SEB Smart Employee Benefits Inc

Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) today reports its financial results for the fourth quarter and fiscal year ending November 30, 2019.

States John McKimm, President/CEO/CIO of Smart Employee Benefits Inc.:“Adjusted EBITDA and EBITDA improved for the fourth quarter and fiscal year ended November 30, 2019 over comparable periods the previous year.  The 2.0% increase in gross margin percentage for the year combined with operating costs reduction initiatives, led to the year over year improvement.  The divestiture of the operating assets of Paradigm Consulting Group Inc. (“Paradigm”) resulted in a positive EBITDA of $1.9M for the third quarter in continuing operations.  The cash flow generated from the Paradigm transaction facilitated a $6.7M reduction in bank debt and the elimination of $3.0M of convertible preferred shares, from November 30, 2018.

Adjusted EBITDA improved by $1.301M in the fourth quarter to a negative $133,259 from a negative $1.434M.  EBITDA for the year improved by $8.567M to a positive $627,691 from a negative $7.939M, a portion of which was due to the gain from the sale of the company's 75% shareholding in a subsidiary.  Both the third and fourth quarters of fiscal 2019 recorded positive EBITDA.  Adjusted EBITDA was also positive for the third quarter and, excluding the allowance for bad debts of approximately $133,000, would have been marginally positive in the fourth quarter.

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 delivers strong operating results, and the Benefits Division (“BD”) is anticipated to follow suit in Fiscal 2020.

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. 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, approximately 10% of our revenues are at risk, primarily those related to the project driven portion of the business.  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 approximately $400K of COVID-19 government relief, the majority of the relief for one subsidiary representing approximately 6% of total revenues.  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 strong financial performance in 2020 fiscal year, particularly in the BD.”

Quarterly Statements of Comprehensive Income (Loss) 2019

		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
Revenue	$	17,326,306		$	16,974,918		$	17,675,478		$	16,506,330
Cost of revenues		11,689,312			11,403,091			12,224,037			10,989,649
Gross Margin		5,636,994			5,571,827			5,451,441			5,516,681
Gross Margin as a % of Revenue		32.5	%		32.8	%		30.8	%		33.4	%
Salaries and other compensation costs		3,520,015			4,008,953			4,427,102			4,486,090
Professional fees		303,311			111,674			315,072			137,112
Office and general		1,946,927			1,275,940			1,235,608			1,819,528
Adjusted EBITDA		(133,259	)		175,261			(526,341	)		(926,049	)
Investment income		(181,424	)		(34,077	)		-			-
Gain on sale of assets		(153,461	)		(1,894,514	)		-			-
Write down of assets		-			-			-			-
Transition and decommissioning costs		-			-			-			-
Change in fair value of contingent consideration		(36,094	)		-			-			-
Share-based compensation		11,904			35,675			63,151			76,158
Transaction costs		(117,856	)		136,021			50,000			6,437
EBITDA		343,672			1,932,158			(639,493	)		(1,008,644	)
Interest and financing costs		783,596			994,527			608,487			531,528
Income tax expense( recovery)		(141,522	)		(451,128	)		(556	)		556
Depreciation and amortization		744,462			623,321			1,120,003			655,231
Net income (loss) from continuing operations		(1,042,864	)		765,438			(2,367,426	)		(2,195,959	)
Income (Loss) from assets held for sale, net of tax		-			(93,799	)		35,890			(312,776	)
Net comprehensive income (loss)	$	(1,042,864	)	$	671,639		$	(2,331,536	)	$	(2,508,735	)
Attributed to non-controlling interest		(50,105	)		(50,776	)		(184,035	)		155,922
Attributed to common shareholders		(992,759	)		722,415			(2,147,501	)		(2,664,657	)
Total	$	(1,042,864	)	$	671,639		$	(2,331,536	)	$	(2,508,735	)

Quarterly Statements of Comprehensive Income (Loss) 2018

		Sep 1, 2018  to Nov 30, 2018(Note 1)			June 1, 2018  to Aug 31, 2018(Note 1)			Mar 1, 2018to May 31, 2018(Note 1)		Dec 1, 2017  to Feb 28, 2018(Note 1)
Revenue	$	18,559,118		$	17,990,986		$	20,019,485		$	20,509,710
Cost of revenues		12,803,253			12,272,162			14,061,863			14,537,910
Gross Margin		5,755,865			5,718,823			5,957,622			5,971,800
Gross Margin as a % of Revenue		31.0	%		31.8	%		29.8	%		29.1	%
Salaries and other compensation costs		4,886,028			4,363,734			3,868,546			4,166,263
Professional fees		580,742			60,214			553,123			200,048
Office and general		1,723,510			1,159,385			1,269,466			1,588,170
Adjusted EBITDA		(1,434,415	)		135,490			266,487			17,319
Investment income		-			-			-			-
Gain on sale of assets		-			-			-			-
Write down of assets		6,671,890			-			-			-
Transition and decommissioning costs		-			-			161,750			-
Change in fair value of contingent consideration		(480,374	)		-			-			-
Share-based compensation		(171,152	)		216,998			425,270			99,652
Transaction costs		-			-			-			-
EBITDA		(7,454,779	)		(81,508	)		(320,533	)		(82,333	)
Interest and financing costs		(400,582	)		618,939			878,706			575,239
Income tax expense( recovery)		(1,267,024	)		(42,983	)		22,706			1,764
Depreciation and amortization		768,493			777,520			757,185			796,246
Net income (loss) from continuing operations		(6,555,666	)		(1,434,984	)		(1,979,130	)		(1,455,581	)
Income (Loss) from assets held for sale, net of tax		(1,432,309	)		128,204			(312,934	)		(94,844	)
Net comprehensive income (loss)	$	(7,987,974	)	$	(1,306,780	)	$	(2,292,064	)	$	(1,550,426	)
Attributed to non-controlling interest		(136,312	)		167,478			(8,158	)		50,546
Attributed to common shareholders		(7,851,662	)		(1,474,258	)		(2,283,910	)		(1,600,972	)
Total	$	(7,987,974	)	$	(1,306,780	)	$	(2,292,068	)	$	(1,550,426	)
Note 1 - Historic quarters have been restated to reflect the operations of Paradigm Consulting Group as income from discontinued operations

Comparative Results for fiscal year 2019 and 2018

			Year ended November 30
				2019			2018
Revenue			$	68,483,032		$	77,079,295
Cost of revenues				46,306,089			53,675,187
Gross Margin				22,176,943			23,404,108
Gross Margin as a % of Revenue				32.4	%		30.4	%
Operating costs				22,720,163			23,025,101
Professional fees				867,170			1,394,127
Adjusted EBITDA				(1,410,390	)		(1,015,120	)
Transition and decommissioning costs				-			161,750
Investment income				(215,501	)		-
Gain on sale of portion of business				(2,047,975	)		-
Share based compensation				186,887			570,768
Transaction costs				74,602			-
Change in fair value of contingent liability				(36,094	)		(480,374	)
Write down of assets				-			6,671,890
EBITDA			$	627,691		$	(7,939,154	)
Net loss from continuing operations (Note 1)			$	(4,840,811	)	$	(11,425,363	)
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 Net income (loss) to EBITDA

	Fiscal year ended
		30-Nov-19			30-Nov-18
Net loss from continuing operations	$	(4,840,811	)	$	(11,425,363	)
Interest and financing costs		2,918,137			1,672,302
Income tax expense recovery		(592,650	)		(1,285,537	)
Depreciation and amortization		3,143,014			3,099,444
EBITDA		627,691			(7,939,154	)
Transition and decommissioning costs		-			161,750
Investment income		(215,501	)		-
Gain on sale of assets		(2,047,975	)		-
Write- down of assets		-			6,671,890
Change in fair value of contingent consideration		(36,094	)		(480,374	)
Share-based compensation		186,888			570,768
Transaction costs		74,602			-
Adjusted EBITDA	$	(1,410,390	)	$	(1,015,120	)

RevenueDuring Fiscal 2019, consolidated revenues from continuing operations decreased compared to prior year by $8.6M.  In the TD, revenues decreased by $8.1M, while the BD’s revenues decreased by $677K.  The differential is intercompany revenue which is eliminated on consolidation.  In the TD, the revenue decrease is partially a result of technical resources being used internally to build-out and integrate systems to support the BD.  Additionally, most of the revenue reduction in the TD is due to non-recurring project revenue with three clients.  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 and considers the decrease in TD’s revenues as an investment in the future.

Gross Margins and Gross Margin %The Company generated $22.2M in gross margin during the year ended November 30, 2019 vs. $23.4M in fiscal 2018.  Consolidated gross margin from continuing operations declined year over year by approximately $848K in the TD and $510K in the BD.  Gross Margin % (“GM %”) for continuing operations was 32.4% in 2019 compared to 30.4% in 2018.  Improved margins resulted in both the TD and BD.  Continued delivery of higher margins is expected throughout 2020.

Operational Costs:

• Salaries and Other Compensation - salaries decreased by $843K during the year over the comparable period the prior year.  The reduction is a result of the cost reduction initiatives.  The largest reduction was in corporate and TD with the BD relatively flat, year over year.  Additional savings are targeted for 2020, as the full impact of 2019 reductions flow through for the complete year. 
• Office and General Costs­ – Normalized office and general costs would have decreased by $611K year over year, except for a one-time cost recovery related to Paradigm totaling of $1.149M over the comparable period in 2018. 
• Professional Fees - Professional fees decreased by $527K year over year.  Professional fees vary with the amount of financing or acquisition/disposition activity during the period.

Non-Cash Expenses:Non-Cash expenses include amortization, depreciation and share-based (options) compensation decreased $0.34M over the year ended November 30, 2019 compared to prior year.  The largest component is amortization of intangible assets (mostly related to acquisition), which was $2.9M YTD.  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 $1.25M compared to prior year with approximately $2.9M being expensed in Fiscal 2019.  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.

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 advanced stages of the refinancing process with negotiations at advanced levels on 5-year convertible notes of $20M and operating credit facilities in the $12.0M range.

Sale of Paradigm Consulting Group Inc. On July 3, 2019, the Company divested the operating assets of Paradigm to a Limited Partnership of which the combination of Golden Opportunities Fund Inc. (“Golden”) and Paradigm’s senior management own 75% and the Company owns 25%.  The purchase price included a cash amount of $4.5M, cancellation of $3.0M of Paradigm preferred shares owned by Golden, which were convertible into SEB common shares, and a working capital and pre-closing earnings adjustment.  In exchange for Golden relinquishing the convertibility and earnings bonus features of the preferred shares, the Company issued to Golden 1,000,000 warrants to acquire SEB shares at an exercise price of $0.30 per share for a period of four years following close of the transaction.

Paradigm was originally acquired in 2015 to facilitate a local footprint in Saskatchewan and Manitoba for multiple RFP bids, which Management believes can be achieved with a 25% equity interest.  The proceeds from the sale have been used to reduce SEB’s debt and contribute to working capital. 

Chief Financial Officer ChangesRobert Prentice, CPA, CA, a founder of SEB and the Chief Financial Officer (“CFO”) retired in the third quarter and resigned from the Company.  The Company would like to thank Robert for his contributions to the Company over the past eight years and wish him all the best in his future endeavors.

The Company appointed Tim Beaulieu, CPA, CA, as CFO and Corporate Secretary in the public company.  Tim has a long history with the Company, as CFO of both Technology Division entities and Benefits Division entities, representing over 80% of consolidated Company revenues.

Business Development to dateDuring Fiscal 2019, the Company has made substantial progress on new business development.  In the BD, the Company has added more than 17,000 new plan members in 2019 from new and existing clients, representing annual revenue in excess of $1.0M, with multi-year contracts.  In addition, the Company has renewed 10 existing clients representing over 38,000 plan members.  This brings the Company’s total renewals since acquiring the Aon book of business to 35 of 48 clients representing over 180,000 plan members.  The remaining clients are either evergreen (ongoing) or come up for renewal in 2020 and beyond. The company anticipates high renewal rates.

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’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.  Total contract value for both TD and BD including backlog, option years and evergreen remains strong.

Cost Reduction and Integration In Fiscal 2019, the Company reduced its cost structure by over $1.33M per annum, with the full amount being 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.  As articulated previously, win rates in the past 4 months have been over 50% of submitted bids and proposals.”

CONFERENCE CALL DETAILS Date/Time: Tuesday, May 19 at 11:00 AM ET. Canada & USA Toll Free Dial In: 1-800-319-4610Toronto Toll Dial In: 1-416-915-3239Callers 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/sebIR20200519.htmlConference Call Replay Numbers:

Canada & USA Toll Free:	1-855-669-9658
Code:	3841 followed by the # sign
Replay Duration: Available for one week until end of day Tuesday, May 26, 2020.

ABOUT SEBSEB 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 ContactJohn McKimmPresident/CEO/CIOOffice (888) 939-8885 x 2354Cell (416) 460-2817john.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.