Equity Investment Symposium 2015

Hosted by: Toronto CFA Society

February 23, 2015 Broadview Capital Management Inc.
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Disclaimer
This presentation is not to be construed as an offer, solicitation or recommendation to buy, sell or
otherwise transact in any of the securities herein named. At the time of reading the investments
mentioned may no longer be held by the Broadview Dark Horse LP (the Fund). This information is
intended only for informational purposes, is as of the date indicated, is not complete and is subject
to change. It may not be relied upon and should not be construed as legal, investment, accounting
or other professional advice. Performance information is net of applicable fees unless otherwise
specifically noted. Past performance is no guarantee of future results. Performance results will vary,
depending on the series in which one is invested. The information contained herein is unaudited. It
has been supplied by Broadview Capital Management Inc. (Broadview), the Funds Investment
Manager and not the Funds Administrator who is responsible for the final calculation for the actual
performance and final month-end Net Asset Values. Every effort has been made to ensure that the
material contained herein is accurate as of publication. Broadview makes no representations or
warranties as to the accuracy or completeness of such information and accepts no responsibility for
any loss arising from any use of or reliance on the information contained herein. Broadview has no
obligation to update the information at any point in the future.

Broadview Capital Management Inc.

We look to arbitrage the difference between

perception and reality

Alaris Royalty Corp.

Short selling thesis on Alaris Royalty Corp.
AD: TSX $32.80

Broadview Capital Management Inc.

February 23, 2015

Alaris Royalty Corp.

As They Present Themselves

A hybrid debt/equity provider to mid-market companies in Canada and the U.S.

Provider of Preferred Equity capital tranche in exchange for variable

distributions based on KPIs of investee companies

A royalty stream company

Dividends, dividends, dividends

Heavily owned by retail, index funds and safe-haven investors

Alaris Royalty Corp.

As Broadview Sees It

Bay Street construct meant to create an artificially low volatility stream of

dividends to retail investors

Not really a royalty stream at all

Portfolio comprised of highly-levered, cyclical and/or otherwise challenged businesses

Material mis-pricings in existing book

Poor track record in spite of benign credit environment

Valuation 2x what it should be

Alaris Royalty Corp.

As Broadview Sees It

Sausage:
An assortment of inferior cuts of meat and other filler presented
in a fashion to make them more appetizing.

CC license

Alaris Royalty Corp.

Comparing Alaris and Typical BDC

Alaris competes with other mid-market capital providers such as U.S.-based

Business Development Companies (BDCs)

Outgrown the ability to source deals without competition

There are roughly 50 publicly-traded BDCs managing tens of

billions with thousands of seasoned investment professionals,
often aligned with even larger financial institutions

Alaris Royalty Corp.

Comparing Alaris and Typical BDC

Typical BDC:

Industry or regional specialists

Experienced investment teams
Significant resources to assist investee companies on an on-going basis
Focussed on:

Senior secured loans

Senior Unsecured loans (i.e. cash flow loans)
Mezzanine loans
Equity

Alaris Royalty Corp.

Comparing Alaris and Typical BDC

Alariss Preferred Equity investments are most comparable to

BDCs senior unsecured (Cash flow) loans

Senior secured loans provide lenders asset protection usually through

determined borrowing bases of A/R and inventory

Interest rates are lower than cash flow loans but recoveries are high (80%, higher in
easy environments)

Senior unsecured loans typically buyout loans where asset backing is

determined by cash flow and estimates of sale value of the enterprise

Interest rates are higher than senior secured loans and equity kickers common but
recoveries are much lower (40%)

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Alaris Royalty Corp.

Comparing Alaris and Typical BDC

Tranche
Initial Rate
Sweetener
Covenants
Security
Recovery Rate
Maturity

Alaris

BDC

BDC

Preferred Equity
15%
Variable upside with collar
No
None
???
None

Senior Secured
9%
None
Yes
Fully secured
90%
3 to 5 years

Senior Unsecured
13%
Equity kicker
Some
Second Lien
40%
5 to 7 years

Alariss investments provide more upside versus a typical

senior secured loan. However, on a risk-adjusted basis,
the proposition is materially worse
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Alaris Royalty Corp.

Alaris versus Other lending Models

Alaris suffers from adverse selection

Best credits can walk with no upside to Alaris

Other hybrid lenders have longer term and/or equity kicker

Leaves Alaris with only those who have no other choice

In a world flush with capital, who willingly pays 15-16%?

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Alaris Royalty Corp.

Track Record

15 investments since inception (13 of which are more than one year old)

There have been clear financial issues with 6 of them:

SHS
LMS
KMH Cardiology LP
Labstat LP
Agility Health
Lifemark/Centric Health

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Alaris Royalty Corp.

Track Record - SHS

SHS Services Management LP was the licensed operator of Sears

Canadas Sears Home Services business

Alaris invested $15m in SHS in March 2013

On November 11, 2013 Alaris announced an amendment to its

agreement with SHS

Alaris prides itself in being a valued long term partner to our private company partners. While SHS has had a difficult transition
period relating to the takeover of the national home service business from Sears Canada, the short term concessions from

Sears and Alaris will provide SHS the flexibility and time needed to implement its remaining initiatives, which have
already begun to be put in place by management of SHS. While any disruption in a distribution stream is difficult, we view
this as an important decision for our long term cash flow stream from SHS," said Steve King, President and CEO, Alaris Royalty Corp.

On Dec. 14, 2013 SHS went into receivership

Alaris expected recovery on its SHS investment is zero

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Alaris Royalty Corp.

Track Record - LMS

LMS LP is a Vancouver area rebar manufacturer and installer

Alaris invested $51m in LMS in late 2007

Represented 45% of Alaris invested capital at that time

Original contemplated distribution to Alaris was $8.5m

Late in its fiscal year 2008, LMS experienced a dramatic shift in its business that included projects being
cancelled and others being significantly delayed due to the unprecedented economic conditions that formed at
that time. The end result was that LMS incurred material bad debt expenses, for the first time in its operating
history, that decreased its reported gross profit for 2008. For 2009, LMS expects to see a significant drop in
gross profit compared to the previous year. The net result of these factors on LMS's operation is possible decline
in gross profits of as much as 80% for its 2009 fiscal year, which would result in a decrease in LMS's distribution
to Alaris in 2010. - Alaris AIF from 2009

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Alaris Royalty Corp.

Track Record - LMS

LMS EBITDA performance since Alaris investment

Company

2008

2009

2010

2011

2012

2013

Solowave
End of the Roll
LifeMark Health

$1.9
$7.9

$3.1
$9.8

$3.3
$12.2

$9.8
$2.5
$6.8

$7.0
$3.3
$7.4

$10.5
$2.6
$5.3

LMS

$16.6 $1.6 $2.1

$0.3

$2.3

$4.6

$4.6
$10.8
$18.6

$8.4
$12.2
$12.4
$7.9
$11.0

$53.3

$71.9

$9.5
$14.4
$11.6
$2.3
$3.9
$0.0
$16.3
$13.8
$7.7
$102.5

KMH
Killick
Quetico
Labstat
Agility Health
SHS
Sequel
SCR Mines Technology
Smi
Total Implied EBITDA

$26.4

$14.5

$17.6

Source: Broadview Capital Management estimates. Company filings

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Alaris Royalty Corp.

Track Record - LMS

Fair value is $32.5 million, a 33% discount to cost

Distributions fell from $7.6 million in 2009 to $1.6 in 2011

Distributions were being paid out of working cap

This was not a good investment and could have sunk the whole story if not
for new capital raised and deployed

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Alaris Royalty Corp.

Track Record KMH

KMH LP is a Mississauga-based radiology clinic roll-up

Alaris has invested a total of $54.8m in KMH in multiple rounds between
April 2010 and December 2012
On January 2, 2015 Alaris amended its agreement with KMH:

Alaris has agreed to receive a portion of its upcoming distributions (the "KMH Distribution") from KMH Cardiology L.P. ("KMH") by
way of a deferred payment (the "Deferred KMH Distribution"). Nothing has been formalized as of yet but Alaris expects to
receive approximately two thirds of the monthly distribution in cash for the next several months. The portion not
paid in cash, the Deferred KMH Distribution, will be booked as revenue on Alaris' income statement and will accumulate as a
liability on KMH's balance sheet as the accumulated Deferred KMH Distribution will be paid out to Alaris on any sale of KMH's
business or as cash flows suffice. Alaris has also agreed to defer approximately $1,500,000 of the $7,960,000 of
distributions that were to be paid in 2014.
Alaris and KMH Management are working together to rectify cash flow constraints that have arisen as a result of a number of
factors relating to KMH's U.S. operations, including without limitation, the timing of collections on receivables related to
Medicare/Medicaid insured patients, which can take up to one year to collect, and KMH's current bank facility being unable

to accommodate this extended receivables collection period as well as increased overhead costs

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Alaris Royalty Corp.

Track Record Labstat

Labstat International LP is a Kitchener-based provider of chemical testing

for tobacco regulation

Alaris invested $41.2m in Labstat in June 2012

On February 28, 2014 Alaris amended its agreement with Labstat

Provided additional short-term loans on three occasions

Alaris distribution reduced from $6.2m to $3.0m with variable free cash flow sweep
$6m additional investment to reduce indebtedness to senior lenders

Distributions have since been increased but still lag original expectations
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Alaris Royalty Corp.

Track Record Agility Health

Agility Health LLC is a wholly-owned subsidiary of Agility Health Inc.

which is a publicly-traded roll-up of physiotherapy clinics

Alaris has invested a total of $19.6m USD in Agility

$12.5m in December 2012

$5.6m USD in October 2013
$2.0m USD in November 2013

Agility is not earning its distribution to Alaris currently

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Track Record Benign Credit Loss Environment

Alaris has encountered a large number of problem investments while other mid-market
lenders have seen non-accruals hit cycle lows at virtually zero
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Source: Prospect Capital Company Filings, Management

Alaris Royalty Corp.

Existing Portfolio mis-markings

Portfolio is marked to model against initial investment assumptions

No provision for loan losses accrued

Several data points indicate that book value is overstated:

Centric Health convertible debentures are $35 with ~50% YTM

Centric Health 2018 senior notes are ~$82 with ~16%+ YTM
Alaris Preferred Partnership Units marked at $36.9m at Q3 2014

Marking it in the context of other debt would result in a meaningful reduction in book value
At 20% yield Alaris units would be worth $20.5m

KMH units should be impaired given announced reduction in cash

distributions

Conservative estimate of 15% reduction in value of investment is $8.3m

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Alaris Royalty Corp.

Existing Portfolio mis-markings

Current Book Value is $15.96 per share (as of Q3/14)

Less: CHH/Lifemark
Less: KMH

$0.50 per share

$0.25 per share

Adjusted book value with these two marks is $15.21

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Alaris Royalty Corp.

What causes Alaris to crack?

Alaris has shown remarkable resiliency as a stock despite:

SHS, Labstat and KMH challenges

CRA investigation (on-going)
Retirement of Quetico and Killick
Founding shareholder, Clay Reidel, disposed of all his shares

BUT
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Alaris Royalty Corp.

What causes Alaris to crack?

At some point logic and/or the competitive nature of lending

will reveal Alaris for what it is

15-16% is the right cost for these loans ergo, defaults will be higher

Book should be marked down for eventual loan loss provisions

Or

Default risk is as low as cheerleaders say ergo, cost of the debt is too high

Competitive capital will enter and/or partner companies will exit

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Alaris Royalty Corp.

What causes Alaris to crack?

This is likely already occurring

Potential for lower returns and higher risk of default as Alaris invests:

in a more competitive environment

in larger dollar amounts

Most recent investment in fitness franchisor was at a lower rate than

previous dealsand theyre a franchisee of gyms!!!

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Alaris Royalty Corp.

What causes Alaris to crack?

The company could be only one or two more body blows away
from real trouble

Another company exiting the portfolio, either by choice or default,

could tip the scales from blind enthusiasm to widespread skepticism
Market growing impatient with lack of new investments or dividend
increases
Recent increase in insider selling
Dividend sustainability called into question

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Alaris Royalty Corp.

What causes Alaris to crack?

Dividend stream is the backbone of Alaris public market appeal

If dividend ever gets called into question, look out below!

Forced selling (retail, dividend indices and safe-haven) with no natural buyers

By our math, Alaris will not earn its current distribution by the second half
of 2015 unless it deploys net new capital

Deferred tax assets burn off in 2H 2015 causing Alaris to be fully cash tax paying
Deferral of cash distributions from KMH will reduce cash flow

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Alaris Royalty Corp.

What causes Alaris to crack?

The deferral of KMH cash distributions and the impact of fully cash taxes
in 2H 2015 could push dividend payout ration materially above 100%

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Alaris Royalty Corp.

Valuation

Alaris should trade in-line or at a discount to its U.S. BDC peer group

Adjusting for portfolio mis-pricings current book is estimated at $15.21

per share

At 100% of adjusted book value Alaris would yield 9.8% - right in-line with BDC peers
Average BDC Trades at 0.93% of NAV
Greater than 50% downside from current price

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Alaris Royalty Corp.

Risks

The downside scenario to the short thesis is that the music

keeps playing

Sell-side cheerleading keeps valuation elevated enough for Alaris to

continuously raise capital and deploy into new investments

Bullish bias towards Alaris from the sell-side due to the companys need
to raise equity

Skepticism will be suspended as long as there is some hope of banking fees

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Alaris Royalty Corp.

Risks

If capital can be deployed in larger and larger amounts than reality of

existing book could be obscured

SHS was only 3% of the portfolio when it went to zero

Dividend yield and cost of borrow

No conceivable private market buyer at a price anywhere near current levels

There is no equity upside to Alaris if any of its investee companies is acquired

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Alaris Royalty Corp.

Conclusion

Alaris has crafted a narrative that it is collecting a low-risk top-line

royalty stream from stable underlying businesses.

We do not believe this perception meets reality.

With material downside and limited upside on the stock, the Risk/reward
tradeoff of a short position in Alaris is very favorable to Broadview and
its LPs
Downside to $15.00 range implies 55%

It wont be very appetizing once everyone sees what goes into

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the sausage

Alaris Royalty Corp

Appendices

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Alaris Royalty Corp.

Implied debt/EBITDA

Company
Solowave
End of the Roll
LifeMark Health
LMS
KMH
Killick
Quetico
Labstat
Agility Health
SHS
Sequel
SCR Mines Technology
Smi
Total Implied Alaris Debt/EBITDA

2008

2009

2010

3.92
5.94
3.09

2.39
6.08
32.14

2.23
5.56
24.70

4.24

8.62

9.74

2011

2012

2013

3.38
2.97
5.47
195.50
6.04
2.54
1.51

4.72
2.24
5.01
21.99
6.56
3.00
2.23
5.27
1.19

3.15
2.77
3.75
11.91
5.82
2.89
2.53
18.30
5.68

4.21

4.33
2.94
4.00
4.51

3.98

Source: Broadview Capital Management Estimates. Company Filings.

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Alaris Royalty Corp.

Coverage Ratios

Company
Solowave
End of the Roll
LifeMark Health
LMS
KMH
Killick
Quetico
Labstat
Agility Health
SHS
Sequel
SCR Mines Technology
Smi
Total Coverage Ratio

2008

2009

2010

1.33
1.05
2.34

2.09
1.17
0.21

2.43
1.08
0.62
0.76

2011

2012

2013

1.95
1.81
1.00
0.16
1.07
2.52
4.38

1.50
2.78
1.05
0.98
1.02
2.11
2.66
1.28
5.49

2.17
2.31
1.32
1.31
1.10
2.11
2.66
0.53
1.09
0.00
1.50
2.15
1.60
1.53

Source: Broadview Capital Management Estimates. Company Filings.

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Publicly-traded U.S. BDC universe by market cap

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BDC Universe valuation Dividend Yield

38

BDC Universe valuation Price/NAV

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Broadview Capital Management Inc.

For investment or other related inquiries, please contact:
Jason Bernstein
AssociateOperations and Business Development
Broadview Capital Management Inc.
181 Carlaw Ave., Suite 302
Toronto, Ontario
M4M 2S1
Phone: (416) 406-4802
Email: jason@broadviewcapital.ca
www.broadviewcapital.ca

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