Q2 2019 Results Call Supplemental Slides Kevin OMeara, Chief - - PowerPoint PPT Presentation

Q2 2019 Results Call

Supplemental Slides

Kevin O’Meara, Chief Executive Officer Geoff Krause, Chief Financial Officer

July 31, 2019

2

Forward-Looking Statements

In this presentation, all amounts are in Canadian dollars, unless otherwise indicated. Certain information and statements contained in this presentation constitute “forward-looking information” and “forward-looking statements” (collectively, “Forward-Looking Information”) as defined under applicable Canadian securities laws and DIRTT Environmental Solutions Ltd. (“DIRTT” or 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 presentation. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “believes”, “estimated”, “intends”, “plans”, “projection” and “outlook”) are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such Forward-Looking Information. In particular and without limitation, this presentation contains Forward-Looking Information pertaining to the following: the business plans and objectives of DIRTT; estimates of domestic and international economics; and growth strategy and

• pportunities.

With respect to Forward-Looking Information contained in this presentation, assumptions have been made regarding, among other things: the Company’s ability to manage its growth; competition in the Company’s industry; the Company’s ability to enhance current products and develop and introduce new products; the Company’s ability to obtain components and products from suppliers on a timely basis and on favorable terms; the Company’s ability to obtain qualified staff and equipment in a timely and cost efficient manner; the regulatory framework governing taxes in Canada and the United States and any other jurisdictions in which the Company may conduct its business in the future; future development plans for the Company’s assets unfolding as currently envisioned; future capital expenditures to be made by the Company; future sources of funding for the Company’s capital program; the Company’s ability to list on an accredited US exchange; the impact of increasing competition on the Company; the Company’s ability to remediate product deficiencies and the Company’s success in identifying other risks to its business and managing the risks mentioned below. The Company’s actual results or outcomes could differ materially from those expressed in the Forward-Looking Information as a result of the risks normally encountered in its industry such as: maintaining and managing growth; history of losses; risks related to new technology; competition risk; operating results and financial condition fluctuations on a quarterly and annual basis; risks related to intellectual property; risks related to additional capital requirements; customer base and market acceptance; software and product defects and design risks; availability of key supplies; dependence on key personnel; commodity price risk; credit risk; the effect of government regulation; risks related to international expansion; risks related to physical facilities; legal risks; foreign currency and fiscal matters; risks related to future acquisitions; risks related to Forward-Looking Information; reliance on third parties; and conflicts of interest. 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. DIRTT cautions that the foregoing lists of factors are not exhaustive. Further, Forward-Looking Information is made as of the date hereof and the Company undertakes no obligation to update Forward-Looking Information to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable Canadian securities laws. New factors emerge from time to time, and it is not possible for Management to predict all of these factors and to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in Forward-Looking Information. No assurance can be given that these expectations will prove to be correct and such Forward-Looking Information contained in this presentation should not be unduly relied upon. In addition, this presentation may contain Forward-Looking Information attributed to third party industry sources. The Forward-Looking Information contained in this presentation is expressly qualified by the foregoing cautionary statements. This presentation shall not constitute an offer to sell or the solicitation of any offer to buy any of DIRTT’s securities in any jurisdiction. The securities of DIRTT have not been and will not be registered under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) or any state securities laws and may not be offered or sold in the United States except in certain transactions exempt from the registration requirements of the U.S. Securities Act and applicable state securities laws.

3

Non-IFRS measures

The term "Adjusted Gross Profit", “Adjusted Gross Profit %”, "Adjusted EBITDA", "Adjusted EBITDA %", "Adjusted Operating Expenses", “Adjusted Net Income” and “Net cash flows provided by operating activities before changes in non- cash working capital” are financial measures used by DIRTT that are not standard measures under International Financial Reporting Standards ("IFRS") as adopted by the Canadian Institute of Chartered Accountants. DIRTT’s method of calculating Adjusted Gross Profit, Adjusted Gross Profit %, Adjusted EBITDA, Adjusted EBITDA %, Adjusted Operating Expenses, Adjusted Net Income and Net cash flows provided by operating activities before changes in non-cash working capital may differ from the methods used by other issuers. Therefore, these non-IFRS measures may not be comparable to the same measures presented by other issuers. Adjusted Gross Profit is gross profit before deductions for depreciation and amortization of equipment, tooling and intangible assets for manufacturing-related assets. Adjusted Gross Profit % is Adjusted Gross Profit divided by revenue. We use these measures to assess our manufacturing and operating performance. As manufacturing volumes and revenue rise, production synergies tend to permit improvements in gross profit, subject to variability in monthly manufacturing volumes and product/service revenue mix. Adjusted EBITDA is net income before interest, taxes, depreciation and amortization, plus: non-cash foreign exchange gains or losses on debt revaluation; stock based compensation expenses; reorganization costs; and any other non- recurring gains or losses. Adjusted EBITDA % is calculated as Adjusted EBITDA divided by revenue. We use these measures as a performance measure as they are widely used by securities analysts and investors to evaluate financial performance, as well we use these measures to assess our ability to generate cash flows, service debt, pay current taxes and fund capital expenditures. Adjusted Operating Expenses is Operating Expenses before deductions for depreciation and amortization of non-manufacturing related assets, stock-based compensation expenses and reorganization costs. We use this as a measure of the efficiency and effectiveness of our sales and marketing efforts and overall administrative support efforts by comparing them to prior period results. “Adjusted Net Income” is net income (loss) excluding the tax effected impact of reorganization costs and stock-based compensation fair value adjustment. "Net cash flows provided by operating activities before changes in non-cash working capital" are net cash flows provided by operating activities and adding back the change in non-cash working capital. For a reconciliation of these non-IFRS measure see DIRTT’s annual and interim Management Discussion and Analysis, complete copies of which are available on the Company’s website at www.dirtt.net and on SEDAR at www.sedar.com.

4

Overview

• Sales and Marketing
• CCO search complete; newest executive team member to be announced in the coming weeks
• Management consulting report received
• Strategic plan to be shared with investors Fall 2019
• Operations
• Permanent resolution to tile warping
• Two phases of resolution
• Phase I – third party applies sealant
• Phase 2 – Introduction of dedicated new coating line to bring capabilities in house (capital cost approx. $2.6 million)
• New Factory Location – SE US, two potential sites identified, in final negotiations to identify the best alternative
• Chromacoat tile and millwork capabilities
• Closer to major markets to reduce shipment times and costs
• Reduces single factory risk for tile and millwork production
• Better match of currency of cost structure with currency of revenue stream
• No disruption to current production during expansion
• Anticipated capital cost of $US18.5 million

5

• 10,000

20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Q2 2018 Q2 2019

CDN$ 000

Product Transportation Installation Licenses and Services

Revenue

Q2/19 revenue increased 6% ($4.9M) vs Q2/18

• Product and transportation revenue up $3.6M
• F/X rate accounted for $3.1M
• Installation revenue increased by $1.2M

Healthcare as a percentage of product and transportation revenue 17% in Q2/19 vs 20% in Q2/18

$80,666 $85,577

6

Adjusted Gross Profit %

Summary of quarterly results

($ thousands, except per Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 share amounts) 2019 3 2019 3 2018 2 2018 2 2018 2018 2017 2017 2017 Revenue 85,577 86,331 98,660 96,604 80,666 80,749 74,337 84,022 70,006 Gross profit 35,450 34,113 39,680 41,976 32,751 35,416 29,780 35,911 29,868 Gross profit % 41.4% 39.5% 40.2% 43.5% 40.6% 43.9% 40.1% 42.7% 42.7% Adjusted gross profit %1 43.1% 41.6% 41.9% 45.5% 43.0% 46.1% 42.4% 44.8% 43.9% Adjusted EBITDA1 9,149 11,014 17,494 17,788 8,174 12,715 (1,006) 10,745 2,096 Adjusted EBITDA%1 10.7% 12.8% 17.7% 18.4% 10.1% 15.7% (1.4%) 12.8% 3.0% Net income (loss) 2,984 (7,815) 3,524 (4,867) 778 3,562 (7,316) 4,179 (2,877) Net income (loss) per share - basic and diluted 0.04 (0.09) 0.04 (0.06) 0.01 0.04 (0.09) 0.05 (0.03)

1 See “Non-IFRS Measures” 2 Impairment expense included in Q4 2018 and Q3 2018 is $5.1 million and $14.8 million, respectively; and 3 Stock-based compensation charge relating primarily to the impact of fair valuing cash settled stock-options is a $1.4 million recovery in Q2 2019 and a $9.1 million expense in Q1 2019

7

Operating Expenses Breakdown

Total Adjusted Operating Expenses of $27.1M in Q2/19 vs. $26.6M in Q2/18

• Sales & Marketing - $0.3M decrease including reductions on

travel, meals/entertainment and a specific trade show offset by $1.7M for sales and marketing consulting engagement

• G&A Expenses – $1.1M decrease includes $0.5M in costs

related to US listing and the absence of proxy defense costs incurred in Q2/18

• Operations Support – $1.3M increase includes $0.9M in

consultant costs for evaluation of operations/tile issue and higher headcount

• Technology and Development – $1.7M increase includes

$0.7M reduction in non-capitalizable costs of salaries, $0.4M provision for variable compensation and reallocation of $0.5M costs that were cost of sales in 2018

13,038 12,765 10,060 8,937 4,619 5,936 1,944 3,624

• 2,000

4,000 6,000 8,000 10,000 12,000 14,000 Q2 2018 Q2 2019 Sales & Marketing G&A Operations Tech & Development

8

Adjusted EBITDA Q2/18 vs Q2/19

9

Net Income Q2/18 to Q2/19

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Additional Financial Highlights

(In thousands) 6/30/2019 12/31/2018 Cash and cash equivalents 76,868 72,865 Trade and other receivables 37,280 59,852 Inventory 24,488 25,442 Property, plant and equipment 47,207 50,104 Intangible assets 18,620 18,992 Right-of-use assets 25,909

• Trade accounts payable and other liabilities

30,413 42,673 Other current liabilities1 9,990 9,262 Long-term debt2,3

• 7,674

Lease liabilities2 28,699

• (In thousands)

Q2 2019 Q2 2018 Net cash flows provided by operating activities before changes in non-cash working capital4 8,316 6,083 Net cash flows provided by operating activities 10,564 (709) Capital expenditures (3,909) (6,640)

1 The liability for cash-settleable stock options was $3.7 million for Q2 2019 2 Current and long-term portions 3 Repaid on January 31, 2019 4 See “Non-IFRS Measures”

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Summary

• 2019 a transitional year; building a platform for scalable, sustainable growth
• Significant operational and strategic progress in Q2
• CCO search complete, newest executive team member to be announced in the coming weeks
• Management consulting report received
• Tile warping issue resolved
• Operational efficiencies beginning to produce financial benefits
• Fourth factory announced
• NASDAQ listing on track for Fall 2019
• Reaffirming 5%-10% revenue growth in 2019, expectation at lower end of range

7303 30th Street SE Calgary, AB, T2C 1N6 ir@dirtt.net