Mr. John McKimm reports

SEB REPORTS RESULTS FOR SECOND QUARTER, 2016 AND SCHEDULES CONFERENCE CALL

Smart Employee Benefits Inc. has released its financial results for the second quarter ended May 31, 2016.

Financial overview (all comparative figures are for the second quarter of the prior year, unless stated otherwise)

The results for the second quarter ended May 31, 2016, are the best financial results of any quarter since Smart Employee's inception. Both revenue and adjusted earnings before interest, taxes, depreciation and amortization have reached new highs. Additionally, subsequent to the quarter-end, Smart Employee refinanced its operating credit facilities and extended, repaid or refinanced all of its short-term debt facilities. Smart Employee's refinancing of select short-term debt facilities with more permanent solutions is also well advanced.

Revenue

Revenue for the three-month period ended May 31, 2016, increased by 88.5 per cent, or $11.8-million, to $25.1-million from $13.3-million for the same period in the prior year. Revenue for the six-month period ended May 31, 2016, increased by 97.0 per cent, or $23.9-million, to $48.5-million from $24.6-million for the same period in the prior year. The acquisitions of Maplesoft Group Inc. and Paradigm Consulting Group Inc. contributed significantly to this growth, accounting for $13.7-million in revenue for the quarter and $28.2-million for the half-year. This was partially offset by a change in accounting for Smart Employee's 50-per-cent ownership of Banyan Work Health Solutions Inc. The comparative prior-year figures included Banyan, which represented $2.2-million of revenue for the quarter and $4.2-million for the half-year.

Gross margin

Gross margin for the three months ended May 31, 2016, increased by $1.6-million over the prior year, reaching $4.7-million. For the six-month period, gross margin increased by $3.1-million to $9.0-million, year over year. The prior year included Banyan, which represented $400,000 for the quarter and $900,000 for the six months. Gross margin as a percentage of sales declined to 18.8 per cent and 18.5 per cent for the quarter and half-year, respectively, versus 23.6 per cent and 23.8 per cent for the previous year. The growing professional services business from the Maplesoft acquisition was largely responsible for the gross margin percentage decline. Professional services typically have a lower percentage gross margin.

Operating expenses metric (salaries and other compensation, professional fees, and office and general):

1. Salaries and other compensation were 9.6 per cent and 10.0 per cent of sales for the first quarter and the half-year, up from 8.0 per cent and 9.5 per cent for the same period the previous year. This is largely due to the addition of staff in the benefits division as the company positions for growth in this segment. Longer term, management believes that this ratio will shrink to the 7-per-cent range.
2. Professional fees were $201,000 in the quarter versus $417,000 for the same period in the previous year. Costs for the half-year were $651,000, up $116,000 from the previous year.
3. Office and general were 4.5 per cent and 4.7 per cent of sales for the first quarter and the half-year, an improvement from 7.9 per cent and 7.6 per cent for the same periods the previous year.
4. Total operating expenses were 14.9 per cent and 16.1 per cent of sales for the quarter and the half-year, respectively. This is an improvement from 19.0 per cent and 19.2 per cent in the previous year. Management expects operating expenses as a percentage of sales to continue to improve significantly as sales grows. This element of the Smart Employee cost structure is very scalable.

Operating income before non-cash costs, interest and one time-professional fees was $1.0-million for the quarter versus $600,000 in the previous year. The half-year was $1.2-million versus $1.1-million in the previous year. The comparative figures include Banyan's results. The quarter ended May 31, 2016, has been the strongest positive quarter since the inception of the company.

Adjusted earnings before interest, taxes, depreciation and amortization from continuing operations were $1.1-million for the quarter, up from $200,000 in the previous year. The half-year comparison is $1.1-million, up from $600,000.

Loss from continuing operations was $1.1-million for the quarter and $3.5-million for the half-year. This compares with $1.8-million and $2.6-million for the same previous year. Significant contributors to the loss are non-cash items (for example, share-based compensation, amortization, depreciation and interest accretion).

Technology division

The technology division recorded strong performance for the first half of fiscal 2016. Revenue was $47.8-million with an EBITDA of $3.2-million. Backlog and renewals remain strong.

Benefits division

The deconsolidation of Banyan significantly reduced the revenue from this division. This division remains a major growth focus for the company in 2016 and beyond. The company has significant growth opportunities in the second half of 2016.

Corporate division

The corporate division's adjusted EBITDA for the second quarter was negative $600,000 versus the previous year's loss of $800,000. Legal, accounting and valuation fees are significant costs of this division.

Year-to-date financial highlights:

• The company acquired Maplesoft, including the amount of approximately $13.5-million of debt, of which $5.1-million was an operating credit facility.
• The company received proceeds of a $1.6-million equity private placement financing, closing a $4.0-million commitment from a strategic investor.
• Following the second quarter, the company finalized a total of up to $15.5-million in operating credit facilities, increasing availability from up to $12.0-million to up to $15.5-million.
• On July 26, 2016, Smart Employee extended and amended two convertible note issues:
  1. $1.69-million of $2-million of convertible notes maturing May 13, 2016, with a conversion price of 60 cents, was extended to Dec. 31, 2016, at a revised conversion price of 30 cents; the interest rate increased from 9.75 per cent to 12.0 per cent; management and directors own $1,605,000 of the $1.69-million extended; the remaining $310,000 was repaid;
  2. $1,331,669 of $1.94-million of convertible notes maturing on Aug. 12, 2016, extended to Dec. 31, 2016, on the same terms as the above notes; $608,333 of these notes was repaid.
• Approximately $3.9-million of term debt was extended to Oct. 31, 2016, and $2.9-million extended to Feb. 7, 2017.
• The company is in active negotiations to replace its short-term debt with more permanent solutions. This debt was the result of acquisitions. The more permanent solutions being considered include a new convertible note issue from insiders, an equity issue from insiders, and strategic partners and U.S. private equity funds. It is the company's objective to have all the short-term debt replaced with more permanent solutions prior to the end of October, 2016.

Conference call

The company will hold a conference call to discuss these results on Aug. 3 at 11 a.m. (Toronto time). Call details are outlined below:

Canada and the United States 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 United States toll-free:  1-855-669-9658

Outside Canada and the U.S.:  1-604-674-8052

Code:  00701 followed by the number sign

Replay duration:  available for one week until end of day on Aug. 10, 2016

Management comments

John McKimm, president and chief executive officer of Smart Employee, stated: "SEB's acquisition program continues to deliver positive results. The company now has a geographic footprint across Canada, the UAE and India. The business base has been established for strong organic growth. The SEB group employs approximately 726 people globally, one-third employees and the rest contractors. Over $30.0-million 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 technology and benefits divisions.

"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. Management believes the technology division is well positioned for organic growth and to support the benefits division's growth initiatives."

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