MISSISSAUGA, Ontario, Oct. 30, 2020 (GLOBE NEWSWIRE) -- Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) today reports its financial results for the third quarter of 2020.
States John McKimm, President/CEO/CIO of Smart Employee Benefits Inc.:
“Adjusted EBITDA and EBITDA improved significantly for the third quarter, 2020 over the comparable period the previous year, after adjustment of the one-time Gain on sale of assets recorded in the third quarter, 2019. The gross margin percentage improved by 3.5% from the second quarter, 2020 and 3.4% from the same period the previous year. Operating costs reduction initiatives led to the year over year improvement in cost structure of approximately $1,227,496 quarter over quarter and $3,585,015, for the nine months year to date 2020 compared to 2019.These savings are expected to be permanent and reach over $4.0M annually.
EBITDA (adjusted for the one-time Gain on sale of assets recorded in the third quarter of 2019) improved by $453,491 in the third quarter to a positive $491,133 from a positive $37,642 and Adjusted EBITDA improved by $918,518 to a positive $1,093,778 from a positive $175,260 in the same period the previous year. The improvement is attributed to a combination of company wide cost reduction initiatives, COVID-19 related government wage subsidies received in the Technology Division and revenue 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 $2,824,687 of EBITDA in the first 9 months versus $2,059,776 the previous year. The Benefits Division (“BD”) experienced a positive $854,008 versus a negative $2,202,100 the same period the previous year. This trend is expected to continue in last quarter of 2020.
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. 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 August 31, 2020
| June 1, 2020 to Aug 31, 2020 | Mar 1, 2020 to May 31, 2020 | 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) | |||||||||
| Revenue | $ 14,664,966 | $ 15,436,686 | $ 16,520,977 | $ 17,326,306 | $ 16,974,918 | $ 17,675,479 | $ 16,506,330 | $ 18,559,118 | ||||||||
| Cost of revenues | 9,351,211 | 10,389,383 | 11,198,629 | 11,689,312 | 11,403,091 | 12,224,037 | 10,989,649 | 12,803,253 | ||||||||
| Gross Margin | 5,313,755 | 5,047,303 | 5,322,348 | 5,636,994 | 5,571,827 | 5,451,442 | 5,516,681 | 5,755,865 | ||||||||
| Gross Margin as a % of Revenue | 36.2% | 32.7% | 32.2% | 32.5% | 32.8% | 30.8% | 33.4% | 31.0% | ||||||||
| Salaries and other compensation costs | 2,694,858 | 3,074,118 | 3,805,798 | 3,520,013 | 4,008,953 | 4,427,102 | 4,486,090 | 4,886,028 | ||||||||
| Professional fees | 162,581 | 125,830 | 169,443 | 303,312 | 111,674 | 315,073 | 137,112 | 580,742 | ||||||||
| Office and general | 1,362,538 | 1,327,462 | 1,403,431 | 1,946,928 | 1,275,940 | 1,235,608 | 1,819,528 | 1,723,510 | ||||||||
| Adjusted EBITDA | 1,093,778 | 519,894 | (56,324) | (133,259) | 175,260 | (526,341) | (926,049) | (1,434,415) | ||||||||
| Investment loss (income) | - | 5,807 | - | (181,424) | (34,077) | - | - | - | ||||||||
| Gain on sale of assets | - | - | - | (153,461) | (1,894,514) | - | - | - | ||||||||
| Write down of assets | - | - | - | - | - | - | - | 6,671,890 | ||||||||
| Change in fair value of contingent consideration | - | - | - | (36,094) | - | - | - | (480,374) | ||||||||
| Share-based compensation | 1,261 | 2,851 | 15,576 | 11,903 | 35,675 | 63,151 | 76,158 | (171,152) | ||||||||
| Transaction costs | 601,386 | 64 | - | (117,856) | 136,021 | 50,000 | 6,437 | - | ||||||||
| EBITDA | 491,133 | 511,172 | (71,900) | 343,673 | 1,932,156 | (639,492) | (1,008,644) | (7,454,779) | ||||||||
| Interest and financing costs | 662,004 | 768,934 | 725,580 | 783,599 | 994,527 | 608,487 | 531,528 | (400,582) | ||||||||
| Income tax expense (recovery) | (18,178) | (48,374) | (3,928) | (141,521) | (451,128) | (556) | 556 | (1,267,024) | ||||||||
| Depreciation and amortization | 642,043 | 629,951 | 633,171 | 744,460 | 623,319 | 1,120,003 | 655,231 | 768,493 | ||||||||
| Depreciation of right-of-use assets | 244,333 | 239,021 | 161,077 | - | - | - | - | - | ||||||||
| Net income (loss) from continuing operations | (1,039,069) | (1,078,360) | (1,587,800) | (1,042,865) | 765,438 | (2,367,426) | (2,195,959) | (6,555,666) | ||||||||
| Income (Loss) from assets held for sale, net of tax | - | - | - | - | (93,799) | 35,890 | (312,776) | (1,432,309) | ||||||||
| Net comprehensive income (loss) | $ (1,039,069) | $ (1,078,360) | $ (1,587,800) | $ (1,042,865) | $ 671,639 | $ (2,331,536) | $ (2,508,735) | $ (7,987,974) | ||||||||
| Attributed to non-controlling interest | (53,508) | (119,033) | (241,535) | (50,105) | (50,776) | (184,035) | 155,922 | (136,312) | ||||||||
| Attributed to common shareholders | (985,561) | (959,327) | (1,346,265) | (992,760) | 722,415 | (2,147,501) | (2,664,657) | (7,851,662) | ||||||||
| Total | $ (1,039,069) | $ (1,078,360) | $ (1,587,800) | $ (1,042,865) | $ 671,639 | $ (2,331,536) | $ (2,508,735) | $ (7,987,974) | ||||||||
| Note 1 - Historic quarters have been restated to reflect the operations of Paradigm Consulting Group as income from discontinued operations | ||||||||||||||||
Segmented Results for the year to date ended August 31, 2020 and 2019…
| Smart Employee Benefits Inc. | ||||||||||||||
| Segmented Income Statement Detail for YTD ended August 31, 2020 (in C$) | Technology | Benefits | Corporate | Intercompany Sales/COS | Total Continuing Operations | Discontinued operations | Total Company | |||||||
| Revenue | $ 36,835,170 | $ 11,057,019 | $ - | $ (1,269,561) | $ 46,622,629 | $ - | $ 46,622,629 | |||||||
| Cost of revenues | 30,519,160 | 1,689,623 | - | (1,269,561) | 30,939,223 | - | 30,939,223 | |||||||
| Gross margin | 6,316,011 | 9,367,396 | - | - | 15,683,406 | - | 15,683,406 | |||||||
| Expenses | ||||||||||||||
| Salaries and other compensation costs | 2,335,215 | 6,478,199 | 761,359 | - | 9,574,774 | - | 9,574,774 | |||||||
| Office and general | 1,138,939 | 2,017,861 | 936,634 | - | 4,093,434 | - | 4,093,434 | |||||||
| Professional fees | 2,005 | 17,328 | 438,520 | - | 457,853 | - | 457,853 | |||||||
| 3,476,159 | 8,513,388 | 2,136,513 | - | 14,126,060 | - | 14,126,060 | ||||||||
| Adjusted EBITDA | 2,839,852 | 854,008 | (2,136,513) | - | 1,557,346 | - | 1,557,346 | |||||||
| Investment loss | - | - | 5,807 | - | 5,807 | - | 5,807 | |||||||
| Transaction costs | 15,165 | - | 586,285 | - | 601,450 | - | 601,450 | |||||||
| Share-based compensation | - | - | 19,688 | - | 19,688 | - | 19,688 | |||||||
| EBITDA | 2,824,687 | 854,008 | (2,748,293) | - | 930,401 | - | 930,401 | |||||||
| Amortization of intangible assets | 9,104 | 239,801 | 1,501,692 | - | 1,750,597 | - | 1,750,597 | |||||||
| Depreciation of equipment | 78,638 | 74,274 | 1,655 | - | 154,567 | - | 154,567 | |||||||
| Depreciation of right-of-use assets | 69,334 | 171,454 | 403,644 | - | 644,431 | - | 644,431 | |||||||
| Interest and financing costs | 889,634 | 455,414 | 811,468 | - | 2,156,516 | - | 2,156,516 | |||||||
| Income tax recovery | (9,666) | - | (60,814) | - | (70,480) | - | (70,480) | |||||||
| Net income (loss) | $ 1,787,643 | $ (86,935) | $ (5,405,938) | $ - | $ (3,705,229) | $ - | $ (3,705,229) | |||||||
…Segmented Results for the year to date ended August 31, 2020 and 2019
| Smart Employee Benefits Inc. | |||||||||||||||
| Segmented Income Statement Detail for YTD ended August 31, 2019 (in C$) | Technology | Benefits | Corporate | Intercompany Sales/COS | Total Continuing Operations | Discontinued operations | Total Company | ||||||||
| Revenue | $ 43,558,073 | $ 9,177,620 | $ - | $ (1,578,966) | $ 51,156,728 | $ 13,817,603 | $ 64,974,331 | ||||||||
| Cost of revenues | 35,546,568 | 382,415 | - | (1,312,206) | 34,616,776 | 10,978,245 | 45,595,021 | ||||||||
| Gross margin | 8,011,505 | 8,795,205 | - | (266,760) | 16,539,952 | 2,839,358 | 19,379,310 | ||||||||
| Expenses | |||||||||||||||
| Salaries and other compensation costs | 3,953,234 | 8,290,319 | 945,352 | (266,760) | 12,922,145 | 1,014,471 | 13,936,616 | ||||||||
| Office and general | 1,884,182 | 2,583,446 | (136,551) | - | 4,331,077 | 1,504,985 | 5,836,062 | ||||||||
| Professional fees | 114,313 | 123,540 | 326,006 | - | 563,859 | 127,331 | 691,190 | ||||||||
| 5,951,730 | 10,997,305 | 1,134,806 | (266,760) | 17,817,080 | 2,646,787 | 20,463,867 | |||||||||
| Adjusted EBITDA | 2,059,776 | (2,202,100) | (1,134,806) | - | (1,277,128) | 192,571 | (1,084,557) | ||||||||
| Investment income | - | - | (34,077) | - | (34,077) | - | (34,077) | ||||||||
| Gain on settlement of debt | - | - | - | - | - | (472,364) | (472,364) | ||||||||
| Gain on sale of assets | - | - | (1,894,514) | - | (1,894,514) | - | (1,894,514) | ||||||||
| Transaction costs | - | - | 192,458 | - | 192,458 | 475,438 | 667,896 | ||||||||
| Share-based compensation | - | - | 174,983 | - | 174,984 | - | 174,984 | ||||||||
| EBITDA | 2,059,776 | (2,202,100) | 426,344 | - | 284,021 | 189,498 | 473,518 | ||||||||
| Amortization of intangible assets | 165,576 | 603,158 | 1,441,829 | - | 2,210,564 | - | 2,210,564 | ||||||||
| Depreciation of equipment | 105,650 | 79,859 | 2,480 | - | 187,989 | - | 187,989 | ||||||||
| Interest and financing costs | 1,263,681 | 424,091 | 446,770 | - | 2,134,542 | 968,869 | 3,103,411 | ||||||||
| Income tax recovery | (151,144) | (1,721) | (298,262) | - | (451,128) | (408,687) | (859,815) | ||||||||
| Net income (loss) | $ 676,014 | $ (3,307,487) | $ (1,166,474) | $ - | $ (3,797,947) | $ (370,685) | $ (4,168,632) | ||||||||
Comparative Consolidated Results for the third quarter of 2020 and 2019
| Three months ended Aug 31 | Nine months ended Aug 31 | |||||||
| 2020 | 2019 | 2020 | 2019 | |||||
| Revenue | $ 14,664,966 | $ 16,974,918 | $ 46,622,629 | $ 51,156,727 | ||||
| Cost of revenues | 9,351,211 | 11,403,091 | 30,939,223 | 34,616,777 | ||||
| Gross Margin | 5,313,755 | 5,571,827 | 15,683,406 | 16,539,950 | ||||
| Gross Margin as a % of Revenue | 36.2% | 32.8% | 33.6% | 32.3% | ||||
| Operating costs | 4,057,397 | 5,284,893 | 13,668,206 | 17,253,222 | ||||
| Professional fees | 162,581 | 111,674 | 457,853 | 563,859 | ||||
| Adjusted EBITDA | 1,093,777 | 175,260 | 1,557,347 | (1,277,130) | ||||
| Investment loss (income) | - | (34,077) | 5,807 | (34,077) | ||||
| Gain on sale of assets | - | (1,894,514) | - | (1,894,514) | ||||
| Share based compensation | 1,261 | 35,675 | 19,688 | 174,984 | ||||
| Transaction costs | 601,386 | 136,021 | 601,450 | 192,458 | ||||
| EBITDA | $ 491,130 | $ 1,932,156 | $ 930,402 | $ 284,019 | ||||
| Net Income (loss) from continuing operations (Note 1) | $ (1,039,069) | $ 765,438 | $ (3,705,229) | $ (3,797,947) | ||||
| 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 third quarter of 2020 and 2019
| Three months ended | Nine months ended | |||||||
| 31-Aug-20 | 31-Aug-19 | 31-Aug-20 | 31-Aug-19 | |||||
| Net gain (loss) from continuing operations | $ (1,039,069) | $ 765,438 | $ (3,705,229) | $ (3,797,947) | ||||
| Interest and financing costs | 662,001 | 994,527 | 2,156,517 | 2,134,541 | ||||
| Income tax recovery | (18,178) | (451,128) | (70,480) | (451,128) | ||||
| Depreciation and amortization | 642,043 | 623,319 | 1,905,165 | 2,398,553 | ||||
| Deprecation charge | 244,333 | - | 644,429 | - | ||||
| EBITDA | 491,130 | 1,932,156 | 930,402 | 284,019 | ||||
| Investment loss (gain) | - | (34,077) | 5,807 | (34,077) | ||||
| Gain on sale of assets | - | (1,894,514) | - | (1,894,514) | ||||
| Share- based compensation | 1,261 | 35,675 | 19,688 | 174,984 | ||||
| Transaction costs | 601,386 | 136,021 | 601,450 | 192,458 | ||||
| Adjusted EBITDA | $ 1,093,777 | $ 175,260 | $ 1,557,347 | $ (1,277,130) | ||||
Revenue
During the third quarter, 2020 consolidated revenues from continuing operations was a $14.665M compared to $16.975M in the prior year. In the TD, revenues decreased by $6.723M, while the BD’s revenues increased by $1.879M. 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 late in the fourth quarter and into the first quarter of 2021. The Company is focused on the higher margin business within the Benefits Division.
Gross Margins and Gross Margin %
The Company generated $5.314M in gross margin during the third quarter August 31, 2020 vs. $5.572M the previous year. Gross Margin % (“GM %”) for continuing operations was 36.2% in 2020 compared to 32.8% in 2019. TD gross margins were 19.1% vs. 18.4% the previous year, due to one-time revenue yielding higher margin in 2020. BD gross margins were 77.0% vs 96.7%, largely due to smaller margins in the online medical module sales.
Operational Costs:
- Salaries and Other Compensation - salaries decreased by $3.347M during the first nine months of the year when compared to the same period the prior year. The reduction is a result of the cost reduction initiatives and the government subsidies related to COVID-19. The cost reductions are 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 $0.238M during the first three quarters. This cost reduction was across all divisions and expected to prevail throughout 2020.
- Professional Fees - Professional fees decreased by $0.106M, in the nine months of 2020, compared to 2019. 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 and decreased by $0.004M nine months into the year compared to the previous year. The largest component is amortization of intangible assets (mostly related to acquisition) and has decreased by $0.460M. These costs are expected to be largely amortized by the end of Fiscal 2020. This is offset by an increase of $0.644M in depreciation of right-of-use assets.
Interest and Financing Costs and Interest Accretion:
Interest and financing costs increased by approximately $0.022M during the first three quarters compared to the same period in the 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.
Cost Reduction and Integration
Nine months into the fiscal year, the Company reduced its operating cost structure by over $3.585M, 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.”
CONFERENCE CALL DETAILS
Date/Time: Thursday, November 5, at 11:30 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/seb20201105.html
| Conference Call Replay Numbers: | |
| Canada & USA Toll Free: | 1-855-669-9658 |
| Code: | 5573 followed by the # sign |
| Replay Duration: Available for one week until end of day Wednesday November 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.