Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) today reports its financial results for the second quarter of 2020.

States John McKimm, President/CEO/CIO of Smart Employee Benefits Inc.:

“Adjusted EBITDA and EBITDA improved significantly for the second quarter, 2020 over the comparable period the previous year and from the first quarter, 2020.  The gross margin percentage improved by 0.5% from the first quarter, 2020 and 1.9% from the same period the previous year. Operating costs reduction initiatives led to the year over year improvement in cost structure of approximately $1,261,130 quarter over quarter and $2,357,519, first half over first half, which is expected to be permanent cost savings of over $4.0M annually.

EBITDA improved by $1,150,664 in the second quarter to a positive $511,172 from a negative $639,492 and Adjusted EBITDA improved by $1,046,235 to a positive $519,894 from a negative $526,341 in the same period the previous year. The improvement is the result of cost reduction initiatives across the company and growth in the Benefits Division.

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 and strong strategic partnerships in both divisions.  As a result, the Technology Division (“TD”) currently experienced a positive $1,730,401 of EBITDA in the first 6 months versus $1,561,881 the previous year. The Benefits Division (“BD”) experienced a positive $29,178 versus a negative $1,827,547 the same period the previous year. This trend is expected to continue in the second half of 2020 with significant improvement in the BD in the second half.

From January 2020 to April 2020, the company has won over $20.0M of net new contracts.  This represents a win rate of approximately 50% of opportunities bid, well above industry averages and the company’s previous track record.  Submitted proposals and bids outstanding for net new business total over $100.0M with decisions pending in the near future.  Additionally, the Company has signed agreements per its “Channel Partner White Label TPA” initiatives, to add approximately 150,000 new plan members to its benefits processing business.  The BD has under contract over 96% of its 2020 budget and is expected to be cash flow positive in 2020.  The signed new business to date, in 2020, is materially ahead of our business development budget. Additionally, the BD just renewed existing clients contracts representing almost 40,000 plan members for another 5 years.  The TD has historically been cash flow positive and net new business wins remain strong. The BD is just now becoming cash flow positive after huge investment in technology/infrastructure and is expected to have continued strong sustainable growth going forward. Signed contracts (backlog, evergreen, option years), based on a 5-year time frame are valued at over $400M.

COVID-19 has led to demand for our BD solutions, including our “online medical care partnerships”.  In our TD, a portion of our revenues are at risk near term, primarily those related to the project driven portion of the business and the delay of government renewals of existing contracts and the onboarding of new contracts. Budget allocations have not changed, but the expenditures have been delayed.  The remaining business is largely multi-year managed services driven contracts for mission critical infrastructure and systems.  On a consolidated level the company applied for COVID-19 government relief which offset the profitability loss from the decline in revenue in the TD.  The remaining business has experienced stable and growing revenue and is not eligible.

The sales pipeline is the strongest it has ever been.  At a 50% win rate in the past four months this win rate is well above our historical 30% to 35%.  The cost savings initiatives taken over the past several years should be fully experienced in 2020.  We are anticipating improved consolidated financial performance in 2020 fiscal year vs. 2019, particularly in the BD.”

Quarterly Statements of Comprehensive Income (Loss) for the eight quarters ended May 31, 2020

Segmented Results for the year to date ended May 31, 2020 and 2019…

…Segmented Results for the year to date ended May 31, 2020 and 2019

Comparative Consolidated Results for First Half of 2020 and 2019

Reconciliation of Consolidated Net income (loss) to EBITDA for First Half of 2020 and 2019

Revenue

During the second quarter, 2020 consolidated revenues from continuing operations was a $15,437M compared to $17.675M in the prior year. In the TD, revenues decreased by $2.884M, while the BD’s revenues increased by $0.485M.  Most of the revenue reduction in the TD is due to a combination of non-recurring project revenue and temporary office closures as a result of the pandemic. These contracts affected by the pandemic are largely federal government delaying renewals. The contracts are expected to be renewed in the fourth quarter.   The Company is focused on the higher margin business within the Benefits Division.

Gross Margins and Gross Margin %

The Company generated $5.047M in gross margin during the second quarter May 31, 2020 vs. $5.451M the previous year. Gross Margin % (“GM %”) for continuing operations was 32.7% in 2020 compared to 30.8% in 2019. TD gross margins were 17.2% vs. 17.3% the previous year. BD gross margins were 83.0% vs 95.9%, largely due to smaller margins in the online medical module sales.

Operational Costs:

·      Salaries and Other Compensation - salaries decreased by $2.033M during the first half over the comparable period the prior year.  The reduction is a result of the cost reduction initiatives.  The cost reduction was across the company.  Additional savings are targeted for 2020, as the full impact of 2019 cost saving initiatives flow through for the complete 2020 year.

·      Office and General Costs­ – Normalized office and general costs decreased by $0.324M during the first half. This cost reduction was across all divisions and expected to prevail throughout 2020.

·      Professional Fees - Professional fees decreased by $0.157M, in the first half, year over year.  Professional fees vary with the amount of financing or acquisition/disposition activity during the period. Given the major transactions in process, these fees will increase in 2020 as transactions close.

Non-Cash Expenses:

Non-Cash expenses include amortization, depreciation and share-based (options) compensation decreased $0.233M in the first half ended May 31, 2020 compared to the previous year.  The largest component is amortization of intangible assets (mostly related to acquisition). These costs are expected to be largely amortized by the end of Fiscal 2020.

Interest and Financing Costs and Interest Accretion:

Interest and financing costs increased by approximately $0.354M during the first half compared to prior year. The increase is primarily due to the one-time costs associated with the refinancing process.

KEY DEVELOPMENTS DURING AND SUBSEQUENT TO THE YEAR

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.  The Company is currently in the final stages of the refinancing process with negotiations at advanced levels on 5-year convertible notes of $20M and operating credit facilities in the $10.0M range.

Business Development to Date

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 and beyond from the Channel Partner business initiatives.  Channel Partner “white label TPA” agreements have been recently signed with organizations representing approximately 150,000 plan members. The Company has gained significant traction with its online medical care partnership with EQ Care, recently adding clients representing over 110,000 plan members. In addition, the company has launched “FlexPlus – Worksafe”, a fully integrated module for collecting, aggregating, and analyzing and utilizing workforce data to manage the complexities of the pandemic in returning the workforce to the workplace.

The Company’s RFP sales pipeline is the largest it has ever been, in both corporate and government opportunities.

In the TD the Company won or renewed in 2019 over $100.0M of new multi-year contracts and added over $20.0M of contracts value in the first quarter 2020.  The second quarter has been static because of the pandemic. Total contract value for both TD and BD including backlog, option years and evergreen remains strong.

Cost Reduction and Integration

In the first half, the Company reduced its operating cost structure by over $2.357M, with the full annualized amount expected to be reflected in Fiscal 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, net earnings, and EBITDA.  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 in 2020.  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.  The RFP win rates in the first quarter have been over 50% of submitted bids and proposals, well above the industry average and the company’s past experience in the 30%-35% range. This trend is expected to continue in the second half, 2020.”

CONFERENCE CALL DETAILS

Date/Time: Wednesday, August 5, at 11:00 AM ET.

Canada & USA Toll Free Dial In: 1-800-319-4610

Toronto Toll Dial In: 1-416-915-3239

Callers should dial in 5-10 minutes prior to the scheduled start time and simply ask to join the call. 

Webcast Link access at  http://services.choruscall.ca/links/sebIR20200805.html

Conference Call Replay Numbers:

Replay Duration: Available for one week until end of day Wednesday August 12, 2020.

ABOUT SEB

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.

Media and Investor Contact

John McKimm

President/CEO/CIO

Office (888) 939-8885 x 2354

Cell (416) 460-2817

john.mckimm@seb-inc.com

Neither TSX Venture Exchange Inc. nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange Inc.) accepts responsibility for the adequacy or accuracy of this release.