AI assistant
BuildDirect.com Technologies Inc. — Interim / Quarterly Report 2021
Nov 18, 2021
47925_rns_2021-11-18_d10e8aa7-6e10-45f9-95b0-129c1ad51906.pdf
Interim / Quarterly Report
Open in viewerOpens in your device viewer
==> picture [233 x 76] intentionally omitted <==
BuildDirect.com Technologies Inc
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three months and nine months ended September 30, 2021 and September 30, 2020
1
GENERAL INFORMATION AND CAUTIONARY STATEMENTS
The following management’s discussion and analysis (“MD&A”) dated November 18, 2021, provides information concerning the financial condition and results of operations of BuildDirect.com Technologies Inc. (“BuildDirect” or the “Company”) for the three and nine months ended September 30, 2021 (“2021”) and September 30, 2020 (“2020”). This report intends to complement and supplement our unaudited condensed interim consolidated financial statements for the three-month period ended September 30, 2021 and September 30, 2020 and should be read in conjunction with the unaudited condensed interim consolidated financial statements and the accompanying notes. Readers are also advised to read the Company’s audited financial statements and accompanying notes for the year ended December 31, 2020, which have been prepared in accordance with International Financial Reporting Standards and the Company’s annual MD&A for the year ended December 31, 2020. Additional information relating to the Company is available on Company’s website at www.builddirect.com
Basis of presentation
In this MD&A, unless otherwise indicated, all dollar amounts are expressed in US dollars. The MD&A has been prepared by reference to the MD&A disclosure requirements established under National Investment 52-202 “Continued Disclosure Obligations” (“NI 52-202”) for the Canadian Securities Administrations. The information and disclosure in this report as at the date of November 18, 2021, unless otherwise noted.
Forward looking Information
This MD&A contains “forward-looking information” within the meaning of applicable securities laws in Canada. These statements are based on current expectations and estimates about our business and include information regarding our financial position, business strategy, growth strategies, operations, financial results and objectives. Particularly, information regarding our expectations of future results, growth of our operations and performance opportunities in the market in which we operate is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “expects” or “does not expect”, “estimates”, “outlook”, “prospects”; “projection”, “intends”, “believes”, “should”, “will”, “would” or the negative of these terms, and similar expressions intended to identify forward-looking statements. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. The forward-looking information contained in this MD&A represents our expectations as of the date of the MD&A (or as of the date they are otherwise stated to be made) and are subject to changes after such date. We disclaim any intention or obligation or undertaking to update or revise any forwardlooking information, whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada.
Non-IFRS financial measures
This MD&A makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS, and do not have a standardised meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our
2
results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including “EBITDA” and “Adjusted EBITDA”. Management uses these non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts, and to determine components of management compensation. As required by Canadian securities laws, we reconcile these non-IFRS measures to the most comparable IFRS measures in this MD&A. For definitions and reconciliation of these non-IFRS measures to the relevant reported measures, see “Non-IFRS measures”.
COMPANY OVERVIEW & OUTLOOK
BuildDirect is an innovative platform for purchasing and selling building materials online. The Company is poised to help accelerate the rapid transformation of the home improvement products industry and how professionals (“Pro”) and homeowners alike, approach their home improvement projects.
The BuildDirect platform connects homeowners and home improvement professionals in North America with suppliers and sellers of quality building materials from around the world, including flooring, tile, decking and more. BuildDirect’s year-over-year growth, proprietary heavyweight delivery network, and digital reach have served to solidify its role as a ground-breaking player in the home improvement industry.
BuildDirect’s growth strategy is centered on enhancing the home improvement industry, using technology to give customers a better, more simplified experience. BuildDirect’s platform is positioned to quickly deliver a full assortment of building materials to a jobsite or to the home with a focus on the end-to-end floor buying experience through its easy-to-use website www.builddirect.com, best-in-industry selection breadth, direct from manufacturer pricing, proprietary heavyweight supply chain, as well as hands-on and knowledgeable customer support.
An addressable market of approximately $71 billion[1] in the U.S. flooring segment provides significant runway for growth. This large and growing market, combined with a strategy of anchoring BuildDirect’s presence in local markets by acquiring successful brick and mortar operations, provides the Company an opportunity to consolidate a fragmented supplier and customer base. BuildDirect’s distinct digital and physical (“DiPhy”) growth strategy focuses on pivoting from pure e-Commerce to an expansive omnichannel offering. It combines technology and a heavyweight delivery platform with localised relationships, service and product knowledge of the established independent retailers to drive growth to deliver value to all of BuildDirect’s stakeholders.
BuildDirect’s business performance accelerated over the past year, a result of significant growth in the home improvement products industry driven by a shift towards investment in the home, which has driven record breaking online growth in building material purchases. Driving this growth forward, BuildDirect intends to continue expanding gross margin through further alignment of unit economics and profitability in addition to enhancing revenue through its omnichannel platform. In 2021, BuildDirect anticipates revenue in the range of $90 - $98 million, representing significant year-over-year growth”.
BuildDirect believes its best days are still ahead as the Company leverages its DiPhy growth strategy and expands its reach into brick and mortar independent retailers and captures the B2B professionals. The above guidance does not include additional acquisitions, however BuildDirect maintains a strong funnel of actionable acquisition targets that fit within its well-defined investment criteria.
3
Actual results may differ materially from BuildDirect's financial outlook as a result of, among other things, the factors described under "Forward-Looking Information" above.
1 Source: Floor Covering Weekly; Vol 69 No 16; July 27, 2020.
RECENT DEVELOPMENTS
Acquisitions
O n November 17, 2021, the Company announced the closing of an agreement to acquire 100% of the fully diluted outstanding capital stock of Superb Flooring & Design LLC (“Superb” or the “Acquisition”), an established brand name serving Pro builder customers (home builders, condominium developers, commercial and residential contractors, interior designers, architects, and multi-family property managers) across the U.S. mid-West. Pursuant to the Purchase Agreement, BuildDirect paid Superb an aggregate purchase price of USD $10 million, comprising
-
An initial payment in cash on closing of the Acquisition;
-
Certain deferred payments following the closing date of the Acquisition, a portion of which is subject to Superb’s achievement of certain performance metrics.
The purchase price is also subject to customary post-closing working capital adjustments.
Reverse take-over transaction
On March 19, 2021, the Company entered into a definitive agreement with VLCTY Capital Inc. (“VLCTY”), a public company trading on the TSX Venture Exchange (“TSXV”), whereby the Company would complete a reverse take-over of VLCTY pursuant to which, among other things, VLCTY would acquire all of the issued and outstanding securities of BuildDirect (the “Transaction”).
Following receipt of approval by the TSXV on August 13, 2021, the Company amalgamated with a whollyowned subsidiary of VLCTY to facilitate the completion of the Transaction. Following the closing of the transaction (then referred to as the “resulting issuer”), listed on the TSXV as a Tier 1 Technology issuer, and that the business of the resulting issuer is the business of BuildDirect, effective August 18, 2021.
Immediately prior to the completion of the Transaction, VLCTY effected: (i) the VLCTY Consolidation, resulting in an aggregate of approximately 226,091 post-VLCTY Consolidation common shares of VLCTY (each a “VLCTY share” and, upon closing of the Transactions, a “resulting issuer share”) being issued and outstanding; (ii) a name change pursuant to which VLCTY changed its name to "BuildDirect.com Technologies Inc."; and (iii) the adoption of the new equity incentive plan.
In connection with the Transaction, on April 30, 2021, BuildDirect obtained funding from a private placement offering (the “Offering”) of 3,487,000 subscription receipts (the “subscription receipts”) at an issue price of CDN$5.75 per Subscription Receipt for aggregate gross proceeds of CDN $20,050,250 (USD $16,177,384). Each subscription receipt automatically converted into one common share and one warrant of the Company upon completion of the Transaction. Each warrant entitles the holder to purchase one additional share of the Company at a price of CDN$6.90 per warrant of the Company at any time 24 months from the closing of the Transaction. If prior to the expiry date of the warrant, the daily volume-weighted average trading price of the Company exceeds CDN$8.00 for a period of at least 30 consecutive trading
4
days, the Company may accelerate the expiry of the warrant to a date not earlier than the date that is 30 days following the acceleration of the warrant. The proceeds of the Offering have been received on August 18, 2021.
In addition, under the terms of the Exempt Market Dealer Services Agreement, which was finalized immediately prior to the completion of the transaction, BuildDirect obtained funding from a non-brokered private placement offering (the “Non-brokered Offering”) of 90,264 equity units (the “Units”) at an issue price of CDN$5.75 per Unit for aggregate gross proceeds of CDN$519,018. Each Unit has automatically converted into one common share and one warrant of the Company pursuant to the terms of the Exempt Market Dealer Services Agreement and the Warrant Indenture. Each warrant entitles the holder to purchase one additional share of the Company at a price of CDN$6.90 per warrant of the Company at any time 24 months from the closing of the Transaction. If prior to the expiry date of the warrant, the daily volumeweighted average trading price of the Company exceeds CDN$8.00 for a period of at least 30 consecutive trading days, the Company may accelerate the expiry of the warrant to a date not earlier than the date that is 30 days following the acceleration of the warrant. The proceeds of the Offering have been deposited in trust with Company’s legal counsel.
Immediately prior to the completion of the Transaction, the Company effected a consolidation of all of the outstanding BuildDirect Shares and the Class AA preference shares of BuildDirect (collectively, the “BuildDirect Shares”) on the basis of 5.393 pre-consolidation BuildDirect Shares to 1 post-consolidation BuildDirect Share, resulting in an aggregate of 25,842,130 BuildDirect Shares being issued, including 3,597,501 BuildDirect Shares to be issued upon conversion of the convertible notes.
The completion of the Offering and release of the proceeds to the Company was conditional on conditions (the “Release Conditions”), which include completion of the reverse takeover transaction with VLCTY and the shares of the resulting company being conditionally listed by the TSX Venture Exchange as of August 13, 2021.
On October 15, the Company announced that due to personal reasons, Chief Executive Officer ("CEO"), Dan Park, will transition to Chair of the Board effective December 31, 2021 and that seasoned executives Peg Hunter and Henry Lees-Buckley have been appointed to its Board of Directors, effective immediately.
Boyden Canada, an executive search firm, has been engaged to identify a new CEO who will complement BuildDirect's strong leadership team, has public markets experience, and will drive forward BuildDirect's distinct DiPhy strategy.
Tariff Dispute and Litigation
On September 21, 2020, BuildDirect filed an action in the U.S. Court of International Trade against U.S. Customs and Border Protection and the U.S. Trade Representative challenging the imposition and collection of certain tariffs on goods imported into the U.S. This action is ongoing and is substantially similar to lawsuits filed by approximately 3,500 other importers similarly affected by the above noted tariffs.
Management of BuildDirect is not aware of any material pending or threatened proceedings as at September 30, 2021.
5
SELECTED INTERIM INFORMATION
Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020
| For the three months ended | For the three months ended | For the nine | months ended | |
|---|---|---|---|---|
| September | 30 | September 30 | ||
| 2021 | 2020 | 2021 | 2020 | |
| Revenue | $ 22,355,658 | $ 14,819,622 | $ 66,649,723 | $ 37,059,011 |
| Cost of goods sold | 14,216,903 | 9,337,086 | 42,372,402 | 22,840,645 |
| Gross Profit | 8,138,755 | 5,482,536 | 24,277,321 | 14,218,366 |
| Operating expenses: | ||||
| Fulfillment costs | 2,374,704 | 2,395,634 | 6,855,014 | 6,382,115 |
| Selling and marketing | 2,968,055 | 1,971,881 | 8,359,299 | 5,444,591 |
| Administration | 3,609,064 | 1,566,850 | 11,151,304 | 4,884,990 |
| Research and development | 472,539 | (222,797) | 1,298,102 | (310,015) |
| Depreciation and amortization | 794,995 | 168,970 | 2,746,238 | 614,420 |
| 10,219,357 | 5,880,538 | 30,409,957 | 17,016,101 |
|
| Loss from operations | (2,080,602) | (398,002) | (6,132,636) | (2,797,735) |
| Other income (expense): | ||||
| Interest income | 23,836 | 36,004 | 64,106 | 92,592 |
| Interest expense | (527,408) | (183,823) | (1,829,265) | (591,192) |
| Finance costs | (374,652) | - | (1,444,745) | - |
| Rental income | 61,154 | 47,700 | 161,710 | 357,159 |
| Fair value adjustment of convertible debt | 4,964,539 | - | (1,455,090) | - |
| and warrants | ||||
| Foreign exchange (loss)/gain | 98,063 | 301,735 | 9,899 | 382,595 |
| Gain on sublease | - | - | - | 129,148 |
| Listing expense | (1,017,659) | - | (1,017,659) | - |
| 3,227,873 | 201,616 | (5,511,044) | 370,302 |
|
| Income/(loss) before income taxes | 1,147,271 | (196,386) | (11,643,680) | (2,427,433) |
| Income tax expense* | (474,031) | - | (1,283,537) | - |
| Total income/(loss) and comprehensive | $ 673,240 | $ (196,386) | $ (12,927,217) | $ (2,427,433) |
| income/(loss)for theperiod |
* 2021 income tax expense relates to the operations of Charter Distributing Company (“FloorSource”), which was acquired on December 31, 2020. FloorSource has four locations in the state of Michigan (“MI”) and is subject to US federal and state taxes.
6
Revenue and Gross Margin
Three months ended September 30, 2021 compared to Three months ended September 30, 2020
Total revenues for the three months ended September 30, 2021 increased by $7,536,036 (50.9%) over the same period in 2020, largely driven by continuing favourable market conditions as well as immediate revenue contribution from the acquisition of FloorSource, which completed on December 31, 2020.
Revenues for our Product Sales increased by $7,617,938 for the three months ended September 30, 2021 compared to the same period in 2020, mainly due to the acquisition of FloorSource as mentioned above.
Revenues for our Freight decreased by $642,701 for the three months ended September 30, 2021 compared to the same period in 2020. The decrease is mainly due to additional free shipping promotions in Q3 2021.
Revenues for our Warehouse services decreased by $225,691 for the three months ended September 30, 2021 compared to the same period in 2020. The decrease in revenues in 2021 can be attributed to a strategic decision to shift away from charging supplier warehousing fees.
Revenue from our Installation services increased by $822,018 for the three-month ended September 30, 2021 compared to the same period in 2020, which can be attributed entirely to the acquisition of FloorSource.
Gross margin dollars for the three months ended September 30, 2021, increased by $2,656,219 (48.4%) over 2020. Gross margin percentage was 36.4%, a decrease from 37.0% achieved in the same period in prior year due to slightly lower gross margin percentages from the FloorSource business and higher supply chain costs in 2021 compared to 2020.
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
Total revenues for the nine months ended September 30, 2021 increased by $29,590,712 (87.1%) over the same period in 2020.
Revenues for our Product Sales increased by $28,926,729 for the nine months ended September 30, 2021 compared to the same period in 2020. The increase is mainly due to the acquisition of FloorSource, which occurred on December 31, 2020.
Revenues for our Freight decreased by $896,610 for the nine months ended September 30, 2021 compared to the same period in 2020. The decrease is mainly due to additional free shipping promotions in 2021.
Revenues for our Warehouse services decreased by $394,308 for the nine months ended September 30, 2021 compared to the same period in 2020. The decrease in revenues in 2021 can be attributed to the strategic decision to shift away from charging supplier warehousing fees.
Revenue from our Installation services increased by $2,0433,781 for the nine months ended September 30, 2021 compared to the same period in 2020, which can be attributed to the acquisition of FloorSource.
Gross margin dollars for the nine months ended September 30, 2021, increased by $10,058,955 (70.7%) over 2020. Gross margin percentage was 36.4%, a decrease from 38.4% achieved in the same period in prior year. The main driver of the decrease in margin is due to the $528,552 fair value adjustment of inventory related to FloorSource acquisitions, which was all expensed into cost of good sold in Q1 2021. In addition, there were higher supply chain costs in 2021.
7
Expenses:
Three months ended September 30, 2021 compared to Three months ended September 30, 2020
Expenses for the three months ended September 30, 2021 were $10,219,357 versus $5,880,538 in 2020, an increase of $4,338,819 (73.8%), due to expenses related to the acquired business and the additional expenses related to listing on the TSXV. As a percentage of revenue, expenses rose to 44.0% compared to 39.7% in 2020.
Fulfillment costs decreased by $20,930 (0.9%) from $2,395,634 for the three months ended September 30, 2020 to $2,374,704 for the three months ended September 30, 2021. Of the revenue that has fulfillment costs associated, it is in line with revenue.
Selling and marketing expenses increased by $966,174 (50.5%) from 1,971,881 for the three months ended September 30, 2020 to $2,968,055 for the three months ended September 30, 2021 as the Company invested in key initiatives that drove higher sales commissions and innovative marketing activities to accelerate sales growth.
Administration expenses increased by $2,042,214 (130.3%) from $1,566,850 for the three months ended September 30, 2020 to $3,609,064 for three months ended September 30, 2021. The increase reflects added expenses related to acquired business and the additional expenses related to listing on the TSXV. As a percentage of revenue, administration expenses were 16.1% for the three months ended September 30, 2021, compared to 10.6% for the same period in 2020. Non-recurring expenses related to listing on the TSXV were $409,211 for the three months ended September 30, 2021. After excluding the non-recurring expenses, as a percentage of revenue it is 14.3%.
Research and development expenses increased by $695,336 from $(227,797) for the three months ended September 30, 2020 to $472,539 for the three months ended September 30, 2021. The increase was mainly driven by lower government tax credits received.
Depreciation and amortization expenses increased by $626,025 from $168,970 for the three months ended September 30, 2020 to $794,995 for the three months ended September 30, 2021. The major driver of the increase is the amortization of the intangible asset acquired from FloorSource on December 31, 2020 and amortization on additional right-of-use assets.
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
Expenses for the nine months ended September 30, 2021 were $30,409,957 versus $17,016,101 in 2020, an increase of $13,393,856 (78.7%). The increase reflects added expenses related to the acquired business and the additional expenses related to listing on the TSXV. As a percentage of revenue, expenses were 45.6% for the nine months ended September 30, 2021, compared to 45.9% for the same period in 2020.
Fulfillment costs increased by $472,899 (7.4%) from $6,382,115 for the nine months ended September 30, 2020 to $6,855,014 for the nine months ended September 30, 2021 to due to the increase in revenue that has fulfillment costs associated.
Selling and marketing expenses increased by $2,914,708 (53.5%) from $5,444,591 for the nine months ended September 30, 2020 to $8,359,299 for the nine months ended September 30, 2021 as the Company invested in key initiatives that drove higher sales commissions and innovative marketing activities to accelerate sales growth.
Administration expenses increased by $6,266,314 (128.3%) from $4,884,990 for the nine months ended September 30, 2020 to $11,151,304 for the nine months ended September 30, 2021. The increase reflects added expenses related to acquired business and the additional expenses related to listing on the TSXV. As a percentage of revenue, administration expenses were 16.7% for the nine months ended September
8
30, 2021, compared to 13.2% for the same period in 2020. Non-recurring expenses related to listing on the TSXV were $409,211 for the three nine ended September 30, 2021. After excluding the non-recurring expenses, as a percentage of revenue it is 15.6%.
Research and development expenses increased by $1,608,117 from $(310,015) for the nine months ended September 30, 2020 to $1,298,102 for the nine months ended September 30, 2020. The increase was mainly driven by lower government tax credits received.
Depreciation and amortization expenses increased by $2,131,818 from $614,420 for the nine months ended September 30, 2020 to $2,746,238 for the nine months ended September 30, 2021. The major driver of the increase is the amortization of the intangible asset acquired from FloorSource on December 31, 2020 and amortization on additional right-of-use assets.
NON-IFRS MEASURES
We define EBITDA as net income or loss before interest, income taxes and amortization. Adjusted EBITDA removes fair value adjustment of convertible debt and warrants, fair value adjustment of inventory, restructuring expenses, non-recurring bad debt expense, foreign exchange gains and losses, and sharebased compensation items from EBITDA. We are presenting these measures because we believe that our current and potential investors, and many analysts, use them to assess our current and future operating results and to make investments decisions. Management uses these measures in managing the business and making decisions. EBITDA and adjusted EBITDA are not intended as substitutes for IFRS measures.
| For the three months ended | For the three months ended | For the nine | months ended | |
|---|---|---|---|---|
| September | 30 | September 30 | ||
| Adjusted EBITDA | 2021 | 2020 | 2021 | 2020 |
| Gain (Loss for the period | $ 673,240 | $ (196,386) | $ (12,927,217) | $ (2,427,433) |
| Income tax expense | 474,031 | - | 1,283,537 | - |
| Depreciation and amortization | 794,995 | 168,970 | 2,746,238 | 614,420 |
| Interest | 503,572 | 147,819 | 1,765,159 | 498,600 |
| EBITDA | 2,445,839 | 120,403 | (7,132,283) | (1,314,413) |
| EBITDA adjustments | ||||
| Stock-based compensation | $ 196,284 | $ 57,520 | $ 1,250,114 | $ 172,561 |
| Foreign exchange (gain)/loss | (98,063) | (301,735) | (9,899) | (382,595) |
| Fair value adjustment of | (4,964,539) | - | 1,455,090 | - |
| convertible debt and warrants | ||||
| Impact of fair value adjustment of | - | - | 528,552 | - |
| Inventory in FloorSource acquisition1 | ||||
| Significant bad debt expense2 | 257,891 | - |
||
| Finance costs3 | 374,652 | - | 1,444,745 | - |
| Listing expenses4 | 1,017,659 | - | 1,017,659 | - |
| Other expenses related to TSXV listing5 | 409,211 | - | 409,211 | - |
| Adjusted EBITDA | (618,958) | (123,812) | (778,920) | (1,524,447) |
| Adjusted EBITDA % | (3%) | (1%) | (1%) | (4%) |
9
1 The adjustment for the impact of the fair value of FloorSource inventory relates to the impact on normal selling profit from the fact that IFRS requires that the inventory be recorded at fair value on acquisition and not at FloorSource’s historical cost. Earnings are impacted as this inventory was sold in the period.
2 The adjustment is a non-recurring activity, relating to a provision for an advance made to a former employee, which was deemed uncollectible in 2021.
3 The adjustment relates to agents’ commission and certain expenses of the private placement offering totalling CDN $1,796,748.
4 The adjustment relates to the consideration transferred in excess of the net assets acquired and certain expenses related to the reverse acquisition.
5 The adjustment relates to non-recurring legal and accounting expenses required to meet public company standards for TSXV listing.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2021, there was an increase in cash of $12,458,227, compared to $561,943 in the same period in 2020. The change in total cash was mostly due to cash provided by financing activities related to the subscription receipts proceeds, net of financing costs.
CASH FLOW
| For | the nine months | ended | September 30, | |
|---|---|---|---|---|
| 2021 | 2020 | |||
| Cash (used in)/provided by operating activities | $ | (281,752) | $ | 1,531,856 |
| Cash provided by investing activities | 395,726 | 138,325 | ||
| Cashprovided by/(used in)financingactivities | 12,344,253 | (1,108,238) | ||
| Increase/(Decrease) in cash | 12,458,227 | 561,943 |
Operating activities
For the nine months ended September 30, 2021, cash flow used in our operating activities was $281,752 compared to cash provided of $1,531,856 for the nine months ended September 30, 2020. The decrease of $1,813,608 was due to working capital changes.
Investing activities
For the nine months ended September 30, 2021, cash flow provided by our investing activities was $395,726 compared to $138,325 for the nine months ended September 30, 2020. The increase of $257,401 was mostly due to the cash acquired from the reverse acquisition of VLCTY.
Financing activities
For the nine months ended September 30, 2021, cash flow provided by our financing activities was $12,344,253 compared to cash used of $1,108,238 for the nine months ended September 30, 2020. The increase in cash was a result of the subscription receipt proceeds in connection with the Transaction, net of subscription receipts issuance costs and interest paid on promissory notes during the period.
As at September 30, 2021 the Company had a positive working capital of $9,616,206 (December 31, 2020 working capital of $594,093). Current assets primarily consisting of cash, restricted cash, and inventory totaled $31,016,888 (December 31, 2020 – $15,095,644). Current liabilities which primarily consist of
10
accounts payable and accrued liabilities, and loans payable, totaled $21,400,682 as at September 30, 2021 (December 31, 2020 – $14,501,561).
The Company’s major capital expenditures in 2021 have largely been in relation to the Transaction discussed above and expenses related to select accretive acquisitions to drive growth.
BuildDirect manages liquidity risk through ongoing review of working capital balances and management of cash and the assumption that the Company will realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. There can be no assurance that the Company will be able to obtain adequate financing in the future or if available that such financing will be on acceptable terms. If adequate financing is not available when required, the Company may be required to delay, scale back or growth plans and may be unable to continue in operation. The Company may seek such additional financing through debt or equity offerings. Any equity offering will result in dilution to the ownership interests of the Company’s shareholders and may result in dilution to the value of such interests.
Liquidity risk is the risk that the Company will be unable to fulfill its obligations on a timely basis or at a reasonable cost. The Company manages its liquidity risk by monitoring its operating requirements. The Company prepares budget and cash forecasts to ensure it has sufficient funds to fulfill its obligations. For the nine months ended September 30, 2021 there is a net loss of $12,927,217 (2020 – $2,427,433). There is negative cash flow from operations of $281,752 for the nine months ended September 30, 2021 (2020 - positive cash flow of $1,531,856). Due to the increase in working capital from $594,083 at December 31, 2020 to $9,616,206 at September 30, 2021, and current cash balance of $17,874,738 at September 30, 2021, the Company believes there are adequate resources available to fund operations and obligations.
The following table summarizes the amount of contractual undiscounted future cash flows for the Company’s financial liabilities, including interest as at September 30, 2021:
| 2021 | 2022 | 2023 | 2024 | 2025 | Total | ||||
|---|---|---|---|---|---|---|---|---|---|
| Accounts payable and | |||||||||
| accrued liabilities | $10,388,873 | $ - | $ | - | $ | - | $ | - |
$10,388,873 |
| Income tax payable- | 1,283,537 | - | - | - | - | 1,283,537 | |||
| Promissory note | 1,323,782 | 1,475,402 | 1,414,225 | 1,352,060 | 1,289,249 | 6,854,718 | |||
| Loan payable | 115,322 | 4,039,614 | 4,154,936 | ||||||
| Deferred consideration | |||||||||
| payable | 675,000 | 675,000 | 675,000 | - | - | 2,025,000 | |||
| Lease liabilities | 1,332,827 | 1,332,119 | 1,305,806 | 944,656 | 196,023 | 5,111,431 | |||
| $15,119,341 | $7,522,135 | $3,395,031 | $2,296,716 | $1,485,272 | $29,818,495 |
LONG TERM DEBT IS AS FOLLOWS:
| September 30, 2021 | September 30, 2021 | December 31, 2020 | December 31, 2020 | |
|---|---|---|---|---|
| Secured note | $ | 3,810,038 | $ | 3,927,113 |
| Secured convertible notes | - | 12,120,679 | ||
| Securedpromissorynote | 5,912,093 | 5,698,656 | ||
| Total | 9,722,131 | 21,746,448 |
The secured note agreement has a principal amount of $3,927,113 (CDN$5,000,000) and bears interest at 12% per annum and in the event of default, the interest rate will be amended to 15% per annum. Interest
11
is payable on the first anniversary of the agreement, and subsequently every quarter. A portion of the note in the amount of $114,382 (CDN$145,631) was paid in June of 2021, the remainder of the note has a maturity date of June 30, 2022. The note is secured by all property, assets, and rights of the Company, excluding property assets and rights of FloorSource. Covenants include, but are not limited to, making timely payments per the agreement, allowing the note holders access to financial records, maintaining appropriate insurance and accounting records including completing the audit of the consolidated financial statements within 120 days after the end of each fiscal year, complying with all material laws and regulations, filing and paying taxes as due. Since the Company did not complete the audited financial statements within 120 days after the end of fiscal year ended December 2019 and 2020, the covenant was breached and as such the secured loan is classified as a current liability.
The secured convertible notes, and accrued interest at 8% compounded monthly, were converted to equity and warrants upon private placement offering transaction. The December 31, 2020, fair value of $12,120,679 was determined by the Company using a lattice valuation approach with a binomial tree. Under this valuation approach, a share price lattice was constructed according to a volatility of a group of comparable companies range of 60-62%, risk-free rate range of 0.22 to 0.26%, estimated fair value of the Company’s common shares of $0.64 and a credit spread of 15% as at December 31, 2020.
In connection with the reverse acquisition, additional warrants were issued as follows:
-
Warrants exercisable to acquire 3,577,264 common shares issued in connection with the subscription receipt financing, and the non-brokered unit financing (see note 3). Each warrant entitles the holder to purchase one common share of the Company at a price of CDN$6.90 per share at any time up to 24 months from the closing of the Transaction. If prior to the expiry date of the warrant, the daily volume- weighted average trading price of the Company exceeds CDN$8.00 per share for a period of at least 30 consecutive trading days, the Company may accelerate the expiry of the warrant to a date not earlier than the date that is 30 days following the acceleration of the warrant. the unit financing, and the warrants issued in connection with the convertible notes) at exercise prices between USD $0.5393 to CDN $6.90 per share.
-
Warrants exercisable to acquire 3,563,072 common shares issued in connection with the convertible notes. Each warrant entitles the holder to purchase one common share of the Company at a price of CDN$6.90 per share at any time up to 24 months from the closing of the Transaction. If prior to the expiry date of the warrant, the daily volume- weighted average trading price of the Company exceeds CDN$8.00 per share for a period of at least 30 consecutive trading days, the Company may accelerate the expiry of the warrant to a date not earlier than the date that is 30 days following the acceleration of the warrant. the unit financing, and the warrants issued in connection with the convertible notes) at exercise prices between USD $0.5393 to CDN $6.90 per share.
-
Warrants exercisable to acquire 11,305 Resulting Issuer Common Shares (in respect of the VLCTY Broker Options) at exercise price of $2.6538 per share
-
Warrants exercisable to acquire 193,710 Resulting Issuer Common Shares at an exercise price of $5.75 per share (in respect of the Replacement Compensation Warrants).
12
The fair value of the warrants, which are carried at fair value through profit and loss was determined using Black Scholes model with the following assumptions:
| Replacement warrants in connection with convertible notes Warrants in connection with subscription receipt financing Warrants in connection with convertible notes Warrants in connection with VLCTY Broker Options Warrants in connection with Replacement Compensation |
Replacement warrants in connection with convertible notes Warrants in connection with subscription receipt financing Warrants in connection with convertible notes Warrants in connection with VLCTY Broker Options Warrants in connection with Replacement Compensation |
Replacement warrants in connection with convertible notes Warrants in connection with subscription receipt financing Warrants in connection with convertible notes Warrants in connection with VLCTY Broker Options Warrants in connection with Replacement Compensation |
Replacement warrants in connection with convertible notes Warrants in connection with subscription receipt financing Warrants in connection with convertible notes Warrants in connection with VLCTY Broker Options Warrants in connection with Replacement Compensation |
Replacement warrants in connection with convertible notes Warrants in connection with subscription receipt financing Warrants in connection with convertible notes Warrants in connection with VLCTY Broker Options Warrants in connection with Replacement Compensation |
|---|---|---|---|---|
| Exercise price (per share) | CDN $4.2281 | CDN $6.90 | CDN $2.6538 | CDN $5.75 |
| Time to maturity (in years) | 9.25 | 1.58 | ||
| Volatility | 52-54% | 61% | ||
| Risk-free rate | 0.90-0.95% | 0.46% | ||
| Value of common shares at September 30, 2021 |
2.45 |
The promissory note bears interest at an effective rate of 12% compounded annually and is payable commencing on April 1, 2021. Interest accrued for the three months ended September 30, 2021 aggregate to $124,143 (2020: nil) and $369,284 for the nine months ended. Interest payments of $77,922 have been made in the three months ended and $155,848 in the nine months ended September 30, 2021 (2020: nil).
OFF-BALANCE SHEET ARRANGEMENTS
As at the date of this MD&A, the Company has not entered into any off-balance sheet arrangements.
TRANSACTIONS WITH RELATED PARTIES
BuildDirect.com Technologies Inc. has no related party transactions for the three months ended September 30, 2021.
CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS
Use of Judgements, Estimates and Assumptions:
The preparation of these interim financial statements in accordance with IAS 34 requires management to use judgement and make estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities at the date of the interim financial statements, and the reported amounts of revenue and expenses during the reporting periods. The judgements, estimates and associated assumptions are based on historical experience and other factors that management considers to be relevant and are subject to uncertainty. Judgements, estimates and underlying assumptions are reviewed on an ongoing basis, and revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Actual results could differ from these estimates due to changes in interest rates, foreign exchange rates, inflation, and economic conditions. The areas of significant judgement and estimation were identified in BuildDirect.com Technologies Inc.’s most recent audited consolidated financial statements for the year ended December 31, 2020, except for judgements
13
pertaining to the adoption of new accounting policies effective on January 1, 2021. These condensed consolidated interim financial statements should be read in conjunction with Note 2(e) audited consolidated financial statements for the year ended December 31, 2020.
FINANCIAL RISK FACTORS
The Company’s operations expose it to a variety of financial risks including liquidity risk, market risk and credit risk.
(a) Market risk:
- (i) Currency risk:
Currency risk reflects the risk that the Company’s earnings will decline due to fluctuations in exchange rates.
The Company has cash and cash equivalents denominated in Canadian dollars. As at September 30, 2021, the amount totaled $7,948,867 (2020 - $262,742).
The Company has accounts payable and accrued liabilities denominated in Canadian dollars. As at September 30, 2021, the amount totaled $1,836,692 (2020 - $2,017,433).
The Company holds a loan payable in Canadian dollars. As at September 30, 2021, the amount totaled $3,810,038 (2020 – $3,927,113).
If the period-end foreign exchange rate of Canadian dollar has been 10% higher, or 10% lower, with all other variables held constant, the effect on the Company’s foreign exchange for the nine months ended September 30, 2021 would have been $209,285 (2020 - $516,528) higher or lower.
(ii) Interest risk:
Interest Risk is the risk that the fair value or cash flows from a financial instrument will fluctuate due to a change in market interest rates. The Company does not hold any variable rate longterm debt thus is not subject to significant changes in the future cash flows due to interest rate risk. The interest rate risk on cash and short-term investments is considered insignificant due to the low interest rates in the current economic environment and short-term nature of its holdings and as such the Company does not take any actions to manage interest rate risk.
(b) Credit risk:
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss. The Company, in its normal course of business, evaluates the financial condition of its customers on a regular basis, in addition to assessing the loss allowance under the ECL model. In addition, the Company requires a majority of its customers to prepay for orders before shipment can be made. Therefore, the Company has determined there is no significant exposure to customer credit risk.
(c) Capital management:
The Company’s objective when managing its capital structure is to maintain a strong financial position and to provide returns with sufficient liquidity to undertake further growth for the benefit of its shareholders. The Company’s capital is comprised of long-term obligations and equity as outlines below:
14
| September 30, 2021 | September 30, 2021 | December 31, 2020 | December 31, 2020 | |
|---|---|---|---|---|
| External debt | $ | 9,722,131 | $ | 23,848,005 |
| Less cash | (17,874,738) | (5,416,511) | ||
| Net long-term obligations | (8,152,607) | 18,431,494 | ||
| Total deficiency | (13,399,005) | 5,424,012 | ||
| Total capitalization | $ | 5,246,398 | $ | 13,007,482 |
There were no changes to the Company’s approach to capital management during the period. The Company is subject to certain covenants (none of which are financial covenants) on its debt obligations. The Company’s strategy is to ensure it remains in compliance with all of its existing covenants so as to ensure continuous access to required debt to fund growth. Management reviews results and forecasts to monitor the Company’s compliance.
(d) Fair value hierarchy:
-
Level 1: The fair value of financial instruments traded in active markets and based on quoted market prices at the end of the reporting period.
-
Level 2 The fair value of financial instruments that are not traded in an active market and determined using valuation techniques using observable market data and rely little on entityspecific estimates If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.
-
Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3 (i.e. unlisted equity securities).
The Company’s cash, trade and other receivables, short-term investments, accounts payable and accrued liabilities, and lease liabilities are classified as measured at amortized cost. The carrying amounts of these instruments approximate fair value as at September 30, 2021 and September 30, 2020. The fair value of the warrants, promissory note and deferred consideration are described below and the basis of their valuation are explained in the respective notes There have been no transfers between levels in the current year. There have been no transfers between levels in the current period.
| Level 1 | Level 2 | Level 3 | |
|---|---|---|---|
| Warrants | - | - | (1,517,051) |
| Promissory note | - | (5,912,093) | - |
| Deferred considerationpayable | - | - | (1,765,619) |
15
RISK FACTORS
(a) The Flooring Industry:
The flooring industry is highly dependent on the remodeling of existing homes and commercial spaces and new home and commercial space construction. Remodeling and new home and commercial space construction depend on a number of factors, which are beyond BuildDirect’s control, including, without limitation, interest rates, tax policy, employment levels, consumer confidence, credit availability, real estate prices, demographic trends, weather conditions, natural disasters and general economic conditions. Risk therefore includes, without limitation, rise in interest rates, decrease in the availability of credit, increase in costs of fuel and changes in real estate markets or unemployment levels, which could limit discretionary consumer spending, reduce the purchase or remodelling of home and materially adverse effect on the BuildDirect’s business, operating results and financial condition.
(b) Reliance on Management and Key Employees
BuildDirect’s success is highly dependent on the retention of key personnel both at the parent company level and within its subsidiaries. If BuildDirect or its subsidiaries should lose the services of one or more key members of its executive or key employees, its ability to implement its business plan could be severely impaired. As BuildDirect’s business activity grows, additional key financial and administrative personnel, as well as additional staff, may be required. If BuildDirect and/or its subsidiaries are not successful in attracting, training and retaining qualified personnel, the efficiency of their operations may be affected.
(c) Reliance on Third-Party Service Providers
BuildDirect relies heavily on third party vendors, suppliers and partners to provide some of its products and services. If these third parties were unable or unwilling to provide these products and services in the future, BuildDirect would need to obtain such products or services from other providers if they are available. This could cause BuildDirect to incur additional costs or cause material interruptions to its business until these products and services are replaced if possible and all of which could adversely affect BuildDirect’s business, results of operations and financial condition.
(d) Product Suppliers
BuildDirect relies on a concentrated group of suppliers for a significant portion of the products it sells including a select group of foreign suppliers of products that the BuildDirect’s expectations. BuildDirect does not have long-term agreements with suppliers, and we usually obtain supplies on a container-by-container basis. BuildDirect’s suppliers may be unable to supply it in the future including but not limited to as a result of include a supplier’s financial instability, inability or refusal to comply with applicable laws, trade restrictions or tariffs, insufficient transport capacity and other factors, which are beyond the control of BuildDirect. There are also certain risks to BuildDirect associated with obtaining products from foreign suppliers, which are beyond BuildDirect’s control including terrorism, political unrest, and economic instability resulting in the disruption of trade from foreign countries where BuildDirect’s products originate, currency fluctuations, the development of new laws and regulations (including, without limitation, in relation to imports, exports, duties, tariffs, taxes, trade restrictions, quality and safety standards, and shipping delays and disruptions. If BuildDirect can no longer obtain products from its key suppliers, or such suppliers refuse to continue to supply BuildDirect on commercially reasonable terms or at all,
16
and BuildDirect cannot find replacement suppliers, this would have a materially adverse effect on its business, operating results and financial condition.
(e) Third-Party Supply Chain Network
BuildDirect sources product from around the world and sells to customers throughout North America and relies on third party ocean, freight, trucking and warehouse service providers to transport and store its products and deliver products to its customers. BuildDirect is therefore subject to various risks including, without limitation, increased fuel costs, security concerns, rise in import tariffs, labour disputes, union organising activity, and inclement weather, associated with service providers’ ability to provide product fulfillment and delivery services to meet BuildDirect’s distribution and shipping needs. Failure to procure and deliver products and services, either to BuildDirect or its customers in a timely and accurate manner, will harm BuildDirect’s reputation, business, and results of operations. In addition, any increase in fulfillment costs and expenses could adversely affect business and operating results.
(f) Third Party Real Estate
BuildDirect acts both as a tenant and a sub-landlord within the context of the commercial spaces that it operates in. BuildDirect does not own real property. There is a risk that these leases may not be renewed at the end of term, and a risk that an alternative location cannot be found. Moreover, these leased properties are managed by third parties and as such there is no assurance that they will be managed and maintained to meet any required legal standards (including, but not limited to, environmental and safety standards).
(g) Call Centre and Website
BuildDirect’s website and call center are material elements of BuildDirect’s business. Customers use BuildDirect’s website to source and purchase products and services. BuildDirect’s website in particular is vulnerable to certain risks and uncertainties associated with the Internet, including, without limitation, website downtime and other technical failures, security breaches and consumer privacy concerns. If BuildDirect cannot successfully keep its website and call center operational, this would have a materially adverse effect on BuildDirect’s business, operating results and financial condition.
(h) Product Recalls
Manufacturers and distributors of products are sometimes required to recall or request the return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of BuildDirect’s products are recalled due to an alleged product defect or for any other reason, BuildDirect could be required to incur the unexpected expense of the recall and any legal proceedings that may arise in connection with the recall. BuildDirect may lose a significant amount of sales and not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although BuildDirect has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of BuildDirect’s significant brands were subject to recall, the image of that brand and BuildDirect could be harmed. A recall for any of the foregoing
17
reasons could lead to decreased demand for BuildDirect’s products and could have a material adverse effect on the results of operations and financial condition of BuildDirect.
(i) Licenses
BuildDirect’s licenses are subject to ongoing compliance and reporting requirements. Failure by BuildDirect to comply with the requirements of licenses or any failure to maintain licenses would have a material adverse impact on the business, financial condition and operating results of BuildDirect.
(j) Insurance and Uninsured Risks
BuildDirect’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, damage, delays in operations, monetary losses and possible legal liability. Although BuildDirect intends to continue to maintain insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance will not cover all the potential risks associated with its operations. BuildDirect may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. BuildDirect might also become subject to liability hazards, which may not be insured against or which BuildDirect may elect not to insure against because of premium costs or other reasons. Losses from these events may cause BuildDirect to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.
(k) Failure to Comply with Anti-Bribery Laws
BuildDirect is subject to the Corruption of Foreign Public Officials Act (Canada) (“ CFPOA ”) and the United States Foreign Corrupt Practices Act (“ FCPA ”), which generally prohibit companies and company employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The CFPOA and the FCPA also require companies to maintain accurate books and records and internal controls, including at foreign controlled subsidiaries. In addition, BuildDirect may become subject to other anti-bribery laws of any nations in which it conducts business that apply similar prohibitions as the CFPOA and FCPA (e.g. the Organisation for Economic Co-operation and Development Anti-Bribery Convention). BuildDirect’s employees or other agents may, without BuildDirect’s knowledge and despite BuildDirect’s efforts, engage in prohibited conduct under BuildDirect’s policies and procedures and the CFPOA, the FCPA or other anti-bribery laws, which BuildDirect may be subject to, and BuildDirect may be held responsible. If BuildDirect’s employees or other agents are found to have engaged in such practices, BuildDirect could suffer severe penalties and other consequences that may have a material adverse effect on BuildDirect’s business, financial condition and results of operations.
(l) Litigation
BuildDirect may become party to litigation from time to time in the ordinary course of business, which could adversely affect its business. Monitoring and defending against legal actions, whether or not meritorious, can be time-consuming, divert management’s attention and resources and cause BuildDirect to incur significant expenses. In addition, legal fees and costs incurred in connection with such activities may be significant and BuildDirect could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. Substantial litigation costs, even if
18
BuildDirect wins, or an adverse result in any litigation may adversely affect BuildDirect’s ability to continue operating and the market price for BuildDirect Common Shares and could use significant resources.
(m) The Requirements of Being a Public Company May Strain the Resulting Issuer’s Resources
In the event the Business Combination is completed, the Resulting Issuer will continue the BuildDirect Business. As a reporting issuer, the Resulting Issuer, and its business activities, will be subject to the reporting requirements of applicable securities legislation of the jurisdictions in which it is a reporting issuer, the listing requirements of the Exchange and other applicable securities rules and regulations. Compliance with those rules and regulations will increase the Resulting Issuer’s legal and financial costs as compared to BuildDirect’s current activities making some activities more difficult, time consuming or costly and increase demand on its systems and resources.
(n) Product Liability
BuildDirect faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. BuildDirect may be subject to various product liability claims, including, among others, that BuildDirect’s products caused injury or illness or death. A product liability claim or regulatory action against BuildDirect could result in increased costs, could adversely affect BuildDirect’s reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations and financial condition of BuildDirect. There can be no assurances that BuildDirect will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialisation of BuildDirect’s potential products.
(o) Environmental Laws and Employee Health and Safety Regulations
BuildDirect’s operations are subject to environmental and safety laws and regulations concerning, among other things, employee health and safety. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions on BuildDirect’s operations. In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement thereof or other unanticipated events could require extensive changes to BuildDirect’s operations or give rise to material liabilities, which could have a material adverse effect on BuildDirect’s business, results of operations and financial condition.
(p) Conflicts of Interest
Certain of the directors and/or officers of BuildDirect may be engaged in a range of business activities, (including certain officers, directors and consultants that provide services to other companies involved in ecommerce) and may also serve as directors and/or officers of other companies. BuildDirect’s executive officers, directors and consultants may devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to BuildDirect. In some cases, BuildDirect’s executive officers, directors and consultants may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to BuildDirect’s business and affairs and that could adversely affect BuildDirect’s operations. These business interests
19
could require significant time and attention of BuildDirect’s executive officers, directors and consultants. In addition, BuildDirect may also become involved in other transactions, which conflict with the interests of its directors, officers and consultants who may from time to time deal with persons, firms, institutions or corporations with which BuildDirect may be dealing, or which may be seeking investments similar to those desired by it. Consequently, the interests of these persons could conflict with those of BuildDirect and such interests could interfere with these persons’ ability to devote time to BuildDirect’s business and affairs and that could adversely affect BuildDirect’s operations. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws and any decision made by any of such directors and officers involving BuildDirect are subject to their duties and obligations to act honestly, in good faith and in the best interests of BuildDirect.
(q) Additional Financing
BuildDirect may require additional equity and/or debt financing in the future and no assurance can be given that such capital will be available on terms commercially acceptable to BuildDirect or at all. Accordingly, depending on its ability to achieve the goals set out in its business plan, BuildDirect may need to raise further equity and/or debt financing to fund its operations and execute on its business plan. BuildDirect’s inability to raise financing to support on-going operations or acquisitions could limit its growth, result in the delay or indefinite postponement of current business objectives and may have a material adverse effect upon future profitability. If additional funds are raised through further issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of BuildDirect’s shareholders. Further, due to regulatory impediments and lack of investor appetite, the ability of BuildDirect to issue additional securities to finance acquisitions may be restricted. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for BuildDirect to obtain additional capital and to pursue business opportunities, including potential acquisitions. If BuildDirect requires additional financing and is unable to obtain it, there may be a possibility that it will not be able to fund its operations and execute on its business plan, which would have a materially adverse effect on its business, operating results and financial condition.
(r) Resale of Shares
There can be no assurance that the publicly-traded market price of BuildDirect Common Shares will be high enough to create a positive return for the existing investors. Further, there can be no assurance that BuildDirect Common Shares will be sufficiently liquid so as to permit investors to sell their position in BuildDirect without adversely affecting the stock price. In such event, the probability of resale of BuildDirect Common Shares would be diminished.
(s) Market for Securities
In recent years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations in price, which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continuing fluctuations in price will not occur. It may be anticipated that any quoted market for BuildDirect Common Shares will be subject to market trends generally, notwithstanding any potential success of BuildDirect in creating revenues, cash flows or earnings. The value of BuildDirect Common Shares will be affected
20
by such volatility. An active public market for BuildDirect Common Shares might not develop or be sustained after the completion of the Business Combination. If an active public market for BuildDirect Common Shares does not develop, the liquidity of a shareholder’s investment may be limited and the share price may decline.
(t) Global Financial Conditions
Current global financial conditions have been subject to increased volatility and access to financial markets has been severely restricted. These factors may impact the ability of BuildDirect to obtain equity or debt financing in the future and, if obtained, on terms favourable to BuildDirect. If these increased levels of volatility and market turmoil continue, BuildDirect’s operations could be adversely impacted and the value and the price of BuildDirect Common Shares could continue to be adversely affected.
(u) Management of Growth
The growth of BuildDirect’s operations has placed significant demands on managerial, financial and human resources. BuildDirect’s ability to continue its rate of growth will depend on a number of factors, including the availability of capital, existing and emerging competition and the ability to recruit and train additional qualified personnel. Moreover, as BuildDirect’s business grows, BuildDirect will need to devote additional resources to improve its operational infrastructure and to maintain the performance of its business.
(v) Risks Associated with Acquisitions
BuildDirect may acquire additional businesses. Acquisitions involve a number of known and unknown risks, including diversion of management’s attention, failure to retain key acquired personnel, legal liabilities, risk associated with the realisation of synergies and overall integration of BuildDirect’s operations with the acquired business and unanticipated events or circumstances, some or all of which could have a material adverse effect on the business, results of operations and financial condition of BuildDirect. In addition, there can be no assurance that BuildDirect can complete any acquisition it pursues on favourable terms, that any acquired businesses, products or technologies will achieve anticipated revenues and income, or that any acquisitions completed will ultimately benefit the business. An acquisition could also result in a potentially dilutive issuance of equity securities. The failure of BuildDirect to successfully manage its strategy of growth through acquisitions could have a material adverse effect on BuildDirect’s business, results of operations and financial condition.
(w) Tax Risk
BuildDirect will be considered to have been carrying on business in Canada for purposes of the Tax Act. However, BuildDirect will be operating in a new and developing industry that has had historically low regulations and tax compliance. There is risk that foreign governments may look to increase their tax revenues or levy additional taxes. While BuildDirect does not foresee any adverse tax affects, there is no guarantee that governments will not impose such additional adverse taxes in the future.
(x) Currency Fluctuations
Due to BuildDirect’s present operations, and after completion of the Business Combination, the Resulting Issuer’s proposed operations and intention is to have future operations in jurisdictions outside Canada, the Resulting Issuer is expected to be exposed to significant currency fluctuations. Recent
21
events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the US dollar and other currencies may have a material adverse effect on the Resulting Issuer’s business, financial condition and operating results. The Resulting Issuer may, after completion of the Business Combination, expand operations globally so it may be subject to additional gains and losses against additional currencies. BuildDirect does not currently have a foreign exchange hedging program in place. In the future, the Resulting Issuer may establish a program to hedge a portion of its foreign currency exposure with the objective of minimising the impact of adverse foreign currency exchange movements. However, even if BuildDirect or the Resulting Issuer develops a hedging program, it may not hedge its entire exposure to any one foreign currency and it may not hedge its exposure at all with respect to certain foreign currencies
(y) Competitive Markets
BuildDirect will face competition and new competitors will continue to emerge throughout the world. Products and services to be offered by competitors of BuildDirect may take a larger market share than anticipated, which could cause BuildDirect’s performance to fall below expectations. It is expected that competition in the ecommerce environment will intensify. If competitors of BuildDirect develop and market more successful products or services, offer competitive products or services at lower price points, have a higher capitalisation, more experienced management, or more mature as a business or if BuildDirect does not produce consistently high-quality and well-received products and services, revenues, margins and profitability of BuildDirect will decline.
In addition, the success of BuildDirect is subject to its ability to anticipate and forecast changes in trends and consumer preferences and continuously manage its products and services offerings. There can be no assurance that BuildDirect will be able to continue to maintain its inventory strategies and stock of the appropriate assortment of products. To the extent BuildDirect’s predictions differ from its customers’ purchasing preferences, BuildDirect may be faced with excess inventory for some products and/or shortages of other products. Low inventory levels can adversely affect BuildDirect’s ability to meet customer demand, which may lead to lost revenue and diminished brand loyalty. Any sustained failure to anticipate, identify and respond to emerging trends in consumer preferences could have a material adverse effect on BuildDirect’s business, operating results and financial condition.
(z) Uncertainty and Adverse Changes in the Economy
Adverse changes in the economy or a decline in the price of Resulting Issuer Common Shares could negatively impact the business of BuildDirect. Future economic distress may result in a decrease in demand for the products and services of BuildDirect, which could have a material adverse impact on BuildDirect’s operating results and financial condition. Uncertainty and adverse changes in the economy or a prolonged decline in the price of Resulting Issuer Common Shares could also increase costs associated with the sourcing of products, increase the cost and decrease the availability of sources of financing, and increase BuildDirect’s exposure to material losses from bad debts, any of which could have a material adverse impact on the financial condition and operating results of BuildDirect. Because a significant portion of BuildDirect’s operations have been and are expected in future to be financed through the sale of equity securities, a decline in the price of Resulting Issuer Common Shares could be especially detrimental to BuildDirect’s liquidity and its operations. Such reductions may force BuildDirect to reallocate funds from other planned uses and may have a significant negative effect on BuildDirect’s business plan and operations, including its ability to repay outstanding obligations, to develop new products and continue its current operations.
22
Catastrophic events in general can have a material impact on the potential continuity of the business. The COVID-19 outbreak could result in adverse effects on the business and operations, including but not limited to business disruption, reduced operations, of BuildDirect and its third-party service providers, which could materially affect business, financial condition and results of operations. The spread of COVID-19, which has caused a broad impact globally, may materially affect BuildDirect economically. While the potential economic impact brought by, and the duration of, COVID19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing BuildDirect’s ability to access capital, which could in the future negatively affect liquidity. The global outbreak of COVID-19 continues to evolve rapidly. The extent to which COVID-19 may impact BuildDirect’s business, operations and financial performance will depend on future developments, including but not limited to, matters such as (a) the duration and/or severity of the outbreak, (b) government policies, restrictions and requirements as it relates to COVID-19, (c) nongovernmental influences or challenges such as the failure of banks and/or (d) any corresponding effect caused by the substantial economic damage that can be inflicted by a pandemic like COVID-19. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence.
(aa) If BuildDirect is unable to attract new customers or sell additional products to existing customers, BuildDirect’s revenue growth and profitability will be adversely affected
To increase revenue and achieve and maintain profitability, BuildDirect must regularly add new customers and sell additional products and services to existing customers. Various factors may prevent BuildDirect’s ability to add such new customers and retaining existing customers, including, without limitation BuildDirect’s failure to attract, retain and effectively train new sales and marketing personnel, to develop and maintain relationships with professional contractors, partners and suppliers, to ensure the effectiveness of BuildDirect’s marketing programs, to secure high quality products and services at competitive prices and to convert customers referred to BuildDirect by its existing network into paying customers. In addition, if prospective customers do not perceive that BuildDirect’s products and services are of sufficiently high value and quality, BuildDirect may not be able to attract the number and types of new customers that BuildDirect is seeking. The failure of BuildDirect to attract new customers or to obtain new business from existing clients may mean that BuildDirect will not increase its revenues as quickly as is anticipated, if at all.
(bb) Cybersecurity
BuildDirect relies on digital and internet technologies to conduct and expand its operations, including reliance on information technology to process, transmit and store sensitive and confidential data, including personally identifiable information, and proprietary and confidential business performance data. As a result, BuildDirect and/or its customers will be exposed to risks related to cybersecurity. Such risks may include unauthorised access, use, or disclosure of sensitive information (including corruption or destruction of data, or operational disruption resulting from system impairment (e.g., malware). Third parties to whom BuildDirect outsources certain functions, or with whom their systems interface, are also subject to the risks outlined above and may not have or use appropriate controls to protect confidential information. A breach or attack affecting a third-party service provider or partner could harm BuildDirect’s business even if the Resulting Issuer does not control the service that is attacked. BuildDirect’s operations depend, in part, on how well it protects networks, equipment, information technology systems and software against damage from a number of threats, including, but not limited to damage to hardware, computer viruses, hacking and theft. BuildDirect’s operations also
23
depend on the timely maintenance, upgrade and replacement of networks, equipment, information technology systems and software, as well as pre-emptive expenses to mitigate the risks of failures. A compromise of BuildDirect’s information technology or confidential information, or that of BuildDirect’s third parties with whom BuildDirect interacts, may result in negative consequences, including reputational harm affecting investor and customer confidence, potential liability under privacy, security, consumer protection or other applicable laws, regulatory penalties and additional regulatory scrutiny, any of which could have a material adverse effect on BuildDirect’s business, financial position, results of operations or cash flows. As BuildDirect has access to sensitive and confidential information, including personal information, and since BuildDirect may be vulnerable to material security breaches, theft, misplaced, lost or corrupted data, programming errors, employee errors and/or malfeasance (including misappropriation by departing employees), there is a risk that sensitive and confidential information, including personal information, may be disclosed through improper use of Resulting Issuer systems, software solutions or networks or that there may be unauthorised access, use, disclosure, modification or destruction of such information. BuildDirect’s on-going risk and exposure to these matters is partially attributable to, among other things, the evolving nature of these threats. As a result, cybersecurity and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage, malfunction, human error, technological error or unauthorised access is a priority. As cyber threats continue to evolve, BuildDirect may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
(cc) Intellectual Property
From time to time, BuildDirect may receive notices from third parties alleging that it has infringed their intellectual property rights or may need to pursue claims against third parties to defend its intellectual property rights. Responding and/or pursuing any such claim, regardless of its merit in the event of a defence of such claim, may be time-consuming, result in costly litigation, divert management’s attention and resources and cause BuildDirect to incur significant expenses. Any meritorious claim of intellectual property infringement against BuildDirect may potentially result in a temporary or permanent injunction, prohibiting it from marketing or selling certain products or requiring it to pay royalties to a third party. In the event of a meritorious claim or the inability of BuildDirect to develop or license substitute technology, its business and results of operations may be materially adversely affected. The laws of certain countries do not protect proprietary rights to intellectual property to extent as do the laws of the United States and Canada, and therefore there can be no assurance that BuildDirect will be able to adequately protect its intellectual property against unauthorised third party copying or use. Such unauthorised copying or use may adversely affect BuildDirect’s competitive position and operations. In addition, there can be no assurance that BuildDirect will successfully obtain licenses to any technology that it may require to conduct its business or that, if obtainable, such technology can be licensed at a reasonable cost. BuildDirect’s operations depend, in part, on how it makes use of certain open-source software products. These open-source software products are developed by third parties over whom BuildDirect has no control. BuildDirect could be exposed to infringement claims and liability in connection with the use of these open-source software components, and BuildDirect may be forced to replace these components with internally developed software or software obtained from another supplier, which may increase its expenses. BuildDirect has conducted no independent investigation to determine whether the sources of the open-source software have the rights necessary to permit BuildDirect to use this software free of claims of infringement by third parties. The developers of opensource software may be under no obligation to maintain or update that software, and BuildDirect may
24
be forced to maintain or update such software itself or replace such software with internally developed software or software obtained from another supplier, which may increase its expenses and delay enhancements to BuildDirect’s services. Certain open-source software licenses provide that the licensed software may be freely used, modified and distributed to others provided that any modifications made to such software, including the source code to such modifications, are also made available under the same terms and conditions. As a result, any modifications BuildDirect makes to such software may be made available to all downstream users of the software, including its competitors. Opensource software licenses may require BuildDirect to make source code for the derivative works available to the public. In the event that BuildDirect inadvertently use open-source software without the correct license form, or a copyright holder of any open source software were to successfully establish in court that BuildDirect had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public. BuildDirect could also incur costs associated with litigation or other regulatory penalties as a result.
(dd) Difficulty to Forecast
BuildDirect must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources. A failure in the demand for its products to materialise as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of BuildDirect.
(ee) Voting Control
Certain shareholders of BuildDirect will exercise a significant portion of the voting power in respect of the outstanding Resulting Issuer Common Shares. As a result, they are expected to have the ability to influence the outcome of all matters submitted to BuildDirect’s shareholders for approval, including the election and removal of directors and any arrangement or sale of all or substantially all of the assets of BuildDirect.
This concentrated control could delay, defer, or prevent a change of control of BuildDirect, arrangement or amalgamation involving BuildDirect or sale of all or substantially all of the assets of BuildDirect that its other shareholders support. Conversely, this concentrated control could allow the holders of Common Shares to consummate such a transaction that BuildDirect’s other shareholders do not support.
(ff) Risks Associated with Internal Controls over Financial Reporting
Effective internal controls are necessary for BuildDirect to provide reliable financial reports and to help prevent fraud. Although BuildDirect has undertaken a number of procedures and implemented a number of safeguards, in each case, in order to help ensure the reliability of its financial reports, including those imposed on BuildDirect under Canadian securities law, BuildDirect cannot be certain that such measures will ensure that BuildDirect will maintain adequate control over financial processes and reporting. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm BuildDirect’s results of operations, or cause it to fail to meet its reporting obligations. If BuildDirect or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in BuildDirect’s consolidated financial statements and materially adversely affect the trading price of Resulting Issuer Common Shares.
25