July 31, 2017 – Mississauga, ON
Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) has made significant progress during the first six months of fiscal 2017. States John McKimm, President/CEO/CIO of SEB, “The Company is currently tracking sales in the $110.0M range and has in excess of $500.0M of backlog, renewal and option year contracts with over 200 active clients. The Benefits Processing book of business has grown significantly. Benefits Processing sales are now tracking in excess of $12.0M up from $1.8M in fiscal 2016. The below transactions, which closed during the second quarter, have strengthened the Company’s balance sheet and positioned SEB for strong growth in the remainder of fiscal 2017 and into fiscal 2018.”
Key transactions closed include the following:
Aon Transaction—-The Company closed the acquisition of the Aon Hewitt Inc. (“Aon”) mid market health benefits administration business in Canada and structured a strategic sales and marketing alliance with Aon. Aon is one of the largest benefit consulting companies in the world operating in over 100 countries. This transaction added 48 corporate clients and over 250,000 plan members plus technology which broadened SEB’s benefits processing capabilities.
Debt Financing—SEB closed $22.5M of debt facilities with a major Canadian Bank. These financings convert short term debt issued or assumed in the course of acquisitions to longer terms of four to five years. This improves the Company’s working capital ratio and is expected to save over $1.5M annually in interest and financing charges.
Equity Financing—The Company closed approximately $7.2M of new equity since November, 2016 of which the President/CEO/CIO and companies related subscribed for over 40%. This equity was used to reduce debt and increase working capital.
CONSOLIDATED RESULTS OF THE QUARTER ENDING MAY 31, 2017 (“Q2/17”)
The Company’s detailed financial results can be found at www.sedar.com. An analysis of these results includes:
- 1. Consolidated Revenue from Continuing Operations – was $26.9M versus $25.1M the previous year and $23.1M in Q1/17. Consolidated revenue grew 16.1% in Q2/17 over Q1/17. Technology Non-Benefits revenue grew 8.5% in Q2/17 over Q1/17. Benefits Processing revenue grew to $2.252M from $0.454M in Q1/17. Benefits Processing Revenue, on a monthly run rate, is now in excess of $12.0M annualized. Consolidated annual sales are tracking in excess of $110.0M.
- 2. Consolidated Gross Margin – was $7.3M for the quarter, up from $4.7M the previous year and $3.7M in Q1/17. As a percent of revenue, consolidated gross margin was 27.0% in Q2/17 versus 16.1% in Q1/17 and 18.8% in Q2/16. This is due to growth in both Benefits Processing and Technology Non-Benefits margins. Gross margin percentages in Technology Non-Benefits was 21.0% in Q2/17 versus 15.3% in Q1/17. Continued sustainable gross margin growth is expected in subsequent quarters. Today, over 46% of every gross margin dollar goes to EBITDA, up from 29% in fiscal 2015.
- 3. Salaries and Other Compensation – costs were 15.1% of sales in Q2/17, versus 8.9% in Q1/17 and 9.6% in Q2/16. This cost structure increased largely due to additional staff in the Benefits Processing business and additional sales and marketing efforts in Technology Non-Benefits. This cost structure is highly scalable. It will not increase materially in either business unit as sales grow. The Technology Non-Benefits costs have fewer employees and more contractors. Contractors’ costs are recorded in cost of sales. Benefits Processing is primarily employees with very few contractors. Employee costs are recorded below Gross Margin.
- 4. Office and General Expenses – were 6.2% of sales in Q2/17, up from 4.9% in Q1/17 and 4.5% in Q2/16. The increase is due to additional real estate costs tied to the Aon transaction. We now have additional office space in Montreal, Toronto and India. This expense is highly scalable. It will not increase materially as sales grow.
- 5. Professional Fees – were 1.8% of sales in Q2/17 up from 0.8% of sales in Q2/16 and 2.0% in Q1/17. The increase in costs is one time and largely tied to costs associated with the new bank financing, the equity issues and the Aon transaction. We are expecting a reduction of over $600,000 in these costs the second half.
- 6. Operating Income Prior to Non-Cash expenses- was $749,029 in Q2/17 versus $994,427 in Q2/16 and $59,453 for Q1/17. Operating income was impacted primarily due to the one time professional costs (noted above), the increase in compensation, office and general costs tied to Aon transaction.
- 7. Interest and Financing Fees- were $648,839 for Q2/17 versus $693,417 for Q2/16 and $502,087 in Q1/17. The Bank Financing which closed April 30, 2017 will reduce these charges by over $350,000 per quarter going forward.
- 8. Non-cash Expense – consisting of amortization, depreciation and share based compensation was relatively flat in both dollar amounts and as a percentage of sales. Amortization attributable to acquisitions is the largest component representing over 85% of non-cash expenses. The majority of these costs will be fully amortized by fiscal 2019 and no longer have an impact on net income. Currently, they affect net income by over $5.0M per annum.
- 9. Transition Costs for Aon Transaction – were $0.98M in Q2/17. These costs are related to the Aon transaction and are one time. Transition costs will continue to be recorded in the third quarter ending August 31, 2017. These costs are non-recurring and will be totally expensed by the end of Q3/17 (August 31). The transition cost budget for the Aon transaction is $1.84M. We expect actuals to be within 5% of budget.
- 10. Transaction Costs – in Q2/17 were $925,646 up from $295,967 in Q2/16. Over 85% of these costs are tied to the equity financing, the Bank financing and closing the Aon transaction and are one time.
- 11. The Company Reported Net Loss– of $3.2M for Q2/17 versus $2.2M for Q1/17 and $1.25M in Q2/16. Approximately $1.34M of these losses are related to non-cash expenses, primarily amortization and deprecation. The Aon one time transition costs for Q2/17 were $0.98M. One time transaction costs (legal and accounting) associated with equity financings, the major bank debt financing and the Aon transaction were $925,646.
These costs accounted for the majority of the loss. Financial performance in the second half of fiscal 2017 is expected to significantly improve due to the permanent reductions of $2.0M of cost structure on Technology Non-Benefits, the completion of the $1.84M of the one-time Aon transition costs, the reduction of $1.5M, annually, in interest charges, the reduction in professional fees of at least $600,000 in the second half of fiscal 2017 and the continued growth of gross margin and revenue.
DIVISIONAL PERFORMANCE – STEADY IMPROVEMENT
- 1. The Technology Division revenue was $24.6M for the quarter versus $22.7M the previous quarter. The change is largely due to seasonal improvements offset by weakness in the Western Canada market. Operating income was $1.7M versus $0.9M the previous quarter.
- 2. The Benefits Division revenue was $2.3M for the quarter versus $0.5M the previous quarter, largely due to the Aon acquisition. Operating results for the quarter was a loss of $0.05M versus a loss of $0.5M the previous quarter. The Aon transition is forecast to be significantly profitable by September, 2017 once the transition is complete. As part of the acquisition of the Aon benefits business, SEB agreed to pay one-time Transition Fees while it built the infrastructure necessary to manage the business. The total fees for the months of April and May were recorded as “Transition costs” at $0.98M. The Canadian transition was completed as planned on June 30. The transition for the India operations is expected to be completed on August 31, at which point no further fees are expected. The costs savings, post transition, is expected to exceed $1.5M per annum.
- 3. The Corporate Division reported an operating loss of $.98M, up from a loss of $0.4M the previous quarter; the largest items being increased one time professional costs related to the equity and debt financing and closing the Aon transaction.
- 4. Permanent cost savings in the Technology Non-Benefits is in the $2.0M per annum range over the past 15 months. Interest cost savings are in excess of $1.5M per annum due to the bank financing and the equity raises. The majority of these savings will be evident in financial results going forward. Additionally, the full transition of Aon business to the SEB infrastructure will generate in excess of another $1.5M of permanent cost savings. Over half of these cost savings resulted as of July 1, 2017. The remainder will be completed by August 31, 2017.
THE AON TRANSACTION POSTIONS SEB AS A MATERIAL PROVIDER OF BENEFITS PROCESSING SOLUTIONS
The acquisition of Aon’s mid-market health benefits administration business in Canada represents 48 clients, many with globally recognized brands, with over 250,000 plan members. As a part of this transaction SEB added several complementary technology platforms and approximately 160 employees across Canada and India. The Agreement also included a strategic business relationship with Aon Hewitt where SEB’s technology solutions enable future business development initiatives.
States John McKimm, President /CEO/CIO of SEB, “The Aon Transaction adds not only long term client relationships to SEB’s Benefits Processing business, it also adds a strategic relationship with one of the largest benefits consulting organizations in the world. A further positive is the “Flex-Plus” administration platform and other technology applications, SEB believes “Flex-Plus” to be the most comprehensive, user friendly and easily customizable “Flex Systems” in the market place today.”
“SEB has made over $20.0M of investment during the past five years in its health benefits processing solutions. The “Flex-Plus” platform and other solutions acquired from Aon, materially, enhance SEB’s processing solutions capabilities. SEB has added to the functionality of “Flex-Plus” with additional capability from its own administration solutions.”
Today SEB provides fully automated processing of health benefits plans including Administration Solutions (Traditional or Flex), Adjudication, Claims Payment, Billing, Real Time Reporting, Analytics and Fraud Analytics. SEB offers Total Integrated Processing Functionality on a “White-Label Joint Venture” basis per a Channel Partner business model. SEB solutions, among other capability, includes custom preferred provider networks, custom EDI capability, PBM (pharmacy benefit management) functionality, a new products on-line portal solution which automates the application and underwriting process for new insurance products reducing approval terms to minutes from months, white-label benefit cards, an integrated disability management portal automating the case management process, health & wellness automated solutions, health spending accounts, etc. SEB also provides a nationally focused fully bilingual Contact Centre based in Montreal with the leading contact center software in the industry today. This is very scalable infrastructure. SEB benefits processing solutions are unique in that they provide fully automated processing for “All Benefits Types in One Processing Environment on One Benefit Card”.
SEB solutions allow “Convergence” of benefits processing including “Single Sign On”, in a world where disaggregation is the norm. An average employee benefit plan costs approximately $3000 per employee per annum. Processing fees account for approximately 10% of these premiums. SEB’s fully integrated processing solutions provide over 90% of these processing services in “One Processing Environment”. Currently, SEB has over 300,000 plan members operating on one or more of its processing solutions. SEB’s objective is “Convergence”; to transition clients over time to “One Processing Environment”. This “Convergence” strategy significantly improves services to clients, allows clients real time information to make better cost decisions, allows real time fraud identification and analytics; essentially providing “One Processing Environment for All Benefit Types”. All SEB benefits processing solutions are fully supported and managed by over 900 full time employees and contractors across Canada and globally. The utilization of SEB’s fully integrated platform targets revenue in Canada in excess of $250.00 per plan member per annum. These are costs most clients are already spending among multiple processing environments. The “Convergence” resulting from SEB’s integrated processing environment is both highly cost effective and enhances functionality and value add for the client without increasing costs.
DEBT FINANCING OF $22.5M
The new financing arrangements with a major Canadian Bank consist of an operating demand facility of up to $12.0M, a loan $5.5M (now $5.1M outstanding) term loan facility with repayment amortized over four years (the “Senior Term Facility”) and a $5.0M subordinated term loan facility (the “Junior Term Facility”). The Senior Term Facility has interest terms consistent with fully secured senior debt. The Junior Term Facility is a five year, subordinated term facility with the mezzanine arm of the bank. It has monthly interest only and a balloon payment at the end of the term. The Junior Term Facility has interest terms consistent with secured subordinate debt facilities.
The new credit facilities consolidate and replace the aggregate $4.8M of credit facilities that the Company’s wholly owned Technology Division subsidiaries had with the same major Canadian bank, as well as the Company’s asset-based credit facilities of $12.5M with a major international Asset Based Lender (ABL). The new credit facilities also repay short term acquisition debt at the subsidiary level and select short term notes at the public company level. States John McKimm President/CEO/CIO of SEB, “the new credit facilities reduce the Company’s interest charges by over $1.5M per annum and significantly improves debt service ratios which in the Technology Non-Benefits business is over 2.0 times with an adjusted EBITDA/Debt ratio of less than 3.0 times both ratios which contributed to the ability to secure senior bank financing.”
The Company has closed (in several tranches) equity financings since November, 2016 totaling $7.2M. In total 37,528,165 shares and 26,691,540 warrants were issued. Most recently the Company announces, as part of the $7.2M equity raise, that it has closed today, $240,100 of new equity comprising 1,500,625 shares issued at $0.16 per share. Agents were paid 91,000 Finders’ Shares and 91,000 Brokers’ Warrants. The brokers’ warrants have a 24-month term and are exercisable at $0.20 per share during the term.
CONFERENCE CALL DETAILS
Date/Time: Wednesday, August 2nd at 11:30AM ET.
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Replay Duration: Available for one week until end of day August 9, 2017.
Smart Employee Benefits Inc.’s global infrastructure is comprised of two operating business units: Technology Non-Benefits (“TNB”) and Benefits Processing (“BP”). The TNB currently serves corporate and government clients across Canada and internationally. The BP focuses on offering SaaS and BPO solutions in the Benefits Processing Sector to corporate and government clients globally. The BP business operates as a client of the TNB. The TNB is a critical competitive advantage in supporting the implementation and management of SEB’s benefits processing solutions into client environments. BP is a high-growth specialty practice area where SEB solutions can be game changing for the client.
The core expertise of both business units is data processing. Emphasis is on automating business processes utilizing SEB proprietary software solutions combined with solutions of third parties through joint ventures and partnerships. SEB’s business model in the BP is “Channel Partnerships” where SEB processing solutions enable business process efficiencies which both improve cost structures and enable new revenue models for Channel Partners and clients. All SEB solutions are cloud enabled and can be delivered as SaaS environment.
For further information about SEB, please visit www.seb-inc.com.
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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