DLCG Dominion Lending Centres Inc

Dominion Lending Centres Inc. (TSX:DLCG) (“DLCG” or the “Corporation”) is pleased to report its financial results for the three months ended June 30, 2022 (“Q2-2022”) and six months ended June 30, 2022. For complete information, readers should refer to the interim financial statements and management discussion and analysis which are available on SEDAR at www.sedar.com and on the Corporation’s website at www.dlcg.ca. All amounts are presented in Canadian dollars unless otherwise stated.

Reference herein to the Dominion Lending Centres Group of Companies (the “DLC Group” or “Core Business Operations”) includes the Corporation and its three main subsidiaries, MCC Mortgage Centres Canada Inc. (“MCC”), MA Mortgage Architects Inc. (“MA”), and Newton Connectivity Systems Inc. (“Newton), and excludes the Non-Core Business Asset Management segment and their corresponding historical financial and operating results. The “Non-Core Business Asset Management” segment represents the Corporation’s share of income in its equity-accounted investments in Club16 Limited Partnership (“Club16”) and Cape Communications International Inc. (“Impact”) (collectively, the “Non-Core Assets”), the expenses, assets and liabilities associated with managing the Non-Core Assets, the non-core credit facility, and public company costs.

Q2-2022 Financial Highlights

• Q2-2022 funded volumes of $21.4 billion, representing a 2% decrease as compared to Q2-2021;
• Q2-2022 DLC Group revenue of $21.8 million representing a 2% increase as compared to Q2-2021;
• Q2-2022 DLC Group Adjusted EBITDA of $12.6 million as compared to $12.8 million during Q2-2021, representing a 2% decrease over the prior period;
• The Corporation declared a quarterly dividend of $0.03 per class A common share, resulting in a dividend payment of $1.5 million; and
• The Corporation implemented a normal-course issuer bid (“NCIB”) that allows the Corporation to purchase up to 1.2 million Common Shares (during Q2-22, the Corporation made repurchases under the NCIB of 31,925 Common Shares at an average price of $3.33 per share).

Gary Mauris, Executive Chairman and CEO, commented, “We are pleased to announce our second quarter financial and operating results for the period ended June 30, 2022. Looking back, the Corporation experienced significant growth in funded volumes in 2021 and we’re encouraged that we’ve maintained that pace in the first half of 2022. Funded volumes during Fiscal 2021 grew by over 50% while adjusted EBITDA grew by over 70%. Putting the foregoing into perspective, we are very proud of our team achieving funded volumes of $21.4 billion, which is the third highest in our history, after Q3-2021 and Q2-2021. Furthermore, we are delighted with our ongoing recruiting and reflagging efforts which resulted in over 10% growth in our overall broker count year-over-year. Our mortgage professionals are our most important asset and growing our mortgage professional base will enable us to better navigate housing market volatility. Looking forward, an increase in mortgage interest rates have softened overall housing market activity, however, from our perspective, in a rising interest rate environment, working with a mortgage broker is even more critical to ensure Canadians are receiving the best advice as well as most competitive mortgage rates. While we may see some short-term volatility in our business, we are not anticipating a long-term material negative impact on funded volumes.”

Selected Consolidated Financial Highlights:Below are the highlights of our financial results for the three and six months ended June 30, 2022 and June 30, 2021.

Three months ended June 30,							Six months ended June 30,
(in thousands, except per share)		2022		2021	Change		2022		2021	Change
Revenues	$	21,823	$	21,316	2%	$	38,852	$	35,204	10%
Income from operations		10,853		10,741	1%		16,181		15,741	3%
Adjusted EBITDA(1)		13,391		13,502	(1%)		19,631		20,521	(4%)
Free cash flow attributable to common shareholders(1)		5,507		4,853	13%		6,648		7,826	(15%)
Net income (loss)(2)		6,709		608	NMF(3)		(15,781)		508	NMF(3)
Adjusted net income(1)		5,268		4,245	24%		6,349		4,472	42%
Diluted income (loss) per Common Share(2)		0.14		0.00	NMF(3)		(0.34)		(0.01)	NMF(3)
Adjusted diluted earnings per Common Share(1)		0.11		0.08	38%		0.13		0.08	63%
Dividends declared per share	$	0.03	$	-	NMF(3)	$	0.03	$	-	NMF(3)

(1)   Please see the Non-IFRS Financial Performance Measures section of this document for additional information.

(2)   Net income (loss) for the three and six months ended June 30, 2022 includes $2.5 million and $28.3 million of non-cash finance expense on the Preferred Share liability, respectively (June 30, 2021 – $7.1 million and $10.3 million). The quarterly reassessment of the Corporation’s outlook and forecast for the 2022 fiscal year strengthened since its prior budgeting period in the fourth quarter of 2021, resulting in an increase the Corporation’s Preferred Share liability during the six months ended June 30, 2022 (see the Preferred Shares section).

(3)   The percentage change is Not a Meaningful Figure (“NMF”).

Three months ended June 30,								Six months ended June 30,
(in thousands)		2022		2021	Change			2022		2021	Change
Adjusted EBITDA(1)
Core Business Operations	$	12,634	$	12,829	(2%)		$	20,390	$	21,209	(4%)
Non-Core Business Asset Management		757		673	12%			(759)		(688)	(10%)
Adjusted EBITDA(1)(2)	$	13,391	$	13,502	(1%)		$	19,631	$	20,521	(4%)

(1)   Please see the Non-IFRS Financial Performance Measures section of this document for additional information.

(2)   Adjusted EBITDA for the six months ended June 30, 2022 includes an increase in professional fees of $1.6 million compared to the six months ended June 30, 2021 primarily from elevated legal costs and expenses associated with the stay of the class action legal claim, an ongoing arbitration, the settlement of legal claims, and the completion of the Newton Acquisition.

HighlightsThe Corporation’s net income increased during the three months ended June 30, 2022 when compared to the same period in the previous year, primarily due to lower non-cash finance expense on the Preferred Share liability of $4.6 million, a decrease in interest expense of $0.8 million from lower interest rates under the Junior Credit Facility when compared to the previous Sagard credit facility, higher revenues, and a recovery on share-based compensation. The decrease in finance expense on the Preferred share liability was due to the Corporation’s outlook and forecast for the 2022 fiscal year softening from its previous outlook and forecast assessed during the first quarter of 2022.

For the six months ended June 30, 2022 the Corporation incurred a net loss compared to net income during the same period in the previous year, primarily due to higher non-cash finance expense on the Preferred Share liability of $18.0 million and higher general administrative expenses from increased legal costs and expenses and personnel costs. The Corporation’s outlook and forecast for the 2022 fiscal year strengthened since its budgeting period in the fourth quarter of 2021, significantly increasing the Corporation’s Preferred Share liability during the six months ended June 30, 2022, which was partly offset by a slight recovery during the three months ended June 30, 2022. The increase in expenses was partly offset by higher revenues from higher funded mortgage volumes, lower interest expense from lower interest rates under the Junior Credit Facility when compared to the previous Sagard credit facility, and a recovery on share-based compensation.

Adjusted net income for the three and six months ended June 30, 2022 increased compared to the same periods in the previous year primarily from higher income from operations driven by increased revenues.

Adjusted EBITDA was relatively consistent for the three months ended June 30, 2022 and decreased during the six months ended June 30, 2022 when compared to the same periods in the previous year. The decrease during the six months ended June 30, 2022 was due to higher general and administrative expenses, primarily due to elevated legal costs and expenses, and increased personnel costs; partly offset by higher revenues.

Free cash flow attributable to common shareholders increased during the three months ended June 30, 2022 when compared to the same period in the prior year primarily due to the full allocation of Newton cash flows to common shareholders compared to 70% in 2021. The decrease in adjusted EBITDA contributed to the decrease in free cash flow attributable to common shareholders during the six months ended June 30, 2022 when compared to the same period in 2021.

Selected Segmented Financial Highlights:

Three months ended June 30,							Six months ended June 30,
(in thousands)		2022		2021	Change		2022		2021	Change
Revenues
Core Business Operations	$	21,823	$	21,316	2%	$	38,852	$	35,204	10%
Revenues		21,823		21,316	2%		38,852		35,204	10%
Operating expenses(1)
Core Business Operations		10,488		9,842	7%		21,155		17,324	22%
Non-Core Business Asset Management		482		733	(34%)		1,516		2,139	(29%)
Operating expenses(1)		10,970		10,575	4%		22,671		19,463	16%
Income (loss) from operations
Core Business Operations		11,335		11,474	(1%)		17,697		17,880	(1%)
Non-Core Business Asset Management		(482)		(733)	34%		(1,516)		(2,139)	29%
Income from operations		10,853		10,741	1%		16,181		15,741	3%
Adjusted EBITDA(2)
Core Business Operations		12,634		12,829	(2%)		20,390		21,209	(4%)
Non-Core Business Asset Management		757		673	12%		(759)		(688)	(10%)
Adjusted EBITDA(2)(3)	$	13,391		13,502	(1%)	$	19,631		20,521	(4%)

(1)  Operating expenses are comprised of direct costs, general and administrative expenses, share-based payments (recovery) expense, and depreciation and amortization expense.

(2)  Please see the Non-IFRS Financial Performance Measures section of this document for additional information.

(3)  Adjusted EBITDA for the six months ended June 30, 2022 includes an increase in professional fees of $1.6 million compared to the six months ended June 30, 2021 primarily from elevated legal costs and expenses associated with the stay of the class action legal claim, an ongoing arbitration, the settlement of legal claims, and the completion of the Newton Acquisition.

Non-IFRS Financial Performance Measures Management presents certain non-IFRS financial performance measures which we use as supplemental indicators of our operating performance. These non-IFRS measures do not have any standardized meaning, and therefore are unlikely to be comparable to the calculation of similar measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Non-IFRS measures are defined and reconciled to the most directly comparable IFRS measure. Non-IFRS financial performance measures include Adjusted EBITDA, Adjusted net income, Adjusted earnings per share, and free cash flow. Please see the Non-IFRS Financial Performance Measures section of the Corporation’s MD&A dated August 10, 2022, for the three and six months ended June 30, 2022, for further information on these measures. The Corporation’s MD&A is available on SEDAR at www.sedar.com.

The following table reconciles adjusted EBITDA from income (loss) before income tax, which is the most directly-comparable measure calculated in accordance with IFRS:

	Three months ended June 30,								Six months ended June 30,
(in thousands)			2022			2021				2022			2021
Income (loss) before income tax		$	9,449		$	3,637			$	(11,737)		$	4,317
Add back:
Depreciation and amortization			1,034			1,064				2,063			2,110
Finance expense			600			1,350				1,032			2,597
Finance expense on the Preferred Share liability(1)			2,535			7,146				28,250			10,292
			13,618			13,197				19,608			19,316
Adjustments:
Share-based payments (recovery) expense			(221)			228				(11)			1,123
Foreign exchange loss (gain)			1			(153)				16			(211)
(Gain) loss on contract settlement			(52)			355				(27)			441
Other income(2)			-			(175)				-			(238)
Acquisition, integration and restructuring costs(3)			45			50				45			90
Adjusted EBITDA(4)(5)		$	13,391		$	13,502			$	19,631		$	20,521

(1)  The Corporation’s overall outlook and forecast has strengthened since its prior budgeting period in the fourth quarter of 2021, resulting in an increase the Corporation’s Preferred Share liability during the six months ended June 30, 2022 (see the Preferred Share section).

(2)  Other income in the three and six months ended June 30, 2021 related to a legal settlement and the derecognition of sales tax receivables and payables on initial acquisition of the Core Business Operations in 2016, respectively.

(3)  Acquisition, integration and restructuring costs for the three and six months ended June 30, 2021 related to the restructuring and amalgamation of the Corporation from Founders Advantage Capital Corp. to Dominion Lending Centres Inc.

(4)  Adjusted EBITDA for the six months ended June 30, 2022 included an increase in professional fees of $1.6 million compared to the six months ended June 30, 2021 primarily from elevated legal costs and expenses associated with the stay of the class action legal claim, an ongoing arbitration, the settlement of legal claims, and the completion of the Newton Acquisition.

(5)   The amortization of franchise rights and relationships within the Core Business Operations of $0.8 million and $1.5 million for the three and months ended June 30, 2022 (June 30, 2021 – $0.7 million and $1.3 million) are classified as a charge against revenue, and have not been added back for Adjusted EBITDA.

The following table reconciles free cash flow from cash flow from operating activities, which is the most directly-comparable measure calculated in accordance with IFRS:

	Three months ended June 30,						Six months ended June 30,
(in thousands)		2022			2021(2)			2022			2021(2)
Cash flow from operating activities	$	11,644		$	14,040		$	13,465		$	18,653
Changes in non-cash working capital and other non-cash items		(1,053)			(4,030)			3,079			(2,701)
Cash provided from operations excluding changes in non-cash working capital and other non-cash items		10,591			10,010			16,544			15,952
Adjustments:
Distributions from equity-accounted investees(1)		331			471			481			721
Maintenance CAPEX(1)		(1,048)			(615)			(4,208)			(1,080)
NCI portion of cash provided from continuing operations		-			(409)			(191)			(781)
Lease payments(1)		(153)			(136)			(300)			(276)
Acquisition, integration and restructuring costs(1)		45			50			45			90
(Gain) loss on settlement of a contract(1)		(52)			355			(27)			441
Other non-cash items(1)		-			(175)			-			(238)
		9,714			9,551			12,344			14,829
Free cash flow attributable to Preferred Shareholders		(4,207)			(4,698)			(5,696)			(7,003)
Free cash flow attributable to common shareholders	$	5,507		$	4,853		$	6,648		$	7,826

(1)  Amounts presented reflect the Corporation’s common shareholders’ proportion and have excluded amounts attributed to NCI holders.

(2)  The Corporation’s calculation of free cash flow was amended during the three months ended September 30, 2021. Free cash flow for the three and six months ended June 30, 2021 has been updated to conform with the current year calculation, to replace the adjustment of “CDC attributable to Preferred Shareholders” with an adjustment for “free cash flow attributable to the Preferred Shareholders”.

The following table reconciles adjusted net income from net income (loss), which is the most directly-comparable measure calculated in accordance with IFRS:

	Three months ended June 30,						Six months ended June 30,
(in thousands)		2022			2021(1)			2022			2021(1)
Net income (loss)	$	6,709		$	608		$	(15,781)		$	508
Add back:
Foreign exchange loss (gain)		1			(153)			16			(211)
Finance expense on the Preferred Share liability(2)		2,535			7,146			28,250			10,292
(Gain) loss on contract settlement		(52)			355			(27)			441
Other income		-			(175)			-			(238)
Acquisition, integration and restructuring costs		45			50			45			90
Income tax effects of adjusting items		(12)			(40)			(14)			(4)
		9,226			7,791			12,489			10,878
Core Business Operations’ adjusted net income attributable to Preferred Shareholders		(3,958)			(3,546)			(6,140)			(6,406)
Adjusted net income		5,268			4,245			6,349			4,472
Adjusted net income attributable to common shareholders		5,259			3,840			6,151			3,681
Adjusted net income attributable to non-controlling interest		9			405			198			791
Diluted adjusted earnings per Common Share	$	0.11		$	0.08		$	0.13		$	0.08

(1)  The Corporation’s calculation of adjusted net income was amended during the three months ended September 30, 2021. Adjusted net income for the three and six months ended June 30, 2021 has been updated to conform with the current year calculation, replacing the previous adjustment for “Core Business Operations’ net income attributable to Preferred Shareholders” with an adjustment for “Core Business Operations’ adjusted net income attributable to Preferred Shareholders”.

(2)  Though the quarterly reassessment of the Corporation’s outlook and forecast for the 2022 fiscal year resulted in a revaluation recovery during the three months ended June 30, 2022, the Corporation’s overall outlook and forecast has strengthened since its prior budgeting period in the fourth quarter of 2021, resulting in an increase the Corporation’s Preferred Share liability during the six months ended June 30, 2022.

Forward-Looking 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,” or similar words suggesting future outcomes or an outlook. Forward-looking information in this document includes, but is not limited to: the effect of changes in mortgage interest rates not materially negatively affecting long-term funded mortgage volumes.

Such forward-looking information is based on many estimates and assumptions, including material estimates and assumptions, related to the following factors below that, while considered reasonable by the Corporation as at the date of this MD&A considering management’s experience and perception of current conditions and expected developments, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. Such factors include, but are not limited to:

• Changes in interest rates;
• The DLC Group’s ability to maintain its existing number of franchisees and add additional franchisees;
• Changes in Canadian mortgage lending and mortgage brokerage laws;
• Material decreases in the aggregate Canadian mortgage lending marketplace;
• Changes in the fees paid for mortgage brokerage services in Canada;
• Changes in the regulatory framework for the Canadian housing and lending sectors;
• Demand for the Corporation’s products remaining consistent with historical demand.

Many of these uncertainties and contingencies may affect our actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, us. Readers are cautioned that forward-looking statements are not guarantees of future performance. All forward-looking statements made in this document are qualified by these cautionary statements. The foregoing list of risks is not exhaustive. The forward-looking information contained in this document is made as of the date hereof and, except as required by applicable securities laws, we undertake no obligation to update publicly or revise any forward-looking statements or information, whether because of new information, future events or otherwise.

About Dominion Lending Centres Inc.The DLC Group is Canada’s leading network of mortgage professionals. The DLC Group operates through Dominion Lending Centres and its three main subsidiaries, MCC Mortgage Centre Canada Inc., MA Mortgage Architects Inc. and Newton Connectivity Systems Inc., and has operations across Canada. The DLC Group’s extensive network includes ~8,100 agents and ~545 locations. Headquartered in British Columbia, the DLC Group was founded in 2006 by Gary Mauris and Chris Kayat.

Contact information for the Corporation is as follows:

James BellCo-President403-560-0821jbell@dlcg.ca

Robin BurpeeCo-Chief Financial Officer403-455-9670rburpee@dlcg.ca

Amar LeekhaSr. Vice-President, Capital Markets403-455-6671aleekha@dlcg.ca