Serenic Reports Financial Results for Year End 2014 and Pending Sale of Serenic Subsidiaries
EDMONTON, Alberta, Canada (June 26, 2014) – Serenic Corporation (TSX-V: SER), an international software developer specializing in integrated financial management and human capital management (“HCM”) solutions for Non-Profit (“NFP”) organizations, government agencies and Microsoft Dynamics NAV users, reports the pending sale of Serenic subsidiaries and announces its financial results for the three months and year ended February 28, 2014.
Pending Sale of Serenic Subsidiaries
On June 26, 2014, the Company entered into a definitive agreement to sell the shares of Serenic Canada Inc., Serenic Software Inc. and Serenic Software (EMEA) Limited (collectively, the “SOC’s”) to Sylogist Ltd. (TSX-V:SYZ). The aggregate purchase price to be paid by Sylogist for the purchased shares is $11,880,431 less net liabilities of these subsidiaries to be assumed by Sylogist which are estimated to be approximately $3,880,431 to yield estimated cash of $8,000,000 to Serenic. The estimated net liabilities will be adjusted to actual on the closing date, which is forecasted to be July 25, 2014. Serenic will retain all cash and cash equivalents on the closing date which is estimated to be $11,000,000 including the proceeds from the sale. The use of this cash has not yet been made final; however, it is contemplated that an estimated aggregate amount of $7,500,000 (or approximately $0.45 per share on a fully diluted basis) would be distributed to shareholders. This would consist of an amount estimated to be $4,000,000 or approximately $0.24 per common share to be paid through a reduction of the paid-up capital of the Corporation, subject to TSX Venture Exchange approval; and an amount estimated to be $3,500,000 or approximately $0.21 per common share held, to be paid as a special dividend, subject to TSX Venture Exchange approval. The balance of the funds, net of costs associated with closing of the transaction and estimated income tax expense, would be retained in Serenic to fund further development of Serenic’s Cloud business, which is not part of the assets being sold to Sylogist. A further press release will be issued with respect to the timing and procedure of the cash distribution. Serenic intends to maintain its listing on the TSX Venture Exchange, subject to maintaining the Continuing Listing Requirements.
Closing of the transaction is subject to the approval of the Serenic shareholders to be voted upon at the Annual General and Special. Shareholders’ meeting to be held on July 22, 2014, the receipt of all necessary regulatory and stock exchange approvals and satisfaction of certain other closing conditions which are customary in transactions of this nature. Please see the Press Release “Sylogist to Acquire Serenic Operating Companies” dated June 26, 2014 as filed on SEDAR for further details of this transaction.
Serenic intends to rebrand and form a new operating division referred to as “Cloudco”, which will retain the SOC’s existing intellectual property associated with Serenic’s cloud technology. Sylogist will grant a royalty bearing OEM license involving certain of the SOC’s products to Cloudco. Cloudco will re-brand and market these solutions to new customers segments that the SOCs have not historically pursued. The parties intend to work non-competitively to pursue new volume markets for mutual benefit.
Financial results are summarized as follows:
(1) Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, stock option expense and impairment provisions. Please review the Serenic Management Discussion and Analysis (“MD&A”) for the Three months and Year ended February 28, 2014 for more information.
Review of Fiscal 2014
Although Serenic’s business continued to operate as a consolidated entity during Fiscal 2014, management believes it is useful to review Serenic’s financial information from the perspective of divisional profit centers. This is the measurement being adopted in Fiscal 2015 and which was not previously used to assess performance and allocate resources. Serenic has reorganized its business into three operational, profit-center business-units for Fiscal 2015:
- 1. the NFP business unit that provides on-premise perpetual license solutions for mid to large enterprise level not-for–profit organizations and certain public sector organizations;
- 2. the HCM business unit that provides on-premise human capital management license products to small and medium business (“SMB”) customers that are not-for-profit, public sector and for-profit organizations; and
- 3. the “Cloud” business unit that is developing versions of the Company’s software solutions for deployment as Software as a Service (‘SaaS”) solutions, in alignment with Microsoft’s volume and Cloud strategies.
Serenic’s Cloud division has developed technology that enables applications based on the Microsoft’s Dynamics NAV ERP and CRM platforms to operate on Microsoft’s new Cloud technology platform known as Azure. Cloud technology facilitates access and use of computer applications by any computer device that is browser-capable, without the requirement for such programs and data to be installed on the device. Serenic’s Cloud solutions can include integration with Microsoft Office 365 and other cloud products.
Whereas the NFP and HCM divisions are mature businesses that management expects to continue to operate profitably, the Cloud division is still in a pre-revenue stage, and will sustain operating losses until software subscription fees paid by new customers for the new products offset the expenses being funded from the Company’s cash. The two mature divisions both currently realize greater than 50% of their revenues from recurring software maintenance contracts, which are purchased by customers to obtain software updates and associated services to keep their software solutions current. Although total revenue growth declined in Fiscal 2014 from the prior year by about 6%, the compound annual revenue growth rate as measured over the past eight years remains positive, and is indicative of a growing business.
The following table represents the financial results of the Company’s three business units during Fiscal 2014, using the perspective of divisional business units which is being adopted in Fiscal 2015 and which was not previously used by management to measure performance and to allocate resources.
The legacy HCM and NFP divisions contributed positively to the overall financial results. We continued to derive revenue from the legacy divisions by increasing new customer adds, and by providing updates, maintenance and support services to our customer base. Recurring revenue from existing customers accounted for more than half of the gross revenue recorded in Fiscal 2014; however, the Company’s significant investment into the Cloud project during Fiscal 2014 greatly reduced EBITDA and earnings, and resulted in the loss recorded for the year.
Revenues for the current year were $11,333,123 a decline of 6% from revenue of $12,071,865 in Fiscal 2013. Gross profit was $7,325,991 versus $8,209,696 in the prior fiscal year, primarily due to decreased license sales revenue from Serenic’s reseller partner channel. In the current year, HCM license sales grew by 22.7%, as a result of the typically consistent pace of payroll and other HCM product licenses and sales pertaining to the new advanced human resource information system (“HRIS”) solution. An initiative was launched during the year to integrate an OEM-licensed HRIS solution with Serenic’s payroll products for both Serenic Navigator and Dynamics NAV users, with the expectation that the fully integrated solution will be released to market in June, 2014.
While revenue from Cloud products was nominal during the year, we started to showcase our Cloud solutions during Fiscal 2014 in various webinars which have, in management’s opinion, yielded good attendance and interest. Our sales team successfully completed the first sale of a prescriptive version of Serenic Navigator, which will be implemented using a fixed-price, streamlined methodology. This lean Cloud deployment methodology is different from the highly consultative sale and implementation methodology that typifies Serenic’s historical Enterprise level business and it is considered essential to allow Serenic to be competitive in the SMB volume markets. The first of the new Cloud ERP products targeted at the SMB space, Serenic Navigator Express, was released in December, 2013. The objective is to allow new customers to self-initiate a trial installation of the entry-level Serenic Navigator solution on an Azure cloud server using a “Click—Try—Buy” process, import their own financial records, work with the trial version for a period of time, and subsequently purchase the product – all of which can be accomplished with little or no interaction with Serenic personnel.
In Fiscal 2014, the Company recorded a non-cash impairment charge of $421,376 related to certain of its intellectual properties, and capitalized $169,257 less costs than in Fiscal 2013. Expenses included certain costs associated with the reorganization to operate as segmented business units in Fiscal 2015, including reduction in personnel, the engagement of independent vendors contracted to work on Cloud initiatives, and for legal and other matters. The combination of the reduced gross profit and increased expenses resulted in the Company recording a net loss of $2,048,306 in Fiscal 2014 compared to the net income of $39,110 earned in the prior year.
Management also continued to actively explore strategic corporate alternatives, with the objective being to potentially increase and unlock shareholder value. During the year, the Company purchased 536,500 of its shares for cancellation under its Normal Course Issuer Bid.
Cash resources as at February 28, 2014 were $3,318,602, a reduction of $1,013,976 from cash resources of $4,332,578 as at February 28, 2013. The net loss was primarily responsible for the reduction of cash. Management believes the cash resources continue to be adequate for the Company to operate in its anticipated manner.
Review of 2014 Fourth Quarter
Total revenue for the quarter was $2.9 million, a decrease of 26.8% from revenue of $3.9 million in the same quarter last year. Software license sales decreased by $1.3 million due to a large sale having been recorded in Q4 of 2013 and no sales of similar magnitude being recorded in this fiscal year. HCM license sales were on par with last year. Services revenue increased $100,000 or 15.1% as the combination of the HRIS system implementations, Total Care Plan amortization and an increase in SaaS or cloud monthly fees boosted revenues. Software maintenance contract revenue increased by 13.9% to $200,000 due to high contract renewal rates with existing customers and new clients being added. In total, revenues were assisted by a strengthening U.S. dollar which had the effect of increasing revenues by approximately $206,000.
Gross profit decreased by $996,224 due to the decrease in software license revenues and their related gross margin.
Expenses increased by $822,990 or 39.5%. A non-cash impairment charge of $421,376 was recorded in the quarter due to the non-cash impairment charge related to the write down in value of internally generated software. The higher U.S. dollar increased this cost category by approximately $114,000. At year-end, as the Company reorganized to implement its Fiscal 2015 strategies, the Company reduced its work force and a severance provision was accrued. Incentive pay reduced sharply in the period and sales and marketing costs were flat quarter over quarter.
Due to the reduced sales and gross profit, the increase in expenses, and the non-cash impairment charge, the net income of $575,636 recorded in the fourth quarter of 2013 reduced to a net loss of $1,158,329 in the current quarter. Adjusted EBITDA decreased by $1,378,295 due to the net loss experienced this quarter.
Outlook (Pending the Closing of the Sale of Serenic Subsidiaries)
For Fiscal 2015, Serenic’s operational teams have been reorganized into the legacy NFP and HCM business units in order to optimize their financial performance and provide adequate funding for development of the Cloud unit. Notwithstanding the continued investment in Cloud, Management and the Board have budgeted for a significant improvement in financial performance and EBITDA contribution on a consolidated basis during Fiscal 2015. The legacy business units have been streamlined to operate more efficiently and profitably, and as much of the foundational work in the Cloud division has been completed, greater revenue generation from Cloud division is anticipated to occur during the latter portion of Fiscal 2015, which we anticipate will reduce the losses incurred by the Cloud project.
Serenic will continue to nurture and grow its traditional niche market customers by selling and deploying enhanced versions of historical products to those organizations that wish to continue to embrace on-premise perpetual license solutions. Concurrently, we will provide a bridge to the SaaS world for those NFP and HCM customers who choose to transition to Cloud-deployed solutions. As well, we intend to investigate new volume niche markets that are now addressable with our new Cloud products, essentially using Click—Try—Buy and other volume-enabling features.
Other potential opportunities with Cloud may be investigated, including the provision of Serenic’s underlying Cloud technology to other Dynamics NAV vendors who require technology to migrate their ERP solutions to the Microsoft Cloud. Serenic has enjoyed a close and beneficial working relationship with Microsoft for more than ten years, and expenditures to adopt Microsoft’s Cloud strategies have given Serenic a competitive advantage and are estimated to have exceeded $3 million to date. Management believes that developing this bridge to Microsoft Cloud is not easily repeatable by or feasible for most small software companies to pursue, particularly by those who had not yet committed to this development strategy and are now lagging from a technology perspective.
The Company is also expanding its product offerings through collaboration with other software vendors, including an alliance with a U.S. based organization that focuses on donor management for faith based organizations. This donor management application and the HRIS offering have both yielded initial success in Fiscal 2014 and management believes they bode well for future opportunity to increase revenues and contribution.
Regarding corporate development matters, management continues to believe that the market capitalization and share price of the Company does not adequately reflect Serenic’s fair value, particularly considering the results of our mature software divisions, the solid value of our loyal customer base, the high ratio of recurring revenue we experience, and our technological leadership with respect to Cloud for Dynamics NAV products. If the pending sale of Serenic subsidiaries noted above does not close, we intend to continue to investigate and pursue potential alternatives to optimize and unlock shareholder value, and remain confident that our strategies will ultimately generate greater value for our shareholders.
Interested parties are urged to read Serenic’s audited consolidated Financial Statements and Management’s Discussion and Analysis for the year ended February 28, 2014 which can be located on Sedar.com.