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BRAMPTON, Ontario–()–DATA Communications Management Corp. (TSX: DCM):

Second Quarter Highlights (vs. Q2, 2019)

First-Half Highlights (vs. H1, 2019)

Revenue of $63.9 million, compared with $69.6 million

 

Revenue of $141.4 million, compared with $148.2 million

Cost of sales of $44.3 million, compared with $53.9 million

 

Cost of sales of $100.1 million, compared with $111.7 million

Gross margin of 30.7%, compared with 22.6%

 

Gross margin of 29.2%, compared with 24.6%

Adjusted EBITDA of $13.5 million, compared with $4.4 million

 

Adjusted EBITDA of $23.9 million, compared with $12.3 million

Net income of $4.2 million, compared with net loss of $3.8 million

 

Net income of $6.4 million, compared with net loss of $4.1 million

DATA Communications Management Corp. (TSX: DCM) (“DCM” or the “Company”), a leading provider of marketing and business communication solutions to companies across North America, announces its consolidated financial results for the three and six months ended June 30, 2020.

“Revenues from our large, enterprise clients have proven to be, for the most part, quite resilient through the first half of 2020. In fact, year over year growth from our core enterprise clients has helped offset revenue declines we experienced in the second quarter amongst our smaller, more transactional-focused clients, including clients in certain retail sectors. These smaller clients have been most affected by the COVID-19 pandemic,” said Michael Coté, President.

“While revenue in the second quarter was off 8.2% compared to last year, we achieved improved margins and profitability from a number of initiatives taken in the past twelve months to reduce our cost structure. Notably, improvements in gross profit and gross margin for the first half of 2020 are owing to increased operating efficiencies in our business gained through actions implemented in the second half of 2019 and the first half of 2020, together with COVID-19 related cost reduction measures taken in Q2 2020 including temporary layoffs, wage roll-backs and other expense reductions. We also benefited from positive margin trends in products sold in the second quarter. SG&A expenses, while comparable to those in the prior period, were favourable if adjusted to exclude ERP capitalization expense.”

“The balance outstanding on our revolving line of credit was $19.8 million as at August 6, 2020, which was down $7.7 million from $27.5 million at June 30, 2020, and $17.0 million lower than the $36.8 million balance drawn at March 31, 2020. Most recently, the declines in our revolver balance are primarily a function of our focused efforts to convert our top customers from our legacy “bill-as-released” billing practice to a more appropriate “bill and hold” model. We have also continued to make progress on reducing the balances on our aged accounts receivable since the beginning of the year. These and other working capital initiatives continue to be a significant priority for us for the balance of the year.”

PROGRESS ON ERP

As a result of the significant disruption in DCM’s business caused by the implementation of a new ERP system since June 3, 2019, the Company’s liquidity was constrained by delays in production, shipments and billings to its customers. Significant progress continued to be made throughout the first and second quarters of 2020 and system issues and data quality were substantively remediated during the fourth quarter of 2019. Production and shipping volumes have returned to more normal levels commensurate with activity prior to the implementation of the new ERP system and DCM continues to work on invoice corrections and accounts receivable collection efforts.

Management of DCM has diagnosed the issues that impacted 2019 and is working to strengthen its system processes and financial controls in 2020. DCM has shifted its focus to achieving post-implementation efficiencies, including providing additional training to employees in each business area, simplifying business processes and improving efficiencies in the system as designed. Management is also executing a detailed business process improvement plan to reduce some of the complexities that were designed into the configuration of the system.

COVID-19 GLOBAL PANDEMIC

Management of DCM has been closely monitoring and responding to developments related to COVID-19, including the current and potential impact on global and local economies in the jurisdictions where it operates. While safeguarding the well-being of individuals is the Company’s principal concern, it remains focused on continuity plans and preparedness measures at each of its locations. Several measures designed to mitigate the financial impact on our business have been implemented to date, including temporary layoffs, wage rollbacks for senior executives, director level and other employees, shift reductions, reductions in non-essential spending and deferral of other expenses and payments where practical. The Company continues to evaluate and assess further actions that may be required.

To date, DCM has not experienced any material disruptions in its supply chain due to COVID-19. Nor has DCM experienced any material credit collection delinquencies related to COVID-19, although certain customers have stretched their payment terms.

GOVERNMENT GRANTS

DCM has to date qualified for, and received, approximately $6.2 million under the Canada Emergency Wage Subsidy or CEWS, with $1.6 million of that amount attributable to the first quarter of 2020, and the balance of $4.5 million attributable to the second quarter. DCM continues to assess whether it may meet the CEWS eligibility criteria for future periods, as well as other subsidies that may be available due to the impact of COVID-19 on its business.

RESULTS OF OPERATIONS

All financial information in this press release is presented in Canadian dollars and in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

The following table sets out selected historical consolidated financial information for the periods noted. See “Non IFRS Measures” section above for more details.

For the periods ended June 30, 2020 and 2019

April 1 to

June 30, 2020

 

April 1 to

June 30, 2019

 

January 1 to

June 30, 2020

 

January 1 to

June 30, 2019

(in thousands of Canadian dollars, except share and per share amounts, unaudited)

 

Revenues

$

63,936

 

 

$

69,623

 

 

 

$

141,351

 

 

$

148,172

 

 

 

 

 

 

 

 

 

 

Gross profit

19,630

 

 

15,721

 

 

 

41,271

 

 

36,483

 

 

 

 

 

 

 

 

 

 

Gross profit, as a percentage of revenues

30.7

%

 

22.6

 

%

 

29.2

%

 

24.6

 

%

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

15,441

 

 

15,530

 

 

 

32,626

 

 

32,688

 

 

As a percentage of revenues

24.2

%

 

22.3

 

%

 

23.1

%

 

22.1

 

%

 

 

 

 

 

 

 

 

Adjusted EBITDA

13,459

 

 

4,436

 

 

 

23,938

 

 

12,295

 

 

As a percentage of revenues

21.1

%

 

6.4

 

%

 

16.9

%

 

8.3

 

%

 

 

 

 

 

 

 

 

Net income (loss) for the period

4,232

 

 

(3,754

)

 

 

6,442

 

 

(4,077

)

 

 

 

 

 

 

 

 

 

Adjusted net income (loss)

4,686

 

 

(1,057

)

 

 

7,450

 

 

167

 

 

As a percentage of revenues

7.3

%

 

(1.5

)

%

 

5.3

%

 

0.1

 

%

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

$

0.10

 

 

$

(0.17

)

 

 

$

0.15

 

 

$

(0.19

)

 

Adjusted net income (loss) per share, basic and diluted

$

0.11

 

 

$

(0.05

)

 

 

$

0.17

 

 

$

0.01

 

 

Weighted average number of common shares outstanding, basic

43,047,030

 

21,523,515

 

 

43,047,030

 

21,523,515

 

Weighted average number of common shares outstanding, diluted

43,047,030

 

21,523,515

 

 

43,047,030

 

21,523,515

 

REVENUES

For the three months ended June 30, 2020, DCM recorded revenues of $63.9 million, a decrease of $5.7 million or 8.2% compared with the same period in 2019. For the six months ended June 30, 2020, DCM recorded revenues of $141.4 million, a decrease of $6.8 million or 4.6% compared with the same period in 2019. The decrease in revenues for the three and six months ended June 30, 2020 was primarily attributable to lower demand resulting from the impact of the COVID-19 pandemic in the second quarter of 2020. The decline in revenues was partially offset by strong performance in the first quarter of 2020 in our financial services, public sector and healthcare vertical markets, and growth of cannabis label business, and one-time COVID-19 related wins in the second quarter of 2020. In the second quarter of 2019, production revenue in June was negatively impacted by the launch of our new ERP system.

COST OF REVENUES AND GROSS PROFIT

For the three months ended June 30, 2020, cost of revenues decreased to $44.3 million from $53.9 million for the same period in 2019, resulting in a $9.6 million or 17.8% decrease over the same period last year.

Gross profit for the three months ended June 30, 2020 was $19.6 million, which represented an increase of $3.9 million or 24.9% from $15.7 million for the same period in 2019. Gross profit as a percentage of revenues increased to 30.7% for the three months ended June 30, 2020, compared to 22.6% for the same period in 2019.

For the six months ended June 30, 2020, cost of revenues decreased to $100.1 million from $111.7 million for the same period in 2019, resulting in a $11.6 million or 10.4% decrease over the same period last year.

Gross profit for the six months ended June 30, 2020 was $41.3 million, which represented an increase of $4.8 million or 13.1% from $36.5 million for the same period in 2019. Gross profit as a percentage of revenues increased to 29.2% for the six months ended June 30, 2020, compared to 24.6% for the same period in 2019. Gross profit as a percentage of revenues for the three and six months ended June 30, 2020 was positively impacted by (i) realizing the full benefits from the cost saving initiatives implemented particularly in the second and third quarters of 2019, resulting in a reduction in salaries and wages, (ii) more normalized levels of operations and margins following remediation of the ERP system challenges experienced in June 2019 (iii) lower levels of casual labour and temporary staffing following remediation of the ERP system challenges, along with temporary lay-offs and other cost saving measures in reaction to the impact of COVID-19 on revenues (iv) sale of the loose-leaf binders and index tab business in the second quarter of 2019 resulting in improved production margins, (v) continued discipline to improve pricing with customers, and (vi) the loss of lower margin customers. The increase was slightly offset by lower margins attributable to third-party product resales work in the first quarter of 2020, and lower sales in the second quarter of 2020 thereby resulting in weaker absorption of fixed overhead costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2020 of $15.4 million, or 24.2% of total revenues, remained consistent with the comparative prior period in 2019 of $15.5 million, or 22.3% of total revenues. SG&A for the six months ended June 30, 2020 of $32.6 million, or 23.08% of total revenues, remained consistent with the comparative prior period in 2019 of $32.7 million, or 22.06% of total revenues. SG&A expenses for the three and six months ended June 30, 2020 benefited from a reduction in selling, commissions and other sales expenses of $0.8 million and $2.5 million, respectively, whereas general and administrative expenses increased by $0.7 million and $2.5 million, respectively. The decrease in selling, commissions and other sales expenses was primarily attributed to the benefits from the cost saving initiatives implemented in the second and third quarters of 2019, resulting in a reduction in salaries and wages. The increase in general and administrative expenses was primarily attributed to increased professional services surrounding the ERP system, an increase in amortization costs related to the ERP intangible asset which commenced in June 2019, increased salaries and wages for employees that have resumed normal responsibilities following the launch of the ERP system and no longer have their salaries and wages capitalized, increases in casual labour and temporary staffing to assist with the ERP post-implementation remediation and other ERP project expenses that are no longer eligible for capitalization. This increase was offset by a reduction in salaries and wages due to benefits from cost saving initiatives implemented in the second and third quarters of 2019, and lower compensation and discretionary spending in response to the impact of COVID-19 on the business. SG&A expenses in the second quarter of 2020 were also positively impacted by temporary lay-offs, wage roll backs and other cost saving measures to mitigate the impact of COVID-19. SG&A expenses for the three and six months ended June 30, 2020 would be favourable in comparison to last year if adjusted to exclude the addition of capitalized ERP expenses.

RESTRUCTURING EXPENSES

Cost reductions and enhancement of operating efficiencies have been an area of focus for DCM over the past five years in order to improve margins and better align costs with the declining revenues experienced by the Company in its traditional business, a trend being faced by the traditional printing industry for several years now.

For the three months ended June 30, 2020, DCM incurred restructuring expenses of $0.3 million compared to $3.2 million in the same period in 2019. For the six months ended June 30, 2020, DCM incurred restructuring expenses of $1.0 million compared to $4.9 million in the same period in 2019. Restructuring costs for the three and six months ended June 30, 2020 related to headcount reductions from the billings and credit/collections departments to integrate the groups into one team to achieve greater synergies across the cash management process, and other various headcount reductions to indirect labour as cost savings initiatives to improve gross margin. Restructuring costs for the three and six months ended June 30, 2019 related to headcount reductions from (i) the closure of its Brossard, Quebec facility which was announced in March 2019, (ii) the sale of its loose-leaf binders and index tab business in May 2019, (iii) process improvements in manufacturing to improve efficiencies and gross margins, and (iv) process improvements in its SG&A functions to reduce costs and enhance productivity.

DCM will continue to evaluate its operating costs for further efficiencies as part of its commitment to improving its gross margins and lowering its selling, general and administration expenses.

OTHER INCOME

Other income includes government grant income received from the CEWS (see note 18 of the interim condensed consolidated financial statements). DCM has to date qualified for, and received, approximately $6.2 million with $1.6 million of that amount attributable to the first quarter of 2020 and the balance of $4.5 million attributable to the second quarter of 2020.

ADJUSTED EBITDA

For the three months ended June 30, 2020, Adjusted EBITDA was $13.5 million or 21.1% of revenues, after adjusting EBITDA for $0.3 million in restructuring charges, compared to $4.4 million or 6.4% of revenues in the same period in 2019. For the six months ended June 30, 2020, Adjusted EBITDA was $23.9 million or 16.9% of revenues, after adjusting EBITDA for the $1.0 million in restructuring charges, compared to $12.3 million or 8.3% of revenues in the same period in 2019.

The increase in Adjusted EBITDA for the three and six months ended June 30, 2020 over the prior year comparative period was primarily due to (i) improved gross margins and reductions in selling, commissions, and other selling expenses realized through cost reductions from ongoing cost savings initiatives implemented in the second and third quarter of 2019, (ii) improved gross margins from continued discipline to improve pricing with customers, (iii) temporary lay-offs and reductions in compensation and discretionary spending in response to the impact of COVID-19 on the business, and (iv) receipt of the CEWS grant income.

FINANCE COSTS

Finance costs including interest on debt outstanding under DCM’s credit facilities, interest accretion expense and income related to certain debt obligations discounts / premiums, interest on pension obligations, debt modification gains/losses, amortization of debt transaction costs and interest expense on lease liabilities under IFRS 16 was $2.7 million for the three months ended June 30, 2020 compared to $2.2 million for the same period in 2019, and was $4.9 million for the six months ended June 30, 2020 compared to $4.4 million for the same period in 2019. Interest expense for the for the three and six months ended June 30, 2020 had a slight decrease due to the reduction in the prime rates, thereby reducing the interest expense on the Credit Facility. In the fourth quarter of 2019 and first quarter of 2020, DCM recorded debt premiums on the Credit Facility and Crown Facility, which resulted in recognition of accretion income during 2020. This decrease was offset by an increase in interest expense due to an increase in total debt as at June 30, 2020 due to an additional $7.0 million loan obtained from Crown in the third quarter of 2019 and higher levels drawn under the Bank Credit Facility throughout 2019 and the first and second quarters of 2020. In addition, there was an increase in the interest rate for the Crown Facility by 200 basis points per annum effective December 19, 2019.

INCOME TAXES

DCM reported income before income taxes of $5.8 million and a net income tax expense of $1.5 million for the three months ended June 30, 2020 compared to a loss before income taxes of $5.2 million and a net income tax recovery of $1.4 million for the same period in 2019.

DCM reported income before income taxes of $8.9 million and a net income tax expense of $2.5 million for the six months ended June 30, 2020 compared to a loss before income taxes of $5.5 million and a net income tax recovery of $1.4 million for the same period in 2019.

The change from a net income tax recovery to a net income tax expense was due to the change in the estimated taxable income for the three and six months ended June 30, 2020. The deferred income tax expense was adjusted for any changes in estimates of future reversals of temporary differences, including estimated changes in tax loss carryforwards.

NET INCOME (LOSS)

Net income for the three months ended June 30, 2020 was $4.2 million compared to a net loss of $3.8 million for the same period in 2019. Net income for the six months ended June 30, 2020 was $6.4 million compared to a net loss of $4.1 million for the same period in 2019.

The increase in comparable profitability for the three and six months ended June 30, 2020 was primarily due to (i) improved margins and reduction in selling, commissions, and other selling expenses realized through headcount reductions due to ongoing cost savings initiatives implemented in the second and third quarter of 2019, (ii) improved margins from continued discipline to improve pricing with customers, (iii) temporary lay-offs and reductions in compensation and discretionary expenses in response to the impact of COVID-19 on the business, (iv) receipt of the CEWS grant income, and (v) reduction in restructuring initiatives.

ADJUSTED NET INCOME (LOSS)

Adjusted net income for the three months ended June 30, 2020 was $4.7 million compared to adjusted net loss of $1.1 million for the same period in 2019. Adjusted net income for the six months ended June 30, 2020 was $7.5 million compared to adjusted net income of $0.2 million for the same period in 2019.

The increase in comparable profitability for the three and six months ended June 30, 2020 was primarily due to (i) improved margins and reduction in selling, commissions, and other selling expenses realized through headcount reductions due to ongoing cost savings initiatives implemented in the second and third quarter of 2019, (ii) improved margins from continued discipline to improve pricing with customers, (iii) temporary lay-offs and reduction in other discretionary compensation and expenses in response to the impact of COVID-19 on the business and (iv) receipt of the CEWS grant income.

CASH FLOW FROM OPERATIONS

During the six months ended June 30, 2020, cash flows generated by operating activities were $15.3 million compared to cash flows generated by operating activities of $13.5 million during the same period in 2019. Current period cash flow from operations, before adjusting for changes in working capital, generated a total of $18.7 million compared with $5.3 million for the same period last year. Current period cash flows from operations were positively impacted primarily due to an increase in the net income which stems from the improved margins and reduction in selling, commissions, and other selling expenses realized through headcount reductions due to ongoing cost savings initiatives implemented in the second and third quarter of 2019 and temporary cost saving measures related to COVID-19 in the second quarter of 2020. Contributions to defined benefit pension plans and payments for severances and lease terminations related to DCM’s restructuring initiatives stayed consistent compared to the same period last year. However, income tax payments were lower by $1.2 million compared to the same period last year.

Changes in working capital during the six months ended June 30, 2020 used $3.4 million in cash compared with $8.2 million of cash generated in the prior period. In the prior comparable period before the launch of the ERP system in June 2019, DCM’s focus was to better align payments to its vendors with cash receipts from its customers given many of its customers opt to store their finished goods product in DCM’s warehouses and pay upon taking shipment of product which extends the time to collection. This alignment and deferral in payment resulted in an increase to accounts payable and accrued liabilities by $4.7 million. In the current period, DCM continued to manage the cash flow challenges encountered with timely collection of billings remaining from the ERP transition in June 2019. In the third and fourth quarters of 2019, billing volumes progressively increased throughout the quarters as the Company began catching up on its backlog of orders, with continued efforts into the first and second quarters of 2020. Furthermore, DCM initiated clean-up efforts in the first and second quarters of 2020 to address the inaccurate billings previously issued, thereby constraining the invoicing team and causing further delay in timely billings and deterioration of collection efforts. This resulted in liquidity constraints whereby the Company was required to obtain additional financing in 2019 and manage payments to suppliers to maintain cash for working capital requirements. However in the second quarter of 2020, DCM started to see an inflow of cash from its billing efforts resulting in a decrease in trade receivables of $2.3 million. The improvement in the cash position has also allowed DCM to increase payments to vendors resulting in a cash outflow of $6.2 million.

INVESTING ACTIVITIES

For the six months ended June 30, 2020, $0.1 million in cash flows were used for investing activities compared with $2.7 million during the same period in 2019. For the six months ended June 30, 2019, $0.6 million of cash was primarily used to invest in IT equipment related to the implementation of the new ERP system and costs related to leasehold improvements to set up new production equipment, including the Gallus/Heidelberg hybrid digital label press at its Brampton, Ontario facility and the Heidelberg six-colour press at its Toronto, Ontario facility. Furthermore, $3.0 million of cash was used to further invest in the development of DCM’s new ERP system and $0.7 million in cash proceeds were received upon the sale of its loose-leaf and index tab business in May 2019.

FINANCING ACTIVITIES

For the six months ended June 30, 2020, cash flow used in financing activities was $14.6 million compared with $7.6 million used during the same period in 2019.

A total of $8.2 million was repaid in the current period on DCM’s revolving credit facility with the Bank compared to proceeds drawn of $4.7 million during the comparative period. The draw on the credit facility in the comparative period was to fund working capital requirements and manage cash flow to compensate for the slow-down in the collection process as a result of the ERP disruptions. In the current period, as working capital improved, DCM started to repay the additional financing drawn on the revolver throughout 2019 and the first quarter of 2020. In 2019, DCM paid $2.8 million in outstanding principal amounts under its FPD Credit Facilities, however on July 25, 2019, DCM deferred principal amounts up until June 2020 so no payments were made in the first half of 2020. In addition, $0.5 million was repaid during the period related to the vendor take-back promissory note issued in connection with the acquisition of Perennial compared with $3.9 million in the prior comparative period in connection with the DCM Burlington and Thistle VTBs, which were fully repaid in the first quarter of 2019, and BOLDER Graphics VTB and Perennial VTB, of which $0.3 million and $1 million, respectively, was repaid.

OUTLOOK

The ongoing and uncertain impact of COVID-19 on our economy and business makes it difficult to predict our financial performance for the second half of the year. While we are presently anticipating a return to a more normal level of business in the fourth quarter, as pandemic restrictions ease across Canada and the United States, it is not currently possible to accurately quantify the impact of the pandemic on the Company’s operations or financial results or the length of time over which this impact may continue. These possible impacts may include: changes in our clients’ needs and their buying behavior; impact to DCM’s operating locations due to possible renewal of public gathering restrictions to limit the spreading of the virus; and the timing of loosening restrictions on businesses and the general public. However, DCM is working closely with its customers to assist in this transition.

Management of DCM continues to assess the impact of COVID-19 on the Company’s business, as well as further government responses and assistance that may benefit the Company, in the form of tax rebates, holidays, grants and subsidies introduced in response to the impact of the ongoing COVID-19 pandemic.

As at August 6, 2020, there were outstanding borrowings of $19.8 million under the revolving facilities portion of the Bank Credit Facility, compared to $27.5 million as at June 30, 2020, and $36.8 million as of March 31, 2020, representing improvements of approximately $7.7 million and $17.0 million, respectively. On August 6, 2020, the Company had $1.3 million in available credit pursuant to its revolving Bank Credit Facility. The Company has to date qualified for and received approximately $6.2 million under the Canada Emergency Wage Subsidy relief program with $1.6 million of that amount attributable to the first quarter of 2020 and the balance attributable to the second quarter. DCM did not meet the eligibility criteria for pay periods 3 and 4. DCM continues to monitor changes to the CEWS and other COVID-19 related grants and subsidies that may be available and DCM’s ability to qualify for any such programs.

Working capital improvement is a significant priority for your company; both the timely collection of accounts receivable and better matching of production costs to revenue. The substantial progress made in remediating ERP issues from 2019 is expected to help return our accounts receivable to more acceptable levels by the end of 2020. We are also well-advanced in changing our legacy practice of billing, which we call “bill-as-released” or “BAR”, where we incur the costs of producing finished goods for our clients, warehouse these products for extended periods of time, yet do not issue invoices until the finished goods are actually shipped. At the end of the first quarter of 2020, we initiated a project to convert our top 15 BAR clients, who represent approximately two-thirds of our BAR products, to a model which better and more timely matches the receipt of revenue to when we incur production related expenses. We plan to convert all BAR customers from that legacy practice of billing and, in doing so, further improve our working capital.

The impact of the COVID-19 pandemic on our economy and business make it difficult to predict our financial performance for the balance of the year however, your company’s return to progress, reflected in the strong performance in the first half of 2020 despite economic challenges, reinforces that your company remains a trusted partner to many of Canada’s leading brands. While we do not expect our return to progress to present itself as a neat straight-line for the remainder of the year, your company intends to remain flexible and able to adapt to the uncertainty of the economy and the changing needs of our clients.

Due to the impact of COVID-19, the Company continues to defer most of its planned spending on capital expenditures and technology development initiatives. It is expected this spending will re-commence once better visibility in the balance of the year is available. Digital innovation investment remains a priority for capital spending initiatives for DCM in 2020 and the coming years.

About DATA Communications Management Corp.

DCM is a communication solutions partner that adds value for major companies across North America by creating more meaningful connections with their customers. DCM pairs customer insights and thought leadership with cutting-edge products, modular enabling technology and services to power its clients’ go-to market strategies. DCM helps its clients manage how their brands come to life, determine which channels are right for them, manage multimedia campaigns, deploy location-specific and 1:1 marketing, execute custom loyalty programs, and fulfill their commercial printing needs all in one place.

DCM’s extensive experience has positioned it as an expert at providing communication solutions across many verticals, including the financial, retail, healthcare, consumer health, energy, and not-for-profit sectors. As a result of its locations throughout Canada and in the United States (Chicago, Illinois and New York, New York), it is able to meet its clients’ varying needs with scale, speed, and efficiency – no matter how large or complex the ask. DCM is able to deliver advanced data security, regulatory compliance, and bilingual communications, both in print and/or digital formats.

Additional information relating to DATA Communications Management Corp. is available on www.datacm.com, and in the disclosure documents filed by DATA Communications Management Corp. on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

FORWARD-LOOKING STATEMENTS

Certain statements in this press release constitute “forward-looking” statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, objectives or achievements of DCM, or industry results, to be materially different from any future results, performance, objectives or achievements expressed or implied by such forward-looking statements. When used in this press release, words such as “may”, “would”, “could”, “will”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “plan”, and other similar expressions are intended to identify forward-looking statements. These statements reflect DCM’s current views regarding future events and operating performance, are based on information currently available to DCM, and speak only as of the date of this press release. These forward-looking statements involve a number of risks, uncertainties and assumptions and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such performance or results will be achieved. Many factors could cause the actual results, performance, objectives or achievements of DCM to be materially different from any future results, performance, objectives or achievements that may be expressed or implied by such forward-looking statements. The principal factors, assumptions and risks that DCM made or took into account in the preparation of these forward-looking statements include: risks relating to the impact of the COVID-19 pandemic, a rapidly evolving situation the impact of which could be material on DCM’s business, liquidity and results of operations; DCM’s new enterprise resource planning (“ERP”) system has failed to perform as planned and interrupted operational transactions during and following the implementation, which has, and may continue to, materially and adversely affect DCM’s financial liquidity and operations and results of operations; there are material uncertainties associated with the resolution of the liquidity challenges currently facing DCM that may cast significant doubt as to the ability of DCM to meet its obligations as they come due; there is no assurance that management’s initiatives for dealing with these events and conditions will be successful and there are risks in the expected timing of resolution thereof and the possible effects of these issues if they are not resolved; DCM’s ability to continue as a going concern is dependent upon its ability to return DCM to profitability, generate positive cash flows from operations, obtain additional financing, risks relating to DCM’s ability to access sufficient capital, including, without limitation, under its existing revolving credit facility, on favourable terms to fund its liquidity and business plans from internal and external sources; the risk that a material weakness in internal control of financial reporting, could, if uncorrected, result in a future misstatement of revenues that may result in a material misstatement of DCM’s annual or interim consolidated financial statements if not prevented or detected on a timely basis; the risk that DCM will not be successful in implementing amendments to the terms of its existing credit facilities including, without limitations, the financial covenants of DCM under these facilities; the limited growth in the traditional printing industry and the potential for further declines in sales of DCM’s printed business documents relative to historical sales levels for those products; the risk that changes in the mix of products and services sold by DCM will adversely affect DCM’s financial results; the risk that DCM may not be successful in reducing the size of its legacy print business, realizing the benefits expected from restructuring and business reorganization initiatives, reducing costs, reducing and repaying its long term debt, and growing its digital and marketing communications businesses; the risk that DCM may not be successful in managing its organic growth; DCM’s ability to invest in, develop and successfully market new digital and other products and services; competition from competitors supplying similar products and services, some of whom have greater economic resources than DCM and are well-established suppliers; DCM’s ability to grow its sales or even maintain historical levels of its sales of printed business documents; the impact of economic conditions on DCM’s businesses; risks associated with acquisitions and/or investments in joint ventures by DCM; the failure to realize the expected benefits from the acquisitions it has made and risks associated with the integration and growth of such businesses; increases in the costs of paper and other raw materials used by DCM; and DCM’s ability to maintain relationships with its customers and suppliers; risks relating to the continuing impact of the COVID-19 pandemic, the impact of which could be material on DCM’s business, liquidity and results of operations; DCM’s new enterprise resource planning (“ERP”) system has failed to perform as planned and interrupted operational transactions during and following the implementation, which has, and may continue to, materially and adversely affect DCM’s financial liquidity and operations and results of operations; there are material uncertainties associated with the resolution of the liquidity challenges currently facing DCM that may cast significant doubt as to the ability of DCM to meet its obligations as they come due; there is no assurance that management’s initiatives for dealing with these events and conditions will be successful and there are risks in the expected timing of resolution thereof and the possible effects of these issues if they are not resolved; DCM’s ability to continue as a going concern is dependent upon its ability to return DCM to sustained profitability, generate positive cash flows from operations, and obtain such additional financing as may be required; risks relating to DCM’s ability to access sufficient capital, including, without limitation, under its existing revolving credit facility, on favourable terms to fund its liquidity and business plans from internal and external sources; the risk that a material weakness in internal control of financial reporting, could, if uncorrected, result in a future misstatement of revenues that may result in a material misstatement of DCM’s annual or interim consolidated financial statements if not prevented or detected on a timely basis; the risk that DCM will not be successful in implementing amendments to the terms of its existing credit facilities including, without limitation, the financial covenants of DCM under these facilities; the limited growth in the traditional printing industry and the potential for further declines in sales of DCM’s printed business documents relative to historical sales levels for those products; the risk that changes in the mix of products and services sold by DCM will adversely affect DCM’s financial results; the risk that DCM may not be successful in reducing the size of its legacy print business, realizing the benefits expected from restructuring and business reorganization initiatives, reducing costs, reducing and repaying its long term debt, and growing its digital and marketing communications businesses; the risk that DCM may not be successful in managing its organic growth; DCM’s ability to invest in, develop and successfully market new digital and other products and services; competition from competitors supplying similar products and services, some of whom have greater economic resources than DCM and are well-established suppliers; DCM’s ability to grow its sales or even maintain historical levels of its sales of printed business documents; the impact of economic conditions on DCM’s businesses; risks associated with acquisitions and/or investments in joint ventures by DCM; the failure to realize the expected benefits from the acquisitions it has made and risks associated with the integration and growth of such businesses; increases in the costs of paper and other raw materials used by DCM; and DCM’s ability to maintain relationships with its customers and suppliers. Additional factors are discussed elsewhere in this press release and under the headings “Liquidity and capital resources” and “Risks and Uncertainties” in DCM’s management’s discussion and analysis and in DCM’s other publicly available disclosure documents, as filed by DCM on SEDAR (www.sedar.com). Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described in this press release as intended, planned, anticipated, believed, estimated or expected. Unless required by applicable securities law, DCM does not intend and does not assume any obligation to update these forward-looking statements.

NON-IFRS MEASURES

This press release includes certain non-IFRS measures as supplementary information. Except as otherwise noted, when used in this press release, EBITDA means earnings before interest and finance costs, taxes, depreciation and amortization. Adjusted EBITDA means EBITDA adjusted for restructuring expenses, one-time business reorganization costs, goodwill impairment charges, and acquisition costs. Adjusted net income (loss) means net income (loss) adjusted for restructuring expenses, one-time business reorganization costs, goodwill impairment charges, acquisition costs and the tax effects of those items. Adjusted net income (loss) per share (basic and diluted) is calculated by dividing Adjusted net income (loss) for the period by the weighted average number of common shares of DCM (basic and diluted) outstanding during the period. In addition to net income (loss), DCM uses non-IFRS measures including Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA to provide investors with supplemental measures of DCM’s operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. DCM also believes that securities analysts, investors, rating agencies and other interested parties frequently use non-IFRS measures in the evaluation of issuers. DCM’s management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess its ability to meet future debt service, capital expenditure and working capital requirements. Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are not earnings measures recognized by IFRS and do not have any standardized meanings prescribed by IFRS. Therefore, Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA are unlikely to be comparable to similar measures presented by other issuers.

Investors are cautioned that Adjusted net income (loss), Adjusted net income (loss) per share, EBITDA and Adjusted EBITDA should not be construed as alternatives to net income (loss) determined in accordance with IFRS as an indicator of DCM’s performance. For a reconciliation of net income (loss) to EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA, see Table 3 in the accompanying Management’s Discussion & Analysis. For a reconciliation of net income (loss) to Adjusted net income (loss) and a presentation of Adjusted net income (loss) per share, see Table 4 in the accompanying Management’s Discussion & Analysis.

Condensed interim consolidated statements of operations

 

(in thousands of Canadian dollars, unaudited)

June 30, 2020

 

December 31, 2019

 

$

 

$

 

 

 

 

Assets

 

 

 

Current assets

 

 

 

Trade receivables

84,076

 

 

86,451

 

Inventories

11,715

 

 

12,580

 

Prepaid expenses and other current assets

3,000

 

 

2,611

 

 

98,791

 

 

101,642

 

Non-current assets

 

 

 

Other non-current assets

646

 

 

828

 

Deferred income tax assets

4,690

 

 

6,648

 

Restricted cash

515

 

 

515

 

Property, plant and equipment

11,298

 

 

13,062

 

Right-of-use assets

52,329

 

 

56,381

 

Pension assets

664

 

 

156

 

Intangible assets

16,056

 

 

18,167

 

Goodwill

16,973

 

 

16,973

 

 

 

 

 

 

201,962

 

 

214,372

 

 

 

 

 

Liabilities

 

 

 

Current liabilities

 

 

 

Bank overdraft

477

 

 

1,093

 

Trade payables and accrued liabilities

45,377

 

 

51,743

 

Current portion of credit facilities

5,966

 

 

3,887

 

Current portion of promissory notes

992

 

 

492

 

Current portion of lease liabilities

8,156

 

 

8,252

 

Provisions

2,106

 

 

3,886

 

Income taxes payable

2,401

 

 

2,068

 

Deferred revenue

2,013

 

 

2,133

 

 

67,488

 

 

73,554

 

Non-current liabilities

 

 

 

Provisions

296

 

 

192

 

Credit facilities

65,435

 

 

74,760

 

Promissory notes

1,146

 

 

2,095

 

Lease liabilities

50,625

 

 

53,514

 

Deferred income tax liabilities

342

 

 

402

 

Pension obligations

8,121

 

 

7,958

 

Other post-employment benefit plans

3,007

 

 

2,938

 

 

196,460

 

 

215,413

 

 

 

 

 

Equity

 

 

 

Shareholders’ equity

 

 

 

Shares

256,045

 

 

256,045

 

Warrants

892

 

 

853

 

Contributed surplus

2,338

 

 

2,300

 

Translation reserve

212

 

 

254

 

Deficit

(253,985

)

 

(260,493

)

 

5,502

 

 

(1,041

)

 

 

 

 

 

201,962

 

 

214,372

 

Condensed interim consolidated statements of operations

 

(in thousands of Canadian dollars, except per share amounts, unaudited)

For the three months

ended June 30, 2020

 

For the three months

ended June 30, 2019

 

$

 

$

 

 

 

 

Revenues

63,936

 

 

69,623

 

 

 

 

 

Cost of revenues

44,306

 

 

53,902

 

 

 

 

 

Gross profit

19,630

 

 

15,721

 

 

 

 

 

Expenses

 

 

 

Selling, commissions and expenses

6,841

 

 

7,677

 

General and administration expenses

8,600

 

 

7,853

 

Restructuring expenses

265

 

 

3,189

 

 

15,706

 

 

18,719

 

 

 

 

 

Income (loss) before finance costs, other income and income taxes

3,924

 

 

(2,998

)

 

 

 

 

Finance costs

 

 

 

Interest expense on long term debt and pensions, net

1,097

 

 

1,162

 

Interest expense on lease liabilities

814

 

 

913

 

Debt modification losses

629

 

 

 

Amortization of transaction costs

151

 

 

86

 

 

2,691

 

 

2,161

 

Other income

 

 

 

Government grant income

4,547

 

 

 

 

 

 

 

Income (loss) before income taxes

5,780

 

 

(5,159

)

 

 

 

 

Income tax (recovery) expense

 

 

 

Current

590

 

 

(506

)

Deferred

958

 

 

(899

)

 

1,548

 

 

(1,405

)

 

 

 

 

Net Income (loss) for the period

4,232

 

 

(3,754

)

 

 

 

 

Basic earnings (loss) per share

0.10

 

 

(0.17

)

 

 

 

 

Diluted earnings (loss) per share

0.10

 

 

(0.17

)

Condensed interim consolidated statements of operations

 

(in thousands of Canadian dollars, except per share amounts, unaudited)

For the six months

ended June 30, 2020

 

For the six months

ended June 30, 2019

 

$

 

$

 

 

 

 

Revenues

141,351

 

 

148,172

 

 

 

 

 

Cost of revenues

100,080

 

 

111,689

 

 

 

 

 

Gross profit

41,271

 

 

36,483

 

 

 

 

 

Expenses

 

 

 

Selling, commissions and expenses

14,456

 

 

16,982

 

General and administration expenses

18,170

 

 

15,706

 

Restructuring expenses

1,008

 

 

4,871

 

 

33,634

 

 

37,559

 

 

 

 

 

Income (loss) before finance costs, other income and income taxes

7,637

 

 

(1,076

)

 

 

 

 

Finance costs

 

 

 

Interest expense on long term debt and pensions, net

2,308

 

 

2,404

 

Interest expense on lease liabilities

1,704

 

 

1,803

 

Debt modification losses

625

 

 

 

Amortization of transaction costs

261

 

 

223

 

 

4,898

 

 

4,430

 

Other income

 

 

 

Government grant income

6,169

 

 

 

 

 

 

 

Income (loss) before income taxes

8,908

 

 

(5,506

)

 

 

 

 

Income tax expense (recovery)

 

 

 

Current

590

 

 

(474

)

Deferred

1,876

 

 

(955

)

 

2,466

 

 

(1,429

)

 

 

 

 

Net income (loss) for the period

6,442

 

 

(4,077

)

 

 

 

 

Basic earnings (loss) per share

0.15

 

 

(0.19

)

 

 

 

 

Diluted earnings (loss) per share

0.15

 

 

(0.19

)

Condensed interim consolidated statements of comprehensive income (loss)

 

(in thousands of Canadian dollars, unaudited)

For the three months

ended June 30, 2020

 

For the three months

ended June 30, 2019

 

$

 

$

 

 

 

 

Net income (loss) for the period

4,232

 

 

(3,754

)

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Items that may be reclassified subsequently to income (loss)

 

 

 

Foreign currency translation

(64

)

 

(19

)

 

(64

)

 

(19

)

 

 

 

 

Items that will not be reclassified to income (loss)

 

 

 

Re-measurements of pension and other post-employment benefit obligations

(4,419

)

 

(474

)

Taxes related to pension and other post-employment benefit adjustment above

1,116

 

 

123

 

 

(3,303

)

 

(351

)

 

 

 

 

Other comprehensive (loss) for the period, net of tax

(3,367

)

 

(370

)

 

 

 

 

Comprehensive income (loss) for the period

865

 

 

(4,124

)

 

 

 

 

 

 

 

 

Condensed interim consolidated statements of comprehensive income (loss)

 

(in thousands of Canadian dollars, unaudited)

For the six months

ended June 30, 2020

 

For the six months

ended June 30, 2019

 

$

 

$

 

 

 

 

Net income (loss) for the period

6,442

 

 

(4,077

)

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

Items that may be reclassified subsequently to income (loss)

 

 

 

Foreign currency translation

(42

)

 

12

 

 

(42

)

 

12

 

 

 

 

 

Items that will not be reclassified to income (loss)

 

 

 

Re-measurements of pension and other post-employment benefit obligations

88

 

 

(724

)

Taxes related to pension and other post-employment benefit adjustment above

(22

)

 

188

 

 

66

 

 

(536

)

 

 

 

 

Other comprehensive income (loss) for the period, net of tax

24

 

 

(524

)

 

 

 

 

Comprehensive income (loss) for the period

6,466

 

 

(4,601

)

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(in thousands of Canadian dollars, unaudited)

Shares

Warrants

Conversion

options

Contributed

surplus

Translation

reserve

Deficit

Total equity

 

$

$

$

 

$

$

$

 

 

 

 

 

 

 

 

Balance as at December 31, 2018

251,217

 

806

 

 

1,841

 

242

 

(246,594

)

7,512

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

(4,077

)

(4,077

)

Other comprehensive loss for the period

 

 

 

 

12

 

(536

)

(524

)

Total comprehensive loss for the period

 

 

 

 

12

 

(4,613

)

(4,601

)

 

 

 

 

 

 

 

 

Expiration of warrants

 

(269

)

 

269

 

 

 

 

Share-based compensation expense

 

 

 

132

 

 

 

132

 

 

 

 

 

 

 

 

 

Balance as at June 30, 2019

251,217

 

537

 

 

2,242

 

254

 

(251,207

)

3,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at December 31, 2019

256,045

 

853

 

 

2,300

 

254

 

(260,493

)

(1,041

)

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

6,442

 

6,442

 

Other comprehensive income for the period

 

 

 

 

(42

)

66

 

24

 

Total comprehensive income for the period

 

 

 

 

(42

)

6,508

 

6,466

 

 

 

 

 

 

 

 

 

Issuance of common shares, net

 

39

 

 

 

 

 

39

 

Share-based compensation expense

 

 

 

38

 

 

 

38

 

 

 

 

 

 

 

 

 

Balance as at June 30, 2020

256,045

 

892

 

 

2,338

 

212

 

(253,985

)

5,502

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands of Canadian dollars, unaudited)

For the six months

ended June 30, 2020

 

For the six months

ended June 30, 2019

 

$

 

$

 

 

 

 

Cash provided by (used in)

 

 

 

 

 

 

 

Operating activities

 

 

 

Net income (loss) for the period

6,442

 

 

(4,077

)

Adjustments to net income (loss)

 

 

 

Depreciation of property, plant and equipment

1,869

 

 

2,150

 

Amortization of intangible assets

2,111

 

 

1,244

 

Depreciation of right-of-use-assets

4,796

 

 

4,234

 

Interest expense on lease liabilities

1,704

 

 

1,803

 

Share-based compensation expense

38

 

 

132

 

Pension expense

261

 

 

297

 

Loss on disposal of property, plant, and equipment

 

 

84

 

Provisions

1,008

 

 

4,871

 

Amortization of transaction costs and debt modification losses

886

 

 

223

 

Accretion of non-current liabilities and related interest expense

372

 

 

178

 

Other non-current liabilities

 

 

 

Other post-employment benefit plans, net

69

 

 

128

 

Income tax expense (recovery)

2,466

 

 

(1,429

)

 

22,022

 

 

9,838

 

Changes in working capital

(3,373

)

 

8,207

 

Contributions made to pension plans

(518

)

 

(514

)

Provisions paid

(2,684

)

 

(2,654

)

Income taxes paid

(149

)

 

(1,362

)

 

15,298

 

 

13,515

 

 

 

 

 

Investing activities

 

 

 

Purchase of property, plant and equipment

(105

)

 

(645

)

Purchase of intangible assets

 

 

(2,986

)

Proceeds on disposal of property, plant and equipment

 

 

254

 

Proceeds on sale of business

 

 

675

 

 

(105

)

 

(2,702

)

 

 

 

 

Financing activities

 

 

 

Issuance of common shares and warrants, net

 

 

 

Proceeds from credit facilities

 

 

4,741

 

Repayment of credit facilities

(8,167

)

 

(2,788

)

Repayment of other liabilities

(200

)

 

(200

)

Proceeds from promissory notes and warrants

 

 

 

Repayment of promissory notes

(535

)

 

(3,905

)

Transaction costs

(227

)

 

(112

)

Lease payments

(5,435

)

 

(5,298

)

 

(14,564

)

 

(7,562

)

 

 

 

 

Decrease in bank overdraft during the period

629

 

 

3,251

 

(Bank overdraft) – beginning of period

(1,093

)

 

(3,999

)

Effects of foreign exchange on cash balances

(13

)

 

1

 

(Bank overdraft) – end of period

(477

)

 

(747

)

 

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