Q2 2020 Earnings Call Supplemental Slides Kevin OMeara, Chief - - PowerPoint PPT Presentation

Q2 2020 Earnings Call

Supplemental Slides

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

July 30, 2020

Advisory

Special Note Regarding Forward-Looking Statements Certain information and statements contained in this presentation 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 Securities Exchange Act of 1934 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 presentation, 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 presentation contains Forward-Looking Information with respect to, among other things, the impact of COVID-19 on our business, the expected timing of re-opening our DIRTT Experience Centers to client tours, our expectations regarding the impacts of implementing our CRM system, our expectation to commission our new South Carolina plant in the second half of 2020 and commence commercial operations in the first half of 2021; the expected cost of commissioning our new South Carolina plant; our expected focus on leveraging opportunities to accelerate the shift from conventional to modular construction and our ability to position DIRTT to achieve sustained, long-term market share growth, and our expectations regarding future travel and entertainment expenses. 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. Forward-Looking Information necessarily involves unknown risks and uncertainties, which could cause actual results or

• utcomes to differ materially from those expressed or implied in such statements. Factors that could have a material effect on our business, financial condition, results of operations and growth prospects

include, 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; 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 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 Form 10-Q filed with the Securities and Exchange Commission on July 29, 2020. 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. Currency and Presentation of Financial Information Unless otherwise indicated, all financial information relating to the Company in this Presentation has been prepared in U.S. dollars using accounting principles generally accepted in the United States (“GAAP") and the rules and regulations of the SEC.

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Non-GAAP Financial Measures

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Our consolidated financial statements are prepared in accordance with GAAP. These 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 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

• utstanding 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, government subsidies 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. For the current year, we removed the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-on-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. We have presented a reconciliation to our prior calculation of Adjusted EBITDA for all years presented. Additionally, in the current year, we have excluded from Adjusted Gross Profit costs associated with under-utilized capacity. Fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. The following non-GAAP financial measures may be presented herein. A description of the calculation for each measure is as follows: Adjusted Gross Profit is Gross profit before deductions for costs of under-utilized capacity, depreciation and amortization. Adjusted Gross Profit Margin is Adjusted Gross Profit divided by revenue. EBITDA is net income before interest, taxes, depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for foreign exchange gains or losses; impairment expenses; stock-based compensation expense; government subsidies; reorganization expenses; and any other non-core gains or losses. Adjusted EBITDA Margin is 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 their most directly comparable GAAP financial measure is presented in the tables at the end of this presentation. A reconciliation of these non-GAAP measures is also contained in DIRTT’s Form 10-Q filed with the Securities and Exchange Commission (the “SEC”), complete copies of which are available on the Company’s website at www.dirtt.com and on EDGAR at www.sec.gov/edgar

Q2 Update

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• Project deferrals of $3.7 million due to COVID-19
• Revenue slightly exceeded Q1/20
• Delivered modestly positive adjusted EBITDA
• Strong balance sheet and $44.6 million cash

Financials

• Near-term challenges as end users take a measured response to COVID-19
• Potential to accelerate the trend to offsite construction

Required labor reductions onsite Increased focus on infection control and physical separation in offices Requirement for flexible spaces

COVID-19

Strategic Marketing Campaign

5 Communicate DIRTT’s full solution and benefits Connect DIRTT’s value to prevailing customer needs and trends Position DIRTT effectively at both a business (economic) and human (experience) level Bolster DIRTT’s mind share and market share Elevate our image as design-driven, problem- solving, richness of applications Strengthen existing market opportunities and target new markets Drive solid prospects to DIRTT sales reps / partners Build pipeline coverage

Make space for possibilities™

Targeting

DIGITAL PLATFORMS: Google search, Google Display Network, LinkedIn, Twitter, YouTube, Facebook and Instagram TARGETING: Fortune 500 companies, strategic accounts, general contractors, architects and designers, and decision makers at healthcare and higher education organizations TIMING: Q2- Q4 (6 months)

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Strategic Plan Progress in Q2

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• Completed phase 1 rollout of CRM concurrent with launch of Make space for

possibilitiesTM

• Hiring
• All direct reports to CCO and VP Sales on board

Mark Kinsler joins as Director, Strategic Accounts and Enterprise Sales Final regional sales director hired

• 5 new partners

Commercial

• Safety performance continues to exceed industry standards
• In Q2, all plants exceeded goals to reduce external quality issues
• On track to achieve continuous improvement by year end
• On schedule for commissioning new South Carolina plant 1H21

Manufacturing

New Board Members

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Shauna King

Former Vice President, Finance & Business Operations, Yale University Former Chief Information Officer / Chief Transformation Officer, PepsiCo

Michael Ford

Head of Global Real Estate & Security, Microsoft

Progress in Q2 – Financial Liquidity

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• Completed definitive documentation on covenant holiday
• Extends to September 30th, 2020
• Currently $12.8 million available and undrawn

Credit Facility

• Drew CDN$3.6 million of CDN$5.0 million leasing facility
• Undrawn US$16.0 million leasing facility to fund equipment purchases for new

Carolina plant, expected in Q3/Q4

Leasing Facility

• Qualified for approximately $4.3 million in April – June period
• $1.6 million received in June, balance expected in Q3
• Ongoing evaluation as to continued eligibility

Canadian Emergency Wage Subsidy

• Net working capital at June 30th of $52.2 million including $44.6 million cash

Working Capital

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Revenue

• Revenue decline vs. prior year but slight

sequential increase from Q1 2020

• Q2 COVID-19 deferrals estimated at

approximately $3.7 million

$64.1 $42.2 $41.0 $42.2 $- $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 Q2 2019 Q2 2020 Q1 2020 Q2 2020

US$ 000

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Gross Profit and Adjusted Gross Profit Margin1

1 See “non-GAAP financial measures”

Q2 2020 impacts

• Reduced warranty provision related to timber to $1.3 million (from $2.5 million)
• Negative leverage on fixed costs
• $0.5 million severance costs as a result of additional rightsizing factory labor in early Q2

38.1% 33.7% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Q2 2019 Q2 2020

Gross Profit Margin

42.1% 38.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Q2 2019 Q2 2020

Adjusted Gross Profit1 Margin

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Operating Expenses Breakdown1

1 Excludes stock-based compensation expenses

Sales and Marketing Variability

• Variable commission down on lower revenue
• $1.3 million COVID-19 related deferrals in sales

and marketing spending

• Connext trade show
• Travel, meals and entertainment
• Q2 2019 included $1.3 million in consulting costs

related to development of sales and marketing strategy

$9.5 $6.9 $2.9 $2.0 $6.2 $6.2 $2.3 $2.1 $- $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0 Sales & Marketing G&A Operations Technology & Development

$million

Q2 2019 Q2 2020

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Adjusted EBITDA1 Q2/19 vs Q2/20

1 See “non-GAAP financial measures”. We have revised our calculation of Adjusted EBITDA for the periods presented.

Q2/20 Adjusted EBITDA

• Reflects $1.2 million recovery for timber

provision offset by $0.5 million of severances

• Lower sales and marketing expenses

due to lower activity, COVID-19, and non-recurring consulting costs

• Canadian Emergency Wage Subsidy

removed from calculation

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Net Loss Q2/19 to Q2/20

Stock-based compensation

• Q2/20 $0.4 million
• Q2/19 recovery of $1.7 million

due to temporary cash settlement

• f options that ceased upon US

listing in 2H19

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Outlook

Average daily order entry levels for July consistent with 1H20 Market outlook remains uncertain due to COVID-19 Substantial improvements within commercial organization

Strategic marketing campaign: Make space for possibilitiesTM

Solid balance sheet to support operations going forward

Remain ready to reevaluate should business conditions warrant

Summary of Consolidated Financial Results

1. See “Non-GAAP Financial Measures” 2. Recalculated in six months ended June 30, 2020 to exclude $2.0 million of costs attributable to under-utilized capacity in cost of sales as a result of production in the first quarter being below capacity. 3. Three and six months ended June 30, 2019 included $1.7 million recovery and $4.8 million expense of stock-based compensation, respectively and $2.6 million in reorganization expenses for the six months ended June 30, 2019 (2020 – $0.4 million and $0.9 million in stock-based compensation expenses for the three and six month periods respectively and no reorganization expenses). 4. Recalculated from prior periods to exclude the impact of foreign currency gains and losses, previously only foreign currency impacts on debt revaluation were included in the calculation of Adjusted EBITDA.

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For the period-ended June 30 ($ thousands, except per share amounts) Three 2020 months 2019 % Change Six 2020 months 2019 % Change Revenue 42,155 64,091 (34) 83,136 129,152 (36) Gross profit 14,216 24,421 (42) 25,531 48,025 (47) Gross profit margin 33.7% 38.1% (12) 30.7% 37.25 (99) Adjusted Gross Profit, as previously presented1,2 16,124 26,980 (40) 29,700 52,764 (44) Adjusted Gross Profit1,2 16,124 26,980 (40) 31,700 52,764 (44) Adjusted Gross Profit Margin1,2 38.2% 42.1% (9) 38.1% 40.9% (7) Operating expenses3 17,129 19,660 (13) 37,520 48,029 (22) Operating expenses %3 40.6% 30.7% 32 45.1% 37.2% 21 Operating income (loss)3 (2,913) 4,761 NA (11,989) (4) NA Adjusted EBITDA, as previously presented1 (687) 5,605 NA (3,851) 12,591 NA Adjusted EBITDA1,4 273 6,046 (95) (5,210) 13,762 NA Adjusted EBITDA Margin%1,4 0.6% 9.4% (94) (6.3%) 10.7% NA Income tax expense (recovery) 124 1,722 (93) (1,202) 1,708 NA Net income (loss)3 283 2,611 (89) (5,045) (2,654) 90 Net income (loss) per share - basic and diluted3

• 0.03

NA (0.06) (0.03) 100

Additional Financial Highlights

1) Current and long-term portions

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($ thousands) Jun 30, 2020 Dec 31, 2019 Cash and cash equivalents 44,626 47,174 Trade and other receivables, net 21,281 24,941 Inventory 17,651 17,566 Property, plant and equipment, net 42,094 41,365 Capitalized software, net 8,073 8,213 Operating lease right-of-use assets, net1 18,111 20,661 Accounts payable and other liabilities 20,458 20,384 Other current liabilities 4,071 5,187 Lease liabilities1 18,774 21,403 For the period-ended ($ thousands) Jun 30, 2020 Jun 30, 2019 Net cash flows provided by operating activities 1,617 14,881 Capital expenditures 8,101 4,754

Non-GAAP Financial Measures

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The following tables present a reconciliation for the three and six months ended June 30, 2020 and 2019 of our non-GAAP measures to the most directly comparable GAAP measures, being Adjusted EBITDA to net income, and Adjusted Gross Profit to gross profit.

For the period-ended June 30 ($ thousands) Three 2020 months 2019 Six 2020 months 2019 Net income (loss) for the period 283 2,611 (5,045) (2,654) Add back (deduct): Interest Expense 61 25 96 74 Interest Income (57) (38) (195) (92) Income Tax Expense (Recovery) 124 1,722 (1,202) 1,708 Depreciation and Amortization 2,761 2,940 5,893 6,335 EBITDA 3,172 7,260 (453) 5,371 Stock-based Compensation Expense (Recovery) 425 (1,655) 886 4,792 Government Subsidies (4,284)

• (4,284)
• Non-cash Foreign exchange (Gain) Loss on

Debt Revaluation

• (211)

Reorganization Expense

• 2,639

Adjusted EBITDA, as previously presented (687) 5,605 (3,851) 12,591 Other Foreign Exchange (Gains) Losses 960 441 (1,359) 1,171 Adjusted EBITDA 273 6,046 (5,210) 13,762 Net Income (Loss) Margin 0.7% 4.1% (6.1%) (2.1%) Adjusted EBITDA Margin, as previously presented (1.6%) 8.7% (4.6%) 9.7% Adjusted EBITDA Margin 0.6% 9.4% (6.3%) 10.7% For the period-ended June 30 ($ thousands) Three 2020 months 2019 Six 2020 months 2019 Gross profit 14,216 24,421 25,531 48,025 Gross profit margin 33.7% 38.1% 30.7% 37.2% Add: Depreciation and amortization expense 1,908 2,559 4,169 4,739 Adjusted Gross Profit, as previously presented 16,124 26,980 29,700 52,764 Add: Costs of under-utilized capacity

• 2,010
• Adjusted Gross Profit

16,124 26,980 31,710 52,764 Adjusted Gross Profit Margin, as previously presented 38.2% 42.1% 35.7% 40.9% Adjusted Gross Profit Margin 38.2% 42.1% 38.1% 40.9%