DIRTT Environmental Solutions Ltd.announced its financial results for the three months ended March 31, 2020. All financial information is presented in U.S. dollars, unless otherwise stated.
First Quarter 2020
Revenue of $41.0 million
Gross profit margin of 27.6%
Adjusted Gross Profit Margin1 of 38.0%
Net loss of $5.3 million or $(0.06)/share
Net loss margin of (13.0)%
Adjusted EBITDA1 of $(5.5) million
Adjusted EBITDA Margin1 of (13.4)%
$43.5 million cash balance
Notes: (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
“Revenues for the first quarter of $41.0 million were generally in line with our expectations, despite the onset of the COVID-19 pandemic in March,” stated Kevin O’Meara, chief executive officer.
“As the threat of COVID-19 emerged, we took decisive measures to keep our employees safe, maximize liquidity and prudently manage our expenses. First, we implemented work-from-home policies for our non-factory workforce and instituted strict access restrictions and social-distancing measures within our factories, all consistent with protocols required and recommended by health authorities. We also eliminated or deferred uncommitted non-critical spending; supplemented our existing cash on hand via entering into new capital lease facilities; and reached an agreement in principal, subject to completion of final documentation, to allow additional covenant flexibility in our revolving credit facility, which remains currently undrawn. To further mitigate costs and right size our capacity, we reduced production staffing in January and April and as a result, our plant headcount is now 25% lower than at year end.
“While the duration and ultimate impacts of this pandemic cannot yet be determined, we believe DIRTT’s innovation, manufacturing excellence, and nimble commercial execution all remain key advantages in commercial construction. We are taking a targeted approach to executing our strategic plan while conserving financial liquidity, which we believe will allow us to emerge as an even stronger leader in the prefabricated construction market as the pandemic abates. Since January, that approach has included hiring another regional sales director, upgrading our sales management, enhancing our sales and marketing tools and adding two new distribution partners in April.
“While we have slowed down hiring within our commercial organization, we are moving forward with filling key positions to round out our capabilities. We will also move forward with the sales and marketing tools that we believe will enhance our sales performance for a nominal cost. We expect that commissioning activities for our new South Carolina plant will begin in the second half of 2020, with commercial operations expected to commence in the first half of 2021. With the establishment of our capital lease facility, we believe the incremental commissioning cash cost of approximately $4.0 million, of which approximately $2.0 million will be financed, is a prudent investment that will eliminate single-plant risk and will, we believe, create significant cost savings through material and labor efficiencies as well as logistics improvements.”
Mr. O’Meara concluded, “While it is impossible to predict COVID-19’s near- and long-term impact on how organizations use their space and thus commercial construction activity levels, we believe the current crisis may present new opportunities, such as increased investment in healthcare infrastructure and the need for flexibility as people begin to re-occupy their existing work spaces. Nevertheless, we remain prepared to take further actions as necessary if economic or industry conditions deteriorate. Whatever the ultimate timing and pace of economic recovery, our goal is to have a strong financial position and the organizational capabilities to enable us to target the market segments where we can be most effective and grow our market share.”
First Quarter Financial Review
Revenues for the first quarter of 2020 were $41.0 million compared to $65.1 million reported in the first quarter of 2019. In the first quarter of 2020, we experienced the ongoing effects of disruption in sales activity levels, particularly with respect to larger size projects, stemming from the distraction of rebuilding our management team and sales and marketing function during 2018 and 2019.
Correspondingly, gross profit for the first quarter of 2020 declined to $11.3 million from $23.6 million in the prior year period. Gross profit margin decreased to 27.6% of revenue in the first quarter from 36.3% in the prior year period, but up from 25.3% in the fourth quarter of 2019.
Gross profit was impacted by reduced fixed cost leverage on lower revenues and excess labor capacity prior to headcount reductions. During the quarter, we took steps to manage our excess labor capacity, including a previously disclosed reduction in production staffing by 14%. In April, we made a further 12% reduction and undertook planned factory curtailments and reduced shift lengths. These actions realigned our capacity with currently expected activity levels, but we retain the flexibility to expand capacity quickly in the future as needed.
Adjusted Gross Profit Margin in the first quarter decreased to 38.0% from 39.6% in the prior year period but increased from 33.4% in the fourth quarter of 2019. In the quarter, we separately classified $2.0 million as costs related to our under-utilized capacity in cost of sales. Adjusted Gross Profit Margin excludes the costs of under-utilized capacity.
Sales and marketing expenses decreased to $7.4 million for the first quarter of 2020 from $7.8 million in the prior year period. The decline was caused primarily by decreased commission expense on lower revenue.
General and administrative expenses increased to $7.8 million for the first quarter of 2020 from $6.9 million for the prior year period. The increase was due primarily to higher professional fees of $0.8 million due to ongoing litigation matters. In the first quarter of 2020 we recorded expected credit losses of $0.6 million against our accounts receivable balance. Additionally, in the first quarter of 2019 we incurred $0.7 million of costs related to the listing of our common shares on Nasdaq.
Operations support expenses of $2.5 million in the first three months of 2020 were consistent with the prior year period.
Technology and Development expenses increased to $2.2 million for the first quarter of 2020 from $2.1 million in the prior year period due primarily to an increase in headcount partially offset by a $0.5 million increase in capitalized software development costs for the three months ended March 31, 2020.
Net loss for the first quarter of 2020 was $5.3 million or $(0.06) per share consistent with a net loss of $5.3 million or $(0.06) per share for the first quarter of 2019. The loss remained flat as a result of changes in gross profit and operating expenses as described above, offset by lower stock-based compensation and reorganization expenses as well as increased foreign exchange gains and income tax recoveries. Net loss for the three months ended March 31, 2019 included $6.4 million of stock-based compensation expense and $2.6 million of reorganization expenses, compared to $0.5 million and $nil, respectively, in the same period of 2020. Net loss margin was (13.0)% for the first quarter of 2020.
Adjusted EBITDA and Adjusted EBITDA Margin for the three months ended March 31, 2020 decreased to a loss of $(5.5) million or (13.4)% from earnings of $7.7 million or 11.9% in the same period of 2019. This reflects a $10.2 million decrease in Adjusted Gross Profit and $2.0 million of costs of underutilized capacity, discussed above; $0.8 million of higher litigation costs in 2020; and $0.6 million increase to provision for expected credit losses. Additionally, in the first quarter of 2019 we incurred $0.7 million of costs related to the listing of our common shares on Nasdaq. These reductions in Adjusted EBITDA were partially offset by reductions in variable compensation provisions and other cost reductions.