DIRTT Environmental Solutions Ltd. (“DIRTT,” the “Company,” “we” or
“us”) (TSX: DRT, NASDAQ: DRTT), an interior construction company
that uses technology for client-driven design and manufacturing,
today announced its financial results for the three and six months
ended June 30, 2020. All financial information in this news release
is presented in U.S. dollars, unless otherwise stated.
Second Quarter 2020
- Revenue of $42.2 million
- Gross profit margin of 33.7%
- Adjusted Gross Profit Margin1 of 38.2%
- Net income of $0.3 million
- Net income margin of 0.7%
- Adjusted EBITDA1 of $0.3 million
- Adjusted EBITDA Margin1 of 0.6%
- $44.6 million cash balance
Note: |
|
(1) See
“Non-GAAP Financial Measures”. We have revised our calculations of
Adjusted Gross Profit Margin and Adjusted EBITDA for the periods
presented. |
Management Commentary
“We continued making steady progress in implementing key
elements of our strategic plan despite adjusting our hiring plans
in reaction to the COVID-19 pandemic,” stated CEO Kevin O’Meara.
“Strengthening our commercial capabilities, we welcomed our
director of strategic accounts and enterprise sales, whose industry
experience includes 25 years with Herman Miller, most recently as
Senior Vice President of Sales and five years as president of
Trendway, a manufacturer of office furniture and systems. We hired
the last of our four regional sales directors, broadened our
partner network with five new partners, and will soon re-open our
DIRTT Experience Centers to client tours. We also implemented phase
one of our CRM system, which we expect will significantly
strengthen our ability to manage lead generation and our end to end
sales pipeline.
“Leveraging our many new capabilities, on July 7th we launched
Make Space for Possibilities™, DIRTT’s first-ever comprehensive
strategic marketing campaign. The campaign integrates our Company’s
expanded sales, marketing and product efforts, illustrating our
in-depth approach to enhancing sales execution. Make Space for
Possibilitie™ highlights the ability of DIRTT solutions to
meet the needs of individuals, teams and organizations seeking
greater adaptability within their workplaces and real estate
portfolios as they adjust to the long-term impacts of
COVID-19.”
Mr. O’Meara concluded, “Despite dramatic economic shifts due to
the pandemic and its impact on the construction industry, our
second quarter revenue of $42.2 million slightly exceeded our first
quarter revenue and we delivered modestly positive adjusted EBITDA.
Given the uncertain macro-environment, we continued to take
measures to conserve financial liquidity and maintain our strong
balance sheet and ended the quarter with just under $45 million of
cash. In the second half of 2020, we will be laser-focused on
leveraging opportunities to accelerate the shift from conventional
to modular construction and, in the process, positioning DIRTT to
achieve sustained, long-term market share growth.”
Board of Directors
DIRTT is pleased to announce that Michael T. Ford and Shauna R.
King will be joining the Company’s board effective August 1, 2020.
Mr. Ford is Head of Global Real Estate & Security for Microsoft
Corporation, with responsibility for a multi-billion-dollar real
estate portfolio including more than 38 million square feet across
113 countries. Ms. King was formerly Vice President, Finance and
Business Operations for Yale University and, prior to that, held
many leadership positions with PepsiCo, Inc., including Global
Chief Information Officer and Chief Transformation
Officer.
DIRTT also announces the resignation of Christine McGinley from
the board, effective August 31. Ms. McGinley has been a director of
DIRTT since 2013 and is the current chair of the Audit Committee.
Ms. McGinley was instrumental in leading the board's efforts in
relation to the Company's recent Nasdaq listing and the Company's
conversion from IFRS accounting to US GAAP. Management and the
board thank Ms. McGinley for her significant contributions to the
board and the Company.
Upon the effectiveness of their appointment, Mr. Ford and Ms.
King will both join the Audit Committee along with current members
Wayne Boulais and Denise Karkkainen, with Ms. King assuming the
role of Audit Committee Chair.
Second Quarter Financial Review
Revenue for the second quarter of 2020 was $42.2 million
compared to $64.1 million reported in the second quarter of 2019.
In the second quarter of 2020, we experienced the ongoing effects
of disruption in sales activity levels stemming from the
transitional state of our commercial function as we implement our
strategic plan. Our revenues were also impacted by the COVID-19
pandemic. We estimate approximately $3.7 million of projects that
we were highly confident of second quarter delivery at March 15
which were deferred to future quarters in addition to opportunities
that would normally have come to fruition that were delayed or
deferred, the amount of which is not possible to quantify.
Correspondingly, gross profit for the second quarter of 2020
declined to $14.2 million from $24.4 million in the prior year
period. Gross profit margin decreased to 33.7% of revenue in the
second quarter from 38.1% in the prior year period, but up from
27.6% in the first quarter of 2020.
Gross profit for the second quarter was impacted by reduced
fixed cost leverage on lower revenues and $0.5 million of severance
costs offset by a $1.2 million timber provision reversal, following
the validation of an in-situ remediation solution.
Adjusted Gross Profit Margin in the second quarter decreased to
38.2% from 42.1% in the prior year period.
Sales and marketing expenses decreased to $6.2 million for the
second quarter of 2020 from $9.5 million in the prior year period.
The decline was caused primarily by a reduction in commission
expense on lower revenue; lower travel, meals and entertainment
expenses due to restriction on travel as a result of COVID-19; the
cancellation of the annual Connext trade show in June as a result
of COVID-19; as well as continued attention to cost discipline.
Included in sales and marketing expenses in the prior year period
were $1.3 million of consulting costs related to our sales and
marketing plan that did not recur in 2020. As economies re-open, we
anticipate travel and entertainment expenses to increase over
current levels, the timing and amount of which, however, are
indeterminate.
General and administrative expenses decreased to $6.2 million
for the second quarter of 2020 from $6.9 million for the prior year
period. The decrease reflects expense reductions, both deliberate
and as a result of COVID-19 combined with $0.4 million of
professional fees related to the listing of our common shares on
Nasdaq that did not recur. These reductions were partially offset
by $0.9 million of higher legal costs.
Operations support expenses decreased to $2.3 million in the
second quarter of 2020 from $2.9 million for the prior year period.
In the second quarter of 2019 we incurred $0.7 million of
consulting costs to assist with the rectification of the tile
warping issue that did not recur in 2020.
Technology and development expenses of $2.1 million for the
second quarter of 2020 were consistent with $2.0 million in the
prior year period.
Net income for the second quarter of 2020 was $0.3 million or
$0.00 per share compared to net income of $2.6 million or $0.03 per
share for the second quarter of 2019. The decrease was a result of
changes in gross profit and operating expenses as described above,
increased stock-based compensation expense, as in 2019 stock-based
compensation expense included a fair value adjustment on cash
settled options, and a $0.5 million increase in foreign exchange
losses partially offset by $4.3 million of government subsidies and
lower income tax expense.
Adjusted EBITDA and Adjusted EBITDA Margin for the three months
ended June 30, 2020 decreased to $0.3 million or 0.6% from $6.0
million or 9.4% in the same period of 2019. This reflects a $10.9
million decrease in Adjusted Gross Profit and $0.9 million of
higher legal costs in 2020, partially offset by reduced commissions
on lower revenues and decreased spending on travel, meals and
entertainment, including tradeshows due to COVID-19 as well as cost
reduction initiatives. Additionally, in the second quarter of 2019
we incurred $1.3 million of consulting costs for our sales and
marketing plan and $0.4 million of costs related to the listing of
our common shares on Nasdaq, neither of which recurred in 2020.
Conference Call and Webcast Details
A conference call and webcast for the investment community is
scheduled for Thursday, July 30, 2020 at 8:00 a.m. MDT (10:00 a.m.
EDT). The call and webcast will be hosted by Kevin O’Meara, chief
executive officer, Geoff Krause, chief financial officer, and Kim
MacEachern, director of investor relations.
The conference call will be broadcast live in listen-only mode
available through the Company website at dirtt.com/investors.
Alternatively, click here to listen to the live webcast.
To join by telephone, dial +1-877-479-7708 (toll-free in North
America) or +1-647-427-2478 (international). Please dial in a
minimum of 15 minutes prior to the start time.
Investors are invited to submit questions to ir@dirtt.com before
and during the call. Supplemental information slides will be
available within the webcast and at dirtt.com/investors prior to
the call start.
A replay of the webcast will be available online and on DIRTT’s
website.
Statement of Operations
The following unaudited table presents DIRTT’s consolidated
statements of operations for the three and six -month periods ended
June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
For the
three months |
|
For the
six months |
Unaudited |
|
ended June 30, |
|
ended June 30, |
($000’s) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
40,765 |
|
|
61,273 |
|
|
81,064 |
|
|
125,113 |
|
Service revenue |
|
1,390 |
|
|
2,818 |
|
|
2,072 |
|
|
4,039 |
|
Total revenue |
|
42,155 |
|
|
64,091 |
|
|
83,136 |
|
|
129,152 |
|
|
|
|
|
|
|
|
|
|
Product cost of sales |
|
26,751 |
|
|
37,102 |
|
|
54,041 |
|
|
77,170 |
|
Costs of under-utilized capacity |
|
- |
|
|
- |
|
|
2,010 |
|
|
- |
|
Service cost of sales |
|
1,188 |
|
|
2,568 |
|
|
1,554 |
|
|
3,957 |
|
Total cost of sales |
|
27,939 |
|
|
39,670 |
|
|
57,605 |
|
|
81,127 |
|
Gross profit |
|
14,216 |
|
|
24,421 |
|
|
25,531 |
|
|
48,025 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Sales and marketing |
|
6,177 |
|
|
9,543 |
|
|
13,585 |
|
|
17,330 |
|
General and administrative |
|
6,194 |
|
|
6,856 |
|
|
14,019 |
|
|
13,753 |
|
Operations support |
|
2,251 |
|
|
2,870 |
|
|
4,783 |
|
|
5,352 |
|
Technology and development |
|
2,082 |
|
|
2,046 |
|
|
4,247 |
|
|
4,163 |
|
Stock-based compensation |
|
425 |
|
|
(1,655 |
) |
|
886 |
|
|
4,792 |
|
Reorganization |
|
- |
|
|
- |
|
|
- |
|
|
2,639 |
|
Total operating expenses |
|
17,129 |
|
|
19,660 |
|
|
37,520 |
|
|
48,029 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
(2,913 |
) |
|
4,761 |
|
|
(11,989 |
) |
|
(4 |
) |
Government subsidies |
|
(4,284 |
) |
|
- |
|
|
(4,284 |
) |
|
- |
|
Foreign exchange (gain) loss |
|
960 |
|
|
441 |
|
|
(1,359 |
) |
|
960 |
|
Interest income |
|
(57 |
) |
|
(38 |
) |
|
(195 |
) |
|
(92 |
) |
Interest expense |
|
61 |
|
|
25 |
|
|
96 |
|
|
74 |
|
|
|
(3,320 |
) |
|
428 |
|
|
(5,742 |
) |
|
942 |
|
Income (loss) before tax |
|
407 |
|
|
4,333 |
|
|
(6,247 |
) |
|
(946 |
) |
Income taxes |
|
|
|
|
|
|
|
|
Current tax expense (recovery) |
|
366 |
|
|
936 |
|
|
(215 |
) |
|
1,088 |
|
Deferred tax expense (recovery) |
|
(242 |
) |
|
786 |
|
|
(987 |
) |
|
620 |
|
|
|
124 |
|
|
1,722 |
|
|
(1,202 |
) |
|
1,708 |
|
Net income (loss) |
|
283 |
|
|
2,611 |
|
|
(5,045 |
) |
|
(2,654 |
) |
|
|
|
|
|
|
|
|
|
Income (loss) per share |
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share |
|
0.00 |
|
|
0.03 |
|
|
(0.06 |
) |
|
(0.03 |
) |
Non-GAAP Financial Measures
Our condensed consolidated financial statements
are prepared in accordance with GAAP. These GAAP financial
statements include non-cash charges and other charges and benefits
that we believe are unusual or infrequent in nature or that we
believe may make comparisons to our prior or future performance
difficult.
As a result, we also provide financial
information in this news release that is not prepared in accordance
with GAAP and should not be considered as an alternative to the
information prepared in accordance with GAAP. Management uses these
non-GAAP financial measures in its review and evaluation of the
financial performance of the Company. We believe that these
non-GAAP financial measures also provide additional insight to
investors and securities analysts as supplemental information to
our GAAP results and as a basis to compare our financial
performance from period-over-period and to compare our financial
performance with that of other companies. We believe that these
non-GAAP financial measures facilitate comparisons of our core
operating results from period to period and to other companies by
removing the effects of our capital structure (net interest income
on cash deposits, interest expense on outstanding debt and debt
facilities, or foreign exchange movements), asset base
(depreciation and amortization), the impact of under-utilized
capacity on gross profit, tax consequences and stock-based
compensation. In addition, management bases certain forward-looking
estimates and budgets on non-GAAP financial measures, primarily
Adjusted EBITDA.
For the current period, we removed the impact of
all foreign exchange from Adjusted EBITDA. Foreign exchange gains
and losses can vary significantly period-on-period due to the
impact of changes in the U.S. and Canadian dollar exchange rates on
foreign currency denominated monetary items on the balance sheet
and are not reflective of the underlying operations of the Company.
We have presented a reconciliation to our prior calculation of
Adjusted EBITDA for all the quarters presented. Additionally, in
the current period, we have excluded from Adjusted Gross Profit
costs associated with under-utilized capacity. Fixed production
overheads are allocated to inventory on the basis of normal
capacity of the production facilities. In periods where production
levels are abnormally low, unallocated overheads are recognized as
an expense in the period in which they are incurred. In the second
quarter of 2020, we also removed the impact of government subsidies
from Adjusted EBITDA.
Reorganization expenses, government subsidies,
depreciation and amortization, stock-based compensation expense,
and foreign exchange gains and losses are excluded from our
non-GAAP financial measures because management considers them to be
outside of the Company’s core operating results, even though some
of those expenses may recur, and because management believes that
each of these items can distort the trends associated with the
Company’s ongoing performance. We believe that excluding these
expenses provides investors and management with greater visibility
into the underlying performance of the business operations,
enhances consistency and comparativeness with results in prior
periods that do not, or future periods that may not, include such
items, and facilitates comparison with the results of other
companies in our industry.
The following non-GAAP financial measures are
presented in this news release, and a description of the
calculation for each measure is included.
|
Adjusted Gross Profit, as previously
presented |
|
Gross profit before deductions for depreciation and
amortization |
Adjusted
Gross Profit |
|
Gross profit before deductions
for costs of under-utilized capacity, depreciation and
amortization |
|
|
|
Adjusted
Gross Profit Margin |
|
Adjusted Gross Profit divided by
revenue |
|
|
|
EBITDA |
|
Net income before interest,
taxes, depreciation and amortization |
|
|
|
Adjusted
EBITDA, as previously presented |
|
EBITDA adjusted for non-cash
foreign exchange gains or losses on debt revaluation; impairment
expenses; stock-based compensation expense; reorganization
expenses; and any other non-core gains or losses |
|
|
|
Adjusted
EBITDA |
|
EBITDA adjusted for foreign
exchange gains or losses; impairment expenses; stock-based
compensation expense; government subsidies; reorganization
expenses; and any other non-core gains or losses |
|
|
|
Adjusted
EBITDA Margin |
|
Adjusted EBITDA divided by
revenue |
You should carefully evaluate these non-GAAP financial measures,
the adjustments included in them, and the reasons we consider them
appropriate for analysis supplemental to our GAAP information. Each
of these non-GAAP financial measures has important limitations as
an analytical tool due to exclusion of some but not all items that
affect the most directly comparable GAAP financial measures. You
should not consider any of these non-GAAP financial measures in
isolation or as substitutes for an analysis of our results as
reported under GAAP. You should also be aware that we may recognize
income or incur expenses in the future that are the same as, or
similar to some of the adjustments in these non-GAAP financial
measures. Because these non-GAAP financial measures may be defined
differently by other companies in our industry, our definitions of
these non-GAAP financial measures may not be comparable to
similarly titled measures of other companies, thereby diminishing
their utility.
The following table presents a reconciliation for the three and
six-month periods ended June 30, 2020 and 2019 of EBITDA and
Adjusted EBITDA to our net income (loss), which is the most
directly comparable GAAP measure for the periods presented:
|
|
|
|
|
|
|
|
|
Unaudited |
|
Three months ended June 30, |
|
Six months ended June 30, |
($000s) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
Net income (loss) for
the period |
|
283 |
|
|
2,611 |
|
|
(5,045 |
) |
|
(2,654 |
) |
Add back (deduct): |
|
|
|
|
|
|
|
|
Interest Expense |
|
61 |
|
|
25 |
|
|
96 |
|
|
74 |
|
Interest Income |
|
(57 |
) |
|
(38 |
) |
|
(195 |
) |
|
(92 |
) |
Income Tax Recovery |
|
124 |
|
|
1,722 |
|
|
(1,202 |
) |
|
1,708 |
|
Depreciation and
Amortization |
|
2,761 |
|
|
2,940 |
|
|
5,893 |
|
|
6,335 |
|
EBITDA |
|
3,172 |
|
|
7,260 |
|
|
(453 |
) |
|
5,371 |
|
Stock-based Compensation
Expense |
|
425 |
|
|
(1,655 |
) |
|
886 |
|
|
4,792 |
|
Non-cash Foreign Exchange Gain
on Debt Revaluation |
|
- |
|
|
- |
|
|
- |
|
|
(211 |
) |
Government Subsidies |
|
(4,284 |
) |
|
- |
|
|
(4,284 |
) |
|
- |
|
Reorganization Expense |
|
- |
|
|
- |
|
|
- |
|
|
2,639 |
|
Adjusted EBITDA, as
previously presented |
|
(687 |
) |
|
5,605 |
|
|
(3,851 |
) |
|
12,591 |
|
Other Foreign Exchange (Gains)
Losses |
|
960 |
|
|
441 |
|
|
(1,359 |
) |
|
1,171 |
|
Adjusted
EBITDA |
|
273 |
|
|
6,046 |
|
|
(5,210 |
) |
|
13,762 |
|
Net Income (Loss)
Margin |
|
0.7 |
% |
|
4.1 |
% |
|
(6.1 |
%) |
|
(2.1 |
%) |
Adjusted EBITDA
Margin, as previously presented |
|
(1.6 |
%) |
|
8.7 |
% |
|
(4.6 |
%) |
|
9.7 |
% |
Adjusted EBITDA
Margin |
|
0.6 |
% |
|
9.4 |
% |
|
(6.3 |
%) |
|
10.7 |
% |
The following unaudited table presents a reconciliation for the
three and six-month periods ended June 30, 2020 and 2019 of
Adjusted Gross Profit to our gross profit, which is the most
directly comparable GAAP measure for the periods presented:
|
|
|
|
|
|
|
|
|
Unaudited |
|
Three months ended June 30, |
|
Six months ended June 30, |
($000s) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
Gross
profit |
|
14,216 |
|
|
24,421 |
|
|
25,531 |
|
|
48,025 |
|
Gross profit
margin |
|
33.7 |
% |
|
38.1 |
% |
|
30.7 |
% |
|
37.2 |
% |
Add: Depreciation and
amortization expense |
|
1,908 |
|
|
2,559 |
|
|
4,169 |
|
|
4,739 |
|
Adjusted Gross Profit,
as previously presented |
|
16,124 |
|
|
26,980 |
|
|
29,700 |
|
|
52,764 |
|
Add: Costs of under-utilized
capacity |
|
- |
|
|
- |
|
|
2,010 |
|
|
- |
|
Adjusted Gross
Profit |
|
16,124 |
|
|
26,980 |
|
|
31,710 |
|
|
52,764 |
|
Adjusted Gross Profit
Margin, as previously presented |
|
38.2 |
% |
|
42.1 |
% |
|
35.7 |
% |
|
40.9 |
% |
Adjusted Gross Profit
Margin |
|
38.2 |
% |
|
42.1 |
% |
|
38.1 |
% |
|
40.9 |
% |
Special Note Regarding Forward-Looking
Statements
Certain information and statements contained in this news
release constitute “forward-looking information” and
“forward-looking statements” (collectively, “Forward-Looking
Information”) as defined under applicable provisions of the United
States Private Securities Litigation Reform Act of 1995 and Section
21E of the Securities Exchange Act of 1934 and within the meaning
of applicable Canadian securities laws. The Company hereby cautions
investors about important factors that could cause the Company’s
actual results or outcomes to differ materially from those
projected in any Forward-Looking Information contained in this news
release. When used in this news release, the words “anticipate,”
“believe,” “expect,” “estimate,” “intend,” “target,” “plan,”
“project,” “outlook,” “may,” “will,” “should,” “would,” “could,”
“can,” the negatives thereof, variations thereon and other similar
expressions are intended to identify Forward-Looking Information,
although not all Forward-Looking Information contains such
identifying words. In particular, this news release contains
Forward-Looking Information with respect to, among other things,
the impact of COVID-19 on our business, expected changes to the
Company’s board of directors and Audit Committee, and the timing
thereof, the expected timing of re-opening our DIRTT Experience
Centers to client tours, our expectations regarding the impacts of
implementing our CRM system, our expected focus on leveraging
opportunities to accelerate the shift from conventional to modular
construction and our ability to position DIRTT to achieve
sustained, long-term market share growth, and our expectations
regarding future travel and entertainment expenses. Forward-Looking
Information necessarily involves unknown risks and uncertainties,
which could cause actual results or outcomes to differ materially
from those expressed or implied in such statements. Factors that
could have a material effect on our business, financial condition,
results of operations and growth prospects include, but are not
limited to: competition in the interior construction industry;
global economic, political, health and social conditions and
financial markets, including those related to pandemics; our
reliance on our network of distribution partners for sales,
marketing and installation of our solutions; our ability to
implement our strategic plans and to maintain and manage growth
effectively; our ability to introduce new designs, solutions and
technology and gain client and market acceptance; labor
overcapacity or shortages and disruptions in our manufacturing
facilities; product liability, product defects and warranty claims
brought against us; defects in our designing and manufacturing
software; infringement on our patents and other intellectual
property; cyber-attacks and other security breaches of our
information and technology systems; material fluctuations of
commodity prices, including raw materials; shortages of supplies or
disruption in the supply chain of certain key components and
materials; our ability to balance capacity within our existing
manufacturing facilities; our exposure to currency exchange rate,
tax rate and other fluctuations that result from general economic
conditions and changes in laws; legal and regulatory proceedings
brought against us; the availability of capital or financing on
acceptable terms, which may impair our ability to make investments
in the business; and other factors and risks described under the
heading “Risk Factors” included in our Annual Report on Form 10-K
for the year ended December 31, 2019 and our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2020 filed with the
Securities and Exchange Commission.
Since actual results or outcomes could differ materially from
those expressed in the Forward-Looking Information provided by or
on behalf of the Company, investors and others should not place
undue reliance on any such Forward-Looking Information.
About DIRTT DIRTT is a building process powered
by technology. The Company uses its proprietary ICE® software to
design, manufacture and install fully customized interior
environments. The technology drives DIRTT’s advanced manufacturing
and provides certainty on cost, schedule and the final result.
Complete interior spaces are constructed faster, cleaner and more
sustainably. DIRTT’s manufacturing facilities are located in
Phoenix, Savannah and Calgary. DIRTT works with nearly 100 partner
locations globally. DIRTT trades on Nasdaq under the symbol “DRTT”
and on the Toronto Stock Exchange under the symbol “DRT.” For more
information, visit dirtt.com/investors.
For more information, please contact:
Kim MacEachern
Investor Relations, DIRTT
Kmaceachern@dirtt.com
403.618.4539
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