BIOREM Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS ("MD&A")
For the Quarter Ended September 30, 2024
Introduction
This Management Discussion and Analysis ("MD&A") provides information that management believes is relevant to an assessment and understanding of the Company's consolidated results of operation and financial condition. This discussion should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2023 and the accompanying notes, which are prepared in accordance with International Financial Reporting Standards or "IFRS" and the Company's condensed consolidated interim financial statements for the period ended September 30, 2024. This discussion is based on information available to management as of November 6, 2024, unless otherwise indicated.
Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars.
The core business of the Company is to provide advanced technology biological filters for removal of odors, volatile organic compounds (VOCs), hazardous air pollutants (HAPs) and for the conditioning of biogas renewable energy. With over 2,000 installed systems and over a decade of experience, the Company's groundbreaking biofilters are the technology of choice for wastewater treatment plants across North America. Additional information about the Company, including our most recently filed Annual Report, is available on SEDAR at www.sedar.com.
Forward Looking Statements
Certain statements in this report may contain "forward looking" statements that involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "anticipate" and other similar terminology are used to identify forward looking statements. These statements reflect current assumptions and expectations regarding future events and operating performance and speak only as of the date of this MD&A, November 6, 2024. Forward looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to vary significantly from the results discussed in the forward looking statements, including, but not limited to, the factors discussed under "Risks and Uncertainties". Although the forward looking statements contained in this MD&A are based upon what management of the Company believes are reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward looking statements. These forward looking statements are made as of the date of this MD&A and the Company assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances.
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Non-IFRS Measures
"EBITDA," "Order Bookings," "Order Backlog" and "Working capital" do not have any standardized meaning prescribed by IFRS and may not be comparable to measures presented by other companies.
EBITDA is used to denote earnings (loss) from operations before interest, income taxes, foreign exchange gains and losses, depreciation and amortization. This measure is important to the Company since it is used by potential investors and lenders to evaluate the ongoing cash generating capability of the Company and thus the amounts they are willing to invest and lend to the Company.
Order Bookings and Order Backlog are non-IFRS measures that the Company uses to evaluate its sales performance. Order Bookings are those binding contracts that the Company enters into during a fiscal year with a third party for the delivery of our products or services. As Order Bookings are received, the contract value (before any associated sales taxes) is included in the Order Backlog. The Order Backlog is reduced by the revenue that is recognized on each project and is also adjusted for foreign exchange changes in the period presented.
Overview
Biorem is a leading clean technology company that designs, manufactures and distributes a comprehensive line of high-efficiency emissions control systems used to eliminate odors, volatile organic compounds (VOCs) and hazardous air pollutants (HAPs). Biorem also offers Biogas Conditioning technologies specializing in biological treatment of hydrogen sulfide.
Biorem offers a selection of products that can be tailored to suit application specific requirements. Biorem ensures optimized long-term performance on every application by custom-designing systems to meet the individual needs of their clients.
Biorem has sales and manufacturing offices across North America and in China, a dedicated research facility, a worldwide sales representative network, and a dedicated service and support division. As a result, Biorem has the resources available to ensure that projects are handled promptly and professionally from conception to completion.
The Company has more than 2,000 installed systems worldwide.
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Significant Events For The Third Quarter 2024
Key events of note in Q3 2024 include the following:
- Record quarterly revenues for the quarter were $14.9 million, a 103% increase over the previous quarter
- Order bookings for the quarter were $6.6 million
- Order backlog remained at historically high $48.4 million at the end of the quarter
- Net earnings for the quarter were $2.2 million or $0.139 per share
- Working capital on September 30, 2024 grew to $10.4 million
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Selected Quarterly Information (Unaudited)
Selected Balance Sheet Information as at | ||||||||
Sept | June | March | Dec | Sept | June | March | Dec | |
( in ,000's) | 2024 | 2024 | 2024 | 2023 | 2023 | 2023 | 2023 | 2022 |
Cash and cash equivalents | 7,275 | 3,904 | 5,902 | 2,292 | 2,383 | 1,565 | 4,696 | 3,775 |
Accounts receivable | 7,703 | 10,054 | 6,576 | 12,042 | 5,134 | 6,005 | 4,281 | 8,357 |
Unbilled revenue | 2,157 | 2,488 | 2,628 | 3,037 | 3,610 | 3,684 | 4,361 | 3,884 |
Working capital | 10,441 | 7,590 | 7,007 | 6,710 | 3,790 | 3,430 | 4,110 | 4,853 |
Total assets | 24,377 | 24,390 | 22,061 | 24,076 | 17,624 | 17,124 | 18,407 | 20,730 |
Accounts payable | 4,631 | 4,448 | 3,950 | 6,136 | 3,371 | 2,603 | 3,249 | 4,711 |
Accrued liabilities | 1,910 | 1,364 | 1,506 | 2,132 | 2,144 | 1,957 | 1,715 | 2,664 |
Deferred revenue | 3,460 | 6,152 | 4,589 | 4,306 | 3,306 | 2,662 | 3,257 | 2,573 |
Interest bearing loans | 2,568 | 2,706 | 2,841 | 2,976 | 3,110 | 4,380 | 4,326 | 4,276 |
Shareholders' equity | 9,955 | 7,898 | 7,371 | 6,720 | 4,492 | 3,867 | 4,107 | 4,521 |
Selected Statement of Operations information for the three month periods ended | ||||||||
Sept | June | March | Dec | Sept | June | March | Dec | |
( in ,000's) | 2024 | 2024 | 2024 | 2023 | 2023 | 2023 | 2023 | 2022 |
Revenue | 14,885 | 7,300 | 5,918 | 12,207 | 5,509 | 4,280 | 3,169 | 10,911 |
Cost of goods sold | 9,864 | 5,643 | 4,138 | 7,800 | 3,965 | 3,326 | 3,052 | 7,002 |
Gross margin | 5,021 | 1,657 | 1,780 | 4,407 | 1,544 | 954 | 117 | 3,909 |
Total operating expenses | 1,992 | 1,145 | 1,264 | 1,329 | 806 | 1,018 | 806 | 2,594 |
Finance costs | 47 | 50 | 51 | 88 | 54 | 65 | 64 | 53 |
Net earnings (loss) | 2,192 | 340 | 344 | 2,364 | 503 | (131) | (557) | 789 |
EPS-basic | 0.139 | 0.021 | 0.022 | 0.15 | 0.030 | (0.006) | (0.036) | 0.05 |
EPS- fully diluted | 0.118 | 0.018 | 0.019 | 0.14 | 0.030 | (0.006) | (0.036) | 0.045 |
Common shares outstanding | 15,799,727 | 15,697,437 | 15,697,437 | 15,697,437 | 15,697,437 | 15,697,437 | 15,697,437 | 15,497,437 |
All amounts except Working capital have been determined under IFRS.
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Financial Results For The Three Months Ended September 30, 2024
The following analysis of the results of operations for the three months ended September 30, 2024 includes comparisons to the three months ended June 30, 2024 and September 30, 2023.
Revenues
Revenues for the quarter were a quarterly record of 14.9 million, a $7.6 million or 103% increase over the previous quarter and a $9.4 million or 170% increase over the three months ended September 30, 2023. The significant increases in Q3 2024 revenues from the prior period and the same quarter in the prior year was the result of the Company's large backlog of orders and the delivery of systems and components in Q3 2024 that had been delayed in prior quarters due to customer's project construction delays.
Revenue by Geography
September 2024 | June 2024 | September 2023 | |
Canada | $3,423,000 | $1,876,000 | $3,141,000 |
United States | 10,966,000 | 5,421,000 | 2,309,000 |
Other | 496,000 | 3,000 | 59,000 |
Total Revenue | 14,885,000 | 7,300,000 | 5,509,000 |
Biorem's core market is the North American municipal odour control market with international distribution established in Europe, Americas and South Africa as well as opportunistically in other jurisdictions. Project delivery mix varies from quarter to quarter but the Company relies heavily on the USA and Canada. The project mix in the current backlog of the Company is consistent with the geographic mix shown in the table.
A number of factors contribute to variations in the Company's quarterly results: customer scheduling and delivery of our products, the Company's mix of product and service offerings, the currency in which the revenue is earned and the timing of revenue recognition.
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Bookings and Backlog
Order Bookings
Q3 2024 | Q2 2024 | Q3 2023 |
$6,600,000 | $13,800,000 | $8,200,000 |
Order Bookings are those binding contracts that the Company enters into with a third party for the delivery of our products or services. Bookings can vary considerably from quarter to quarter, due to both the size of the contracts won and the timing of the awarding of the contracts.
Bookings during the third quarter totaled $6.6 million with annual bookings to September 30, 2024 totaling $25.7 million. The booked orders came primarily from Canada and the United States. The Company's bidding activity during the fourth quarter remains high with a large number and value of projects bid remaining to be awarded.
Order Backlog
September 2024 | June 2024 | September 2023 |
$48,400,000 | $57,000,000 | $54,500,000 |
The value of the Company's order backlog at September 30, 2024 stood at $48.4 million an $8.6 million decrease over the value of the backlog on June 30, 2024 and an $6.1 million decrease over the order backlog one year ago. The decrease in the order backlog is primarily due to the delivery in the quarter of several projects that had been delayed previously due to customer construction delays.
Due to customer scheduling, the Company cannot provide precise guidance as to the quarters when the Backlog will be converted into revenue however management's current estimate is that approximately seventy five percent of the Backlog will be converted into revenue during the next twelve months.
Gross Profit and Operating Expenses
Gross Profit
September 2024 | June 2024 | September 2023 |
$5,021,000 | $1,657,000 | $1,544,000 |
Gross profit of $5 million in the quarter was an increase of $3.4 million over the previous quarter and a $3.5 million and 225% increase over the same quarter in 2023. The increase in gross profit between the quarters is directly related to the increase in the revenue reported in the respective quarters. Gross profit percentage was 33.7% of revenue compared to 22.7% for the quarter ended June 30, 2024 and 28% for the three months ended September 30, 2023.
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The fixed component of cost of goods sold which includes engineering and project management was $1.2 million which was a slight increase over previous quarters.
Sales and Marketing
September 2024 | June 2024 | September 2023 |
$1,157,000 | $745,000 | $531,000 |
The Company's sales and marketing expenditures are composed of two significant categories; variable selling costs and sales department expenditures.
Variable selling costs represent amounts that are paid to both internal sales employees and external manufacturer representatives. These costs are incurred when the project revenue is recognized during the period. Sales department expenditures relate primarily to departmental salaries and advertising expenses.
Sales and marketing costs for the third quarter of 2024 totaled $1,157,000 and represented 7.8% of revenue compared to the 10.2% of revenue that sales and marketing costs represented for the previous quarter. Year to date sales and marketing costs are 9.2% of reported revenue compared to 9.1% for the year ended December 31, 2023. The increase in sales costs in the quarter were due to increased commission expense on the higher revenues recorded and higher travel and accommodation costs.
Research and Development
September 2024 | June 2024 | September 2023 |
$8,000 | $14,000 | $5,000 |
Research and Development expenditures include research and development salaries, material and laboratory costs as well as subcontractor costs for the development of and installation of demonstration sites.
General and Administrative | September 2024 | June 2024 | September 2023 |
$830,000 | $386,000 | $258,000 | |
General and Administration expenditures include administrative salaries, consulting, office supplies, regulatory and transfer fees, travel and corporate affairs.
General and administrative expenses of $830,000 were higher in the quarter compared to the previous quarter and the same period in the prior due to increase compensation costs recorded, higher legal fees, insurance costs and recruitment costs.
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Other Expense(Income)
September 2024 | June 2024 | September 2023 |
$(4,000) | $1,000 | $12,000 |
Other income in the quarter was from $8,000 of foreign exchange gain on the monetary assets of Biorem Technologies Inc held in US dollars compared to $1,000 of foreign exchange losses in the second quarter of 2024, and $12,000 of foreign exchange losses in the third quarter of 2023. All the gains and losses were the result of fluctuations the exchange rate of the United States dollar to the Canadian dollar during the periods.
Liquidity
The Company finances its operations and capital expenditures through cash generated from operations and equity and debt financings.
2024 Cash flow
Cash and cash equivalents
September 2024 | June 2024 | September 2023 |
$7,275,000 | $3,904,000 | $2,383,000 |
Cash on hand increased by $3,371,000 to $7,275,000 on September 30, 2024 from $3,904,000 at June 30, 2024.
The sources and uses of cash for the quarters ended are summarized below:
September 2024 | June 2024 | September 2023 | |
Cash provided by (used in) operating | $3,020,000 | $(1,860,000) | $2,564,000 |
activities | |||
Cash provided by (used in) investing | - | (3,000) | (241,000) |
activities | |||
Cash provided by (used in) financing | (201,000) | (200,000) | (1,328,000) |
activities | |||
Foreign exchange gain (loss) on cash | 552,000 | 65,000 | (198,000) |
Net increase (decrease) in cash | $3,371,000 | $(1,998,000) | $797,000 |
Cash provided by operating activities - Earnings from operating activities during the quarter generated $3,145,000 of cash, and $125,000 of cash was used to fund increases in non-cash working capital. In particular, $2.1 million was generated from the collection of accounts receivable and $663,000 from the reduction in prepaid project costs. These sources of cash were offset by a $2.6 million decrease in unearned revenue and a $949,000 increase in inventories.
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Cash used in investing activities - There was no investment activities in the quarter.
Cash generated by financing activities - $137,000 of cash was used to make principal payments on the Company's term loan and a further $64,000 of cash was used in the quarter to pay lease obligations.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Board of Directors reviews and approves the Company's operating and capital budgets, as well as any material transactions out of the ordinary course of business including proposals on major investments. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and by continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities.
The Company's objectives of managing liquidity risk are to forecast the liquidity position as accurately as possible and to maintain sufficient resources to pursue its growth strategy. The Company's financial liabilities include accounts payable and accrued liabilities, unearned revenue and contract advances as well as long and short term debt.
The Company's net current assets (liabilities) are summarized below.
September 2024 | June 2024 | September 2023 | |
Cash and cash equivalents | $7,275,000 | $3,904,000 | $2,383,000 |
Working capital | $10,441,000 | $7,590,000 | 3,790,000 |
Unused operating line of credit | 3,000,000 | 3,000,000 | 3,000,000 |
(1) Working capital represents total current assets less total current liabilities.
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A maturity analysis as at September 30, 2024 of the Company's financial liabilities based on gross, undiscounted cash flows is presented below. The maturity analysis is based on the earliest date that liabilities may be due.
Carrying | Contractual | Less than | |||||
Amount | Cash Flow | 1 year | 1-5 years | 5+ years | Total | ||
$ | $ | $ | $ | $ | $ | ||
September 2024 | |||||||
Accounts payable | 4,631,165 | 4,631,165 | 4,631,165 | - | - | 4,631,165 | |
Accrued liabilities | 1,909,541 | 1,909,541 | 1,909,541 | - | - | 1,909,541 | |
Interest bearing loans | 2,568,031 | 2,799,647 | 658,740 | 2,140,906 | 2,799,646 | ||
Lease liabilities | 1,162,136 | 1,523,239 | 174,439 | 853,872 | 494,928 | 1,523,239 | |
10,270,873 | 10,863,592 | 7,373,885 | 2,994,778 | 494,928 | 10,863,591 | ||
December 2023 | |||||||
Accounts payable | 6,136,127 | 6,136,127 | 6,136,127 | - | - | 6,136,127 | |
Accrued liabilities | 2,132,986 | 2,132,986 | 2,132,986 | - | - | 2,132,986 | |
Interest bearing loans | 2,976,137 | 3,293,701 | 658,740 | 2,634,961 | - | 3,293,701 | |
Lease liabilities | 1,209,042 | 1,660,808 | 251,374 | 631,228 | 778,206 | 1,660,808 | |
12,454,292 | 13,223,622 | 9,179,227 | 3,266,189 | 778,206 | 13,223,622 |
Capital Resources
On September 30, 2024 the Company had an undrawn operating line of credit of $3 million. The Company does not have any significant capital expenditure projects underway or forecasted for the balance of 2024 or 2025.
Financial instruments
At September 30, 2024 the Company held no forward exchange contracts.
Commitments
Commitments include operating leases for office equipment and facilities, bank guarantees, and performance bonds issued on our behalf by financial institutions in connection with facility leases and contracts with public sector customers. Aside from the aforementioned, the Company does not have any other business arrangements or any equity interests in unconsolidated companies that would have a significant effect on its assets and liabilities as at September 30, 2024.
Off-Balance Sheet Arrangements
As a general practice, the Company does not enter into off-balance sheet financing arrangements. Except for operating leases and letters of credit, all commitments are reflected on the balance sheet.
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