TORONTO, Ontario, August 29, 2016 – Grenville Strategic Royalty Corp. (TSXV: GRC) (“Grenville” or the “Company”) today announced its financial and operating results for the three-month (“Q2 2016”) and six-month (“YTD 2016”) periods ended June 30, 2016. Financial references are in Canadian dollars unless otherwise specified.
2016 Second Quarter Financial Highlights
2016 Second Quarter Portfolio Highlights
“We made significant progress on the plan we laid out in the first quarter. We have reduced operating costs and determined the business can be effectively managed at a cost of $2.4 million to $3.0 million per year. We have extracted additional value from the existing portfolio as evidenced by the Bluedrop amendment. We have also identified new investment targets to generate additional cash flow,” said Steve Parry, Chief Executive Officer of Grenville. “However, we now believe that we will need more capital for additional investments to generate sufficient cash flow to complete our goal of growing the Company now that we have stabilized the business.”
Mr. Parry continued, “Multiple alternatives exist to access new capital including cash flow from future Contract Buyouts or the use of senior debt. Based on discussions held to date, we believe we can raise senior debt at a reasonable cost for accretive investment opportunities. Both cash flow and senior debt sources may have an impact on the current dividend. We continue to focus our business to maximize margins and cash flow to enhance shareholder value.”
Financial Highlights
(1) EBITDA, Adjusted EBITDA, and Free cash flow are non-IFRS measures. Refer to section Definition of Non-IFRS Measures for further explanation and definitions.
Revenues
Revenues were $1,291,000 and $(1,543,000) for Q2 2016 and YTD 2016, respectively, compared to $1,753,000 and $4,531,000 for the corresponding periods last year. With the adoption of IFRS 9, certain non-cash items are recognized in revenue. Revenues in Q2 2016 were impacted by a net non-cash loss amount of $806,000 related to an unrealized loss from the change in fair value of royalty agreements acquired and promissory notes receivable as well as unrealized foreign exchange loss of $195,000. Revenues in the YTD 2016 period were impacted by a net non-cash loss amount of $6,257,000 related to $3,530,000 for an unrealized loss from the change in fair value of royalty agreements acquired and promissory notes receivable as well as $2,727,000 of unrealized foreign exchange loss due to the movement in the exchange rate from $1.3840 at December 31, 2015 to $1.2917 at June 30, 2016.
Royalty Payment Income and Interest Income Earned
Royalty payment income plus interest income earned was $2,073,000 and $4,654,000 for Q2 2016 and YTD 2016, respectively, compared to $2,094,000 and $3,599,000 in the corresponding periods last year. The change in the YTD period is primarily due to an increase in the total aggregate investments of 67.6% since the six-month period ended June 30, 2015. Management believes that the growing core of portfolio companies will continue to contribute income on a regular basis as the portfolio matures.
Operating Expenses
Total operating expenses were $1,657,000 and $2,715,000 for Q2 2016 and YTD 2016, respectively, compared with $672,000 and $1,193,000 for the corresponding periods last year. The change is primarily due to increased salary and benefits related to costs related to the departure of the former CEO, a new managing director, an additional investment team member, and a third-party executive compensation review that resulted in an increase for existing members as well as a one-time consultancy expense in the YTD 2016 period for the IFRS 9 conversion and portfolio fair value valuation reports.
Adjusted EBITDA(1)
Adjusted EBITDA was $508,000 and $2,094,000 for Q2 2016 and YTD 2016, respectively, compared to $1,524,000 and $2,579,000 for the corresponding periods last year. The changes were primarily due to increased operating expenses referenced above, partially offset in the YTD period by higher royalty payment income.
Free Cash Flow(1)
The free cash flow was $340,000 and $(251,000) for Q2 2016 and YTD 2016, respectively, compared to $777,000 and $942,000 for the corresponding periods last year. The change in free cash flow during the YTD period was primarily due to short-term timing differences, in particular, $500,000 for the 2015 accrued bonuses paid in Q1 2016 and $248,000 for royalty payments due at June 30, 2016 that were paid subsequent to the end of the period.
Income (Loss) After Taxes
Income (Loss) after taxes was $(633,00) and $(3,824,000) for Q2 2016 and YTD 2016, respectively, compared to $469,000 and $1,818,000 in the corresponding periods last year. The changes were due to the aforementioned changes in the fair value of royalty agreements acquired and promissory notes receivable and the unrealized foreign exchange loss.
Assets
Average Royalty Payment per Million Invested(1)
The average royalty payment per million invested(1) for the month of June 2016 was $164,000 which was within the range outlined by management at the time of the Q1 2016 report.
The rolling twelve-month average royalty payment per million invested(1) was $337,000 for the period ended June 30, 2016.
To view the bar graph accompanying this press release, please visit the following link:
http://media3.marketwire.com/docs/Grenville829a.jpg
Portfolio Performance Profile
On a quarterly basis, the Company carries out a portfolio performance review of the portfolio of royalty agreements acquired and promissory notes. As of June 30, 2016, 79.8% of the investment portfolio has generated returns equal to or in excess of Grenville’s pricing level of 25%. As of June 30, 2016, as a percentage of total portfolio value the Bought Out category was 21.4% and the Above Target category was 10.9% – which includes $2,510,000 which was moved into the category during the quarter. The On Target category was 47.5% and the Off Target category was 17.1% – which includes $1,510,000 which was moved into the category during the quarter. The Loss category accounted for 3.1% of the portfolio value.
An outline of the portfolio for the periods ended June 30, 2016 and March 31, 2016, is as follows*: http://media3.marketwire.com/docs/Grenville829b.jpg
Outlook
The Company has invested more than $63 million of capital in 31 portfolio companies. Management is building a balanced portfolio using a pricing level of 25%. Contract Buyouts will continue to form a meaningful part of the Company’s annual revenue stream and the capital returned from Contract Buyouts represent the cheapest form of capital for growth. However, given their nature, the timing of buyouts and buydowns will be more irregular than the monthly royalty payments received by the Company. Offsetting the Contract Buyouts, the Company has experienced losses and underperforming investments which management anticipates will continue in the future consistent with expectations for an SME portfolio. The Company plans to mitigate investment losses and underperforming investments by designing a portfolio diverse of U.S. and Canadian dollar denominated investments and investments consisting of cyclical, neutral and defensive sectors as well as growth through new company investments. The core of the portfolio has reached a scale at which it is generating stable income, positive free cash flow (a non-IFRS measure, refer to Definition of Non-IFRS Measures for definition) and Adjusted EBITDA (a non-IFRS measure, refer to Definition of Non-IFRS Measures for definition).
Grenville’s royalty agreements with its portfolio companies generated Adjusted EBITDA (a non-IFRS measure, refer to Definition of Non-IFRS Measures for definition) to the Company of approximately $0.5 million for the three-month period ended June 30, 2016 and $2.09 million for the six-month period ended June 30, 2016. As of August 29, 2016, management estimates the royalty payment income and interest earned for July and August 2016 will total $1.43 million which is a higher run-rate than the second quarter of 2016, as a result of a negotiated increase in the monthly minimum monthly royalty with Bluedrop and higher royalties earned on other investments in the Above Target category. Based on information available as of August 29, 2016, management does not expect any further material unrealized losses on investments for the three-month period ended September 30, 2016.
Based on information available as of August 29, 2016, management believes that there are a number of investments in the Above Target category that may represent Contract Buyout opportunities in the next few quarters. Management believes that the potential gross amount that could be received from these Contract Buyouts is up to $9 million which, if realized in the amounts that management believes are possible, would significantly increase Adjusted EBITDA (a non-IFRS measure, refer to Definition of Non-IFRS Measures for definition) up to $5 million and Free Cash Flow (a non-IFRS measure, refer to Definition of Non-IFRS Measures for definition) up to $3.7 million. Given the nature of Contract Buyouts, the timing and the amount of Contract Buyouts are uncertain and any estimates included here may vary either positively or negatively.
Operating expenses for Q2 2016, were approximately $0.33 million per month excluding any exceptional non-recurring expense, and are estimated to be in the range of $2.4 million to $3.0 million on an annualized basis in Q3 2016.
Grenville’s unique capital offering continues to fill an expansive niche in the North American small to medium enterprise, growth-capital markets. With continued access to funding accretive to shareholder value, management is confident the Company will be able to add new portfolio companies to its existing portfolio holdings. Each new portfolio company added will further diversify and strengthen Grenville’s existing portfolio balance. Management also believes that the revenue contribution per portfolio-company added will be priced at roughly the same rate as existing companies within the portfolio.
Grenville’s financial statements and management’s discussion and analysis for the three-month and six-month periods ended June 30, 2016 are filed on SEDAR at www.sedar.com and also available n Grenville’s website at www.flowcap.com.
(1) Please refer to the Company’s management’s discussion and analysis for definitions and reconciliations of these non-IFRS measures to measures prescribed by IFRS.
Conference Call Details
Grenville will host a conference call to discuss these results at 8:00 a.m. Eastern Time, Tuesday, August 30, 2016. Participants should call (647) 788-4922 or (877) 291-4570 and ask an operator for the Grenville earnings call. Please dial in 10 minutes prior to the call to secure a line. A replay will be available shortly after the call. To access the replay, please dial (416) 621-4642 or (800) 585-8367 and enter access code 70449917. The replay recording will be available until 11:59 p.m. Eastern Time, September 6, 2016.
About Grenville
Based in Toronto, Grenville is a publicly-traded royalty company that makes investments in established businesses with revenues of up to $50 million dollars. Grenville generates revenues from royalty payments and buyouts from contracts. The non-dilutive royalty financing structure offered by Grenville competes directly with traditional equity to meet the long-term financing needs of companies on more attractive commercial terms.
For further information, please contact:
Grenville Strategic Royalty Corp.:
Steve Parry
Chief Executive Officer
Tel: (416) 777-0383
This press release contains certain “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or may contain statements that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “will continue”, “will occur” or “will be achieved”. The forward-looking information contained herein may include, but is not limited to, information with respect to: prospective financial performance; including the Company’s opinion regarding the current and future performance of its portfolio, expenses and operations; anticipated cash needs and need for additional financing; anticipated funding sources; future growth plans; royalty acquisition targets and proposed or completed royalty transactions; estimated operating costs; estimated market drivers and demand; business prospects and strategy; anticipated trends and challenges in the Company’s business and the markets in which it operates; the amount and timing of the payment of dividends by the Company; and the Company’s financial position. By identifying such information and statements in this manner, the Company is alerting the reader that such information and statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the Company to be materially different from those expressed or implied by such information and statements.
An investment in securities of the Company is speculative and subject to a number of risks including, without limitation, risks relating to: the need for additional financing; the relative speculative and illiquid nature of an investment in the Company; the volatility of the Company’s share price; the Company’s limited operating history; the Company’s ability to generate sufficient revenues; the Company’s ability to manage future growth; the limited diversification in the Company’s existing investments; the Company’s ability to negotiate additional royalty purchases from new investee companies; the Company’s dependence on the operations, assets and financial health of its investee companies; the Company’s limited ability to exercise control or direction over investee companies; potential defaults by investee companies and the unsecured nature of the Company’s investments; the Company’s ability to enforce on any default by an investee company; competition with other investment entities; tax matters, including the potential impact of the Foreign Account Tax Compliance Act on the Company; the potential impact of the Company being classified as a Passive Foreign Investment Company (“PFIC”); the Company’s ability to pay dividends in the future and the timing and amount of those dividends; reliance on key personnel, particularly the Company’s founders; dilution of shareholders’ interest through future financings; and general economic and political conditions; as well as the risks discussed under the heading “Risk Factors” on pages 16 to 22 of the Annual Information Form of the Company dated February 11, 2015 and the risks discussed herein. Although the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in the forward-looking information and forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended.
In connection with the forward-looking information and forward-looking statements contained in this press release, the Company has made certain assumptions. Assumptions about the performance of the Canadian and U.S. economies over the next 24 months and how that will affect the Company’s business and its ability to identify and close new opportunities with new investees are material factors that the Company considered when setting its strategic priorities and objectives, and its outlook for its business.
Key assumptions include, but are not limited to: assumptions that the Canadian and U.S. economies relevant to the Company’s investment focus will remain relatively stable over the next 12 to 24 months; that interest rates will not increase dramatically over the next 12 to 24 months; that the Company’s existing investees will continue to make royalty payments to the Company as and when required; that the businesses of the Company’s investees will not experience material negative results; that the Company will continue to grow its portfolio in a manner similar to what has already been established; that tax rates and tax laws will not change significantly in Canada and the U.S.; that more small to medium private and public companies will continue to require access to alternative sources of capital; that the Company will have the ability to raise required equity and/or debt financing on acceptable terms; and that the Company will have sufficient free cash flow to pay dividends. The Company has also assumed that access to the capital markets will remain relatively stable, that the capital markets will perform with normal levels of volatility and that the Canadian dollar will not have a high amount of volatility relative to the U.S. dollar. In determining expectations for economic growth, the Company primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies. Although the Company believes that the assumptions and factors used in preparing, and the expectations contained in, the forward-looking information and statements are reasonable, undue reliance should not be placed on such information and statements, and no assurance or guarantee can be given that such forward-looking information and statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information and statements.
The forward-looking information and forward-looking statements contained in this PRESS RELEASE are made as of the date of this PRESS RELEASE, and the Company does not undertake to update any forward-looking information and/or forward-looking statements that are contained or referenced herein, except in accordance with applicable securities laws. All subsequent written and oral forward- looking information and statements attributable to the Company or persons acting on its behalf is expressly qualified in its entirety by this notice.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
