1
FISCAL YEAR ENDED DECEMBER 31, 2022
ANNUAL REPORT
www.alarisequitypartners.com
ANNUAL REPORT 2022
2
President’s Message ....................................................................................................................................................................................3
About Alaris ..................................................................................................................................................................................................4
Board of Trustees ........................................................................................................................................................................................5
Investment Summary ...................................................................................................................................................................................6
Private Company Partner Summaries ........................................................................................................................................................7
2022 Financial Highlights ............................................................................................................................................................................8
2022 Per Unit Highlights ............................................................................................................................................................................12
Management Discussion & Analysis ........................................................................................................................................................13
OVERVIEW ........................................................................................................................................................................................................................................................... 14
RESULTS OF OPERATIONS ............................................................................................................................................................................................................................... 15
OUTLOOK ............................................................................................................................................................................................................................................................. 19
PARTNER UPDATES ........................................................................................................................................................................................................................................... 24
LIQUIDITY AND CAPITAL RESOURCES ............................................................................................................................................................................................................ 29
NET WORKING CAPITAL .................................................................................................................................................................................................................................... 30
FINANCIAL INSTRUMENTS ................................................................................................................................................................................................................................ 31
INTERNAL CONTROLS OVER FINANCIAL REPORTING ................................................................................................................................................................................. 32
SUMMARY OF CONTRACTUAL OBLIGATIONS ................................................................................................................................................................................................ 32
RELATED PARTY TRANSACTIONS ................................................................................................................................................................................................................... 33
CRITICAL ACCOUNTING ESTIMATES AND POLICIES .................................................................................................................................................................................... 33
SUMMARY OF QUARTERLY RESULTS ............................................................................................................................................................................................................. 33
OUTSTANDING UNITS ........................................................................................................................................................................................................................................ 34
INCOME TAXES ................................................................................................................................................................................................................................................... 34
RISK FACTORS .................................................................................................................................................................................................................................................... 35
FORWARD-LOOKING STATEMENTS ................................................................................................................................................................................................................ 50
Consolidated Financial Statements .........................................................................................................................................................52
Independent Auditor's Report ............................................................................................................................................................................................................................... 53
Consolidated statements of financial position ...................................................................................................................................................................................................... 56
Consolidated statements of comprehensive income ............................................................................................................................................................................................ 57
Consolidated statement of changes in equity ....................................................................................................................................................................................................... 58
1.
Reporting entity: .................................................................................................................................................................................................................................. 61
2.
Statement of compliance: ................................................................................................................................................................................................................... 61
3.
Significant accounting policies:........................................................................................................................................................................................................... 62
4.
Financial risk management overview ................................................................................................................................................................................................. 68
5.
Investments......................................................................................................................................................................................................................................... 72
6.
Unitholders’ capital: ............................................................................................................................................................................................................................ 79
7.
Loans and borrowings: ....................................................................................................................................................................................................................... 80
8.
Convertible and senior unsecured debentures: ................................................................................................................................................................................. 80
9.
Unit-based payments: ......................................................................................................................................................................................................................... 81
10.
Income taxes:...................................................................................................................................................................................................................................... 82
11.
Fair value of financial instruments: ..................................................................................................................................................................................................... 84
12.
Commitments and contingencies: ...................................................................................................................................................................................................... 85
13.
Related parties: ................................................................................................................................................................................................................................... 85
14.
Subsequent events: ............................................................................................................................................................................................................................ 86
ANNUAL REPORT 2022
3
President’s Message1
2022 represented another record year of performance for Alaris. It also represented a first look at some of the advancements that we’ve made with our
business model and how we are improving performance going forward. With the FNC redemption during the year, Alaris had our first sale of an investment
that included common equity – a strategy that we started implementing four years ago. At that time, we hoped that adding a sliver of common equity
would allow us to deploy more capital, to increase our overall return profile and to align ourselves better with our partners. Four years later, I am happy
to report that all of those advantages have been realized. Owning common equity in addition to our traditional preferred equity helped contribute to an
outstanding return of in excess of a 40% IRR on FNC. On a broader scale, dividends from the common equity that we own in seven different investments
have come in significantly larger than our guidance. During 2022, our common equity cash yield was more than 10% of the capital invested (roughly $14
million compared to guidance of $4 million) and helped contribute to Alaris having an Actual Payout Ratio of below 40% compared to the stated guidance
of 65-70%.
The BCC transaction that was announced in February is also a significant enhancement in our goal of deploying more preferred equity as well as increasing
overall returns. This was an innovative deal that involved rolling our previous investment in BCC into new convertible preferred equity as well as bringing
in a significant new partner in Brookfield. Not only did this transaction extend the relationship with an extremely high performing investment in BCC, it
allowed us to leverage our team and our proprietary deal flow in order to generate an over allocation of profits as it relates to other convertible preferred
equity outstanding, in addition to our returns on our US$145 million. While the full impact of this transaction will not be fully felt for a few years, it allows
us to preserve a valuable revenue stream from BCC and creates a template for doing similar transactions with both current and future partners. The
addition of common equity with our preferred equity as well as the BCC investment structure are both developments that involved a slight drop in our
current cash yields from our investments. However, both strategies significantly improve our expected overall returns and allow us to deploy and retain
more preferred equity investments, thus increasing our expected revenue growth rate. A true win-win for Alaris unitholders.
From a portfolio health perspective, we are very encouraged by the results that our partners continue to post on a monthly basis. As in any large portfolio,
there is always going to be a mix of results depending on the specific drivers in each company but as a whole, we are still operating at a historically strong
level. While many economists are forecasting a recession in the coming year, we feel that we are uniquely suited to successfully weather a potential
storm. Our businesses are broadly considered required service providers and most importantly, our partners generally have low levels of debt with only
ten of our eighteen Partners having senior debt, we are not as exposed to the rising costs and refinance risks that most private equity firms will be
encountering over the next few months and years.
Looking forward, it appears that we are coming out of a softer than usual new deal environment. Because of the difficult equity and debt markets that
we’ve seen over the last twelve months, most high performing companies chose to sit tight and not go to market. Early 2023 has shown a higher volume
of quality deal flow. More importantly, we are now operating in an environment that favours our form of equity capital for private businesses. The significant
negative change in the private debt markets has hurt the ability of traditional private equity firms to fund their deals and at the very least, the cost of all
capital has gone up considerably, making Alaris’ structured equity model increasingly more attractive. We look forward to a productive year of capital
deployment and continued strong returns from our portfolio.
Steve King
CEO
1 Please refer to the “Forward-Looking Statements” section in this Annual Report.
ANNUAL REPORT 2022
4
About Alaris
The Trust provides alternative financing for a diversified group of private businesses ("Private Company Partners") in exchange for
distributions, dividends and interest (“Distributions”) from the Private Company Partners, with the principal objective of generating stable
and predictable cash flows for distribution payments to its unitholders. Distributions from the Private Company Partners are adjusted each
year based on the percentage change of a "top line" financial performance measure such as gross revenue, gross margin or same-store
sales and rank in priority to the owners' common equity position.
Objective & Strategy
Alaris is dedicated to creating long-term value for its unitholders.
Alaris’ purpose, through its subsidiaries, is to provide non-control permanent equity to private companies to meet their business and capital
objectives, which includes management buyouts, dividend recapitalization and growth and acquisitions. Alaris achieves this by investing
its capital, through its subsidiaries, into private businesses (individually, a “Private Company Partner” and collectively the “Partners”)
primarily through preferred equity, common equity, subordinated debt and promissory notes. In exchange for the investments in preferred
equity, subordinated debt and promissory notes, the Trust earns Distributions received in regular monthly or quarterly payments that are
contractually agreed to between Alaris and each Private Company Partner. These payments are set for twelve months at a time and are
adjusted annually based on the audited performance of each Private Company Partner’s gross revenue, gross profit, same store sales or
other similar “top-line” performance measures. Alaris’ preferred equity investments can also appreciate through the reset metric and
typically include a premium upon exit or redemption. In certain situations, Alaris also invests through owning a minority common equity
position in our Partners and participates in the growth and distributions or dividends in proportion to our ownership percentage. Alaris has
limited general and administrative expenses with only sixteen employees.
Our goal is to continue to diversify and increase our revenue streams by adding a select few new Partners each year, providing follow-on
capital to our existing Partners, and also adding new revenue streams or growth prospects through new and innovative investment
structures to supplement our primary private equity investments. Within our current revenue streams we aim to generate organic growth
of 3-5% per year.
ANNUAL REPORT 2022
5
Board of Trustees
John "Jay" F. Ripley
Chairman
Bob Bertram
E. Mitchell Shier
Sophia Langlois
Kim Lynch Proctor
Stephen W. King
ANNUAL REPORT 2022
6
Investment Summary
Today our invested dollars are exposed to the following industry sectors: 32% to industrials
31% to business services; 21% to consumer products and services; and 16% consumer
financial services.
13%
87%
Investment by Country
Canada
US
21%
16%
31%
32%
Investment by Industry Segment
Consumer Products/ Services
Consumer Financial Services
Business Services
Industrial
Alaris has approximately 87% of its fair value of investments in
US based companies.
ANNUAL REPORT 2022
7
Private Company Partner Summaries
all dollar values in this table US$(000’s) as of March 9, 2023.
PARTNER
Partner Since
Current Distribution
Amount Invested
Collar
3E
Feb. 2021
$ 5,987
$39,500
+/-6%
Accscient
June 2017
$ 9,693
$62,000 (preferred)
$10,000 (common)
+/-5%
Body Contour Centers
Sept. 2018
$ 13,825
$145,000
N/A
Brown & Settle
Feb. 2021
$ 8,447
$53,700 (preferred)
$12,300 (common)
+/-6%
Carey Electric
June 2020
$ 1,773
$13,100 (preferred)
$900 (common)
+/-5%
DNT
June 2015
$ 11,678
$62,800
+/-6%
D&M
June 2021
$ 9,108
$67,000 (preferred)
$7,500 (common)
+/-7%
Edgewater Technical
Associates
Dec. 2020
$ 4,262
$30,600 (preferred)
$3,400 (common)
+/-6%
Fleet Advantage
June 2018
$ 2,968
$20,000 (preferred)
$8,000 (common)
+/-6%
GWM Holdings
Nov. 2018
$ 8,401
$76,000 (preferred)
$30,000 (common)
+/-8%
Heritage Restoration
Jan. 2018
$ 3,067
$17,500 (preferred)
$1,000 (common)
+/-6%
PFGP
Nov. 2014
$ 12,952
$76,900 (Preferred)
$17,700 (Common)
+/-5%
Sagamore
Nov. 2022
$ 3,000
$20,000 (Preferred)
$4,000 (Common)
+/- 6%
Stride
Nov. 2019
$ 589
$4,500
+/- 6%
Unify
Oct. 2016
$ 1,655
$11,000
+/-5%
Total US$
$97,405
$794,400
all dollar values in this table CDN$(000’s) as of March 9, 2023.
PARTNER
Partner Since
Current Distribution
Amount Invested
Collar
Amur
June 2019
$6,869
$50,000 (preferred)
$20,000 (common)
+/- 6%
LMS
Apr. 2007
$5,313
$60,600
No collar
SCR
May 2013
$4,500
$40,000
+/-6%
Total CDN$
$16,682
$170,600
ANNUAL REPORT 2022
8
2022 Financial Highlights
•
Revenue of $51.1 million and cash from operations, prior to changes in working capital of $47.3 million in the
fourth quarter of 2022 each represent 36% and 13% increases respectively, as compared to the same period in
2021. On a per unit basis, revenue of $1.13 and cash from operations, prior to changes in working capital of
$1.04 each represent 36% and 12% increases, respectively, as compared to Q4 2021;
•
Full year 2022 record revenue of $190.0 million and cash from operations, prior to changes in working capital of
$171.0 million represent increases of 29% and 22% each, respectively, as compared to in 2021. On a per unit
basis, revenue of $4.20 and cash from operations, prior to changes in working capital of $3.78, represent
increases of 25% and 19%, respectively, as compared to the prior year;
•
Capital deployment of $155.9 million in 2022, which included initial annual contracted Distributions of
approximately $19.0 million, or $0.42 per unit. Partially offsetting this deployment are total redemptions of $162.0
million (with a cost basis of $130.0 million) that included annual contracted Distributions of $17.2 million. As a
result there was a total realized premium on redemptions of $32.0 million or approximately $0.71 per unit;
•
Subsequent to December 31, 2022, the Trust completed a strategic transaction involving Body Contour Centers,
LLC (“BCC”) and co-sponsor Brookfield through its Special Investments program (“Brookfield”), that included
Alaris exchanging US$145.0 million of preferred equity for newly issued convertible preferred units, which are
entitled to receive an initial annual Distribution of US$12.3 million along with an annual transaction fee of US$1.5
million. Alaris received US$20.3 million of additional proceeds on redemption of its remaining preferred equity
resulting in a premium above cost of US$9.3 million;
•
Alaris is expecting an overall positive reset of approximately 1.2% for preferred Distributions that are resetting in
2023, resulting in additional Run Rate Revenue³ of $1.4 million or $0.03 per unit. The reduction from the positive
2.4% reset previously guided towards in the Trust’s Q3 2022 financial results, is primarily due to the redemption
and subsequent conversion of the BCC preferred equity to convertible preferred equity;
•
The weighted average combined Earnings Coverage Ratio5 for Alaris’ Partners has decreased slightly from
previous quarters but remains in excess of 1.60x with thirteen of eighteen Partners greater than 1.5x;
•
The Trust had a net unrealized and realized gain from investments in 2022 of $8.0 million, which included realized
gains on the redemptions of Kimco and FNC partially offset by decreases in investments at fair value during the
year;
•
In 2022 Alaris realized an Actual Payout Ratio2 of 39%, which thereby generated approximately $93 million of
excess cash from operations that was used for a combination of investing purposes and the repayment of senior
debt. The lower Actual Payout Ratio as compared to the Run Rate Payout Ratio4 range of 65% to 70% was a
result of fewer cash taxes paid than forecasted, premiums and additional Distributions received on the Kimco and
FNC redemptions, and is also attributable to the conservative approach the Trust takes in estimating Run Rate
Payout Ratio on a proforma basis; and
•
For the year ended December 31, 2022, Alaris generated basic earnings per unit of $2.89 and paid out $1.33 of
distributions per unit, resulting in $1.56 per unit of additional book value, improving the book value per unit at
year-end to $19.84.
For more information, please view our Investor Presentation found on our website under Presentations & Events:
https://www.alarisequitypartners.com/investors.
ANNUAL REPORT 2022
9
Non-GAAP and Other Financial Measures
The terms Run Rate Payout Ratio, Run Rate Revenue, Earnings Coverage Ratio, and Actual Payout Ratio (collectively, the “Non-GAAP
and Other Financial Measures”) are financial measures used in this Annual Report that are not standard measures under International
Financial Reporting Standards (“IFRS”). The Trust’s method of calculating Run Rate Payout Ratio, Run Rate Revenue, Earnings Coverage
Ratio, and Actual Payout Ratio may differ from the methods used by other issuers. Therefore, the Trust’s Run Rate Payout Ratio, Run
Rate Revenue, Earnings Coverage Ratio, and Actual Payout Ratio may not be comparable to similar measures presented by other issuers.
1.
“EBITDA” and “EBITDA per unit” are Non-GAAP financial measures and refer to earnings determined in accordance with IFRS,
before depreciation and amortization, interest expense (finance costs) and income tax expense and the same amount divided
by weighted average basic units outstanding. EBITDA and EBITDA per unit are used by management and many investors to
determine the ability of an issuer to generate cash from operations, aside from still including fluctuations due to changes in
exchange rates and changes in the Trust’s investments at fair value. Management believes EBITDA and EBITDA per unit are
useful supplemental measures from which to determine the Trust’s ability to generate cash available for servicing its loans and
borrowings, income taxes and distributions to unitholders. Refer to the reconciliation of EBITDA and calculation of EBITDA per
unit in the table below.
2.
“Actual Payout Ratio” is a supplementary financial measure and refers to Alaris’ total distributions paid during the period
(annually or quarterly) divided by the actual net cash from operating activities Alaris generated for the period. It represents the
net cash from operating activities after distributions paid to unitholders available for either repayments of senior debt and/or to
be used in investing activities.
3.
“Run Rate Revenue” is a supplementary financial measure and refers to Alaris’ total revenue expected to be generated over the
next twelve months based on contracted distributions from current Partners, excluding any potential Partner redemptions, it also
includes an estimate for common dividends or distributions based on past practices, where applicable. Run Rate Revenue is a
useful metric as it provides an expectation for the amount of revenue Alaris can expect to generate in the next twelve months
based on information known.
4.
“Run Rate Payout Ratio” is a Non-GAAP financial ratio that refers to Alaris’ distributions per unit expected to be paid over the
next twelve months divided by the net cash from operating activities per unit calculated in the Run Rate Cash Flow table. Run
Rate Payout Ratio is a useful metric for Alaris to track and to outline as it provides a summary of the percentage of the net cash
from operating activities that can be used to either repay senior debt during the next twelve months and/or be used for additional
investment purposes. Run Rate Payout Ratio is comparable to Actual Payout Ratio as defined above.
5.
“Earnings Coverage Ratio (“ECR”)” is a supplementary financial measure and refers to the EBITDA of a Partner divided by
such Partner’s sum of debt servicing (interest and principal), unfunded 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.
6.
“Run Rate Cash Flow” is a Non-GAAP financial measure and outlines the net cash from operating activities, net of distributions
paid, that Alaris is expecting to have after the next twelve months. This measure is comparable to net cash from operating
activities less distributions paid, as outlined in Alaris’ consolidated statements of cash flows.
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Earnings
$ 34,504
$ 46,102
-25.2%
$ 130,676
$ 144,244
-9.4%
Depreciation and amortization
55 46
+19.6%
216 211
+2.4%
Finance costs
7,543 6,723
+12.2%
28,185 24,988
+12.8%
Total income tax expense / (recovery)
4,956 3,756
+31.9%
24,280 21,801
+11.4%
EBITDA
$ 47,058
$ 56,627
-16.9%
$ 183,357
$ 191,244
-4.1%
Weighted average basic units (000's)
45,280 45,121
45,249 43,994
EBITDA per unit
$ 1.04
$ 1.26
-17.5%
$ 4.05
$ 4.35
-6.9%
ANNUAL REPORT 2022
10
7.
“Per Unit” values, other than earnings per unit, refer to the related financial statement caption as defined under IFRS or related
term as defined herein, divided by the weighted average basic units outstanding for the period.
8.
“IRR” is a supplementary financial measure and 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. The Trust’s method
of calculating this supplementary financial measure may differ from the methods used by other issuers. Therefore, it may not be
comparable to similar measures presented by other issuers.
The terms EBITDA, Actual Payout Ratio, Run Rate Revenue, Run Rate Payout Ratio, Earnings Coverage Ratio, Run Rate Cash
Flow and Per Unit amounts should only be used in conjunction with the Trust’s annual audited financial statements, complete
versions of which available on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
This Annual Report (including the documents included within) contains forward-looking information and forward-looking statements
(collectively, “forward-looking statements”) under applicable securities laws, including any applicable “safe harbor” provisions. Statements
other than statements of historical fact contained in this Annual Report are forward-looking statements, including, without limitation,
management's expectations, intentions and beliefs concerning the growth, results of operations, performance of the Trust and the Partners,
the future financial position or results of the Trust, business strategy and plans and objectives of or involving the Trust or the Partners.
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. In particular, this Annual Report contains forward-looking statements
regarding: the anticipated financial and operating performance of the Partners; the Trust’s Run Rate Payout Ratio, Run Rate Cash Flow,
Run Rate Revenue and total revenue; the impact of recent new investments and follow-on investments; expectations regarding receipt
(and amount of) any common equity distributions or dividends from Partners in which Alaris holds common equity, including the impact on
the Trust’s net cash from operating activities, Run Rate Revenue, Run Rate Cash Flow and Run Rate Payout Ratio; the use of proceeds
from the senior credit facility; impact of future deployment; the Trust’s ability to deploy capital; the impact of changes in interest rates; the
yield on the Trust’s investments and expected resets on Distributions; the Trust’s return on its investments; and Alaris’ expenses for 2023.
To the extent any forward-looking statements herein constitute a financial outlook or future oriented financial information (collectively,
“FOFI”), including estimates regarding revenues, Distributions from Partners (including expected resets, restarting full or partial
Distributions and common equity distributions), Run Rate Payout Ratio, Run Rate Cash Flow, net cash from operating activities, expenses
and impact of capital deployment, they were approved by management as of the date hereof and have been included to provide an
understanding with respect to 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.
By their nature, forward-looking statements require Alaris to make assumptions and are subject to inherent risks and uncertainties.
Assumptions about the performance of the Canadian and U.S. economies over the next 24 months and how that will affect Alaris’ business
and that of its Partners (including, without limitation, any ongoing impact of COVID-19) are material factors considered by Alaris
management when setting the outlook for Alaris. Key assumptions include, but are not limited to, assumptions that: the Russia/Ukraine
conflict and other global economic pressures over the next twelve months will not materially impact the economy; interest rates will not rise
in a matter materially different from the prevailing market expectation over the next 12 to 24 months; that COVID-19 or any variants thereof
will not impact the economy or our partners operations in a material way in the next 12 months; the businesses of the majority of our
Partners will continue to grow; more private companies will require access to alternative sources of capital; the businesses of new Partners
and those of existing Partners will perform in line with Alaris’ expectations and diligence; and that Alaris will have the ability to raise required
equity and/or debt financing on acceptable terms. Management of Alaris has also assumed that the Canadian and U.S. dollar trading pair
will remain in a range of approximately plus or minus 15% of the current rate over the next 6 months. In determining expectations for
economic growth, management of Alaris primarily considers historical economic data provided by the Canadian and U.S. governments
and their agencies as well as prevailing economic conditions at the time of such determinations.
There can be no assurance that the assumptions, 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. The actual results of the Trust and the Partners could materially differ from those anticipated in the
forward-looking statements contained herein as a result of certain risk factors, including, but not limited to, the following: an increase in
COVID-19 (or its variants) or other widespread health crises; other global economic factors (including, without limitation, the Russia/Ukraine
conflict, inflationary measures and global supply chain disruptions on the Trust and the Partners (including how many Partners will
ANNUAL REPORT 2022
11
experience a slowdown of their business and the length of time of such slowdown); the dependence of Alaris on the Partners; leverage
and restrictive covenants under credit facilities; reliance on key personnel; general economic conditions, including any new investment
structures; failure to complete or realize the anticipated benefit of Alaris’ financing arrangements with the Partners; a failure to obtain
required regulatory approvals on a timely basis or at all; changes in legislation and regulations and the interpretations thereof; risks relating
to the Partners and their businesses, including, without limitation, a material change in the operations of a Partner or the industries they
operate in; inability to close additional Partner contributions or collect proceeds from any redemptions in a timely fashion on anticipated
terms, or at all; a change in the ability of the Partners to continue to pay Alaris at expected Distribution levels or restart distributions (in full
or in part); a failure to collect material deferred Distributions; a change in the unaudited information provided to the Trust; and a failure to
realize the benefits of any concessions or relief measures provided by Alaris to any Partner or to successfully execute an exit strategy for
a Partner where desired. Additional risks that may cause actual results to vary from those indicated are discussed in the Management
Discussion and Analysist and Annual Information Form, under the heading “Risk Factors”, for the year ended December 31, 2022, which
are filed under Alaris’ profile at www.sedar.com and on its website at www.alarisequitypartners.com.
Readers are cautioned that the assumptions used in the preparation of forward-looking statements, including FOFI, although considered
reasonable at the time of preparation, based on information in Alaris’ possession as of the date hereof, may prove to be imprecise. In
addition, there are a number of factors that could cause Alaris’ actual results, performance or achievement to differ materially from those
expressed in, or implied by, forward looking statements and FOFI, or if any of them do so occur, what benefits the Trust will derive
therefrom. As such, undue reliance should not be placed on any forward-looking statements, including FOFI.
The Trust has included the forward-looking statements and FOFI in order to provide readers with a more complete perspective on Alaris’
future operations and such information may not be appropriate for other purposes. The forward-looking statements, including FOFI,
contained herein are expressly qualified in their entirety by this cautionary statement. Alaris disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
ANNUAL REPORT 2022
12
2022 Per Unit Highlights
$4.20
Revenue from Partners
$3.78
Cash from operations
prior to changes in
working capital
$1.33
Annual Distribution
ANNUAL REPORT 2022
13
Management Discussion & Analysis
Alaris Equity Partners Income Trust
For the year ended December 31, 2022
ANNUAL REPORT 2022
14
This management’s discussion and analysis (“MD&A”) should be read in conjunction with the audited financial statements for the years
ended December 31, 2022 and 2021 for Alaris Equity Partners Income Trust (“Alaris” or the “Trust"). The Trust’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 guaranteed as to the Alaris future results since there are inherent difficulties in predicting those. Accordingly, actual
results could differ materially from those expressed or implied in the forward-looking statements. See "Forward-Looking Statements" for a
discussion of the risks, uncertainties and assumptions relating to those statements. Some of the factors that could cause results or events
to differ from current expectations include, but are not limited to, the factors described under "Risks and Uncertainty". This MD&A also
refers to certain Non-GAAP and Other Financial Measures, including EBITDA, Earnings Coverage Ratio, Run Rate Payout Ratio, Actual
Payout Ratio, Run Rate Revenue, Run Rate Cash Flow, IRR, Per Unit amounts and Net Working Capital. The terms EBITDA, Earnings
Coverage Ratio, Run Rate Payout Ratio, Actual Payout Ratio, Run Rate Revenue, Run Rate Cash Flow, IRR, Per Unit amounts and Net
Working Capital (collectively, the “Non-GAAP and Other Financial Measures”) are financial measures used in this MD&A that are not
standard measures under IFRS. The Trust’s method of calculating the Non-GAAP and Other Financial Measures may differ from the
methods used by other issuers. Therefore, the Trust’s Non-GAAP and Other Financial Measures may not be comparable to similar
measures presented by other issuers.
Partner company names are referred to as follows: LMS Management LP and LMS Reinforcing Steel USA LP (collectively, “LMS”), SCR
Mining and Tunneling, LP (“SCR”), Ohana Growth Partners, LLC, formerly know as PF Growth Partners, LLC (“PFGP”), DNT Construction,
LLC (“DNT”), Unify Consulting, LLC ("Unify"), Accscient, LLC ("Accscient"), Heritage Restoration, LLC (“Heritage”), Fleet Advantage,
LLC ("Fleet"), Body Contour Centers, LLC ("BCC" or “Body Contour Centers”), GWM Holdings, Inc. and its subsidiaries ("GWM"), Amur
Financial Group Inc. (“Amur”), Stride Consulting LLC. (“Stride”), Carey Electric Contracting LLC (“Carey Electric”), Edgewater Technical
Associates, LLC (“Edgewater”), Brown & Settle Investments, LLC and a subsidiary thereof (collectively, “Brown & Settle”), 3E, LLC (“3E”),
Vehicle Leasing Holdings, LLC, dba D&M Leasing (“D&M”), and Sagamore Plumbing and Heating, LLC (“Sagamore”). Former partner
company names are referred to as follows: Falcon Master Holdings LLC, dba FNC Title Service (“FNC”), Kimco Holdings, LLC (“Kimco”),
Federal Resources Supply Company and its subsidiaries (“FED” or “Federal Resources”), ccCommunications LLC (“ccComm”) and
Sandbox Acquisitions, LLC and Sandbox Advertising LP (collectively, “Sandbox”).
The Non-GAAP and Other Financial Measures should only be used in conjunction with the Trust’s audited consolidated financial
statements, excerpts of which are available below, complete versions of these statements are available on SEDAR at www.sedar.com.
OVERVIEW
Alaris’ purpose, through its subsidiaries, is to provide non-control permanent equity to private companies to meet their business
and capital objectives, which includes management buyouts, dividend recapitalization and growth and acquisitions. Alaris
achieves this by investing its capital, through its subsidiaries, into private businesses (individually, a “Private Company
Partner” and collectively the “Partners”) primarily through preferred equity, in addition to common equity, subordinated debt
and promissory notes. The Trust primarily earns distributions, dividends and interest (“Distributions”), on preferred equity,
subordinated debt and promissory notes that are received in regular monthly or quarterly payments that are contractually
agreed to between Alaris and each Private Company Partner. These payments are set for twelve months at a time and are
adjusted annually based on the audited performance of each Private Company Partner’s gross revenue, gross profit, same
store sales or other similar “top-line” performance measures (the reset metric). Alaris’ preferred equity investments have the
ability to appreciate through these reset metrics and typically include a premium upon exit or redemption. Alaris has limited
general and administrative expenses with only seventeen employees.
In certain situations, Alaris also invests through owning a minority common equity position in our Partners and participates in
the growth and distributions in proportion to our ownership percentage. Alaris believes that the use of common equity in certain
transactions will: (a) better align our interests with those of our Partners; (b) provide higher overall returns on investments than
preferred equity alone; and (c) enable Alaris to increase our capital deployment. Common equity distributions are not fixed or
set in advance, but rather will be paid as cashflow of a Partner permits.
ANNUAL REPORT 2022
15
RESULTS OF OPERATIONS
Below is a summary of the Trust’s Revenue, EBITDA (1), cash generated from operating activities prior to changes in working
capital, Trust distributions declared and basic earnings all divided by the weighted average basic units outstanding. The per
unit results, other than EBITDA per unit (2) are supplementary financial measures and are provided for the three months and
years ended December 31, 2022 and 2021. Total Revenue, EBITDA (1), cash generated from operating activities, prior to
changes in working capital and earnings are outlined below.
Revenue
For the three months ended December 31, 2022, revenue per unit increased by 36.1% compared to the same period in 2021.
In the current period, $7.1 million (US$5.2 million) was received upon redemption from FNC for Distributions owing up to the
third anniversary date of the initial investment, which would have been in January 2024. In December 2022, PFGP made an
additional payment of $4.1 million (US$3.0 million) to catch up Distributions from prior years that were deferred as a result of
the impact of COVID-19. BCC’s Distributions were higher as a result of a follow-on investment made in March 2022. These
increases were partially offset by the reduction in Distributions due to the redemptions of Kimco and FED. The average
exchange rate during Q4 2022 was approximately 8% more favorable than in the prior year, contributing to an improvement
in US denominated Distribution revenue.
In the year ended December 31, 2022, revenue per unit increased by 25.0% compared to 2021, primarily as a result of $17.2
million (US$13.7 million) of additional Distributions from Kimco received as part of their redemption, as well as FNC’s
Distributions owing upon redemption as described above. After reducing the total revenue earned in fiscal year 2022 by these
amounts, the remaining revenue of $165.7 million represents a 12.2% increase compared to $147.7 million in the comparable
period of 2021. The remaining increase is predominantly a result of increased Distributions from BCC following their March
2022 follow-on investment and increases to PFGP Distributions due to the additional payment described above. Follow on
investments such as Fleet in Q4 2021 and Accscient in Q3 2022 also contributed to increased Distributions year over year.
These increases were partially offset by decreases in monthly Distributions due to the redemptions of FED and Kimco. The
Distributions from GWM decreased by 22% as a result of the partial repayment of preferred units and subordinated debt in Q4
2021. In addition, the average exchange rate for the year ended December 31, 2022 was approximately 4% more favorable
than in the prior year, contributing to an improvement in US denominated Distribution revenue.
2 EBITDA and EBITDA per unit are Non-GAAP financial measures and refer to earnings determined in accordance with IFRS, before depreciation and amortization, interest expense (finance costs)
and income tax expense and the same amount divided by weighted average basic units outstanding. EBITDA and EBITDA per unit are used by management and many investors to determine the
ability of an issuer to generate cash from operations, aside from still including fluctuations due to changes in exchange rates and changes in the Trust’s investments at fair value. Management
believes EBITDA and EBITDA per unit are useful supplemental measures from which to determine the Trust’s ability to generate cash available for servicing its loans and borrowings, income taxes
and distributions to unitholders. The supporting calculation for Alaris’ EBITDA is on the following page. The Trust’s method of calculating these Non-GAAP financial measures may differ from the
methods used by other issuers. Therefore, they may not be comparable to similar measures presented by other issuers.
Three months ended
December 31
Year ended
December 31
2022
2021
% Change
2022
2021
% Change
Revenue per unit
$ 1.13
$ 0.83
+36.1%
$ 4.20
$ 3.36
+25.0%
EBITDA per unit
$ 1.04
$ 1.26
-17.5%
$ 4.05
$ 4.35
-6.9%
Cash from operations, prior to changes in working capital per unit
$ 1.04
$ 0.93
+11.8%
$ 3.78
$ 3.18
+18.9%
Distributions declared per unit
$ 0.34
$ 0.33
+3.0%
$ 1.33
$ 1.28
+3.9%
Basic earnings per unit
$ 0.76
$ 1.02
-25.5%
$ 2.89
$ 3.28
-11.9%
Fully diluted earnings per unit
$ 0.73
$ 0.97
-24.7%
$ 2.79
$ 3.13
-10.9%
Weighted average basic units (000's)
45,280 45,121
45,249 43,994
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Revenues, including realized foreign exchange gain (Revenue)
$ 51,115
$ 37,619
+35.9%
$ 190,046
$ 147,664
+28.7%
Revenue per unit
$ 1.13
$ 0.83
+36.1%
$ 4.20
$ 3.36
+25.0%
ANNUAL REPORT 2022
16
Refer to the below table for Distributions from each of the Alaris Partners for the three and twelve months ended December 31, 2022 and
2021:
EBITDA(1)
Three months ended
December 31,
Year ended
December 31,
2022
2021
2022
2021
BCC
$ 7,209
$ 2,926
+146.4%
$ 25,586
$ 11,373 +125.0% Follow-on in Dec-21 & Mar-22, reset +6% in Jan-22
PFGP
8,225 2,962
+177.7% 19,982 8,415 +137.5% Partial Distributions in 1H-21, reset +5% in Jan-22
DNT
3,740 3,407
+9.8% 14,337 13,575
+5.6% Reset +6% in Jan-22
D&M
3,184 2,813
+13.2% 12,207 5,627 +116.9% Contribution closed in Jun-21, follow-on Dec-21
GWM
3,100 3,828
-19.0% 11,863 15,229
-22.1% Partial preferred redemption in Dec-21
FNC
7,091 1,419
+399.7% 11,724 5,537 +111.7% Make whole Distribution as part of Oct-22 redemption
Brown & Settle
2,675 2,160
+23.8% 10,651 8,142
+30.8% Contribution closed Feb-21, reset +6% in Jan-22
Accscient
3,169 2,162
+46.6% 10,506 8,398
+25.1% Follow-on in Feb-21 and Aug-22, reset +5% in Jan-22
3E
1,919 1,447
+32.6%
7,354 3,927
+87.3% Contribution closed in Feb-21, follow-on in Nov-21
LMS
1,718 2,117
-18.8%
6,837 8,463
-19.2% Negative 21% reset in Jan-22, FX impact
Amur
1,620 1,528
+6.0%
6,480 6,105
+6.0% Reset +6% in Jan-22
Edgewater
1,365 1,349
+1.2%
5,232 5,364
-2.5% Reset -6% in Jan-22
Fleet
1,284 496
+158.9%
4,935 1,972 +150.3% Follow-on in Dec-21
Unify
1,216 1,075
+13.1%
4,652 4,279
+8.7% Positive 5% reset Jan-22
SCR
1,050 1,411
-25.6%
4,040 5,061
-20.2% Reduction to additional cash flow sweep in 2022
Heritage
972 746
+30.3%
3,608 2,963
+21.8% Positive 5% reset in Jan-22, follow-on in May-22
Carey Electric
675 710
-4.9%
2,612 2,900
-9.9% Partial redemptions in May-21 and Jan-22
Stride
195 255
-23.5%
862 1,013
-14.9% Partial redemption in Jun-22, Negative 6% reset in Jan-22
Sagamore
585
- +100.0%
585
- +100.0% Contribution closed in Nov-22
Kimco
- 1,479
-100.0% 18,738 10,182
+84.0% Deferred distributions from PY received on redemption in Apr-22
FED
- 1,136
-100.0%
- 11,641 -100.0% Redemption in Oct-21
Distributions - Pref/Debt
$ 50,992
$ 35,426
+43.9%
$ 182,791
$ 140,166
+30.4%
Common Distributions
1,205 1,417
-15.0%
8,092 3,294 +145.7%
Total Distributions
$ 52,197
$ 36,843
+41.7%
$ 190,883
$ 143,460
+33.1%
Interest
23 320
-92.8%
481 1,841
-73.9% Kimco repayments in 2021 and Apr-22
Realized FX Gain/(Loss)
(1,105) 456
-342.3% (1,318)
2,363 -155.8% FX contracts out of money in 2022 as a result of USD strengthening
Total Revenue
$ 51,115
$ 37,619
+35.9%
$ 190,046
$ 147,664
+28.7%
Partner Revenue
($ thousands)
%
Change
Comment (1)
%
Change
Incremental increase in 2022 is a result of common distributions
received from Fleet, Amur, Edgewater and D&M
Note 1 - US denominated Distribution revenue is impacted by changes in the average exchange rate over the year. In the year ended December 31, 2022, the impact of the strengthening
US dollar resulted in favorable increases in US denominated Distribution revenue when compared to the same period in the prior year.
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Earnings
$ 34,504
$ 46,102
-25.2%
$ 130,676
$ 144,244
-9.4%
Depreciation and amortization
55 46
+19.6%
216 211
+2.4%
Finance costs
7,543 6,723
+12.2%
28,185 24,988
+12.8%
Total income tax expense / (recovery)
4,956 3,756
+31.9%
24,280 21,801
+11.4%
EBITDA
$ 47,058
$ 56,627
-16.9%
$ 183,357
$ 191,244
-4.1%
Weighted average basic units (000's)
45,280 45,121
45,249 43,994
EBITDA per unit
$ 1.04
$ 1.26
-17.5%
$ 4.05
$ 4.35
-6.9%
ANNUAL REPORT 2022
17
For the three months ended December 31, 2022, EBITDA per unit decreased by 17.5% compared to the three months ended
December 31, 2021. Although revenue increased in Q4 2022 as compared to the prior year, this increase was offset by a
reduction in the net realized and unrealized gain on the fair value of investments. In Q4 2022, the net realized and unrealized
gain on investments was $5.6 million compared to $25.6 million in Q4 2021. In Q4 2021, the fair value of investments increased
more substantially than Q4 2022 partially due to recouping losses related to the initial impact of COVID-19, as well as FED’s
redemption of all Alaris’ investment resulting in a realized gain on sale of investment. During Q4 2022 there were increases to
the fair value of investments to Fleet, BCC, Accscient, Edgewater and Heritage that were partially offset by decreases to Amur,
GWM, LMS, SCR, and D&M. General and administrative costs increased by 37.8% compared to Q4 2021, as there were
higher corporate and office costs and legal and accounting fees. Furthermore, the foreign exchange loss was $2.5 million in
Q4 2022 compared to a foreign exchange gain of $1.1 million in Q4 2021.
In the year ended December 31, 2022, EBITDA per unit decreased by 6.9% compared to 2021. Consistent to the above,
although revenue increased year over year, due to the net realized and unrealized gain on investment in 2021 being $63.2
million as compared to $8.0 million in 2022, there was a decrease of 87% in the net realized and unrealized gain on investment
driving the decrease in EBITDA per unit. The decrease is a result of fiscal year 2021 recouping prior year losses from the
initial impact of COVID-19 to Partner fair market values, coupled with the impact of increasing interest rates in the second half
of 2022, which caused an increase in the discount rates used in fair value assumptions. An increase in general and
administrative costs also contributed to the decrease in EBITDA per unit year over year, partially offset by an increase in
foreign exchange gains.
Cash from operations, prior to changes in working capital
As the Trust’s cash from operations, prior to changes in working capital, excludes primarily all non-cash items in the Trust’s
consolidated statement of comprehensive income, it is an important tool in assessing Alaris’ ongoing ability to generate cash.
In the three months ended December 31, 2022, cash generated from operations, prior to changes in working capital per unit
increased by 11.8% compared to the three month period ended December 31, 2021. The increase in Q4 2022 is a result of
increased revenue per unit as discussed above, partially offset by increased general and administrative costs driven by higher
legal costs and a reduction to the recovery on current income taxes when compared to Q4 2021.
In the year ended December 31, 2022, cash generated from operating activities per unit increased by 18.9% compared to
2021 due to the increase in revenue per unit discussed above offset by higher general and administrative costs, and an
increase to current the income tax expense when compared to the income tax recovery in the prior year. In addition, during
the year ended December 31, 2022, Fleet declared a common dividend and distributed excess cash to common unit holders,
a total of US$5.9 million to Alaris. Of the total US$5.9 million received, US$4.4 million was recorded as a realized gain with
the remaining US$1.5 million being recorded as revenue. This amount is included in cash from operations, prior to changes
in working capital to reflect the nature of the payment being a common equity distribution.
The Actual Payout Ratio (3) for Alaris for the year ended December 31, 2022 was 39.2%, an improvement from 52.7% in 2021,
as a result of the year over year improvements noted above, as well as a fewer cash taxes paid in the current year.
3 Actual Payout Ratio is a supplementary financial measure and refers to Alaris’ total cash distributions paid during the period (annually or quarterly) divided by the actual net cash from operating
activities Alaris generated for the period. It represents the free cash flow after distributions paid to unitholders available for either repayments of senior debt and/or to be used in investing activities.
The Trust’s method of calculating this supplementary financial measure may differ from the methods used by other issuers. Therefore, it may not be comparable to similar measures presented by
other issuers.
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Cash from operations, prior to changes in working capital
$ 47,273
$ 41,856
+12.9%
$ 171,014
$ 140,073
+22.1%
Cash from operations, prior to changes in working capital per unit
$ 1.04
$ 0.93
+11.8%
$ 3.78
$ 3.18
+18.9%
ANNUAL REPORT 2022
18
Earnings
In the three months ended December 31, 2022 basic earnings per unit decreased by 25.5% and by 11.9% in the year ended
December 31, 2022, each as compared to the respective comparable periods in 2021. These decreases are primarily a result
of the decreases in EBITDA per unit discussed above. In addition, finance costs increased as a result of higher interest rates
in 2022 and increases in total income tax expense for the three months and year ended December 31, 2022.
General and administrative expenses
General and administrative expenses, which includes salaries and benefits, corporate and office, and legal and accounting
fees, was $6.9 million in the three months ended December 31, 2022 (2021 - $5.0 million), an increase of 37.8%. Corporate
and office increased by $1.0 million or 350% when compared to Q4 2021. This increase is a result of additional insurance
costs to mitigate risks associated to the CRA reassessment as outlined in the Income Tax section, as well as costs associated
to travel and the timing of annual conference expenses. Consulting costs increased in the period as a result of the strategic
investment in BCC. The increase in legal and accounting fees of $0.8 million or 57.7% is primarily due to ongoing legal costs
related to the Sandbox transaction, for additional discussion on this topic refer to the Summary of Critical Accounting Estimates
and Policies section below. Salaries and wages remained relatively consistent, increasing by 4% to $3.6 million in Q4 2022
from $3.4 million in Q4 2021.
Finance costs
For the three months ended December 31, 2022, finance costs increased by 12.2% to $7.5 million (2021 - $6.7 million) and
for the year ended December 31, 2022 increased by 12.8% to $28.2 million (2021 - $25.0 million). These increases were the
result of higher average interest rates on Alaris’ senior debt partially offset by lower average amounts of senior debt
outstanding in 2022. Additionally, Alaris incurred new finance costs in 2022 following the issuance of $65.0 million of senior
unsecured debentures in February 2022 which carry an annualized interest rate of 6.25%. As interest rates continue to rise,
finance costs are expected to increase but at a reduced pace as a result of the rate on convertible debentures and senior
unsecured debentures being fixed and a portion of the senior debt outstanding locked into interest rate swap contracts. Alaris
has two interest rate swaps until June 2023 in place of SOFR (“Secured Overnight Financing Rate”). These interest rate swaps
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Earnings
$ 34,504
$ 46,102
-25.2%
$ 130,676
$ 144,244
-9.4%
Basic earnings per unit
$ 0.76
$ 1.02
-25.5%
$ 2.89
$ 3.28
-11.9%
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Salaries and benefits
$ 3,566
$ 3,425
+4.1%
$ 10,208
$ 8,112
+25.8%
Corporate and office
1,278 284
+350.0%
4,454 1,803
+147.0%
Legal and accounting fees
2,096 1,329
+57.7%
7,370 3,358
+119.5%
General and administrative
$ 6,940
$ 5,038
+37.8%
$ 22,032
$ 13,273
+66.0%
General and administrative per unit
$ 0.15
$ 0.11
+36.4%
$ 0.49
$ 0.30
+63.3%
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Finance costs
$ 7,543
$ 6,723
+12.2%
$ 28,185
$ 24,988
+12.8%
Finance costs per unit
$ 0.17
$ 0.15
+13.3%
$ 0.62
$ 0.57
+8.8%
ANNUAL REPORT 2022
19
include 0.74% on US$50.0 million and 0.35% on US$25.0 million of senior debt outstanding. Beyond June 2023 and with a
maturity date of July 2026, there is an additional interest rate swap of 2.99% in place of SOFR on US$50.0 million. As at
December 31, 2022 Alaris had US$161.75 million of senior debt outstanding.
Transaction Diligence costs
For the three months ended December 31, 2022, transaction costs decreased by $0.1 million to $1.3 million (2021 - $1.4
million) and for the year ended December 31, 2022 increased $0.4 million to $4.6 million (2021 - $4.2 million), however on a
per unit basis remained relatively consistent period over period. In 2021, diligence costs were primarily incurred to support the
initial investments in FNC, Brown & Settle, 3E and D&M, whereas in 2022 a significant portion of costs incurred related to the
strategic investment in BCC as well as the initial investment in Sagamore and other follow-on investments made.
Unit-based compensation
Unit-based compensation in the three months ended December 31, 2022, was $0.8 million (2021 - $1.4 million), a decrease
of $0.6 million due to the expiry of outstanding options in Q4 2022, whereas in Q4 2021, a portion of unit-based compensation
expense related to the valuation of these options, increasing the total unit-based cost in the period. This was slightly offset by
the new issuances of RTU and PTU units earlier in the year.
In the year ended December 31, 2022, unit-based compensation expense of $2.8 million (2021 - $5.4 million) decreased by
$2.6 million or 48.5% mainly due to the year over year changes in Alaris’ unit price. In the year ended December 31, 2022,
Alaris’ unit price decreased as compared to the price increasing in 2021, and due to the nature of the calculation for the RTU
and PTU liability being re-valued each period end based on the Trust unit price, unit-based compensation was lower in 2022
than in 2021.
OUTLOOK
The Trust deployed approximately $155.9 million in the year ended December 31, 2022, consistent with the Trust’s total
acquisition of investments in its consolidated statement of cash flows. Total revenue of $51.1 million in Q4 2022 exceeded
previous guidance of $47.0 million as a result of the additional payment from PFGP described earlier, collectively higher than
expected common dividends from Alaris’ Partners and a higher average exchange rate than forecast. As presented below,
the outlook for the next twelve months includes Run Rate Revenue (4) expected to be approximately $151.0 million. This
includes current contracted amounts, an additional US$2.4 million from PFGP related to deferred Distributions during COVID-
19 and an estimated $3.7 million of common dividends. Alaris expects total revenue from its Partners in Q1 2023 of
approximately $37.0 million.
The Run Rate Cash Flow table below outlines the Trust’s expectation for revenue, general and administrative expenses,
interest expense, tax expense and distributions to unitholders for the next twelve months. The Run Rate Cash Flow is a Non-
4 Run Rate Revenue is a supplementary financial measure and refers to Alaris’ total revenue expected to be generated over the next twelve months based on contracted Distributions from current
Partners as well as an estimate for common dividends or distributions based on past practices, where applicable. Run Rate Revenue is a useful metric as it provides an expectation for the amount
of revenue Alaris can expect to generate in the next twelve months based on information known. The Trust’s method of calculating this supplementary financial measure may differ from the methods
used by other issuers. Therefore, it may not be comparable to similar measures presented by other issuers
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Transaction diligence costs
$ 1,292
$ 1,401
-7.8%
$ 4,640
$ 4,246
+9.3%
Transaction diligence costs per unit
$ 0.03
$ 0.03
+0.0%
$ 0.10
$ 0.10
+0.0%
Three months ended
December 31
Year ended
December 31
$ thousands except per unit amounts
2022
2021
% Change
2022
2021
% Change
Unit-based compensation
$ 758
$ 1,385
-45.3%
$ 2,762
$ 5,362
-48.5%
Unit-based compensation per unit
$ 0.02
$ 0.03
-33.3%
$ 0.06
$ 0.12
-50.0%
ANNUAL REPORT 2022
20
GAAP financial measure and outlines the net cash from operating activities, net of distributions paid, that Alaris is expecting
to have after the next twelve months. This measure is comparable to net cash from operating activities less distributions paid,
as outlined in Alaris’ consolidated statements of cash flows. The Trust’s method of calculating this Non-GAAP financial
measure may differ from the methods used by other issuers. Therefore, it may not be comparable to similar measures
presented by other issuers.
Annual general and administrative expenses are currently estimated at $17.5 million and include all public company costs.
The Trust’s Run Rate Payout Ratio (4) is expected to be within a range of 65% and 70% when including Run Rate Revenue
(3), overhead expenses and its existing capital structure. The table below sets out our estimated Run Rate Cash Flow alongside
the after-tax impact of positive net deployment and the impact of every 1% increase in SOFR based on current outstanding
USD debt and the impact of every $0.01 change in the USD to CAD exchange rate.
The senior debt facility was drawn to $216.1 million at December 31, 2022. The annual interest rate on that debt, inclusive of
standby charges on available capacity, was approximately 5.3% for the year ended December 31, 2022. Subsequent to
December 31, 2022, proceeds from the partial redemptions of Unify, Fleet, and BCC, along with excess cashflow, were used
to repay senior debt. Following these repayments, the total drawn on the facility on the date of this release is approximately
$150 million with the capacity to draw up to an additional $300 million based on the covenants and terms.
The Trust’s Run Rate Payout Ratio (5) does not include new potential deployment opportunities. However, Alaris expects to
maintain our track record of net positive capital deployment as a result of the demand for Alaris’ capital which continues to fill
a niche in the private capital markets.
Common Equity Investments
Alaris has added a minority common equity position in some Partners to its investment strategy. Common equity investments
are assessed on each individual opportunity, won’t appear in every new Partner and will generally be a small portion of total
capital invested. Alaris management believes this feature will facilitate access to more transactions as well as an opportunity
to participate in greater upside of certain partnerships. Additionally, in certain situations where Alaris owns common equity,
there is an expectation of a current yield by way of discretionary common dividends or distributions consistent with past
practices in the business, and as cash flows allow. The Run Rate Revenue (3) includes an estimate for common equity
dividends or distributions from the Partners based on each Partner’s forecasted cash flows for the next twelve months and
expected capital allocation decisions.
Included in the previous table summarizing Distributions from Partners during the year ended December 31, 2022, were $2.3
million of common equity distributions from Amur, $2.0 million from FNC, $7.8 million from Fleet ($2.0 million recorded as
5 Run Rate Payout Ratio is a Non-GAAP financial ratio that refers to Alaris’ distributions per unit expected to be paid over the next twelve months divided by the net cash from operating activities
per unit calculated in the Run Rate Cash Flow table. Run Rate Payout Ratio is a useful metric for Alaris to track and to outline as it provides a summary of the percentage of the net cash from
operating activities that can be used to either repay senior debt during the next twelve months and/or be used for additional investment purposes. The Trust’s method of calculating this Non-GAAP
financial ratio may differ from the methods used by other issuers. Therefore, it may not be comparable to similar measures presented by other issuers. Run Rate Payout Ratio is comparable to Actual
Payout Ratio as defined above in (2).
Run Rate Cash Flow ($ thousands except per unit)
Amount ($)
$ / Unit
Revenue
$ 151,000
$ 3.33
General and administrative expenses
(17,500)
(0.39)
Interest and taxes
(45,500)
(1.00)
Net cash from operating activities
$ 88,000
$ 1.94
Distributions paid
(61,600)
(1.36)
Run Rate Cash Flow
$ 26,400
$ 0.58
Other considerations (after taxes and interest):
New investments
Every $50 million deployed @ 14%
+2,906
+0.06
Interest rates
Every 1.0% increase in SOFR
-400
-0.01
USD to CAD
Every $0.01 change of USD to CAD
+/- 900
+/- 0.02
ANNUAL REPORT 2022
21
revenue and $5.8 million recorded as a realized gain), $0.9 million from D&M, $0.4 million from Carey Electric, $0.2 million
from Edgewater and $0.3 million total between Accscient and Heritage. Certain common equity investments such as, PFGP,
GWM, and Brown & Settle are focused on growth and reinvestment in the short-term period, through which Alaris expects to
increase its common equity value over time rather than through cash distributions. As with all common distributions these
amounts are declared and paid as cashflows permit. As of December 31, 2022, the total fair value of Alaris’ common equity
investments of $143.0 million is approximately 11% of total investments.
Private Company Partner Update
Through its subsidiaries, the Trust’s investment in each of the Partners consists of a preferred partnership interest, preferred
equity interest or loans, with a return generated from Distributions 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, other than the recent strategic investment into BCC that has a fixed Distribution rate and in exchange exposure to
common equity upside through the conversion feature. As discussed above, Alaris may also invest in a minority common
equity position along side its preferred equity or loans.
Alaris is not involved in the day to day business of each Private Company Partner and has no rights to participate in normal
course management decisions. Alaris 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, Alaris has
certain restrictive covenants in place designed to protect the ongoing payment of Distributions 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 matters 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.
Included in the summary table below is each Partners’ Earnings Coverage Ratio (“ECR”) (6). 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 greater the number is, the better the ratio. Alaris notes that these ECRs are based on historical results.
Description: Alaris’ investment thesis is to generally partner with companies that have:
(i)
A history of success (average age of Partners is approximately 25 years)
• Offer a required service or products in mature industries;
• Low risk of obsolescence; and
• Non-declining asset bases.
(ii)
Proven track record of free cash flow.
(iii)
Low levels of debt – reduced leverage minimizes financial risk from business fluctuations and allows for free cash
flow to remain in the business to support growth and make common and preferred equity distributions.
(iv)
Low levels of capital expenditures required to maintain/grow a business – Our Partners are typically not required to
reinvest much of their cash flow back into their operations as they are typically asset light businesses with minimal
capital requirements.
(v)
Management continuity and quality management teams - Alaris has invested in 38 Partners since inception, exited
our investment in 20 Partners over that time with 14 yielding highly positive results displayed by an overall total return
from exited investments of 65% and a median IRR (6) of 19%.
6 Earnings Coverage Ratio (“ECR”) is a supplementary financial measure and refers to the EBITDA of a Partner divided by such Partner’s sum of debt servicing (interest and principal), unfunded
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.
The Trust’s method of calculating this Non-GAAP financial measure may differ from the methods used by other issuers. Therefore, it may not be comparable to similar measures presented by other
issuers.
ANNUAL REPORT 2022
22
Contribution History: Alaris has invested over $2.1 billion into 38 Partners and over 85 tranches of financing, including an
average of approximately $215 million over the past five fiscal years (2018 – 2022). During the year ended December 31,
2022, Alaris deployed a total of approximately $155.9 million.
Performance: Alaris discloses an ECR to provide information on the financial health of our Partners. Alaris has seven Partners
with an ECR greater than 2.0x (Amur, Carey Electric, DNT, Fleet, Heritage, Sagamore and Unify), six in the 1.5x-2.0x range
(Accscient, 3E, Brown & Settle, D&M, Edgewater, and Stride), four between 1.2x-1.5x (BCC, GWM, PFGP, and SCR) and
one in the range of less than 1.0x (LMS).
Capital Structure: With a primary focus on being a preferred equity investor, we have invested in a diverse group of capital
structures and we pride ourselves on achieving the optimal capital structure so both Alaris and our Partners benefit. Of our
existing portfolio, eight of our eighteen Partners have no debt, three Partners have less than 1.0x Senior Debt to EBITDA and
seven Partners have debt greater than 1.0x Senior Debt to EBITDA on a trailing twelve months basis.
Reset: The annual Distribution reset is another feature of our capital which we view as win-win. The capped reset allows for
Alaris to participate in the growth of its Partners while providing the majority of the upside to the entrepreneurs who create the
business value.
ANNUAL REPORT 2022
23
The following is a summary of each of the Partners recent financial results. The below table outlines the date the original
contribution to each Partner was made, the total invested to date (net of any partial redemptions since the initial investment),
Run Rate Revenue (3) in exchange for the preferred equity and subordinated debt investments for the next twelve months,
ECR range for the most recent trailing twelve month periods received, estimated 2023 reset, year-to-date changes in revenue
and EBITDA compared to the comparable period in 2021 and the fair value adjustments to the investments at fair value for
the year ended December 31, 2022. See the table below for additional relevant information on each Partner that has occurred
during the year ended December 31, 2022. Unless specifically discussed within each Partner update, the ECR range outlined
below is consistent with the prior quarterly disclosure. For fair values of each investment refer to Note 5 in the Trust’s
accompanying audited financial statements for the years ended December 31, 2022 and 2021.
Year-to-date
changes in (1) :
Fair Value
Changes
Revenue
EBITDA
Year ended
Dec. 31/22
BCC (2)
Sep 2018
US $145,000
US $13,825
12%
1.2x - 1.5x
n/a
n/a
GWM
Nov 2018
US $106,000
US $8,401
7%
1.2x - 1.5x
- 8%
US ($27,000)
PFGP
Nov 2014
US $94,629
US $12,952
12%
1.2x - 1.5x
+ 5%
US ($2,500)
D&M
Jun 2021
US $74,500
US $9,108
8%
1.5x - 2.0x
- 3%
US ($6,100)
Accscient
Jun 2017
US $72,000
US $9,693
9%
1.5x - 2.0x
+ 5%
US +$1,800
Amur
Jun 2019
CA $70,000
CA $6,869
5%
> 2.0x
+ 6%
CA ($1,000)
Brown &
Settle
Feb 2021
US $66,394
US $8,447
7%
1.5x - 2.0x
+ 6%
US ($800)
DNT
Jun 2015
US $62,800
US $11,678
11%
> 2.0x
+ 6%
US +$1,200
LMS
Feb 2007
CA $60,564
CA $5,313
3%
< 1.0
- 25%
CA ($5,844)
SCR
May 2013
CA $40,000
CA $4,500
3%
1.2x - 1.5x
n/a
CA ($5,300)
3E
Feb 2021
US $39,500
US $5,987
5%
1.5x - 2.0x
+ 6%
n/a
Edgewater
Dec 2020
US $34,000
US $4,262
4%
1.5x - 2.0x
+ 6%
US +$3,200
Fleet
Jun 2018
US $28,000
US $2,968
3%
> 2.0x
+ 6%
US +$17,350
Sagamore
Nov 2022
US $24,000
US $3,000
3%
> 2.0x
n/a
n/a
Heritage
Jan 2018
US $18,500
US $3,067
3%
> 2.0x
+ 6%
US +$1,300
Carey
Electric
Jun 2020
US $14,000
US $1,773
2%
> 2.0x
- 5%
US ($500)
Unify
Oct 2016
US $11,000
US $1,655
2%
> 2.0x
+ 5%
US +$882
Stride
Nov 2019
US $4,500
US $589
1%
1.5x - 2.0x
+ 3%
n/a
Note 1:
Note 2:
Run Rate
Revenue
(000's)
The year-to-date changes in Revenue and EBITDA are based on unaudited information provided by management of each Private Company
Partner and are summarized here based on being either relatively consistent or whether or not they've increased or decreased, when compared
against the same period in 2021.
On February 14th, 2023, Alaris completed a strategic transaction in which a portion of Alaris' investment in BCC's existing preferred units where
exchanged for newly issued convertible preferred units and the remaining portion of BCC's existing preferred units were redeemed. Amounts
outlined in the above table are reflective of this transaction and Alaris' investment in the newly issued convertible preferred units.
As a %
of total
ECR
Range
Estimated
2023 Reset
Partner
Original
Investment
Date
Current Total
Invested
(000's)
ANNUAL REPORT 2022
24
PARTNER UPDATES
3E – utility service provider working on critical infrastructure throughout Southeastern and Midwest U.S.
•
Based on 3E’s unaudited financial results for the year ended December 31, 2022, 3E’s revenue and EBITDA have
increased in 2022 as compared to 2021. Although there was pressure on 3E’s gross margin in 2022 as a result of
higher operating costs in the high inflationary environment during 2022, due to the incremental revenue earned in
2022, 3E’s gross profit still saw an increase in excess of 6% in 2022 as compared to 2021. As a result, Alaris is
expecting a positive 6% reset for 2023. There was no change to the fair value of the 3E investment during 2022 as it
remains at US$40.0 million at December 31, 2022.
Accscient – IT staffing, consulting and outsourcing services throughout the United States
•
In August of 2022, Alaris contributed an additional US$26.0 million into Accscient which consisted of US$16.0 million
of additional preferred equity as well as an investment of US$10.0 million in exchange for a minority ownership
position of the common equity of Accscient. The additional investment in preferred equity was in exchange for initial
annualized Distributions of US$2.1 million. Following this contribution, the total Alaris investment in Accscient is
US$72.0 million, consisting of US$62.0 million of preferred equity at an annualized pre-tax yield of 15.1% and
US$10.0 million of common equity.
•
Based on Accscient’s unaudited financial results for the year ended December 31, 2022, Alaris is expecting a positive
5% reset on the preferred Distributions in 2023, which is the top of their collar. As a result of a positive reset as well
as their outlook for 2023, the fair value of the Accscient investment was increased by US$1.8 million during the year
ended December 31, 2022. Following the increase in fair value the Accscient investment at December 31, 2022 is
US$77.3 million.
Amur – mortgage originations and asset management in Canada
•
Based on Amur’s unaudited financial results for the year ended December 31, 2022, their reset in 2023 is expected
to be a positive 6%, which is the top of their collar. However, due to rising interest rates in late 2022 and the expected
impact that will have on new loan origination demand there was a net decrease to the fair value of the Amur
investment of $1.0 million during 2022. As at December 31, 2022 the fair value of the Amur investment is $72.2
million.
Body Contour Centers – cosmetic surgery practice across the United States with over 70 locations
•
During Q1 2022, Alaris contributed an additional US$65.0 million to BCC in exchange for initial annualized
Distributions of US$8.5 million. Proceeds from the BCC contribution were used to acquire the only licensee of the
Sono Bello brand with 12 locations throughout the eastern United States and Texas. As a result of this contribution,
Alaris had invested a total of US$156.0 million as of December 31, 2022.
•
Subsequent to December 31, 2022, Alaris completed a strategic transaction involving BCC and co-sponsor
Brookfield, through its Special Investment program. The transaction included exchanging US$145.0 million of its
existing preferred units in BCC for newly issued convertible preferred units and receiving cash proceeds of US$20.3
million for the redemption of its remaining existing preferred units. The new convertible preferred units are entitled to
an 8.5% Distribution payable in cash or in-kind, and are convertible at the option of the holder, for a period of up to
five years, into common equity of BCC at a predetermined valuation. These units also participate in any common
distribution paid above 8.5%. As with all our common distributions these amounts are paid when declared as cashflow
permits. In addition, Alaris will be entitled to an annual transaction fee of US$1.5 million payable quarterly. At the
discretion of BCC, the new preferred distribution may be satisfied by payment in-kind. If the distribution is satisfied
by a payment in-kind, then (i) the conversion price shall be adjusted and (ii) a pro rata portion of the quarterly
transaction fee will be deferred until an exit event.
ANNUAL REPORT 2022
25
Alaris will also receive an over allocation of profits relative to the other convertible preferred units not held by Alaris
if certain return-based performance thresholds are achieved.
•
As a result of the above subsequent event, the fair value of BCC’s existing preferred equity investment at December
31, 2022, was increased to the redemption price of US$165.3 million, resulting in a total fair value gain of US$9.7
million during 2022.
Brown & Settle – full-service large-parcel site development contractor, based in the Mid-Atlantic region of the U.S.
•
Based on Brown and Settle’s unaudited financial results for the year ended December 31, 2022, revenue and EBITDA
increased in 2022 as compared to the prior year, as well Brown and Settle also continue to maintain a strong backlog.
As a result of this growth in revenue Alaris is expecting a maximum reset of 6% to the Brown & Settle preferred
Distributions in 2023. Although year over year, Brown and Settle’s revenue and EBITDA has shown growth, an
increase to the discount rate as a result of increased market interest rates resulted in a decrease in the fair value of
the investment in Brown and Settle of US$0.8 million. The resulting fair value of the Brown and Settle investment at
December 31, 2022 is US$63.9 million.
Carey Electric – electrical contracting in Illinois
•
During Q1 2022, Carey Electric redeemed US$1.0 million of the preferred units at par, in accordance with their
operating agreement. Subsequent to December 31, 2022, Carey Electric redeemed an additional US$1.0 million of
preferred units at par. Carey Electric has now redeemed the full $3.0 million of eligible redeemable units at par from
the initial investment. The resulting total that is invested as of the date of this release is US$14.0 million, inclusive of
preferred and common equity.
•
Based on Carey Electric’s unaudited financial results for the year ended December 31, 2022 and as compared to the
prior year, their revenues declined year over year. As a result Alaris is expecting a negative 5% reset for 2022. This
negative reset has led to the fair value being decreased by US$0.5 million during 2022. The resulting fair value of the
Carey Electric investment as at December 31, 2022 is US$14.7 million.
D&M – independent direct-to-consumer provider of vehicle sourcing and leasing services in Texas
•
Based on D&M’s unaudited financial results for the year ended December 31, 2022, D&M’s net revenue improved as
compared to the prior year. However, due to the calculation of the reset excluding net revenue attributable to an
acquisition the company made in late 2021, the net revenue for the Alaris Distribution reset purposes decreased
slightly in 2022 as compared to 2021. Additionally, the impact that rising interest rates has had on reducing demand
for vehicle leases in late 2022 has reduced their overall outlook for expected financial results in 2023 from previous
expectations. The negative reset on the preferred distributions along with the change in outlook going forward
together resulted in an overall decrease of US$6.1 million in the fair value of the D&M investment during 2022. The
resulting fair value of the D&M investment at December 31, 2022 is US$71.8 million.
DNT – civil construction contractor in Austin and San Antonio, Texas
•
Based on DNT’s unaudited financial results for the year ended December 31, 2022, revenue and EBITDA have both
improved as compared to the prior year, due to increased demand for housing in the Austin and San Antonio markets
during the year. This increase in revenue resulted in Alaris expecting a positive reset of 6% on the preferred
distributions, which is top of their collar. As a result, the fair value of the DNT preferred equity was increased by
US$1.2 million during 2022 and the resulting fair value of the DNT investment at December 31, 2022 is US$63.9
million.
ANNUAL REPORT 2022
26
Edgewater – professional and technical services firm supporting the U.S. Department of Energy
•
Based on Edgewater’s unaudited financial results for the year ended December 31, 2022, gross profit and EBITDA
have both increased as compared to the prior year as a result of a combination of growth within existing and new
contracts. Given the improvement in gross profit compared to 2021, Alaris is expecting a positive reset of 6%, which
is top of their collar. As a result of this positive reset, the fair value of the preferred equity increased by US$0.9 million
during 2022.
Edgewater’s outlook remains robust with their ability to continue to grow headcount on their long-term contracts within
the U.S. Department of Energy. As a result, Edgewater’s underlying cash flows for Q4 2022 and into future years
remains attractive. Based on the above, the fair value of the Edgewater common equity investment was increased
by US$2.3 million during 2022. The resulting fair value of the total investment in Edgewater at December 31, 2022 is
US$34.6 million.
•
As a result of Edgewater’s improvement in EBITDA throughout 2022, their ECR also improved and is now between
1.5x and 2.0x.
Fleet – provides fleet leasing and truck lifecycle management solutions in the U.S.
•
In the three months ended September 30, 2022, Fleet declared a common dividend and distributed the excess cash
to common unit holders, a total of US$5.9 million to Alaris. Of the total US$5.9 million received, US$4.4 million was
recorded as a realized gain in Q3 2022, with the remaining US$1.5 million being recorded as revenue in the year.
•
During Q4 2022, Fleet redeemed US$7.0 million of preferred units for total proceeds of US$7.4 million, realizing a
gain on Alaris’ investment in Fleet of US$0.4 million. The resulting total that is invested in Fleet at December 31,
2022 is US$28.0 million.
•
Based on Fleet’s unaudited financial results of the twelve months ended December 31, 2022, Fleet’s revenue and
EBITDA have both improved as compared to the prior year, primarily due to an increase in syndications of new units.
Also, in Q4 2022 Fleet’s backlog of syndication work for 2023 and into 2024 increased substantially with new contract
wins. As a result of this growth in backlog and its impact to Fleet’s outlook, coupled with strong results during 2022,
the fair value of the Fleet investment increased by US$17.0 million during the year. As of December 31, 2022, the
fair value of the Fleet investment is US$45.0 million.
•
Based on their improvement in revenue during 2022, Alaris is expecting a 6% positive reset on the preferred
Distributions, which is the top of their collar.
GWM – provides data-driven digital marketing solutions for advertisers globally
•
Based on GWM’s unaudited financial results for the year ended December 31, 2022, revenue and EBITDA have both
decreased as compared to the prior year. Primarily due to a decline in their legacy performance division. GWM is
pivoting away from this division, however, it still has an impact on top-line performance. Although total revenue
decreased, their high growth and high margin programmatic media division has improved year over year. Overall the
decrease in revenue has resulted in an expectation for a negative 8% reset in 2023 for the preferred Distributions.
The impact of this negative reset to the fair value of the GWM preferred equity investment during 2022 is a decrease
of US$8.2 million.
•
GWM was not immune to the overall impact of the rising interest rates in the second half of 2022 along with inflationary
increases causing macroeconomic disruptions during 2022 and into 2023. The discount rate used in the valuation
assumptions increased due to higher interest rates and overall customer advertising spending declined in early 2023
as compared to in 2022, as budgets were reduced. The combination of these factors resulted in an overall decrease
in the fair value of the GWM common equity investment during 2022 of US$18.8 million. However, GWM and Alaris
are still optimistic on the long-term outlook for the company given the breadth of their customer base and the quality
of their management team.
•
Following the total decrease to the fair value of the GWM investment during 2022 of US$27.0 million, the resulting
fair value at December 31, 2022 is US$79.4 million.
ANNUAL REPORT 2022
27
Heritage – provides masonry and masonry services to commercial building industry in Massachusetts
•
In May 2022, Alaris contributed an additional US$3.5 million to Heritage, which consisted of US$2.5 million of
preferred equity as well as an investment of US$1.0 million in exchange for a minority ownership of the common
equity in Heritage. The existing US$15.0 million of preferred equity prior to this contribution remained at the same
yield prior to the investment, while the new US$2.5 million of preferred equity is at an initial yield of 15%.
•
Based on Heritage’s unaudited financial results for the year ended December 31, 2022, revenue and EBITDA
improved year over year, in addition to starting 2023 with a healthy backlog of work. Alaris expects Heritage’s reset
on preferred distribution to be a positive 6% for 2023, which is top of their collar, and as a result the fair value of the
preferred equity increased by US$1.3 million during 2022. The total fair value of the preferred and common equity
investments in Heritage at December 31, 2022 is US$20.0 million.
LMS – rebar and post tensioning fabrication and installer in British Columbia, Alberta and California
•
Based on LMS’ unaudited financial results for the year ended December 31, 2022, revenue has increased year over
year, however as a result of the increases in steel prices, LMS’ margins have been compressed and gross profit has
declined. Although LMS has worked to include steel price escalation features in new contracts to reflect current
pricing where possible, they still had to work through already contracted lower bill rate contracts that will absorb the
higher steel costs resulting in reduced gross profit. As there is no collar, the expected reset for 2023 preferred
distributions is approximately negative 25%. LMS expects to work through the higher priced inventory during the first
half of 2023, which is expected to result in significant improvements to gross margins for the second half of 2023.
Based on the expected negative reset for 2023, there was a decrease to the fair value of the LMS investment of $5.8
million during 2022, and the resulting fair value of Alaris’ investment in LMS is $42.2 million.
•
As a result of margin pressures due to steel pricing, LMS’ earning coverage ratio has decreased and is now below
1.0x. As mentioned above the negative implications to LMS’ cash flows from higher priced steel in recent months are
nearing their end and for the second half of 2023 both LMS and Alaris are optimistic of improving the ECR on a
trailing twelve month basis back above 1.0x and of a positive reset on the preferred distributions for 2024.
PFGP – Planet Fitness franchisee with over 70 fitness clubs in the U.S.
•
Based on the unaudited financial results for the year ended December 31, 2022, PFGP’s revenue and EBITDA have
both improved as compared to the prior year as a result of increased members in existing clubs and the resumption
of new club openings in the second half of 2022. This has resulted in a positive reset expectation of 5%, which is the
top of their collar, and an increase in the fair value of the PFGP preferred equity investment of US$1.5 million during
2022.
•
As a result of the impact that higher market interest rates has had on the discount rate used in the valuation of the
fair value of the PFGP common equity investment, the fair value decreased during 2022 by US$4.0 million.
•
In Q4 2022, as part of an overall commitment made in July 2019 for a total of US$8.0 million, the Trust contributed a
total of US$2.1 million, consisting of US$1.7 million of preferred equity and US$0.4 million in exchange for additional
common equity. The remaining amount to fund as part of this commitment is US$1.4 million, and the timing of which
is to be determined. At December 31, 2022 the total capital provided to PFGP is US$94.6 million with a current fair
value of US$99.3 million.
SCR – mining services in Eastern Canada
•
Based on SCR’s unaudited financial results for the year ended December 31, 2022, revenue and EBITDA
decreased slightly in the first half of 2022 as compared to 2021 but have since improved in the second half of 2022
as a result of the timing of large projects as compared to the timing of their work in the prior year. A decrease in fair
value of $5.3 million resulted during 2022. The resulting fair value at December 31, 2022 is $28.6 million.
ANNUAL REPORT 2022
28
•
As a result of the decrease in EBITDA for SCR in 2022 as compared to 2021, their ECR decreased and is now
between 1.2x and 1.5x. This ECR is based on the $4.2 million of scheduled Distributions from SCR and excludes
any additional amounts provided from their bi-annual cash flow sweep to Alaris.
Sagamore – specialty HVAC and plumbing services provider, serving broader New England area
•
Founded in 1991, Sagamore offers a complete range of commercial plumbing, HVAC and facilities maintenance
services to clients across all industries, with experienced teams and advanced capabilities to handle complex work
for applications in health care, biotech, pharmaceutical and academic research. Sagamore operates in New England
with a focus in the greater Boston region.
•
Alaris contributed US$24.0 million into Sagamore in November 2022 consisting of US$20.0 million of preferred equity
and US$4.0 million in exchange for a minority ownership of common equity. The contribution of preferred equity is in
exchange for preferred Distributions at an annualized yield of 15%. The Sagamore distribution will reset +/- 6%
annually based on the percentage change of gross revenue with the first reset commencing January 1, 2024.
•
Based on Sagamore’s unaudited financial results for the year ended December 31, 2022, Sagamore’s earning
coverage ratio is greater than 2.0x
Stride Consulting – IT consulting utilizing the agile methodology, based in New York City
•
Based on Stride’s unaudited financial results for the year ended December 31, 2022, Stride’s distribution reset in
2023 is expected to be approximately positive 3%.
•
During the year ended December 31, 2022, Stride redeemed US$1.5 million of preferred units at par. The remaining
preferred units as at December 31, 2022 have a cost basis of US$4.5 million with a current fair value of US$4.0
million.
Unify Consulting – IT consulting based in Washington State and California
•
Based on Unify’s unaudited results for the year ended December 31, 2022, revenue and EBITDA have both improved
in 2022 as compared to 2021, which has resulted in an expected positive reset of 5%, the top of their collar. This
expectation for a positive reset has resulted in an increase in the fair value of US$0.4 million in the year ended
December 31, 2022.
•
In Q4 2022, Unify provided total proceeds of US$16.6 million to redeem a portion of Alaris’ preferred equity units with
a cost base of US$14.0 million, resulting in a realized gain on redemption of US$2.6 million. At December 31, 2022,
the total investment in Unify is US$11.0 million and a fair value of US$12.6 million.
PARTNER REDEMPTIONS
Kimco:
On April 1, 2022, Kimco redeemed all of Alaris’ preferred equity investments and repaid all of the outstanding promissory
notes. The gross proceeds received on the redemption and repayment totaled US$68.2 million, consisting of (i) US$43.6
million for the redemption of all of Alaris’ preferred equity, (ii) the payment of US$13.7 million of previously deferred
Distributions owed to Alaris from previous years and (iii) the repayment of US$9.8 million of promissory notes. In connection
with the Kimco redemption, Alaris agreed to fund US$1.1 million of the total proceeds into an escrow account to cover potential
indemnification obligations. Alaris’ total return on its Kimco investment was US$52.1 million or 109%, which represents an
unlevered IRR (7) of over 13% during the eight-year partnership, excluding the escrowed proceeds. Alaris’ total return was
generated by collecting US$37.4 million of Distributions (including the US$13.7 million of deferred Distributions paid on
7 IRR is a supplementary financial measure and 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. The Trust’s method of calculating this supplementary financial measure may differ from the methods used by other issuers. Therefore, it may not
be comparable to similar measures presented by other issuers
ANNUAL REPORT 2022
29
redemption) and US$5.3 million in interest payments, along with a premium of US$9.4 million on the redemption of the
preferred equity, which had a cost basis of US$34.2 million.
FNC
On October 1, 2022 FNC entered into a purchase and sale agreement with a third party pursuant to which FNC redeemed all
of Alaris’ outstanding common and preferred units which totaled US$40.0 million. The gross proceeds to Alaris of US$58.4
million consisted of (i) US$51.8 million for the redemption of all Alaris’ preferred and common equity and (ii) US$5.2 million of
Distributions owing up to the third anniversary date of the initial investment which was January 7, 2021. Alaris agreed to fund
US$1.4 million of the total proceeds into an escrow account to cover potential indemnification obligations. Alaris’ total return
on its FNC investment will be US$30.0 million or 75% upon the receipt of the proceeds in escrow, which represents an
unlevered IRR (6 of approximately 42% consisting of an approximate 43% IRR for the preferred equity investment and 38%
IRR for the common equity investment.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2022 Alaris Equity Partners Inc. (“AEP”), the Trust’s subsidiary, has a $450 million credit facility with a
syndicate of Canadian chartered banks, which has a maturity date in September 2026 and is secured by a general security
agreement on all of the Trust’s assets. The interest rate is based on a combination of the CAD Prime Rate (“Prime”), Bankers’
Acceptances (“BA”), US Base Rate (“USBR”) and SOFR and the applicable spread determined by the Trust’s covenants. AEP
realized an annualized blended interest rate (inclusive of standby fees) of 5.3% for the for the year ended December 31, 2022.
At December 31, 2022 Alaris met all of its covenants as required by the facility and had US$161.75 million (CA$219.1 million)
drawn on its credit facility (December 31, 2021 – US$256.8 million CA$328.2 million). The amount in the Trust’s statement of
financial position of $216.1 million is the total drawn of $219.1 million reduced by $3.0 million of unamortized debt amendment
and extension fees.
During the year ended December 31, 2022, Alaris completed an amendment to its credit facility with its senior lenders. The
amendment increased the base of the credit facility from $400 million to $450 million and included the addition of an eighth
bank to the syndicate. The amendment also extended the facility maturity from November 2023 to September 2026 and
increased the minimum tangible net worth covenant from $450 million to $550 million.
During Q1 2022, the Trust issued senior unsecured debentures (“Debentures”). The Debentures have a face value of $65.0
million, annual interest rate of 6.25% payable semi-annually and maturity date of March 31, 2027. The Debentures will not be
redeemable by the Trust before March 31, 2025 (the “First Call Date”). On and after the First Call Date and prior to March 31,
2026, the Debentures will be redeemable, in whole or in part at the Trust’s option at a redemption price equal to 103.125% of
the principal amount of the Debentures redeemed plus accrued and unpaid interest, if any. On and after March 31, 2026 and
prior to the Maturity Date, the Debentures will be redeemable, in whole or in part at the Trust’s option at par plus accrued and
unpaid interest, if any, up to but excluding the date set for redemption. The Trust has the option to satisfy its obligations to
repay the principal amount of and premium (if any) on the Debentures due at redemption or on maturity by issuing and
delivering that number of freely tradeable trust units of the Trust to Debenture holders.
In 2019, Alaris issued convertible debentures. The hybrid instrument has a face value of $100.0 million, annual interest rate
of 5.5% payable semi-annually and maturity of five years from the issue date. The debentures are convertible at the holder’s
option at any time prior to the close of business on the earlier of the business day immediately preceding the maturity date of
June 30, 2024 and the date specified by Alaris for redemption of the debentures into fully paid and non-assessable units of
Alaris at a conversion price of $24.25 per unit, being a conversion rate of approximately 41.2371 units for each $1,000 principal
amount of debentures.
Holders of debentures are advised that conversions of debentures into units pursuant to the terms of the debenture indenture
dated June 11, 2019 will be processed up until the date that is five business days prior to each upcoming interest payment.
In March 2021, Alaris completed a bought deal short-form prospectus offering, with the total trust units being issued of
5,909,375 at a price of $16.00 per unit, for aggregate gross proceeds of $94.6 million. After deduction of the underwriters’ fees
and expenses of the offering, net proceeds to Alaris were $90.3 million.
ANNUAL REPORT 2022
30
Alaris declared a quarterly distribution in December 2022 of $0.34 per unit (2021 - $0.33 per unit), The total distributions
declared during the year ended December 31, 2022 was $1.33 per unit and $60.2 million in aggregate (2021 - $1.28 per unit
and $57.7 million).
Since converting to an income trust, the tax profile of distributions changed from being 100% eligible dividends to a combination
of return of capital, eligible dividends, capital gains and interest income. The effective tax rate of Alaris’ distribution, for an
Alberta individual in the top tax bracket, for 2022 was 34.3%. If the same distribution was received from a corporation, the
effective tax rate would be 34.3%. For 2022, the split of the distributions was as follows:
As disclosed in its consolidated financial statements for the year ended December 31, 2022, Alaris has exposure to credit risk,
other price risk, liquidity risk, and market risk, including foreign exchange risk and interest rate risk.
NET WORKING CAPITAL
Alaris’ Net Working Capital is a Non-GAAP financial measure and is defined as current assets less current liabilities, and as
at December 31, 2022 and 2021 is set forth in the tables below. The Trust uses this measure to assess the Trust’s liquidity
position. The Trust’s method of calculating the Non-GAAP financial measure may differ from the methods used by other
issuers. Therefore, it may not be comparable to similar measures presented by other issuers.
Tax Profile of Distributions
For the year ended December 31, 2022
Per unit
2022
Dividends
0.0564
$
Trust Income
0.9105
$
Return of Capital
0.3631
$
Total paid
1.3300
$
As a percentage of total
2022
Dividends
4.2%
Trust Income
68.5%
Return of Capital
27.3%
Total
100.0%
Net Working Capital
31-Dec-22
31-Dec-21
Cash
$ 60,193
$ 18,447
Derivative contracts
2,507 71
Accounts receivable and prepayments
2,689 3,181
Income taxes receivable
22,675 28,991
Promissory notes and other assets
- 13,555
Total Current Assets
$ 88,064
$ 64,245
Accounts payable and accrued liabilities
11,517 8,214
Distributions payable
15,395 14,899
Derivative contracts
2,818
-
Office Lease
352 500
Income tax payable
306 740
Total Current Liabilities
$ 30,388
$ 24,353
Net Working Capital
$ 57,676
$ 39,892
ANNUAL REPORT 2022
31
Net Working Capital was $57.7 million at December 31, 2022, Under the current terms of the various commitments, Alaris has
the ability to meet all current 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. Alaris has designated its financial instruments into the following categories
applying the indicated measurement methods.
Financial Instrument
Measurement Method
Cash
Amortized cost
Accounts receivables
Amortized cost
Promissory notes and other assets
Amortized cost
Investments
Fair Value or amortized cost
Accounts payable and accrued liabilities
Amortized cost
Loans and borrowings
Convertible and senior debentures
Amortized cost
Amortized cost
Derivative contracts
Other long-term liabilities
Fair Value
Fair Value or amortized cost
Alaris 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 where applicable would be included in earnings.
Alaris holds derivative financial instruments to hedge its foreign currency exposure and variable interest rate exposure. Alaris
purchases forward exchange rate contracts to match a portion of the quarterly distributions and expenses in Canadian dollars
on a rolling 12-month basis and also for a portion of the expected distributions and expenses in Canadian dollars on a rolling
12 to 24 month basis. The fair value of the forward contracts is estimated at each reporting date and any unrealized gain or
loss on the contracts is recognized in profit or loss. Current portions of forward contracts are presented as Current derivative
contracts assets and liabilities on the statement of financial position. The long term portion of these contracts are included in
Other. As at December 31, 2022, for the next twelve months, Alaris has total contracts to sell US$39.1 million forward at an
average $1.2789 CAD. For the following twelve months, Alaris has total contracts to sell US$19.0 million forward at an average
$1.3095 CAD.
Alaris has an interest rate swap that allows for a fixed interest rate of 0.35% instead of SOFR on US$25.0 million of debt and
an additional interest rate swap that allows for a fixed interest rate of 0.74% instead of SOFR on US$50.0 million of debt, both
with an expiry in June 2023. Alaris also has an interest rate swap on US$50.0 million of debt that allows for a fixed interest
rate of 2.99% in place of SOFR that begins in July 2023 and that has an expiry date in July 2026.
Forward exchange rate contracts and the interest rate swaps are presented on the statement of financial position as current
or non-current based on the derivatives expected recognition or the contractual maturity. Current amounts are presented as
derivative contract assets or liabilities and non-current amounts are included in Other long-term assets or liabilities.
ANNUAL REPORT 2022
32
Alaris has the following financial instruments that mature as follows:
Derivative contracts in the above table are the sum of current and long-term liability obligations. Other long-term liabilities are
adjusted for long-term derivative contracts included in Derivative contracts. Convertible and senior unsecured debentures and
Loans and borrowings are presented gross, to present the expected financial obligation owed.
Alaris has sufficient cash on hand to settle all current accounts payable, accrued liabilities, distributions payable and all
scheduled interest payments on the senior debt. In the event the senior debt is not renewed beyond the agreed upon extension
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 Trust’s management (including the CEO
and CFO) of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures, as defined in
National Instrument 52-109. Based on that evaluation, the Trust’s management (including the CEO and CFO) concluded that
the Trust’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, 2022. The Trust uses the 2013 Committee of Sponsoring
Organization of the Treasury Commission (COSO) framework.
Management Report on Internal Controls over Financial Reporting
The Trust’s management, (including the CEO and CFO) have assessed and evaluated the design and effectiveness of the
Trust’s internal controls over financial reporting as defined in National Instrument 52-109 as of December 31, 2022. Alaris'
assessment included documentation, evaluation and testing of its internal controls over financial reporting. Based on that
evaluation, Alaris’ management concluded that its 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, 2022 that have materially affected, or are
reasonably likely to materially affect Alaris’ internal control over financial reporting.
SUMMARY OF CONTRACTUAL OBLIGATIONS
Alaris, through its subsidiaries, has an outstanding senior credit facility, and convertible and senior unsecured debentures of
which are described under “Liquidity and Capital Resources”, a commitment to fund PFGP an additional US$1.4 million exact
timing of which is unknown at this time and leases for office space.
31-Dec-22
Total
0-6 Months
6 mo – 1 yr
1 – 2 years
Year 3 and
Thereafter
Accounts payable and accrued liabilities
$ 11,517
$ 11,110
$ 407
$-
$-
Distributions payable
15,395 15,395
- - -
Derivative contracts
3,509 1,712 1,106 691
-
Office Lease Payments
497 91 101 203 102
Other long-term liabilities
1,247
- - 831 416
Convertible debenture
100,000
- - 100,000
-
Senior unsecured debenture
65,000
- - - 65,000
Loans and borrowings
219,107
- - - 219,107
Total
$ 416,272
$ 28,308
$ 1,614
$ 101,725
$ 284,625
ANNUAL REPORT 2022
33
RELATED PARTY TRANSACTIONS
The Trust had no transactions with related parties for the years ending December 31, 2022 or 2021.
In addition to salaries, the Trust also provides long-term compensation to employees of its subsidiaries in the form of RTUs
as well as bonuses. Key management personnel compensation comprised the following:
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, 2022.
As disclosed in Note 12 to the consolidated audited financial statements for the year ended December 31, 2022, subsequent
to the sale of Sandbox in Q1 2020, AEP received a complaint (the “Complaint”) from the purchasers of Sandbox concerning
its disputes arising out of the sale of the Sandbox assets, which alleges damages of approximately US$37.2 million. AEP and
the Trust believe the claims within the Complaint are without merit and is vigorously defending the case. The Complaint has
progressed to the discovery stage and AEP has filed a counterclaim against the purchasers of Sandbox. Based upon its
knowledge of the facts of the pre-closing of Sandbox, the sale process and other advice obtained to date, no liability has been
recorded in the financial statements.
SUMMARY OF QUARTERLY RESULTS
Amounts are in thousands except for income (loss) per unit:
In each period, an unrealized (non-cash) foreign exchange gain/loss has impacted earnings.
Contractual Obligations
Total
< 1 year
1 – 3 years
4 – 5 years
> 5 years
Loans and borrowings
$ 219,107
$ -
$ -
$ 219,107
$ -
Convertible debenture
100,000
- 100,000
- -
Senior unsecured debenture
65,000
- - 65,000
-
Additional contribution to PFGP
1,896 1,896
- - -
Office lease
352 145 207
- -
Total Contractual Obligations
$ 386,355
$ 2,041
$ 100,207
$ 284,107
$ -
Key Management Personnel
2022
2021
Base salaries and benefits
$ 1,528
$ 1,600
Bonus
2,440
751
Unit-based payments
1,125 3,232
Total
$ 5,093
$ 5,583
ANNUAL REPORT 2022
34
In Q4 2022, Alaris’ earnings of $34.5 million included a total realized gain of $20.1 million from FNC, Unify and Fleet as well
as a total unrealized loss of $14.6 million which included decreases in fair value for GWM of $12.9 million, LMS of $3.8 million,
D&M of $3.7 million, Amur of $3.5 million and SCR of $2.2 million. Partially offset by an increase in fair value for Fleet of $20.6
million, among other less significant increases and decreases in the fair values of investments. In Q3 2022, Alaris’ earnings
included a net loss on realized and unrealized fair value of investments of $7.1 million. In Q2 2022, Alaris’ earnings included
a total net realized and unrealized loss of $0.5 million. This consisted of a decrease in the fair value of GWM of US$10.8
million and a decrease in the fair value of SCR of $4.4 million, partially offset by increases in Amur of $6.2 million and Fleet of
US$4.4 million, among other less significant increases and decreases. In Q1 2022, Alaris’ earnings included an unrealized
gain on investments of $10.0 million on the fair value of the Kimco investment as a result of the redemption of Kimco and the
unrecognized premium.
In Q4 2021, Alaris’ earnings included a total net unrealized gain on investments of $25.6 million, which largely consisted of
increases to the fair values of PFGP of $8.6 million and of FNC of $6.1 million. In Q3 2021, Alaris’ earnings included a total
net unrealized gain on investments of $15.9 million, which largely consisted of an increase to the fair value of Kimco of $8.2
million. In Q2 2021, Alaris’ earnings included a total net unrealized gain on investments of $16.2 million. This largely consisted
of an unrealized gain of $8.9 million as part of the proceeds received in the ccComm redemption. In Q1 2021, Alaris’ earnings
included a total net unrealized gain on investments at fair value of $5.5 million. It also included the reversal of previously
recorded credit losses related to the Kimco promissory notes and outstanding long-term accounts receivable. The total reversal
of this prior impairment included in Q1 2021 was $4.0 million.
Diluted earnings per unit in prior periods have been recast to reflect the conversion feature of the convertible debenture.
OUTSTANDING UNITS
At December 31, 2022, Alaris had authorized, issued and outstanding, 45,280,685 voting trust units.
During the year ended December 31, 2022, 131,299 units were issued on the vesting of RTUs and all outstanding options
expired with in the year.
At December 31, 2022, 354,963 RTUs were outstanding under Alaris’ long-term incentive compensation plans.
In March 2021, Alaris completed an additional bought deal short-form prospectus offering, with the total trust units being issued
of 5,909,375 at a price of $16.00 per unit, for aggregate gross proceeds of $94.6 million. After deduction of the underwriters’
fees and expenses of the offering, net proceeds to Alaris were $90.3 million.
As at March 9, 2023, Alaris had 45,312,403 units outstanding.
INCOME TAXES
Beginning in 2015, the Trust began receiving notices of reassessment (the “Reassessments”) from the Canada Revenue
Agency (the “CRA”) in respect of its 2009 through 2019 taxation years to deny the use of non-capital losses, accumulated
scientific research and experimental development expenditures (“SRED) and investment tax credits (“ITCs”). Pursuant to the
Reassessments, the deduction of approximately $121.2 million of non-capital losses and SRED expenditures and utilization
of $9.9 million in ITCs by the Trust were denied, resulting in reassessed taxes and interest of approximately $61.0 million
(2021 - $61.0 million).
Subsequent to filing the original notice of objection for the July 14, 2009 taxation year, Alaris received an additional proposal
from the CRA proposing to apply the general anti avoidance rule to deny the use of these deductions. The proposal does not
impact the Trust'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.
At the time the relevant transactions were completed, the Trust received legal advice that it should be entitled to deduct the
non-capital losses and SRED expenditures and claim ITCs. Based on ongoing discussions with its legal counsel, the Trust
remains of the opinion that all tax filings to date were filed correctly and that it will be successful in appealing such
Reassessments. The Trust intends to continue to vigorously defend its tax filing position. In order to do that, the Trust was
required to pay 50% of the reassessed amounts as a deposit to the Canada Revenue Agency and to the Alberta Treasury for
ANNUAL REPORT 2022
35
the amounts reassessed for the 2013 taxation year and onwards. The Trust has paid a total of $25.0 million (2021 - $25.0
million) in deposits to the CRA and Alberta Treasury relating to the Reassessments to date. These deposits have been
recorded on the statement of financial position.
Should the Trust be unsuccessful, it will be required to pay the remaining reassessed taxes and interest and will not recover
the $25.0 million in deposits paid to December 31, 2022.
Alaris has entered into insurance contracts to mitigate the risk presented by the above-noted matter, although there can be
no assurance that all the amounts for which Alaris may ultimately be liable will be fully covered. The premiums in respect of
the insurance contracts are fully paid and will be amortized on a straight-line basis over the term of the insurance contracts.
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) and anticipated
expenses. The purpose of providing such information in this MD&A is to demonstrate the visibility Alaris 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
Statements” below.
RISK FACTORS
Alaris' risk factors described below comprise risks that we know about and that we consider material to our business or results
of our operations. The innovative financing structure we use to invest in private businesses involves unique risks together with
the other risks present in the industry as a whole. When considering an investment in trust units, investors and others should
carefully consider these risk factors and other uncertainties and potential events that may adversely affect our business and
financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from
time-to-time. Management cannot predict all risk factors or the effect that risk factors have on our business, reputation, financial
condition, cash flows, ability to pay predictable and stable distributions, response to changes in our industry, our ability to
complete strategic acquisitions or divestitures in an efficient manner or at all or the market price of our trust units.
We have organized our risks as follows:
•
Strategic Risk Factors Relating to our Business.
•
Operational and Financial Risk Factors Relating to our Business.
•
Risk Factors Relating to our Partners.
STRATEGIC RISK FACTORS RELATING TO OUR BUSINESS
We depend upon the operations, assets and financial health of our Partners
We depend on the operations, assets and financial health of our Partners through our agreements with them. Our ability to pay distributions
to unitholders, to satisfy our debt service obligations and to pay our operating expenses depends on our Partners' consistent payment of
Distributions, our sole source of cash flow. Except for BCC (where our Distributions are fixed in exchange for a portion of BCC's upside
growth), increases or decreases to Distributions generally follow the percentage change of each Partner's revenues, same store sales,
gross margin or other similar top-line measure. As a result, subject to certain conditions, if a negative percentage change to a Partner's
applicable performance measure will reduce Distributions. The failure of any material Partner (or collectively several non-material Partners)
to pay its Distribution could materially adversely affect our financial condition and cash flows. Each Partner may have liabilities or other
matters that we do not identify through our due diligence or ongoing communications and monitoring procedures, which may have a
material adverse effect on the Partners and the applicable performance measure.
While the Trust's subsidiaries have certain rights and remedies available to them under the agreements with our Partners, these rights and
remedies, including the right to receive Distributions, are generally subordinated to the payment rights and security interests of the Partner's
senior lenders (for example, standstill provisions limit our exercise of some remedies until the senior debt is fully paid or for a specified
period).
Because of Alaris' limited voting rights in our Partners, our ability to exercise direct control or influence over the operations of our Partners
is limited (except for our consent rights and when there has been an uncured event of default and required Distributions have not been
ANNUAL REPORT 2022
36
made. Further, Alaris' consent rights and remedies are generally subordinated to the rights, or require the consent, of our Partners' senior
lenders and may also be subject to additional regulatory restrictions applicable to a Partner or the industry they operate in. Payment of
Distributions therefore depends on several factors that may be outside our control.
Our Partner agreements also provide Partners the right to purchase, repay or redeem Alaris' investment. If a material Partner (or a group
of Partners that collectively represent a material amount of our revenues) purchases, repays or redeems Alaris' equity and we cannot
redeploy the proceeds in a favourable manner into new or existing Partners, it could have a material adverse impact on Alaris' business,
including our revenues.
There is generally no public information (including financial information) about our Partners or their management. Partner management
are not subject to the same governance or disclosure requirements that apply to Canadian public companies. Therefore, we rely on our
management team and third-party service providers to investigate each Partner's business. However, neither our due diligence efforts nor
our ongoing monitoring procedures can assure that we will uncover all material information about a Partner necessary to make fully
informed decisions. In addition, our due diligence and monitoring procedures will not necessarily ensure an investment's success. Partners
may: have significant variations in operating results; from time to time be parties to litigation; be engaged in rapidly changing businesses;
expand business operations to new jurisdictions or business lines; require substantial additional capital to support their operations, to
finance expansion or to maintain their competitive position; or experience adverse changes in their business cycle or in the industries in
which they operate.
Numerous factors may affect the quantum of a Distribution or Partner's ability to maintain its Distribution obligations, including: its failure
to meet its business plan; regulatory or other changes affecting its industry; integration issues related to acquisitions, new locations or new
business lines; a downturn in its industry; negative economic conditions; changes in legislation or regulations governing a business or
industry; material changes in the unaudited information provided to Alaris; disruptions in the supply chain; disputes with suppliers,
customers or service providers or changes in arrangements with them; and working capital or cash flow management issues. Deterioration
in a Partner's financial condition and prospects may cause or coincide with a material reduction in the amount of its Distributions. See "Risk
Factors Relating to our Partners".
We are subject to risks affecting any new Partners
The businesses of any new Partners may be subject to one or more of the risks referred to under the heading "Risk Factors Relating to
our Partners" or similar risks and may be subject to other risks particular to such business or businesses. A material change in a Partner's
business or its ability to pay Distributions could have an adverse effect on our business.
We may not complete or realize the anticipated benefits of our Partner arrangements due to a difficult
investment market, geopolitical and other conditions that affect our or our Partners’ businesses
A key element of our growth plan is adding new Partners and making additional investments in existing Partners. We cannot guarantee
our ability to identify and complete new investment opportunities. Achieving the benefits of future investments will depend in part on
successfully identifying and capturing 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 concessions to certain Partners to help
them manage their debt covenants, working capital or for other reasons. Such concessions may create temporary or permanent reductions
in the Partner's payment of Distributions, 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 Partners.
Alaris may undertake new investment structures or strategies to supplement its primary preferred equity investments and increase Alaris'
growth profile. If a new structure or strategy does not provide Alaris with the intended benefits or any benefits at all our operations, cashflows
or financial condition may be negatively impacted. In addition, new investment structures and strategies could negatively impact Alaris by
creating an overutilization of internal resources.
Although Alaris currently has eighteen Partners and diversification continues to improve, Alaris does not have stringent fixed guidelines for
diversification for our Partners. At any given time, a significant portion of our assets may be dedicated to a single business or industry. If
any single Partner or industry does not succeed 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 Partner is subject to changes in North American and international economic conditions, including
higher inflation, rising interest rates, labour shortages, recessionary or inflationary trends, capital market volatility, consumer credit
ANNUAL REPORT 2022
37
availability, currency exchange rates, consumers' disposable income and spending levels, job security and unemployment, corporate
taxation and overall consumer confidence. Although inflation appears to be moderating recently, the record inflation that occurred
throughout 2022 and the associated significant rise in interest rates in response to inflation have contributed to the instability of debt and
equity markets. Competition for workers, rising energy and commodity prices have led to increasing wage and business input costs. These
factors can adversely affect our Partners' profit margins and ability to pay Distributions. Similarly, our ability to invest in new Partners may
be negatively impacted by inflation, higher interest rates and rising costs of capital. Even steady Distribution payments from our Partners
may not offset the potential adverse impact of sustained inflation and high interest rates.
Market and political events and other conditions, including reactions to global health crises (like the COVID-19 pandemic), disruptions in
the international credit markets and other financial systems, may result in a deterioration of global economic conditions. These conditions
could reduce 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. Despite 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 of these negative economic events could have a material adverse effect on our
business and our Partners' business, financial condition, results of operations and cash flows.
Alaris and our Partners' businesses could be adversely affected by extraordinary political, social,
economic events, war, terrorist attacks, natural disasters and public health threats
International political, social and economic events, acts of war and terrorism, natural disasters and major epidemics and pandemics, may,
directly or indirectly, adversely impact our and our Partners' businesses. For example, the ongoing war between Russia and Ukraine and
the global response to that conflict or other conflicts, or conversely peaceful developments, arising in the Middle East, Asia or Eastern
Europe and other areas of the world that affect the price of important commodities can negatively affect financial markets and the global
economy. Any such negative impacts could have a material adverse effect on our and our Partners' businesses, financial condition, results
of operations and cash flows.
Our ability to manage future growth and carry out our business plans may have an adverse effect on
our business and our reputation
Our ability to sustain continued growth depends on our ability to identify, evaluate and contribute financing to potential Partners that meet
our criteria. Accomplishing such a result on a cost-effective basis largely depends on 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 need to hire, train, supervise and manage new employees. Failure to effectively manage
future growth or to execute on our business plans to add new Partners could have a material adverse effect on our business, reputation,
financial condition and results of operations. We also rely on our reputation to maintain positive relationships with our investors and other
stakeholders and with investment banks and other investment sources to receive potential Partner opportunities. Any action that
undermines the public or an investment source's opinion of Alaris may adversely affect our unit price or continued growth.
We face competition with other investment entities
Alaris competes for investment opportunities with many private equity funds, mezzanine funds, equity and non-equity-based investment
funds, royalty companies and other institutional and strategic investors, including the public and private capital markets and 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 unavailable 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 and 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.
As a result of this competition, we may be unable to benefit from 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.
Potential Investment Opportunities
Alaris regularly evaluates, considers and engages in discussions with respect to potential investment opportunities that it believes may
help it achieve its commercial and growth plans, and in connection therewith, it may at any time have outstanding non-binding letters of
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intent or conditional agreements which individually or together may be material. There can be no assurance that any such discussions,
non-binding letters of intent or conditional agreements will result in a definitive investment agreement and, if they do, what the terms or
timing of such would be or that such investment will be completed by Alaris. If Alaris does complete any such transaction, it cannot assure
investors that the transaction will ultimately strengthen its financial or operating results, prospects or competitive position or that it will not
be viewed negatively by securities analysts or investors. Such transactions may also involve significant commitments of Alaris' financial
and other resources, including the completion of new financings of equity or debt (which may be convertible into equity). Any such activity
may fail to generate revenue, income or other returns to Alaris, and the resources committed to such activities will not be available to Alaris
for other purposes.
OPERATIONAL AND FINANCIAL RISK FACTORS RELATING TO OUR BUSINESS
We are subject to tax related risks
CRA Re-Assessment
Alaris received the Reassessments from the CRA for our 2009 through 2020 taxation years to deny the use of non-capital losses,
accumulated scientific research and experimental development expenditures and investment tax credits. The Reassessments seek to deny
the deduction of approximately $121.2 million of non-capital losses and use of $9.9 million in ITCs by the Trust, resulting in reassessed
taxes and interest of approximately $61 million. After filing the original notice of objection for the July 2009 taxation year, the CRA sent
Alaris a further notice proposing to apply the general anti-avoidance rule to deny the ITC deductions. The proposal does not affect Alaris'
previously disclosed assessment of the total potential tax liability (including interest) or the deposits required to be paid to dispute the
CRA's reassessments.
At the time the relevant transactions were completed, the Trust received legal advice that it should have a right to deduct the non-capital
losses and claim ITCs. Based on ongoing discussions with its legal counsel, the Trust remains of the opinion that all tax filings to date were
filed correctly and that it will succeed in appealing the Reassessments. Alaris intends to continue to vigorously defend its tax filing position.
In order to do that, Alaris was required to deposit 50% of the reassessed amounts with the CRA and Alberta Treasury. As of the date of
this filing, Alaris has deposited $25 million with the CRA and Alberta Treasury.
Alaris expects that achieving a final resolution of the Reassessments will take considerable time. The payment of deposits and any taxes,
interest or penalties owing should not materially impact the Trust's payout ratio. We believe we will succeed in defending our position and
therefore expect that the CRA will refund any current or future deposit with interest.
International Structure
Alaris' international structure is subject to assessment and possible adjustment by any of the taxation authorities in the jurisdictions in
which it operates based on differences of interpretation of the applicable tax laws and the way such laws have been implemented.
On April 8, 2020, the U.S. Treasury Department and IRS published the final regulations ("Regulations") addressing hybrid financing
arrangements. The key impact that these Regulations had on Alaris is that certain interest payments made by Alaris' U.S. entities in 2019
and 2020 may not be deductible. In 2019, certain Alaris U.S. entities took a deduction for interest expense, against which a reserve of
$10.4M was booked in 2020. In 2020, Alaris’ U.S. entities did not take a deduction for interest and therefore Alaris was not required to take
a reserve in 2021.
Furthermore, certain changes in the structure and business practices of our Partners could affect our structure. Although we are of the
view that our structure has been implemented correctly and is being managed and monitored properly, there can be no assurance that our
Partners' business models will continue to allow us to fully benefit from our corporate structure. If this is the case, our operating results
could be adversely affected. Alaris' international structure is subject to assessment and possible adjustment by any of the taxation
authorities in the jurisdictions in which it operates based on differences of interpretation of the applicable tax laws and the way such laws
have been implemented.
Mutual Fund Trust Status
The Trust may cease to qualify as a "mutual fund trust" for purposes of the Canadian Income Tax Act ("Tax Act"). If the Trust did not so
qualify for such purposes continuously throughout a taxation year, it would be subject to adverse tax consequences, which may materially
reduce its ability to make distributions on the trust units.
Furthermore, if the Trust is considered to have been established primarily for the benefit of Non-Residents, depending on the character of
the properties held by the Trust at that time, it could be permanently disqualified from qualifying as a "mutual fund trust" for such purposes.
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39
The trust units will cease to be qualified investments for a Registered Plan under the Tax Act unless the Trust qualifies as a "mutual fund
trust" (as defined in the Tax Act).
Laws, Rules and Regulations Applicable to the Trust
There can be no assurance that additional changes to the taxation of income trusts or corporations or changes to other government laws,
rules and regulations, either in Canada or the United States, will not be undertaken which could have a material adverse effect on the
Trust's unit price and its activities and undertakings. There can be no assurance that the Trust will benefit from any rules applicable to
corporations, that these rules will not change in the future or that the Trust will avail itself of them.
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 and Alaris' interpretation of and compliance with relevant tax legislation and regulations.
Our ability to recover from Partners for defaults under our agreements with them may be limited
Each Partner provides certain representations and warranties and covenants to us on the Partner and its business and certain other
matters. Following a transaction with Alaris, the Partner may distribute all or a substantial portion of the proceeds that it receives from us
to its security holders or owners. If we suffer any loss because of a breach of the representations and warranties or non-compliance with
any other terms of an agreement with a Partner, we may not recover the entire amount of our loss from the Partner. The Partner may not
have sufficient property to satisfy our loss. In addition, our rights and remedies upon default are generally subordinated to a Partner's
senior lenders, if any, or may be subject to regulatory restrictions applicable to the Partner or the industry in which they operate, which can
limit our ability to recover any losses from Partners. When Alaris' co-invests with another institutional investor, there may be additional
restrictions or limitations on the exercise of remedies or such co-investor may dispute the exercise. Furthermore, a Partner may try to
contest the application of our remedies, which could delay (or, if a Partner's contest succeeds, deny) the operation of our rights and
remedies and add costs to Alaris.
There are risks related to Alaris' and our Partners' outstanding debt
Alaris relies on borrowing under our Senior Credit Facility and our ability to earn attractive returns on our Partner investments depends on
our ability to borrow at favourable rates. Many of our Partners also rely on various credit facilities to fund their businesses. The cost of debt
financing has increased due to higher interest rates and may continue to do so. If the debt financing market contracts significantly or other
adverse changes occur concerning the terms of debt financing (for example, higher equity requirements or more restrictive covenants), it
could negatively impact our and our Partners' businesses.
Certain terms of our Senior Credit Facility (including its renewal on substantially similar terms) and any outstanding debt of our Partners
could adversely affect our ability to raise additional capital, fund operations or pay distributions to unitholders, 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 cause 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 a repayment. In addition, a default under
our debt facility may impact our ability to obtain future debt financing on terms favorable to Alaris. Furthermore, an inability of any material
Partner (or a group of non-material Partners collectively representing a material portion of our revenues) to meet its (or their) debt covenants
and a failure of a Partner to refinance or restructure its debt where necessary can affect the ability to pay Distributions and therefore impact
Alaris' cash flows. In addition, where a 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.
In addition, if Alaris or any of its assets becomes subject to any insolvency, bankruptcy, receivership, liquidation, reorganization or similar
proceedings, Alaris' outstanding debt will rank in priority to equity holders (with the indebtedness under the Senior Credit Facility ranking
in priority to the Debentures and other unsecured debt).
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Material Damage or Interruptions to our or our Partners’ information systems from external factors,
staffing shortages, cybersecurity breaches or cyber fraud, or difficulties in updating existing software
or implementing new software could adversely affect our or our Partners’ businesses or results of
operations
We and our Partners use information technology systems to varying degrees in the conduct of operations. Information technology systems
can be complex to develop, maintain, upgrade and protect against emerging threats. As a result, failure to hire or retain adequate personnel
to manage our information systems may impair our ability to accurately gauge the financial and managerial resources needed to invest in
information systems or result in failure to realize the anticipated benefits of resources invested in information systems particularly as
business needs changes. Information technology systems are subject to damage or interruption from power outages, computer and
telecommunications failures, computer viruses, security breaches and natural disasters. In addition, non-technical issues (including
vandalism, catastrophic events and human error) can damage or interrupt information technology systems in ways that require significant
investment to fix or replace the affected system. As a result, we or our Partners may suffer interruptions in our operations in the interim.
Third parties with whom we and our Partners share data also face risks relating to cybersecurity. Neither we nor our Partners directly
control these third parties' information security or privacy operations. Similarly, we do not control any of our Partners' information security
or privacy operations. Any material interruptions or failures in our or our Partners' systems or the products or systems of our or our Partners'
third-party vendors or other service providers that we and our Partners share data with may have a material adverse effect on our business
or results of operations.
Over the last several years, there has been an increase in the scope of cybersecurity attacks in Canada and the U.S. We expect
cybersecurity attacks to continue, and that Alaris and its Partners could be targeted. We also expect the scope sophistication of
cybersecurity attacks to increase. While we adopt countermeasures to address cybersecurity risks, our efforts will likely not wholly eliminate
these risks or thwart all attacks. Any failure to address vulnerabilities in a timely and comprehensive manner, including shortcomings in
our efforts to timely replace and upgrade network equipment, servers or other technology assets, could result in a successful breach of
our information technology systems. Our efforts to ensure the integrity of our information technology systems may not succeed. We may
not anticipate, detect or implement adequate preventive measures against all cyber threats because techniques used to obtain
unauthorized access or sabotage systems change frequently and often are not recognized until launched against a target.
Our Partners' operations are also dependent on information technology systems and cybersecurity measures. Attempted cyber intrusions
into our Partners' information systems through their own and their third-party service providers' networks or products, if successful, could
compromise our Partners' information systems. In addition, when investing in new Partners, we may be unable to detect information
systems risks in their businesses or adequately ensure their policies and procedures for addressing cybersecurity risks or identifying
weaknesses in their information systems are adequate. A computer hacker or other third party that circumvents our or our Partners' security
measures could destroy or steal valuable information or disrupt our or our Partners' operations. Any successful breaches or attempted
intrusions could increase information systems costs and potential reputational damage, which could materially adversely affect our or our
Partners' businesses and results of operations.
Additionally, we and our Partners must securely handle and transmit confidential and personal information. Personal information includes
data about our Partners' customers, including personally identifiable information, credit card information and sensitive information about
our Partners' service providers and workforce, including social security numbers and bank account information. If our or our Partners'
systems are damaged, interrupted or subject to unauthorized access, confidential personal information could be stolen or misused. Any
security breach could expose Alaris or our Partners to data loss, fines, litigation, and liability, seriously disrupt our or our Partners'
operations, harm our or our Partners' reputations and adversely affect our or our Partners' business. Failure to handle or transmit
confidential or personal information securely could result in claims or lawsuits, including personally identifiable information about our
Partners' customers, vendors or workforce. Aside from fines, lawsuits, and other claims, we and our Partners may need to expend
significant resources to change our business practices to protect personally identifiable information, which could adversely affect our or
our Partners' businesses.
Certain Partners are also subject to payment card association rules and network operating rules, including data security rules and
certification requirements. Both Alaris and certain of our Partners are subject to rules governing electronic funds transfers. Such rules could
change over time. Security standards of the payment card industry contain compliance guidelines and standards for our Partners' security
surrounding the physical and electronic storage, processing and transmission of individual cardholder data. Any breach or compromise of
a Partner's internal systems may result in liability for card re-issuance costs, fines and higher transaction fees and the Partner losing its
ability to accept credit or debit card payments, which could adversely affect the Partner's business.
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Various levels of government have enacted additional laws and regulations to protect consumers against identity theft, including laws
governing the treatment of personally identifiable information. For example, Canada's Personal Information Protection and Electronic
Documents Act, California's Consumer Privacy Act, and the various Consumer Protection Acts found in Canadian provinces impose
stringent requirements on collecting and processing personal information and provide for significant penalties for noncompliance. These
laws have increased the costs of doing business. Failure to implement appropriate safeguards or to detect and provide prompt notice of
unauthorized access as required by some of these laws could result in claims for damages and other remedies. Any penalty imposed
under these laws could adversely impact the business, results of operations and financial condition of Alaris or our Partners. In addition,
investigations, lawsuits or adverse publicity relating to our or our Partners' methods of handling personal data could increase costs and
cause negative market reaction.
Data privacy and security laws and regulations continue to evolve. As a result, we and our Partners may be subject to more extensive
requirements to protect personal information. Any failure to successfully respond to these risks and uncertainties could have a material
adverse effect on our or our Partners' businesses or results of operations.
Alaris and our Partners are subject to significant regulation
Alaris, its subsidiaries and our Partners are subject to various laws, regulations and guidelines in the jurisdictions in which they operate
(including U.S. federal, state and local laws and Canadian federal, provincial and local laws) and may become subject to new laws,
regulations and guidelines, 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, which could have a material adverse
effect on Alaris' and the 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 Partners to predict the cost or impact of changes to such laws and regulations on future operations.
There are no guarantees as to the timing and amount of our Distributions
Payment of distributions to unitholders will depend on several 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. We cannot guarantee the payment of distributions to
unitholders, which fluctuate with our performance and the performance of our Partners. There can be no assurance as to the amount of
distributions we pay to unitholders, if any. The market value of the trust units may deteriorate if we cannot pay distributions to unitholders
in accordance with our distribution policy, or at all, and such deterioration may be material.
There are no guarantees as to the availability of future financing for operations, Distributions and
growth
We expect that our principal sources of funds for our operations, including our Distribution, will be the cash we generate from 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, Alaris may require new 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 our operating cash may make future investment capital and operating expenditures dependent on
increased cash flow or additional financings. Alaris may require equity or debt financing to acquire interests in new Partners or make
additional contributions to our current Partners. Although we have managed to obtain 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 will depend in part upon the prevailing
capital market conditions and our business performance.
Our ability to pay Distributions is affected by the terms of our Senior Credit Facility
Our ability to pay distributions to unitholders is subject to applicable laws and contractual restrictions in the instruments governing our
indebtedness. How much Alaris is leveraged and compliance with other debt covenants under the Senior Credit Facility could have
important consequences for Unitholders including: (a) our ability to obtain additional financing for future contributions to private companies
may be limited; (b) all or part of our cash flow from operations may be dedicated to the repayment of our indebtedness, thereby reducing
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funds available for future operations or for payment of distributions to unitholders; (c) certain of our borrowings are at variable rates of
interest, which exposes us to the risk of increased interest rates; and (d) 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 distributions to unitholders.
Interest expense has been estimated to calculate our distributable cash based on current market conditions that are subject to fluctuations.
Such fluctuations could lead to an unanticipated material increase in interest rates that could, in turn, have a material adverse effect on
cash available to pay distributions to unitholders.
We are subject to fluctuations in the U.S./Canadian dollar pairing (USD/CAD)
Most Partners pay Distributions in USD. But the Trust pays distributions to unitholders in CAD. We currently have currency hedges in place
to manage the risk and economic consequences of foreign currency exchange fluctuations on our monthly cash flows and natural hedges
such as carrying U.S. dollar-denominated debt. However, the Canadian dollar relative to the U.S. dollar is subject to fluctuations, and the
currency hedges are for a limited period. 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 a result, 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.
Certain of our currency hedges are conducted through a forward contract, which comes 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' favour, it could receive a cash benefit from being unable to fulfill its forward
contract. But if the spot to forward price differential is not in Alaris' favour, it could owe considerable 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 decline
in a Partner's business, which diminishes its Distribution, or if a material U.S. Partner repurchases (or several U.S. Partners repurchase)
Alaris. Any cash outlay to meet a forward contract obligation could impair Alaris' cash flows.
Alaris has investments in several U.S.-based businesses and will continue to invest in U.S.-based businesses in U.S. denominated
currency. The Senior 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 Partners. However, Alaris may, from time-to-time, purchase USD 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 USD-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 USD-denominated investments because there is
no expectation to be redeemed or to exit these investments, and therefore the timing of such exit events is uncertain. This exposes Alaris
to a cash loss, or gain, on a USD investment, even if the investment succeeded in its U.S.-based currency. Alaris adjusts the fair value of
its USD 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 Partners have termination rights which may be exercised
Each Partner has the right to terminate their agreement with Alaris through repurchase or redemption rights. Some of these rights may be
restricted for a fixed period following Alaris' initial investment. Although Management believes that the repurchase or redemption purchase
price would adequately compensate Alaris for the forgone payments, we would need to reinvest the cash received, including possibly
repurchasing for cancellation of our own trust units to maintain our Trust distribution levels. There is no assurance that we would be able
to successfully identify and complete any such alternative investments or complete any such trust unit repurchase.
Our Partners and we rely heavily on key personnel
The success of Alaris and our Partners depends on the abilities, experience, efforts and industry knowledge of 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 Partner. The growth plans of Alaris and the 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 our Partners may be unable
to attract and retain additional qualified management and employees as needed. There can be no assurance that Alaris or our Partners
will 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.
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Our trust unit price is unpredictable and can be volatile
A publicly traded income trust will not necessarily trade at values determined by reference to the underlying value of its business. The
prices at which the trust units will trade are unpredictable. The market price of the trust units could fluctuate significantly in response to
variations in quarterly and annual operating results, the results of any public announcements we make, general economic conditions,
unexpected volatility in global stock markets and other factors beyond our control.
We may issue additional Trust Units diluting existing Unitholders' interests
We may issue an unlimited number of trust units or other securities for consideration and on terms as we establish without Unitholder
approval. Any further issuance of trust units will dilute the interests of existing Unitholders if the proceeds of such issuances are not being
used in a manner that is accretive to Alaris' net cash from operating activities per trust unit. Unitholders have no pre-emptive rights in
connection with such future issuances.
We are subject to a risk of legal and regulatory 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 high costs. There has been a rise in the number of claims
and amount of damages sought in litigation and regulatory proceedings against the financial industry in recent years (particularly in the
United States). This increase in litigation risk applies to the activities of our Partners as well as Alaris, both of which could be named in
lawsuits or subject to regulatory investigations directed at a given Partner. These actions could result in third-party litigation or regulatory
proceedings related to investor dissatisfaction with our performance, alleged conflicts of interest, our Partners' products and services and
other claims.
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. The widespread use of social media, the internet
and other media platforms, combined with growing public scrutiny of the effects of business activities, could result in negative publicity or
inaccurate information about Alaris or its Partners spreading rapidly and to a wide audience. This could make it harder to address and
remedy issues and further amplify the reputational risks related to negative publicity.
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General Risks Related to the Debentures
In June 2019, Alaris issued the 2024 Debentures in an aggregate principal amount of $100 million, convertible at the holder's option at any
time before the close of business on the earlier of the business day immediately preceding the June 30, 2024 maturity date and the date
specified by Alaris for the redemption of the 2024 Debentures into fully paid and non-assessable trust units at a conversion price of $24.25
per trust unit, being a conversion rate of approximately 41.2371 trust unit for each $1,000 principal amount of 2024 Debenture. Each series
of the 2024 Debenture will rank pari passu with each other 2024 Debenture of the same series and, subject to certain statutory exceptions,
with all other present and future subordinated and unsecured indebtedness of Alaris (except for any sinking fund provisions applicable to
different series of 2024 Debentures or similar types of obligations of Alaris).
In February 2022, Alaris issued the 2027 Debentures in an aggregate principal amount of $65 million. Each 2027 Debenture ranks pari
passu with each other 2027 Debenture and, subject to certain statutory exceptions, with all other present and future unsubordinated and
unsecured indebtedness of Alaris. Alaris may, at its option, repay the principal amount of the 2027 Debentures in Canadian dollars or by
delivery of fully paid and non-assessable trust units.
If Alaris or any of its assets becomes subject to any insolvency, bankruptcy, receivership, liquidation, reorganization or similar proceedings,
Alaris must first repay the Senior Credit Facility and any other senior indebtedness which may arise from time to time before repaying
holders of Debentures. Following repayment in full of the Senior Credit Facility and any other senior indebtedness, the Debentures become
entitled to the distribution of any remaining assets of Alaris to satisfy any owing obligations on such Debentures. In addition, any assets of
Alaris that are subject to a security interest or are required to be marshalled by the rights of any creditor ranking senior to the holders of
the Debentures may not be available to satisfy any obligations owing on the Debentures. As a result, if Alaris or any of its assets becomes
subject to any insolvency, bankruptcy, receivership, liquidation, reorganization or similar proceedings, Alaris may have insufficient assets
remaining to pay amounts due on any or all of the then outstanding Debentures.
Additionally, any deterioration in Alaris' financial condition may affect our ability to pay principal, premium (if any) and interest on the
Debentures when due. Alaris is prohibited from making any payment on the Debentures if: (a) a default, event of default or acceleration
occurs under the Senior Credit Facility or any other senior indebtedness or any swap obligation of any senior creditor or its affiliates; (b) a
default under the Senior Credit Facility or any other senior indebtedness permits the holders of the Senior Credit Facility or any other senior
indebtedness (as applicable) to accelerate its maturity; or (c) if such payment would create a default of the Senior Credit Facility or any
other senior indebtedness that would permit acceleration of its maturity.
Alaris may Redeem the Debentures before Maturity
Between June 30, 2022, and June 30, 2023 (and subject to regulatory approval and any restrictions on the redemption of 2024 Debentures
of a particular series), Alaris has the right to redeem the 2024 Debentures, either in whole at any time or in part from time to time, on at
least 30 and not more than 60 days' notice, at a redemption price equal to the principal amount of the 2024 Debentures plus accrued and
unpaid interest, as long as the volume-weighted average trading price of the trust units on the TSX for the 20 consecutive trading days
ending on the fifth trading day before the date on which the notice of redemption is given is at least 125% of the conversion price. Holders
of 2024 Debentures should assume that Alaris will exercise its redemption right if refinancing at a lower interest rate becomes available or
if Management determines that it is otherwise in Alaris' best interest to redeem the 2024 Debentures.
Between March 31, 2025, and March 31, 2026 (and subject to regulatory approval and any restrictions on the redemption of 2027
Debentures of a particular series), Alaris has the right to redeem the 2027 Debentures, either in whole or in part, on at least 30 and not
more than 60 days' notice, at a redemption price equal to 103.125% of the principal amount of the 2027 Debentures to be redeemed plus
accrued and unpaid interest up to but excluding the date of redemption. On or after March 31, 2026, and the maturity date of the 2027
Debentures, Alaris has the right to redeem the 2027 Debentures, either in whole or in part, on at least 30 and not more than 60 days'
notice, by issuing trust units at a redemption price equal to the principal amount of the 2027 Debentures to be redeemed plus accrued and
unpaid interest up to but excluding the date of redemption.
Redemption of Debentures upon a Change of Control
Alaris must offer to purchase all 2024 Debentures within 30 days of the acquisition of voting control or direction of more than 50% of the
outstanding trust units. Upon such an event, Alaris may not have sufficient funds to satisfy the required purchase of all 2024 Debentures.
Within 30 days following the occurrence of the acquisition of voting control or direction of more than 50% of the outstanding trust units,
Alaris must offer to purchase, in whole or in part, the 2027 Debentures then outstanding for 100% of the principal amount of the 2027
Debentures plus accrued and unpaid interest up to but excluding the date of acquisition.
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45
Additionally, the rights under the Senior Credit Facility or any other senior indebtedness in existence at such time may restrict such a
purchase.
Effect of Interest Rates on the Price of convertible debentures
The market value of the Debentures will fluctuate with the interest rates in effect from time to time. Consequently, the market value of the
Debentures may decline if general interest rates begin to rise.
Nature of Investment
Unitholders of Alaris do not hold a share of a body corporate. As holders of trust units, Unitholders do not have statutory rights normally
associated with ownership of shares of a corporation, including, for example, the right to bring "derivative" actions. The rights of Unitholders
are based primarily on the Declaration of Trust, a copy of which is available under the Trust's profile at www.sedar.com. There is no statute
governing the affairs of the Trust equivalent to the Canada Business Corporation Act which sets out the rights and entitlements of
shareholders of corporations in various circumstances.
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 under section 3(c)(7) of that Act. The U.S. Investment Company Act and related
rules provide certain protections to investors and restrict companies who register with the U.S. Securities and Exchange Commission as
investment companies. None of these protections or restrictions is or will be available to investors in Alaris. In addition, as long as Alaris is
an "investment company" under the Investment Company Act, 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 trust units, which may materially affect your ability to hold or transfer the trust units. If we
needed to register with the U.S. Securities and Exchange Commission 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 Trust Units or to transfer any Trust Units that investors hold
may be limited by certain ERISA, U.S. Tax Code and other Considerations
Alaris has restricted the ownership and holding of trust units so that none of our assets will constitute "plan assets" (as defined in the Plan
Asset Rules) of any of the following: (a) an "employee benefit plan" (under section 3(3) of the U.S. Employee Retirement Income Security
Act of 1974 ("ERISA") that is subject to Part 4 of Subtitle B of Title I of ERISA; (b) a plan, individual retirement account or another
arrangement that is subject to Section 4975 of the Code; (c) any other retirement or benefit plan that is not described in (a) or (b), but that
is subject any similar law; or (d) an entity whose underlying assets are considered to include "plan assets" of any such plan, account or
arrangement in (a) through (c) under ERISA, the Code or similar law.
If Alaris' assets were considered "plan assets" of any of the above entities, non-exempt "prohibited transactions" under section 406 of
ERISA, section 4975 of the Code or similar law could arise from transactions the Trust or any of our subsidiaries enters into in the ordinary
course of business, leading to tax penalties and mandatory rescission of such transactions. Consequently, each recipient and subsequent
transferee of trust units will, or will be deemed to, represent and warrant that it is not an entity described in (a) through (d) in the preceding
paragraph and that no portion of the assets used to acquire or hold its interest in trust units or any beneficial interest in them constitutes or
will constitute the assets of such an entity. Any holding or transfer of trust units 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 (non-U.S.) financial institutions and certain
foreign (non-U.S.) non-financial entities. Failure by such an institution or entity to comply with these obligations could subject it to a 30%
U.S. withholding tax on certain U.S. source income (including interest, dividends, rents, royalties, compensation, other passive income and
gross proceeds from the sale or other disposition of property that produce similar of U.S. source income) and thereby reduce its distributable
cash and net asset value. In 2014, Canada and the United States entered into an Intergovernmental Agreement (the "IGA") to facilitate
compliance with FATCA by Canadian financial and non-financial institutions and entities.
ANNUAL REPORT 2022
46
Under the IGA and the Canadian legislation enacted to implement the IGA (the "Canada IGA Legislation"), Alaris (and our subsidiaries):
(a) registered with the IRS and acquired identifying numbers; (b) performed, and will continue to perform, specified diligence to determine
whether they have any "U.S. reportable accounts"; and (c) will annually, report to the CRA required information about U.S. "account
holders", which could include certain of Alaris' Unitholders. Under the Canada IGA Legislation, Unitholders may need to provide identity,
residency and other information to Alaris (and may be subject to penalties for failing to do so) that, for certain U.S. persons or certain non-
U.S. entities controlled by certain U.S. persons, Alaris would then report to the CRA. The CRA may report such information about U.S.
reportable accounts to the IRS under the exchange-of-information provisions in the Canada-U.S. tax treaty.
Under the Canada IGA Legislation, equity and debt interests that regularly trade on an established securities market are not treated as
"financial accounts". If the trust units are regularly traded on an established securities market, Alaris will not need to provide information to
the CRA about U.S. holders of trust units. Because we believe the trust units would be considered regularly traded on an established
securities market, Alaris does not expect to report information about U.S. Unitholders to the CRA under FATCA. However, if in the future
the trust units are no longer considered regularly traded on an established securities market, Alaris' reporting obligations under FATCA
may change.
Alaris and its subsidiaries intend to continue to take any measures and implement any procedures that we, in consultation with our legal
and tax counsel, find necessary or desirable to comply with our obligations under the IGA and, more particularly, the Canada IGA
Legislation. If Alaris or a subsidiary of does not satisfy the applicable requirements of the IGA and the Canada IGA Legislation or if the
Canadian government does not comply with the IGA and if Alaris is otherwise unable to comply with any relevant legislation, then Alaris
(or a subsidiary of Alaris) could be subject to FATCA tax.
The discussion above reflects the 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 their interpretations 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
unfavorable to Alaris and holders of trust units.
Passive Foreign Investment Company ("PFIC") Rules and Potential Implications for U.S. Unitholders
Sections 1291 through 1298 of the Code provide for special (and generally unfavorable for U.S. unitholders) 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 (a) at least 75% of its
gross income 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 (b) at least 50% of our assets by value (determined on the basis of a quarterly average) produce or are held for the production of
passive income. For this purpose, the non-U.S. corporation will be deemed to receive its proportionate share of the income directly and to
hold its proportionate share of the assets of any corporation or partnership (whether U.S. or non-U.S.) that we own at least 25% (by value).
For any taxable year in which a non-U.S. corporation is a PFIC in the absence of an election by a U.S. shareholder 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"), a U.S. shareholder will, upon making 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 rateably 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 on 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 or will be or become a PFIC was and is fundamentally fact-specific 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 our subsidiaries was or will be or become a PFIC; or (ii) that the IRS would not take the position that either
Alaris or any of our subsidiaries should have been or should be treated as a PFIC for any one or more taxable years despite Alaris' contrary
reporting position.
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. unitholders
the financial information necessary to make a QEF Election; however, provided the trust units constitute "marketable stock" (as specifically
defined under the MTM Election regulations), a U.S. unitholder should be able to make an MTM Election with respect to a Unitholder's
ANNUAL REPORT 2022
47
trust units. Alaris believes that the trust units would currently be considered "marketable stock" for this purpose. Making an MTM Election
would result in the electing U.S. unitholder of trust units having to recognize as ordinary income or loss each year an amount equal to the
difference as of the close of such year between the fair market value of the trust units and the unitholder's adjusted U.S. federal income
tax basis in such trust units. Losses would be allowed only to the extent of the net mark-to-market gain previously included in income by
the U.S. unitholder under the MTM Election for prior taxable years. If an MTM Election is made, then distributions to unitholders 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. unitholders to consult their own tax advisors regarding the possible application of the PFIC rules.
Expectations of Alaris and our Partners relating to environmental, social and governance factors may impose additional costs
and expose us to new risks.
We are subject to increasing scrutiny from regulators, politicians, unitholders, investors and other stakeholders with respect to
environmental, social and governance ("ESG") matters. We expect that an increased focus on ESG considerations will affect some aspects
of our operations, including our due diligence processes when determining whether to invest in a new Partner. There are many groups
involved in a range of ESG issues, including investors, special interest groups, public and consumer interest groups and third-party service
providers. As a result, there is an increased emphasis on corporate responsibility ratings and a number of third parties provide reports on
companies to measure and assess corporate responsibility performance. The ESG factors used to assess Alaris' corporate responsibility
may change, which could result in greater expectations of Alaris and cause us to undertake costly initiatives to satisfy new ESG criteria.
In our public disclosures, we may share certain ESG-related initiatives, commitments and goals. However, implementing these initiatives,
commitments and goals could be challenging and expensive, and we may not achieve them within the timelines we announce or at all. For
instance, we may find some ESG initiatives, commitments or goals are impractical or infeasible due to cost, timing or other factors. Our
ESG-related disclosures, policies, practices, initiatives, commitments and goals may also face criticism for being incomplete, inaccurate or
inadequate, especially as the frameworks and standards for measuring ESG progress are still developing. Our ESG practices rely on third-
party data, services and methodologies, as well as reporting from our Partners, which may prove to be incomplete or inaccurate.
If our or third parties' ESG-related data, processes or reporting are incomplete or inaccurate, or if we fail to satisfy existing or new ESG
criteria, investors may conclude that our corporate responsibility policies are inadequate. We risk damage to our reputation if our corporate
responsibility procedures, standards or policies do not meet the standards set by various ESG focused groups. Alaris has made, and may
need to make future, substantial investments in matters related to ESG which require significant investment and resources. Any failure in
our decision-making or investments related to ESG could affect investor perceptions of Alaris. Furthermore, we cannot control the ESG
approach taken by our current or potential Partners. If we communicate specific ESG goals or initiatives, we could fail, or be perceived to
fail, in our achievement of such goals or initiatives, or we could be criticized for the scope of such goals or initiatives. If we, directly or
indirectly through our Partners, fail to satisfy the ESG expectations of investors and other key stakeholders or our ESG goal or initiatives
are not executed as planned, our reputation could be materially and adversely affected.
RISKS RELATING TO OUR PARTNERS
Our material Partners face several 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 BCC
Lawsuits
Any business performing medical procedures has a higher probability of facing lawsuits in the US
than most, even minimally invasive procedures such as those Sono Bello completes. Medical
malpractice lawsuits are common in this space and can have a material impact on the business. BCC
has appropriate levels of insurance coverage to manage historical lawsuit risks.
Consumer discretionary
BCC performs elective procedures, primarily minimally invasive liposuction. This elective procedure
is driven by pricing and consumer spending. If consumers have less disposable income, they tend to
cut out consumer discretionary spending and focus on core spending. This could have a negative
impact on BCC’s business. The price point of a typical procedure at BCC is not as significant as other
more invasive cosmetic procedures but it is high enough that during recessionary times, they will see
a pull back in revenue.
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Growth of new territories
BCC continues to grow through expansion which comes with the risk that not all new locations
produce the returns realized at current ones. Not all markets are created equal and therefore could
have substantially different results. Ambitious growth initiatives open the door to execution risk. The
team in place at BCC has successfully taken the business through various stages of growth thus far
and has executed very well. However, execution risk remains.
Competition
Barriers to entry are time and money in order to get the scale Sono Bello has. However, there are
groups that could follow Sono Bello’s lead given the growth prospects and profitability of the industry.
Competition in the cosmetic procedures business is regional but substantial and growing. On a
national level and in the procedures of focus for BCC, they are the dominate player and on a national
scale any new competitors will take time to grow to BCC’s size and scale. However, new entrants can
put pressure on pricing and BCC may not be able to compete with competitors in regions where BCC
plans to expand due to existing brand loyalty. Competitors may attempt to copy BCC’s business
model, or portions thereof, which could erode market share and impair profitability. This competition
may limit their ability to attract and new customers, which could materially affect their results of
operations and financial condition.
Reliance on IT
BCC relies on their IT systems and the security within, both for lead generation and closing leads, but
also on the security front to ensure the confidentiality of the information provided by customers. If the
confidentiality and integrity of their customer’s personal data, including banking information, aren’t
upheld then their reputation and business could be materially impacted.
Social acceptance of
minimally invasive
procedures
Changes in the acceptance of cosmetic procedures (negative image) could lead to a reduction of
people that would be willing to have a cosmetic surgery procedure.
Brand Reputation
Sono Bello is a brand in a vanity driven industry. If something was to hurt the image of Sono Bello
(customer complaints, lawsuits, botched procedures and even death) it could severely damage Sono
Bello’s brand and thus the profitability of the business.
Risks Relating Specifically to PFGP
Additional franchise
operations may be limited
PFGP is a franchisee of Planet Fitness. As such, PFGP's operations depend, in part, on decisions
made by the Planet Fitness franchisor, including decisions relating to pricing, advertising, policy and
procedures and 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.
Brand loyalty
PFGP relies on the other franchisees to uphold the Planet Fitness brand. Franchisees are
contractually obligated to operate their stores under the standards outlined in the agreements with
the franchisor. However, the other franchisees are independent third parties whose actions are
outside of the control of PFGP.
Performance amongst new
clubs
PFGP continues to expand, which comes with the risk that not all new clubs produce the same returns
as current clubs. Further, there is a risk of ensuring new clubs are not within close enough proximity
to existing stores that would negatively impact the existing stores' results.
High level of competition
The high level of competition in the health and fitness industry could materially and adversely affect
their business. PFGP may not be able to compete effectively in the markets in which they operate.
Competitors may attempt to copy their business model, which could erode market share and impair
profitability. This competition may limit their ability to attract and retain existing members and their
ability to attract new members, which in each case could materially and adversely affect their results
of operations and financial condition. Increase in competition also may limit ability to attract staff in
addition to new customers.
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Reliance on IT
PFGP relies heavily on their IT systems and the security within, both for ease of service with their
point-of-sale processing systems and the security front to ensure the confidentiality of the information
provided by customers. If the privacy and integrity of their customer's data, including member banking
information, are not upheld, PFGP's reputation and business could be materially impacted.
RISKS RELATING TO ALL OF OUR PARTNERS, GENERALLY
Along with the risks relating specifically to our material Partners, several other risks impact all of our current and future Partners collectively,
which, if realized, could have a material impact on our operations and financial condition, as described below.
How a Partner is leveraged may have adverse consequences to them
Leverage may have important adverse consequences on our Partners. Partners may be subject to restrictive financial and operating
covenants. Leverage may impair our Partners' ability to finance their future operations and capital needs and continue paying Distributions.
As a result, their flexibility to respond to changing business and economic conditions and business opportunities may be limited. A
leveraged company's income and net assets will increase or decrease faster than if the borrowed money was not used.
Our Partners rely on key personnel
Often, a private business's success 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 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" and "Our Partners and we rely heavily on key personnel".
A lack of funding for our Partners could have adverse consequences to them
Each of our Partners may continue to require additional working capital to conduct their existing business activities and expand their
businesses. Our 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 unavailable, our Partners may need to curtail
their business objectives in one or more areas. There can be no assurance that unforeseen developments or circumstances will not alter
a Partner's capital requirements. 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 many of our Partners includes acquiring businesses and assets or growth through expanding to new locations. In
addition, a 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 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 the anticipated
benefits of such acquisitions, new business lines or locations could have a material adverse impact on a Partner's operations and therefore
on our operations.
Our Partners may suffer damage to their brand reputations
Damage to our Partners' brands or reputation, or the reputation of the brands of suppliers of products that the Partners offer, could result
from events out of our Partners' control. This damage could negatively impact consumer opinion of our Partners or their related products
and services, which could harm the Partners' performance.
Our Partners face intense competition
Our Partners may face intense competition, including competition from companies with greater financial and other resources, more
extensive development, manufacturing, marketing, other capabilities and more qualified managerial and technical personnel. There can
be no assurance that our Partners will be able to compete against their respective competitors successfully 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.
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50
Changes in the industry in which the Partners operate
Our Partners operate in several 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.
Risks regarding legal proceedings involving our 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 high costs and restraints
on a Partner's operations, which could negatively impact their ability to pay Distributions 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 Partners throughout the year and bases certain estimates on this
information, including ECR estimates. 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 Unitholders. The adjustments could also impact financial covenants that our Partners have with their lenders and
thus could impact Distributions.
Customer Concentration
At times, some Partners may have a single customer concentration or only 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.
Public health crises, epidemics and pandemics may negatively impact our Partners’ business
continuity
Another public health crises like COVID-19 could disrupt a Partner's ability to continue business in the ordinary course including by reducing
their earnings, leading to an inability to pay Distributions to Alaris and a reduction in our revenues. In addition, the disruption to supply
chains, overall market sentiment, credit rating, political and governmental reaction and risks to employee health and safety due to such
health crises may result in a slowdown or temporary shutdown of the operations of our Partners or any of them.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking information and forward-looking statements (collectively, “forward-looking statements”) under
applicable securities laws, including any applicable “safe harbor” provisions. Statements other than statements of historical fact contained
in this MD&A are forward-looking statements, including, without limitation, management's expectations, intentions and beliefs concerning
the growth, results of operations, performance of the Trust and the Partners, the future financial position or results of the Trust, business
strategy and plans and objectives of or involving the Trust or the Partners. 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. In
particular, this MD&A contains forward-looking statements regarding: the anticipated financial and operating performance of the Partners;
the Trust’s Run Rate Payout Ratio, Run Rate Cash Flow, Run Rate Revenue and total revenue; the impact of recent new investments and
follow-on investments; expectations regarding receipt (and amount of) any common equity distributions or dividends from Partners in which
Alaris holds common equity, including the impact on the Trust’s net cash from operating activities, Run Rate Revenue, Run Rate Cash
Flow and Run Rate Payout Ratio; the use of proceeds from the senior credit facility; impact of future deployment; the Trust’s ability to
deploy capital; the impact of changes in interest rates; the yield on the Trust’s investments and expected resets on Distributions; the Trust’s
return on its investments; and Alaris’ expenses for 2023. To the extent any forward-looking statements herein constitute a financial outlook
or future oriented financial information (collectively, “FOFI”), including estimates regarding revenues, Distributions from Partners (including
expected resets, restarting full or partial Distributions and common equity distributions), Run Rate Payout Ratio, Run Rate Cash Flow, net
cash from operating activities, expenses and impact of capital deployment, they were approved by management as of the date hereof and
have been included to provide an understanding with respect to Alaris' financial performance and are subject to the same risks and
ANNUAL REPORT 2022
51
assumptions disclosed herein. There can be no assurance that the plans, intentions or expectations upon which these forward-looking
statements are based will occur.
By their nature, forward-looking statements require Alaris to make assumptions and are subject to inherent risks and uncertainties.
Assumptions about the performance of the Canadian and U.S. economies over the next 24 months and how that will affect Alaris’ business
and that of its Partners (including, without limitation, any ongoing impact of COVID-19) are material factors considered by Alaris
management when setting the outlook for Alaris. Key assumptions include, but are not limited to, assumptions that: the Russia/Ukraine
conflict and other global economic pressures over the next twelve months will not materially impact the economy; interest rates will not rise
in a matter materially different from the prevailing market expectation over the next 12 to 24 months; that COVID-19 or any variants thereof
will not impact the economy or our partners operations in a material way in the next 12 months; the businesses of the majority of our
Partners will continue to grow; more private companies will require access to alternative sources of capital; the businesses of new Partners
and those of existing Partners will perform in line with Alaris’ expectations and diligence; and that Alaris will have the ability to raise required
equity and/or debt financing on acceptable terms. Management of Alaris has also assumed that the Canadian and U.S. dollar trading pair
will remain in a range of approximately plus or minus 15% of the current rate over the next 6 months. In determining expectations for
economic growth, management of Alaris primarily considers historical economic data provided by the Canadian and U.S. governments
and their agencies as well as prevailing economic conditions at the time of such determinations.
There can be no assurance that the assumptions, 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. The actual results of the Trust and the Partners could materially differ from those anticipated in the
forward-looking statements contained herein as a result of certain risk factors, including, but not limited to, the following: an increase in
COVID-19 (or its variants) or other widespread health crises; other global economic factors (including, without limitation, the Russia/Ukraine
conflict, inflationary measures and global supply chain disruptions on the Trust and the Partners (including how many Partners will
experience a slowdown of their business and the length of time of such slowdown); the dependence of Alaris on the Partners; leverage
and restrictive covenants under credit facilities; reliance on key personnel; general economic conditions, including any new investment
structures; failure to complete or realize the anticipated benefit of Alaris’ financing arrangements with the Partners; a failure to obtain
required regulatory approvals on a timely basis or at all; changes in legislation and regulations and the interpretations thereof; risks relating
to the Partners and their businesses, including, without limitation, a material change in the operations of a Partner or the industries they
operate in; inability to close additional Partner contributions or collect proceeds from any redemptions in a timely fashion on anticipated
terms, or at all; a change in the ability of the Partners to continue to pay Alaris at expected Distribution levels or restart distributions (in full
or in part); a failure to collect material deferred Distributions; a change in the unaudited information provided to the Trust; and a failure to
realize the benefits of any concessions or relief measures provided by Alaris to any Partner or to successfully execute an exit strategy for
a Partner where desired. Additional risks that may cause actual results to vary from those indicated are discussed under the heading “Risk
Factors” and in this Management Discussion and Analysis and Annual Information Form for the year ended December 31, 2022, which is
or will be (in the case of the AIF) filed under Alaris’ profile at www.sedar.com and on its website at www.alarisequitypartners.com.
Readers are cautioned that the assumptions used in the preparation of forward-looking statements, including FOFI, although considered
reasonable at the time of preparation, based on information in Alaris’ possession as of the date hereof, may prove to be imprecise. In
addition, there are a number of factors that could cause Alaris’ actual results, performance or achievement to differ materially from those
expressed in, or implied by, forward looking statements and FOFI, or if any of them do so occur, what benefits the Trust will derive
therefrom. As such, undue reliance should not be placed on any forward-looking statements, including FOFI.
The Trust has included the forward-looking statements and FOFI in order to provide readers with a more complete perspective on Alaris’
future operations and such information may not be appropriate for other purposes. The forward-looking statements, including FOFI,
contained herein are expressly qualified in their entirety by this cautionary statement. Alaris disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
For more information please contact:
Investor Relations
Alaris Equity Partners Income Trust
403-260-1457
ir@alarisequity.com
ANNUAL REPORT 2022
52
Consolidated Financial Statements of
Alaris Equity Partners Income Trust
Audited financial statements for the years ended December 31, 2022 and 2021
ANNUAL REPORT 2022
53
INDEPENDENT AUDITORS’ REPORT
To the Unitholders of Alaris Equity Partners Income Trust
Opinion
We have audited the consolidated financial statements of Alaris Equity Partners Income Trust (the Entity), which comprise:
•
the consolidated statements of financial position as at December 31, 2022 and December 31, 2021
•
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 end of December 31, 2022 and December 31, 2021, and its consolidated financial performance and its consolidated cash flows for
the years then ended in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our auditor’s report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements
for the year ended December 31, 2022. These matters were addressed in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our auditor’s report.
Evaluation of the fair value of investments at fair value
Description of the matter
We draw attention to Notes 2(d), 5, and 11 to the financial statements. Investments at fair value are measured using a discounted cash
flow model or capitalized cash flow. The Entity recognizes that the determination of fair value of its investments at fair value becomes more
judgmental the longer the investments are held. Typically, the risk profile and future cash flows expected from the individual investments
change over time. The Entity’s valuation model incorporates these factors each reporting period. The Entity has recorded investments at
fair value of $1,248,159,000 as at December 31, 2022. Significant assumptions in determining the fair value of investments at fair value
include the discount rate, terminal value growth rate and changes in future distributions for preferred unit investments, and the discount
rate, terminal value growth rate, cash flow multiple and estimated future cash flows for common equity investments.
Why the matter is a key audit matter
We identified the evaluation of the fair value of investments at fair value as a key audit matter. This matter represented an area of significant
risk of material misstatement given the magnitude of investments at fair value and the high degree of estimation uncertainty in determining
the fair value of investments at fair value. In addition, significant auditor judgment and specialized skills and knowledge were required in
evaluating the results of our procedures, due to the sensitivity of the fair value of investments at fair value to minor changes to significant
assumptions.
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following:
We compared the Entity’s actual 2022 distributions received to the amount budgeted for 2022 to assess the Entity’s ability to accurately
forecast.
ANNUAL REPORT 2022
54
We evaluated the appropriateness of the assumptions used in determining the fair value of investments at fair value by:
•
Comparing a selection of changes in future distributions to the actual historical distributions, and assessing the adjustments
made in arriving at changes in future distributions by comparing to the adjustment factors permitted under the respective
agreements. We took into account changes in conditions and events affecting estimated future distributions to assess the
adjustments or lack of adjustments made in arriving at estimated future distributions.
•
Comparing a selection of the estimated future cash flows to the actual historical cash flows. We took into account changes in
conditions and events affecting estimated future cash flows to assess the adjustments or lack of adjustments made in arriving at
estimated future cash flows.
We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rates, terminal value
growth rates and cash flow multiples used in determining the fair value of investments at fair value by:
•
Comparing a selection of discount rates and terminal value growth rates to the transaction discount rates and terminal value
growth rates implied at the time of the Entity making the initial investment
•
Comparing the changes in a selection of discount rates and terminal value growth rates to changes in the financial performance
and condition of each specific investment since the time of the Entity making the initial investment
•
Comparing a selection of discount rates and cash flow multiples against a discount rate range and cash flow multiple range that
were independently developed using publicly available market data for comparable entities
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.
•
the information, other than the financial statements and the auditor’s report thereon, included in a document likely to be entitled
“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 and
remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions
as at the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to report that fact in the auditor’s report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditor’s report thereon, included in a document likely to be entitled “Annual
Report” is expected to be made available to us after the date of this auditor’s 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 (IFRS) as issued by the International Accounting Standards Board (IASB), 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.
ANNUAL REPORT 2022
55
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion.
•
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting 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 auditor’s report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the
Entity to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that achieves fair presentation.
•
Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
•
Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
•
Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the
audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this auditor’s report is Kimberly Maria Isotti.
Chartered Professional Accountants
Calgary, Canada
March 9, 2023
Chartered Professional Accountants
ANNUAL REPORT 2022
56
Alaris Equity Partners Income Trust
Consolidated statements of financial position
31-Dec
31-Dec
$ thousands
Note
2022
2021
Assets
Cash
$ 60,193
$ 18,447
Derivative contracts
11
2,507 71
Accounts receivable and prepayments
2,689 3,181
Income taxes receivable
22,675 28,991
Promissory notes and other assets
5
- 13,555
Current Assets
$ 88,064
$ 64,245
Property and equipment
485 658
Other long-term assets
10,11
33,395 24,979
Investments
5
1,248,159 1,185,327
Non-current assets
$ 1,282,039
$ 1,210,964
Total Assets
$ 1,370,103
$ 1,275,209
Liabilities
Accounts payable and accrued liabilities
9
$ 11,517
$ 8,214
Distributions payable
6
15,395 14,899
Derivative contracts
11
2,818 -
Office Lease
352 500
Income tax payable
306 740
Current Liabilities
$ 30,388
$ 24,353
Deferred income taxes
10
67,386 43,903
Loans and borrowings
7
216,077 326,569
Convertible debenture
8
93,446 89,592
Senior unsecured debenture
8
62,613 -
Other long-term liabilities
9,11
1,938 1,933
Non-current liabilities
$ 441,460
$ 461,997
Total Liabilities
$ 471,848
$ 486,350
Equity
Unitholders' capital
6
$ 757,220
$ 754,622
Translation reserve
51,391 15,052
Retained earnings
89,644 19,185
Total Equity
$ 898,255
$ 788,859
Total Liabilities and Equity
$ 1,370,103
$ 1,275,209
Commitments and contingencies
12
Related parties
13
Subsequent events
14
On behalf of the Board:
Director (signed) "John F. Ripley"
Director (signed) "Sophia Langlois"
ANNUAL REPORT 2022
57
Alaris Equity Partners Income Trust
Consolidated statements of comprehensive income
Year ended
December 31
$ thousands except per unit amounts
Note
2022
2021
Revenues, including realized foreign exchange gain
5
$ 190,046
$ 147,664
Net realized gain from investments
5
37,941
9,921
Net unrealized gain / (loss) on investments at fair value
5
(29,906)
53,275
Bad debt recovery
5
-
4,030
Total revenue and other operating income
$ 198,081
$ 214,890
General and administrative
22,032
13,273
Transaction diligence costs
4,640
4,246
Unit-based compensation
9
2,762
5,362
Depreciation and amortization
216
211
Total operating expenses
29,650
23,092
Earnings from operations
$ 168,431
$ 191,798
Finance costs
7,8
28,185
24,988
Net unrealized loss on derivative contracts
11
106
1,419
Foreign exchange gain
(14,816)
(654)
Earnings before taxes
$ 154,956
$ 166,045
Current income tax expense / (recovery)
10
3,970
(5,682)
Deferred income tax expense
10
20,310
27,483
Total income tax expense
24,280
21,801
Earnings
$ 130,676
$ 144,244
Other comprehensive income
Foreign currency translation differences
36,339
2,621
Total comprehensive income
$ 167,015
$ 146,865
Earnings per unit
Basic
$ 2.89
$ 3.28
Fully diluted
$ 2.79
$ 3.13
Weighted average units outstanding
Basic
6
45,249
43,994
Fully Diluted
6
49,728
48,432
58
Alaris Equity Partners Income Trust
Consolidated statement of changes in equity
For the year ended December 31, 2022
ANNUAL REPORT 2022
59
Alaris Equity Partners Income Trust
Consolidated statement of changes in equity
For the year ended December 31, 2021
Units
Unitholders'
Equity
Translation
Retained
Total
$ thousands, except for number of units (000's)
Notes Outstanding
Capital
Reserve
Reserve
Earnings / (Deficit)
Equity
Balance at January 1, 2021
38,996
$ 659,988
$ 17,621
$ 12,431
$ (85,026)
$ 605,014
Earnings for the year
-
- - -
144,244
144,244
Other comprehensive income
Foreign currency translation differences
-
- -
2,621 -
2,621
Total comprehensive income for the year
-
$ -
$ -
$ 2,621
$ 144,244
$ 146,865
Transactions with unitholders, recognized directly in equity
Distributions to unitholders
6
-
$ -
$ -
$ -
$ (57,654)
$ (57,654)
Units issued under RTU plan
6
244
4,347 - - -
4,347
Units issued in the period by short form prospectus
6
5,909
94,550 - - -
94,550
Unit issuance costs
6
-
(4,263) - - - (4,263)
Transfer equity reserve to retained earnings
-
- (17,621) - $ 17,621 -
Total transactions with Unitholders
6,153
$ 94,634
$ (17,621)
$ -
$ (40,033)
$ 36,980
Balance at December 31, 2021
45,149
$ 754,622
$ -
$ 15,052
$ 19,185
$ 788,859
60
Alaris Equity Partners Income Trust
Consolidated statements of cash flows
Year ended December 31
$ thousands
Notes
2022
2021
Cash flows from operating activities
Earnings for the period
130,676
144,244
Adjustments for:
Finance costs
7,8
28,185
24,988
Deferred income tax expense
20,310
27,483
Depreciation and amortization
216
211
Bad debt recovery
-
(4,030)
Net realized (gain) / loss from investments
5
(32,097)
(9,921)
Net unrealized (gain) / loss of investments at fair value
5
29,906
(53,275)
Unrealized (gain) / loss on derivative contracts
11
106
1,419
Unrealized foreign exchange (gain) / loss
(13,690)
(654)
Transaction diligence costs
4,640
4,246
Unit-based compensation
9
2,762
5,362
Cash from operations, prior to changes in working capital
171,014
140,073
Changes in working capital:
Accounts receivable and prepayments
492
(2,200)
Income tax receivable / payable
9,056
(15,997)
Other long-term assets
10, 11
(7,448)
-
Accounts payable, accrued liabilities
1,466
2,805
Cash generated from operating activities
174,580
124,681
Cash interest paid
7, 8
(22,164)
(20,523)
Net cash from operating activities
152,416
104,158
Cash flows from investing activities
Acquisition of investments
5
(155,884)
(357,750)
Transaction diligence costs
(4,640)
(4,246)
Proceeds from partner redemptions
5
161,838
119,600
Promissory notes and other assets issued
5
(2,738)
(1,030)
Promissory notes and other assets repaid
5
16,274
14,435
Net cash from / (used in) investing activities
14,850
(228,991)
Cash flows from financing activities
Repayment of loans and borrowings
7
(267,692)
(219,624)
Proceeds from loans and borrowings
7
142,528
318,130
Debt amendment and extension fees
(2,317)
(552)
Issuance of unitholders' capital, net of unit issue costs
6
-
90,287
Proceeds from senior unsecured debenture, net of fees
8
62,192
-
Distributions paid
6
(59,721)
(54,844)
Office lease payments
(148)
(159)
Deposits with CRA
10
-
(4,773)
Net cash from / (used in) financing activities
(125,158)
128,465
Net increase in cash
42,108
3,632
Impact of foreign exchange on cash balances
(362)
(1,683)
Cash, Beginning of year
18,447
16,498
Cash, End of year
60,193
18,447
Cash taxes paid / (received)
(3,010)
14,267
ANNUAL REPORT 2022
61
Alaris Equity Partners Income Trust
Notes to consolidated financial statements
1. Reporting entity:
Alaris Equity Partners Income Trust is a company domiciled in Calgary, Alberta, Canada. The consolidated financial statements
as at and for the year ended December 31, 2022 are composed of Alaris Equity Partners Income Trust and its subsidiaries
(together referred to as “Alaris” or the “Trust”). The Trust’s Canadian investments are made through a wholly-owned Canadian
corporation, Alaris Equity Partners Inc. (“AEP”, formerly known as Alaris Royalty Corp.) and its American investments are made
through two Delaware corporations, Alaris Equity Partners USA Inc. (“Alaris USA”) and Salaris USA Royalty Inc. (“Salaris USA”).
The Trust’s operations consist of investments in private operating entities, typically in the form of preferred or common limited
partnership interests, preferred or common interest in limited liability corporations in the United States, and loans receivable. In
the year ended December 31, 2022 the Trust’s wholly-owned subsidiary in the Netherlands, Alaris Cooperatief U.A. (“Alaris
Cooperatief”) was liquidated.
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 Trustees on March 9, 2023.
(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 5).
•
Derivative financial instruments are measured at fair value (see Note 11).
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars which is the Trust and AEP’s functional currency.
Alaris USA Inc., Salaris USA, and Alaris Cooperatief have the United States dollar as its functional currency.
(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.
ANNUAL REPORT 2022
62
2. Statement of compliance (continued):
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:
Significant judgments
A significant judgment relates to the consideration of control, joint control and significant influence in each of our investments.
Through subsidiaries, the Trust has agreements with various private businesses in whom it invests capital into (collectively the
“Partners”) and these agreements include not only clauses as to distributions but also various protective rights. The Trust has
assessed these rights under IFRS 10 and 11 and determined that consolidation is not appropriate as control does not exist.
The Trust has also assessed the rights under IAS 28 and determined that significant influence does not exist. In a number of
our investments we have protective rights, which provides the Trust 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 Trust’s rights to
control or significantly influence the investment.
Key estimates used in determining investments at fair value
Investments at fair value are measured using a discounted cash flow model or capitalized cash flow. Significant assumptions
used in the valuation of the preferred unit investments include the discount rate, terminal value growth rate and changes in
future distributions. Significant assumptions used in the valuation of the common equity investments include the discount rate,
terminal value growth rate, cash flow multiple and estimated future cash flows.
Income taxes
Provisions for income taxes are made using the best estimate of the amount expected to be paid based on a qualitative
assessment of all relevant factors. Management reviews the adequacy of these provisions at the end of the reporting period.
However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the
final outcome of these tax related matters is different from the amounts that were initially recorded, such differences will affect
the tax provisions in the period in which such determination is made.
3. Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements, unless otherwise indicated.
(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Trust. The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that control ceases.
(ii) Transactions eliminated on consolidation
Intra-company balances and transactions, and any unrealized income and expenses arising from intra-company transactions,
are eliminated in preparing the consolidated financial statements.
(b) Revenue recognition
The Trust recognizes revenue on its financial instruments in accordance with IFRS 9. Revenue is recognized when and only
when, the Trust becomes party to the monthly distributions, interest and discretionary common distributions related to the
instruments and collection is reasonably assured.
ANNUAL REPORT 2022
63
3. Significant accounting policies (continued):
(c) Financial instruments
Recognition and Initial Measurement
Financial instruments are recognized when the Trust becomes party to the contractual provisions of the instrument. Financial
assets and liabilities are not offset unless the Trust 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 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 Alaris’ investing activity and therefore presented as cash flow from investing in the consolidated statement of
cash flows.
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 Trust 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 Trust 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.
ANNUAL REPORT 2022
64
3. Significant accounting policies (continued):
Business Model Assessment
The Trust 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.
In assessing whether the contractual cash flows are solely payments of principal and interest, the Trust 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.
Derecognition and modifications
A financial asset is derecognized when the rights to receive cash flows from the asset have expired or have been transferred
and the Trust has transferred substantially all the risks and rewards of ownership. The Trust assesses the modification of terms
of a financial asset to evaluate whether its contractual rights to the cash flows from that asset have expired in accordance with
the Trust’s derecognition policy.
When the modifications do not result in derecognition of the financial asset, the gross carrying amount of the financial asset is
recalculated with any difference between the previous carrying amount and the new carrying amount recognized in profit or
loss. The new gross carrying amount is recalculated as the present value of the modified contractual cash flows discounted at
the asset’s original effective interest rate.
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 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.
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.
ANNUAL REPORT 2022
65
3. Significant accounting policies (continued):
The Trust’s financial instruments are classified as follows:
Compound Financial Instruments:
The Trust has convertible unsecured subordinated debentures that are convertible at the holder’s option. The entire instrument
is considered a financial liability, as there is a contractual obligation for the Trust to deliver Trust units.
As permitted under IFRS 9, Financial Instruments, the Trust has elected to separate the conversion feature from the debt
instrument, and account for the conversion feature at fair value through profit or loss (“FVTPL”). The liability portion of the
conversion feature is included in Other long-term liabilities. Changes in fair value of the conversion feature are recorded as
finance costs.
(d) Unitholders’ capital
The Trust is an open-ended mutual fund trust and, as a result, the Trust units are redeemable at the holders’ option. This
puttable feature would generally result in recognizing the Trust units as a financial liability. However, under International
Accounting Standard 32, “Financial Instruments: Presentation” (IAS 32), the Trust units meet the narrow scope exception to be
presented as equity, including meeting the condition as the most residual class of units.
As a result of the redemption feature and the fact the units meet the definition of a financial liability, they may not be considered
equity in accordance with IAS 33 Earnings Per Share. However, the Trust has elected to continue to present earnings per unit.
All references to “unit” or “unitholder” throughout these financial statements refer to trust units or trust unitholders.
(e) Equipment
(i) Recognition and measurement
Equipment is measured at cost less accumulated depreciation.
(ii) Depreciation
Depreciation is based on the cost of an asset less its residual value. Depreciation is recognized in profit or loss on a straight-
line basis over the estimated useful life of the asset. Depreciation methods, useful lives and residual values are reviewed at
each annual reporting date and adjusted if appropriate.
Financial Instrument
Measurement Method
Cash
Amortized cost
Accounts receivables
Amortized cost
Promissory notes and other assets
Amortized cost
Investments
FVTPL or amortized cost
Accounts payable and accrued liabilities
Amortized cost
Loans and borrowings
Amortized cost
Convertible and senior debentures
Amortized cost
Derivative contracts
FVTPL
Other long-term liabilities
FVTPL or amortized cost
ANNUAL REPORT 2022
66
3. Significant accounting policies (continued):
(f) Impairment of financial assets
The Trust recognizes loss allowances for expected credit losses (“ECLs”) on its financial assets measured at amortized cost.
The ECL model requires the recognition of credit losses based on 12 months of expected losses for performing financial assets
(Stage 1) and the recognition of lifetime expected losses on performing financial assets that have experienced a significant
increase in credit risk since origination (Stage 2) and credit impaired financial assets (Stage 3). 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 Trust 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 Trust expects to receive). ECLs are discounted at the
effective interest rate of the financial asset.
(g) Unit based compensation
The Trust has two unit-based compensation plans, a unit option plan and a restricted trust unit plan. The fair value of the unit-
based compensation is recognized as compensation expense over the vesting period. The grants under the unit-based
compensation plans are considered to be grants of financial liabilities because there is a contractual obligation for the Trust to
deliver Trust units (which are accounted for as liabilities but presented as equity instruments under IAS 32 upon conversion of
the unit options and restricted units).
Holders of units granted under the restricted unit plans receive distributions when the Trust declares distributions on its Trust
units, once the granted units have vested. The distributions are recognized as compensation expense once the units have
vested and the distributions are paid.
Changes in fair value are recorded as an increase or (decrease) to unit-based compensation expense each period. The current
portion of the liability is recorded in accounts payable and accrued liabilities, while the long-term portion is included in other
long-term liabilities.
(h) Finance costs
Finance costs are composed of interest expense on borrowings, interest expense on convertible and senior unsecured
debentures, accretion expense on convertible and senior unsecured debentures, 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.
(i) Income tax
Income tax expense include 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.
ANNUAL REPORT 2022
67
3. Significant accounting policies (continued):
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.
(j) Earnings per unit
The Trust presents basic and diluted earnings per unit data for its trust units. Basic earnings per unit is calculated by dividing
the profit or loss attributable to common unitholders of the Trust by the weighted average number of units outstanding during
the period. Diluted earnings per unit is determined by adjusting the profit or loss attributable to common unitholders and the
weighted average number of units outstanding, adjusted for the effects of all dilutive potential units, which are comprised of the
convertible debentures and restricted trust units and options granted to employees.
(k) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of the Trust’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.
ANNUAL REPORT 2022
68
3. Significant accounting policies (continued):
(l) Foreign operations
The assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates at the reporting date. The
income and expenses of foreign operations are translated to Canadian dollars at exchange rates at the dates of the transactions.
Foreign currency differences are recognized in other comprehensive income, and presented in the foreign currency translation
reserve (translation reserve) in equity. When a foreign operation is disposed of such that control, significant influence or joint
control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss
as a part of the gain or loss on disposal.
When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the
foreseeable future, foreign currency gains and losses arising from such items are considered to form part of a net investment
in the foreign operation and are recognized in other comprehensive income, and presented in the translation reserve in equity.
Additionally, the Trust has US dollar loans with its US subsidiaries that do not form part of a net investment in the foreign
operations, at balance sheet date, foreign exchange revaluation is recognized in earnings and presented as foreign exchange
gain or loss.
(m) Office lease
The Trust recognizes a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially
measured at cost and subsequently measured at cost less any accumulated depreciation and impairment losses.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date,
discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Trust’s incremental
borrowing rate. The Trust uses its incremental borrowing rate as the discount rate.
The lease liability is subsequently measured at amortized cost.
4. Financial risk management overview
The Trust has exposure to the following risks from its use of financial instruments:
•
credit risk and other price risk
•
liquidity risk
•
market risk
•
foreign exchange risk
•
interest rate risk
This note presents information about the Trust’s exposure to each of the above risks, the Trust’s objectives, policies and
processes for measuring and managing risk, and the Trust’s management of capital. Further quantitative disclosures are
included throughout these consolidated financial statements.
Risk management framework
The Board of Trustees has overall responsibility for the establishment and oversight of the Trust’s risk management framework.
The Board has established the Risk Management Committee, which is responsible for developing and monitoring the Trust’s
risk management policies. The committee reports regularly to the Board of Trustees on its activities.
ANNUAL REPORT 2022
69
4. Financial Risk Management Overview (continued):
The Trust’s risk management policies are established to identify and analyze the risks faced by the Trust, 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 Trust’s activities. The Trust aims to develop a disciplined and
constructive control environment in which all employees understand their roles and obligations.
The Trust’s Risk Management Committee oversees how management monitors compliance with the Trust’s risk management
policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the
Trust. The Risk Management 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 Trust if a partner or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Trust’s investments, accounts receivable and promissory notes receivable.
Concentrations of credit risk exist when a significant proportion of the Trust’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 Trust’s exposure to credit risk is influenced mainly by the individual characteristics of
each Partner.
The Trust 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 distributions from investments could be
reduced, resulting in losses on investment values. Based on the terms of the investment agreement, payment is typically
receivable monthly or quarterly, with receipt of payment due no later than the last day of the month payment becomes due.
Cash consist of cash bank balances. The Trust 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 Trust held cash of $60.2 million at December 31, 2022
(December 31, 2021 - $18.5 million), which represents its maximum credit exposure on these assets.
The carrying amount of investments, accounts receivables, promissory notes, and cash represents the maximum credit
exposure.
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 14% of the Trust’s revenue in the years ended December 31, 2022 and 2021.
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 metric. Accordingly, to the extent that the financial performance of the investment declines in respect of the relevant
performance metric, cash payments to the Trust 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.
Liquidity risk
Liquidity risk is the risk that the Trust will encounter difficulty in meeting the obligations associated with its financial liabilities
that are settled by delivering cash or another financial asset.
ANNUAL REPORT 2022
70
4. Financial Risk Management Overview (continued):
The Trust’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
Trust’s reputation.
Typically the Trust 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 Trust maintains a $450 million, revolving credit facility maturing in 2026, and has
$219.1 million balance drawn at December 31, 2022 ($328.2 million at December 31, 2021).
As at December 31, 2022 the Trust has the following financial liabilities that mature as follows:
Derivative contracts in the above table are the sum of current and long-term liability obligations. Other long-term liabilities are
adjusted for long-term derivative contracts included in Derivative contracts. Convertible and senior unsecured debentures and
Loans and borrowings are presented gross, to present the expected financial obligation owed.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Trust’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 Trust’s Risk Management Committee.
Foreign currency exchange rate risk
As a result of the investments denominated in USD, the Trust has exposure to foreign currency exchange rate risk. The Trust
purchases forward exchange rate contracts to match expected distributions and expenditures in Canadian dollars on a rolling
12 month basis and also for a portion of the expected distributions and expenditures in Canadian dollars on a rolling 12 to 24
month basis (total current notional value of US$58.1 million for next 24 months).
Additionally, the Trust has US dollar subsidiaries and loans in US dollars (external senior debt and intercompany) that are
translated at each balance sheet date with an unrealized foreign exchange gain or loss recorded in earnings.
As at December 31, 2022, if the US foreign exchange rate had been $0.01 lower with all other variables held constant, earnings
for the year would have been approximately $2.2 million lower due to lower net income from US subsidiaries and a reduction
to unrealized gain on loans to subsidiaries, partially offset by a reduction to the unrealized loss on USD denominated external
senior debt, a reduction to the unrealized loss on forward exchange rate contracts and a reduction to finance costs related to
the interest expense on the USD denominated external senior debt.
31-Dec-22
Total
0-6 Months
6 mo – 1 yr
1 – 2 years
Year 3 and
Thereafter
Accounts payable and accrued liabilities
$ 11,517
$ 11,110
$ 407
$-
$-
Distributions payable
15,395 15,395
- - -
Derivative contracts
3,509 1,712 1,106 691
-
Office Lease Payments
497 91 101 203 102
Other long-term liabilities
1,247
- - 831 416
Convertible debenture
100,000
- - 100,000
-
Senior unsecured debenture
65,000
- - - 65,000
Loans and borrowings
219,107
- - - 219,107
Total
$ 416,272
$ 28,308
$ 1,614
$ 101,725
$ 284,625
ANNUAL REPORT 2022
71
4. Financial Risk Management Overview (continued):
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Trust is
exposed to interest rate fluctuations on its bank debt that bears a floating rate of interest. As at December 31, 2022, if interest
rates had been 1% higher with all other variables held constant, earnings for the year would have been approximately $2.7
million lower, due to higher finance costs. An equal and opposite impact would have occurred to earnings had interest rates
been 1% lower. The Trust holds three interest rate swap contracts. There is an interest rate swap that allows for a fixed interest
rate of 0.35% instead of SOFR (“Secured Overnight Financing Rate”) on US$25.0 million of debt, and an interest rate swap
that allows for a fixed interest rate of 0.74% instead of SOFR on US$50.0 million of debt, both with an expiry in June 2023. The
Trust also has an interest rate swap that allows for a fixed interest rate of 2.99% instead of SOFR on US$50.0 million of debt
that begins in July 2023 and expires July 2026.
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 unitholders’ capital, a $450.0 million revolving credit facility, a $50.0
million accordion facility, $100.0 million of convertible debentures and retained earnings and in February 2022 the Trust issued
an additional $65.0 million of senior unsecured debentures. The Board of Trustees monitors the return on capital as well as the
level of distributions to common unitholders.
The Trust manages capital by monitoring certain debt covenants set out in its credit facility. In September 2022, the Trust
completed an amendment to its credit facility with its senior lenders. The amendment increased the base of the credit facility
from $400 million to $450 million and included an addition of an eighth bank to the syndicate. The amendment also extended
the facility maturity from November 2023 to September 2026. The Trust has a maximum senior debt to contracted EBITDA
covenant 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, bad debt expense, realized and unrealized foreign exchange gains or
losses and unit-based compensation expenses, the Trust 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 Trust has a fixed charge coverage ratio covenant of 1:1.
Additionally, the amendment increased the minimum tangible net worth requirement of $450.0 million to $550.0 million. Tangible
net worth is defined as unitholders equity less intangible assets. The Trust was in compliance with all debt covenants at
December 31, 2022 (please refer to Note 7 for actual ratios as of December 31, 2022). In order to acquire more distributions,
the Trust can access its credit facility for investing activity. Any funding requirements for acquisitions in excess of availability
under the credit facility will require the Trust to access capital markets and manage the business within the bank covenants.
There were no significant changes in the Trust’s approach to capital management.
ANNUAL REPORT 2022
72
5. Investments
The following table lists the Trust’s investments at December 31, 2022 and 2021. For each period 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 listed below are each denominated in their local currencies, other than LMS which includes a portion of its total
that is in USD but translated into Canadian dollars using the period end exchange rates. The total United States investments in
USD is also translated below into Canadian dollars using the period end exchange rates.
Investments at Fair Value & Amortized Cost
$ thousands
As at
31-Dec-22
31-Dec-21
31-Dec-22
Body Contour Centers, LLC ("BCC")
US $ 165,303
US $ 90,604
US $ 156,000
PF Growth Partners, LLC (“PFGP”) Note 1
99,329 99,700
94,629
Accscient, LLC ("Accscient")
77,277 49,477
72,000
D&M Leasing ("D&M")
71,800 77,900
74,500
DNT Construction, LLC (“DNT”)
63,943 62,743
62,800
Brown & Settle Investments, LLC ("Brown & Settle")
63,894 64,694
66,394
GWM Loan Receivable at amortized cost
62,678 62,678
62,946
GWM Holdings, Inc ("GWM")
16,699 43,698
43,054
3E, LLC ("3E")
40,000 40,000
39,500
Fleet Advantage, LLC ("Fleet")
45,000 35,000
28,000
Edgewater Technical Associates, LLC ("Edgewater")
34,600 31,400
34,000
Unify Consulting, LLC ("Unify")
12,628 28,300
11,000
Sagamore Plumbing and Heating, LLC (“Sagamore”)
24,000
- 24,000
Heritage Restoration, LLC (“Heritage”)
20,000 15,200
18,500
Carey Electric Contracting LLC ("Carey Electric")
14,680 16,180
15,000
Stride Consulting LLC ("Stride")
4,000 5,500
4,500
Kimco Holdings, LLC (“Kimco”)
- 35,753
-
Falcon Master Holdings LLC ("FNC")
- 47,450
-
Total Investments (based in United States) - USD
815,831 806,277
806,823
Total Preferred and Debt (based in United States) - USD
724,864 708,309
711,536
Total Common (based in United States) - USD
90,967 97,968
95,287
Total Investments (based in United States) - CAD
$ 1,105,124
$ 1,030,502
$ 1,092,922
Amur Financial Group ("Amur")
72,200 73,200
70,000
Lower Mainland Steel Limited Partnership (“LMS”)
42,232 47,722
60,564
SCR Mining and Tunneling, LP (“SCR”)
28,603 33,903
40,000
Total Investments (based in Canada)
$ 143,035
$ 154,825
$ 170,564
Total Preferred and Debt (based in Canada)
123,235 133,425
150,564
Total Common (based in Canada)
19,800 21,400
20,000
Total Investments Pref/Debt
1,105,135
1,038,714
1,114,411
Total Investments Common
143,024
146,613
149,075
Total Investments
$ 1,248,159
$ 1,185,327
$ 1,263,486
Note 1 - Ohana Growth Partners, LLC, formerly know as PF Growth Partners, LLC ("PFGP")
Acquisition
Cost
Carrying Value
ANNUAL REPORT 2022
73
5. Investments (continued):
Transactions closed in 2022
Partner
Date
Investment / Redemption
Investment Type
Contribution /
(Proceeds)
Annualized
Distributions
Carey Electric
05-Jan-22
Redemption - Partial
Preferred
US ($ 1,000)
US ($ 150)
BCC
11-Mar-22
Investment - Follow-on
Preferred
US $ 65,000
US $ 8,450
Kimco (Note 1)
01-Apr-22
Redemption - Full
Preferred
US ($ 43,656)
US ($ 4,692)
Heritage
10-May-22
Investment - Follow-on
Preferred & Common
US $ 3,500
US $ 375
Stride
29-Jun-22
Redemption - Partial
Preferred
US ($ 1,500)
US ($ 190)
Accscient
08-Aug-22
Investment - Follow-on
Preferred & Common
US $ 26,000
US $ 2,133
FNC (Note 2)
01-Oct-22
Redemption - Full
Preferred & Common
US ($ 51,811)
US ($ 4,816)
Sagamore
08-Nov-22
Investment - New Partner
Preferred & Common
US $ 24,000
US $ 3,000
PFGP
30-Dec-22
Investment - Follow-on
Preferred & Common
US $ 2,129
US $ 227
Unify
30-Dec-22
Redemption - Partial
Preferred
US ($ 16,554)
US ($ 2,006)
Fleet
30-Dec-22
Redemption - Partial
Preferred
US ($ 7,350)
US ($ 980)
Note 1 - On April 1, 2022, Kimco entered into a purchase and sale agreement with a third party pursuant to which Kimco redeemed all of
Alaris’ outstanding US$34.2 million of preferred units as well as repaid US$9.8 million of outstanding promissory notes. The gross proceeds to
Alaris of US$68.2 million consisted of (i) US$43.6 million for the redemption of all of Alaris’ preferred equity, (ii) the payment of US$13.7 million
of previously deferred distributions owed to Alaris and (iii) the repayment of US$9.8 million of promissory notes. Alaris agreed to fund US$1.1
million of the total proceeds into an escrow account to cover potential indemnification obligations. The amounts in escrow will be recognized
once released and received by Alaris.
Note 2 - On October 1, 2022, FNC entered into a purchase and sale agreement with a third party pursuant to which FNC redeemed all of
Alaris' outstanding preferred and common units totaling US$40.0 million. The gross process to Alaris of US$58.4 million consisted of (i)
US$51.8 million for the redemption of all Alaris' preferred and common equity and (ii) US$5.2 million of distributions owing up to the third
anniversary date of the initial investment being January 7, 2021. Alaris Agreed to fund US$1.4 million of the total proceeds into an escrow
account to cover potential indemnification obligations. The amounts in escrow will be recognized once released and received by Alaris.
ANNUAL REPORT 2022
74
5. Investments (continued):
Transactions closed in 2021
Assumptions used in fair value calculations:
Alaris recognizes that the determination of the fair value of its investments becomes more judgmental the longer the investments
are held. The price Alaris pays for its investments is fair value at the time of acquisition. Typically, the risk profile and future
cash flows expected from the individual investments change over time. Alaris’ valuation model incorporates these factors each
reporting period. Alaris typically estimates the fair value of the investments by calculating the discounted cash flow of the future
distributions for preferred equity and debt instruments carried at fair value. Alaris estimates the fair value of its common equity
investments using discounted cash flows or capitalized cash flows of the underlying business. Key assumptions used in the
valuation of the preferred unit investments include the discount rate, terminal value growth rate and estimates relating to
changes in future distributions. Key assumptions used in the valuation of the common equity investments include the discount
rate, terminal value growth rate, cash flow multiple and estimated future cash flows. Alaris also considers the maximum
repurchase price outlined in the respective partnership agreement in all fair value adjustments of investments.
Partner
Date
Investment / Redemption
Investment Type
Contribution /
(Proceeds)
Annualized
Distributions
FNC
07-Jan-21
Investment - New Partner
Preferred & Common
US $ 40,000
US $ 4,501
Brown & Settle
09-Feb-21
Investment - New Partner
Preferred & Common
US $ 66,000
US $ 7,518
Accscient
18-Feb-21
Investment - Follow-on
Preferred
US $ 8,000
US $ 1,144
3E (Note 1)
22-Feb-21
Investment - New Partner
Preferred
US $ 30,000
US $ 4,200
Carey Electric
14-May-21
Redemption - Partial
Preferred
US ($ 1,000)
US ($ 150)
D&M
28-Jun-21
Investment - New Partner
Preferred & Common
US $ 70,000
US $ 8,750
ccComm (Note 2)
02-Jul-21
Redemption - Full
Preferred
US ($ 11,000)
$nil
Federal Resources
26-Oct-21
Redemption - Full
Preferred & Debt
US ($ 80,900)
US ($ 11,147)
3E
16-Nov-21
Investment - Follow-on
Preferred
US $ 9,500
US $ 1,235
D&M
03-Dec-21
Investment - Follow-on
Preferred
US $ 4,500
US $ 630
BCC
23-Dec-21
Investment - Follow-on
Preferred
US $ 25,000
US $ 3,250
GWM (Note 3)
29-Dec-21
Net Investment - Follow on
Pref/Debt & Common
US $ 4,200
US ($ 3,000)
Fleet
30-Dec-21
Investment - Follow-on
Preferred & Common
US $ 25,000
US $ 2,380
Note 1 - The investment in 3E on February 22, 2021 was an initial contribution of US$30.0 million; however, initially there was US$22.5
million of preferred equity and US$7.5 million placed into escrow to be funded into additional preferred units in two additional tranches once
additional performance thresholds were met. These thresholds were met during the remainder of 2021 and therefore the total preferred equity
investment is US$30.0 million, with an initial annualized distribution of US$4.2 million.
Note 2 - On July 2, 2021 Alaris received US$11.0 million from ccComm as a negotiated redemption of the ccComm preferred units, as well
as potential additional proceeds as cash flows permit. During Q4 2021, Alaris received an Additional $1.0 Million from ccComm related to the
negotiated redemption of the ccComm preferred units. The original cost of the units was US$19.2 million, resulting in a realized loss on
redemption of US$8.2 million for the nine months period end September 30th. For the three and nine months ended September 2021, Alaris
received $nil distributions related to the investment of ccComm preferred units.
Note 3 - On December 29, 2021 Alaris received US$25.8 million for a partial redemption of preferred units and a partial repayment of
outstanding subordinated indebtedness in GWM as well as contributed an additional US$30 million in exchange for minority non-voting
ownership of common equity. The US$25.8 million of proceeds received from the partial redemption had an associated costs basis of
US$25.0 million. As a result of this redemption annualized distributions were decreased by US$3.0 million. The investment in GWM
common equity is entitled to discretionary common distributions of which are recognized when declared and distribution is received or
collection is reasonably assured.
ANNUAL REPORT 2022
75
5. Investments (continued):
For each individual Partner, Alaris considered a number of different discount rate and cash flow multiple factors including what
industry they operate in, the size of the entity, the health of the balance sheet and the ability of the historical earnings to cover
the future distributions. This was supported by the historical yield of the original investment, current investing yields, and the
current yield of other similar public companies. Cash flows have been discounted at rates ranging from 12.8% - 23.8%
These assumptions will be refined each reporting period as new information is obtained and may continue to require future
adjustment to the fair value of the investments. All assumptions made at December 31, 2022 are based on the information
available to the Trust as of the date of these financial statements. Refer to Note 11 for additional information, including sensitivity
analyses to these inputs.
ANNUAL REPORT 2022
76
5. Investments (continued):
Below is a summary of changes in each investment during the years ended December 31, 2022 and 2021:
Investments
($ thousands)
Opening
Carrying
Value
Additions
Redemptions
Foreign
Exchange
Adjustment
Fair Value
Adjustment
Ending
Carrying
Value
2022
BCC
US $ 90,604 US $ 65,000
- - US $ 9,699
US $ 165,303
PFGP
99,700 2,129
- - (2,500) 99,329
Accscient
49,477 26,000
- - 1,800 77,277
D&M
77,900
- - - (6,100) 71,800
DNT
62,743
- - - 1,200 63,943
Brown & Settle
64,694
- - - (800) 63,894
GWM loan receivable
62,678
- - - - 62,678
GWM
43,698
- - - (27,000) 16,699
3E
40,000
- - - - 40,000
Fleet
35,000
- (7,350)
- 17,350 45,000
Edgewater
31,400
- - - 3,200 34,600
Sagamore
- 24,000
- - - 24,000
Heritage
15,200 3,500
- - 1,300 20,000
Unify
28,300
- (16,554)
- 882 12,628
Carey Electric
16,180
- (1,000)
- (500) 14,680
Stride
5,500
- (1,500)
- - 4,000
Kimco
35,753
- (43,671)
- 7,918
-
FNC
47,450
- (51,812)
- 4,362
-
Total (based in US) - in USD
806,277 120,629 (121,887)
- 10,811 815,831
Total Pref/Debt (based in US) - USD
708,309 105,230 (113,478)
- 24,803 724,864
Total Common (based in US) - USD
97,968 15,399 (8,409)
- (13,992) 90,967
Total (based in US) - CAD
$ 1,030,502
$ 155,884
$ (161,838)
$ 66,356
$ 14,220
$ 1,105,124
Amur
73,200
- - - (1,000) 72,200
LMS
47,722
- - 355 (5,845) 42,232
SCR
33,903
- - - (5,300) 28,603
Total (based in Canada)
$ 154,825
$ -
$ -
$ 355
$ (12,145)
$ 143,035
Total Pref/Debt (based in Canada)
133,425
- - 355 (10,545) 123,235
Total Common (based in Canada)
21,400
- - - (1,600) 19,800
Investments -
December 31, 2022
$ 1,185,327
$ 155,884
$ (161,838)
$ 66,711
$ 2,075
$ 1,248,159
ANNUAL REPORT 2022
77
5. Investments (continued):
Distributions:
The total revenues, net of realized foreign exchange, includes the total distributions received and accrued from Partners, interest
income received and accrued from Partners on outstanding promissory notes and the realized gain or loss on derivative contracts
entered into in order to translate USD revenues to CAD. The Trust recorded distribution revenue, interest and realized gain/losses
on foreign exchange contracts as follows:
ANNUAL REPORT 2022
78
5. Investments (continued):
During the year ended December 31, 2022, Fleet declared a common dividend to distribute excess cash to common unit holders.
Prior to the dividend being declared, and due to the value of this excess cash, the fair value of Fleet common equity was increased
by US$4.4 million, resulting in an unrealized gain of US$4.4 million within the year. The receipt of this distribution resulted in a
realization of this previously unrealized gain. As a result, the net impact to realized and unrealized fair value investments is a net
realized gain of US$4.4 million, rather than a common equity distribution included above.
Promissory notes and other assets:
As part of being a long-term partner with the entities Alaris holds preferred interests in, from time to time Alaris has offered alternative
financing solutions to assist with short-term needs of the individual businesses. Should there be an adverse event to any of the
below businesses, the timing and amounts collected could be negatively impacted.
In the current year, the Trust was repaid in full for all outstanding promissory notes. Below is a summary of changes in promissory
notes and other assets for the years ended December 31, 2022 and 2021.
Total Revenues:
$ thousands
2022
2021
Preferred Equity and Debt Investment Distributions
$ 182,791
$ 140,166
Common Equity investments Distributions
8,092 3,294
Total Distributions
$ 190,883
$ 143,460
Interest
481 1,841
Realized gain / (loss) on derivative contracts
(1,318)
2,363
Revenues, including realized foreign exchange gain
$ 190,046
$ 147,664
Year ended
December 31
Reconciliation of Promissory notes and other assets
($ thousands)
31-Dec-22
31-Dec-21
Face Value - Opening
$ 13,555
$ 27,327
Opening provision for credit losses
- (4,094)
Carrying value as at beginning of period
$ 13,555
$ 23,233
Additions
2,738 1,030
Repayments
(16,274) (14,435)
Bad debt recovery / (expense)
- 4,030
Foreign exchange
(19) (303)
Carrying value as at end of period
$ -
$ 13,555
Promissory notes and other assets
Note
Carrying Value
($ thousands)
31-Dec-22
31-Dec-21
Kimco - promissory notes
$ -
$ 12,525
D&M
- 1,030
Heritage
(1)
- -
Balance
$
$ 13,555
(1) - Unsecured subordinated promissory note with notional amount of US$2.0 million issued in July 2022, bearing
interest at 8% per annum and repaid in full in December, 2022
ANNUAL REPORT 2022
79
5. Investments (continued):
The expected credit loss model classifies Alaris’ outstanding promissory notes and other assets in three stages based on their
credit quality. Stage 1 represents the lowest credit risk and stage 3 represents loans that are credit impaired. As at December
31, 2022 the Trust had $nil (December 31, 2021 - $13.6 million) of promissory notes and other assets classified as stage 1 and
$nil classified as stage 3 (December 31, 2020 - $nil). There was a transfer of $2.3 million from Stage 3 to Stage 1, as well as a
bad debt recovery of $4.0 million, during the year ended December 31, 2021. The transfer between stages and the bad debt
recovery was due to the reduced risk of credit losses on the Kimco accounts receivable and the Kimco promissory notes. The
Kimco promissory notes were recorded at their original face value as at December 31, 2021 due to this transfer between stages
and the associated lower credit risk. The cumulative total credit loss provision as at December 31, 2022 is $nil (December 31,
2021 - $nil).
6. Unitholders’ capital:
The Trust has authorized, issued and outstanding, 45,280,685 voting units as at December 31, 2022 (December 31, 2021 –
45,149,386).
Outlined below are the weighted average units outstanding for the year ended December 31, 2022 and 2021:
At December 31, 2022, there were no options outstanding, all outstanding options expired within the current year. At December
31, 2021, there were 984,019 options excluded from the calculation as they were anti-dilutive.
Distributions
For the three months ended December 31, 2022, the Trust declared a quarterly distribution of $0.34 per unit, paid on January
16, 2023. The total distributions declared during the year ended December 31, 2022 were $1.33 per unit and $60.2 million in
aggregate (2021 - $1.28 per unit and $57.7 million in aggregate).
Unit offering
In March 2021, Alaris completed a bought deal short-form prospectus offering, with the total trust units being issued of 5,909,375
at a price of $16.00 per unit, for aggregate gross proceeds of $94.6 million. After deduction of the underwriters’ fees and
expenses of the offering, net proceeds to Alaris were $90.3 million.
Issued Trust Units
Number of Units
Amount ($)
thousands
$ thousands
Balance at January 1, 2021
38,996
$ 659,988
Trust units issued by short form prospectus
5,909 94,550
Short form prospectus costs
- (4,263)
RTUs vested
244 4,347
Balance at December 31, 2021
45,149
$ 754,622
RTUs vested
132 2,598
Balance at December 31, 2022
45,281
$ 757,220
Weighted Average Units Outstanding
Year ended
December 31
thousands
2022
2021
Weighted average units outstanding, basic
45,249
43,994
Effect of outstanding convertible debentures
4,124 4,124
Effect of outstanding RTUs
355
314
Weighted average units outstanding, fully diluted
49,728
48,432
ANNUAL REPORT 2022
80
7. Loans and borrowings:
As at December 31, 2022, AEP has a $450 million credit facility with a syndicate of Canadian chartered banks, which has a
maturity date in September 2026 and is secured by a general security agreement on all of Alaris’ assets. The interest rate is
based on a combination of the CAD Prime Rate (“Prime”), Bankers’ Acceptances (“BA”), US Base Rate (“USBR”) and SOFR.
Alaris realized a blended interest rate of 5.3% (inclusive of standby fees) for the year ended December 31, 2022.
At December 31, 2022, AEP had US$161.75 million (total CA$219.1 million) drawn on its credit facility (December 31, 2021 –
US$256.8 million or CA$328.2 million). The amount recorded in the Trust’s statement of financial position of $216.1 million is
reduced by the unamortized debt amendment and extension fees of $3.0 million.
During the year ended December 31, 2022, Alaris completed an amendment to its credit facility with its senior lenders. The
amendment increased the base of the credit facility from $400 million to $450 million and included the addition of an eighth
bank to the syndicate. The amendment also extended the facility maturity from November 2023 to September 2026 and
increased the minimum tangible net worth covenant from $450 million to $550 million.
At December 31, 2022, AEP met all of its covenants as required under the credit 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 90 days (actual ratio is 1.42x at December
31, 2022); minimum fixed charge coverage ratio of 1:1 (actual ratio is 2.20x at December 31, 2022); and a minimum tangible
net worth of $550.0 million (actual amount is $898.3million at December 31, 2022).
8. Convertible and senior unsecured debentures:
The Trust has convertible unsecured subordinated debentures (“Convertible debentures”) that bear interest at 5.50% per
annum, payable semi-annually on the last business day of June and December with a maturity date of June 30, 2024.
The Convertible debentures are convertible at the holder’s option at any time prior to the close of business on the earlier of the
business day immediately preceding the maturity date of June 30, 2024 and the date specified by the Trust for redemption of
the Convertible debentures into fully paid and non-assessable units of the Trust at a conversion price of $24.25 per unit, being
a conversion rate of approximately 41.2371 units for each $1,000 principal amount of Convertible debentures.
On and after June 30, 2022 and prior to June 30, 2023, the Convertible debentures may be redeemed in whole or in part from
time to time at the option of the Trust at a price equal to their principal amount plus accrued and unpaid interest, provided that
the volume weighted average trading price of the units on the TSX for the 20 consecutive trading days ending on the fifth trading
day preceding the date on which the notice of the redemption is given is not less than 125% of the conversion price. On and
after June 30, 2023, the Convertible debentures may be redeemed in whole or in part from time to time at the option of the
Trust at a price equal to their principal amount plus accrued and unpaid interest regardless of the trading price of the units.
Convertible Debenture ($ thousands)
Total
Balance at January 1, 2021
86,029
$
Accretion
3,563
Balance at December 31, 2021
89,592
$
Accretion
3,854
Balance at December 31, 2022
93,446
$
ANNUAL REPORT 2022
81
8. Convertible and senior unsecured debentures (continued):
During the year ended December 31, 2022, the Trust issued $65.0 million aggregate principal amount of senior unsecured
debentures (“Senior debentures”) at a price of $1,000 per Senior debenture and an interest rate of 6.25% per annum, payable
semi-annually on the last business day of March and September which commenced March 31, 2022 with a maturity date of
March 31, 2027.
The Senior debentures will not be redeemable by the Trust before March 31, 2025 (the “First Call Date”). On and after the First
Call Date and prior to March 31, 2026, the Senior debentures will be redeemable, in whole or in part at the Trust’s option at a
redemption price equal to 103.125% of the principal amount of the Senior debentures redeemed plus accrued and unpaid
interest, if any. On and after March 31, 2026 and prior to the Maturity Date, the Senior debentures will be redeemable, in whole
or in part at the Trust’s option at par plus accrued and unpaid interest, if any, up to but excluding the date set for redemption.
The Trust has the option to satisfy its obligations to repay the principal amount of and premium (if any) on the Senior debentures
due at redemption or on maturity by issuing and delivering the appropriate number of freely tradeable trust units of the Trust to
Senior debenture holders.
The Trust recorded $2.8 million in issuance costs which will be amortized using the effective interest rate method over the five-
year term of the Senior debentures.
9. Unit-based payments:
The Trust has a Restricted Trust Unit Plan (“RTU Plan”), formerly Restricted Share Unit Plan, and a Unit Option Plan as
approved by shareholders at a special shareholders meeting on July 31, 2008 that authorizes the Board of Trustees to grant
awards of Restricted Trust Units (“RTUs”) and Unit Options (“Options”). During the year ended December 31, 2022, all
outstanding Options expired and the Trust no longer participates in the Unit Option Plan. The Restricted Trust Unit Plan can
grant awards to a maximum of 2.5% percent of the issued and outstanding units of the Trust.
The RTU Plan will settle in voting trust units which may be issued from treasury or purchased on the Toronto Stock Exchange.
The Trust has reserved 1,132,025 and issued 354,963 RTUs to management and Trustees as of December 31, 2022. The
RTUs issued to Trustees (97,165) vest over a three-year period. The RTUs issued to management (257,798) are a combination
of time vested units (146,664) and performance vested units (111,134). The time vested units do not vest until the end of a
three-year period (53,300 in 2023, 47,092 in 2024 and 46,272 in 2025). The performance vested units vest one third every year
(56,738 in 2023, 38,972 in 2024 and 15,424 in 2025) and are subject to certain performance conditions relating to book value
per unit. The unit-based compensation expense relating to the RTU Plan is based on the unit price of the Alaris units at
December 31, 2022 and based on the remaining time left until vesting for each tranche of units. At December 31, 2022, the
total liability related to the RTU is $3.7 million, $2.5 million of which is included in Accounts payable and accrued liabilities and
$1.2 million in Other long-term liabilities.
The Trust had reserved and issued 984,019 options at December 31, 2021. In the current year, all options outstanding expired
and as of December 31, 2022, the Trust has nil options outstanding. The options outstanding at December 31, 2021 had an
exercise price in the range of $20.60 to $22.47, a weighted average exercise price of $21.55 and a weighted average contractual
life of 0.40 years.
Senior Unsecured Debenture ($ thousands)
Total
Balance at January 1, 2022
-
Face value of issuance
65,000
Issuance costs
(2,808)
Accretion expense
421
Balance at December 31, 2022
62,613
$
ANNUAL REPORT 2022
82
9. Unit-based payments(continued):
The following table summarizes a continuity of RTUs and Options outstanding in 2022 and 2021:
10. Income taxes:
The statutory tax rate for the year ended December 31, 2022 was 48% which is the top marginal tax rate of the Trust (December
31, 2021 – 48%). The Trust Indenture requires that any income of the Trust be allocated to unitholders and so it is not anticipated
that the Trust as a stand-alone entity will be taxable. The tax provision differs from the expected income tax provision calculated
using the Trust’s statutory tax rate as follows:
During the year, the Trust’s subsidiaries paid taxes of $4.6 million and received refunds of $7.7 million. In 2021 the Trust’s
subsidiaries paid taxes of $15.4 million and received refunds of $1.1 million.
The Trust’s subsidiaries currently have US$9.5 million (2021 - US$73.3 million) of non-capital losses in the United States that
can be carried forward indefinitely and $5.7 million (2021 - $nil) of non-capital losses in Canada that expire in 2042.
RTUs and Options
RTUs
Options
Number of Units
Balance at January 1, 2021
361,518 984,019
Issued
196,115
-
Vested or exercise
(243,612)
-
Balance at December 31, 2021
314,021
984,019
Issued
187,373
-
Vested or exercise
(131,299)
-
Forfeited / expired
(15,132) (984,019)
Balance at December 31, 2022
354,963
-
Income Tax Expense
2022
2021
Earnings before income taxes
$ 154,956
$ 166,045
Combined federal and provincial statutory income tax rate
48.00%
48.00%
Expected income tax provision
$ 74,379
$ 79,702
Loss of the Trust
(32,791)
(20,118)
Canadian and Foreign corporate rate differences
(21,681)
(30,190)
Expected income tax provision after rate differences
19,907
29,394
Non-taxable portion of capital gains
3,266
481
Non-deductible interest
-
(7,199)
Non-deductible expenses, rate change and other
(1,591)
(820)
Change in unrecognized deferred tax assets
2,698
(55)
Balance at end of year
$ 24,280
$ 21,801
ANNUAL REPORT 2022
83
10. Income taxes(continued):
The income tax effect of the temporary differences that give rise to the Trust’s deferred income tax assets and liabilities are as
follows:
Beginning in 2015, the Trust began receiving notices of reassessment (the “Reassessments”) from the Canada Revenue
Agency (the “CRA”) in respect of its 2009 through 2020 taxation years to deny the use of non-capital losses, accumulated
scientific research and experimental development expenditures (“SRED”) and investment tax credits (“ITCs”). Pursuant to the
Reassessments, the deduction of approximately $121.2 million of non-capital losses and SRED expenditures and utilization of
$9.9 million in ITCs by the Trust were denied, resulting in reassessed taxes and interest of approximately $61 million (2021 -
$61 million).
Subsequent to filing the original notice of objection for the July 14, 2009 taxation year, Alaris received an additional proposal
from the CRA proposing to apply the general anti avoidance rule to deny the use of these deductions. The proposal does not
impact the Trust'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.
At the time the relevant transactions were completed, the Trust received legal advice that it should be entitled to deduct the
non-capital losses and SRED expenditures and claim ITCs. Based on ongoing discussions with its legal counsel, the Trust
remains of the opinion that all tax filings to date were filed correctly and that it will be successful in appealing such
Reassessments. The Trust intends to continue to vigorously defend its tax filing position. In order to do that, the Trust was
required to pay 50% of the reassessed amounts as a deposit to the Canada Revenue Agency and to the Alberta Treasury for
amounts reassessed for the 2013 taxation year and onwards. The Trust has paid a total of $25 million (2021 - $25 million) in
deposits to the CRA and Alberta Treasury relating to the Reassessments to date. These deposits have been recorded on the
statement of financial position and are included in Other long-term assets.
Deferred income tax liabilities:
2022
2021
Preferred partnership units
$ (68,384)
$ (63,069)
Share issue costs
372
622
Convertible debentures
(1,710)
(2,682)
Disallowed interest and net capital losses
302
-
Foreign exchange on loan payable
1,262
(247)
Distributions to be taxed in future years
(215)
(17)
Unrecognized Deferred Tax Asset
(3,631)
(932)
Non-capital losses, other
4,618
22,422
Balance at end of year
$ (67,386)
$ (43,903)
Movement in deferred tax balances during the year
Deferred Income Taxes
Balance at January 1, 2021
$ (16,112)
Recognized in profit and loss
(27,483)
Currency translation and other
(308)
Balance at December 31, 2021
(43,903)
Recognized in profit and loss
(20,310)
Currency translation and other
(3,173)
Balance at December 31, 2022
$ (67,386)
ANNUAL REPORT 2022
84
10. Income taxes (continued):
The Trust 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 Trust’s payout ratio.
The Trust firmly believes it will be successful in defending its position and therefore, any current or future deposit paid to the
CRA and Alberta Treasury would be refunded, plus interest.
Should the Trust be unsuccessful, it will be required to pay the remaining reassessed taxes and interest and will not recover
the $25.0 million in deposits paid to December 31, 2022.
Alaris has entered into insurance contracts to mitigate the risk presented by the above-noted matter, although there can be no
assurance that all the amounts for which Alaris may ultimately be liable will be fully covered. The premiums in respect of the
insurance contracts are fully paid and will be amortized on a straight-line basis over the term of the insurance contracts.
11. 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 statement of financial position as at December 31, 2022 and December 31, 2021, are
measured at fair value on a recurring basis using level 2 or level 3 inputs. Discount rates, terminal value growth rates, cash flow
multiples, changes in future distributions and estimated future cash flows 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, 2022.
The Trust purchases forward exchange rate contracts to match a portion of the quarterly distributions and expenses in Canadian
dollars on a rolling 12-month basis and also a portion of the expected costs on a rolling 12 to 24 month basis. The notional
value of outstanding foreign exchange contracts is US$58.1 million as at December 31, 2022 (US$51.9 million as at December
31, 2021). At December 31, 2022, Alaris holds three interest rate swap contracts. There is an interest rate swap that allows for
a fixed interest rate of 0.35% instead of SOFR (“Secured Overnight Financing Rate”) on US$25.0 million of debt, and an interest
rate swap that allows for a fixed interest rate of 0.74% instead of SOFR on US$50.0 million of debt, both with an expiry in June
2023. Alaris also has an interest rate swap that allows for a fixed interest rate of 2.99% instead of SOFR on US$50.0 million of
debt that begins in July 2023 and that has an expiry date in July 2026.
Fair value classification ($ thousands)
Level 1
Level 2
Level 3
Total
31-Dec-22
Net Derivative contracts
$ -
$ (34)
$ -
$ (34)
Investments
-
- 1,248,159 1,248,159
Total at December 31, 2022
$ -
($ 34)
$ 1,248,159
$ 1,248,125
31-Dec-21
Level 1
Level 2
Level 3
Total
Net Derivative contracts
$ -
$ 71
$ -
$ 71
Investments
-
- 1,185,327 1,185,327
Total at December 31, 2021
$ -
$ 71
$ 1,185,327
$ 1,185,398
ANNUAL REPORT 2022
85
11. Fair value of financial instruments (continued):
Forward exchange rate contracts and the interest rate swaps included in the above table are presented on the statement of
financial position as current or non-current based on the derivatives expected recognition or the contractual maturity. Current
amounts are presented as derivative contract assets or liabilities and non-current amounts are included in Other long-term
assets or liabilities.
The most significant assumptions in the calculation of fair value of Level 3 Investments are the discount rate, terminal value
growth rates, cash flow multiples, changes in future distributions and estimated future cash flows.
As outlined in Note 5, cash flows have been discounted at rates ranging from 12.8% to 23.8%. If the discount rate increased
(decreased) by 1%, the fair value of Level 3 investments at December 31, 2022 would decrease by $96.1 million and increase
by $112.7 million. If the terminal value growth rate increased (decreased) by 1%, the fair value of Level 3 investments would
increase by $61.2 million and decrease by $51.8 million. For the preferred unit investments, if changes in future distributions
increased (decreased) by 1% the fair value of Level 3 investments would increase by $9.0 million and decrease by $8.9 million.
For the common equity investments, if the estimated future cash flows increased (decreased) by 1%, the fair value of the
common equity investments would increase by $4.4 million and decrease by $4.4 million. For the common equity investments,
if the cash flow multiples increased (decreased) by 1%, the fair value of the common equity investments would increase by $1.3
million and decrease by $1.3 million.
12. Commitments and contingencies:
Alaris has a commitment to an additional contribution of US$1.4 million to PFGP, the timing of the additional funding is unknown
at this time as the commitment requires certain conditions to be met.
Subsequent to closing of the sale of Sandbox in February of 2020, AEP received a direct claim and protest notice (the “Notices”)
from the purchasers of Sandbox for amounts under the indemnification and working capital adjustment provisions.
In September 2020, the purchaser served AEP with a complaint (the “Complaint”), which advances claims centered upon the
assertions contained in the Notices that were previously disclosed. That is, the Complaint alleges, among other things, that
AEP and certain of its representatives breached some of the representations and warranties of the purchase and sale
agreement (“purchase agreement”) and in so doing committed fraud. The Complaint also asserts that AEP breached the
purchase and sale agreement when it took the position that certain issues related to a working capital adjustment were not
appropriate for arbitration. The Complaint alleges damages of approximately US$37.2 million. AEP and the Trust believe the
claims within the Complaint are without merit and is vigorously defending the case. The Complaint has progressed to the
discovery stage and AEP has filed a counterclaim against the purchasers of Sandbox.
Based upon its knowledge of the facts of the pre-closing of Sandbox, the sale process and other advice obtained to date, no
liability associated with this claim has been recorded in the financial statements.
13. Related parties:
In addition to salaries, the Trust also provides long-term compensation to employees of its subsidiaries in the form of options
and RTUs, as well as bonuses. Key management personnel compensation comprised the following:
Key Management Personnel ($ thousands)
2022
2021
Base salaries and benefits
$ 1,528
$ 1,600
Bonus
2,440 751
Unit-based compensation
1,125 3,232
Total for year ended December 31
$ 5,093
$ 5,583
ANNUAL REPORT 2022
86
14. Subsequent events:
Strategic Investment with Brookfield Special Investments (”Brookfield”) in BCC
On February 14th, 2023, Alaris completed a strategic transaction involving current Partner BCC and co-sponsor Brookfield,
through its Special Investment program. The transaction included Alaris exchanging US$145.0 million of its existing preferred
units in BCC for newly issued convertible preferred units and receiving cash proceeds of US$20.3 million on the redemption of
its remaining existing preferred units. The new convertible preferred units are entitled to an 8.5% Distribution payable in cash
or in-kind, and are convertible at the option of the holder, for a period of up to five years, into common equity of BCC at a
predetermined valuation. These units also participate in any common distribution paid above 8.5%. As with all our common
distributions, these amounts are paid when declared as cashflow permits. In addition, Alaris will be entitled to an annual
transaction fee of US$1.5 million payable quarterly. At the discretion of BCC, the new preferred distribution may be satisfied by
payment in-kind. If the distribution is satisfied by a payment in-kind, then (i) the conversion price shall be adjusted and (ii) a pro
rata portion of the quarterly transaction fee will be deferred until an exit event.
Alaris’ initial cost on the existing preferred units was US$156.0 million, resulting in a realized gain of US$9.3 million on
redemption and conversion of all outstanding existing preferred units in BCC.
87
Suite 250, 333 – 24 Ave SW | Calgary, Alberta | T2S3E6
1 (403) 228 – 0873
Additional information relating to the Trust, including all public filings, is
available on SEDAR (www.sedar.com)