which is dependent on a number of different
assumptions that requires management to exercise judgment, to determine if impairment exists. These assumptions
include the projected sales underlying the royalty payment, as well as the pre-tax discount rate used to determine the
value-in-use. As a result, the estimated cash flows that the intangible assets are expected to generate could differ
materially from actual results.
• Valuation of the Investment in NND LP:
The Company’s investment in NND LP is a financial instrument recorded at fair value. The valuation of NND LP
includes an estimate of the discounted cash flows receivable from Nurse Next Door and takes into consideration a
number of different variables that requires management to exercise judgment. These judgments include the discount
rate used to calculate the fair value of the contractual cash flows receivable, the likelihood of Nurse Next Door
exercising the NND Buy-Out Option and the likelihood of Nurse Next Door exercising its right to exchange NND LP
Class B units for DIV shares (or cash at DIV’s option), subject to meeting certain criteria (the “NND Exchange
Mechanism”). As a result, the estimated cash flows that the investment in NND LP are expected to generate could
differ materially from actual results.
5. Royalty income:
Mr. Lube
AIR MILES®
Sutton
Oxford
Mr. Mikes
(a) Mr. Lube:
$
$
2021
19,236
6,570
4,065
3,610
3,337
36,818
2020
15,196
7,026
3,327
2,686
1,839
30,074
$
$
Pursuant to the terms of the licence and royalty agreement dated August 19, 2015 (the “Mr. Lube Licence and Royalty
Agreement”), the royalty paid by Mr. Lube to ML LP is calculated by multiplying the system sales of locations within the
Mr. Lube Royalty Pool by an agreed royalty fee (the “Mr. Lube Royalty Rate”). In addition, ML LP is entitled to receive a
make-whole payment in the event that a Mr. Lube location in the ML Royalty Pool is permanently closed during the royalty
payment period. The make-whole payment is based on the lost system sales multiplied by the Mr. Lube Royalty Rate. Mr.
Lube will also, subject to meeting certain performance criteria, be provided opportunities to increase the Mr. Lube Royalty
Rate in four, 0.5% increments (note 8(a)).
In September 2017, Mr. Lube launched a new tire program. In connection with this incremental line of business, on October
20, 2017, ML LP amended its licence and royalty agreement (the “ML LRA Amendment”) with Mr. Lube in respect of this
new retail tire program. Mr. Lube is charging a lower royalty fee and waived certain other fees payable by Mr. Lube
12
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
5. Royalty income (continued):
(a) Mr. Lube (continued):
franchisees on the sale of tires and rims to account for the lower margins on these hard goods. Pursuant to the ML LRA
Amendment, ML LP has agreed to charge an effective royalty rate payable on system sales derived from the sale of tires
and rims of 2.5% (compared to 6.95% on all other system sales) for the locations currently in the Mr. Lube Royalty Pool.
The ML LRA Amendment is effective from September 18, 2017.
Effective May 1, 2021, the Mr. Lube Royalty Pool was adjusted to include the royalties from thirteen new Mr. Lube
locations. With the adjustment for these thirteen new locations, the Mr. Lube Royalty Pool had 135 locations effective May
1, 2021 (note 8(a)).
In 2021, the royalty paid by Mr. Lube includes non-tire make-whole payments for 2 stores that closed on August 13 and
November 28, 2021. For the year ended December 31, 2021, the make-whole payments were $0.4 million (2020 – nil).
Effective May 1, 2019, the Mr. Lube Royalty Pool was adjusted to include the royalties from four new Mr. Lube locations.
With the adjustment for these four new locations, the Mr. Lube Royalty Pool had 122 locations effective May 1, 2019 (note
8(a)). There were no adjustments to the Mr. Lube Royalty Pool during the year ended December 31, 2020.
(b) AIR MILES:
The royalty paid by LoyaltyOne Co. to AM LP is equal to 1% of the gross billings from the AIR MILES Program in
accordance with the terms of the AIR MILES Licenses.
(c) Sutton:
Pursuant to the terms of the licence and royalty agreement dated June 19, 2015 (the “Sutton Licence and Royalty
Agreement”), the royalty paid by Sutton to SGRS LP is calculated by multiplying a determined number of agents in the
Sutton Royalty Pool by the Sutton Royalty Rate. Sutton has the ability, subject to meeting certain performance criteria, to
increase the amount of the annual royalty payable to the Company by increasing the number of agents in the Sutton
Royalty Pool. The number of agents in the Sutton Royalty Pool may be increased annually and will never be decreased.
The Sutton Royalty Rate will automatically increase by 2% each July 1st beginning in 2016. Sutton will also have the ability,
subject to meeting certain performance criteria, to increase the Sutton Royalty Rate in 10.0% increments four times during
the life of the royalty (note 8(c)).
Effective July 1, 2021, the monthly Sutton Royalty Rate increased from $62.105 per agent to $63.347 per agent,
representing the 2.0% annual contractual increase in the Sutton Royalty Rate for 2021. Effective July 1, 2020, the monthly
Sutton Royalty Rate increased from $60.887 per agent to $62.105 per agent, representing the 2.0% annual contractual
increase in the Sutton Royalty Rate for 2020.
With the dramatic slow-down of residential real estate activity due to COVID-19 in the spring of 2020, DIV waived 50% of
Sutton’s March 2020 royalty and management fees that were due in April 2020. In addition, DIV had waived 75% of
Sutton’s April and May 2020 royalty and management fees that were due in May and June 2020, respectively. Since June
2020, 100% of the royalty and management fees were collected from Sutton.
(d) Mr. Mikes:
Pursuant to the term of the licence and royalty agreement between Mr. Mikes and MRM LP dated May 20, 2019 (the “Mr.
Mikes Licence and Royalty Agreement”), the royalty paid by Mr. Mikes to MRM LP is calculated by multiplying the notional
system sales of restaurants in the Mr. Mikes Royalty Pool by an agreed royalty rate, which is initially set at 4.35%.
On March 18, 2020, in response to the evolving circumstances relating to the COVID-19 pandemic, all Mr. Mikes
restaurants were temporarily closed for in-restaurant dining. In early June 2020, certain Mr. Mikes restaurants re-opened
for in-restaurant or patio dining at reduced capacity, and since mid-June 2021 the majority of Mr. Mikes restaurants have
been open for in-restaurant dining at a reduced capacity. For the year ended December 31, 2021, DIV collected $3.3
million from Mr. Mikes or 81% of the contractual royalty amount, which reflects the royalty relief granted to Mr. Mikes in
connection with the COVID-19 pandemic. As of the date of these financial statements, DIV has deferred a total of $1.3
million of contractual amounts otherwise owing, which have not been recognized into revenue, but may be partially or fully
recognized and collected in the future. DIV continues to discuss with its lender and Mr. Mikes about whether additional
royalty relief is required for subsequent periods.
13
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
5. Royalty income (continued):
(e) Oxford:
Pursuant to the terms of the licence and royalty agreement between Oxford and OX LP dated February 20, 2020 (the “OX
Licence and Royalty Agreement”), the royalty paid by Oxford to OX LP is calculated by multiplying the gross sales of the
locations in the Oxford Royalty Pool by a royalty rate equal to 7.67%.
6. Royalties and management fees receivable:
AIR MILES®
Mr. Lube
Sutton
Mr. Mikes
Oxford
Nurse Next Door
$
$
2021
2,003
1,813
369
366
353
7
4,911
2020
2,193
1,237
362
179
315
7
4,293
$
$
The Company has collected the total royalties and management fees receivable at December 31, 2021 from its royalty partners
in January 2022.
7.
Investment in NND LP:
On November 15, 2019, DIV subscribed to NND LP Class A units for a cash purchase price of $52.0 million, and Nurse Next
Door subscribed to NND LP Class B units for an agreed value of $23.0 million. On November 15, 2019, NND LP licensed the
NND Rights to Nurse Next Door for 99 years in exchange for a Gross Royalty equal to the greater of: (i) 6% of gross sales
from Nurse Next Door’s franchises and corporate stores in Canada and the United States, and (ii) $4.8 million per year, which
increases at a fixed rate of 2.0% per annum. Subject to certain royalty coverage tests being met, Nurse Next Door is able to
sell additional royalties to NND LP commencing in February 1, 2021. In consideration for the incremental royalty, Nurse Next
Door will be entitled, subject to TSX approval, to indirectly exchange its NND LP Class B Units for common shares of DIV, or
cash at DIV’s election.
The Company, through its ownership of NND LP Class A units, is entitled to receive a cash distribution of $4.8 million per year,
which grows at a fixed rate of 2.0% per annum (the “DIV Distribution Entitlement”). To the extent the Gross Royalty is greater
than the DIV Distribution Entitlement, Nurse Next Door is entitled to receive the excess amount in the form of a cash distribution
through its ownership of NND LP Class B units. Under the terms of the governance agreement dated November 15, 2019
between DIV, Nurse Next Door and other parties (the “NND Governance Agreement”), Nurse Next Door has the right at any
time after November 15, 2026 to buy back the NND Rights at a price determined in accordance with a formula outlined in the
NND Governance Agreement upon any exercise of such right.
Due to the NND Buy-Out Option, NND LP does not have control (per IFRS 15) over the NND Rights and cannot recognize the
NND Rights as an intangible asset on its books. Instead, the transaction is accounted for as a financing arrangement, and the
Company’s investment in NND LP is a financial instrument measured at fair value. The cash distributions received by the
Company from NND LP are recorded as a reduction in its investment in NND LP. For the year ended December 31, 2021, the
DIV Distribution Entitlement was $4.9 million, gross and net of expenses incurred by NND LP, (December 31, 2020 - $4.8
million gross and $4.6 million net of expenses incurred by NND LP).
The valuation of the financial instrument includes an estimate of the discounted cash flow receivable from Nurse Next Door
and takes into consideration the likelihood of Nurse Next Door exercising the NND Buy-Out Option and the NND Exchange
Mechanism. The NND Buy-Out Option and NND Exchange Mechanism are embedded derivatives with a negligible value at
December 31, 2021 and 2020. The contractual cash flows receivable from Nurse Next Door were discounted at a rate of 13.9%
(2020 - 14.0%). The total fair value of NND LP was $44.5 million (2020 - $43.6 million) and a fair value gain of $5.7 million was
recorded during the year ended December 31, 2021 (2020 – fair value loss of $3.6 million). A one percentage point increase
in the discount rate would decrease the fair value by $4.4 million (2020 - $3.2 million). A one percentage point decrease in the
discount rate would increase the fair value by $2.7 million (2020 -$3.7 million).
14
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
8.
Intangible assets:
Balance, December 31, 2019
Additions
Reversal (Impairment)
Balance, December 31, 2020
Additions
Reversal (Impairment)
ML Rights
(a)
$
152,327
661
-
$
152,988
17,970
-
AIR MILES SGRS Rights MRM Rights Oxford Rights
(e)
(c)
(d)
(b)
Total
$
53,977
-
-
$
32,273
-
-
$
43,210
-
(19,841)
-
$
44,354
(6,060)
$
281,787
45,015
(25,901)
$
53,977
-
(5,167)
$
32,273
-
-
$
23,369
-
5,681
$
38,294
-
1,210
$
300,901
17,970
1,724
Balance, December 31, 2021
$
170,958
$
48,810
$
32,273
$
29,050
$
39,504
$
320,595
(a) ML Rights:
ML LP licensed the ML Rights back to Mr. Lube for 99 years in exchange for a royalty payment equal to the system sales
of the Mr. Lube locations in the Mr. Lube Royalty Pool multiplied by the Mr. Lube Royalty Rate (note 5(a)).
Upon closing the Mr. Lube Acquisition, ML LP issued 100,000,000 Class B, Class C, Class D, Class E, and Class F units
to Mr. Lube. These units will become exchangeable into common shares of the Company through the exchange agreement
dated August 19, 2015 among Mr. Lube, ML Royalties GP Inc. and the Company (the “Mr. Lube Exchange Agreement”)
upon the satisfaction of certain performance criteria. The Class B LP units of ML LP become exchangeable into common
shares of the Company upon adding Mr. Lube locations to the ML Royalty Pool. The Class C, Class D, Class E, and Class
F LP units become exchangeable into common shares of the Company on increases in the ML Royalty Rate of 0.5%
increments four times during the life of the royalty, in accordance with the partnership agreement dated August 19, 2015
among Mr. Lube, the Company, and ML Royalties GP Inc.
In addition to the royalty, Mr. Lube will pay the Company a management fee of approximately $0.2 million per year for
strategic and other services. The management fee will be increased at a rate of 2.0% per annum over the term of the Mr.
Lube Licence and Royalty Agreement.
Annually on May 1, the Mr. Lube Royalty Pool may be adjusted, subject to meeting certain criteria, to include gross sales
from new Mr. Lube locations less gross sales from Mr. Lube locations that were permanently closed during the preceding
calendar year. In return for adding these net sales to the Mr. Lube Royalty Pool, Mr. Lube receives the right to indirectly
acquire common shares of the Company through the exchange of Class B LP Units of ML LP (the “ML Additional
Entitlement”). The ML Additional Entitlement is determined based on the estimated net tax-adjusted royalty revenue added
to the Mr. Lube Royalty Pool (adjusted by a 20% discount for locations that were open for business prior to June 30, 2019,
or a 7.5% discount for all other additions), divided by the yield of the Company’s shares, divided by the weighted average
share price of the Company’s shares over the 20 days preceding March 31. Mr. Lube receives 80% of the estimated ML
Additional Entitlement initially, with the balance received on May 1 of the subsequent year when the actual full year
performance of the new locations is known with certainty. The ML Additional Entitlement is automatically exchanged by
Mr. Lube into common shares of DIV, or settled in cash at DIV’s option, pursuant to the Mr. Lube Exchange Agreement.
On November 9, 2020, DIV and Mr. Lube entered into an amendment to the amended and restated limited partnership
agreement of ML LP (the “LP Agreement”) to confirm the terms on which (i) the Mr. Lube royalty rate on non-tire sales at
flagship locations would be increased by 0.5% from 7.45% to 7.95% effective May 1, 2021, and (ii) the Mr. Lube Royalty
Pool would be adjusted to include royalties from 13 additional Mr. Lube locations effective May 1, 2021.
The increase of the Mr. Lube royalty rate from 7.45% to 7.95% on non-tire sales on May 1, 2021 represents the second
such royalty rate increase. The royalty rate on tire sales remains unchanged at 2.50%. The LP Amendment provides that
the consideration payable to Mr. Lube for the Mr. Lube royalty rate increase on May 1, 2021 was to be calculated based
on a 7.25x multiple of the incremental annual royalty revenue from such increase, which consideration was required to be
paid in cash. The total consideration for the increase of the Mr. Lube Royalty Rate of $8.3 million was paid to Mr. Lube on
May 1, 2021 in cash and recorded as an addition to intangible assets.
The LP Amendment also provides that the consideration payable to Mr. Lube for the addition of the 13 locations to the
Mr. Lube Royalty Pool on May 1, 2021 was to be calculated based on a 7.25x multiple of the incremental annual royalty
15
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
8.
Intangible assets (continued):
(a) ML Rights (continued):
revenue to be added to the Mr. Lube Royalty Pool from such additions, which consideration is required to be paid in cash.
The initial consideration payable to Mr. Lube on May 1, 2021 for the estimated net additional royalty revenue from the 13
Mr. Lube locations to be added to the Mr. Lube Royalty Pool was $7.7 million, representing 80% of the total estimated
consideration of $9.6 million. The remaining consideration payable for the net additional royalty revenue related to 7 of
the 13 locations will be paid to Mr. Lube on May 1, 2022 and the payable was adjusted to reflect the actual system sales
of these locations for the year ending December 31, 2021. The remaining consideration payable for the net additional
royalty revenue related to 6 of the 13 locations will be paid to Mr. Lube on May 1, 2023 and will be adjusted to reflect the
actual system sales of these locations for the year ending December 31, 2022. As at December 31, 2021, the remaining
consideration payable to Mr. Lube was $2.6 million, of which $1.6 million was recorded to accounts payable and accrued
liabilities and $1.0 million was recorded to exchangeable units and other (note 12) on the statement of financial position.
On May 1, 2019, the Mr. Lube Royalty Pool was adjusted to include the royalties from four new Mr. Lube locations. The
initial consideration paid to Mr. Lube for the estimated additional royalty revenue was $2.7 million, representing 80% of
the total estimated consideration of $3.4 million. In exchange for the addition to the Mr. Lube Royalty Pool, Mr. Lube
received the right to exchange Class B LP units of ML LP for common shares of DIV. DIV elected to pay the initial
consideration to Mr. Lube in cash.
Based on the actual system sales for the year ended December 31, 2019 of the four new locations added to the Mr. Lube
Royalty Pool, Mr. Lube is entitled to exchange 357,716 Class B units of ML LP (the “ML Units”) for DIV shares (or cash at
DIV’s option). On April 28, 2020, Mr. Lube and DIV entered into an agreement to defer the settlement of the ML Units to
a subsequent adjustment date being no earlier than May 1, 2021. On May 1, 2021, DIV paid Mr. Lube the remaining $0.9
million of cash consideration for the additions to the Mr. Lube Royalty Pool that occurred on the 2019 Adjustment Date.
The cash consideration paid was equal to the lower of: (i) $3.1822 per share and (ii) the weighted average share price of
the Company’s shares over the 20 trading days ending on April 26, 2021, the fifth trading day before May 1, 2021, which
was determined to be $2.4941 per share.
(b) AIR MILES Rights:
In accordance with the terms of the AIR MILES Licenses, AM LP will receive an aggregate royalty, payable quarterly,
equal to 1% of gross billings from the AIR MILES Program in Canada in perpetuity.
(c) SGRS Rights:
SGRS LP licensed the SGRS Rights back to Sutton for 99 years in exchange for a royalty payment equal to the Sutton
Royalty Pool multiplied by the Sutton Royalty Rate (note 5(c)).
Upon closing the Sutton Acquisition, SGRS LP issued 100,000,000 Class A, Class B, Class C, Class D, and Class E LP
units to Sutton. These units will become exchangeable into common shares of the Company through the exchange
agreement dated June 19, 2015 among Sutton, SGRS Royalties GP Inc. and the Company upon the satisfaction of certain
performance criteria. The Class A LP Units become exchangeable into common shares of the Company on the contribution
of additional agents into the Sutton Royalty Pool. The Class B, Class C, Class D, and Class E LP units become
exchangeable into common shares of the Company on increases in the Sutton Royalty Rate of 10.0% increments four
times during the life of the royalty, in accordance with the partnership agreement dated June 19, 2015 among Sutton, the
Company, and SGRS Royalties GP Inc. (the “Sutton Exchange Agreement”).
In addition to the royalty, Sutton will pay the Company a management fee of approximately $0.1 million per year for
strategic and other services. The management fee will be increased by 10.0% every five years.
Annually on July 1, the Sutton Royalty Pool may be adjusted, subject to meeting certain performance criteria, to increase
the number of agents. In return for increasing the number of agents in the Sutton Royalty Pool, Sutton receives the right
to indirectly acquire common shares of the Company through the exchange of Class A LP Units of SGRS LP (the “SGRS
Additional Entitlement”). The SGRS Additional Entitlement is determined based on 92.5% of the estimated net tax-adjusted
royalty revenue added to the Sutton Royalty Pool, divided by the yield of the Company’s shares, divided by the weighted
average share price of the Company’s shares over the 20 days preceding May 31. The SGRS Additional Entitlement is
automatically exchanged by Sutton into common shares of DIV, or settled in cash at DIV’s option, pursuant to the Sutton
Exchange Agreement.
16
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
8.
Intangible assets (continued):
(d) MRM Rights:
On May 20, 2019, the Company acquired, through MRM LP, the MRM Rights for $43.2 million. The purchase price was
satisfied by a cash payment of $37.1 million, the issuance of 1,000,000,000 Class B and Class C units of MRM LP having
an agreed value of $1.15 million to Mr. Mikes, and a promissory note of $4.95 million, payable subject to certain conditions
being met. The cash payment was financed by cash on hand of $37.1 million, which was subsequently partially refinanced
by the issuance of $10.3 million of debt (note 9(b)). In addition, $0.2 million in costs incurred for the acquisition of the MRM
Rights were capitalized as part of the purchase.
The promissory note is payable on the date Mr. Mikes has opened five new locations, subject to Mr. Mikes meeting the
required royalty coverage test. Once these five locations are open and Mr. Mikes has met the required royalty coverage
test, these locations will be added to the Mr. Mikes Royalty Pool. The promissory note was initially recorded at a fair value
and is subsequently measured at amortized cost using the effective interest method. During the year ended December
31, 2021, due to a change in the expected timing of the settlement of the promissory note, a $0.1 million gain was recorded
in other finance income (note 18).
The Class B and Class C units are exchangeable into common shares of the Company through certain agreements among
Mr. Mikes, MRM Royalties GP Inc. and the Company, in each case, upon satisfaction of certain performance criteria and
the approval of the TSX. The Class B units become exchangeable into common shares of the Company upon adding
eligible Mr. Mikes locations to the MRM Royalty Pool (other than the five locations subject to the promissory note). The
Class C units become exchangeable into common shares of the Company upon increases in the MRM Royalty Rate,
which may be done in increments of 0.25% six times during the life of the royalty, in accordance with the partnership
agreement dated May 20, 2019 among Mr. Mikes, the Company and MRM Royalties GP Inc. On May 20, 2019, the total
number of exchangeable Class B and Class C units was 355,032, and represents a retained interest in MRM LP (the
“Initial Retained Interest”) of approximately 4.1% (note 12). The Initial Retained Interest must be held in perpetuity and
cannot be exchanged by Mr. Mikes for common shares of DIV without DIV’s prior written approval and the approval of the
TSX.
Annually on April 1, the Mr. Mikes Royalty Pool may be adjusted, subject to meeting certain criteria, to include gross sales
from new Mr. Mikes restaurants less gross sales from Mr. Mikes restaurants that were permanently closed during the
preceding calendar year. In return for adding these net sales to the Mr. Mikes Royalty Pool, Mr. Mikes receives the right
to indirectly acquire common shares of the Company through the exchange of Class B LP units of MRM LP (the “MRM
Additional Entitlement”). The MRM Additional Entitlement is determined based on the estimated net-tax-adjusted royalty
revenue added to the MRM Royalty Pool (adjusted by a 10% discount for restaurants that were open for business prior to
December 31, 2024, or a 7.5% discount for all other locations), divided by the yield of the Company’s shares, divided by
the weighted average share price of the Company’s shares of the 20 trading days ending on the fifth trading day preceding
April 1. Mr. Mikes receives 80% of the estimated MRM Additional Entitlement initially, with the balance received on April
1 of the subsequent year when the actual full year performance of the new locations is known with certainty. The MRM
Additional Entitlement is exchanged by Mr. Mikes into common shares of DIV, or settled in cash at DIV’s option, pursuant
to the Mr. Mikes Exchange Agreement.
In addition to the royalty, Mr. Mikes will pay the Company a management fee of approximately $0.04 million per year for
strategic and other services. The management fee will be increased at a rate of 2.5% per annum over the term of the Mr.
Mikes Licence and Royalty Agreement.
(e) Oxford Rights:
On February 20, 2020, the Company indirectly acquired, through OX LP, the Oxford Rights for a purchase price of $44.0
million (the “Purchase Price”), plus a retained interest provided to Oxford through the issuance of 10,493 Ordinary LP
units, 100,000,000 Class B, 100,000,000 Class C, 100,000,000 Class D, 100,000,000 Class E, 100,000,000 Class F,
100,000,000 Class G, and 100,000,000 Class H limited partner units of OX LP having an agreed value of approximately
$33,000.
The cash Purchase Price of $44.0 million was funded with $37.0 million drawn from DIV’s Acquisition Facility and DIV’s
cash on hand following DIV’s drawdown of the remaining $7.0 million of available capacity under the NNDH LP term loan
facility (note 9(b)). The refundable Goods and Services Tax of $2.2 million payable by OX LP on the Purchase Price and
estimated transaction costs were funded with a further $2.7 million drawn from the available capacity under the Acquisition
Facility. The Acquisition Facility was subsequently partially repaid in cash using funds received from the issuance of equity
(note 15) and the issuance of $9.0 million of debt (note 9(b)).
17
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
8.
Intangible assets (continued):
(e) Oxford Rights (continued):
The Class B, Class C, Class D, Class E, Class F, Class G and Class H units are exchangeable into common shares of
the Company through the exchange agreement dated February 20, 2020 among Oxford, OX Royalties GP Inc. and the
Company (the “Oxford Exchange Agreement”) upon the satisfaction of certain performance criteria.
Annually on May 1, the Oxford Royalty Pool may be adjusted, subject to meeting certain criteria, to include gross sales
from new Oxford locations less gross sales from Oxford locations that were permanently closed during the preceding
calendar year. In return for adding these net sales to the Oxford Royalty Pool, Oxford receives the right to indirectly acquire
common shares of the Company through the exchange of Class B units of OX LP (the “OX Additional Entitlement”). The
OX Additional Entitlement is determined based on the estimated net tax-adjusted royalty revenue added to the Oxford
Royalty Pool (adjusted by a 10% discount for locations that were open for business prior to December 31, 2023, or a 7.5%
discount for all other additions), divided by the yield of the Company’s common shares. Oxford receives 80% of the
estimated OX Additional Entitlement initially, with the balance received on May 1 of the subsequent year when the actual
full year performance of the new locations is known with certainty. The OX Additional Entitlement is automatically
exchanged by Oxford into common shares of DIV, or settled in cash at DIV’s option, pursuant to the Oxford Exchange
Agreement.
The Class C, Class D, Class E, Class F, Class G and Class H units become exchangeable into common shares of the
Company on increases in the Oxford Royalty rate of 0.25% increments six times during the term of the OX Licence and
Royalty Agreement.
In addition to the royalty payable to OX LP, Oxford will pay DIV a management fee of $40,000 per annum for strategic
advice and other services. The management fee will increase by $5,000 every five years over the term of the OX License
and Royalty Agreement.
(f) Impairment assessment:
The Company tests the carrying value of its intangible assets for impairment annually, or when there is an indication that
an asset may be impaired. Impairment exists if the carrying value of the cash-generating unit (“CGU”) is greater than its
recoverable amount.
The Company performed its annual impairment test on its indefinite life intangible assets as at December 31, 2020 and
December 31, 2021. The Company has used the value in use method to determine the recoverable amount for all
impairment testing performed during the years ended December 31, 2020 and December 31, 2021. The estimates of
future cash flows require a number of key assumptions about future business performance. These assumptions and
estimates are based on the relevant business’ historical experience, economic trends, as well as past and ongoing
communications with relevant stakeholders of the Company. The expected future cash flows are based on the projected
sales underlying the royalty payment over a five-year period, with a terminal growth rate applied on the expected cash
flows thereafter to reflect the indefinite life of the intangible assets. However, these forecasted cash flows are based on
current and anticipated market conditions, which are inherently uncertain due to the evolving impact of the COVID-19
pandemic. The COVID-19 pandemic and its impact on the economy is constantly changing in an unpredictable manner
and presents many variables and contingencies for modeling. In future periods, the effects of the COVID-19 pandemic
may have a material impact on the recoverable amount of the Company’s CGUs. The following tables outline the pre-tax
discount rate and the terminal value growth rate used in calculating the recoverable amount for each CGU tested for
impairment as at December 31, 2021 and December 31, 2020:
December 31, 2021
Pre-tax discount rate
Terminal value growth rate
December 31, 2020
Pre-tax discount rate
Terminal value growth rate
ML Rights
AIR MILES SGRS Rights MRM Rights Oxford Rights
10.7%
2.0%
14.4%
0.5%
14.6%
2.0%
12.7%
2.0%
12.0%
2.0%
ML Rights
AIR MILES SGRS Rights MRM Rights Oxford Rights
10.7%
2.0%
12.3%
0.5%
14.7%
2.0%
12.5%
2.0%
11.9%
2.0%
18
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
8.
Intangible assets (continued):
(f)
Impairment assessment (continued):
During the year ended December 31, 2021, the pre-tax discount rate had a range from 10.7% to 14.6% (2020 – 10.7% to
14.7%), and the terminal value growth rate had a range from 0.5% to 2.0% in both years.
In 2020, based on the assessments performed, the Company recorded impairment losses of $19.8 million and $6.1 million
in connection with the MRM Rights and OX Rights respectively for the year ended December 31, 2020.
The MRM Rights 2020 impairment was due to the impact of the COVID-19 pandemic on Mr. Mikes’ restaurants and the
company’s inability to pay the fixed royalty payment to DIV in full. In 2021, Mr. Mikes saw a general recovery in the
restaurant industry as compared to 2020. However, the Company continued to experience challenges in the latter part of
2021 as new restrictions were implemented in various regions to combat the Delta and Omicron variants. The Company
concluded that the recoverable amount for the MRM Rights exceeded the carrying amount, resulting in a non-cash
accounting partial reversal of the 2020 impairment charge recorded as a gain of $5.7 million through profit or loss. DIV
continues discussions with its lenders and Mr. Mikes about whether additional royalty relief is required for subsequent
periods.
The OX Rights 2020 impairment was due to negative impacts of the COVID-19 pandemic, resulting in reduced capacity
for in-centre services and temporary closures of in-person tutoring at various locations. The royalty generated by Oxford
was less than the original estimates when the acquisition of the OX Rights was completed in February 2020 and there
was significant uncertainty surrounding the timing of the recovery of Oxford’s operations to pre-COVID levels. In 2021,
Oxford saw a consistent recovery due to the relaxing of government restrictions, the transition back to in-person tutoring
(albeit still at reduced capacity in various jurisdictions) and the continued offering of virtual tutoring for most locations. The
Company concluded that the recoverable amount for the OX Rights exceeded the carrying amount, resulting in a non-
cash accounting partial reversal of the 2020 impairment charge, recorded as a gain of $1.2 million through profit or loss.
In 2021, LoyaltyOne saw the non-renewal and loss of two sponsors from the AIR MILES Program, and the emergence of
the COVID-19 Omicron variant in November 2021, which negatively impacted results. Based on the assessments
performed, the Company concluded that the carrying amount for the AIR MILES Rights exceeded the recoverable amount.
As a result, the Company recorded an impairment loss of $5.2 million in connection with the AIR MILES Rights for the
year ended December 31, 2021.
The Company also considers other reasonably possible scenarios where projected sales underlying the royalty payment
are less than expected, along with other reasonably possible higher discount rates to determine whether the intangible
assets would be impaired under those scenarios. As the carrying value of the SGRS Rights, OX Rights, MRM Rights and
AIR MILES Rights approximate the estimated recoverable amount, a subsequent change in any key assumption utilized
in the estimate of future cash flows may result in an impairment.
9. Borrowings:
(a) Acquisition facility:
On December 5, 2019, the Company entered into a credit agreement with a Canadian chartered bank for a $50.0 million
undrawn senior secured credit facility (the “Acquisition Facility”). The Acquisition Facility matures on November 30, 2022
and each draw is interest only for the first six months and then amortizes over 60 months. As at December 31, 2021 and
2020, the Acquisition Facility was undrawn. During the year ended December 31, 2019, financing costs of $0.4 million
were recorded within prepaid expenses and other, and are being amortized over the term of the Acquisition Facility using
the effective interest rate method.
19
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
9. Borrowings (continued):
(b) Term loan facilities and operating lines of credit:
As at December 31, 2021, the Company had the following term loan facilities and operating lines of credit:
Term loan facilities
ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
NNDH LP term loan
OX LP term loan
Operating lines of credit
ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
OX LP term loan
Interest rate
BA + 2.50%
BA + 1.95%
BA + 1.95%
BA + 1.95%
BA + 1.90%
BA + 1.95%
Interest rate
Prime + 0.25%
BA + 1.95%
BA + 1.95%
Prime + 0.25%
Prime + 0.25%
Maturity date
May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025
Maturity date
May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Apr 27, 2025
$
Face value
53,000
17,400
6,300
10,300
14,500
9,000
$
Carrying value
52,698
17,254
6,251
10,230
14,389
8,928
$
110,500
$
109,750
$
Maximum
available
1,000
3,000
500
500
500
$
Available
for use
1,000
3,000
500
500
500
$
5,500
$
5,500
As at December 31, 2020, the Company had the following term loan facilities and operating lines of credit:
Term loan facilities
ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
NNDH LP term loan
OX LP term loan
Operating lines of credit
ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
OX LP term loan
Interest rate
BA + 1.95%
BA + 2.25%
BA + 2.00%
BA + 1.95%
BA + 1.90%
BA + 1.95%
Interest rate
Prime + 0.25%
BA + 2.25%
BA + 2.00%
Prime + 0.25%
Prime + 0.25%
Maturity date
Jul 31, 2022
Sep 6, 2022
Jun 30, 2022
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025
Maturity date
Jul 31, 2022
Sep 6, 2022
Jun 30, 2022
Jun 24, 2024
Apr 27, 2025
$
Face value
41,600
17,400
6,300
10,300
14,500
9,000
$
Carrying value
41,491
17,329
6,275
10,203
14,352
8,907
$
99,100
$
98,557
$
Maximum
available
1,000
3,000
500
500
500
$
Available
for use
1,000
3,000
500
500
500
$
5,500
$
5,500
ML LP has a credit agreement that originally consisted of a non-amortizing $34.6 million term loan and a $1.0 million
demand operating facility from a Canadian chartered bank. The ML LP term loan and line of credit are secured by the ML
Rights and the royalties payable by Mr. Lube under the Mr. Lube Licence and Royalty Agreement. On May 1, 2021, in
connection with the Mr. Lube royalty rate increase and the addition of 13 stores to the Mr. Lube Royalty pool (note 8), ML
LP amended its credit facility agreement, which consists of a non-amortizing term loan facility and an operating line of
credit. The amendment to the ML LP credit facility agreement resulted in an increase to the term loan facility from $41.6
million to $53.0 million, an increase in the interest rate by 0.55%, and an extension of the maturity date from July 31, 2022
to May 1, 2025.
AM LP has a credit agreement that consists of a non-amortizing $17.4 million term loan facility and $3.0 million demand
operating facility from a Canadian chartered bank. The AM LP term loan and line of credit are secured by the AIR MILES
Rights and the royalties payable by LoyaltyOne Co. under the AIR MILES Licenses. On September 13, 2021, AM LP
amended its credit facility agreement, which consists of a non-amortizing term loan facility and an operating line of credit.
The amendment to the AM LP credit facility resulted in a decrease in the interest rate by 0.30% and an extension of the
maturity date from September 6, 2022 to September 30, 2026.
20
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
9. Borrowings (continued):
(b) Term loan facilities and operating lines of credit (continued):
SGRS LP has a credit agreement that consists of a non-amortizing $6.3 million term loan and a $0.5 million demand
operating facility from a Canadian chartered bank. The SGRS LP term loan and line of credit are secured by the SGRS
Rights and the royalties payable by Sutton under the Sutton Licence and Royalty Agreement. On June 11, 2021, SGRS
LP amended its credit facility agreement, which consists of a non-amortizing term loan facility and an operating line of
credit. The amendment to the SGRS LP credit facility resulted in a decrease in the interest rate by 0.05% and an extension
of the maturity date from June 30, 2022 to June 30, 2026.
MRM LP has a credit agreement with a Canadian chartered bank that consists of a non-amortizing $10.3 million term loan
and a $0.5 million line of credit. The MRM LP term loan and line of credit are secured by the MRM Rights and the royalties
payable by Mr. Mikes under the Mr. Mikes Licence and Royalty Agreement.
NNDH LP, a wholly-owned subsidiary of DIV, has a credit agreement with a Canadian chartered bank that consists of a
non-amortizing $14.5 million term loan. The NNDH LP term loan is secured by the NND Rights and the royalties payable
by Nurse Next Door.
On April 27, 2020, OX LP entered into a credit agreement with a Canadian chartered bank that consists of a non-amortizing
$9.0 million term loan and a $0.5 million line of credit. The OX LP term loan and line of credit are secured by the OX Rights
and the royalties payable by Oxford under the Oxford Licence and Royalty Agreement.
As at December 31, 2021 and 2020, the Company was in compliance with all financial covenants associated with its
Acquisition Facility, term loan facilities and operating lines of credit. AM LP obtained waivers from the lender with respect
to certain financial covenants in respect of the period from July 1, 2020 to September 30, 2020 and the period from October
1, 2020 to December 31, 2020, and the AM Credit Agreement was amended and restated in March 2021 in order to,
among other things, amend the financial covenants for the first three fiscal quarters of 2021, and subsequently amended
in September 2021 in order to, among other things, amend the financial covenants for the last fiscal quarter of 2021 and
for the first two fiscal quarters of 2022. If AM LP had not received such waivers or entered into such amendment, AM LP
would have been in breach of its financial covenants as of September 30, 2020, December 31, 2020, March 31, 2021,
June 30, 2021, September 30, 2021 and December 31, 2021.
In February 2021, MRM LP negotiated a covenant amendment to its credit agreement, which included a suspension to its
financial covenants for the quarters ended December 31, 2020, March 31, 2021 and June 30, 2021; and in September
2021, MRM LP negotiated a similar covenant amendment that contained the same suspension for the quarters ended
September 30, 2021 and December 31, 2021. If MRM LP had not entered into such covenant amendment, MRM LP would
have been in breach of its financial covenants as of such dates. DIV continues to closely monitor the results of its royalty
partners and is in regular discussions with its lending partners about the impact of COVID-19 on its business including
covenant relief, which may be required in the months ahead dependent on the future results of several of DIV’s royalty
partners.
10. Convertible debentures:
On November 7, 2017, the Company issued Debentures for an aggregate principal amount of $57.5 million at a price of $1,000
per Debenture. The Debentures mature on December 31, 2022 and bear interest at an annual rate of 5.25% payable semi-
annually in arrears on the last day of December and June in each year. The Company plans to refinance the Debentures before
the maturity date and expects that it will be able to complete the refinancing transaction in 2022. At the holder’s option, the
Debentures may be converted into common shares of the Company at any time prior to the earlier of: (i) the last business day
immediately preceding December 31, 2022; or (ii) the date specified by the Company for redemption of the Debentures. The
conversion price will be $4.55 per common share (the “Conversion Price), subject to adjustment in certain circumstances.
The Debentures are not redeemable prior to January 1, 2021, except upon the satisfaction of certain conditions after a change
of control has occurred. On or after January 1, 2021 and prior to December 31, 2021, the Debentures may be redeemed in
whole or in part from time to time at DIV’s option, provided that the volume weighted average trading price of the common
shares on the TSX during the 20 consecutive trading days ending on the fifth trading day preceding the date on which the
notice of the redemption is given is not less than 125% of the Conversion Price. On or after December 31, 2021 and prior to
the maturity date, DIV may, at its option, redeem the Debentures, in whole or in part, from time to time at par plus accrued and
unpaid interest. On redemption or at maturity, the Company will repay the indebtedness of the Debentures by paying an amount
equal to the principal amount of the outstanding Debentures, together with accrued and unpaid interest thereon.
21
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
10. Convertible debentures (continued):
The Company may, at its option, elect to satisfy its obligation to repay the principal amount of the convertible debentures,
which are to be redeemed or which have matured, by issuing shares to the holders of the convertible debentures. The number
of shares to be issued will be determined by dividing $1,000 of principal amount of the convertible debentures by 95% of the
then current market price on the day preceding the date fixed for redemption or the maturity date.
On initial recognition, the Company valued the liability component at $53.2 million and the equity component at $4.3 million. In
addition, the Company incurred transaction costs of $2.8 million, of which $2.6 million was allocated to the liability component
and $0.2 million was allocated to the equity component. The net amount recognized as the equity component of the Debentures
was $2.9 million, after deferred taxes of $1.2 million and transaction costs of $0.2 million.
The following table reconciles the principal amount of the convertible debentures to the carrying value of the liability component:
Principal amount
Equity component of Debentures
Unamortized deferred financing fees
Accretion on liability component of Debentures
Current portion of Debentures
Long-term portion of Debentures
11. Interest rate swaps:
2021
2020
$
57,500
$
57,500
(4,312)
(570)
3,350
(4,312)
(1,105)
2,452
$
55,968
(55,968)
$
-
$
$
54,535
-
54,535
The Company has interest rate swap agreements that entitle the Company to receive interest at floating rates and effectively
pay interest at fixed rates for a portion of its term loan facilities.
The interest rate swaps are re-measured at fair value at the end of each reporting period with fair values calculated as the
present value of contractual cash flows based on quoted forward curves and discount rates incorporating the applicable yield
curve. The following table summarizes the interest rate swap agreements the Company has entered into as of
December 31, 2021:
Term loan facilities
Effective date
Maturity date
Fixed interest rate
Notional amount
ML LP1
ML LP1
ML LP
AM LP2
MRM LP
NNDH LP
OX LP
Aug 13, 2018
Feb 5, 2020
Jul 29, 2022
Sep 6, 2017
Jul 25, 2019
Feb 12, 2020
Aug 26, 2020
Jul 31, 2022
Jul 31, 2022
May 1, 2025
Aug 19, 2022
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025
4.72%
4.43%
4.25%
4.12%
4.05%
3.98%
2.96%
$
34,600
7,000
39,750
8,700
10,300
7,500
4,500
1) On May 1, 2021 ML LP amended its credit facility agreement, which resulted in an increase to its fixed interest rate by 0.55%.
2) On September 13, 2021 AM LP amended its credit facility agreement, which resulted in a decrease to its fixed interest rate by 0.30%.
12. Exchangeable Units and Other:
(a) MRM Units:
Mr. Mikes is entitled to receive distributions from MRM LP on the Initial Retained Interest on a pro rata basis with the
limited partnership units of MRM LP (the “MRM Units”) held by DIV. The MRM Units are recorded as a liability and
measured at fair value. The distributions issued by MRM LP to Mr. Mikes are recorded as an expense on the Company’s
income statement. During the year ended December 31, 2021, MRM LP issued distributions of nil to Mr. Mikes (2020 -
$0.03 million).
22
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
12. Exchangeable Units and Other (continued):
(a) MRM Units (continued):
The fair value of the MRM Units is determined at the end of each period by multiplying the number of MRM Units held by
Mr. Mikes at the end of the period by the closing price of DIV shares on the last business day of the period. As at December
31, 2021, the MRM Units were valued at $1.0 million based on the DIV closing share price of $2.82 at period end (2020 -
$2.38), multiplied by the total number of MRM Units of 355,032.
(b) ML Units:
As referenced in note 8a, the $1.0 million consideration payable was recorded to exchangeable units and other, with
changes in the fair value recorded as a fair value adjustment on financial instruments in the statement of net income.
13. ROU asset and lease obligation:
In December 2020, DIV signed a ten-year lease agreement for its head office and obtained possession in January 2021. Under
IFRS 16, DIV recognized a ROU asset representing its right to use the underlying asset and a lease liability representing its
obligation to make lease payments. During the year ended December 31, 2021, the Company recorded $0.1 million as
depreciation expense for the ROU asset and a nominal amount as other finance costs on the lease obligation. The Company’s
annual fixed lease payments are approximately $0.1 million over the ten-year term of the lease.
14. Income taxes:
The income taxes recognized in the Statements of Net income (loss) are as follows:
Deferred income tax expense (recovery)
Current income tax expense
Years ended December 31,
2020
2021
$
$
5,082
4,084
9,166
$
$
(4,828)
1,979
(2,849)
Income tax expense (recovery) as reported differs from the amount that would be computed by applying the combined Federal
and Provincial statutory income tax rates to income (loss) before income taxes. The reasons for the difference are as follows:
Income (loss) before income taxes
Combined Canadian federal and provincial rates
Expected tax expense (recovery)
Increased by:
Permanent and other non-deductible differences
Years ended December 31,
2020
2021
$
$
$
32,684
27%
8,825
341
9,166
$
$
$
(11,734)
27%
(3,168)
319
(2,849)
23
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
14. Income taxes (continued):
The tax effect of temporary differences that gives rise to the net deferred tax liabilities as at December 31, 2021 and 2020 are
as follows:
Intangible assets
Financing and share issuance costs
Convertible debentures
Other
Intangible assets
Net deferred income tax liability
2021
227
93
(260)
(358)
(11,595)
(11,893)
$
$
2020
244
223
(502)
142
(6,917)
(6,810)
$
$
The deferred tax liability as at December 31, 2021 is largely associated with the temporary differences on the Company’s
intangible assets, which have an undepreciated capital cost allowance of approximately $199.2 million (2020 - $211.5 million).
In addition, pursuant to NND LP’s limited partnership agreement dated November 15, 2019, its undepreciated capital cost
allowance of approximately $46.5 million at December 31, 2021 (2020 - $49.0 million) is allocated to the Company for tax
purposes.
Tax attributes are subject to review, and potential adjustment, by competent authority.
15. Share capital:
As at December 31, 2021, the authorized share capital of the Company consists of an unlimited number of common shares.
On March 5, 2020, the Company completed a public offering of 10,810,000 common shares, including 1,410,000 common
shares pursuant to the full exercise of the over-allotment option, at a price of $3.20 per common share, for gross proceeds of
$34.6 million. After deducting issuance costs of $2.1 million, net proceeds were $32.5 million. The deferred tax impact of $0.6
million on the share issue costs was recognized within share capital.
The Company has a dividend reinvestment plan (“DRIP”) that allows eligible holders of the Company’s common shares to
reinvest some or all cash dividends paid in respect of their common shares in additional common shares of the Company. At
the Company’s election, these additional common shares may be issued from treasury or purchased on the open market. If
the Company elects to issue common shares from treasury, the common shares will be purchased under the DRIP at a 3%
discount to the volume weighted average of the closing price for the common shares on the TSX for the five trading days
immediately preceding the relevant dividend payment date. The Company may, from time to time, change or eliminate the
discount applicable to common shares issued from treasury. The Company temporarily suspended the DRIP, starting with the
dividend payable to shareholders in respect of the month of April 2020. Effective with the January 2021 monthly dividend, the
Board approved the reinstatement of the DRIP.
16. Share-based compensation:
The Company has a long-term incentive plan (the “Plan”) available to both employees and non-employees as a form of
retention and incentive compensation. Under the Plan, the maximum number of common shares available to be granted,
as restricted share units or share options, is 10% of the issued and outstanding common shares of the Company at the
time of the grant.
(a) Restricted share units:
Under the Plan, the Company can issue RSUs whereby each RSU is equal in value to one common share of the Company
and is entitled to dividends that would arise thereon if it was an issued and outstanding common share. The notional
24
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
16. Share-based compensation (continued):
(a) Restricted share units (continued):
dividends are recorded as additional issuance of RSUs during the life of the RSU. Currently, all the outstanding RSUs will
be settled in common shares, unless the RSU holder elects to settle the RSUs in cash, in certain instances.
The number of RSUs outstanding is as follows:
Balance, beginning of year
Granted
Dividends earned
Settled
Forfeited
Cancelled
Balance, end of year
Unvested
Vested
2021
Weighted
average grant-
date fair value
$
2.24
2.52
2.64
2.71
2.24
3.04
Number of
RSUs
499,382
405,331
41,170
(431,246)
(46,643)
(15,816)
2020
Weighted
average grant-
date fair value
$
3.31
1.67
1.95
3.25
-
-
Number of
RSUs
941,762
265,645
105,504
(813,529)
-
-
452,178
$
2.05
499,382
$
2.24
452,178
-
$
2.05
$
-
480,781
18,601
$
$
2.21
3.02
As at December 31, 2021, approximately 46% of the unvested RSUs will vest in 2022, 33% will vest in 2023, and the
remainder in 2024.
(b) Share options:
The following table summarizes the changes in the Company’s share options during the years ended December 31, 2021
and 2020:
Balance, beginning of year
Granted
Forfeited
Balance, end of year
2021
Weighted
average
exercise price
$
3.26
2.52
3.19
Number of
options
2,300,000
816,667
(75,000)
2020
Weighted
average
exercise price
$
3.26
-
-
Number of
options
2,300,000
-
-
3,041,667
$
3.06
2,300,000
$
3.26
The following table summarizes information relating to outstanding and exercisable options as at December 31, 2021:
Expiry Date
November 23, 2022
October 11, 2022
May 6, 2026
Balance, end of year
Exercise Price
3.53
3.22
2.52
Weighted average
remaining life
(years)
0.90
0.78
4.35
1.72
Options
outstanding
250,000
2,000,000
791,667
3,041,667
Options
exercisable
250,000
2,000,000
263,889
2,513,889
25
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
16. Share-based compensation (continued):
(b) Share options (continued):
No share options were granted by the Company for the year ended December 31, 2020. The weighted average
assumptions used in calculating the fair values of options granted in 2021 are as follows:
Risk free rate
Expected life
Expected volatility
Forfeiture rate
Expected dividends
17. Income per share:
Income (loss) for the year
Weighted average number of shares outstanding - basic
Effective impact of dilutive securities:
Share options
RSUs
Convertible debentures
Exchangeable MRM units
0.91%
5.0 years
33.92%
Nil
7.87%
Years ended December 31,
2020
2021
$
23,518
$
(8,885)
121,866,677
118,849,222
27,252
662,184
12,637,363
355,032
-
-
-
-
Weighted average number of shares outstanding - diluted
135,548,507
118,849,222
Net income (loss) per common share
Basic
Diluted
18. Other finance (costs) income, net:
Fair value adjustment on promissory note
Finance income
Amortization of deferred financing charges
Accretion expense and other
Foreign exchange loss
Distributions paid on Exchangeable MRM Units
$
$
0.19
0.19
$
$
(0.07)
(0.07)
Years ended December 31,
2020
2021
$
$
143
29
(831)
(1,086)
-
-
$
(1,745)
$
1,777
65
(822)
(917)
(1)
(33)
69
26
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
19. Financial instruments:
The Company must classify fair value measurements according to a hierarchy that reflects the significance of the inputs used
in performing such measurements. The Company’s fair value hierarchy comprises the following levels:
• Level 1 – quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active
markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an
ongoing basis.
• Level 2 – pricing inputs are other than quoted in active markets included in Level 1. Prices in Level 2 are either directly or
indirectly observable as of the reporting date.
• Level 3 – valuations in this level are those with inputs for the asset or liability that are not based on observable data.
The carrying value of current financial assets and liabilities approximate their fair value due to their short-term nature. The
carrying value of the long-term bank loans approximates their fair value as these facilities bear interest at floating market
interest rates. The fair value of the convertible debentures is measured using Level 1 inputs. The fair value of the MRM Units,
ML Units and the interest rate swap liabilities are measured using Level 2 inputs. The fair value of the investment in NND LP
(note 7) is measured using Level 3 inputs.
The following tables presents the carrying amounts of each category of financial assets and liabilities as at December 31, 2021
and 2020:
As at December 31, 2021
Financial assets
Cash and cash equivalents
Royalties and management
fees receivable
Amounts receivable
Interest rate swap assets
Investment in NND LP
Financial liabilities
Accounts payable and
accrued liabilities
Long-term bank loans
Promissory note
Lease obligation
Convertible debentures
Interest rate swap liabilities
Exchangeable MRM Units
$
$
$
Carrying value
FVTPL
Amortized
cost
-
$
$
8,939
4,911
-
-
647
44,467
11
-
-
45,114
$
13,861
$
Fair value hierarchy
Level 1
Level 2
Level 3
-
$
-
-
-
647
-
647
$
-
-
-
44,467
44,467
-
-
-
-
-
-
$
$
$
-
-
-
-
-
-
-
-
$
-
-
-
-
-
1,017
2,008
$
2,544
109,750
3,109
829
55,968
-
-
-
-
-
-
55,968
-
-
$
-
-
-
-
-
1,017
2,008
$
3,025
$
172,200
$
55,968
$
3,025
$
27
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
19. Financial instruments (continued):
As at December 31, 2020
Financial assets
Cash and cash equivalents
Royalties and management
fees receivable
Amounts receivable
Investment in NND LP
Financial liabilities
Accounts payable and
accrued liabilities
Long-term bank loans
Promissory note
Convertible debentures
Interest rate swap liabilities
Exchangeable MRM Units
$
$
$
Carrying value
FVTPL
Amortized
cost
-
$
-
-
43,627
$
9,218
4,293
15
-
43,627
$
13,526
$
$
-
-
-
-
2,370
878
$
1,710
98,557
3,108
54,535
-
-
-
-
-
54,535
-
-
Fair value hierarchy
Level 1
Level 2
Level 3
-
-
-
-
-
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
2,370
878
-
-
-
43,627
43,627
-
-
-
-
-
-
-
$
3,248
$
157,910
$
54,535
$
3,248
$
The following table presents the changes in fair value measurements of the Company’s investment in NND LP recognized at
fair value at December 31, 2021 and 2020 and classified as Level 3:
Opening balance of Level 3 investments
Distribution received, net of expenses
Unrealized fair value gain (loss) on Investment in NND LP
Balance of level 3 investments, end of year
20. Financial risk management:
Years ended December 31,
2020
2021
$
43,627
(4,906)
5,746
44,467
$
51,807
(4,588)
(3,593)
43,627
$
$
The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk, liquidity risk,
currency risk and interest rate risk. This note presents information about the Company’s exposure to each of the above risks,
the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of
capital. Further quantitative disclosures are included throughout these consolidated financial statements.
The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set
appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are
reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training
and management standards and procedures, aims to develop a disciplined and constructive control environment in which all
employees understand their roles and obligations.
The Board of Directors has responsibility for the oversight of the Company’s risk management framework. The Board of
Directors has mandated the Audit Committee to review how management monitors compliance of the Company’s risk
management policies and procedures and review the adequacy of the risk management policies and procedures.
28
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
20. Financial risk management (continued):
(a) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet
its contractual obligations. Credit risk is associated with the Company’s cash, royalties and management fees receivable,
amounts receivable and investment in NND LP.
Credit risk on the Company’s cash are mitigated by holding these amounts with a Canadian chartered bank of high
creditworthiness. Credit risk on the royalties and management fees receivable and the investment in NND LP is monitored
through regular review of the operating and financing activities of the Company’s Royalty Partners. The carrying amount
of financial assets represents the maximum credit exposure.
The maximum exposure to credit risk at December 31, 2021 and 2020 were as follows:
Cash
Royalties and management fees receivable
Amounts receivable
Investment in NND LP
$
2021
8,939 $
4,911
11
44,467
2020
9,218
4,293
15
43,627
$ 58,328 $
57,153
The aging of royalties and management fees receivable, as well as amounts receivable at December 31, 2021 and 2020
were as follows:
Current
Over 30 days
(b) Liquidity risk:
$
2021
4,911 $
-
2020
4,293
-
$ 4,911 $
4,293
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity risk
is to monitor consolidated cash flow to ensure that there will always be sufficient liquidity to meet liabilities when due. In
addition, the Company manages its liquidity risk by preparing rolling cash flow forecasts, taking into consideration various
scenarios and assumptions, monitoring the business operations of its royalty partners, and monitoring compliance with
the terms of financing arrangements. Given the economic uncertainty facing DIV and its royalty partners as a result of the
COVID-19 pandemic, the Company decreased the monthly dividend from $0.01958 per share to $0.01667 per share
effective with the dividend declared in the month of April 2020. The Board believes the reduction of the monthly dividend
is a prudent measure to preserve capital and maintain liquidity in the current market environment.
As at December 31, 2021, the Company had a cash balance of $8.9 million (2020 - $9.2 million) and working capital deficit
of $47.5 million (2020 - working capital of $10.2 million). The working capital deficit includes the current portion of the
Debentures which mature on December 31, 2022. The Company plans to refinance the Debentures before the maturity
date and expects that it will be able to complete the refinancing transaction in 2022. Upon completion of the refinancing
transaction, the Company expects that future operating and debt settlement requirements will be satisfied from operating
cash flows.
29
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
20. Financial risk management (continued):
(b) Liquidity risk (continued):
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the
impact of netting agreements:
Accounts payable and
accrued liabilities
Promissory note
Lease obligation
Long-term bank loans1
Convertible debentures
Exchangeable ML LP units
Carrying
amount
Contractual
cash flow
2022
2023
2024
2025 Thereafter
$ 2,544 $ 2,544 $ 2,544 $ - $ - $ - $ -
3,109 4,952 - - - - 4,952
829 1,085 104 107 110 112 652
109,750 123,074 3,897 3,663 28,192 63,270 24,052
55,968 60,519 60,519 - - - -
974 974 974 - - - -
Total contractual obligations
$173,174
$193,148
$ 68,038
$ 3,770
$ 28,302
$ 63,382
$ 29,656
1) Includes the impact of interest rate swap agreements.
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly
different amounts.
(c) Currency risk:
Currency risk is the risk that the fair value or future cash flows will fluctuate due to changes in foreign exchange rates. The
Company’s exposure to foreign currency risk at the reporting date is described below:
Expressed in thousands of U.S. dollars
Cash and cash equivalents
$
2021
84 $
2020
95
Net exposure in thousands of U.S. dollars
$ 84 $
95
A 10% strengthening (weakening) of the Canadian dollar against the U.S. dollar would have increased (decreased) equity
and comprehensive income and loss by a nominal amount as at December 31, 2021 and 2020.
(d) Interest rate risk:
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market interest rates.
The Company has long-term bank loans that are subject to floating interest rates. As at December 31, 2021, the interest
rate related to long-term bank loans is mitigated by interest rate swap arrangements on $72.6 million of $110.5 million of
the Company’s term loan facilities (2020 - $78.9 million of $99.1 million of the Company’s term loan facilities). Based on
the balance outstanding on December 31, 2021, a one percentage point increase (decrease) in the interest rate would
increase (decrease) interest expense by $0.3 million (2020 - $0.2 million).
The investment in NND LP is a financial asset measured at fair value, which will fluctuate because of changes in interest
rates. As at December 31, 2021, the investment in NND LP was valued at $44.5 million (2020 - $43.6 million) and a fair
value gain of $5.7 million (2020 – loss of $3.6 million) was recorded during the year ended December 31, 2021.
(e) Capital management:
The Company’s objective is to maintain a strong capital base to maintain investor, creditor and market confidence and to
develop the business.
Management defines capital as the Company’s total shareholders’ equity, Acquisition Facility, long-term bank loans and
convertible debentures. The Board of Directors does not establish quantitative return on capital criteria for management.
The Board of Directors reviews the capital structure on a quarterly basis.
In order to maintain or adjust the capital structure, the Company may issue new shares, warrants, or debt, draw on its
operating line of credit, purchase shares for cancellation pursuant to normal course issuer bids, temporarily suspend the
DRIP, reduce the monthly dividend or reduce debt.
30
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
21. Related party transactions:
In addition to information disclosed elsewhere in these consolidated financial statements, the Company had the following
related party transactions during the years ended December 31, 2021 and 2020:
Key management personnel
Key management personnel of the Company includes Members of the Board of Directors, the President and CEO, and CFO.
The table below provides a breakdown of the compensation of key management personnel included in net income:
Short-term benefits
Share-based compensation
Maxam Services Agreement
Years ended December 31,
2020
2021
$
1,622 $
1,005
1,269
1,326
$
2,627 $
2,595
The Company’s President and CEO, Sean Morrison, and one of the Company’s directors, Johnny Ciampi, are co-founders
and managing partners of Maxam Capital Corp. (“Maxam”). The Company had a services agreement with Maxam (the “Maxam
Services Agreement”) whereby Maxam provided office space and administrative services to the Company. The Maxam
Services Agreement was terminated on May 31, 2021. In May 2021, DIV entered into a services agreement and cost sharing
agreement with Maxam Capital Management Ltd. (“MCM”), an entity in respect of which Mr. Morrison is a director, and Mr.
Morrison and Mr. Ciampi are minority shareholders, through which DIV provides certain office space and certain administrative
services to MCM (the “MCM Agreements”). The transactions under the Maxam Services Agreement and the MCM Agreements
are not material to DIV, Maxam, MCM, Mr. Morrison or Mr. Ciampi but are identified here for purposes of full disclosure.
The above transactions are in the normal course of operations and are measured at the exchange amount, which is the amount
of consideration established and agreed to by the related parties.
22. Supplemental cash flow information:
The following tables reconciles the movements in liabilities to cash flows arising from financing activities:
Promissory
note
(note 8(d))
Acquisition
facility
(note 9(a))
Long-term
debt Debentures
(note 10)
(note 9(b))
Lease
obligations
(note 13)
Balance, December 31, 2019
$
4,805
$
(374)
$
82,473
$
53,194
$
Changes from financing cash flows:
Proceeds from issuance of debt
Repayment of debt
Debt financing costs
Liability-related other changes:
Amortization of deferred financing charges
Accretion expense
Fair value adjustment on promissory note
-
-
-
-
80
(1,777)
39,700
(39,700)
-
16,000
-
(107)
127
-
-
191
-
-
-
-
-
504
837
-
Balance, December 31, 2020
$
3,108
$
(247)
$
98,557
$
54,535
$
-
-
-
-
-
-
-
-
Total
$
140,098
55,700
(39,700)
(107)
822
917
(1,777)
$
155,954
31
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2021 and 2020
22. Supplemental cash flow information (continued):
Promissory
note
(note 8(d))
Acquisition
facility
(note 9(a))
Long-term
debt Debentures
(note 10)
(note 9(b))
Lease
obligations
(note 13)
Total
Balance, December 31, 2020
$
3,108
$
(247)
$
98,557
$
54,535
$
-
$
155,954
Changes from financing cash flows:
Proceeds from issuance of debt
Debt financing costs
Payment of lease obligation
Liability-related other changes:
New lease
Amortization of deferred financing charges
Accretion expense
Fair value adjustment on promissory note
-
-
-
-
-
144
(143)
-
-
-
-
129
-
-
11,400
(373)
-
-
166
-
-
-
-
-
-
535
898
-
-
-
42
743
-
44
-
11,400
(373)
42
743
831
1,086
(143)
Balance, December 31, 2021
$
3,109
$
(118)
$
109,750
$
55,968
$
829
$
169,541
32