Alaris Royalty Corp. Releases Q1 2020 Financial Results

/NOT FOR DISTRIBUTION IN THE UNITED STATES.
FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF UNITED STATES SECURITIES LAW./

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

While the first quarter revenue and cash flow numbers were not affected by the COVID-19 pandemic, the impact on our Partner companies was varied. Some of the consumer facing businesses have had location closures, our consulting businesses are managing by working from home and others are either servicing or classified as an essential industry in this unique environment. Overall, the asset light operating model and low leverage levels across the portfolio will help most of the businesses to manage through the challenges brought on by the pandemic. The direct impact of the pandemic on the financial statements for the first quarter is a reduction in the fair value of the investments of approximately $85 million or $2.33 per share (approximately 10% of the previous fair value of investments), resulting in a book value per share for the Corporation of $15.78 at March 31, 2020.

Q1 2020 Highlights:

• Generated revenue of $34.0 million in the quarter, the largest quarter in Corporation history and an increase of 21.1% on a per share basis compared to the prior year period.  The higher revenue number in Q1 was primarily a result of additional distributions in the amount of US$7.0 million from Sales Benchmark Index LLC ("SBI") as part of their redemption in January 2020. In addition to the SBI distributions, additional revenue growth was driven by new investments in 2019 in Amur Financial Group Inc. ("Amur") and Stride Consulting LLC ("Stride"), as well as follow-on investments in PF Growth Partners, LLC ("PFGP") and Unify Consulting LLC ("Unify"). Revenue also increased due to net positive distribution resets effective January 1, 2020;
• Based on the Corporation's assessment of COVID-19 and its current and possible future impact on Partner businesses, fair values of certain investments were reduced (recorded as an unrealized loss of investments at fair value) by a total of $84.9 million in the period ($2.33 per share). This reduction results in a fair value of investments of $739.7 million at March 31, 2020. This was based on expected decreases in performance metrics from certain Partners for the 2021 reset as well as expected deferral of monthly distributions from certain Partners in 2020;
• To date, the Corporation has only experienced a deferral of revenue from Body Contour Centers, LLC ("BCC") and PFGP and the suspension of distributions from M-Rhino Holdings ("Providence") for April, May and June 2020. Of note, both BCC and PFGP have opened or are in the process of re-opening locations in certain states in May;
• In January, SBI was sold to a third party and the Corporation received US$91.3 million of proceeds which included a US$9.3 million premium to cost and US$7.0 million in additional distributions as mentioned above;
• In February, Sandbox Acquisitions LLC and Sandbox Advertising Limited Partnership (collectively, "Sandbox") was sold to a third party. Alaris received proceeds of US$32.6 million which included all of the senior debt and accrued interest of US$21.9 million and US$9.1 million of proceeds for preferred units with a cost base of US$40.0 million;
• Together the SBI and Sandbox redemptions resulted in over $155 million CAD of proceeds received in the quarter that went to reduce debt and put the Corporation in a strong position for the expected economic recovery from the pandemic;
• The Corporation paid $15.1 million of dividends during the three months ended March 31, 2020, resulting in an Actual Payout Ratio of 57.0% for the three-month period. The Corporation also announced during the quarter that following the payment of the March monthly dividend, future dividends will be paid on a quarterly with the first quarterly dividend to be declared in June 2020, payable July 15, 2020;
• Due to the current and expected future impact of the COVID-19 pandemic on our Partners (as defined below), the Corporation is announcing a reduction in its dividend of approximately 30% to $1.16 annually and $0.29 per quarter (from $1.65 annually and $0.4125 per quarter). This reduction will come into effect with the Q2 dividend to be declared in June 2020;
• In March 2020 the Corporation announced a normal course issuer bid and to date has repurchased 1,014,607 shares. After giving effect to the new expected annual dividend rate of $1.16 per share, the NCIB purchases has resulted in a savings of $1.18 million in after tax dividends, a total pre-tax savings of $1.12 million when factoring in interest cost of $0.48 million; and
• The Corporation has a term sheet with its syndicate of senior lenders for an amendment that will give Alaris the required flexibility on financial covenants and permitting deployment as it navigates through the next twelve to eighteen months.

"Given the incredible disruption that has happened to the world economy, we are pleased, to this point, only two of our partners have had to temporarily defer their monthly distributions to Alaris. We're also pleased that those two companies, PFGP and BCC, represent two of our strongest partners and operate businesses that we feel will rebound fully. Additionally, we would note that one of our Partners, Federal Resources, has recently been a key provider of Personal Protective Equipment to different government agencies in the United States," said Steve King, President and CEO, Alaris.

"Our new dividend rate not only reflects what we expect to be a short-term cash flow disruption associated with the COVID-19 pandemic, but moving forward it will allow us to achieve our long-term payout ratio objectives once our cash flow streams from our partners normalize. We now will be able to establish a new normal of paying out a much lower portion of our quarterly earnings, resulting in a lower volatility stock as well as being able to internally fund a portion of our annual deployment. With a large amount of capital available on our balance sheet and a lower dividend, we are in a very good position to take advantage of the opportunities that will present themselves coming out of this pandemic," said King.

Per Share Results	Three months ended
Period ending March 31	2020		2019		% Change
Revenue	$	0.92	$	0.76	+21.1%
Normalized EBITDA	$	0.58	$	0.68	-14.7%
Net cash from operating activities	$	0.72	$	0.56	+28.6%
Dividends	$	0.41	$	0.412	+0.2%
Basic earnings	$	(1.16)	$	0.31	-474.2%
Fully diluted earnings	$	(1.16)	$	0.31	-474.2%
Weighted average basic shares (000's)	36,694		36,496

Reconciliation of Net Income to Normalized EBITDA	Three months ended March 31
$ thousands	2020		2019
Earnings	$	(42,662)	$	11,262
Adjustments to Net Income:
Amortization and depreciation	77		102
Finance costs	4,754		4,136
Income tax expense	(11,622)		836
EBITDA	$	(49,453)	$	16,336
Normalizing Adjustments
Realized (gain) / loss on investment	(11,603)		-
Unrealized loss on investments at fair value	96,527		5,097
Transaction diligence costs	1,977		179
Distributions received on redemption (SBI)	(9,176)		-
Unrealized (gain) / loss on foreign exchange	(6,993)		2,998
Realized (gain) / loss on foreign exchange	(78)		170
Normalized EBITDA	$	21,201	$	24,780

For the three months ended March 31, 2020, revenue per share increased by 21.1% due to distributions from new investments Amur and Stride, follow-on investments in PFGP and Unify and organic growth through the 2020 reset. The Corporation also received an additional US$7.0 million of distributions from SBI during the current period as part of their redemption in January 2020. These distributions were amounts owed up to the third anniversary date of the Corporation's initial investment, being August 31, 2020.

The negative basic and fully diluted earnings per share amounts for the three months ended March 31, 2020, are a result of the unrealized loss of investments at fair value recorded in the period of $96.5 million, which is primarily a result of the impact that COVID-19 has had on the Corporation's Partners. A portion of this loss is a reclassification of a previously recorded unrealized gain on redemption of SBI in the amount of $11.6 million, which was realized in January 2020. The residual unrealized loss of investments at fair value in the period was $84.9 million, which represents $2.33 per share. The $84.9 million reduction in fair value was a write-down of approximately 10% of the book value of investments, leaving a book value of $739.7 million at March 31, 2020.

Normalized EBITDA of $0.58 per share decreased 14.7% compared to the three months ending March 31, 2019 due to the redemptions in the current period of SBI and Sandbox, offset by new distributions from Amur and Stride and incremental distributions from PFGP and Unify. Net cash from operating activities was $0.72 per share, an increase of 28.6% due to higher distributions and the timing of the payment of convertible debt interest being only on a semi-annual basis, with the next payment in June 2020. The Corporation paid $0.4125 per share of dividends during the three months ended March 31, 2020, resulting in an Actual Payout Ratio of 57.0% for the period, significantly lower than expected due to the additional distributions in the period and the timing of convertible debt interest payments.

Outlook
The Corporation's Q1 2020 revenue, cash flows and Normalized EBITDA were not affected by the COVID-19 pandemic. However, earnings were impacted by the reductions in the fair values of investments due to lower expected growth rates and anticipated reductions in future distributions from certain Partners. Due to the continued uncertainty regarding future impacts to Alaris' Partners from COVID-19, the Corporation deems it prudent to withhold from providing financial guidance for the remainder of 2020. The high level of uncertainty regarding the potential impact from COVID-19 as well as anticipated recovery from such and the timing of that recovery, makes it difficult to accurately project the expected distributions for the next twelve month period. The Corporation describes the impact COVID-19 has had on each Partner in further detail in the Corporation's MD&A and continues to work with each management team to assist them through this unprecedented environment.

To provide additional flexibility to assess the potential impacts from COVID-19, the Corporation announced in March that following the payment of the March 2020 monthly dividend in April 2020, future dividends will be paid on a quarterly basis beginning with the dividend for Q2 to be declared in June 2020, payable July 15, 2020. As noted above, the Corporation is also announcing a dividend reduction of approximately 30% beginning with the Q2 2020 dividend. The reduced dividend will provide additional liquidity for the Corporation as we navigate through these uncertain times.

The senior debt facility was drawn to $150.5 million at March 31, 2020, with the capacity to draw up to another $188.6 million based on covenants and credit terms. The annual interest rate on that debt was approximately 5.9% at March 31, 2020.

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.

Earnings Release Date and Conference Call Details
Alaris management will host a conference call at 9am MDT (11am EDT), Wednesday, May 6, 2020 to discuss the financial results for Q1 2020 and outlook for the Corporation.

Participants can access the conference call by dialing toll free 1-888-390-0546 (or 1-416-764-8688).  Alternatively, to listen to this event online, please click the webcast link and follow the prompts given: Q1 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 until 11:59pm EDT, May 13, 2020. You can access the replay by dialing toll free 1-888-390-0541 (or 1-416-764-8677) and entering the passcode 695175.  The webcast will be archived 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 – "Presentation and Events", on our website at www.alarisroyalty.com.  

Annual General and Special Meeting
In response to the unprecedented impact of the 2019 novel coronavirus ("COVID-19") pandemic and out of a concern for the safety of Alaris' shareholders, employees, other stakeholders and its community as whole, Alaris has decided to hold the Meeting as a virtual only meeting via a live audio webcast rather than an in-person meeting. Alaris will be holding its Annual General and Special Meeting of common shareholders at 2:30pm MDT on Wednesday, May 6, 2020.  Materials for the meeting have been mailed to shareholders of record as of March 20, 2020 and copies are available along with the Corporation's profile on SEDAR at www.sedar.com as well as on its website under the "Investors" section. Please monitor our website at https://www.alarisroyalty.com/investors for updated information.

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 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, Actual Payout Ratio, Earnings Coverage 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 EBITDA, Normalized EBITDA, Actual Payout Ratio, Earnings Coverage Ratio, Per Share and IRR may differ from the methods used by other issuers. Therefore, the Corporation's EBITDA, Normalized EBITDA, Actual Payout Ratio, Earnings Coverage Ratio, Per Share and IRR may not be comparable to similar measures presented by other issuers.

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

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

Normalized EBITDA refers to EBITDA excluding items that are non-recurring in nature and is calculated by adjusting for non-recurring expenses and gains to EBITDA. Management deems non-recurring items to be unusual and/or infrequent items that the Corporation incurs outside of its common day-to-day operations. For the three months ended March 31, 2020, the distributions received upon redemption of SBI are considered by management to be a non-recurring charge. 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 non-recurring items allows management to assess cash flow from ongoing operations.

Earnings Coverage Ratio refers to the Normalized EBITDA of a Partner divided by such Partner's sum of debt servicing (interest and principal), unfunded capital expenditures and distributions to Alaris. Management believes the earnings coverage ratio is a useful metric in assessing our partners continued ability to make their contracted distributions.

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

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, Normalized EBITDA, Actual Payout Ratio, Earnings Coverage Ratio, Per Share and IRR 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 information and forward-looking statements (collectively, "forward-looking statements") under applicable securities laws, including any applicable "safe harbor" provisions. Statements other than statements of historical fact contained in this 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 Private Company Partners, the future financial position or results of the Corporation, 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 Corporation's Partners; the impact of COVID-19 on the operations of the Corporation and those of its Partners; expected amendments to the Corporation's senior credit agreement and the impact thereof; the amount of the Corporation's dividend (both quarterly and on an annualized basis); the use of proceeds from the Corporation's senior credit facility; the Corporation's ability to deploy capital; impact of capital deployment; and the impact of the reduction in the Corporation's dividend. To the extent any forward-looking statements herein constitute a financial outlook, including estimates regarding revenues, distributions from Partners (including expected resets), expenses and impact of capital deployment, they were approved by management as of the date hereof and have been included to provide an understanding with respect to Alaris' financial performance and are subject to the same risks and assumptions disclosed herein. There can be no assurance that the plans, intentions or expectations upon which these forward-looking statements are based will occur.

By their nature, forward-looking statements require Alaris to make assumptions and are subject to inherent risks and uncertainties.  Assumptions about the performance of the Canadian and U.S. economies over the next 24 months and how that will affect Alaris' business and that of its Partners (including, without limitation, the ongoing impact of COVID-19) are material factors considered by Alaris management when setting the outlook for Alaris.  Key assumptions include, but are not limited to, assumptions that: the Canadian and U.S. economies will begin to recover from the ongoing economic downturn created by the response to COVID-19 within the next twelve months, interest rates will not rise in a material way over the next 12 to 24 months, that those Alaris Partners detrimentally affected by COVID-19 will recover from the pandemic's impact and return to their current operating environments, following a recovery from the COVID-19 impact, the businesses of the majority of our 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 the Canadian and U.S. dollar trading pair will remain in a range of approximately plus or minus 15% of the current rate over the next 6 months.  In determining expectations for economic growth, management of Alaris primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies as well as prevailing economic conditions at the time of such determinations.

There can be no assurance that the assumptions, plans, intentions or expectations upon which these forward‑looking statements are based will occur.  Forward‑looking statements are subject to risks, uncertainties and assumptions and should not be read as guarantees or assurances of future performance. The actual results of the 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 ongoing impact of the COVID-19 pandemic on the Corporation and its Partners (including how many Partners will experience a slowdown or closure of their business and the length of time of such slowdown or closure); management's ability to assess and mitigate the impacts of COVID-19; the dependence of Alaris on the Partners; leverage and restrictive covenants under credit facilities; a failure to close the expected amendments to the Corporation's senior credit facility agreement in line with anticipated terms or at all; reliance on key personnel; general economic conditions, including the ongoing impact of COVID-19 on the Canadian, U.S. and global economies; failure to complete or realize the anticipated benefit of Alaris' financing arrangements with the Partners; a failure to obtain required regulatory approvals on a timely basis or at all; changes in legislation and regulations and the interpretations thereof; risks relating to the Partners and their businesses, including, without limitation, a material change in the operations of a Partner or the industries they operate in; inability to close additional Partner contributions or redeem proceeds from any redemptions in a timely fashion on anticipated terms, or at all; a change in the ability of the Partners to continue to pay Alaris at expected distribution levels or restart distributions (in full or in part); a failure to collect material deferred distributions; a change in the unaudited information provided to the Corporation; and a failure to realize the benefits of any concessions or relief measures provided by Alaris to any Partner or to successfully execute an exit strategy for a Partner where desired.  Additional risks that may cause actual results to vary from those indicated are discussed under the heading "Risk Factors" and "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 information contained in this news release.  Statements containing forward‑looking information 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.
Condensed consolidated statements of financial position (unaudited)

	31-Mar		31-Dec
$ thousands	2020		2019
Assets
Cash and cash equivalents	$	24,371	$	17,104
Prepayments	1,847		1,509
Derivative contracts	-		555
Trade and other receivables	2,614		1,226
Income taxes receivable	9,639		4,205
Investment tax credit receivable	1,731		1,032
Assets acquired held for sale	-		97,173
Promissory notes receivable	6,130		6,580
Current Assets	$	46,332	$	129,384
Promissory notes and other receivables	21,239		19,663
Deposits	20,206		20,206
Property and equipment	978		1,053
Investments	739,720		881,037
Investment tax credit receivable	1,506		2,243
Deferred income taxes	5,481		986
Non-current assets	$	789,130	$	925,188
Total Assets	$	835,462	$	1,054,572
Liabilities
Accounts payable and accrued liabilities	$	3,066	$	2,713
Dividends payable	5,019		5,047
Derivative contracts	6,835		-
Liabilities acquired held for sale	-		60,297
Office Lease	775		837
Income tax payable	449		384
Current Liabilities	$	16,144	$	69,278
Deferred income taxes	2,985		4,715
Loans and borrowings	150,493		285,193
Convertible debenture	91,366		90,939
Non-current liabilities	$	244,844	$	380,847
Total Liabilities	$	260,988	$	450,125
Equity
Share capital	$	623,035	$	625,313
Equity component of convertible debenture	4,059		4,059
Equity reserve	15,343		14,763
Translation reserve	46,577		17,076
Retained earnings / (deficit)	(114,540)		(56,764)
Total Equity	$	574,474	$	604,447
Total Liabilities and Equity	$	835,462	$	1,054,572

Alaris Royalty Corp.
Condensed consolidated statements of comprehensive income / (loss) (unaudited)

	Three months ended March 31
$ thousands except per share amounts	2020		2019
Revenues, net of realized foreign exchange gain or loss	$	33,971	$	27,488
Net realized gain from investments	11,603		-
Net unrealized losses of investments at fair value	(96,527)		(5,097)
Total revenue and other operating income / (loss)	$	(50,953)	$	22,391
General and administrative	2,773		2,525
Transaction diligence costs	1,977		179
Non-cash stock-based compensation	743		353
Depreciation and amortization	77		102
Total operating expenses	5,570		3,159
Earnings / (loss) from operations	$	(56,523)	$	19,232
Finance costs	4,754		4,136
Unrealized (gain) / loss on foreign exchange	(6,993)		2,998
Earnings / (loss) before taxes	$	(54,284)	$	12,098
Current income tax expense / (recovery)	(5,586)		2,532
Deferred income tax recovery	(6,036)		(1,696)
Total income tax expense / (recovery)	(11,622)		836
Earnings / (loss)	$	(42,662)	$	11,262
Other comprehensive income / (loss)
Foreign currency translation differences	29,501		(7,711)
Total comprehensive income / (loss)	$	(13,161)	$	3,551
Earnings / (loss) per share
Basic	$	(1.16)	$	0.31
Fully diluted	$	(1.16)	$	0.31
Weighted average shares outstanding
Basic	36,694		36,496
Fully Diluted	37,104		36,772

Alaris Royalty Corp.
Condensed consolidated statements of cash flows (unaudited)

	Three months ended March 31
$ thousands	2020		2019
Cash flows from operating activities
Earnings / (loss) for the period	$	(42,662)	$	11,262
Adjustments for:
Finance costs	4,754		4,136
Deferred income tax recovery	(6,036)		(1,696)
Depreciation and amortization	77		102
Net realized gain from investments	(11,603)		-
Net unrealized losses of investments at fair value	96,527		5,097
Unrealized (gain) / loss on foreign exchange	(6,993)		2,998
Transaction diligence costs	1,977		179
Non-cash stock-based compensation	743		353
Change in:
- trade and other receivables	(683)		(679)
- income tax receivable / payable	(5,369)		4,121
- prepayments	(338)		620
- accounts payable, accrued liabilities	(1,046)		(1,770)
Cash generated from operating activities	29,348		24,723
Cash interest paid	(2,796)		(4,136)
Net cash from operating activities	$	26,552	$	20,587
Cash flows from investing activities
Acquisition of investments	$	(4,941)	$	(17,154)
Transaction diligence costs	(1,977)		(179)
Proceeds from partner redemptions	111,306		-
Proceeds on disposal of assets and liabilities held for sale	38,491		-
Promissory notes repaid	450		870
Net cash from / (used in) investing activities	$	143,329	$	(16,463)
Cash flows from financing activities
Repayment of loans and borrowings	$	(151,102)	$	-
Proceeds from loans and borrowings	7,903		6,634
Dividends paid	(15,142)		(15,054)
Common share repurchases	(2,441)		-
Office lease payments	(63)		(64)
Net cash used in financing activities	$	(160,845)	$	(8,484)
Net increase / (decrease) in cash and cash equivalents	$	9,036	$	(4,360)
Impact of foreign exchange on cash balances	(1,769)		(596)
Cash and cash equivalents, Beginning of period	17,104		22,774
Cash and cash equivalents, End of period	$	24,371	$	17,818
Cash taxes received	$	(555)	$	(1,638)

SOURCE Alaris Royalty Corp.

Curtis Krawetz, Vice President, Investments and Investor Relations, Alaris Royalty Corp., 403-221-7305

Related Links

www.alarisroyalty.com