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 months ended
September 30, 2019. All financial information in this release is
presented in U.S. dollars, unless otherwise stated.
THIRD QUARTER 2019 VS. THIRD QUARTER 2018
- Revenue of $65.4 million vs. $73.9 million (down 12%)
- Gross Profit Margin of 38.1% vs. 40.7%
- Adjusted Gross Profit Margin1 of 41.8% vs. 44.0%
- Operating expenses of $17.6 million2 vs. $30.4 million
- Net income of $5.8 million or $0.07 per share vs. net loss of
$(1.4) million or $(0.02) per share
- Adjusted EBITDA1 of $8.1 million vs. $13.1 million
- Adjusted EBITDA Margin1 of 12.3% vs. 17.7%
Notes: |
(1) See "Non-GAAP Financial Measures" |
|
(2) 2018 Operating expenses include a $6.1 million impairment,
$2.2 million reorganization costs and $2.0 million of stock-based
compensation expense. 2019 Operating expenses include a $2.4
million recovery of stock-based compensation |
THIRD QUARTER 2019 RESULTS
Kevin O’Meara, DIRTT’s chief executive officer, stated: “Our
third quarter revenue of $65.4 million was 12% below the same
quarter of 2018. Several factors continue to impact our 2019
revenue, including the disruption to our salesforce and
distribution partner network from 2018’s management transition, the
impact of an immature go-to-market approach, an inadequately
supported sales force working on a long sales-cycle, as well as the
revised timing of various projects and the loss of certain expected
projects. It has become clear as the year progressed that the sales
and marketing organization with which we entered 2019 has been
unable to deliver on the opportunities identified and on which our
prior guidance was based, and therefore, we anticipate fourth
quarter revenue to be lower than expected. This has been driven
largely by a historical lack of training, individual accountability
and necessary processes and tools. Our belief in the size of our
market opportunity — and the resonance of DIRTT’s value proposition
within it — remains unchanged. Accordingly, we have embarked on a
comprehensive transformation of these functions that we believe
will create a scalable platform from which to generate profitable
growth.
“During the quarter, we took significant steps to
establish DIRTT’s commercial function. We began implementing our
comprehensive sales and marketing strategy, which includes newly
established sales roles to support growth, dedicated resources to
strategic national accounts, and the creation of marketing
programs, systems and communications to drive lead generation. Our
commercial function is being spearheaded by our new chief
commercial officer, Jennifer Warawa, who joined DIRTT effective
September 16, 2019. While the expected benefits of these
initiatives take time to realize, we believe they are the
foundation of a robust and sustainable approach to generating
future sales growth.
“Brandon Jones has joined DIRTT as vice president of strategy,
effective September 30, 2019. He will be responsible for the
project management of DIRTT’s commercial strategy implementation,
supporting Ms. Warawa. Mr. Jones was most recently a project leader
for the Boston Consulting Group and has a mechanical engineering
degree from the University of Southern California and an MBA from
the University of Chicago. He also served as a commercial general
contractor for eight years prior to earning his MBA.
“In our manufacturing operations, we have been moving ahead with
a metrics-based approach to lean manufacturing within our
facilities, with a focus on Safety, Quality, Delivery, Inventory
and Productivity (SQDIP). This approach is being implemented in all
our facilities, along with related systems, and has begun to yield
improvements. These improvements were offset, however, by lower
leverage on fixed manufacturing costs and underutilized labor
capacity from lower-than-expected revenue. Adjusted Gross Profit
Margin decreased to 41.8% in the third quarter of 2019, compared to
44.0% in the third quarter of 2018. Accordingly, Adjusted EBITDA
also decreased comparatively to $8.1 million, or 12.3% of revenue,
reflecting both the lower sales and decreased gross margin, offset
by a $1.3 million reversal of a claims provision.
“Moving forward with our manufacturing capacity expansion, in
early October we entered into a lease agreement for our previously
announced combined tile and millwork factory. The new facility will
be located in the Charlotte metropolitan area, less than 30 minutes
from the Charlotte Douglas International Airport in North Carolina,
and will include a world-class DIRTT Experience Center (DXC).
Charlotte Douglas is one of the busiest airports in the United
States, and the new DXC will serve as our east coast sales and
marketing hub.
“We expect the total cost of this new facility to be
approximately $18.5 million, excluding the cost of the DXC, for
which planning is currently underway. In August 2019, we paid $1.6
million to equipment suppliers for customized equipment for this
facility that has an anticipated delivery in the second half of
2020. We expect this new location to maximize DIRTT’s production
efficiency, allow us to better serve our customers geographically,
and afford us the capacity to support growth while maintaining our
rapid manufacturing lead times. We expect commercial operations to
begin in the first quarter of 2021.
“Trading of our common shares on The Nasdaq Global Select Market
(“Nasdaq”) commenced October 9, 2019. As a result of the listing,
DIRTT’s financial statements are now reported under the accounting
principles generally accepted in the United States (“GAAP”) and in
U.S. dollars. We also ceased our offering of a cash-surrender
option for employee stock options. Year-to-date one-time costs of
the Nasdaq listing are approximately $2.5 million, and we expect to
incur approximately $0.5 million of additional costs in the fourth
quarter of 2019.
“Within the area of product development, Geoff Gosling, director
of innovation, has decided to retire. Mr. Gosling, who ceased to be
an executive officer earlier in the year, was one of DIRTT’s
founders and our first leader of product development, and was one
of the principal inventors of DIRTT’s solutions. His retirement
will allow for him to spend well-deserved time with his family.
“Colin Blehm, who has been with DIRTT for over 15 years and has
led the product development team for the last nine months, has been
named vice president of product development and will continue
reporting to me in this capacity. Mr. Blehm led the development of
the groundbreaking Reflect™ ultra-minimalist wall we announced in
October, and he is also responsible for leading efforts on a number
of product innovations that resulted in patents for DIRTT. Prior to
joining DIRTT, Mr. Blehm worked with Evans Consoles in the areas of
product development and research and development.
“We began this year with the expectation that our fiscal 2019
revenue would be 5% to 10% higher than our 2018 revenue, with
corresponding increases in net income and adjusted EBITDA. With
increasing recognition of challenges associated with the overall
management changes and the immature nature of our commercial
function, we revised our expectation downward as the year
progressed. In addition, we said that we expected Adjusted EBITDA
to be impacted by certain one-time costs related to the sales and
marketing plan, Nasdaq listing, and operating consulting costs.
Management now expects 2019 revenue to be 7% to 10% lower than 2018
revenue, which equates to estimated fourth quarter revenue of
between $52 million and $60 million. Management also expects
Adjusted EBITDA to be negatively impacted by deleveraging of fixed
costs on lower revenue.”
Mr. O’Meara added: “While 2019 has been a challenging year and
we are clearly not satisfied with the results, it is a transition
year. We have made significant strides toward enhancing our
management team, our commercial organization and marketing
strategy. Despite the revenue decline and associated one-time
consulting and listing costs, we expect to exit 2019 in a strong
financial position with a net cash balance at least equal to last
year and increased liquidity from a larger credit facility.”
The Company’s Analyst Day for institutional investors and
securities analysts is scheduled for November 12, 2019 in New York
City. At that time, DIRTT’s management team will present the
Company’s long-term growth strategy, including revenue and Adjusted
EBITDA targets the Company is working to achieve by the end of
2023.
THIRD QUARTER FINANCIAL REVIEW
Revenue
Revenue decreased in the three months ended September 30, 2019
by $8.5 million or 12% compared to the same period of 2018. Revenue
decreased due to several factors, including the impact of a large
healthcare project in 2018 that was not replaced in 2019. We also
believe the distraction from significant management changes during
2018 on a long sales cycle combined with the current immature and
transitional state of our sales and marketing function limited our
ability to take advantage of the growth opportunities in our
market. The recent enhancements to our organizational structure and
senior management team have not yet positively affected sales due
to, we believe, our long sales cycle.
Gross Profit / Gross Profit Margin / Adjusted Gross
Profit / Adjusted Gross Profit Margin
Gross profit and gross profit margin decreased to $24.9 million
or 38.1% for the three months ended September 30, 2019, from $30.1
million or 40.7% for the three months ended September 30, 2018. The
decrease is largely due to an increase in unused labor capacity and
reduced fixed cost leverage on lower revenue levels. Reductions in
direct material and transportation costs, due to improved
efficiency and product mix, offset the incremental material costs
of $0.8 million (1.0% reduction in gross profit margin) that is
expected to mitigate warping of our tiles.
Adjusted Gross Profit1 and Adjusted Gross Profit Margin1
decreased to $27.3 million or 41.8% in the third quarter of 2019,
from $32.5 million or 44.0% in the same period of 2018, for the
reasons described above.
Sales and marketing expenses
Sales and marketing expenses decreased $1.4 million to $8.6
million for the three months ended September 30, 2019, from $10.0
million for the three months ended September 30, 2018. Included in
sales and marketing expenses in the three months ended September
30, 2019 were $0.7 million of one-time consulting costs related to
a sales and marketing plan that was developed with the assistance
of an internationally recognized consulting firm. This cost was
offset by a $1.5 million reduction in commission expense on lower
revenues. Additionally, we continued to benefit from decreases in
travel, meals and entertainment costs as well as cost reductions
related to trade shows. None of these expense reductions are
expected to materially affect our future sales revenue.
General and administrative expenses
General and administrative (“G&A”) expenses increased $0.1
million to $7.3 million for the three months ended September 30,
2019 from $7.2 million for the three months ended September 30,
2018. Included in G&A was $1.4 million of one-time costs
related to the Nasdaq listing incurred in the third quarter of
2019, offset by a $1.3 million reversal of a claims provision.
Beginning in 2020, we anticipate incremental annual non-listing
related costs as a result of becoming a U.S. registrant of
approximately $1.5 to $2.0 million, driven largely by increased
director and officer insurance premiums and the costs of
maintaining two listings, as well as expected increases in audit,
legal, and other compliance costs.
Operations support expenses
Operations support expenses increased $0.5 million to $2.4
million for the three months ended September 30, 2019, from $1.9
million for the three months ended September 30, 2018, largely due
to an increase in consulting costs during the quarter. The
consulting costs incurred were to assist with the evaluation of
current operations and the rectification of the tile warping issue
and increases in personnel costs due to increased headcount and an
increased provision for variable compensation.
Technology and development expenses
Technology and development expenses increased $0.8 million to
$1.7 million for the three months ended September 30, 2019,
compared to $0.9 million for the three months ended September 30,
2018. The increase is due to a $0.3 million decrease in capitalized
salaries for the three months ended September 30, 2019, as the
current mix of projects undertaken included a higher portion of
efforts related to business process improvements that were not
eligible for capitalization. Additionally, we had a higher
provision for variable compensation in the three months ended
September 30, 2019, and $0.3 million additional salary and benefit
costs were classified as cost of sales of technical services during
the period.
Stock-based compensation
Stock-based compensation reflected a $2.4 million recovery for
the three months ended September 30, 2019, compared to an expense
of $2.0 million for the same period of 2018. We recorded fair value
adjustments on cash settled stock options during the three months
ended September 30, 2019 with no fair value adjustment required in
the respective prior year periods. Following our listing on the
Nasdaq on October 9, 2019, we ceased allowing cash surrender of
options. As a result, we will cease the associated liability
accounting for our stock option plan, which required quarterly fair
value adjustments while the cash surrender option was allowed.
Net income
Net income was $5.8 million or $0.07 per share in the third
quarter of 2019, compared to a net loss of $1.4 million or $0.02
net loss per share for the third quarter of 2018. The variances are
the result of changes in gross profit and operating expenses as
described above. Net income for the three months ended September
30, 2019 includes a $2.4 million recovery in stock-based
compensation, compared to a $2.0 million expense in the same period
of 2018, and no reorganization or impairment expenses for the three
months ended September 30, 2019, compared to $2.2 million and $6.1
million, respectively, in the same period of 2018.
Adjusted EBITDA / Adjusted EBITDA Margin2
For the three months ended September 30, 2019, Adjusted EBITDA
and EBITDA Margin decreased to $8.1 million or 12.3% from $13.1
million or 17.7% in the same period of 2018. This reflects the $5.2
million decrease in Adjusted Gross Profit, the impacts of $2.4
million of one-time costs in operating expenses (which included
$0.7 million related to the Sales & Marketing Plan, $1.4
million of Nasdaq listing costs, and $0.3 million of operations
consulting costs) partially offset by ongoing cost reductions, the
reversal of a $1.3 million provision and a $0.5 million increase in
foreign exchange gains.
Liquidity and capital resources
Cash and cash equivalents at September 30, 2019 totaled $56.6
million, an increase of $3.2 million from December 31, 2018. In
July 2019, we entered into a C$50.0 million revolving operating
facility with the Royal Bank of Canada (the “RBC Credit Facility”).
Drawdowns under the RBC Credit Facility are available in both
Canadian and U.S. dollars. The RBC Credit Facility replaced the
$18.0 million revolving operating facility with Comerica Bank that
expired on June 30, 2019.
Conference call and webcast details
To discuss these financial results in greater detail, a
conference call and webcast for the investment community is
scheduled for Friday, Nov. 8, 2019, at 8:00 a.m. MST (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.
To join by telephone, dial +1-877-479-7708 (toll-free in North
America) or +1-647-427-2478 (international). Please dial in 10
minutes prior to the start time. For the live webcast (in
listen-only mode) visit
https://edge.media-server.com/mmc/p/4aj92y9h.
Investors are invited to submit questions to
ir@dirtt.net before and during the call. Supplemental
information slides will be available with the webcast and at
dirtt.net/investors prior to the call start.
A replay of the call and webcast will be available from 11:00
a.m. MST (1:00 p.m. EST) on Nov. 8, 2019 until 9:59 p.m. MST (11:59
p.m. EST) on November 15, 2019:
- By phone at +1-855-859-2056 with passcode 2577557;
- Online at https://edge.media-server.com/mmc/p/4aj92y9h;
and
- On DIRTT’s website at dirtt.net/financial-reports.
Non-GAAP Financial Measures
Note regarding use of non-GAAP financial
measures
Our consolidated financial statements are prepared in accordance
with GAAP. Those 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 to 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, or foreign exchange movements on debt
revaluation), asset base (depreciation and amortization), tax
consequences and stock-based compensation. In addition, management
bases certain forward-looking estimates and budgets on non-GAAP
financial measures, primarily Adjusted EBITDA.
Reorganization expenses, impairment expenses, depreciation and
amortization, and stock-based compensation 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
to 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
press release, and a description of the calculation for each
measure is included.
Adjusted Gross Profit |
Gross profit
before deductions for depreciation and amortization |
|
|
Adjusted Gross Profit Margin |
Adjusted Gross Profit divided by revenue |
|
|
EBITDA |
Net income before interest, taxes, depreciation and
amortization |
|
|
Adjusted EBITDA |
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 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. A reconciliation of these non-GAAP financial
measures to the most directly comparable GAAP financial measures
are presented in the tables below.
The following table presents a reconciliation for the third
quarter 2019 and 2018 of EBITDA and Adjusted EBITDA to our net
income (loss), which is the most directly comparable GAAP measure
for the periods presented:
|
Three Months Ended September
30, |
|
|
2019 |
|
|
|
2018 |
|
|
($ in thousands) |
Net income (loss) for the period |
$ |
5,802 |
|
|
$ |
(1,433 |
) |
Add back (deduct): |
|
|
Interest Expense |
|
3 |
|
|
|
98 |
|
Interest Income |
|
(228 |
) |
|
|
(101 |
) |
Income Tax Expense |
|
1,959 |
|
|
|
684 |
|
Depreciation and Amortization |
|
2,925 |
|
|
|
3,544 |
|
EBITDA |
$ |
10,461 |
|
|
$ |
2,792 |
|
Stock-based Compensation Expense (Recovery) |
|
(2,389 |
) |
|
|
2,037 |
|
Non-cash Foreign Exchange Gain on Debt Revaluation |
|
— |
|
|
|
(101 |
) |
Impairment Expense |
|
— |
|
|
|
6,098 |
|
Reorganization Expense |
|
— |
|
|
|
2,236 |
|
Adjusted EBITDA |
$ |
8,072 |
|
|
$ |
13,062 |
|
Net Income Margin (net income divided by
revenue) |
|
8.9 |
% |
|
|
(1.9 |
)% |
Adjusted EBITDA Margin |
|
12.3 |
% |
|
|
17.7 |
% |
The following table presents a reconciliation for the three
months ended September 30, 2019 and 2018 of Adjusted Gross Profit
to our gross profit, which is the most directly comparable GAAP
measure for the periods presented:
|
Three Months Ended September
30, |
|
2019 |
|
|
2018 |
|
|
($ in thousands) |
Gross Profit |
24,934 |
|
|
30,085 |
|
Gross Profit Margin |
38.1 |
% |
|
40.7 |
% |
Add: Depreciation and Amortization Expense |
2,375 |
|
|
2,422 |
|
Adjusted Gross Profit |
27,309 |
|
|
32,507 |
|
Adjusted Gross Profit Margin |
41.8 |
% |
|
44.0 |
% |
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 Exchange Act 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 cost of new facilities and
the expected commencement date for commercial operations; expected
revenue, Adjusted EBITDA and net cash balances; expected growth
from organizational changes; and expected costs related to the
Nasdaq listing and non-listing related costs as a result of
becoming a U.S. registrant. Forward-Looking Information is
based on certain estimates, beliefs, expectations and assumptions
made in light of management’s experience and perception of
historical trends, current conditions and expected future
developments, as well as other factors that may be appropriate.
Important factors that could cause actual results to differ
materially from those in the Forward-Looking Information includes,
but are not limited to: competition in the interior construction
industry; global economic, political and social conditions and
financial markets; 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;
loss of our key executives; labor 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 of
certain key components and materials; our ability to achieve
requisite capacity from 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 Registration Statement on Form 10 filed with the
Securities and Exchange Commission on September 20, 2019.
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 and the Company works with nearly 100
sales construction partners globally. DIRTT trades on the Nasdaq
under the symbol “DRTT” and on the Toronto Stock Exchange under the
symbol “DRT.” For more information, visit dirtt.com/investors.
1 See “Non-GAAP Financial Measures.”
2 See “Non-GAAP Financial Measures.”
For more information, please contact:
Kim MacEachern
Investor Relations, DIRTT
Kmaceachern@dirtt.com
403.618.4539
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