October 30, 2019 – Mississauga, ON
Conference Call Scheduled Monday November 4, 2019 at 11:00 A.M.
Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) today reported its financial results for the three and nine months ending August 31, 2019.
States John McKimm, President/CEO/CIO of Smart Employee Benefits Inc.:
“Net comprehensive income for the third quarter ended August 31, 2019 increased from the comparable period previous year by $2.0M ($980K for the nine months then ended). The 1.0% increase in gross margin percentage for the quarter combined with operating costs reduction initiatives, led to a quarter over quarter improvement in Adjusted EBITDA, and the divestiture of the operating assets of Paradigm Consulting Group Inc. (“Paradigm”) resulted in a positive EBITDA of $1.9M for the third quarter in continuing operations ($284K YTD). The cash flow generated from these transactions facilitated a $6.7M reduction in bank debt since November 30, 2018 the Company’s year end.
SEB has made significant investments in both the Technology and Benefits Divisions since the Company’s inception. Building the infrastructure, while a time consuming and costly process; has created significant contract backlog with blue chip and government clientele in both divisions, and strong strategic partnerships. As a result, the Technology Division (“TD”) currently delivers strong operating results, and the Benefits Division (“BD”) is anticipated to follow suit in Fiscal 2020.”
Comparative Results for the three and nine months ended August 31, 2019
For the three months ended August 31, 2019, consolidated revenues from continuing operations declined from the comparable period prior year by $1.0M ($7.4M YTD). The TD declined by $281K ($7.8M YTD), while the BD increased by $31K (declined $0.6M YTD). In 2018, in addition to managing its clients’ annual needs, certain of SEB’s clients requested additional one-time services such as systems implementations, platform transitions and global event management. In 2019, SEB maintained its base revenue and continued to grow its contract portfolio. The sales pipeline and contracts are the strongest they have ever been, particularly in the BD.
Gross Margins and Gross Margin %
The Company generated $16.5M in gross margin during the nine months ended August 31, 2019 ($5.6M Q3/19). Consolidated gross margin from continuing operations declined quarter over quarter by $147K ($1.1M YTD) primarily in the TD. Gross Margin % (“GM %”) for continuing operations was 32.8% in Q3/19 compared to 31.8% in Q3/18. GM % for the nine months ended August 31, 2019 for continuing operations were 32.3% compared to 30.2% in 2018. Improved margins in both the TD and BD contributed to the overall increase. Continued delivery of higher margins is expected throughout 2019 and 2020.
- Salaries and Other Compensation - salaries decreased by $0.4M during the quarter (increase of $0.5M YTD) over the comparable periods prior year. The quarter’s reduction is a result of the cost reduction initiatives, while the year over year change is primarily attributable to the immediate expensing of development costs, as compared to their capitalization.
- Office and General Costs – Office and general costs increased by $117K in the quarter (increased $0.3M YTD) over the comparable periods prior year.
- Professional Fees: – Professional fees increased by $51K quarter over quarter (decrease of $0.2M YTD). Professional fees vary with the amount of financing or acquisition/disposition activity during the period.
Non-Cash expenses include amortization, depreciation and share-based (options) compensation decreased $0.5M over the nine months ended August 31, 2019 compared to prior year. The largest component is amortization of intangible assets (related to acquisition), which was $2.2M YTD. These costs are expected to be largely amortized by Fiscal 2020.
Interest and Financing Costs and Interest Accretion:
Interest and financing costs remained relatively consistent YTD compared to prior year with approximately $2.1mm being expensed.
KEY DEVELOPMENTS DURING AND SUBSEQUENT TO THE QUARTER
Update on Scotia Capital Strategic Review Process
Scotia Capital Inc. was engaged in March 2019 to assist the Company in identifying and negotiating a transaction with a strategic investment partner. The SEB Board and Management believes this process will provide the optimal immediate value for shareholders, be operationally strategic to SEB, and provide the working capital to expedite the many growth opportunities. During the quarter Scotia moved to the second stage of the process.
Sale of Paradigm Consulting Group Inc.
On July 3, 2019, the Company divested the operating assets of Paradigm to a Limited Partnership of which the combination of Golden Opportunities Fund Inc. (“Golden”) and Paradigm’s senior management own 75% and the Company owns 25%. The purchase price included a cash amount of $4.5M, cancellation of $3.0M of Paradigm preferred shares owned by Golden, which were convertible into SEB common shares, and a working capital and pre-closing earnings adjustment. In exchange for Golden relinquishing the convertibility and earnings bonus features of the preferred shares, the Company issued to Golden 1,000,000 warrants to acquire SEB shares at an exercise price of $0.30 per share for a period of four years following close of the transaction.
Paradigm was originally acquired in 2015 to facilitate a local footprint in Saskatchewan and Manitoba for multiple RFP bids, which Management believes can be achieved with a 25% equity interest. The proceeds from the sale have been used to reduce SEB’s debt and contribute to working capital.
Chief Financial Officer Changes
Robert Prentice, CPA, CA, a founder of SEB and the Chief Financial Officer (“CFO”) has retired and has resigned from the Company. The Company would like to thank Robert for his contributions to the Company over the past eight years and wish him all the best in his future endeavors. While Robert has retired, he has agreed to make himself available over the next year to assist in transition as may be required.
The Company is pleased to announce the appointment of Tim Beaulieu, CPA, CA, as CFO and Corporate Secretary in the public company. Tim has a long history with the Company, as CFO of both Technology Division entities and Benefits Division entities, representing over 80% of consolidated Company revenues.
Business Development to date in Fiscal 2019
During Fiscal 2019, the Company has made substantial progress on new business development. In the BD, the Company has added more than 17,000 new plan members from new and existing clients, representing annual revenue in excess of $1.0M, with multi-year contracts. In addition, the Company has renewed 10 existing clients representing over 38,000 plan members. This brings the Company’s total renewals since acquiring the Aon book of business to 33 of 47 clients representing over 160,000 plan members. The remaining clients are either evergreen (ongoing) or come up for renewal in 2020 and beyond.
Relationships have been consolidated and grown with multiple new consulting partners. The Company’s Channel Partner strategy has gained strong traction with more than a dozen active negotiations with Channel Partner opportunities including brokerage organizations, MGAs, TPAs, insurers, unions and corporate entities. Several LOIs and LOAs have been executed with revenue growth expected in 2020 from the Channel Partner business initiatives.
The Company’s RFP sales pipeline is the largest it has ever been, in both corporate and government opportunities.
In the TD the Company has won or renewed over $90.0M of new multi-year contracts. Total contract value for both TD and BD including backlog, option years and evergreen remains strong.
Cost Reduction and Integration
In Fiscal 2019, the Company has reduced its cost structure by over $1.33M per annum of which an estimated $318K is expected to be reflected in Fiscal 2019 with the full amount in 2020 and beyond. Technology infrastructure represents more than half of the savings. This amount brings total cost reductions to in excess of $4.0M per annum since Fiscal 2017, over 60% attributed to technology infrastructure. The Company is targeting additional cost realignment and reduction in Fiscal 2020 as new technology systems improve efficiencies.
States John McKimm, President/CEO/CIO of Smart Employee Benefits Inc.:
“SEB has been in an investment mode since its inception in both the TD and more significantly in the BD. The TD, historically, has strong profitability. The BD has required significant investment, the majority of which has been expensed. This has penalized cash flow, earnings and EBITDA. The fourth quarter of 2019 is expected to be a strong quarter. Going forward, the capital expenditures are minimal, the cost structure from acquisitions and integrations has been largely realigned and both the TD and BD are anticipated to show strong growth and positive cash flow. The contract values including backlog, option years and evergreen remain strong, with the Company continually renewing or winning sufficient new business to replace annual revenues. The Company has established strong traction in multiple new business initiatives and is well positioned to win new business going forward.”
CONFERENCE CALL DETAILS
Date/Time: Monday, November 4, 2019 at 11:00 AM ET.
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SEB is a technology company providing Business Process Automation and Outsourcing software, solutions and services to a national and global client base. SEB has a specialty growth focus in cloud enabled SaaS processing solutions for managing employer and government sponsored health benefit plans on a BPO (Business Processing Outsourcing) business model, globally. SEB currently serves corporate and government clients across Canada and internationally. Over 80% of SEB’s revenues derive from government, insurance and health care organizations. SEB’s technology infrastructure of over 650 multi-certified technical professionals, across Canada and globally, is a critical competitive advantage in supporting the implementation and management of SEB’s benefits processing solutions into client environments. SEB’s Benefits Processing Solutions can be game changing for SEB clients.
The core expertise of SEB is automating and managing business processes utilizing SEB proprietary software solutions combined with solutions of third parties through joint ventures and partnerships. SEB’s client acquisition model in benefits processing is “Channel Partnerships” where SEB processing solutions both improve cost structures and enable new revenue models for Channel Partners and clients. All SEB solutions are cloud enabled and can be delivered on a SaaS platform. SEB solutions turn cost centers to profit centers for our Channel Partners.
The forward-looking information contained in this release represents the Company’s current expectations and, accordingly, is subject to change. However, the Company expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable law.
All figures are in Canadian dollars unless otherwise stated.
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