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Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Equity Bottom-Up

<h3>KEY POINTS</h3>
<p>All figures are expressed in Canadian dollars unless specified.</p>
<ul>
<li>Quarterly revenue, including the share of income from the company’s investment in OCEP, was $1.3 million, compared with $0.5 million (+155.8% Y/Y) in 3Q21. Royalty revenue for the current period remained largely consistent with the prior period. The increase in finance income was mainly attributed to the inclusion of finance income related to the OCEP loan in the financial statements following the change of control in August.</li>
<li>Gross profit increased 177.2% Y/Y to $1.2 million from $0.4 million in 3Q21. Notably, gross margin increased by 7.4% Y/Y to 95%. ~98% of revenue came from the North American market, while the remainder came from Europe.</li>
<li>The company recorded net income of $0.5 million ($0.01 per share), compared with a net loss of $0.4 million (-$0.01 per share) in 3Q21. The positive figure resulted from an increase in finance income, a decrease in operating expenses, and the recognition of a stake in one of the investee firms (OCEP) as a revenue line item.</li>
<li>As of September 30, 2022, the company had total assets worth ~ $43.3 million, which mainly included secured loans advanced and royalty interests (~$33.2 million) and cash balance (~$8.3 million). Green bonds (~$19.4 million) constituted most of the non-current liabilities totaling ~$19.5 million, while convertible notes issued (~$1.9 million) had the major share in current liabilities that totaled ~$2.3 million. The company has no lines of credit and complied with all the debt covenants.</li>
<li>During the 9M22 period, the company used $0.6 million cash in its operating activities and $16.8 million in investing activities, primarily for new royalty-based investments. Financing activities provided $5.0 million cash, mainly from the net proceeds ($7.3 million) from the public offering, partially offset by cash distributions ($1.1 million) to the company’s shareholders and interest payments ($0.9 million) on green bonds.</li>
</ul>
<h2>EARNINGS SNAPSHOT</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/113/original/image_53359328021670289382522.png?1670289385" class="editor-image img-responsive" data-smartkarma-image-id="314113"></figure>
<h2>HIGHLIGHTS</h2>
<ul>
<li>In August 2022, upon de-recognition of the company’s interest in OCEP JV, RER recognized a loss of $348,792 and reclassified accumulated foreign exchange translation difference of $100,475 relating to its investment in OCEP JV from other comprehensive income to net income.</li>
<li>At the end of September 2022, RER owned a portfolio of 115 royalties on various solar, wind, battery storage, energy efficiency, and renewable natural gas projects in Canada, the United States, Mexico, and Europe.</li>
<li>During the quarter, the company provided a secured acquisition loan of $1.3 million to&nbsp;Switch Power Corporation (Switch)&nbsp;to acquire an operational 428 kWDC solar project located in Vaughan, Ontario. RE Royalties will also receive a gross revenue royalty of 1% on the project for the remainder of the contract term, or approximately 12.5 years, and if the loan term is extended beyond the initial six-month term, the royalty will increase to 2%.</li>
<li>RE Royalties provided a $1.86 million secured loan facility to&nbsp;ReVolve Renewable Power Corp (ReVolve), (of which a partial advance was made subsequent to the quarter-end) to support the purchase of battery and inverter equipment for three energy storage projects, totaling 3.2 MWh of capacity, in Mexico. The company will also receive a gross revenue royalty of 5% on all revenues received on the three projects for 10 years.</li>
<li>Subsequent to the quarter-end, in October 2022, the company provided Delta Energy Partners (Delta) with a US$3.9 million secured loan and royalty facility. Delta is a provider of Energy-as-a-Service (EaaS) solutions to customers in Puerto Rico and the loan will finance the procurement and installation of energy efficiency and building energy equipment.</li>
<li>In November 2022, the company’s green bondholders approved, by way of extraordinary resolution, to modify the debt-to-equity ratio per the bond indenture from 1:1 to 3:1. This will allow the company to increase its use of debt to fund new assets.</li>
<li>Our prior content on RROYF can be accessed&nbsp;here.</li>
</ul>
<h2>OUR PREVIOUS RESEARCH CONTENT</h2>
<h2>Initiation of Coverage Report</h2>
<p>11/09/22&nbsp;Innovative Royalty Financing Company with Growing, Resilient, and Long-Term Recurring Revenues in the Renewable Energy Sector</p>
<p>Extensive coverage on RE Royalties assessing key opportunities, obstacles, technology, industry, risks, competition, financials, management profiles, etc.</p>
<h2>COMPANY OVERVIEW</h2>
<p>RE Royalties Ltd. (hereafter referred to as RER) provides a non-dilutive royalty financing solution (through a combination of short-term loans and acquisition of revenue-based royalties) to privately held and publicly traded renewable energy and clean energy technology companies. RER’s objective is to acquire a portfolio of long-term, stable, diversified renewable energy royalty and income streams to provide shareholders with capital appreciation and a growing, sustainable, long-term cash distribution. RER is a pioneer and the first publicly traded company to provide this royalty financing for the renewable energy and clean technology sector.</p>
<p>At the end of September 2022, RER owned a portfolio of 115 royalties on various solar, wind, hydro, battery storage, and renewable natural gas projects operating or in development in Canada, the United States, Mexico, and Europe. These long-term royalties are on more than 280 MW of solar, wind, renewable natural gas, energy efficiency, energy storage, and hydro projects that are currently in operation or will be in the near term. These projects play a significant role in combatting climate change. They will displace more than 169,730 tons of carbon annually (equivalent to powering 90,111 homes with clean energy and 2.8 million trees planted) from entering the atmosphere.</p>
<p>RER has invested more than C$55 million in royalty transactions since its inception. The top three clients include&nbsp;Switch Power&nbsp;(cumulative C$8.68 million),&nbsp;Nomad Transportable Power Systems&nbsp;(C$7.17 million),&nbsp;and&nbsp;Outagamie Clean Energy Partners&nbsp;(C$5.89 million).</p>
<p>RER is headquartered in Vancouver, Canada, and was incorporated in 2016. RER’s common shares were listed on the TSX Venture Exchange in November 2018. In March 2022, RER took the next stride in its growth and its common shares began trading on the OTCQX Best Market, the highest market tier administered by OTC Markets Group Inc., with the ticker RROYF.</p>
<h2>Business Model</h2>
<p>Royalty financing allows renewable energy and clean technology companies to raise capital to fund their growth plans when traditional options such as debt and equity aren’t available or suitable. Royalty financing also enables these companies to avoid having to sell their existing assets in order to raise capital. RER offers capital in the form of an upfront cash payment or interest-bearing short-term loan in exchange for a percentage of future revenues from operating projects (which can be a fixed amount annually). The clients retain 100% control of their assets and businesses, and there are usually no material restrictions on how the funds are used.</p>
<p>RER receives royalties (or periodic percentage payments) from the revenues earned by their clients. These clients will have long-term power purchase or energy services agreements (PPAs) for most projects. RER’s royalties are tied to the revenues generated from these PPAs. The counterparties to these PPAs are typically government, quasi-government entities, utilities or large corporations, who agree to purchase electricity from the project at a fixed price (sometimes scaled with inflation) or energy services (such as storage or efficiencies) for a set period (typically 20 years or more).</p>
<p>RER generally targets unlevered internal rates of returns (IRR) of 10-20% on their investments. Their investments in 2022 to date have yielded an IRR of 18%.</p>
<h2>Industry Summary</h2>
<p>The global&nbsp;renewable energy market&nbsp;was valued at US$769 billion in 2021 and is projected to reach US$2,630 billion by 2030, growing at a CAGR of 16.6%. The major driving factors of the market are favorable government policies, increasing adoption of renewable energy with the declining price of clean tech resources.</p>
<p>According to the International Renewable Energy Agency (IRENA), renewable capacity additions in 2021 climbed by 6% to break another record, reaching almost 295 GW despite persisting pandemic-induced supply chain issues, construction delays, and record-high raw material and commodity prices. According to the IEA, global renewable capacity is expected to increase over 8% Y/Y in 2022, pushing through the 300 GW mark for the first time, with solar PV accounting for 60% of the increase in capacity through the commissioning of 190 GW, a 25% gain from 2021.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Shawn Severson, who is the writer of this report, covers the Emerging Growth &amp; Special Situations, BioEconomy, and ClimateTech &amp; Sustainable Investing sectors for WTR. Mr. Severson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS
All figures are expressed in Canadian dollars unless specified.

Quarterly revenue, including the share of income from the company’s investment in OCEP, was $1.3 million, compared with $0.5 million (+155.8% Y/Y) in 3Q21. Royalty revenue for the current period remained largely consistent with the prior period. The increase in finance income was mainly attributed to the inclusion of finance income related to the OCEP loan in the financial statements following the change of control in August.
Gross profit increased 177.2% Y/Y to $1.2 million from $0.4 million in 3Q21. Notably, gross margin increased by 7.4% Y/Y to 95%. ~98% of revenue came from the North American market, while the remainder came from Europe.
The company recorded net income of $0.5 million ($0.01 per share), compared with a net loss of $0.4 million (-$0.01 per share) in 3Q21. The positive figure resulted from an increase in finance income, a decrease in operating expenses, and the recognition of a stake in one of the investee firms (OCEP) as a revenue line item.
As of September 30, 2022, the company had total assets worth ~ $43.3 million, which mainly included secured loans advanced and royalty interests (~$33.2 million) and cash balance (~$8.3 million). Green bonds (~$19.4 million) constituted most of the non-current liabilities totaling ~$19.5 million, while convertible notes issued (~$1.9 million) had the major share in current liabilities that totaled ~$2.3 million. The company has no lines of credit and complied with all the debt covenants.
During the 9M22 period, the company used $0.6 million cash in its operating activities and $16.8 million in investing activities, primarily for new royalty-based investments. Financing activities provided $5.0 million cash, mainly from the net proceeds ($7.3 million) from the public offering, partially offset by cash distributions ($1.1 million) to the company’s shareholders and interest payments ($0.9 million) on green bonds.

EARNINGS SNAPSHOT

HIGHLIGHTS

In August 2022, upon de-recognition of the company’s interest in OCEP JV, RER recognized a loss of $348,792 and reclassified accumulated foreign exchange translation difference of $100,475 relating to its investment in OCEP JV from other comprehensive income to net income.
At the end of September 2022, RER owned a portfolio of 115 royalties on various solar, wind, battery storage, energy efficiency, and renewable natural gas projects in Canada, the United States, Mexico, and Europe.
During the quarter, the company provided a secured acquisition loan of $1.3 million to&nbsp;Switch Power Corporation (Switch)&nbsp;to acquire an operational 428 kWDC solar project located in Vaughan, Ontario. RE Royalties will also receive a gross revenue royalty of 1% on the project for the remainder of the contract term, or approximately 12.5 years, and if the loan term is extended beyond the initial six-month term, the royalty will increase to 2%.
RE Royalties provided a $1.86 million secured loan facility to&nbsp;ReVolve Renewable Power Corp (ReVolve), (of which a partial advance was made subsequent to the quarter-end) to support the purchase of battery and inverter equipment for three energy storage projects, totaling 3.2 MWh of capacity, in Mexico. The company will also receive a gross revenue royalty of 5% on all revenues received on the three projects for 10 years.
Subsequent to the quarter-end, in October 2022, the company provided Delta Energy Partners (Delta) with a US$3.9 million secured loan and royalty facility. Delta is a provider of Energy-as-a-Service (EaaS) solutions to customers in Puerto Rico and the loan will finance the procurement and installation of energy efficiency and building energy equipment.
In November 2022, the company’s green bondholders approved, by way of extraordinary resolution, to modify the debt-to-equity ratio per the bond indenture from 1:1 to 3:1. This will allow the company to increase its use of debt to fund new assets.
Our prior content on RROYF can be accessed&nbsp;here.

OUR PREVIOUS RESEARCH CONTENT
Initiation of Coverage Report
11/09/22&nbsp;Innovative Royalty Financing Company with Growing, Resilient, and Long-Term Recurring Revenues in the Renewable Energy Sector
Extensive coverage on RE Royalties assessing key opportunities, obstacles, technology, industry, risks, competition, financials, management profiles, etc.
COMPANY OVERVIEW
RE Royalties Ltd. (hereafter referred to as RER) provides a non-dilutive royalty financing solution (through a combination of short-term loans and acquisition of revenue-based royalties) to privately held and publicly traded renewable energy and clean energy technology companies. RER’s objective is to acquire a portfolio of long-term, stable, diversified renewable energy royalty and income streams to provide shareholders with capital appreciation and a growing, sustainable, long-term cash distribution. RER is a pioneer and the first publicly traded company to provide this royalty financing for the renewable energy and clean technology sector.
At the end of September 2022, RER owned a portfolio of 115 royalties on various solar, wind, hydro, battery storage, and renewable natural gas projects operating or in development in Canada, the United States, Mexico, and Europe. These long-term royalties are on more than 280 MW of solar, wind, renewable natural gas, energy efficiency, energy storage, and hydro projects that are currently in operation or will be in the near term. These projects play a significant role in combatting climate change. They will displace more than 169,730 tons of carbon annually (equivalent to powering 90,111 homes with clean energy and 2.8 million trees planted) from entering the atmosphere.
RER has invested more than C$55 million in royalty transactions since its inception. The top three clients include&nbsp;Switch Power&nbsp;(cumulative C$8.68 million),&nbsp;Nomad Transportable Power Systems&nbsp;(C$7.17 million),&nbsp;and&nbsp;Outagamie Clean Energy Partners&nbsp;(C$5.89 million).
RER is headquartered in Vancouver, Canada, and was incorporated in 2016. RER’s common shares were listed on the TSX Venture Exchange in November 2018. In March 2022, RER took the next stride in its growth and its common shares began trading on the OTCQX Best Market, the highest market tier administered by OTC Markets Group Inc., with the ticker RROYF.
Business Model
Royalty financing allows renewable energy and clean technology companies to raise capital to fund their growth plans when traditional options such as debt and equity aren’t available or suitable. Royalty financing also enables these companies to avoid having to sell their existing assets in order to raise capital. RER offers capital in the form of an upfront cash payment or interest-bearing short-term loan in exchange for a percentage of future revenues from operating projects (which can be a fixed amount annually). The clients retain 100% control of their assets and businesses, and there are usually no material restrictions on how the funds are used.
RER receives royalties (or periodic percentage payments) from the revenues earned by their clients. These clients will have long-term power purchase or energy services agreements (PPAs) for most projects. RER’s royalties are tied to the revenues generated from these PPAs. The counterparties to these PPAs are typically government, quasi-government entities, utilities or large corporations, who agree to purchase electricity from the project at a fixed price (sometimes scaled with inflation) or energy services (such as storage or efficiencies) for a set period (typically 20 years or more).
RER generally targets unlevered internal rates of returns (IRR) of 10-20% on their investments. Their investments in 2022 to date have yielded an IRR of 18%.
Industry Summary
The global&nbsp;renewable energy market&nbsp;was valued at US$769 billion in 2021 and is projected to reach US$2,630 billion by 2030, growing at a CAGR of 16.6%. The major driving factors of the market are favorable government policies, increasing adoption of renewable energy with the declining price of clean tech resources.
According to the International Renewable Energy Agency (IRENA), renewable capacity additions in 2021 climbed by 6% to break another record, reaching almost 295 GW despite persisting pandemic-induced supply chain issues, construction delays, and record-high raw material and commodity prices. According to the IEA, global renewable capacity is expected to increase over 8% Y/Y in 2022, pushing through the 300 GW mark for the first time, with solar PV accounting for 60% of the increase in capacity through the commissioning of 190 GW, a 25% gain from 2021.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Shawn Severson, who is the writer of this report, covers the Emerging Growth &amp; Special Situations, BioEconomy, and ClimateTech &amp; Sustainable Investing sectors for WTR. Mr. Severson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

3Q22 Results: Revenue Jumps 156% Y/Y; Gross Profit Surges 177% Y/Y; Financing Vertical Shines with Growing Client Base