Founders Advantage Capital Corp.
TSX VENTURE : FCF

Founders Advantage Capital Corp.

May 29, 2017 22:08 ET

Founders Advantage Releases Q1 2017 Results; Investee Revenues Increase Year Over Year, Earnings Reflect Normal Seasonality

CALGARY, ALBERTA--(Marketwired - May 29, 2017) - Founders Advantage Capital Corp. (TSX VENTURE:FCF) (the "Corporation") is pleased to report its financial results for the three months ended March 31, 2017 ("Q1 2017"). Readers should refer to the condensed interim consolidated financial statements and management discussion and analysis ("MD&A") for the three months ended March 31, 2017 for complete information, which are available on SEDAR at www.sedar.com and on the Corporation's website at www.advantagecapital.ca.

"We continue to be excited about the performance of our current investments and the pipeline of opportunities being presented to us," stated Stephen Reid, President and Chief Executive Officer of the Corporation. "DLC has continued to grow its funded mortgage volumes despite the recent turbulence in the Canadian mortgage industry and Club16 has increased its membership base by 4.9% year over year. Historically, January through March is the slowest period of the year for home purchases, which impacts DLC's revenues. Even during the slowest time of year, DLC's funded mortgage volume grew 11.2% year over year, outperforming our expectations. As these seasonal lows are anticipated, DLC management uses this time for marketing and promotion activities to recruit additional brokers and franchises, which drive additional funded volume growth for the remainder of the year. During the quarter, DLC continued to reposition its newest asset, Newton Connectivity Systems, which was acquired in December 2016. While we are very pleased with the growth outlook and initial revenues being generated by Newton, we are forecasting certain repositioning costs to be incurred during the year, and expect better indications of run-rate profitability in subsequent quarters."

Please see the Overview and Outlook of Investees section for performance details on each of our investees and Outlook for 2017.

Q1 2017 Highlights

  • On March 1, 2017, the Corporation completed the acquisition of a 52% interest in Impact Radio Accessories ("Impact") for $12.7 million. This acquisition further diversifies the Corporation's investment portfolio of companies operating in defensive, recession-resistant industries.
  • Concurrent with the acquisition of Impact, the Corporation entered into an amended credit facility with ATB Financial to increase its revolving credit facility from $17.0 million to $28.0 million and to cancel its previously existing non-revolving $5.0 million credit facility. As such, the Corporation increased its available borrowing limit from $22.0 million to $28.0 million. The Corporation used its available borrowings to fund the acquisition of Impact.
  • Declared first quarterly dividend of $0.0125 per share ($0.05 per share annualized), which resulted in a payment of $0.5 million in April 2017.

Selected Consolidated Financial Highlights

For the three months ended
(000's, except per share amounts) March 31,
2017
December 31,
2016
March 31,
2016(1)
Revenues $ 13,694 $ 9,277 $ -
Loss from operations (2) $ (1,790) $ (1,606) $ (2,940)
Adjusted EBITDA (2) (3) $ 1,413 $ 998 $ (1,930)
Cash generated by (used in) operating activities $ 3,334 $ (253) $ (1,578)
Net loss attributable to shareholders $ (1,630) $ (2,410) $ (4,025)
Adjusted EBITDA attributable to shareholders (3) $ 255 $ (211) $ (1,930)
Basic loss per share $ (0.04) $ (0.07) $ (0.40)
Diluted loss per share $ (0.04) $ (0.07) $ (0.40)
Dividends declared (4) $ 474 $ - $ -
(1) As a result of the change in the Corporation's business plan, effective February 23, 2016, the prior year period is not a direct indication of comparable results.
(2) Newton Connectivity Systems contributed loss from operations of $1.0 million and negative adjusted EBITDA of $0.8 million during the three months ended March 31, 2017.
(3) See "Non-IFRS measures" below for the definition of adjusted EBITDA and cautions related thereto.
(4) The Corporation announced a dividend policy in November 2016, with the first quarterly dividend being declared on March 15, 2017 to shareholders of record as at March 31, 2017.

Review of Q1 2017 Consolidated Financial Results

Consolidated revenues were $13.7 million, compared to $nil during Q1 2016, due to the timing of acquisitions made during fiscal 2016. Specifically, as the acquisition of Dominion Lending Centres Limited Partnership ("DLC"), Club16 Limited Partnership ("Club16" or "Trevor Linden Club16") and Impact Radio Accessories ("Impact") closed on June 3, 2016, December 20, 2016 and March 1, 2017, respectively, there were no financial results consolidated into the Corporation's financial statements during Q1 2016. DLC's $7.2 million in revenues for Q1 2017 were impacted by the expected seasonally slowest period for home purchases, but were supplemented by $0.6 million in revenues generated by DLC's most recent acquisition, Newton Connectivity Systems Inc. ("Newton"). As Newton is still restructuring and ramping up its services, we expect growing quarterly revenues from Newton going forward. Club16 generated revenue of $5.5 million during Q1 2017, which excludes the annual club enhancement fee paid by the Club16 members every May, which $2.2 million was received on May 3, 2017. Impact generated revenue of $0.9 million since its acquisition (31 days of the current quarter), which is effected by the timing of certain larger purchase orders during the year. Please see "Overview and Outlook of Investees" section below for additional details on investee performance.

Consolidated loss from operations was $1.8 million, compared to $2.9 million during Q1 2016. The current quarter loss is impacted by the $9.6 million of consolidated general and administrative expenses and seasonality of DLC's operations. DLC ($4.1 million), Club16 ($3.8 million), Impact ($0.3 million) and Corporate ($1.5 million) each contributed to the consolidated general and administrative expenses. DLC's expenses do not vary proportionately with the fluctuations in revenue caused by the changes in home buying season. As a result, loss from operations for Q1 2017 is impacted more heavily than in other fiscal quarters when revenues are expected to be higher and costs are not increased proportionately. Also, DLC incurred $0.3 million in severance costs related to DLC and Newton during Q1 2017. Newton incurred a loss from operations of $1.0 million during the quarter, which is expected to improve during fiscal 2017 as operations continue to ramp up. Further, Club16's annual club enhancement fee is not earned until May every year, which $2.2 million was received on May 3, 2017. This revenue has no associated costs, which results in a significant positive impact to income from operations during the next fiscal quarter. Due to the seasonality of DLC's business, the changing run-rate profitability of Newton, the timing of Club16's annual club enhancement fee, and the variable timing of Impact's revenue, the loss from operations for Q1 2017 is not necessarily indicative of future quarterly results.

Consolidated adjusted EBITDA was $1.4 million, compared to negative adjusted EBITDA of $1.9 million during Q1 2016. This increase over the prior year is significantly due to the completed acquisitions. As noted above, due to the seasonality of DLC's business, the changing run-rate profitability of Newton, the timing of Club16's annual club enhancement fee, and the variable timing of Impact's revenue, the adjusted EBITDA for Q1 2017 is not necessarily indicative of future quarterly results.

Consolidated net loss attributable to shareholders was $1.6 million, compared to $4.0 million during Q1 2016. This variance over the prior year quarter is primarily driven by the full consolidation of the financial results of DLC, Club16 and Impact during Q1 2017. As discussed above, due to the seasonality of DLC's business, the changing run-rate profitability of Newton, the timing of Club16's annual club enhancement fee, and the variable timing of Impact's revenue, the net loss attributable to shareholders for Q1 2017 is not necessarily indicative of future quarterly results.

Overview and Outlook of Investees

In addition to the information provided in the Q1 2017 consolidated financial statements and associated MD&A, we would like to note the following additional information regarding our investees.

DLC Limited Partnership

For the three months ended
(000's) (1) March 31,
2017
December 31,
2016
Revenues $ 7,338 $ 8,644
Operating expenses 6,729 7,153
Income from operations (2) 609 1,491
Other (expense) income, net (275) 426
Income before tax 334 1,917
Add back:
Depreciation and amortization 1,338 1,341
Finance expense 177 130
Other income - (462)
Adjusted EBITDA(2) $ 1,849 $ 2,926
Adjusted EBITDA attributable to:
Shareholders $ 1,224 $ 1,755
Non-controlling interests $ 605 $ 1,171
Key performance indicators:
Funded mortgage volumes (3) $ 6,769,244 $ 9,325,208
Number of franchises (4) 446 443
Number of brokers (4) 5,309 5,237
(1) DLC's results generally vary from quarter to quarter as a result of seasonal fluctuations in the reporting segment. This means DLC's results in one quarter are not necessarily a good indication of how they will perform in a future quarter.
(2) Newton Connectivity Systems contributed loss from operations of $1.0 million and negative adjusted EBITDA of $0.8 million during the three months ended March 31, 2017.
(3) Funded mortgage volumes are a key performance indicator for the DLC segment that allows us to measure DLC's performance against our operating strategy. These amounts are stated in thousands.
(4) The number of franchises and brokers are as at the respective balance sheet date.

The Corporation acquired its 60% interest in DLC on June 3, 2016. Prior to the acquisition, DLC's unaudited revenue for Q1 2016 was $6.4 million. The revenue for Q1 2017 was $7.3 million, representing 14.1% revenue growth year over year. This growth over the prior year is significantly due to the 11.2% increase in funded mortgage volumes during Q1 2017, compared to Q1 2016. DLC's revenues are significantly impacted by the home buying season, which is typically more heavily weighted during the months of May through September. As a result, we expect additional revenues to be earned during the upcoming fiscal quarters when compared to Q1 2017.

DLC's income from operations and adjusted EBITDA were $0.6 million and $1.8 million, respectively, which were significantly impacted by both direct costs of $1.3 million and general and administrative expense of $4.1 million. As noted above, DLC's revenue is seasonal in nature caused by changes in the home buying season, and general and administrative costs do not vary proportionately with these seasonal fluctuations. As a result, income from operations for Q1 2017 is impacted more heavily than in other fiscal quarters when revenues are expected to be higher and costs are not increased proportionately. Also included in income from operations for the current quarter are the revenues and costs associated with Newton, totaling a net $1.0 million in costs, which include $0.2 million of severance related expenses. As Newton continues to ramp up its operations, we expect the income from operations to increase going forward. Currently, Newton represents approximately 3% of the connectivity platform market. As DLC represents approximately 35% of the Canadian mortgage brokerage industry, migrating mortgage brokers to the Newton platform would have a meaningful impact on DLC's revenues and adjusted EBITDA.

DLC expects to continue to expand its network of mortgage brokers and franchisees by focusing on their recruiting initiatives, as evidenced by DLC's continued quarter over quarter growth in funded mortgage volumes and increases in franchises and brokers. As a result of these growth initiatives, we anticipate DLC having steady growth in its funded mortgage volumes in 2017, resulting in steady growth in revenues and adjusted EBITDA.

The Corporation is receiving $540,000 per month in after-tax cash distributions from DLC.

Trevor Linden Club16

For the three months ended
(000's) March 31,
2017
December 31,
2016
Revenues $ 5,466 $ 633
Operating expenses 5,022 665
Income (loss) from operations 444 (32)
Other (expense), net (40) (6)
Income (loss) before tax 404 (38)
Add back:
Depreciation and amortization 672 127
Finance expense 40 6
Adjusted EBITDA $ 1,116 $ 95
Adjusted EBITDA attributable to:
Shareholders $ 670 $ 57
Non-controlling interests $ 446 $ 38
Key performance indicators:
Total fitness club members (1) 80,296 78,316
(1) The number of fitness club members is as at the respective balance sheet date.

The Corporation acquired its 60% interest in Trevor Linden Club16 on December 20, 2016. Prior to the acquisition, Club16's unaudited revenue for Q1 2016 was $5.0 million. The revenue for Q1 2017 was $5.5 million, representing 9.2% revenue growth year over year, which is partially driven by the 4.9% increase in membership base. Also, Club16 received its annual club enhancement fee from its members on May 3, 2017 for $2.2 million, which will be included in the financial results of the next quarter.

Club16's income from operations and adjusted EBITDA were $0.4 million and $1.1 million, respectively. The income from operations and adjusted EBITDA for Q1 2017 represent normal course operations, and we expect continued growth in the total fitness club members based on the historic growth trend.

Club16 anticipates continued growth in its personal training services, which are a relatively new product offering. These services are expected to add to Trevor Linden Club16's revenues and adjusted EBITDA. During Q1 2017, Club16 earned $0.7 million in revenues related to personal training services (gross margin of 43%), compared to $0.3 million during Q1 2016 (gross margin of 24%).

Trevor Linden Club16 expects to continue adding new members by increasing total square footage of gym space via opening a new location and expanding one of the current locations during 2017. It is anticipated that these initiatives will have a positive impact on 2017 fitness club membership revenues and adjusted EBITDA.

The Corporation is receiving $270,000 per month in pre-tax cash distributions from Club16. The Corporation offsets this income with its corporate general and administrative expenses to reduce the income taxes payable to nil.

Impact

For the three months ended
(000's) (1) March 31,
2017
December 31,
2016
Revenues $ 890 $ -
Operating expenses 799 -
Income from operations 91 -
Other income, net 12 -
Income before tax 103 -
Add back:
Depreciation and amortization 96 -
Share-based payments 24 -
Adjusted EBITDA $ 223 $ -
Adjusted EBITDA attributable to:
Shareholders $ 116 $ -
Non-controlling interests $ 107 $ -
(1) Includes 31 days of Impact operations as the acquisition was completed on March 1, 2017.

The Corporation acquired its 52% interest in Impact on March 1, 2017. Revenues for the month of March 2017 were $0.9 million, consistent with March 2016. Total revenues for Q1 2017, including the period prior to the acquisition, were $2.4 million, consistent with the same prior year period.

Impact's income from operations and adjusted EBITDA were $0.1 million and $0.2 million, respectively, which represents 31 days of operations. As Impact is subject to certain fluctuations in timing of larger purchase orders, we expect variability in the quarterly financial results.

Impact expects to increase sales by adding distributors and anticipates that its products will gain additional exposure as the distributors expand their own businesses (via organic and acquisition growth), which will result in more distributor representatives selling the Impact products. It is anticipated that these initiatives will have a positive impact on 2017 revenues and adjusted EBITDA.

The Corporation is receiving $104,000 per month in after-tax cash distributions from Impact.

Non-IFRS measures

Adjusted EBITDA for both our corporate head office and investees is defined as earnings before interest, taxes, and non-cash items such as depreciation and amortization, share-based payments, losses recognized on the sale of investments, and any unusual non-operating one-time items such as corporate start-up costs and other revenues. Adjusted EBITDA is also adjusted for expenses relating to prior mineral property impairment reversal and arbitration. Readers are cautioned that adjusted EBITDA should not be construed as a substitute or an alternative to applicable generally accepted accounting principle measures as determined in accordance with IFRS.

About Founders Advantage Capital Corp.

The Corporation is listed on the TSX Venture Exchange as an Investment Issuer (Tier 1) and employs a permanent investment approach. The Corporation has developed an investment approach to create long-term value for its shareholders and partner entrepreneurs (investees) by pursuing controlling interest acquisitions of cash flow positive middle-market privately held entities. The Corporation seeks to win mandates by appealing to the segment of the market which is not aligned with traditional private equity control, royalty monetizations or related structures. The Corporation's innovative platform offers disproportionate incentives (contractually) for growth in favour of our investees. This unique platform is designed to appeal to entrepreneurs who believe in the growth of their businesses and who want the added ability to continue managing the business while partnering with a long-term partner.

The Corporation's common shares are listed on the TSX Venture Exchange under the symbol "FCF".

For further information, please refer to the Corporation's website at www.advantagecapital.ca.

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.

Cautionary Statement Regarding Forward-Looking Financial Information

Certain statements in this document constitute forward-looking information under applicable securities legislation. Forward-looking information typically contains statements with words such as "anticipate", "believe", "estimate", "will", "expect", "plan", "intend", or similar words suggesting future outcomes or an outlook. Forward-looking information in this document includes, but is not limited to:

  • the Corporation forecasts certain restructuring costs to be incurred related to Newton;
  • the Corporation expects better run-rate profitability in subsequent quarters from Newton;
  • the Corporation expects growing quarterly revenues from Newton going forward;
  • the Corporation plans to obtain additional financing either through debt or equity;
  • the Corporation is forecasting positive cash flows from operating activities;
  • the Corporation expects DLC's funded mortgage volumes will continue growing;
  • the Corporation expects Newton to continue to ramp up its operations;
  • the Corporation expects Newton's income from operations to increase going forward;
  • DLC anticipates it can increase Newton's market share;
  • DLC expects to continue to expand its network of mortgage brokers and franchisees;
  • the Corporation expects Trevor Linden Club16's membership base to continue growing;
  • Trevor Linden Club16 anticipates continued growth in its personal training services;
  • Trevor Linden Club16 expects to continue adding new members;
  • Impact expects to increase sales by adding distributors;
  • Impact expects its products will gain additional exposure; and
  • The Corporation's ability to win potential acquisitions over competing sources of investment, including, but not limited to, private equity, royalty funds or related structures.

Such forward-looking information is based on a number of assumptions which may prove to be incorrect. Assumptions have been made with respect to the following matters, in addition to any other assumptions identified in this document:

  • The Corporation being able to source and negotiate transactions on acceptable terms and in a timely manner;
  • The Corporation being able to source additional financing on acceptable terms and in a timely manner;
  • That the Board of Directors for each of the investee entities resolves to continue distributing cash as expected; and
  • That the business of DLC, Trevor Linden Club16 and Impact will not suffer any material adverse changes.

Although the Corporation believes that the expectations reflected in such forward-looking information are reasonable, undue reliance should not be placed on them as the Corporation can give no assurance that such expectations will prove to be correct. Forward-looking information is based on expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by the Corporation and described in the forward-looking information. The material risks and uncertainties include, but are not limited to:

  • The adequacy of the Corporation's existing resources to complete additional potential transactions;
  • The return for any acquisition not being as expected by the Corporation post-closing; and
  • Incremental risks associated with any additional investee company, as well as the risks associated with the industries in which additional investees operate.

The foregoing list of risks is not exhaustive. For more information relating to risks, see the section titled "Risk Factors" in the Corporation's current annual information form. The forward-looking information contained in this document is made as of the date hereof and, except as required by applicable securities law, the Corporation undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise.

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