DIRTT Environmental Solutions Ltd., 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
Revenue for the second quarter of 2020 was $42.2 million compared to $64.1 million reported in the second quarter of 2019, a decrease of 34.17%. In the second quarter of 2020, the company experienced the ongoing effects of disruption in sales activity levels stemming from the transitional state of their commercial function as they implement a strategic plan. Revenues were also impacted by the COVID-19 pandemic. The company estimate approximately $3.7 million of projects that they 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 NeoCon 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 the sales and marketing plan that did not recur in 2020. As economies re-open, they 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 their 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, a drop of 98% 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.
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 announced 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.