DIRTT Environmental Solutions Ltd. today announced its financial results for the three and twelve months ended December 31, 2020. All financial information is presented in U.S. dollars unless otherwise stated.
Fourth Quarter 2020
Revenue of $42.2 million
Gross profit margin of 27.4%
Adjusted Gross Profit Margin1 of 32.0%
Net loss of $4.2 million
Net loss margin of (9.9%)
Adjusted EBITDA1 of ($2.9) million
Adjusted EBITDA Margin1 of (6.8%)
Fiscal 2020
Revenue of $171.5 million
Gross profit margin of 31.1%
Adjusted Gross Profit Margin1 of 37.0%
Net loss of $11.3 million
Net loss margin of (6.6%)
Adjusted EBITDA1 of ($7.2) million
Adjusted EBITDA Margin1 of (4.2%)
$45.8 million cash balance at December 31, 2020
“The COVID-19 pandemic brought swift and severe changes to the construction industry in 2020 and DIRTT was not immune to the resulting contraction in commercial construction activity,” stated Kevin O’Meara, chief executive officer. “We benefited throughout most of the year from the completion of projects that were underway at the beginning of the pandemic. However, with continued lack of clarity on how COVID-19 and associated restrictions will evolve, end customers remain reluctant to make firm commitments on new projects. This dynamic began to impact our activity levels in the fourth quarter of 2020 and has continued into 2021.”
“Nevertheless, industry forecasts are predicting commercial construction starts to recover slightly this year and conversations with distribution partners and end customers support the view of strengthening market demand beginning slowly in the second half of 2021. The pace of the recovery may be dependent on the success of vaccination programs and the ensuing confidence of end customers to move forward with projects. Longer term, we continue to believe the pandemic has brought greater attention to how organizations design and build, and we see evidence that it has heightened the need for the type of flexible and adaptable spaces that DIRTT provides.”
“Despite these challenges, we have continued to transform DIRTT through the prudent execution of our strategic plan. This included significant progress towards our objective to develop a robust commercial organization, attain the continuous improvement phase of our operations, and innovate advances in our ICE® technology and solutions suite. Further, in January of 2021 we secured additional liquidity through an oversubscribed offering of 6% convertible unsecured subordinated debentures that, combined with our existing strong balance sheet, we believe enables us to continue the transformational investments we have made while ensuring flexibility should a recovery take longer than expected. We believe these achievements position us to deliver sustainable sales growth when the non-residential market begins to emerge from the pandemic-induced downturn.”
Mr. O’Meara concluded, “Our focus in 2021 is to continue building out our commercial team and to leverage the organizational strength we have developed to drive sales execution and increase market penetration. We remain confident in the strength of our business model and approach to interior construction and resolute in the execution of our strategic plan to drive the Company to achieve its full potential.”
Fourth Quarter Financial Review
Revenue for the fourth quarter of 2020 was $42.2 million compared to $53.2 million reported in the fourth quarter of 2019, a decline of $11 million or 21%. The decrease reflects the major contraction in construction activity levels in North America due primarily to the COVID-19 pandemic.
Correspondingly, gross profit for the fourth quarter of 2020 declined to $11.5 million from $13.5 million in the prior year period, reflecting the impact of lower revenue and negative leverage on our fixed manufacturing costs. However, gross profit margin increased to 27.4% of revenue in the fourth quarter of 2020 from 25.3% in the prior year period, reflecting the benefits of labor reductions in early 2020 and efficiency improvements in our manufacturing operations. In addition, 2019 included a one-time provision of $2.5 million related to certain previously delivered timber projects, which provision was reduced to $0.7 million as at year-end 2020.
Adjusted Gross Profit Margin in the fourth quarter of 2020 decreased to 32.0% from 33.4% in the prior year period. Adjusted Gross Profit Margin for the fourth quarter of 2019 excluded a $2.2 million cost of under-utilized capacity with no similar adjustment in the fourth quarter of 2020.
Sales and marketing expenses in the fourth quarter of 2020 were $7.5 million, a decrease of $0.5 million from $8.0 million in the prior year period, reflecting reduced commissions on lower revenues, lower travel, meals and entertainment expenses, and lower marketing and trade show expenses due to COVID-19, offset by slight increases in salaries due to strategic headcount increases.
General and administrative expenses were $5.7 million in the fourth quarter of 2020, a $0.9 million decrease from $6.6 million in the prior year period. The decrease is due to the reversal of a $1.2 million provision relating to a claim for severance by one of our former founders, as well as lower travel and meals and entertainment expenses due to pandemic induced restrictions. These savings were partially offset by increased legal fees relating to ongoing litigation matters in 2020.
Operations support expenses were $2.3 million in the fourth quarter of 2020, a decrease of $1.0 million from $3.3 million in the prior year period, as a result of lower travel and office expenditures due primarily to the impacts of the pandemic.
Technology and development expenses were $1.9 million in the fourth quarter of 2020 and consistent with the same period of 2019.
Net loss for the fourth quarter of 2020 was $4.2 million or $(0.05) net loss per share compared to net loss of $7.5 million or $(0.09) net loss per share for the fourth quarter of 2019. The reduction in net loss reflects a $5.1 million decrease in operating expenses combined with $3.9 million of government subsidies, partially offset by a $1.9 million decrease in gross profit, $0.9 million increase in foreign exchange losses and $2.6 million of lower income tax recoveries.
Adjusted EBITDA and Adjusted EBITDA Margin for the fourth quarter of 2020 were a $2.9 million loss and (6.8%), respectively, an improvement from a $3.4 million loss and (6.4%) in the fourth quarter of 2019, due to reduced operating expenses more than offsetting the impact of lower revenues.
Full Year Financial Review
Revenues for the year ended December 31, 2020 were $171.5 million, a decline of $76.2 million or 31% from $247.7 million in the prior year period. The decrease reflects the impact of the COVID-19 pandemic, including a major contraction in construction activity levels in North America due to work-from-home measures and other responses to the pandemic.
Correspondingly, gross profit for the year ended December 31, 2020 was $53.3 million or 31.1% of revenue, a decline of $33.1 million or 38% from $86.4 million or 34.9% of revenue for the year ended December 31, 2019. This reduction was largely attributable to our decline in revenues and the impact of fixed costs on lower revenues. During the year ended December 31, 2020, we incurred $1.0 million of severance costs to reduce headcount in response to excess labor capacity caused by lower revenues. These costs were offset by the reversal of $1.8 million of the timber provision initially taken at year-end 2019, but subsequently reversed following confirmation of applicable code compliance. Adjusted Gross Profit Margin for the year ended December 31, 2020 was 37.0% of revenue, a decline from 39.5% in the prior year period for the reasons described above. Excluded from Adjusted Gross Profit in 2019 and 2020 are $2.2 million and $2.0 million, respectively, of overhead costs associated with operating at lower than normal capacity levels, which were charged directly and separately to cost of sales rather than as costs attributable to production.
Sales and marketing expenses decreased $5.9 million to $28.0 million for the year ended December 31, 2020, down from $33.9 million for the prior year period. The decreases were largely related to a reduction in commission expenses on lower revenues and lower travel, meals and entertainment expenses during the year ended December 31, 2020 as a result of COVID-19 induced travel restrictions, the cancellation of Connext and other tradeshows as well as continued attention to cost discipline. These reductions were partially offset by $1.1 million of increased salary and wage expenses as we continue to invest in our sales organization. Included in sales and marketing expenses for the year ended December 31, 2019 were $2.0 million of one-time consulting costs related to our sales and marketing plan.
General and administrative expenses decreased $0.9 million to $26.7 million for the year ended December 31, 2020, down from $27.6 million in the prior year period. The decrease was primarily the result of $1.9 million of expense reductions due to COVID-19, offset by a $3.2 million increase in professional fees and a $0.6 million provision for expected credit losses against our accounts receivable balances. During fiscal 2019, we incurred $2.6 million of expenses related to the listing of our common shares on the Nasdaq Global Select Market (“Nasdaq”), which did not reoccur in 2020.
Operations support expenses decreased $1.7 million to $9.4 million for the year ended December 31, 2020, down from $11.0 million for the prior year period. The decrease was the result of lower consulting costs and a decrease in travel, meals and entertainment costs in 2020 due to COVID-19 restrictions. These decreases were partially offset by an increase in personnel costs due to increased headcount. In 2019, we incurred $1.1 million of consulting costs to assist with the rectification of a tile warping issue.
Technology and development expenses increased by $0.3 million to $8.1 million for the year ended December 31, 2020, compared to $7.8 million for the prior year period, due to increased professional fees related to patents of our technology.
Net loss for the year ended December 31, 2020 was $11.3 million, an increase in losses of $6.9 million from net loss of $4.4 million for the year ended December 31, 2019. The increase in net loss is attributable to the above noted reduction in gross profit and a $1.1 million increase in income tax expense, partially offset by a $14.3 million reduction in operating costs, a $0.7 million decrease in foreign exchange losses, and government subsidies of $12.7 million.
Adjusted EBITDA and Adjusted EBITDA Margin for the year ended December 31, 2020 was a $7.2 million loss and (4.2%), respectively, a decline of $25.4 million or 140% from $18.2 million and 7.4% for the year ended December 31, 2019 for the above noted reasons. This reflects a $34.5 million decrease in Adjusted Gross Profit, partially offset by reduced commissions on lower revenues and decreased spending on travel, meals and entertainment expenses, including tradeshows due to COVID-19 related reductions.