Mr. Leighton Carroll reports

BAYLIN ANNOUNCES FINANCIAL RESULTS FOR THE FIRST QUARTER OF 2023 AND ITS SIXTH CONSECUTIVE QUARTER OF POSITIVE ADJUSTED EBITDA

Baylin Technologies Inc. has released its financial results for the three months ended March 31, 2023.

First quarter summary:

• Revenue of $25.1-million in the first quarter of 2023, a decrease of $5.9-million or 18.9 per cent compared with the first quarter of 2022; the decrease was primarily due to a significant reduction in orders from its primary customer in the mobile and network (M&N) business line, partially offset by stronger sales in the wireless infrastructure and Satcom business lines;
• Gross margin was 30.5 per cent in the first quarter of 2023 compared with 26.0 per cent in the first quarter of 2022 despite gross profit of $7.7-million being $400,000 less than the first quarter of 2022; the improved gross margin resulted from a balanced product mix due to new product sales, changes in pricing strategy and a data-driven focus on contribution margin at the business line level; in the first quarter of 2023, the improvement was primarily generated by: (i) revenue recovery and favourable product mix, including its new multibeam and innovative small cell antennas in the wireless infrastructure business line; (ii) enhanced production efficiency and favourable product mix in the Satcom business line despite supply chain constraints; and (iii) consistent operational efficiency in the embedded antenna business line;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $900,000 in the first quarter of 2023, the sixth consecutive quarter of positive adjusted EBITDA; adjusted EBITDA increased by $700,000 compared with the first quarter of 2022; the increase in adjusted EBITDA was mainly due to improving gross margins through both new product sales and pricing changes, as well as a decrease of $900,000 in operating expenses (excluding lease termination gain and impairment recovery); adjusted EBITDA increased in the first quarter of 2023 despite the decrease in gross profit compared with the prior-year period;
• Net loss of $1.2-million in the first quarter of 2023 compared with a net loss of $3.1-million in the first quarter of 2022; the net loss in the first quarter of 2023 included a lease termination gain and impairment recovery of $2.7-million as a result of completing the lease transfer of the MMU facility in Vietnam to a third party; the net loss in the first quarter of 2023 was primarily attributable to interest and other finance expenses despite having an operating income of $400,000; on a per-share basis, a net loss of one cent per share in the first quarter of 2023 compared with a net loss of four cents per share in the first quarter of 2022;
• Net debt was $22.6-million as at March 31, 2023, an increase of $1.2-million from Dec. 31, 2022, mainly due to debt interest payments and lease payments;
• Backlog was $35.2-million at March 31, 2023, and $36.4-million at April 30, 2023, compared with the backlog level of $38.1-million at Dec. 31, 2022, and $38.2-million at March 31, 2022; the decrease was primarily due to a significant lower level of backlog in the mobile and network business line as a result of across-the-board production volume reductions at its principal customer.

Recent developments

Convertible debentures

Amendment

The company is also announcing today a proposal to amend the terms of its 6.5 per cent extendible convertible unsecured debentures due July 10, 2023, to: (i) extend the maturity date of the debentures from July 10, 2023, to June 30, 2026; (ii) increase the interest rate on the debentures from 6.5 per cent to 8.5 per cent, effective June 30, 2023; (iii) reduce the conversion price of the debentures from $3.85 to $1 per common share of the company; and (iv) amend the definition of change of control to permit the company's chairman of the board of directors, Jeffrey C. Royer, and related parties to acquire 66-2/3rds per cent or more of the common shares of the company without it constituting a change of control. The amendments are subject to approval of the Toronto Stock Exchange.

The company will be soliciting written consents and proxies from holders of the debentures to approve the amendments by way of extraordinary resolution. In the case of the consent solicitation, the extraordinary resolution will pass (and the amendments will be approved) if the company receives valid consents in favour of the extraordinary resolution, representing at least 66-2/3rds per cent of all the debentures outstanding. There is currently $5,115-million principal amount of debentures outstanding.

In addition to but concurrently with the consent solicitation, the company will also be soliciting proxies as part of the proxy solicitation for use in connection with a proposed meeting of debentureholders to be held on June 20, 2023, at which debentureholders will be asked to approve the amendments. If the consent solicitation achieves the requisite level of support to approve the amendments, the meeting will be cancelled. If not, the company will proceed with the meeting. At the meeting, the extraordinary resolution will pass (and the amendments will be approved) if the company receives the favourable votes of holders of at least 66-2/3rds per cent of the principal amount of the debentures present in person or represented by proxy at the meeting.

The company has retained Kingsdale Advisors to act as information and solicitation agent for the solicitation. The company will be arranging to send to debentureholders a solicitation statement and related materials in connection with the solicitation and the meeting. The company will issue a press release to advise when these materials have been filed under the company's profile on SEDAR.

Payment of convertible debentures in common shares at maturity

The debentures mature on July 10, 2023. In addition to payment in cash, the company has the right to repay the debentures in its common shares at 95 per cent of their market price at the maturity date. The company intends to exercise the common share repayment right and elect to repay the principal amount of the debentures on the maturity date by issuing common shares to debentureholders, as it is permitted to do under the terms of the debentures, rather than repay the debentures in cash, subject to receipt of any required regulatory approvals, including the Toronto Stock Exchange. The number of common shares to be issued would be equal to the principal amount of the debentures then outstanding divided by 95 per cent of the current market price of the common shares (which would be calculated based on the volume-weighted average trading price of the common shares on the TSX for the 20 consecutive trading days ending five days before the maturity date).

The common share repayment right is effectively conditional on the outcome of the solicitation. If the extraordinary resolution is passed and the amendments become effective before the maturity date, the common share repayment right will not occur and will be withdrawn.

If the extraordinary resolution is not passed, the company will proceed with the common share repayment right and repay the debentures in common shares in accordance with the terms of the debentures.

Private placement of common shares

The company's principal shareholder, 2385796 Ontario Inc., a corporation over which its chairman of the board of directors, Jeffery C. Royer, exercises control and direction over investment decisions, has agreed to subscribe on a private placement basis for common shares of the company, subject to a maximum number of eight million common shares and maximum proceeds to the company of $4-million. The common shares will be issued at a price based on the five-day volume-weighted average trading price of the common shares on the TSX. Subject to TSX approval, the private placement is expected to close around May 22, 2023. The proceeds from the private placement will be used to finance working capital in the business, including for use in the mobile and network business line. The principal shareholder and a related party currently hold approximately 58 per cent of its outstanding common shares. Assuming the private placement results in the issuance of eight million common shares, the principal shareholder and related party would hold approximately 61.8 per cent of its outstanding common shares after giving effect to the private placement.

Credit facilities

Canadian credit facility

In May, 2023, the company and its lenders (Royal Bank of Canada and HSBC Bank Canada) agreed to further amendments to the company's credit facilities, among others, to change the minimum liquidity covenant. The company is required to maintain minimum liquidity of $3-million until May 31, 2023, and $4-million thereafter until maturity of the credit facilities.

China credit facility

The company's Chinese subsidiary is arranging a new 30-million-Chinese-yuan multiple-tranche secured credit facility with Bank of Ningbo. The facility, which will be secured by the subsidiary's building, will replace the 17-million-Chinese-yuan secured facility with Shanghai Pudong Development Bank and increase liquidity by approximately $2.5-million.

Selected financial information

The attached table discloses selected financial information for the periods indicated.

A copy of the company's unaudited interim condensed consolidated financial statements for the three months ended March 31, 2023, and corresponding management's discussion and analysis is available under the company's SEDAR profile.

Outlook

The company has achieved six consecutive quarters of positive adjusted EBITDA and consistently improved gross margins since the first quarter of 2022. The North American business lines continue to perform well generally, but overall performance is being negatively affected by the results of its mobile and network business line. It continues to prioritize product mix, emphasizing products that generate higher margins and gross profit, with a view to maintaining and increasing adjusted EBITDA, even at the expense of higher revenue. The macroeconomic environment, shortages in materials and increased material costs due to supply chain challenges and chip set shortages remain an issue for its business. These factors are expected to continue to cause delays in both the production and the delivery of its products, as well as pushouts of orders from customers. It had expected that these disruptions would begin to ease over the second half of 2022, but now anticipates that they will continue into the first half of 2023. The continuing war in Ukraine could continue to exacerbate supply chain disruptions. As a result of these continuing challenges, it continues to expect that its 2023 results will be generally consistent with 2022 results for revenue and adjusted EBITDA in spite of the growth in the company's backlog of purchase orders and improving margins.

Embedded antenna business line

It continues to expect the embedded antenna business line will perform strongly in 2023 although at slightly reduced levels from 2022, reflecting more normalized purchasing patterns. It expects the home networking, public safety and automotive markets to remain resilient despite the economic slowdown and inflationary pressures, in part, due to continued positive momentum in request for proposals and continuing bidding activity.

Wireless infrastructure business line

It expects the wireless infrastructure business line will continue to perform strongly in 2023 with improvements in both revenue and adjusted EBITDA compared with 2022. It expects that Stadium and DAS deployments will strengthen, particularly for use in stadiums and other venues requiring in-building wireless. It also expects that its new higher-margin multibeam and innovative antenna portfolio will open up new global opportunities to drive sales with wireless carriers and third party operators which operate wireless mobile networks for their customers.

Mobile and network business line

The mobile and network business line continues to face significant challenges due to large production volume reductions at its principal customer. Those reductions reflect a contraction in this customer's smart phone market in 2023, due in part to the global economic slowdown and continuing inflation, as well as competitive pressures faced by the customer. Management took steps to limit the adverse effect this has had on the business by reducing or eliminating operating and other costs. Management has also been working to diversify the M&N business to reduce its dependency on its principal customer. It expects to benefit from additional revenue-generating network projects, as well as begin to see a recovery in the mobile business in the second half of 2023. In the meantime, management continues to seek financial support for the business in South Korea and elsewhere and to evaluate the company's various options for the business, including a determination of whether it should remain part of the company's core long-term strategy.

Satcom business line

The commercial side of the Satcom business line continues to demonstrate consistent demand with capital spending by its customers continuing the momentum seen in the fourth quarter of 2022. Given the capital build cycles of satellite operators and others in the Satcom ecosystem, it expects this will continue to benefit the business in 2023. It expects that its new Genesis line of solid-state power amplifiers will generate significant interest from commercial clients, particularly those in the aviation and maritime industries.

Sales for military and other government-related uses, which represent the balance of this business line, will continue and potentially increase in 2023, as many western countries have dramatically increased their defence spending. It has recently completed multiple technology upgrades within its product portfolio, which are expected to generate additional sales.

The Satcom business line continues to demonstrate a strong order book with improving margins, but production continues to be affected by supply chain constraints, chip set shortages and component delays. In the meantime, it continues to take steps to improve production efficiencies in its facilities to address the backlog and improve overall revenue attainment. To alleviate some of the production backlog in its Kirkland, Que., facility, it is starting production of high-power amplifiers in its State College, Pa., facility.

Investor conference call

Baylin will hold a conference call on May 11, 2023, at 8 a.m. ET, to discuss its financial results for the three months ended March 31, 2023. The conference call will be hosted by Leighton Carroll, chief executive officer, Dan Nohdomi, chief financial officer, and Daniel Kim, executive vice-president of corporate development. All interested parties are invited to participate using the dial-in details provided below.

Date:  May 11, 2023

Time:  8 a.m. ET

Dial-in number:  888-664-6392 or 416-764-8659

Conference ID No.:  54226823

Rapid connect:  To instantly join the conference call by phone, please register.

Webcast:  This call is also being webcast.

About Baylin Technologies Inc.

Baylin is a diversified global wireless technology company focused on the research, design, development, manufacture and sale of passive and active radio frequency products, satellite communications products, and supporting services.

We seek Safe Harbor.