MTY Food Group
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 OUR BANNERS TM ® MTYGROUP.COM Dear fellow Shareholders, The year that just ended has been a transformational year for MTY. First, we have completed five transactions, investing $325 million and adding 702 locations to our network, bringing our system sales to $2.8 billion for 2018 and easily surpassing last year’s record-breaking $2.3 billion. Second, our founder and our COO of Canadian operations have announced they would concentrate on their board of director duties while focusing on realizing additional acquisition opportunities for MTY. Last, in November we put a solid leadership team in place that will help MTY achieve its goals. Their experience and long list of past successes will all contribute to helping our franchisees prosper and accelerate MTY’s growth. Among the acquisitions realized during 2018, the acquisition of Imvescor Restaurant Group Inc. (“IRG”) was the most significant in terms of total purchase consideration but also in terms of expanding MTY into the casual dining segment of the restaurant industry. The expertise we gained when the IRG team joined was invaluable and we hope they can help us grow further into a segment in which we had previously been less present. The strong performance of IRG and The Counter Custom Burgers/Built Custom Burgers since their acquisition has largely driven the 36% growth in EBITDA realized during 2018. Our EBITDA surpassed the $100 million mark for the first time this year and reached $127.7 million. The business continues to provide a high conversion rate of our EBITDA into cash flows; our operating cash flows also reached a record high this year, at $97.6 million. During 2018, the consolidation of our industry accelerated and MTY participated unfruitfully in many auction processes in which prices rose past our comfort zone. At certain times prices seem to become a secondary factor for some optimistic participants. Our love for acquisitions does not supersede the rigor we have imposed on ourselves since the beginning of MTY. In this context, our commitment to financial discipline and patience were crucial, and our determination to pay a fair price for acquisitions was more important than ever. The consolidation of the industry continues at an accelerated pace as I write this message, and MTY is ready to expand its footprint further but is also prepared to remain on the sidelines when prices exceed our comfort zone. Despite all the changes during 2018, MTY’s DNA remains the same; we are an entrepreneurial and disciplined company driven by our core values of Excellence, Dedication, Innovation. The transformation we have initiated aims at ensuring our organization will continue to deliver solid cash flows whether we acquire new businesses or not. Over the years we have shifted from being predominantly in food courts to a more diversified store base; in 2016, we entered the US market with a sizeable acquisition that makes our presence robust and durable. In the past two years, we have approached the casual dining with increased intensity and have further diversified our portfolio. Adjustments have happened in increments, allowing us time to learn and master the new business avenues we have been exploring. Our goal is to continue down that path in the future, with the hope that our actions will result in great rewards in the long term. In 2019, MTY is entering into its 40th year, and the restaurant industry in North America has never been so competitive. Changes are happening faster than ever with the growth of delivery platforms, meal kits delivered at home, etc. However, the industry also provides tremendous opportunities to flourish for restaurants that provide the best food, stay ahead of food trends and offer the greatest value. As such, our team’s focus is oriented towards improving every aspect of our customers’ experience and helping our franchise partners succeed in a highly competitive environment. Looking back at the year that just ended, I must say that I am very proud of the performance of MTY’s team and of its franchise partners, they are truly the heart and soul of MTY, and I want to thank them for the dedication to achieve the best possible performance. We will continue to grow and prosper with the help of our exceptional team, our franchisees, and our valued business partners, all of whom I want to thank personally and on behalf of the Board of Directors. Eric Lefebvre Chief Executive Officer February 14, 2019 Management’s Discussion and Analysis For the fiscal year ended November 30, 2018 General This Management's Discussion and Analysis of the financial position and financial performance ("MD&A") of MTY Food Group Inc. ("MTY") is supplementary information and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes for the fiscal year ended November 30, 2018. In the MD&A, MTY Food Group Inc., MTY, or the Company, designates, as the case may be, MTY Food Group Inc. and its Subsidiaries, or MTY Food Group Inc., or one of its subsidiaries. The disclosures and values in this MD&A were prepared in accordance with International Financial Reporting Standards (IFRS) and with current issued and adopted interpretations applied to fiscal years beginning on or after December 1, 2017. This MD&A was prepared as of February 14, 2019. Supplementary information about MTY, including its latest annual and quarterly reports, and press releases, is available on SEDAR’s website at www.sedar.com. Forward looking statements and use of estimates This MD&A and, in particular, but without limitation, the sections of this MD&A entitled Outlook, Same-Store Sales, Contingent Liabilities and Subsequent Event, contain forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to certain aspects of the business outlook of the Company during the course of 2018. Forward-looking statements also include any other statements that do not refer to independently verifiable historical facts. A statement made is forward-looking when it uses what is known and expected today to make a statement about the future. Forward-looking statements may include words such as aim, anticipate, assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan, project, seek, should, strategy, strive, target and will. All such forward-looking statements are made pursuant to the ‘safe harbour’ provisions of applicable Canadian securities laws. Unless otherwise indicated, forward-looking statements in this MD&A describe the Company’s expectations as at February 14, 2019 and, accordingly, are subject to change after such date. Except as may be required by Canadian securities laws, the Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements, by their very nature, are subject to inherent risks and uncertainties and are based on several assumptions which give rise to the possibility that actual results or events could differ materially from the expectations expressed in or implied by such forward-looking statements and that the business outlook, objectives, plans and strategic priorities may not be achieved. As a result, the Company cannot guarantee that any forward-looking statement will materialize and readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements are provided in this MD&A for the purpose of giving information about management’s current strategic priorities, expectations and plans and allowing investors and others to get a better understanding of the business outlook and operating environment. Readers are cautioned, however, that such information may not be appropriate for other purposes. Forward-looking statements made in this MD&A are based on a number of assumptions that are believed to be reasonable on February 14, 2019. Refer, in particular, to the section of this MD&A entitled Risks and Uncertainties for a description of certain key economic, market and operational assumptions the Company has used in making forward- Page 1 looking statements contained in this MD&A. If the assumptions turn out to be inaccurate, the actual results could be materially different from what is expected. In preparing the consolidated financial statements in accordance with IFRS and the MD&A, management must exercise judgment when applying accounting policies and use assumptions and estimates that have an impact on the amounts of assets, liabilities, sales and expenses reported and information on contingent liabilities and contingent assets provided. Unless otherwise indicated in this MD&A, the strategic priorities, business outlooks and assumptions described in the previous MD&A remain substantially unchanged. Important risk factors that could cause actual results or events to differ materially from those expressed in or implied by the above-mentioned forward-looking statements and other forward-looking statements included in this MD&A include, but are not limited to: the intensity of competitive activity, and the resulting impact on the ability to attract customers’ disposable income; the Company’s ability to secure advantageous locations and renew existing leases at sustainable rates; the arrival of foreign concepts, the ability to attract new franchisees; changes in customer tastes, demographic trends and in the attractiveness of concepts, traffic patterns, occupancy cost and occupancy level of malls and office towers; general economic and financial market conditions, the level of consumer confidence and spending, and the demand for, and prices of, the products; the ability to implement strategies and plans in order to produce the expected benefits; events affecting the ability of third-party suppliers to provide essential products and services; labour availability and cost; stock market volatility; volatility in foreign exchange rates or borrowing rates; foodborne illness; operational constraints and the event of the occurrence of epidemics, pandemics and other health risks. These and other risk factors that could cause actual results or events to differ materially from the expectations expressed in or implied by these forward-looking statements are discussed in this MD&A. Readers are cautioned that the risks described above are not the only ones that could impact the Company. Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also have a material adverse effect on the business, financial condition or results of operations. Except as otherwise indicated by the Company, forward-looking statements do not reflect the potential impact of any non-recurring or other special items or of any dispositions, monetizations, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after February 14, 2019. The financial impact of these transactions and non-recurring and other special items can be complex and depend on the facts particular to each of them. The Company therefore cannot describe the expected impact in a meaningful way or in the same way that present known risks affecting our business. Compliance with International Financial Reporting Standards Unless otherwise indicated, the financial information presented below, including tabular amounts, is prepared in accordance with International Financial Reporting Standards (“IFRS”). MTY uses earnings before interest, taxes, depreciation and amortization (“EBITDA”), because this measure enables management to assess the Company’s operational performance. The Company also discloses same-store sales growth, which are defined as comparative sales generated by stores that have been open for at least thirteen months or that have been acquired more than thirteen months ago. Same store sales growth provides information on the comparative performance of the restaurants in our network from one period to the next. Similarly, the Company uses system sales to evaluate the size and performance of MTY’s network, as well as to indicate its income-generation potential. System sales include the sales of existing restaurants, of the ones that have closed or have opened during the period, as well as the sales of new concepts acquired from the closing date of the transaction and forward. These measures are widely accepted financial indicators but are not a measurement determined in accordance with IFRS and may not be comparable to those presented by other companies. These non-IFRS measures are intended to provide additional information about the performance of MTY and should not be considered in isolation or as a substitute for measure of performance prepared in accordance with IFRS. The Company uses these measures to evaluate the performance of the business as they reflect its ongoing operations. Management believes that certain investors and analysts use EBITDA to measure a company’s ability to meet payment obligations or as a common measurement to value companies in the industry. Similarly, same-store sales growth and Page 2 system sales provide additional information to investors about the performance of the network that is not available under IFRS. Both measures are components in the determination of short-term incentive compensation for some employees. Highlights of significant events during the fiscal year Acquisition of the limited liability interests in CB (Custom Burger) Franchise Systems LLC and Built Franchise Systems LLC On December 1, 2017, the Company announced that it had completed the acquisition of the limited liability company interests in CB (Custom Burger) Franchise Systems LLC and Built Franchise Systems LLC. The purchase price was $30.0 million (US$ 23.5 million) of which $28.3 million (US$ 22.2 million) was paid at closing. At closing 41 franchised and 3 corporately owned restaurants were in operation. Completion of combination agreement with Imvescor On March 1, 2018, the Company, through the merger of a wholly owned subsidiary with Imvescor Restaurant Group Inc. (“IRG”), acquired all the outstanding shares of IRG. The total consideration for the transaction was $250.8 million, of which $53.1 million was settled in cash and the remaining in shares. At closing IRG operated 5 brands in Canada and had 261 locations in operation. Acquisition of the assets of Grabbagreen® On March 15, 2018, one of the Company’s wholly owned subsidiaries acquired the assets of Grabbagreen®. The total consideration amounted to $3.4 million (US$ 2.6 million), of which $3.1 million (US$ 2.4 million) was paid on closing. At closing, there were 27 locations in operation in the United States. Acquisition of the assets of Timothy’s World Coffee® and Mmmuffins® On April 4, 2018, one of the Company’s wholly owned subsidiaries acquired the assets of Timothy’s World Coffee® and Mmmuffins®. The total consideration amounted to $1.3 million, of which $1.2 million was paid on closing. At closing, there were 39 locations in operation in Canada. Acquisition of non-controlling interest in Madison’s On September 7, 2018, the Company acquired the remaining 10% non-controlling interest of 8825726 Canada Inc. (Madison’s) for a cash consideration of $1.1 million. Acquisition of the SweetFrog Premium Frozen Yogurt Franchise On September 25, 2018, the Company announced that it had completed the acquisition of substantially all of the assets of SweetFrog Premium Frozen Yogurt for $41.5 million (US$ 32.1 million). Of this total, $37.4 million (US$ 28.9 million) was paid on closing. At closing, there were 323 franchised/licensed locations in the US and 8 located internationally. Core business MTY franchises and operates quick service and casual dining restaurants under the following banners: Tiki-Ming, Sukiyaki, La Crémière, Au Vieux Duluth Express, Panini Pizza Pasta, Villa Madina, Cultures, Thaï Express, Vanellis, Kim Chi, “TCBY”, Sushi Shop, Koya Japan, Vie & Nam, Tandori, O’Burger, Tutti Frutti, Taco Time, Country Style, Buns Master, Valentine, Jugo Juice, Mr. Sub, Koryo Korean Barbeque, Mr. Souvlaki, Sushi Go, Mucho Burrito, Extreme Pita, PurBlendz, ThaïZone, Madisons New York Grill & Bar, Café Dépôt, Muffin Plus, Sushi-Man, Fabrika, Van Houtte, Manchu Wok, Wasabi Grill & Noodle, Tosto, Big Smoke Burger, Cold Stone Creamery, Blimpie, Surf City Squeeze, The Great Steak & Potato Company, NrGize Lifestyle Café, Samurai Sam’s Teriyaki Grill, Frullati Café & Bakery, Rollerz, Johnnie`s New York Pizzeria, Ranch One, America’s Taco Shop, Cereality, Tasti D-Lite, Planet Smoothie, Maui Wowi, Pinkberry, Baja Fresh Mexican Grill, La Salsa Fresh Mexican Grill, La Diperie, Steak Frites St-Paul, Giorgio Ristorante, The Works Gourmet Burger Bistro, Houston Avenue Bar & Grill and Industria Pizzeria + Bar, Dagwoods Sandwiches and Salads, The Counter Custom Burgers, Built Custom Burgers, Baton Rouge, Pizza Delight, Scores, Toujours Mikes, Ben & Florentine, Grabbagreen, Timothy’s World Coffee, Mmmuffins and SweetFrog. As at November 30, 2018, MTY had 5,984 locations in operation, of which 5,919 were franchised or under operator agreements and the remaining 65 locations were operated by MTY. Page 3 MTY’s locations can be found in: i) mall and office tower food courts and shopping malls; ii) street front; and, iii) non- traditional format within airports, petroleum retailers, convenience stores, cinemas, amusement parks, in other venues or retailers shared sites, hospitals, universities and food-truck carts. The street front locations are mostly made up of the Country Style, La Crémière, Sushi Shop, Taco Time, Tutti Frutti, Valentine, Mr. Sub, ThaïZone, Extreme Pita, Mucho Burrito, Madisons, Houston Avenue Bar & Grill, Industria Pizzeria + Bar, Steak Frites St-Paul, Giorgio Ristorante, The Works Gourmet Burger Bistro, Blimpie, Cold Stone Creamery, Baja Fresh Mexican Grill, The Counter Custom Burgers, Built Custom Burgers, Baton Rouge, Scores, Pizza Delight, Toujours Mikes, Ben & Florentine and Grabbagreen. La Crémière, “TCBY”, La Diperie and SweetFrog operate primarily from April to September and the other banners generally operate year-round. MTY has developed several quick service restaurant concepts: Tiki-Ming (Chinese cuisine), was its first banner, followed by Sukiyaki (a Japanese delight), Franx Supreme (hot dog/hamburger), Panini Pizza Pasta, Chick’n’Chick, Caferama, Carrefour Oriental, Villa Madina, Kim Chi, Vie & Nam, Tandori, O’Burger and Tosto. Other banners added through acquisitions include: Brand Fontaine Santé/Veggirama La Crémière Croissant Plus Cultures Thaï Express Mrs. Vanelli’s TCBY – Canadian master franchise right Yogen FrüzTM exclusive master franchise rights in Canada1 Sushi Shop Koya Japan Sushi Shop – existing franchise locations Tutti Frutti Taco Time – Canadian master franchise rights Country Style Food Services Holdings Inc. Groupe Valentine inc. Jugo Juice Mr. Submarine Koryo Korean BBQ Mr. Souvlaki SushiGo Extreme Pita, PurBlendz and Mucho Burrito ("Extreme Brandz") ThaïZone Madisons Café Dépôt, Muffin Plus, Sushi-Man and Fabrika Van Houtte Café Bistros – perpetual franchising license Acquisition year 1999 2001 2002 2003 May 2004 June 2004 September 2005 April 2006 September 2006 October 2006 September 2007 September 2008 October 2008 May 2009 September 2010 August 2011 November 2011 November 2011 September 2012 June 2013 September 2013 September 2013 March 2015 July 2014 September 2018 October 2014 % ownership 100% 100% 100% 100% 100% 100% 100% 100% # of franchised locations 18 71 18 24 6 103 91 152 # of corporate locations — 3 2 — — — — — 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 80% + 20% 90% + 10% 100% 42 24 — 29 117 475 86 134 338 19 14 3 300 - 34 of which in the United States 25 and 3 mobile restaurants 14 88 51 5 — 15 — — 5 9 2 — 1 — 2 5 — — 13 1 Page 4 November 2014 100% 1 The Yogen FrüzTM exclusive master franchise rights in Canada were disposed of on February 1st, 2017. Brand Manchu Wok, Wasabi Grill & Noodle and SenseAsian Big Smoke Burger Kahala Brands Ltd - Cold Stone Creamery, Blimpie, Taco Time, Surf City Squeeze, The Great Steak & Potato Company, NrGize Lifestyle Café, Samurai Sam’s Teriyaki Grill, Frullati Café & Bakery, Rollerz, Johnnie`s New York Pizzeria, Ranch One, America’s Taco Shop, Cereality, Tasti D-Lite, Planet Smoothie, Maui Wowi and Pinkberry BF Acquisition Holdings, LLC – Baja Fresh Mexican Grill and La Salsa Fresh Mexican Grill La Diperie Steak Frites St-Paul and Giorgio Ristorante The Works Gourmet Burger Bistro Houston Avenue Bar & Grill and Industria Pizzeria + Bar Dagwoods Sandwiches and Salads The Counter Custom Burgers Built Custom Burgers Imvescor Restaurant Group - Baton Rouge, Pizza Delight, Scores, Toujours Mikes, and Ben & Florentine Grabbagreen Timothy’s World Coffee and Mmmuffins - perpetual franchising license SweetFrog Premium Frozen Yogurt Acquisition year December 2014 % ownership 100% # of franchised locations 115 # of corporate locations 17 September 2015 September 2016 July 2016 60% + 40% 100% 13 2,839 October 2016 100% December 2016 May 2017 September 2018 June 2017 June 2017 September 2017 December 2017 December 2017 March 2018 60% 83.25% + 9.25% 100% 80% 100% 100% 100% 100% March 2018 April 2018 100% 100% September 2018 100% 167 5 15 23 12 20 36 5 253 26 32 331 4 40 16 — — 4 — 2 3 — 8 1 7 — MTY also has an exclusive area development agreement with Restaurant Au Vieux Duluth to develop and sub-franchise Au Vieux Duluth Express quick-service restaurants in the Provinces of Ontario and Quebec. Revenues from franchise locations are generated from royalty fees, franchise fees, sales of turnkey projects, rent, sign rental, supplier contributions, gift card breakage and program fees and sales of other goods and services, including those generated by products sold at various retailers and by the distribution centre that serves the Valentine franchisees. Operating expenses related to franchising include salaries, general and administrative costs associated with existing and new franchisees, expenses in the development of new markets, costs of setting up turnkey projects, rent, supplies, finished products and equipment sold. Revenues from corporate-owned locations include sales generated from corporate-owned locations. Corporate owned location expenses include the costs incurred to operate corporate owned locations. MTY generates revenues from the food processing business discussed herein. The plant produces various products that range from ingredients and ready to eat food sold to restaurants or other food processing plants to prepared food sold in retail stores. The plant generates most of its revenues selling its products to distributors and retailers. Page 5 Description of recent acquisitions On September 25, 2018, the Company announced that it had completed the acquisition of substantially all of the assets of SweetFrog Premium Frozen Yogurt for $41.5 million (US$ 32.1 million). Of this total, $37.4 million (US$ 28.9 million) was paid on closing. At closing, there were 323 franchised/licensed locations in the US and 8 located internationally. On September 7, 2018, the Company acquired the remaining 10% non-controlling interest of 8825726 Canada Inc. (Madison’s) for a cash consideration of $1.1 million. On April 4, 2018, one of the Company’s wholly owned subsidiaries acquired the assets of Timothy’s World Coffee® and Mmmuffins®. The total consideration amounted to $1.3 million, of which $1.2 million was paid on closing. At closing, there were 39 locations in operation in Canada. On March 15, 2018, one of the Company’s wholly owned subsidiaries acquired the assets of Grabbagreen®. The total consideration amounted to $3.4 million (US$ 2.6 million), of which $3.1 million (US$2.4 million) was paid on closing. At closing, there were 27 locations in operation in the United States. On March 1, 2018, the Company, through the merger of a wholly owned subsidiary with Imvescor Restaurant Group Inc. (“IRG”), acquired all the outstanding shares of IRG. The total consideration for the transaction was $250.8 million, of which $53.1 million was settled in cash and the remaining in shares. At closing IRG operated 5 brands in Canada and had 261 locations in operation. On December 1, 2017, the Company announced that it had completed the acquisition of the limited liability company interests in CB Franchise Systems LLC and Built Franchise Systems LLC. The purchase price was $30.0 million (US$ 23.5 million) of which $28.3 million (US$ 22.2 million) was settled in cash. At closing 41 franchised and 3 corporately owned restaurants were in operation. The network has locations in the United States of America, Canada, Ghana, Ireland, Japan, Mexico, Saudi Arabia and the United Kingdom. On September 29, 2017, the Company announced it had completed the acquisition of the assets of Dagwoods Sandwiches and Salads. The purchase price was $3.0 million of which $2.6 million was settled in cash. At closing, there were 22 locations in operation, all of them located in Canada. On June 16, 2017, the Company announced it had completed through its 80% controlling interest in a subsidiary the acquisition of the assets of Houston Avenue Bar & Grill (“Houston”) and Industria Pizzeria + Bar (“Industria”). The Company’s share of the purchase consideration was $16.8 million of which $12.8 million was settled in cash. At closing 9 Houston and 3 Industria were in operation. All locations are located in Canada. On June 9, 2017, the Company announced it had completed the acquisition of the assets of The Works Gourmet Burger Bistro. The purchase price was $8.2 million of which $7.1 million was settled in cash. At closing, there were 27 locations in operation, all of them located in Canada. On May 8, 2017, the Company announced that it had completed the acquisition of the assets of Steak Frites St-Paul and Giorgio Ristorante for an amount of $0.4 million, of which $0.3 million was paid from cash on hand. At closing, 6 Giorgio Ristorante and 9 Steak Frites were in operation. All locations are located in Canada. On April 19, 2017, the Company acquired the remaining non-controlling shareholder interest in 7687567 Canada Inc. (Lucky 8) for a non-material cash consideration. On December 9, 2016, the Company announced that it had completed through its 60% controlling interest in a subsidiary the acquisition of the assets of La Diperie. The Company’s share of the purchase consideration amounted to $0.9 million, satisfied by the payment of $0.8 million cash. At closing, La Diperie operated 5 stores in Canada. Page 6 Selected annual information (in thousands $, except EPS, dividend per common share and number of common shares) Year ended November 30, 2018 Year ended November 30, 2017 As adjusted (1) Year ended November 30, 2016 Total assets Total long-term liabilities Operating revenue EBITDA(2) Income before income taxes Income before taxes, excluding impairment charges and reversals Net income attributable to owners Total comprehensive income attributable to owners EPS basic EPS diluted Dividends paid on common stock Dividends per common share Weighted daily average number of common shares 1,230,307 388,369 353,303 127,743 82,900 88,431 98,580 112,308 4.07 4.06 14,530 $0.60 855,013 342,444 276,083 93,726 62,664 63,664 49,507 33,747 2.32 2.32 9,832 $0.46 852,650 359,512 191,275 65,841 68,686 68,686 54,421 57,147 2.73 2.73 9,314 $0.46 24,228,206 21,374,497 19,908,827 Weighted average number of diluted common shares (1) Total assets and total liabilities have been adjusted to reflect a change to the Houston Bar & Grill and Industria Pizzeria + Bar preliminary purchase price calculation. The purchase price calculation has now been finalized. For more information, see note 6 IX to the November 30, 2018 consolidated financial statements 21,374,497 24,272,650 19,908,827 (2) EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. EBITDA is defined as operating revenues less operating expenses. See reconciliation of EBITDA to Income before taxes on page 12. Page 7 Summary of quarterly financial information (in thousands $, except EPS) February 2017 May 2017 August 2017 November 2017 February 2018 May 2018 August 2018 November 2018 Revenue $64,016 $69,962 $72,372 $69,733 $63,715 $89,829 $91,236 $108,523 Quarters ended EBITDA(1) $16,336 $24,595 $25,576 $27,219 $19,912 $35,506 $39,578 $32,747 Net income attributable to owners Total comprehensive income (loss) attributable to owners Earnings per share Earnings per diluted share $2,015 $16,033 $12,035 $19,424 $45,332 $18,040 $22,275 $12,933 ($1,192) $20,145 ($14,344) $29,138 $43,852 $22,260 $25,547 $20,649 $0.09 $0.75 $0.56 $0.91 $2.12 $0.72 $0.89 $0.09 $0.75 $0.56 $0.91 $2.12 $0.72 $0.88 $0.34 $0.34 (1) EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. EBITDA is defined as operating revenues less operating expenses. See reconciliation of EBITDA to Income before taxes on page 12. Segment note disclosure Management monitors and evaluates results of the Company based on geographical segments; these two segments being Canadian and United States of America/ International. The Company and its chief operating decision maker assess the performance of each operating segment based on its segment profitability. Results of operations for the fiscal year ended November 30, 2018 Revenue During the 2018 fiscal year, the Company’s total revenue increased to $353.3 million, from $276.1 million a year earlier. Revenues for the two segments of business are broken down as follows: Segment Canada Total Canada Subdivision Franchise operation Corporate stores Food processing Intercompany transactions USA & International Franchise operation Corporate stores Intercompany transactions Total USA/International Total operating revenues November 30, 2018 ($ millions) 169.1 34.8 15.6 (4.2) 215.3 113.4 24.9 (0.3) 138.0 353.3 November 30, 2017 ($ millions) 107.9 23.4 14.7 (4.1) 141.9 107.7 26.8 (0.3) 134.2 276.1 Variation 57% 49% 6% N/A 52% 5% (7%) N/A 3% 28% Page 8 Canada revenue analysis: As is shown in the table above, revenue from franchise locations in Canada increased by 57%. Several factors contributed to the variation, as listed below: Revenues, 2017 fiscal year Increase in recurring revenue streams Increase in initial franchise fees, renewal fees and transfer fees Decrease in turnkey, sales of material to franchisees and rent revenues Increase due to the acquisitions 2017 one-time contract termination settlement Other non-material variations Revenues, 2018 fiscal year $ millions 107.9 6.7 0.1 (2.0) 58.1 (1.9) 0.2 169.1 Revenue from corporate-owned locations increased by 49% to $34.8 million during the period. The increase is mainly due to sales from the four corporate The Works Gourmet Burger Bistro locations acquired in the second quarter of 2017 and the 8 corporate Imvescor Restaurant Group restaurants acquired at the beginning of the second quarter. Food processing revenues increased by 6% during 2018, mainly due to increased volumes of certain existing products as well as to the continuous addition of new product lines. USA/International revenue analysis: As is shown in the table in the previous page, revenue from franchise locations in the US increased by 5%. Several factors contributed to the variation, as listed below: Revenues, 2017 fiscal year Decrease in recurring revenue streams Increase in initial franchise fees, renewal fees and transfer fees Decrease due to the sale of material and services to franchisees Decrease due to gift card breakage income Increase due to acquisitions Impact of variation in foreign exchange rates Other non-material differences Revenues, 2018 fiscal year $ millions 107.7 (0.8) 0.8 (0.9) (0.4) 7.4 0.1 (0.5) 113.4 Revenue from corporate-owned locations decreased by 7%, to $24.9 million during the year due to a decrease in the number of corporate locations. Page 9 Cost of sales and other operating expenses During the 2018 fiscal year operating expenses increased by 24% to $225.6 million, up from $182.4 million a year ago. Operating expenses for the two business segments were incurred as follows: Segment Canada Total Canada USA & International Subdivision Franchise operation Corporate stores Food processing Intercompany transactions Franchise operation Corporate stores Intercompany transactions Total USA/International Total cost of sales and other operating expenses November 30, 2018 ($ millions) 88.1 35.4 14.1 (2.9) 134.7 63.4 29.1 (1.6) 90.9 225.6 November 30, 2017 ($ millions) 53.0 23.2 Variation 66% 53% 13.3 (2.9) 86.6 66.3 31.0 (1.5) 95.8 182.4 6% N/A 55% (4%) (6%) N/A (5%) 24% Canada cost of sales and other operating expenses analysis: Expenses from franchise operations increased by $35.1 million or 66% when compared to fiscal year 2017. Excluding the impact from the acquisition of Imvescor Group, expenses from franchise operations decreased slightly compared to 2017. A decrease in lease termination costs and rent and a decrease in the number of turnkey projects which fluctuated in line with the associated revenues were partially offset by an increase in the wages and benefits resulting from acquisitions realized in 2017 and 2018 and in professional fees. During the year, the Company incurred approximately $1.7 million in non-recurring incremental costs related to the acquisition of Imvescor Restaurant Group Inc., which closed on March 1, 2018. The variation of expenses from the corporate stores and food processing activities were both tightly correlated to the related revenues. USA/International cost of sales and other operating expenses analysis: During the 2018 fiscal year, the Company’s expenses from US franchise operations decreased by $2.9 million or 4% when compared to the same period last year. The decrease predominantly results from a decrease in professional fees, rent and resale material expenses. The decrease was partially offset by an increase in wages and benefits. Corporate stores costs decreased 6% for the year compared to the same period last year. The variation of expenses from the corporate stores was correlated to the related revenues. Earnings before interest, taxes, depreciation and amortization (EBITDA) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Fiscal year ended November 30, 2018 Canada USA & International Total (In millions $) 215.3 134.7 80.6 37% 138.0 90.9 47.1 34% 353.3 225.6 127.7 36% Page 10 Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Fiscal year ended November 30, 2017 (In millions $) Canada USA & International Total 141.9 86.6 55.3 39% 134.2 95.8 38.4 29% 276.1 182.4 93.7 34% (1) EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. EBITDA is defined as operating revenues less operating expenses. See reconciliation of EBITDA to Income before taxes on page 12. Below is a summary of performance segmented by product/service: (In millions $) Revenues Expenses EBITDA1 EBITDA as a % of Revenue Fiscal year ended November 30, 2018 Franchise Corporate Processing 282.5 151.5 131.0 46% 59.7 64.5 (4.8) N/A 15.6 14.1 1.5 10% Intercompany transactions Total (4.5) (4.5) — N/A 353.3 225.6 127.7 36% (In millions $) Revenues Expenses EBITDA1 EBITDA as a % of Revenue Fiscal year ended November 30, 2017 Franchise Corporate Processing 215.6 119.3 96.3 45% 50.2 54.2 (4.0) N/A 14.7 13.3 1.4 10% Intercompany transactions Total (4.4) (4.4) — N/A 276.1 182.4 93.7 34% (1) EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. EBITDA is defined as operating revenues less operating expenses. See reconciliation of EBITDA to Income before taxes on page 12. Total EBITDA for the year ended November 30, 2018 was $127.7 million, an increase of 36% compared to the same period last year. Canada contributed 63% of total EBITDA and 74% of the total increase in EBITDA, mainly owing to the acquisitions realized in 2017 and 2018. The acquisition of Imvescor Restaurant Group, which contributed $20.1 million since the closing of the transaction on March 1st, 2018, was the largest contributor. The USA & International EBITDA grew by 23% mainly as a result of the acquisitions during the year. Foreign exchange fluctuations had minimal impact year over year. Net income For the year ended November 30, 2018, net income attributable to owners increased to $98.6 million or $4.07 per share ($4.06 per diluted share) compared to $49.5 million or $2.32 per share ($2.32 per diluted share) for the same period last year. The results were impacted favorably by an adjustment in the prospective income tax rate for the United States used to calculate the deferred income taxes. Excluding the impact of this non-recurring adjustment, net income attributable to owners would have been $63.1 million, or $2.60 per share ($2.60 per diluted share). Page 11 Calculation of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (in thousands $) Year ended November 30, 2018 Year ended November 30, 2017 Income before taxes Depreciation – property, plant and equipment Amortization – intangible assets Interest on long-term debt Impairment on property, plant and equipment and intangible assets Unrealized and realized foreign exchange gain Interest income Gain on disposal of property, plant and equipment and intangible assets Loss on revaluation of financial liabilities recorded at fair value through profit and loss EBITDA 82,900 2,755 24,749 11,717 5,531 (11) (649) (710) 1,461 127,743 62,664 2,724 20,178 10,314 1,000 (2,004) (439) (1,120) 409 93,726 Other income and charges Amortization of intangible assets increased as a result of the 2018 acquisitions and the intangibles added as part of the purchase price. Unrealized and realized foreign exchange gains decreased compared to prior year as 2017 saw higher fluctuations in foreign exchange rates when compared to 2018. 2018 stayed relatively constant year over year with only 1% average decrease in the rate. During the year, as the result of a decline in their financial performance, the Company carried out a review of the recoverable amounts of the capital assets related to certain corporate stores and of intangibles related to multiple concepts. The review led to the recognition of a non-cash impairment loss of $5.5 million composed of $2.0 million in leasehold improvements and equipment and $5.8 million in franchise rights and trademarks offset by an impairment reversal of $2.3 million. The reversal of $2.3 million relates to a 2014 impairment taken on Country Style which has shown favourable performance in the last few years as a result of increases in the number of non-traditional locations opened. Results of operations for the three-month period ended November 30, 2018 Revenue During the fourth quarter of the 2018 fiscal year, the Company’s total revenue increased by 56% to reach $108.5 million. Revenues for the two segments of business are broken down as follows: Segment Canada Total Canada USA & International Subdivision Franchise operation Corporate stores Food processing Intercompany transactions Franchise operation Corporate stores Intercompany transactions Total USA/International Total operating revenues November 30, 2018 ($ millions) 65.1 9.5 November 30, 2017 ($ millions) 31.3 6.2 Variation 108% 52% 4.4 (2.3) 76.7 27.6 4.3 (0.1) 31.8 108.5 4.2 (2.1) 39.6 25.3 4.9 (0.1) 30.1 69.7 3% N/A 93% 9% (12%) N/A 6% 56% Page 12 Canada revenue analysis: As is shown in the table on the previous page, revenue from franchise locations in Canada increased by 108% compared to prior year. Several factors contributed to the variation, as listed below: Revenues, fourth quarter of 2017 Increase in recurring revenue steams Increase in sales of material to franchisees and rent revenues Increase due to the acquisitions 2017 one-time contract termination settlement Other non-material variations Revenues, fourth quarter of 2018 $ millions 31.3 0.5 0.3 35.1 (1.9) (0.2) 65.1 Revenue from corporate-owned locations increased by 52%, to $9.5 million during the three-month period. The increase is mainly due to sales from the 8 corporate Imvescor Restaurant Group restaurants acquired at the beginning of the second quarter of 2018. USA/International revenue analysis: As is shown in the table on the previous page, revenue from franchise locations in the US increased by 9%. Several factors contributed to the variation, as listed below: Revenues, fourth quarter of 2017 Increase in recurring revenue streams Increase in initial franchise fees, renewal fees and transfer fees Decrease in sales of material and services to franchisees Decrease due to gift card breakage income Increase due to acquisitions Impact of variation in foreign exchange rates Other non-material differences Revenues, fourth quarter of 2018 $ millions 25.3 0.5 2.3 (0.9) (3.5) 2.4 1.9 (0.4) 27.6 Revenue from corporate-owned locations decreased by 12%, to $4.3 million, mainly due to a decrease in the number of corporate restaurants. Cost of sales and other operating expenses During the fourth quarter of 2018, operating expenses increased by 79%. Operating expenses for the two business segments were incurred as follows: Segment Canada Total Canada USA & International Subdivision Franchise operation Corporate stores Food processing Intercompany transactions Franchise operation Corporate stores Intercompany transactions Total USA/International Total cost of sales and other operating expenses November 30, 2018 ($ millions) 40.7 9.9 November 30, 2017 ($ millions) 12.4 5.8 Variation 227% 70% 4.0 (0.8) 53.8 18.3 5.3 (1.6) 22.0 75.8 3.6 (0.6) 21.2 17.0 5.9 (1.6) 21.3 42.5 9% N/A 153% 8% (10%) N/A 4% 79% Page 13 Canada cost of sales and other operating expenses analysis: Expenses from franchise operations increased by $28.3 million or 227% when compared to the same period in 2017. Excluding the impact from the acquisition of Imvescor Restaurant Group, expenses from franchise operations would have increased by $2.1 million. An increase in rent and lease termination costs as well as wages and benefits was offset by a decrease in consulting and professional fees. Expenses from corporate stores and the food processing segment fluctuated mostly as a function of factors explained in the Revenue section above. USA/International cost of sales and other operating expenses analysis: During the fourth quarter, the Company’s expenses from US franchise operations increased by $1.3 million or 8%. Expenses were impacted unfavourably by variations in foreign exchange rates between the two periods. Corporate stores costs decrease by 10% for the fourth quarter when compared to the same period last year. The variation of expenses from the corporate stores was correlated to the related revenues. Earnings before interest, taxes, depreciation and amortization (EBITDA) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Three months ended November 30, 2018 (In millions $) Canada USA & International 76.7 53.8 22.9 30% 31.8 22.0 9.8 31% Total 108.5 75.8 32.7 30% Three months ended November 30, 2017 (In millions $) Canada USA & International 39.6 21.2 18.4 46% 30.1 21.3 8.8 29% Below is a summary of performance segmented by product/service: (In millions $) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Three months ended November 30, 2018 Franchise 92.7 59.0 33.7 Corporate 13.8 15.2 (1.4) Processing 4.4 4.0 0.4 Intercompany transactions (2.4) (2.4) — 36% N/A 9% N/A Total 69.7 42.5 27.2 39% Total 108.5 75.8 32.7 30% Page 14 (In millions $) Revenues Expenses EBITDA(1) EBITDA as a % of Revenue Three months ended November 30, 2017 Franchise 56.6 29.4 27.2 Corporate 11.1 11.7 (0.6) Processing 4.2 3.6 0.6 Intercompany transactions (2.2) (2.2) — 48% N/A 14% N/A Total 69.7 42.5 27.2 39% (1)EBITDA (income before income taxes, interest, depreciation and amortization) is not an earnings measure recognized by IFRS and therefore may not be comparable to similar measures presented by other companies. EBITDA is defined as operating revenues less operating expenses. See reconciliation of EBITDA to Income before taxes on page 16 Total EBITDA for the three-month period ended November 30, 2018 was $32.7 million, an increase of $5.5 million compared to the same period last year. Canadian operations contributed to 82% while USA operations contributed to the remaining 18% increase. In Canada, EBITDA for the fourth quarter of 2018 increased by $4.5 million compared to the same period last year mostly due to the acquisitions in the second half of 2017 and during 2018. The main contributor was the acquisition of Imvescor Restaurant Group at the beginning of the second quarter, which generated $6.5 million in EBITDA. Excluding Imvescor Restaurant Group, Canadian EBITDA decreased due to a one-time contract termination settlement in 2017 as well as an increase in 2018 wages. Net income For the three-month period ended November 30, 2018, net income attributable to owners decreased by $6.5 million, to $12.9 million or $0.34 per share ($0.34 per diluted share) compared to $19.4 million or $0.91 per share ($0.91 per diluted share) for the same period last year. The decrease is due to an impairment charge increase of $3.0 million pre-tax ($2.3 million after tax) compared to the same period last year, a $3.4 million pre-tax ($2.6 million after tax) 2017 gift card revenue catch-up adjustment as well as a $1.9 million pre-tax ($1.4 million after tax) one-time 2017 contract termination settlement offset by the increase in EBITDA from the 2018 acquisitions. Calculation of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (in thousands of dollars) Period ended November 30, 2018 Period ended November 30, 2017 Income before taxes Depreciation – property, plant and equipment Amortization – intangible assets Interest on long-term debt Impairment charge on property, plant and equipment and intangible assets Unrealized and realized foreign exchange loss Interest income Gain on disposal of property, plant and equipment and intangible assets Loss on revaluation of financial liabilities recorded at fair value EBITDA 18,596 699 6,601 2,955 4,016 16 (156) (212) 232 32,747 19,132 576 3,386 2,470 1,000 360 (66) (48) 409 27,219 Other income and charges Interest on long-term debt increased to $3.0 million from $2.5 million during the three-month period as a result of the interest on the credit facilities, from which the company has drawn additional funds since the fourth quarter of 2017. Depreciation and amortization both increased significantly due to recent acquisitions, most notably that of Imvescor Restaurant Group which resulted in an increase in capital assets and amortizable franchise rights. During the fourth quarter, as the result of a decline in their financial performance, the Company carried out a review of the recoverable amounts of the capital assets related to certain corporate stores and of intangibles related to multiple concepts. The review led to the recognition of a non-cash impairment loss of $4.0 million composed of $0.5 million in leasehold improvements and equipment and $3.5 million in franchise rights and trademarks. Page 15 Income taxes The provision for income taxes as a percentage of income before taxes has increased significantly during the quarter compared to the same period last year. The increase mainly stems from a change in deferred income tax rates and adjustments made in 2017. Contractual obligations and long-term debt The obligations pertaining to the long-term debt and the minimum rentals for the leases that are not subleased are as follows: For the period ending (In thousands $) Long-term debt(1) 12 months ending November 2019 12 months ending November 2020 12 months ending November 2021 12 months ending November 2022 12 months ending November 2023 Balance of commitments due after 2023 8,893 4,326 260,453 4,781 8 22 278,483 Net lease commitments 10,379 9,472 8,708 8,001 5,922 21,501 63,983 Total contractual obligations 19,272 13,798 269,161 12,782 5,930 21,523 342,466 (1) Amounts shown represent the total amount payable at maturity and are therefore undiscounted. For total commitments, please refer to the November 30, 2018 consolidated financial statements. Long-term debt includes interest-bearing loans related to acquisitions, promissory notes, minority put options, non- interest-bearing holdbacks on acquisitions and non-interest-bearing contract cancellation fees. Liquidity and capital resources As of November 30, 2018, the amount held in cash totaled $32.3 million, a decrease of $24.2 million since the end of the 2017 fiscal period. The decrease is primarily explained by considerations paid for acquisitions from cash on hand, as well as debt repayments. During the 2018 fiscal year, the Company paid $14.5 million in dividends to its shareholders. This had no significant impact on the cash position of the Company as a result of strong cash flows generated by operations. During the year, cash flows generated by operating activities were $97.6 million, compared to $93.5 million in 2017. Excluding the variation in non-cash working capital items, income taxes and interest paid, operations generated $129.0 million in cash flows, compared to $96.6 million in 2017, which represents an increase of 34% year over year. The increase is mostly due to the increase in EBITDA detailed above. The revolving credit facility has an authorized amount of $500,000 (November 30, 2017 - $305,000), of which $256,143 was drawn at November 30, 2018 (November 30, 2017 - $210,522). The facility has the following financial covenants:   The Debt to EBITDA ratio must be less than 3.00:1.00. The interest and rent coverage ratio must be at 2.00:1.00 at all times. The credit agreement also contains various limitations on distributions and on the usage of the proceeds from the disposal of assets which are not expected to impact the Company during the term of the credit agreement. The revolving facility is repayable without penalty with the balance due on the date of maturity July 21, 2021. At quarter end, the Company was in compliance with the covenants of the credit agreement. Financial position Accounts receivable at the end of the year were $49.2 million, compared to $34.2 million at the end of the 2017 fiscal period. The increase is entirely attributable to the acquisition of IRG. Page 16 Intangible assets grew by $226.7 million. The increase is due to the acquisition of The Counter and Built Custom Burgers, Imvescor Restaurant Group, Grabbagreen and Timothy’s World Coffee and Mmmuffins during the year. The increase was also caused by the impact of foreign exchange variations. This was offset by the amortization expense recorded during the year. Accounts payable and accrued liabilities increased to $68.7 million as at November 30, 2018, from $57.6 million as at November 30, 2017. The full amount of the $11.1 million increase is due to the acquisition of Imvescor and was partially offset by a decrease in the other entities due to the timing of cash payments from suppliers. Provisions, which are composed of litigation and dispute, closed store and gift card provisions, increased to $90.0 million as at November 30, 2018 from $75.3 million as at November 30, 2017. The increase is mainly due to the gift card liability from the acquisition of Imvescor Restaurant Group and an increase in the gift card liability. Long-term debt increased by $47.8 million. The increase is attributable to the additional funds required for the acquisition of Imvescor Restaurant Group Inc. and SweetFrog and to the holdbacks payable in relation to the acquisitions of The Counter and Built Custom Burgers, Grabbagreen, Timothy’s World Coffee and Mmmuffins and SweetFrog. Deferred income tax balances were remeasured during the first quarter of 2018 using the new U.S statutory federal income tax rate, which decreased from 35% to 21%. This resulted in a decrease of the Company’s net liability by $35.5 million. This net tax benefit is estimated based on the initial analysis of the “U.S. Tax Cuts and Job Act”, and given the complexity of this act, this estimate is subject to adjustment when further guidance becomes available. Further details on the above statement of financial position items can be found in the notes to the November 30, 2018 consolidated financial statements. Capital stock During the 2018 fiscal year the Company issued 3,795,281 shares in connection with the acquisition of Imvescor Restaurant Group. The Company did not redeem any shares. As at February 14, 2019, the Company had 25,169,778 shares outstanding. Location information MTY’s locations can be found in: i) food courts and shopping malls; ii) street front; and iii) non-traditional format within petroleum retailers, convenience stores, cinemas, amusement parks, in other venues or retailer shared sites, hospitals, universities and airports. The non-traditional locations are typically smaller in size, require lower investment and generate lower revenue than the shopping malls, food courts and street front locations. Number of locations November 30, 2018 November 30, 2017 Franchises, beginning of the period Corporate owned, beginning of period Canada United States Total, beginning of the period Opened during the period Closed during the period Acquired during the period Reduction due to sale of Yogen Früz Total, end of the period Franchises, end of the period Corporate owned, end of the period Canada United States Total, end of the period 5,402 29 38 5,469 269 (456) 702 — 5,984 5,919 42 23 5,984 5,599 31 51 5,681 260 (454) 81 (99) 5,469 5,402 29 38 5,469 Page 17 During 2018, the Company completed the following acquisitions: Concept The Counter and Built Custom Burger Imvescor Restaurant Group Grabbagreen Timothy’s and Mmmuffins SweetFrog Total number of restaurants acquired Number of restaurants as at the date of the acquisition 44 261 27 39 331 702 Excluding the acquisitions mentioned above, the Company’s network opened 269 locations (119 in Canada, 98 in the United States and 52 International) and closed 425 location (185 in Canada, 200 in the United States and 40 International) during 2018. The net reduction of 187 (91 in the first quarter, 15 in the second quarter, 44 in the third quarter and 37 in the fourth quarter) results from a multitude of factors, which include landlords redeveloping their properties, competitive pressures, leases expiring, and closure of underperforming stores. The Frozen Treats and Sandwiches and Coffee categories contributed the largest part of the decline on a year-to-date basis; during the fourth quarter, the Sandwiches and Coffee category remained the most challenging with a net reduction of 34 while the Frozen Treats category had a negative 5 locations. The chart below provides the breakdown of MTY’s locations and system sales by type: Location type Shopping mall & office tower food courts Street front Non-traditional format % of location count % of system sales year ended November 30 November 30 2018 2017 2018 2017 21% 56% 23% 23% 48% 29% 22% 63% 15% 27% 57% 16% The geographical breakdown of MTY’s locations and system sales consists of: Geographical location % of location count % of system sales year ended November 30 2018 2017 November 30 2018 2017 Ontario Quebec & Eastern Canada Western Canada California Rest of the United States International 15% 19% 10% 8% 17% 17% 10% 8% 39% 39% 9% 9% 14% 28% 9% 12% 14% 19% 11% 11% 31% 37% 8% 6% In the United States, only the state of California exceeds 10% of the total system sales. Florida is the second largest contributor to the network’s sales with 3%. The West Coast of the United States contributes 21% of the Company’s system sales (49% of the sales realized in the United States), while the states bordering the Atlantic represent 12% of the Company’s system sales (27% of the sales realized in the United States). During the 2018 fiscal year, casual dining concepts generated approximately 21% of system sales (up from 4% in 2017); this proportion has gone up following several acquisitions in the Casual Dining segment in the last two years. Quick Service locations currently represent two thirds of the network’s sales, down from 80% in 2017, and fast casual locations represent the balance. Page 18 System wide sales During the 2018 fiscal year, MTY’s network generated $2,782.5 million in sales, an increase of 21% compared to sales generated in the prior year. The increase is distributed as follows: (millions of $) Three months Twelve months Sales Reported sales – comparative period of 2017 fiscal year Net increase in sales generated by concepts acquired during the last 24 months Net decrease resulting from the sale of the Yogen Früz network Net increase (decrease) resulting from stores opened or closed in the last 24 months Impact of same store sales growth Cumulative impact of foreign exchange variation Other non-material variations Reported sales – 2018 fiscal year 544.2 153.4 — 7.2 (6.8) 11.7 (2.3) 707.4 2,301.8 516.6 (2.2) (13.0) (4.3) (11.8) (4.6) 2,782.5 During the 2018 fiscal year, system sales totaled $2,782.5 million, compared to $2,301.8 million during 2017. The acquisitions realized during 2017 and 2018 were the main drivers for the growth in system sales. The relative strength of the Canadian dollar during the 2018 fiscal year resulted in an unfavorable variation of $11.8 million in reported sales, while the net impact of stores opened and closed in the past 24 months was a $13.0 million decrease in system sales. Cold Stone Creamery is the only concept that currently represents more than 10% of system sales, generating approximately 21% of the total sales of MTY’s network during the year. Thai Express, Taco Time and Baja Fresh Mexican Grill are the second, third and fourth largest concepts in terms of system sales, generating less than 10% each of the network’s sales. System wide sales include sales for corporate and franchise locations and exclude sales realized by the distribution center or by the food processing plant. System sales are converted from the currency in which they are generated into Canadian dollars for presentation purposes; they are therefore subject to variations in foreign exchange rates. Same store sales During the year ended November 30, 2018, same store sales decreased by 0.2% over the same period last year. Same store sales growth was broken down as follows in MTY’s main regions: Region Canada United States International Total Quarter ended November 30, 2018 Year ended November 30, 2018 +0.0% -1.9% -8.9% -1.3% +1.0% -0.9% -4.9% -0.2% During the fourth quarter, same store sales for Canadian locations increased slightly and has now been positive for the last five quarters. Ontario continues to show positive same store sales growth following the price increases resulting from the change in minimum wage regulation. British Columbia also continues on the momentum gained last year and posted positive results. Alberta had a third consecutive positive same store sales quarter, while Saskatchewan remains under significant pressure following the introduction of the meal tax in the second quarter of 2017. In the United States, there were no abrupt movements in same store sales during the quarter; California continued to be slightly negative during the quarter, as were Arizona, Maryland and Oregon, which are important markets for the Company. California was negatively impacted by the extreme weather, including major forest fires which disrupted operations for a large part of the state. Given the weight of California on the US portion of MTY’s network, the negative results of the quarter have translated into a negative performance for the United States as a whole. Page 19 During the fourth quarter, the concepts acquired in the Imvescor transaction have posted a positive same store sales growth of 1.9%, led by Ben & Florentine, Mikes and Scores which all posted strong performances. Those figures are excluded from the information presented above as MTY has not owned those networks for more than 12 months yet. For 2019, management expects competition in both the Canadian and US markets to intensify further from a price, product, experience and delivery to end customer points of view. Restaurants are facing more and more competition for food dollars coming from various sources including retail stores “grab and go” and “meal kit deliveries” types of offering. Drastic minimum wage increases in some regions are expected to cause some changes to the industry, and the reaction of customers to those changes cannot be anticipated at this moment. The Company continues to monitor the situation and assess the impact of price increases on customer traffic in the impacted regions. Unusual weather patterns in North America have been affecting the Company and continue to affect it in unpredictable ways; the months of March, April and November have proven especially challenging in that regard in certain areas of the United States, causing sharp declines in sales and resulting in negative same store sales for that period. Similarly, sales from ribs and steak casual dining restaurants experienced a decline during the third quarter due to the unusually hot and dry summer in Eastern Canada which drove customers to enjoy more outdoor BBQ’s. MTY’s network has become more sensitive to the weather variations following the acquisition of Kahala; that sensitivity has been more noticeable recently as weather has been more volatile than in the past two years since we acquired Kahala. Although consumer confidence and the current economic environment seem favorable at the moment, volatility in the price of commodities and currencies has a very material impact on employment rates and disposable income for MTY’s customers, resulting in uncertainty with respect to the future. Stock options During the period, no options were granted. As at November 30, 2018 there were 200,000 options outstanding and none that are exercisable. Subsequent Events Acquisition of Casa Grecque On December 11, 2018, the Company completed its acquisition of substantially most of the assets of Casa Grecque for a total consideration of $22.4 million, of which $20.8 million was financed from MTY’s cash on hand and existing credit facilities, while $0.3 million in net liabilities was assumed and $1.3 million was held back. As at February 14, 2019, a preliminary purchase price allocation has not yet been completed. Acquisition of South St. Burger On December 11, 2018, the Company announced that one of its wholly owned subsidiaries had signed an agreement to acquire the assets of South St. Burger, a chain of gourmet burger restaurants. The acquisition is expected to be completed within 90 days of the announcement. Dividends On January 21, 2019, the Company approved a quarterly dividend of $0.165 per common share to be paid out February 15, 2019. Seasonality Results of operations for any interim period are not necessarily indicative of the results of operations for the full year. The Company expects that seasonality will be a material factor in the quarterly variation of its results. During January and February sales are historically lower than average due to weather conditions. Sales are historically above average during May to August; given the addition of Cold Stone Creamery, which is now MTY’s largest concept and which is also extremely seasonal, this pattern is expected to be more important in the future. This is generally as a result of higher traffic in the street front locations, higher sales from seasonal locations only operating during the summer months and higher sales from shopping centre locations. Sales for shopping mall locations are also higher than average in December during the holiday shopping period. Page 20 Contingent Liabilities The Company is involved in legal claims associated with its current business activities. The Company’s estimate of the outcome of these claims is disclosed in note 15 of the consolidated financial statements as at November 30, 2018. The timing of the outflows, if any, is out of the control of the Company and is as a result undetermined at the moment. Guarantee The Company has provided a guarantee on certain leases for which it is not the lessee, for a cumulative amount of $9,330 (November 30, 2017 - $1,398). Risks and uncertainties Despite the fact that the Company has various numbers of concepts, diversified in type of locations and geographies across Canada and the United States, the performance of the Company is also influenced by changes in demographic trends, traffic patterns, occupancy level of malls and office towers and the type, number, and location of competing restaurants. In addition, factors such as innovation, increased food costs, labour and benefits costs, occupancy costs and the availability of experienced management and hourly employees may adversely affect the Company. Changing consumer preferences and discretionary spending patterns could oblige the Company to modify or discontinue concepts and/or menus and could result in a reduction of revenue and operating income. Even if the Company was able to compete successfully with other restaurant companies with similar concepts, it may be forced to make changes in one or more of its concepts in order to respond to changes in consumer tastes or dining patterns. If the Company changes a concept, it may lose additional customers who do not prefer the new concept and menu, and it may not be able to attract a sufficient new customer base to produce the revenue needed to make the concept profitable. Similarly, the Company may have different or additional competitors for its intended customers as a result of such a concept change and may not be able to successfully compete against such competitors. The Company's success also depends on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce customer traffic or impose practical limits on pricing, either of which could reduce revenue and operating income. The growth of MTY is dependent on maintaining the current franchise system which is subject to the renewal of existing leases at sustainable rates, MTY’s ability to continue to expand by obtaining acceptable store sites and lease terms, obtaining qualified franchisees, increasing comparable store sales and completing acquisitions. The time, energy and resources involved in the integration of the acquired businesses into the MTY system and culture could also have an impact on MTY’s results. Off-balance sheet arrangement MTY has no off-balance sheet arrangements. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation. Details of transactions between the Company and other related parties are disclosed below. Compensation of key management personnel The remuneration of key management personnel and directors during the periods was as follows: Short-term benefits Share based payment Board member fees Total remuneration of key management personnel 2018 $ 2,051 659 64 2,774 2017 $ 1,406 401 49 1,856 Page 21 Key management personnel is composed of the Company’s CEO, COO’s, CFO. The remuneration of directors and key executives is determined by the Board of Directors having regard to the performance of individuals and market trends. Given its widely held share base, the Company does not have an ultimate controlling party; its most important shareholder is its Chair of the Board of Directors, who controls 19% of the outstanding shares. The Company also pays employment benefits to individuals related to members of the key management personnel described above. Their total remuneration was as follows: Short-term benefits Share based payment Consulting services Total remuneration of individuals related to key management personnel 2018 $ 452 20 13 485 2017 $ 660 30 — 690 Future accounting changes A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board (“IASB”) that are not yet effective for the period ended November 30, 2018 and have not been applied in preparing the consolidated financial statements. The following standards may have a material impact on the consolidated financial statements of the Company: Standard Issue date Effective date for the Company Impact October 2018 IFRS 3 Business Combinations IFRS 9 Financial Instruments July 2014 IFRS 15 Revenue from contracts with customers May 2014 IFRS 16 Leases IFRIC 22 Foreign Currency Transactions and advance Consideration IFRIC 23 uncertainty over income tax treatments June 2017 December 1, 2020 December 1, 2018 December 1, 2018 January 2016 December 1, 2019 December 2016 December 1, 2018 In assessment In assessment In assessment In assessment In assessment December 1 2019 In assessment In October 2018, the International Accounting Standards Board issued amendments to the definition of a business in IFRS 3 Business Combinations. The amendments are intended to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments to IFRS 3 are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively. Earlier application is permitted. The Company is still in the process of assessing the impact. IFRS 9 introduces a revised approach for the classification of financial assets based on how an entity manages financial assets and the characteristics of the contractual cash flows of the financial assets replacing the multiple rules in IAS 39. Most of the requirements in IAS 39 for classification and measurement of financial liabilities have been carried forward in IFRS 9. IFRS 9 also introduces a new hedge accounting model that is more closely aligned with risk-management activities and a new expected credit loss model for calculating impairment on financial assets replacing the incurred loss model in IAS 39. The Company will adopt IFRS 9 in its financial statements for the annual period beginning on December 1, 2018 and will apply the exemption from the requirement to restate comparative information. The Company is still in the process of assessing the impact of the new standard. The Company does not expect that the adoption of this standard will have a significant impact on its consolidated financial statements. Page 22 IFRS 15 replaces the following standards: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transactions Involving Advertising Services. This new standard sets out the requirements for recognizing and disclosing revenue that apply to all contracts with customers. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. IFRS 15 also includes a cohesive set of disclosure requirements that would result in an entity providing comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The Company will adopt IFRS 15 in its financial statements for the annual period beginning on December 1, 2018. The standard allows for either a full retrospective or modified retrospective transition method. Management has elected to apply the modified retrospective transition method. The Company has performed an assessment of the impact of the new standard and it has identified changes that will impact its consolidated financial statements. The Company has determined that the new standard will change the way the Company recognizes initial franchise fees, master franchise fees, transfer fees and renewal fees. Under the current guidance the Company recognizes these fees when we have performed all material obligations and services. Under the new guidance the Company will defer these fees and recognize them over the term of the related franchise agreement. This will have no impact on the amount or timing of cash flows. Moreover, under the current guidance the Company does not reflect promotional funds collected from franchisees and the related promotional expenditures in the consolidated statements of income. Upon adoption of the new standard, the promotional funds collected, and the related expenditures will be reported on a gross basis in the consolidated statements of income. To the extent that promotional funds received exceed the related promotional expenditures, the excess contributions will be recorded in accounts payable and accrued liabilities. We do not expect that there will be a material net income impact for this change. Additionally, under the new guidance, incremental costs to obtain a contract must be deferred if they are expected to be recoverable. Accordingly, the Company will recognize those costs as an asset when incurred and will amortize this asset over the term of the related franchise agreement. There will also be a change to the accounting for gift cards breakage for some of the gift card programs which were being accounted for based on the remote likelihood of a gift card being redeemed. Following the adoption of the new standard, all of the gift card programs will record breakage income on a prorated recognition basis. Lastly, restaurant construction and renovation revenue were previously recognized by reference to the stage of completion of the contract activity; under the new standard, the criteria for recognizing revenue over time are not met and therefore, the Company will now recognize revenue for these services at a point in time, when the construction and renovation is completed. As a result of the adoption of the new standard, the Company expects to record a pre-tax cumulative reduction adjustment of approximately $27.0 million to retained earnings as at December 1, 2018 primarily related to franchise, transfer and renewal fees. We do not expect a material adjustment to retained earnings related to the change in method for the restaurant construction and renovation. We do not expect that there will be a change in the other categories of revenues, although the Company is still evaluating the impact of adopting this standard, which may result in additional changes to be identified to accounting policies upon adoption. On January 13, 2016, the IASB issued IFRS 16 that provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. It supersedes IAS 17 Leases and its associated interpretive guidance. Significant changes were made to lessee accounting with the distinction between operating and finance leases removed and assets and liabilities recognized in respect of all leases (subject to limited exceptions for short-term leases and leases of low value assets). In contrast, IFRS 16 does not include significant changes to the requirements for lessors. IFRS 16 is effective January 1, 2019 with earlier application permitted for companies that have also adopted IFRS 15, Revenue from Contracts with Customers. The Company anticipates a material change in the presentation of both the consolidated statement of financial position and the consolidated statement of income. As a result of IFRS 16, both assets and liabilities will significantly increase and there will be material changes to the presentation of expenses associated with the new lease standard. In December 2016, the IASB issued IFRIC 22 which provides an interpretation on how to determine the date of the transaction when applying the standard on foreign currency transactions, IAS 21. The interpretation applies where an entity pays or receives consideration in advance for foreign currency-denominated contracts. The date of the transaction determines the exchange rate to be used on initial recognition of the related asset, expense or income. This Interpretation provides guidance for when a single payment or receipt is made, as well as for situations where multiple payments or Page 23 receipts are made and aims to reduce diversity in practice. This standard is effective for annual reporting periods beginning on or after January 1, 2018. On 7 June 2017, the IFRS Interpretations Committee issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 Income taxes are applied where there is uncertainty over income tax treatments. This standard is effective for annual reporting periods beginning on or after January 1, 2019. The Company continues to assess the impact of these standards on its consolidated financial statements. Although the extent of the impact has not yet been determined, the Company expects that the adoption of IFRS 16 will result in material changes to its consolidated statement of income and consolidated statement of financial position. Economic environment risk The business of the Company is dependent upon numerous aspects of a healthy general economic environment, from strong consumer spending to provide sales revenue, to available credit to finance the franchisees and the Company. In light of recent upheaval in economic, credit and capital markets, the Company’s performance and market price may be adversely affected. The Company’s current planning assumptions forecast that the quick service restaurant industry will be impacted by the current economic recession in the provinces in which it operates. However, management is of the opinion that the current economic situation will not have a major impact on the Company due to the following reasons: 1) the Company has strong cash flows; 2) quick service restaurants represent an affordable dining out option for consumers in an economic slowdown. Financial instruments and financial risk exposure In the normal course of business, the Company uses various financial instruments which by their nature involve risk, including market risk and the credit risk of non-performance by counterparties. These financial instruments are subject to normal credit standards, financial controls, risk management as well as monitoring procedures. The classification, carrying value and fair value of financial instruments are as follows: Financial assets Loans receivable Financial liabilities Long-term debt(1) Carrying amount $ 2018 Fair value Carrying amount $ $ 8,104 8,104 5,926 2017 Fair value $ 5,926 266,087 268,954 219,739 221,889 (¹) Excludes promissory notes and obligations to repurchase non-controlling interests The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is established based on market information available at the date of the consolidated statement of financial position. In the absence of an active market for a financial instrument, the Company uses the valuation methods described below to determine the fair value of the instrument. To make the assumptions required by certain valuation models, the Company relies mainly on external, readily observable market inputs. Assumptions or inputs that are not based on observable market data are used in the absence of external data. These assumptions or factors represent management’s best estimates of the assumptions or factors that would be used by market participants for these instruments. The credit risk of the counterparty and the Company’s own credit risk have been taken into account in estimating the fair value of all financial assets and financial liabilities, including derivatives. The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Loans receivable – The loans receivable generally bear interest at market rates and therefore it is management’s opinion that the carrying value approximates the fair value. Page 24 Long-term debt – The fair value of long-term debt is determined using the present value of future cash flows under current financing agreements based on the Company’s current estimated borrowing rate for a similar debt. Promissory notes The Company issued as part of its consideration for the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar promissory notes to the vendors and the minority shareholders of 10220396 Canada Inc. These promissory notes are subject to earn out provisions, which are based on future earnings. These promissory notes are repayable in October 2019 and June 2022. These promissory notes have been recorded at fair value and are remeasured on a recurring basis. Of the $7.0 million promissory note, $4.5 million is subject to an earn-out provision. A discounted cash flow method was used to capture the present value of the expected future economic benefits that will flow out of the Company, with respect to these promissory notes. These notes are subject to significant unobservable inputs such as discount rates and projected revenues and EBITDA. An increase or decrease by 1% in the discount rates used would have an impact of $0.1 million on the fair value, as at November 30, 2018 (November 30, 2017 - $0.3 million). A fair value re-measurement loss of $1.0 million was recorded for these promissory notes for the period ended November 30, 2018 (November 30, 2017 - $0.2 million). Obligations to repurchase non-controlling interests The Company has entered into an agreement to purchase the shares of a minority interest shareholder of 9974644 Canada Inc. at the option of the holder at anytime after December 9, 2017. The consideration is based on a multiplier of EBITDA, as prescribed by the terms of the shareholder agreement. As a result, the Company recorded a liability at fair value remeasured at each reporting period. A fair value remeasurement gain of $nil (2017- loss of $0.2 million) was recorded for this non-controlling interest obligation. The Company, in conjunction with the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar, entered into an agreement to acquire the non-controlling interest in 10220396 Canada Inc., in June 2022. The consideration to be paid for this acquisition will be based on future earnings. As a result, the Company recorded a liability at fair value and is remeasured at each reporting period. A discounted cash flow method was used to capture the present value of the expected future economic benefits that will flow out of the Company with respect to this obligation. The non-controlling interest buyback obligation is subject to significant unobservable inputs such as discount rate and projected EBITDA. An increase or decrease by 1% in the discount rates used would have an impact of $0.1 million on the carrying amount as at November 30, 2018 (November 30, 2017 - $0.1 million). A fair value re-measurement loss of $0.4 million (2017 - $0.1 million) was recorded for this non-controlling interest obligation. Fair value hierarchy (In thousands $) Financial liabilities Promissory notes related to the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar Non-controlling interest options Financial Liabilities Level 3 2018 7,034 2,495 9,529 2017 6,041 2,027 8,068 The Company has determined that the fair value of its financial assets and financial liabilities with short-term maturities approximates their carrying value. These financial instruments include cash, accounts receivables, accounts payable and accrued liabilities and deposits. The table below shows the fair value and the carrying value of other financial instruments as at November 30, 2018 and November 30, 2017. Since estimates are used to determine fair value, they must not be interpreted as being realizable in the event of a settlement of the instruments. Page 25 Risk Management Policies The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement of risks as at November 30, 2018. Credit risk The Company’s credit risk is primarily attributable to its trade receivables. The amounts disclosed in the consolidated statement of financial position are net of allowances for bad debts, estimated by the Company’s management based on past experience and counterparty specific circumstances. The Company believes that the credit risk of accounts receivable is limited for the following reasons: ‒ ‒ Other than receivables from international locations, the Company’s broad client base is spread mostly across Canada and USA, which limits the concentration of credit risk. The Company accounts for a specific bad debt provision when management considers that the expected recovery is less than the actual account receivable. The credit risk on the loans receivable is similar to that of accounts receivable. Foreign exchange risk Foreign exchange risk is the Company’s exposure to decreases or increases in financial instrument values caused by fluctuations in exchange rates. The Company’s exposure to foreign exchange risk mainly comes from sales denominated in foreign currencies. The Company’s USA and foreign operations use the U.S. dollar (USD) as functional currency. The Company’s exposure to foreign exchange risk stems mainly from cash, accounts receivable, long-term debt denominated in U.S. dollars, other working capital items and financial obligations from its USA operations. Fluctuations in USD exchange rate are deemed to have minimal risk as they are mostly offset by the stand-alone operations of the Company’s US entities. Total US net income for the period was C$56.4 million, (2017 - C$18.9 million). A 5% change to foreign exchange would represent a gain or loss to the Company of C$2.8 million (2017 - C$0.9 million). As at November 30, 2018, the Company has the following financial instruments denominated in foreign currencies: November 30, 2018 November 30, 2017 USD $ 980 330 CAD $ 1,304 439 Financial assets Cash Accounts receivable Financial liabilities Accounts payable and deposits Long-term debt (32 ) (14,000 ) (43 ) (18,621 ) Net Financial (Liabilities) Assets (12,722 ) (16,921 ) USD $ CAD $ 160 313 (24 ) — 449 206 403 (31 ) — 578 All other factors being equal, a reasonable possible 5% rise in foreign currency exchange rates per Canadian dollar would result in a loss of C$0.8 million (November 30, 2017 - C$nil) change on the consolidated statements of income and comprehensive income. Interest rate risk Interest rate risk is the Company’s exposure to increases and decreases in financial instrument values caused by the fluctuation in interest rates. The Company is exposed to cash flow risk due to the interest rate fluctuation in its floating- rate interest-bearing financial obligations. Page 26 Furthermore, upon refinancing of a borrowing, depending on the availability of funds in the market and lender perception of the Company’s risk, the margin that is added to the reference rate, such as LIBOR or prime rates, could vary and thereby directly influence the interest rate payable by the Company. Long-term debt stems mainly from acquisitions of long-term assets and business combinations. The Company is exposed to interest rate risk with its revolving credit facility which is used to finance the Company’s acquisitions. Both facilities bear interest at a variable rate and as such the interest burden could change materially. $256.1 million (2017 - $210.5 million) of the credit facilities were used as at November 30, 2018. A 100 basis points increase in the bank’s prime rate would result in additional interest of $2.6 million per annum (2017 - $2.1 million) on the outstanding credit facility. Liquidity risk Liquidity risk refers to the possibility of the Company not being able to meet its financial obligations when they become due. The Company has contractual and fiscal obligations as well as financial liabilities and is therefore exposed to liquidity risk. Such risk can result, for example, from a market disruption or a lack of liquidity. The Company actively maintains credit facilities to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost. As at November 30, 2018, the Company had an authorized revolving credit facility for which the available amount may not exceed $500,000 to ensure that sufficient funds are available to meet its financial requirements. The terms and conditions related to this revolving credit facility is described in note 14 of the consolidated financial statements as at November 30, 2018. The following are the contractual maturities of financial liabilities as at November 30, 2018 (In thousands $) Accounts payable and accrued liabilities Long-term debt Interest on long-term debt (1) Carrying amount $ Contractual cash flows $ 0 to 6 months $ 6 to 12 months $ 12 to 24 months $ Thereafter $ 68,700 275,616 68,700 278,483 68,700 1,449 — 7,444 — 4,326 — 265,264 n/a 24,581 344,316 371,764 4,609 74,758 4,609 9,218 12,053 13,544 6,145 271,409 (1) When future interest cash flows are variable, they are calculated using the interest rates prevailing at the end of the reporting period. Outlook In the very short term, management’s primary focus will be on continuing to produce positive same store sales while alleviating some of the financial pressure on its franchise partners by optimizing processes and sourcing products at prices that are stable and competitive. Innovation, quality of food and of customer service in each of our outlets and maximizing the value offered to our customers are going to be main areas of focus for the coming year. Management will also focus on the integration of the recently acquired brands. Following the closing of those acquisitions, MTY is well-positioned to expand in Canada and in the United States, including growing its existing Canadian brands into the United States. The restaurant industry will remain challenging in the future, and management believes that the focus on the food offering, innovation, consistency and store design will give MTY’s restaurants a stronger position to face challenges. Given this difficult competitive context in which more restaurants compete for a finite amount of consumer dollars, each concept needs to preserve and improve the relevance of its offer to consumers. Management will maintain its focus on maximizing shareholder value by adding new locations of some of its existing concepts and remains committed to seek potential acquisitions to increase its market share. Page 27 Controls and Procedures Disclosure controls and procedures Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with the securities regulatory authorities are recorded, processed, summarized and reported in a timely fashion. The disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in such reports is then accumulated and communicated to the Company’s management to ensure timely decisions regarding required disclosure. Management regularly reviews disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud. The Company’s Chief Executive Officer and the Chief Financial Officer have concluded that the design of the disclosure controls and procedures (“DC&P”) as at November 30, 2018 provide reasonable assurance that significant information relevant to the Company, including that of its subsidiaries, is reported to them during the preparation of disclosure documents. Internal controls over financial reporting The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining internal controls over financial reporting. The Company’s internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Over the course of 2018, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s internal controls over financial reporting were not effective due to the identification of a material weakness related to controls over the accounting for non-routine and complex transactions, including accounting for purchase price allocations in respect of business acquisitions. The Company’s review process did not sufficiently prevent or detect errors in the data inputs used or in the calculation of fair value. This control weakness lead to the correction of a preliminary purchase price. In the third quarter of 2018, the board of directors, Chief Executive Officer, and Chief Financial Officer implemented processes that significant purchase price allocations will be reviewed by a third-party expert to ensure the accuracy of the fair value of assets acquired and liabilities assumed in a business acquisition. Since these changes, no such acquisitions have occurred that would require a purchase price allocation to be completed which would allow the Company to test the control. Management has added resources and tools in the internal audit department to test and assess the control environment in the existing and newly acquired businesses. Material weaknesses cannot be considered remediated until the remedial controls operate for a sufficient period of time and management has concluded through testing, that these controls are operating effectively. Notwithstanding the outstanding assessment regarding the remediation actions as described above, the Chief Executive Officer and the Chief Financial Officer, together with Management have concluded the financial statements included in this report present fairly in all material respects its financial position, results of operations, capital position and cash flows for the periods presented in accordance with IFRS. The Chief Executive Officer and the Chief Financial Officer, together with Management, have concluded after having conducted an evaluation and to the best of their knowledge that, as at November 30, 2018, other than the material weakness mentioned above, no change in the Company’s internal controls over financial reporting occurred that could have materially affected or is reasonably likely to materially affect the Company’s internal controls over financial reporting. Limitations of Controls and Procedures Management, including the President and Chief Executive Officer and Chief Financial Officer, believes that any disclosure controls and procedures or internal controls over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the reality judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any control system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Page 28 Consolidated financial statements of MTY Food Group Inc. November 30, 2018 and 2017 February 14, 2019 Independent Auditor’s Report To the Shareholders of MTY Food Group Inc. We have audited the accompanying consolidated financial statements of MTY Food Group Inc. and its subsidiaries, which comprise the consolidated statement of financial position as at November 30, 2018 and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP 1250, René-Lévesque blvd W, office 2500, Montreal, Quebec, Canada H3B 4Y1 T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. Other Matter The consolidated financial statements of MTY Food Group Inc. and its subsidiaries for the year ended November 30, 2017 were audited by another auditor who expressed an unmodified opinion on those statements on February 15, 2018. Montreal, Canada 1 FCPA auditor, FCA, public accountancy permit No. A116853 2 MTY Food Group Inc. Consolidated statements of income Years ended November 30, 2018 and November 30, 2017 (In thousands of Canadian dollars, except per share amounts) Revenue Expenses Operating expenses Depreciation – property, plant and equipment Amortization – intangible assets Interest on long-term debt Impairment charge on property, plant and equipment and intangible assets Other income (charges) Unrealized and realized foreign exchange gain Interest income Gain on disposal of property, plant and equipment and intangible assets Loss on revaluation of financial liabilities recorded at fair value through profit and loss Income before taxes Income tax (recovery) expense Current Deferred Net income Net income attributable to: Owners Non-controlling interests Income per share Basic Diluted Notes 2018 $ 2017 $ 23 & 29 353,303 276,083 24 & 29 11 12 11 & 12 21 28 20 225,560 2,755 24,749 11,717 5,531 270,312 11 649 710 (1,461) (91) 182,357 2,724 20,178 10,314 1,000 216,573 2,004 439 1,120 (409) 3,154 82,900 62,664 18,721 (34,812) (16,091) 98,991 98,580 411 98,991 4.07 4.06 9,685 3,125 12,810 49,854 49,507 347 49,854 2.32 2.32 The accompanying notes are an integral part of the consolidated financial statements. Page 3 MTY Food Group Inc. Consolidated statements of comprehensive income Years ended November 30, 2018 and November 30, 2017 (In thousands of Canadian dollars, except per share amounts) Notes 2018 $ 2017 $ Net income 98,991 49,854 Items that may be reclassified subsequently to net income: Unrealized gain (loss) on translation of foreign operations 14,748 (17,307) Deferred income tax (expense) recovery on foreign currency translation adjustments Other comprehensive income (loss) Total comprehensive income Total comprehensive income attributable to: Owners Non-controlling interest (1,020) 13,728 112,719 1,547 (15,760) 34,094 112,308 411 112,719 33,747 347 34,094 The accompanying notes are an integral part of the consolidated financial statements. Page 4 MTY Food Group Inc. Consolidated statements of changes in shareholders’ equity Years ended November 30, 2018 and November 30, 2017 (In thousands of Canadian dollars, except per share amounts) Reserves Capital stock $ Other $ Contributed surplus $ Balance as at November 30, 2016 Net income for the year ended November 30, 2017 Other comprehensive income Total comprehensive income Acquisition of La Diperie (note 6) Acquisition of non-controlling interest in 7687567 Canada Inc (note 7) Acquisition of Steak Frites and Giorgio (note 6) Acquisition of Houston and Industria (note 6) Dividends Option granted to minority interest 9974644 Canada Inc. Stock options (note 19) Balance as at November 30, 2017 Net income for the year ended November 30, 2018 Other comprehensive income Total comprehensive income Acquisition of non-controlling interest in 8825726 Canada Inc (note 7) Issuance of shares on acquisition of Imvescor Restaurant Group (note 6) Dividends Stock options (note 19) Balance as at November 30, 2018 114,545 — — — — — — — — — 114,545 — — — — — — — — — — (850) — (850) — — — — 197,616 — — 312,161 — — — (850) The accompanying notes are an integral part of the consolidated financial statements. 481 — — — — — — — — 401 882 — — — — — 630 1,512 Foreign currency translation $ 2,615 — (15,760) Total reserves $ Retained earnings $ Total $ 3,096 192,543 — 49,507 (15,760) 310,184 49,507 — (15,760) 33,747 Equity attributable to non- controlling interest $ Total $ 682 347 310,866 49,854 — (15,760) 34,094 — — — — 615 615 — — — — — — (13,145) — 13,728 — — — — 583 (26) — — — — — — (9,832) — — (13,113) 232,192 — 98,580 (850) 401 (26) — — (9,832) (850) 401 333,624 98,580 — 13,728 112,308 13,728 (4) 16 63 (17) — — 1,702 411 — (30) 16 63 (9,849) (850) 401 335,326 98,991 13,728 112,719 — (257) (257) (802) (1,059) — — (14,530) — 315,985 — 197,616 (14,530) 630 629,391 630 1,245 — 197,616 (14,560) (30) 630 — 630,672 1,281 Page 5 MTY Food Group Inc. Consolidated statements of financial position As at November 30, 2018 and November 30, 2017 (In thousands of Canadian dollars, except per share amounts) Assets Current assets Cash Accounts receivable Inventories Loans receivable Income taxes receivable Other assets Prepaid expenses and deposits Loans receivable Deferred income tax Property, plant and equipment Intangible assets Goodwill Liabilities and Shareholders’ equity Liabilities Current liabilities Accounts payable and accrued liabilities Provisions Income taxes payable Deferred revenue and deposits Current portion of long-term debt Long-term debt Deferred revenue and deposits Deferred income taxes Notes 2018 $ 8 9 10 10 11 12 13 15 16 17 17 16 28 32,304 49,168 3,574 2,134 — 692 7,291 95,163 5,970 114 18,753 733,660 376,647 1,230,307 68,700 90,039 24,989 20,122 7,416 211,266 268,200 705 119,464 599,635 The accompanying notes are an integral part of the consolidated financial statements. 2017 $ (Adjusted, note 6 IX) 56,453 34,151 3,281 2,817 1,408 1,163 5,461 104,734 3,109 351 13,081 506,970 226,768 855,013 57,555 75,331 19,273 20,844 4,240 177 243 223,567 1,946 116,931 519,687 Page 6 Page 7 MTY Food Group Inc. Consolidated statements of cash flows Years ended November 30, 2018 and November 30, 2017 (In thousands of Canadian dollars, except per share amounts) Operating activities Net income Adjusting items: Interest on long-term debt Depreciation – property, plant and equipment Amortization – intangible assets Gain on disposal of property, plant and equipment and intangible assets Impairment charge on property, plant and equipment and intangible assets Loss on revaluation of financial liabilities recorded at fair value through profit and loss Income tax (recovery) expense Share based payments Income tax refunds received Income taxes paid Interest paid Changes in non-cash working capital items Other Cash flows provided by operating activities Investing activities Net cash outflow on acquisitions Additions to property, plant and equipment Additions to intangible assets Proceeds on disposal of property, plant and equipment and intangible assets Cash flows used in investing activities Notes 2018 $ 2017 $ 98,991 49,854 11,717 2,755 24,749 10,314 2,724 20,178 (710) (1,120) 11 & 12 5,531 1,461 (16,091) 630 129,033 1,189 (13,865) (9,448) (7,648) (1,631) 97,630 (123,243) (6,544) (1,286) 2,548 (128,525) 30 6 11 12 1,000 409 12,810 401 96,570 — (10,385) (7,646) 12,993 1,999 93,531 (23,939) (2,815) (453) 3,758 (23,449) Page 8 MTY Food Group Inc. Consolidated statements of cash flows (continued) Years ended November 30, 2018 and November 30, 2017 (In thousands of Canadian dollars, except per share amounts) Financing activities Issuance of long-term debt Repayment of long-term debt Cash acquired Capitalized financing costs Acquisition of the non-controlling interest Dividends paid to non-controlling shareholders of subsidiaries Dividends paid Cash flows provided by (used in) financing activities Net increase (decrease) in cash Effect of foreign exchange rate changes on cash Cash, beginning of period Cash, end of period Notes 2018 $ 2017 $ 6 7 134,805 (117,180) 4,652 (455) (1,059) (30) (14,530) 6,203 (24,692) 543 56,453 32,304 13,000 (48,452) — (519) (30) (17) (9,832) (45,850) 24,232 (4,039) 36,260 56,453 The accompanying notes are an integral part of the consolidated financial statements. Page 9 MTY Food Group Inc. Table of contents Independent Auditor’s Report 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. Description of the business Basis of preparation Accounting policies Critical accounting judgments and key sources of estimation uncertainty Future accounting changes Business acquisition Acquisition of non-controlling interest Accounts receivable Inventories Loans receivable Property, plant and equipment Intangible assets Goodwill Credit facilities Provisions Deferred revenue and deposits Long-term debt Capital Stock Stock options Income per share Financial instruments Capital disclosures Revenue Operating expenses Operating lease arrangements Guarantee Contingent liabilities Income taxes Segmented information Statement of cash flows Related party transactions Subsequent Events 2 11 11 12 25 27 29 39 40 41 41 42 44 47 47 48 49 49 50 50 51 51 55 56 56 57 57 57 58 60 62 63 64 Page 10 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 1. Description of the business MTY Food Group Inc. (the “Company”) is a franchisor in the quick service and casual dining food industry. Its activities consist of franchising and operating corporate-owned locations as well as the sale of retail products under a multitude of banners. The Company also operates a distribution center and a food processing plant, both of which are located in the province of Quebec. The Company is incorporated under the Canada Business Corporations Act and is listed on the Toronto Stock Exchange. The Company’s head office is located at 8210, Autoroute Transcanadienne, Ville Saint-Laurent, Quebec. 2. Basis of preparation The consolidated financial statements (“financial statements”) have been prepared on the historical cost basis except for certain financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17 and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • 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. The consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company, and tabular amounts are rounded to the nearest thousand ($000) except when otherwise indicated. Statement of compliance The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standard Board. These consolidated financial statements were authorized for issue by the Board of Directors on February 14, 2019. Page 11 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: • has power over the investee; • • has the ability to use its power to affect its returns. is exposed, or has rights, to variable returns from its involvement with the investee; and Principal subsidiaries are as follows: Principal subsidiaries Percentage of equity interest MTY Tiki Ming Enterprises Inc. MTY Franchising USA, Inc. BF Acquisition Holdings, LLC Kahala Brands Ltd. Imvescor Restaurant Group Inc. 8825726 Canada Inc. 9974644 Canada Inc. 10179612 Canada Inc. 10220396 Canada Inc. % 100 100 100 100 100 100 60 92.5 80 The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company's voting rights in an investee are sufficient to give it power, including: • the size of the Company's holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the Company, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statements of income and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Company's accounting policies. For the purposes of consolidating Imvescor Restaurant Group Inc., a period end date of November 25, 2018 was used as per their original reporting setup prior to acquisition. It was deemed not practical or material to change the year-end reporting date for this entity. Page 12 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Basis of consolidation (continued) All intercompany transactions, balances, revenue and expenses are eliminated in full on consolidation. Changes in the Company's ownership interests in existing subsidiaries Changes in the Company's ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Company's interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company. When the Company loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Company had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value. This is calculated as the sum of the acquisition date fair values of the assets transferred by the Company and liabilities incurred by the Company to the former owners of the acquiree in exchange for control of the acquiree. Acquisition related costs are recognized in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except for deferred tax assets or liabilities, which are recognized and measured in accordance with IAS 12 Income Taxes. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. Goodwill reflects how the acquisition will impact the Company’s ability to generate future profits in excess of existing profits. The consideration paid mostly relates to combined synergies, related mainly to revenue growth. These benefits are not recognized separately from goodwill as they do not meet the recognition criteria for identifiable intangible assets. Non-controlling interests are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation. These may be initially measured either at fair value or at the non- controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. Page 13 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Business combinations (continued) The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39 Financial Instruments: recognition and measurement, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. When a business combination is achieved in stages, the Company’s previously held equity interest in the acquiree is remeasured at fair value at the acquisition date (i.e. the date when the Company obtains control) and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted retrospectively during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Where goodwill forms part of a cash-generating unit and part of the operation within the unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation and the portion of the cash-generating unit retained. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes and duty. Revenue is generally recognized on the sale of products or services when the products are delivered or the services are performed, all significant contractual obligations have been satisfied and the collection is reasonably assured. i) Revenue from franchise locations Royalties are based either on a percentage of gross sales as reported by the franchisees or on a fixed monthly fee. They are recognized on an accrual basis in accordance with the substance of the relevant agreement, provided that it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Initial franchise fees are recognized when substantially all of the initial services as required by the franchise agreement have been performed. This usually occurs when the location commences operations. Restaurant construction and renovation revenue is recognized by reference to the stage of completion of the contract activity at the end of the reporting period. This is measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Page 14 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Revenue recognition (continued) i) Revenue from franchise locations (continued) When it is probable that total contract costs will exceed contract revenue, the expected loss is recognized as an expense immediately. When the outcome of the project cannot be estimated reliably, revenue is recognized to the extent of expenses recognized in the period. The excess of revenue recognized over amounts billed is recorded as part of accounts receivable. Master license fees are recognized when the Company has performed substantially all material initial obligations under the agreement, which usually occurs when the agreement is signed, which is recorded in franchise and transfer fees (note 23). Renewal and transfer fees are recognized when substantially all applicable services required by the Company under the franchise agreement have been performed. This generally occurs when the agreement is signed. This revenue is recorded in franchise and transfer fees (note 23). Revenue from equipment sale is recognized when the risk and rewards of ownership and title pass to buyer, generally upon the shipment of the equipment. This revenue is recorded in sale of goods, including construction revenues (note 23). Depending on the gift card program, the Company recognizes breakage income either on a pro-rated recognition basis, which is based on the historical redemption pattern of the gift cards or based on the remote likelihood of a gift card being redeemed. The Company also charges various program fees to its franchisees as gift cards are redeemed. Notably, this does not apply to gift card liabilities assumed upon a business acquisition, which are accounted for at fair value. The Company earns rent revenue on certain leases it holds and sign rental revenue; the Company’s policy is described below. The Company receives considerations from certain suppliers. Supplier contributions are recognized as revenue as they are earned and are recorded in other franchising revenue (note 23). Distribution and retail revenue is recognized when goods have been delivered or when significant risks and rewards of ownership have been transferred and it is probable that the economic benefit associated with the transaction will flow to the Company. These revenues are recorded in sale of goods (note 23). ii) Revenue from food processing Food processing revenue is recognized when goods have been delivered to end users or when significant risks and rewards of ownership have been transferred to distributors and it is probable that the economic benefit associated with the transaction will flow to the Company. iii) Revenue from corporate-owned locations Revenue from corporate-owned locations is recorded when goods are delivered to customers. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Company as lessor Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Page 15 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Leasing (continued) The Company as lessee Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Functional and presentation currency These consolidated financial statements are presented using the Company’s functional currency, which is the Canadian dollar. Each entity of the Company determines its own functional currency, and the financial statement items of each entity are measured using that functional currency. Functional currency is the currency of the primary economic environment in which the entity operates. The assets and liabilities of a foreign operation with a functional currency different from that of the Company are translated into the presentation currency using the exchange rate in effect on the reporting date. Revenue and expenses are translated into the presentation currency using the average exchange rate for the period. Exchange differences arising from the translation of a foreign operation are recognized in reserves. Upon complete or partial disposal of the investment in the foreign operation, the foreign currency translation reserve or a portion of it will be recognized in the consolidated statement of income in other income (charges). Foreign currency transactions At the end of each reporting period, the Company’s monetary assets and liabilities that are denominated in a currency other than the Company’s functional currency are translated using the exchange rate prevailing at that date. Non- monetary items are translated using historical exchange rates. Revenue and expenses are translated at the exchange rate in effect on the transaction date, except for depreciation and amortization, which are translated using historical exchange rates. Exchange gains and losses are recognized in profit or loss in the period in which they arise in foreign exchange gain (loss). Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profit for the year and adjustments to prior year provisions. Taxable profit differs from profit as reported in the consolidated statement of income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Page 16 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Deferred tax (continued) Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax for the year Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the consolidated statement of financial position at their historical costs less accumulated depreciation (buildings) and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, including any costs directly attributable to bringing the asset to a working condition for its intended use. Equipment, leasehold improvements, rolling stock and computer hardware are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognized so as to write off the cost or valuation of assets (other than land) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each year, with the effect of any changes in estimate accounted for on a prospective basis. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Depreciation is based on the following terms: Buildings Equipment Leasehold improvements Rolling stock Computer hardware Straight-line Straight-line Straight-line Straight-line Straight-line 25 to 50 years 3 to 10 years Term of the lease 5 to 7 years 3 to 7 years Page 17 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Intangible assets Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses, if applicable. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives and amortization methods are reviewed at the end of each year, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses, if applicable. Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Subsequent to initial recognition, intangible assets having a finite life acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, if applicable, on the same basis as intangible assets that are acquired separately. Intangible assets having an indefinite life are not amortized and are therefore carried at cost less accumulated impairment losses, if applicable. Derecognition of intangible assets An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized. The Company currently carries the following intangible assets in its books: Franchise rights and master franchise rights The franchise rights and master franchise rights acquired through business combinations were recognized at the fair value of the estimated future cash inflows related to the acquisition of franchises. The franchise rights and master franchise rights are generally amortized on a straight-line basis over the term of the agreements which typically range between 10 to 20 years. Step-in rights Step-in rights are the rights of the Company to take over the premises and associated lease of a franchised location in the event the franchise is in default of payments. These are acquired through business combinations and are recognized at their fair value at the time of the acquisition. They are amortized over the term of the franchise agreement. Trademarks Trademarks acquired through business combinations were recognized at their fair value at the time of the acquisition and are not amortized. Trademarks were determined to have an indefinite useful life based on their strong brand recognition and their ability to generate revenue through changing economic conditions with no foreseeable time limit. Leases Leases, which represent the value associated with preferential terms or locations, are amortized on a straight-line basis over the term of the leases. Other Included in other intangible assets are primarily purchased software, which are being amortized over their expected useful life on a straight-line basis. Page 18 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Intangible assets (continued) Impairment of long-lived assets At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash- generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. A majority of the Company’s intangible assets do not have cash inflows independent of those from other assets and as such are tested within their respective cash generating units. Intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. The Company does not reduce the carrying value of an asset below the highest of its fair value less cost of disposal and its value in use. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Impairment of goodwill For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually as at August 31, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss in the consolidated statement of income. An impairment loss recognized for goodwill is not reversed in subsequent periods. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Cash Cash item includes cash on hand and short-term investments, if any, with maturities upon acquisition of generally three months or less or that are redeemable at any time at full value and for which the risk of a change in value is not significant. Page 19 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Inventories Inventories are measured at the lower of cost and net realizable value. Costs of inventories are determined on a first- in-first-out basis and include acquisition costs, conversion costs and other costs incurred to bring inventories to their present location and condition. The cost of finished goods includes a pro-rata share of production overhead based on normal production capacity. In the normal course of business, the Company enters into contracts for the construction and sale of franchise locations. The related work in progress inventory includes all direct costs relating to the construction of these locations, and is recorded at the lower of cost and net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Provisions are measured at the present value of the cash flows expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. This is recorded in cost of goods sold and rent (note 24) on the consolidated statement of income. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Onerous contracts Present obligations arising under onerous contracts are recognized and measured as provisions. An onerous contract is considered to exist where the Company has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. Gift card and loyalty program liabilities Gift card liability represents liabilities related to unused balances on reloadable payment cards. Loyalty program liabilities represent the dollar value of the loyalty points earned and unused by customers. The Company’s various franchised and corporate owned locations, in addition to third-party companies, sell gift cards to be redeemed at the Company’s corporate and franchised locations for food and beverages only. Proceeds from the sale of gift cards are included in gift card liability until redeemed by the gift cardholder as a method of payment for good and beverage purchases. The Company recognizes breakage on all material gift card programs in its consolidated statements of income based on historical load and redemption patterns. The redemption rate is established following an analysis performed over 10 years of the redemption patterns as well as expected future trends. The expected breakage is then recognized into income on a pro rata basis as gift cards are redeemed. For all other non-material gift card programs, the Company estimates based on historical redemption patterns, the portion of gift cards that have a remote likelihood of being redeemed and recognizes the amount in its consolidated statements of income, except for those gift cards liabilities assumed upon a business acquisition. Page 20 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Provisions (continued) Gift card and loyalty program liabilities (continued) Due to the inherent nature of gift cards, it is not possible for the Company to determine what portion of the gift card liability will be redeemed in the next 12 months and, therefore, the entire unredeemed gift card liability is considered to be a current liability. Litigation, disputes and closed stores Provisions for the expected cost of litigation, disputes and the cost of settling leases for closed stores are recognized when it becomes probable the Company will be required to settle the obligation, at management’s best estimate of the expenditure required to settle the Company’s obligation. Contingent liabilities acquired in a business combination Contingent liabilities acquired in a business combination are initially measured at fair value at the acquisition date. At the end of subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognized in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less cumulative amortization recognized, if any. Deferred revenue and deposits The Company has deferred revenue and deposits for amounts received for which the service or sale of goods associated with these revenues have not yet been rendered. These are comprised mainly of franchise fee deposits, unearned rent, and supplier contributions. Revenues on these are recorded once the service or contract terms have been met and the services or goods have been delivered. Financial instruments Financial assets and financial liabilities are recognized when an entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. The subsequent measurement of financial assets and financial liabilities is dependent on their classification as described below. Their classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Company’s designation of such instruments. Classification Cash Accounts receivable Deposits Loans receivable Accounts payable and accrued liabilities Non-interest-bearing contract cancellation fees and holdbacks Revolving Credit Facility Promissory notes related to the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar Non-controlling interest buyback obligation Non-controlling interest option FVTPL FVTPL FVTPL Loans and receivables Loans and receivables Loans and receivables Loans and receivables Other financial liabilities Other financial liabilities Other financial liabilities Page 21 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Financial instruments (continued) Financial assets Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”), ‘held-to-maturity’ investments and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade and other receivables, cash and deposits) are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. Objective evidence of impairment could include:  significant financial difficulty of the issuer or counterparty; or  breach of contract, such as a default or delinquency in interest or principal payments; or  it becoming probable that the borrower will enter bankruptcy or financial reorganization; or  the disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past a certain credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. Page 22 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Financial instruments (continued) Financial assets (continued) For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Derecognition of financial assets The Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. Financial liabilities Classification as debt or equity Debt and equity instruments issued by an entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs. Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’. Other financial liabilities Financial instruments included in this category are initially recognized at fair value less transaction costs and are subsequently measured at amortized cost using the effective interest method. FVTPL Financial instruments included in this category are initially recognized at fair value and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is immediately recognized in the consolidated statements of income. Derecognition of financial liabilities The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss. Page 23 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 3. Accounting policies (continued) Financial instruments (continued) Derivative financial instruments The Company, from time to time, uses derivative financial instruments in the form of foreign exchange swap contracts to manage its current and anticipated exposure to fluctuations in foreign exchange rates. The Company does not enter into derivative financial instruments for trading or speculative purposes. Derivative financial instruments not designated within an effective hedging relationship are measured at fair value with changes recorded in the consolidated statements of income. Derivative financial instruments that are designated within an effective hedging relationship are formally identified and the relationship between hedging instruments and hedged items are documented by the Company. Derivative financial instruments designated as cash flow hedges are measured at fair value with changes in fair value recorded in other comprehensive income. Effectiveness tests are performed to evaluate hedge effectiveness at inception and on a quarterly basis. If and when a derivative instrument is no longer expected to be effective, hedge accounting is discontinued, the derivative is held, sold or expired and the cumulative gain or loss previously recognized in accumulated other comprehensive income is transferred to the consolidated statements of income in the same period that the hedge item affects net income. Promotional funds The Company manages the promotional funds of its banners. They are established specifically for each banner to collect and administer funds dedicated for use in advertising and promotional programs as well as other initiatives designed to increase sales and enhance the image and reputation of the banners. Contributions to the funds are made based on a percentage of sales. The revenue and expenses of the promotional funds are not included in the Company’s consolidated statement of income because the contributions to these funds are segregated and designated for specific purposes. The combined amount payable resulting from the promotional fund reserves amounts to a surplus of $11,652 (November 30, 2017 – $8,836). These amounts are included in accounts payable and accrued liabilities. Share-based payment arrangements The Company measures stock options granted to employees that vest in specified installments over the service period based on the fair value of each tranche on the grant date by using the Black-Scholes pricing model. Based on the Company’s estimate of equity instruments that will eventually vest, a compensation expense is recognized over the vesting period applicable to the tranche with a corresponding increase to contributed surplus. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 19. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment in contributed surplus. When the stock options are exercised, share capital is credited by the sum of the consideration paid and the related portion previously recorded in contributed surplus. Operating Segments An operating segment is a distinguishable component of the Company that engages in business activities from which it may earn revenue and incur expenses, including revenue and expenses that relate to transactions with any of the Company’s other components, and for which separate financial information is available. Segment disclosures are provided for the Company’s operating segments (note 29). The operating segments are determined based on the Company’s management and internal reporting structure. All operating segments’ operating results are regularly reviewed by the Chief Operating Officers to make decisions on resources to be allocated to the segment and to assess its performance. Page 24 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 4. Critical accounting judgments and key sources of estimation uncertainty In the application of the Company’s accounting policies, which are described in note 3, management is required to make judgements in applying accounting policies and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following are the critical judgements, apart from those involving estimations, that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Impairment of long-lived assets The Company assesses whether there are any indicators of impairment for all long-lived assets at each reporting period date. In addition, management is required to use judgement in determining the grouping of assets to identify cash-generating units; the determination is done based on management’s best estimation of what constitutes the lowest level at which an asset or group of assets has the possibility of generating cash inflows. Revenue recognition In making their judgement, management considers the detailed criteria for the recognition of revenue from the sale of goods and for construction contracts set out in IAS 18 Revenue and IAS 11 Construction contracts and, in particular, whether the Company had transferred to the buyer the significant risks and rewards of ownership of the goods. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Business combinations For business combinations, the Company must make assumptions and estimates to determine the purchase price accounting of the business being acquired. To do so, the Company must determine the acquisition date fair value of the identifiable assets acquired, including such intangible assets as franchise rights and master franchise rights, trademarks, step-in rights and liabilities assumed. Among other things, the determination of these fair market values involves the use of discounted cash flow analyses and future system sales growth. Goodwill is measured as the excess of the fair value of the consideration transferred including the recognized amount of any non- controlling interest in the acquiree over the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date. These assumptions and estimates have an impact on the asset and liability amounts recorded in the consolidated statement of financial position on the acquisition date. In addition, the estimated useful lives of the acquired amortizable assets, the identification of intangible assets and the determination of the indefinite or finite useful lives of intangible assets acquired will have an impact on the Company’s future profit or loss. Impairment of plant, property and equipment, franchise rights and trademarks The Company performs an annual impairment test of its trademarks. The recoverable amounts of the Company’s assets are generally estimated based on value-in-use calculations using a discounted cash flow approach as this was determined to be higher than fair value less cost of disposal, except for certain corporate store assets for which fair value less cost of disposal was higher than their value in use. The fair value less cost of disposal of corporate stores is generally determined by estimating the liquidation value of the restaurant equipment. Page 25 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Key sources of estimation uncertainty (continued) Impairment of plant, property and equipment, franchise rights and trademarks (continued) In the current year, the value in use of CGUs tested was higher or equal to the carrying value of the assets. Impairment assessments were established using discount rates of 7.7% in Canada and 8.3% in the United States of America (US) on the corporate stores, the trademarks and franchise rights. Discount rates are based on pre-tax rates that reflect the current market assessments, taking the time value of money and the risks specific to the CGU into account. In the US, a change in the discount rate applied of 1% would result in an additional impairment of approximately $1,500. This total additional impairment would be related to 5 different US brands. A change in the discount rate applied of 1% in Canada would not result in any additional impairment. During the year, the Company recognized an impairment on four of its trademarks and on the franchise rights of three of its brands following a decline in the performance of the related brands. The total impairment of $5,827 (2017 - $1,000) represents a write down of the carrying value to the fair value of the trademarks and franchise rights. This was offset by a reversal of impairment of $2,356. The fair value was determined using significant unobservable inputs such as discount rates and projected revenues and EBITDA. The fair value is classified as level 3 in the fair value hierarchy. During the year, the Company also recognized an impairment on property, plant and equipment for two of its brands. The cumulative impairment on property, plant and equipment of $2,060 (2017 - $158) represents a write down of the carrying value of the leasehold improvements and equipment to their fair value less cost of disposal, which was higher than their value in use. These calculations take into account our best estimate of future cash flows, using previous year’s cash flows for each CGU to extrapolate a CGUs future performance to the earlier of the termination of the lease (if applicable) or 5 years and a terminal value is calculated beyond this period, assuming no growth to the cash flows of previous periods. A cash flow period of 5 years was used as predictability for periods beyond this cannot be estimated with reasonable accuracy. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of recoverable amount in use of the CGUs to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. During the year or in prior year, no impairment charge on goodwill was required. The Company used discount rates of 7.7% in Canada and 8.3% in the US for its assessment of goodwill. A growth of 1% was applied to the cash flows used to estimate the terminal value. A change in the discount rate applied of 1% would not result in an additional impairment. Useful lives of property, plant and equipment and intangible assets As described in note 3 above, the Company reviews the estimated useful lives of property, plant and equipment and intangible assets with definite useful lives at the end of each year and assesses whether the useful lives of certain items should be shortened or extended, due to various factors including technology, competition and revised service offerings. During the years ended November 30, 2018 and 2017, the Company was not required to adjust the useful lives of any assets based on the factors described above. Provisions The Company makes assumptions and estimations based on its current knowledge of future disbursements it will have to make in connection with various events that have occurred in the past and for which the amount to be disbursed and the timing of such disbursement are uncertain at the date of producing its financial statements. This includes provisions for onerous contracts, litigations and disputes and contingencies. Gift card liabilities Management is required to make certain assumptions in both the prorated recognition based on redemption pattern and remoteness recognition of gift card breakage. The significant estimates are breakage rate and the redemption patterns. Page 26 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Key sources of estimation uncertainty (continued) Revenue recognition for construction and renovation contracts Restaurant construction and renovation revenue is recognized by reference to the stage of completion of the contract activity at the end of the reporting period. Management makes an estimate on the percentage of completion based on costs incurred to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Accounts receivable The Company recognizes an allowance for doubtful accounts based on past experience, outlet-specific situation, counterparty’s current financial situation and age of the receivables. Trade receivables include amounts that are past due at the end of the reporting period and for which the Company has not recognized an allowance for doubtful accounts because there was no significant change in the credit quality of the counterparty and the amounts are therefore considered recoverable. Supplier contributions The Company recognizes certain revenues based on estimated considerations to be received from suppliers. These estimates are based on historical patterns of purchase and earned revenues. 5. Future accounting changes A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board (“IASB”) that are not yet effective for the period ended November 30, 2018, and have not been applied in preparing these consolidated financial statements. The following standards may have a material impact on the consolidated financial statements of the Company: Standard Issue date Effective date for the Company October 2018 IFRS 3 Business Combinations IFRS 9 Financial Instruments July 2014 IFRS 15 Revenue from contracts with customers May 2014 IFRS 16 Leases IFRIC 22 Foreign Currency Transactions and advance Consideration IFRIC 23 uncertainty over income tax treatments January 2016 December 2016 June 2017 December 1, 2020 December 1, 2018 December 1, 2018 December 1, 2019 December 1, 2018 December 1 2019 In assessment Impact In assessment In assessment In assessment In assessment In assessment In October 2018, the International Accounting Standards Board issued amendments to the definition of a business in IFRS 3 Business Combinations. The amendments are intended to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments to IFRS 3 are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively. Earlier application is permitted. The Company is still in the process of assessing the impact. IFRS 9 introduces a revised approach for the classification of financial assets based on how an entity manages financial assets and the characteristics of the contractual cash flows of the financial assets replacing the multiple rules in IAS 39. Most of the requirements in IAS 39 for classification and measurement of financial liabilities have been carried forward in IFRS 9. IFRS 9 also introduces a new hedge accounting model that is more closely aligned with risk-management activities and a new expected credit loss model for calculating impairment on financial assets replacing the incurred loss model in IAS 39. Page 27 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 5. Future accounting changes (continued) The Company will adopt IFRS 9 in its financial statements for the annual period beginning on December 1, 2018 and will apply the exemption from the requirement to restate comparative information. The Company is still in the process of assessing the impact of the new standard. The Company does not expect that the adoption of this standard will have a significant impact on its consolidated financial statements. IFRS 15 replaces the following standards: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transactions Involving Advertising Services. This new standard sets out the requirements for recognizing and disclosing revenue that apply to all contracts with customers. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. IFRS 15 also includes a cohesive set of disclosure requirements that would result in an entity providing comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The Company will adopt IFRS 15 in its financial statements for the annual period beginning on December 1, 2018. The standard allows for either a full retrospective or modified retrospective transition method. Management has elected to apply the modified retrospective transition method. The Company has performed an assessment of the impact of the new standard and it has identified changes that will impact its consolidated financial statements. The Company has determined that the new standard will change the way the Company recognizes initial franchise fees, master franchise fees, transfer fees and renewal fees. Under the current guidance, the Company recognizes these fees when we have performed all material obligations and services. Under the new guidance, the Company will defer these fees and recognize them over the term of the related franchise agreement. This will have no impact on the amount or timing of cash flows. Moreover, under the current guidance the Company does not reflect promotional funds collected from franchisees and the related promotional expenditures in the consolidated statements of income. Upon adoption of the new standard, the promotional funds collected, and the related expenditures will be reported on a gross basis in the consolidated statements of income. To the extent that promotional funds received exceed the related promotional expenditures, the excess contributions will be recorded in accounts payable and accrued liabilities. We do not expect that there will be a material net income impact for this change. Additionally, under the new guidance, incremental costs to obtain a contract must be deferred if they are expected to be recoverable. Accordingly, the Company will recognize those costs as an asset when incurred and will amortize this asset over the term of the related franchise agreement. There will also be a change to the accounting for gift cards breakage for some of the gift card programs which were being accounted for based on the remote likelihood of a gift card being redeemed. Following the adoption of the new standard, all of the gift card programs will record breakage income on a prorated recognition basis. Lastly, restaurant construction and renovation revenues were previously recognized by reference to the stage of completion of the contract activity; under the new standard, the criteria for recognizing revenue over time are not met and therefore, the Company will now recognize revenue for these services at a point in time, when the construction and renovations are completed. As a result of the adoption of the new standard, the Company expects to record a pre-tax cumulative reduction adjustment of approximately $27,000 to retained earnings as at December 1, 2018 primarily related to franchise, transfer and renewal fees. We do not expect a material adjustment to retained earnings related to the change in method for the restaurant construction and renovation. We do not expect that there will be a change in the other categories of revenues, although the Company is still evaluating the impact of adopting this standard, which may result in additional changes to be identified to accounting policies upon adoption. Page 28 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 5. Future accounting changes (continued) On January 13, 2016, the IASB issued IFRS 16 that provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. It supersedes IAS 17 Leases and its associated interpretive guidance. Significant changes were made to lessee accounting with the distinction between operating and finance leases removed and assets and liabilities recognized in respect of all leases (subject to limited exceptions for short-term leases and leases of low value assets). In contrast, IFRS 16 does not include significant changes to the requirements for lessors. IFRS 16 is effective January 1, 2019 with earlier application permitted for companies that have also adopted IFRS 15, Revenue from Contracts with Customers. The Company anticipates a material change in the presentation of both the consolidated statement of financial position and the consolidated statement of income. As a result of IFRS 16, both assets and liabilities will significantly increase and there will be material changes to the presentation of expenses associated with the new lease standard. In December 2016, the IASB issued IFRIC 22 which provides an interpretation on how to determine the date of the transaction when applying the standard on foreign currency transactions, IAS 21. The interpretation applies where an entity pays or receives consideration in advance for foreign currency-denominated contracts. The date of the transaction determines the exchange rate to be used on initial recognition of the related asset, expense or income. This Interpretation provides guidance for when a single payment or receipt is made, as well as for situations where multiple payments or receipts are made and aims to reduce diversity in practice. This standard is effective for annual reporting periods beginning on or after January 1, 2018. On 7 June 2017, the IFRS Interpretations Committee issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 Income taxes are applied where there is uncertainty over income tax treatments. This standard is effective for annual reporting periods beginning on or after January 1, 2019. The Company continues to assess the impact of these standards on its consolidated financial statements. 6. Business acquisition I) Acquisition of the Counter Custom Burgers and Built Custom Burgers On December 1, 2017, the Company’s US operations completed the acquisition of all the limited liability company interests in CB Franchise Systems, LLC and Built Franchise Systems, LLC. The total consideration for the transaction was $29,971 (US$23,545). The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. As previously reported Adjustment Adjusted Final Consideration Consideration paid: Purchase price Repayment of external debt Working capital Discount on non-interest-bearing holdback Net purchase price Holdback Less cash acquired Net consideration paid/cash outflow 28,893 1,261 1,141 (334) 30,961 (2,625) (34) 28,302 — — (990) — (990) 990 — — $ 28,893 1,261 151 (334) 29,971 (1,635) (34) 28,302 Page 29 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) I) Acquisition of the Counter Custom Burgers and Built Custom Burgers (continued) The purchase price allocation is as follows: Net assets acquired: Current assets Cash Accounts receivable Inventory Prepaid expenses and deposits Property, plant and equipment Franchise rights Trademarks Goodwill (1) Current liabilities Accounts payable and accrued liabilities Unredeemed gift card liability Deferred revenues Deferred income tax Net purchase price (1) Goodwill is deductible for tax purposes. As previously reported Adjustment Adjusted Purchase price allocation 34 426 71 87 618 633 9,165 16,802 5,146 (i) 32,364 956 291 104 52 1,403 30,961 $ 34 426 71 87 618 633 9,165 16,802 4,156 31,374 956 291 104 52 1,403 29,971 — — — — — — — — (990) (990) — — — — — (990) (i) The Company has recorded an adjustment to its previously reported preliminary purchase price allocation during the period relating to working capital items. Total expenses incurred related to acquisition costs amounted to $77. The purchase price allocation is final. Page 30 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) II) Acquisition of Imvescor Restaurant Group Inc. On March 1, 2018, the Company’s Canadian operations, through the merger of a wholly owned subsidiary with Imvescor Restaurant Group Inc. (“IRG”), acquired all the outstanding shares of IRG. The purpose of the transaction was to diversify the Company’s range of offering with a highly scalable portfolio of recognized restaurant brands and concepts. Since the original preliminary purchase price allocation disclosure in the second quarter, the total consideration was adjusted to $250,814, to reflect an adjustment to the accounting treatment of certain stock options that were settled on acquisition and had previously been expensed as well as the additional issuance of shares to a shareholder. As previously reported Adjustment Adjusted Consideration $ 52,373 197,144 (i) 249,517 (4,702) 244,815 825 472 1,297 87 1,384 53,198 197,616 250,814 (4,615) 246,199 Consideration paid: Cash and amount paid for early settlement of options Shares issued Total consideration Less cash acquired Total consideration (i) Additional issuance of 9,285 shares to a shareholder. Page 31 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) II) Acquisition of Imvescor Restaurant Group Inc. (continued) The preliminary purchase price allocation is as follows: Net assets acquired: Current assets Cash Accounts receivable Notes receivable Inventory Prepaid expenses and deposits Notes receivable Projects under construction Property, plant and equipment Other intangible assets Franchise rights Trademarks Goodwill (1) Current liabilities As previously reported $ Adjustment $ 4,702 (i) 11,121 (i & ii) (ii) — (i) (i) (i) (iii) (ii) 214 387 16,424 915 567 6,248 — 70,200 125,700 104,403 324,457 Adjusted Purchase price allocation $ 4,615 9,788 367 214 204 15,188 1,134 1,242 4,945 347 70,200 140,600 93,029 326,685 14,610 5,157 539 175 20,481 20,000 138 35,252 75,871 250,814 (87) (1,333) 367 — (183) (1,236) 219 675 (1,303) 347 — 14,900 (11,374) 2,228 643 357 (10) (215) 775 — 138 18 931 1,297 Accounts payable and accrued liabilities 13,967 (i) Unredeemed gift card liability and loyalty points Deferred revenues Income tax payable Credit facility Deferred revenues Deferred income tax Net purchase price (iv) (i) (i) (ii) (iii) 4,800 549 390 19,706 20,000 — 35,234 74,940 249,517 (1) Goodwill is not deductible for tax purposes. The Company has recorded adjustments to its previously reported preliminary purchase price allocation reported in prior quarters. The adjustments are as follows: (i) (ii) (iii) (iv) Adjustment for working capital items. Reclass of presentation. Adjustment of fair value for certain items of property, plant and equipment and intangibles To record loyalty points assumed. Page 32 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) II) Acquisition of Imvescor Restaurant Group Inc. (continued) Total expenses incurred related to acquisition costs amounted to approximately $1,720 and are recorded as an operating expense on the consolidated statements of income. The purchase price allocation is still preliminary and may be subject to revision. III) Acquisition of Grabbagreen On March 15, 2018, the Company’s US operations completed its acquisition of the assets of Grabbagreen franchise system. The total consideration for the transaction was $3,409 (US$2,633). The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid: Purchase price Net obligations assumed Discount on non-interest-bearing holdback Net purchase price Holdback Net consideration paid/cash outflow The preliminary purchase price allocation is as follows: Net assets acquired: Current assets Prepaid expenses and deposits Property, plant and equipment Franchise rights Trademarks Goodwill (1) Current liabilities Unredeemed gift card liability Net purchase price (1) Goodwill is deductible for tax purposes 2018 $ 3,463 (29) (25) 3,409 (322) 3,087 As previously reported Adjustment Adjusted Purchase price allocation (i) (i) (i) 17 73 377 2,070 918 3,455 46 3,409 — (58) — (130) 188 — — — $ 17 15 377 1,940 1,106 3,455 46 3,409 (i) The Company has recorded an adjustment to the fair value for certain items of property, plant and equipment and trademark from its previously reported preliminary purchase price allocation during the period. Total expenses incurred related to acquisition costs amounted to $nil. The purchase price allocation is still preliminary as post-closing adjustments have not been finalized. Page 33 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) IV) Acquisition of Timothy’s World Coffee and Mmmuffins On April 4, 2018, the Company’s Canadian operations completed its acquisition of the assets of Timothy’s World Coffee and Mmmuffins. The total consideration for the transaction was $1,321. The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid: Purchase price Net obligations assumed Working capital Discount on non-interest-bearing holdback Net purchase price Holdback Less cash acquired Net consideration paid/cash outflow The preliminary purchase price allocation is as follows: Net assets acquired: Current assets Cash Inventory Prepaid expenses and deposits Property, plant and equipment Franchise rights Perpetual license Goodwill (1) Current liabilities Accounts payable and accrued liabilities Unredeemed gift card liability As previously reported Adjustment Adjusted Consideration 1,675 (130) — (16) 1,529 (301) (3) 1,225 — (208) — (208) 208 — — $ 1,675 (130) (208) (16) 1,321 (93) (3) 1,225 As previously reported Adjustment Adjusted Purchase price allocation 3 64 43 110 100 417 232 846 (i) 1,705 101 75 (i) 176 — — — — — — — 120 120 — 328 328 $ 3 64 43 110 100 417 232 966 1,825 101 403 504 Net purchase price 1,529 (208) 1,321 (1) Goodwill is deductible for tax purposes (i) The Company has recorded an adjustment to its previously reported preliminary purchase price allocation during the period relating to working capital items. Total expenses incurred related to acquisition costs amounted to $nil. The purchase price allocation is still preliminary as post-closing adjustments have not been finalized. Page 34 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) V) Acquisition of SweetFrog On September 25, 2018, the Company’s US operations completed its acquisition of the assets of SweetFrog Premium Frozen Yogurt (“SweetFrog”). The total consideration for the transaction was $41,507 (US$32,064). The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid: Purchase price Net obligations assumed Discount on non-interest-bearing holdback Net purchase price Holdback Net consideration paid/cash outflow The preliminary purchase price allocation is as follows: Net assets acquired: Current assets Inventory Prepaid expenses Goodwill (1 & 2) Current liabilities Accounts payable and accrued liabilities Unredeemed gift card liability Deferred revenue Net purchase price (1) Goodwill is deductible for tax purposes 2018 $ 45,307 (3,383) (417) 41,507 (4,113) 37,394 2018 $ 254 30 284 44,155 44,439 146 2,757 29 2,932 41,507 (2) Given the size of the transaction, the Company has not yet completed its fair value assessment of the intangibles assets and goodwill acquired. Consequently, part of the fair value adjustments, mainly relating to franchise rights and trademark, related to this acquisition are included in goodwill in the preliminary fair value assessment of the assets acquired. Total expenses incurred related to acquisition costs amounted to $nil. The purchase price allocation is still preliminary as post-closing adjustments have not been finalized and as such material adjustments will be made. Page 35 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) VI) Acquisition of La Diperie (2017) On December 9, 2016, the Company announced it had completed through its 60% interest in 9974644 Canada Inc. the acquisition of the assets of La Diperie. The Company’s share of the purchase consideration amounted to $917. The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid: Purchase price Discount on non-interest-bearing holdback Net purchase price Holdback (note 17) Net consideration paid Less: Issuance of shares to non-controlling interest Net cash outflow (1) Non-controlling interest was measured at fair value. The price allocation is as follows: Net assets acquired: Current assets Inventory Franchise rights Goodwill (1) Deferred income tax Liability Net purchase price (1) Goodwill is deductible for tax purposes 2017 $ 1,529 (13) 1,516 (87) 1,429 (615) 814 2017 $ 12 12 63 1,444 1,507 3 1,516 Total expenses incurred related to acquisition costs amounted to $nil. The purchase price has been finalized and no adjustments were recorded to the preliminary purchase price calculation. VII) Acquisition of Steak Frites St-Paul and Giorgio Ristorante (2017) On May 8, 2017, the Company announced it had completed through its 83.25% controlling interest in 10179612 Canada Inc., the acquisition of the assets of Steak Frites St-Paul and Giorgio Ristorante. The total consideration for the transaction was $467 of which $347 was settled in cash. The transaction resulted in an increase of $253 and $214 to goodwill and trademarks, respectively. The purchase price has been finalized and no adjustments were recorded to the preliminary purchase price calculation. Page 36 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) VIII) Acquisition of The Works Gourmet Burger Bistro (2017) On June 9, 2017, the Company’s Canadian operations announced it had completed through its 100% owned subsidiary MTY Tiki Ming Entreprises Inc., the acquisition of the assets of The Works Gourmet Burger Bistro. The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid: Purchase price Discount on non-interest-bearing holdback Working capital and assumed obligations Net purchase price Holdback Net consideration paid and net cash outflow The final purchase price allocation is as follows: Net assets acquired: Current assets Inventory Prepaid expenses Property, plant and equipment Franchise rights Trademark Goodwill (1) Current liabilities Accounts payable and accrued liabilities and unredeemed gift card liability Deferred revenue Net purchase price (1) Goodwill is deductible for tax purposes 2017 $ 8,200 (43) (273) 7,884 (747) 7,137 2017 $ 75 49 124 1,398 1,363 3,481 1,844 8,210 95 231 326 7,884 Total expenses incurred related to acquisition costs amounted to $79. The expenses are presented in operating expenses in consolidated statements of income. The purchase price has been finalized and no adjustments were recorded to the preliminary purchase price calculation. Page 37 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) IX) Acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar (2017) On June 16, 2017, the Company’s Canadian operations announced it had completed through its 80% controlling interest in 10220396 Canada Inc., the acquisition of the assets of Houston Avenue Bar & Grill and Industria Pizzeria + Bar. The Company’s share of the purchase consideration amounted to $19,631. The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. The purchase price has been finalized and adjustments to the preliminary purchase price calculation are as follows: As previously reported Adjustment Final Consideration Consideration paid: Purchase price Undiscounted promissory notes Contingent consideration in the form of promissory notes Working capital Non-controlling interest buyback obligation Non-controlling interest (1) Net purchase price Promissory notes and non-controlling interest buyback obligation Net cash outflow $ 20,972 (7,910) 5,248 (304) 957 63 19,026 (6,268) 12,758 $ — — 605 — — — 605 (605) — The final purchase price allocation is as follows: As previously reported Adjustment Net assets acquired: Franchise rights Trademark Goodwill (2) Current liabilities Accounts payable and accrued liabilities Deferred revenue Deferred income tax liability Net purchase price $ 5,833 5,667 7,975 19,475 4 300 304 145 19,026 $ 369 467 (168) 668 — — — 63 605 $ 20,972 (7,910) 5,853 (304) 957 63 19,631 (6,873) 12,758 Final $ 6,202 6,134 7,807 20,143 4 300 304 208 19,631 (1) Non-controlling interest was measured at fair value which includes the use of discounted cash flow model which is subject to significant unobservable inputs such as discount rate and projected EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. (2) Goodwill is deductible for tax purposes. Page 38 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 6. Business acquisitions (continued) X) Acquisition of Dagwoods Sandwiches and Salads (2017) On September 29, 2017, the Company announced it had completed through its 100% owned subsidiary MTY Tiki Ming Entreprises Inc., the acquisition of the assets of Dagwoods Sandwiches and Salads for a consideration of $2,916. The purpose of the transaction was to diversify the Company’s range of offering as well as to complement existing MTY brands. Consideration paid: Purchase price Discount on non-interest-bearing holdback Working capital and assumed obligations Net purchase price Holdback Net consideration paid and cash outflow The final purchase price allocation is as follows: Net assets acquired: Franchise rights Trademark Goodwill (1) Current liabilities Accounts payable and accrued liabilities Deferred revenue Net purchase price (1) Goodwill is deductible for tax purposes 2017 $ 3,000 (20) (64) 2,916 (330) 2,586 2017 $ 640 1,271 1,070 2,981 11 54 65 2,916 Total expenses incurred related to acquisition costs amounted to $nil. The purchase price has been finalized and no adjustments were recorded to the preliminary purchase price calculation. 7. Acquisition of non-controlling interest In September 2018, the Company acquired the remaining 10% non-controlling interest of 8825726 Canada Inc. (Madison’s) for a cash consideration of $1,059. Following the transaction, 8825726 Canada Inc. has become a wholly owned subsidiary. In April 2017 the Company acquired the remaining 1% non-controlling interest of 7687567 Canada Inc. (Lucky 8 Foods), for a cash consideration of $30. Following the transaction, 7687567 Canada Inc. has become a wholly owned subsidiary. Page 39 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 8. Accounts receivable The following table provides details on trade accounts receivable not past due, past due and the related allowance for doubtful accounts: Total accounts receivable Less : Allowance for doubtful accounts Total accounts receivable, net Of which: Not past due Past due for more than one day but for no more than 30 days Past due for more than 31 days but for no more than 60 days Past due for more than 61 days Total accounts receivable, net Allowance for doubtful accounts, beginning of year Additions Additions through acquisition Reversals Write-off Allowance for doubtful accounts, end of year 2018 $ 58,488 9,320 49,168 40,521 1,559 2,168 4,920 49,168 2018 $ 9,611 315 379 208 (1,193) 9,320 2017 $ 43,762 9,611 34,151 25,885 1,568 1,483 5,215 34,151 2017 $ 8,007 2,566 13 402 (1,377) 9,611 The Company has recognized an allowance for doubtful accounts based on past experience, outlet-specific situation, counterparty’s current financial situation and age of the receivables. Trade receivables disclosed above include amounts that are past due at the end of the reporting period and for which the Company has not recognized an allowance for doubtful accounts because there was no significant change in the credit quality of the counterparty and the amounts are therefore considered recoverable. The Company does not hold any collateral or other credit enhancements over these balances nor does it have the legal right of offset against any amounts owed by the Company to the counterparty. The concentration of credit risk is limited due to the fact that the customer base is large and unrelated. Page 40 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 9. Inventories Raw materials Finished goods Total inventories 2018 $ 1,709 1,865 3,574 2017 $ 1,966 1,315 3,281 Inventories are presented net of a $46 allowance for obsolescence ($17 as at November 30, 2017). All of the inventories are expected to be sold within the next twelve months. Inventories expensed during the year ended November 30, 2018 were $65,289 (2017 - $43,047). 10. Loans receivable Loans receivable generally result from the sales of franchises and of various advances to certain franchisees and consist of the following: 2018 $ 2017 $ 8,104 8,104 (2,134) 5,970 5,926 5,926 (2,817) 3,109 Loans receivable bearing interest between nil to 9% per annum, receivable in monthly installments of $342 in aggregate, including principal and interest, ending in 2030 Current portion The capital repayments in subsequent years will be: 2019 2020 2021 2022 2023 Thereafter $ 2,134 833 2,718 1,667 202 550 8,104 There is currently an allowance for doubtful accounts offset against the loans receivable balance of $2,928 (2017 - $1,182). Page 41 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 11. Property, plant and equipment Cost Land Buildings Leasehold improve- ments Equipment Computer hardware $ $ $ $ $ Balance at November 30, 2016 Additions Disposals Foreign exchange Additions through business combinations Balance at November 30, 2017 Additions Disposals Impairment (1) Foreign exchange Additions through 1,236 — — — — 1,236 — — — — 3,778 223 (12) — 5,495 873 (1,921) 1 8,568 1,522 (2,026) (89) — 831 567 3,989 1,077 — — — 5,279 1,855 (1,053) (867) 2 8,542 3,130 (1,149) (1,193) (53) 869 191 (28) (8) — 1,024 419 — — 6 business combinations — — 3,695 1,270 461 Balance at November 30, 2018 1,236 5,066 8,911 10,547 1,910 Rolling stock $ Total $ 149 6 (14) (3) 20,095 2,815 (4,001) (99) — 1,398 138 63 — — 3 267 471 20,208 6,544 (2,202) (2,060) (42) 5,693 28,141 (1) During the year, as the result of a decline in the financial performance, the Company carried out a review of the recoverable amounts of the capital assets related to certain corporate stores. The review led to the recognition of a non-cash impairment loss of $2,060 composed of leasehold improvements and equipment. Of this amount, $1,515 was related to Canadian operations while $545 was related to the US operations. Page 42 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 11. Property, plant and equipment (continued) Accumulated depreciation Land Buildings Leasehold improve- ments Equipment Computer hardware $ $ $ $ Rolling stock $ Total $ Balance at November 30, 2016 Eliminated on disposal of assets Foreign exchange Depreciation expense Balance at November 30, 2017 Eliminated on disposal of assets Foreign exchange Depreciation expense Balance at November 30, 2018 $ — — — — — — — — — 804 1,934 2,852 386 32 6,008 (7) — (836) 3 (720) (17) 175 733 1,615 (12) (2) 176 972 1,834 3,730 548 — — 189 (120) — (393) 15 834 1,347 — 3 332 1,161 2,548 4,699 883 (14) — 25 43 — 1 53 97 Carrying amounts Land Buildings Leasehold improve- ments Equipment Computer hardware Rolling stock $ $ $ $ $ November 30, 2017 November 30, 2018 1,236 1,236 3,017 3,905 3,445 6,363 4,812 5,848 476 1,027 $ 95 374 (1,589) (16) 2,724 7,127 (513) 19 2,755 9,388 Total $ 13,081 18,753 Page 43 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 12. Intangible assets Cost Balance at November 30, 2016 Additions Disposals Acquisition through business combinations (Adjusted, see note 6 IX) Foreign exchange Impairment Balance at November 30, 2017 (Adjusted, see note 6 IX) Additions Disposals Acquisition through business combinations Foreign exchange Impairment net of reversal Balance at November 30, 2018 Franchise and master franchise rights Trademarks Step-in rights Leases Other(1) $ $ $ $ $ Total $ 245,055 97 (3,050) 323,261 5 (24) 1,199 — — 908 — (170 ) 1,294 351 — 571,717 453 (3,244) 8,268 (7,229) (309) 11,100 (10,421) (731) 242,832 — — 323,190 — — 80,159 5,910 159,342 8,680 (1,248) (2,223 ) — — — 1,199 — — — — — — — — 738 — — — — — — — — 19,368 (17,650) (1,040) 1,645 1,286 (2) 579 16 — 569,604 1,286 (2) 240,080 14,606 (3,471) 327,653 488,989 1,199 738 3,524 822,103 Page 44 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 12. Intangible assets (continued) Accumulated amortization Balance at November 30, 2016 Disposals Foreign exchange Amortization Impairment Balance at November 30, 2017 Foreign exchange Amortization Balance at November 30, 2018 Franchise and master franchise rights $ 44,138 (2,584) (400) 19,792 (40) 60,906 1,060 24,187 86,153 Trademarks Step-in rights Leases $ — — — — — — — — — $ 380 — — 120 — 500 — 120 620 $ 905 (170) — 3 — 738 — — 738 Carrying amounts Franchise and master franchise rights Trademarks Step-in rights Leases $ $ November 30, 2017 (Adjusted, see note 6 IX) November 30, 2018 181,926 241,500 323,190 488,989 $ 699 579 $ — — Other(1) $ 227 — — 263 — 490 — 442 Total $ 45,650 (2,754) (400) 20,178 (40) 62,634 1,060 24,749 932 88,443 Other(1) $ Total $ 1,155 2,592 506,970 733,660 (1) Other items include $579 ($347 as at November 30, 2017) of unamortizable licenses with an indefinite term. Page 45 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 12. Intangible assets (continued) Indefinite life intangibles, which consist of trademarks and perpetual licenses have been allocated for impairment testing purposes to the following cash generating units: Valentine Jugo Juice Mr. Sub Extreme Pita Mucho Burrito ThaïZone Madisons New York Grill & Bar Manchu Wok (1) Big Smoke Burger Blimpie (1) Cold Stone Creamery(1) Great Steak (1) Pinkberry (1) Planet Smoothie(1) Surf City Squeeze Taco Time(1) Baja Fresh (1) The Works Gourmet Burger Bistro Houston Avenue Bar & Grill The Counter Custom Burger (2) Built Custom Burger Pizza Delight Mikes Scores Baton Rouge Ben & Florentine Retail Other 2018 $ 3,338 5,425 11,320 3,179 9,816 7,417 3,410 5,831 3,305 6,112 155,674 3,774 8,928 9,521 3,041 35,068 20,162 3,481 3,963 12,503 5,054 16,000 33,300 29,400 32,000 15,000 14,900 28,646 489,568 2017 $ (Adjusted, note 6 IX) 3,338 5,425 11,320 3,179 9,816 7,417 3,410 5,772 3,305 5,922 150,840 3,657 8,650 9,226 2,946 33,979 19,536 3,481 3,963 — — — — — — — — 28,355 323,537 (1) Variance from prior year due to foreign exchange conversion. (2) Amount impacted by foreign exchange conversion since the acquisition date. During the year, as the result of a decline in the financial performance of certain brands, the Company carried out a review of the recoverable amounts of the intangible assets. The review led to the recognition of a non-cash impairment loss of $1,248 in franchise rights and $4,579 in trademarks for the US segment, which have been recognized in the consolidated statement of income. This was offset by a $2,356 reversal of the Country Style impairment loss taken in 2014 in the Canadian segment. The reversal was the result of favourable performance in the last few years by the brand as a result of increases in the number of non-traditional locations opened. Page 46 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 13. Goodwill The changes in the carrying amount of goodwill are as follows: Balance, beginning of year Additional amounts recognized from business acquisitions (note 6) Houston Avenue Bar & Grill and Industria Pizzeria + Bar purchase price adjustment Foreign Exchange Balance, end of year 2018 $ 2017 $ (Adjusted, note 6 IX) 226,768 220,928 143,412 — 6,467 376,647 12,586 (168) (6,578) 226,768 Goodwill was allocated to two CGU’s in 2018, these two CGUs being Canada and the US & International. For the purpose of impairment testing, goodwill is allocated to the group of CGUs that are considered to represent the lowest level within the group at which the goodwill is monitored for internal management purposes. As at November 30, 2018, goodwill for Canada and the US represent $163,327 and $213,320 respectively (November 30, 2017 - $69,286 and $157,482 respectively). 14. Credit facilities During the year the Company modified its existing credit facilities payable to a syndicate of lenders. The modification resulted in an increase to the revolving credit facility which now has an authorized amount of $500,000 (November 30, 2017 - $305,000). Transaction costs of $652 were incurred and will be deferred and amortized over the remaining 3 years of the life of the revolving credit facility. As at November 30, 2018, $256,143 was drawn from the revolving credit facility (November 30, 2017 - $210,522). Interest rates are variable and are based on various financing instruments that have maturities from 1 to 180 days. Interest rates also depend on the Company’s debt-to-equity ratio, where a lower indebtedness results in more favorable terms. For amounts drawn in US dollars, the Company has the option to pay interest based on US base rates, 5.75% as at November 30, 2018 (4.75% as at November 30, 2017), plus a margin not exceeding 2.00%, or based on LIBOR plus a margin not exceeding 2.50% (November 30, 2017 – 2.00% and 3.00% respectively). For amounts drawn in Canadian dollars, the Company has the option to pay interest based on the Canada Prime rate, 3.95% as at November 30, 2018 (4.20% as at November 30, 2017), as determined by the Toronto-Dominion Bank of Canada, plus a margin not exceeding 2.00% or based on Banker’s Acceptances, plus a margin not exceeding 3.00%. Under this facility, the Company is required to comply with certain financial covenants, including a debt to EBITDA ratio and interest and rent coverage ratio. As at November 30, 2018, the Company was in compliance with those financial covenants. Page 47 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 15. Provisions Included in provisions are the following amounts: Litigations and disputes Closed stores Gift card liabilities/loyalty programs liabilities Total 2018 $ 2,390 1,250 3,640 86,399 90,039 2017 $ 3,168 1,413 4,581 70,750 75,331 The provision for litigation and disputes represents management’s best estimate of the outcome of litigations and disputes that are ongoing at the date of the statement of financial position. This provision is made of multiple items; the timing of the settlement of this provision is unknown given its nature, as the Company does not control the litigation timelines. The payables related to closed stores mainly represent amounts that are expected to be disbursed to exit leases of underperforming or closed stores. The negotiations with the various stakeholders are typically short in duration and are expected to be settled within a few months following the recognition of the provision. The provisions also varied in part due to foreign exchange fluctuations related to the US subsidiaries. Provision for litigation and disputes and closed stores, beginning balance Reversals Amounts used Additions Impact of foreign exchange 2018 $ 4,581 (1,897) (2,810) 3,710 56 2017 $ 2,641 (637) (1,475) 4,134 (82) Provision for litigation and disputes and closed stores, ending balance 3,640 4,581 The gift card and loyalty programs liabilities are the estimated balance in gift cards and points outstanding at the date of the consolidated statement of financial position. The timing of the reversal of this provision is dependent on customer behaviour and therefore outside of the Company’s control. Page 48 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 16. Deferred revenue and deposits Franchise fee deposits Unearned rent Supplier contributions and other allowances Current portion 17. Long-term debt Non-interest bearing contract cancellation fees and holdbacks on acquisitions Fair value of promissory notes related to the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar, repayable October 2019 and June 2022 (note 6 and note 21) Fair value non-controlling interest buyback obligation in 10220396 Canada Inc (note 6 and note 21)(1) Fair value non-controlling interest option in La Diperie (note 21)(2) Revolving credit facility payable to a syndicate of lenders (note 14)(3) Credit facility financing costs Current portion 2018 $ 8,682 3,415 8,730 20,827 2017 $ 9,105 3,377 10,308 22,790 (20,122) 705 (20,844) 1,946 2018 $ 2017 $ (Adjusted, note 6 IX) 11,898 11,367 7,034 6,041 1,501 994 256,143 (1,954) 275,616 (7,416) 268,200 1,026 1,001 210,522 (2,150) 227,807 (4,240) 223,567 (1) Payable at the earlier of 3 years from the date option is exercised or June 2022. (2) Payable on demand. (3) Under the revolving credit facility, the Company has the option to draw funds in Canadian or in US dollars, at its discretion. The facility’s maturity is July 21, 2021 and must be repaid in full at that time. As at November 30, 2018, the Company had drawn C$237,522 and US$14,000 (C$18,621), (2017-US$ nil and C$210,522) and had elected to pay interest based on LIBOR and bankers’ acceptances plus the applicable margins. Page 49 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 18. Capital Stock Authorized, unlimited number of common shares without nominal or par value Number 2018 Amount $ Number Balance beginning of period Shares issued as part of acquisition (note 6) Balance end of year 21,374,497 114,545 21,374,497 3,795,281 25,169,778 197,616 312,161 — 21,374,497 2017 Amount $ 114,545 — 114,545 19. Stock options The Company offered for the benefit of the CEO a share option plan. In accordance with the terms of the plan the Company may grant stock options on the common shares at the discretion of the Board of Directors. 300,000 shares are available for issuance under the share option plan as of November 30, 2018 (2017- 300,000). Under the Stock Option Plan of the Company, the following options were granted and are outstanding as at November 30: 2018 Weighted average exercise price Number of Options Outstanding beginning of period Granted Outstanding end of year Vested end of period 200,000 — 200,000 — $ 48.36 — 48.36 — 2017 Weighted average exercise price $ — 48.36 48.36 — Number of Options — 200,000 200,000 — Options granted during the period ended November 30, 2017 have a service condition in order to vest and excluding the first year, will vest pro-rata over a service period of 10 years. The options will expire on April 11, 2027. The fair value of the stock options granted for the period ended November 30, 2017 was $14.69 per option. The fair value of the options granted was estimated at the grant date for purposes of determining share-based payment expense using the Black-Scholes option pricing model. Page 50 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 19. Stock options (continued) The following assumptions were used: Acquisition date share price Exercise price Expected dividend yield Expected volatility Risk-free interest rate Expected life (in years) 2017 $48.36 $48.36 1.0% 24.9% 1.8% 10 years A compensation expense of $630 was recorded for period ended November 30, 2018 (2017-$401). The expense is presented in wages and benefits that is included in operating expenses in the consolidated statements of income. 20. Income per share The following table provides the weighted average number of common shares used in the calculation of basic income per share and that used for the purpose of diluted income per share: Weighted daily average number of common shares - basic Assumed exercise of stock options (1) Weighted daily average number of common shares - diluted 2018 2017 24,228,206 44,444 24,272,650 21,374,497 — 21,374,497 (1) The calculation of the assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. The number of excluded options was 155,556 (November 30, 2017 – 200,000). 21. Financial instruments In the normal course of business, the Company uses various financial instruments which by their nature involve risk, including market risk and the credit risk of non-performance by counterparties. These financial instruments are subject to normal credit standards, financial controls, risk management as well as monitoring procedures. Page 51 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 21. Financial instruments (continued) Fair value of recognized financial instruments Promissory notes The Company issued as part of its consideration for the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar promissory notes to the vendors and the minority shareholders of 10220396 Canada Inc. These promissory notes are subject to earn out provisions, which are based on future earnings. These promissory notes are repayable in October 2019 and June 2022. These promissory notes have been recorded at fair value and are remeasured on a recurring basis. Of the $7,034 promissory note, $4,487 is subject to an earn-out provision. A discounted cash flow method was used to capture the present value of the expected future economic benefits that will flow out of the Company, with respect to these promissory notes. These notes are subject to significant unobservable inputs such as discount rates and projected revenues and EBITDA. An increase or decrease by 1% in the discount rates used would have an impact of $145 on the fair value, as at November 30, 2018 (November 30, 2017 - $254). A fair value re-measurement loss of $993 was recorded for these promissory notes for the period ended November 30, 2018 (November 30, 2017 - $188). Obligations to repurchase non-controlling interests The Company has entered into an agreement to purchase the shares of a minority interest shareholder of 9974644 Canada Inc. at the option of the holder at any time after December 9, 2017. The consideration is based on a multiplier of EBITDA, as prescribed by the terms of the shareholder agreement. The Company records a liability at fair value (note 17) which is remeasured at each reporting period. A fair value remeasurement gain of $7 (2017- loss of $152) was recorded for this non-controlling interest obligation. The Company, in conjunction with the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar, entered into an agreement to acquire the non-controlling interest in 10220396 Canada Inc., in June 2022. The consideration to be paid for this acquisition will be based on future earnings. The Company recorded a liability at fair value (note 17) which is remeasured at each reporting period. A discounted cash flow method was used to capture the present value of the expected future economic benefits that will flow out of the Company with respect to this obligation. The non-controlling interest buyback obligation is subject to significant unobservable inputs such as a discount rate and projected EBITDA. An increase or decrease by 1% in the discount rates used would have an impact of $52 on the carrying amount as at November 30, 2018 (November 30, 2017 - $52). A fair value re-measurement loss of $475 (2017 - $69) was recorded for this non-controlling interest obligation. Fair value hierarchy Financial liabilities Promissory notes related to the acquisition of Houston Avenue Bar & Grill and Industria Pizzeria + Bar Non-controlling interest buyback options Financial Liabilities Level 3 2018 7,034 2,495 9,529 2017 6,041 2,027 8,068 The Company has determined that the fair value of its financial assets and financial liabilities with short-term maturities approximates their carrying value. These financial instruments include cash, accounts receivables, accounts payable and accrued liabilities and deposits. The table below shows the fair value and the carrying value of other financial instruments as at November 30, 2018 and November 30, 2017. Since estimates are used to determine fair value, they must not be interpreted as being realizable in the event of a settlement of the instruments. Page 52 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 21. Financial instruments (continued) Fair value of recognized financial instruments (continued) Financial assets Loans receivable Financial liabilities Long-term debt(1) Carrying amount $ 8,104 2018 Fair value $ 8,104 Carrying amount $ 5,926 2017 Fair value $ 5,926 266,087 268,954 219,739 221,889 (1) Excludes promissory notes and obligations to repurchase non-controlling interests Determination of fair value The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Loans receivable – The loans receivable generally bear interest at market rates and therefore it is management’s opinion that the carrying value approximates the fair value. Long-term debt – The fair value of long-term debt is determined using the present value of future cash flows under current financing agreements based on the Company’s current estimated borrowing rate for a similar debt. The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement of risks as at November 30, 2018. Credit risk The Company’s credit risk is primarily attributable to its trade receivables. The amounts disclosed in the consolidated statement of financial position are net of allowances for bad debts, estimated by the Company’s management based on past experience and counterparty specific circumstances. The Company believes that the credit risk of accounts receivable is limited for the following reasons: ‒ Other than receivables from international locations, the Company’s broad client base is spread mostly across Canada and USA, which limits the concentration of credit risk. ‒ The Company accounts for a specific bad debt provision when management considers that the expected recovery is less than the actual account receivable. The credit risk on the loans receivable is similar to that of accounts receivable. Foreign exchange risk Foreign exchange risk is the Company’s exposure to decreases or increases in financial instrument values caused by fluctuations in exchange rates. The Company’s exposure to foreign exchange risk mainly comes from sales denominated in foreign currencies. The Company’s USA and foreign operations use the U.S. dollar (USD) as functional currency. The Company’s exposure to foreign exchange risk stems mainly from cash, accounts receivable, long-term debt denominated in U.S. dollars, other working capital items and financial obligations from its USA operations. Fluctuations in USD exchange rate are deemed to have minimal risk as they are mostly offset by the stand-alone operations of the Company’s US entities. Page 53 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 21. Financial instruments (continued) Foreign exchange risk (continued) Total US net income for the period was C$56,424 (2017 - C$18,855). A 5% change to foreign exchange would represent a gain or loss to the Company of C$2,821 (2017 - C$942). As at November 30, 2018, the Company has the following financial instruments denominated in foreign currencies: November 30, 2018 November 30, 2017 USD $ 980 330 CAD $ 1,304 439 Financial assets Cash Accounts receivable Financial liabilities Accounts payable and deposits Long-term debt (32 ) (14,000 ) (43) (18,621) Net Financial (Liabilities) Assets (12,722 ) (16,921) USD $ CAD $ 160 313 (24) — 449 206 403 (31) — 578 All other factors being equal, a reasonable possible 5% rise in foreign currency exchange rates per Canadian dollar would result in a loss of C$846 (November 30, 2017 - C$29 gain) change on the consolidated statements of income and comprehensive income. Interest rate risk Interest rate risk is the Company’s exposure to increases and decreases in financial instrument values caused by the fluctuation in interest rates. The Company is exposed to cash flow risk due to the interest rate fluctuation in its floating- rate interest-bearing financial obligations. Furthermore, upon refinancing of a borrowing, depending on the availability of funds in the market and lender perception of the Company’s risk, the margin that is added to the reference rate, such as LIBOR or prime rates, could vary and thereby directly influence the interest rate payable by the Company. Long-term debt stems mainly from acquisitions of long-term assets and business combinations. The Company is exposed to interest rate risk with its revolving credit facility which is used to finance the Company’s acquisitions. The facility bears interest at a variable rate and as such the interest burden could change materially. $256,143 (2017 - $210,522) of the credit facility was used as at November 30, 2018. A 100 basis points increase in the bank’s prime rate would result in additional interest of $2,561 per annum (2017 - $2,105) on the outstanding credit facility. Liquidity risk Liquidity risk refers to the possibility of the Company not being able to meet its financial obligations when they become due. The Company has contractual and fiscal obligations as well as financial liabilities and is therefore exposed to liquidity risk. Such risk can result, for example, from a market disruption or a lack of liquidity. The Company actively maintains its credit facility to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost. Page 54 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 21. Financial instruments (continued) Liquidity risk (continued) As at November 30, 2018, the Company had an authorized revolving credit facility for which the available amount may not exceed $500,000 to ensure that sufficient funds are available to meet its financial requirements. The terms and conditions related to this revolving credit facility is described in note 14. The following are the contractual maturities of financial liabilities as at November 30, 2018 Carrying amount Contractual cash flows 0 to 6 months 6 to 12 months 12 to 24 months Thereafter $ $ $ $ $ $ Accounts payable and accrued liabilities Long-term debt Interest on long-term debt (1) 68,700 275,616 n/a 344,316 68,700 278,483 24,581 371,764 68,700 1,449 4,609 74,758 — 7,444 4,609 12,053 — 4,326 9,218 13,544 — 265,264 6,145 271,409 (1) When future interest cash flows are variable, they are calculated using the interest rates prevailing at the end of the reporting period. 22. Capital disclosures The Company’s objectives when managing capital are: (a) To safeguard the Company’s ability to obtain financing should the need arise; (b) To provide an adequate return to its shareholders; (c) To maintain financial flexibility in order to have access to capital in the event of future acquisitions. The Company defines its capital as follows: (a) Shareholders’ equity; (b) Long-term debt including the current portion; (c) Deferred revenue including the current portion; (d) Cash The Company’s financial strategy is designed and formulated to maintain a flexible capital structure consistent with the objectives stated above and to respond to changes in economic conditions and the risk characteristics of the underlying assets. The Company may invest in longer or shorter-term investments depending on eventual liquidity requirements. Page 55 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 22. Capital disclosures (continued) The Company monitors capital on the basis of the debt-to-equity ratio. The debt-to-equity ratios at November 30, 2018 and November 30, 2017 were as follows: Debt Equity Debt-to-equity ratio 2018 $ 480,171 630,672 0.76 2017 $ 402,756 335,326 1.20 The decrease in debt-to-equity ratio is due to the increase in common shares outstanding as a result of the acquisition of Imvescor Restaurant Group. Maintaining a low debt-to-equity ratio is a priority in order to preserve the Company’s ability to secure financing at a reasonable cost for future acquisitions. MTY expects to maintain a low ratio by continuously using the expected cash flows from the newly acquired business in both the US and Canada to reduce the level of long-term debt. The Company’s credit facilities impose a maximum debt-to-EBITDA ratio of 3:1 until the maturity date of July 21, 2021. 23. Revenue Royalties Franchise and transfer fees Rent Sale of goods, including construction revenues Gift card breakage income Other franchising revenue Other 24. Operating expenses Cost of goods sold, retail costs and rent Wages and benefits Consulting and professional fees Gift cards related costs Royalties Other (1) 2018 $ 141,040 13,208 1,820 130,620 6,815 55,529 4,271 353,303 2018 $ 89,814 78,692 11,685 7,452 7,082 30,835 2017 $ 118,655 11,090 2,317 90,438 6,528 40,873 6,182 276,083 2017 $ 61,788 67,648 12,310 8,132 7,109 25,370 (1) Other operating expenses are comprised mainly of travel and promotional costs, bad debt expense and other office administration expenses. 225,560 182,357 Page 56 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 25. Operating lease arrangements Operating leases as lessee relate to leases of premises in relation to the Company’s operations. Leases typically have terms ranging between 5 and 10 years at inception. The Company does not have options to purchase the premises on any of its operating leases. The Company has entered into various long-term leases and has sub-leased substantially all of the premises based on the same terms and conditions as the original lease to unrelated franchisees. The minimum rentals, exclusive of occupancy and escalation charges, and additional rent paid on a percentage of sales basis, payable under the leases are as follows: 2019 2020 2021 2022 2023 Thereafter Lease commitments $ Sub-leases $ 134,272 119,617 107,035 91,606 74,538 207,773 734,841 123,893 110,145 98,327 83,605 68,616 186,272 670,858 Net commitments $ 10,379 9,472 8,708 8,001 5,922 21,501 63,983 Payments recognized as a net expense during the year ended November 30, 2018 amount to $18,331 (2017 - $21,608). Operating leases as lessor relate to the properties leased or owned by the Company, with lease terms ranging between 5 to 10 years. Some have options to extend the duration of the agreements, for periods ranging between 1 and 15 years. None of the agreements contain clauses that would enable the lessee or sub-lessee to acquire the property. During the year, the Company earned rental revenue of $1,820 (2017 - $2,317). The Company has recognized a liability of $1,250 (November 30, 2017 - $1,413) for the leases of premises in which it no longer has operations but retains the obligations contained in the lease agreement (note 15). 26. Guarantee The Company has provided a guarantee on certain leases for which it is not the lessee, for a cumulative amount of $9,330 (November 30, 2017 - $1,398). 27. Contingent liabilities The Company is involved in legal claims associated with its current business activities. The Company’s estimate of the outcome of these claims is disclosed in note 15. The timing of the outflows, if any, is out of the control of the Company and is as a result undetermined at the moment. Page 57 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 28. Income taxes On December 22, 2017, the United States enacted the “U.S. Tax Cuts and Job Act”, commonly referred to as U.S. tax reform, which resulted in the U.S statutory federal income tax rate to be reduced to 21.0% from the previous rate of 35.0%, effective January 1, 2018. Consequently, for its fiscal year ending on November 30, 2018, the Company estimated that its effective U.S. federal tax rate will be 22.19%. The Company recorded a net tax benefit of $35,491 during the year, which is primarily derived from the re measurement of the Company’s deferred income tax balances. The benefit is estimated based on our initial analysis of the “U.S. Tax Cuts and Job Act”, and given the complexity of this act, this estimate is subject to adjustment when further guidance becomes available. Variations of income tax expense from the basic Canadian federal and provincial combined tax rates applicable to income from operations before income taxes are as follows: $ 2018 % $ 2017 % 22,134 26.7 16,794 26.8 Combined income tax rate in Canada Add effect of: Difference between Canadian and foreign statutory rate Non-taxable portion of capital gains Permanent differences Recognition of previously (4,033) 8 1,356 unrecognized deferred tax assets (758) Losses in subsidiaries for which no deferred income tax assets is recognized Rate variation on deferred income tax Adjustment to prior year provisions Other – net Provision for income taxes 132 (35,491) 649 (88) (16,091) (4.9) 0.0 1.6 (0.9) 0.2 (42.8) 0.8 (0.1) (19.4) (2,895) (268) 794 (327) 982 (1,595) (586) (89) 12,810 (4.6) (0.4) 1.3 (0.5) 1.5 (2.6) (1.0) (0.1) 20.4 Page 58 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 28. Income taxes (continued) The variation in deferred income taxes during the year were as follows: November 30, 2017 Recognized in profit or loss Recognized in other comprehen- sive income Acquisition Foreign exchange November 30, 2018 Net deferred tax assets (liabilities) in relation to: Property, plant and equipment Accounts receivable Provisions Long-term debt Non-capital losses $ Adjusted, note 6 IX 801 1,929 18,814 (336) 461 Intangible assets (145,625) Accrued expenses Deferred revenue 5,352 2,024 (116,580) $ $ $ $ $ 46 (932) (4,811) 766 (194) 42,835 (2,149) (749) 34,812 — — — (1,020) — — — — 438 — 591 (54) 22 24 40 473 (2) — 1,309 1,037 15,067 (646) 289 (36,439) (1,937) (141,166) 138 — 102 42 3,443 1,317 (1,020) (35,304) (1,258) (119,350) November 30, 2016 Recognized in profit or loss $ $ Net deferred tax assets (liabilities) in relation to: Property, plant and equipment Accounts receivable Provisions Long-term debt Non-capital losses 625 1,500 23,484 (285) 280 Intangible assets (152,418) Accrued expenses Deferred revenue 4,850 2,569 (119,395) 62 497 (3,797) (1,219) 181 906 700 (455) (3,125) Recognized in other comprehen- sive income Acquisition $ — — — $ Adjusted, note 6 IX 141 — — 1,547 (377) — — — — — 25 — — Foreign exchange November 30, 2017 $ $ (27) (68) 801 1,929 (873 ) 18,814 (2) — (336) 461 5,862 (145,625) (198) (90) 5,352 2,024 1,547 (211) 4,604 (116,580) Page 59 MTY Food Group Inc. Notes to the consolidated financial statements For the periods ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts and stock options) 28. Income taxes (continued) As at November 30, 2018 there were approximately $311 (2017 – $275) of capital losses which may be applied against capital gains for future years and be carried forward indefinitely. The deferred income tax benefit of these capital losses has not been recognized. As at November 30, 2018, there were approximately $1,026 (2017 - $677) in non-capital losses accumulated in one of the Company’s subsidiaries for which no deferred income tax asset was recognized. These capital losses will expire between 2035 to 2038. The deductible temporary difference in relation to foreign exchange on intercompany loans for which a deferred tax asset has not been recognized amounts to $15 (2017 - $3,048). No deferred income tax liability is recognized on unremitted earnings of $52,000 related to the investments in subsidiaries. Such unremitted earnings are reinvested in the subsidiaries and will not be repatriated in the foreseeable future. 29. Segmented information Management monitors and evaluates results of the Company based on geographical segments; these two segments being Canada and US & International. The Company and its chief operating decision maker assess the performance of each operating segment based on its segment profit and loss which is equal to revenue less operating expenses. Page 60 MTY Food Group Inc. Notes to the consolidated financial statements Years ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts) 29. Segmented information (continued) Below is a summary of each geographical segment’s performance during the period. Revenues Operating expenses Segment profit Other expenses Depreciation – property, plant and equipment Amortization – intangible assets Interest on long-term debt Impairment charge on property, plant and equipment and intangible assets Other income (expense) Unrealized foreign exchange gain (loss) Interest income Gain on disposal of property, plant and equipment and intangible assets Loss on revaluation on financial liabilities recorded at fair value Income before taxes Current income taxes Deferred income taxes Net income Total assets Total liabilities US & International $ Total Consolidated 2018 $ 138,010 90,931 353,303 225,560 Canada $ 141,867 86,615 US & International $ Total Consolidated 2017 $ 134,216 95,742 276,083 182,357 47,079 127,743 55,252 38,474 93,726 402 14,722 1,567 6,372 (11) 285 190 — 24,480 4,319 (36,263) 56,424 416,953 224,519 2,755 24,749 11,717 5,531 11 649 710 (1,461) 82,900 18,721 (34,812) 98,991 1,230,307 599,635 1,645 5,926 8,448 — 2,013 101 584 (409) 41,522 9,088 1,435 30,999 473,190 269,612 1,079 14,252 1,866 1,000 (9) 338 536 — 21,142 597 1,690 18,855 381,155 249,407 2,724 20,178 10,314 1,000 2,004 439 1,120 (409) 62,664 9,685 3,125 49,854 854,345 519,019 Canada $ 215,293 134,629 80,664 2,353 10,027 10,150 (841) 22 364 520 (1,461) 58,420 14,402 1,451 42,567 813,354 375,116 Page 61 MTY Food Group Inc. Notes to the consolidated financial statements Years ended November 30, 2017 and 2016 (In thousands of Canadian dollars, except per share amounts) 30. Statement of cash flows Changes in liabilities and assets arising from financing and investing activities: Revolving credit facility Line of credit Loan financing costs Non-interest- bearing contracts and holdback Non -controlling interest buyback obligation Promissory notes Non-controlling interest option $ (2,150) $ 11,367 $ 6,041 $ 1,026 $ 1,001 $ 210,522 — — 134,805 — (89,512) — — (20,000) — — — — — 328 — — — — Balance as at November 30, 2017 Changes arising from financing activities: Increase in term revolving credit facility Repayment in term revolving credit facility Repayment of holdback Payment of upfront fees Changes from non-cash transactions: Amortization of transaction costs directly attributable to a financing arrangement Accretion of interest on non-interest- bearing holdbacks Revaluation of financial liabilities recorded at fair value through profit and loss (note 10) Foreign exchange Changes arising from investing activities: Issuance of holdback Business acquisition (note 6) Balance as at November 30, 2018 — — (7,668) — — 1,618 — 417 — — — (455) 651 — — — — — — — — — — 993 — — — — — — — 475 — — — 1,501 — — 256,143 — 20,000 — — — (1,954) 6,164 — 11,898 — — 7,034 Total $ 227,807 134,805 (109,512) (7,668) (455) 651 1,618 1,461 745 — — — — — — (7) — — — 994 6,164 20,000 275,616 Page 62 MTY Food Group Inc. Notes to the consolidated financial statements Years ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts) 30. Statement of cash flows (continued) Changes in non-cash operating activities are as follows: Accounts receivable Inventories Loans receivable Prepaid expenses and deposits Other asset Accounts payable and accrued liabilities Provisions Deferred revenue & deposits 2018 $ (4,349) 1,569 1,050 (1,274) 326 (5,366) 3,578 (3,182) (7,648) 2017 $ 1,249 79 32 2,245 (1,165) 9,741 (1,437) 2,249 12,993 Other includes changes in non-cash proceeds from dispositions of capital assets amounting to $145 (2017- $242). 31. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation. Details of transactions between the Company and other related parties are disclosed below. Compensation of key management personnel The remuneration of key management personnel and directors during the periods was as follows: Short-term benefits Share based payment Board member fees Total remuneration of key management personnel 2018 $ 2,051 659 64 2,774 2017 $ 1,406 401 49 1,856 Key management personnel is composed of the Company’s CEO, COO’s, CFO. The remuneration of directors and key executives is determined by the Board of Directors having regard to the performance of individuals and market trends. Given its widely held share base, the Company does not have an ultimate controlling party; its most important shareholder is its Chair of the Board of Directors, who controls 19% of the outstanding shares. Page 63 MTY Food Group Inc. Notes to the consolidated financial statements Years ended November 30, 2018 and 2017 (In thousands of Canadian dollars, except per share amounts) 31. Related party transactions (continued) The Company also pays employment benefits to individuals related to members of the key management personnel described above. Their total remuneration was as follows: Short-term benefits Share based payment Consulting services Total remuneration of individuals related to key management personnel 32. Subsequent Events 2018 $ 452 20 13 485 2017 $ 660 30 — 690 Acquisition of Casa Grecque On December 11, 2018, the Company completed its acquisition of substantially most of the assets of Casa Grecque for a total consideration of $22,352, of which $20,806 was financed from MTY’s cash on hand and existing credit facilities, while $296 in net liabilities was assumed and $1,250 was held back. As at February 14, 2019, a preliminary purchase price allocation has not yet been completed. Acquisition of South St. Burger On December 11, 2018, the Company announced that one of its wholly owned subsidiaries had signed an agreement to acquire the assets of South St. Burger, a chain of gourmet burger restaurants operating 26 franchised and 14 corporate restaurants. The acquisition is expected to be completed within 90 days of the announcement. Dividends On January 21, 2019, the Company approved a quarterly dividend of $0.165 per common share to be paid out February 15, 2019. Page 64 CORPORATE INFORMATION HEAD OFFICE > 8150 Transcanada Highway suite 200, Saint-Laurent QC H4S 1M5 Canada T. : 514 336-8885 F. : 514 336-9222 www.mtygroup.com TRANSFER AGENT & REGISTRAR > Computershare Trust Company of Canada 100 University Ave., 9th Floor, Toronto ON M5J 2Y1 Canada T. : 1.800 564-6253 service@computershare.com AUDITORS > PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250, René-Lévesque Blvd W., suite 2500 Montreal QC Canada H3B 4Y1 T. : 514 205-5000 F. : 514 876-1502 SOLICITORS > Fasken Martineau DuMoulin LLP 800, rue du Square-Victoria, suite 3700 Montreal QC Canada H4Z 1E9 T. : 514 397-7400 1 800 361-6266 F. : 514 397-7600 DIRECTORS > Stanley Ma Claude St-Pierre Eric Lefebvre Dickie Orr* David Wong* Murat Armutlu* Garry O’Connor* *Audit Committee INVESTORS RELATIONS > Eric Lefebvre T. : 514 336-8885 F. : 514 336-9222 ir@mtygroup.com MTY Food Group Inc. Groupe d’alimentation MTY Inc. 8150 Transcanada Highway, Suite 200 Saint-Laurent QC H4S 1M5, Canada T. : 514 336-8885 | F. : 514 336-9222 TSX “MTY” MTYGROUP.COM 

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