SEB Reports First Quarter, 2016

MISSISSAUGA, ONTARIO–(Marketwired – April 29, 2016) – Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSX VENTURE:SEB) today reported its financial results for the first quarter ended February 29, 2016.

FINANCIAL OVERVIEW FOR THE FIRST QUARTER
(All comparative figures are the first quarter prior year, unless stated otherwise.)

  • Revenue increased by 107.1 % to $23.4m as a result of both the acquisition of the Maplesoft Group of Companies (“Maplesoft”) which contributed $13.4m, and organic growth initiatives. The increase was offset by the de-consolidation of Banyan Work Health Solutions Inc. (“Banyan”) which had contributed $2.0m in Q1, 2015.
  • Gross Margin increased by 55.2% to $4.2m from $2.7m, even though the prior year’s comparative figure included $465K from Banyan. Gross margin percentage (“GM %”) declined from 24.1% to 18.1% due to the change in accounting for Banyan from consolidation to equity method. (Banyan’s GM % for Q1, 2015 was 23.2%).
  • Operating expenses changed as follows:
    • Salaries and other compensation costs fell to 10.4% of sales from 11.3%. Further improvements in cost structure are planned during the year.
    • Office and general costs fell to 5.0% of sales from 7.2%, and from 9.4% in fiscal 2015.
  • Adjusted EBITDA was at break-even (negative $124), falling below expectations as a result of one entity in the Technology Division and one entity in the Benefits Division performing below budget; the change in accounting for Banyan; and higher than projected corporate costs. Management believes this shortfall will be recovered as the year evolves.
  • Overall performance in the Technology Division was strong. Sales growth was higher than expected while backlog and renewals remain over $300.0m. Revenues increased by 159.2% to $23.0m from $8.9m. Adjusted EBITDA increased to $1.5m from $733k. Adjusted EBITDA was impacted by a weakness in one entity where the bench utilization was lower than expected. These employees have now been deployed in revenue generating capacities and utilization is anticipated to return to normal in Q2, 2016. Growth in the Technology Division remains strong and results are expected to show continued improvement throughout the year.
  • Benefits Division revenues decreased by $2.0m from prior year as a result of the deconsolidation of Banyan. EBITDA was a negative $562K compared to $66K. Negative earnings were a result of $432K spent on the customization of technology solutions for specific market opportunity to be launched in Q3, 2016; equity accounting for Banyan, which added $181K of expenses that would have previously been excluded from EBITDA (depreciation, amortization and interest); and lower than anticipated earnings from Disability Management due to sales from a long-term client being delayed. Management anticipates that Q1, 2016 results will be offset by the growth from other clients during the year.
  • The Benefits Division is a major growth focus in fiscal, 2016. The Company has launched its Broker Affiliate Program and Joint-Venture White Label TPA Program. Both will require investment in sales and marketing in Q2, 2016 which may weaken the Benefits Division results. Management estimates that the Benefits Division EBITDA will be positive by the fourth quarter, as investments in the first and second quarters start to realize results.
  • The Corporate Division’s EBITDA was $507K lower than prior year largely due to increases in operating costs and professional fees. Legal, accounting, audit and valuation fees were heavily impacted by the acquisitions and growing complexity of the Company. A reduction in these costs are projected in Q2, 2016.
  • The consolidated financial statements and related MD&A for the quarter ended February 29, 2016, can be found on SEDAR, at www.sedar.com under the profile of Smart Employee Benefits Inc.

FINANCE HIGHLIGHTS DURING THE QUARTER

  • The acquisition of Maplesoft in December, 2015 included the assumption of $13.5m debt of which $5.1m was a revolving credit facility.
  • Received proceeds of $1.6m of a private placement equity financing, closing a $4.0m commitment from a strategic investor.
  • Extended the maturation date of short-term debt from February, 2016 to August, 2016 and from March, 2016 to May, 2016. Agreements have been reached for further extensions to June, 2016 and April, 2017.
  • Management has been engaged over the past several months in consolidating operating credit facilities and extending the term of the short-term debt. The Company has signed back lender term sheets, which, on closing, would increase operating credit facilities (tied to current receivables) to over $15.0m and consolidate the term debt into 24 to 60 months terms. Due diligence is in progress and closings are targeted in May, 2016. These new financing solutions would significantly improve the current ratio and are expected to reduce interest costs by over $500k per annum.

MANAGEMENT COMMENTS

John McKimm, President/CEO of SEB, states:

“SEB’s acquisition program continues to deliver positive results. The Company now has a geographic footprint across Canada, the UAE, India and Australia. The business base has been established for strong organic growth. Contracted backlog and expected renewals exceed $360.0m, up from approximately $25.0m, at November 2014. The SEB Group employs approximately 850 people globally, one third employees and the rest, contractors. Over $30.0m has been spent over the past four years on the acquisition and development of software solutions and hosting infrastructures, and acquiring companies that are core to the business.

The acquisition of Maplesoft is expected to increase the consolidated annual revenue of SEB by over $50.0m, contribute substantially to the overall profitability, and increase sales backlog and renewals by over $280.0m. This acquisition builds on our previous technology acquisitions (Somos Consulting Group Ltd., Logitek Technology Ltd., Inforica Inc., Stroma Service Consulting Inc., APS -Antian Professional Services Inc. and Paradigm Consulting Group Inc.), and will establish SEB as a leading Canadian company in the Cyber/IT Security, Information Management, IT Infrastructure Management, Data Centre Management, Project Management and Professional Services sectors, capable of delivering a broad portfolio of services and solutions to government and corporate clients, with specialty practices in healthcare and benefits processing solutions.

Transactions in the acquisition and joint venture pipeline for 2016 are well advanced. The cost structure of completed acquisitions continues to be optimized through cost reduction initiatives. The cost structure has been permanently reduced in the past 90 days by over $1.4m annualized, largely due to restructuring of the senior management team in both the Technology and Benefits Divisions. This has positioned the Company to emphasize growth initiatives in the Benefits Division for 2016. SEB has now reached the point where Management expects significant, ongoing, positive EBITDA from continuing operations.

The growth emphasis in 2016 and beyond will be on the Benefits Division. This will require additional investment in sales and marketing initiatives, acquisitions and joint ventures. Our Technology Division is staged for both double-digit, organic growth, and to support of the Benefits Division’s growth initiatives. SEB’s unique blend of benefit technology solutions are well-positioned to experience significant growth in 2016.”

ABOUT SEB

Smart Employee Benefits Inc.’s global infrastructure is comprised of two operating Divisions: Technology and Benefits. The Technology Division currently serves corporate and government clients across Canada and internationally. The Benefits Division focuses on SAAS and BPO solutions in the Health Sector and delivers its offerings to corporate and government clientele. The Benefits Division operates as a client of the Technology Division. The Technology Division is a critical competitive advantage in supporting the implementation of SEB’s benefits processing solutions into client environments. Acquisitions, joint ventures, and RFP wins will continue to be dominant influences in driving growth in both Divisions.

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.

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

MEDIA AND INVESTOR CONTACTS:
John McKimm
President/CEO
(888) 939-8885 x 354 or (416) 460-2817
john.mckimm@seb-inc.com

Glenn Akselrod
Bristol Capital Ltd.
(905) 326-1888 x10
glen@bristolir.com