ANNUAL
REPORT
Fiscal year ended December 31, 2017
Creating the optimal dividend stream available for investors
PROFILE
Alaris is a Canadian company based in Calgary, Alberta. We provide preferred equity
financing to private businesses across North America using an innovative structure
which fills a niche in the private capital markets. This niche is: providing capital to
successful businesses, which are in need of capital, but are unwilling to compromise
the current state of their equity ownership and operational control of the business.
Alaris Royalty Corp. trades on the Toronto Stock Exchange under the symbol “AD”.
OBJECTIVE & STRATEGY
Alaris is dedicated to creating long-term value for its shareholders.
We provide capital to well-run, profitable private companies in exchange for a monthly
preferred equity distribution. These distributions to Alaris are set for 12 months and
adjusted annually based on the “top-line” results of our private company partners
(“Partners”). Alaris creates long-term partnerships with companies that have a proven
track record of stability and profitability in varying economic conditions. Our Partners
are mostly closely held businesses that use our capital for growth, generational
transfers, partial liquidity, management or private equity partner buyouts, or a
combination of the aforementioned. For private companies with exceptional results,
where giving up traditional common equity would be far too expensive, we believe
that Alaris’ preferred equity represents the lowest cost, least intrusive equity in the
private capital market.
Our goal is to continue to diversify and increase our revenue streams by adding a
select few new Partners each year in addition to providing follow-on capital to our
existing Partners. Within our current revenue streams we aim to generate organic
growth of 3-5% per year.
TABLE OF CONTENTS
PRESIDENT’S MESSAGE ..................................................................................................................................................................... 4
BENEFITS TO SHAREHOLDERS & OWNERS .................................................................................................................................... 5
PARTNER CRITERIA ............................................................................................................................................................................. 6
OUR PERFORMANCE ........................................................................................................................................................................... 7
PRIVATE COMPANY PARTNER SUMMARIES .................................................................................................................................... 9
FINANCIAL HIGHLIGHTS ................................................................................................................................................................... 18
MANAGEMENT DISCUSSION AND ANALYSIS ................................................................................................................................ 20
OVERVIEW.......................................................................................................................................................................................... 21
RESULTS OF OPERATIONS ................................................................................................................................................................... 21
PRIVATE COMPANY PARTNER UPDATE ................................................................................................................................................. 27
SUBSEQUENT EVENTS ......................................................................................................................................................................... 36
REDEMPTION OF KMH UNITS .............................................................................................................................................................. 37
REDEMPTION OF SEQUEL UNITS .......................................................................................................................................................... 37
IMPAIRMENT OF GROUP SM UNITS ...................................................................................................................................................... 38
BAD DEBT EXPENSE AND RESERVE ..................................................................................................................................................... 38
LIQUIDITY AND CAPITAL RESOURCES ................................................................................................................................................... 38
WORKING CAPITAL.............................................................................................................................................................................. 39
FINANCIAL INSTRUMENTS .................................................................................................................................................................... 39
INTERNAL CONTROLS OVER FINANCIAL REPORTING .............................................................................................................................. 40
SUMMARY OF CONTRACTUAL OBLIGATIONS .......................................................................................................................................... 40
TRANSACTIONS WITH RELATED PARTIES .............................................................................................................................................. 41
CRITICAL ACCOUNTING ESTIMATES AND POLICIES ................................................................................................................................ 41
RECENT ACCOUNTING PRONOUNCEMENTS ........................................................................................................................................... 41
SUMMARY OF ANNUAL AND QUARTERLY RESULTS ................................................................................................................................ 42
OUTSTANDING SHARES ....................................................................................................................................................................... 43
INCOME TAXES ................................................................................................................................................................................... 43
OUTLOOK ........................................................................................................................................................................................... 44
RISKS FACTORS ................................................................................................................................................................................. 45
FORWARD-LOOKING STATEMENTS ....................................................................................................................................................... 57
ADDITIONAL INFORMATION ................................................................................................................................................................... 58
CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................................... 60
INDEPENDENT AUDITORS’ REPORT....................................................................................................................................................... 60
CONSOLIDATED STATEMENT OF FINANCIAL POSITION ............................................................................................................................. 61
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME / (LOSS) ........................................................................................................ 62
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............................................................................................................................. 63
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............................................................................................................................. 64
CONSOLIDATED STATEMENT OF CASH FLOWS........................................................................................................................................ 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................................ 66
REPORTING ENTITY ................................................................................................................................................................... 66
STATEMENT OF COMPLIANCE ..................................................................................................................................................... 66
SIGNIFICANT ACCOUNTING POLICIES ........................................................................................................................................... 67
FINANCIAL RISK MANAGEMENT ................................................................................................................................................... 71
INVESTMENTS AT FAIR VALUE .................................................................................................................................................... 75
SHARE CAPITAL ........................................................................................................................................................................ 83
LOANS AND BORROWING ........................................................................................................................................................... 84
SHARE-BASED PAYMENTS.......................................................................................................................................................... 84
INCOME TAXES ......................................................................................................................................................................... 86
FAIR VALUE OF FINANCIAL INSTRUMENTS .............................................................................................................................. 89
COMMITMENTS .................................................................................................................................................................... 89
RELATED PARTIES ............................................................................................................................................................... 90
SUBSEQUENT EVENTS.......................................................................................................................................................... 90
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PRESIDENT’S MESSAGE
2017 was a dynamic year within Alaris’ portfolio. In addition to setting a new record for capital deployment over the last twelve
months and adding the single largest partner in our history, we also continued our strong track record of returns on partners where
we have sold alongside the entrepreneur. Over the 14 year history of Alaris, we have now had a full investment cycle with 10
companies (including the recently announced Agility transaction) and have recorded internal rates of return of greater than 20% in
seven of them with a weighted average of roughly 17.5%. Management believes these results put us near the top of our industry in
performance.
Most encouraging is the strength of our current portfolio. Alongside progress from companies that have experienced challenges, our
largest partners continue to be amongst our best performers and more than 80% of our revenue in 2017 is from partners that are
growing their distributions to us year over year. Of the challenged files, we were able to successfully exit Agility with an IRR of 25%
and we re-instituted partial distributions from SCR in 2017 and expect those distributions to increase this year. Partial Kimco
distributions are expected to re-start imminently with the recent change in the company’s banking relationship and improving
financial results. Group SM was the one major disappointment in 2017 but discussions to recoup our remaining outstanding debt
have been encouraging. As a whole, we are pleased with the performance but will as always continue to explore ways to improve
our performance. Utilizing innovative structures that have been initiated over the last few years we believe will have measurable
benefits for our shareholders moving forward.
Looking ahead, while the overall environment in the private equity industry remains extremely competitive, we do see an opportunity
to continue growing our capital deployment due to increasing interest rates in the US, restrictions on the use of high levels of debt
and also our own new initiatives. Shareholders can expect to see Alaris invest not just with our traditional preferred shares in our
partners but also with a small amount of common shares that will provide us with additional upside on successful partners while also
allowing us to participate in additional transactions where more than just preferred shares are required to compete. This small
change will not change the mission of Alaris to provide our shareholders with a safe, predictable cash dividend stream that we’ve
been delivering since we started in early 2004 but we do feel that it will enhance our ability to deploy more capital with highly
accretive returns.
I look forward to reporting back in one year’s time after what we expect to be another very successful year.
Yours truly,
Steve King
President and CEO
Alaris Royalty Corp.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
4
BENEFITS TO SHAREHOLDERS & OWNERS
Low Volatility
of Cash Flows
Visibility
of Cash Flows
Benefits to Shareholders – The Five Pillars to the Optimal Dividend
Diversification
of Revenue
Streams
• Currently have 16
revenue streams
• Long-term goal is to
have no single revenue
stream >10% of total
revenue
• Average daily trading
volumes provide
adequate liquidity for
shareholders
Liquidity
for Shareholders
• Alaris adjusts its
distributions from
Partner’s annually and
for 12 months
• Financial health of
Partners is monitored
closely each month
• The Corporation has
relatively low SG&A
expenses relative to
profitability which has
proven the scalability
of the model
Alaris’ preferred
distributions are:
• based on top-line
performance and paid
in priority to other
equity
• covered by a cash-
flow buffer and
protective covenants
• paid monthly
providing monthly cash
returns vs
returns on an exit
• volatility reducing
collars on >80% of
current distributions
Growth
in Cash Flow Per
Share
• Historic organic
growth in Partner
revenues of 1% to 5%
per year
• Add to cash flow per
share through
accretive capital
deployments
• Historic growth led to
10 consecutive
dividend increases
since April 2010
Non-Voting Preferred Equity
Long-Term Capital Partner
Tax Efficient
Lower Participation in Growth
Benefits to business owners
Allows the entrepreneur to continue to run their successful businesses with
minimal interference by Alaris
Alaris does not require an exit
This allows the entrepreneur to focus on long-term goals rather than short-
term goals of its equity sponsor
The distributions paid to Alaris are essentially pre-tax as they lower the taxable
income of remaining partners
Alaris reduces its participation in the growth of the business through the use
of collars on its distribution and by basing the performance metric on the
organic change in the business versus total growth
Alaris versus other sources of capital: Why do businesses choose Alaris?
Operating Control
Time Horizon
Growth Participation
Future Funding
Dilution
Debt
None
3 – 5 years
Minimal
Maxes out
Warrants
Alaris
None
Indefinite
Capped
Unlimited
Traditional Private Equity
Needs control
3 – 6 years
Full carry
Maxes out
Preferred Shares
Common equity
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
5
PARTNER CRITERIA
Old Economy Business
Required services or products in mature industries
Businesses with a risk of obsolescence or a declining asset base are
not a good fit
Track Record of Free Cash Flow
Alaris looks at historical free cash flow to predict sustainability of its
Low Levels of Debt and Capital
Expenditure Requirements
Management Continuity
distribution
More free cash flow is required if a business displays more volatility of
cash flows
Debt levels can vary amongst our Partners depending on industry, but
typically a business must have low levels of debt in its capital structure
If a business requires excessive capital expenditures to maintain
current cash flow it is likely not a candidate for Alaris
Alaris does not manage the business of its Partners, therefore it relies
on the ownership group/management team to continue to run the
business
Alaris invests in companies that are “not for sale”, where management
wants to stay in and grow instead of exiting
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
6
OUR PERFORMANCE
Dividend History and Sustainability
Current dividend per share of $0.135 per
month ($1.62 annual)
Annualized Dividend History
Alaris has paid monthly dividends every
month since Nov 2008 totaling more than
$12.50 per share and $330 million gross.
Dividends per share paid of $1.36, $1.48,
$1.56, $1.62 and $1.62 from 2013 through
2017 respectively.
10 consecutive dividend increases totaling
93% gross increase.
5 year CAGR of 7%
$1.70
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
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Returns from Exit to Date
Alaris has generated $307 million in total returns (83%) on partners that have either repurchased Alaris’ units or ceased operations.
IRR’s from Partners that repurchased Alaris’ units are in a range of 17% to 47% (1)(2).
The monthly distribution Alaris receives from its Partner’s ensures Alaris is getting a return on investment from day 1,
rather than on an exit event. This greatly reduces the investment risk.
(1) MAHC repurchased Alaris’ units after 1 year, resulting in an additional 24 months of distributions being paid to Alaris on exit. This resulted in an IRR much higher
than what is expected. Returns are in Canadian dollar. In US dollar terms total return was 53%.
(2) SHS went into receivership in December 2013, therefore no exit capital was received.
(3) A portion of KMH’s exit capital has not been collected but is secured against certain assets and collection is expected over time.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
7
$millions CADNumber of Years InvestedCapital InvestedDistributions ReceivedExit Capital ReceivedTotal Return% total ReturnIRR %LifeMark11.3(67.5)$ 51.8$ 123.4$ 107.7$ 159%29%MediChair6.8(6.5) 6.4 10.0 9.9 152%23%Quetico3.0(26.9) 13.3 30.7 17.1 63%22%Killick4.0(41.3) 22.7 44.7 26.1 63%20%Solowave5.8(42.5) 31.4 44.5 33.4 78%17%MAHC (1)1.0(18.5) 8.0 19.2 8.7 47%47%SHS (2)0.9(15.0) 0.8 - (14.2) -95%-95%KMH ⁽³⁾7.0(54.5) 21.1 28.0 (5.4) -10%-2%Sequel4.2(77.5) 58.4 119.5 100.4 130%29%Agility5.3(20.3) 15.3 28.5 23.5 116%25%Totals from exits(370.5)$ 229.0$ 448.4$ 307.0$ 83%
OUR PERFORMANCE (CONTINUED)
Capital Deployed since 2011
$173
$178
$172
$77
$90
$108
$108
2011
2012
2013
2014
2015
2016
2017
Per Share Metrics
5 year CAGR 10%
5 year CAGR 11%
5 year CAGR 8%
5 year CAGR 7%
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Partner revenue
Normalized EBITDA
Net cash from ops
Dividend
2013
2014
2015
2016
2017
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
8
PRIVATE COMPANY PARTNER SUMMARIES
Alaris has approximately 80% of its fair value of investments in US based companies
Of the 20% of fair value of investments in Canadian companies, 7% have a focus on Western Canada while 13% are focused
on Eastern Canada
Alaris has historically been weighted to healthcare. However, today, 49% of invested dollars are exposed to business &
professional services, 40% to industrials, and 11% to consumer discretionary.
Approximately 90% of new deals Alaris looks at are domiciled in the United States.
Investment by Industry Segment %
49%
40%
11%
Consumer
Products/Services
Business Services
Industrials
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
9
Accscient LLC
Business Description:
Founded in 2007 Accscient provides IT Staffing, Consulting, and Outsourcing services and
specializes in Digital Infrastructure Management, Enterprise Resource Planning, Business
Intelligence and Database Administration. Headquartered in Atlanta, GA, Accscient’s operating
businesses include Norwin Technologies (Boston, MA), Premier IT Solutions (Dallas, TX) and
Appridat Solutions (Atlanta, GA). Accscient provides its services to a diverse customer base
including several Fortune 500 companies.
Industry:
Business Services: IT Consulting and Staffing
Capital Invested:
US$20.0m
Annualized Distribution:
US$3.0m
Distribution collar:
+/- 5%
Year end:
Website:
December 31
www.norwintechnologies.com, www.premieritsolns.com, www.appridat.com
Partner since:
June 2017
C&C Communications, LLC
Business Description:
ccComm is a Sprint Preferred Retailer offering mobile solutions and accessories across the Sprint
platform. ccComm is headquartered in Federal Way, Washington, with over 65 locations throughout
Washington, Oregon, Oklahoma, Texas and Utah and employs over 225 people. ccComm
customers are individuals purchasing mobile devices and data/voice plans through the Sprint
network as well as customers purchasing accessories for mobile devices.
Industry:
Consumer Discretionary: Telecommunications
Capital Invested:
US$6.2m
Annualized Distribution:
US$0.9m
Distribution collar:
+/- 6%
Year end:
Website:
December 31
abwx.net
Partner since:
December 2016
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
10
DNT
Business Description:
DNT was founded in 2009 and specializes in turnkey civil construction services to residential,
commercial and municipal end markets. Services include; excavation, the installation of wet and
dry utilities such as electrical, gas, sewage and water as well as paving and the building of retaining
walls. DNT has strong functional capabilities and believes it is the only company in its core markets
capable of providing these turnkey infrastructure solutions to its customers. With its head office in
Austin, Texas, DNT employs over 650 people during peak season and is one of the largest service
providers of its kind in the Austin market while also holding significant market share in San Antonio.
These markets are attractive, fast growing and have diverse economies with major industry
employers including healthcare, government, technology and education. Both Austin and San
Antonio have strong employment rates and significant job growth at rates above the National
average. These, among other factors, have placed both markets as amongst the most desirable for
commercial and residential development. Customers of DNT’s include large publicly traded
commercial and residential real estate developers, regional commercial and residential real estate
developers and municipal governments.
Industry:
Industrials: Civil Construction Services
Capital Invested:
US$68.0m
Annualized Distribution:
US11.5m
Distribution collar:
+/- 6%
Year end:
Website:
December 31
www.dntconstruction.com
Partner since:
June 2015
End of the Roll
Business Description:
End of the Roll is Canada's largest dedicated flooring retailer. End of the Roll was incorporated in
1990 and began offering franchise locations in 1994. The discount renovation market is relatively
stable compared to the new home market due to the nature of the purchase and the amount of the
average sale. Currently, End of the Roll collects franchise royalties from over 50 franchisees
nationwide. End of the Roll targets "budget minded" customers who prefer to purchase in smaller
quantities and coordinate private installation in order to save on the costs of using a full service
retailer.
Industry:
Consumer Discretionary: Discount flooring
Capital Invested:
$7.2m
Annualized Distribution:
$1.7m
Distribution collar:
Year end:
Website:
No collar
April 30
www.endoftheroll.com
Partner since:
May 2005
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
11
Federal Resources
Business Description:
Founded in 1986 and employing over 200 people, Federal Resources is a Maryland based leading
value-added provider of mission critical products and solutions to defense, first responder, homeland
security and maritime end users. Federal Resources is a leading provider of detection and protection
equipment to first line responders dealing with chemical, biological, radiological, nuclear and
explosive (“CBRNE”) threats, as well as supplying tactical gear, tools and maritime products.
Federal Resources management believes that the CBRNE product category is one of the highest
growth product categories in the defense procurement budget with potential CBRNE attacks
representing the most widely anticipated global threat for the next 10 years. Customers of Federal
Resources include all branches of the US military, various municipal agencies, first responders,
airports and various other private and governmental agencies.
Industry:
Industrials: Wholesale Distribution
Capital Invested:
US$67.0 (3 tranches)
Annualized Distribution:
US$10.6m
Distribution collar:
+/- 6%
Year end:
Website:
December 31
www.federalresources.com
Partner since:
June 2015
Heritage Restoration, LLC
Business Description:
Founded in 1981, and under the leadership of CEO, Andy Bear since 2003, Heritage is a leading
specialty contractor providing masonry and masonry related services to the commercial building
industry. With a focus on the restoration of existing structures, Heritage’s services include masonry
procurement, installation and restoration, concrete structure restoration, waterproofing and coating
repair, Heritage provides quality customer service and workmanship throughout the entire New
England area, employing over 100 highly skilled masons; carpenters; and laborers during peak
times. New England’s abundance of university campuses, hospitals, and historic urban architecture
utilizing brick and stone construction, combined with the high concentrations of concrete parking
structures and tunnels, represents large and attractive market opportunities for Heritage, In addition,
the attractive macroeconomic environment for new construction activity in the metropolitan Boston
area also continues to provide significant opportunities for Heritage. Heritage works with many large
regional and national primary contractors, commercial real estate owners and developers and
municipalities.
Industry:
Industrials: Masonry
Capital Invested:
US$15.0m
Annualized Distribution:
US$2.3m
Distribution collar:
+/- 5%
Year end:
Website:
December 31
http://heritageri.com
Partner since:
January 2018
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
12
Kimco
Business Description:
Kimco and its predecessor companies have been providing route based commercial janitorial
services throughout the United States since the 1970's. Kimco is a significant sized service provider
in a highly fragmented industry, which is estimated by Kimco management to generate over $50
billion in annual sales in the United States. Kimco is one of only a small group of businesses in this
industry that operates on a national scale. Services are provided in three business segments:
commercial/retail, hospitality and malls. The majority of Kimco’s revenue is generated under long-
term contracts (generally 1 to 3 years). Kimco services customers, which range in size from multi-
location national customers to regional single site customers.
Industry:
Business Services: Commercial Janitorial Services
Capital Invested:
US$34.2m (2 tranches)
Annualized Distribution:
US$5.0m⁽¹⁾
Distribution collar:
+/- 6%
Year end:
Website:
December 31
www.kimcoserv.com
Partner since:
June 2014
Labstat
Business Description:
(1) Partial distributions from Kimco are expected to begin in April 2018 at an estimated $100,000 per month, which
represents 18-24% of the $5.0 million of distributions Kimco is contractually obligated to pay Alaris in 2018 with a plan to
install a variable payment of distributions based on the availability after meeting banking covenants.
Located in Kitchener, Ontario, Labstat was established in 1976 and has grown to become one of
the largest independent third party tobacco testing companies in the world supporting regulatory
testing and research. Labstat tests all forms of tobacco products including cigarettes (mainstream
and side stream tobacco smoke), whole tobacco, snus and smokeless tobacco as well as non-
tobacco products such as electronic cigarettes. Labstat has carried out hundreds of Health Canada
projects and wrote and validated all 45 of the sanctioned tobacco smoke testing methods for
Canada; the first country to implement tobacco regulation. These testing methods are now
considered to be the worldwide model for tobacco testing regulation. The senior management team
of Labstat is comprised of industry recognized scientists and technical staff, who collectively have
over 120 years of experience in the industry. Labstat employs between 130 and 160 staff during its
peak business. Labstat provides tobacco chemistry and toxicology testing services for tobacco
manufacturers, governments, and public and private entities alike. Labstat is a global business with
customers in North America, Europe, South America, New Zealand and Asia.
Industry:
Business Services: Laboratory testing services
Capital Invested:
$47.2m (2 tranches)
Annualized Distribution:
$8.4m
Distribution collar:
+/- 6%
Year end:
Website:
December 31
www.labstat.com
Partner since:
June 2012
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
13
LMS Reinforcing Steel Group
Business Description:
LMS is Western Canada's leading concrete reinforcing steel (rebar) fabricator and installer also
providing post tensioning, trucking and crane services. As an installer and supplier, LMS has the
advantage of having low fixed costs and fixed assets, which allows the company to be profitable
during various negative economic scenarios as it can adjust its labour force to match the activity
level. LMS fabricates and installs concrete reinforcing rebar and post tensioning services for
construction projects primarily in British Columbia, Alberta, Saskatchewan, and Manitoba as well as
recent expansion into California. Project types include; (i) Infrastructure Projects - light rail transit,
water treatment plants, tunnels, hydro facilities and bridge decks; (ii) Commercial projects - high rise
office space, aquatic centers or airport terminals; (iii) Residential - high rise developments; and (iv)
Institutional – university residences, hospitals and community centers. LMS has up to 600
employees during peak season. LMS' customers are typically large general contractors and/or
developers.
Industry:
Industrials: Rebar fabrication & installation
Capital Invested:
$60.0m (4 tranches)
Annualized Distribution:
$4.9m
Distribution collar:
NA
Year end:
Website:
December 31
www.lmsgroup.ca
Partner since:
April 2007
Planet Fitness Growth Partners
Business Description:
PFGP is a franchisee of Planet Fitness® and was founded in 2008 by Victor and Lynne Brick. The
Bricks and their management team are well-respected operators in the fitness industry and have
over 30 years of experience as owner/operators of fitness clubs on an individual basis. Through its
affiliates, PFGP operates over 55 fitness clubs in Maryland, Tennessee, Florida, Washington DC
and Washington State and has area development agreements ("ADA's") to open over 50 additional
Planet Fitness® clubs in those same States. PFGP has grown to become one of the top 3 largest
non-corporate affiliated franchisees in the Planet Fitness® system and were awarded (out of over
190 franchisees and over 850 Planet Fitness® clubs) the 2013 Franchisee of the Year, 2014
Developer of the Year for opening the most clubs in a single year and the 2014 Brand Excellence
Review winner for having the highest rated clubs in the company according to club inspections
conducted by Planet Fitness® Corporate. PFGP has its head office in Timonium, MD, located just
outside of Baltimore, MD where it employs over 20 people. PFGP has a very repeatable, predictable
and scalable business model and intends to continue to open new clubs in 2018 and beyond and
currently employs over 500 individuals company wide. Individuals which want to exercise in the
Judgment Free Zone® that Planet Fitness provides.
Industry:
Consumer Discretionary: Health & Fitness Clubs
Capital Invested:
US$40.0m (2 tranches)
Annualized Distribution:
US$6.5m
Distribution collar:
+/- 5%
Year end:
Website:
December 31
NA
Partner since:
November 2014
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
14
Providence Industries
Business Description:
Providence is a leading service provider to the apparel industry. Founded in 2006 and
headquartered in Long Beach, California, Providence (d.b.a. MyDyer) is a leading provider of
design, engineering, development, manufacturing and sourcing services. Providence utilizes its
extensive global network of sourcing and manufacturing partners to provide value-added sourcing
excellence to customers, combined with rapid speed to market. In addition, Providence’s unique
design expertise and focus on innovation enables customers to remain at the forefront of evolving
fashion trends. The company has an experienced management team supported by a talented
workforce of over 300 employees. Customers include publicly traded and private apparel companies
and apparel retailers.
Industry:
Business Services: Apparel Design, Engineering and Sourcing Services
Capital Invested:
US$30.0m
Annualized Distribution:
US$4.7m
Distribution collar:
+/- 5%
Year end:
Website:
December 31
www.mydyer.com
Partner since:
April 2016
Sandbox
Business Description:
Sandbox is a leading advertising and marketing firm with its headquarters’ in Chicago, IL and offices
in Chicago, Kansas City, Indianapolis, Santa Monica, New York and Toronto. Sandbox offers a wide
range of marketing and advertising services including strategic marketing and planning, creative
development for all media and digital strategy solutions including CRM and data analytics for clients
in a variety of industries within the US and Canada. Sandbox has decades of proven results and is
owned and managed by highly experienced advertising professionals with global experience. The
company plans to continue to acquire and combine regional marketing communication companies
that would complement the entire organization through diversity of clients and industries, skill sets
and expertise. Sandbox focuses on serving business to business clients primarily in highly
specialized industries such as life sciences, agriculture and financial services.
Industry:
Business Services: Full Service Marketing and Advertising Agency
Capital Invested:
US$35.0m
Annualized Distribution:
US$5.4m
Distribution collar:
+/- 6%
Year end:
Website:
December 31
www.sandboxww.com
Partner since:
March 2016
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
15
SBI
Business Description:
Founded in 2006, SBI is a US based management consulting firm specializing in sales and
marketing that is dedicated to helping their clients exceed their revenue growth number. SBI uses
the benchmarking method to help clients accelerate their rate of revenue growth. Benchmarking
allows SBI’s clients to leap frog their competitors by getting access to emerging best practices from
the top sales and marketing leaders. SBI believes it is different from other management consulting
firms for 3 reasons: (i) Agilitrust – The SBI delivery methodology involves getting to a working
prototype very quickly and then rapidly iterating from this to a finished solution. SBI offers a much
faster cycle time from problem identification to problem resolution; (ii) Staffing Process – SBI staffs
projects with senior-level executives and former heads of sales and marketing who have real-world
experience, which results
in practical solutions that actually get implemented; and (iii)
Compensations Practices – 30% to 50% of every SBI employee’s compensation package is tied to
a bonus that is entirely based on client feedback and overall impact, which naturally fosters client
intimacy. Customers include private equity funds, mid to large regional businesses and Fortune 500
businesses.
Industry:
Business Services: Management Consulting, Sales & Marketing
Capital Invested:
US$85.0m
Annualized Distribution:
US$11.1m
Distribution collar:
+/- 8%
Year end:
Website:
December 31
www.salesbenchmarkindex.com
Partner since:
August 2017
SCR
Business Description:
SCR has been providing mining services in the Northern Ontario region since 1994. SCR offers a
wide variety of surface and subsurface mining, construction, electrical and mechanical services.
SCR is known for their expertise and ability to install, construct, maintain, and recommend the best
and most economical solution for a mining project. The company employs over 250 dedicated
workers during peak times. The company works with large multi-national mining companies as well
as junior producers alike, on a contractual basis.
Industry:
Industrials: Mining services
Capital Invested:
$40.0m
Annualized Distribution:
$5.7m⁽¹⁾
Distribution collar:
+/- 6%
Year end:
Website:
December 31
www.scrmines.com
Partner since:
May 2013
(1) SCR is contractually obligated to pay Alaris $5.66 million in 2018 but currently paying Alaris $100,000 per month ($1.2
million annually) with expectations that this amount will increase throughout the year. The actual amount of distributions
received by Alaris from SCR will likely be less than $5.66 million in 2018.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
16
S.M. Group International
Business Description:
SMi is a privately owned company founded in 1972 which specializes in the delivery of integrated
scientific, engineering and IT solutions dedicated to the areas of buildings, energy, energy efficiency,
environment, industry, infrastructure, natural resources, power, security, telecommunications and
materials testing. Active in more than 30 countries, SMi has over 1,200 professionals and specialists
who are dedicated to delivering innovative and fully integrated solutions. SMi provides its services
to a broad scope of clients including local corporations, multinationals, institutions, as well as
government bodies at every level, including state owned enterprises.
Industry:
Industrials: Engineering and construction services
Capital Invested:
$40.5m (3 tranches)
Annualized Distribution:
$6.0m⁽¹⁾
Distribution collar:
+/- 6%
Year end:
Website:
Partner since:
Partner since:
December 31
www.groupesm.com
November 2013
December 2010
Unify
Business Description:
(1) The distribution from SMi listed in the table is the amount they are contractually obligated to pay Alaris in 2018.
However, SMi is currently not paying Alaris a distribution nor is it expected to be making any distributions for the
foreseeable future.
Founded in 2006, Unify is a management consulting firm that provides companies with local,
customized consulting solutions. Located in Seattle, Washington, Unify employs over 200
experienced consultants that provide consulting solutions across six primary service lines: Business
Intelligence, Business Transformation, Enterprise Resource Planning, Project and Product
Management, Visual Communication and Organizational Change Management. Unify expects
continued growth in the Seattle region, one of the fastest growing markets in the U.S., coupled with
growth opportunities in other identified regions. Unify has been recognized as one of the fasted
growing consulting firms in the U.S. as well as one of Washington’s top workplaces. Customers
include a blend of Fortune 500 companies across a diverse set of industries.
Industry:
Business Services: Management Consulting
Capital Invested:
US$18.0m
Annualized Distribution:
US$2.8m
Distribution collar:
+/- 5%
Year end:
Website:
December 31
https://www.unifyconsulting.com/
Partner since:
October 2016
Note: Please refer to the Annual Information Form dated March 13, 2018 for more information on Private Company
Partners, including, without limitation, how the annualized distribution is calculated.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
17
FINANCIAL HIGHLIGHTS
Full Year 2017 Highlights:
Revenue from Partners of 89 million
Normalized EBITDA to $77 million
Net cash from operating activities of $67 million
Dividends paid of $59 million – full year payout ratio of 87.6%
Per Share Items:
Revenue from Partners of $2.44
Normalized EBITDA of $2.11
Net cash from operating activities of $1.85
Annual dividend of $1.62
Capital Deployment Last 18 Months - $191 million (US$153 million):
New Partners in 2017
US$85.0 million into SBI
US$20.0 million into Accscient
US$6.2 million into ccComm
Follow-on Contributions to Existing Partners in 2017
US$13.5 million into Federal Resources
US$13.0 million into Sandbox
Partner Redemptions in 2017:
US$95.6 million from the full redemption of Alaris’ units in Sequel (IRR of 29% in Canadian dollar terms, 25% US dollar)
US$2.0 million from the partial redemption of DNT’s redeemable units (US$28.0 million of redeemable units and US$40.0
million of permanent units remain)
Subsequent to year end:
Added a new Partner - US$15.0 million contribution into Heritage in January 2018.
Successful conclusion relating to Agility Health, LLC (“Agility”)
o Received US$22.2 million of proceeds for the redemption of all of our units in Agility – an IRR of 25% in Canadian
dollar terms, 18% in US dollars)
o Received US$2.9 million of proceeds for previously unpaid distributions and US$1.6 million of principal and interest
on a loan outstanding.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
18
MANAGEMENT DISCUSSION AND ANALYSIS
For the year ended December 31, 2017
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
19
MANAGEMENT DISCUSSION AND ANALYSIS
This management’s discussion and analysis (“MD&A”) should be read in conjunction with the financial statements for the year ended
December 31, 2017 and December 31, 2016 for Alaris Royalty Corp. (“Alaris” or the “Corporation"). The Corporation’s consolidated
financial statements and the notes thereto have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and are recorded in Canadian dollars. Certain dollar
amounts in the MD&A have been rounded to the nearest thousands of dollars.
This MD&A contains forward-looking statements that are not historical in nature and involve risks and uncertainties. Forward-looking
statements are not guarantees as to the Corporation’s future results since there are inherent difficulties in predicting future results.
Accordingly, actual results could differ materially from those expressed or implied in the forward-looking statements. See "Forward
Looking Statements" for a discussion of the risks, uncertainties and assumptions relating to those statements. Some of the factors
that could cause results or events to differ from current expectations include, but are not limited to, the factors described under "Risks
and Uncertainty". This MD&A also refers to certain non-IFRS measures, including EBITDA, Normalized EBITDA, Earnings Coverage
Ratio, Contracted EBITDA, Annualized Payout Ratio, and Per Share values as well as certain financial covenants defined below to
assist in assessing the Corporation’s financial performance. The terms EBITDA, Normalized EBITDA, Earnings Coverage Ratio,
Contracted EBITDA, Annualized Payout Ratio, Actual Payout Ratio, Tangible Net Worth, Fixed Charge Coverage Ratio and Per
Share values (the “Non-IFRS Measures”) as well as certain financial covenants as defined below are financial measures used in
this MD&A that are not standard measures under IFRS. The Corporation’s method of calculating the Non-IFRS Measures may differ
from the methods used by other issuers. Therefore, the Corporation’s Non-IFRS measures may not be comparable to similar
measures presented by other issuers. See “Results of Operations” for a reconciliation of EBITDA and Normalized EBITDA to
earnings.
EBITDA refers to earnings determined in accordance with IFRS, before depreciation and amortization, net of gain or loss on disposal
of capital assets, interest expense and income tax expense. EBITDA is used by management and many investors to determine the
ability of an issuer to generate cash from operations. Management believes EBITDA is a useful supplemental measure from which
to determine the Corporation’s ability to generate cash available for debt service, working capital, capital expenditures, income taxes
and dividends.
Normalized EBITDA refers to EBITDA excluding items that are non-recurring in nature and is calculated by adjusting for non-
recurring expenses and gains to EBITDA. Management deems non-recurring items to be unusual and/or infrequent items that the
Corporation incurs outside of its common day-to-day operations. For the years ended December 31, 2017 and 2016, the gains on
the redemption of the LifeMark, Solowave, MAHC and Sequel units, the impairment of the KMH and Group SM units, the write off of
the interest on the KMH promissory notes, bad debt expense related to unpaid distributions from Group SM, the impairment and
accretion of the Phoenix secured note, bad debt expense of the Kimco long-term receivable and promissory note, one-time penalties
and fees related to the CRA GST audit (and the subsequent recovered amount) are considered by management to be non-recurring
charges. Foreign exchange realized and unrealized gains and losses are recurring but not considered part of operating results and
excluded from EBITDA on an ongoing basis. Adjusting for these non-recurring items allows management to assess EBITDA from
ongoing operations.
Normalized Earnings refers to earnings excluding items that are non-recurring in nature and is calculated by adjusting for non-
recurring expenses, gains, non-cash unrealized gains and losses on foreign exchange items and the net tax impact of the
adjustments to earnings. Management deems non-recurring items to be unusual and/or infrequent items that the Corporation incurs
outside of its common day-to-day operations. The corresponding tax impact of the all non-recurring items is adjusted in Normalized
Earnings. For the year ended December 31, 2017 and 2016, the gain on the redemption of the LifeMark, Solowave, MAHC and
Sequel units, the impairment of the KMH and Group SM units, the write off of the interest on the KMH promissory notes, bad debt
expense of the Kimco long-term receivable and promissory note, bad debt expense related to unpaid distributions from Group SM,
the impairment and accretion of the Phoenix secured note are considered by management to be non-recurring charges. Foreign
exchange realized and unrealized gains and losses are recurring but not considered part of operating results and excluded from
earnings on an ongoing basis.
Earnings Coverage Ratio refers to the Normalized EBITDA of a Partner divided by such Partner’s sum of debt servicing (interest
and principal), unfunded maintenance capital expenditures and distributions to Alaris.
Per Share values, other than earnings per share, refer to the related financial statement caption as defined under IFRS or related
term as defined herein, divided by the weighted average basic shares outstanding for the period.
Fixed Charge Coverage Ratio refers to EBITDA less unfunded maintenance capital expenditures less income taxes divided by the
sum of interest, debt repayments and distributions to Alaris.
Management Discussion and Analysis (continued)
Contracted EBITDA refers to EBITDA for the previous twelve months excluding proceeds from any disposition of investments and
any distributions accrued and not received but including all projected contracted payments from new and existing investments for
the twelve-month period following the investment date.
Annualized Payout Ratio: Annualized Payout Ratio refers to Alaris’ total annualized dividend per share expected to be paid over
the next twelve months divided by the estimated net cash from operating activities per share Alaris expects to generate over the
same twelve month period (after giving effect to the impact of all information disclosed as of the date of this report).
Actual Payout Ratio: Actual Payout Ratio refers to Alaris’ total cash dividends paid during the period (annually or quarterly) divided
by the actual net cash from operating activities Alaris generated for the period.
Tangible Net Worth refers to the sum of shareholders’ equity less intangibles.
The Non-IFRS measures should only be used in conjunction with the Corporation’s annual audited financial statements, excerpts of
which are available below, complete versions of these statements are available on SEDAR at www.sedar.com.
OVERVIEW
The Corporation earns its revenues by providing capital to private businesses (individually, a “Private Company Partner” and
collectively the “Partners”) in exchange for royalties, preferred distributions and interest (“Distributions”) received in regular monthly
payments that are contractually agreed to between the Corporation and each Private Company Partner. These payments are set for
twelve months at a time and adjusted annually based on the audited performance of each Private Company Partner’s gross revenue,
gross margin, same store sales, or other similar “top-line” performance measure. The Corporation has limited general and
administrative expenses with only fourteen employees.
RESULTS OF OPERATIONS
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Year Ended December 31
Revenue per share
Normalized EBITDA per share
Net cash from operating activities per share
Dividends per share
Basic earnings per share
Fully diluted earnings per share
Normalized basic earnings per share
2017
$2.44
$2.11
$1.85
$1.62
$0.33
$0.32
$1.81
2016
$2.75
$2.40
$2.02
$1.62
$1.83
$1.81
$1.75
% Change
-11.3%
-6.2%
-8.4%
+0.0%
-82.0%
-82.3%
+3.4%
Weighted average basic shares outstanding (000’s)
36,447
36,336
For the year ended December 31, 2017, revenue per share decreased by 11.3% due to a number of successful and profitable partner
redemptions in the past twenty-four months ($17.5 million less revenue in 2017 compared to 2016 for Solowave, MAHC, LifeMark,
Sequel) and the pause or partial payment of distributions from three existing partners (Group SM, Kimco and SCR). These decreases
were partially offset by new partner distributions in 2017 of $12.8 million (Sandbox, MyDyer, Unify (formerly Matisia), SBI, Accscient,
ccComm, and follow on transactions with Sandbox and Federal Resources and higher distributions from positive resets ($3.6 million).
Normalized EBITDA of $2.11 per share decreased by 6.2% due to lower distributions as noted above offset by lower overhead. Net
cash from operating activities was $1.85 per share, a decrease of 8.4% compared to the year ending December 31, 2016. The
decrease is a result of lower distributions as the comparative period included an additional US$3.9 million (approximately CAD$5.3
million and $0.14 per share) of distributions from the MAHC redemption and a larger realized foreign exchange gain, partially offset
by lower overhead. Dividends paid were $1.62 per share during year ended December 31, 2017, an actual payout ratio of 87.6% for
the year.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
21
Management Discussion and Analysis (continued)
Partner Revenue
(000’s)
DNT
Sequel
FED
Planet Fitness
Labstat
Providence
Sandbox
LMS
SBI
Agility Health
Unify (formerly
Matisia)
Accscient
End of the Roll
ccComm
SCR
Group SM
Solowave
Kimco
MAHC
LifeMark Health
Year ended
December
31, 2017
$14,216
12,174
11,074
8,488
7,940
5,843
4,909
4,746
4,642
3,972
3,506
1,926
1,266
883
600
500
-
-
-
-
Year
ended
December
31, 2016
$ 13,921
%
Change
Comment
+2.1%
+6% Gross Revenue in Jan-17, offset by $2M redemption and FX impact
15,937
-23.6%
Redemption of all units in Sept-17
10,122
8,250
+9.4%
+2.9%
+6% Gross Revenue in Jan-17, follow on contribution Apl-16 and Dec-17
+5% same club sales increase Jan-17, offset by FX impact
5,500
+44.4%
Cash flow sweep significantly higher in 2017, max distributions in 2017
4,420
+32.2%
Contribution closed Apl-16
3,507
+40.0%
4,653
+2.0%
Contributions Mar-16, Sept-17 and Dec-17 and +6% reset Jan-17
Gross profit -1% Jan-17, additional contribution of US$4.35M in Mar-16
-
+100.0% Contribution closed Sept-17
4,074
-2.5%
FX impact
835
+319.7% Contribution closed Oct-16
-
+100.0% Contribution closed Jun-17
1,219
+3.9%
3.9% increase in same store sales May-17
-
+100.0% Contribution closed Jan-17, additional contribution of US$2.2M in Aug-17
3,008
6,377
-80.1%
-92.2%
Pause in distributions beginning Jun-16, restarted Jul-17 at $100K per month
6% reduction in reset in Jan-16, only recognizing revenue as received in 2017
5,160
-100.0%
Redeemed in Sept-16
2,816
-100.0%
Stopped monthly accrual Jul-16
7,958
730
-100.0%
-100.0%
Redeemed in Dec-16
Redeemed in Jan-16
$86,684
$ 98,486
-12.0%
Interest & other
2,389
1,556
+53.5%
Increase in Group SM, Kimco and Agility notional oustanding and accretion on long
term prom notes
Total
$89,073
$100,042
-11.0%
Finance costs were $6.6 million compared to $5.9 million in the prior year, an 11.9% increase due to higher interest rates on US and
CDN denominated debt with comparable average debt amounts outstanding (average outstanding debt of $112.2 million for the year
ending December 31, 2017 versus $114.9 million for the comparable year in 2016).
Salaries and benefits were $3.4 million in the year, an increase of 0.3% compared to the prior year. The increase is due to a higher
number of total employees partially offset by lower variable compensation.
Corporate and office expenses were $2.6 million in the year a decrease of -21.2% compared to $3.3 million in the prior year. The
decrease is due to 2016 including $0.7 million of one time penalties and fees related to prior year tax filings and 2017 including the
receipt of contested penalties ($0.4 million) on previous tax filings.
Legal and accounting fees were $2.1 million in the year a decrease of -16.6% compared to $2.5 million in the prior year. The decrease
is due the Corporation incurring lower accounting and advisory fees related to existing partners in 2017.
For the year ended December 31, 2017 the Corporation incurred stock-based compensation expenses of $3.4 million (2016 - $4.3
million) which includes: $2.2 million (non-cash expense) for the RSU Plan expense that is to be amortized over the thirty-six month
vesting year of the plan (2016 - $3.2 million); and $1.2 million (non-cash expense) for the amortization of the fair value of outstanding
stock options (2016 - $1.1 million). The lower stock based compensation is a result of a member of the management team leaving
the Corporation in Q4, 2016, resulting in forfeited options and RSU’s.
The Corporation recorded earnings of $11.9 million, EBITDA of $29.0 million and Normalized EBITDA of $77.0 million for the year
ended December 31, 2017 compared to earnings of $66.6 million, EBITDA of $92.3 million and Normalized EBITDA of $81.8 million
for the year ended December 31, 2016. The -5.9% decrease in Normalized EBITDA is a result of redemptions as discussed above
(LifeMark, Solowave, MAHC and Sequel) and reduced or no distributions from existing partners (SCR, Group SM, Kimco), offset by
distributions from new partners (SBI, Accscient, ccComm, Unify) and follow on transactions with Sandbox and Federal Resources,
net positive resets and lower corporate costs.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
22
Management Discussion and Analysis (continued)
The decrease in earnings is a result of lower revenue (or distribution’s from partners) in 2017, $42.5 million of impairment & other
charges related to Group SM preferred units ($41.0 million) and discount on KMH promissory note ($1.5 million), bad debt expense
on unpaid distributions ($9.8 million), a reserve on the unsecured promissory note ($5.4 million) from Group SM, a $0.5 million bad
debt expense on the SHS promissory note, a $5.1 million reserve on the Phoenix promissory note (a note held by Phoenix Holdings
Limited a company controlled by the former principals of KMH), a $2.6 million reserve on the Kimco long term accounts receivable
and promissory note, and $10.3 million of taxes, partially offset by $26.7 million from the redemption of Sequel Units. The comparable
period included a $20.3 million gain on the redemption of LifeMark, Solowave and MAHC units (including $5.3 million in additional
distributions on redemption), partially offset by a $7.0 million impairment of KMH units and a $2.4 million bad debt related to KMH
distributions and an allowance for Kimco long-term receivable.
The Corporation also normalizes foreign exchange realized and unrealized gains and losses which are recurring but not considered
part of operating results. These included a $1.3 million realized gain on foreign exchange contracts (2016 - $3.5 million gain) and a
$10.6 million loss on non-cash foreign exchange items (2016 - $8.5 million loss). The foreign exchange loss is the impact of the
change in the US exchange rate on the USD loan to the Corporation’s wholly-owned US subsidiary, and the Federal Resources loan
receivable, offset by the changes in the value of outstanding foreign exchange contracts and external US denominated debt.
Reconciliation of Net Income to EBITDA
(thousands)
Earnings
Year ended December 31, 2017
Year ended December 31, 2016
$ 11,882
$ 66,553
Adjustments to Net Income:
Amortization and depreciation
Finance costs
Income tax expense
EBITDA
Normalizing Adjustments
Gain on disposal of investment
Impairment and other charges
Bad Debt Expense
Distributions received on redemption (MAHC)
Unrealized (gain) / loss on foreign exchange
Realized (gain) on foreign exchange
Accretion of prom. notes & other receivables
Penalties and Fees
Normalized EBITDA
268
6,582
10,274
29,006
(26,575)
42,491
23,430
-
10,649
(1,370)
(150)
(502)
$ 76,979
279
5,882
19,589
92,303
(20,271)
7,000
2,442
(5,318)
8,502
(3,473)
-
-
$ 81,842
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
23
Due to the number and magnitude of the non-recurring items, the Corporation is also showing a Normalized Earnings in the following
table:
Management Discussion and Analysis (continued)
Normalized Earnings
Year ended December 31
in thousands except on per share basis
Earnings before the undernoted
Finance costs
Impairment and other charges
Bad debt expense & reserve
(Gain)/Loss on redemption
Normalized Earnings pre-tax
Total income taxes
Tax normalizations for above items
Normalized Earnings
Normalized Earnings per share
Basic
Fully diluted
2017
$ 39,386
2016
$ 100,526
(6,582)
42,491
23,430
(26,575)
$ 72,150
(5,882)
7,000
2,442
(20,271)
$ 83,816
(10,274)
(19,589)
4,246
(509)
$ 66,122
$ 63,718
$1.81
$1.80
$1.75
$1.74
Quarter Ended December 31, 2017 Compared to Quarter Ended December 31, 2016
Three Months Ended December 31
Revenue per share
Normalized EBITDA per share
Net cash from operating activities per share
Dividends per share
Basic earnings per share
Fully diluted earnings per share
Normalized basic earnings per share
2017
$2.44
$2.11
$1.85
$1.62
$0.33
$0.32
$1.81
2016 % Change
$2.75
$2.25
$2.02
$1.62
$1.83
$1.81
$1.75
-11.3%
-6.2%
-8.4%
+0.0%
-82.0%
-82.3%
+3.4%
Weighted average basic shares outstanding (000’s)
36,447
36,336
For the three months ended December 31, 2017, revenue per share decreased by 21.3% due to the $5.3 million of additional
distributions received on the redemption of MAHC that occurred late in the prior year period. Excluding the excess MAHC
distributions, revenue per share was slightly higher (+0.5%) than the comparable three month period as new partner distributions in
2017 of $4.6 million (SBI, Accscient, ccComm), follow on transactions with (Sandbox and Federal Resources) and higher
distributions from positive resets was fully offset by the Sequel ($4.0 million) and MAHC redemption ($0.9 million of normal course
distributions) and the recognition of distributions as received from Group SM for an impact of $1.5 million.
Normalized EBITDA of $0.51 per share decreased by 5.6% due to lower distributions as noted above and realized gains offset by
lower overhead. Net cash from operating activities was $0.55 per share, a decrease of 36.0% compared to the year ending December
31, 2017. The decrease is a result of lower distributions and a realized gain as the comparative period included an additional US$3.9
million (approximately CAD$5.3 million and $0.14 per share) of distributions from the MAHC redemption and a realized foreign
exchange gain of $5.2 million, partially offset by lower overhead. Dividends paid were $0.405 per share during the three months
ended December 31, 2017, an actual payout ratio of 76.6%, lower than expected due to the timing of changes in working capital.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
24
Management Discussion and Analysis (continued)
Quarter
ended
December
31, 2017
$ 3,509
Quarter
ended
December
31, 2016
$-
%
Change
Comment
+100.0% Contribution closed Aug-17
3,434
2,783
2,078
1,985
1,491
1,429
1,181
971
953
857
321
300
290
-
-
-
3,505
2,621
2,087
-2.0% Gross revenue reset +6% in Jan-17, offset by US$2M redemption, impact of FX
+6.2% Gross revenue reset +6% in Jan-17 and additional $6.9M contribution in Apl-16
-0.4% Same club sales reset +5% in Jan-17 and impact of FX
1,025
+93.7% Gross revenue reset +6% in Jan-17 and significant increase in cash flow sweep
1,100
+35.5% Max reset of +6% Jan-17 and additional contribution in Sept-17 and impact of FX
1,502
1,188
1,021
-4.9%
Impact of FX
-0.6% Gross profit -1.6% Jan-17, and impact of FX
-4.9%
Impact of FX
-
+100.0% Contribution closed Jun-17
835
+2.6% Contribution closed Oct-16
292
+10.0% Estimate flat same store sales May-17 updated for +3.3% in Q4-17
-
-
+100.0% Pause in distributions Jun-16, restarting partial distributions Jul-17
+100.0% Contribution closed Jan-17, follow on contribution in Aug-17
1,594
-100.0% Recording distributions as received
4,085
-100.0% Same program sales increase Jul-17 and impact of FX
Partner Revenue
(000’s)
SBI
DNT
FED
Planet Fitness
Labstat
Sandbox
Providence
LMS
Agility Health
Accscient
Unify (formerly
Matisia)
End of the Roll
SCR
ccComm
Group SM
Sequel
MAHC
$ 21,582
$ 26,838
5,982
-100.0% Redemption of all units in Dec-16
-19.6%
Interest & other
56
430
-87.1%
Interest on promissory notes, offset by negative accretion during the period
Total
$ 21,638
$ 27,268
-20.6%
Finance costs were $1.6 million compared to $1.5 million in the prior year, a 6.2% increase was due to higher interest rates on US and
CDN denominated debt and a higher average debt amount outstanding (average outstanding debt of $127.3 million for the three
months ending December 31, 2017 versus to $121.7 million for the comparable period in 2016).
Salaries and benefits were $0.6 million in the period, an increase of 5.0% compared to the prior year period. The increase is due to
slightly higher base compensation.
Corporate and office were $0.7 million in the period an increase of 12.5% compared to the comparable three month period. The
increase is due to higher travel costs for new and existing investments.
Legal and accounting fees were $0.7 million in the period, an increase of 1.2% compared to the comparable three month period. The
increase is due to the Corporation incurring higher corporate legal fees regarding the new banking facility, partially offset by less fees
related to existing partners.
For the three months ended December 31, 2017 the Corporation incurred stock-based compensation expenses of $0.8 million (2016
- $0.5 million) which includes: $0.5 million (non-cash expense) for the RSU Plan expense that is to be amortized over the thirty-six
month vesting period of the plan (2016 - $0.5 million); and $0.3 million (non-cash expense) for the amortization of the fair value of
outstanding stock options (2016 - $0.3 million).
The Corporation recorded earnings of $11.4 million, EBITDA of $8.1 million and Normalized EBITDA of $18.5 million for the three
months ended December 31, 2017 compared to earnings of $21.6 million, EBITDA of $28.4 million and Normalized EBITDA of $19.6
million for the three months ended December 31, 2016. The -5.2% decrease in Normalized EBITDA is a result of lower revenue and
to slightly higher overhead. Distributions excluding those received on redemption from MAHC were consistent with the comparative
period.
The decrease in earnings is a result of lower distributions, a lower foreign exchange gain, and a $13.6 million bad debt expense on
promissory notes outstanding (Group SM unsecured note - $5.4 million, SHS promissory note - $0.5 million, Phoenix promissory note
- $5.1 million and Kimco long-term receivable - $1.9 million and Kimco promissory note – $0.7 million) partially offset by income taxes
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
25
Management Discussion and Analysis (continued)
increasing earnings by $5.0 million in the three months ended December 31, 2017 compared to a $5.2 million tax expense in the
comparable period.
The Corporation also normalizes realized and unrealized foreign exchange gains and losses which are recurring but not considered
part of operating results. These included a $0.5 million realized gain on foreign exchange contracts (2016 - $5.2 million gain) and a
$2.0 million gain on non-cash foreign exchange items, (2016 - $0.2 million loss). The foreign exchange gain is the impact of the change
in the US exchange rate on the USD loan to the Corporation’s wholly-owned US subsidiary, and the Federal Resources loan receivable
offset by the changes in the value of outstanding foreign exchange contracts, and external US denominated debt.
Reconciliation of Net Income to EBITDA
(thousands)
Three Months Ended
December 31, 2017
Three Months Ended
December 31, 2016
Earnings
Adjustments to Net Income:
Amortization and depreciation
Finance costs
Income tax expense
EBITDA
Normalizing Adjustments
Gain on disposal of investment
Bad Debt Expense
Distributions received on redemption (MAHC)
Unrealized (gain) / loss on foreign exchange
Realized (gain) on foreign exchange
Penalties and Fees
Accretion of prom. notes & other receivables
$ 11,410
$ 21,645
67
1,575
(4,964)
$ 8,088
-
13,617
-
(2,081)
(852)
(502)
252
71
1,483
5,249
$ 28,448
(94)
1,589
(5,318)
149
(5,227)
-
-
Normalized EBITDA
$ 18,523
$ 19,547
Due to the number and magnitude of the non-recurring items, the Corporation is also showing a Normalized Earnings in the following
table:
Normalized Earnings
Three months ended December 31
in thousands except on per share basis
Earnings before the undernoted
Finance costs
Bad debt expense & reserve
(Gain)/Loss on redemption
Normalized Earnings pre-tax
Total income taxes
Tax normalizations for above items
Normalized Earnings
Normalized Earnings per share
Basic
Fully diluted
2017
$ 5,940
(1,575)
13,617
-
$ 17,982
4,964
(1,911)
$ 21,035
$0.58
$0.57
2016
$ 28,526
(1,483)
1,589
(94)
$ 28,538
(5,249)
(67)
$ 23,222
$0.64
$0.63
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
26
Management Discussion and Analysis (continued)
PRIVATE COMPANY PARTNER UPDATE
The Corporation’s interest in each of the Partners consists of a preferred partnership interest, preferred LLC or other equity interest, a
loan, or ownership of intellectual property with a return based on distributions or royalties that are adjusted annually based on a formula
linked to a top-line metric (i.e. sales, gross profit, same store sales) rather than a residual equity interest in the net earnings of such
entities. The Corporation has no involvement in the day to day business of each Private Company Partner and has no rights to
participate in management decisions. The Corporation does not have any significant influence over any of the Partners nor does it
have the ability to exercise control over such Partners except in limited situations of uncured events of default. Instead, the Corporation
has certain restrictive covenants in place designed to protect the ongoing payment of the distributions payable to Alaris. In addition,
the Partners are required to obtain the consent of Alaris in certain circumstances prior to entering into a material transaction or other
significant matters outside the normal course of business. Such transactions include, without limitation, acquisitions & divestitures,
major capital expenditures, change of control and incurring additional indebtedness.
For the revenues received in USD, the Corporation has purchased monthly forward contracts locking in approximately 50-75% of the
foreign exchange rate for the next twelve months and approximately 25-50% of the following twelve months USD distributions.
The following is a summary of each of the Partners recent financial results. Included in this summary will be a comment on the Partners’
Earnings Coverage Ratio (“ECR”). Because this information from time to time is based on unaudited information provided by Private
Company Partner management, each Earnings Coverage Ratio, based on the most current information for the trailing twelve months,
will be identified as part of a range. The ranges are: less than 1.0x, 1.0x to 1.2x, 1.2x to 1.5x, 1.5x to 2.0x and greater than 2.0x. A
result greater than 1 is considered appropriate and the higher the number is, the better the ratio.
Additionally, the Corporation has disclosed the percentage of current annualized revenue based on the expected distributions from
each Partner for the next twelve months based on information at March 5, 2018. Interest from promissory notes is 1.6% of total revenue
from Partners.
Accscient
Description
Contribution
History
4.0% of revenue
Accscient provides IT Staffing, Consulting, and Outsourcing services and specializes in Digital
Infrastructure Management, Enterprise Resource Planning, Business Intelligence and Database
Administration. Through its operating businesses (i) Norwin Technologies, (ii) Premier IT Solutions and
(iii) Appridat Solutions, Accscient provides these services to its diverse customer base by leveraging a
global delivery platform, led by a seasoned management team, to ensure reliable, proven and
innovative solutions.
Alaris contributed US$20.0 million (the “Accscient Contribution”) into Accscient LLC (“Accscient”) in
exchange for an annualized distribution of US$3.0 million (the “Accscient Distribution”). The Accscient
Contribution is made up of US$14.0 million of permanent units (the “Permanent Units”) as well as
US$6.0 million of redeemable units (the “Redeemable Units”). The Redeemable Units can be
redeemed at par at any time up to the third anniversary following the closing of the Accscient
Contribution at Accscient’s discretion. After the third anniversary the Redeemable Units will have the
same repurchase metrics as the Permanent Units.
Performance
Based on unaudited statements provided by management for the year ended December 31, 2017,
revenue and EBITDA are consistent with the comparable period.
The Accscient Distribution will be reset for the first time on January 1, 2019 based on the percentage
change in gross profit from 2018 vs 2017 and has a collar of plus or minus 5%.
Fair Value
ECR
The fair value of the Accscient units will fluctuate each quarter with foreign exchange rates but the
underlying valuation of the Accscient units is evaluated each quarter. The fair value of the Accscient
units remains at US$20.0 million at December 31, 2017.
The Earnings Coverage Ratio declined slightly from last quarter and remains between 1.2x and 1.5x,
unchanged from the previous period and the date of investment.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
27
Agility Health
Description
Contribution
History
Performance
Fair Value
ccComm
Description
Contribution
History
Performance
Management Discussion and Analysis (continued)
4.1% of revenue
Agility Health is a health care company specializing in providing physical and occupational therapy and
speech pathology services to health care providers and employers through 37 hospital clinics, 34 long
term care facilities and 70 outpatient clinics across the United States.
Since December 2012, the Corporation has purchased preferred LLC units in Agility Health, LLC
(“Agility”) for an aggregate acquisition cost of US$20.1 million. Annual growth and decline in Agility’s
distributions to Alaris is capped at 6% and is based on the change in same clinic sales.
Subsequent to December 31, 2017, the Corporation successfully redeemed all of its units in Agility as
a result of the sale of Agility to a third party. Total consideration to Alaris was US$26.7 million which
consists of US$22.23 million for redemption of preferred units (US$2.2 million premium over cost base),
US$2.58 million of accrued distributions and US$1.58 million of outstanding promissory notes and
interest. See page 20 for additional details.
The fair value of the Agility units will fluctuate each quarter with foreign exchange rates but the
underlying valuation of the Agility units is evaluated each quarter. The fair value of the Agility units was
increased by US$0.7 million from US$20.1 million to US$20.8 million during the three month period to
reflect the redemption amount received subsequent to December 31, 2017.
1.2% of revenue
ccComm is a Sprint retailer with over 65 locations throughout the Northwest and Central U.S. ccComm
is expected to use the partnership to pursue a roll-up strategy in which Salaris expects to contribute
additional capital to support ccComm’s growth program.
In January 2017, the Corporation purchased preferred units in ccComm for US$4 million (CAD$5.4
million). The Corporation contributed an additional US$2.2 million (CAD$2.75 million) in August 2017
to complete an acquisition of additional Sprint retail locations.
ccComm revenue and EBITDA have increased in the year ended December 31, 2017 compared to the
same period in 2016.
The combined annual distribution (currently US$0.93 million) will grow or decline based on net revenue
to a cap of +/- 6%. Based on unaudited results, the Corporation expects the ccComm distribution to
reset +6%, effective January 1, 2018.
Fair Value
ECR
The fair value of the units are unchanged with their original contribution amount. The fair value of the
ccComm units will fluctuate each quarter with foreign exchange rates but the underlying valuation of
the ccComm units is evaluated each quarter.
The Earnings Coverage Ratio at December 31, 2017 has increased from last quarter and is now over
2.0x.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
28
Management Discussion and Analysis (continued)
DNT Construction
14.7% of revenue
Description
Contribution
History
DNT specializes in turnkey civil construction services to residential, commercial and municipal end
markets including excavation, the installation of wet and dry utilities such as electrical, gas, sewage
and water as well as paving and the building of retaining walls. With its head office in Austin, Texas,
DNT employs over 650 people during peak season and is one of the largest service providers of its
kind in the Austin market while also holding significant market share in San Antonio. These markets
are attractive, fast growing and have diverse economies with major industry employers including
healthcare, government, technology and education. Both Austin and San Antonio have strong
employment rates and significant job growth at rates above the U.S. National average.
In June 2015, the Corporation purchased preferred units in DNT, for an aggregate acquisition cost of
US$70 million. US$30 million of the preferred units were redeemable at par with a mandatory annual
redemption amount based on a predetermined formula commencing in 2017. During the year ended
December 31, 2017, DNT redeemed US$2 million of the redeemable units as per a formula in the
operating agreement. The Redeemable Units can be redeemed at par at any time up to the fifth
anniversary following the closing of the DNT Contribution at DNT’s discretion. After the fifth anniversary
the Redeemable Units will have the same repurchase metrics as the Permanent Units.
Performance
Based on unaudited financial statements provided by management for the year ended December 31,
2017, DNT’s revenue is ahead of the prior year and EBITDA is behind the comparable period.
Annual growth or decline in DNT’s annualized distributions to Alaris is capped at 6% and is based on
gross revenues. Based on unaudited results, the Corporation expects the 2018 DNT distribution to
reset +6%.
Fair Value
ECR
There was no change in the fair value of the DNT units during the year ending December 31, 2017.
The fair value of the DNT units in Canadian dollars will fluctuate each quarter with foreign exchange
rates.
The Earnings Coverage Ratio has decreased slightly since last quarter and is now just below 1.5x
(between 1.2x and 1.5x).
End of the Roll
Description
Contribution
History
Performance
Fair Value
ECR
1.3% of revenue
End of the Roll is a Canada-wide retail flooring franchise system and completed its twelfth fiscal year
as an Alaris partner on April 30, 2017. The renovation industry has been relatively stable year over
year and End of the Roll’s results reflect that.
The Corporation’s original contribution of $7.2 million in End of the Roll was in 2005. Same store sales
is the top-line performance metric on which the annual payments to the Corporation are reset.
Based on unaudited financial statements for the seven months ended November 30, 2017 (year end of
April 30th), revenue and EBITDA are both exceeding the comparable period.
Based on audited financial statements for the year ending April 30, 2017, End of the Roll revenue and
EBITDA increased compared to the previous year. This resulted in a +3.2% positive reset.
The End of the Roll transaction is recorded as an intangible asset, amortized over 80 years and is
reviewed for impairment when triggers exist. No impairment triggers exist at this time.
The Earnings Coverage Ratio for End of the Roll improved since the last quarter and continues to be
well over 2.0x.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
29
Management Discussion and Analysis (continued)
Federal Resources
13.9% of revenue
Description
Contribution
History
Federal Resources is a leading value-added provider of mission critical products and solutions to
defense, first responder, homeland security and maritime end users in the United States. In particular,
Federal Resources specializes in the provision of detection and protection equipment to end-users
dealing with chemical biological, radiological, nuclear and explosive ("CBRNE") threats.
In June 2015, the Corporation announced a US$7.0 million subscription for preferred stock (the “FED
Units”) of Federal Resources and a US$40 million secured subordinated loan (the “FED Loan”) to
Federal Resources, for an aggregate cost of US$47 million. In exchange for the FED Units and Loan,
the Corporation was initially entitled to a combined US$7.1 million of annual distributions.
In April, 2016 Alaris made an additional contribution of US$6.5 million in exchange for preferred units
in a subsidiary of Federal Resources providing an annual distribution of US$0.9 million, which will be
adjustable starting in 2018, subject to the same +/-6% collar.
In December 2017, Alaris made a third contribution of US$13.5 million in exchange for preferred units
in a subsidiary of Federal Resources providing an annual distribution of US$1.8 million, which will be
adjustable in 2019, subject to the same +/-6% collar and a no call period of 18 months. The contribution
was used to fund an acquisition.
Performance
Based on unaudited financial statements provided by management for the year ended December 31,
2017, Federal Resource’s revenue and EBITDA have increased +6% compared to 2016.
Commencing in January, 2017, Alaris became entitled to receive an annual preferred dividend based
on an increase to Federal Resources' gross revenues (subject to a +/-6% collar and based on a
predetermined formula). Based on unaudited results, the Corporation expects the FED distribution is
expected to reset +6% in 2018.
Fair Value
The FED Loan was made in June 2015 and the fair value of the FED Loan equals the face value and
fair value of US$40 million. During the year ending December 31, 2017, the fair value of the FED units
increased by US$2.64 million (US$1.3 million for the three months ended December 31, 2017) as
expectations for future distributions increased. The fair value of the FED Units and the FED Loan in
Canadian dollars will fluctuate each quarter with foreign exchange rates.
ECR
The Earnings Coverage Ratio for FR has increased slightly since the last quarter and remains between
1.2x and 1.5x.
Kimco
Description
Contribution
History
0.0% of revenue
Kimco has been providing commercial janitorial services since the 1970s. The majority of Kimco’s
services are generated under long-term contracts (generally 1-3 years) to more than 375 customers,
which range in size from multi-location national customers to regional single-site customers.
In June 2014, the Corporation purchased preferred units in Kimco for an aggregate acquisition cost of
US$29.2 million. The Corporation purchased additional preferred units for US$3 million in December
2015 and US$2 million in November 2016. Annual growth or decline in Kimco`s annualized distributions
to Alaris is capped at 6% and is based on gross revenue. The Corporation contributed an additional
US$4 million for the year ended December 31, 2017, by way of an unsecured promissory note (“Kimco
Prom Note”), to reduce Kimco’s total senior debt outstanding. Interest of 8% is being paid on a monthly
basis on the Kimco Prom Note.
Performance
As disclosed previously, Kimco was in breach of certain financial covenants with its senior lenders
which resulted in the distribution to Alaris being suspended in July 2015. At December 31, 2016, US$4.4
million of unpaid Kimco distributions that Alaris expects to eventually collect were moved from trade
and other receivables into long-term promissory notes and other receivables. The Corporation believes
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
30
Management Discussion and Analysis (continued)
the repayment of this amount over the long-term is reasonably assured. Kimco management has made
significant improvements in the company’s cost structure in order to improve cash flow management.
Subsequent to December 31, 2017, Kimco is in the process of replacing its senior lender with a new
bank paving the way to the restart of some level of distributions in 2018. As part of the refinancing the
Corporation is expected to replace US$6 million of subordinated debt in Kimco, paying cash interest of
12% interest per annum.
During the current year, Kimco completed a transaction with Alaris’ support that saw the common equity
owned by previous management sold to the group that was brought in to oversee a turnaround of the
business, a positive indication of the long-term prospects of the business.
Based on unaudited financial statements provided by Kimco management, for the year ended
December 31, 2017 revenue is consistent with prior year and EBITDA is ahead of the comparable
period due to cost efficiencies implemented by the new management group.
Fair Value
ECR
The fair value of the Kimco units in Canadian dollars will fluctuate each quarter with foreign exchange
rates but the underlying fair value will be evaluated each quarter in USD. The fair value of the Kimco
units are unchanged for the year ended December 31, 2017.
The Earnings Coverage Ratio for Kimco has improved since last quarter but remains below 1.0x based
on the last twelve months (subsequent to management changes) when considering all distributions
owed to Alaris.
Labstat International
8.6% of revenue
Description
Contribution
History
Performance
Labstat is a global leader in regulation-driven analysis of tobacco smoke and products as well as
deemed tobacco products such as electronic cigarettes.
The Corporation purchased partnership units in Labstat International, ULC (“Labstat”) for an aggregate
acquisition cost of $47.2 million over two tranches. Annual growth and decline in Labstat’s distributions
to Alaris are capped at 6% and is based on the change in gross revenues.
In February 2014, Alaris agreed to temporarily restructure the form of its distributions, reducing the fixed
portion to 7.50% on all preferred equity contributed with a variable portion in the form of a cash sweep
up to the maximum that would have been paid under the original agreement provided certain financial
covenants and performance targets continued to be met. In July 2017, the arrangement for modified
distributions was extended to December 31, 2017 with a higher fixed monthly payment ($350 thousand
per month compared to the previous $285 thousand per month) and a quarterly catch up of the variable
portion compared to an annual catch up under the previous arrangement.
Based on unaudited financial statements prepared by management for the year ended December 31,
2017, revenue and EBITDA are both considerably ahead of the comparable period. The Corporation
has accrued total distributions from Labstat of $7.94 million for 2017. The $4.2 million accrual for the
cash flow sweep earned to date in 2017 is expected to be received in April 2018. The increase in
revenue resulted in a positive +6% reset increasing 2018 distribution to $8.4 million to be received in
equal monthly installments.
Fair Value
ECR
During the year ended December 31, 2017, the fair value of the Labstat units was increased by $12.1
million as the Corporation adjusted the 2017 distribution to the full $7.9 million compared to the original
forecast of $6.5 million, which also increased our expectation of distributions in future periods.
The Earnings Coverage Ratio has increased significantly since last quarter and is now in the 1.5x to
2.0x range and includes the full distributions owed to the Corporation.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
31
Management Discussion and Analysis (continued)
LMS Reinforcing Steel Group
5.0% of revenue
Description
Contribution
History
Performance
Fair Value
LMS is a western Canadian concrete reinforcing steel fabricator and installer with operations in British
Columbia, Alberta and Southern California.
The Corporation’s original contribution into LMS was in 2007 subsequent to which it has since
contributed a total of $54 million. The Corporation completed a follow on contribution in 2016 (to a U.S.
affiliate) of US$4.35 million to help LMS fund an acquisition in a new market where they have similar
customers. Total gross profit is the reset performance metric on which the annual distributions to the
Corporation are reset. A portion of the annual distributions from LMS reset on January 1st and the
remainder on April 1st based on the December year end results from the previous year.
Based on unaudited financial statements prepared by management for the year ended December 31,
2017, revenue is slightly ahead with EBITDA slightly trailing the comparable period.
The fair value of the Canadian LMS units were increased by $1.0 million due to a better than expected
reset for 2018. Earlier in the year the fair value of the units were decreased by $875 thousand due to
the 2017 distributions resetting -1.2% compared to flat as originally expected. The LMS US units’ fair
value remain unchanged at US$4.35 million at December 31, 2017.
ECR
The Earnings Coverage Ratio for LMS is consistent with last quarter and remains at the high end of the
range between 1.0x and 1.2x.
PF Growth Partners
9.5% of revenue
Description
Contribution
History
Performance
Fair Value
Planet Fitness, through its affiliates, operates over 55 fitness clubs in Maryland, Tennessee, Florida
and Washington (as of December 31, 2017) as a franchisee of Planet Fitness®. Planet Fitness has
grown to become one of the top 3 largest non-corporate affiliated franchisees in the Planet Fitness®
system.
In November 2014, the Corporation purchased preferred units in Planet Fitness, for an aggregate
acquisition cost of US$35 million. In July 2015, the Corporation purchased an additional US$5 million
of preferred units. Annual growth or decline in Planet Fitness’ annualized distribution is capped at 5%
and is based on same club sales.
Based on unaudited financial statements provided by management for the year ended December 31,
2017, Planet Fitness’ revenue and EBITDA are both considerably ahead of the prior year due to organic
growth of their existing clubs.
Based on unaudited results, the Corporation expects the 2018 Planet Fitness distribution to reset +5%
effective January 1, 2018.
The fair value of the Planet Fitness units increased by US$0.7 million for the three months ended
December 31, 2017 for a total of US$1.2 million in the year ended December 31, 2017 as expectations
for future distributions continued to increase. The fair value of the Planet Fitness units in Canadian
dollars will fluctuate each quarter with foreign exchange rates.
ECR
The Earnings Coverage Ratio for Planet Fitness is consistent with last quarter and remains above 2.0x.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
32
Management Discussion and Analysis (continued)
Providence Industries
6.3% of revenue
Description
Contribution
History
Performance
Fair Value
Providence is a leading provider of design, engineering, development, manufacturing and sourcing
services for international apparel companies and retailers. The Company utilizes its extensive global
network of sourcing and manufacturing partners to provide value-added sourcing excellence to
customers, combined with rapid speed to market. In addition, Providence’s unique design expertise
and focus on innovation enables customers to remain at the forefront of evolving fashion trends.
In April 2015, the Corporation contributed US$30.0 million to Providence. Annual growth or decline in
Providence’s annualized distributions of US$4.5 million to Alaris is capped at 5% and is based on the
change in same customer sales.
Based on unaudited financial statements provided by management for the year ended December 31,
2017, Providence’s revenue and EBITDA are both significantly ahead of the prior year, resulting in a
maximum reset of +5% beginning January 1, 2018.
The fair value of the Providence units increased by US$0.5 million during the three month period ending
December 21, 2017, for a total increase of US$2.0 million for the year ended December 31, 2017 as
expectations for future distributions have continued to increased. The fair value of the Providence units
in Canadian dollars will fluctuate each quarter with foreign exchange rates.
ECR
The earnings coverage ratio for Providence has decreased slightly since last quarter and remains well
over 2.0x.
Sandbox
Description
Contribution
History
Performance
Fair Value
7.4% of revenue
Sandbox offers a wide range of marketing and advertising services including strategic marketing and
planning, creative development for all media and digital strategy solutions including CRM and data
analytics for clients in a variety of industries within the US and Canada. Sandbox has decades of proven
results and is owned and managed by highly experienced advertising professionals with global
experience. Sandbox focuses on serving clients primarily in highly specialized industries such as life
sciences, agriculture and financial services.
In March 2016, the Corporation announced the purchase of preferred units in Sandbox for an aggregate
acquisition cost of US$22 million in exchange for US$3.3 million of initial distributions. The Corporation
contributed an additional US$6.0 million in September 2017 to finance an acquisition completed by
Sandbox and an a further US$7.0 million in December 2017 to fund a performance earn out, in
exchange for a combined distribution of US$1.9 million. Annual growth or decline in Sandbox’s
annualized distributions of US$5.4 million to Alaris is capped at 6% and is based on the change in net
revenue.
Based on unaudited financial statements provided by management for the year ended December 31,
2017, revenue and EBITDA are both ahead of the comparable period. Based on unaudited results, the
Corporation expects the 2018 Sandbox distribution to reset +6%.
The fair value of the Sandbox units increased by US$0.2 million during the three month period ending
December 21, 2017, for a total increase of US$1.2 million for the year ended December 31, 2017 as
expectations for future distributions have continued to increased. The fair value of the Sandbox units in
Canadian dollars will fluctuate each quarter with foreign exchange rates.
ECR
The Earnings Coverage Ratio has decreased slightly since last quarter and is now between 1.2x and
1.5x.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
33
SCR Mine Services
1.2% of revenue
Management Discussion and Analysis (continued)
Description
Contribution
History
Performance
Fair Value
ECR
SBI
Description
Contribution
History
SCR provides mining, surface and underground construction, electrical and mechanical services to the
Canadian mining industry.
In May 2013, the Corporation purchased partnership units in SCR Mining and Tunneling, LP (“SCR”)
for an aggregate acquisition cost of $40 million. Annual growth or decline in SCR’s distributions to Alaris
is capped at 6% and are based on net revenue.
Based on unaudited financial statements provided by management for the year ended December 31,
2017, SCR’s revenue and EBITDA has improved significantly versus the comparable twelve month
period. SCR has significant cash on its balance sheet to invest in capex and working capital as the
business continues to rebound.
For 2017, SCR restarted distributions of $100 thousand per month beginning July 2017 ($100 thousand
distribution received for each month from July to December 2017). The Corporation intends to amend
the agreement with SCR to include a fixed portion of $100 thousand per month and a variable format
based on available free cash flow with the ability to catch up previously unpaid distributions; the exact
structure and terms of those amendments are still being finalized.
The fair value of the SCR units were decreased by $4.29 million during the year ended December 31,
2017 as expectations for the timing to return to full distributions has been pushed out but results have
continued to improve.
The Earnings Coverage Ratio for SCR improved since the last quarter and remains below 1.0x when
considering full distributions but at the current distribution rate of $1.2 million the Earnings Coverage
Ratio is between 1.5x and 2.0x.
14.7% of revenue
SBI is a management consulting firm specializing in sales and marketing that is dedicated to helping
companies reach their sales objectives. SBI conducts in-depth market research and partners with
business leaders to develop strategies that enhance performance and drive results. Through evidence-
based methods, SBI creates actionable procedures that, once embraced and adopted, result in lasting
success.
In August 2017, the Corporation contributed US$85.0 million in SBI, in return for an annualized
distribution of US$11.05 million. The distribution will reset based on gross revenue with a cap of +/- 8%,
with the first reset in January 2019. The SBI Contribution is made up of US$75.0 million of permanent
units (the “Permanent Units”) as well as US$10.0 million of redeemable units (the “Redeemable Units”).
The Redeemable Units can be redeemed at par at any time up to the third anniversary following the
closing of the SBI Contribution at SBI’s discretion. After the third anniversary the Redeemable Units will
have the same repurchase metrics as the Permanent Units.
Performance
Based on unaudited information provided by management for the year ended December 31, 2017,
revenues and EBITDA are consistent with the prior year.
Fair Value
ECR
The fair value of the SBI units remained unchanged from the contributed amount. The fair value of the
SBI units in Canadian dollars will fluctuate each quarter with foreign exchange rates.
The Earnings Coverage Ratio for SBI is consistent with the time of investment and is between 1.2x and
1.5x based on actual result since the August 31, 2017 contribution.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
34
SM Group
Description
Contribution
History
Management Discussion and Analysis (continued)
0.0% of revenue
Group SM is a privately owned company founded in 1972 which specializes in the delivery of integrated
scientific, engineering and IT solutions dedicated to the areas of buildings, energy, energy efficiency,
environment, industry, infrastructure, natural resources, power, security, telecommunications and
materials testing.
Since November 2013, the Corporation has purchased partnership units in SM Group International, LP
(“Group SM”) for an aggregate acquisition cost of $40.5 million. Annual growth or decline in Group SM’s
distributions to Alaris is capped at 6% and is based on gross revenue. Since June 2015, the Corporation
has also loaned $17 million of unsecured promissory notes out of a maximum $17 million demand
facility as at December 31, 2017. During the year ended December 31, 2017, an additional $10 million
of secured promissory notes was provided to Group SM to provide liquidity in lieu of a senior revolving
credit facility, the Corporation determined that providing the revolving facility was beneficial to Group
SM as opposed to introducing another new external senior debt provider prior to the resolution of the
international dispute. The $10 million has first secured position at Group SM with respect to accounts
receivable and collectability is not a concern.
Performance
Based on unaudited financial statements for the year ending December 31, 2017, Group SM’s revenue
and EBITDA were both down versus the comparable period.
Group SM was in breach of certain financial covenants and its senior lender suspended the monthly
distribution to Alaris beginning in Q3 2015 continuing until March 31, 2017 when the senior lender was
replaced with a new lender. Until further notice, the Corporation will record distributions only as
received, with $500 thousand received during 2017 and nothing received in the last six months of 2017.
The Corporation is working with Group SM management on a long-term plan that will ensure the
business can continue to provide services to its customers without interruption. The Corporation will
continue to pursue all that is owed to the Corporation, and a strategic process is underway, see page
21 for additional information.
During the year ended December 31, 2017, the Corporation collected from Group SM $1.5 million of
interest on the unsecured promissory notes representing all interest owed up to December 31, 2016.
Interest is current on the secured promissory note.
Fair Value
ECR
As discussed above, the fair value of the Group SM units was reduced to nil during the year ended
December 31, 2017, and the amounts were charged to Impairment and other charges on the
Corporation’s income statement.
The Earnings Coverage Ratio for Group SM is below 1.0x when considering the distributions that should
have been paid to Alaris, consistent with the previous quarter.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
35
Management Discussion and Analysis (continued)
Unify (formally referred to as Matisia)
3.6% of revenue
Description
Contribution
History
Matisia is a Seattle, Washington-based management consulting firm that works with companies to
provide innovative, customized consulting solutions across four primary service lines: Business
Intelligence, Enterprise Resource Planning Services, Project Leadership & Product Management,
and Organizational Change Management.
In October 2016, Salaris USA (wholly owned subsidiary of Alaris USA Inc.) made a contribution of
US$18.0 million (comprised of US$12 million of permanent units and US$6 million of redeemable
units) to Unify LLC (the “Unify Contribution”) in exchange for an annual distribution of US$2.7 million
(the “Unify Distribution”). The Redeemable Units can be redeemed at any time at par by Unify, and
entitle Alaris to an annual distribution of US$0.9 million out of the US$2.7 million total distributions.
Performance
Based on unaudited financial statements prepared by management for the year ended December
31, 2017, revenue and EBITDA are consistent with the comparable period, and exceeded forecast
amounts.
Fair Value
ECR
The Unify Distribution will reset based on Same Client Revenue with a cap of +/- 5%, based on
unaudited results the 2018 distribution is expected to have a positive reset of approximately 2%.
The fair value of the Unify units increase by US$1.2 million to US$19.2 million based on a better than
expected 2017.
The Earnings Coverage Ratio for Unify has increased slightly since last quarter and remains between
1.5x to 2.0x.
SUBSEQUENT EVENTS
Heritage Restoration, Inc.
2.9% of revenue
Description
Contribution
History
Heritage is a leading specialty contractor providing masonry and masonry related services to the
commercial building industry. With a focus on the restoration of existing structures, Heritage’s services
include masonry procurement, installation and restoration, concrete structure restoration, waterproofing
and coating repair, Heritage provides quality customer service and workmanship throughout the entire
New England area, employing over 100 highly skilled masons; carpenters; and laborers during peak
times.
On January 23, 2018, the Corporation entered into subscription and operating agreements with
Heritage Restoration, Holdings, LLC (“Heritage”), pursuant to which the Corporation invested US$15.0
million (“Heritage Contribution”) in exchange for preferred units in Heritage (the “Heritage Units”). The
Corporation is entitled to an annual distribution of US$2.25 million (“Heritage Distribution”) for the first
full year following the transaction, which equates to an initial yield of 15%. US$3.0 million of the Heritage
Units are redeemable at par at any time.
Performance
The performance metric dictating the annual percentage change in the Heritage Distribution is gross
margin, subject to a 6% collar and will reset for the first time on January 1, 2019. The Heritage
Contribution was used to fund the management buyout of the existing shareholder.
ECR
The Earnings Coverage Ratio for Heritage at the time of the investment is between 1.5x to 2.0x.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
36
Management Discussion and Analysis (continued)
Increase in Credit Facility
Subsequent to December 31, 2017, the Corporation received an increase in their revolving credit facility which included (i) an increase
in capacity to $280 million ($200 million as of December 31, 2017); (ii) an increase in the accordion facility to $70 million ($50 million
as of December 31, 2017). The maximum senior debt to contracted EBITDA was increased to 2.5:1 which can extend to 3:1 for a
period of 90 days (previously 1.75x with an extension to 2.25x, this amendment was effective for the quarter ending December 31,
2017). The tangible net worth, fixed charge coverage ratio covenants, interest rate spread, and standby fees remained consistent with
the prior agreement.
Agility
Subsequent to December 31, 2017, the Corporation successfully redeemed all of its units in Agility as a result of the sale of Agility to
a third party. Gross proceeds to Alaris from the Agility Sale consist of: (i) US$22.2 million for the preferred units Alaris holds in Agility
LLC, which includes a premium of US$2.1 million over Alaris’ original cost of US$20.10 million (currently held at a fair value of $20.0
million); (ii) US$2.9 million for all unpaid distributions up to February 28, 2018; and (iii) US$1.6 million for a loan outstanding, including
all principal and interest accrued on such loan. US$1.5 million of the repurchase price to be paid to Alaris will be placed in escrow for
18 months to satisfy indemnification obligations under the transaction. Following the escrow period any remaining escrowed funds
will be paid to Alaris. Total proceeds received by the Corporation went toward debt reduction of US$26.5 million (approximately
CAD$34.0 million against the CAD$173.5 million outstanding at December 31, 2017.
REDEMPTION OF KMH UNITS
On June 19, 2017, total consideration of $30.5 million ($9.8 million of cash and $20.7 million of secured promissory notes) was
exchanged for the redemption of all outstanding preferred units (the “Alaris Preferred Units”) and the outstanding $3.5 million
promissory note as a result of the sale of the majority of KMH’s Canadian clinics to a third party (the “Third Party Sale”). The $20.7
million of promissory notes (the “Phoenix Notes”) are issued by Phoenix Holdings Limited (“Phoenix”), a company controlled by the
former principals of KMH, and are secured by way of first security on Phoenix’s U.S. business that was carved out of the Third Party
Sale, a right to the residual value in certain real estate assets owned by Phoenix and its principals, and a preferred liquidation position
on the equity in the Canadian business retained by Phoenix as a result of the Third Party Sale.
As a result of the redemption of all outstanding KMH units, the Corporation has no remaining investments at fair value as of December
31, 2017 relating to KMH. The Corporation expects to receive the $20.7 million Phoenix Notes in three different tranches. The
Corporation expects to receive value for the first tranche totaling $12.4 million within the next twelve months with the remaining $8.3
million collected over a longer term period as Phoenix continues with the strategic process and recapitalization of their U.S. business.
Subsequent to December 31, 2017, the Corporation has the ability to compel the U.S. business to be sold. Phoenix has acknowledged
this right and a strategic process to realize on the debt is under way.
As the redemption of the KMH units and the $3.5 million promissory notes resulted in an extinguishment of financial assets, the
Corporation recorded an initial loss of $1.5 million, representing the difference between the carrying value of the assets given up and
the fair value of the consideration received. The fair value of the consideration received was calculated as the cash proceeds plus the
face value of the short term secured note plus the discounted value of the long-term secured note. The long term secured note of $8.3
million was discounted using a five year term and a 5% discount rate to arrive at the fair value. The fair value difference will be accreted
to its face value over its estimated five year term, ($0.2 million was accreted during the twelve months ended December 31, 2017).
See Promissory and Other Receivable table later in this note 5 for additional information on the valuation of these notes as at December
31, 2017.
REDEMPTION OF SEQUEL UNITS
On September 1, 2017, Sequel redeemed all units for total proceeds of US$95.9 million (approximately CAD$121 million) (the “Sequel
Redemption”). The Corporation received US$91.8 million (approximately CAD$114.8 million) at close, the remainder of the proceeds
were received prior to December 31, 2017. The Corporation recognized a US$21.6 million (approximately CAD$26.6 million) gain
through earnings as proceeds on redemption (US$95.9 million) exceeded total capital invested (US$74.1 million). The Corporation
paid US$12.8 million (CAD$16.0 million) of taxes from the gain on redemption of the Sequel units during the year ended December
31, 2017. These taxes were a direct result of the proceeds on redemption of the Sequel units exceeding the cost basis of the units.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
37
Management Discussion and Analysis (continued)
IMPAIRMENT OF GROUP SM UNITS
During the year ended December 31, 2017, Group SM received the final judgment related to an international arbitration process and
the amount awarded was substantially less than anticipated. Therefore, Group SM was not in a position to repay the previously accrued
$9.8 million in unpaid distributions. The Corporation therefore recorded a $9.8 million bad debt expense in Q3 2017. The fair value of
the preferred units were reduced in the year to nil in Q3 2017 as they are subordinate to the secured and unsecured debt on Group
SM’s balance sheet. The permanent impairment of $41.0 million of the Group SM units was recorded through the statement of profit
or loss.
As of December 31, 2017 the Corporation has $27 million owing from Group SM, including a credit facility and promissory notes ($10
million first priority secured and $17 million of unsecured), outstanding. The smaller judgment also means that the majority of the short-
term unsecured notes of $17 million will only be collected after the successful recapitalization or sale of the business, thus moved from
current assets to non-current assets. Group SM is currently undergoing a full restructuring process. Subsequent to the restructuring
the Corporation believes there will be sufficient enterprise value to repay in full the $27 million of secured and unsecured promissory
notes.
BAD DEBT EXPENSE AND RESERVE
During the year ended December 31, 2017, the Corporation recorded a bad debt expense and reserve of $23.4 million, which is
comprised of $10.2 million of write offs related to Group SM ($9.8 million) as discussed above and recorded in Q3 2017, and $0.5
million related to the SHS promissory note as a result of the Sears Canada, Inc. bankruptcy proceeding recorded in Q4 2017.
The Corporation also recorded a $13.1 million reserve on outstanding promissory notes in Q4 2017 with Group SM ($5.4 million),
Phoenix ($5.1 million) and Kimco ($2.6 million) as the probability of receiving the entire amount outstanding, and the timing of collection
is not certain. The Corporation expects and will continue to pursue recovery of the full notional value for all outstanding promissory
notes.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2017 the Corporation has a $200 million credit facility with a syndicate of Canadian chartered banks, the facility
has a four year term with a maturity date in September 2021. The interest rate is based on a combination of the CAD Prime Rate
(“Prime”), Bankers’ Acceptances (“BA”), US Base Rate (“USBR”) and LIBOR. When Funded Debt to Contract EBITDA is below 2.25:1,
Prime and USBRs are plus 2.25% and BAs and LIBOR are plus 3.25%. When Funded Debt to Contract EBITDA is above 2.25:1,
Prime and USBRs are plus 2.75% and BAs and LIBOR are plus 3.75%, the Corporation realized a blended interest rate of 5.3% for
the year ended December 31, 2017. At December 31, 2017, the facility was $173.5 million drawn.
At December 31, 2017, the Corporation met all of its covenants as required by the facility. Those covenants include a maximum funded
debt to contracted EBITDA of 2.5:1 (actual ratio is 1.97:1 at December 31, 2017); minimum tangible net worth of $450.0 million (actual
amount is $598.4 million at December 31, 2017); and a minimum fixed charge coverage ratio of 1:1 (actual ratio is 1.07:1 at December
31, 2017).
Subsequent to December 31, 2017, the Corporation received an increase in their revolving credit facility, to a total of $280 million with
an accordion of $70 million. The maximum senior debt to contracted EBITDA was increased to 2.5:1 (previously 1.75:1) which can
extend to 3:1 for a period of 90 days (previously 2.25:1). The tangible net worth, fixed charge coverage ratio covenants, interest rate
spread, standby fees and terms of the accordion facility remained consistent with the prior agreement.
In each month of 2017, the Corporation declared a dividend of $0.135 per common share ($1.62 per share and $59.0 million in
aggregate). In each month of 2016, the Corporation declared a dividend of $0.135 per common share ($1.62 per share and $58.8
million in aggregate).
The Corporation had 36,481,247 voting common shares outstanding at December 31, 2017. The Corporation had working capital of
approximately $40.7 million at December 31, 2017. Under the current terms of the various commitments, the Corporation has the
ability to meet all current obligations as they become due.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
38
WORKING CAPITAL
The Company's working capital (defined as current assets, excluding promissory notes and investment tax credits receivable, less
current liabilities) at December 31, 2017 and December 31, 2016 is set forth in the tables below.
Management Discussion and Analysis (continued)
Working Capital
Cash
Prepayments
Foreign exchange contracts
Trade and other receivables
Total Current Assets
Accounts payable & accrued liabilities
Dividends payable
Foreign exchange contracts
Income tax payable
Total Current Liabilities
31-Dec-17
31-Dec-16
$35,475
$29,491
2,407
1,430
8,642
2,097
-
16,762
$47,954
$48,350
1,707
4,921
-
588
3,057
4,905
712
2,007
$7,217
$10,682
Net working capital at December 31st
$40,737
$37,668
Management of the Corporation believes that the Corporation is able to meet its obligations as they become due.
FINANCIAL INSTRUMENTS
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to
another entity. Upon initial recognition all financial instruments, including derivatives, are recognized on the balance sheet at fair value.
Subsequent measurement is then based on the financial instruments being classified into one of five categories: held for trading, held
to maturity, loans and receivables, available for sale and other liabilities. The Corporation has designated its financial instruments into
the following categories applying the indicated measurement methods:
Financial Instrument
Cash and cash equivalents
Trade and other receivables
Promissory notes and other receivable
Investments at fair value
Loan receivable
Accounts payable and accrued liabilities
Loans and borrowings
Foreign exchange contracts
Category
Measurement Method
At fair value through profit or loss
Fair value
Loans and receivables
Loans and receivables
Available for sale
Available for sale
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
At fair value through profit or loss
Fair value
The Corporation will assess at each reporting period whether there is a financial asset, other than those classified as held for trading,
that is impaired. An impairment loss, other than temporary, is included in net earnings.
The Corporation holds derivative financial instruments to hedge its foreign currency exposure. The Corporation has entered into
forward contracts equal to the monthly and quarterly flow of funds from the Corporation’s US investments. The Corporation matches
approximately 50-75% over a rolling twelve month period based on scheduled distributions to the Canadian parent and a portion of
the scheduled distributions over a rolling 12 to 24 month period based distributions resulting in an economic hedge of the foreign
currency exposure. The fair value of the forward contracts will be estimated at each reporting date and any unrealized gain or loss on
the contracts will be recognized in profit or loss. As at December 31, 2017, for the next twelve months, total contracts of US$26.8
million average $1.2969 CAD. For the following twelve months, total contracts of US$6.8 million USD average $1.2716 CAD.
The Corporation records all transaction costs incurred, in relation to the acquisition of investments classified as “available for sale”, as
an additional cost of the investment. The Corporation applies trade-date accounting for the recognition of a purchase or sale of cash
equivalents and derivative contracts.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
39
The Corporation has the following financial instruments that mature as follows:
Management Discussion and Analysis (continued)
31-Dec-17
Total
0-6 Months
6 mo – 1 yr
1 – 2 years
3 – 4 years
Accounts payable and accrued liabilities
Dividends payable
Income tax (payable) / receivable
Loans and borrowings
Total
$ (1,707)
(4,921)
(588)
(173,464)
$ (1,707)
(4,921)
(588)
-
$ (180,681)
$ (7,217)
$-
-
-
-
$ -
$-
-
-
-
$-
-
-
(173,464)
$ -
$ (173,464)
The Corporation has sufficient cash on hand to settle all current accounts payable, accrued liabilities, dividends payable and all
scheduled interest payments on the senior debt. In the event the senior debt is not renewed and principal payments become due,
the debt would be refinanced, or alternatively, management expects that there would be sufficient cash flow from operations and
expected Partner redemptions to meet all required repayments.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
A. Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Corporation’s management (including the CEO
and CFO) of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures, as defined in
National Instrument 52-109. Based on that evaluation, the Corporation’s management (including the CEO and CFO) concluded that
the Corporation’s disclosure controls and procedures were designed to provide a reasonable level of assurance over disclosures of
material information and are effective as of December 31, 2017. The Corporation uses the 2013 Committee of Sponsoring
Organization of the Treasury Commission (COSO) framework.
B. Management Report on Internal Controls over Financial Reporting
The Corporation’s management, (including the CEO and CFO) have assessed and evaluated the design and effectiveness of the
Corporation’s internal controls over financial reporting as defined in National Instrument 52-109 as of December 31, 2017. The
Corporation’s assessment included documentation, evaluation and testing of its internal controls over financial reporting. Based on
that evaluation, the Corporation’s management concluded that the Corporation’s internal controls over financial reporting are
effective as defined by National Instrument 52-109.
There were no changes in internal controls during the year ended December 31, 2017 that have materially affected, or are reasonably
likely to materially affect the Company’s internal control over financial reporting.
SUMMARY OF CONTRACTUAL OBLIGATIONS
Other than the senior credit facility described under “Liquidity and Capital Resources”, the only material contractual obligation of the
Corporation is its leases for office space. The Corporation agreed to a five-year lease commencing July 2015 at its current location
with total leasing commitments of $1.1 million.
Contractual Obligations
Total
< 1 year
1 – 3 years
4 – 5 years
> 5 years
Long term debt
Office lease
$173,464
1,068
$-
421
$-
647
$173,464
$-
Total Contractual Obligations
$174,533
$421
$647
$173,464
$-
$-
$-
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
40
Management Discussion and Analysis (continued)
TRANSACTIONS WITH RELATED PARTIES
The Company had no transactions with related parties for the years ending December 31, 2017 or 2016.
In addition to their salaries, the Corporation also provides long-term compensation in the form of options and RSUs. Key management
personnel compensation comprised the following:
Key Management Personnel
Base salaries and benefits
Bonus
Share-based payments (non-cash)
Total
2017
$854
407
2,033
2016
$876
519
520
$3,294
$1,916f
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Management is required to make estimates when preparing the financial statements. Significant estimates include the valuation of
intangible assets and preferred limited partnership units, valuation of accounts receivable and promissory notes and income taxes.
Refer to the consolidated financial statements for the year ended December 31, 2017.
The Corporation capitalizes legal and accounting costs relating to a specific transaction once a letter of intent has been signed. The
Corporation's transactions structured as limited partnerships are not amortized and will be assessed for objective evidence of
impairment at each balance sheet date. The Corporation's intangible assets are being amortized over the 80-year term of the
agreements on a straight-line basis.
RECENT ACCOUNTING PRONOUNCEMENTS
IFRS 9: Financial Instruments
On July 24, 2014, the IASB issued the final version of IFRS 9, “Financial Instruments” (“IFRS 9”) to replace IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”).
IFRS 9 introduces a single approach to determine whether a financial asset is measured at amortized cost or fair value and replaces
the multiple rules in IAS 39. The approach is based on how an entity manages its financial instruments in the context of its business
model and the contractual cash flow characteristics of the financial assets. The IAS 39 measurement categories for financial assets
will be replaced by fair value through profit or loss (“FVTPL”), fair value through other comprehensive income and amortized cost.
IFRS 9 retains most of the IAS 39 requirements for financial liabilities and the Corporation does not anticipate any changes in
classification or measurement of financial liabilities on transition to IFRS 9.
A new expected credit loss model for calculating impairment on financial assets classified at amortized costs replaces the incurred
loss impairment model used in IAS 39. The new model will result in more timely recognition of expected credit losses.
When financial assets are impaired by credit losses and the entity records the impairment in a separate account (eg. an allowance
account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly
reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in that account during the period for each class
of financial assets.
IFRS 9 is effective for years beginning on or after January 1, 2018. Based on the assessments undertaken to date, the only material
change will be to the classification and measurement of investments at fair value. Although the investments at fair value will continue
to be measured at fair value, fair value gains or losses will be recorded through profit or loss as opposed to through other
comprehensive income. Therefore, on transition to IFRS 9, an adjustment will be made to move cumulative fair value gains or losses
from the fair value reserve to retained earnings. No other adjustments to opening retained earnings are anticipated on adoption of
IFRS 9 as it relates to classification and measurement of financial assets.
For those financial assets classified and measured at amortized cost, the expected credit loss model will be applied to determine
impairment of financial assets. This will therefore apply to trade and other receivables, as well as promissory notes receivable.
The Corporation has compared its existing methodology to determining credit losses and compared to the expected credit loss model
that will be applied to assets classified at amortized cost. The Corporation is in the process of finalizing the quantum of this adjustment,
however, does not expect it to be material.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
41
Management Discussion and Analysis (continued)
IFRS 15: Revenue from Contracts with Customers
Revenue from Contracts with Customers provides guidance on revenue recognition and relevant disclosures, and is effective for
annual reporting periods beginning on or after January 1, 2018. Due to the fact that the majority of its revenues are generated from
financial instruments and therefore not in the scope of IFRS 15, the Corporation does not expect any material changes to its revenue
recognition and does not anticipate any transition adjustments.
SUMMARY OF ANNUAL AND QUARTERLY RESULTS
Amounts are in thousands except for income (loss) per unit/share:
In each period, an unrealized (non-cash) foreign exchange gain/loss has impacted earnings.
Annual Results Summary
Revenue
Earnings
Basic and Diluted Income per Share/Unit
Total Assets
Total Liabilities
Cash Dividends/Distributions declared per Share/Unit
2017
2016
2015
$ 89,073
11,882
Basic - $0.33
$ 100,042
66,553
Basic - $1.83
$ 82,846
57,529
Basic - $1.70
Diluted - $0.32 Diluted - $1.81
Diluted - $1.68
793,418
188,873
787,221
132,523
788,210
111,164
Basic - $1.62
Basic - $1.62
Basic - $1.55
Diluted - $1.61 Diluted - $1.60
Diluted - $1.53
In 2017, the Corporation recorded $23.4 million in bad debt expense as unpaid distributions from Group SM and the SHS promissory
note were written off in addition to a $13.1 million reserve related to promissory notes and other receivables, the Corporation also
recorded $42.5 million in impairment and other charges as the fair value of the Group SM units were reduced to nil in the period
($41.0 million) and the long-term Phoenix promissory note was discounted ($1.5 million). The Corporation also realized a $26.6
million gain on the redemption of Sequel.
In 2016, the Corporation recorded a total gain of $20.7 million on the LifeMark, Solowave and MAHC redemptions that increased
revenue and earnings and a $7 million impairment charge was recorded for KMH. In 2015 the Corporation recorded a $2.8 million
gain on the Killick redemption that increased revenue and earnings in that period and an impairment charge on KMH of $20 million
that reduced earnings. In each period, an unrealized (non-cash) foreign exchange gain/loss has impacted earnings.
Quarterly Results
Summary
Revenue
Earnings
Basic and Diluted
Income (loss) per
Share/Unit
Q4-17
Q3-17
Q2-17
Q1-17
Q4-16
Q3-16
Q2-16
Q1-16
$ 21,638
$ 11,410
$ 23,775
$ (22,031)
$ 0.31
$ 0.31
$ (0.60)
$ (0.60)
$ 22,779
$ 10,656
$ 0.29
$ 0.29
$ 20,881
$ 11,849
$ 0.33
$ 0.32
$ 27,259
$ 21,724
$ 0.60
$ 0.59
$ 23,294
$ 17,026
$ 0.47
$ 0.46
$ 24,913
$ 7,043
$ 0.19
$ 0.19
$ 24,566
$ 20,842
$ 0.57
$ 0.57
In Q4 2017, the Corporation recorded a $13.6 million in bad debt expense as the remainder of the SHS promissory note was written
off and a reserve related to the Kimco, Group SM and Phoenix promissory notes and other receivables as the probability surrounding
their collectability is not assured. In Q3 2017, the Corporation recorded $9.8 million in bad debt expense as unpaid distributions from
Group SM were written off, the Corporation also recorded $41.0 million in impairment charges as the fair value of the Group SM
units were reduced to nil in the period and realized a $26.6 million gain on the redemption of Sequel.
In Q4 2016, the Corporation recorded a $0.9 million gain as well as an additional $5.3 million in distributions on the MAHC
redemption. In Q3 2016, the Corporation recorded a $1.6 million gain on the Solowave redemption that increased revenue and
earnings in that period. In Q2 2016, a $7 million impairment charge on the KMH units was recorded. In each quarter in 2015 and
2016, an unrealized foreign exchange gain/loss has impacted earnings. In Q1 2016, the Corporation recorded an $18.6 million gain
on the LifeMark redemption that increased revenue and earnings in that period.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
42
Management Discussion and Analysis (continued)
OUTSTANDING SHARES
At December 31, 2017, the Corporation had authorized, issued and outstanding, 36,481,247 voting common shares.
For the year ended December 31, 2017, the Company issued 35,711 common shares upon the exercise of stock options and 109,479
common shares from the exchange of vested RSU’s.
At December 31, 2017, 291,651 RSUs and 2,242,364 stock options were outstanding under the Corporation’s long-term incentive
compensation plans. 2,109,671 stock options are out of the money at December 31, 2017. The weighted average exercise price of
the outstanding options is $25.56. The Corporation issued 31,966 RSU’s and 1,070,218 stock options with a weighted average exercise
price of $21.56 during the year.
At March 5, 2018, the Corporation had 36,481,247 common shares outstanding.
INCOME TAXES
In 2015, the Corporation received a notice of reassessment from the Canada Revenue Agency in respect of its taxation year ended
July 14, 2009. The Corporation has since received notices of reassessment from the Canada Revenue Agency in respect of its taxation
years ended December 31, 2009 through December 31, 2016 (collectively the “Reassessments”). Pursuant to the Reassessments,
the deduction of approximately $121 million of non-capital losses and utilization of $5.2 million in investment tax credits by the
Corporation was denied, resulting in reassessed taxes and interest of approximately $44.4 million. Subsequent to filing the notice of
objection for the July 14, 2009 taxation year, Alaris received an additional proposal from the CRA pursuant to which the CRA is
proposing to apply the general anti avoidance rule to deny the use of non-capital losses, accumulated scientific research and
experimental development expenditures and investment tax credits. The proposal does not impact the Corporation's previously
disclosed assessment of the total potential tax liability (including interest) or the deposits required to be paid in order to dispute the
CRA's reassessments. The Corporation has received legal advice that it should be entitled to deduct the non-capital losses and as
such, the Corporation remains of the opinion that all tax filings to date were filed correctly and that it will be successful in appealing
such Reassessments. The Corporation intends to continue to vigorously defend its tax filing position. In order to do that, the Corporation
was required to pay 50% of the reassessed amounts as a deposit to the Canada Revenue Agency. The Corporation has paid a total
of $19.3 million in deposits to the CRA relating to the Reassessments to date, including $3.0 million deposited in 2017. It is possible
that the Corporation may be reassessed with respect to the deduction of its non-capital losses in respect of its tax filings in respect of
the 2017 taxation year, on the same basis. The carrying values of the remaining ITC’s of $3.0 million at December 31, 2017 and the
ITC’s claimed in 2017 of $3.5 million are at risk should the Corporation be unsuccessful in defending its position. The Corporation
anticipates that legal proceedings through the CRA and the courts will take considerable time to resolve and the payment of the
deposits, and any taxes, interest or penalties owing will not materially impact the Corporation’s payout ratio.
The Corporation firmly believes it will be successful in defending its position and therefore, any current or future deposit paid to the
CRA would be refunded, plus interest. The Corporation will continue to file its tax returns by claiming the remaining available investment
tax credits in subsequent tax filings.
Tax Year
July 2009
December 2009
December 2010
December 2011
December 2012
December 2013
December 2014
December 2015
December 2016
Total
ITCs Applied
Losses Applied
Estimated Tax
$ 10,532
1,916
14,646
14,992
16,774
22,642
29,153
10,560
-
$4,310
748
5,486
5,113
4,462
6,519
8,439
4,417
4,836
$121,215
$44,384
2,315
2,905
$5,220
On December 2017, the United States government enacted the tax Cuts and Jobs Act (“US Tax Reform”) with the majority of the
legislation being effective January 1, 2018. The impact of this legislation on the Corporation’s 2017 financial statements is a reduction
in the deferred income tax liability of $6 million as a result of the reduction in the federal income tax rate from 35% to 21%.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
43
Management Discussion and Analysis (continued)
In future years the Company will be positively impacted by the reduction in federal income tax rate which will be offset by limitations
imposed on the deduction of interest expense. The Corporation does not anticipate that US Tax Reform will have a material impact on
the cash taxes it is required to pay. The Corporation estimates the impact of US Tax Reform to the tax provision may be adjusted in
the future based on anticipated future regulations and guidance from the U.S Treasury and the Internal Revenue Service.
OUTLOOK
Based on Alaris’ current agreements with its partners, it expects revenues of approximately $94 million for 2018, revenue for Kimco
(currently nil) and SCR ($100 thousand per month) are included at their current run rate, however the Corporation expects distributions
from both partners to exceed the included amount. Total revenue from partners is expected to be $23.5 million in Q1 2018, an increase
of 9% compared to $21.6 million in Q4 2017. Annual general and administrative expenses are currently estimated at $8.5 million and
include all public company costs.
Including the successful redemption of Agility, the Corporation’s Annualized Payout Ratio is now just over 90%. The table below sets
out our estimated annualized current run rate of net cash from operating activities alongside the after-tax impact of the various
improvements the Corporation is expecting in 2018.
Comments
$1.30 USD/CAD exchange rate
Annualized Cash Flow (in 000's)
Revenue
General & Admins.
Interest & Taxes
Net cash flow
Annual Dividend
Surplus
Other Considerations (after taxes and interest):
SCR & Kimco
New Investments
Every addtl $2 million in distributions received is $0.05/share
Every $20 million deployed @ 15%
Amount ($)
$ 94,200
(8,500)
(22,000)
$ 63,700
59,000
$4,700
$ / Share
$ 2.58
(0.23)
(0.60)
1.75
1.62
0.13
+1,600
+1,515
+0.05
+0.04
The senior debt facility was drawn to $173.5 million at December 31, 2017, the Corporation used the proceeds from the Agility
redemption to reduce the debt facility to $139.5 million subsequent to December 31, 2017, with the capacity to draw up to another
$136.2 million based on new covenants and credit terms, in addition to the $70 million accordion facility for a total of $206.2 million.
The annual interest rate on that debt was approximately 5.3% at December 31, 2017, increased by 0.25% effective January 2018.
Alaris’ unique capital structure continues to fill a niche in the private capital markets. Therefore, Alaris continues to attract interest in
its capital from private businesses across North America and is confident it will contribute capital to new, and existing Partners in 2018.
As a conservative measure, Alaris does not use any estimates for future revenue earned from the contribution of capital into new or
existing Partners in its guidance or budgeting process
Certain information contained herein may be considered to be future oriented financial information or financial outlook under applicable
securities laws, including statements regarding expected revenues (annually and quarterly), the Annualized Payout Ratio and
anticipated expenses. The purpose of providing such information in this MD&A is to demonstrate the visibility the Corporation has with
respect to its revenue streams, and such statements are subject to the risks and assumptions identified for the business in this MD&A,
and readers are cautioned that the information may not be appropriate for other purposes. See also “Forward Looking Information”
below.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
44
Management Discussion and Analysis (continued)
RISKS FACTORS
An investment in our securities involves a number of risks. The risks and uncertainties described below are all of the risks that we
know about and that we have deemed to be material to our business or results of our operations. When reviewing forward-looking
statements and other information contained in this AIF, investors and others should carefully consider these factors, as well as other
uncertainties, potential events and industry and company-specific factors that may adversely affect our future results. We operate in
a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for Management
to predict all risk factors or the impact of such factors on our business. We assume no obligation to update or revise our risk factors
or other information contained in this AIF to reflect new events or circumstances, except as may be required by law.
We have organized our risks into the following categories:
Strategic Risk Factors Relating to our Business
Operational and Financial Risk Factors Relating to Our Business
Risk Factors Relating to our Private Company Partners
Strategic Risk Factors Relating to Our Business
We depend upon the operations, assets and financial health of our Private Company Partners
We are entirely dependent on the operations, assets and financial health of our Private Company Partners through our agreements
with them. Our ability to pay dividends, to satisfy our debt service obligations and to pay our operating expenses is dependent on the
Distributions received from our Private Company Partners, our sole source of cash flow. Adjustments of Distributions to Alaris from
our Private Company Partners are generally based on the percentage change of the Private Company Partner's revenues, same-store
sales, gross margin or other similar top-line measure. Accordingly, subject to certain conditions, to the extent that the financial
performance of a Private Company Partner declines with respect to the relevant performance measure, cash payments to Alaris will
decline. The failure of any material Private Company Partner or collectively a number of non-material Private Company Partners to
fulfill its distribution obligations to Alaris could materially adversely affect our financial condition and cash flows. We conduct due
diligence on each of our Private Company Partners and the industries they operate in prior to entering into our agreements with them.
In addition, we continue to have regular discussions with our Private Company Partners, we receive regular financial and other reports
from them and we continue to monitor changes in the industries in which they operate. However, there is a risk that there may be
liabilities or other matters that are not identified by us through our due diligence or ongoing communications and monitoring procedures,
which may have a material adverse effect on the Private Company Partners and the applicable performance measure.
Our agreements with our Private Company Partners provide us with certain remedies in the event of non-payment of Distributions by
the applicable Private Company Partner. In addition, some of our arrangements are secured by the assets of the Private Company
Partner (for example, End of the Roll and Federal Resources) or are guaranteed by an affiliated entity. However, our rights to payment,
our remedies, and our security interests are generally subordinated to the payment rights and security interests of a Private Company
Partner's senior lenders. Specifically, our agreements with a Private Company Partner include a standstill provision limiting our ability
to exercise certain remedies until the senior debt is paid or for a specified period of time.
We have numerous positive and negative covenants in place with our Private Company Partners designed to protect our Distributions
and typically our prior consent is required for items outside of the ordinary course of business; however, we generally do not have
significant voting rights in our Private Company Partners and accordingly our ability to exercise direct control or influence over the
operations of our Private Company Partners (except with respect to our consent rights and in circumstances where there has been an
uncured event of default and Distribution payments to Alaris have not been made as required) may be limited. The Distributions
received by us from the Private Company Partners therefore depend upon a number of factors that may be outside of our control.
There is generally no publicly available information, including audited or other financial information, about our Private Company
Partners and the boards of directors and management of these companies are not subject to the same governance and disclosure
requirements applicable to Canadian public companies. Therefore, we rely on our Management and third party service providers to
investigate these businesses. There can be no assurance that our due diligence efforts or ongoing monitoring procedures will uncover
all material information about the privately held businesses necessary to make fully informed decisions. In addition, our due diligence
and monitoring procedures will not necessarily ensure that an investment will be successful. Private Company Partners may have
significant variations in operating results; may from time to time be parties to litigation; may be engaged in rapidly changing businesses;
may expand business operations to new jurisdictions or business lines; may require substantial additional capital to support their
operations, to finance expansion or to maintain their competitive position; or may be adversely affected by changes in their business
cycle or changes in the industries in which they operate.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
45
Management Discussion and Analysis (continued)
Numerous factors may affect the quantum of a Private Company Partner's Distribution to Alaris, or the ability of a Private Company
Partner to service such distribution obligations, including, without limitation: the failure to meet its business plan; regulatory or other
changes affecting its industry; integration issues with respect to acquisitions, new locations or new business lines; a downturn in its
industry; negative economic conditions; changes in legislation or regulations governing a business or industry; disruptions in the
supply chain; disputes with suppliers, customers, or service providers or changes in arrangements therewith; and working capital
and/or cash flow management issues. Deterioration in a Private Company Partner's financial condition and prospects may be
accompanied by a material reduction in the distributions or payments received by Alaris. See "Risk Factors Relating to our Private
Company Partners".
We are subject to risks affecting any new Private Company Partners
If Alaris is successful in partnering with one or more new Private Company Partners, the businesses of these Private Company Partners
may be subject to one or more of the risks referred to under "Risk Factors Relating to our Private Company Partners" or similar risks
and may be subject to other risks particular to such business or businesses. A material change in a Private Company Partner's
business and/or their ability to pay the Distribution payable to us could have an adverse effect on our business.
We may not complete or realize the anticipated benefits of our Private Company Partner arrangements
A key element of our growth plan is adding new Private Company Partners and making additional investments in existing Private
Company Partners in the future. Our ability to identify and complete new investment opportunities is not guaranteed. Achieving the
benefits of future investments will depend in part on successfully identifying and capturing such opportunities in a timely and efficient
manner and in structuring such arrangements to ensure a stable and growing stream of Distributions. From time to time, Alaris has
been required to grant certain concessions to certain of its Private Company Partners to assist them in managing their debt covenants,
working capital or for other reasons. Such concessions may result in a temporary or permanent reduction in our Distributions from
such Private Company Partner, which may negatively affect our operations, financial condition or cash flows. There are also no
guarantees that the perceived benefits of such concessions will, in fact, exist.
We have limited diversification in our Private Company Partners
Although Alaris currently has 16 Private Company Partners and diversification has improved since inception, Alaris continues to have
limited diversification in its Distributions from Private Company Partners. Alaris does not have stringent fixed guidelines for
diversification with respect to our Private Company Partners. At any given point in time, we may have a significant portion of our
assets dedicated to a single business or industry. In the event that any such business or industry is unsuccessful or experiences a
downturn, this could have a material adverse effect on our business, results from operations and financial condition.
Our business and the business of each of the Private Company Partners are subject to changes in North American and international
economic conditions, including but not limited to, recessionary or inflationary trends, capital market volatility, consumer credit
availability, interest rates, consumers' disposable income and spending levels, job security and unemployment, corporate taxation and
overall consumer confidence. As has been experienced over the last decade, market events and conditions, including disruptions in
the international credit markets and other financial systems, may result in a deterioration of global economic conditions. These
conditions could cause a decrease in confidence in the broader North American and global credit and financial markets and create a
climate of greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit losses and tighter
credit conditions. Notwithstanding various actions by governments, from time to time there may be concerns about the general
condition of the capital markets, financial instruments, banks, investment banks, insurers and other financial institutions. These factors
could negatively impact company valuations and impact the performance of the global economy. A return of any these negative
economic events could have a material adverse effect on our Company and our Private Company Partners' business, financial
condition, results of operations and cash flows.
In addition, economic conditions in North America and globally may be affected by geopolitical events throughout the world that cause
disruptions in the financial markets, either directly or indirectly. In particular, conflicts, or conversely peaceful developments, arising in
the Middle-East, Asia, or Eastern Europe and other areas of the world that have a significant impact on the price of important
commodities can have a significant impact on financial markets and global economy. Any such negative impacts could have a material
adverse effect on our Company and our Private Company Partners' business, financial condition, results of operations and cash flows.
Our ability to manage future growth and carry out our business plans may have an adverse effect on our business and our
reputation
Our ability to sustain continued growth depends on our ability to identify, evaluate and contribute financing to suitable private
businesses that meet our criteria. Accomplishing such a result on a cost-effective basis is largely a function of Alaris' sourcing
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
46
Management Discussion and Analysis (continued)
capabilities, our management of the investment process, our ability to provide capital on terms that are attractive to private businesses
and our access to financing on acceptable terms. As Alaris grows, we will also be required to hire, train, supervise and manage new
employees. Failure to manage effectively any future growth or to execute on our business plans to add new Private Company Partners
could have a material adverse effect on our business, reputation, financial condition and results of operations.
We face competition with other investment entities
Alaris competes with a large number of private equity funds, mezzanine funds, equity and non-equity based investment funds, royalty
companies and other sources of financing, including the public and private capital markets as well as senior debt providers. Some of
our competitors, particularly those operating in the United States, are substantially larger and have considerably greater financial
resources and more diverse funding structures than Alaris. Competitors may have a lower cost of funds and many have access to
funding sources and unique structures that are not available to Alaris. In addition, some of our competitors may have higher risk
tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more
relationships and build their market shares as well as to use high amounts of leverage to increase valuations given to entrepreneurs.
There is no assurance that the competitive pressures that we face will not have a material adverse effect on our business, financial
condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment
opportunities and there can be no assurance that Alaris will be able to identify and make investments that satisfy our business
objectives or that we will be able to meet our business goals.
Operational and Financial Risk Factors Relating to Our Business
We are subject to tax related risks
CRA Re-Assessment
In 2015, the Corporation received a notice of reassessment from the Canada Revenue Agency in respect of its taxation year ended
July 14, 2009. The Corporation has since received notices of reassessment from the Canada Revenue Agency in respect of its taxation
years ended December 31, 2009 through December 31, 2016 (collectively the “Reassessments”). Pursuant to the Reassessments,
the deduction of approximately $121 million of non-capital losses and utilization of $5.2 million in investment tax credits by the
Corporation was denied, resulting in reassessed taxes and interest of approximately $44.4 million. Subsequent to filing the notice of
objection for the July 14, 2009 taxation year, Alaris received an additional proposal from the CRA pursuant to which the CRA is
proposing to apply the general anti avoidance rule to deny the use of non-capital losses, accumulated scientific research and
experimental development expenditures and investment tax credits. The proposal does not impact the Corporation's previously
disclosed assessment of the total potential tax liability (including interest) or the deposits required to be paid in order to dispute the
CRA's reassessments. The Corporation has received legal advice that it should be entitled to deduct the non-capital losses and as
such, the Corporation remains of the opinion that all tax filings to date were filed correctly and that it will be successful in appealing
such Reassessments. The Corporation intends to continue to vigorously defend its tax filing position. In order to do that, the Corporation
was required to pay 50% of the reassessed amounts as a deposit to the Canada Revenue Agency. The Corporation has paid a total
of $19.3 million in deposits to the CRA relating to the Reassessments to date, including $3.0 million deposited in 2017. It is possible
that the Corporation may be reassessed with respect to the deduction of its non-capital losses in respect of its tax filings in respect of
the 2017 taxation year, on the same basis. The carrying values of the remaining ITC’s of $3.0 million at December 31, 2017 and the
ITC’s claimed in 2017 of $3.5 million are at risk should the Corporation be unsuccessful in defending its position. The Corporation
anticipates that legal proceedings through the CRA and the courts will take considerable time to resolve and the payment of the
deposits, and any taxes, interest or penalties owing will not materially impact the Corporation’s payout ratio.
The Corporation firmly believes it will be successful in defending its position and therefore, any current or future deposit paid to the
CRA would be refunded, plus interest. The Corporation will continue to file its tax returns by claiming the remaining available investment
tax credits in subsequent tax filings.
International Structure
Alaris has established Alaris Coop, Alaris USA, and Salaris USA for the purpose of financing and entering into arrangements with
potential Private Company Partners in the United States and other jurisdictions on a tax efficient basis. Our corporate structure for
this purpose was implemented having regard to the complex corporate and tax laws and regulations of Canada, The Netherlands and
the United States, as well as the income tax conventions between those countries to date, and our understanding of the current
administrative practices and policies of the taxation authorities of each such jurisdiction, as well the structure of our Private Company
Partners. Such laws, regulations and conventions are subject to change from time to time. There is a possibility that such a change
may be made, including with retroactive or retrospective effect. In addition, such structure is subject to assessment and possible
adjustment by any of the taxation authorities of such jurisdictions based on differences of interpretation of the applicable tax laws and
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
47
Management Discussion and Analysis (continued)
the manner in which such laws have been implemented. Furthermore, certain changes in the structure and business practices of our
Private Company Partners could impact our structure. Although we are of the view that the corporate structure has been implemented
correctly and is being managed and monitored properly, there can be no assurance that the tax authorities of such jurisdictions will
agree. If such tax authorities successfully challenge any aspect of our financing and corporate structure, or if for business reasons we
are not able to implement our structure fully, our operating results could be adversely affected.
In early January 2017, the CRA began an international tax audit of Alaris with respect to its 2013, 2014 and 2015 taxation years. In
December 2017, the CRA issued a letter proposing adjustments relating to intercompany services provided by Alaris to its foreign
subsidiaries. Alaris strongly disagrees with the CRA’s assessment and intends to vigorously defend its tax filing position. The two
parties continue to work through this matter, and currently, Alaris has not formally been reassessed by the CRA.
General
Income tax provisions, including current and deferred income tax assets and liabilities, and income tax filing positions require estimates
and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application
to Alaris' specific situation. The business and operations of Alaris are complex and we have executed a number of significant financings
and transactions over the course of our history. The computation of income taxes payable as a result of these transactions involves
many complex factors as well as Alaris' interpretation of and compliance with relevant tax legislation and regulations.
Our ability to recover from Private Company Partners for defaults under our agreements with them may be limited
Each Private Company Partner provides certain representations and warranties and covenants to us regarding the Private Company
Partner and its business and certain other matters. Following a transaction with Alaris, the Private Company Partner may distribute
all or a substantial portion of the proceeds that it receives from us to its security holders or owners. In the event that we suffer any
loss as a result of a breach of the representations and warranties or non-compliance with any other terms of an agreement with a
Private Company Partner, we may not be able to recover the amount of our entire loss from the Private Company Partner. The Private
Company Partner may not have sufficient property to satisfy our loss. In addition, our rights and remedies in the event of a default are
generally subordinated to a Private Company Partners senior lenders, which can limit our ability to recover any losses from Private
Company Partners. Furthermore, a Private Company Partner may try to contest the application of our remedies, which could delay
the operation (or if a partner is successful deny the operation) of our rights and remedies and add additional costs to Alaris.
There are risks related to Alaris' and our Private Company Partners' outstanding debt
Certain features of our outstanding debt, including the renewal of such debt on substantially similar terms, and the nature of any
outstanding debt of the Private Company Partners could adversely affect our ability to raise additional capital, to fund our operations,
to pay dividends, and could limit our ability to react to changes in the economy and our industry, expose us to interest rate risks and
could prevent us from meeting certain of our business objectives. An inability to meet our debt covenants could result in a default
under our senior credit facility, which may then require repayment of any outstanding amounts at a time when Alaris may not have
sufficient cash available to make such repayment. In addition, a default under our debt facility may impact our ability to obtain future
debt financing on terms favorable to Alaris. Furthermore, an inability of any material Private Company Partner (or a group of non-
material Partners collectively representing a material portion of our revenues) to meet their debt covenants and a failure of a Private
Company Partner to refinance or restructure its debt where necessary can have an impact on their ability to pay our Distributions and
therefore impact Alaris’ cash flows. In addition, where a Private Company Partner has defaulted under our agreements, our right to
exercise our remedies may be subordinate to the Partner’s senior lender and subject to a standstill provision until the senior debt is
repaid or for a specified period of time.
Alaris and our Partners are subject to significant regulation
Alaris, its subsidiaries, and the Private Company Partners are subject to a variety of laws, regulations, and guidelines in the jurisdictions
in which they operate (including Dutch, U.S. federal, state and local laws, and Canadian federal, provincial and local laws) and may
become subject to additional laws, regulations and guidelines in the future, particularly as a result of acquisitions or additional changes
to the jurisdictions in which they operate. The financial and managerial resources necessary to ensure such compliance could escalate
significantly in the future which could have a material adverse effect on Alaris' and the Private Company Partners' business, resources,
financial condition, results of operations and cash flows. The same goes for any failure to maintain compliance or obtain any required
approvals. Such laws and regulations are subject to change. Accordingly, it is impossible for Alaris or the Private Company Partners
to predict the cost or impact of changes to such laws and regulations on their respective future operations.
There are no guarantees as to the timing and amount of our dividends
The amount of dividends paid by us will depend upon numerous factors, including Distributions received, profitability, debt covenants
and obligations, foreign exchange rate, the availability and cost of acquisitions, fluctuations in working capital, the timing and amount
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
48
Management Discussion and Analysis (continued)
of capital expenditures, applicable law and other factors which may be beyond our control. Dividends are not guaranteed and will
fluctuate with our performance and the performance of our Private Company Partners. There can be no assurance as to the levels of
dividends to be paid by us, if any. The market value of the Common Shares may deteriorate if we are unable to pay dividends in
accordance with our dividend policy in the future, or not at all, and such deterioration may be material.
There are no guarantees as to the availability of future financing for operations, dividends and growth
We expect that our principal sources of funds to fund our operations, including our dividend, will be the cash we generate from Private
Company Partner Distributions. We believe that funds from these sources will provide Alaris with sufficient liquidity and capital
resources to meet our ongoing business operations at existing levels. Despite our expectations, however, Alaris may require additional
equity or debt financing to meet our financing and operational requirements. There can be no assurance that this financing will be
available when required or available on commercially favourable terms or on terms that are otherwise satisfactory to Alaris, in which
event our financial condition may be materially adversely affected.
The payout by Alaris of substantially all of our operating cash may make additional investment capital and operating expenditures
dependent on increased cash flow or additional financings in the future. Alaris may require equity or debt financing in order to acquire
interests in new Private Company Partners or make additional contributions to our current Private Company Partners. Although we
have been successful in obtaining such financing as and when required to date, there can be no assurance that such financing will be
available when required or will be on commercially favourable terms. A lack of availability or commercially favourable terms could limit
our growth. The ability of Alaris to arrange such financing in the future will depend in part upon the prevailing capital market conditions
as well as our business performance.
Our ability to pay dividends is affected by the terms of our Senior Credit Facility
Our ability to pay dividends is subject to applicable laws and contractual restrictions in the instruments governing our indebtedness.
The degree to which Alaris is leveraged and compliance with other debt covenants under our debt facility could have important
consequences for Shareholders including: (i) our ability to obtain additional financing for future contributions to private companies may
be limited; (ii) all or part of our cash flow from operations may be dedicated to the repayment of our indebtedness, thereby reducing
funds available for future operations or for payment of dividends; (iii) certain of our borrowings are at variable rates of interest, which
exposes us to the risk of increased interest rates; and (iv) we may be more vulnerable to economic downturns and be limited in our
ability to withstand competitive pressures. These factors may adversely impact our cash flow, and, as a result, the amount of cash
available for payment of dividends.
Interest expense has been estimated for the purpose of estimating our distributable cash based on current market conditions that are
subject to fluctuations. Such fluctuations could result in an unanticipated material increase in interest rates that could in turn have a
material adverse effect on cash available to pay dividends to Shareholders.
We are subject to fluctuations in the US/Canadian dollar pairing (USD/CAD)
At this point in time, the majority of our Distributions are paid to us in United States dollars. However, our dividends are paid to our
Shareholders in Canadian dollars. Currently, we have in place currency hedges to manage the risk and economic consequences of
foreign currency exchange fluctuations on our monthly cash flows as well as natural hedges such as carrying US dollar denominated
debt. However, the Canadian dollar relative to the United States dollar is subject to fluctuations and the currency hedges are for a
limited period of time. There can be no guarantee that future hedges will be at rates of USDCAD that fully protect Alaris’ cash flows
against major fluctuations. As such, failure to adequately manage our foreign exchange risk could adversely affect our business,
financial condition and results of operation. In general, where we continue to have a majority of our investments in the U.S., a declining
Canadian dollar versus the U.S. dollar is a net benefit to Alaris’ monthly cash flows and to the principal value of its investments.
Also, certain of our currency hedges are conducted by way of a forward contract, which come with an obligation to fulfill the contract
at a future date. If Alaris did not have adequate USD to sell under the forward contract it would have to pay the difference between
the contract price and the current spot price. If the current spot price is in Alaris' favor it could receive a cash benefit from not being
able to fulfill its forward contract. However, if the spot to forward price differential is not in Alaris' favor, it could owe a substantial
amount of money to the holder of the contract. A significant loss of USD revenue could cause Alaris to fail to meet its obligations
under the forward contracts. This could result from a significant decrease in a Partners business, which resulted in a significant
decrease in its Distribution to Alaris or if Alaris was repurchased by a material U.S. partner or several US Partners within that time
period. Any cash outlay to meet a forward contract obligation could negatively affect Alaris' cash flows.
Alaris has investments in a number of U.S. based businesses, and will continue to invest in U.S. based businesses, in U.S.
denominated currency. Alaris’ credit facility allows for USD denominated draws to fund U.S. based businesses. This will act as a
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
49
Management Discussion and Analysis (continued)
natural hedge on cash flows and future repurchases by Private Company Partners. However, Alaris may from time to time purchase
U.S. dollars in the spot market based on the USDCAD rate of exchange at the time of investment to make U.S. based investments. If
Alaris is redeemed on a U.S. dollar based investment it may incur a loss in the Canadian dollar equivalent if the USDCAD spot rate is
lower at the time of the redemption than it was when the original investment was made. Alaris does not hedge the fair value of its U.S.
dollar denominated investments due to the fact that there is no expectation to be redeemed or to exit these investments and therefore
there is an uncertain time horizon of such exit events. This exposes Alaris to a cash loss, or gain, on a US dollar investment, even if
the investment was successful in its U.S. based currency. Alaris adjusts the fair value of its U.S. dollar denominated investments
based on the USDCAD rate on the balance sheet date for each quarter and records an unrealized gain or loss to account for the
fluctuations in the exchange rate.
Our Private Company Partners have termination rights which may be exercised
Each of our Private Company Partners has the right to terminate their agreement with Alaris through a repurchase or redemption right
that arises after a fixed period of time following the closing of our arrangement with the applicable Private Company Partner. Although
Management believes that the repurchase or redemption purchase price would adequately compensate Alaris for the foregone
payments, we would be required to reinvest the cash received including possibly investing in our own shares through the repurchase
and cancellation of our shares, in order to maintain our dividend levels. There is no assurance that we would be able to successfully
identify and complete any such alternative investments or complete any such share repurchase.
We and our Private Company Partners rely heavily on key personnel
The success of Alaris and of each of our Private Company Partners depends on the abilities, experience, efforts and industry
knowledge of their respective senior management and other key employees, including their ability to retain and attract skilled
management and employees. The long-term loss of the services of any key personnel for any reason could have a material adverse
effect on the business, financial condition, results of operations or future prospects of Alaris or a Private Company Partner. In addition,
the growth plans of Alaris and the Private Company Partners described in this document may require additional employees, increase
the demand on management and produce risks in both productivity and retention levels. Alaris and the Private Company Partners
may not be able to attract and retain additional qualified management and employees as needed in the future. There can be no
assurance that Alaris or the Private Company Partners will be able to effectively manage their growth, and any failure to do so could
have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our share price is unpredictable and can be volatile
A publicly traded corporation will not necessarily trade at values determined by reference to the underlying value of its business. The
prices at which the Common Shares will trade cannot be predicted. The market price of the Common Shares could be subject to
significant fluctuations in response to variations in quarterly and annual operating results, the results of any public announcements we
make, general economic conditions, unexpected volatility in Global stock markets and other factors beyond our control.
We may issue additional Common Shares diluting existing Shareholders' interests
We may issue an unlimited number of Common Shares or other securities for such consideration and on such terms and conditions
as shall be established by us without the approval of Shareholders. Any further issuance of Common Shares will dilute the interests
of existing Shareholders, if the proceeds of such issuances are not being used in a manner that is accretive to Alaris’ net cash from
operating activities per share. The Shareholders will have no pre-emptive rights in connection with such future issuances.
We are subject to a risk of legal proceedings
In the normal course of business, we may be subject to or involved in lawsuits, claims, regulatory proceedings, and litigation for
amounts not covered by our liability insurance. Some of these proceedings could result in significant costs. Although the outcome of
such proceedings is not predictable with assurance, Alaris has no reason to believe that the disposition of such matters could have a
significant impact on our financial position, operating results or ability to carry on our business activities. As of the date of this document
no material claims or litigation have been brought against Alaris.
We are not, and do not intend to become, registered as an Investment Company under the U.S. Investment Company Act and
related rules
We have not been and do not intend to become registered as an investment company under the U.S. Investment Company Act and
related rules in reliance on the exemption from such registration provided by Section 3(c)(7) of that Act. The U.S. Investment Company
Act and related rules provide certain protections to investors and impose certain restrictions on companies that are registered with the
U.S. Securities and Exchange Commission (the "SEC") as investment companies. None of these protections or restrictions is or will
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
50
Management Discussion and Analysis (continued)
be available to investors in Alaris. In addition, to comply with the Section 3(c)(7) exemption from registration and avoid being required
to register as an investments company under the U.S. Investment Company Act and related rules, we have implemented restrictions
on the ownership and transfer of the Common Shares, which may materially affect your ability to hold or transfer the Common Shares.
Additionally, if we were required to register with the SEC as an investment company, compliance with the U.S. Investment Company
Act would significantly and adversely affect our ability to conduct our business.
Potential investors' ability to invest in Common Shares or to transfer any Common Shares that investors hold may be limited
by certain ERISA, U.S. Tax Code and other considerations
Alaris has restricted the ownership and holding of Common Shares so that none of our assets will constitute "plan assets" (as defined
in Section 3(42) of ERISA and applicable regulations) of any of the following: (1) an "employee benefit plan" (within the meaning of
Section 3(3) of ERISA that is subject to Part 4 of Subtitle B of Title I of ERISA, (2) a plan, individual retirement account or other
arrangement that is subject to Section 4975 of the U.S. Tax Code, (3) any other retirement or benefit plan that is not described in (1)
or (2), but that is subject any similar law, or (4) an entity whose underlying assets are considered to include "plan assets" of any such
plan, account or arrangement in (1) - (3) pursuant to ERISA, the U.S. Tax Code or similar law.
If the Company's assets were considered to constitute "plan assets" of any of the foregoing entities, non-exempt "prohibited
transactions" under Section 406 of ERISA, Section 4975 of the U.S. Tax Code or similar law could arise from transactions the Company
enters into in the ordinary course of business, resulting in tax penalties and mandatory rescission of such transactions. Consequently,
each recipient and subsequent transferee of common shares will, or will be deemed to, represent and warrant that it is not an entity
described in (1)-(4) in the preceding paragraph and that no portion of the assets used to acquire or hold its interest in common shares
or any beneficial interest therein constitutes or will constitute the assets of such an entity. Any holding or transfer of common shares
in violation of such representation will be void. See "Ownership and Transfer Restrictions".
Foreign Account Tax Compliance Act (“FACTA”) Provisions
In general, FATCA imposes due diligence, reporting and withholding obligations on foreign (i.e., non-U.S.) financial institutions and
certain foreign (i.e., non-U.S.) non-financial entities. A failure by such an institution or entity to comply with these obligations could
subject it to a 30% U.S. withholding tax (“FATCA Tax”) on certain its U.S. source income (including interest, dividends, rents, royalties,
compensation and other passive income and, beginning in 2019 gross proceeds from the sale or other disposition of property that can
produce such type of U.S. source income) and thereby reduce its distributable cash and net asset value. Canada and the United
States entered into an Intergovernmental Agreement (the "IGA") on February 5, 2014, which came into force on June 27, 2014, to
facilitate compliance with FATCA by Canadian financial and non-financial institutions and entities.
Under the IGA and the Canadian legislation enacted to implement the IGA (the “Canada IGA Legislation”), Alaris (and its subsidiaries)
(i) registered with the IRS and acquired identifying numbers, (ii) performed, and will continue to perform, specified diligence to
determine whether they have any "U.S. reportable accounts" and (iii) will on an annual basis, report to the CRA, as required or
applicable, information about our U.S. “account holders”, which could include certain of Alaris' shareholders. Also, under the Canada
IGA Legislation, a shareholder of Alaris may be required to provide identity, residency and other information to Alaris (and may be
subject to penalties for failing to do so) that, in the case of certain U.S. persons or certain non-U.S. entities controlled by certain U.S.
persons, Alaris would then report to the CRA and which the CRA would then report to the IRS. The CRA has reported, and will report,
such information about U.S. reportable accounts and such U.S. persons and non-U.S. entities to the IRS pursuant to the exchange-
of-information provisions in the Canada-U.S. tax treaty.
Nevertheless, under the Canada IGA Legislation, equity and debt interests that are regularly traded on an established securities market
are not treated as "financial accounts". If the Common Shares are regularly traded on an established securities market, Alaris will not
be required to provide information to the CRA about U.S. holders of Common Shares. The Common Shares are regularly traded on
an established securities market and as such, Alaris does not expect to report information about US holders of its Common Shares to
the CRA under FATCA. However, should the Common Shares no longer be considered to be regularly traded on an established
securities market, Alaris' reporting obligations under FATCA may change.
Alaris and its subsidiaries intend to continue to take such measures and implement such procedures as it, in consultation with its legal
and tax counsel, determines to be necessary or desirable to comply with its obligations under the IGA and, more particularly, the
Canada IGA Legislation. If Alaris or a subsidiary of Alaris cannot (or otherwise does not) satisfy the applicable requirements of the
IGA and the Canada IGA Legislation or if the Canadian government is not in compliance with the IGA and if Alaris is otherwise unable
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
51
Management Discussion and Analysis (continued)
to comply with any relevant and applicable legislation, then Alaris (or a subsidiary of Alaris) could be subject to the FATCA Tax and
thereby reduce the distributable cash and net asset value of Alaris.
The foregoing discussion is based on the U.S. Internal Revenue Code, guidance issued by the IRS and the United States Treasury
Department, including regulations and IRS notices, and the IGA and the Canada IGA Legislation (and the interpretations thereof and
the guidance issued by the CRA). Future guidance, including explanations of and rulings interpreting current authorities, may affect
the application of FATCA to Alaris in a manner that is unfavorable to Alaris and holders of Common Shares.
Passive Foreign Investment Company ("PFIC") Rules and Potential Implications for U.S. Shareholders
Sections 1291 through 1298 of the United States Internal Revenue Code (the “Code”) provide for special (and generally unfavorable
for U.S. shareholders) rules applicable to non-U.S. corporations that constitute PFICs. A non-U.S. corporation will constitute a PFIC
for any taxable year in which either (1) at least 75% of its gross income for such taxable year is passive income (which would include,
among other things and subject to certain exceptions, dividends, interest, royalties, rents, annuities and other income of a kind that
would be “foreign personal holding company income”, as defined in Section 954(c) of the Code), or (2) the average percentage of
assets, by value (determined on the basis of a quarterly average),held by it during such taxable year which produce passive income
or which are held for the production of passive income is at least 50%. For this purpose, the non-U.S. corporation will be considered
as receiving directly its proportionate share of the income, and as holding its proportionate share of the assets, of any corporation
(whether U.S. or non-U.S.) at least 25% (by value) of the stock of which the non-U.S. corporation owns directly or indirectly.
For any taxable year in which a non-U.S. corporation is a PFIC, and in the absence of an election by a U.S. shareholder of such non-
U.S. corporation to either treat such non-U.S. corporation as a “qualified electing fund” (such election, a “QEF Election”) or “mark-to-
market” his or her shares of such non-U.S. corporation (such election, an “MTM Election”), such U.S. shareholder will, upon the making
of certain “excess distributions” by such non-U.S. corporation or upon the U.S. shareholder’s disposition of his or her shares of such
non-U.S. corporation at a gain, be subject to U.S. federal income tax at the highest tax rate on ordinary income in effect for each year
to which the income is allocated plus an interest charge on the deemed tax deferral, as if the distribution or gain had been recognized
ratably over each day in the U.S. shareholder’s holding period for his or her shares in such non-U.S. corporation while such corporation
was a PFIC.
Based upon its (and its subsidiaries’) income and assets in prior tax years, Alaris has taken the position that neither it nor any of its
subsidiaries were PFICs for any of its prior taxable years. Furthermore, based on its current and projected operations and financial
expectations for the current taxable year, Alaris believes that neither it nor any of its subsidiaries will be a PFIC for the current taxable
year. However, the determination of whether Alaris or any of its subsidiaries was (for any prior taxable year) or will be or become (for
the current or any future taxable year) a PFIC was and is fundamentally fact-specific in nature and dependent on: (a) the income and
assets of Alaris and its subsidiaries over the course of any such taxable year; and (b) the application of complex U.S. federal income
tax rules, which are subject to differing interpretations. Consequently, Alaris cannot provide any assurance that: (i) neither it nor any
of its subsidiaries was (for any prior taxable year) or will be or become (for the current or any future taxable year) a PFIC; or (ii) that
the IRS would not take the position that either Alaris and/or any one or more of its subsidiaries should have been or should be treated
as a PFIC for any one or more taxable years despite a contrary reporting position of Alaris or the applicable subsidiary.
If Alaris were to be or become a PFIC for the current or any future taxable year, Alaris does not intend to make available to U.S.
shareholders the financial information necessary to make a QEF Election; however, provided the Common Shares were to constitute
“marketable stock” (as specifically defined under the MTM Election regulations), a U.S. shareholder should be able to make an MTM
Election with respect to his or her Common Shares. Alaris believes that the Common Shares would currently be considered
“marketable stock” for this purpose. The making of an MTM Election would result in the electing U.S. shareholder of Common Shares
having to recognize as ordinary income or loss each year an amount equal to the difference as of the close of such year (or the actual
disposition of the Common Shares) between the fair market value of the Common Shares and the shareholder’s adjusted U.S. federal
income tax basis in such shares. Losses would be allowed only to the extent of the net mark-to-market gain previously included in
income by the U.S. shareholder under the MTM Election for prior taxable years. If an MTM Election is made, then distributions from
Alaris with respect to the Common Shares would be treated as if Alaris were not a PFIC, except that the lower tax rate currently
imposed on dividends to individuals would not apply.
Alaris urges U.S. shareholders to consult their own tax advisors regarding the possible application of the PFIC rules.
Our capacity to protect our intellectual property may be limited
We rely on various intellectual property protections, including trademark laws, to preserve our intellectual property rights, for our
investment in End of the Roll. To protect our intellectual property, we may become involved in litigation, which could result in substantial
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
52
Management Discussion and Analysis (continued)
expenses, divert the attention of Management, cause significant delays, materially disrupt the conduct of our business or adversely
affect our revenues, financial position and results of operations.
RISKS RELATING TO OUR PRIVATE COMPANY PARTNERS
Risks Relating to Our Material Private Company Partners
Our material Private Company Partners face a number of business, operational and other risks which if realized, could have a material
impact on our operating results and conditions. These risks are outlined in more detail below.
Risks Relating Specifically to SBI
A loss of a key revenue
generating principal in the
business
An inability to attract the
skilled workforce SBI relies
on
Contracts are short-term in
nature
Exposed to the M&A market
in the United States
Highly fragmented industry
with low costs to enter
If SBI were to lose a key member of its revenue generating team to attrition or other reasons
there could be a short-term impact on revenue and cash flows. Although key account
relationships are held at the company level, losing a top producing principal may result in
the loss of future business with companies that a principal may have had in its sales
pipeline.
SBI must retain and be able to attract the highly skilled workforce it requires to meet the
demand of its clients. Management has indicated it has not had and does not expect to
have an issue attracting top talent due to its corporate culture and compensation packages.
However, an inability to continue to attract high quality employees could impact the business
in the short and long-term.
Although some client revenues are reoccurring in nature, the contracts SBI has with clients
tend to be short-term (project based) and therefore make long-term planning a bit more
difficult. Forecasting the business outside of a 3 to 6 month window is relatively tough and
based on historic lead generation and conversation rates. A failure to convert new leads
into actionable mandates can have a negative impact on SBI’s revenue and cash flow
following the completion of existing contracted business. Although SBI tends to differentiate
itself from its competitors on processes and procedures rather than price, it does also have
to compete on price. If SBI cannot be competitive when bidding on new contracts it may
not be able to replace business that is running off.
SBI generates a large portion of its revenue by working for private equity clients with
purchase mandates. Although all indicators are pointing to continued momentum in the
private equity space, if the level of private equity activity slows down from current record
levels SBI may face a decrease in revenues and cash flow.
The industry in which SBI competes in is highly fragmented with many small to medium
sized businesses as well as a few large well capitalized competitors. The cost to enter this
industry is relatively low and therefore the barriers to entry are minimal. Although the cost
to enter the industry are low, new entrants to the market must also be able to prove their
processes and procedures lead to a successful outcome for its client and therefore new
entrants can take a while to gain significant market share. Entry of new competitors or
discount pricing strategies by a few large competitors could impact the revenues and
margins of SBI’s business and lead to lower cash flow.
Needs sufficient cash flow to
incentivise principals for
performance
The compensation structure of SBI is such that a significant portion of a principal’s income
comes by way of partner distributions at year end. In order to incentivize minority owner
partners as well as principals, SBI needs to have enough cash to pay out meaningful partner
distributions on an annual basis going forward.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
53
Management Discussion and Analysis (continued)
Risks Relating Specifically to DNT
Exposure to residential
development
Geographic exposure to
Austin and San Antonio
Bonding requirements
Seasonality including weather
related events
Fixed price contracts
Customer concentration
In the current economic cycle, DNT chooses to have a higher percentage of its revenue
generated from new residential development projects than commercial or infrastructure
projects. Although it DNT’s strategy to focus more of its efforts on the segment of the
market with the most current and projected growth, it exposes DNT to a downturn in the
new home development segment of the economy, which can have a material impact on its
cash flows. In times of economic downturns DNT can shift its focus to commercial and
infrastructure projects. However, failing to do so in a timely manner to offset lost revenue
from the residential segment, or at all, can have a significant impact on DNT’s cash flow.
DNT focuses primarily on the Austin and San Antonio regions of the state of Texas.
Although these two regions have robust economies, which are diversified among
healthcare, technology and education, they are close enough in proximity to be impacted
by the same economic and weather related factors. This lack of geographic diversification
exposes DNT to more concentrated events than it would otherwise be if it were to be
diversified across many regions of the United States.
DNT Requires bonding on a significant number of its projects. This requires DNT to
maintain a healthy balance sheet or face the risk of not being able to bid on certain new
projects. Any lack of ability to bond new projects could have a significant impact on DNT’s
cash flows.
Unusual amounts of rain can impact the business significantly as it prevents DNT from
providing its services and in many instances can increase costs for things such as water
remediation. The unusual wet weather can also cause “work overs” which can erode
margins on certain projects. The unusual wet weather may also cause margins to erode
when the work is eventually restarted as it may require overtime hours to complete the
work on schedule.
As costs are established on estimates for fixed price contracts, DNT bears the risk for cost
overruns. Generally it manages the risk with vigorous pre-bid analysis and through
hedging of its materials and fuel costs. However, errors in estimating and unforeseen
weather events can cause both labour and materials costs overruns.
DNT generates a large portion of its revenues from a handful of customers. If DNT fails to
win new tenders with these customers or if the customers face financial trouble, which
results in the delay or cancelation of new projects, DNT’s revenue and cash flows can be
negatively impacted until the revenue can be replaced through other sources.
Risks Relating Specifically to Federal Resources
Complex procurement rules
and regulations on U.S.
government contracts
Subject to reviews, audits
and costs adjustments by the
U.S. government
Contracts can be cancelled at
anytime
Federal Resources derives a majority of its revenue from contracts with the U.S.
government, as well as other State level and municipal contracts. U.S. government
contracts have complex procurement rules and certain regulations. A failure to abide by
these rules/regulations can result in penalties such as termination of certain contracts,
disqualification from bidding on future contracts and suspension or permanent removal
from bidding on U.S. government contracts.
If a review, audit or cost adjustment conducted by the U.S. government results in an
outcome negative to Federal Resources, it could adversely affect their profitability, cash
flow or growth prospects.
The U.S. government can cancel contracts at any time through a termination of
convenience provision, provided that they cover Federal Resources for costs incurred.
Although cost coverage would result in Federal Resources not incurring a loss on the
inventory it purchased, it will not make a profit on the sale and will need to find a substantial
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
54
Management Discussion and Analysis (continued)
Competition is intense
Seasonality/variability of
revenue
Working capital requirements
at certain times of the year
can be significant
A decline in U.S. government
defense budgets can impact
FRS
new customer or customers and sell the product over a prolonged period of time in order
to eventually realize a profit on the inventory.
Federal Resources competes with a number of large established multinational companies.
This results in competitive pricing and low profit margins. Successfully winning contracts
in a competitive environment can result in losses on certain contracts if certain variables
change given the low profit margins Federal Resources operates with.
Due to the timing of government’s budget cycles, the majority of Federal Resources sales
can come within a certain time of the year. This requires Federal Resources to manage
its cash flows for operations, debt payments and distribution payments to Alaris for the
remaining months of a given year out of the cash generated from prior sales. Failure to
properly manage cash flow from seasonal sales could negatively impact Federal
Resources cash flow.
Due to the amount of inventory Federal Resources has to carry to satisfy certain contracts
at certain times of the year, it can result in significant requirements for working capital to
fund operations. If Federal Resources fails to have sufficient working capital to support
periodic needs it could negatively impact the cash flows of the business and thus payment
of Distributions to Alaris.
Given that Federal Resources generates a majority of its revenue from U.S. government
defense contracts it could be negatively impacted by a general decrease in defense budget
spending in a given year.
Risks relating to all of our Private Company Partners, generally
RISKS RELATING TO ALL OF OUR PRIVATE COMPANY PARTNERS, GENERALLY
In addition to the risks relating specifically to our material Private Company Partners, there a number of other risks which impact all of
our current and future Private Company Partners collectively, which if realized, could have a material impact on our operations and
financial condition, as described below.
How a Private Company Partner is leveraged may have adverse consequences to them
Leverage may have important adverse consequences on our Private Company Partners. Private Company Partners may be subject
to restrictive financial and operating covenants. Leverage may impair our Private Company Partners' ability to finance their future
operations and capital needs as well as to continue to pay our distribution. As a result, their flexibility to respond to changing business
and economic conditions and to business opportunities may be limited. A leveraged company's income and net assets will tend to
increase or decrease at a greater rate than if borrowed money was not used.
Our Private Company Partners rely on key personnel
Often, the success of a private business depends on the management talents and efforts of one or two persons or a small group of
persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on a Private
Company Partner's operations or ability to access additional capital, qualified personnel, expand or compete. See also, "Risk Factors
– Operational and Financial Risk Factors Relating to our Business" as well as "We and our Private Company Partners rely heavily on
key personnel".
A lack of funding for our Private Company Partners could have adverse consequences to them
Each of our Private Company Partners may continue to require additional working capital to conduct their existing business activities
and to expand their businesses. Our Private Company Partners may need to raise additional funds through collaborations with
corporate partners, including Alaris, or through private or public financings to support their long-term growth efforts. If adequate funds
are not available, our Private Company Partners may be required to curtail their business objectives in one or more areas. There can
be no assurance that unforeseen developments or circumstances will not alter a Private Company Partner's requirements for capital,
and no assurance can be given that additional financing will be available on acceptable terms, if at all.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
55
Management Discussion and Analysis (continued)
Failure to Realize Anticipated Benefits of Acquisitions
The business model for a number of our Private Company Partners includes an acquisition strategy involving the acquisition of
businesses and assets or growth through expanding to new locations. In addition, a Private Company Partner's business could launch
a new business line or service offering. Achieving the benefits of acquisitions, new business lines, new locations and other transactions
depends on, among other things, successfully consolidating functions and integrating operations and procedures in a timely and
efficient manner, allocating appropriate resources, including management time, and a Private Company Partner's ability to realize the
anticipated growth opportunities and synergies from combining the acquired businesses, assets and operations with those of their
own. The integration of acquired businesses, new business lines or locations may require substantial management effort, time and
resources diverting management's focus from other strategic opportunities and operational matters. A failure to realize on the
anticipated benefits of such acquisitions, new business lines or locations could have a material adverse impact on a Private Company
Partner's operations and therefore on our operations.
Our Private Company Partners may suffer damage to their brand reputations
Damage to the reputation of our Private Company Partners' brands, or the reputation of the brands of suppliers of products that are
offered by the Private Company Partners, could result from events out of the control of our Private Company Partners. This damage
could negatively impact consumer opinion of our Private Company Partners or their related products and services, which could have
an adverse effect on the Private Company Partners' performance.
Our Private Company Partners face intense competition
Our Private Company Partners may face intense competition, including competition from companies with greater financial and other
resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial
and technical personnel. There can be no assurance that our Private Company Partners will be able to successfully compete against
their respective competitors or that such competition will not have a material adverse effect on their businesses, financial condition,
results of operations and cash flows and therefore their ability to pay Distributions to Alaris.
Additional franchises and franchise operations may be limited
One of our Private Company Partners, End of the Roll, is a franchisor. The growth of revenues of this company is largely dependent
upon its ability to maintain and grow its franchise systems and to execute its current growth strategy for both increasing the number of
franchisees and increasing the number of locations. If this company is unable to attract qualified franchisees, its operations could be
adversely affected. The slowing of growth could lead potential and existing franchisees to begin to look elsewhere for better
opportunities. The growth of the franchise network through adding new franchisees is somewhat dependent upon available personnel.
Additionally, PFGP is a franchisee of Planet Fitness. As such, PGFP’s operations depend, in part, on decisions made by the Planet
Fitness franchisor, including decisions relating to pricing, advertising, policy and procedures as well as approvals required for
acquisitions and territory expansion. Business decisions made by the franchisor could impact PFGP’s operating performance and
profitability. In addition, PFGP must comply with the terms of its franchise agreements with the franchisor and its applicable land
development agreements. A failure to comply with such obligations or a failure to obtain renewals on any expiring franchise
agreements could adversely affect PFGP’s operations.
Changes in the industry in which the Private Company Partners operate
Our Partners operate in a number of different industries, some of which are heavily regulated. A change in the regulatory regime of
such industries or a material change in the economic factors specific to any industry in which our Partners operate, could have a
material impact on the operations of such Partners and, therefore, could have an adverse impact on their ability to pay Distributions to
Alaris.
Risks regarding legal proceedings involving our Private Company Partners
During the course of their operations, our Partners may be subject to or involved in lawsuits, claims, regulatory proceedings, or other
litigation matters for amounts not covered by their liability insurance. Some of these proceedings could result in significant costs and
restraints on a Partner’s operations, which could negatively impact their ability to pay the Distributions to Alaris and, therefore, could
have a material impact on our financial performance.
There could be material adjustments to financial information once an annual audit is conducted
Alaris receives unaudited internal financial information from each of its Private Company Partners throughout the year and bases
certain estimates on this information including the earnings coverage ratios Alaris discloses throughout the year. Upon conducting an
audit of the annual information there could be material adjustments to the financial statements used by us in determining such estimates
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
56
Management Discussion and Analysis (continued)
and therefore Alaris may have to change certain guidance that it had previously given to its shareholders. The adjustments could also
impact financial covenants that our Private Company Partners have with their lenders and thus could impact the distribution to Alaris.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward looking statements. Statements other than statements of historical fact contained in this MD&A may be
forward looking statements, including, without limitation: management’s expectations, intentions and beliefs concerning the growth,
results of operations, performance and business prospects and opportunities of the Corporation and the Partners, the general
economy, the amount and timing of the declaration and payment of dividends by the Corporation, the future financial position or
results of the Corporation, business strategy, proposed acquisitions, growth opportunities, budgets, litigation, projected costs and
plans and objectives of or involving the Corporation or the Partners. In particular, this MD&A contains forward looking statements
regarding the anticipated financial and operating performance of the Partners in 2018, including, without limitation, the earnings
coverage ratio for the Partners and the Corporation’s Annualized Payout Ratio; the revenues to be received by Alaris in 2018 (on an
annual and quarterly basis); the Corporation’s general and administrative expenses and cash requirements in 2018; the CRA
proceedings (including the expected timing and financial impact thereof); the Corporation’s payout ratio (actual and annualized);
changes in Distributions from Partners; the proposed resolutions to outstanding issues with certain Partners; the restart of
Distributions from any partners not currently paying a Distribution; the timing for collection of deferred or unpaid Distributions; and
Alaris’ ability to attract new private businesses to invest in. Many of these statements can be identified by looking for words such as
"believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words or the negative thereof. To
the extent that any forward-looking statements herein constitute a financial outlook, including without limitation, estimated revenues,
and expenses, Annualized Payout Ratio, and changes in distributions from Partners, they were approved by management as of the
date hereof and have been included to assist readers in understanding management’s current expectations regarding Alaris’ financial
performance and are subject to the same risks and assumptions disclosed herein. There can be no assurance that the plans,
intentions or expectations upon which these forward looking statements are based will occur. Forward looking statements are subject
to risks, uncertainties and assumptions and should not be read as guarantees or assurances of future performance. Accordingly,
readers are cautioned not to place undue reliance on any forward looking information contained in this MD&A. Statements containing
forward looking information reflect management’s current beliefs and assumptions based on information in its possession on the
date of this MD&A. Although management believes that the expectations represented in such forward looking statements are
reasonable, there can be no assurance that such expectations will prove to be correct.
Statements containing forward-looking information by their nature involve numerous assumptions and significant known and
unknown facts and uncertainties of both a general and a specific nature. The forward looking information contained herein are based
on certain assumptions, including assumptions regarding the performance of the Canadian and U.S. economies over the next 24
months and how that will affect our business and our ability to identify and close new opportunities with new Private Company
Partners; the continuing ability of the business of the Partners to pay the distributions; the performance of the Private Company
Partners; that interest rates will not rise in a material way over the next 12 to 24 months; that the businesses of the Partners will not
change in a material way; that the Corporation will experience net positive resets to its annual royalties and distributions from its
Partners in 2018; more private companies will require access to alternative sources of capital; and that Alaris will have the ability to
raise required equity and/or debt financing on acceptable terms.
Some of the factors that could affect future results and could cause results to differ materially from those expressed in the forward
looking statements contained herein include risks relating to: the dependence of the Corporation on the Partners; risks relating to
the Partners and their businesses; reliance on key personnel; general economic conditions; failure to complete or realize the
anticipated benefits of transactions; limited diversification of Alaris’ transactions; management of future growth; availability of future
financing; competition; government regulation; leverage and restrictive covenants under credit facilities; the ability of the Partners to
terminate the various agreements with Alaris; unpredictability and potential volatility of the trading price of the common shares;
fluctuations in the amount of cash dividends; restrictions on the potential growth of the Corporation as a consequence of the payment
by Alaris of substantially all of its operating cash flow; income tax related risks; ability to recover from the Partners for defaults under
the various agreements with Alaris; potential conflicts of interest; dilution; liquidity of Common Shares; changes in the financial
markets; risks associated with the Partners and their respective businesses; a change in the ability of the Partners to continue to
pay Distributions to Alaris; a material change in the operations of a Partner or the industries in which they operate; a failure to obtain
the benefit of any concessions provided to any Partners; a failure to obtain by the Corporation or the Partners required regulatory
approvals on a timely basis or at all; changes in legislation and regulations and the interpretations thereof; litigation risk associated
with the CRA’s reassessment and the Corporation’s challenge thereof; and material adjustments to the unaudited internal financial
reports provided to Alaris by the Partners. The information contained in this MD&A, and the Corporations annual management
discussion and analysis for the year ended December 31, 2017 including the information set forth under "Risks and Uncertainty",
identifies additional factors that could affect the operating results and performance of the Corporation. Without limitation of the
foregoing assumptions and risk factors, the forward looking statements in this MD&A regarding the revenues anticipated to be
received from the Partners and the Corporation's general and administrative expenses are based on a number of assumptions
including no adverse developments in the business and affairs of the Partners that would impair their ability to fulfill their payment
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
57
Management Discussion and Analysis (continued)
obligations to the Corporation and no material changes to the business of the Corporation or current economic conditions that would
result in an increase in general and administrative expenses.
The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward
looking statements included in this MD&A are made as of the date of this MD&A and Alaris does not undertake or assume any
obligation to update or revise such statements to reflect new events or circumstances except as expressly required by applicable
securities legislation.
ADDITIONAL INFORMATION
Additional information relating to the Corporation, including the Corporation's Annual Information Form, is on available on SEDAR at
www.sedar.com or under the “Investors” section of the Corporations website at www.alarisroyalty.com.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
58
Consolidated Financial Statements of
ALARIS ROYALTY CORP.
Audited financial statements for the years ended
December 31, 2017 and 2016
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
59
CONSOLIDATED FINANCIAL STATEMENTS
KPMG LLP
205 – 5th Avenue SW, Suite 3100
Calgary, AB T2P 4B9
Telephone (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Alaris Royalty Corp.
We have audited the accompanying consolidated financial statements of Alaris Royalty Corp., which comprise the
consolidated statement of financial position as at December 31, 2017 and December 31, 2016, the consolidated statements
of comprehensive income / (loss), changes in equity and cash flows for the years then ended, and notes, comprising a
summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud
or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments,
we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Alaris
Royalty Corp. as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the
years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
March 5, 2018
Calgary, Canada
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG
LLP.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
60
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Consolidated Financial Statements (continued)
31-Dec
2017
$ 35,475
2,407
1,430
8,642
2,957
15,403
$ 66,315
32,017
19,252
503
6,116
669,216
-
727,103
$ 793,418
$ 1,707
4,921
-
588
7,217
8,192
173,464
181,656
$ 188,873
$ 620,842
12,058
-17,036
5,767
-17,087
$ 604,545
$ 793,418
31-Dec
2016
$ 29,491
2,097
-
16,762
3,654
21,922
$ 73,926
7,891
16,256
647
6,206
681,093
1,201
713,295
$ 787,221
$ 3,057
4,905
712
2,007
10,682
22,458
99,383
121,841
$ 132,523
$ 617,893
11,628
(27,931)
23,029
30,079
$ 654,698
$ 787,221
Note
10
5
9
5
5
9
5
5
9
10
9
9
7
6
13
$ thousands
Assets
Cash and cash equivalents
Prepayments
Foreign exchange contracts
Trade and other receivables
Investment tax credit receivable
Promissory notes receivable
Current Assets
Promissory notes and other receivables
Deposits
Equipment
Intangible assets
Investments at fair value
Investment tax credit receivable
Non-current assets
Total Assets
Liabilities
Accounts payable and accrued liabilities
Dividends payable
Foreign exchange contracts
Income tax payable
Current Liabilities
Deferred income taxes
Loans and borrowings
Non-current liabilities
Total Liabilities
Equity
Share capital
Equity reserve
Fair value reserve
Translation reserve
Retained earnings / (deficit)
Total Equity
Total Liabilities and Equity
Subsequent events
On behalf of the Board:
Director (signed) "Jack C. Lee"
Director (signed) "Mary Ritchie"
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
61
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME / (LOSS)
Consolidated Financial Statements (continued)
Year ended December 31
$ thousands except per share amounts
Note
Revenues
Royalties and distributions
Interest and other
Total Revenue
Other income
Gain on partner redemptions
Realized gain on foreign exchange contracts
Total other income
Salaries and benefits
Corporate and office
Legal and accounting fees
Non-cash stock-based compensation
Bad debt expense & reserve
Impairment and other charges
Depreciation and amortization
Total Operating Expenses
Earnings before the undernoted
Finance costs
Unrealized (gain) on foreign exchange contracts
Unrealized foreign exchange loss
Earnings before taxes
Current income tax expense
Deferred income tax expense / (recovery)
Total income tax expense
Earnings
Other comprehensive income
Transfer on redemption of investments at fair value
Transfer from fair value reserve to impairment and other
charges
Net change in fair value of investments at fair value
Tax effect of items in other comprehensive income
Foreign currency translation differences
Other comprehensive (loss) for the year net of income
tax
Total comprehensive income for the year
Earnings per share
Basic
Fully diluted
5
5
5
8
5
5
7
6
6
2017
$ 86,684
2,389
89,073
26,575
1,370
27,945
3,371
2,597
2,096
3,379
23,430
42,491
268
77,632
39,386
6,582
(2,144)
12,793
22,155
22,089
(11,815)
10,274
$ 11,882
$ (9,062)
4,250
16,692
(984)
(17,262)
(6,366)
$ 5,516
$0.33
$0.32
2016
$ 98,486
1,556
100,042
20,271
3,473
23,744
3,361
3,297
2,513
4,369
2,442
7,000
279
23,260
100,526
5,882
(4,633)
13,136
86,142
7,104
12,484
19,589
$ 66,553
$ (27,399)
-
(8,020)
5,613
(4,622)
(34,428)
$ 32,125
$1.83
$1.81
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
62
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended December 31, 2016
$ thousands
Balance at January 1, 2016
Earnings for the year
Other comprehensive income / (loss)
Transfer on redemption of investments at fair value
Transfer from fair value reserve to impairment and other
charges
Net change in investments at fair value
Tax effect on items in other comprehensive income
Foreign currency translation differences
Total other comprehensive income / (loss)
Total comprehensive income / (loss) for the year
Transactions with shareholders of the Company,
recognized directly in equity
Non-cash stock based compensation
Dividends to shareholders
Options exercised in the period
Notes
Share
Capital
$ 617,627
Equity
Reserve
$ 7,526
Fair Value
Reserve
$ 1,875
Translation
Reserve
$ 27,651
Retained
Earnings
$ 22,368
Total
Equity
$ 677,046
$ -
$ -
$ -
$ -
$ 66,553
$ 66,553
-
-
-
-
-
-
$ -
-
-
-
-
-
(27,399)
-
-
-
(8,020)
5,613
-
-
(4,622)
-
-
-
-
-
-
(27,399)
-
(8,020)
5,613
(4,622)
-
$ -
(29,806)
$ (29,806)
(4,622)
$ (4,622)
-
$ 66,553
(34,428)
$ 32,125
8
6
$ -
$ 4,369
-
-
266
(266)
$ -
-
-
Total transactions with Shareholders of the Company
Balance at December 31, 2016
266
$ 617,893
4,103
$ 11,628
-
$ (27,931)
$ -
$ -
$ 4,369
-
-
-
$ 23,029
(58,842)
(58,842)
-
-
(58,842)
$ 30,079
(54,474)
$ 654,698
C
o
n
s
o
l
i
d
a
t
i
e
d
F
n
a
n
c
a
i
l
S
a
t
t
e
m
e
n
t
s
(
c
o
n
t
i
n
u
e
d
)
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
63
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended December 31, 2017
$ thousands
Balance at January 1, 2017
Earnings for the year
Other comprehensive loss
Transfer on redemption of investments at fair value
Transfer from fair value reserve to impairment and other
charges
Net change in investments at fair value
Tax effect on items in other comprehensive income
Foreign currency translation differences
Total other comprehensive income / (loss)
Total comprehensive income / (loss) for the year
Transactions with shareholders of the Company,
recognized directly in equity
Non-cash stock based compensation
Dividends to shareholders
Options / RSU's exercised in the period
Share
Equity
Fair Value
Translation
Notes
Capital
Reserve
Reserve
$ 617,893
$ 11,628
$ (27,931)
Reserve
$ 23,029
Retained
Earnings /
(Deficit)
$ 30,079
Total
Equity
$ 654,698
$ -
$ -
$ -
$ -
$ 11,882
$ 11,882
-
-
-
-
-
$ -
-
-
-
-
(9,062)
4,250
16,692
(984)
-
-
-
(17,262)
-
-
-
-
-
-
$ -
10,896
$ 10,896
(17,262)
$ (17,262)
-
$ 11,882
(9,062)
4,250
16,692
(984)
(17,262)
(6,366)
$ 5,516
8
6
$ -
$ 3,379
-
-
2,950
(2,950)
$ -
-
-
Total transactions with Shareholders of the Company
Balance at December 31, 2017
2,950
$ 620,842
429
$ 12,058
-
$ (17,035)
$ -
$ -
$ 3,379
-
-
-
$ 5,767
(59,048)
(59,048)
-
-
(59,048)
$ (17,087)
(55,669)
$ 604,545
C
o
n
s
o
l
i
d
a
t
i
e
d
F
n
a
n
c
a
i
l
S
a
t
t
e
m
e
n
t
s
(
c
o
n
t
i
n
u
e
d
)
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
64
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31
$ thousands
Cash flows from operating activities
Earnings from the year
Adjustments for:
Finance costs
Deferred income tax expense / (recovery)
Depreciation and amortization
Bad debt expense & reserve
Impairment and other charges
Gain on partner redemptions, net of cash taxes
Unrealized (gain) on foreign exchange contracts
Unrealized foreign exchange loss
Non-cash stock-based compensation
Change in:
- trade and other receivables
- income tax receivable / payable
- prepayments
- accounts payable and accrued liabilities
Cash generated from operating activities
Finance costs
Net cash from operating activities
Cash flows from investing activities
Acquisition of equipment
Acquisition of preferred units
Proceeds from partner redemptions, net of cash taxes
Promissory notes issued
Promissory notes repaid
Net cash used in investing activities
Cash flows from financing activities
Repayment of debt
Proceeds from debt
Dividends paid
Deposits with CRA
Net cash from / (used in) financing activities
Net increase in cash and cash equivalents
Impact of foreign exchange on cash balances
Cash and cash equivalents, Beginning of year
Cash and cash equivalents, End of year
Notes
2017
2016
7
9
5
5
5
8
5
9
7
5
5
5
5
7
7
6
9
$ 11,882
$ 66,553
6,582
(11,815)
268
23,430
42,491
(10,535)
(2,144)
12,793
3,379
$ 76,331
(1,693)
319
227
(1,350)
73,834
(6,582)
$ 67,252
5,882
12,484
279
2,442
7,000
(20,271)
(4,633)
13,136
4,369
$ 87,241
(13,018)
3,694
337
919
79,174
(5,882)
$ 73,292
$ (32)
(175,293)
116,277
(16,467)
617
$ (74,899)
$ (43)
(110,882)
103,212
(6,750)
313
$ (14,151)
$ (116,277)
196,528
(59,032)
(2,422)
$ 18,797
$ (78,863)
99,657
(58,838)
(4,233)
$ (42,278)
$ 11,151
(5,166)
29,491
$ 35,475
$ 16,863
(8,363)
20,991
$ 29,491
Cash Taxes paid
$ 26,712
$ 7,900
Notes to Consolidated Financial Statements (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REPORTING ENTITY
Alaris Royalty Corp. is a company domiciled in Calgary, Alberta, Canada. The consolidated financial statements as at and for the
year ended December 31, 2017 comprise Alaris Royalty Corp. and its subsidiaries (together referred to as the “Corporation”). The
Corporation’s Canadian operations are conducted through a partnership (Alaris Income Growth Fund Partnership) and Salaris Small
Cap. Royalty Corp. (“Salaris”). The Corporation’s American operations are conducted through two Delaware Corporations, Alaris
USA Inc.(“Alaris USA”) and Salaris USA Royalty Inc. (“Salaris USA”). The Corporation’s operations consist primarily of investments
in private operating entities, typically in the form of preferred limited partnership interests, preferred interest in limited liability
corporations in the United States, loans receivable, or long-term license and royalty arrangements. The Corporation also has wholly-
owned subsidiaries in the Netherlands, Alaris Cooperatief U.A. (“Alaris Cooperatief”) and Salaris Cooperatief U.A. (“Salaris
Cooperatief”).
2. STATEMENT OF COMPLIANCE
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board.
These consolidated financial statements were approved by the Board of Directors on March 5, 2018.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following material items in
the statement of financial position:
Available-for-sale financial assets (Investments at fair value) are measured at fair value with changes in fair value
recorded in other comprehensive income or earnings if the asset is impaired.
Derivative financial instruments are measured at fair value
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars which is the Corporation’s functional currency.
Alaris USA Inc. and Salaris USA have the United States dollar, while Alaris Cooperatief and Salaris Cooperatief have the
Canadian dollar as the functional currencies.
(d) 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.
Information about assumptions, judgments and estimation uncertainties that have a significant risk of resulting in a material
adjustment within the next twelve months are as follows:
Key judgments
A key judgment relates to the consideration of control, joint control and significant influence in each of our investments. The
Corporation has agreements with various partners and these agreements include not only clauses as to distributions but also
various protective rights. The Corporation has assessed these rights under IFRS 10 and 11 and determined that consolidation is
not appropriate. In a number of our investments we have protective rights, which provides the Corporation the right to demand
repayment of our investment if it is in default of the terms of our operating agreement. Failure to satisfy the demand for repayment
can lead to the Corporation’s rights to allow it to control the investment.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
66
Notes to Consolidated Financial Statements (continued)
2. Statement of compliance (continued):
Key estimates used in discounted cash flow projections
Key assumptions used in the calculation of the fair value of available for sale financial assets are discount rates, terminal value growth
rates and annual performance metric growth rates. Where partners are in default, other valuation methods may be used. See note 5
for details in respect of the calculation.
Collectability of amounts receivable
Management makes estimates on the timing and availability of cash flows from its partners to pay for amounts that are past due.
These estimates are generally based on a combination of the relevant partners’ most recently available financial information and past
performance. Refer to note 5 for details on the Corporation’s assessment of collectability of amounts receivable that are past due.
Income taxes
Provisions for income taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment
of all relevant factors. Management reviews the adequacy of these provisions at the end of the reporting period. However, it is possible
that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax related
matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which
such determination is made.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements, unless otherwise indicated.
(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Corporation. The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that control ceases.
(ii) Transactions eliminated on consolidation
Intra-Corporation balances and transactions, and any unrealized income and expenses arising from intra-Corporation transactions,
are eliminated in preparing the consolidated financial statements.
(b) Revenue recognition
The Corporation recognizes revenue from the distributions and royalties it receives from the private company partners as they
become due under the partnership agreement, limited liability corporation agreement, or royalty agreement with each specific partner
and reasonable assurance of collection exists.
(c) Financial instruments
(i) Non-derivative financial assets
The Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers
the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards
of ownership of the financial asset are transferred.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets
are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and
receivables are measured at amortized cost using the effective interest method, less any impairment losses.
Loans and receivables are comprised of cash and cash equivalents, and trade and other receivables, and promissory notes and
other receivables.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash balances and banker’s acceptances with original maturities of three months or
less.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
67
Notes to Consolidated Financial Statements (continued)
3. Significant accounting policies (continued):
Available-for-sale financial assets
Investments at fair value are non-derivative financial assets that are designated as available for sale or are not classified in any of
the previous categories. The Corporation’s investments in preferred partnership units, limited liability corporations and the loan
receivable from Federal Resources are classified as available-for-sale financial assets. Subsequent to initial recognition, they are
measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income and
presented in fair value reserve. When an investment is derecognized, the gain or loss accumulated in equity is reclassified to profit
or loss.
The Corporation’s interest in the partner companies is through ownership of preferred units. The units do not constitute control or
significant influence over the businesses as the units are predominantly non-voting (in some cases there are minority voting shares
for structuring purposes only). The units do not include any residual benefits and the Corporation has no right to participate in
management decisions except in certain instances outside the normal course of business (adding new debt, change of control,
extraordinary capital expenses and material acquisitions and divestitures) and the Corporation is not involved in the financial or
operating policies of the partner company.
After an exclusive letter of intent has been signed, the Corporation records all transaction costs incurred, in relation to the acquisition
of investments classified as available for sale, as an additional cost of the investment.
(ii) Derivative financial instruments
The Corporation holds derivative financial instruments to hedge its foreign currency exposure. The fair value of the forward contracts
will be estimated at each reporting date and any gain or loss on the contracts will be recognized in profit or loss. The Corporation
does not apply hedge accounting to these hedging contracts.
(d) Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a
deduction from equity, net of any tax effects.
(e) Equipment
(i) Recognition and measurement
Equipment is measured at cost less accumulated depreciation.
(ii) Depreciation
Depreciation is based on the cost of an asset less its residual value. Depreciation is recognized in profit or loss on a straight-line
basis over the estimated useful life of the asset. Depreciation methods, useful lives and residual values are reviewed at each annual
reporting date and adjusted if appropriate.
(f)
Intangible assets
(i)
Intangible assets
Intangible assets are comprised solely of the Corporation’s investment in certain intellectual property of End of the Roll, which has
a finite useful life and is measured at cost less accumulated amortization and accumulated impairment losses.
(ii) Amortization
Amortization is based on the cost of an asset less its residual value. Amortization is recognized in profit or loss on a straight-line
basis over the estimated useful lives of the intangible assets from the date that they are available for use. Intangible assets held by
the Corporation include intellectual property and are amortized over the 80 year life of the license and royalty agreement.
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
(g) Impairment
(i) Non-derivative financial assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is
objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after
the initial recognition of the asset, and that the loss event has a negative effect on the estimated future cash flows of that asset that
can be estimated reliably.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
68
Notes to Consolidated Financial Statements (continued)
3. Significant accounting policies (continued):
Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due
to the Corporation on terms that the Corporation would not consider otherwise, indications that a debtor or issuer will enter
bankruptcy, economic conditions that correlate with defaults or the disappearance of an active market for a security. In addition, for
an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of
impairment.
(ii) Available-for-sale financial assets
Impairment losses on available-for-sale financial assets are recognized by reclassifying losses accumulated in fair value reserve in
equity, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition
cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously in
profit or loss. Changes in impairment provisions attributable to application of the effective interest method are reflected as a
component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale security increases and the
increase can be related objectively to an event occurring after the impairment loss was recognized in profit or loss, then the
impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the
fair value of an impaired available-for-sale equity security is recognized in other comprehensive income.
(h) Share based payment transactions
The grant-date fair value of share–based payment awards granted to employees is recognized as an employee expense, with a
corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount
recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions
are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the
related service and non-market performance conditions at the vesting date.
(i) Finance costs
Finance costs comprise interest expense on borrowings and credit facility renewal fees. Borrowing costs that are not directly
attributable to the acquisition of a qualifying asset are recognized in profit or loss using the effective interest method.
(j)
Income tax
Income tax expense comprises current and deferred tax. Current and deferred tax is 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 period, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also
includes any tax liability arising from the declaration of dividends.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:
temporary differences on 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;
temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable
that they will not reverse in the foreseeable future; and
taxable temporary differences arising on the initial recognition of goodwill.
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 period.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they
related to income taxes levied by the 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.
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.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
69
Notes to Consolidated Financial Statements (continued)
3. Significant accounting policies (continued):
(k) Earnings per Share
The Corporation presents basic and diluted earnings per share data for its common shares. Basic earnings per share is calculated
by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to common
shareholders and the weighted average number of common shares outstanding, adjusted for the effects of all dilutive potential
common shares, which comprise restricted share units and share options granted to employees.
(l) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of the Corporation’s entities at exchange
rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are
retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the
difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments
during the year and the amortized cost in foreign currency translated at the exchange rate at the end of the year.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the
functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency
that are measured based on historical cost are translated using the exchange rate at the date of the transaction.
Foreign currency differences arising on retranslation are recognized in profit or loss, except for available for sale equity investments
(except on impairment in which case foreign currency differences that have been recognized in other comprehensive income are
reclassified to profit or loss) which are recognized in other comprehensive income.
(m) Foreign operations
The assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates at the reporting date. The income
and expenses of foreign operations are translated to Canadian dollars at exchange rates at the dates of the transactions.
Foreign currency differences are recognized in other comprehensive income, and presented in the foreign currency translation
reserve (translation reserve) in equity. When a foreign operation is disposed of such that control, significant influence or joint control
is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as a part of
the gain or loss on disposal.
When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the
foreseeable future, foreign currency gains and losses arising from such items are considered to form part of a net investment in the
foreign operation and are recognized in other comprehensive income, and presented in the translation reserve in equity.
(n) New standards and interpretations not adopted
IFRS 9: Financial Instruments
On July 24, 2014, the IASB issued the final version of IFRS 9, “Financial Instruments” (“IFRS 9”) to replace IAS 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”).
IFRS 9 introduces a single approach to determine whether a financial asset is measured at amortized cost or fair value and replaces
the multiple rules in IAS 39. The approach is based on how an entity manages its financial instruments in the context of its business
model and the contractual cash flow characteristics of the financial assets. The IAS 39 measurement categories for financial assets
will be replaced by fair value through profit or loss (“FVTPL”), fair value through other comprehensive income and amortized cost.
IFRS 9 retains most of the IAS 39 requirements for financial liabilities and the Corporation does not anticipate any changes in
classification or measurement of financial liabilities on transition to IFRS 9.
A new expected credit loss model for calculating impairment on financial assets classified at amortized cost replaces the incurred
loss impairment model used in IAS 39. The new model is expected to result in more timely recognition of expected credit losses.
When financial assets are impaired by credit losses and the entity records the impairment in a separate account (eg an allowance
account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than
directly reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in that account during the period for
each class of financial assets.
IFRS 9 is effective for years beginning on or after January 1, 2018. Based on the assessments undertaken to date, the following
classification and measurement differences between IAS 39 and IFRS 9 are expected:
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
70
3. Significant accounting policies (continued):
Notes to Consolidated Financial Statements (continued)
Financial Instrument
Category
Measurement
Category
Measurement
IAS 39
IFRS 9
Cash and cash
Equivalents
Trade and other
receivables
Foreign exchange
contracts
Promissory notes
receivable
Investments at fair value
Accounts payable and
accrued liabilities
Loans and borrowings
FVTPL
Fair value
Amortized cost
Amortized cost
Loans and
receivables
Amortized cost
Amortized cost
Amortized cost
FVTPL
Fair value
FVTPL
FVTPL
Loans and
receivables
Available for
sale financial
assets
Amortized cost
Amortized cost
Amortized cost
Fair value
FVTPL
FVTPL
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Although the investments at fair value will continue to be measured at fair value, fair value gains or losses will be recorded through
profit or loss as opposed to through other comprehensive income. Therefore, on transition to IFRS 9, an adjustment will be made to
move cumulative fair value gains or losses from the fair value reserve to retained earnings. The Corporation is still assessing the
classification and measurement of its loan to Federal Resources, which will either be at amortized cost or at FVTPL. Should it be
classified at amortized cost, a transition adjustment for this change in classification and measurement will be required. No other
adjustments to opening retained earnings are anticipated on adoption of IFRS 9 as it relates to classification and measurement of
financial assets.
For those financial assets classified and measured at amortized cost, the expected credit loss model will be applied to determine
impairment of financial assets. This will therefore apply to trade and other receivables, as well as promissory notes receivable.
The Corporation has compared its existing methodology to determining credit losses and compared to the expected credit loss model
that will be applied to assets classified at amortized cost. The Corporation is in the process of finalizing the quantum of this
adjustment, however, does not expect it to be material.
IFRS 15: Revenue from Contracts with Customers
Revenue from Contracts with Customers provides guidance on revenue recognition and relevant disclosures, and is effective for
annual reporting periods beginning on or after January 1, 2018. Due to the fact that the majority of its revenues are generated from
financial instruments and therefore not in the scope of IFRS 15, the Corporation does not expect any material changes to its revenue
recognition and does not anticipate any transition adjustments.
4. FINANCIAL RISK MANAGEMENT
Overview
The Corporation has exposure to the following risks from its use of financial instruments:
credit risk and other price risk
liquidity risk
market risk
foreign exchange risk
This note presents information about the Corporation’s exposure to each of the above risks, the Corporation’s objectives, policies
and processes for measuring and managing risk, and the Corporation’s management of capital. Further quantitative disclosures are
included throughout these consolidated financial statements.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
71
Notes to Consolidated Financial Statements (continued)
4. Financial risk management (continued):
Risk Management Framework
The Board of Directors has overall responsibility for the establishment and oversight of the Corporation’s risk management
framework. The Board has established the Risk Management Committee, which is responsible for developing and monitoring the
Corporation’s risk management policies. The committee reports regularly to the Board of Directors on its activities.
The Corporation’s risk management policies are established to identify and analyse the risks faced by the Corporation, 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 Corporation’s activities. The Corporation aims to develop a
disciplined and constructive control environment in which all employees understand their roles and obligations.
The Corporation’s Audit Committee oversees how management monitors compliance with the Corporation’s risk management
policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the
Corporation. The Audit Committee undertakes both regular and ad hoc reviews of risk management controls and procedures.
Credit Risk and Other Price Risk
Credit risk is the risk of financial loss to the Corporation if a partner or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Corporation’s investments and amounts and promissory notes receivable. Concentrations
of credit risk exist when a significant proportion of the Corporation’s assets are invested in a small number of individually significant
investments, and investments with similar characteristics and/or subject to similar economic, political and other conditions that may
prevail. The Corporation’s exposure to credit risk is influenced mainly by the individual characteristics of each customer.
However, management also considers the demographics of counterparties, including the default risk of the industry and country in
which counterparties operate, as these factors may have an influence on credit risk. No single partner accounted for more than 20%
of the Corporation’s revenue in the year ended December 31, 2017. See note 5 for additional information on distributions receivable
that are past due.
Other price risk is the risk that future cash flows associated with portfolio investments will fluctuate. Changes in cash flow from
investments is generally based on a percentage of the investments’ gross revenue, same store sales, gross margin or other similar
revenue. Accordingly, to the extent that the financial performance of the investment declines in respect of the relevant performance
metric, cash payments to the Corporation will decline. Portfolio investment agreements allow for the repayment of investments at
the option of the portfolio entity, and such repayment could affect future cash flows.
The Corporation is exposed to credit related losses on current and future amounts receivable pursuant to investment agreements
and outsanding promissory notes. In the event of non-performance by partners, future royalty and distribution revenue from the
investments could be reduced, resulting in impairment of investment values. The investment agreements typically provide that
payments are receivable monthly no later than the last day of the month.
Cash and cash equivalents consist of cash bank balances and short-term deposits maturing in less than 90 days. The Corporation
manages the credit exposure related to short-term investments by selecting counter parties based on credit ratings and monitors all
investments to ensure a stable return, avoiding complex investment vehicles with higher risk such as asset backed commercial
paper. The Corporation held cash and cash equivalents of $35.5 million at December 31, 2017 (December 31, 2016 - $29.5 million),
which represents its maximum credit exposure on these assets. The unusually high amount of cash was in place in order to fund a
transaction of US$15 million (approximately $18.8 million) in January 2018 (see Note 13).
The carrying amount of investments, trade and other receivables, promissory notes, and cash and cash equivalents represents the
maximum credit exposure.
Liquidity Risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting the obligations associated with its financial liabilities
that are settled by delivering cash or another financial asset.
The Corporation’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the
Corporation’s reputation.
Typically the Corporation ensures that it has sufficient cash on hand to meet expected operational expenses for a period of 30 days,
including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably
be predicted. In addition, the Corporation maintains a $200 million, four year revolving credit facility, and has $173.5 million balance
drawn at December 31, 2017 ($99.5 million at December 31, 2016). Subsequent to December 31, 2017, the facility was increased
to $280 million. The Corporation has the following financial instruments that mature as follows:
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
72
Notes to Consolidated Financial Statements (continued)
Total
0-6 Months
6 mo – 1 yr
1 – 2 years
3 – 4 years
4. Financial risk management (continued):
31-Dec-17
Accounts payable and accrued
liabilities
Dividends payable
Income tax (payable) /
receivable
($1,707)
($1,707)
(4,921)
(4,921)
(588)
(588)
Loans and borrowings
(173,464)
-
Total
Market Risk
($180,681)
($7,217)
$ -
-
-
-
$ -
$ -
-
-
-
$ -
$ -
-
-
(173,464)
($173,464)
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the
Corporation’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and
control market risk exposures within acceptable parameters, while optimizing the return. All such transactions are carried out within
the guidelines set by the Risk Management Committee.
Foreign currency exchange rate risk and commodity price risk
As a result of the investments in the United States, the Corporation has exposure to foreign currency exchange rate risk. The
Corporation purchases forward exchange rate contracts to match expected distributions in US dollars on a rolling 12 month basis and
also for between 25% to 50% of the expected distributions on a rolling 12 to 24 month basis (current notional value of US$33.6 million).
The Corporation intends to purchase additional contracts each quarter so that approximately two years of distributions would be
hedged against movement in the US Dollar compared to the Canadian dollar. As at December 31, 2017, if the US foreign exchange
rate had been $0.01 lower with all other variables held constant, net income for the year would have been approximately $0.4 million
lower, due to a smaller unrealized foreign exchange gain during the period. An equal and opposite impact would have occurred to net
income had foreign exchange rates been $0.01 higher.
Additionally, the Corporation has US dollar subsidiaries and loans in US dollars (external senior debt, intercompany and with Federal
Resources) that are translated at each balance sheet date with an unrealized foreign exchange gain or loss recorded in earnings. As
at December 31, 2017, if the US foreign exchange rate had been $0.01 lower with all other variables held constant, net income for the
year would have been approximately $1.4 million lower due to lower net income from US subsidiaries, a larger unrealized loss on loans
to subsidiaries and Federal Resources, partially offset by a higher unrealized gain on USD denominated external debt.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation is
exposed to interest rate fluctuations on its bank debt that bears a floating rate of interest. As at December 31, 2017, if interest rates
had been 1% higher with all other variables held constant, net income for the year would have been approximately $1.1 million lower,
due to higher interest expense. An equal and opposite impact would have occurred to net income had interest rates been 1% lower.
The Corporation had no interest rate swap or financial contracts in place as at or during the year ended December 31, 2017.
Capital Management
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future
development of the business. Capital consists of share capital, a four year, $200 million revolving credit facility, a $50 million accordion
facility and retained earnings. The Board of Directors monitors the return on capital as well as the level of dividends to common
shareholders.
The Corporation manages capital by monitoring certain debt covenants set out in its credit facility. The Corporation has a maximum
senior debt to contracted EBITDA of 2.5:1 which can extend to 3.0:1 for a period of 90 days (actual ratio is 1.97:1 at December 31,
2017). Contracted EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization and non-
cash stock-based compensation expenses but the Corporation can include twelve months of revenue from partners that are less than
twelve months from closing and must exclude revenue from partners for the portion that was redeemed or repurchased and for
distributions that have been accrued and are past due. The Corporation has a fixed charge coverage ratio covenant of 1:1 (actual ratio
is 1.07:1 at December 31, 2017). Additionally, a minimum tangible net worth requirement of $450 million is in place (actual amount is
$598.4 million at December 31, 2017). Tangible net worth is defined as subordinated debt plus shareholders equity less intangible
assets. The Corporation was in compliance with all debt covenants at December 31, 2017. In order to acquire more distributions and
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
73
Notes to Consolidated Financial Statements (continued)
4. Financial risk management (continued):
royalties, the Corporation can access its credit facility for investing activity. Any funding requirements for acquisitions in excess of
availability under the credit facility will require, the Corporation to access public equity markets and manage the business within the
bank covenants. There were no significant changes in the Corporation’s approach to capital management, with a slight change in the
tolerance to carry a permanent amount of long term debt in the capital structure if it reduces the Corporation’s cost of capital.
Subsequent to December 31, 2017, the Corporation received an increase in its revolving credit facility to $280 million ($200 million as
of December 31, 2017), please see note 13 for details of the subsequent amendments to the Corporation’s credit facility.
(remainder of page left blank intentionally)
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
74
Notes to Consolidated Financial Statements (continued)
5. INVESTMENTS AT FAIR VALUE
Differences in the acquisition cost of Agility, Sequel, Kimco, Planet Fitness, DNT, FED, Sandbox, Providence and Unify
(formerly Matisia) at December 31, 2017 and December 31, 2016 are partially attributable to foreign currency translation.
31-Dec-17
$ thousands
Lower Mainland Steel Limited Partnership
(“LMS”)
Labstat International, LP (“Labstat”)
Agility Health, LLC (“Agility”)
SCR Mining and Tunneling, LP (“SCR”)
SM Group International, LP (“Group SM”)
Kimco Holdings, LLC (“Kimco”)
PF Growth Partners, LLC (“Planet Fitness”)
DNT, LLC (“DNT”)
Federal Resources Supply Company (“FED”):
Sandbox Acquisitions, LLC (“Sandbox”)
Providence Industries, LLC ("Providence")
Unify, LLC ("Unify") formerly Matisia, LLC
ccCommunications LLC (“ccComm”)
Accscient, LLC ("Accscient")
Sales Benchmark Index LLC (“SBI”)
Capitalized costs
Total LP and LLC Units
FED Loan Receivable
Acquisition
Cost
Capitalized
Cost
Net Cost
Fair Value
$ 60,034
$ 656
$ 60,690
$ 35,917
47,200
25,232
40,000
40,500
42,928
50,212
85,177
33,327
43,878
37,659
22,376
7,786
25,887
106,829
-
669,023
50,212
519
781
487
717
1,252
787
707
1,731
941
488
617
456
548
442
155
11,286
-
47,719
26,013
40,487
41,217
44,180
50,999
85,883
35,058
44,819
38,147
22,993
8,242
26,435
107,271
155
680,309
50,212
61,324
26,133
26,203
-
29,045
57,427
89,933
40,576
46,517
40,661
24,499
7,941
25,514
107,158
155
619,004
50,212
Total Investments at Fair Value
$ 719,235
$ 11,286
$ 730,521
$ 669,216
31-Dec-16
LMS
KMH Limited Partnership (“KMH”)
Labstat
Agility Health
SCR
Sequel Youth and Family Services, LLC
(“Sequel”)
Group SM
Kimco
Planet Fitness
DNT
FED
Sandbox
Providence
Unify (formerly Matisia)
Capitalized costs
Total LP and LLC Units
FED Loan Receivable
Acquisition
Cost
$ 60,034
54,800
47,200
27,075
40,000
Capitalized
Cost
$ 656
589
519
838
487
99,005
40,500
46,064
53,880
94,290
17,577
29,634
40,410
24,010
-
674,478
53,880
769
717
1,344
845
758
1,858
923
524
662
298
11,788
-
Net Cost
Fair Value
$ 60,690
55,389
47,719
27,913
40,487
99,774
41,217
47,407
54,725
95,048
19,435
30,557
40,934
24,672
298
686,266
53,880
$ 36,215
26,947
49,199
26,965
30,488
109,498
40,217
31,166
59,062
99,197
21,800
30,538
40,950
24,672
298
627,213
53,880
Total Investments at Fair Value
$ 728,358
$ 11,788
$ 740,146
$ 681,093
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
75
Notes to Consolidated Financial Statements (continued)
5. Investments (continued):
Transactions closed in 2017
Investment in ccCommunications LLC (“ccComm”)
The Corporation contributed US$4 million (approximately CAD$5.4 million) to ccComm on January 10, 2017 in exchange for an
annualized distribution of US$0.6 million (approximately CAD$0.8 million). ccComm is a Sprint retailer with over 50 locations
throughout the Northwest U.S. The reset metric is net revenue with a collar of plus or minus 6%.
The Corporation contributed an additional US$2.2 million (approximately CAD$2.7 million) to ccComm on August 31, 2017 (ccComm
Tranche #2) in exchange for an annualized distribution of US$0.3 million (approximately CAD$0.4 million). ccComm used the
proceeds to acquire an additional 21 Sprint retail locations in the Northwest U.S.
Redemption of KMH Limited Partnership (“KMH”) Units
On June 19, 2017, total consideration of $30.5 million ($9.8 million of cash and $20.7 million of secured promissory notes) was
exchanged for the redemption of all outstanding preferred units (the “Alaris Preferred Units”) and the outstanding $3.5 million
promissory note as a result of the sale of the majority of KMH’s Canadian clinics to a third party (the “Third Party Sale”). The $20.7
million of promissory notes (the “Phoenix Notes”) are issued by Phoenix Holdings Limited (“Phoenix”), a company controlled by the
former principals of KMH, and are secured by way of first security on Phoenix’s U.S. business that was carved out of the Third Party
Sale, a right to the residual value in certain real estate assets owned by Phoenix and its principals, and a preferred liquidation position
on the equity in the Canadian business retained by Phoenix as a result of the Third Party Sale.
As a result of the redemption of all outstanding KMH units, the Corporation has no remaining investments at fair value as of December
31, 2017 relating to KMH. The Corporation expects to receive the $20.7 million Phoenix Notes in three different tranches. The
Corporation expects to receive value for the first tranche totaling $12.4 million within the next twelve months with the remaining $8.3
million collected over a longer term period as Phoenix continues with the strategic process and recapitalization of their U.S. business.
Subsequent to December 31, 2017, the Corporation has the ability to compel the U.S. business to be sold. Phoenix has
acknowledged this right and a strategic process to realize on the debt is under way.
As the redemption of the KMH units and the $3.5 million promissory notes resulted in an extinguishment of financial assets, the
Corporation recorded an initial loss of $1.5 million, representing the difference between the carrying value of the assets given up
and the fair value of the consideration received. The fair value of the consideration received was calculated as the cash proceeds
plus the face value of the short term secured note plus the discounted value of the long-term secured note. The long term secured
note of $8.3 million was discounted using a five year term and a 5% discount rate to arrive at the fair value. The fair value difference
will be accreted to its face value over its estimated five year term, ($0.2 million was accreted during the twelve months ended
December 31, 2017). See Promissory and Other Receivable table later in this note 5 for additional information on the valuation of
these notes as at December 31, 2017.
Return of US$2 million of Redeemable Units from DNT, LLC (“DNT”)
On May 26, 2017, as per the terms of the partnership agreement, DNT returned US$2 million (CAD$2.7 million) as calculated based
on their excess cash flow sweep. The return of US$2.0 million of redeemable shares result in the reduction of DNT net cost to US$68
million (US$40 million permanent units in addition to US$28 million of redeemable units). During the year ended December 31, 2017,
the fair value of the DNT units was increased to US$71.6 million.
Investment in Accscient, LLC (“Accscient”)
The Corporation contributed US$20.0 million (CAD$26.4 million) into Accscient LLC on June 20, 2017 in exchange for an annualized
distribution of US$3.0 million (CAD$3.9 million). The Accscient Distribution will be reset for the first time on January 1, 2019 based
on the percentage change in gross profit with a collar of plus or minus 5%. The Accscient Contribution is made up of US$14.0 million
of permanent units as well as US$6.0 million of redeemable units (the “Redeemable Units”). The Redeemable Units can be
redeemed at par by the issuer at any time up to the third anniversary following the closing of the Accscient Contribution at Accscient’s
discretion. After the third anniversary the Redeemable Units will have the same repurchase metrics as the Permanent Units.
Investment in Sales Benchmark Index LLC (“SBI”)
On August 31, 2017, the Corporation contributed US$85.0 million (CAD$106 million) into SBI in exchange for an annualized
distribution of US$11.1 million (CAD$13.8 million) on August 31, 2017. The SBI Distribution will be reset for the first time on January
1, 2019 based on the percentage change in gross revenue with a collar of plus or minus 8%. The SBI Contribution is made up of
US$75.0 million of permanent units (the “SBI Permanent Units”) as well as US$10.0 million of redeemable units (the “SBI
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
76
Notes to Consolidated Financial Statements (continued)
5. Investments (continued):
Redeemable Units”). The Redeemable Units can be redeemed at par by the issuer at any time up to the third anniversary following
the closing of the SBI Contribution at SBI’s discretion. After the third anniversary the Redeemable Units will have the same
repurchase metrics as the Permanent Units. SBI is a management consulting firm specializing in sales and marketing that is
dedicated to helping companies reach their sales objectives.
Redemption of Sequel Youth and Family Services, LLC (“Sequel”) Units
On September 1, 2017, Sequel redeemed all units for total proceeds of US$95.9 million (approximately CAD$121 million) (the
“Sequel Redemption”). The Corporation received US$91.8 million (approximately CAD$114.8 million) at close, the remainder of the
proceeds were received prior to December 31, 2017. The Corporation recognized a US$21.6 million (approximately CAD$26.6
million) gain through earnings as proceeds on redemption (US$95.9 million) exceeded total capital invested (US$74.1 million). The
Corporation paid US$12.8 million (CAD$16.0 million) of taxes from the gain on redemption of the Sequel units during the year ended
December 31, 2017. These taxes were a direct result of the proceeds on redemption of the Sequel units exceeding the cost basis
of the units.
S.M. Group International LP (“Group SM”)
During the year ended December 31, 2017, Group SM received the final judgment related to an international arbitration process and
the amount awarded was substantially less than anticipated. Therefore, Group SM was not in a position to repay the previously
accrued $9.8 million in unpaid distributions. The Corporation therefore recorded a $9.8 million bad debt expense. The fair value of
the preferred units were reduced in the year to nil as they are subordinate to the secured and unsecured debt on Group SM’s balance
sheet. The permanent impairment of $41.0 million of the Group SM units was recorded through the statement of profit or loss.
As of December 31, 2017 the Corporation has $27 million of promissory notes ($10 million first priority secured and $17 million of
unsecured) outstanding. The smaller judgment also means that the majority of the short-term unsecured notes of $17 million will
only be collected after the successful recapitalization or sale of the business, thus moved from current assets to non-current assets.
Group SM is currently undergoing a full restructuring process, subsequent to the restructuring the Corporation believes there will be
sufficient enterprise value to repay in full the $27 million of secured and unsecured promissory notes. See Promissory and Other
Receivable table later in this note 5 for additional information on the valuation of these notes as at December 31, 2017.
Sandbox Acquisitions, LLC (“Sandbox”) Additional Contribution
On September 20, 2017, the Corporation contributed an additional US$6.0 million (CAD$7.5 million) (Sandbox Tranche #2) into
Sandbox LLC in exchange for an annualized distribution of US$0.9 million (CAD$1.1 million). The Sandbox Additional Contribution
was used to fund an acquisition.
On December 15, 2017, the Corporation contributed an additional US$7.0 million (CA$9.0 million) (Sandbox Tranche #3) into
Sandbox LLC in exchange for an annualized distribution of US$1.0 million (CAD$1.3 million). The Sandbox Additional Contribution
was used to fund a performance earn out in connection with a prior acquisition.
Federal Resources Supply Company (“FED”) Additional Contribution
On December 13, 2017, the Corporation contributed an additional US$13.5 million (CAD$17.4 million) (FED Tranche #3) into FED
in exchange for an annualized distribution of US$1.8 million (CAD$2.3 million). The contribution was used to partially fund an
acquisition.
Transactions closed in 2016
Redemption in LifeMark Health Limited Partnership (“LifeMark Health”) Units
On March 4, 2016, the Corporation redeemed all of its preferred units in LifeMark in exchange for $30 million in cash and an $8.4
million promissory note with interest at 11.15% from Centric Health Corporation (“Centric”). The promissory note, along with all
interest accrued and owing, was repaid in full by Centric on March 23, 2016. The Corporation realized a gain on redemption of $18.6
million that had accumulated through comprehensive income over the life of the investment.
Investment in Sandbox Acquisitions, LLC (“Sandbox”)
On March 8, 2016, the Corporation holds 556 Class B units, 1,444 Class C units and 1 Class D unit in Sandbox Acquisitions, LLC
along with 200,000 Preferred units in Sandbox Advertising Limited Partnership (collectively the “Sandbox units”) acquired for
US$22.0 million. The Sandbox units entitle the Corporation to receive an initial annual preferred distribution of US$3.3 million in
priority to distributions on Sandbox’s other LLC units. The Sandbox distribution will reset based on Net Revenue plus or minus 6%.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
77
Notes to Consolidated Financial Statements (continued)
5. Investments (continued):
Investment in Providence Industries, LLC (“Providence”).
On April 1, 2016 the Corporation, through its wholly-owned subsidiary Alaris USA Inc., collectively contributed US$30.0 million to
Providence. The Corporation is entitled to receive an initial annual preferred distribution of US$4.5 million in priority to distributions
on Providence’s common shares. After the initial annual preferred distribution, the distribution is an amount equal to the preferred
distribution for the prior fiscal year multiplied by the percentage increase or decrease in Providence’s same customer revenues for
the previous fiscal year subject to a maximum increase or decrease of 5%. Distributions on the Providence units are receivable
monthly.
Redemption of Solowave Design, LP (“Solowave”) Units
On September 30, 2016 Solowave sold its children’s play division which represented the majority of Solowave’s earnings and
resulted in the repurchase of all Alaris Preferred Units in Solowave for total proceeds to Alaris of $44.6 million. The Corporation
recognized a gain of $1.5 million through earnings as proceeds on redemption ($44.6 million) exceeded the total capital invested
($42.5 million) plus costs.
Investment in Unify, LLC (“Unify”) formerly Matisia, LLC
On October 10, 2016 Salaris USA Inc. announced a contribution of US$18.0 million to Matisia LLC in exchange for a total annual
distribution of US$2.7 million. The Matisia contribution is comprised of US$12 million of permanent preferred units and US$6.0 million
of redeemable preferred units. The Redeemable Matisia Units are expected to be short-term, and can be redeemed at any time at
par by Matisia. After the initial annual preferred distribution, the distribution is an amount equal to the preferred distribution for the
prior fiscal year multiplied by the percentage increase or decrease in Matisia’s same customer revenues for the previous fiscal year
subject to a maximum increase or decrease of 5%.
Redemption of Mid-Atlantic Health Care, LLC (“MAHC”) Units
On December 22, 2016, MAHC was sold to a third party which resulted in the repurchase of all Alaris Preferred Units in MAHC
(“MAHC Repurchase”) for total proceeds to Alaris of US$18.3 million, consisting of US$14.3 million on the redemption of the units
and an additional US$4.0 million in owed distributions. The owed distributions represent the Corporation’s entitlement under the
partnership agreement to a minimum of three years of distributions from its initial investment date regardless if a redemption takes
place. The US$4.0 million has been included with MACH’s distribution revenue for the year ended December 31, 2016.
Assumptions used in fair value calculations:
The Corporation recognizes that the determination of fair value of its investments becomes more judgmental the longer the
investment is held. The price the Corporation pays for its investments is fair value at that time. Typically, the risk profile and future
cash flows expected from the individual investments change over time. The Corporation’s valuation model incorporates these factors
each reporting period.
The Corporation estimated the fair value of the available for sale financial assets (Investments at fair value) by evaluating a number
of different methods:
a) A going concern value was determined by calculating the discounted cash flow of the future expected distributions. Key
assumptions used include the discount rate used in the calculation and estimates relating to changes in future distributions.
For each individual partner, the Corporation considered a number of different discount rate factors including what industry
they operated in, the size of the company, the health of the balance sheet and the ability of the historical earnings to cover
the future distributions. This was supported by the historical yield of the original investment, current investing yields, and
the current yield of Alaris’ publicly traded shares and of other similar public companies. Future distributions have been
discounted at rates ranging from 13.25% - 19.50%. The Corporation considers the maximum repurchase price in all fair
value adjustments of investments. All of the investments except as noted below were valued on this basis at December
31, 2017 and December 31, 2016.
b) A liquidation value is used when there is concern around the collection of future distributions and the partner company is
in default with the Corporation. The liquidation value is calculated using the formula specified in each of the Partnership
agreements while considering an estimate of the current value of the private company to determine if there would be
sufficient value to cover the liquidation amount. If not, the value is reduced to what the calculation estimates may be
recovered (the liquidation value). The Corporation’s investment in Agility and Group SM were valued on this basis at
December 31, 2017 (December 31, 2016, KMH and Group SM).
From this analysis, management of the Corporation determined the fair value of the Investments at Fair Value and Loan Receivable
for each individual Partner and below is a summary of the fair value adjustments in 2017 and 2016.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
78
Notes to Consolidated Financial Statements (continued)
5. Investments (continued):
Investments at Fair Value
($ thousands)
2017
Lower Mainland Steel
KMH
Labstat
Agility
SCR
Sequel
Group SM
Kimco
Planet Fitness
DNT
FED
Sandbox
Providence
Opening
Fair Value
Additions
Disposals
Foreign Exchange
Adjustment
Fair Value
Adjustment
Closing Fair
Value
$ 36,215
$ -
$ -
$ (422)
$ 125
$ 35,917
26,947
- (26,947)
-
-
-
49,199
-
-
-
12,125
61,324
26,965
-
-
(1,837)
1,004
26,133
30,488
-
-
-
(4,285)
26,203
109,498
214
(101,466)
(8,246)
-
-
40,217
-
-
-
(40,217)
-
31,166
-
-
(2,122)
-
29,045
59,062
-
-
(4,021)
2,385
57,427
99,197
- (2,694)
(6,569)
-
89,933
75,680
16,947
-
(5,152)
3,314
90,788
30,538
16,342
-
(1,833)
1,469
46,517
40,950
-
-
(2,788)
2,498
40,661
Unify (formerly Matisia)
24,672
-
-
(1,680)
1,506
24,499
ccComm.
Accscient
SBI
Capitalized Costs
Investments at Fair Value
- December 31, 2017
2016
196
7,994
-
(249)
-
7,941
- 26,473
-
(958)
-
25,514
- 107,270
-
(113)
-
107,157
102
54
-
-
-
156
$ 681,093
$ 175,293
$ (131,107)
$ (35,989)
$ (20,076)
$ 669,216
LifeMark Health
$ 38,467
$ 27
$ (38,494)
$ -
$ -
$ -
Lower Mainland Steel
33,029
6,128
-
58
(3,000)
36,215
Solowave
KMH
Labstat
Agility
SCR
Sequel
Group SM
Kimco
Planet Fitness
DNT
FED
MAHC
Sandbox
Providence
Unify (formerly Matisia)
Capitalized Costs
Investments at Fair Value
- December 31, 2016
50,474
- (51,724)
-
1,250
-
35,001
- (1,054)
-
(7,000)
26,947
46,999
-
-
-
2,200
49,199
27,724
-
-
(759)
-
26,965
32,988
-
-
-
(2,500)
30,488
108,904
-
-
(2,983)
3,577
109,498
42,617
-
-
-
(2,400)
45,352
2,731
-
(1,761)
(15,156)
40,217
31,166
58,275
-
-
(1,633)
2,421
59,062
97,843
-
-
(2,665)
4,020
99,197
66,737
8,483
-
(1,243)
1,702
75,680
19,522
243
(19,216)
(549)
-
-
177
30,296
-
66
-
30,538
- 38,129
-
2,822
-
40,950
- 24,548
- 298
-
-
125
-
-
-
24,672
298
$ 704,109
$ 110,882
$ (110,488)
$ (8,524)
$ (14,886)
$ 681,093
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
79
Notes to Consolidated Financial Statements (continued)
5. Investments (continued):
Royalties and Distributions:
The Corporation recorded royalty and distribution revenue and interest and other income as follows:
Royalties and distributions:
Year ended December 31
$
thousands
DNT
Sequel
FED
Planet Fitness
Labstat
Providence
Sandbox
LMS
SBI
Agility Health
Unify (formerly Matisia)
Accscient
End of the Roll
ccComm
SCR
Group SM
Solowave
Kimco
MAHC
LifeMark Health
Total Distributions
Other Income
Interest
Total Revenue
2017
$ 14,216
12,174
11,074
8,488
7,940
5,843
4,909
4,746
4,642
3,972
3,506
1,926
1,266
883
600
500
-
-
-
-
$ 86,684
2,389
$ 89,073
2016
$ 13,921
15,937
10,122
8,250
5,500
4,420
3,507
4,653
-
4,074
835
-
1,219
-
3,008
6,377
5,160
2,816
7,958
730
$ 98,486
1,556
$ 100,042
Trade receivables are due mostly from three partner companies with the majority of the outstanding balance over 90 days. The
Corporation continuously assesses the likelihood of collecting outstanding accounts receivable at each partner given their specific
situation.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
80
5. Investments (continued):
Notes to Consolidated Financial Statements (continued)
Trade & Other Receivables
$ thousands
Group SM (1)
Agility (2)
Labstat (3)
Other Receivables
Balance at December 31, 2017
31-Dec-17
31-Dec-16
$ 544
2,973
4,239
886
$ 8,642
$ 11,218
2,382
2,468
694
$ 16,762
(1) Group SM includes unpaid interest on the $17 million unsecured promissory notes from January 2015 the full amount of which is expected
to be collected in the next twelve months. Group SM is current on interest payments related to the $10 million of secured promissory notes
and the Corporation collected $1.5 million of accrued interest on the $17 million unsecured promissory notes during the year ended
December 31, 2017.
(2) Agility represents US$2.3 million (2016 – US$1.7 million). The Corporation collected all amounts due on February 28, 2018 as part of the
redemption of the Agility units, see note 13.
(3) Labstat includes the cash flow sweep for 2017 distributions. The Corporation expects the collection of all Labstat receivables prior to April
30, 2018.
Should there be an adverse event in Labstat, or Group SM’s businesses, collection could be negatively impacted.
Promissory Notes and Other Receivables:
As part of being a long-term partner with the companies the Corporation holds preferred interests in, from time to time the Corporation
has offered alternative financing solutions to assist with short-term needs of the individual businesses. At December 31, 2017, the
following is a summary of the outstanding promissory notes.
Promissory Notes and Other Receivables ($ thousands)
Current
Group SM (3)
Labstat (2)
Agility (6)
SHS (4)
Total Current
Non-Current
Group SM (3)
KMH (1)
Phoenix Secured Loan - US (1)
Phoenix Secured Loan - CDN (1)
Kimco (5)
Total Non-current
Balance at December 31, 2017
Carrying Value
Notional Value
31-Dec-17
$ 10,000
3,735
1,255
413
$ 15,403
31-Dec-16
$ -
3,735
-
1,188
$ 4,922
31-Dec-17
$ 10,000
3,735
1,255
875
$ 15,865
31-Dec-16
$ -
3,735
-
1,188
$ 4,922
$ 11,600
$ 17,000
$ 17,000
$ 17,000
-
3,500
-
3,500
10,047
3,784
6,586
$ 32,017
$ 47,420
-
-
4,391
$ 24,891
$ 29,814
12,400
8,033
10,607
$ 48,041
$ 63,906
-
-
5,994
$ 26,494
$ 31,417
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
81
Notes to Consolidated Financial Statements (continued)
5. Investments (continued):
The Corporation expects and will continue to pursue recovery of the full notional value for all outstanding promissory notes. The
differences between carrying value and notional value is due to the timing and uncertainty surrounding the collection of cash flows.
See below footnotes for additional details on each promissory note.
(1) See the heading “Redemption of KMH Limited Partnership (“KMH”) Units” earlier in note 5 for details of the $3.5 million outstanding at
December 31, 2016. The Corporation expects to receive approximately $12.4 million of value at conculsion of the U.S. business sales
process. The remainder of approximately $8.3 million will be collected over time and is secured by the former owners of KMH’s capital
assets. Due to the long- term collection horizon, the Corporation has discounted this portion of the outstanding secured loan using a five
year term and a 5% discount rate (reflective of their previous secured lender). The note will be accreted to the face value of the note over
its estimated five year life. The secured long term loans and the prior period promissory note are non-interest bearing. Due to the uncertainty
surrounding the discounted cash flows the Corporation recorded an incremental reserve of $5.1 million for the year ended December 31,
2017.
(2) Labstat note (interest at 7%) is due July 2018, and is expected to be received in full.
(3) During the year ending December 31, 2017 the Corporation provided $10 million to Group SM as short term financing as they repaid a
previous senior lender who had demanded repayment. The funds are being used by Group SM to fund working capital in lieu of a senior
revolving credit facility. The first $10 million is secured against outstanding accounts receivable and has a first lien on the business and
bears interest at 10% per annum. In addition, Group SM has a $17 million unsecured demand note (interest at 8%) outstanding, subordinate
to a third party loan. The collection of both the secured and non-secured notes are expected at the completion of the ongoing restructuring
process. While the process is expected to be resolved in the next twelve months, due to the uncertainty surrounding this timing they have
been classified as long-term. Due to the uncertainty of timing of future repayments of the $17 million unsecured promissory note, the
Corporation recorded a reserve of $5.4 million. The allowance is recorded as a bad debt expense. The carrying value of the $17 million
unsecured promissory note was classified as current as of December 31, 2016. Should there be adverse developments in the restructuring
process, collection of a portion up to the entire $17 million of unsecured notes could be impacted.
(4) SHS Services Management, LP (“SHS”) note is non-interest bearing and secured against certain assets of the SHS business. The
Corporation received partial settlement on the SHS note of $0.3 million in March 2016 and an additional $0.3 million in July 2017. With
Sears Canada Inc. formally entering bankruptcy the Corporation negotiated a payment of $0.4 million for the remainder of the loan to avoid
entering a legal process. The difference between the carrying value ($0.8 million) and proceeds of $0.4 million was recorded as a bad debt
expense during the period. Subsequent to December 31, 2017 the Corporation received the $0.4 million outstanding.
(5) Accrued distributions totaling US$4.5 million were reclassified to long-term receivables during 2016. Upon reclassification, the amounts due
were discounted to reflect the long-term collection horizon. The carrying value at December 31, 2017 reflects that the Corporation expects
to receive these amounts over a five year period. The company recorded US$0.1 million of accretion during the year ending December 31,
2017. In addition, the Corporation contributed an additional US$4 million during the year ended December 31, 2017 to provide Kimco with
balance sheet flexibility to grow the business under new management. Kimco is currently paying monthly interest of 8% on the US$4.0
million promissory note. Due to the uncertainty surrounding the timing around collection, the Corporation recorded an incremental reserve
of $2.6 million for the year ended December 31, 2017.
(6) The Corporation issued a US$1 million promissory note to Agility during the year ended December 31, 2017 due to the timing of payments
and collections causing short term liquidity constraints. Subsequent to December 31, 2017 the Corporation issued an additional US$0.5
million to fund working capital. The note is payable on demand, bears interest at 10% per annum and was collected February 28, 2018 as
part of the redemption of the Agility units.
Should there be an adverse event to any of the above businesses, collection could be negatively impacted.
The Corporation recorded bad debt expense of $23.4 million for the year ended December 31, 2017 (December 31, 2016 - $2.5
million). This consisted of $10.3 million of write offs as distributions accrued but not received from Group SM ($9.8 million) and a
reduction of the SHS promissory note ($0.5 million) will not be received. The Corporation also recorded a $13.2 million reserve on
outstanding promissory notes with Group SM ($5.4 million), Phoenix ($5.1 million) and Kimco ($2.6 million) as the probability of
receiving the entire amount outstanding is not assured. The allowance is recorded as a bad debt expense and will be recovered from
the respective strategic processes and recapitalization if the proceeds are in excess of the Corporation’s carrying value. For the year
ended December 31, 2016 the Corporation recorded a bad debt expense on KMH interest ($0.9 million) and the outstanding promissory
note ($1.5 million).
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
82
5. Investments (continued):
Notes to Consolidated Financial Statements (continued)
Bad Debt Expense and Reserve ($ thousands)
Write Offs
SHS
Group SM
Total Write offs
Reserve
Group SM - Unsecured Promissory Note
Phoenix Secured Loan - US (1)
Phoenix Secured Loan - CDN (1)
KMH
Kimco
Total Reserve
Total Bad Debt Expense
31-Dec-17
31-Dec-16
$ 463
9,813
10,276
$ -
-
-
$ 5,400
2,353
2,780
-
2,621
$ 13,154
$ 23,430
$ -
-
-
2,442
-
$ 2,442
$ 2,442
Intangible Assets:
The Corporation holds intangible assets in End of the Roll of $6.1 million (December 31, 2016 - $6.2 million), net of accumulated
amortization of $1.2 million (December 31, 2016 - $1.1 million).
6. SHARE CAPITAL
Issued Common Shares
Balance at January 1, 2016
Issued after employee vesting
Number of Shares
thousands
36,303
Amount ($)
$ thousands
$ 617,627
1
-
Cashless options exercised in the period
33
-
Fair value of options exercised in the period
-
266
Balance at December 31, 2016
36,336
$ 617,893
Issued after employee / director vesting
109
2,512
Cashless options exercised in the period
36
-
Fair value of options exercised in the period
-
438
Balance at December 31, 2017
36,481
$ 620,842
The Corporation has authorized, issued and outstanding, 36,481,247 voting common shares as at December 31, 2017.
Weighted Average Shares Outstanding
Year ended December 31
thousands
Weighted average shares outstanding, basic
Effect of outstanding options
Effect of outstanding RSUs
Weighted average shares outstanding, fully diluted
2017
36,447
15
292
36,754
2016
36,336
74
302
36,711
1,723,160 options were excluded from the calculation as they were anti-dilutive at December 31, 2017 (December 31, 2016 - 669,799).
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
83
Notes to Consolidated Financial Statements (continued)
6. Share Capital (continued):
Dividends
The following dividends were declared and paid in the month following by the Corporation:
In each month of 2017, the Corporation declared a dividend of $0.135 per common share ($1.62 per share and $59.0 million in
aggregate). In each month of 2016, the Corporation declared a dividend of $0.135 per common share ($1.62 per share and $58.8
million in aggregate).
7. LOANS AND BORROWING
As at December 31, 2017 the Corporation had a $200 million credit facility with a syndicate of Canadian chartered banks, the facility
has a four year term with a maturity date in September 2021. The interest rate is based on a combination of the CAD Prime Rate
(“Prime”), Bankers’ Acceptances (“BA”), US Base Rate (“USBR”) and LIBOR. When Funded Debt to Contract EBITDA is below 2.25:1,
Prime and USBRs are plus 2.25% and BAs and LIBOR are plus 3.25%. When Funded Debt to Contract EBITDA is above 2.25:1,
Prime and USBRs are plus 2.75% and BAs and LIBOR are plus 3.75%. The Corporation realized a blended interest rate of 5.3% for
the year ended December 31, 2017. At December 31, 2017, the facility was $173.5 million drawn (December 31, 2016 - $99.4 million).
At December 31, 2017, the Corporation met all of its covenants as required by the facility. Those covenants include a maximum funded
debt to contracted EBITDA of 2.5:1 (actual ratio is 1.97:1 at December 31, 2017); minimum tangible net worth of $450.0 million (actual
amount is $598.4 million at December 31, 2017); and a minimum fixed charge coverage ratio of 1:1 (actual ratio is 1.07:1 at December
31, 2017).
The Corporation had US$112.7 million of USD denominated debt as of December 31, 2017 (December 31, 2016 US$53.0 million),
subsequent to December 31, 2017 the Corporation repaid US$26.5 million of USD denominated debt. The Corporation began funding
USD transactions with USD debt in 2016.
Debt Continuity
$ thousands
Balance at December 31, 2016
Senior debt advance (Accscient)
Senior debt advance (Kimco Prom Note)
Senior debt advance (SBI)
Senior debt advance (ccComm)
Senior debt repayment (Sequel, net of tax payment)
Senior debt advance (Sandbox Tranche #2)
Senior debt advance (FED Tranche #3)
Senior debt advance (Sandbox Tranche #3)
Senior debt advance (Heritage)
Unrealized FX (gain) / loss on USD denominated debt
Balance at December 31, 2017
Denominated Debt
$USD
13,000
-
85,000
2,200
(82,500)
6,000
14,000
7,000
15,000
$CAD
$ 99,383
17,190
4,000
106,232
2,750
(103,414)
7,393
17,780
9,004
19,317
(6,169)
$ 173,464
8. SHARE-BASED PAYMENTS
The Corporation has a Restricted Share Unit Plan (“RSU Plan”) and a Stock Option Plan as approved by shareholders at a special
shareholders meeting on July 31, 2008 that authorizes the Board of Directors to grant awards of Restricted Share Units (“RSUs”) and
Stock Options (“Options”) subject to a maximum of ten percent of the issued and outstanding common shares of the Corporation.
The RSU Plan will settle in voting common shares which may be issued from treasury or purchased on the Toronto Stock Exchange.
The Corporation has reserved 455,551 and issued 291,651 RSUs to management and Directors as of December 31, 2017. The RSUs
issued to directors (93,605) vest over a three year period. The RSUs issued to management (198,046) do not vest until the end of a
three year period (119,000 in July 2018, 47,080 in July 2019, and 31,966 in October 2020) and are subject to certain performance
conditions relating to operating cash flow per share. The stock-based compensation expense relating to the RSU Plan is based on
the issue price at the time of grant and management’s estimate of the future performance conditions and will be amortized over the
thirty-six month vesting period.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
84
Notes to Consolidated Financial Statements (continued)
8. Share-based payments (continued):
The Corporation has reserved 2,574,073 and issued 2,242,364 options as of December 31, 2017. The options outstanding at
December 31, 2017, have an exercise price in the range of $20.60 to $33.87, a weighted average exercise price of $25.56 (2016 –
$26.94) and a weighted average contractual life of 2.97 years (2016 – 1.97 years).
For the year ended December 31, 2017 the Corporation incurred stock-based compensation expenses of $3.4 million (2016 - $4.4
million) which includes: $2.1 million (non-cash expense) for the RSU Plan expense that is to be amortized over the thirty-six month
vesting period of the plan (2016 - $3.2 million); and $1.2 million (non-cash expense) for the amortization of the fair value of outstanding
stock options (2016 - $1.1 million).
Options Summary
Outstanding at January 1
Exercised during the year
Expired during the year
Forfeited during the year
Granted during the year
Outstanding at December 31
Exercisable at December 31
Weighted Avg
Exercise Price
2017
Number of
Options - 2017
Weighted Avg
Exercise Price
2016
Number of
Options - 2016
$26.94
$19.40
$23.63
$0.00
$21.56
$25.56
$30.38
1,726,182
(197,525)
(356,511)
-
1,070,218
2,242,364
865,788
$26.93
$15.76
$0.00
$31.50
$0.00
$26.94
$17.19
1,966,484
(70,500)
-
(169,802)
-
1,726,182
1,114,662
The following table summarizes the options outstanding and exercisable as at December 31, 2017:
Exercise
price
Number outstanding
Weighted average remaining life
(years)
Number exercisable
$16.87
$23.53
$33.87
$26.79
$31.15
$33.06
$24.78
$22.47
$22.33
$20.60
2017
N/A
N/A
407,560
45,000
193,739
20,000
505,847
521,014
30,000
519,204
2016
122,525
428,011
411,060
45,000
193,739
20,000
505,847
N/A
N/A
N/A
Total
2,242,364
1,726,182
2017
N/A
N/A
0.56
1.05
1.59
1.70
2.57
4.07
4.20
4.78
2.97
2016
0.10
0.67
1.56
2.05
2.59
2.70
3.57
N/A
N/A
N/A
1.97
2017
N/A
N/A
407,560
45,000
145,304
15,000
252,924
-
-
-
2016
122,525
428,011
308,295
22,500
96,870
10,000
126,462
N/A
N/A
N/A
865,788
1,114,663
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
85
Notes to Consolidated Financial Statements (continued)
8. Share-based payments (continued):
The fair value of the options was calculated using a Black-Scholes model with the following assumptions:
Issue Date
Dividend Yield
Expected
Volatility
Risk Free Rate of
Return
Expected
Life
Weighted Average
Value
Jan-17
Mar-17
Oct-17
7.17%
7.20%
7.69%
26.38%
27.45%
27.75%
1.14%
1.10%
1.57%
4.325
4.325
4.325
$2.05
$2.19
$2.02
During the year ending December 31, 2017, the Corporation issued 31,966 RSU’s and 1,070,218 stock options with an average
exercise price of $21.56. During the year ending December 31, 2017, the Corporation issued 35,711 shares as a result of the exercise
of options and 109,479 shares as a result of vested RSUs.
9. INCOME TAXES
The Corporation’s consolidated effective tax rate for the year ended December 31, 2017 was 26.32% (year ended December 31, 2016
– 26.29%). The change in the Corporation’s consolidated effective tax rate from 2016 was caused by income being allocated to different
provinces than in the prior year.
Income tax expense is calculated by using the combined federal and provincial and state statutory income tax rates. The provision for
income tax (deferred and current) differs from that which would be expected by applying statutory rates. A reconciliation of the
difference is as follows:
Income Tax Expense
Earnings before income taxes
Combined federal and provincial statutory income tax
rate
Expected income tax provision
Rate differences of foreign jurisdictions
Impact of change in US federal tax rates
Non-taxable portion of capital gains
Non-deductible expense and other
Prior period adjustment
Balance at December 31, 2017
2017
$ 22,155
26.32%
$ 5,831
2016
$ 86,142
26.29%
$ 22,647
(249)
(5,151)
(5,975)
-
8,649
(743)
2,620
1,234
(602)
1,603
$ 10,274
$ 19,589
Cash taxes paid during the year were $26.6 million ($7.9 million in 2016) which includes $16.0 million of cash taxes related to the
gain on redemption of Sequel units.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
86
Notes to Consolidated Financial Statements (continued)
9. Income taxes (continued):
The income tax effect of the temporary differences that give rise to the Corporation’s deferred income tax assets and liabilities are
as follows:
Deferred income tax assets (liabilities):
2017
2016
Equipment
Share issue costs
Intangible assets
Investment tax credits
Preferred partnership units
Partnership deferral
Investment in sub or other items
Derivatives
Foreign exchange on loan receivable
Distributions to be taxed in future years
Balance at December 31, 2017
$ (2)
$ (2)
1,035
2,164
(1,681)
(1,500)
(8,523)
(1,691)
(2,263)
(17,995)
6,061
50
691
4,105
(1,626)
(205)
(2,442)
(3,006)
(552)
(3,268)
$ (8,192)
$ (22,458)
As at December 31, 2017, the Corporation has unused federal investment tax credits which expire from time to time as follows:
Unused Federal Investment Tax Credits
2022
2023
2024
Balance at December 31, 2017
2017
$ 468
1,841
648
$ 2,957
Movement in deferred tax balances during the year
Deferred Income Taxes
Balance at January 1, 2016
Recognized in profit and loss
Reduction to investment tax credit
Recognized in other comprehensive income
Currency translation and other
Balance at December 31, 2016
Recognized in profit and loss
Reduction to investment tax credit
Recognized in other comprehensive income
Currency translation and other
Balance at December 31, 2017
$ (19,491)
(12,484)
3,659
5,613
245
(22,458)
11,815
1,898
(984)
1,537
$ (8,192)
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
87
Notes to Consolidated Financial Statements (continued)
9. Income taxes (continued):
In 2015, the Corporation received a notice of reassessment from the Canada Revenue Agency in respect of its taxation year ended
July 14, 2009. The Corporation has since received notices of reassessment from the Canada Revenue Agency in respect of its taxation
years ended December 31, 2009 through December 31, 2016 (collectively the “Reassessments”). Pursuant to the Reassessments,
the deduction of approximately $121 million of non-capital losses and utilization of $5.2 million in investment tax credits by the
Corporation was denied, resulting in reassessed taxes and interest of approximately $44.4 million. Subsequent to filing the notice of
objection for the July 14, 2009 taxation year, Alaris received an additional proposal from the CRA pursuant to which the CRA is
proposing to apply the general anti avoidance rule to deny the use of non-capital losses, accumulated scientific research and
experimental development expenditures and investment tax credits. The proposal does not impact the Corporation's previously
disclosed assessment of the total potential tax liability (including interest) or the deposits required to be paid in order to dispute the
CRA's reassessments. The Corporation has received legal advice that it should be entitled to deduct the non-capital losses and as
such, the Corporation remains of the opinion that all tax filings to date were filed correctly and that it will be successful in appealing
such Reassessments. The Corporation intends to continue to vigorously defend its tax filing position. In order to do that, the Corporation
was required to pay 50% of the reassessed amounts as a deposit to the Canada Revenue Agency. The Corporation has paid a total
of $19.3 million in deposits to the CRA relating to the Reassessments to date, including $3.0 million deposited in 2017. It is possible
that the Corporation may be reassessed with respect to the deduction of its non-capital losses in respect of its tax filings in respect of
the 2017 taxation year, on the same basis. The carrying values of the remaining ITC’s of $3.0 million at December 31, 2017 and the
ITC’s claimed in 2017 of $3.5 million are at risk should the Corporation be unsuccessful in defending its position. The Corporation
anticipates that legal proceedings through the CRA and the courts will take considerable time to resolve and the payment of the
deposits, and any taxes, interest or penalties owing will not materially impact the Corporation’s payout ratio.
The Corporation firmly believes it will be successful in defending its position and therefore, any current or future deposit paid to the
CRA would be refunded, plus interest. The Corporation will continue to file its tax returns by claiming the remaining available investment
tax credits in subsequent tax filings.
Tax Year
July 2009
December 2009
December 2010
December 2011
December 2012
December 2013
December 2014
December 2015
December 2016
Balance at December 31, 2017
ITCs Applied
Losses Applied
Estimated tax and
interest
$ 10,532
$ 4,310
1,916
14,646
14,992
16,774
22,642
29,153
748
5,486
5,113
4,462
6,519
8,493
2,315
2,905
$ 5,220
10,560
4,417
-
4,836
$ 121,215
$ 44,384
On December 2017, the United States government enacted the tax Cuts and Jobs Act (“US Tax Reform”) with the majority of the
legislation being effective January 1, 2018. The impact of this legislation on the Corporation’s 2017 financial statements is a reduction
in the deferred income tax liability of $6 million as a result of the reduction in the federal income tax rate from 35% to 21%.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
88
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as
follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The following items shown on the consolidated statement of financial position as at December 31, 2017 and December 31, 2016, are
measured at fair value on a recurring basis using level 2 or level 3 inputs. Discount rates and estimates used to determine changes in
future distributions from each investment are the primary inputs in the fair value models and are generally unobservable. Accordingly,
these fair value measures are classified as level 3. There were no transfers between level 2 or level 3 classified assets and liabilities
during the year ended December 31, 2017.
($ thousands)
Fair value
classification
31-Dec-17
Foreign exchange contracts
Investments at fair value
Total at December 31, 2017
31-Dec-16
Foreign exchange contracts
Investments at fair value
Total at December 31, 2016
Level 1
Level 2
Level 3
Total
$ -
-
$ -
Level 1
$ -
-
$ -
$ 1,430
-
$ 1,430
Level 2
$ (712)
-
$ (712)
$ -
669,216
$ 1,430
669,216
$ 669,216
$ 670,646
Level 3
$ -
681,093
Total
$ (712)
681,093
$ 681,093
$ 680,381
Financial instruments whose fair value is equivalent to its carrying value are omitted from the above table (these include: cash and
cash equivalents, trade and other receivables, promissory note receivable, accounts payable and accrued liabilities, loans and
borrowings).
The Corporation purchases forward exchange rate contracts to match expected after tax distributions in US dollars on a rolling 12
month basis and also for between 25% to 50% of the expected distributions on a rolling 12 to 24 month basis. The notional value of
outstanding foreign exchange contracts is US$33.6 million (US$49.1 million as of December 31, 2016) with maturity dates between
January 2018 and October 2019.
11. COMMITMENTS
The Corporation’s annual commitments under its current office lease are as follows:
Commitments
2018
2019
2020
31-Dec-17
421
432
216
1,068
$
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
89
Notes to Consolidated Financial Statements (continued)
12. RELATED PARTIES
In addition to their salaries, the Corporation also provides long-term compensation in the form of options and RSUs. Key management
personnel compensation comprised the following:
Key Management Personnel
Base salaries and benefits
Bonus
Share-based payments (non-cash)
Total
2017
$854
407
2,033
$3,294
2016
$876
519
520
$1,916
13. SUBSEQUENT EVENTS
Increase in Credit Facility
Subsequent to December 31, 2017, the Corporation received an increase in their revolving credit facility which included (i) an increase
in capacity to $280 million ($200 million as of December 31, 2017); (ii) an increase in the accordion facility to $70 million ($50 million
as of December 31, 2017). The maximum senior debt to contracted EBITDA was increased to 2.5:1 which can extend to 3:1 for a
period of 90 days (previously 1.75x with an extension to 2.25x, this amendment was effective for the quarter ending December 31,
2017). The tangible net worth, fixed charge coverage ratio covenants, interest rate spread, and standby fees remained consistent with
the prior agreement.
Investment in Heritage Restoration, LLC (“Heritage”)
On January 23, 2018, the Corporation entered into subscription and operating agreements with Heritage Restoration, Holdings, LLC
(“Heritage”), pursuant to which the Corporation invested US$15.0 million (“Heritage Contribution”) in exchange for preferred units in
Heritage (the “Heritage Units”). The Corporation is entitled to an annual distribution of US$2.25 million (“Heritage Distribution”) for the
first full year following the transaction, which equates to an initial yield of 15%. US$3.0 million of the Heritage Units are redeemable at
par at any time. The performance metric dictating the annual percentage change in the Heritage Distribution is gross margin, subject
to a 6% collar and will reset for the first time on January 1, 2019. The Heritage Contribution was used to fund the management buyout
of the existing shareholder.
Agility
Subsequent to December 31, 2017, the Corporation successfully redeemed all of its units in Agility as a result of the sale of Agility to
a third party. Gross proceeds to Alaris from the Agility Sale consist of: (i) US$22.2 million for the preferred units Alaris holds in Agility
LLC, which includes a premium of US$2.1 million over Alaris’ original cost of US$20.1 million (currently held at a fair value of $20.0
million); (ii) US$2.9 million for all unpaid distributions up to February 28, 2018; and (iii) US$1.6 million for a loan outstanding, including
all principal and interest accrued on such loan. US$1.5 million of the Repurchase Price to be paid to Alaris will be placed in escrow
for 18 months to satisfy indemnification obligations under the transaction. Following the escrow period any remaining escrowed funds
will be paid to Alaris. Total proceeds received by the Corporation went toward debt reduction of US$26.5 million (approximately
CAD$34.0 million) against the CAD$173.5 million outstanding at December 31, 2017.
Alaris Royalty Corp. – Annual Report for the year ended December 31, 2017
90
Directors
Jack C. Lee, Chairman of the Board of Directors
Audit Committee
Officers
Steve King
President and Chief Executive Officer
Steve King, Director
President and Chief Executive Officer
Darren Driscoll
Chief Financial Officer
John P. Budreski, Director
Corporate Governance & Compensation Committee
Mike Ervin
Chief Legal Officer, Corporate Secretary
Mitch Shier, Director
Corporate Governance &Compensation Committee
Gregg Delcourt
Senior Vice President, Small Cap Investments
Mary Ritchie, Director
Chair – Audit Committee
Gary Patterson, Director
Audit Committee
Bob Bertram, Director
Corporate Governance & Compensation Committee
Audit Committee
Curtis Krawetz
Vice President Investments and Investor Relations
Liz McCarthy
Vice President Legal
Amanda Frazer
Vice President Investments
Dan Bertram
Vice President Business Development
Devin Timberlake
Vice President Business Development
Additional information relating to the Corporation, including all public filings, is available on SEDAR (www.sedar.com)
Suite 250, 333 – 24th Avenue SW, Calgary AB, T2S 3E6
Main line: 403-228-0873
www.alarisroyalty.com
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