Consolidated Financial Statements of
DIVERSIFIED ROYALTY CORP.
Years ended December 31, 2023 and 2022
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITOR’S 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, 2023 and December 31,
2022;
the consolidated statements of net income and other comprehensive income 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 material 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, 2023 and December 31, 2022, and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance
with IFRS Accounting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditor’s Responsibilities for the
Audit of the Financial Statements” section of our auditor’s 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.
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, 2023. 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
auditor’s report.
Assessment of the fair value measurement of the investment in NND LP
Description of the matter
We draw attention to Notes 3(j), 4(b), and 8 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 $40,825
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 and planned business initiatives. 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 data for comparable companies. The valuation professionals considered
features and risks specific to the investment in NND LP.
Page 3
Assessment of the carrying value of intangible assets
Description of the matter
We draw attention to Notes 3(e), 4(b), and 9(h) to the financial statements. The intangible assets are
measured at historical cost and have a carrying value of $511,489 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 judgment 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. 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 data for comparable companies. 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
Page 4
financial statements or our knowledge obtained in the audit and remain alert for indications that the other
information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions as at the date of this auditor’s report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other
information, we are required to report that fact in the auditor’s 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 IFRS Accounting Standards, 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.
Auditor’s 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 auditor’s report that includes
our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of 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
intentional omissions,
misrepresentations, or the override of internal control.
involve collusion,
from error, as
fraud may
forgery,
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 auditor’s
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 auditor’s 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 auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances,
we determine that a matter should not be communicated in our auditor’s 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 auditor’s report is Arnold Singh, CPA.
Chartered Professional Accountants
Vancouver, Canada
March 21, 2024
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
As at December 31, 2023 and 2022
Assets
Current assets:
Cash
Royalty and other receivables
Income tax receivable
Prepaid expenses and other
Interest rate swap assets
Interest rate swap assets
Right-of-use asset and other
Note receivable
Investment in NND LP
Intangible assets
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
Income tax payable
Bank loans, net of deferred financing charges
Bank loans, net of deferred financing charges
Convertible debentures
Promissory notes
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 other comprehensive income
Accumulated deficit
Subsequent events (note 26)
Note
December 31, 2023 December 31, 2022
$
$
$
6
16
13
13
7
8
9
10
16
11
11
12
9(d), 9(g)
14
13
16
$
4,031
5,857
328
342
2,279
12,837
-
711
1,489
40,825
511,489
7,409
5,591
-
409
2,104
15,513
1,205
801
-
42,339
398,592
567,351
$
458,450
$
1,803
-
16,734
18,537
205,375
48,586
33,763
2,234
547
706
20,199
260,142
40,351
5,127
(229)
(67,987)
237,404
5,376
1,486
-
6,862
147,905
47,637
3,467
3,716
-
770
14,205
253,139
39,776
5,127
1,165
(65,319)
233,888
$
567,351
$
458,450
The accompanying notes are an integral part of these consolidated financial statements.
1
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Net Income and Comprehensive Income
(Expressed in thousands of Canadian dollars, except per share amounts)
For the years ended December 31, 2023 and 2022
Royalty income
Management fees
Expenses:
Salaries and benefits
Share-based compensation
General and administration
Professional fees
Impairment (reversal)
Income from operations
Interest expense on credit facilities
Other finance income (costs), net
Fair value adjustment on financial instruments
Income before income taxes
Income tax expense
Net income for the year
Other comprehensive (loss) income
Item that may be reclassified subsequently to profit or loss:
Foreign currency translation adjustment
Other comprehensive (loss) income for the year
Total comprehensive income for the year
Weighted average number of shares outstanding
Basic (thousands)
Diluted (thousands)
Income per share
Basic
Diluted
Note
5
$
18
9(h)
20
15
16
19
19
19
19
$
$
$
$
$
Years ended December 31,
2022
2023
$
55,962
533
56,495
2,480
1,381
1,222
681
(91)
5,673
50,822
(13,126)
3,811
2,087
43,594
11,871
31,723
$
(1,394)
(1,394)
30,329
$
$
44,650
533
45,183
2,271
1,176
835
566
7,553
12,401
32,782
(8,911)
(3,300)
2,928
23,499
7,938
15,561
1,165
1,165
16,726
142,676
144,051
125,607
126,834
0.22
0.22
$
$
0.12
0.12
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)
As at December 31, 2023 and 2022
Balance, December 31, 2022
Common shares issued on DRIP
Common shares issued on RSU's settled
Share-based compensation - net of
RSU's settled
Dividends declared
Settlement of consideration payable
Comprehensive income
Note
17
9(a)
Common
shares
(thousands)
Share
capital
Contributed
surplus
Equity
component of
convertible
debentures
Accumulated
other
comprehensive
(loss) income
Accumulated
deficit
Total
equity
141,423
$
253,139
$
39,776
$
5,127
$
1,165
$
(65,319)
$
233,888
1,558
57
-
-
833
-
4,300
72
-
-
2,631
-
-
(700)
1,275
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,394)
(34,391)
-
31,723
4,300
(628)
1,275
(34,391)
2,631
30,329
Balance, December 31, 2023
143,871
$
260,142
$
40,351
$
5,127
$
(229)
$
(67,987)
$
237,404
Common
shares
(thousands)
Note
Share
capital
Contributed
surplus
Equity
component of
convertible
debentures
Accumulated
other
comprehensive
income
Accumulated
deficit
Total
equity
Balance, December 31, 2021
122,559
$
201,972
$
39,450
$
2,938
$
Common shares issued on
public offering
Common shares issued on DRIP
Common shares issued on RSU's settled
Share-based compensation - net of
RSU's settled
Dividends declared
Issuance of convertible debentures
Addition to intangible assets
Comprehensive income
17
17
12
9(a)
16,429
1,270
82
-
-
-
1,083
-
44,004
3,545
196
-
-
-
3,422
-
-
-
(704)
1,030
-
-
-
-
-
-
-
-
-
2,189
-
-
-
-
-
-
-
$
(52,835)
$
191,525
-
-
-
-
44,004
3,545
(508)
1,030
(28,045)
2,189
3,422
16,726
-
-
-
1,165
(28,045)
-
-
15,561
Balance, December 31, 2022
141,423
$
253,139
$
39,776
$
5,127
$
1,165
$
(65,319)
$
233,888
The accompanying notes are an integral part of these consolidated financial statements.
3
Years ended December 31,
2022
2023
$
31,723
$
15,561
DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
Operating activities:
Net income
Adjustments for:
Tax expense
Impairment (reversal)
Depreciation expense
Share-based compensation
Fair value adjustments on financial instruments
Interest expense on credit facilities
Other finance income (costs), net
Interest paid
Interest received
Taxes paid
Distributions received from NND LP
Distributions paid on Exchangeable MRM Units
Note receivable
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:
Note
16
9(h)
15
20
14(a)
7
Proceeds from issuance of debt, net of fees
Proceeds from equity issuance, net of fees
Payment of lease obligations
RSUs settled in cash
Repayment of debt
Payment of dividends
Proceeds from issuance of convertible debentures, net of fees
Redemption of convertible debentures
Cash flows generated from financing activities
9,11
17
12
12
11
Investing activities:
Additions to intangible assets
Purchase of fixed assets
Cash flows used in investing activities
Net decrease in cash
Cash, beginning of the year
Effect of foreign exchange rate changes on cash
Cash, end of the year
9
The accompanying notes are an integral part of these consolidated financial statements.
4
11,871
(91)
100
1,381
(2,087)
13,126
(3,811)
(13,170)
243
(7,691)
5,095
(164)
(2,130)
(293)
(11)
(586)
(2,689)
30,816
89,290
-
(107)
(689)
(15,350)
(30,091)
-
-
43,053
(77,215)
(10)
(77,225)
(3,356)
7,409
(22)
4,031
$
$
7,938
7,553
100
1,176
(2,928)
8,911
3,300
(8,911)
168
(6,252)
5,005
(327)
-
(664)
(5)
(761)
(1,487)
28,377
81,338
43,602
(105)
(238)
(43,630)
(24,498)
50,400
(57,500)
49,369
(79,304)
(4)
(79,308)
(1,562)
8,939
32
7,409
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
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 years ended December 31, 2023 and 2022, 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 licence 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 $65.906 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 + Tires”): 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 + Tires in its business
(the “ML Rights”). The Company granted Mr. Lube + Tires 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 + Tires locations in the royalty
pool (the “Mr. Lube + Tires Royalty Pool”).
AIR MILES Loyalty Inc. (“Loyalty Inc.”): AM Royalties Limited Partnership (“AM LP”) (a wholly owned subsidiary of the
Company) owns the Canadian AIR MILES trademarks and certain related Canadian intellectual property rights (collectively,
the “AIR MILES® Rights”) used by Loyalty Inc. (an affiliate of the Bank of Montreal) in operating the AIR MILES® reward
program in Canada (the “AIR MILES® Program”). In accordance with the terms of two licence agreements with Loyalty Inc.
(collectively, the “AIR MILES® Licences”), Loyalty Inc. has an exclusive right to use the AIR MILES® Rights in Canada in
exchange for a royalty payment equal to 1% of gross billings from the AIR MILES® Reward 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 based on
the actual system sales of the Mr. Mikes locations in the royalty pool, which was comprised of 44 Mr. Mikes Restaurants (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 8). 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 currently entitled to receive a cash distribution of $5.1 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”).
5
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
1. Nature of operations (continued):
Stratus Building Solutions Franchising, LLC (“Stratus”) (a US based company): Strat-B Royalties Limited Partnership (“Strat-
B LP”) (an entity controlled by the Company) owns the trademarks and certain other intellectual property rights utilized by
Stratus in its business (the “Stratus Rights”). The Company granted Stratus the licence to use the Stratus Rights in exchange
for a royalty payment currently equal to US$6.0 million per annum which increases each November at a rate of 5% in 2023,
2024, 2025 and 2026 and 4% thereafter.
BarBurrito Restaurants Inc. (“BarBurrito”): BARB Royalties Limited Partnership (“BARB LP”) (an entity controlled by the
Company) owns the trademarks and certain other intellectual property rights utilized by BarBurrito in its quick service Mexican
restaurants in Canada (the “BarBurrito Rights”). The Company granted BarBurrito the licence to use the BarBurrito Rights in
exchange for a royalty payment of $8.3 million per annum which grows at a fixed rate of 4% per annum for the first seven years
and, commencing on January 1, 2031, will fluctuate based on the gross sales of the BarBurrito locations in the 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.
Liquidity
Working capital is defined as current assets less current liabilities on the consolidated statements of financial position. As at
December 31, 2023, the Company had cash of $4.0 million and a working capital deficit of $5.7 million (2022 - $7.4 million
cash, positive working capital of $8.7 million). The working capital deficit includes the NNDH LP term loan (note 11(b)) which
matures on November 15, 2024. The Company plans to refinance the NNDH LP term loan and extend the term before the
maturity date and expects that the term extension will be completed in 2024. This is based on the Company’s ability to generate
positive cash flow from operations, including NND LP, and its history of being able to successfully refinance its debt.
In addition, subsequent to the year end, the Company reduced its liquidity risk and improved its working capital position as
follows: (i) AM LP made a contractual partial principal repayment of $0.63 million and a voluntary $3.2 million partial principal
paydown on its credit facility, further reducing the outstanding principal balance to $10.1 million; and (ii) DIV completed a $54.0
million bought deal public offering of common shares and used the net proceeds to pay down in full the remaining $48.2 million
outstanding balance on the Acquisition Facility (defined below, refer to note 11(a)). Refer to subsequent events listed in note
26.
2. Basis of preparation:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with IFRS Accounting Standards. The
consolidated financial statements were authorized and approved for issue by the Company’s Board of Directors on
March 21, 2024.
(b) Basis of measurement:
These financial statements have been prepared on the historical cost basis except for its Investment in NND LP, interest
rate swaps, the MRM Units (defined below) and the ML Units (defined below), which are measured at fair value.
(c) Functional and presentation currency:
These consolidated financial statements are presented in Canadian dollars (“CAD”).
The financial statements for each of the Company’s subsidiaries are prepared using their functional currencies. Functional
currency is the currency of the primary economic environment in which each of the entities operates. The functional
currency of Strat-B LP is the United States dollar (“USD”). All other entities in the Company have a Canadian dollar
functional currency. References to “$” or “CAD” are related to Canadian dollars, while references to “US$” or “USD” are
related to United States (“US”) dollars.
Subsidiaries whose functional currencies differ from the presentation currency are translated into Canadian dollars as
follows: assets and liabilities at the closing rate as at the reporting date, equity at the historical rate and income and
expenses at the average rate of the period. All resulting changes are recognized in other comprehensive income as
cumulative translation differences.
6
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
3. Material accounting policies:
The Company has consistently applied the following accounting policies to all periods presented in these consolidated financial
statements, unless mentioned otherwise. The Company adopted Disclosure of Accounting Policies (Amendments to IAS 1 and
IFRS Practice Statement 2) from January 1, 2023. The amendments require the disclosure of ‘material’, rather than significant,
accounting policies. Although the amendments did not result in any changes to the accounting policies themselves, they
impacted the accounting policy information disclosed in this note in certain instances (see note 3(l) for further information).
The material accounting policies of these consolidated financial statements are set out 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”), OX LP, Strat-B LP and BARB 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 fees.
Royalty income: The Company licenses its intellectual property rights to third parties in exchange for royalty payments.
Under the Company’s licence and royalty agreements, the performance obligation is satisfied over time because the
licensees simultaneously receive and consume the benefits from the Company licensing the intellectual property to
them over the terms of their respective agreements. As a result, the Company recognizes royalty income based on
the usage or sales that have occurred over a period of time on a monthly basis for practical purposes.
Management fees: 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 + Tires, Sutton, Oxford and BarBurrito are usually receivable within
15 to 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 Loyalty Inc.’s calendar quarter. Royalty income from Stratus is usually receivable within 25 days after the calendar
month.
(d) Intangible assets:
The intangible assets are recorded at cost on initial recognition, 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, 2023 and 2022
3. Material 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, 2023 and 2022
3. Material 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.
Foreign withholding taxes, including United States federal withholding taxes at a rate of 10% of gross royalty income
generated from sources within the United States, are recognized as a payment in lieu of Canadian federal and provincial
current tax to the extent that they may be recovered by the Company as a foreign tax credit against its current tax liabilities
arising in Canada.
(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 or 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.
9
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
3. Material accounting policies (continued):
(j) Financial instruments (continued):
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.
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) 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.
(l) Changes in material accounting policy:
The Company adopted Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) from
January 1, 2023. Although the amendments did not result in any changes to the accounting policies themselves, they
impacted the accounting policy information disclosed in the financial statements.
The amendments require the disclosure of ‘material’, rather than ‘significant’, accounting policies. The amendments also
provide guidance on the application of materiality to disclosure of accounting policies, assisting entities to provide useful,
entity-specific accounting policy information that users need to understand other information in the financial statements.
Management reviewed the accounting policies and made updates to the information disclosed above (2022 - Significant
accounting policies) in certain instances in line with the amendments.
(m) New and amended standards and interpretations:
Certain new or amended standards and interpretations became effective on January 1, 2023, but do not have an impact
on the consolidated financial statements of the Company.
(n) Accounting standards and amendments issued but not yet adopted:
Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
On January 23, 2020, the IASB issued Presentation of Financial Statements (Amendments to IAS 1) and on October 31,
2022, the IASB issued Non-current Liabilities with Covenants (Amendments to IAS 1). The amendments are effective for
annual periods beginning on or after January 1, 2024. These amendments clarify the classification of liabilities as current
or non-current and improve the information a company provides about long-term debt with covenants. For the purposes
of non-current classification, the amendments remove the requirement for a right to defer settlement or roll over of a liability
for at least twelve months to be unconditional. Instead, such a right must exist at the end of the reporting period and have
substance. In addition, covenants with which a company must comply after the reporting date do not affect the liability’s
classification at the reporting date. The Company has done an initial assessment of these amendments and does not
anticipate an impact on the Company’s business, financial statements or disclosure. The Company intends to adopt these
amendments in its consolidated financial statements for the annual period beginning on January 1, 2024.
10
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
3. Material accounting policies (continued):
(n) Accounting standards and amendments issued but not yet adopted (continued):
Certain other new or amended standards and interpretations are expected to become effective on January 1, 2024 and
beyond. There are no new standards, interpretations or amendments that are expected to have a material impact to the
Company’s consolidated financial statements. The Company has not early adopted any standard, interpretation or
amendment that has been issued but is not yet effective.
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, AM LP, NND LP, OX LP, Strat-B LP and BARB 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, AM LP,
OX LP, Strat-B LP and BARB 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.
Determination of business combination or asset acquisition:
At the time of acquisition, the Company considers whether or not the transaction represents a business combination
or an asset acquisition. A business consists of inputs and processes applied to those inputs that have the ability to
contribute to the creation of outputs. This requires the Company to make certain judgments as to whether or not the
assets acquired during the transaction include the inputs, processes and outputs necessary to constitute a business.
If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an
asset acquisition. Under a business combination, acquisition-related costs are recognized as an expense. Under an
asset acquisition, acquisition-related 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, Oxford Rights, Stratus Rights and
BarBurrito 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, 2023 and 2022
4. Use of estimates and judgments (continued):
(b) Key estimates and assumptions:
Fair value of exchangeable partnership units in SGRS LP, ML LP, MRM LP, OX LP and BARB 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; 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 14).
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 + Tires
Stratus1
Mr. Mikes2
Oxford
AIR MILES®
Sutton
BarBurrito
$
Years ended December 31,
2022
23,708
1,040
5,060
4,199
6,497
4,146
-
44,650
2023
28,196
8,171
4,520
4,481
4,352
4,229
2,013
55,962
$
$
$
1) Stratus royalty income for the years ended December 31, 2023 and 2022 was US$6.1 million and US$0.77 million, respectively, translated
at an average foreign exchange rate of $1.3493 to US$1 and $1.3521 to US$1, respectively.
2) For the years ended December 31, 2023 and 2022, Mr. Mikes royalty income includes payments of $0.2 million and $1.30 million,
respectively, representing payments of deferred contractual royalty fees, which have been recognized as revenue upon collection.
(a) Mr. Lube + Tires:
Pursuant to the terms of the licence and royalty agreement dated August 19, 2015 (the “Mr. Lube + Tires Licence and
Royalty Agreement”), the royalty paid by Mr. Lube + Tires to ML LP is calculated by multiplying the system sales of
locations within the Mr. Lube + Tires Royalty Pool by an agreed royalty fee (the “Mr. Lube + Tires Royalty Rate”). In
addition, ML LP is entitled to receive a make-whole payment in the event that a Mr. Lube + Tires 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 + Tires Royalty Rate. Mr. Lube + Tires will also, subject to meeting certain performance criteria,
be provided opportunities to increase the Mr. Lube + Tires Royalty Rate in four, 0.5% increments (note 9(a)).
12
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
5. Royalty income (continued):
(a) Mr. Lube + Tires (continued):
Mr. Lube + Tires launched a new tire program launched in September 2017. Pursuant to the amended licence and royalty
agreement effective September 18, 2017, ML LP 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% at that time on all other system sales) for the locations
in the Mr. Lube + Tires Royalty Pool. On May 1, 2018, the Mr. Lube + Tires Royalty Rate on non-tire sales was increased
from 6.95% to 7.45% and on May 1, 2021, the Mr. Lube + Tires Royalty Rate on non-tire sales was increased from 7.45%
to 7.95%.
Effective May 1, 2022, the Mr. Lube + Tires Royalty Pool was adjusted to include the royalties from six new Mr. Lube +
Tires locations and to remove two Mr. Lube + Tires locations for which make-whole payments were being made due to
the store closures in 2021. With the adjustment for these six new locations and two closures, the Mr. Lube + Tires Royalty
Pool increased to 139 locations effective May 1, 2022. Effective May 1, 2023, the Mr. Lube + Tires Royalty Pool was
adjusted to include the royalties from five new Mr. Lube + Tires locations. With the adjustment for these five new locations,
the Mr. Lube + Tires Royalty Pool increased to 144 locations effective May 1, 2023.
For the year ended December 31, 2022, the royalty paid by Mr. Lube + Tires included non-tire make-whole payments of
$0.7 million for two stores that closed on August 13 and November 28, 2021. No make-whole payments were made for
the year ended December 31, 2023.
(b) AIR MILES:
The royalty paid by Loyalty Inc. 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 9(c)).
Effective July 1, 2023, the monthly Sutton Royalty Rate increased from $64.614 per agent to $65.906 per agent,
representing the 2.0% annual contractual increase in the Sutton Royalty Rate for 2023.
(d) Mr. Mikes:
Pursuant to the terms 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 November 9, 2022, DIV, its subsidiaries MRM LP and MRM Royalties GP Inc. (“MRM GP”) and Mr. Mikes, entered
into amendments to certain of the agreements governing the royalty and related arrangements between the parties
(collectively the “Amended MRM Royalty Agreements”), which are retroactively applied and effective as of June 13, 2022.
Pursuant to the Amended MRM Royalty Agreements, the royalty paid by Mr. Mikes to MRM LP is calculated by multiplying
the actual system sales of the restaurants in the Amended Mr. Mikes Royalty Pool by the agreed royalty rate, which
remained unchanged at 4.35%. Accordingly, the Mr. Mikes royalty transitioned from a fixed royalty to a variable top-line
royalty.
As at December 31, 2023, DIV has $nil deferred contractual amounts otherwise owing (2022 - $0.2 million) as all deferred
amounts have been recognized upon collection during the year ended December 31, 2023.
(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%.
13
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
5. Royalty income (continued):
(f) Stratus:
Pursuant to the terms of the licence and royalty agreement between Stratus and Strat-B LP dated November 15, 2022
(the “Strat-B Licence and Royalty Agreement”), the royalty paid by Stratus to Strat-B LP is US$6.0 million per annum, net
of withholding tax (note 3(i)), and which increases each November at a rate of 5% in 2023, 2024, 2025 and 2026 and 4%
thereafter.
(g) BarBurrito:
Pursuant to the terms of the licence and royalty agreement between BarBurrito and BARB LP dated October 4, 2023 (the
“BARB Licence and Royalty Agreement”), the royalty paid by BarBurrito to BARB LP is $8.3 million per annum which
grows at a fixed rate of 4% per annum for the first seven years and, commencing on January 1, 2031, will fluctuate based
on the gross sales of the BarBurrito locations in the royalty pool.
6. Royalty and other receivables:
Mr. Lube + Tires
BarBurrito
AIR MILES®
Stratus1
Oxford
Mr. Mikes
Sutton
Other
Nurse Next Door
$
$
December 31,
2023
2,372
791
737
628
483
438
383
18
7
5,857
December 31,
2022
2,102
-
1,641
612
445
392
376
16
7
5,591
$
$
1) Stratus royalty receivable was US$0.47 million at December 31, 2023, translated at the year-end rate of $1.3243 to US$1. Stratus royalty
receivable was US$0.45 million at December 31, 2022, translated at the year-end rate of $1.3544 to US$1.
The Company subsequently collected all royalties and management fees receivable at December 31, 2023 in January and
February 2024.
7. Note receivable:
As at December 31, 2023, the Company had the following note receivable:
Promissory note receivable
December 31,
2023
1,489
$
December 31,
2022
$
-
$
1,489
$
-
On December 11, 2023, DIV issued a promissory note receivable with a face value of $2.1 million to a company unrelated to
DIV. The note receivable is a 5-year, interest-bearing, non-amortizing promissory note with a discounted carrying value of $1.5
million. Interest shall bear a rate equal to Term CORRA plus 2.5% per annum, payable monthly. See (note 26(b)) for information
on principal payments received subsequent to year end.
14
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
8.
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 on 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, 2023, the
DIV Distribution Entitlement was $5.1 million, gross and net of expenses incurred by NND LP (December 31, 2022 - $5.0
million, gross and 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, 2023 and 2022. The contractual cash flows receivable from Nurse Next Door were discounted at a rate of 15.6%
(2022 - 14.4%). The total fair value of NND LP was $40.8 million (2022 - $42.3 million) and a fair value gain of $3.6 million was
recorded during the year ended December 31, 2023 (2022 – fair value gain of $2.9 million). A one percentage point increase
in the discount rate would decrease the fair value by $2.6 million (2022 - $3.1 million). A one percentage point decrease in the
discount rate would increase the fair value by $3.1 million (2022 - $3.6 million).
9.
Intangible assets:
Balance, December 31, 2021
Additions
Foreign exchange
(Impairment) reversals(3)
Balance, December 31, 2022
Additions
Foreign exchange
(Impairment) reversals(3)
ML Rights AIR MILES Rights
SGRS Rights
MRM Rights
Oxford Rights
$
(a)
170,958
4,277
-
$
(b)
48,810
-
-
$
(c)
32,273
-
-
$
(d)
29,050
-
-
$
(e)
39,504
-
-
Stratus Rights
(f) (1)
-
$
79,700
1,573
BarBurrito Rights
(g) (2)
-
$
-
-
Total
$
320,595
83,977
1,573
-
(14,357)
(3,999)
8,956
1,847
-
-
(7,553)
$
175,235
5,938
-
$
34,453
-
-
$
28,274
-
-
$
38,006
-
-
$
41,351
-
-
$
81,273
-
(1,806)
-
$
108,674
-
$
398,592
114,612
(1,806)
-
(3,778)
(621)
4,490
-
-
-
91
Balance, December 31, 2023
1) At December 31, 2023, the Stratus Rights were translated at the year-end rate of $1.3243 to US$1, giving rise to a $1.8 million foreign
exchange loss recorded to other comprehensive income. At December 31, 2022, the Stratus Rights were translated at the year-end rate
of $1.3544 to US$1, giving rise to a $1.6 million foreign exchange gain recorded to other comprehensive income.
108,674
511,489
181,173
$
$
$
79,467
27,653
41,351
30,675
42,496
$
$
$
$
$
2) The BarBurrito Rights were acquired on Oct 4, 2023 for a total purchase price of $108 million plus capitalized transaction costs, of which
$72 million was paid in cash. The remaining consideration includes a $36 million promissory note (refer to note 9(g)).
3) Refer to note 9(h).
15
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
9.
Intangible assets (continued):
(a) ML Rights:
ML LP licensed the ML Rights back to Mr. Lube + Tires for 99 years in exchange for a royalty payment equal to the system
sales of the Mr. Lube + Tires locations in the Mr. Lube + Tires Royalty Pool multiplied by the Mr. Lube + Tires Royalty
Rate (note 5(a)). Upon closing the Mr. Lube + Tires acquisition, ML LP issued 100,000,000 Class B, Class C, Class D,
Class E, and Class F units to Mr. Lube + Tires. These units will become exchangeable into common shares of the
Company through the exchange agreement dated August 19, 2015 among Mr. Lube + Tires, 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 + Tires 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 + Tires, the Company, and ML Royalties GP Inc.
In addition to the royalty, Mr. Lube + Tires 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 + Tires Royalty Pool may be adjusted, subject to meeting certain criteria, to include gross
sales from new Mr. Lube + Tires locations less gross sales from Mr. Lube + Tires locations that were permanently closed
during the preceding calendar year. In return for adding these net sales to the Mr. Lube + Tires Royalty Pool, Mr. Lube +
Tires 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 + Tires 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 + Tires 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 + Tires into common shares of DIV, or settled in cash at DIV’s option,
pursuant to the Mr. Lube + Tires Exchange Agreement.
On May 1, 2021, the Mr. Lube + Tires Royalty Pool was adjusted to include royalties from 13 new flagship Mr. Lube +
Tires locations. The initial consideration previously paid by DIV on May 1, 2021 was $7.7 million, which represented 80%
of the total estimated consideration for those 13 locations, which estimate was based on the forecast system sales of
these 13 locations for the 2021 fiscal year. The remaining consideration payable for the net additional royalty revenue
related to 7 of the 13 locations of $1.6 million was paid by DIV to Mr. Lube + Tires in cash on May 1, 2022 based the actual
system sales of these locations for the year ending December 31, 2021. The remaining consideration for the net additional
royalty revenue related to 6 of the 13 locations of $2.8 million was paid by DIV to Mr. Lube + Tires in cash on May 1, 2023
(the “2021 True-up Consideration”) based on the actual system sales of these locations for the year ending
December 31, 2022.
On May 1, 2022, the Mr. Lube + Tires Royalty Pool was adjusted to include royalties from six new flagship Mr. Lube +
Tires locations (the “2022 True-Up Locations”) and to remove two locations that had been permanently closed. The initial
consideration previously paid by DIV on May 1, 2022 was $3.4 million, which was paid in the form of 1,083,063 common
shares of DIV on the basis of the 20-day volume weighted average closing price of the common shares for the period
ended April 25, 2022 of $3.1592 per common share (the “2022 Share Price”). The initial consideration represented 80%
of the total estimated consideration for those 2022 True-Up Locations, which estimate was based on the forecast system
sales of these 2022 True-Up Locations for the 2022 fiscal year. The remaining consideration payable for the net additional
royalty revenue related to the 2022 True-Up Locations of $2.6 million was paid by DIV to Mr. Lube + Tires in the form of
832,848 common shares valued on the 2022 Share Price and was determined based on the actual system sales of these
locations for the year ended December 31, 2022. In accordance with the terms of the LP Agreement, ML LP also made a
cash payment to Mr. Lube + Tires of approximately $192,000 representing the amount of the dividends of DIV that would
have been received by Mr. Lube + Tires had the 832,848 common shares been issued to Mr. Lube + Tires on May 1, 2022.
On April 21, 2023, DIV and Mr. Lube + Tires entered into an amendment (the “LP Amendment”) to the amended and
restated limited partnership agreement (the “LP Agreement”) of DIV’s direct subsidiary ML LP to confirm the terms on
which five new locations would be added to the Mr. Lube + Tires Royalty Pool on May 1, 2023.
16
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
9.
Intangible assets (continued):
(a) ML Rights (continued):
The initial consideration paid to Mr. Lube + Tires for the estimated net additional royalty revenue from the five new locations
was $4.7 million, representing 80% of the total estimated consideration of $5.9 million. The initial consideration of $4.7
million was elected by DIV to be paid in cash (the “2023 Amendment Consideration”). The initial consideration is based
on the forecast system sales of such locations for year ending December 31, 2023. As a result of the LP Amendment, the
remaining consideration payable for the additional royalty revenue of the five new Mr. Lube + Tires locations added to the
Mr. Lube + Tires Royalty Pool on May 1, 2023 will be paid to Mr. Lube + Tires on May 1, 2025 (as opposed to May 1, 2024),
and will be adjusted to reflect the actual system sales of these five new locations for the year ending December 31, 2024
(as opposed to the actual system sales for the year ending December 31, 2023).
To fund the 2023 Amendment Consideration and the 2021 True-up Consideration, DIV drew an additional $7.5 million on
its Acquisition Facility (defined below, note 11(a)).
(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.
(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 11(b)). The promissory note was initially recorded at a fair value and is
subsequently measured at amortized cost using the effective interest method. In addition, $0.2 million in costs incurred
for the acquisition of the MRM Rights were capitalized as part of the purchase.
Pursuant to the Amended MRM Royalty Agreements (note 5(d)), Mr. Mikes will be permitted, on April 1st of each year, to
add eligible new Mr. Mikes locations to the Amended Mr. Mikes Royalty Pool less gross sales from Mr. Mikes restaurants
that were permanently closed during the preceding calendar year, subject to Mr. Mikes meeting the required royalty
coverage test. In consideration for the addition of the net eligible new Mr. Mikes locations to the Amended Mr. Mikes
Royalty Pool, Mr. Mikes will initially be entitled to payment in cash, which payments will be deducted against the
outstanding balance owing by MRM LP on the promissory note (the “Amended Note”), and thereafter to exchange certain
units of MRM LP held by Mr. Mikes for common shares of DIV subject to the approval of the TSX or cash at DIV’s election.
17
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
9.
Intangible assets (continued):
(d) MRM Rights (continued):
The Amended Note is deducted by payment amounts calculated based on a multiple of 8.5x, multiplied by the net royalty
revenue attributable to the net eligible new Mr. Mikes locations added to the Amended Mr. Mikes Royalty Pool, with other
adjustments.
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 net
eligible new Mr. Mikes locations to the Amended Mr. Mikes Royalty Pool (excluding the locations attributable to deduction
against the Amended Note). 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 Class C units become exchangeable into common shares of the Company upon
increases in the MRM Royalty Rate, which may continue to be in increments of 0.25% six times during the life of the
royalty, in accordance with the Amended MRM Royalty Agreements. On May 20, 2019 and as at December 31, 2023 and
December 31, 2022, 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 14(b)). 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.
The MRM Additional Entitlement is determined based on the estimated net-tax-adjusted royalty revenue added to the
Amended Mr. Mikes Royalty Pool (adjusted by a 10% discount), 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
the last day of February, with other adjustments. 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 Amended MRM Royalty Agreements.
In addition to the royalty payable to MRM LP, 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 Amended MRM Royalty Agreements. During the year ended December 31, 2023, due to a change in the
expected timing of the settlement of the promissory note, a $0.06 million gain (2022 - $0.2 million loss) was recorded in
other finance costs (note 20). The MRM LP promissory note was discounted at a rate of 8.5% and had a carrying value of
$3.8 million as at December 31, 2023 (2022 – $3.5 million).
(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, 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 (defined
below, refer to note 11(a)) 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 11(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 and the issuance of $9.0 million of debt (note 11(b)).
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.
18
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
9.
Intangible assets (continued):
(e) Oxford Rights (continued):
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) Stratus Rights:
On November 14, 2022, the Company acquired through Strat-B LP, the Stratus Rights for a purchase price of US$59.4
million. The purchase price was funded with $47.0 million drawn from DIV’s existing undrawn Acquisition Facility (defined
below, refer to note 11(a)), a $15 million increase in the senior credit facilities of the Company’s subsidiary ML LP (note
11(b)), and a US$15 million senior credit facility issued to Strat-B LP (note 11(b)). The Acquisition Facility was
subsequently partially repaid in cash using funds received from the issuance of equity (note 17).
Stratus may increase the annual royalty payable on April 1st of each year following the closing date (each an “Adjustment
Date”) subject to Stratus satisfying certain royalty coverage tests. The amount of each royalty increase cannot be less
than US$1.0 million per annum and must, in respect of amounts over that threshold, be in increments of US$0.1 million
per annum. In consideration for a royalty increase on an Adjustment Date, Strat-B LP will pay an amount to Stratus in
cash, based on a formula that is intended to be accretive to DIV.
(g) BarBurrito Rights:
On October 4, 2023, the Company acquired through BARB LP, the BarBurrito Rights for a purchase price of $72 million
cash, a retained interest provided to BarBurrito through the issuance of 18,791 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 BARB LP having an agreed value of approximately $52,059, and a $36 million
promissory note that is repayable by BARB LP to BarBurrito upon the first eligible new BarBurrito locations being added
to the royalty pool, for a total of $108 million. The BARB LP promissory note was initially recorded at a fair value and is
subsequently measured at amortized cost using the effective interest method. The promissory note was discounted at a
rate of 8.5% and had a carrying value of $29.9 million as at December 31, 2023 (2022 – $nil).
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 October 4, 2023 among BarBurrito, BARB Royalties GP Inc. and
the Company (the “BarBurrito Exchange Agreement”) upon the satisfaction of certain performance criteria.
The cash purchase price was funded with (i) $50.0 million drawn from DIV’s Acquisition Facility (defined below, refer to
note 11(a)), (ii) $2.0 million from DIV’s cash on hand, (iii) $10.0 million drawn from a new senior credit facility issued to
BARB LP (refer to note 11(b)), (iv) $10.0 million drawn from a new senior term credit facility issued to DIV (refer to note
11(b)).
19
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
9.
Intangible assets (continued):
(g) BarBurrito Rights (continued):
Commencing January 1, 2025, the BarBurrito locations into the royalty pool (the “BarBurrito Royalty Pool”), may be
adjusted annually on January 1, subject to meeting certain criteria, to include gross sales from new BarBurrito locations
less gross sales from BarBurrito locations that were permanently closed during the preceding calendar year. On the
addition of net new BarBurrito locations into the BarBurrito Royalty Pool, BARB LP will first pay down the $36 million
promissory note at an 8.75x multiple. After the promissory note has been repaid in full, on the addition of net new BarBurrito
locations into the BarBurrito Royalty Pool, BarBurrito will be entitled to exchange Class B units of BARB LP (the “BARB
Additional Entitlement”) for common shares of DIV (or cash, at DIV’s election) at a 7.75x multiple.
Commencing January 1, 2031 when the Royalty begins to fluctuate based on the gross sales of the BarBurrito Royalty
Pool and subject to meeting certain performance criteria, BarBurrito will also be provided opportunities to increase the
royalty rate then payable in six, 0.25% increments during the life of the royalty. The Class C, Class D, Class E, Class F,
Class G and Class H units become exchangeable into common shares of the Company (or cash, at DIV’s election) on
increases in the BarBurrito royalty rate of 0.25% increments six times during the term of the BarBurrito Licence and Royalty
Agreement.
In addition to the royalty payable to BARB LP, BarBurrito will pay DIV a management fee of $80,000 per annum for
strategic advice and other services. The management fee will be adjusted on January 1st of each year for the change in
the consumer price index for the most current twelve-month period available on such January 1, or if such index is replaced
or renamed, the consumer price index with the broadest basket of goods for all of Canada.
(h) 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, 2023 and
December 31, 2022. 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, 2023 and December 31, 2022. 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.
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, 2023 and December 31, 2022:
December 31, 2023
Pre-tax discount rate
Terminal value growth rate
December 31, 2022
Pre-tax discount rate
Terminal value growth rate
ML Rights AIR MILES Rights
SGRS Rights
MRM Rights Oxford Rights
Stratus Rights
BarBurrito Rights
11.4%
2.0%
14.7%
2.0%
17.5%
2.0%
12.8%
2.0%
13.0%
2.0%
13.6%
4.0%
11.2%
4.0%
ML Rights AIR MILES Rights
SGRS Rights
MRM Rights Oxford Rights
Stratus Rights
BarBurrito Rights
11.7%
2.0%
15.7%
2.0%
16.8%
2.0%
13.0%
2.0%
12.9%
2.0%
13.9%
4.0%
N/A
N/A
During the year ended December 31, 2023, the pre-tax discount rate had a range from 11.2% to 17.5% (2022 – 11.7% to
16.8%), and the terminal value growth rate had a range of 2.0% to 5.0% (2022 - range from 2.0% to 4.0%).
20
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
9.
Intangible assets (continued):
(h) Impairment assessment (continued):
In 2022, Mr. Mikes saw a recovery back to pre-pandemic levels comparable to 2019. COVID-19 restrictions were
completely lifted in early 2022, and the restaurant industry saw a significant recovery thereafter. The Company concluded,
in 2022, 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 $9.0 million through profit or loss. In
2023, Mr. Mikes saw a continued growth. The Company concluded, in 2023, 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 $4.5 million through profit or loss.
In 2022, AIR MILES saw the loss of a significant sponsor, which negatively impacted results in the fourth quarter of 2022.
Based on the assessments performed, the Company concluded that the carrying amount for the AIR MILES Rights
exceeded the recoverable amount and as a result, the Company recorded an impairment loss of $14.4 million for the year
ended December 31, 2022. On June 1, 2023, Loyalty Inc. acquired the AIR MILES Reward Program business from
LoyaltyOne, Co. However, the loss of the sponsor proved to have a greater negative impact compared to 2022. Based on
the assessments performed, the Company concluded that the carrying amount for the AIR MILES Rights exceeded the
recoverable amount and as a result, the Company recorded a further impairment loss of $3.8 million in connection with
the AIR MILES Rights for the year ended December 31, 2023.
In 2023, the Canadian real estate market saw a continued slowdown, which began in late 2022, due to higher inflation
and a steady rise in interest rates. Despite this slowdown, Sutton paid 100% of the fixed royalty and management fee for
the years ended December 31, 2023 and 2022. Based on the assessments performed, the Company concluded that the
carrying amount for the SGRS Rights exceeded the recoverable amount and as a result, the Company recorded an
impairment loss of $0.6 million in connection with the SGRS Rights for the year ended December 31, 2023 (2022 -
impairment loss of $4.0 million).
As the carrying value of the SGRS Rights, MRM Rights, OX Rights, Stratus 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 further adjustments. 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 at December 31, 2023, the
Company also tested the ML Rights in a similar manner described above and determined that the recoverable amount
exceeded the carrying value by approximately $131.6 million (2022 – $72.1 million) and therefore no impairment exists. If
the pre-tax discount rate was 9.74% higher, the recoverable amount would approximate carrying value.
10. Accounts payable and accrued liabilities
As at December 31, 2023 and 2022, the Company had the following accounts payable and accrued liabilities:
Accrued liabilities
GST payable
Salaries and employment benefits
Trade payables
Interest accrued on long-term debt
Mr. Lube + Tires true-up payable
Short-term portion of Acquisition Facility1
$
December 31,
2023
633
410
290
240
230
-
$
December 31,
2022
588
347
336
728
203
2,775
$
-
1,803
$
399
5,376
1) At December 31, 2022, the current portion of bank loans, net of deferred financing charges was $0.4 million (which was the short-term
portion of Acquisition Facility, stated above), for the year ended December 31, 2023 the current portion of bank loans, net of deferred
financing charges was $16.7 million (which includes $1.6 million relating to the short-term portion of Acquisition Facility), this has been
reclassified to short-term debt (see note 11).
21
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
11. Bank loans, net of deferred financing charges:
(a) Acquisition facility:
DIV has a $50.0 million senior secured credit facility (the “Acquisition Facility”) with a Canadian chartered bank, that
matures on April 20, 2026.
On April 20, 2022, DIV amended its Acquisition Facility to allow for a one-time advance of up to $9.0 million to be used to
partially fund the repayment of DIV’s outstanding convertible debentures due on December 31, 2022 (“2022 Debentures”)
and to extend the maturity date of the Acquisition Facility to April 20, 2026.
On November 15, 2022, DIV drew $47.0 million on the Acquisition Facility to fund the purchase price of the acquisition of
the Stratus Rights and on November 24, 2022, subsequent to the closing of the 2022 Bought Deal Offering (defined in
note 17), the Company partially repaid $43.5 million on the Acquisition Facility, of which $3.5 million remained outstanding
at December 31, 2022.
On May 1, 2023, to fund the 2023 Amendment Consideration and the 2021 True-up Consideration (refer to note 9(a)),
DIV drew an additional $7.5 million on its Acquisition Facility. On August 15, 2023, DIV used the incremental cash from
the ML LP amended credit facility (refer to note 11(b)) to pay down $10.9 million of the outstanding balance on the
Acquisition Facility, reducing the balance to $nil.
On October 2, 2023, DIV drew $50.0 million on the Acquisition Facility to fund the purchase price of the acquisition of the
BarBurrito Rights. Each draw is interest only for the first twelve months and then amortized over 60 months beginning
October 2, 2024. During the three months ended December 31, 2023, the Company partially repaid $0.9 million on the
Acquisition Facility, of which $49.1 million remains outstanding at December 31, 2023. The Acquisition Facility amortizes
over 60 months beginning October 2, 2024. The Acquisition Facility, net of deferred financing fees, is measured at
amortized cost with a carrying value of $49.0 million as at December 31, 2023, of which $1.6 million is classified as short-
term loan facilities on the statement of financial position (see below, refer to note 11(b)). As at December 31, 2023 and
2022, the Company was in compliance with all financial covenants associated with its Acquisition Facility. Refer to
subsequent events (note 26(d)) regarding the paydown of the Acquisition Facility.
(b) Term loan facilities and operating lines of credit:
As at December 31, 2023, the Company had the following short and long-term loan facilities:
Short-term loan facilities
AM LP term loan1
NNDH LP term loan
DIV Acquisition Facility
Interest rate
Maturity date
Face value
Carrying value
CORRA + 2.25%
BA + 1.90%
CDOR + 2.50%
Sep 30, 2026
Nov 15, 2024
Apr 20, 2026
$
$
628
14,500
1,641
16,769
628
14,465
1,641
16,734
$
$
Long-term loan facilities
Interest rate
Maturity date
Face value
Carrying value
ML LP term loan2
AM LP term loan1
SGRS LP term loan
OX LP term loan
Strat-B LP term loan
BARB LP term loan
MRM LP term loan
DIV term loan
DIV Acquisition Facility
79,701
13,223
6,272
8,970
19,762
9,911
10,237
9,973
47,326
205,375
1) During the year ended December 31, 2023, AM LP made partial principal paydowns of $3.5 million, in aggregate, on its $17.4 million
BA + 2.00%
CORRA + 2.25%
BA + 1.95%
CDOR + 1.95%
SOFR + 2.11%
CDOR + 2.50%
CORRA + 2.80%
CDOR + 2.50%
CDOR + 2.50%
May 1, 2025
Sep 30, 2026
Jun 30, 2026
Apr 27, 2025
Nov 15, 2027
Oct 4, 2026
Dec 27, 2026
Apr 4, 2025
Apr 20, 2026
79,870
13,327
6,300
9,000
19,864
10,000
10,300
10,000
47,450
206,111
$
$
$
$
credit facility, reducing the balance to $13.9 million. Refer to subsequent events (note 26).
2) On August 15, 2023. ML LP amended its credit facility agreement with an increase to the term loan facility from $67.9 million to $79.9
million, of which $10.9 million was used to pay down the outstanding balance on the Acquisition Facility at that time.
22
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
11. Bank loans, net of deferred financing charges (continued):
(b) Term loan facilities and operating lines of credit (continued):
As at December 31, 2023, the Company had the following operating lines of credit:
Operating lines of credit
ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
OX LP term loan
Strat-B LP term loan
BARB LP term loan
Interest rate
Prime + 0.25%
BA + 1.95%
BA + 1.95%
Prime + 0.25%
Prime + 0.25%
SOFR + 2.11%
CDOR + 2.50%
Maturity date
May 1, 2025
Sep 30, 2026
Jun 30, 2026
Dec 27, 2026
Apr 27, 2025
Nov 15, 2027
Oct 4, 2026
As at December 31, 2022, the Company had the following short and long-term loan facilities and operating lines of credit:
$
$
Interest rate
Maturity date
Face value
Carrying value
$
$
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
Strat-B LP term loan
DIV Acquisition Facility
Operating lines of credit
ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
OX LP term loan
Strat-B LP term loan
BA + 2.50%
BA + 1.95%
BA + 1.95%
BA + 1.95%
BA + 1.90%
CDOR + 1.95%
SOFR + 2.11%
CDOR + 2.25%
Interest rate
Prime + 0.25%
BA + 1.95%
BA + 1.95%
Prime + 0.25%
Prime + 0.25%
SOFR + 2.11%
May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025
Nov 15, 2027
Apr 20, 2026
Maturity date
May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Apr 27, 2025
Nov 15, 2027
Maximum
available
Available
for use
$
$
1,000
3,000
500
500
500
662
500
6,662
67,870
17,400
6,300
10,300
14,500
9,000
20,316
3,500
149,186
1,000
3,000
500
500
500
677
6,177
1,000
3,000
500
500
500
662
500
6,662
67,614
17,283
6,261
10,258
14,427
8,949
20,188
2,925
147,905
1,000
3,000
500
500
500
677
6,177
$
$
Maximum
available
Available
for use
$
$
$
$
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 + Tires under the Mr. Lube + Tires Licence and Royalty Agreement. On
May 1, 2021, in connection with the Mr. Lube + Tires royalty rate increase and the addition of 13 stores to the Mr. Lube +
Tires Royalty pool (note 9(a)), 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. On November 15, 2022, in connection with the Stratus acquisition (note
9(f)), ML LP amended its credit facility agreement with an increase to the term loan facility from $53.0 million to $68.0
million which included a reduction in the interest rate by 0.50%. On August 15, 2023, in connection with the Acquisition
Facility (note 11(a)), ML LP amended its credit facility agreement with an increase to the term loan facility from $68.0
million to $79.9 million.
AM LP has a credit agreement that consists of a non-amortizing $13.9 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 Loyalty Inc. under the AIR MILES Licenses.
23
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
11. Bank loans, net of deferred financing charges (continued):
(b) Term loan facilities and operating lines of credit (continued):
The AM Credit Agreement was amended and restated in September 2022 in order to, among other things, amend the
financial covenants for the last two fiscal quarters of 2022. The AM Credit Agreement was further amended and restated
in June 2023, in order to, among other things, amend the financial covenants for the second and third quarter of 2023 (as
it was in compliance in the first quarter of 2023). The AM Credit Agreement was further amended and restated in December
2023, in order to, among other things, amend the financial covenants for the last fiscal quarter of 2023 and the first fiscal
quarter of 2024. If AM LP had not entered into such amendments, AM LP would have been in breach of its financial
covenants for the fiscal quarters referenced above in 2022 and 2023. Refer to subsequent events (note 26) regarding the
further partial paydown of the AM LP term loan.
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.
On December 27, 2023, MRM LP amended its credit facility agreement to extend the maturity date from June 24, 2024 to
December 27, 2026. The amendment to the MRM LP credit facility resulted in an increase in the credit spread by 0.55%.
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.
On November 15, 2022, Strat-B LP, a wholly-owned subsidiary of DIV, entered into a credit agreement with a Canadian
chartered bank that consists of a non-amortizing US$15.0 million term loan and a US$0.5 million line of credit. The Strat-
B LP loan and line of credit are secured by the Stratus Rights and the royalties payable by Stratus under the Stratus
Licence and Royalty Agreement.
On October 4, 2023, BARB LP, a wholly-owned subsidiary of DIV, entered into a credit agreement with a Canadian
chartered bank that consists of a non-amortizing $10.0 million term loan and a $0.5 million line of credit. The BARB LP
loan and line of credit are secured by the BarBurrito Rights and the royalties payable to BarBurrito under the BarBurrito
Licence and Royalty Agreement.
On October 4, 2023, to partially fund the purchase price of the acquisition of the BarBurrito Rights, DIV entered into a new
senior credit agreement with a Canadian chartered bank that consists of a non-amortizing $10.0 million term loan.
As at December 31, 2023 and 2022, the Company was in compliance with all financial covenants associated with its term
loan facilities and operating lines of credit.
12. Convertible debentures:
On March 30, 2022, the Company issued convertible unsecured subordinated debentures (“2027 Debentures”) for an
aggregate principal amount of $52.5 million at a price of $1,000 per debenture (“the 2022 Offering”). The 2027 Debentures
mature on June 30, 2027 and bear interest at an annual rate of 6.00% payable semi-annually in arrears on the last day of
December and June in each year, commencing June 30, 2022. At the holder’s option, the 2027 Debentures may be converted
into common shares of the Company at any time prior to the earlier of the last business day immediately preceding June 30,
2027 and the date specified by the Company for redemption. The conversion price will be $4.05 per common share (the
“Conversion Price”), subject to adjustment in certain circumstances.
24
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
12. Convertible debentures (continued):
The 2027 Debentures are not redeemable prior to June 30, 2025, except upon the satisfaction of certain conditions after a
change of control has occurred. On and after June 30, 2025 and prior to June 30, 2026, the 2027 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 June 30, 2026 and prior to the
maturity date, DIV may, at its option, redeem the 2027 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 2027 Debentures by paying
an amount equal to the principal amount of the outstanding debentures, together with accrued and unpaid interest thereon.
On May 4, 2022 (the “Redemption Date”), the Company used the net proceeds from the 2022 Offering to complete the $52.5
million partial redemption of the principal amount of the 2022 Debentures outstanding plus accrued and unpaid interest at
5.25% up to, but excluding, the Redemption Date. On December 20, 2022 (the "Final Redemption Date"), the Company
redeemed the $5.0 million aggregate principal amount of 2022 Debentures issued and outstanding in accordance with the
notice of redemption to the registered holders of its 2022 Debentures issued on November 9, 2022. The 2022 Debentures
were redeemed at a redemption price equal to their principal amount, plus accrued and unpaid interest thereon up to, but
excluding, the Final Redemption Date and the Debentures were de-listed from TSX subsequently thereafter.
The following table reconciles the principal amount of the 2022 Debentures to the carrying value of the liability component:
Principal amount - 2022 Debentures
Full Redemption - principal amount
Equity component
Accretion on liability component
Current portion of convertible debentures
December 31,
2023
-
-
-
-
-
December 31,
2022
57,500
(57,500)
(4,312)
4,312
-
$
$
$
$
The Company may, at its option, elect to satisfy its obligation to repay the principal amount of the 2027 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 debentures by 95% of the current market price
on the maturity date.
On initial recognition, the Company valued the liability component of the 2027 Debentures at $49.4 million and the equity
component at $3.1 million. In addition, the Company incurred transaction costs of $2.6 million, of which $2.4 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 2027 Debentures, after deferred taxes of $0.8 million, was $2.1 million.
The following table reconciles the principal amount of the 2027 Debentures to the carrying value of the liability component:
Principal amount - 2027 Debentures
Equity component
Unamortized deferred financing fees
Accretion on liability component
December 31,
2023
December 31,
2022
$
$
52,500
$
(3,074)
(1,738)
898
48,586
$
52,500
(3,074)
(2,161)
372
47,637
25
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
13. Interest rate swaps:
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. There was a fair value loss of $1.6 million on interest rate swaps for the year ended December 31, 2023 (2022 – gain
of $3.7 million).
The following table summarizes the interest rate swap agreements the Company has entered into as of December 31, 2023:
Term loan facilities
Effective date
Maturity date
Fixed interest rate
Notional amount
ML LP
ML LP
ML LP1
AM LP
MRM LP2
NNDH LP
OX LP
Strat-B LP
BARB LP3
Jul 29, 2022
Dec 15, 2022
Sept 15, 2023
Aug 19, 2022
Jul 25, 2019
Feb 12, 2020
Aug 26, 2020
Jan 1, 2023
Nov 2, 2023
May 1, 2025
May 1, 2025
May 1, 2025
Sep 30, 2026
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025
Nov 15, 2027
Oct 4, 2026
3.75%
6.09%
7.58%
5.39%
4.05%
3.98%
2.96%
5.72%
7.21%
$
39,750
11,250
9,000
8,700
10,300
7,500
4,500
14,898
7,500
1) Effective September 15, 2023, ML LP entered into a swap agreement with a Canadian chartered bank to swap 75% of the incremental $12 million
loan (refer to note 11(b)). The fixed interest rate includes an interest rate of 5.58% plus credit spread of 2.00%.
2) On January 24, 2024, due to the amendment of the credit facility agreement (refer to note 11(b)), the credit spread on the swapped portion of the
MRM LP term loan was subsequently increased by 0.55%, resulting in a fixed interest rate of 4.60%.
3) Effective November 2, 2023, BARB LP entered into a swap agreement with a Canadian chartered bank to swap 75% of the incremental $10 million
loan (refer to note 11(b)). The fixed interest rate includes an interest rate of 4.71% plus credit spread of 2.50%.
14. Exchangeable units and other:
The following table summarizes exchangeable units and other as at December 31, 2023 and 2022:
December 31, December 31,
2022
2023
Mr. Lube + Tires Class B units
Mr. Mike's Class B units
Mr. Mike's Class C units
BarBurrito minority interest
Oxford minority interest
(a) ML Units:
$
$
1,181
484
484
52
33
2,234
$
2,625
529
529
-
33
3,716
$
The balance as at December 31, 2023 of $1.2 million (December 31, 2022 - $2.6 million) in exchangeable units and other
relates to 20% consideration payable to Mr. Lube + Tires for the 2023 addition of 5 locations to be paid to Mr. Lube + Tires
on May 1, 2025.
26
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
14. Exchangeable Units and Other (continued):
(b) 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 in the statements
of net income. During the year ended December 31, 2023 MRM LP issued distributions of $0.2 million (2022 - $0.5 million)
to Mr. Mikes.
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, 2023 the MRM Units were valued at $1.0 million (December 31, 2022 - $1.1 million) based on the DIV
closing share price of $2.73 as at December 31, 2023 (December 31, 2022 - $2.98), multiplied by the total number of
MRM Units of 355,032.
15. Fair value adjustment on financial instruments:
Investment in NND royalties LP
MRM LP exchangeable units
ML LP exchangeable units
Final share settlement of ML 2022 roll-in
Interest rate swaps
16. Income taxes:
The income taxes recognized in the statements of net income are as follows:
Deferred income tax expense
Current income tax expense
Years ended December 31,
2022
2023
$
3,581
89
-
(6)
(1,577)
$
2,877
85
(3,714)
-
3,680
$
2,087
$
2,928
Years ended December 31,
2022
2023
$
5,993
5,878
$
2,319
5,619
$
11,871
$
7,938
Income tax expense reported differs from the amount that would be computed by applying the combined federal and provincial
statutory income tax rates to income before taxes. The reasons for the difference are as follows:
Income before income taxes
Combined Canadian federal and provincial rates
Expected tax expense
Increased by:
Permanent and other non-deductible differences
Change in unrecognized deferred tax assets
27
Years ended December 31,
2022
2023
$
43,594
27%
$
23,499
27%
$
11,770
$
6,345
154
(53)
11,871
$
1,540
53
7,938
$
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
16. Income taxes (continued):
The tax effect of temporary differences that gives rise to the net deferred tax liabilities as at December 31, 2023 and 2022 are
as follows:
Financing and share issuance costs
Convertible debentures
Other
Intangible assets
Net deferred income tax liability
December 31,
2023
478
(588)
(2,226)
(17,863)
(20,199)
$
$
December 31,
2022
775
(730)
(1,281)
(12,969)
(14,205)
$
$
The deferred tax liability as at December 31, 2023 is largely associated with the temporary differences on the Company’s
intangible assets, which have an undepreciated capital cost allowance of approximately $358.8 million (December 31, 2022 -
$265.8 million). In addition, pursuant to NND LP’s limited partnership agreement dated November 15, 2019, its undepreciated
capital cost allowance of approximately $42.0 million at December 31, 2023 (December 31, 2022 - $44.1 million) is allocated
to the Company for tax purposes.
Tax attributes are subject to review, and potential adjustment, by competent authority.
17. Share capital:
As at December 31, 2023, the authorized share capital of the Company consists of an unlimited number of common shares.
On November 23, 2022, the Company completed a bought deal public offering of 16,428,900 common shares (the “2022
Bought Deal Offering”), including 2,142,900 common shares pursuant to the full exercise of the over-allotment option, at a
price of $2.80 per common share, for gross proceeds of $46.0 million. After deducting issuance costs of $2.7 million, net
proceeds were $43.3 million. The deferred tax impact of $0.7 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.
18. 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 (RSU’s):
Under the Plan, the Company can issue RSU’s 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
dividends are recorded as additional issuance of RSUs during the life of the RSU. Currently, all the outstanding RSU’s will
be settled in common shares, unless the RSU holder elects to settle the RSU’s in cash, in certain instances.
28
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
18. Share-based compensation (continued):
(a) Restricted share units (RSU’s) (continued):
The number of RSU’s outstanding as at December 31, 2023 and 2022 is as follows:
Balance, beginning of year
Granted
Dividends earned
Settled
Balance, end of year
Vested, but not settled
Unvested
Number of
RSUs
550,112
335,919
70,139
(328,688)
627,482
(5,059)
622,423
2023
Weighted
average grant-
date fair value
2.08
3.00
2.83
2.78
2.29
$
$
3.18
2.29
Number of
RSUs
452,178
338,533
52,959
(293,558)
550,112
-
550,112
2022
Weighted
average grant-
date fair value
2.05
2.86
2.88
3.08
2.08
$
$
-
2.08
$
$
As at December 31, 2023, approximately 46% of the unvested RSU’s will vest in 2024, 34% will vest in 2025, and the
remainder in 2026.
(b) Share options:
The following table summarizes the changes in the Company’s share options during the years ended December 31, 2023
and 2022:
Balance, beginning of year
Granted
Expired
Number of
options
1,583,334
791,667
-
2023
Weighted
average
exercise price
$
2.66
3.00
-
Number of
options
3,041,667
791,667
(2,250,000)
2022
Weighted
average
exercise price
$
3.06
2.80
3.25
Balance, end of year
2,375,001
$
2.78
1,583,334
$
2.66
The following tables summarize information relating to outstanding and exercisable options as at December 31, 2023 and
2022:
Expiry Date
May 6, 2026
January 1, 2027
January 1, 2028
Balance, December 31, 2023
Expiry Date
May 6, 2026
January 1, 2027
Balance, December 31, 2022
Weighted average
remaining life
(years)
2.35
3.01
4.01
3.12
Weighted average
remaining life
(years)
3.35
4.01
3.68
Options outstanding Options exercisable
791,667
791,667
791,667
2,375,001
791,667
527,778
263,889
1,583,334
Options outstanding Options exercisable
791,667
791,667
1,583,334
527,778
263,889
791,667
Exercise Price
$
2.52
2.80
3.00
Exercise Price
2.52
$
2.80
29
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
18. Share-based compensation (continued):
(b) Share options (continued):
The weighted average assumptions used in calculating the fair values of options granted in 2023 and 2022 are as follows:
Risk free rate
Expected life
Expected volatility
Forfeiture rate
Expected dividends
19. Income per share:
Income for the year - basic and diluted
Weighted average number of shares outstanding - basic (thousands)
Effective impact of dilutive securities (thousands):
Share options
RSUs
Convertible debentures(1)
Exchangeable MRM units
2023
3.34%
5.0 years
34.59%
Nil
8.05%
2022
1.39%
5.0 years
34.30%
Nil
7.75%
Years ended December 31,
2022
2023
$
31,723
$
142,676
15,561
125,607
120
900
-
355
126
746
-
355
Weighted average number of shares outstanding - diluted (thousands)
144,051
126,834
Income per share
Basic
Diluted
$
$
0.22
0.22
$
$
0.12
0.12
1) For the years ended December 31, 2023 and 2022, the interest expense on convertible debentures and the effective impact from
convertible debentures on securities is excluded from the income per share calculation as the impact is anti-dilutive.
20. Other finance costs, net:
Fair value adjustment on promissory notes
Finance income
Foreign exchange (loss) gain
Distributions on Exchangeable Units
Amortization of deferred financing charges
Accretion expense and other
Years ended December 31,
2022
2023
$
5,704
243
(22)
(164)
(739)
(1,211)
$
(215)
168
32
(518)
(1,916)
(851)
$
3,811
$
(3,300)
30
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
21. 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 term loan facilities approximate their fair value as these facilities bear interest at floating market interest
rates. The fair value of the term loan facilities is measured using Level 2 inputs. The fair value of the convertible debentures is
measured using Level 1 inputs. The fair value of the MRM Units, ML Units, note receivable and the interest rate swap liabilities
are measured using Level 2 inputs. The fair value of the investment in NND LP (note 8) is measured using Level 3 inputs.
The following table presents the carrying amounts of each category of financial assets and liabilities as at December 31, 2023:
As at December 31, 2023
Financial assets:
Cash
Royalty and other receivables
Interest rate swap assets
Note receivable
Investment in NND LP
Financial liabilities:
Accounts payable and
accrued liabilities
Bank loans, net of
deferred financing charges
Promissory notes
Interest rate swap liabilities
Lease obligation
Convertible debentures
Exchangeable units and other
$
$
$
Carrying value
FVTPL
Amortized
cost
Fair value hierarchy
Level 1
Level 2
Level 3
$
-
-
2,279
-
40,825
$
4,031
5,857
-
1,489
-
$
4,031
-
-
-
-
$
-
5,857
2,279
1,489
-
43,104
$
11,377
$
4,031
$
9,625
$
-
-
-
-
40,825
40,825
-
-
-
-
-
-
-
-
-
$
1,803
$
-
$
1,803
$
-
-
547
-
-
2,234
222,109
33,763
-
706
48,586
-
-
-
-
-
48,586
-
222,109
33,763
547
706
-
2,234
$
2,781
$
306,967
$
48,586
$
261,162
$
31
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
21. Financial instruments (continued):
The following table presents the carrying amounts of each category of financial assets and liabilities as at December 31, 2022:
As at December 31, 2022
Financial assets:
Cash
Royalties and management
fees receivable
Interest rate swap assets
Investment in NND LP
Financial liabilities:
Accounts payable and
accrued liabilities
Bank loans, net of
deferred financing charges
Promissory notes
Lease obligation
Convertible debentures
Exchangeable units and other
$
$
$
Carrying value
FVTPL
Amortized
cost
Fair value hierarchy
Level 1
Level 2
Level 3
-
$
7,409
$
7,409
$
-
$
-
-
3,309
42,339
5,591
-
-
-
-
-
5,591
3,309
-
45,648
$
13,000
$
7,409
$
8,900
$
-
-
42,339
42,339
-
$
5,376
$
-
$
5,376
$
-
-
-
-
3,716
147,905
3,467
770
47,637
-
-
-
-
47,637
-
147,905
3,467
770
-
3,716
$
3,716
$
205,155
$
47,637
$
161,234
$
-
-
-
-
-
-
-
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, 2023 and 2022 and classified as Level 3:
Opening balance of Investment in NND LP
Distribution received
Unrealized fair value gain on Investment in NND LP
$
Years ended December 31,
2022
2023
$
42,339
(5,095)
3,581
44,467
(5,005)
2,877
Balance of Investment in NND LP, end of year
$
40,825
$
42,339
22. Financial risk management:
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.
32
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
22. 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, 2023 and 2022 were as follows:
Cash
Royalty and other receivables
Note receivable
Investment in NND LP
$
2023
4,031 $
5,857
1,489
40,825
2022
7,409
5,591
-
42,339
$ 52,202 $
55,339
The aging of royalties and management fees receivable, as well as amounts receivable at December 31, 2023 and 2022
were as follows:
Within 30 days
(b) Liquidity risk:
$
2023
5,857 $
2022
5,591
$ 5,857 $
5,591
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.
As at December 31, 2023, the Company had a cash balance of $4.0 million (2022 - $7.4 million) and a working capital
deficit of $5.7 million (2022 - positive working capital of $8.7 million). The working capital deficit includes the current portion
of bank loans. Refer to the liquidity section in Nature of operations (note 1).
33
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
22. 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:
(000's)
Accounts payable and
accrued liabilities
Promissory notes
Lease obligation
Long-term bank loans
Short-term bank loans
2027 Convertible debentures
Acquisition Facility1,2
Exchangeable ML LP units
AM LP term loan contractual paydown
Carrying
amount
Contractual
cash flow
2024
2025
2026
2027 Thereafter
$ 1,803 $ 1,803 $ 1,803 $ - $ - $ - $ -
33,763 40,952 - - - - 40,952
706 874 110 112 115 117 420
158,049 178,965 9,430 104,645 43,958 20,932 -
14,465 15,199 15,199 - - - -
48,586 63,525 3,150 3,150 3,150 54,075 -
48,967 57,577 5,704 13,186 38,688 - -
1,181 1,181 - 1,181 - - -
628 628 628 - - - -
Total contractual obligations
1) Subsequent to December 31, 2023, the Acquisition Facility has been fully paid down (refer to subsequent events note 26(d)).
2)
Includes $1.6 million related to the short-term portion of the Acquisition Facility outstanding.
$ 308,148 $ 360,704 $ 36,023 $ 122,274 $ 85,911 $ 75,124 $ 41,372
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 of future cash flows will fluctuate due to changes in foreign exchange rates.
DIV’s exposure to foreign currency risk as at December 31, 2023 and 2022 is outlined in the table below:
Expressed in thousands of US dollars
Cash and cash equivalents
Foreign currency exposure to DIV
$
2023
35
$
2022
182
$ 35
$ 182
A 10% strengthening and weakening of the US dollar against the Canadian dollar would have increased and decreased
net income by a nominal amount as at December 31, 2023 and 2022.
Strat-B’s exposure to foreign currency risk as at December 31, 2023 and 2022 is outlined in the table below:
Expressed in thousands of Canadian dollars
Accounts payable and accrued liabilities
Foreign currency exposure to Strat-B LP
2023
2022
$
3
$ 345
$ 3
$ 345
A 10% strengthening and weakening of the Canadian dollar against the US dollar would have increased and decreased
net income by a nominal amount as at December 31, 2023 and 2022.
(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 bank loans that are subject to floating interest rates. As at December 31, 2023, the interest rate related
to bank loans is mitigated by interest rate swap arrangements on $113.4 million of $173.8 million of the Company’s term
loan facilities (2022 - $82.0 million of $149.2 million of the Company’s term loan facilities). Of the $222.9 million in total
bank loan facilities, $49.1 million related to the short and long-term Acquisition Facility outstanding. Based on the balance
outstanding on December 31, 2023, a one percentage point increase (decrease) in the interest rate would increase
(decrease) interest expense by $0.6 million (2022 - $0.4 million).
34
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
22. Financial risk management (continued):
(d) Interest rate risk (continued):
The Company has a note receivable that are subject to floating interest rates. As at December 31, 2023, the Company
had a note receivable of $2.1 million. Based on the balance outstanding on December 31, 2023, a one percentage point
increase in the interest rate would increase (decrease) interest receivable by a nominal amount.
The investment in NND LP is a financial asset measured at fair value, which will partially fluctuate due to changes in the
risk-free rate in addition to other factors including changes in the risk-premium and cash distributions received by the
Company from NND LP.
(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, term loan facilities and
convertible debentures. The Board of Directors does not establish quantitative return on capital criteria for management.
The Board of Directors review 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.
23. 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, 2023 and 2022:
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
MCM Agreement
Years ended December 31,
2022
1,861
1,177
2023
2,140
1,379
$
$
$
3,519
$
3,038
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 (Chief Executive Officer of DIV) is a director, and Mr. Morrison and
Mr. Ciampi (a Director of DIV) are minority shareholders, through which DIV provides certain office space and certain
administrative services to MCM (the “MCM Agreements”). The transactions under the MCM Agreements are not material
to DIV.
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.
35
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
24. Supplemental cash flow information:
The following table reconcile the movements in liabilities to cash flows arising from financing activities for the year ended
December 31, 2023:
Promissory
notes
(note 9(d),(g))
Acquisition
Facility
(note 11(a))
Bank
loans
(note 11(b))
Convertible
debentures
(note 12)
Lease
obligations
Total
Balance, December 31, 2022
$
3,467
$
3,323
$
144,405
$
47,637
$
770
$
199,606
Changes from financing cash flows:
Proceeds from issuance of debt, net of fees
Repayment of debt
Payment of lease obligation
Liability-related other changes:
Amortization of deferred financing charges
BARB LP promissory note
Accretion expense
Foreign exchange
Equity component of convertible debentures
-
-
-
57,496
(11,905)
-
31,794
(3,445)
-
-
36,000
(5,704)
-
-
54
-
-
-
-
262
-
-
126
-
.
-
-
-
423
-
526
-
-
-
-
(107)
43
-
-
-
-
89,290
(15,350)
(107)
739
36,000
(5,135)
126
-
Balance, December 31, 2023
$
33,763
$
48,968
$
173,142
$
48,586
$
706
$
305,169
The following table reconcile the movements in liabilities to cash flows arising from financing activities for the year ended
December 31, 2022:
Promissory
notes
(note 9(d),(g))
Acquisition
Facility
(note 11(a))
Bank
loans
(note 11(b))
Convertible
debentures
(note 12)
Lease
obligations
Total
Balance, December 31, 2021
$
3,109
$
(118)
$
109,750
$
55,968
$
829
$
169,541
Changes from financing cash flows:
Proceeds from issuance of debt, net of fees
Repayment of debt
Payment of lease obligation
Liability-related other changes:
Amortization of deferred financing charges
Accretion expense
Foreign exchange
Equity component of convertible debentures
-
-
-
-
358
-
-
47,000
(43,500)
-
34,161
(130)
-
(59)
-
-
-
220
-
404
-
50,040
(57,500)
-
869
1,334
-
(3,074)
-
-
(105)
131,201
(101,130)
(105)
46
-
-
-
1,030
1,738
404
(3,074)
Balance, December 31, 2022
$
3,467
$
3,323
$
144,405
$
47,637
$
770
$
199,606
36
DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
For the years ended December 31, 2023 and 2022
25. Segment reporting:
The Company has only one business segment that relates to the acquisition of royalties.
The following table summarizes the Company’s one business segment, separated by geographic region from which royalty
income is generated:
For the year ended December 31, 2023:
Royalty income
Management fees
Interest expenses on credit facilities
As at December 31, 2023:
Non-current assets
Total assets
Non-current liabilities
Total liabilities
26. Subsequent events:
Canada
United States
Total
$
$
47,791
533
11,919
$
8,171
-
1,207
475,047
486,860
291,451
310,025
79,466
80,492
19,959
19,923
55,962
533
13,126
554,514
567,351
311,410
329,947
Refer to subsequent events below as well as subsequent events referred to in other notes throughout the financial statements:
(a) AM LP partial paydown of credit facility:
On February 20, 2024, AM LP made a contractual $0.6 million partial principal paydown on its credit facility, reducing the
outstanding principal balance to $13.3 million.
In addition, on March 12, 2024, AM LP made a voluntary $3.2 million partial principal paydown on its credit facility, further
reducing the outstanding principal balance to $10.1 million.
(b) DIV received partial payment on the note receivable:
On February 6, 2024, DIV received a voluntary $0.3 million partial principal payment on its note receivable, reducing the
outstanding balance to $1.8 million.
(c) DIV announced closing of $54.0 million bought deal public offering of common shares:
On February 23, 2024, DIV closed its bought deal public offering of 20,320,500 common shares (the “2024 Bought Deal
Offering"), including 2,650,500 common shares issued pursuant to the full exercise of the over-allotment option, at a price
of $2.66 per common share for total gross proceeds of approximately $54.0 million.
(d) Acquisition Facility paydown:
On January 4 and February 2, 2024, the Company partially repaid a further $0.9 million, in aggregate, on the Acquisition
Facility. On February 26, 2024, DIV used the incremental cash from the net proceeds of the 2024 Bought Deal Offering
(refer to note 26(c)) to pay down in full the remaining $48.2 million outstanding balance on the Acquisition Facility.
(e) Dividend increase:
On February 14, 2024, DIV’s board of directors approved an increase in DIV’s annual dividend policy from 24.5 cents per
share to 25.0 cents per share effective March 1, 2024, an increase of 2.0%.
37