FP Newspapers Inc. — Interim / Quarterly Report 2021

May 27, 2021

FP NEWSPAPERS INC.

INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2021

Approved for issuance: MAY 26, 2021

MANAGEMENT’S DISCUSSION AND ANALYSIS

This management’s discussion and analysis is dated May 26, 2021 and does not reflect changes or information subsequent to this date. Additional regulatory filings for FP NEWSPAPERS INC. (“FPI”) can be found on the SEDAR website at www.sedar.com.

The following discussion and analysis should be read in conjunction with our interim financial statements for the three months ended March 31, 2021. Our interim financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34 – Interim Financial Reporting. Because interim financial statements do not include the same information and disclosures that are required for annual financial statements, this discussion and analysis should also be read in conjunction with our most recent audited consolidated financial statements for the year ended December 30, 2020 which are available on the SEDAR website.

All monetary amounts, unless otherwise indicated, are expressed in Canadian dollars.

This discussion and analysis contains statements that are not historical facts and are forwardlooking that are subject to risks and uncertainties set out below under the heading “Caution Regarding Forward-Looking Statements”. The reader is cautioned not to place undue reliance on forward-looking statements.

OVERVIEW AND BACKGROUND

FP Newspapers Inc. owns securities entitling it to 49% of the distributable cash flow of FP Canadian Newspapers Limited Partnership (“FPLP”). FPLP owns and operates the Winnipeg Free Press, along with several other Manitoba based news and media publications that are available in both print and digital formats. The informative and engaging content we produce has an extensive reach throughout the province of Manitoba. The breadth of our reach provides compelling platforms for those looking to effectively reach a Manitoba audience.

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Operating Results

	For the three	months ended
($ in 000’s)	March 31, 2021	March 31, 2020
Equity interest in FP Canadian Newspapers Limited Partnership
Income (Loss)	$ (194)	$ 112
Administration expenses	(40)	(43)
Other income	-	-
Income (loss) before income taxes	(234)	69
Current income tax recovery (expense)	86	(12)
Deferredincome tax recovery	489	3
Net income for the period	$ 341	$ 60
Items that will not be reclassified to net income (loss):
Equity interest of other comprehensive (loss) income from FP
Canadian Newspapers Limited Partnership	-	(1,595)
Deferred income tax recovery	-	431
Comprehensive income (loss) for the period	$ 341	$ (1,104)
Weighted average number of Common Shares outstanding	6,902,592	6,902,592
Net income per share – basic and diluted	$ 0.049	$ 0.009

Equity interest in FP Canadian Newspapers Limited Partnership Income (Loss)

FPI reported a loss of $0.2 million from the equity interest in FPLP for the three months ended March 31, 2021, compared to income of $0.1 million in the same period last year. See the supplemental management and analysis of FPLP included herein.

Deferred Income Tax Recovery

The deferred income tax recovery increased due to recognizing an adjustment to the net deferred tax liability relating to eligible capital expenditures, historical goodwill, and intangible assets of FPLP. The non-cash adjustment resulted in an increased deferred tax recovery of $0.5 million being recorded in the current period.

Net Income

Net income for the period reflects FPI’s investment in FP Canadian Newspapers Limited Partnership and its underlying performance for the period.

Comprehensive Income (loss)

Comprehensive income (loss) for the three months ended March 31, 2021 was $0.3 million compared to a loss of $1.1 million for the same period last year. Other comprehensive income or losses are a result of FPLP recognizing remeasurement gains or losses related to their defined benefit pension plan. This pension plan was settled in December 2020 as part of FPLP’s transition to the Colleges of Applied Arts & Technology Pension Plan, a multi-employer defined benefit plan.

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QUARTERLY SUMMARY – NET INCOME, and NET INCOME PER SHARE

FPI’s quarterly equity interest in FPLP, net income and net income per share for 2021, 2020 and 2019 is illustrated, below.

	2021	2020	2019
($ in 000’s, except share $)
Equity interest in FPLP
Income (Loss)
Quarter 1	$ (194)	$ 112	$ 121
Quarter 2		1,902	852
Quarter 3		256	177
Quarter 4		3,339	1,026
Net income
Quarter 1	$ 341	$ 60	$ 54
Quarter 2		1,344	636
Quarter 3		126	67
Quarter 4		2,454	687
Net income per share
Quarter 1	$ 0.049	$ 0.009	$ 0.008
Quarter 2		0.195	0.092
Quarter 3		0.018	0.010
Quarter 4		0.355	0.100

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SUPLEMENTAL DISCLOSURE BY FP NEWSPAPERS INC. OF

FP CANADIAN NEWSPAPERS LIMITED PARTNERSHIP INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE THREE MONTHS ENDED MARCH 31, 2021

Approved for issuance: MAY 26,2021

Operating Results

Operating Results	Operating Results
For the three months ended March 31, 2021 March 31, 2020 ($ in 000’s)
	Revenue Print advertising $ 5,329 $ 6,776 Circulation 6,130 5,883 Digital advertising 524 562 Other 892 997
	TOTAL REVENUE 12,875 14,218 Operating expenses Employee compensation 5,919 6,545 Newsprint and other paper 955 1,106 Delivery 2,431 2,563 Other 2,647 2,960 Depreciation and amortization 803 681
	OPERATING INCOME BEFORE RESTRUCTURING 120 363 Restructuringcharge (453) (5)
	OPERATING INCOME (333) 358 Other income 2 14 Finance costs (64) (145)
	NET INCOME (LOSS) FOR THE PERIOD $ (395) $ 227

Revenue

Revenue decreased $1.3 million or 9.4% to $12.9 million for the three months ended March 31, 2021 as compared to the same period in the prior year. The declines are reflective of decreases in almost all of our advertising categories, mostly due to the challenges associated with the economic conditions caused by the COVID-19 pandemic business closures.

Print advertising

Print Advertising revenues decreased $1.4 million or 21.4% to $5.3 million for the three months ended March 31, 2021 as compared to the same period in the prior year. Display advertising decreased $0.7 million or 21.3% to $2.6 million for the same period in the prior year. Classified advertising revenues were steady compared to last year, decreases are offset by increased spending in the obituary category. Flyer distribution revenues decreased by $0.7 million or 34.1% compared to the first quarter in 2020.

Circulation

Circulation revenue increased $0.2 million or 4.2% to $6.1 million, for the three months ended March 31, 2021 as compared to the same period in the prior year. This was primarily due to print subscription rate increases and a moderate increase in overall digital subscriptions.

Digital advertising

Digital Advertising revenues were $0.5 million, remaining at relatively the same level compared to the first quarter of 2020.

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Other

Other revenues were $0.9 million, remaining at relatively the same level compared to the first quarter of 2020.

Expenses

Operating expenses decreased $1.1 million or 7.9% to $12.8 million as compared to the same quarter last year.

Employee Compensation

Employee compensation costs for the first quarter decreased by $0.6 million or 9.6% from the same period in the prior year. The decrease in compensation expense is largely due to the recovery of $0.4 million under The Canada Emergency Wage Subsidy (“CEWS”) program in the period. A recovery of $0.3 million was reflected in the period related to the federal government’s Canadian Journalism Tax credit program (“JTC”). The JTC recovery recorded in the first quarter of 2020 was $0.2 million.

Newsprint and other paper

Newsprint expense for the first quarter decreased by $0.2 million or 13.7% to $1.0 million compared to the same period in the prior year, primarily due to lower printing volumes.

Delivery

Delivery expenses decreased by $0.1 million or 5.2% to $2.4 million, for the three months ended March 31, 2021 as compared to the same period in the prior year, as a result of lower newspaper volumes and cost reduction initiatives to improve route efficiency.

Other

Other operating expenses for the three months ended March 31, 2021 decreased by $0.3 million or 10.6% to $2.6 million for the three months ended March 31, 2021 as compared to the same period in the prior year, as a result of reduced production supply costs.

EBITDA[(1)]

EBITDA for the three months ended March 31, 2021 was $0.5 million compared to $1.0 million for the same period last year, a decrease of 54.8%. EBITDA margin for the three months ended March 31, 2021 was 3.7%, compared to 7.3% in the same period last year. The changes in EBITDA were due to the factors described above.

Finance Costs

Finance costs decreased by $0.1 million to $0.1 million for the three months ended March 31, 2021 as compared to the same period in the prior year, as a result of less outstanding debt.

Net Income (Loss)

A net loss of $0.4 million was reflected for the three months ended March 31, 2021, a decline of $0.6 million from the previous year due to restructuring charges of $0.5 million related to ongoing transformation and cost savings initiatives.

QUARTERLY SUMMARY – REVENUE, EBITDA[(1)] and NET INCOME (LOSS)

A summary of FPLP’s Revenue, EBITDA[(1)] and net income (loss) for 2021, 2020 and 2019 is disclosed below. Newspaper publishing is seasonal to a certain extent, with a higher proportion of

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revenues and operating income occurring within the second and fourth quarters of the calendar year.

($ in 000’s)	2021 2020 2019
Revenue Quarter 1 Quarter 2 Quarter 3 Quarter 4 EBITDA(1) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Net Income (Loss) Quarter 1 Quarter 2 Quarter 3 Quarter 4	$ 12,875 $ 14,218 $ 15,493 11,883 16,971 12,885 15,129 14,444 16,227
	$ 53,430 $ 63,820
	$ 470 $ 1,039 $ 1,171 4,667 2,634 1,272 1,240 7,537 2,956
	$ 14,515 $ 8,001
	$ (395) $ 227 $ 244 3,882 1,735 523 360 6,813 2,088
	$11,445 $4,427

Liquidity and Capital Resources

Cash and cash equivalents at March 31, 2021 was $5.5 million, compared to $5.3 million at December 31, 2020. Our principal uses of funds are for working capital requirements, debt servicing and capital expenditures. Based on our current and anticipated level of operations, we believe that our cash on hand and cash flows from operations, which includes the receipt of CEWS and the journalism tax credits will enable us to meet our working capital, debt servicing, capital expenditure and other funding requirements for the next twelve months. However, our ability to fund our working capital needs, debt servicing and other funding requirements depends on our future operating performance and cash flows. Our cash flows from operating activities may be impacted by, among other things, the overall strength of the economy, competition from digital media and other forms of media as well as competition from alternative emerging technologies. In recent years there has been a growing shift in advertising dollars from print advertising to other advertising formats. We manage this risk by monitoring cash flow forecasts, implementing cost reduction initiatives, deferring or eliminating discretionary spending, monitoring and maintaining compliance with terms of the debt obligations.

Cash Flow from Operating Activities

During the three months ended March 31, 2021, cash generated from operating activities was $1.0 million, compared to $1.3 million for the same period in 2020. Net loss for the three months ended March 31, 2021 was $0.4 million, compared to net income of $0.2 million for the same period in 2020. The change in cash flow from operating activities is primarily from the restructuring charges in the period.

Cash Flow from Investing Activities

Capital asset additions were $0.6 million for the quarter ended March 31, 2021. Expenditures were primarily for computer hardware and software upgrades.

Cash Flow from Financing Activities

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Financing activities used $0.2 million for the three months ended March 31, 2021, compared to $2.1 million for the same period in 2020. A principal repayment of $2.0 million on the term loan was made in the three months ended March 31, 2020; no repayment was made in the same quarter of 2021.

Commitments and Contingencies

There have been no significant changes to contractual obligations since December 31, 2020.

Related Party Transactions

Virtually all newsprint is purchased from the Alberta Newsprint Company. Total newsprint purchases for the three months ended March 31, 2021 were $0.8 million, compared to $0.9 million for the same period last year.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In connection with National Instrument 52-109 (Certificate of Disclosure in Issuer’s Annual and Interim Filings) (“NI 52-109”), the Chief Executive Officer and Chief Financial Officer of the Company have filed a Venture Issue Basic Certificate with respect to the financial information contained in the financial statements for the year ended March 31, 2021 and this accompanying MD&A (together, the “Filings”).

In contrast to the full certificate under NI 52-109, the Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures and internal control over financial reporting, as defined in NI 52-109. For further information, the reader should refer to the Venture Issuer Basic Certificates filed by the Company on SEDAR.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting policies adopted in preparation of the interim condensed financial statements for FPI and FPLP are consistent with those followed in the preparation of the annual consolidated financial statements for the years ended December 30, 2020 and December 31, 2020, respectively.

COVID-19

With the number of COVID-19 cases, the short and long-term impact on the local and national economies is uncertain and is expected to remain this way for the unforeseeable future. The overall impact on our businesses as a result of COVID-19 cannot be predicted with any reliability. While we believe swift actions taken to reduce and defer costs together with meaningful direct support by the federal government have resulted in a relatively stable financial position currently, this could deteriorate quickly if the overall economy does not improve or worsens from the present state.

OUTLOOK

We are continuing to address the current challenges related to the COVID-19 pandemic and have seen gradual improvements in advertising and commercial print revenues month over month. This is despite the reinstatement of restrictions by the Province on how businesses may operate if they are allowed to operate all. The duration to which Provincial restrictions continue to remain in effect, will have a direct impact on our near-term revenue.

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The Canada Emergency Wage Subsidy (“CEWS”) program continued to provide financial relief. On April 19, 2021, as part of the proposed budget, the Government of Canada announced they will extend CEWS to September 2021. We will continue to monitor our eligibility under the CEWS program.

Despite the fact that the impact of the COVID-19 pandemic remains unpredictable, we continue to identify and undertake cost reduction initiatives in an effort to address the underlying revenue declines in the legacy print business.

NON-IFRS MEASURES

(1) Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

FPLP’s EBITDA for the three months ended March 31, 2021 and the same for the prior year is disclosed below. The distributable cash flow of FPLP is defined to be equal to EBITDA as calculated herein.

Net income for the period Add (subtract): Depreciation and amortization Finance costs Other income EBITDA	Three Months Ended March 31, 2021 2020 ($ in000’s)
	$ (395) $ 227 803 681 64 145 (2) (14)
	$ 470 $ 1,039

EBITDA is often referred to as a useful proxy for operating cash flows of a business. It is not a recognized measure of financial performance under IFRS, and readers are therefore cautioned against using this as an alternative to net earnings determined in accordance with IFRS as an indicator of out operating performance. Readers are similarly cautioned that our method for calculating EBITDA, as illustrated above, may differ from those of other issuers and may not allow for direct comparisons to be made.

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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this management’s discussion and analysis may constitute “forward-looking information” under applicable Canadian securities laws. All statements other than statements of historical fact are forward-looking statements. These statements include but are not limited to statements using words such as “anticipate,” “believe,” “budgeted,” “could,” “expect,” “estimate,” “intend,” “may,” “will,” “would,” “should” and similar expressions and derivations thereof in connection with any discussion of future events, trends or prospects or future operating or financial performance. By their nature, forward-looking information and statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These risks and uncertainties include, among others: competition from digital and other forms of media; the effect of economic conditions on advertising revenue; the ability build out digital media and online businesses; the failure to maintain current print and online newspaper readership and circulation levels; the realization of anticipated cost savings; possible damage to the reputation of the Company’s brands or trademarks; possible labour disruptions; possible environmental liabilities, litigation and pension plan obligations; fluctuations in foreign exchange rates and the prices of newsprint and other commodities. While both FPI and FPLP base such information and statements on assumptions believed to be reasonable when made, they are not guarantees of future performance and actual results of operations, financial condition and liquidity, and developments in the industry in which they operate, may differ materially from any such information and statements in this press release. Given these risks and uncertainties, undue reliance should not be placed on any forward-looking information or forward-looking statements, which speak only as of the date of such information or statements. Other than as required by law, FPI and FPLP does not undertake, and specifically declines, any obligation to update such information or statements or to publicly announce the results of any revisions to any such information or statements.

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