Mr. John McKimm reports
SEB REPORTS RESULTS FOR FIRST QUARTER, 2018
Smart Employee Benefits Inc. has released its financial results for the three-month period ended Feb. 28, 2018.
FINANCIAL HIGHLIGHTS
Three months ended Feb. 28,
2018 2017
Revenue $25,510,434 $23,147,959
Cost of revenues 18,527,677 19,427,565
Gross margin 6,982,757 3,720,394
Gross margin as a % of revenue 27.4% 16.1%
Operating costs 6,567,698 3,202,834
Professional fees 156,439 458,107
Adjusted EBITDA 258,620 59,453
Share-based compensation 49,826 54,873
Transaction costs - 160,105
EBITDA 208,794 (155,525)
Interest and financing fees 608,262 913,715
Depreciation and amortization 1,149,195 1,133,045
Income tax 1,764 634
Net (loss) (1,550,427) (2,202,919)
Consolidated performance
The first quarter is typically the slowest quarter for SEB, largely due to the Christmas holidays and a shorter billing period in February. There are approximately 10 fewer billing days than other quarters, which translate to a 15-per-cent to 20-per-cent reduction in normalized revenue. There is also an impact on Smart Employee's profitability as a result of approximately 45 per cent of Smart Employee's work force being employee based, and their costs prevail even on non-billable days. Smart Employee is transitioning more and more business to managed-service-type business, which will reduce the impact of fewer billing days. Growth in the benefits processing business will also reduce this seasonal impact. However, year over year, the results have been positive and within the company's expectations. The company expects strong performance throughout the rest of the year, with the fourth quarter being its strongest quarter, typical of past years.
All comparisons (except where noted) are between first quarter of fiscal 2018 and first quarter of fiscal 2017:
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Consolidated revenue was $25.5-million for the quarter versus $23.1-million for the same quarter in the previous year. The $2.4-million increase is attributable to the benefits processing business acquired April, 2017, from Aon. The technology division was relatively flat quarter over quarter.
- Gross margin was $7.0-million for the quarter, up from $3.7-million the same quarter the previous year. Over 80 per cent of the increase is attributed to the growth in the benefits business from the Aon transaction.
- Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (as described in management's discussion analysis for the quarter) was $258,600 for the quarter, versus $59,500 the previous quarter.
- EBITDA (as described in the MD&A for the quarter) was $208,800 versus a negative $155,500 the previous year, an improvement of $364,300. The only adjustment in first quarter 2018 to adjusted EBITDA was non-cash share-based compensation of $49,800.
- Interest, financing and transaction costs were $608,300 for the quarter, versus $1,074,000 the previous year. The $22.5-million of debt refinancing with Bank of Montreal (April, 2017) and the paydown of debt significantly reduced interest costs by over $2.0-million, annually.
- Consolidated loss for the period was $1.6-million in first quarter 2018 versus $2.2-million for first quarter 2017. Contributing factors to the improvement include a reduction in professional fees of $302,000 and a reduction of $305,000 in interest and financing costs, partly as a result of the refinancing, which occurred in April, 2017. Non-cash expenses included in the loss for the quarter were approximately $1.2-million.
Preferred share financing
On Feb. 28, 2018, Smart Employee closed a private placement with a major Canadian investment fund, pursuant to which the company received $3-million in gross proceeds. The company's wholly owned indirect subsidiary, Paradigm Consulting Group Inc., issued three million preferred shares at a price of $1 each. The preferred shares are entitled to a quarterly 8-per-cent cumulative dividend and a bonus equal to 20 per cent of the gain in enterprise value of Paradigm, payable at the maturity date of May 31, 2023. Each preferred share (at its issue price) is exchangeable into one common share of Smart Employee at 45 cents per common share until Nov. 30, 2019, and at 50 cents per common share at any time after Nov. 30, 2019, until Nov. 30, 2022.
Convertible note financing
Following the quarter, Smart Employee finalized the terms of a convertible note financing for $650,000 for a two-year term, ending April 25, 2020. The interest terms are 5 per cent per annum with a conversion over the term at 50 cents per Smart Employee common share. This financing was an extension of an existing vendor take-back facility issued on an acquisition.
Management comments
John McKimm, president/chief executive officer/chief information officer of Smart Employee, stated: "SEB has progressed significantly year over year. Our technology division maintains a solid base of business with multiple years of healthy EBITDA and significant growth expected in fiscal 2018. Our benefits processing business has gained solid traction with the Aon transaction in April, 2017. Our one-processing-environment technology environment for health benefits manages over 90 per cent of all processing associated with a benefits transaction and integrates additional automated solution modules, including voluntary products, disability management, health and wellness, employee discount programs and human resource solutions. Our white-label channel partners' go-to-market strategy is also gaining strong traction. We have more than a dozen joint venture negotiations in progress. For our channel partners, we turn cost centres to profit centres as their back-office technology partners. This strategy is unique in the marketplace. During the period since November, 2017, on a consolidated basis, we have finalized over $150-million of contracts, of which approximately $70-million is new business and the remainder renewals of multiyear contracts. We have, since 2016, removed over $5-million of cost structure through integration and consolidation of business processes, infrastructure costs and financing costs. Our debt has been significantly reduced during the year, with the majority of our debt being with a major Canadian bank and over 80 per cent of the remainder being insiders. Our contracts (backlog, option year renewals) are maintaining a base of over $500-million. SEB is well positioned for strong organic growth in revenue, EBITDA and earnings over the next three years with annual revenue under contract of over $100-million per annum."
Conference call details
Date/time: May 2, 2018, at 11:30 a.m. ET
Canada and U.S. toll-free dial-in: 1-800-319-4610
Toronto toll dial-in: 1-416-915-3239
Callers should dial in five to 10 minutes prior to the scheduled start time and simply ask to join the call.
Conference call replay numbers
Canada and U.S. toll-free: 1-855-669-9658
Code: 2247 followed by the number sign
Replay duration: available for one week until end of day on May 9, 2018
About Smart Employee Benefits Inc.
Smart Employee is a business process automation and outsourcing technology company providing software, solutions and services to a national and global client base. Smart Employee has a specialty growth focus in cloud-enabled SaaS (software as a service) processing solutions for managing employer and government-sponsored benefit plans on a BPO (business processing outsourcing) business model, globally. This is a major growth focus as Smart Employee currently serves corporate and government clients across Canada and internationally. Smart Employee's technology infrastructure of over 860 multicertified technical professionals, across Canada and globally, is a critical competitive advantage in supporting the implementation and management of Smart Employee's benefits processing solutions into client environments.
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