MISSISSAUGA, Ontario, June 15, 2020 (GLOBE NEWSWIRE) -- Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) today reports its financial results for the first quarter of 2020.
States John McKimm, President/CEO/CIO of Smart Employee Benefits Inc.:
“Adjusted EBITDA and EBITDA improved significantly for the first quarter, 2020 over the comparable period the previous year. The gross margin percentage quarter over quarter declined 1.2%. Operating costs reduction initiatives led to the year over year improvement of over $1.089M in cost structure, which is expected to be over $4.0M annually.
EBITDA improved by $0.937M in the first quarter to a negative $0.072M from a negative $1.009M. Adjusted EBITDA for the year improved by $0.870M to a negative $0.056M from a negative $0.926M. The improvement is the result of cost reduction initiatives across the company.
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 $0.524M of EBITDA in the quarter versus $0.492M the previous year. The Benefits Division (“BD”) experienced a positive $0.03M versus a negative $1.032M the previous year.
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 approximately $74.0M 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 Benefits Division 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. The Technology Division has historically been cash flow positive and net new business wins remain strong. 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)
| Dec 1, 2019 to Feb 29, 2020 | Sep 1, 2019 to Nov 30, 2019 | June 1, 2019 to Aug 31, 2019 | Mar 1, 2019 to May 31, 2019 | Dec 1, 2018 to Feb 28, 2019 | Sep 1, 2018 to Nov 30, 2018 (Note 1) | June 1, 2018 to Aug 31, 2018 (Note 1) | Mar 1, 2018 to May 31, 2018 (Note 1) | ||||||||||||||||||||
| Revenue | $ | 16,520,977 | $ | 17,326,306 | $ | 16,974,918 | $ | 17,675,478 | $ | 16,506,330 | $ | 18,559,118 | $ | 17,990,986 | $ | 20,019,485 | |||||||||||
| Cost of revenues | 11,198,629 | 11,689,312 | 11,403,091 | 12,224,037 | 10,989,649 | 12,803,253 | 12,272,162 | 14,061,863 | |||||||||||||||||||
| Gross Margin | 5,322,348 | 5,636,994 | 5,571,827 | 5,451,441 | 5,516,681 | 5,755,865 | 5,718,823 | 5,957,622 | |||||||||||||||||||
| Gross Margin as a % of Revenue | 32.2% | 32.5% | 32.8% | 30.8% | 33.4% | 31.0% | 31.8% | 29.8% | |||||||||||||||||||
| Salaries and other compensation costs | 3,805,798 | 3,520,013 | 4,008,953 | 4,427,102 | 4,486,090 | 4,886,028 | 4,363,734 | 3,868,546 | |||||||||||||||||||
| Professional fees | 169,443 | 303,312 | 111,674 | 315,072 | 137,112 | 580,742 | 60,214 | 553,123 | |||||||||||||||||||
| Office and general | 1,403,431 | 1,946,928 | 1,275,940 | 1,235,608 | 1,819,528 | 1,723,510 | 1,159,385 | 1,269,466 | |||||||||||||||||||
| Adjusted EBITDA | (56,324 | ) | (133,259 | ) | 175,261 | (526,341 | ) | (926,049 | ) | (1,434,415 | ) | 135,490 | 266,487 | ||||||||||||||
| Investment income | - | (181,424 | ) | (34,077 | ) | - | - | - | - | - | |||||||||||||||||
| Gain on sale of assets | - | (153,461 | ) | (1,894,514 | ) | - | - | - | - | - | |||||||||||||||||
| Write down of assets | - | - | - | - | - | 6,671,890 | - | - | |||||||||||||||||||
| Transition and decommissioning costs | - | - | - | - | - | - | - | 161,750 | |||||||||||||||||||
| Change in fair value of contingent consideration | - | (36,094 | ) | - | - | - | (480,374 | ) | - | - | |||||||||||||||||
| Share- based compensation | 15,576 | 11,903 | 35,675 | 63,151 | 76,158 | (171,152 | ) | 216,998 | 425,270 | ||||||||||||||||||
| Transaction costs | - | (117,856 | ) | 136,021 | 50,000 | 6,437 | - | - | - | ||||||||||||||||||
| EBITDA | (71,900 | ) | 343,673 | 1,932,158 | (639,493 | ) | (1,008,644 | ) | (7,454,779 | ) | (81,508 | ) | (320,533 | ) | |||||||||||||
| Interest and financing costs | 725,580 | 783,599 | 994,527 | 608,487 | 531,528 | (400,582 | ) | 618,939 | 878,706 | ||||||||||||||||||
| Income tax expense (recovery) | (3,928 | ) | (141,521 | ) | (451,128 | ) | (556 | ) | 556 | (1,267,024 | ) | (42,983 | ) | 22,706 | |||||||||||||
| Depreciation and amortization | 633,171 | 744,460 | 623,321 | 1,120,003 | 655,231 | 768,493 | 777,520 | 757,185 | |||||||||||||||||||
| Deprecation charge | 161,077 | - | - | - | - | - | - | - | |||||||||||||||||||
| Net income (loss) from continuing operations | (1,587,800 | ) | (1,042,865 | ) | 765,438 | (2,367,426 | ) | (2,195,959 | ) | (6,555,666 | ) | (1,434,984 | ) | (1,979,130 | ) | ||||||||||||
| Income (Loss) from assets held for sale, net of tax | - | - | (93,799 | ) | 35,890 | (312,776 | ) | (1,432,309 | ) | 128,204 | (312,934 | ) | |||||||||||||||
| Net comprehensive income (loss) | $ | (1,587,800 | ) | $ | (1,042,865 | ) | $ | 671,639 | $ | (2,331,536 | ) | $ | (2,508,735 | ) | $ | (7,987,974 | ) | $ | (1,306,780 | ) | $ | (2,292,064 | ) | ||||
| Attributed to non-controlling interest | (241,535 | ) | (50,105 | ) | (50,776 | ) | (184,035 | ) | 155,922 | (136,312 | ) | 167,478 | (8,158 | ) | |||||||||||||
| Attributed to common shareholders | (1,346,265 | ) | (992,760 | ) | 722,415 | (2,147,501 | ) | (2,664,657 | ) | (7,851,662 | ) | (1,474,258 | ) | (2,283,910 | ) | ||||||||||||
| Total | $ | (1,587,800 | ) | $ | (1,042,865 | ) | $ | 671,639 | $ | (2,331,536 | ) | $ | (2,508,735 | ) | $ | (7,987,974 | ) | $ | (1,306,780 | ) | $ | (2,292,068 | ) | ||||
| Note 1 - Historic quarters have been restated to reflect the operations of Paradigm Consulting Group as income from discontinued operations | |||||||||||||||||||||||||||
Segmented Results for the fiscal years ended February 29, 2020 and 2019…
| Smart Employee Benefits Inc. | |||||||||||||||||||
| Segmented Income Statement Detail for the quarter ended February 29, 2020 (in C$) | Technology | Benefits | Corporate | Inter-company Sales/COS | Total Continuing Operations | Discontinued operations | Total Company | ||||||||||||
| Revenue | $ | 13,603,083 | $ | 3,338,835 | $ | - | $ | (420,942 | ) | $ | 16,520,977 | $ | - | $ | 16,520,977 | ||||
| Cost of revenues | |||||||||||||||||||
| Cost of revenues | 11,495,798 | 123,773 | - | (420,942 | ) | 11,198,629 | - | 11,198,629 | |||||||||||
| Gross margin | 2,107,285 | 3,215,063 | - | - | 5,322,348 | - | 5,322,348 | ||||||||||||
| Expenses | |||||||||||||||||||
| Salaries and other compensation costs | 1,138,985 | 2,410,565 | 256,248 | - | 3,805,798 | - | 3,805,798 | ||||||||||||
| Office and general | 433,310 | 769,448 | 200,674 | - | 1,403,431 | - | 1,403,431 | ||||||||||||
| Professional fees | 10,719 | 5,031 | 153,692 | - | 169,443 | - | 169,443 | ||||||||||||
| 1,583,014 | 3,185,044 | 610,614 | - | 5,378,672 | 5,378,672 | ||||||||||||||
| Adjusted EBITDA | 524,271 | 30,019 | (610,614 | ) | - | (56,324 | ) | - | (56,324 | ) | |||||||||
| Share-based compensation | - | - | 15,576 | - | 15,576 | - | 15,576 | ||||||||||||
| EBITDA | 524,271 | 30,019 | (626,190 | ) | - | (71,900 | ) | - | (71,900 | ) | |||||||||
| Amortization of intangible assets | 3,035 | 76,520 | 500,564 | - | 580,119 | - | 580,119 | ||||||||||||
| Depreciation | 27,546 | 24,679 | 827 | - | 53,052 | - | 53,052 | ||||||||||||
| Depreciation of right-of-use assets | 58,512 | - | 102,565 | - | 161,077 | 161,077 | |||||||||||||
| Interest and financing costs | 263,397 | 73,340 | 388,842 | - | 725,580 | - | 725,580 | ||||||||||||
| Income tax expense | 8,512 | - | (12,440 | ) | - | (3,928 | ) | - | (3,928 | ) | |||||||||
| Net income (loss) | $ | 163,268 | $ | (144,520 | ) | $ | (1,606,548 | ) | $ | - | $ | (1,587,800 | ) | $ | - | $ | (1,587,800 | ) | |
…Segmented Results for the fiscal years ended February 29, 2020 and 2019
| Smart Employee Benefits Inc. | ||||||||||||||||||||
| Segmented Income Statement Detail for the quarter ended February 28, 2019 (in C$) | Technology | Benefits | Corporate | Inter-company Sales/COS | Total Continuing Operations | Discontinued operations | Total Company | |||||||||||||
| Revenue | $ | 14,067,434 | $ | 3,005,821 | $ | - | $ | (566,925 | ) | $ | 16,506,330 | $ | 5,604,238 | $ | 22,110,568 | |||||
| Cost of revenues | ||||||||||||||||||||
| Cost of revenues | 11,309,164 | 152,522 | - | (472,038 | ) | 10,989,649 | 4,497,148 | 15,486,797 | ||||||||||||
| Gross margin | 2,758,269 | 2,853,299 | - | (94,887 | ) | 5,516,681 | 1,107,090 | 6,623,771 | ||||||||||||
| Expenses | ||||||||||||||||||||
| Salaries and other compensation costs | 1,384,146 | 2,882,842 | 313,989 | (94,887 | ) | 4,486,090 | 512,459 | 4,998,549 | ||||||||||||
| Office and general | 813,049 | 987,523 | 18,957 | - | 1,819,528 | 450,833 | 2,270,361 | |||||||||||||
| Professional fees | 69,402 | 15,933 | 51,777 | - | 137,112 | 53,850 | 190,962 | |||||||||||||
| 2,266,596 | 3,886,298 | 384,723 | (94,887 | ) | 6,442,730 | 1,017,143 | 7,459,873 | |||||||||||||
| Adjusted EBITDA | 491,673 | (1,032,999 | ) | (384,723 | ) | - | (926,049 | ) | 89,947 | (836,102 | ) | |||||||||
| Transaction costs | - | - | 6,437 | - | 6,437 | 91,641 | 98,078 | |||||||||||||
| Share-based compensation | - | - | 76,158 | - | 76,158 | - | 76,158 | |||||||||||||
| EBITDA | 491,673 | (1,032,999 | ) | (467,319 | ) | - | (1,008,645 | ) | (1,694 | ) | (1,010,338 | ) | ||||||||
| Amortization of intangible assets | 52,497 | 64,463 | 480,611 | - | 597,572 | - | 597,572 | |||||||||||||
| Depreciation | 30,258 | 26,575 | 827 | - | 57,659 | - | 57,659 | |||||||||||||
| Interest and financing costs | 328,365 | 9,625 | 193,539 | - | 531,528 | 251,082 | 782,611 | |||||||||||||
| Income tax expense | 556 | - | - | - | 556 | 60,000 | 60,556 | |||||||||||||
| Net income (loss) | $ | 79,997 | $ | (1,133,662 | ) | $ | (1,142,295 | ) | $ | - | $ | (2,195,959 | ) | $ | (312,776 | ) | $ | (2,508,735 | ) | |
Comparative Consolidated Results for First Quarter 2020 and 2019
| For the Quarter Ended | ||||||||
| Feb 29, 2020 | Feb 28, 2019 | |||||||
| Revenue | $ | 16,520,977 | $ | 16,506,330 | ||||
| Cost of revenues | 11,198,629 | 10,989,649 | ||||||
| Gross Margin | 5,322,348 | 5,516,681 | ||||||
| Gross Margin as a % of Revenue | 32.2% | 33.4% | ||||||
| Operating costs | 5,209,229 | 6,305,618 | ||||||
| Professional fees | 169,443 | 137,112 | ||||||
| Adjusted EBITDA | (56,324 | ) | (926,049 | ) | ||||
| Share based compensation | 15,576 | 76,158 | ||||||
| Transaction costs | - | 6,437 | ||||||
| EBITDA | $ | (71,900 | ) | $ | (1,008,644 | ) | ||
| Net loss from continuing operations (Note 1) | $ | (1,587,800 | ) | $ | (2,195,959 | ) | ||
| Note 1 - During Fiscal 2018, an LOI was signed with Golden Opportunities Fund to sell Paradigm, leading to a change in financial presentation. In compliance with IFRS, the results of Paradigm and its associated assets/liabilities have been disclosed as assets held for sale in the financial statements. During Fiscal 2019, the transaction was completed. | ||||||||
Reconciliation of Consolidated Net income (loss) to EBITDA
| For the Quarter Ended | ||||||
| Feb 29, 2020 | Feb 28, 2019 | |||||
| Net loss from continuing operations | $ | (1,587,800 | ) | $ | (2,195,959 | ) |
| Interest and financing costs | 725,580 | 531,528 | ||||
| Income tax expense(recovery) | (3,928 | ) | 556 | |||
| Depreciation and amortization | 633,171 | 655,231 | ||||
| Deprecation charge | 161,077 | - | ||||
| EBITDA | (71,900 | ) | (1,008,644 | ) | ||
| Share- based compensation | 15,575 | 76,158 | ||||
| Transaction costs | - | 6,437 | ||||
| Adjusted EBITDA | $ | (56,325 | ) | $ | (926,049 | ) |
Revenue
During the first quarter, 2020 consolidated revenues from continuing operations was a $16.521M compared to $16.506M in the prior year. In the TD, revenues decreased by $0.464M, while the BD’s revenues increased by $0.333M. The differential is due to intercompany revenue elimination difference of $0.146M resulting from consolidation. Most of the revenue reduction in the TD is due to non-recurring project revenue. This project revenue has transitioned to managed services revenue, smaller in amounts, but higher in profit margin. The Company is focused on the higher margin business within the Benefits Division.
Gross Margins and Gross Margin %
The Company generated $5.322M in gross margin during the first quarter February 29, 2020 vs. $5.517M the previous year. Gross Margin % (“GM %”) for continuing operations was 32.2% in 2020 compared to 33.4% in 2019. TD gross margins were 15.5% vs. 19.6% the previous year, largely due to one-time revenue. BD gross margins improved by $0.362M and 1.4% of sales.
Operational Costs:
- Salaries and Other Compensation - salaries decreased by $0.680M during the quarter 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 $0.416M quarter over quarter. This cost reduction was across all divisions and expected to prevail throughout 2020.
- Professional Fees - Professional fees increased by $0.032M, quarter over quarter. 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 increased $0.078M over the quarter ended February 29, 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 approximately $0.194M during the first quarter compared to prior year with approximately $0.726M being expensed in the first quarter. The increase is due largely to refinancing costs during the year and is expected to decline as short-term financing is converted to longer term financing in the third quarter.
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 100,000 plan members. In addition, the company is launching “FlexPlus – Worksafe”, a fully integrated module for collecting, aggregating, and analyzing and managing workforce data to manage the complexities of returning 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 $90.0M of new multi-year contracts and added over $20.0M of contracts value in the first quarter 2020. Total contract value for both TD and BD including backlog, option years and evergreen remains strong.
Cost Reduction and Integration
In the first quarter, the Company reduced its cost structure by over $1.089M, 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.”
CONFERENCE CALL DETAILS
Date/Time: Wednesday June 17, 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/sebIR20200617.html
Conference Call Replay Numbers:
| Canada & USA Toll Free: | 1-855-669-9658 |
| Code: | 4749 followed by the # sign |
Replay Duration: Available for one week until end of day Wednesday June 24, 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.