Alaris Royalty Corp. Releases Q4 2019 Financial Results

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CALGARY, March 5, 2020 - Alaris Royalty Corp. ("Alaris" or the "Corporation") is pleased to announce its results for the three months and year ended December 31, 2019. The results are prepared under International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

2019 Highlights:

• Record capital deployment year, investing $193.4 million into two new partners and follow on contributions into existing partners. The 2019 capital deployment highlights include:
• • New partner contribution announced in June 2019 of CAD$70.0 million to Amur Financial Group Inc. ("Amur"), which consisted of CAD$50.0 million at an initial yield of 13% and a CAD$20.0 million common equity investment for a minority ownership position;
  • Follow-on contribution announced in July 2019 of US$60.2 million to PF Growth Partners, LLC ("PFGP"), which consisted of an incremental US$43.7 million of preferred equity and US$16.5 million common equity for minority ownership position. The transaction included crystallizing a US$7.0 million gain from the rollover of previously invested preferred equity which had a cost of US$20.8 million. The Corporation contributed an additional US$1.0 million in December 2019 of preferred and common equity bringing the total invested in PFGP to US$89.0 million;
  • Follow-on contribution announced in December 2019 of an incremental US$10.5 million investment in preferred units in Unify Consulting LLC ("Unify"). The transaction also included crystallizing a US$2.5 million gain from the rollover of previously invested preferred equity which had a cost of US$12.0 million, bringing the total invested in Unify to US$25.0 million;
  • New partner contribution announced in November 2019 of US$6.0 million to Stride Consulting LLC ("Stride"), in exchange for annual distributions of US$0.8 million; and
  • Incremental contributions to existing current partners throughout 2019 totaled US$16.0 million.
• Generated record revenue of $116.0 million and revenue per share of $3.17 which represents a 15.7% increase compared to 2018. For the three month period, revenue was $30.9 million ($0.84 per share), an increase of 21.7% over the comparable 2018 period;
• Normalized EBITDA for the year was $2.76 per share, a 24.3% increase compared to 2018. Normalized EBITDA was $0.71 per share for the three month period, an increase of 29.1% compared to Q4 2018;
• The Corporation realized organic distribution growth in the majority of its portfolio as a result of partner performance in 2019 and expects 2020 resets to increase distributions by approximately $3.7 million ($0.10 per share);
• Beginning in February 2020, distributions from the preferred units of ccCommunications LLC ("ccComm") were deferred due to required investment in net working capital. Distributions will be recorded by the Corporation as received, with no amount included in the Run Rate Cash Flow. The Corporation is working closely with management and will restart distributions when no further investment in working capital is necessary;
• Subsequent to year end, the Corporation received US$91.3 million as a result of the Sales Benchmark Index LLC ("SBI") redemption. The gross proceeds consisted of US$84.3 million for the preferred units inclusive of a US$9.3 million premium as well as US$7.0 million of distributions for the amounts owed up to the third anniversary date of the Corporation's initial investment, being August 31, 2020. These distributions were previously unaccrued and therefore will be recorded as revenue in 2020. The Corporation achieved a total return of approximately 50% and an IRR of approximately 22% on the SBI investment;
• Subsequent to year end the Corporation exited its investment in Sandbox Acquisitions, LLC and Sandbox Advertising LP (collectively, "Sandbox") for total consideration of US$32.6 million. The Corporation collected 100% of its senior debt and interest owing but received consideration of only US$9.2 million of the US$40 million in preferred shares. Included in the US$9.2 million is US$4.1 million to remain in escrow to cover working capital adjustments and indemnity obligations, which, if released, is expected to be paid out over a period of 24 months. The Corporation may also receive up to an additional US$2 million pursuant to an earnout if certain financial performance criteria are satisfied. The escrow and earnout amounts have not been recorded on the balance sheet and will only be recorded once received. On a cost of US$40 million and considering the receipt of US$18.2 million in distributions and US$5.1 million received on exit, the total return will be between -28% and -42% on its preferred units depending on amounts held in escrow and the earnout being collected. Inclusive of the debt, the Corporation will realize an IRR of between -9% and -16% over the four-year investment period;
• The combined result of the SBI and Sandbox redemptions had limited impact on the Corporation's total IRR on exited investments of approximately 17%.

The total loss on assets held for sale related to the Sandbox sale recorded in the three months and year ended December 31, 2019 was US$35.1 million (CAD$45.9 million), or US$26.5 million (CAD$34.6 million) net of tax. The loss was much higher than expected due to a material reduction in the original offered purchase price. Alaris and Sandbox evaluated all options following the price reduction, including foregoing the sale and continuing with the business. This would have required putting significantly more capital at risk with no guarantee of a better outcome for stakeholders than what was achieved with the sale. On March 4, 2020, the Corporation initiated a dispute process that could lead to legal proceedings against the co-founders of Sandbox, asserting damages incurred by Alaris and Sandbox Acquisitions LLC. Due to the ongoing legal matters, Alaris will not be able to provide comments on anything outside of the financial impact the Sandbox Sale had on Alaris' Q4 2019 earnings.

President's Message

I could not be prouder of the accomplishments that were made by our team at Alaris during 2019. In an environment that has made it very difficult for our industry to achieve above market risk-adjusted returns, Alaris has been able to do so while still setting records for capital deployed. The headline numbers of revenue and Normalized EBITDA being up 16% and 25% respectively are very gratifying but it is the behind the scenes work that makes our business model thrive.

Several events that have transpired over the last twelve months are very good illustrations of this work: First was the introduction of the common equity investments into Amur and PFGP. Both of those transactions were ones that we may have missed out on had we not been innovative and flexible by adding common equity to our typical preferred equity structure. Amur is a significant new partner for us and is already paying a regular dividend on the common equity, while PFGP is a prime example of the investment axiom of "winning with your winners".

A second key event was the sale of SBI. Having the faith in our ability to deploy large amounts of capital made it clear to us that taking out proceeds from that successful investment was the right decision to make. Making a 50% profit in just over two years is a significant achievement and adds to our 16 year track record of success.

The final one is tougher to be proud of but equally important. The sale of Sandbox was littered with extreme challenges but our staff achieved the best possible outcome given the circumstances. While it ended up in a loss, the time and effort that was given by our staff prevented it from being much larger. Investing in private companies, regardless of their track record will always have risks and will always have occasional losses – that's why the returns are higher than other areas of the capital markets. But successful management teams are able to have many more winners than losers and I'm proud of our ability to keep producing the results we have.

Looking forward, our access to the best transactions with the best private companies continues to grow. I'm confident in our ability to keep growing and partnering with outstanding entrepreneurs. There is still nobody in the world to our knowledge that provides the same solution to business owners that would like to maintain the control and upside of their business like they can with an Alaris partnership.

For the three months ended December 31, 2019, revenue per share increased by 21.7% due to distributions from strong net deployment over the last twelve months including new investments in GWM Holdings, Inc. ("GWM"), Amur, Stride and follow-on investments into PFGP and Unify in addition to net positive resets in 2019.

Normalized EBITDA of $0.71 per share, increased 29.1% compared to the three months ending December 31, 2018 due to an increase in distributions along with a decrease in general and administrative expenses. Net cash from operating activities was $0.48 per share, no change compared to the three months ended December 31, 2018. The reason for it being flat is that the revenue increase was offset by higher finance costs and negative changes in net working capital compared to the prior year. The negative changes in working capital related to the significant receivable balance as at December 31, 2017 from the 2018 redemptions of Labstat and Agility, which was received in full during 2018. Dividends paid were $0.4125 per share during three months ended December 31, 2019, resulting in an Actual Payout Ratio of 85.5% for the period.

For the year ended December 31, 2019, revenue per share increased by 15.7% due to distributions from new partners GWM, Body Contour Centers, LLC ("BCC"), Fleet Advantage, LLC ("Fleet"), Heritage Restoration, LLC ("Heritage"), Amur and Stride as well as additional distributions from follow on contributions into Accscient, ccComm, PFGP, and Unify. Distributions were also favorably impacted by the 2019 positive resets for the majority of our portfolio. This was partially offset by the redemption of Labstat International, LP ("Labstat") in the prior year which included an additional $4.2 million of previously forgone distributions received on redemption.

Normalized EBITDA of $2.76 per share increased by 24.3% compared to the year ending December 31, 2018 due to higher distributions as well as lower general and administrative expenses. Net cash from operating activities was $2.04 per share, a decrease of 5.1% compared to the year ended December 31, 2018. The decrease is primarily a result of the net change in working capital as a result of the large receivables balance at December 31, 2017 that was then received in 2018, offset partially by the higher distributions received in 2019. Dividends paid were $1.65 per share during the year ended December 31, 2019, resulting in an Actual Payout Ratio of 80.7% for the year.

The negative basic earnings per share in the current three month period ended December 31, 2019 was a result of the loss on assets held for sale, on the sale of Sandbox, whereby the total loss per share after tax was $0.94.

Outlook

Distributions for 2020 are expected to be $101.8 million based on run rate distributions, which include 2020 contracted amounts inclusive of known resets, $4.2 million from SCR Mining and Tunneling, LP ("SCR") and no distributions from Kimco Holdings, LLC ("Kimco") or ccComm. Distributions for Q1 2020 are expected to be $34.8 million, which includes $9.3 million of additional revenue from SBI received on closing of their redemption. Annual general and administrative expenses are currently estimated at $11.0 million for 2020 and include all public company costs. The Corporation's Run Rate Payout Ratio is approximately 94% on a run rate basis. The table below sets out our estimated cash flows in 2020 alongside the after-tax impact of potential changes to certain Partners' distributions.

The senior debt facility was drawn to $285.2 million at December 31, 2019, with the capacity to draw up to another $44.8 million based on covenants and credit terms, in addition to the $50 million accordion feature for a total of $94.8 million. The annual interest rate on that debt was approximately 6.0% for the year ended December 31, 2019. Subsequent to December 31, 2019, SBI redeemed all of their preferred units for total proceeds of US$91.3 million and the Sandbox sale resulted in gross proceeds of US$28.5 million which the Corporation then used to reduce the balance of the senior debt facility. Following the SBI redemption as well as the sale of Sandbox, the total drawn was $131.5 million, with the capacity to draw up to another $198.5 million in addition to the $50 million accordion feature.

The Consolidated Statement of Financial Position, Statement of Comprehensive Income, and Statement of Cash Flows are attached to this news release. Alaris' financial statements and MD&A are available on SEDAR at www.sedar.com and on our website at www.alarisroyalty.com.

Alaris management will host a conference call at 9am MST (11am EST), Friday, March 6, 2020 to discuss the financial results and outlook for the Corporation. Participants can access the conference call by dialing toll free 1-888-390-0546. Alternatively, to listen to this event online, please click the webcast link and follow the prompts given: Q4 Webcast. Please connect to the call or log into the webcast at least 10 minutes prior to the beginning of the event.

For those unable to participate in the conference call at the scheduled time, it will be archived for instant replay for a week. You can access the replay by dialing toll free 1-888-390-0541 and entering the passcode 982434#. The webcast will be archived for 3 months and is available for replay by using the same link as above or by finding the link we'll have stored under the "Investor" section – "Presentations and Events", on our website at www.alarisroyalty.com.

An updated corporate presentation will be posted to the Corporation's website within 24 hours at www.alarisroyalty.com

About the Corporation:
Alaris provides alternative financing to private companies ("Partners") in exchange for royalties or distributions with the principal objective of generating stable and predictable cash flows for dividend payments to its shareholders. Distributions from the Partners are adjusted annually based on the percentage change of a "top-line" financial performance measure such as gross margin or same store sales and rank in priority to the owner's common equity position.

Non-IFRS Measures
The terms EBITDA, Normalized EBITDA, Run Rate Payout Ratio, Run Rate Cash Flow, Actual Payout Ratio, Per Share, and IRR are financial measures used in this news release that are not standard measures under International Financial Reporting Standards ("IFRS"). The Corporation's method of calculating the Non-IFRS Measures ratio may differ from the methods used by other issuers. Therefore, the Corporation's Non-IFRS Measures may not be comparable to similar measures presented by other issuers.

Run Rate Payout Ratio: refers to Alaris' total dividend per share expected to be paid over the next twelve months divided by the estimated net cash from operating activities per share Alaris expects to generate over the same twelve month period (after giving effect to the impact of all information disclosed as of the date of this report).

Run Rate Cash Flow: refers to Alaris' total expected excess cash flows over the next twelve months after the deduction of the dividend to be paid over the same twelve month period.

Actual Payout Ratio: refers to Alaris' total cash dividends paid during the period (annually or quarterly) divided by the actual net cash from operating activities Alaris generated for the period.

EBITDA refers to earnings determined in accordance with IFRS, before depreciation and amortization, net of gain or loss on disposal of capital assets, interest expense and income tax expense. EBITDA is used by management and many investors to determine the ability of an issuer to generate cash from operations. Management believes EBITDA is a useful supplemental measure from which to determine the Corporation's ability to generate cash available for debt service, working capital, capital expenditures, income taxes and dividends.

Normalized EBITDA refers to EBITDA excluding items that are non-recurring in nature and is calculated by adjusting for non-recurring expenses and gains to EBITDA. Management deems non-recurring items to be unusual and/or infrequent items that the Corporation incurs outside of its common day-to-day operations. For the year ended December 31, 2019 these include a bad debt recovery related to Phoenix and the realized loss on Sandbox. For the year ended December 31, 2018, the gains on the redemption of the Agility, Labstat and End of the Roll, distributions received upon redemption of Labstat, and the Phoenix and Group SM bad debt expense are considered by management to be non-recurring charges. Transaction diligence costs are recurring but are considered an investing activity. Foreign exchange realized and unrealized gains and losses are recurring but not considered part of operating results and excluded from normalized EBITDA on an ongoing basis. Changes in investments at fair value are non-cash and although recurring are also removed from normalized EBITDA. Adjusting for these items allows management to assess cash flow from ongoing operations.

Per Share values, other than earnings per share, refer to the related financial statement caption as defined under IFRS or related term as defined herein, divided by the weighted average basic shares outstanding for the period.

IRR refers to internal rate of return, which is a metric used to determine the discount rate that derives a net present value of cash flows to zero. Management uses IRR to analyze partner returns.

The terms EBITDA and Normalized EBITDA should only be used in conjunction with the Corporation's annual audited financial statements, excerpts of which are available below, while complete versions are available on SEDAR at www.sedar.com.

Forward-Looking Statements
This news release contains "forward-looking statements" and "forward-looking information" (collectively "forward-looking statements") under applicable securities laws. Statements other than statements of historical fact contained in this news release are forward?looking statements, including, without limitation, management's expectations, intentions and beliefs concerning the growth, results of operations, performance of the Corporation and the Partners, the future financial position or results of the Corporation and the Partners, business strategy, and plans and objectives of or involving the Corporation or the Partners. Many of these statements can be identified by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words or the negative thereof. In particular, this news release contains forward?looking statements regarding: the anticipated financial and operating performance of the Partners and the Corporation in 2020; the revenues/contractual distributions to be received by Alaris in 2020 (annually and quarterly); the Run Rate Payout Ratio; the Run Rate Cash Flow; the Corporation's general and administrative expenses in 2020; the impact of expected operational improvements and future investments for the Corporation in 2020; interest and tax expenses in 2020; the Corporation's ability to deploy capital, including redeploying proceeds from any redemptions; run rate cash from operating activities; the cash requirements of the Corporation in 2020; dividends to be paid by the Corporation; indebtedness under the Corporation's senior credit facility; impact of new capital developments; and the release of escrowed proceeds and any payment of the earnout from the Sandbox sale. To the extent any forward-looking statements herein constitute a financial outlook, including estimates regarding revenues, net cash from operating activities, Run Rate Cash Flow, Run Rate Payout Ratio and expenses, they were approved by management as of the date hereof and have been included to provide an understanding with respect to Alaris' financial performance and are subject to the same risks and assumptions disclosed herein. There can be no assurance that the plans, intentions or expectations upon which these forward looking statements are based will occur.

By their nature, forward-looking statements require Alaris to make assumptions and are subject to inherent risks and uncertainties. Assumptions about the performance of the Canadian and U.S. economies in 2020 and how that will affect Alaris' business and that of its Partners are material factors considered by Alaris management when setting the outlook for Alaris. Key assumptions include, but are not limited to, assumptions that the Canadian and U.S. economies will grow moderately in 2020, that interest rates will not rise in a material way over the next 12 to 24 months, that the Partners will continue to make distributions to Alaris as and when required, that the businesses of the Partners will continue to grow, more private companies will require access to alternative sources of capital, and that Alaris will have the ability to raise required equity and/or debt financing on acceptable terms. Management of Alaris has also assumed that capital markets will remain relatively stable and that the Canadian and U.S. dollar trading pair will remain in a range of approximately plus or minus 10% of the current rate over the next 6 months. In determining expectations for economic growth, management of Alaris primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies.

There can be no assurance that the assumptions, plans, intentions or expectations upon which these forward?looking statements are based will occur. Forward?looking statements are subject to risks, uncertainties and assumptions and should not be read as guarantees or assurances of future performance. The actual results of the Corporation and the Partners could materially differ from those anticipated in the forward?looking statements contained herein as a result of certain risk factors, including, but not limited to, the following: the dependence of Alaris on the Partners; reliance on key personnel; general economic conditions; failure to complete or realize the anticipated benefit of Alaris' financing arrangements with the Partners; a failure to obtain required regulatory approvals on a timely basis or at all; changes in legislation and regulations and the interpretations thereof; risks relating to the Partners and their businesses, including, without limitation, a material change in the operations of a Partner or the industries they operate in; inability to close additional Partner contributions; inability to realize proceeds from any redemptions in a timely fashion on anticipated terms, or at all; a change in the ability of the Partners to continue to pay Alaris' preferred distributions; a change in the unaudited information of a Partner provided to the Corporation; and a failure to realize the benefits of any concessions or relief measures provided by Alaris to any Partner. Additional risks that may cause actual results to vary from those indicated are discussed under the heading "Risk Factors" and "Forward Looking Statements" in the Corporation's Management Discussion and Analysis for the year ended December 31, 2019, which is filed under the Corporation's profile at www.sedar.com and on its website at www.alarisroyalty.com. Accordingly, readers are cautioned not to place undue reliance on any forward-looking statements contained in this news release. Statements containing forward?looking statements reflect management's current beliefs and assumptions based on information in its possession on the date of this news release. Although management believes that the expectations represented in such forward?looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

Alaris Royalty Corp.
Consolidated statement of financial position

Alaris Royalty Corp.
Consolidated statement of comprehensive income

Alaris Royalty Corp.
Consolidated statement of cash flows

SOURCE Alaris Royalty Corp.