ANNUAL
REPORT
Fiscal year ended December 31, 2018
www.alarisroyalty.com
Table Of
Contents
President’s Message
About Alaris
Investment Summary
Private Company Partner Summaries
Board of Directors
Financial Highlights
2018 Per Share Highlights
Management Discussion & Analysis
Overview
Results of Operations
Outlook
Private Company Partner Update
Redemption of Preferred Units
Promissory Notes
Liquidity and Capital Resources
Working Capital
Financial Instruments
Internal Controls over Financial Reporting
Summary of Contractual Obligations
Related Party Transactions
Critical Accounting Estimates and Policies
Recent Accounting Pronouncements
Summary of Annual and Quarterly Results
Outstanding Shares
Income Taxes
Risk Factors
Forward-Looking Statements
Additional Information
Consolidated Financial Statements
Independent Auditor's Report
Consolidated statements of financial position
Consolidated statements of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of changes in equity
Consolidated statements of cash flows
Notes to Consolidated Financial Statements
1.
2.
3.
4.
5.
6.
7.
8.
9. Income taxes
10.
11.
12.
13.
Reporting entity
Statement of compliance
Significant accounting policies
Financial Risk Management Overview
Investments
Share capital:
Loans and borrowings
Share-based payments
Fair Value of Financial Instruments
Commitments
Related Parties
Subsequent Events
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5
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29
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30
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31
31
32
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35
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48
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57
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58
63
67
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Annual Report
2018
Fifteen years after the creation of Alaris, we
are still improving and learning. There is no
doubt that there will be more challenges in
the future but our unique structure and our
diversification across 16 partners has given
us the ability to handle those challenges and
continue to prosper. I don’t believe that there
will ever be a time that the private equity
industry will not be hyper-competitive, but
I feel very confident that our structure and
more importantly our wonderful team will
allow us to keep succeeding.
Steve King
CEO
4
President’s
Message
2018 was an extremely successful year for
Alaris. Double digit growth in revenue per
share was a welcome return to the high
growth rates that we have shown for the
majority of our 15 year history. This growth
came from two factors that were both all-
time best performances for our company:
For the first time in our history, each of
our partner companies that had resets
(effective January 1, 2018) had positive
distribution
resets which collectively
resulted in the best overall organic growth
rate in our history of 6%. Given that almost
all of our resets are capped between 5%
and 8%, having an average reset of 6%
is an extraordinary achievement. The
second factor that led to our growth was
the best year of capital deployment in our
history – deploying $185 million over the
course of the year.
While the private equity landscape in
North America continues to be incredibly
competitive – there
is an estimated
one trillion dollars of uninvested capital
looking for deals – Alaris has continued to
succeed in deploying capital into strong
companies that do not want to lose
control and want to keep the majority of
their future upside. We feel fortunate to
have carved out such a profitable niche in
a huge but competitive industry.
Our portfolio continues to be stronger on
a year over year basis while we have de-
risked our portfolio over the past number
of years. Six partners have no long-term
debt and half of our partners have less
than one times EBITDA in long-term debt
on their balance sheets.
Annual Report
2018
About Alaris
5
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”).
long-term partnerships
Alaris creates
with companies that have a proven
track record of stability and profitability
in varying economic conditions. Our
Partners typically use our capital for
growth, generational transfers, partial
liquidity, management or private equity
sponsor 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.
6
Annual Report
2018
Investment Summary
Alaris has approximately 91% of its fair value of
investments in US based companies
Alaris has historically been weighted to healthcare. However, today,
58% of invested dollars are exposed to business services, 35% to
industrials, and 7% to consumer products and services.
Partner Since
Distribution
Current
Amount
Invested
Centers
June 2017
Sept. 2018
Jan. 2017
June 2015
June 2015
June 2018
Nov. 2018
Jan. 2018
Nov. 2014
Apr. 2016
Mar. 2016
Aug. 2017
Oct. 2016
$5.57
$6.44
$2.35
$11.42
$11.35
$2.10
$5.56
$2.36
$3.70
$4.49
$6.18
$11.93
$1.92
June 2014
$0.001
$38.00
$46.00
$16.20
$67.802
$67.00
$15.00
$46.00
$15.00
$34.20
$20.803
$30.00
$40.00
$85.00
$12.004
Collar
+/-5%
+/-6%
+/-6%
+/-6%
+/-6%
+/-6%
+/-8%
+/-6%
+/-6%
+/-5%
+/-5%
+/-6%
+/-8%
+/-5%
Total US$
$75.37
$528.00
Partner Since
Distribution
Current
Apr. 2017
May 2013
$5.20
$1.805
Amount
Invested
$60.00
$40.00
Collar
NA
+/-6%
Total CDN$
$7.00
$100.00
Annual Report
2018
7
Private Company Partner Summaries
(all dollar values in this table US$millions
PARTNER
Accscient
Body Contour Centers
ccComm
DNT
Federal Resources
Fleet Advantage
GWM Holdings
Heritage Restoration
Kimco
PFGP
Providence
Sandbox
SBI
Unify
Partner Since
Current
Distribution
Amount
Invested
June 2017
Sept. 2018
Jan. 2017
June 2015
June 2015
June 2018
Nov. 2018
Jan. 2018
$5.57
$6.44
$2.35
$11.42
$11.35
$2.10
$5.56
$2.36
June 2014
$0.001
Nov. 2014
Apr. 2016
Mar. 2016
Aug. 2017
Oct. 2016
$3.70
$4.49
$6.18
$11.93
$1.92
$38.00
$46.00
$16.20
$67.802
$67.00
$15.00
$46.00
$15.00
$34.20
$20.803
$30.00
$40.00
$85.00
$12.004
Collar
+/-5%
+/-6%
+/-6%
+/-6%
+/-6%
+/-6%
+/-8%
+/-6%
+/-6%
+/-5%
+/-5%
+/-6%
+/-8%
+/-5%
(all dollar values in this table CDN$millions
Total US$
$75.37
$528.00
PARTNER
LMS
SCR
NOTES:
Partner Since
Current
Distribution
Amount
Invested
Apr. 2017
May 2013
$5.20
$1.805
$60.00
$40.00
Collar
NA
+/-6%
Total CDN$
$7.00
$100.00
1. Kimco is currently not paying a distribution to Alaris but is contractually obligated to pay up to US$4.70.
2. Alaris originally invested US$70 million in DNT, with US$2.2 million having been redeemed to date.
3. Alaris originally invested US$40 million in PFGP, with PFGP redeemed 41% of the outstanding units for
US$25 million leaving units worth $20.8 million remaining in PFGP.
4. Alaris originally invested US$18 million in Unify. Unify has redeemed US$6
5. SCR is paying CAD$150,000 per month currently (CAD$1.8 million per year) but ithis amount may be higher
if business performance allows, up to CAD$6.02 million per year.
8
Board of
Directors
Annual Report
2018
Jack C. Lee
Chairman
Bob Bertram
John "Jay" F. Ripley
Gary Patterson
Mary Ritchie
E. Mitchell Shier
Stephen W. King
Annual Report
2018
9
Financial Highlights
Full Year 2018 Highlights
• Revenue from Partners of $100.1 million, a 12.4% increase
• Normalized EBITDA of $80.8 million, a 5% increase
• Net cash from operating activities of $78.3 million, a 16.4% increase
• Dividends paid of $59.2 million, unchanged
• Full year payout ratio of 75.8%
John "Jay" F. Ripley
Record capital deployment in 2018 investing $185.0 million into
four new partners and three follow on contributions into two
existing partners.
New Partners
• US$46.0 million into GWM Holdings, Inc.
• US$46.0 million into Body Contour Centers, LLC
• US$15.0 million into Heritage Restoration, LLC
• US$15.0 million into Fleet Advantage, LLC
Follow-on Contributions to Existing Partners in 2018
• US$3.0 million (May 2018) and US$7.0 million (August 2018) into Accscient LLC
• US$10.0 million (May 2018) into C&C Communications
Partner Redemptions in 2018
• Agility redemption generated an IRR of approximately 18% (25% in Canadian dollar)
over our 5.2 year hold period
• Labstat redemption generated an IRR of approximately 19% over our 6.2 year hold
period
• End of the Roll repurchased the Corporations intangible asset during the period,
generating an IRR of approximately 22% over the 13 year hold period (the Corporations
longest ever investment)
For more information, please view our Corporate Presentation found on our website under
Presentations & Events: https://www.alarisroyalty.com/investors/presentations-and-events.
10
Annual Report
2018
2018 Per Share Highlights
$2.74
Revenue from
Partners per share
(a 12.3% increase)
$2.21
Normalized
EBITDA per share
(a 4.7% increase)
$2.15
Net Cash from
operating activities
(a 16.2% increase)
$1.622
Annual Dividend
(unchanged)
Annual Report
2018
11
Management Discussion & Analysis
Alaris Royalty Corp.
For the year ended December 31, 2018
12
Management Discussion & Analysis
Annual Report
2018
This management’s discussion and analysis (“MD&A”) should be read in conjunction with the unaudited consolidated
financial statements for the year ended December 31, 2018 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" in the annual MD&A.
This MD&A also refers to certain non-IFRS measures, including EBITDA, Normalized EBITDA, Earnings Coverage Ratio,
Contracted EBITDA, Run Rate Payout Ratio, Actual Payout Ratio, Tangible Net Worth 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, Run Rate 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.
Run Rate Payout Ratio refers to Alaris’ total 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 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.
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 three months and year ended
December 31, 2018 and 2017, the gains on the redemption of the Agility and Labstat units and the sale of the End of the
Roll intangible asset, increase in fair value of investments at fair value, previously unrecognized distributions received
upon the Labstat redemption and the KMH and Group SM bad debt expense are considered by management to be non-
recurring charges. Transaction diligence costs are recurring but are considered an investing activity. 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 cash flow from
ongoing operations.
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. Management believes
the earnings coverage ratio is a useful metric in assessing our partners continued ability to make their contracted
distributions.
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 divided by the sum of
taxes, interest, debt repayments and dividends paid by Alaris. The Corporations senior credit facility requires a minimum
Fixed Charge Coverage Ratio as a financial covenant.
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. Contracted EBITDA is used in
determining the Corporations leverage covenant as required by our senior debt facility.
IRR refers to internal rate of return, which is a metric used to determine the discount rate that derives a net present value
of cash flows to zero. Management uses IRR to analyze partner returns.
Annual Report
2018
Management Discussion & Analysis
13
Tangible Net Worth refers to the sum of shareholders’ equity less intangibles. The Corporations senior credit facility
requires a minimum Tangible Net Worth as a financial covenant.
Adjusted Net Working Capital refers to current assets excluding promissory notes receivables and investment tax
credit receivable less current liabilities. Management believes this is a useful metric in determining the liquidity of
the corporation and ability to meet its short term liabilities.
Partner company names are referred to as follows: Lower Mainland Steel Limited Partnership (“LMS”), SCR Mining
and Tunneling, LP (“SCR”), Kimco Holdings, LLC (“Kimco”), PF Growth Partners, LLC (“Planet Fitness”), DNT, LLC
(“DNT”), Federal Resources Supply Company (“FED” or “Federal Resources”), Sandbox Acquisitions, LLC (“Sandbox”),
Providence Industries, LLC ("Providence"), Unify, LLC ("Unify"), ccCommunications LLC (“ccComm”), Accscient, LLC
("Accscient"), Sales Benchmark Index LLC (“SBI”), Heritage Restoration, LLC (“Heritage”), Fleet Advantage, LLC
("Fleet"), Body Contour Centers, LLC ("BCC" or “Body Contour Centers”), GWM Holdings, Inc. ("GWM")
The Non-IFRS measures should only be used in conjunction with the Corporation’s consolidated 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
Quarter ended December 31, 2018 Compared to Quarter ended December 31, 2017
Three Months Ended December 31
2018
2017 % Change
Revenue per share
Normalized EBITDA per share
Net cash from operating activities per share
$ 0.69
$ 0.55
$ 0.48
$ 0.51
$ 0.55
$ 0.59
+16.9%
Dividends per share
Basic earnings per share
Fully diluted earnings per share
$ 0.407
$ 0.405
$ 0.49
$ 0.49
$ 0.31
$ 0.31
Weighted average basic shares (000’s)
36,496
36,444
+7.8%
-12.7%
+0.6%
+58.1%
+58.1%
For the three months ended December 31, 2018, revenue per share increased by 16.9% due to distributions from
new investments GWM, BCC, Fleet and Heritage, organic growth through the 2018 reset in the majority of the
Corporation’s revenue base and the appreciation of the US dollar versus the comparable period. This was partially
offset by the reduction in distributions stemming from profitable redemptions from Labstat, End of the Roll, Agility
and a partial redemption of Planet Fitness units.
Normalized EBITDA of $0.55 per share, increased 7.8% compared to the three months ending December 31, 2017
due to an increase in distributions partially offset by an increase in general & administrative costs. Net cash from
operating activities was $0.48 per share, a decrease of 12.7% compared to the three months ended December 31,
2017. The decrease is a result of a realized foreign exchange loss versus a realized gain in the comparative period,
increase in general and administrative costs (specifically salaries and legal) and higher finance costs due to a
larger weighted average amount of debt outstanding, partially offset by the increase in distributions. The monthly
dividend was increased to $0.1375 in December 2018, dividends paid were $0.41 per share during three months
ended December 31, 2018, resulting in an Actual Payout Ratio of 84.3% for the period.
14
Management Discussion & Analysis
Annual Report
2018
Partner Revenue
($ thousands)
Quarter ended
December 31,
2018
Quarter ended
December 31,
2017
% Change Comment
DNT
SBI
Federal Resources
Body Contour Centers
Sandbox
Providence
Accscient
LMS
Planet Fitness
Unify
GWM
Heritage
ccComm
Fleet
SCR
Labstat
Agility Health
End of the Roll
$ 3,774
$ 3,433
+9.9%
Gross revenue reset +6% in Jan-18, impact of FX
3,650
3,534
2,127
1,817
1,561
1,463
1,299
1,165
841
830
742
774
694
450
-
-
-
3,509
+4.0%
FX impact
2,783
+27.0%
Gross revenue reset +6% in Jan-18 and additional contribution in Dec-17
-
+100.0% Contribution closed Sept-18
1,491
+21.8%
Reset of +2% Jan-18 and additional contributions in Dec-17
1,429
+9.2%
Same customer sales reset +5% in Jan-18, FX impact
953
+53.5%
Additional contributions in Jun-18 and Aug-18
1,181
+10.0%
Gross profit +12.4% Jan-18, FX impact on US investment
2,078
-43.9%
Partial redemption in May-18 partially offset by reset of +5% Jan-18 and FX
858
-2.0%
Partial redemption in Dec-18 partially offset by reset +2% in Jan-18, FX impact
-
+100.0% Contribution closed Nov-18
-
+100.0% Contribution closed Jan-18
290
+167.0%
Additional contributions in May-18
-
+100.0% Contribution closed Jun-18
300
+50.0%
Increase in monthly distribution from $100k to $150k in Apl-18
1,985
-100.0%
Redemption of units in Jun-18
972
-100.0%
Redemption of units in Feb-18
322
-100.0%
Redemption of units in Jun-18
Total Distributions
$ 24,721
$ 21,584
+14.5%
Interest & other
591
61
+874.7% New debt provided to LMS, Sandbox and Kimco versus the comparable period
Total Revenue
$ 25,311
$ 21,644
+16.9%
Finance costs were $2.8 million compared to $1.6 million in the prior year period, a 79.7% increase due to higher
weighted average debt outstanding (average outstanding debt of $189.9 million for the three months ending
December 31, 2018 versus $127.3 million for the comparable period in 2017), in addition to higher interest rates.
Salaries and benefits were $2.6 million in the period, an increase of 309.0% compared to $0.6 million in the prior year
period. The increase is due to the Corporation changing its incentive compensation schedule to align with its fiscal
year, resulting in a bonus accrual for the second half of 2018 of $1.9 million. Base salaries and benefit expense were
comparable to the prior year period. Corporate and office expenses were $0.7 million in the period, a decrease of
0.9% compared to the prior year period.
Legal and accounting fees were $1.3 million in the period, an increase of 93.0% compared to $0.7 million in the prior
year period. The increase is due to the Corporation incurring higher legal fees related to managing opportunities
and business issues with existing partners and corporate matters.
The Corporation recognized $3.9 million of transaction diligence costs during the three month period as a result
of the adoption of IFRS 9. The preceding accounting standards permitted transaction diligence costs related
to successful transactions to be capitalized. Under the new standard (effective January 1, 2018) the Corporation
is required to recognize the costs through profit and loss when incurred. The $3.9 million expense includes all
transaction diligence costs incurred since the adoption of IFRS 9.
For the three months ended December 31, 2018 the Corporation incurred stock-based compensation expenses of
$0.6 million (2017 - $0.8 million) which includes: $0.4 million (non-cash expense) for the RSU Plan expense that is
to be amortized over the thirty-six month vesting period of the plan (2017 - $0.5 million); and $0.2 million (non-cash
expense) for the amortization of the fair value of outstanding stock options (2017 - $0.3 million).
Partner Revenue
($ thousands)
Quarter ended
Quarter ended
December 31,
December 31,
% Change Comment
2018
2017
$ 3,774
$ 3,433
+9.9%
Gross revenue reset +6% in Jan-18, impact of FX
DNT
SBI
Federal Resources
Body Contour Centers
Sandbox
Providence
Accscient
LMS
Planet Fitness
Unify
GWM
Heritage
ccComm
Fleet
SCR
Labstat
Agility Health
End of the Roll
3,650
3,534
2,127
1,817
1,561
1,463
1,299
1,165
841
830
742
774
694
450
-
-
-
3,509
+4.0%
FX impact
2,783
+27.0%
-
+100.0% Contribution closed Sept-18
1,491
+21.8%
Reset of +2% Jan-18 and additional contributions in Dec-17
1,429
+9.2%
Same customer sales reset +5% in Jan-18, FX impact
953
+53.5%
Additional contributions in Jun-18 and Aug-18
1,181
+10.0%
Gross profit +12.4% Jan-18, FX impact on US investment
2,078
-43.9%
858
-2.0%
-
+100.0% Contribution closed Nov-18
-
+100.0% Contribution closed Jan-18
290
+167.0%
Additional contributions in May-18
-
+100.0% Contribution closed Jun-18
1,985
-100.0%
Redemption of units in Jun-18
972
-100.0%
Redemption of units in Feb-18
322
-100.0%
Redemption of units in Jun-18
300
+50.0%
Increase in monthly distribution from $100k to $150k in Apl-18
Total Distributions
$ 24,721
$ 21,584
+14.5%
Interest & other
591
61
+874.7%
Total Revenue
$ 25,311
$ 21,644
+16.9%
Annual Report
2018
Management Discussion & Analysis
15
Earnings were $17.9 million in the period, an increase of 57.5% compared to $11.4 million in the prior year period. The
increase is due to higher distributions, an increase in unrealized foreign exchange gains, the comparable period
including a $13.6 million bad debt expense, partially offset by higher taxes, salaries and benefits, corporate overhead
and the requirement to expense transaction diligence costs. The below normalized EBITDA metric provides a more
accurate depiction of operating results for the three month period.
The Corporation recorded EBITDA of $24.7 million and Normalized EBITDA of $20.1 million for the three months
ended December 31, 2018 compared to EBITDA of $8.1 million and Normalized EBITDA of $18.5 million for the three
months ended December 31, 2017. The 8.5% increase in Normalized EBITDA is a result of higher distributions from
new partners GWM, BCC, Fleet and Heritage, 2018 positive resets, and follow on contributions into Accscient, Federal
Resources and ccComm. These were partially offset by redemptions in Labstat, Agility and End of the Roll as well as
higher corporate overhead costs.
Reconciliation of Net Income to EBITDA
($ thousands)
Three Months
Ended
December 31,
2018
Three Months
Ended
December 31,
2017
Earnings
$ 17,981
$ 11,414
Adjustments to Net Income:
Amortization and depreciation
Finance costs
Income tax expense
EBITDA
Normalizing Adjustments
Increase in investments at fair value
Transaction diligence costs
Bad debt expense
Unrealized (gain) on foreign exchange
Realized (gain) / loss on foreign exchange
Penalties and fees & Accretion on prom notes
42
2,830
3,855
67
1,575
(4,964)
$ 24,708
$ 8,092
(386)
3,957
-
(8,387)
218
-
-
-
13,617
(2,081)
(852)
(250)
Normalized EBITDA
$ 20,110
$ 18,527
Quarter ended December 31, 2018 Compared to Quarter ended December 31, 2017
Year Ended December 31
2018
2017 % Change
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
$ 2.74
$ 2.44
+12.3%
$ 2.21
$ 2.15
$ 2.11
+4.7%
$ 1.85
+16.2%
$ 1.622
$ 1.620
+0.1%
$ 1.67
$ 1.65
$ 0.33
+406.1%
$ 0.32
+415.6%
Weighted average basic shares (000’s)
36,490
36,447
For the year ended December 31, 2018, revenue per share increased by 12.3% due to distributions from new partners
GWM, BCC, Fleet, Heritage, SBI and Accscient as well as full distributions received from Labstat in the first half of
the year plus an additional $4.2 million of previously forgone distributions received as part of their redemption.
Distributions were also favourably impacted by the 2018 positive resets for the majority of our portfolio and follow
on contributions into Federal Resources, Sandbox, Accscient and ccComm. This was partially offset by the reduction
in distributions from the profitable redemptions of Sequel, Agility and End of the Roll.
Normalized EBITDA of $2.21 per share increased by 4.7% compared to the year ending December 31, 2017 due to
higher distributions, partially offset by higher corporate expenses, salaries and benefits and legal and accounting
fees.
16
Management Discussion & Analysis
Annual Report
2018
Net cash from operating activities was $2.15 per share, an increase of 16.2% compared to the year ended December
31, 2017. The increase is a result of higher distributions (including Labstat as described above), the collection of
US$2.9 million of unpaid distributions upon redemption of the Agility units and the 2017 Labstat sweep of $4.2
million. Dividends paid were $1.622 per share during the year ended December 31, 2018, and an Actual Payout Ratio
of 75.8% for the year. Excluding the one-time collection of the Agility accrued receivables and the collection of
previously forgone distributions from Labstat, the Actual Payout Ratio would have been 83.4%.
Partner Revenue
($ thousands)
Year ended
December 31,
2018
Year ended
December 31,
2017
% Change Comment
DNT
SBI
$ 14,831
$ 14,215
+4.3% Gross revenue reset +6% in Jan-18, offset by US$2.2M redemption, impact of FX
14,320
4,641 +208.5% Contribution closed Sept-17
Federal Resources
13,864
11,074 +25.2% +6% Gross Revenue in Jan-18, follow on contribution Dec-17
Labstat
Sandbox
8,340
7,940
+5.0% $4.2M of additional distributions on exit, max distributions until redemption in Jun-18
7,150
4,909 +45.7% Follow on contributions Sept-17 and Dec-17, +2% reset Jan-18
Planet Fitness
6,349
8,488
-25.2% Partial redemption in May-18, offset by +5% same club sales increase Jan-18
Providence
6,125
5,843
+4.8% +5% same customer sales increase Jan-18, FX impact
LMS
Accscient
Unify
Heritage
Body Contour Centers
ccComm
SCR
Fleet
GWM
Kimco
End of the Roll
Agility Health
Sequel
Group SM
5,170
4,746
+8.9% Gross profit reset of +12.4% Jan-18, FX impact on USD distribution
4,711
1,926 +144.6% Contribution closed Jun-17, addt contributions in Jun-18 and Aug-18
3,502
3,506
-0.1%
+2% gross revenue increase Jan-18, offset by partial redemption Dec-18
2,730
2,495
2,299
1,650
1,495
830
780
692
637
-
-
- +100.0% Contribution closed Jan-18
- +100.0% Contribution closed in Sept-18
883 +160.4% Additional contributions in Aug-17 and May-18
600 +175.0% Monthly distributions of $100k from Jul-18 to Apl-18 increasing to $150k thereafter
- +100.0% Contribution closed in Jun-18
- +100.0% Contribution closed in Nov-18
- +100.0% Partial distributions of US$100k per month Apl-18 to Sept-18
1,266
-45.4% Redemption of all units in Jun-18
3,972
-84.0% Redemption of all units in Feb-18
12,174 -100.0% Redemption of all units in Sept-17
500 -100.0% Distributions recorded as received
Total Distributions
$ 97,970
$ 86,684 +13.0%
Interest & other
2,109
2,389
-11.7%
Decrease in interest from Group SM partially offset by interest on Kimco, LMS and
Sandbox notes
Total Revenue
$ 100,079
$ 89,073 +12.4%
Finance costs were $8.9 million compared to $6.6 million in the prior year, a 34.6% increase due to higher interest
rates on US and CDN denominated debt and a higher weighted average debt outstanding (average outstanding
debt of $147.4 million for the year ending December 31, 2018 versus $112.3 million for the comparable period in 2017).
Salaries and benefits were $5.4 million in the period, an increase of 59.7% compared to $3.4 million in the prior
year period. The increase is due to higher base salaries and a one-time realignment of the incentive compensation
schedule to coincide with the fiscal calendar previously based on a year over year change at June 30th. The change
resulted in an additional half year bonus accrual of $1.9 million for the last six months of 2018.
Corporate and office expenses were $3.4 million in the period, an increase of 31.3% compared to $2.6 million in the
prior year period. The increase is due to one-time IT spending, consulting fees and a GST penalty refund in the
comparable period.
Legal and accounting fees were $3.3 million in the period an increase of 59.0% compared to $2.1 million in the prior
year period. The increase is due to the Corporation incurring higher accounting and legal fees related to existing
partners, legal fees on prospective deals which were expensed and corporate matters in 2018 including: the KMH
Annual Report
2018
Management Discussion & Analysis
17
strategic process, the Kimco restructuring, the Sandbox recapitalization and some additional consulting costs
incurred on behalf of partner companies as part of an increased effort to support our current portfolio.
The Corporation recognized $3.9 million of transaction diligence costs during the year ended December 31, 2018
as a result of the adoption of IFRS 9, as explained previously. Had the same accounting standard been in place for
the year ended December 31, 2017, the Corporation would have recognized a $1.3 million expense. The increase
is a result of completing more transactions, and partner refinancing then the comparable period. The quantum
of transactions costs vary based on the specifics of each deal. Transaction diligence costs are directly related to
the Corporation’s investing activity and therefore presented as cash flow from investing and do no impact the
Corporation’s Actual Payout Ratio. The transaction diligence costs are also added back to Normalized EBITDA
although recurring they are an investment function as opposed to operating cash flow which Normalized EBITDA
represents.
For the year ended December 31, 2018 the Corporation incurred stock-based compensation expenses of $2.9 million
(2017 - $3.4 million) which includes; $1.9 million (non-cash expense) for the RSU Plan expense that is to be amortized
over the thirty-six month vesting period of the plan (2017 - $2.2 million); and $1.0 million (non-cash expense) for the
amortization of the fair value of outstanding stock options (2017 - $1.2 million).
Earnings were $60.8 million in the period, an increase of 411.7% compared to $11.9 million in the prior year period.
The increase is due to higher partner distributions, a significant swing in unrealized foreign exchange gains and
losses as the USD appreciated versus the CAD, and lower impairment and bad debt expenses related to Group
SM and KMH, partially offset by the expensing of deal related transaction diligence costs. The below normalized
EBITDA description provides additional details on a more comparable change in period over period results.
The Corporation recorded EBITDA of $85.3 million and Normalized EBITDA of $80.8 million for the year ended
December 31, 2018 compared to EBITDA of $29.0 million and Normalized EBITDA of $77.0 million for the year ended
December 31, 2017. The 5.0% increase in Normalized EBITDA is a result of the addition of new partners (Body Contour
Centers, Fleet, Heritage, SBI), follow on contributions into existing partners (Federal Resources, Sandbox, Accscient
and ccComm) in addition to top of the collar resets for the majority of the portfolio in 2018, partially offset by the
reduction of distributions as a result of profitable redemptions (Sequel, Labstat, End of the Roll and Agility) and
higher corporate expenses.
Reconciliation of Net Income to EBITDA
($ thousands)
Earnings
Adjustments to Net Income:
Amortization and depreciation
Finance costs
Income tax expense
EBITDA
Normalizing Adjustments
(Gain) on disposal of investment
Increase in investments at fair value
Transaction diligence costs
Impairment and other charges
Bad debt expense
Distributions received on redemption (Labstat)
Unrealized (gain) / loss on foreign exchange
Realized (gain) / loss on foreign exchange
Penalties and fees & Accretion on prom notes
Year ended
December 31,
2018
Year ended
December 31,
2017
$ 60,796
$ 11,882
214
8,858
15,436
268
6,582
10,274
$ 85,303
$ 29,006
(8,144)
(11,537)
3,957
-
25,974
(4,282)
(10,534)
73
-
(26,575)
-
-
42,491
23,430
-
10,649
(1,370)
(652)
Normalized EBITDA
$ 80,810
$ 76,978
18
Management Discussion & Analysis
Annual Report
2018
Outlook
Distributions for 2019 are expected to be $110.1 million based on run rate distributions, which include 2019 contracted
amounts inclusive of known resets, $1.8 million from SCR and no distributions from Kimco. Distributions for Q1 2019
are expected to be $27.4 million. Annual general and administrative expenses are currently estimated at $10.0
million for 2019 and include all public company costs. The Corporation’s Run Rate Payout Ratio is just under 90%.
The table below sets out our estimated Run Rate Payout Ratio alongside the after-tax impact of potential changes
to certain Partners distributions.
There is no impact of the change in accounting policy to expense all deal related costs as we have not incorporated
the corresponding transaction in the run rate distributions, interest or taxes. The Corporation’s transaction diligence
costs have historically (2014-2018) represented a one-time cost averaging 2.0% of capital deployed. Transaction
diligence costs vary by deal due to the individual intricacies of each transaction. Although the Corporation manages
transaction diligence costs carefully it is not an area which we attempt to minimize as they are an integral part in
our transaction process.
Run Rate Cash Flow
Comments
Amount ($)
$ / Share
Revenue
$1.32 USD/CAD exchange rate
General & Admin.
Interest & Taxes
Free cash flow
Annual Dividend
Excess Cash Flow
Other Considerations (after taxes and interest):
SCR & Kimco
Every addtl $2 million in distributions received is $0.05/share
New Investments
Every $50 million deployed @ 14%
$ 110,100
$ 3.02
(10,000)
(0.27)
(32,800)
(0.90)
$ 67,300
1.85
60,200
1.65
$ 7,100
$ 0.20
+1,600
+3,188
+0.05
+0.09
The senior debt facility was drawn to $228.1 million at December 31, 2018, with the capacity to draw up to another
$71.9 million based on covenants and credit terms, in addition to the $50 million accordion facility for a total of $121.9
million. The annual interest rate on that debt was approximately 5.7% at December 31, 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 2019. 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.
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, certain changes in structure,
certain changes in executive management, change of control and incurring additional indebtedness or amending
existing debt terms.
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 other than with respect to
fiscal year end is based on unaudited information provided by Private Company Partner management, each ECR,
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 1.0x is
considered appropriate and the higher the number is, the better the ratio.
Annual Report
2018
Management Discussion & Analysis
19
Additionally, the Corporation has disclosed the percentage of current run rate revenue based on the expected
distributions from each Partner for the next twelve months based on information at March 5, 2019. Interest from
promissory notes is 3.3% of run rate distributions from Partners.
Alaris Portfolio
Annual Distribution
Description
Contribution History
Performance
Capital Structure
Reset
Total run rate distributions of $110.1 million of which over 90.0% is USD
denominated (US$78.4 million)
The Corporation’s investment thesis is to generally partner with companies
that have:
Low risk of obsolescence
(i) A history of success (average age of partners is approximately 19 years)
• Offer a required service or products in mature industries
•
• Non-declining asset bases (no exploration companies)
•
(ii) Proven track record of free cash flow
(iii) Low levels of debt - Allows excess cash flow to remain in the business to
support growth and the Alaris distribution rather than paying principal and
interest on debt.
(iv) Low levels of capital expenditures required to maintain/grow a business
- None of our partners are required to reinvest much of their cash flow back
into their operations as they are typically asset light businesses with minimal
equipment requirements.
(v) Management continuity and quality management teams - The Corporation
has invested in 29 partners since inception, exited our investment in thirteen
partners over that time with ten yielding highly positive results displayed by a
total return of 73% and a median IRR of 21%.
The Corporation has invested over $1.2 billion into 29 partners and over 60
tranches of financing, including an average of approximately $150 million over
the past five fiscal years (2013 – 2018).
The Corporation discloses an ECR to provide information on the financial
health of our partners. The Corporation has four partners with ECR greater
than 2.0x, two in the 1.5x-2.0x range, four between 1.2x-1.5x, three in the
1.0x-1.2x range and three less than 1.0x.
As a preferred equity investor we have invested in a diverse group of capital
structures and we pride ourselves on achieving the optimal capital structure
for our partners so both Alaris and our partners benefit. Of our existing portfolio
six of our sixteen have no debt, two partners have less than 1.0x Senior Debt to
EBITDA and seven partners have debt greater than 1.0x Senior Debt to EBITDA.
The annual distribution reset is another feature of our capital which we view as
win-win. It aligns our interest with our partners while providing the majority of
the upside to the entrepreneurs who create the business value. Of the partners
which had resets effective in 2018 (mostly January 1st), all had positive resets
with six hitting the top of their collar (+5% to 6%).
20
Management Discussion & Analysis
Annual Report
2018
Accscient
Annual Distribution
US$5.6 million (or 6.7% of run rate revenue)
Description
Accscient provides IT Staffing, Consulting, and Outsourcing services and
specializes
Infrastructure Management, Enterprise Resource
Planning, Business Intelligence and Database Administration.
in Digital
Contribution History
In June 2017, the Corporation contributed US$20.0 million into Accscient
(US$14.0 million permanent units and US$6.0 million redeemable units).
In June 2018, the Corporation contributed an additional US$3.0 million, in
exchange for an annualized distribution of US$0.4 million. In August 2018,
the Corporation contributed an additional US$7.0 million, in exchange for an
annualized distribution of US$1.0 million. Both follow on contributions were to
fund or partially fund an acquisition which broadens their IT service offerings.
Subsequent to year end, on January 12, 2019, the Corporation contributed an
additional US$8.0 million, in exchange for an annualized distribution of US$1.1
million. The proceeds were used to partially fund an acquisition in its related
industry.
Based on unaudited statements provided by management for the year ended
December 31, 2018, revenue, gross profit and EBITDA have increased versus 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 and has a collar of plus or
minus 6%. The Corporation expects the reset to be flat.
The fair value of the Accscient units remained unchanged during the three
months ended December 31, 2018 and increased by US$0.6 million during the
year ended December 31, 2018. 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 Earnings Coverage Ratio has increased since last quarter and remains
between 1.5x and 2.0x.
Performance
Fair Value
ECR
Body Contour Centers
Annual Distribution
US$6.4 million (or 7.8% of run rate revenue)
Description
Contribution History
Body Contour Centers operates one of the largest private plastic surgery
practice in the United States with over 50 locations across the country.
Operating in nearly 30 states, it combines a consistent patient experience with
the art of treating each patient as an individual with unique plastic surgery
needs. Procedures are conducted by over 100 board-certified plastic surgeons
and every surgical center is certified by AAAHC, the highest-level certification
for plastic surgery. BCC is growing rapidly, doubling its location count over the
last two years.
On September 14, 2018, the Corporation entered into subscription and
operating agreements with BCC, pursuant to which the Corporation made
the initial contribution of US$46.0 million in exchange for preferred units in
BCC, which entitles the Corporation to an initial annual distribution of US$6.4
million. BCC has the option to pay a portion of the BCC distribution, subject
to a maximum of 2% of the aggregate contributed capital any given year as
payment in kind (“PIK”) provided that any amounts subject to the PIK must be
paid in cash every three years.
Annual Report
2018
Contribution History
Performance
Fair Value
ECR
ccComm
Management Discussion & Analysis
21
The Corporation, has also committed as part of the operating and subscription
agreements with BCC to the additional contributions consisting of US$20.0
million (“Tranche 2”) and US$25.0 million (“Tranche 3”). The additional
contributions will be funded upon BCC satisfying certain financial targets. The
Corporation does not expect to fund Tranche 2 until late 2019 or 2020.
The additional BCC contributions will carry the same terms as the original BCC
contribution. Up to 25% of the BCC units are redeemable at par at any time
following the earlier of the second tranche closing and three years from the
original closing date, prior to such time these units are non-redeemable. The
BCC contribution was used to provide partial liquidity to existing equity holders.
Based on unaudited statements provided by management for the year ended
December 31, 2018, revenue is consistent with the comparable period while
EBITDA has decreased due to challenges with sales performance at identified
locations as BCC significantly grew their number of clinics. BCC management
has addressed the issue through focused recruiting and onboarding efforts
with improvements expected in future quarters.
The BCC distribution will be adjusted annually (commencing January 1, 2020)
based on the change in same clinic sales, subject to a 6% collar.
The fair value of the BCC units remain unchanged from the date of investment.
The fair value of the BCC units will fluctuate each quarter with foreign exchange
rates but the underlying valuation of the BCC units is evaluated each quarter.
The Earnings Coverage Ratio has declined since the last period and is now below
1.0x. BCC has no debt and a large amount of cash reserves, the Corporation
expects their ECR to improve in the coming quarters.
Annual Distribution
US$2.3 million (or 3.1% of run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
ccComm is a Sprint retailer with over 95 locations throughout the Northwest
and Central U.S.
In January 2017, the Corporation purchased preferred units in ccComm for
US$4.0 million. The Corporation contributed an additional US$2.2 million in
August 2017 to complete an acquisition of additional Sprint retail locations.
In May 2018, the Corporation contributed an additional US$10.0 million to fund
the acquisition of additional Sprint locations. In exchange for the contribution,
the Corporation is entitled to an annualized distribution of US$1.4 million.
ccComm’s revenue and EBITDA have decreased for the year ended December 31,
2018, compared to the same period in 2017. ccComm completed an acquisition
of poor performing Sprint locations in September 2017 which have been a cash
drag on the business in addition to a reduction in Sprint commission rates and
lower volumes impacting their profitability.
Distributions will increase or decrease based on net revenue to a collar of +/- 6%.
The fair value of the ccComm units were decreased by US$0.4 million during
the three month period and year ended December 31, 2018 as future reset
perspectives were reduced. 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, 2018 has remained unchanged
from last quarter and remains below 1.0x. The Corporation expects a rebound
in ECR in the upcoming quarters and no disruption in distributions.
22
Management Discussion & Analysis
Annual Report
2018
DNT
Annual Distribution
US$11.4 million (or 13.8% of run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
Federal Resources
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 in the Austin, San Antonio
corridor.
In June 2015, the Corporation purchased preferred units in DNT, for an aggregate
acquisition cost of US$70.0 million (US$40.0 million permanent units and
US$30.0 million redeemable units).
In June 2018, DNT repaid US$0.2 million of the outstanding redeemable units
as required under their annual redemption calculation, bringing the total
redeemed units to US$2.2 million since the investment date.
Based on unaudited financial statements provided by management for the
eleven months ended November 30, 2018, DNT’s gross revenue is unchanged
and EBITDA down slightly versus the comparable period due to wet operating
conditions and tightening of the labour market.
Annual increase or decrease in DNT’s distribution to Alaris is subject to a collar
of +/- 6% and is based on gross revenues.
The fair value of the DNT units were decreased by US$2.5 million during the
three months and year ending December 31, 2018 as the 2020 reset expectation
was lowered due to the aforementioned operational constraints. The fair value
of the DNT units in Canadian dollars will fluctuate each quarter with foreign
exchange rates.
The Earnings Coverage Ratio has decreased since last quarter and remains
between 1.2x and 1.5x.
Annual Distribution
US$11.4 million (or 13.7% of run rate revenues)
Description
Contribution History
Performance
Fair Value
ECR
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 June 2015, the Corporation announced a US$7.0 million subscription
for preferred stock of Federal Resources and a US$40.0 million secured
subordinated loan (the “FED Loan”) to Federal Resources, for an aggregate
cost of US$47.0 million. In exchange for the Federal Resources Units and Loan,
the Corporation was initially entitled to a combined US$7.1 million of annual
distributions.
In April 2016 and December 2017 Alaris made additional contributions of US$6.5
million and US$13.5 million in subsidiaries of Federal Resources. The additional
contributions were used to fund or partially fund acquisitions in their industry.
Based on unaudited financial statements provided by management for the
year ended December 31, 2018, Federal Resource’s revenue has increased well
above the 6% collar and EBITDA has declined slightly versus the comparable
period. The Corporation is expecting a maximum +6% increase effective
January 1, 2019.
The fair value of the Federal Resources units were unchanged during the three
months ended December 31, 2018 and were increased for a total of US$1.4
million for the year ended as the Federal Resources distribution reset of +6%
effective January 1, 2019, became more apparent throughout the year. The fair
value of the Federal Resources investment in Canadian dollars will fluctuate
each quarter with foreign exchange rates.
The Earnings Coverage Ratio for Federal Resources has decreased since the
last quarter and is now between 1.0x and 1.2x as higher interest costs, principle
repayments and our distributions have increased since the comparable
period.
Annual Report
2018
Fleet
Management Discussion & Analysis
23
Annual Distribution
US$2.1 million (or 2.5% run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
GWM
Fleet serves America’s top truck fleets and guarantees the lowest cost of
operation by providing truck leasing and matching proprietary data driven
IT processes with fleet analytics using the latest eco-efficient clean diesel
technology to achieve optimum vehicle productivity, while reducing operating
costs.
On June 15, 2018 the Corporation entered into subscription and operating
agreements with Fleet, pursuant to which the Corporation contributed US$15.0
million, which entitles the Corporation to an initial annual distribution of US$2.1
million. Fleet has the option to pay a portion of the distribution, subject to a
maximum of 2% (US$0.3 million in the first year) of the annualized yield in any
given year as PIK (similarly detailed in BCC above) provided that any amounts
subject to the PIK must be paid in cash every three years. US$7.5 million of the
Fleet units are redeemable at par at any time.
The Fleet distribution will be adjusted annually (commencing January 1,
2020) based on the change in net revenues, subject to a 6% collar. The Fleet
contribution was used to fund continued growth and provide partial liquidity
to existing shareholders.
Based on unaudited financial statements provided by management for the
year ended December 31, 2018, Fleet’s revenue and EBITDA are trailing the
comparable period, which was expected at the time of the investment.
The contribution closed in June 2018 and there was no change in the fair value
of the Fleet units during the three months ending December 31, 2018. The fair
value of the Fleet units in Canadian dollars will fluctuate each quarter with
foreign exchange rates.
The Earnings Coverage Ratio has decreased slightly since the last period and
is now between 1.2x to 1.5x.
Annual Distribution
US$5.6 million (or 6.8% of run rate revenue)
Description
Contribution History
Performance
GWM provides data-driven digital marketing solutions for advertisers globally.
The company manages performance and branding campaigns for advertisers
across all forms of digital media including display, video, connected TV, social,
and email on devices including computers, mobile, tablets, and Connected TV.
On November 19, 2018, the Corporation entered into subscription and operating
agreements with GWM, pursuant to which the Corporation invested a total of
US$46.0 million (US$41.5 million of subordinated debt and US$4.5 million of
preferred units). The Corporation is entitled to an annual distribution of US$5.6
million for the first full year following the transaction, which equates to an initial
yield of 12.1%. The combination of debt and preferred equity selected by the
Corporation was a result of GWM being a Corporation, compared to a Limited
Liability Corporation (“LLC”). Due to GWM being a Corporation, a portion of the
distributions received have already been taxed, therefore the initial yield of
12.1% is equivalent to a 13.0% yield under the Corporations traditional structure.
The GWM distribution will reset with a collar of +/- 8% annually based on gross
revenue. The wider collar on the GWM distribution will allow Alaris to capture
more upside through larger resets as GWM is expecting significant growth in
the years to come. Given the growth profile of GWM, the 8% collar and an 8.57x
predetermined exit multiple, Alaris is expecting returns equal to or greater than
prior deals that had higher first year pre-tax yields. GWM used the proceeds
from the GWM contribution to complete a management buyout of an existing
equity sponsor.
Based on unaudited financial statements provided by management for the
year ended December 31, 2018, GWM’s revenue and EBITDA are both consistent
with their results at the date of the investment.
24
Management Discussion & Analysis
Annual Report
2018
Fair Value
ECR
Heritage Restoration
The fair value of the GWM units remained unchanged since the date of
investment. The fair value of the GWM units in Canadian dollars will fluctuate
each quarter with foreign exchange rates.
The Earnings Coverage Ratio for GWM remains unchanged since our
investment date and remains between 1.5x and 2.0x.
Annual Distribution
US$2.4 million (or 2.9% of run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
Kimco
Annual Distribution
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.
On January 23, 2018, the Corporation entered into subscription and operating
agreements with Heritage, pursuant to which the Corporation invested
US$15.0 million in exchange for preferred units in Heritage. The Corporation is
entitled to an annual distribution of US$2.3 million for the initial 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 Heritage distribution will
reset with a collar of +/- 6% annually based on gross revenue.
Based on unaudited financial statements provided by management for the
year ended November 31, 2018, Heritage’s revenue and EBITDA have both
increased versus the comparable period and the Corporation is expecting a
maximum +6% increase to annual distributions effective January 1, 2019.
The fair value of the Heritage units were unchanged in the three months
ended December 31, 2018 and were increased by US$0.8 million during the year
ended December 31, 2018 as the maximum reset is expected effective January
1, 2019. The fair value of the Heritage units in Canadian dollars will fluctuate
each quarter with foreign exchange rates.
The Earnings Coverage Ratio for Heritage has decreased since last quarter
and remains above 2.0x.
Received US$0.9 million for the year ended December 31, 2018. Distributions
will be recorded as received with no amount included in the run rate
distributions or Run Rate Payout Ratio
Kimco provides commercial janitorial services to over 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$3.0 million in December 2015 and US$2.0
million in November 2016.
The Corporation contributed an additional US$4.0 million in 2017, by way of an
unsecured promissory note, to reduce Kimco’s total senior debt outstanding.
Kimco is currently paying 8% per annum on the debt.
During 2018, the Corporation loaned US$6.0 million (April 2018) to replace
Kimco’s existing subordinated debt from a third party, the debt bears interest
of 12% per annum. The Corporation also loaned US$3.8 million (July 2018) to
provide additional capacity to fund working capital requirements. The US$3.8
million debt bears interest of 8% per annum as the Corporation views this as a
short term loan compared to the US$6.0 million loan which it foresees as part
of the capital structure long-term.
Performance
Based on unaudited financial statements for the year ended December 31,
2018, revenue and EBITDA are behind the prior year due to turnover in their
customer base and higher insurance costs but recent months have shown
improvement over the prior period.
Annual Report
2018
Fair Value
ECR
LMS
Management Discussion & Analysis
25
The fair value of the Kimco units were unchanged during the three months
ending December 31, 2018. Kimco units have decreased a total of US$4.2 million
during the year ended December 31, 2018. 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 Earnings Coverage Ratio for Kimco under the new capital structure has
decreased since last quarter and remains below 1.0x. Based on management’s
2019 forecast, the Corporation expects the ECR to be back above 1.0x in 2019.
Annual Distribution
CAD$5.2 million (or 4.7% of run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
Planet Fitness
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 CAD$54 million. The Corporation
completed a follow on contribution in 2016 (to a U.S. affiliate) of US$4.4 million
to help LMS partially fund an acquisition.
During the year ended December 31, 2018, the Corporation provided $5.0 million
via a short term loan bearing annual interest of 8%, escalating 2% annually. The
proceeds were used to make opportunistic steel purchases prior to tariffs fully
impacting prices on imported steel.
Based on unaudited financial statements prepared by LMS management
for the year ended December 31, 2018, revenue and EBITDA are ahead of the
comparable period.
The fair value of the LMS Canadian units and LMS US units were unchanged
during the three months ended December 31, 2018. The LMS Canadian Units
were increased by $2.6 million during the year ending December 31, 2018 due
to the positive results in the current year. The fair value of the LMS US units in
Canadian dollars will fluctuate each quarter with foreign exchange rates.
The Earnings Coverage Ratio for LMS has increased since last quarter and
remains between 1.2x and 1.5x.
Annual Distribution
US$3.5 million (or 4.5% of run rate revenue)
Description
Contribution History
Performance
Fair Value
Planet Fitness, through its affiliates, operates over 60 fitness clubs in Maryland,
Tennessee, Florida and Washington as a franchisee of Planet Fitness.
In November 2014, the Corporation purchased preferred units in Planet Fitness,
for an aggregate acquisition cost of US$35.0 million. In July 2015, the Corporation
purchased an additional US$5.0 million of preferred units.
In May 2018, Planet Fitness redeemed US$19.4 million of their outstanding units
for a redemption price of US$25.0 million resulting in a US$5.8 million gain on
invested capital.
Based on unaudited financial statements provided by Planet Fitness
management for the year ended December 31, 2018, Planet Fitness’ revenue
and EBITDA are both ahead of the prior year due to organic growth of their
existing clubs and the continued build out of new locations. The Corporation
is expecting a maximum +5% increase to the annual distributions effective
January 1, 2019.
The Corporation increased the fair value of the Planet Fitness units by US$0.8
million during the three months ended December 31, 2018. This resulted in a
total increase in fair value of US$4.3 million during the year ended December
31, 2018 as a result of their partial redemption and another max reset effective
January 1, 2019. The fair value of the remaining Planet Fitness units in Canadian
dollars will fluctuate each quarter with foreign exchange rates.
ECR
The Earnings Coverage Ratio for Planet Fitness has increased from last
quarter and remains above 2.0x.
26
Management Discussion & Analysis
Providence Industries
Annual Report
2018
Annual Distribution
US$4.5 million (or 5.4% of run rate revenues)
Description
Providence is a leading provider of design, engineering, development,
manufacturing and sourcing services for international apparel companies and
retailers.
Contribution History
In April 2015, the Corporation contributed US$30.0 million to Providence.
Performance
Fair Value
ECR
Sandbox
Based on unaudited financial statements provided by management for the
eleven months ended November 30, 2018, Providence’s revenue and EBITDA
have decreased versus the comparable period due to the decline of their largest
customer. Providence is no longer providing services to that customer resulting
in an expected decline in their EBITDA in 2019. The Corporation is expecting a
maximum 5% decrease to the annual distributions effective January 1, 2019.
The fair value of the Providence units was decreased by $2.3 million during
the three months ended December 31, 2018 and decreased US$3.8 million in
the full year as the largest customer that drove the +5% increase in the 2018
distributions is expected to result in a -5% reset for 2019 as it has a material
impact on their same customer sales. The fair value of the Providence units in
Canadian dollars will fluctuate each quarter with foreign exchange rates.
The earnings coverage ratio for Providence has decreased since last quarter
and remains over 2.0x.
Annual Distribution
US$5.4 million (or 6.6% of run rate revenues)
Description
Contribution History
Performance
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.
In March 2016, the Corporation purchased preferred units in Sandbox for an
aggregate acquisition cost of US$22.0 million. The Corporation contributed
an additional US$6.0 million in September 2017 to finance an acquisition
completed by Sandbox and a further US$7.0 million in December 2017 to fund a
performance earn out. The Sandbox distribution will reset annually +/-6% based
on net revenue.
The Corporation purchased the outstanding senior debt in Sandbox consisting
of US$6.6 million of amortizing term debt and $7.4 million of an asset backed
lending facility during the year ended December 31, 2018. The purchase of
the senior debt provides the Corporation with additional control over the
distribution of the free cash flow generated by Sandbox providing more
certainty over future distributions. The term debt has annual repayments of $1.6
million (paid monthly) and both the term debt and revolver have LIBOR linked
interest rates. The senior debt also provides additional rights and remedies in
addition to the Corporation’s preferred equity rights.
Subsequent to December 31, 2018 the Corporation contributed an additional
US$5.0 million in exchange for annualized distributions of US$0.8 million. The
new preferred units have a minimum repurchase premium of US$1.0 million
and may include a percentage of common equity upon redemption. The
proceeds were used to fund working capital.
Based on unaudited financial statements provided by Sandbox management
for the year ended December 31, 2018, revenue and EBITDA have increased
versus the comparable period. Sandbox two majority common equity holders,
which were previously CEO and President took excessive compensation which
resulted in a working capital deficiency. With significant changes in corporate
governance the Corporation’s cash flow and balance sheet are sustainable
under the new cost structure and Sandbox expects continued revenue growth.
Annual Report
2018
Fair Value
ECR
SBI
Management Discussion & Analysis
27
The fair value of the Sandbox units were unchanged during the three months
ended December 31, 2018 and increased a total of US$2.2 million for the year
ended December 31, 2018 due to the positive reset confirmed through audited
2017 financial statements. The fair value of the Sandbox units in Canadian
dollars will fluctuate each quarter with foreign exchange rates.
The Earnings Coverage Ratio has increased since last quarter and remains
within the 1.0x to 1.2x range.
Annual Distribution
US$11.9 million (or 14.5% of run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
SCR Mine Services
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$11.1 million. The distribution will reset based on
gross revenue with a collar of +/- 8%, with the first reset in January 1, 2019. The
SBI contribution is made up of US$75.0 million of permanent units as well as
US$10.0 million of 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.
Based on unaudited information provided by SBI management for the year
ended December 31, 2018, revenues are ahead and EBITDA is slightly behind
the prior year. The Corporation is expecting a maximum +8% increase to the
annual distributions effective January 1, 2019.
The fair value of the SBI units were increased by US$3.1 million during the three
months ending December 31, 2018, for a total of US$6.8 million during the year
as a +8% positive reset is expected for 2019. The fair value of the SBI units in
Canadian dollars will fluctuate each quarter with foreign exchange rates.
The Earnings Coverage Ratio for SBI has increased as expected since the last
quarter and is now just below 1.5x (between 1.2x and 1.5x).
Annual Distribution
$1.8 million (or 1.6% run rate revenue).
Description
Contribution History
Performance
Fair Value
ECR
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 for an
aggregate acquisition cost of $40 million. The SCR distribution will reset +/-6%
based gross revenue.
Based on unaudited financial statements provided by management for the
eleven months ended November 30, 2018, SCR’s revenue has increased and
EBITDA is down slightly versus the comparable period.
Effective April 1, 2018 the Corporation and SCR agreed to increase the fixed
monthly distribution from $100 thousand per month to $150 thousand ($1.8
million annually) along with a variable cash sweep based on available free cash
flow, although no cash sweep is expected until late 2019.
The fair value of the SCR units increased by $2.2 million during the three
months ending December 31, 2018, for a total of $2.7 million for the year ended
December 31, 2018 due to the recent positive financial performance of SCR and
expected future distributions.
The Earnings Coverage Ratio for SCR has increased slightly since the last
quarter and remains below 1.0x when considering full distributions but at
the current distribution rate of $1.8 million the Earnings Coverage Ratio is
between 1.0x and 1.2x.
28
Management Discussion & Analysis
Annual Report
2018
Unify
Annual Distribution
US$1.9 million (or 2.3% of run rate revenue)
Description
Contribution History
Performance
Fair Value
ECR
Unify is a 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$12.0 million of permanent
units and US$6.0 million of redeemable units) to Unify, LLC. The Unify
Distribution resets annually +/-5% based on net revenue.
In December 2018, Unify redeemed US$6.0 million representing all redeemable
units outstanding. The units were redeemed at par, consistent with the terms
of the agreement.
Based on unaudited financial statements prepared by Unify management
for the year ended December 31, 2018, revenue and EBITDA have increased
significantly versus the comparable period and exceeded forecast amounts.
The Corporation is expecting a maximum +5% increase effective January 1, 2019.
There was no change in the fair value of the Unify units during the three
months and year ending December 31, 2018. The fair value of the Unify units in
Canadian dollars will fluctuate each quarter with foreign exchange rates.
The Earnings Coverage Ratio for Unify has increased since last quarter and
remains well over 2.0x.
Redemption of Preferred Units
Agility Health
On February 28, 2018, 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 consisted 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;
(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 interest accrued on such loan. US$1.5 million of the repurchase price paid to Alaris was placed in
escrow for 18 months to satisfy indemnification obligations under the transaction and is recorded in trade and
other receivables. Following the escrow period any remaining escrowed funds will be paid to Alaris, which the
Corporation expects will be the full US$1.5 million.
Planet Fitness partial redemption
On May 11, 2018, the Corporation received a partial redemption of US$25.0 million from Planet Fitness in exchange for
preferred units which had an associated US$3.3 million of annual distributions. The gain on the partial redemption
was recorded as a fair value increase as at and for the three months ended March 31, 2018 of $3.5 million CAD.
Subsequent to the transaction, the Corporation is entitled to US$3.5 million of run rate distributions on a remaining
cost basis of US$20.6 million and fair value of US$23.5 million.
Labstat
On June 25, 2018, the Corporation received $61.3 million as a result of the Labstat redemption, which represents
a premium of $13.6 million over Alaris’ original cost of $47.7 million. The fair value of the units were previously
increased to reflect the maximum repurchase price, therefore no gain was recorded at the time of disposition.
Concurrent with the redemption of the preferred units, the Corporation also received $4.3 million for previously
forgone and unaccrued distributions. The previously forgone distributions were a result of the Labstat annual
distributions being determined by a cash flow sweep from 2013 to 2017. The amounts received were recognized
as revenue upon redemption. The Corporation had previously not assigned any value on its balance sheet to the
collection of the $4.3 million of previously forgone distributions because the amount and timing were dependent
on the redemption of the preferred units.
As part of the redemption the Corporation received the repayment of the $3.7 million promissory note outstanding
and $0.3 million of accrued interest. Prior to the redemption the Corporation also received the 2017 cash sweep of
$4.2 million.
Annual Report
2018
End of the Roll
Management Discussion & Analysis
29
On June 29, 2018, the Corporation received $12.6 million as a result of the End of the Roll repurchasing the outstanding
intangible asset. The End of the Roll intangible asset had a carrying value of $6.0 million and an original cost of $7.2
million. The Corporation recognized a $6.5 million gain at the time of redemption.
Promissory Notes
Group SM
Group SM was sold during the three months ended December 31, 2018, at the time of the sale the Corporation had
$10.0 million of secured promissory notes outstanding. The Corporation received $5.5 million at the closing of the
sale with the remaining $4.5 million assumed by the purchaser. The purchaser is required to pay monthly interest
at a rate of 6.7% and intends to refinance the outstanding debt in 2019. Subsequent to December 31, 2018 the
Corporation received an additional $0.9 million of principle repayment and all outstanding interest ($0.1 million).
Liquidity and Capital Resources
As at December 31, 2018 the Corporation has a $300.0 million credit facility with a syndicate of Canadian chartered
banks, the facility has a four year term with a maturity date in September 2021. In 2018, an additional bank joined
the lending syndicate and the facility was increased from $280.0 million to $300.0 million and at the same time
the accordion feature was reduced from $70 million to $50 million. The interest rate is based on a combination of
the CAD Prime Rate (“Prime”), Bankers’ Acceptances (“BA”), US Base Rate (“USBR”) and LIBOR and the applicable
spread determined by the Corporations Funded Debt to Contracted EBITDA. The Corporation realized a blended
interest rate of 5.6% for the year ended December 31, 2018.
At December 31, 2018, 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, which can be increased to 3.0:1 for up to ninety days (actual
ratio is 2.30:1 at December 31, 2018); minimum tangible net worth of $450.0 million (actual amount is $635.9 million
at December 31, 2018); and a minimum fixed charge coverage ratio of 1:1 (actual ratio is 1.21:1 at December 31, 2018).
At December 31, 2018, the facility was $228.1 million drawn, US$167.2 million in USD denominated debt (December
31, 2017 - $173.5 million of which $112.7 million was denominated in USD). The Corporation has the capacity to draw
up to another $71.9 million based on covenants and credit terms, in addition to the $50 million accordion facility for
a total of $121.9 million.
The Corporation increased their monthly dividend from $0.135 per common share to $0.1375 in November 2018
(effective December 2018). The Corporation declared dividends of $0.135 per common share for the first eleven months
of 2018, $1.6225 per share and $59.3 million in aggregate (2017 - $1.62 per share and $59.0 million in aggregate). The
Corporation had 36,496,247 voting common shares outstanding at December 31, 2018. The Corporation had working
capital of approximately $16.0 million at December 31, 2018. Under the current terms of the various commitments,
the Corporation has the ability to meet all current obligations as they become due.
30
Management Discussion & Analysis
Annual Report
2018
Working Capital
The Company's adjusted net working capital (defined as current assets, excluding promissory notes and investment
tax credits receivable, less current liabilities) at December 31, 2018 and December 31, 2017 is set forth in the tables
below.
Working Capital
Cash
Prepayments
Foreign exchange contracts
Trade and other receivables
Income taxes receivable
31-Dec-18 31-Dec-17
$ 22,774
$ 35,475
2,181
2,407
-
1,430
923
8,642
1,484
0
Total Current Assets
$ 27,363 $ 47,954
Accounts payable & accrued liabilities
Dividends payable
Foreign exchange contracts
Income tax payable
3,670
5,013
1,333
1,257
1,707
4,921
-
588
Total Current Liabilities
$ 11,273
$ 7,217
Adjusted Net Working Capital
$ 16,090 $ 40,737
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 two categories: amortized cost and fair value through profit or loss (“FVTPL”). 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
Category
Amortized cost
Amortized cost
Promissory notes and other receivable
Amortized cost
Measurement Method
Amortized cost
Amortized cost
Amortized cost
Investments
FVTPL or amortized cost
Fair Value or amortized cost
Accounts payable and accrued liabilities Amortized cost
Loans and borrowings
Amortized cost
Foreign exchange contracts
FVTPL
Amortized cost
Amortized cost
Fair Value
The Corporation will assess at each reporting period whether there is a financial asset carried at amortized cost that
is impaired using the expected credit loss model. An impairment loss 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 25-60% 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, 2018, for the next twelve months, the Corporation
has total contracts to sell US$21.5 million forward at an average $1.2907 CAD. For the following twelve months, the
Corporation has total contracts to sell US$3.9 million forward at an average $1.2990 CAD.
Annual Report
2018
Management Discussion & Analysis
31
The Corporation has the following financial instruments that mature as follows:
31-Dec-18
Total
0-6 Months
6 mo – 1 yr
1 – 2 years
3 – 4 years
Accounts payable and accrued liabilities
$ (3,670)
$ (3,670)
Dividends payable
Foreign exchange contracts
Loans and borrowings
(5,013)
(1,333)
(228,103)
(5,013)
(835)
-
$-
-
$-
-
$-
-
(330)
(168)
-
-
(228,103)
Total
$ (238,119)
$ (9,517)
$ (330)
$ (168) $ (228,103)
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, 2018. 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, 2018. 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, 2018 that have materially affected,
or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Summary of Contractual Obligations
The Corporation has an outstanding senior credit facility described under “Liquidity and Capital Resources”, the
only material contractual obligation of the Corporation is its commitment to fund two additional contributions
(first for US$20.0 million and second of US$25.0 million) to Body Contour Centers (“BCC”) when specified financial
metrics have been reached, and leases for office space. The Corporation agreed to a five-year lease commencing
July 2015 at its current location with remaining leasing commitments of $0.8 million.
Contractual Obligations
Total
< 1 year
1 – 3 years 4 – 5 years
> 5 years
Long term debt
$ 228,103
$ -
$ -
$ 228,103
Additional Contributions to BCC
61,394
27,286
34,108
Office lease
647
432
216
-
-
Total Contractual Obligations
$ 290,144
$ 27,718 $ 34,323
$ 228,103
$-
-
-
$-
32
Management Discussion & Analysis
Related Party Transactions
Annual Report
2018
The Company had no transactions with related parties for the years ending December 31, 2018 or 2017.
In addition to their salaries, the Corporation also provides long-term compensation in the form of options and RSUs.
Due to restrictions under the Option and RSU plans no Options or RSUs were granted to key management personnel
during the year ended December 31, 2018. Key management personnel compensation comprised the following:
Key Management Personnel
Base salaries and benefits
Bonus
Share-based payments (non-cash)
Total
2018
2017
$ 892
$ 854
920
407
-
2,033
$ 1,812
$ 3,294
Critical Accounting Estimates and Policies
Management is required to make estimates when preparing the financial statements. Significant estimates include
the valuation of investments at fair value, valuation of accounts receivable and promissory notes and income taxes.
Refer to the consolidated financial statements for the year ended December 31, 2018.
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.
Recent Accounting Pronouncements
IFRS 9: Financial Instruments
The Corporation has initially adopted IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial
Instruments from January 1, 2018.
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.
The classification and measurement of investments on transition to IFRS 9 as FVTPL is due to the business model
of held to collect, and contractual cash flows being other than solely payments of principal and interest. Although
the investments at FVTPL (“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. On the date
of transition no investment was classified at amortized cost. Therefore a transition adjustment of $17.0 million was
made to move cumulative fair value gains or losses from the fair value reserve to retained earnings.
For those financial assets classified and measured at amortized cost, the expected credit loss model is applied
to determine impairment of financial assets. This applies to trade and other receivables, as well as promissory
notes receivable. There was no material change from its existing methodology in determining credit losses to
the expected credit loss model that will be applied to assets classified at amortized cost. Therefore, there was no
transition adjustment required.
Annual Report
2018
Management Discussion & Analysis
33
In addition, IFRS 9 requires that transaction costs be expensed as incurred for financial assets measured at FVTPL.
Prior to the adoption of IFRS 9 on January 1, 2018, the Corporation capitalized transaction diligence costs (legal
and accounting costs) relating to a specific investment once a letter of intent had been signed. These costs were
added to the fair value of the individual investment. As a result of adopting IFRS 9, the Corporation is now required
to expense these costs through profit and loss when incurred. During 2018, the Corporation expensed $3.9 million
of transaction diligence costs that would have been capitalized under the previous accounting policy. As the
Corporation investments at December 31, 2017 were recorded at fair value, there was no adjustment to opening
retained earnings to reflect this change in treatment. This resulted in
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, there has been no
change to the Corporation’s revenue recognition and no transition adjustment was required.
As a result of the adoption of the standard as outlined above the following there were a number of account policy
changes, please see the accompanying consolidated financial statements for additional disclosures.
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
2018
2017
2016
Revenue
Earnings
$ 100,079
$ 89,073
$ 100,042
60,796
11,882
66,553
Basic and Diluted Income per Share/Unit
Basic - $1.67
Basic - $0.33
Basic - $1.83
Total Assets
Total Liabilities
Diluted - $1.65 Diluted - $0.32
Diluted - $1.81
891,378
255,513
798,867
194,322
787,221
132,523
Cash Dividends/Distributions declared per
Share/Unit
Basic - $1.622
Basic - $1.620
Basic - $1.620
Diluted - $1.610 Diluted - $1.606 Diluted - $1.600
In 2018, the Corporation recorded a $8.1 million gain on redemption of Labstat, End of the Roll and Agility units, $14.6
million increase in investments at fair value, $25.9 million bad debt expense as promissory notes owed from Group
SM and KMH were written down to nil, and $10.6 million of foreign exchange gains were recorded.
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.
34
Management Discussion & Analysis
Annual Report
2018
Quarterly Results Summary
Q4-18
Q3-18
Q2-18
Q1-18
Q4-17
Q3-17
Q2-17
Q1-17
Revenue
Earnings
$ 25,311 $ 22,685 $ 28,442
$ 23,641
$ 21,638
$ 23,775
$ 22,779
$ 20,881
$ 17,981
$ 19,100 $ 26,863
$ (3,146)
$ 11,410 $ (22,031)
$ 10,656
$ 11,849
Basic and Diluted Income
(loss) per Share/Unit
$ 0.49
$ 0.52
$ 0.74
$ (0.09)
$ 0.31
$ (0.60)
$ 0.29
$ 0.33
$ 0.49
$ 0.52
$ 0.73
$ (0.09)
$ 0.31
$ (0.60)
$ 0.29
$ 0.32
In Q4 2018, the Corporation recorded a $0.3 million increase in investments at fair value. In Q3 2018, the Corporation
recorded a $7.1 increase in investments at fair value. In Q2 2018, the Corporation recorded a $6.4 million gain on
the repurchase of the End of the Roll intangible asset, a partial redemption of the Planet Fitness units and a $0.5
million increase in the fair value of investments at fair value. In Q1 2018, the Corporation recorded a $1.8 million gain
on the redemption of the Agility units, a $3.5 million increase in the fair value of investments at fair value and a $25.9
million bad debt expense related to the Phoenix and Group SM promissory note and Group SM accounts receivable.
The Corporation began recognizing changes in the fair value of investments at fair value through earnings, effective
January 1, 2018. Previously they were recognized in OCI and therefore not included in the below adjustment.
In Q4 2017, the Corporation recorded a $13.6 million 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. 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.
Outstanding Shares
At December 31, 2018, the Corporation had authorized, issued and outstanding, 36,496,247 voting common shares.
For the year ended December 31, 2018, 15,000 shares were issued on the vesting of RSUs and no options were
granted, issued or exercised. At December 31, 2018, 276,651 RSUs and 2,242,364 stock options were outstanding
under the Corporation’s long-term incentive compensation plans. The outstanding stock options have a weighted
average exercise price of $25.56, and as of December 31, 2018 all 2,242,364 options outstanding are out of the money.
At March 5, 2019, the Corporation had 36,496,247 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 year ended December 30, 2009 through December 30, 2017 (collectively
the “Reassessments”). Pursuant to the Reassessments, the deduction of approximately $121 million of non-capital
losses and utilization of $6.8 million in investment tax credits (“ITC’s”) by the Corporation was denied, resulting
in reassessed taxes and interest of approximately $47.0 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 $20.2 million in deposits to the CRA relating to the Reassessments to date. It is possible that the
Corporation may be reassessed with respect to the deduction of its tax pools in respect of its tax filings in respect
of the 2018 taxation years, on the same basis. The carrying values of the remaining ITC’s of $2.7 million at December
31, 2018 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.
Annual Report
2018
Management Discussion & Analysis
35
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 Run Rate 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 Statement” below.
Risk 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 MD&A, 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 MD&A 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, Federal Resources) or are guaranteed by an affiliated
entity (for example, GWM). 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 and could
be impacted by rights of certain unsecured creditors. Specifically, our agreements with a Private Company Partner
may 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
36
Management Discussion & Analysis
Annual Report
2018
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.
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 labour trends in a Private Company Partners
industry or the economy as a whole; 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
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, international trade disputes and tariffs, 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.
Annual Report
2018
Management Discussion & Analysis
37
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 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, 2017 (collectively
the “Reassessments”). Pursuant to the Reassessments, the deduction of approximately $121 million of non-capital
losses and utilization of $7.9 million in investment tax credits by the Corporation was denied, resulting in reassessed
taxes and interest of approximately $47.7 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 $20.2 million in deposits to the CRA relating to the Reassessments to date, including $3.0 million deposited
in 2017 $0.9 million deposited in 2018. 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 2018 taxation year, on the same basis.
The carrying values of the remaining ITC’s of $2.8 million at December 31, 2018 and the ITC’s claimed in 2018 of $0.2
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.
38
Management Discussion & Analysis
International Structure
Annual Report
2018
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 2018, the U.S. Treasury and the Internal Revenue
Service issued proposed regulations relating to the 2017 Tax Cuts and Jobs Act, which provided administrative
guidance and clarified certain aspects of the new laws. The proposed regulations are complex and comprehensive,
and considerable uncertainty continues to exist until the final regulations are released, which is expected to occur
in 2019. The Corporation continues to review, analyze and assess the impact these new proposed regulations could
have on the Company as the impact could be material.
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 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.
International Tax Audit
In early January 2017, the CRA began an international tax audit of Alaris with respect to its 2013, 2014 and 2015
taxation years and in December 2017, the CRA issued a letter proposing adjustments relating to intercompany
services provided by Alaris to its foreign subsidiaries. If unsuccessfully defended, the audit would likely result in
a onetime payment of an amount that is immaterial to the Corporation. 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.
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
Annual Report
2018
Management Discussion & Analysis
39
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 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.
40
Management Discussion & Analysis
Annual Report
2018
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 USD/CAD 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 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 USD/CAD 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 USD/CAD 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 USD/CAD 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 or upon an exit event of a 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. Furthermore, if there were a negative
employment trend in a Partner’s industry or the Canadian or U.S economies as a whole, it could have a negative impact on
a Partner’s financial condition and therefore impact our financial condition and operations.
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.
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Management Discussion & Analysis
41
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 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
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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 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
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Management Discussion & Analysis
43
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.
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
Needs sufficient cash flow to incentivise
principals for performance
Risks Relating Specifically to DNT
Exposure to residential development
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.
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.
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 is 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.
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Geographic exposure to Austin and San Antonio DNT focuses primarily on the Austin and San Antonio regions of the state
Bonding requirements
Seasonality including weather related events
Fixed price contracts
Customer concentration
Labour
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 and 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.
DNT is a labour intensive business. Its employee base is comprised of
management level professionals, skilled operators of heavy equipment and
general labourers. The labour market in Texas is highly competitive and
availability of both general labourers and skilled operators is low across the
industry. A tight labour market can cause wage rates to rise rapidly and
cause temporarily margin compression on jobs previously bid with lower
wage rates. DNT can adapt to wage rate increases in future bids but will
deal with any wage increases through lower margin on current jobs. If
DNT is not able to hire and retain a qualified labour force it could also lead
to a delay in finishing current jobs as well as an inability to win new work.
Failure to complete certain jobs on time can lead to financial penalties
incurred by DNT and failure to competitively bid on new jobs can lead to a
decrease in future company revenues.
Risks Relating Specifically to Federal Resources
Complex procurement rules and regulations on
U.S. government contracts
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.
Subject to reviews, audits and costs adjustments
by the U.S. government
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.
Contracts can be cancelled at anytime
Competition is intense
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 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.
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2018
Seasonality/variability of revenue
Working capital requirements at certain times of
the year can be significant
Management Discussion & Analysis
45
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.
A decline in U.S. government defense budgets
can impact FRS
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
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.
Failure to Realize Anticipated Benefits of Acquisitions, New Business Lines or Locations
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.
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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 franchise operations may be limited
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 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.
Customer Concentration
At times, some of Alaris’ Partners may have concentration to a single customer or a handful of customers that make
up a large portion of their revenues. If there is a loss of one or some of these customers there could be a material
impact on a Partner’s business and its cash flows, which could have a material impact on the Partner’s ability to
pay Distributions.
Annual Report
2018
Forward-Looking Statements
Management Discussion & Analysis
47
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 2019, the Earnings Coverage Ratio for the Partners and the Corporation’s Run
Rate Payout Ratio; the revenues and distributions to be received by Alaris in 2019 (on an annual and quarterly basis); the
Corporation’s general and administrative expenses and cash requirements in 2019; the CRA proceedings (including the
expected timing and financial impact thereof); annualized net cash from operating activities; the impact of expected
operational improvements and future investments for the Corporation; interest and tax expenses; dividends to be paid;
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 or increasing the level of Distribution where a Partner
is paying less than the full contracted amount; the timing for collection of deferred or unpaid Distributions; impact of
new capital deployment; 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 revenue, distributions and expenses, Run Rate Payout Ratio, dividends to
be paid, the impact of capital deployment 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; 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; inability to close new partner contributions in a timely fashion on anticipated
terms or at all; competition; government regulation; leverage and restrictive covenants under credit facilities; the ability
of the Partners to terminate (by way of a redemption) the various agreements with Alaris or a material portion of Alaris
investment; 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, 2018 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 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.
48
Management Discussion & Analysis
Annual Report
2018
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.
Annual Report
2018
49
Consolidated Financial Statements of
Alaris Royalty Corp.
Audited financial statements for the years ended
December 31, 2018 and 2017
50
Management Discussion & Analysis
Annual Report
2018
To the Shareholders of Alaris Royalty Corp.
Opinion
INDEPENDENT AUDITORS’ REPORT
We have audited the consolidated financial statements of Alaris Royalty Corp. (the “Entity”), which comprise:
•
•
•
•
•
the consolidated statements of financial position as at December 31, 2018 and December 31, 2017;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended;
and notes to the consolidated financial statements, including a summary of significant accounting policies.
Hereinafter referred to as the “financial statements”.
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity
as at December 31, 2018 and December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
and the information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled
the “Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as
at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled the
“Annual Report” is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform on this
other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those
charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to
liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity‘s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
Annual Report
2018
51
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
•
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control.
•
•
•
•
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity
to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this auditors’ report is Ernest Trevor Hammond.
Chartered Professional Accountants
Calgary, Canada
March 5, 2019
To the Shareholders of Alaris Royalty Corp.
Opinion
INDEPENDENT AUDITORS’ REPORT
We have audited the consolidated financial statements of Alaris Royalty Corp. (the “Entity”), which comprise:
the consolidated statements of financial position as at December 31, 2018 and December 31, 2017;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended;
and notes to the consolidated financial statements, including a summary of significant accounting policies.
Hereinafter referred to as the “financial statements”.
•
•
•
•
•
•
•
Basis for Opinion
Other Information
the “Annual Report”.
conclusion thereon.
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity
as at December 31, 2018 and December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Management is responsible for the other information. Other information comprises:
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
and the information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as
at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled the
“Annual Report” is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform on this
other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those
charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to
liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity‘s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
52
Alaris Royalty Corp.
Consolidated statements of financial position
Annual Report
2018
$ thousands
Assets
Cash and cash equivalents
Prepayments
Foreign exchange contracts
Trade and other receivables
Income taxes receivable
Investment tax credit receivable
Promissory notes receivable
Current Assets
Promissory notes and other receivables
Deposits
Equipment
Intangible assets
Investments
Deferred income taxes
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
Note
31-Dec
2018
31-Dec
2017
$ 22,774
$ 35,475
5
9
9
5
5
9
5
9
4
9
9
7
6
8
3
2,181
-
923
1,484
2,798
23,252
$ 53,413
26,959
20,206
344
-
790,175
281
$ 837,966
$ 891,378
$ 3,670
5,013
1,333
1,257
$ 11,273
16,137
228,103
$ 244,240
2,407
1,430
8,642
-
2,957
15,403
$ 66,314
32,017
19,252
503
6,116
669,216
5,449
$ 732,552
$ 798,867
$ 1,707
4,921
-
588
$ 7,217
13,641
173,464
$ 187,105
$ 255,513
$ 194,322
$ 621,082
14,679
-
32,725
(32,621)
$ 620,842
12,058
(17,036)
5,767
(17,087)
$ 635,865
$ 604,545
Total Liabilities and Equity
$ 891,378
$ 798,867
Commitments
Related Parties
Subsequent events
On behalf of the Board:
Director (signed) “Jack C. Lee”
Director (signed) “Mary Ritchie”
11
12
13
Annual Report
2018
Alaris Royalty Corp.
Consolidated statements of comprehensive income
53
$ thousands except per share amounts
Note
2018
2017
Year ended December 31
Revenues
Royalties and distributions
Interest and other
Total Revenue
Other income
Gain on partner redemptions
Increase in investments at fair value
Realized gain / (loss) on foreign exchange contracts
Total other income
Salaries and benefits
Corporate and office
Legal and accounting fees
Transaction diligence costs
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) / loss on foreign exchange contracts
Unrealized foreign exchange (gain) / 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 investments at fair value
Tax effect of items in other comprehensive income
Foreign currency translation differences
Total comprehensive income
Earnings per share
Basic
Fully diluted
5
5
5
5
5
8
5
7
9
9
5
6
6
$ 97,970
$ 86,684
2,109
2,389
$ 100,079
$ 89,073
$ 8,144
$ 26,575
11,537
(73)
-
1,370
0
19,608
27,945
$ 5,383
$ 3,371
3,411
3,333
3,957
2,597
2,096
-
2,860
3,379
25,974
23,430
-
214
42,491
268
45,132
77,632
$ 74,555
$ 39,387
8,858
6,582
2,792
(2,144)
(13,327)
12,793
$ 76,232
$ 22,156
8,723
22,089
6,713
(11,815)
15,436
10,274
$ 60,796
$ 11,882
$ -
$ (9,062)
-
-
-
4,250
16,692
(984)
26,958
(17,262)
$ 87,754
$ 5,516
$ 1.67
$ 1.65
$ 0.33
$ 0.32
54
Annual Report
2018
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2018
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56
Alaris Royalty Corp.
Consolidated statements of cash flows
$ thousands
Notes
2018
2017
Year ended December 31
Annual Report
2018
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
Increase in investments at fair value
Unrealized (gain) / loss on foreign exchange contracts
Unrealized foreign exchange (gain) / loss
Transaction diligence costs
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 investments
Transaction diligence costs
Proceeds from partner redemptions
Promissory notes issued
Promissory notes repaid
Acquisition of equipment
Net cash used in investing activities
Cash flows from financing activities
Repayment of debt
Proceeds from debt
Dividends paid
Deposits with CRA
7
5
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$ 60,796
$ 11,882
8,858
6,713
214
25,974
-
(8,144)
(11,537)
2,792
(13,327)
3,957
2,860
6,582
(11,815)
268
23,430
42,491
(10,535)
-
(2,144)
12,793
-
3,379
$ 79,156
$ 76,331
7,176
(815)
(313)
1,962
87,167
(8,858)
(1,693)
319
227
(1,350)
73,834
(6,582)
$ 78,309
$ 67,252
$ (184,878)
$ (175,293)
(3,957)
141,806
(36,154)
11,923
-
-
116,277
(16,467)
617
(32)
$ (71,259)
(74,898)
$ (161,486)
$ (116,277)
201,721
(59,203)
(11)
196,528
(59,032)
(2,422)
Net cash from / (used in) financing activities
$ (18,979)
$ 18,797
Net increase / (decrease) in cash and cash equivalents
$ (11,929)
Impact of foreign exchange on cash balances
Cash and cash equivalents, Beginning of year
(772)
35,475
$ 11,151
(5,166)
29,491
Cash and cash equivalents, End of year
$ 22,774
$ 35,475
Cash taxes paid
$ 10,494
$ 26,712
Annual Report
2018
Alaris Royalty Corp.
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
1.
Reporting entity
57
Alaris Royalty Corp. is a company domiciled in Calgary, Alberta, Canada. The consolidated financial statements
as at and for the year ended December 31, 2018 comprise Alaris Royalty Corp. and its subsidiaries (together
referred to as the “Corporation”). The Corporation’s American investments are made 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 a wholly-owned subsidiary in the
Netherlands, Alaris Cooperatief U.A. (“Alaris 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, 2019.
(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:
•
Investments at fair value are measured at fair value with changes in fair value recorded in earnings (see
note 3).
• 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 has
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.
Key estimates used in discounted cash flow projections
Key assumptions used in the calculation of the fair value of investments at fair value are discount rates,
terminal value growth rates and annual performance metric growth rates. Where partners are in default,
other valuation methods may be used.
58
2.
Statement of Compliance (continued):
Collectability of amounts receivable
Annual Report
2018
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.
In 2017, the President of the United States signed H.R.1, the Tax Cuts and Jobs Act (U.S. Tax Reform or the
Act) into law. As a result, among other things, effective January 1, 2018, the enacted U.S. federal corporate
income tax rate was reduced from 35 per cent to 21 per cent and interest deductibility was restricted.
Existing deferred income tax assets and deferred income tax liabilities related to the Corporation's U.S.
businesses were adjusted to reflect the new lower income tax rate as at December 31, 2017.
In 2018, the U.S. Treasury and the Internal Revenue Service issued proposed regulations relating to the
2017 U.S. Tax Reform which provided administrative guidance and clarified certain aspects of the new
laws. The proposed regulations are complex and comprehensive, and considerable uncertainty continues
to exist until the final regulations are released, which is expected to occur in 2019. The Corporation
continues to review, analyze and assess the impact these new proposed regulations could have on the
Company as the impact could be material.
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.
Basis of consolidation
Subsidiaries
(a)
(i)
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)
Intra-Corporation balances and transactions, and any unrealized income and expenses arising from intra-
Corporation transactions, are eliminated in preparing the consolidated financial statements.
Transactions eliminated on consolidation
Revenue recognition
(b)
The Corporation recognizes revenue on its financial instruments in accordance with IFRS 9. Revenue is
recognized when and only when, the Corporation becomes party to the monthly distributions related to
the instruments and collection is reasonably assured.
(c)
Financial instruments
Recognition and Initial Measurement
Financial instruments are recognized when the Corporation becomes party to the contractual provisions
of the instrument. Financial assets and liabilities are not offset unless the Corporation has the current
legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously. A
financial asset is derecognized when the rights to receive cash flows from the asset have expired or have
been transferred and the Corporation has transferred substantially all the risks and rewards of ownership.
A financial liability is derecognized when the obligation is discharged, cancelled or expired. When an
existing financial liability is replaced by another from the same counterparty with substantially different
Annual Report
2018
3.
Significant accounting policies (continued):
59
terms or the terms of an existing liability are substantially modified, this exchange or modification is
treated as a derecognition of the original liability and the recognition of a new liability. When the terms of
an existing financial liability are modified, but the changes to the terms are considered non-substantial,
the modification is accounted for as a modification to the existing financial liability. The difference in
the carrying amounts of liabilities as a result of both substantial and non-substantial modifications is
recognized in profit and loss.
A financial asset or financial liability is initially measured at fair value, plus, for an item not at Fair Value
through Profit or loss (“FVTPL”), transaction diligence costs that are directly attributable to its acquisition or
issue. Transaction diligence costs directly attributable to financial assets or liabilities measured at FVTPL are
expensed as incurred. Transaction diligence costs are directly related to the Corporation’s investing activity
and therefore presented as cash flow from investing in the consolidated cash flow statement.
Classification and Subsequent Measurement
On initial recognition, a financial asset is classified as measured at amortized cost, fair value through OCI
(“FVOCI”) or FVTPL.
Financial assets are not reclassified subsequent to their initial recognition unless the Corporation changes
its business model for managing financial assets in which case all affected financial assets are reclassified
on the first day of the first reporting period following the change in the business model.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not
designated as at FVTPL:
•
•
it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated
as FVTPL:
•
•
it is held within a business model whose objective is achieved by both collecting contractual cash flows
and selling financial assets; and
its contractual terms give rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
All financial assets not classified as measured at amortized cost or FVOCI as described above are measured
at FVTPL. This includes all derivative financial assets.
The Corporation characterizes its fair value measurements into a three-level hierarchy depending on the
degree to which the inputs are observable, as follows:
•
•
•
Level 1 inputs are quoted prices in active markets for identical assets and liabilities;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the
asset or liability either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
Business Model Assessment
The Corporation makes an assessment of the objective of the business model in which a financial asset
is held at a portfolio level because this best reflects the way the business is managed and information is
provided to management.
Solely Payments of Principal and Interest Assessment
For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial
recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk
associated with the principal amount outstanding during a particular period of time and for other basic
lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin.
60
Annual Report
2018
3.
Significant accounting policies (continued):
In assessing whether the contractual cash flows are solely payments of principal and interest, the
Corporation considers the contractual terms of the instrument. This includes assessing whether the
financial asset contains a contractual term that could change the timing or amount of contractual
cash flows such that it would not meet this condition.
Financial Liabilities
Financial liabilities are classified as measured at amortized cost or FVTPL. A financial liability is
classified as at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such
on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and
losses, including any interest expense, are recognized in profit or loss. Other financial liabilities are
subsequently measured at amortized cost using the effective interest method. Interest expense and
foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on derecognition is
also recognized in profit or loss.
Derivatives
Derivative financial instruments are classified as FVTPL unless designated for hedge accounting.
Derivative instruments that do not qualify as hedges, or are not designated as hedges, are recorded
using mark-to-market accounting whereby instruments are recorded as either an asset or liability with
changes in fair value recognized in profit and loss.
Share capital
(d)
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.
Equipment
Recognition and measurement
(e)
(i)
Equipment is measured at cost less accumulated depreciation.
Depreciation
(ii)
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.
Intangible assets
Intangible assets
(f)
(i)
Intangible assets were comprised solely of the Corporation’s investment in certain intellectual
property of End of the Roll, which had a finite useful life and was measured at cost less accumulated
amortization and accumulated impairment losses. The intangible assets were sold during the year
ended December 31, 2018.
Amortization
(ii)
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. Amortization methods, useful lives and residual values are reviewed at
each reporting date and adjusted if appropriate.
Impairment
(g)
The Corporation recognizes loss allowances for expected credit losses (“ECLs”) on its financial assets
measured at amortized cost. Lifetime ECLs are the ECLs that result from all possible default events
over the expected life of a financial instrument whereas 12 month ECLs are the ECLs that result
from possible default over the next 12 months. The maximum period considered when estimating
ECLs is the maximum contractual period over which the Corporation is exposed to credit risk. ECLs
are a probability-weighted estimate of credit losses, twelve month ECLs are recorded on origination
and changed to lifetime ECLs should a significant deterioration in credit risk arise. Credit losses are
measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to
the entity in accordance with the contract and the cash flows that the Corporation expects to receive).
ECLs are discounted at the effective interest rate of the financial asset.
Annual Report
2018
61
3.
Significant accounting policies (continued):
Share based payment transactions
(h)
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.
Finance costs
(i)
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.
Income tax
( j)
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.
Earnings per Share
(k)
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.
62
Annual Report
2018
3.
Significant accounting policies (continued):
Foreign currency transactions
(l)
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.
Foreign operations
(m)
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.
New standards
(n)
The Corporation has initially adopted IFRS 15 Revenue from Contracts with Customers and
IFRS 9 Financial Instruments from January 1, 2018. The Corporation has adopted the standards
retrospectively, and as permitted any transition adjustments are recorded in opening retained
earnings under IFRS 9 the transition adjustment recorded in opening retained earnings. Comparative
periods have not been restated.
IFRS 9: Financial Instruments
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 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 did not
require 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 results in
more timely recognition of expected credit losses.
Annual Report
2018
3.
Significant accounting policies (continued):
63
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.
As a result of the adoption of IFRS 9, the following classification and measurement changes have been
reflected:
Financial Instrument
Cash and cash
Equivalents
Trade and other
receivables
Foreign exchange
contracts
Promissory notes
receivable
Investments
Accounts payable and
accrued liabilities
IAS 39
IFRS 9
Category
Measurement
Category
Measurement
FVTPL
Fair value
Amortized cost
Amortized cost
Loans and receivables
Amortized cost
Amortized cost
Amortized cost
FVTPL
Fair value
FVTPL
FVTPL
Loans and receivables
Amortized cost
Amortized cost
Amortized cost
Available for sale
financial assets
Fair value
FVTPL or amortized cost
FVTPL or amortized cost
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Loans and borrowings
Other liabilities
Amortized cost
Amortized cost
Amortized cost
The classification and measurement of investments on transition to IFRS 9 as FVTPL is due to the business
model of held to collect, and contractual cash flows being other than solely payments of principal and interest.
Although the investments at FVTPL (“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. On the date of transition no investment was classified at amortized cost. Therefore a transition
adjustment of $17.0 million was made to move cumulative fair value gains or losses from the fair value reserve
to retained earnings.
For those financial assets classified and measured at amortized cost, the expected credit loss model is applied
to determine impairment of financial assets. This applies to trade and other receivables, as well as promissory
notes receivable.
There was no material change from the Corporation’s existing methodology in determining credit losses to
the expected credit loss model that is applied to assets classified at amortized cost effective January 1, 2018.
Therefore, there was no transition adjustment required.
Classification of legal and accounting fees directly related to transactions
In addition, IFRS 9 requires that transaction costs be expensed as incurred for financial assets measured
at FVTPL. As the Corporation’s investments at December 31, 2017 were recorded at fair value, there was no
adjustment to opening retained earnings to reflect this change in treatment.
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, there has been no change to the Corporation’s revenue recognition and no transition adjustment was
required.
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
64
4.
Financial risk management (continued):
• market risk
•
foreign exchange risk
Annual Report
2018
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.
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 analyze 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,
2018 and 2017.
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 outstanding 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 $22.8 million at December 31, 2018 (December 31, 2017 - $35.5 million), which represents its
maximum credit exposure on these assets. The unusually high amount of cash was in place in order to fund
transactions just subsequent to December 31st in each year, US$8.0 million in January 2019 (see Note 13) and
US$15.0 million in January 2018 (see Note 5).
Annual Report
2018
4.
Financial risk management (continued):
65
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 $300 million, four year revolving credit facility, and has $228.1 million balance
drawn at December 31, 2018 ($173.5 million at December 31, 2017). The Corporation has the following
financial liabilities that mature as follows:
31-Dec-18
Total
0-6 Months 6 mo – 1 yr 1 – 2 years 3 – 4 years
Accounts payable and accrued
liabilities
$ (3,670)
$ (3,670)
Dividends payable
(5,013)
(5,013)
$-
-
$-
-
$-
-
Foreign exchange contracts
(1,333)
(835)
(330)
(168)
Loans and borrowings
(228,103)
-
-
-
(228,103)
Total
Market Risk
$ (238,119)
$ (9,517)
$ (330)
$ (168) $ (228,103)
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$25.5 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, 2018, 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 $0.1 million higher, due to a
smaller unrealized foreign exchange loss 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, 2018, 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 $4.0 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.
66
4.
Financial risk management (continued):
Interest Rate Risk
Annual Report
2018
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, 2018, if interest rates had been 1% higher with all other variables
held constant, net income (before tax) for the year would have been approximately $1.4 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, 2018.
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, $300.0 million revolving credit facility, a $50.0 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. Contracted EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization and non-cash stock-based compensation expenses, 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. Additionally, a minimum tangible net worth requirement of $450.0 million is in
place. 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, 2018 (please
refer to note 7 for actual ratios as of December 31, 2018). In order to acquire more distributions and
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 the exception of an expected
increase of permanent long term debt in the capital structure if it reduces the Corporation’s cost of
capital.
Annual Report
2018
5.
Investments
67
The following table lists the Corporation’s investments at period end. For each periods presented, all of the
investments are recorded at fair value with the exception of the GWM loan receivable, which is recorded
at amortized cost. Investments highlighted with asterisks are denominated in US dollars and have been
translated into Canadian dollars using the period end exchange rate.
31-Dec-18
$ thousands
Acquisition
Cost
Carrying
Value
Lower Mainland Steel Limited Partnership (“LMS”)*
$ 60,690
$ 39,769
SCR Mining and Tunneling, LP (“SCR”)
40,487
28,903
Kimco Holdings, LLC (“Kimco”)*
PF Growth Partners, LLC (“Planet Fitness”)*
DNT, LLC (“DNT”)*
48,016
25,965
28,913
93,082
34,064
94,059
Federal Resources Supply Company (“FED”)*
92,674
100,309
Sandbox Acquisitions, LLC (“Sandbox”)*
Providence Industries, LLC (“Providence”)*
Unify, LLC (“Unify”)*
ccCommunications LLC (“ccComm”)*
Accscient, LLC (“Accscient”)*
48,711
41,459
16,803
22,183
41,829
53,318
39,007
18,441
21,755
42,261
Sales Benchmark Index LLC (“SBI”)*
116,585
124,783
Heritage Restoration, LLC (“Heritage”)*
Fleet Advantage, LLC (“Fleet”)*
Body Contour Centers, LLC (“BCC”)*
GWM Holdings, Inc (“GWM”)*
GWM Loan Receivable at amortized cost*
18,511
19,802
59,418
5,975
55,104
21,556
20,464
62,763
6,139
56,619
Total Investments
$ 810,242
$ 790,175
31-Dec-17
Acquisition
Cost
Carrying
Value
Lower Mainland Steel Limited Partnership (“LMS”)*
$ 60,690
$ 35,917
Labstat International, LP (“Labstat”)
Agility Health, LLC (“Agility”)*
SCR Mining and Tunneling, LP (“SCR”)
Kimco Holdings, LLC (“Kimco”)*
PF Growth Partners, LLC (“Planet Fitness”)*
DNT, LLC (“DNT”)*
Federal Resources Supply Company (“FED”)*
47,719
26,013
40,487
44,180
50,999
85,883
35,058
61,324
26,133
26,203
29,045
57,427
89,933
40,576
Sandbox Acquisitions, LLC (“Sandbox”)*
44,819
46,517
Providence Industries, LLC (“Providence”)*
Unify, LLC (“Unify”)*
ccCommunications LLC (“ccComm”)*
Accscient, LLC (“Accscient”)*
38,147
22,993
8,242
26,435
40,661
24,499
7,941
25,514
Sales Benchmark Index LLC (“SBI”)*
107,271
107,158
Prospective deals
FED Loan Receivable*
Total Investments
155
155
50,212
50,212
$ 689,304
$ 669,216
68
5. Investments (continued):
Transactions closed in 2018
Q1 2018
Annual Report
2018
Investment in Heritage Restoration, LLC (“Heritage”)
On January 23, 2018, the Corporation entered into subscription and operating agreements with Heritage
Restoration, Holdings, LLC, pursuant to which the Corporation invested US$15.0 million in exchange
for preferred units in Heritage. The Corporation is entitled to an annual distribution of US$2.3 million
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.
Redemption of Agility Health, LLC Units (“Agility”)
On February 28, 2018, 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 held in Agility, which includes a premium of US$2.1 million over Alaris’
original cost of US$20.1 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 was 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. The escrow period expires on August 31, 2019.
The Corporation recorded a gain on redemption of CAD$1.7 million during the year ended December 31,
2018 which represents the excess of total consideration received (US$22.2 million, US$20.7 million in cash
and US$1.5 million held in escrow and recorded as long-term accounts receivable) above the carrying
value of US$20.8 million converted to Canadian dollars. The cumulative fair value adjustments previously
recorded through other comprehensive income were transferred to retained earnings on January 1,
2018 to reflect the changes in accounting standards (as described in note 3). As a result of the gain on
redemption, the Corporation paid US$2.6 million in taxes during the year ended December 31, 2018.
Kimco Holdings, LLC Additional Contribution (“Kimco”)
On March 30, 2018, the Corporation loaned US$6.0 million to Kimco to replace existing subordinated
debt. The loan has a five year term and an annual yield of 12% (US$0.7 million).
On July 26, 2018, the Corporation loaned an additional US$3.8 million to Kimco to fund working capital.
The Corporation is entitled to an annual yield of 8% (US$0.3 million), paid monthly. Both the subordinated
debt and the loan mature on March 30, 2023.
Q2 2018
PF Growth Partners, LLC Partial Redemption (“Planet Fitness”)
On May 11, 2018, the Corporation received a partial redemption of US$25.0 million from Planet Fitness in
exchange for preferred units which had an associated US$3.3 million of annual distributions. The gain on
the partial redemption was recorded as a fair value increase as at and for the three months ended March
31, 2018 of $3.5 million CAD. Subsequent to the transaction, the Corporation is entitled to US$3.5 million of
annualized distributions on a remaining cost basis of US$20.6 million and fair value of US$23.5 million.
ccCommunications, LLC Additional Contribution (“ccComm”)
On May 31, 2018, the Corporation contributed US$10.0 million to ccComm. in exchange for annualized
distributions of US$1.4 million. The proceeds were used to fund an acquisition in their related industry.
The Corporation has invested a total of US$16.2 million funded over three tranches in exchange for an
annualized distribution of US$2.3 million.
Annual Report
2018
5. Investments (continued):
Fleet Advantage, LLC Initial Investment (“Fleet”)
69
On June 15, 2018, the Corporation contributed US$15.0 million into Fleet in exchange for a first year annualized
distribution of US$2.1 million. Fleet has the option to pay a portion of the Fleet distribution, subject to a
maximum yield of 2% (US$0.3 million in the first year) of the total yield (14% in the initial year) in any given
year as payment-in-kind (“PIK”) provided that any amounts subject to the PIK must be paid in cash every
three years. US$7.5 million of the Fleet units are redeemable at par at any time. The Fleet distribution will
be adjusted annually (commencing January 1, 2020) based on the change in net revenues, subject to a 6%
collar. The Fleet contribution was used to fund continued growth and provide partial liquidity to existing
shareholders.
Labstat International, ULC Redemption (“Labstat”)
On June 25, 2018, the Corporation received $61.3 million as a result of the Labstat redemption, which represents
a premium of $13.6 million over Alaris’ original cost of $47.7 million. The fair value of the units were previously
increased to reflect the maximum repurchase price, therefore no gain was recorded at the time of disposition.
Concurrent with the redemption of the preferred units, the Corporation also received $4.3 million for previously
unpaid distributions. The amounts received were recognized as revenue at the date of redemption. The
Corporation had previously not assigned any value on its balance sheet to the collection of the $4.3 million
of unpaid distributions because the amount and timing were dependent on the redemption of the preferred
units.
As part of the redemption the Corporation received the repayment of the $3.7 million promissory note
outstanding and $0.3 million of accrued interest. Prior to the redemption the Corporation also received the
2017 cash sweep of $4.2 million.
End of the Roll Redemption
On June 29, 2018, the Corporation received $12.6 million as a result of the End of the Roll repurchasing the
outstanding intangible asset. The End of the Roll intangible asset had a carrying value of $6.0 million and an
original cost of $7.2 million. The Corporation recognized a $6.5 million gain upon redemption.
Q3 2018
Accscient, LLC Additional Contributions (“Accscient”)
On June 15, 2018, the Corporation contributed an additional US$3.0 million to Accscient in exchange for an
additional annualized distributions of US$0.4 million.
On August 9, 2018, the Corporation contributed an additional US$7.0 million to Accscient in exchange for an
additional annualized distributions of US$1.0 million. The proceeds for both contributions were used to fund
acquisitions in their related industry.
Investment in Body Contour Centers, LLC (“BCC”)
On September 14, 2018, the Corporation entered into subscription and operating agreements with BCC,
pursuant to which the Corporation made the initial contribution of US$46.0 million in exchange for preferred
units in BCC, which entitles the Corporation to an initial annual distribution of US$6.4 million. BCC has the
option to pay a portion of the BCC Distribution, subject to a maximum of 2% of the aggregate contributed
capital any given year as payment in kind (“PIK”) provided that any amounts subject to the PIK must be paid
every three years. The BCC distribution will be adjusted annually (commencing January 1, 2020) based on the
change in same clinic sales, subject to a 6% collar. The BCC Contribution was used to provide partial liquidity
to existing equity holders.
The Corporation has also committed as part of the operating and subscription agreements with BCC to the
additional contributions consisting of US$20.0 million (“BCC Tranche 2”) and US$25.0 million (“BCC Tranche
3”). The additional contributions will be funded upon BCC satisfying certain financial targets. The additional
BCC contributions will carry the same terms as the original BCC contribution. Up to 25% of the BCC units are
redeemable at par at any time following the earlier of the second tranche closing and three years from the
original closing date, prior to such time these units are non-redeemable.
70
5. Investments (continued):
Lower Mainland Steel Limited Partnership (“LMS”)
Annual Report
2018
On September 20, 2018, the Corporation provided $5.0 million of short term debt to LMS in exchange for
annual interest of $0.4 million. The loan is repayable in one year, with interest rate increases of an additional
2% annually automatically taking effect at the anniversary date of the contribution.
Q4 2018
Sandbox, LLC Debt Purchase (“Sandbox”)
On October 29, 2018, the Corporation purchased the outstanding senior debt of Sandbox for US$12.5 million
with an additional US$1.0 million added in December 2018. The outstanding debt consists of US$6.6 million
of term debt and US$7.4 million of an asset backed lending (“ABL”) facility. The term debt matures on March
8, 2021 and is amortizing over 5 years with annual repayments of US$1.6 million, paid monthly. The term
debt and the ABL facility interest are based on a LIBOR spread, also paid monthly. The purchase of the debt
provides the Corporation with all legal rights of the senior lender agreement.
Investment in GWM Holdings, Inc (“GWM”)
On November 19, 2018, the Corporation contributed a total of US$46.0 million to GWM in exchange for
initial distributions of US$5.6 million. The legal structure of GWM being a corporation (compared to the
traditional LLC’s) required the contribution to be comprised of US$41.5 million of debt and US$4.5 million
of preferred equity to optimize the amount of taxes paid by our partner. Distributions received by GWM are
after tax and therefore the Corporation pays less taxes then comparable transactions into a Limited Liability
Corporation. The GWM distribution will be adjusted annually (commencing January 1, 2020) based on the
change in revenue, subject to a 8% collar.
Partial Redemption of Unify (“Unify”)
On December 12, 2018, Unify returned US$6.0 million of their redeemable preferred units at par, in
accordance with our operating agreement.
Transactions closed in 2017
Investment in ccCommunications LLC (“ccComm”)
The Corporation contributed US$6.2 million to ccComm in 2017 in exchange for an annualized distribution
of US$0.9 million. ccComm is a Sprint retailer with over 70 locations throughout the Northwest U.S. The
reset metric is net revenue with a collar of plus or minus 6%.
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. Since this transaction the Corporation the remaining loans were reduced
to nil in 2018 due to the timing and uncertainty surrounding their collection, please see promissory notes
section further down in note 5.
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).
Annual Report
2018
5. Investments (continued):
Investment in Accscient, LLC (“Accscient”)
71
The Corporation contributed US$20.0 million into Accscient LLC on June 20, 2017 in exchange for an
annualized distribution of US$3.0 million. The Accscient distribution will be reset annually 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 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 into SBI in exchange for an annualized
distribution of US$11.1 million on August 31, 2017. The SBI distribution will be reset annually 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 as well as US$10.0 million of 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.
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 (the “Sequel
Redemption”). 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 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.
Sandbox Acquisitions, LLC (“Sandbox”) Additional Contribution
In 2017, the Corporation contributed an additional US$13.0 million into Sandbox LLC in exchange for an
annualized distribution of US$1.9 million. The Sandbox additional contributions were used to fund an
acquisition and 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 into FED in exchange
for an annualized distribution of US$1.8 million. The contribution was used to partially fund an
acquisition.
72
5. Investments (continued):
Assumptions used in fair value calculations
Annual Report
2018
The Corporation recognizes that the determination of fair value of its investments at fair value
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 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 13.3% - 19.5%. 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, 2018 and
December 31, 2017.
A liquidation value is used when there is concern around the collection of future distributions
b)
and the partner company is in default with the Corporation or when the Corporation has been notified
of redemption and is reasonably certain in collecting the liquidation value. 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). There were no investments valued this way as of December 31, 2018.
The Corporation’s investment in Agility was valued on this basis at December 31, 2017.
From this analysis, management of the Corporation determined the fair value of the investments at
fair value for each individual Partner and below is a summary of the fair value adjustments in 2018 and
2017.
Transaction diligence costs:
Prior to the adoption of IFRS 9 on January 1, 2018, the Corporation capitalized transaction diligence
costs (legal and accounting costs) relating to a specific investment once a letter of intent had been
signed. These costs were added to the fair value of the individual investment. As a result of adopting
IFRS 9, the Corporation is now required to expense these costs through profit and loss when incurred.
During 2018, the Corporation expensed $3.9 million of transaction diligence costs that would have
been capitalized under the previous accounting standard. Under the previous accounting standard
capitalized transaction diligence costs increased the cost basis of individual investments and were
recognized through net income upon redemption of those partner units, a smaller gain or larger loss.
.
Annual Report
2018
5. Investments (continued):
73
Investments
($ thousands)
2018
Opening
Carrying
Value
Additions
Redemptions
Foreign
Exchange
Adjustment
Fair Value
Adjustment
Closing
Carrying
Value
Lower Mainland Steel
$ 35,917
$ -
$ -
$ 502
$ 3,350
39,769
Labstat
Agility
SCR
Kimco
Planet Fitness
DNT
FED
Sandbox
Providence
Unify
ccComm.
Accscient
SBI
Heritage
Fleet
BCC
GWM
GWM loan receivable
Investments -
December 31, 2018
2017
61,324
26,133
26,203
29,045
57,427
89,933
90,788
46,517
40,661
24,499
-
-
-
-
-
-
-
-
-
-
7,941
13,200
25,514
13,027
107,157
-
156
18,354
-
-
-
-
19,801
59,418
5,975
55,104
(61,324)
(26,472)
-
-
(32,337)
(259)
-
-
-
(8,186)
-
-
-
-
-
-
-
-
-
337
-
-
-
-
-
2,700
28,903
2,293
(5,372)
25,965
3,521
7,735
7,936
3,913
5,454
34,064
(3,350)
94,059
1,584
100,309
2,888
53,318
3,408
(5,062)
39,007
2,128
1,150
2,939
9,561
2,008
663
3,345
164
1,515
-
18,441
(536)
780
21,755
42,261
8,066
124,783
1,036
21,555
-
-
-
-
20,464
62,763
6,140
56,619
$ 669,216
$ 184,878
$ (128,577)
$ 53,120
$ 11,537
$ 790,175
Lower Mainland Steel
$ 36,215
$ -
$ -
$ (422)
$ 125
$ 35,917
KMH
Labstat
Agility
SCR
Sequel
Group SM
Kimco
Planet Fitness
DNT
FED
Sandbox
Providence
26,947
49,199
26,965
30,488
-
-
-
-
(26,947)
-
-
-
-
-
(1,837)
-
12,125
1,004
-
61,324
26,133
-
(4,285)
26,203
109,498
214
(101,466)
(8,246)
-
40,217
31,166
59,062
99,197
-
-
-
-
75,680
16,947
30,538
16,342
40,950
-
-
-
-
-
-
-
-
(40,217)
(2,122)
(4,021)
-
29,045
2,385
57,427
(2,694)
(6,569)
-
89,933
-
-
-
-
-
-
-
-
(5,152)
(1,833)
(2,788)
(1,680)
(249)
(958)
(113)
-
3,314
1,469
90,788
46,517
2,498
40,661
1,506
24,499
-
-
-
-
7,941
25,514
107,157
156
Unify (formerly Matisia)
24,672
ccComm.
Accscient
SBI
196
7,994
-
-
26,473
107,270
Prospective deals
102
54
Investments -
December 31, 2017
$ 681,093
$ 175,293
$ (131,107)
$ (35,989)
$ (20,076)
$ 669,216
74
5. Investments (continued):
Annual Report
2018
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
2018
2017
DNT
SBI
FED
Labstat
Sandbox
Planet Fitness
Providence
LMS
Accscient
Unify
Heritage
Body Contour Centers
ccComm
SCR
Fleet
GlobalWide
Kimco
End of the Roll
Agility Health
Sequel
Group SM
$ 14,831
$ 14,216
14,320
13,864
8,340
7,150
6,349
6,125
5,170
4,711
3,502
2,730
2,495
2,299
1,650
1,495
830
780
692
637
-
-
4,642
11,074
7,940
4,909
8,488
5,843
4,746
1,926
3,506
-
-
883
600
-
-
-
1,266
3,972
12,174
500
Total Royalties and Distributions
$ 97,970
$ 86,684
Other Income
Interest
Total Revenue
2,109
2,389
$ 100,079
$ 89,073
As of December 31, 2018, trade receivables are as follows.
Trade Receivables
$ thousands
Labstat
Agility
Other receivables
Balance at December 31, 2018
31-Dec-18
31-Dec-17
$ -
-
923
$ 923
$ 4,239
2,973
1,430
$ 8,642
The other receivables are all greater than 90 days, the Corporation expects to reduce this balance
to zero within the next twelve months. The Corporation recorded a bad debt expense of $0.5
million during the year ended December 31, 2018 (December 31, 2017 - $9.8 million). In both
periods the amounts related to accrued distributions and interest outstanding with Group SM.
Annual Report
2018
5. Investments (continued):
Royalties and Distributions:
Promissory Notes and Other Receivables:
75
As part of being a long-term partner with the companies the Corporation holds preferred interests
in, from time to time the Corporation has offered alternative financing solutions to assist with short-
term needs of the individual businesses. The Corporation will continue to pursue recovery of the
full face value for all outstanding promissory notes. Should there be an adverse event to any of the
above businesses, the timing and amounts collected could be negatively impacted. The differences
between carrying value and face value is due to the timing and uncertainty surrounding the
collection of cash flows. Below is a summary of changes in promissory notes and other receivables
for the year ended December 31, 2018.
Reconciliation of Promissory Notes and Other
Receivables
Year ended December 31
($ thousands)
Face Value - Opening
Opening provision for credit losses
Carrying Value - Opening
Additions - cash
Additions - in kind
Repayments
Bad debt expense
Reserve
Foreign exchange
Carrying Value - Ending
31-Dec-18
31-Dec-17
$ 63,906
(16,486)
$ 31,417
(1,603)
$ 47,420
$ 29,814
36,154
16,467
1,918
17,142
(11,923)
(617)
(25,431)
(13,617)
-
(1,474)
2,072
(295)
$ 50,211
$ 47,420
Promissory notes & other receivables - current
$ 23,252
$ 15,403
Promissory notes & other receivables - non-current
$ 26,959
$ 32,017
The Corporation has the following promissory notes and long-term receivables by partner
outstanding as of December 31, 2018:
Promissory Notes and Other Receivables by Partner
Carrying Value
($ thousands)
Lower Mainland Steel
Sandbox - current portion of term debt + revolver
31-Dec-18
31-Dec-17
$ 5,000
18,136
$ -
-
Group SM - Secured Promissory Note (2)
4,500
10,000
Agility - accounts receivable
Kimco - LT accounts receivable
Kimco
Group SM - Unsecured Promissory Note
Phoenix Secured Loan (1)
Other - former partners
Balance
2,046
2,494
18,035
-
-
-
-
2,281
4,305
11,600
13,831
5,403
$ 50,211
$ 47,420
The Phoenix US assets (formerly KMH) were sold to a third party in the year ended December 31, 2018. Consideration
(1)
included US$1.5 million of secured debt with additional proceeds of up to US$4.0 million to be received if certain revenue
targets are achieved over a period of three years. Due to the increased uncertainty over timing of and collection of amounts
owing, the Corporation recorded a full reserve of the carrying amount of the Phoenix US loan and the Phoenix CDN loan
totaling $13.8 million during the year ended December 31, 2018. Due to the uncertainty no value has been assigned to either
asset as of December 31, 2018.
76
5. Investments (continued):
Annual Report
2018
In 2017, the Corporation provided $10.0 million to Group SM, which is secured against outstanding accounts receivable and
(2)
has a first lien on the business. On October 15, 2018, all of the assets of Group SM were sold, the Corporation received $5.5 million
in cash proceeds during the three months ended December 31, 2018. The remaining $4.5 million is estimated to be received in the
next twelve months as the purchaser has indicated to the Corporation an intent to repay the Corporation in the near term (received
an additional $0.9 million subsequent to year end). The Corporation is receiving monthly interest payments on the outstanding
balance at an interest rate of 6.7% per annum. The Corporation recorded ed a bad debt expense of $11.6 million related to Group SM
unsecured promissory note during the year ended December 31, 2018.
The expected credit loss model classifies the Corporations outstanding promissory notes and other
receivables in three stages based on their credit quality. Stage 1 represents the lowest credit risk and
stage 3 representing loans that are in default or past due. As at December 31, 2018 the Corporation had
$47.7 million (December 31, 2017 - $19.7 million) of promissory notes and other receivables classified as
stage 1 and $2.5 million classified as stage 3 (December 31, 2017 - $27.7 million). There was no transfer
between stages during the year ended December 31, 2018.
Based on the opening credit loss provision $16.5 million and the addition of $25.4 million during the
period the total credit loss provision as at December 31, 2018 is $41.9 million.
6.
Share capital:
The Corporation has authorized, issued and outstanding, 36,496,247 voting common shares as at
December 31, 2018 (December 31, 2017 – 36,481,247).
Issued Common Shares
Number of Shares
Amount ($)
thousands
$ thousands
Balance at December 31, 2016
36,336
$ 617,893
Issued after employee / director vesting
Cashless options exercised in the period
Fair value of options exercised in the period
109
36
-
2,512
-
438
Balance at December 31, 2017
36,481
$ 620,842
RSUs vested
15
240
Balance at December 31, 2018
36,496
$ 621,082
Weighted Average Shares Outstanding
Year ended December 31
thousands
Weighted average shares outstanding, basic
Effect of outstanding options
Effect of outstanding RSUs
2018
36,490
-
276
2017
36,447
15
292
Weighted average shares outstanding, fully diluted
36,766
36,754
2,242,364 and 1,723,160 options were excluded from the calculation as they were anti-dilutive at
December 31, 2018 and December 31, 2017 respectively.
Dividends
The Corporation increased their monthly dividend from $0.135 per common share to $0.1375 in November
2018 (effective December 2018). The Corporation declared dividends of $0.135 per common share for the
first eleven months of 2018, $1.6225 per share and $59.3 million in aggregate (2017 - $1.62 per share and
$59.0 million in aggregate).
7.
Loans and borrowings
As at December 31, 2018 the Corporation had a $300 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
Annual Report
2018
7. Loans and borrowings (continued):
77
Rate (“USBR”) and LIBOR. The Corporation realized a blended interest rate of 5.7% for the year ended
December 31, 2018. During the year, another bank joined the lending syndicate and the facility
was increased from $280 million to $300 million and at the same time the accordion feature was
reduced from $70 million to $50 million. At December 31, 2018, the facility was $228.1 million drawn
(December 31, 2017 - $173.5 million).
Debt Continuity
$ thousands
Denominated Debt
Total
$USD
$CAD
$CAD
Balance at December 31, 2017
$ 112,700
$ 32,000
$ 173,464
Senior debt repayment (Agility redemption)
Senior debt advance (Kimco sub debt)
Senior debt advance (ccComm. tranche #2)
Senior debt advance (Fleet)
(26,500)
6,000
10,000
15,000
N/A
N/A
N/A
N/A
Senior debt repayment (Labstat redemption)
(30,000)
(32,000)
Senior debt repayment (PF partial redemption)
Senior debt repayment (EOR redemption)
Senior debt advance (Accscient tranches #2, #3, #4)
Senior debt advance (Sono Bello)
Senior debt advance (LMS promissory note)
Senior debt advance (Sandbox debt purchase)
Senior debt advance (GlobalWide)
(28,000)
(5,000)
18,000
46,000
N/A
N/A
N/A
N/A
N/A
5,000
9,000
46,000
N/A
N/A
Senior debt repayment (Group SM secured note proceeds)
N/A
(5,000)
Senior debt repayment (Unify partial redemption)
Unrealized FX (gain) / loss on USD denominated debt
Balance at December 31, 2018
(6,000)
N/A
$ 167,200
N/A
N/A
$ -
(34,039)
7,739
12,993
19,511
(71,894)
(35,930)
(6,583)
23,877
60,504
5,000
11,755
60,343
(5,000)
(8,041)
14,404
$ 228,103
At December 31, 2018 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, which can be increased to
3.0:1 for up to ninety days (actual ratio is 2.30:1 at December 31, 2018); minimum tangible net worth
of $450.0 million (actual amount is $635.8 million at December 31, 2018); and a minimum fixed
charge coverage ratio of 1:1 (actual ratio is 1.21:1 at December 31, 2018).
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 403,441 and issued 276,651 RSUs to
management and Directors as of December 31, 2018. The RSUs issued to directors (78,605) 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 not vested yet due to restrictions under the RSU plan, 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 Corporation has approved 157,300 RSUs for management
and 15,000 RSUs for directors that have not yet been granted due to restrictions under the RSU
plan. 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.
78
8. Share-based payments (continued):
Annual Report
2018
The Corporation has reserved 3,102,181 and issued 2,242,364 options as of December 31, 2018. The options
outstanding at December 31, 2018, have an exercise price in the range of $20.60 to $33.87, a weighted
average exercise price of $25.56 (2017 – $25.56) and a weighted average contractual life of 2.05 years (2017 –
2.96 years).
For the year ended December 31, 2018 the Corporation incurred stock-based compensation expenses of $2.9
million (2017 - $3.4 million) which includes: $1.9 million (non-cash expense) for the RSU Plan expense that
is to be amortized over the thirty-six month vesting period of the plan (2017 - $2.2 million); and $1.0 million
(non-cash expense) for the amortization of the fair value of outstanding stock options (2017 - $1.2 million).
Options Summary
Weighted Avg
Exercise Price
2018
Number of
Options - 2018
Weighted Avg
Exercise Price
2017
Number of
Options - 2017
Outstanding at January 1
$25.56
2,242,364
$26.94
1,726,182
Exercised during the year
Expired during the year
Forfeited during the year
Granted during the year
$0.00
$0.00
$0.00
$0.00
-
-
-
-
$19.40
(197,525)
$23.63
(356,511)
$0.00
-
$21.56
1,070,218
Outstanding at December 31
$25.56
2,242,364
$25.56
2,242,364
Exercisable at December 31
$25.08
1,043,432
$30.38
865,788
During the year ending December 31, 2018, the Corporation issued 15,000 shares as a result of vested RSUs.
The following table summarizes the options outstanding and exercisable as at December 31, 2018:
Exercise
price
Number outstanding
Weighted average
remaining life (years)
Number exercisable
$33.87
$26.79
$31.15
$33.06
$24.78
$22.47
$22.33
$20.60
2018
2017
2018
2017
2018
2017
407,560
407,560
0.25
0.56
-
407,560
45,000
193,739
45,000
193,739
20,000
20,000
505,847
505,847
521,014
30,000
521,014
30,000
519,204
519,204
0.30
0.59
0.70
1.57
3.07
3.20
3.78
1.05
1.59
1.70
45,000
45,000
193,739
145,304
20,000
15,000
2.57
379,385
252,924
4.07
260,507
4.20
15,000
4.78
129,801
-
-
-
Total
2,242,364
2,242,364
2.05
2.96
1,043,432
865,788
9. Income taxes
The Corporation’s consolidated statutory tax rate for the year ended December 31, 2018 was 26.64% (year
ended December 31, 2017 – 26.32%). The change in the Corporation’s consolidated statutory tax rate from
2017 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:
Annual Report
2018
9. Income taxes (continued):
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
Change in unrecognized deferred tax assets
Prior period adjustment
Balance at December 31, 2018
79
2018
2017
$ 81,079
$ 22,155
26.64%
26.32%
$ 21,599
(9,685)
-
(478)
883
5,599
$ 5,831
(249)
(5,975)
8,649
2,620
(1,574)
(602)
$ 16,344
$ 10,274
Cash taxes paid during the year were $10.5 million (of which $2.6 million related to the gain on the
redemption of the Agility units), in 2017 the Corporation paid $26.6 million (which included $16.0
million of cash taxes related to the gain on redemption of Sequel units).
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):
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
Foreign exchange on loan payable
Distributions to be taxed in future years
Bad debt
Valuation allowance
2018
401
-
(797)
(7,854)
-
1,113
(3,207)
(651)
1,205
(2,521)
1,130
(5,599)
2017
1,035
(1,681)
(1,500)
(8,523)
6,061
689
(1,626)
(205)
(2,442)
-
Balance at December 31, 2018
$ (16,780)
$ (8,192)
As at December 31, 2018, 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, 2018
2018
$ 309
1,841
648
$ 2,798
80
9. Income taxes (continued):
Movement in deferred tax balances during the year
Balance at December 31, 2016
Recognized in profit and loss
Reduction to investment tax credit
Recognized directly in equity
Recognized in other comprehensive income
Currency translation and other
Balance at December 31, 2017
Recognized in profit and loss
Reduction to investment tax credit
Recognized directly in equity
Recognized in other comprehensive income
Currency translation and other
Balance at December 31, 2018
Annual Report
2018
Deferred Income
Taxes
$ (22,458)
11,815
1,898
-
(984)
1,537
(8,192)
(6,713)
159
-
-
(1,110)
$ (15,856)
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 year ended December
30, 2009 through December 30, 2017 (collectively the “Reassessments”). Pursuant to the
Reassessments, the deduction of approximately $121.2 million of non-capital losses and utilization of
$7.9 million in investment tax credits (“ITC’s”) by the Corporation was denied, resulting in reassessed
taxes and interest of approximately $47.7 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 $20.2 million in deposits to the CRA relating to
the Reassessments to date. It is possible that the Corporation may be reassessed with respect to the
deduction of its tax pools in respect of its tax filings in respect of the 2018 taxation years, thereby
disallowing ITC’s of $0.2 million, on the same basis. The carrying values of the remaining ITC’s of
$2.8 million at December 31, 2018 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. As at December 31, 2018, the CRA has denied the following tax claims and
assessed the related taxes and interest:
Annual Report
2018
9. Income taxes (continued):
Tax Year
July 2009
December 2009
December 2010
December 2011
December 2012
December 2013
December 2014
December 2015
December 2016
December 2017
81
ITCs Applied
Losses Applied
Estimated tax and
interest
$ 10,532
$ 4,475
1,916
14,646
14,992
16,774
22,642
29,153
10,560
-
-
764
5,598
5,215
4,561
6,644
8,751
4,937
4,979
1,781
2,315
2,905
1,618
Balance at December 31, 2018
$ 6,838
$ 121,215
$ 47,705
The comparative period deferred tax balances have been reclassified to conform to the current
period presentation. The Corporation previously reported a net deferred tax liability of $8.2 million.
This amount has been presented in these financial statements in the comparative period as a
deferred tax asset of $5.4 million and a deferred tax liability of $13.6 million.
10.
Fair Value of Financial Instruments
The table below analyzes financial instruments carried at fair value, by valuation method. The
different levels have been defined as follows:
•
•
•
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
The following items shown on the consolidated statement of financial position as at December 31,
2018 and December 31, 2017, are measured at fair value on a recurring basis using level 2 or level
3 inputs. Discount rates and estimates used to determine changes in future distributions from
each investment are the primary inputs in the fair value models and are generally unobservable.
Accordingly, these fair value measures are classified as level 3. There were no transfers between
level 2 or level 3 classified assets and liabilities during the year ended December 31, 2018.
Fair value classification ($ thousands)
Level 1
Level 2
Level 3
Total
31-Dec-18
Foreign exchange contracts
$ -
$ (1,333)
$ -
$ (1,333)
Investments
Total at December 31, 2018
31-Dec-17
-
$ -
-
790,175
790,175
$ (1,333)
$ 790,175
$ 788,842
Level 1
Level 2
Level 3
Total
Foreign exchange contracts
$ -
$ 1,430
$ -
$ 1,430
Investments
Total at December 31, 2017
-
$ -
-
669,216
669,216
$ 1,430
$ 669,216
$ 670,646
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 60% of the
expected distributions on a rolling 12 to 24 month basis. The notional value of outstanding foreign
exchange contracts is US$25.4 million as at December 31, 2018 (US$33.6 million as of December 31,
2017).
82
11.
Commitments
Annual Report
2018
The Corporation has annual commitments under its current office lease of $0.6 million and a
US$45.0 million commitment to Body Contour Centers (“BCC”) to fund additional contributions
when specified financial metrics are achieved (refer to note 5 for additional disclosure).
Commitments ($ thousands)
2019
2020
Total Commitments
12.
Related Parties
31-Dec-18
$ 34,540
27,502
$ 62,041
In addition to their salaries, the Corporation also provides long-term compensation in the form of
options and RSUs. Due to restrictions under the Option and RSU plans no Options or RSUs were
granted to key management personnel during the year ended December 31, 2018. Key management
personnel compensation comprised the following:
Key Management Personnel ($ thousands)
2018
2017
Base salaries and benefits
Bonus
Non cash stock-based compensation
$ 892
$ 854
920
407
-
2,033
Total for year ended December 31
$ 1,812
$ 3,294
13.
Subsequent Events
Accscient Additional Contribution
On January 8, 2019 the Corporation contributed an additional US$8.0 million into Accscient, in
exchange for incremental annual distributions of US$1.1 million. This was the fourth additional
contribution into Accscient bringing the total contributed capital to US$38.0 million and annualized
distributions to US$5.6 million. The proceeds were used to partially fund an acquisition in their
related industry.
Sandbox Additional Contribution
On February 22, 2019, the Corporation contributed an additional US$5.0 million into Sandbox, in
exchange for incremental distributions of US$0.8 million. The fourth additional contribution into
Sandbox has a minimum repurchase premium of US$1.0 million and may include a percentage of
common equity upon redemption. The proceeds were used to fund working capital.
Suite 250, 333 – 24th Avenue SW,
Calgary AB, T2S 3E6
403.228.0873
w w w. a l a r i s r o y a l t y. c o m
A d d i t i o n a l i n f o r m a t i o n r e l a t i n g t o t h e C o r p o r a t i o n , i n c l u d i n g a l l
p u b l i c f i l i n g s , i s a v a i l a b l e o n S E D A R ( w w w. s e d a r . c o m )