KGIC Inc.
TSX VENTURE : LRN

November 19, 2015 20:17 ET

KGIC Inc. Announces Third Quarter 2015 Financial Results

TORONTO, ONTARIO--(Marketwired - Nov. 19, 2015) - KGIC Inc. ("KGIC" or the "Company") (TSX VENTURE:LRN) today announced financial results for the three and nine months ended September 30, 2015. The Company's financial statements and management's discussion and analysis for the three and nine months ended September 30, 2015 are available on SEDAR (www.sedar.com). Financial references are in Canadian dollars unless otherwise specified.

"Our financial results for the third quarter of 2015 reflect the first full period of stewardship under the Company's new management team. Improving trends are evident when examining the Company's performance on a trailing four quarter basis within our school operations, demonstrating early stage progress in reducing unnecessary expenses and expanding gross margins. Having recently divested our South Korean agency businesses, our attention is now exclusively dedicated to strengthening our Canadian school operations and strengthening the Company's financial health," said Shawn Klerer, Chief Executive Officer.

Mr. Klerer further commented, "Despite the many challenges we still face, our efforts are bearing fruit. On this front, I am particularly pleased to report that all three of our language school operations in British Columbia have just this week been approved for accreditation by the Private Career Training Institutions Agency and our Education Quality Assurance designation has been renewed under its new and more stringent regulatory requirements."

School Operations Q3/15 Q2/15 Q1/15 Q4/14
Tuition fees $ 10,697,813 $ 8,224,762 $ 7,501,981 $ 8,874,895
Other income 2,685,839 2,797,167 2,374,697 2,431,188
Total Revenue 13,383,652 11,021,929 9,876,678 11,306,083
Direct costs 10,755,540 9,217,463 8,408,561 11,736,394
Gross profit 2,628,112 1,804,466 1,468,117 (430,311 )
General and administrative expenses 5,718,313 7,230,699 6,307,478 8,974,295
Income from school operations (3,090,201 ) (5,426,233 ) (4,839,361 ) (9,404,606 )
Amortization in direct costs 346,884 354,837 355,860 441,567
EBITDA from school operations $ (2,743,317 ) $ (5,071,396 ) $ (4,483,501 ) $ (8,963,039 )

Further improvement is expected in coming quarters as the third quarter of 2015 reflects only a moderate contribution from the Optimization Plan. The Optimization Plan was initiated in late August and partially implemented in the third quarter of 2015. Additional details of the Optimization Plan can be found in the press release dated August 26, 2015.

As of mid-November 2015, management estimates that the Company has achieved annualized run-rate cost savings in excess of $14 million, approaching the Optimization Plan's targeted $15 million in annualized projected cost savings.

Forbearance Agreement Update and Exit Planning

On August 11, 2015, the Company entered into an amendment of the Forbearance Agreement with its senior lender which extends the repayment date of the $8.9 million owing under the term loan acquisition facility to June 30, 2016 based on achieving certain conditions. The repayment date would be further extended to September 30, 2016 if additional conditions are met.

On August 31, 2015, the Company announced that it had received a notice of default from its senior lender pertaining to a covenant breach in the Forbearance Agreement, which was driven by lower than anticipated collections of accounts receivable. On October 1, 2015, the senior lender accepted a revised cash flow forecast which will apply during the forbearance period, along with a relaxation of certain covenants from September 14, 2015 to November 30, 2015.

As of mid-November 2015, the timely collection of the Company's accounts receivable remains volatile, and the negative variance has not been fully offset by progress made by management at driving expenses below the revised cash flow forecast. While the Company will continue to pursue all avenues to collect amounts owed, management believes the best path for returning to a normal pace of collections is by exiting forbearance in the near term and strengthening the Company's financial position.

Management is presently in negotiations with its senior lender as well as several existing and potential new investors in order to determine if funding can be secured to repay a portion of the term loan acquisition facility in an amount sufficient to reach an agreement to exit forbearance prior to December 31, 2015. There can be no assurance that these negotiations will result in the raising of sufficient funds to allow the Company to fully or partially repay the term loan acquisition facility or to successfully emerge from forbearance.

The following table reconciles income from operations to EBITDA and adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014:

For the three months ended September 30, 2015 2014 2013
Continuing
operations
Discontinued
operations
Income (loss) after income taxes $ (3,896,094 ) $ 2,248,001 $ 1,885,246 $ 1,657,480
Interest and accretion 469,533 42,253 156,127 -
Income tax expense (recovery) - - 144,128 (29,154 )
Amortization 385,427 172,052 409,367 161,919
EBITDA $ (3,041,134 ) $ 2,462,306 $ 2,594,868 $ 1,790,245
Acquisitions and restructuring costs 24,029 - 282,370 640,266
Foreign exchange gain (loss) 191 (5,598 ) 8,127
Impairment (recovery) of goodwill and unallocated purchase price - (2,892,412 ) - -
Impairment of capital assets and intangible assets 191,157 - - -
Share-based compensation 82,440 - - -
Adjusted EBITDA $ (2,743,317 ) $ (435,704 ) $ 2,885,365 $ 2,430,511
For the nine months ended September 30, 2015 2014 2013
Continuing
operations
Discontinued
operations
Income (loss) after income taxes $ (37,202,665 ) $ 995,557 $ 4,786,776 $ 2,965,299
Interest and accretion 1,045,249 136,209 546,942 -
Income tax expense (recovery) - 28,126 (484,627 ) (75,474 )
Amortization 1,175,090 497,149 1,112,593 290,757
EBITDA $ (34,982,326 ) $ 1,657,041 $ 5,961,684 $ 3,180,582
Acquisitions and restructuring costs 449,744 - 605,685 1,260,438
Optimization Plan costs 1,000,000 - - -
Foreign exchange gain (loss) (2,029 ) (79,925 ) 8,467 1,907
Impairment of goodwill and unallocated purchase price 17,613,767 (2,892,412 ) - -
Impairment of capital assets and intangible assets 3,440,142 - - -
Share-based compensation 147,879 - - -
Adjusted EBITDA $ (12,332,823 ) $ (1,315,296 ) $ 6,575,836 $ 4,442,927

The following table presents cash flows from (used in) the Company's operating activities:

For the three months ended September 30, 2015 2014 2013
Cash flows from (used in) operating activities
Net income (loss) $ (1,648,093 ) $ 1,885,246 $ 1,657,480
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization 557,479 409,367 161,919
Accretion 98,783 55,560 -
Provision for doubtful accounts 35,730 226,052 -
Share-based payments 82,440 - -
Impairment of goodwill and unallocated purchase price (2,892,412 ) - -
Impairment of capital assets and intangible assets 191,157 - -
Lease inducement (22,651 ) (11,235 ) 24,791
Rent deposits 127,875 (95,743 ) -
Severance provision 31,975 - -
Exchange rate change (149,241 ) - -
Deferred tax expense (recovery) - - (29,154 )
Changes in working capital balances (1,037,772 ) (4,336,719 ) (2,320,779 )
$ (4,624,730 ) $ (1,867,472 ) $ (505,743 )
For the nine months ended September 30, 2015 2014 2013
Cash flows from (used in) operating activities
Net income (loss) $ (36,207,104 ) $ 4,786,776 $ 2,965,299
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization 1,672,240 1,112,593 290,757
Accretion 222,341 249,500 -
Provision for doubtful accounts 622,087 299,586 -
Loss on sale of investment - - 563
Share-based payments 147,879 - -
Impairment of goodwill and unallocated purchase price 14,721,355 - -
Impairment of capital assets and intangible assets 3,440,142 - -
Lease inducement (67,953 ) (140,092 ) 58,023
Rent deposits 39,907 (79,781 ) (63,661 )
Severance provision 108,469 - -
Exchange rate change 183,443 - -
Deferred tax expense (recovery) - (628,755 ) (75,474 )
Changes in working capital balances 4,122,100 (4,455,743 ) (4,746,967 )
$ (10,995,094 ) $ 1,144,084 $ (1,571,460 )

About KGIC Inc.

KGIC Inc. owns and operates private English as a Second Language (ESL) Schools, Career Colleges and Community Colleges in Toronto, Vancouver and Victoria.

Forward-Looking Information and Statements

This news release includes certain forward-looking information and statements within the meaning of Canadian securities laws. Such forward-looking information and statements are not representative of historical facts or information or current condition, but instead represent only the Company's beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company's control. Generally, such forward-looking information or statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or may contain statements that certain actions, events or results "may", "could", "would", "might" or "will be taken, "will continue", "will occur" or "will be achieved". The forward-looking information contained herein includes information relating to the Company's operating results. By identifying such information and statements in this manner, the Company is alerting the reader that such information and statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the Company to be materially different from those expressed or implied by such information and statements.

Any number of important factors could cause actual results to differ materially from these forward-looking statements as well as future results including, but not limited to, risks relating to: the Company's ability to service its outstanding indebtedness and the impact of that indebtedness on the Company's ability to raise additional capital, fund and maintain operations or meet business objectives; the Company's ability to comply with the terms of the amended forbearance agreement with Bank of Montreal and the consequences of any breach or default thereunder; the Company's ability to successfully exit forbearance; the Company's ability to complete any proposed recapitalization or restructuring activities (including the Optimization Plan referenced herein) on terms acceptable to the Company or at all and the expected cost savings related thereto; the fact that new management of the Company, including the recently appointed Chief Executive Officer, have had limited experience with the Company and its operations and have not had sufficient time to fully analyze all facets of the Company's business; the impact of negative or unfavourable rumours in the marketplace on the Company's brands and student enrollment; any of the Company's announced or proposed acquisitions failing to close or becoming delayed before closing; carrying on business and activities in international jurisdiction where Canadian laws do not apply; any loss of certain key personnel; levels of student enrolment; delays in rolling out online education programs; delays to the completion of any planned initiatives or the inability to complete those initiatives; competition in the educational services market; and currency fluctuations. Although the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in the forward-looking information and statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Although the Company believes that the assumptions and factors used in preparing, and the expectations contained in, the forward-looking information and statements are reasonable, undue reliance should not be placed on such information and statements, and no assurance or guarantee can be given that such forward-looking information and statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information and statements. Accordingly, readers should not place undue reliance on any forward-looking information or statements contained in this press release.

The forward-looking information and statements contained in this press release is made as of the date hereof, and the Company does not undertake to update any forward-looking information and/or statement that is contained or referenced herein, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws. All subsequent written and oral forward looking information and statements attributable to the Company or persons acting on its behalf is expressly qualified in its entirety by this notice.

Caution Regarding Non-IFRS Financial Measures - The Company references certain measures in this press release, which do not have a standardized meaning as prescribed by International Financial Reporting Standards ("IFRS") and are unlikely to be comparable to similar measures presented by other issuers. These non-IFRS measures have been presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company, but should not be considered in isolation or as a substitute for, or more meaningful than, measures prepared in accordance with IFRS, such as net income (loss) or cash flow from operating activities. Please refer to the Company's Management's Discussion and Analysis as at and for the three and nine months ended September 30, 2015 for a reconciliation of these non-IFRS measure to measures prescribed by IFRS.

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.

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