TORONTO, Ontario, November 15, 2016 – Grenville Strategic Royalty Corp. (TSXV: GRC) (“Grenville” or the “Company”) today announced its financial and operating results for the three-month (“Q3 2016”) and nine-month (“YTD 2016”) periods ended September 30, 2016. Financial references are in Canadian dollars unless otherwise specified.
2016 Third Quarter Financial Highlights
“Our business model continues to generate cash – which is the fundamental metric by which to judge Grenville’s performance. The cash generated from the portfolio is available for re-investment in new opportunities now that we have reduced our ongoing expense structure and suspended the dividend,” said Steve Parry, Chief Executive Officer of Grenville. “Our goal remains the same, enhance margins and cash flow to generate shareholder value. The agreements with our two co-investment partners are an innovative method to continue to diversify the portfolio and leverage our capital to support the growth objectives of our investees. We have identified a number of attractive opportunities and expect to deploy capital in the fourth quarter. As contract buyouts arise in the coming months, they provide another non-dilutive source of capital to re-invest in new opportunities alongside our co-investment partners.”
Changes to the Board of Directors
The Board of Directors has appointed Mr. Peter Kampian, CPA, CA, as a Director of the Board, subsequent to the resignation of Ms. Andrea Zaradic, effective November 14, 2016. Mr. Kampian has a long track record as a financial executive with a number of Canadian public companies. Mr. Kampian is currently the Chief Financial Officer of Mettrum Health Corp, and previously held the position of Vice President Finance with Superior Energy Management and Chief Financial Officer of Algonquin Income Fund where he led and supported debt and equity capital raising.
“Peter brings a wealth of public markets experience to our Board. His financial acumen and expertise in financial management, risk management and in capital markets adds to, and broadens, the skill set of the Board,” said Mr. Parry. “On behalf of the Board, I would like to thank Andrea for the commitment and dedication she brought to the Board through the Company’s formative period. The Board has undergone a significant renewal in the past few months and we believe the existing membership is well suited to lead Grenville as we continue to grow the portfolio and support SMEs across North America with non-dilutive royalty-based growth capital.”
Financial Highlights
Revenues
Revenues were $(855,000) and $(2,397,000) for Q3 2016 and YTD 2016, respectively, compared to $6,631,000 and $11,162,000 for the corresponding periods last year. With the adoption of IFRS 9, certain non-cash items are recognized in revenue. Revenues in Q3 2016 were impacted by a total net non-cash losses of $3,461,000 related to an unrealized loss from the change in fair value of royalty agreements acquired and promissory notes receivable and realized loss from investments written off. These losses were partially offset by an unrealized foreign exchange gain of $545,000. The realized loss from investments written off relates to two investments where in previous reporting periods the fair value of the investment was written down to nil. Revenues in the YTD 2016 period were impacted by a total net non-cash losses of $9,272,000 related to an unrealized loss from the change in fair value of royalty agreements acquired and promissory notes receivable of $5,150,000, $1,841,000 of realized loss from investments written off, and $2,182,000 of unrealized foreign exchange loss.
Royalty Payment Income and Interest Income Earned
Royalty payment income plus interest income earned was $2,044,000 and $6,698,000 for Q3 2016 and YTD 2016, respectively, compared to $2,365,000 and $5,963,000 in the corresponding periods last year. The change in the YTD period is primarily due to an increase in the total aggregate investments of 48.1% since the September 30, 2015. Management believes that the core of portfolio companies will continue to contribute Free Cash Flow(1) on a regular basis as the portfolio matures.Operating ExpenseTotal operating expenses were $876,000 and $3,591,000 for Q3 2016 and YTD 2016, respectively, compared with $721,000 and $1,913,000 for the corresponding periods last year. The change in the quarterly period is primarily due to increased professional fees, and general administrative expenses. The YTD change is due primarily to costs related to the departure of the former CEO, the cost of the increased number of employees including a new managing director and investment team member hired in 2015 and a salary increase starting January 1, 2016 following an executive compensation review and 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(1) was $1,376,000 and $3,471,000 for Q3 2016 and YTD 2016, respectively, compared to $3,961,000 and $6,540,000 for the corresponding periods last year. The changes were primarily due to lower realized gain on contract buyouts of $2,098,000 in each period and increased operating costs (excluding share-based payment expense) of $132,000 and $1,607,000 for Q3 2016 and YTD 2016, respectively, which was partially offset by $515,000 of higher royalty payment income in the YTD period.Free Cash Flow(1)The Free Cash Flow(1) was $164,000 and $(98,000) for Q3 2016 and YTD 2016, respectively, compared to $2,655,000 and $3,597,000 for the corresponding periods last year. The change in Free Cash Flow(1) during the periods was primarily due to realized gains of $2,197,000 in Q3 2015 and YTD 2015, respectively. Also, impacting the YTD 2016 figure were short-term timing differences at the end of December 2015, including $500,000 for bonuses accrued and expensed in 2015 but paid in February 2016 and $612,000 in respect of sales taxes for 2015 paid at the end of January 2016.
Income (Loss) After Taxes
Income (Loss) after taxes was $(1,691,00) and $(5,515,000) for Q3 2016 and YTD 2016, respectively, compared to $4,021,000 and $5,839,000 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, the realized losses on investments written off and the unrealized foreign exchange losses.
Assets
Average Royalty Payment per Million Invested(1)
The average royalty payment per million invested(1) for the month of September 2016 was $147,000. The rolling twelve-month average royalty payment per million invested(1) was $266,000 for the period ended September 30, 2016.
The Company will cease reporting these metrics for the three months ended March 31, 2017.To view the bar graph accompanying this press release, please visit the following link:
http://media3.marketwire.com/docs/Grenville%20Graphic%201B.pdf
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 September 30, 2016, 74.3% of the investment portfolio has generated returns equal to or in excess of Grenville’s pricing level of 25%. As of September 30, 2016, as a percentage of total portfolio value the Bought Out category was 16.0% and the Above Target category was 14.8% – which includes $2,161,655 which was moved into the category during the quarter. The On Target category was 43.5% and the Off Target category was 20.5% – which includes $1,615,568 which was moved into the category during the quarter. The Loss category accounted for 5.2% of the portfolio value, which includes the $1,840,936 of unrealized loss written off during the quarter.
An outline of the portfolio for the periods ended September 30, 2016 and June 30, 2016, is as follows*:
http://media3.marketwire.com/docs/Grenville%20Graphic%201B.pdf
*: The $ amounts stated in the tables above reflect amounts invested in royalty agreements acquired and promissory notes per investee and are not measured or adjusted on a fair value basis as part of the Company’s adoption of IFRS 9.
Outlook
The Company has invested more than $63 million of capital in 31 portfolio companies, generated Adjusted EBITDA(1) of $15.3 million since inception in July 2013 and has generated Free Cash Flow(1) of $8.2 million. The core of the portfolio has reached a scale at which it is generating positive Free Cash Flow(1) and Adjusted EBITDA(1). The Company plans to make investments in certain industries where there are a higher likelihood of Contract Buyouts which previously has resulted in significant realized gains. Offsetting the Contract Buyouts, the Company has also experienced losses and underperforming investments which management anticipates will continue in the future which is consistent with expectations for an SME portfolio.
Grenville’s royalty agreements with its portfolio companies generated Adjusted EBITDA(1) to the Company of approximately $1.4 million for the three-month period ended September 30, 2016 and $3.5 million for the nine-month period ended September 30, 2016. As of November 15, 2016, the Company estimates the royalty payment income and interest earned for October 2016 will be $0.6 million which while lower than the run rate for the third quarter of 2016, is still sufficient to generate an estimated $0.4 million of Adjusted EBITDA(1) and $0.1 million of Free Cash Flow(1) for the month.
In October 2016, the Company announced arrangements with two partners that could co-invest with the Company in a syndication structure on future new investments originated by the Company. The co-investments will be incremental to any of the Company’s investment and the enable the Company to participate in a greater number of larger-sized investments. The arrangements enable the Company to continue to build a more diversified portfolio and generate stable returns with non-dilutive capital and earn fees through a license agreement. The Company is entitled to a 50% participation in each investment with the co-investment partners entitled to 25 percent each. The partners may have a higher participation percentage if the Company wishes to have an interest lower than 50%.
Based on information available as of November 15, 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. There is no change in the guidance provided by the Company at the time of the Q2 2016 report and the Company believes that the potential gross amount that could be received from these Contract Buyouts is up to $9 million. If the amounts that the Company believes are possible, this would significantly increase Adjusted EBITDA(1) up to $5 million and Free Cash Flow(1) up to $4 million. Including the cash balance as of November 15, 2016, of $7.3 million, the available capital for investment in new companies would be up to $16.3 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 (excluding share-based payment expense) for Q2 2016, were approximately $0.26 million per month and are estimated to be in the range of $2.4 million to $3.0 million on an annualized basis in Q4 2016.
Grenville’s unique capital offering continues to fill an expansive niche in the North American small to medium sized 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 nine-month periods ended September 30, 2016 are filed on SEDAR at www.sedar.com and also available on 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, Wednesday, November, 16, 2016. Participants should call (647) 427-2311 or (877) 521-4909 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 17231914. The replay recording will be available until 11:59 p.m. Eastern Time, November 23, 2016.
An audio recording of the conference call will also be available on the investors’ page of Grenville’s website at flowcap.com.
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 Company’s ability to pay dividends in the future and the amount and timing of those dividends; the Company’s ability to successfully manage its joint venture relationships
; 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 Company’s ability to pay dividends in the future and the timing and amount of those dividends; 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 and the concentration of a significant amount of the Company’s invested capital in a small number of 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”); reliance on key personnel, particularly the Company’s founders; dilution of shareholders’ interest through future financings; changes to the Company’s accounting policies and methods; 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; and that the Company will have the ability to raise required equity and/or debt financing on acceptable terms. 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.
