FP Newspapers Inc. — Interim / Quarterly Report 2022

Nov 23, 2022

FP NEWSPAPERS INC.

INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

Approved for issuance: NOVEMBER 23, 2022

MANAGEMENT'S DISCUSSION AND ANALYSIS

This management's discussion and analysis is dated November 23, 2022 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 is supplementary to, and should be read in conjunction with our financial statements for the three and nine months ended September 30, 2022.

Forward-Looking Statements

Certain statements in this discussion and analysis may constitute forward-looking statements that reflect management's expectations regarding future growth, financial performance and business opportunities that are not historical facts. Such forward-looking statements are subject to risks and uncertainties set out below under the heading "Caution Regarding Forward-Looking Statements". All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. These statements reflect current expectations of management regarding future events and operating performance and speak only as of the date of this discussion and analysis. They are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes.

Interim Financial Statements

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 financial statements for the year ended December 30, 2021, which are available on the SEDAR website.

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

OVERVIEW AND BACKGROUND

FP NEWSPAPERS INC. has no active business. It owns securities entitling it to 49% of the distributable cash flow of FP CANADIAN NEWSPAPERS LP ("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.

OPERATING RESULTS

A discussion of our quarterly operating results

	For the three monthsended September 30,		For the nine monthsended September 30,
($ in 000's)	2022	2021		2022		2021
Equity interest in FP Canadian Newspapers LP (Loss) IncomeAdministration expenses	$(375) $(40)	268(30)	$	839(146)	$	685(118)
Other income	1	-		2		1
(Loss) Income before income taxes	(414)	238		695		568
Current income tax recovery (expense)	(186)	172		(302)		(209)
Deferred income tax recovery	-	-		-		489
Comprehensive (loss) income for the period	(600)	410		393		848
Weighted average number of Common Shares outstanding	6,902,592	6,902,592		6,902,592		6,902,592
Comprehensive (loss) income per share – basic and diluted	$(0.087) $	0.059	$	0.057	$	0.123

Equity interest in FP Canadian Newspapers LP Income (Loss)

FPI's proportionate share of FPLP comprehensive income (loss) for the three and nine months ended September 30, 2022, was $(0.4) and $0.8 million, respectively, compared to income of $0.3 and $0.7 million in the same period last year. See the supplemental management and analysis of FPLP included herein.

Administrative Expenses

Administrative expenses increased due to increased costs compared to the same period last year.

Income Taxes

Current income taxes include FPI's proportionate share of FPLP's non-conterminous taxable income resulting in fluctuations of FPI's effective tax rate.

During the nine months ended September 30, 2021, the deferred income tax recovery reflects an adjustment of $0.5 million to the net deferred tax liability relating to eligible capital expenditures, historical goodwill, and intangible assets of FPLP.

Comprehensive Income (Loss)

Comprehensive income (loss) for the period reflects FPI's investment in FPLP and its underlying performance for the period. Comprehensive (loss) income for the three and nine months ended September 30, 2022, was $(0.6) and $0.03 million, respectively, compared to an income of $0.4 and $0.8 million for the same period last year.

SUMMARY OF QUARTERLY PERFORMANCE

A summary view of our quarterly financial performance

The following table presents selected financial information for each of the nine most recently completed quarters:

Quarter Ended
($ in '000's,except share $)		2022Sep - 30	2022Jun - 30	2022Mar - 31	2021Dec - 30	2021Sep - 30	2021Jun - 30	2021Mar - 31	2020Dec - 30	2020Sep - 30
FP CANADIAN NEWSPAPERS LP
Revenue	$	13,542	14,619	13,519	15,104	13,101	13,675	12,875	14,444	12,885
Comprehensive income(loss)	$	(766)	1,245	1,233	695	547	1,246	(395)	6,813	523
Proportionate % ofComprehensiveIncome (Loss)attributable to FPNEWSPAPERS INC		49.0%	49.0%	49.0%	49.0%	49.0%	49.0%	49.0%	49.0%	49.0%
Comprehensive income(loss) attributable to FPNEWSPAPERS INC	$	(375)	610	604	341	268	611	(194)	3,339	256
FP NEWSPAPERS INC.
Comprehensive income(loss)	$	(600)	696	297	18	410	95	341	2,454	126
Comprehensive income(loss) per Share	$	(0.087)	0.101	0.043	0.003	0.059	0.014	0.049	0.355	0.018
Outstanding Shares	#	6,902.6	6,902.6	6,902.6	6,902.6	6,902.6	6,902.6	6,902.6	6,902.6	6,902.6

INTERNAL CONTROL OVER FINANCIAL REPORTING

A discussion of our disclosure controls and internal controls over financial reporting

In connection with National Instrument 52-109 (Certificate of Disclosure in Issuer's Annual and Interim Filings), 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 quarter ended and this accompanying MD&A. This can be found on SEDAR.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A description of accounting estimates that are critical to determining our financial results

The accounting policies adopted in preparation of the interim condensed financial statements are consistent with those followed in the preparation of our most recent annual financial statements.

SUPPLEMENTAL DISCLOSURE BY FP NEWSPAPERS INC. OF

FP CANADIAN NEWSPAPERS LIMITED PARTNERSHIP

INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

OPERATING RESULTS

A discussion of our quarterly operating results

	For the three monthsended September 30,		For the nine monthsended September 30,
($ in 000's)	20222021				2022	2021
Revenue
Print advertising	$5,459	$	5,602	$	17,489	$	16,962
Circulation	6,041		6,310		18,047		18,660
Digital advertising	819		474		2,471		1,458
Other	1,223		715		3,673		2,571
TOTAL REVENUE	13,542		13,101		41,680		39,651
Operating expenses
Employee compensation	6,107		5,768		17,894		17,397
Newsprint and other paper	1,051		901		2,946		2,873
Distribution	2,459		2,446		7,382		7,384
Production	1,451		1,179		4,551		3,542
Other	1,298		1,355		4,163		3,941
Depreciation and amortization	1,824		847		3,423		2,481
OPERATING (LOSS) INCOME BEFORE
UNDERNOTED ITEMS	(648)		605		1,321		2,033
Restructuring charge	(1)		-		(18)		(453)
Impairment of intangible assets	-		-		(89)		-
OPERATING (LOSS) INCOME	(649)		605		1,214		1,580
Other income	13		2		28		6
Finance costs	(138)		(60)		(261)		(188)
Gain on disposal of fixed assets	8		-		731		-
COMPREHENSIVE (LOSS) INCOME FOR THEPERIOD	$(766)	$	547	$	1,712	$	1,398

Revenue

Revenue increased $0.4 million or 3.4% to $13.5 million and increased $2.0 million or 5.1% to $41.7 million for the three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. The increases are reflective of increases in digital advertising and commercial printing.

Print advertising

Print Advertising revenues decreased $0.1 million or 2.6% to $5.5 million and increased $0.5 million or 3.1% to $17.5 million for the three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. Classified advertising revenues increased $0.1 million or 5.8% to $1.3 million and increased $0.5 million or 12.9% to $4.3 million for the three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. Display advertising revenues decreased $0.1 million or 2.6% to $2.6 million and increased $0.2 million or 2.2% to $8.5 million for the three and nine months ended September 30, 2022, respectively as compared to last year. Flyer distribution revenues decreased $0.1 million or 8.6% to $1.5 million and decreased $0.1 million or 3.1% to $4.7 million for the three and nine months ended September 30, 2022, respectively as compared to last year.

Circulation

Circulation revenue decreased $0.3 million or 4.3% to $6.0 million and decreased $0.6 million or 3.3% to $18.0 million for the three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. There was an increase in the overall digital subscription revenue albeit not enough to offset the decrease in print subscription revenue.

Digital advertising

Digital Advertising revenues increased $0.3 million or 72.8% to $0.8 million and increased $1.0 million or 69.5% to $2.5 million for three and nine months ended September 30, 2022, respectively as compared to the same period in 2021. This was primarily due to increased client demand.

Other

Other revenues increased $0.5 million or 71.0% to $1.2 million and increased $1.1 million or 42.9% to $3.7 million for three and nine months ended September 30, 2022, respectively, reflecting improved commercial print levels compared to the same period in 2021.

Gain on disposal of fixed assets

In the first quarter of 2022, the FPLP entered into a sale and leaseback transaction for land and property, the net proceeds received were $839. A right of use asset of $67 and a lease liability of $179, along with a related gain of $412 were recognized in the first quarter.

In the second quarter, the FPLP disposed of land and property for net proceeds of $618. A gain of $305 was recognized in the second quarter.

Expenses

Operating expenses increased $1.7 million or 13.6% to $14.2 million and increased $2.7 million or 7.3% to $40.4 million for three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year.

Employee Compensation

Employee compensation costs increased by $0.3 million or 5.9% to $6.1 million and increased $0.5 million or 2.9% to $17.9 million for three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. The increase in compensation expense is largely due to the Canada Emergency Wage Subsidy (CEWS) program ending in 2021. A recovery of $0.2 and $0.7 million was reflected in the period for the three and nine months ended September 30, 2022, related to the federal government's Canadian Journalism Tax credit program ("JTC"), which was comparable to the prior year.

Newsprint and other paper

Newsprint expenses increased $0.2 million or 16.6% to $1.1 million and increased $0.1 million or 2.5% to $2.9 million for the three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year as a result of increases in newsprint prices.

Distribution

Distribution expenses were steady for the three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year.

Production

Production expenses increased $0.3 million or 23.1% to $1.5 million and increased $1.0 million or 28.5% to $4.6 million for three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. The increase in production expenses is a result of increases in third party printing services.

Other

Other operating expenses decreased by $0.1 million or 4.2% to $1.3 million and increased $0.2 million or 5.6% to $4.2 million for three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year, as a result of rising costs in general for the overall category.

Depreciation and amortization

Depreciation and amortization increased by $1.0 million or 115.3% to $1.8 million and increased $0.9 million or 38.0% to $3.4 million for three and nine months ended September 30, 2022, respectively as compared to the same period in the prior year. The increase in depreciation and amortization expense is a result of accelerating the depreciation on currently held press equipment.

EBITDA (1)

EBITDA was $1.2 and $4.7 million for three and nine months ended September 30, 2022, respectively, compared to $1.5 and $4.1 million for the same period last year, a decrease of 19.1% and an increase of 16.4%, respectively. EBITDA margin for the three and nine months ended September 30, 2022 was 8.7% and 11.3%, respectively, compared to 11.1% and 10.2% in the same period last year. The changes in EBITDA were due to the factors described above.

Finance Costs

Finance costs increased $0.1 million or 130.0% to $0.1 million and increased $0.1 million or 38.8% to $0.3 million for the three and nine months ended September 30, 2022, as compared to the same period in the prior year as a result of refinancing the existing HSBC credit facility.

Comprehensive Income (Loss)

A comprehensive income (loss) of $(0.8) and $1.7 million was reflected for the three and nine months ended September 30, 2022, respectively, compared to income of $0.5 and $1.4 million for the same period last year. The decline for the three months ended is a result of accelerating the depreciation as mentioned above. The increase for the nine months ended is a result of gains on disposal of fixed assets of $0.7 million.

SUMMARY OF QUARTERLY PERFORMANCE

A summary view of our quarterly financial performance

The following table presents selected financial information for each of the nine most recently completed quarters:

Quarter Ended
($ in '000's)		2022Sep - 30	2022Jun - 30	2022Mar - 31	2021Dec - 31	2021Sep - 30	2021Jun - 30	2021Mar - 31	2020Dec - 31	2020Sep-30
Revenue	$	13,542	14,619	13,519	15,104	13,101	13,675	12,875	14,444	12,885
EBITDA	$	1,175	1,914	1,637	1,414	1,452	2,139	470	7,537	1,272
Comprehensive Income(Loss)	$	(766)	1,245	1,233	695	547	1,246	(395)	6,813	523
Distributions	$	-	-	1,289	592	-	549	200	-	409
Restructuring	$	1	5	12	760	-	-	453	-	37
Capital Expenditures	$	6,141	709	715	568	347	266	540	156	14

LIQUIDITY AND CAPITAL RESOURCES

A discussion of our cash flow and liquidity

Cash and cash equivalents at September 30, 2022 was $4.1 million, compared to $7.4 million at December 31, 2021. 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 include the receipt of 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 and nine months ended September 30, 2022, cash generated from operating activities was $0.3 and $2.1 million, respectively compared to $1.4 and $4.5 million for the same period in 2021. Comprehensive income (loss) for the three and nine months ended September 30, 2022, was $(0.8) and $1.7 million, respectively compared to comprehensive income of $0.5 and $1.4 million for the same period in 2021. The change in cash flow from operating activities is primarily due to a $0.8 and $2.4 million decrease in the net change in non-cash working capital items for the three and nine months ended September 30, 2022, respectively.

Cash Flow from Investing Activities

Capital and intangible assets additions were $6.1 and $7.6 million for the three and nine months ended September 30, 2022, respectively. Capital asset additions for the quarter relate to the new press equipment which is anticipated to be operational in late 2023. Proceeds from the sale of property, plant and equipment were $0.6 and $1.5 million for the three and nine months ended September 30, 2022, respectively. Capital assets disposed of were land and building.

Cash Flow from Financing Activities

Cash generated from financing activities were $3.8 and $0.7 million for three and nine months ended September 30, 2022, respectively compared to an outflow of $0.7 and $2.5 million for the same period in 2021. Proceeds of $9.2 million were received from the term loan during the quarter. A principal repayment of $5.3 and $7.0 million were made during the three and nine months ended September 30, 2022, respectively. A distribution to partners of $1.3 million (2021 - $0.7 million) was made during the nine months ended September 30, 2022.

COMMITMENTS AND CONTINGENCIES

A description of changes to our material contractual obligations

FPLP has commitments to complete installation of equipment over the next 12 months of approximately $4 million ($3 million USD).

RELATED PARTY TRANSACTIONS

A description of our material transactions with related parties

Virtually all newsprint is purchased from the Alberta Newsprint Company, a related party. Total newsprint purchases for the three and nine months ended September 30, 2022, were $0.9 and $2.4 million, respectively (2021 - $0.9 and $2.2 million).

INTERNAL CONTROL OVER FINANCIAL REPORTING

A discussion of our disclosure controls and internal controls over financial reporting

In connection with National Instrument 52-109 (Certificate of Disclosure in Issuer's Annual and Interim Filings), 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 quarter ended and this accompanying MD&A. This can be found on SEDAR.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A description of accounting estimates that are critical to determining our financial results

The accounting policies adopted in preparation of the interim condensed financial statements are consistent with those followed in the preparation of our most recent annual financial statements and include the following as disclosed in the interim condensed financial statements:

Sale and Leaseback

For sale and leaseback transactions, FPLP applies the requirements of IFRS 15 Revenue to determine whether the transfer of the asset should be accounted for as a sale and is generally considered as such if there is no repurchase option on the asset at the end of the lease term. If the transfer of the asset is a sale, FPLP de-recognizes the underlying asset and recognizes a right-of-use asset arising from the leaseback equal to the retained portion of the previous carrying amount of the sold asset. The residual is recognized through the statement of operations as a gain on sale and leaseback of assets.

OUTLOOK

The outlook for our business

We anticipate the print advertising market to remain challenging, with a continuing shift in advertising dollars from print into other advertising formats, particularly online and digital search and social media platforms. Through this transition we are focused on various initiatives to participate in this area.

We anticipate circulation to remain challenging, with a continuing decline in subscriber volume and shifting dollars from print into digital subscriptions. Historically price increases have mitigated declines in overall circulation volumes that we have experienced over the last few years, and we expect this trend to continue. As our audience transitions, we are focused on various initiatives to remain relevant and accommodate our audience.

We anticipate the economy to remain unpredictable, creating economic uncertainty, influencing the significant structural changes in the newspaper industry and media in general. The impact of which may require us to identify and undertake additional cost reduction initiatives to address the underlying revenue declines in the legacy print business.

We continue to progress with the installation of KBA press equipment. The equipment is anticipated to be operational in late 2023.

NON-IFRS MEASURES

A description of how we determine EBITDA and distributable cash flow used by management

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

EBITDA is often referred to as a useful proxy for operating cash flows of a business. EBITDA is not the actual cash provided by operating activities and is not a recognized measure of financial performance under IFRS. Readers are therefore cautioned against using this as an alternative to net earnings determined in accordance with IFRS as an indicator of our operating performance. Readers are similarly cautioned that our method for calculating EBITDA, may differ from those of other issuers and may not allow for direct comparisons to be made. Our calculation of EBITDA is the operating income as presented on the statement of income excluding depreciation, amortization, finance costs, other income, impairment of intangible assets and gain on disposal of fixed assets.

		For the Three Months EndedSeptember 30,		For the Nine Months EndedSeptember 30,
($ in 000's)		2022	2021	2022	2021
Comprehensive (loss) income for the periodAdd (subtract):	$	(766) $	547 $	1,712 $	1,398
Depreciation and amortization		1,824	847	3,423	2,481
Impairment of intangible assetsFinance costs		-138	-60	89261	-188
Other incomeGain on disposal of fixed assets		(13)(8)	(2)-	(28)(731)	(6)-
EBITDA	$	1,175 $	1,452 $	4,726 $	4,061

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

An elaboration on the above noted title

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 to build out digital media and online businesses; the failure to maintain current print and online newspaper readership and audience 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 forwardlooking 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.