Data Communications Management Corp. Announces Fourth Quarter and Year End Financial Results for 2019 Together With First Quarter 2020 Outlook

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 year ended December 31, 2019.

“Despite the headwinds faced in the final three quarters of 2019 – owing overwhelmingly to the launch of our ERP system in June of 2019 – we expect revenue in the first quarter of 2020 to be in line with the comparable period in 2019. We are encouraged by that, given the first quarter of 2019 was the only quarter of 2019 that was not adversely affected by our ERP launch. We are further encouraged that our gross margin and operating income is expected to exceed that in the first quarter of 2019. Our expected Q1 2020 performance is a testament to our team, our suppliers’ and clients’ ongoing commitment to DCM, and the solutions we offer in the marketplace,” said Gregory J. Cochrane, CEO of DCM.

“Working capital improvement is also a significant focus for us in 2020,” said Michael Coté, President of DCM. “Substantial progress has been made in remediating the ERP issues from 2019. These initiatives are expected to return our working capital to more normal levels by the end of 2020 as we move towards a focus on achieving ERP efficiencies. We are also well-advanced in changing a 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 a period of time, and don’t invoice clients until product is ultimately shipped to our client. At the end of March 2020, we initiated a project to convert our top 15 clients, who represent approximately two-thirds of our BAR products, to a more practical “produce, bill and hold” model when our warehousing services are used. We ultimately plan to convert all our customers from this BAR practice, in order to better align billings with the costs we incur in production. The total value of BAR finished goods we store in our warehouses represents a significant opportunity to improve our working capital position.”

AMENDMENTS TO CREDIT FACILITIES

On February 21, 2020, DCM entered into a sixth amendment to its Bank Credit Facility (the “Bank Sixth Amendment”). Advances under the Bank Credit Facility may not, at any time, exceed the lesser of $50.0 million and a fixed percentage of DCM’s aggregate accounts receivables and inventory (less certain reserve amounts). This amendment permits DCM: (i) for the period from January 1, 2020 to April 30, 2020, to add up to $6.0 million on an unmargined basis (the “Unmargined Amount”) when calculating that borrowing base, and (ii) for the period from January 15, 2020 to May 14, 2020, to remove from the calculation of that borrowing base, up to $2.8 million of reserves (the “Excluded Pension Reserve Amount”) on account of DCM’s deficit in respect of its defined benefit pension plan. The Unmargined Amount of the borrowing base will reduce at the rate of $1.0 million per month commencing on May 1, 2020 until the Unmargined Amount is fully removed from the borrowing base. DCM will be required to reinstate the Excluded Pension Reserve Amount in the calculation of its borrowing base by adding $1.0 million and $2.0 million of that amount respectively in each of May and June, 2020, and by including all of the Excluded Pension Reserve Amount in July 2020 and thereafter. In addition to the financial covenants in the Bank Credit Agreement, the Bank Sixth Amendment added a new financial covenant that requires DCM to meet a Minimum Cash Flow Requirement (as defined in the Bank Sixth Amendment). In the event that DCM’s borrowing base exceeds total borrowings under the Bank Credit Facility by less than $1.5 million, tested on a bi-weekly basis, the Minimum Cash Flow Requirement requires DCM to demonstrate, in that circumstance, that net cash flows for the Company for the preceding four weeks do not vary negatively from its forecasted cash flows by more than $3.0 million.

The Bank Sixth Amendment also restricts DCM from making payments and distributions to non-arm’s length parties without the Bank’s consent, subject to certain exceptions, and increases the interest rate on DCM’s borrowings under the Bank Credit Facility by 0.50% for the period from January 1, 2020 to September 30, 2020. In addition, DCM has agreed to issue to the Bank warrants to purchase, for a period of 24 months, up to 500,000 common shares of the Company at a price to be determined in accordance with the rules of, and approved by, the Toronto Stock Exchange.

On February 21, 2020, DCM entered into an agreement with each of FPD III, FPD IV and FPD V to defer the payment of regularly scheduled principal payments owing to each of them under the applicable FPD Loan Agreement commencing February 1, 2020. Scheduled principal payments will resume June 15, 2020. The deferred principal payments will be added to the amounts due at maturity of the respective FPD Loan Agreements.

On February 21, 2020, DCM entered into a fifth amendment (the “Crown Fifth Amendment”) to the Crown Credit Agreement (as defined in the “Liquidity and capital resources” below section). Under the Crown Fifth Amendment, for the period from January 1, 2020 to October 1, 2020, all interest on outstanding borrowings under the Crown Credit Agreement will be deferred and will be capitalized on each date on which payment of such interest would otherwise be due by adding the amount of the interest due to DCM’s then outstanding principal and interest obligations under the Crown Credit Agreement.

Holders of an aggregate of $1.0 million in promissory notes, which were entered into by DCM in July 2019 with certain parties, including related parties of DCM, have agreed to defer repayment of those notes. It had been intended that these promissory notes would be repaid out of the net proceeds of the rights offering completed by the Company in December 2019.

On March 30, 2020, in reaction to anticipated COVID-19 (as defined below) impacts on its business, DCM entered into a seventh amendment to its Bank Credit Facility (the “Bank Seventh Amendment”). This amendment permits DCM to amend the definition of borrowing base by adding into the margining calculations 75% of BAR Products, without duplication, for the period from April 1, 2020 to June 30, 2020. BAR Products means Bill-as-Released finished goods products that are produced and held for future delivery based on specified contracts and billing procedures with DCM’s customers. During the aforementioned period, finished goods consisting of BAR Product shall be removed from the definition of “Eligible Inventory” when calculating DCM’s borrowing base. The Bank Fifth Amendment covenant requiring DCM to collect an agreed minimum percentage of its outstanding accounts receivable each month has been waived in respect of the months March 2020, April 2020, May 2020 and June 2020, respectively. In addition, the covenant requiring DCM to attain revenue in a minimum amount equal to not less than 90% of its forecasted revenue on a quarterly and on a cumulative basis commencing with the fourth quarter of 2019 and ending with the quarter ending June 30, 2020 was waived starting in the fourth quarter of 2019.

On March 30, 2020, DCM also entered into an agreement with each of FPD III, FPD IV and FPD V, to waive the financial covenant to maintain a minimum monthly EBITDA of $1.0 million in respect of the months of March 2020, April 2020, May 2020 and June 2020 respectively. In addition, FPD also waived the Total Funded Debt to EBTDA Ratio covenant for the quarter ending June 30, 2020.

On March 30, 2020, DCM also entered into a sixth amendment (the “Crown Sixth Amendment”) to the Crown Credit Agreement. This amendment waives the Net Debt to EBITDA Ratio covenant requirements for the quarters ending March 31, 2020 and June 30, 2020, respectively and also removes the new financial covenant requiring DCM to have EBITDA of not less than $4.0 million for the quarter ending March 31, 2020 and cumulative EBITDA of not less than $8.0 million for the six-month period ending June 30, 2020.

PROGRESS ON ERP TRANSITION

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 has been constrained by delays in production, shipments and billings to its customers. Significant progress continued to be made throughout the fourth quarter and system issues and data quality were substantively remediated during the fourth quarter. Production and shipping volumes 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 creating 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

On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, (“COVID-19”), a global pandemic. Governments in affected areas in which the Company operates have imposed a number of measures designed to contain the outbreak, including business closures, travel restrictions, quarantines and cancellations of gatherings and events. The impacts on the global economy have been far-reaching, however, due to the speed with which the situation developed and the uncertainty of its magnitude, outcome and duration it is not possible to quantify the impact this pandemic may have on the financial results and condition of DCM in future periods.

Management of DCM has been closely monitoring 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 ensure continued operation have been implemented to date, including temporary layoffs, wage rollbacks for senior executives and director level employees, shift reductions, reductions in non-essential spending and deferral of other expenses and payments where practical and the Company continues to evaluate and assess further actions. Despite these efforts it is possible that during an extended pandemic the operation of one or more of DCM’s production facilities could be disrupted. In these circumstances DCM may need to limit operations or be temporarily shut down. Although many of DCM customers’ products serve essential everyday needs, it is likely that the customer demand for these customer products could continue to deteriorate due to the slowing economy.

Despite DCM’s business continuing to operate as an essential provider to a number of industries, including the healthcare, financial services and supply chain sectors, the Company has experienced a reduction in demand from certain clients and sectors due to the pandemic, particularly in its retail related business. It is not currently possible to accurately quantify the impact of the pandemic on the Company’s operations or financial results. These possible impacts can be caused by both the pandemic itself as well as by the extensive public restrictions to continue limiting the spread of the virus and may differ in various business areas and DCM’s operating locations and timing of the loosening of various restrictions on businesses and the general public.

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.

DCM’s impairment tests for property, plant and equipment and goodwill are generally based on fair value less costs of disposal. Accordingly, as required by IFRS, DCM has not reflected these subsequent conditions in the measurement of its assets at December 31, 2019. For example, revenue assumptions used in DCM’s impairment indicators/testing were based on expectations at the end of 2019. Impairment indicators for DCM’s assets could exist at March 31, 2020 if current conditions persist. Management of DCM continues to work on revisions to the Company’s forecasts and to develop plans in light of the current conditions and will use updated assumptions/forecasts in its impairment indicator analysis and for impairment tests, if such tests are required, including estimates for government assistance including tax rebates, holidays, grants and subsidies introduced in response to the impact of the ongoing COVID-19 pandemic. However, the full financial impact of these events on the Company’s financial statements cannot be quantified at this time.

GOVERNMENT GRANTS

On April 11, 2020, the Canadian government launched the Canada Emergency Wage Subsidy (the “CEWS”), an emergency economic relief program to lessen the financial fallout on Canadian businesses from the effects of COVID-19.

The CEWS program is designed to help businesses struggling with the economic effects of the coronavirus retain and/or rehire their employees. The CEWS program provides a salary subsidy of 75% of an employee’s wages (up to a weekly cap of $847) for up to 12 weeks, retroactive from March 15, 2020 and ending on June 6, 2020. The subsidy is intended to make it easier for eligible employers to avoid laying off or terminating employees, as well as to bring back staff that were laid-off due to COVID-19 by significantly lessening the organization’s payroll costs.

The wage subsidy is divided into three periods, which each represent an employee’s four-week pay period. The required revenue reduction the employer must experience to be eligible for CEWS depends on what period they are applying for:

• Period 1: To be eligible for CEWS for this period (which covers the employee pay period of March 15 to April 11, 2020), employers must have had at least a 15% reduction in revenue in March 2020. The lower threshold of 15% recognizes that the negative economic effects of COVID-19 did not begin until mid-March. Revenue, under this program, can be calculated using the accrual method of accounting or the cash method.
• Period 2: To be eligible for CEWS for this period (which covers the employee pay period of April 12 to May 9, 2020), employers must show a reduction of at least 30% in revenue in April 2020.
• Period 3: To be eligible for CEWS for this period (which covers the employee pay period of May 10 to June 6, 2020 pay period), employers must show a reduction of at least 30% in revenues in May of 2020.

If eligible employers determine that they qualify for the CEWS for one claim period, they will automatically qualify for the following claim period. On May 15, 2020, the Canadian government announced that it would be extending the CEWS by an additional 12 weeks to August 29, 2020 and will be working on potential adjustments to this program, including the 30 per cent revenue decline threshold.

DCM met the eligibility criteria using the cash method to calculate its revenue decline for CEWS for Period 1, and accordingly also qualified for Period 2 of this program. Under the cash revenue method, DCM’s revenue was more than 15% lower in March 2020 than in March 2019. However, under the accrual method, DCM’s revenue for the month of March was comparable to that in the prior year. At this time, DCM does not expect to meet the eligibility criteria for Period 3, as its cash revenue has improved considerably on a relative month over month comparison. DCM has to date qualified for, and received, approximately $6.1 million under the CEWS with $1.6 million of that amount attributable to the first quarter of 2020.

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”).

TABLE 1 The following table sets out selected historical consolidated financial information for the periods noted.

For the years ended December 31, 2019 and 2018	January 1 to December 31, 2019												January 1 to December 31, 2018
(in thousands of Canadian dollars, except share and per share amounts, unaudited)
	Proforma without IFRS 16 adjustment				IFRS 16 adjustments				As reported				As reported
Revenues	$	282,876			$	—			$	282,876			$	322,769
Cost of revenues	215,322				(1,711		)		213,611				244,571
Gross profit	67,554				1,711				69,265				78,198
Selling, general and administrative expenses	67,335				(245		)		67,090				66,216
Restructuring expenses	7,489				—				7,489				2,654
Acquisition costs	—				—				—				348
	74,824				(245		)		74,579				69,218
(Loss) income before finance costs and income taxes	(7,270		)		1,956				(5,314		)		8,980
Finance costs
Interest expense, net	5,307				3,609				8,916				4,985
Debt modification losses	3,858				—				3,858				—
Amortization of transaction costs	465				—				465				623
	9,630				3,609				13,239				5,608
(Loss) income before income taxes	(16,900		)		(1,653		)		(18,553		)		3,372
Income tax (recovery) expense
Current	(105		)		—				(105		)		1,407
Deferred	(4,461		)		—				(4,461		)		(284		)
	(4,566		)		—				(4,566		)		1,123
Net (loss) income for the year	$	(12,334	)		$	(1,653	)		$	(13,987	)		$	2,249
Basic (loss) earnings per share	$	(0.57	)		$	(0.08	)		$	(0.65	)		$	0.11
Diluted (loss) earnings per share	$	(0.57	)		$	(0.08	)		$	(0.65	)		$	0.11
Weighted average number of common shares outstanding, basic	21,757,467				21,757,467				21,757,467				20,998,703
Weighted average number of common shares outstanding, diluted	21,757,467				21,757,467				21,757,467				21,055,460

The adoption of IFRS 16 resulted in a lower net income by $1.7 million for the year ended December 31, 2019 versus on a pre IFRS 16 basis. Lease payments were previously expensed directly through the statement of operations as cost of sales or SG&A expenses for a total of $10.9 million. Under IFRS 16, (i) the $10.9 million lease payments are recognized as a reduction of lease liabilities which are presented as finance lease payments on the consolidated statement of cash flow, (ii) a depreciation expense of the ROU Asset is recognized in cost of sales and SG&A for an aggregate amount of $8.9 million for a net operating income effect of $2.0 million, and (iii) finance charges on the lease liability were recognized as interest expense of $3.6 million.

TABLE 2 The following table sets out selected historical consolidated financial information for the periods noted.

For the periods ended December 31, 2019 and 2018	October 1 to December 31, 2019												October 1 to December 31, 2018
(in thousands of Canadian dollars, except share and per share amounts, unaudited)
	Proforma without IFRS 16 adjustment				IFRS 16 adjustments				As reported				As reported
Revenues	$	71,489			$	—			$	71,489			$	81,152
Cost of revenues	54,356				(397		)		53,959				61,279
Gross profit	17,133				397				17,530				19,873
Selling, general and administrative expenses	16,722				(57		)		16,665				15,247
Restructuring expenses	(139		)		—				(139		)		1,845
Acquisition costs	—				—				—				29
	16,583				(57		)		16,526				17,121
(Loss) income before finance costs and income taxes	550				454				1,004				2,752
Finance costs
Interest expense, net	1,559				890				2,449				1,321
Debt modification losses	3,789				—				3,789				—
Amortization of transaction costs	117				—				117				154
	5,465				890				6,355				1,475
(Loss) Income before income taxes	(4,915		)		(436		)		(5,351		)		1,277
Income tax (recovery) expense
Current	(26		)		—				(26		)		422
Deferred	(1,312		)		—				(1,312		)		13
	(1,338		)		—				(1,338		)		435
Net (loss) income for the period	$	(3,577	)		$	(436	)		$	(4,013	)		$	842
Basic (loss) earnings per share	$	(0.16	)		$	(0.02	)		$	(0.18	)		0.04
Diluted (loss) earnings per share	$	(0.16	)		$	(0.02	)		$	(0.18	)		0.04
Weighted average number of common shares outstanding, basic	21,757,467				21,757,467				21,757,467				21,523,515
Weighted average number of common shares outstanding, diluted	21,757,467				21,757,467				21,757,467				21,523,515

The adoption of IFRS 16 resulted in a lower net income by $0.4 million for the three months ended December 31, 2019 versus on a pre IFRS 16 basis. Lease payments were previously expensed directly through the statement of operations as cost of sales or SG&A expenses for a total of $2.8 million. Under IFRS 16, (i) the $2.8 million lease payments are recognized as a reduction of lease liabilities which are presented as finance lease payments on the consolidated statement of cash flow, (ii) a depreciation expense of the ROU Asset is recognized in cost of sales and SG&A for an aggregate amount of $2.4 million for a net operating income effect of $0.5 million, and (iii) finance charges on the lease liabilities were recognized as interest expense of $0.9 million.

TABLE 3 The following table sets out selected historical consolidated financial information for the periods noted.

Table 3 highlights the changes to the consolidated statement of financial position as at December 31, 2019 as a result of the adoption of IFRS 16 as at January 1, 2019. The significant changes relate to the following:

• DCM recognized a ROU Asset and a lease liability at the lease commencement date for substantially all of its leases which increased total assets and total liabilities (current and long-term portion);
• The ROU Asset was adjusted for any lease payments made at or before the lease commencement date, less any lease incentives and onerous lease liabilities, which were previously classified within current assets and total liabilities (current and long-term portion), respectively; and
• With respect to subleases where DCM is the lessor, DCM has reclassified the finance lease receivable from total liabilities to total assets, with the short-term portion allocated to current assets.

TABLE 4 The following table sets out selected historical consolidated financial information for the periods noted. See “Non-IFRS Measures” section above for more details.

TABLE 5 The following table sets out selected historical consolidated financial information for the periods noted. See “Non-IFRS Measures” section above for more details.

TABLE 6 The following table provides reconciliations of net (loss) income to EBITDA and of net loss to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures” section above for more details.

EBITDA and Adjusted EBITDA reconciliation

1. 2019 results include the impact of the adoption of a new accounting standard, IFRS 16. Refer to note 3 of the condensed interim consolidated financial statements for the year ended December 31, 2019 and related management’s discussion & analysis for further details of the impact of the adoption of new accounting standards.
2. One-time business reorganization costs include non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs. This also includes one-time expenses for the joint venture with Aphria Inc. (the “JV”) that was dissolved on July 12, 2019.

TABLE 7 The following table provides reconciliations of net (loss) income to EBITDA and of net (loss) income to Adjusted EBITDA for the periods noted. See “Non-IFRS Measures” section above for more details.

EBITDA and Adjusted EBITDA reconciliation

1. 2019 results include the impact of the adoption of a new accounting standard, IFRS 16. Refer to note 3 of the condensed interim consolidated financial statements for the year ended December 31, 2019 and related management’s discussion & analysis for further details of the impact of the adoption of new accounting standards.
2. One-time business reorganization costs include non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs.

TABLE 8 The following table provides reconciliations of net (loss) income to Adjusted net (loss) income and a presentation of Adjusted net income per share for the periods noted. See “Non-IFRS Measures” section above for more details.

Adjusted net (loss) income reconciliation

1. 2019 results include the impact of the adoption of a new accounting standard, IFRS 16. Refer to note 3 of the condensed interim consolidated financial statements for the year ended December 31, 2019 and related management’s discussion & analysis for further details of the impact of the adoption of new accounting standards.
2. One-time business reorganization costs include non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs. This also includes one-time expenses for the JV that was dissolved on July 12, 2019.

TABLE 9 The following table provides reconciliations of net (loss) income to Adjusted net (loss) income and a presentation of Adjusted net income per share for the periods noted. See “Non-IFRS Measures” section above for more details.

Adjusted net (loss) income reconciliation

1. 2019 results include the impact of the adoption of a new accounting standard, IFRS 16. Refer to note 3 of the condensed interim consolidated financial statements for the year ended December 31, 2019 and related management’s discussion & analysis for further details of the impact of the adoption of new accounting standards.
2. One-time business reorganization costs include non-recurring headcount reduction expenses for employees that did not qualify as restructuring costs.

REVENUES

For the three months ended December 31, 2019, DCM recorded revenues of $71.5 million, a decrease of $9.7 million or 11.9% compared with the same period in 2018. The decrease in revenues for the quarter ended December 31, 2019 was due to a number of factors in the quarter, including lower customer demand, volume declines in certain products and production slowdowns related to vendor credit constraints associated with DCM’s financial liquidity challenges, especially in the month of December. Revenues in the quarter were also impacted by a $1.3 million charge to revenue to account for the possibility that aged receivables may not be collectible. The decrease in revenue was partially offset by revenue from the onboarding of a new offering to a large provincial healthcare services customer of $0.8 million and new sales from customers in the Cannabis sector of $2.5 million. In addition, the fourth quarter of 2018 was particularly strong, benefiting from timing of certain customer orders which otherwise would have been produced in the first quarter of 2019, given customer inventory planning and timing of production.

For the year ended December 31, 2019, DCM recorded revenues of $282.9 million, a decrease of $39.9 million or 12.4% compared with the same period in 2018. In the first quarter of 2019, DCM experienced a planned reduction in the scope of work versus the prior year by approximately $4.9 million for a specific customer, which was a one-time non-recurring win in 2018. The remaining decrease in revenue year over year is attributable to (i) a disruption of production and shipments to customers caused by DCM’s transition to a new ERP system resulting in a reduction of revenue by $7.5 million year over year; (ii) $28.7 million lower sales due to reduced customer demand, volume decline, production slowdowns and timing of production; (iii) a reduction in spend by certain retailers to better manage their inventory levels and/or move to other solutions not offered by DCM of $4.0 million; (iv) the loss of a lower margin, limited product line customer resulting in a $3.1 million decrease; (v) $2.1 million due to the deferral of certain work including direct marketing campaigns; (vi) a $1.3 million charge to revenue to account for the possibility that aged receivables may not be collectible, and (vii) $1.0 million for other non-recurring work. The reduction in revenue was partially offset due to (i) onboarding of a new offering to a large provincial healthcare services customer which began to ramp up in the second and third quarter of 2019 for $3.6 million; (ii) new sales from customers in the Cannabis sector of $8.1 million, and (iii) $1.0 million in new wins and existing customer growth. Revenue in the year was also negatively impacted by much of the sales team’s focus being redirected from new business development efforts towards customer service to support ERP remediation efforts. As well, credit constraints with vendors led to production shortfalls, particularly in the month of December 2019, and dampened what was expected to be a stronger finish to the year.

COST OF REVENUES AND GROSS PROFIT

For the three months ended December 31, 2019, cost of revenues decreased to $54.0 million from $61.3 million for the same period in 2018. Excluding the effects of adopting IFRS 16, cost of revenues decreased by $6.9 million or 11.3% relative to the same period last year.

Gross profit for the three months ended December 31, 2019 was $17.5 million, which represented a decrease of $2.3 million or 11.8% from $19.9 million for the same period in 2018. Excluding the effects of adopting IFRS 16, gross profit decreased by $2.7 million or 13.8% relative to the same period last year. Gross profit as a percentage of revenues for the three months ended December 31, 2019 remained largely unchanged from the prior year at 24.5%, however, excluding the effects of adopting IFRS 16, gross profit as a percentage of revenues was 24.0% for the three months ended December 31, 2019. The decrease in gross profit as a percentage of revenues for the three months ended December 31, 2019 was primarily due to softness in sales thereby resulting in weaker absorption of fixed overhead costs, especially in the month of December and the above noted charge to revenue which adversely impacted gross profit. Gross profit as a percentage of revenues was, however, positively impacted due to continued discipline to improve pricing with customers, loss of low margin customers, higher gross margins attributed to Perennial and cost reductions realized from ongoing cost savings initiatives implemented in 2019 and the last quarter of 2018.

For the year ended December 31, 2019, cost of revenues decreased to $213.6 million from $244.6 million for the same period in 2018, resulting in a $31.0 million or 12.7% decrease over the same period last year. Excluding the effects of adopting IFRS 16, cost of revenues decreased by $29.2 million or 12.0% relative to the same period last year.

Gross profit for the year ended December 31, 2019 was $69.3 million, which represented a decrease of $8.9 million or 11.4% from $78.2 million for the same period in 2018. Gross profit as a percentage of revenues increased to 24.5% for the year ended December 31, 2019, compared to 24.2% for the same period in 2018. Excluding the effects of adopting IFRS 16, gross profit for the year ended December 31, 2019 was $67.6 million or 23.9% as a percentage of revenues. Gross profit as a percentage of revenues for the year ended December 31, 2019 was negatively impacted by (i) production inefficiencies caused by disruptions arising from the implementation of the ERP system; (ii) lower revenue thereby resulting in weaker absorption of fixed overhead costs, and, (iii) impact of paper and other raw material price increases leading to somewhat compressed margins on contracts with certain customers. Gross profit as a percentage of revenues was, however, positively impacted due to continued discipline to improve pricing with customers, loss of low margin customers, and cost reductions realized from ongoing cost savings initiatives implemented in 2019 and the last quarter of 2018.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2019 increased $1.4 million or 9.3% to $16.7 million, or 23.3% of total revenues, compared to $15.2 million, or 18.8% of total revenues, in the same period in 2018. The increase in SG&A expense for the three months ended December 31, 2019, is due to an increase in general and administrative expenses of $2.4 million, whereas selling, commissions and expenses decreased by $1.0 million. The decrease in selling, commissions and expenses was primarily attributable to lower sales commission costs commensurate with the decrease in revenues and benefits from the cost saving initiatives implemented in 2019 and the last quarter of 2018 and was partially offset by costs incurred for the strategic ideation and marketing expertise contributed by Perennial for in-house support to the DCM Sales team. The increase in general and administrative expenses was attributable to (i) an increase in amortization costs related to the ERP intangible asset which commenced in June 2019 accounting for $0.6 million of the increase; (ii) increase in 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; (iii) overtime and temporary labour required to action remediation efforts related to the new ERP system, in addition to catching up on production of the sales order backlog and (iv) professional fees surrounding the ERP system.

SG&A expenses for the year ended December 31, 2019 increased $0.9 million or 1.3% to $67.1 million, or 23.7% of total revenues, compared to $66.2 million, or 20.5% of total revenues, for the same period of 2018. After deducting one-time business reorganization costs, SG&A expenses were $66.1 million, or 23.4% of total revenues compared to $64.8 million or 20.1% of revenues in the prior period. The increase in SG&A expenses for the year ended December 31, 2019 is due to an increase in general and administrative expenses of $4.2 million whereas selling, commissions and expenses decreased by $3.3 million. The decrease in selling, commissions and expenses was primarily attributable to (i) lower sales commission costs commensurate with the decrease in revenues, and (ii) benefits from the cost saving initiatives implemented in 2019 and the last quarter of 2018, and was partially offset by costs incurred for the strategic ideation and marketing expertise contributed by Perennial for in-house support to the DCM Sales team. The increase in general and administrative expenses was primarily attributable to (i) an increase in amortization costs related to the ERP intangible asset which commenced in June 2019 accounting for $1.4 million of the increase; (ii) 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; (iii) overtime and temporary labour required to action remediation efforts related to the new ERP system, in addition to catching up on production of the sales order backlog, and (iv) professional fees surrounding the ERP system.

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 December 31, 2019, DCM incurred a net restructuring recovery of $0.1 million compared to restructuring expenses of $1.8 million in the same period in 2018. DCM incurred a net restructuring recovery of $0.1 million during for the three months ended December 31, 2019 primarily related to a recovery of a previous restructuring charges and partially offset by a charge to headcount reductions in certain SG&A functions. For the three months ended December 31, 2018, DCM incurred restructuring expenses of $1.8 million primarily related to headcount reductions across DCM’s operations.

For the year ended December 31, 2019, DCM incurred restructuring expenses of $7.5 million compared to $2.7 million in the same period in 2018. In 2019, the restructuring costs 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 leading to lower labour requirements, and (iv) process improvements in its SG&A functions to reduce labour costs and enhance productivity. In 2018, DCM incurred $3.8 million of restructuring costs related to (i) headcount reductions in indirect labour due to plant consolidations completed during the year, as well as reductions in the sales and administrative functions, and (ii) costs incurred to facilitate the closure and consolidation of Multiple Pakfold, BOLDER Graphics and the Granby, Québec facilities into DCM’s Brampton, Ontario, Calgary, Alberta and Drummondville, Quebec facilities, respectively. Total restructuring costs in 2018 were offset by a recovery of $1.1 million related to the termination of DCM’s lease agreement for its Granby, Québec facility.

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.

ADJUSTED EBITDA

For the three months ended December 31, 2019, Adjusted EBITDA was $5.5 million, or 7.7% of revenues, after adjusting EBITDA for the $0.1 million in net restructuring recovery, adding back $0.1 million of one-time business reorganization costs. Excluding the effects of adopting IFRS 16, Adjusted EBITDA was $2.7 million or 3.7% of revenues for the three months ended December 31, 2019 compared with an Adjusted EBITDA of $6.5 million or 8.1% of revenues for the same period last year.

For the year ended December 31, 2019, Adjusted EBITDA was $20.1 million or 7.1% of revenues, after adjusting EBITDA for the $7.5 million in restructuring charges and $1.0 million of one-time business reorganization costs. Excluding the effects of adopting IFRS 16, Adjusted EBITDA for the year ended December 31, 2019 was $9.2 million, or 3.2% of revenues compared with an Adjusted EBITDA of $22.2 million or 6.9% of revenues for the same period last year.

The decrease in Adjusted EBITDA, excluding the effect of IFRS 16, for the three months and year ended December 31, 2019 over the prior year comparative periods was primarily attributable to the launch of the ERP system resulting in (i) the deferral of revenues and compressed margins, as discussed above; (ii) an increase in SG&A as the cost for salaries and wages for those employees working on the ERP system implementation can no longer be capitalized post go-live; (iii) an increase in overtime costs and temporary labour to help resolve ERP issues post go-live and catch up on production from the sales order backlog caused by delays in the ERP transition, and additional professional fees incurred as a direct result of the new ERP system. Furthermore, there were additional reductions in revenues and margins in the normal course of operations. However, the decline was partially offset due to cost reductions realized from ongoing cost savings initiatives implemented in 2019 and the last quarter of 2018.

FINANCE COSTS

Finance costs include interest on debt outstanding under DCM’s credit facilities, interest accretion expense related to certain debt obligations discounts / premiums, interest on pension obligations, debt modification losses, amortization of debt transaction costs and interest expense on lease liabilities under IFRS 16 was $2.4 million for the three months ended December 31, 2019 compared to $1.3 million for the same period in 2018, and was $8.9 million for the year ended December 31, 2019 compared to $5.0 million for the same period in 2018. Excluding the effects of adopting IFRS 16, interest expense the three months ended December 31, 2019 was $1.6 million and for the year ended December 31, 2019 was $5.3 million. Interest expense for the three months and year ended December 31, 2019 was relatively consistent with the same period in the prior year excluding IFRS 16. The slight change was primarily due to the Crown Facility, secured in 2018 to fund the acquisition of Perennial and to repay the outstanding balance on its subordinated debt facility with Bridging Finance Inc. (“Bridging Credit Facility”), which was partially reflected in the year ended December 31, 2018 as the facility was obtained in May 2018. In addition, total debt increased as at December 31, 2019 due to an additional $7.0 million loan obtained from Crown in the third quarter of 2019 and increases in the Bank Credit Facility during 2019 resulting in additional interest expense. The increase was offset by a reduction in the unwinding of discount which was included in interest expense of the DCM Burlington and Thistle VTBs that were repaid during the first quarter of 2019, and reduction of FPD Credit Facilities through principal payments resulting in lower interest expense. In addition, for the three months and year ended December 31, 2019 DCM incurred debt modification losses totaling $3.8 million and $3.9 million, respectively, as a result of the amendments to its senior credit facilities.

INCOME TAXES

DCM reported a loss before income taxes of $5.4 million and a net income tax recovery of $1.3 million for the three months ended December 31, 2019 compared to income before income taxes of $1.3 million and a net income tax expense of $0.4 million for the three months ended December 31, 2018. DCM reported a loss before income taxes of $18.6 million and a net income tax recovery of $4.6 million for the year ended December 31, 2019 compared to income before income taxes of $3.4 million and a net income tax expense of $1.1 million for the three months and year ended December 31, 2019. The change from a net income tax expense to a recovery position was due to the reduction of DCM’s estimated taxable income to a loss for the year ended December 31, 2019. The deferred income tax recovery for the three months and year ended December 31, 2019 was adjusted for any changes in estimates of future reversals of temporary differences.

NET LOSS

Net loss the three months ended December 31, 2019 was $4.0 million compared to net income of $0.8 million for the same period in 2018. Excluding the effects of adopting IFRS 16, net loss for the three months ended December 31, 2019 was $3.6 million.

Net loss for the year ended December 31, 2019 was $14.0 million compared to a net income of $2.2 million for the same period in 2018. Excluding the effects of adopting IFRS 16, net loss for the year ended December 31, 2019 was $12.3 million.

The decrease in comparable profitability for the three months and year ended December 31, 2019 was primarily due to (i) the launch of the ERP system which resulted in both a reduction in revenues and margins, and increase in SG&A as discussed above, (ii) the decrease in revenues in the normal course of operations, and (iii) an increase in restructuring expenses. This was partially offset by improved pricing discipline and cost savings from restructuring efforts carried out in 2019 and the last quarter of 2018 which helped reduce cost of sales and lower selling, commissions and expenses.

ADJUSTED NET LOSS

Adjusted net loss the three months ended December 31, 2019 was $3.7 million compared to Adjusted net income of $2.3 million for the same period in 2018. Excluding the effects of adopting IFRS 16, Adjusted net loss the three months ended December 31, 2019 was $3.3 million.

Adjusted net loss for the year ended December 31, 2019 was $7.4 million compared to Adjusted net income of $2.3 million for the same period in 2018. Excluding the effects of adopting IFRS 16, Adjusted net loss for the year ended December 31, 2019 was $5.8 million.

The decrease in comparable profitability for the three months and year ended December 31, 2019 was primarily due to (i) the launch of the ERP system resulting in both the reduction in revenues and margins, and increase in SG&A as discussed above, and (ii) the decrease in revenues in the normal course of operations. This was partially offset by improved pricing discipline and cost savings from restructuring efforts carried out in 2019 and the last quarter of 2018 in cost of sales and selling, commissions and expenses.

CASH FLOW FROM OPERATIONS

During the year ended December 31, 2019, cash flows used for operating activities were $0.8 million compared to cash flows generated by operating activities of $17.3 million during the same period in 2018. Current period cash flow from operations, before adjusting for changes in working capital, generated a total of $6.3 million compared with $9.4 million for the same period last year. As a result of the adoption of IFRS 16, $10.9 million in lease payments are now presented as cash used for financing activities in the consolidated statement of cash flow whereby in the prior year comparative period, this was classified as a reduction of operating activities. Excluding the effects of IFRS 16, cash flow used for operating activities, before adjusting for changes in working capital, was $4.6 million, a decrease of $14.0 million, over the same period last year. Current period cash flows from operations were negatively impacted primarily due to an increase in the net loss which stems from the decrease in revenues and increase in general and administration expense, particularly in the second, third and fourth quarters this year as a direct result of the new ERP system, alongside other reductions in revenue due to softness in customer spend. This was offset by further improvements in DCM’s pricing discipline and cost reductions realized from ongoing cost savings initiatives implemented in 2019 and the last quarter of 2018. Contributions to defined benefit pension plans and income taxes payments were relatively consistent with the comparative period. Current year payments for severances and lease termination related to DCM’s restructuring initiatives increased $1.7 million compared to the same period last year as result of the additional restructuring initiatives during 2019 and the last quarter of 2018.

Changes in working capital during the year ended December 31, 2019 used $7.1 million in cash compared with $7.8 million of cash generated in the prior year. In the prior year comparable period 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. In the current year, DCM continues to manage cash flow consistent with the comparative period. There was a significant increase in trade receivables of $13.4 million given the challenges encountered with issuing accurate and timely billings as a result of the ERP transition in June 2019. In the third quarter of 2019, billing volumes progressively increased throughout the quarter as the Company began catching up on its backlog of orders. However, DCM continued to experience issues with issuing accurate billings to its customers thereby resulting in a deterioration of collections and an increase in trade receivables. This resulted in liquidity constraints whereby the Company was required to obtain additional financing and manage payments to suppliers to maintain cash for working capital requirements resulting in an increase in trade and accrued liabilities of $8.8 million.

INVESTING ACTIVITIES

For the year ended December 31, 2019, $3.9 million in cash flows were used for investing activities compared with $14.9 million during the same period in 2018. This represents a reduction of $11.0 million over the same period last year, of which $7.3 million was used in the comparable period for the acquisition of Perennial. In the current period, $1.0 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, compared with $2.7 million of capital expenditures incurred in 2018 related to investments in IT equipment and costs related to leasehold improvements, which were incurred as part of DCM’s consolidation of certain facilities. Furthermore, $3.9 million of cash was used to further invest in the development of DCM’s new ERP system compared with $5.1 million for the same period last year. DCM continued to capitalize costs for the ERP system in the third quarter of 2019 related to further development of the system. $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 year ended December 31, 2019, cash flow generated by financing activities was $7.7 million compared with $3.5 million during the same period in 2018. During the year DCM completed a rights offering and received cash net of expenses of $4.8 million. As noted under “Cash Flow From Operations”, as a result of the adoption of IFRS 16, $10.9 million in lease payments are now presented as cash used for financing activities whereas this is presented as a reduction of cash from operations in the prior year comparative period, thereby contributing to the overall variance in cash used for financing activities. Excluding the effects of IFRS 16, cash flow generated for financing activities was $18.6 million, increasing the variance to $22.0 million from the comparative period. A total of $8.5 million in outstanding principal amounts under its various credit facilities were repaid during the current period compared with $11.2 million during the same period last year. DCM amended its FPD Credit Facilities on July 25, 2019 to defer principal amounts for the months of August to December 2019 which explains the reduction of the repayments on the credit facilities from the comparative period. In addition, $3.9 million was repaid during the period related to the vendor take-back promissory notes issued in connection with the acquisitions of DCM Burlington, Thistle and BOLDER Graphics compared with $4.6 million in the prior year comparative period. The DCM Burlington and Thistle VTBs were fully repaid in the first quarter of 2019, and $1.0 million was paid for the Perennial VTB. The slight decrease from the comparative period relates to the deferral of payments for the Bolder VTB. Lastly, proceeds of $26.1 million was received in the current period, of which $7.0 million represents additional proceeds received from the Crown Facility and the remaining $19.1 million represents the draw on DCM’s revolving credit facility with the Bank compared with $13.0 million during the same period last year to fund its working capital requirements, and manage cash flow to compensate for the slow down in the collection process as a result of the ERP disruptions.

OUTLOOK

Despite the challenges faced by the Company in 2019 with ERP, and in 2020 to date with COVID-19, DCM remains focused on the key strategic priorities it laid out in early 2019, namely:

• Focus on its core enterprise customers– particularly those customers for whom DCM provides value-added marketing solutions with enhanced margins, not simply product-related features
• Improve gross margins – by realizing the benefits of price increases as appropriate, improved operating efficiencies, additional potential headcount reductions and a stabilized ERP system
• Reduce SG&A expenses – through streamlining the overhead required to serve our customers
• Pay down debt – return to paying down amounts drawn on our revolving line of credit towards more historical levels, along with repayment of DCM’s other fixed term debt obligations, and prudent working capital management
• Make strategic investments to support DCM’s future growth – enhancing our DATAOnline platform, development of new technology applications, including customer-specific apps, all of which are intended to better serve our enterprise customers

DCM’s client base is well diversified and includes many essential services providers in industries including the healthcare, financial services and supply chain sectors. Nonetheless, the Company has experienced a reduction in demand from other clients and sectors due to the COVID-19 pandemic, particularly in its retail-related product offerings. DCM remains focused on serving its enterprise clients with value-added services and is experiencing a high level of engagement with those customers during this period.

The Company has initiated a number of actions to manage costs through this period, including temporary layoffs, shift reductions, rollbacks of management and senior executive salaries, reductions in non-essential spending and deferral of other expenses and payments where practical. DCM continues to evaluate the COVID-19 situation closely and assess further actions that may be required in the event of a prolonged disruption. At this point in time, DCM believes that these actions have adequately positioned the Company for the current environment, although it continues to assess opportunities for further cost reduction.

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 customer’s needs and their buying behavior; ongoing public restrictions that could continue to limit the spreading of the virus and may impact DCM’s operating locations; and, the timing of the loosening of various 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 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 June 1, 2020, there were outstanding borrowings of $28.5 million under the revolving facilities portion of the Bank Credit Facility, compared to $34.7 million as at December 31, 2019, an improvement of approximately $6.1 million. And on June 1, 2020, the Company had $6.6 million in available credit pursuant to its revolving Bank Credit Facility, compared to $2.0 million as at December 31, 2019. The Company has to date qualified for and received approximately $6.1 million under the Canadian Emergency Wage Subsidy relief program with $1.6 million of that amount attributable to the first quarter of 2020. At this time DCM does not expect to meet the eligibility criteria for pay period 3 of this program.

Working capital improvement will be a significant focus of the business in 2020 and a critical component to the theme of paying down debt. Substantial progress has been made in remediating the ERP issues from 2019, including a reduction in production backlog, improved invoice accuracy, appropriate revenue recognition, and more-timely customer billing and collection of accounts receivable. These initiatives are expected to return the working capital levels of the Company to more normal levels by the end of 2020 as the Company focuses on achieving post-implementation ERP efficiencies.

In addition, DCM is in advanced stages of implementing a significant change in its billing practices, whereby it is eliminating a legacy practice of not invoicing certain clients for finished goods products until they have been shipped from DCM’s warehouse, and converting these clients to “invoice on production.” Under this legacy “bill as released”, or BAR, practice, and pursuant to long-term contracts, DCM has historically incurred the costs of producing customer-specific finished goods products up-front, warehoused these products for a period of time, and not been able to invoice these clients until product is ultimately shipped to a specific client site. In late March 2020, in conjunction with the impending potential financial impact from COVID-19, the Company implemented a project to initially focus on converting its top 15 BAR accounts to invoice on production. These accounts represent approximately two-thirds of the value of BAR finished goods inventory. The Company ultimately intends to convert all of its BAR clients to invoice on production. The conversion of these BAR clients to invoice on production is well advanced, with conversions of a number of accounts either completed or planned, and represents a significant potential opportunity for the Company to improve its working capital position and better align billings with the costs which DCM incurs to produce these products.

Due to the impact of COVID-19, the Company has deferred most of its planned spending in the first half of 2020 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. 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 6 and Table 7 above. For a reconciliation of net income (loss) to Adjusted net income (loss) and a presentation of Adjusted net income (loss) per share, see Table 8 and Table 9 above.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands of Canadian dollars, unaudited)	December 31, 2019 $			December 31, 2018 $
Assets
Current assets
Trade receivables	86,451			73,124
Inventories	12,580			8,812
Prepaid expenses and other current assets	2,611			3,519
	101,642			85,455
Non-current assets
Other non-current assets	828			827
Deferred income tax assets	6,648			3,428
Restricted cash	515			515
Property, plant and equipment	13,062			16,804
Right-of-use assets	56,381			—
Pension assets	156			—
Intangible assets	18,167			18,164
Goodwill	16,973			17,038
	214,372			142,231
Liabilities
Current liabilities
Bank overdraft	1,093			3,999
Trade payables and accrued liabilities	51,743			43,497
Current portion of credit facilities	3,887			5,670
Current portion of promissory notes	492			4,013
Current portion of lease liabilities	8,252			—
Provisions	3,886			2,908
Income taxes payable	2,068			3,152
Deferred revenue	2,133			1,477
	73,554			64,716
Non-current liabilities
Provisions	192			540
Credit facilities	74,760			51,751
Promissory notes	2,095			1,363
Lease liabilities	53,514			—
Deferred income tax liabilities	402			1,753
Other non-current liabilities	—			3,272
Pension obligations	7,958			8,346
Other post-employment benefit plans	2,938			2,978
	215,413			134,719
Equity
Shareholders’ equity
Shares	256,045			251,217
Warrants	853			806
Contributed surplus	2,300			1,841
Translation reserve	254			242
Deficit	(260,493	)		(246,594	)
	(1,041	)		7,512
	214,372			142,231

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of Canadian dollars, except per share amounts, unaudited)	For the three months ended December 31, 2019			For the three months ended December 31, 2018
	$			$
Revenues	71,489			81,152
Cost of revenues	53,959			61,279
Gross profit	17,530			19,873
Expenses
Selling, commissions and expenses	7,417			8,380
General and administration expenses	9,248			6,867
Restructuring expenses	(139	)		1,845
Acquisition costs	—			29
	16,526			17,121
Income before finance costs and income taxes	1,004			2,752
Finance costs
Interest expense on long term debt and pensions, net	1,559			1,321
Interest expense on lease liabilities	890			—
Debt modification losses	3,789			—
Amortization of transaction costs	117			154
	6,355			1,475
(Loss) income before income taxes	(5,351	)		1,277
Income tax (recovery) expense
Current	(26	)		422
Deferred	(1,312	)		13
	(1,338	)		435
Net (loss) income for the period	(4,013	)		842
Basic (loss) earnings per share	(0.18	)		0.04
Diluted (loss) earnings per share	(0.18	)		0.04

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of Canadian dollars, except per share amounts, unaudited)	For the year ended December 31, 2019			For the year ended December 31, 2018
	$			$
Revenues	282,876			322,769
Cost of revenues	213,611			244,571
Gross profit	69,265			78,198
Expenses
Selling, commissions and expenses	32,946			36,276
General and administration expenses	34,144			29,940
Restructuring expenses	7,489			2,654
Acquisition costs	—			348
	74,579			69,218
(Loss) income before finance costs and income taxes	(5,314	)		8,980
Finance costs (income)
Interest expense on long term debt and pensions, net	5,307			4,985
Interest expense on lease liabilities	3,609			—
Debt modification losses	3,858			—
Amortization of transaction costs	465			623
	13,239			5,608
(Loss) income before income taxes	(18,553	)		3,372
Income tax expense (recovery)
Current	(105	)		1,407
Deferred	(4,461	)		(284	)
	(4,566	)		1,123
Net (loss) income for the year	(13,987	)		2,249
Basic (loss) earnings per share	(0.65	)		0.11
Diluted (loss) earnings per share	(0.65	)		0.11

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands of Canadian dollars, unaudited)	For the three months ended December 31, 2019			For the three months ended December 31, 2018
	$			$
Net (loss) income for the period	(4,013	)		842
Other comprehensive (loss) income:
Items that may be reclassified subsequently to net (loss) income
Foreign currency translation	(4	)		33
	(4	)		33
Items that will not be reclassified to net (loss) income
Re-measurements of pension and other post-employment benefit obligations	54			(2,776	)
Taxes related to pension and other post-employment benefit adjustment above	(13	)		722
	41			(2,054	)
Other comprehensive income (loss) for the period, net of tax	37			(2,021	)
Comprehensive loss for the period	(3,976	)		(1,179	)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands of Canadian dollars, unaudited)	For the year ended December 31, 2019			For the year ended December 31, 2018
	$			$
Net (loss) income for the year	(13,987	)		2,249
Other comprehensive income (loss):
Items that may be reclassified subsequently to net (loss) income
Foreign currency translation	12			59
	12			59
Items that will not be reclassified to net (loss) income
Re-measurements of pension and other post-employment benefit obligations	118			(1,318	)
Taxes related to pension and other post-employment benefit adjustment above	(30	)		343
	88			(975	)
Other comprehensive income (loss) for the year, net of tax	100			(916	)
Comprehensive (loss) income for the year	(13,887	)		1,333

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, 2017	248,996		287		—		1,368		183		(256,233	)	(5,399	)
Impact of change in accounting policy	—		—		—		—		—		8,365		8,365
	248,996		287		—		1,368		183		(247,868	)	2,966
Net income for the year	—		—		—		—		—		2,249		2,249
Other comprehensive loss for the year	—		—		—		—		59		(975	)	(916	)
Total comprehensive income for the year	—		—		—		—		59		1,274		1,333
Issuance of common shares and warrants, net	2,221		519		—		—		—		—		2,740
Share-based compensation expense	—		—		—		473		—		—		473
Balance as at December 31, 2018	251,217		806		—		1,841		242		(246,594	)	7,512
Balance as at December 31, 2018	251,217		806		—		1,841		242		(246,594	)	7,512
Net loss for the year	—		—		—		—		—		(13,987	)	(13,987	)
Other comprehensive income for the year	—		—		—		—		12		88		100
Total comprehensive loss for the year	—		—		—		—		12		(13,899	)	(13,887	)
Issuance of common shares, net	4,828		—		—		—		—		—		4,828
Expiration of warrants	—		(269	)	—		269		—		—		—
Share-based compensation expense	—		—		—		190		—		—		190
Issuance and repricing of warrants, net	—		316		—		—		—		—		316
Balance as at December 31, 2019	256,045		853		—		2,300		254		(260,493	)	(1,041	)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of Canadian dollars, unaudited)	For the year ended December 31, 2019			For the year ended December 31, 2018
	$			$
Cash provided by (used in)
Operating activities
Net (loss) income for the year	(13,987	)		2,249
Adjustments to net (loss) income
Depreciation of property, plant and equipment	3,959			4,678
Amortization of intangible assets	3,962			4,173
Depreciation of right-of-use-assets	8,940			—
Interest expense on lease liabilities	3,609			—
Share-based compensation expense	190			473
Pension expense	596			560
Loss (gain) on disposal of property, plant and equipment	72			(10	)
Write-off of intangible assets	—			242
Provisions	7,489			1,665
Amortization of transaction costs and debt modification losses	4,327			623
Accretion of non-current liabilities and related interest expense	290			617
Other non-current liabilities	—			192
Other post-employment benefit plans, net	(73	)		1
Tax credits recognized	(94	)		(111	)
Income tax (recovery) expense	(4,566	)		1,123
	14,714			16,475
Changes in working capital	(7,122	)		7,827
Contributions made to pension plans	(989	)		(959	)
Provisions paid	(6,543	)		(4,869	)
Income taxes paid	(871	)		(1,211	)
	(811	)		17,263
Investing activities
Purchase of property, plant and equipment	(1,036	)		(2,694	)
Purchase of intangible assets	(3,878	)		(5,111	)
Proceeds on disposal of property, plant and equipment	300			180
Proceeds on sale of business	675			—
Net cash consideration for acquisition of businesses	—			(7,320	)
	(3,939	)		(14,945	)
Financing activities
Issuance of common shares and warrants, net	4,798			685
Proceeds from credit facilities	26,099			12,951
Repayment of credit facilities	(8,495	)		(11,238	)
Repayment of other liabilities	(400	)		(400	)
Proceeds from promissory notes and warrants	1,000			—
Repayment of promissory notes	(3,905	)		(4,561	)
Transaction costs	(533	)		(900	)
Lease payments	(10,904	)		(20	)
	7,660			(3,483	)
Decrease in bank overdraft during the period	2,910			(1,165	)
Bank overdraft – beginning of year	(3,999	)		(2,868	)
Effects of foreign exchange on cash balances	(4	)		34
Bank overdraft – end of year	(1,093	)		(3,999	)

 

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