May 1, 2017

Founders Advantage Capital Corp. Announces Fiscal 2016 Results; Provides Update on Investees

CALGARY, ALBERTA–(Marketwired – May 1, 2017) – Founders Advantage Capital Corp. (TSX VENTURE:FCF) (the “Corporation”) is pleased to report its financial results for the fifteen months ended December 31, 2016 (“fiscal 2016”). The comparative period is the year ended September 30, 2015 (“fiscal 2015”). Note that during fiscal 2016, the Corporation changed its year end from September 30 to December 31. As a result, the Corporation is reporting a one-time, fifteen-month transition year, covering the period of October 1, 2015 to December 31, 2016. All results are presented in Canadian dollars. Readers should refer to the audited annual consolidated financial statements and management discussion and analysis (“MD&A”) for the fifteen months ended December 31, 2016, which are available on SEDAR at www.sedar.com and on the Corporation’s website at www.advantagecapital.ca.

“2016 was an exciting inaugural year for the corporation,” stated Stephen Reid, President and Chief Executive Officer of the Corporation. “In less than ten months, we raised over $100 million in capital and closed two investments in defensive industries that are generating strong free cash flow. Our momentum continued into Q1 2017 with a third acquisition closing post year-end which further diversified our investment portfolio. We are excited about the growth opportunities for each of our investee partners and are confident 2017 will be another strong year. 2016 was a year dedicated to laying a strong foundation for continued success in executing our business plan. During 2017, we intend on continuing to diversify our investment portfolio and execute our long-term business strategy to partner with exceptional founders operating in growing and defensive industries with high free cash flow.”

With recent turbulence in the Canadian mortgage industry, the Corporation is pleased to report that we do not anticipate that Dominion Lending Centres Limited Partnership (“DLC”) will be adversely affected from such events. DLC has over 200 lending partners with the ability to shift volumes when and if necessary. Further, DLC’s primary business is the franchising of mortgage brokerage services (it is not a lender) and therefore does not bear any direct underwriting nor credit risk. Origination volumes are diversified across the country in every province and territory with over 5,000 brokers and 700 locations. DLC continues to exceed our expectations as Canadians continue to rely on mortgage brokers to place their mortgages with financial institutions.

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

Fiscal 2016 Highlights

  • February 3: The Corporation announced the agreement to acquire Advantage Investments (Alberta) Ltd. (“Advantage Investments”), which resulted in the Corporation changing its business strategy and the adoption of a new acquisition-oriented investment model; transaction closed on February 23. This change in business plan has resulted in significantly different financial results compared to fiscal 2015.
  • April 14: Completed brokered and non-brokered private placement of subscription receipts for gross proceeds of $28.8 million.
  • May 13: Announced the agreement to acquire a 60% interest in DLC for $61.4 million cash consideration and 4,761,902 common shares; transaction closed on June 3.
  • July 6: Completed brokered bought deal and non-brokered private placement of common shares for gross proceeds of $33.3 million.
  • July 19: Entered into a commitment letter with ATB for a Senior Credit Facility of $22.0 million, which facility was subsequently renegotiated in December 2016 and March 2017.
  • November 2: Announced the agreement to acquire a 60% interest in Club16 Limited Partnership (“Trevor Linden Club16” or “Club16”) for $22.0 million; transaction closed on December 20.
  • November 4: Announced the implementation of a dividend policy for 2017, whereby the Corporation intends to pay an annual dividend of $0.05 per common share (payable quarterly). The first quarterly dividend ($0.0125 per common share) was declared on March 15, 2017 to shareholders of record as at March 31, 2017.
  • December 14: DLC acquired a 70% interest in Newton Connectivity Systems Inc. (“Newton”, formerly Marlborough Stirling Canada Limited) for an aggregate purchase price of $5.5 million.
  • December 22: Announced the agreement to acquire a 52% interest in Impact Radio Accessories (“Impact”) for $12.0 million; transaction closed on March 1, 2017.

Highlights Subsequent to Year End

  • March 1, 2017: Completed the previously announced acquisition of a 52% interest in Impact. This acquisition further diversifies the Corporation’s investment portfolio of companies operating in defensive, recession-resistant industries.
  • March 1, 2017: Concurrent with the acquisition of Impact, the Corporation entered into an amended credit facility with ATB 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 borrowings from $22.0 million to $28.0 million. The Corporation used its available borrowings to fund the acquisition of Impact.
Selected Consolidated Financial Highlights
(in thousands of Canadian dollars, except per share amounts)
Three months ended December 31, Fiscal(1)
2016 2015 (2) 2016 2015
Revenue $ 9,277 $ $ 22,938 $
Loss from operations $ (1,606 ) $ (658 ) $ (6,337 ) $ (3,282 )
Adjusted EBITDA(3) $ 998 $ (574 ) $ 3,233 $ (1,222 )
Cash generated by operating activities $ (253 ) $ 28 $ (3,440 ) $ (3,443 )
Net (loss) income attributable to shareholders $ (2,410 ) $ (1,116 ) $ (9,794 ) $ 35,709
Basic (loss) income per share $ (0.07 ) $ (0.11 ) $ (0.42 ) $ 3.61
Diluted (loss) income per share $ (0.07 ) $ (0.11 ) $ (0.42 ) $ 3.41
Dividends declared (4) $ $ $ $
Notes:
1. As a result of the change in the Corporation’s business plan, effective February 23, 2016, and the change in year-end from September 30 to December 31, the comparative period is not a direct indication of comparable results.
2. As a result of the change in year-end from September 30 to December 31, the fifteen months ended December 31, 2016 does not have a directly comparable prior year fiscal quarter. To facilitate calendar year over year comparison, the three months ended December 31, 2015 is shown as the comparable period.
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 Fiscal 2016 Selected Consolidated Financial Results

Consolidated revenues were $22.9 million, compared to $nil during fiscal 2015, as a result of the acquisitions made during fiscal 2016. Specifically, as the acquisition of DLC closed on June 3, 2016, a total of 212 days of DLC’s financial information was consolidated into the Corporation’s financial statements. Further, as the acquisition of Trevor Linden Club16 closed on December 20, 2016, a total of 12 days of Trevor Linden Club16’s financial information was consolidated into the Corporation’s financial statements. Please see “Overview and Outlook of Investees” section below for additional details on investee performance.

Consolidated adjusted EBITDA was $3.2 million, compared to negative adjusted EBITDA of $1.2 million during fiscal 2015. This increase over the prior year is significantly due to the acquisitions made during fiscal 2016, which are generating gross profit of $18.3 million. This additional gross profit was partially offset by higher general and administrative expenses of $12.6 million, compared to $2.0 million during fiscal 2015. This increase is a direct result of consolidating the financial results of our investees into the Corporation’s financial statements, as well as higher salaries, professional fees and travel costs associated with the change in business plan.

Consolidated net loss attributable to shareholders was $9.8 million, compared to net income of $35.7 million during fiscal 2015. This variance is primarily driven by the receipt of $39.6 million during the prior year period related to an arbitration settlement regarding certain historic mining concessions that related to the Corporation’s previous business plan. This variance over the prior year is further described by the inclusion of DLC’s financial results during fiscal 2016, partially offset by higher corporate office costs related to a number of items including, salaries, acquisition costs, amortization of intangible assets, finance expense on loans and borrowings and the issuance of share options that were incurred as a result of the change in the Corporation’s business plan.

Working Capital

As at December 31, 2016, the Corporation had a consolidated cash position of $7.8 million and a net working capital deficiency of $19.4 million, primarily resulting from $25.1 million in demand credit facilities being classified as current liabilities as required by International Financial Reporting Standards (“IFRS”). Management plans to renegotiate current credit facilities or obtain additional financing to provide the Corporation with sufficient capital to meet its obligations as they become due, and is forecasting positive cash flows from operating activities during the 2017 fiscal year, which will provide the required resources to fund ongoing operations.

Overview and Outlook of Investees

In addition to the information provided in the fiscal 2016 audited consolidated financial statements and associated MD&A, we would like to note the following additional information regarding our investees.

DLC

The Corporation acquired its 60% interest in DLC on June 3, 2016. At the time of acquisition, DLC’s adjusted trailing twelve month EBITDA was $14.6 million. The adjusted EBITDA for the twelve months ended December 31, 2016 was $16.4 million, representing 12.3% adjusted EBITDA growth since completion of the acquisition.

Overall, we are pleased with DLC’s results for fiscal 2016. In addition to the financial information in the audited consolidated financial statements and associated MD&A, we note DLC’s funded mortgage volumes increased on a quarterly and annual basis, which highlights the defensive nature of DLC’s business. Funded mortgage volumes for Q1 2016, Q2 2016, Q3 2016 and Q4 2016 each grew by 13.3%, 13.0%, 12.2% and 10.5% over their respective 2015 comparable quarter. Based on these historic growth trends, we expect DLC’s funded mortgage volumes to continue growing during 2017.

DLC’s business tracks the seasonality of home purchases in Canada. Based on the seasonality of DLC’s operations, readers are cautioned not to weight quarterly financial data equally for all quarters. More specifically, the following table outlines the historic ranges of funded mortgage volumes on a quarterly basis:

Q1 14.2% – 18.8%
Q2 24.2% – 28.1%
Q3 29.6% – 32.4%
Q4 24.0% – 27.7%

Some of DLC’s expenses are also subject to seasonality. More specifically, certain advertising campaigns and promotional events occur at varying times throughout the fiscal year, which impact adjusted EBITDA disproportionately compared to seasonal revenue fluctuations.

In December 2016, DLC acquired a 70% interest in Newton, which is one of two approved connectivity platforms between Canadian lenders and mortgage brokers. In consideration for the Newton services, Canadian lenders pay Newton fees based on the funded volume of mortgages. DLC anticipates it can increase Newton’s market share by having more DLC mortgage brokers use the Newton platform. It is expected that the financial results of Newton will further grow 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. 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

The Corporation acquired its 60% interest in Trevor Linden Club16 on December 20, 2016, which had adjusted trailing twelve month EBITDA of approximately $6.1 million at that time.

We are excited by the growth in Trevor Linden Club16’s business during 2016 as it continued to increase the average number of members on a quarterly basis. The average number of members for Q1 2016, Q2 2016, Q3 2016 and Q4 2016 each grew by 16.7%, 19.2%, 14.9% and 9.2% over their respective 2015 comparable quarter. Club16 started 2016 with approximately 71,000 members and ended the year with approximately 78,000 members. Based on these historic growth trends, we expect Club16’s membership base to continue growing during 2017. Subsequent to December 31, 2016, Club16’s total membership exceeds 80,000 members, a new milestone for the company. Additionally, 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.

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 Trevor Linden Club16. The Corporation offsets this income with its corporate general and administrative expenses to reduce the income taxes payable to nil.

Impact

The Corporation acquired its 52% interest in Impact on March 1, 2017, which had adjusted trailing twelve month EBITDA of approximately $3.6 million at that time.

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 anticipates receiving $104,000 per month in after-tax cash distributions from Impact, commencing May 2017.

Corporate Outlook

Our team continues to market our investment strategy across North America and receives numerous inbound proposals from founders and their advisors each week. We have a robust pipeline of potential transactions across Canada and the U.S. that we continue to review and assess. Our 2017 key financial priorities include:

  • Continue to focus on partnering with premium founder-run businesses operating in defensive industries with stable historical adjusted EBITDA, significant free cash flows, and attractive growth prospects;
  • Maximizing shareholder value through on-going monitoring of our operating subsidiaries and identifying opportunities for growth and improved efficiencies; and
  • Identifying various sources of capital to finance future acquisition opportunities.

The implementation of the business plan during fiscal 2016 and the achievements since then have created a platform for growth and acquisition opportunities during 2017. As a result of the acquisitions during fiscal 2016 and Impact in March 2017, the Corporation expects its proportionate share of 2017 pro forma anticipated investee adjusted EBITDA to be $17.0 – $18.2 million.

Executive Appointment
The Corporation is pleased to announce that Michelle Chambers has been appointed Senior Vice-President, Finance. Ms. Chambers previously served as Corporate Controller of the Corporation. Ms. Chambers is a Chartered Professional Accountant with several years’ experience in financial accounting and reporting for multi-jurisdictional entities, auditing and management reporting. Prior to joining FA Capital, Ms. Chambers worked in a number of financial accounting lead roles, including most recently with Talisman Energy and Total E&P Canada Ltd.

Non-IFRS measures

EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before non-cash items such as share-based payments and losses recognized on the sale of investments, and any unusual non-operating one-time items such as corporate start-up costs. Readers are cautioned that EBITDA and 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”.

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’s investee entities having another strong year during 2017;
  • the Corporation expects to complete additional acquisitions in 2017;
  • 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;
  • 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;
  • Impact will distribute cash to the Corporation as expected or at all;
  • The 2017 pro forma anticipated investee adjusted EBITDA; 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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