Q3 2020 Earnings Call Supplemental Slides Kevin OMeara, Chief - - PowerPoint PPT Presentation

Q3 2020 Earnings Call

Supplemental Slides

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

November 5, 2020

Advisory

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this presentation for the quarter ended September 30, 2020 (this “presentation”) are “forward- looking statements” within the meaning

• f “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Exchange Act of 1934, as amended (the

“Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this presentation, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and

• bjectives of management are forward-looking statements. When used in this presentation, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,”

“project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward- looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are 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 statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance

• n forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects

include, but are not limited to, the severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada (the “Annual Report on Form 10-K”) and in our Quarterly Report on Form 10-Q for the period ended September 30, 2020 under “Part II, Item 1A. Risk Factors.”. 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

Q3 Update

• Q3 revenue slightly exceeded Q1 and Q2 2020
• Delivered modestly positive adjusted EBITDA
• $50.7 million cash (as at September 30)
• Healthcare 36% of Q3 revenue; including 3 large projects
• Developed 4 Constructed Clinical Enclosures in response

to COVID-19

• marketing to healthcare organizations, retailers,

educational institutions and large employers

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Strategic Plan – One-Year Progress

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COVID-19

COMMERCIAL EXECUTION

36 new hires in sales and marketing Established sales and marketing organization structure Marketing

• Named VP Strategic Marketing, added six team members
• Make Space for Possibilities Campaign
• Increase brand awareness; integrated lead generation and tracking
• Increased engagement with general contractors, architects and designers

Sales

• Regional Sales Directors in place
• Established Strategic Accounts function
• Named Director of Strategic Accounts and Enterprise Sales
• Identified target list of end users

Strategic Plan – One-Year Progress

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COVID-19

COMMERCIAL EXECUTION (continued)

Client Experience

• Virtual client tour
• Virtual onboarding for employees and partners

Partner Success

• Lead generation
• Partner success team
• Five partners expanded, eight new partners
• Partner portal in development
• Vendor financing program established

Commercial Operations

• Analytical and forecasting capabilities strengthened
• Phase 2 CRM roll out
• Cost of ownership tool
• Refined sales collateral

Strategic Plan – One-Year Progress

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COVID-19

MANUFACTURING EXCELLENCE

Total recordable injury rates (TRIF) below industry standard

• Q3 first recordable incident-free quarter

Established operational team to drive LEAN Manufacturing implementation Step function improvements in SQDIP Sustainable process improvements Balanced capacity with demand Driven cost reduction and material/labor efficiencies On schedule for commissioning new South Carolina plant 1H21

• Substantial automation to increase labor and material efficiency

Strategic Plan – One-Year Progress

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COVID-19

Rapid Healthcare Response

• Developed acute care units and constructed clinical enclosures in response to COVID-19

Launched Inspire low profile wall Reflect wall to be formally launched to market in Q4 Rolled out largest version release to date of ICE software

• Enhanced VR and added Android and Windows desktop platform compatibility

INNOVATION

Progress in Q3 – Financial Liquidity

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• Credit line covenant holiday available until year end 2020
• Currently $11.6 million available and undrawn
• Conversion to ABL expected in the fourth quarter

Credit Facility

• Drew $3.5 million of $16.0 million US leasing facility

Leasing Facility

• Qualified for $4.5 million (in addition to $4.3 million during the second quarter)
• Ongoing evaluation as to continued eligibility

Canadian Emergency Wage Subsidy

• Net working capital at September 30th of $56.7 million (up from $52.2 million in

Q2/20) including $50.7 million cash

Working Capital

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Revenue

Revenue decline vs. prior year

• slight sequential increase from

Q1 and Q2 2020

$65.4 $46.2 $41.0 $42.2 $46.2 $- $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 Q3 2019 Q3 2020 Q1 2020 Q2 2020 Q3 2020

US$ 000

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Gross Profit and Adjusted Gross Profit Margin1

1 See “non-GAAP financial measures”

Q3 2020 impacts

• Reduced provision related to timber by $0.5 million ($1.8 million YTD)
• Negative leverage on fixed costs
• Improvement due to labor force reduction 1H20
• Q1 excluded excess capacity of $2 million

41.8% 39.3% 38.0% 38.2% 39.3% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Q3 2019 Q3 2020 Q1 2020 Q2 2020 Q3 2020

Adjusted Gross Profit1 Margin

38.1% 35.1% 27.6% 33.7% 35.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Q3 2019 Q3 2020 Q1 2020 Q2 2020 Q3 2020

Gross Profit Margin

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Operating Expenses Breakdown1

1 Excludes stock-based compensation expenses

• Variable commission down on lower revenue
• COVID-19 related reductions in Sales & Marketing

and G&A expenses

• Q3 2019 included $0.7 million in consulting costs

related to development of sales and marketing strategy

$8.6 $7.3 $2.4 $1.7 $6.9 $6.9 $2.3 $2.0 $- $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

Q3 2019 Q3 2020

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Adjusted EBITDA1 Q3/19 vs Q3/20

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

Q3/20 Adjusted EBITDA

• Reflects $0.5 million recovery for timber

provision

• Lower commission expense due to lower

revenue, lower Sales & Marketing expenses due to COVID-19, and non-reocurring consulting costs

• Canadian Emergency Wage Subsidy

removed from calculation

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Net Loss Q3/19 to Q3/20

Q3/20 we were eligible for $4.5 million of Canadian Emergency Wage Subsidies; we also recorded a $3.1 million valuation allowance against deferred income tax assets

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Outlook

Average daily order entry levels for October consistent with YTD

Expect softness for balance of Q4 and early 2021

No further changes to current cost structure

Proceeding with strategic plan

Substantial improvements within commercial organization Solid balance sheet to support operations going forward

Remain ready to reevaluate should business conditions warrant

Summary of Consolidated Financial Results

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1. See “Non-GAAP Financial Measures” 2. Recalculated in nine months ended September 30, 2020 to exclude $2.0 million of costs attributable to under-utilized capacity in cost of sales as a result of the slowdown in sales. 3. Three and nine months ended September 30, 2019 included $2.4 million recovery and $2.4 million expense of stock-based compensation, respectively and $2.6 million in reorganization expenses for the nine months ended September 30, 2019 (2020 – $0.7 million and $1.6 million in stock-based compensation expenses for the three and nine month periods respectively and no reorganization expenses). 4. Recalculated from prior periods to exclude the impact of foreign currency gains and losses, previously only foreign currency impacts on debt revaluation were included in the calculation of Adjusted EBITDA. For the period-ended September 30 ($ thousands, except per share amounts) Three months Nine months 2020 2019 % Change 2020 2019 % Change Revenue 46,179 65,385 (29) 129,315 194,537 (34) Gross profit 16,212 24,934 (35) 41,743 72,959 (43) Gross profit margin 35.1% 38.1% (8) 32.3% 37.5% (14) Adjusted Gross Profit, as previously presented1,2 18,171 27,309 (33) 47,871 80,073 (40) Adjusted Gross Profit1,2 18,171 27,309 (33) 49,881 80,073 (38) Adjusted Gross Profit Margin1,2 39.3% 41.8% (6) 38.6% 41.2% (6) Operating expenses3 18,856 17,596 7 56,376 65,625 (14) Operating expenses %3 40.8% 26.9% 52 43.6% 33.7% 29 Operating income (loss)3 (2,644) 7,338 NA (14,633) 7,334 NA Adjusted EBITDA, as previously presented1 365 8,072 (95) (3,486) 20,663 NA Adjusted EBITDA1,4 850 7,874 (89) (4,360) 21,636 NA Adjusted EBITDA Margin1, 4 1.8% 12.0% (85) (3.4%) 11.1% NA Income tax expense 3,392 1,959 73 2,190 3,667 (40) Net income (loss)3 (2,075) 5,802 NA (7,120) 3,148 NA Net income (loss) per share - basic and diluted3 (0.02) 0.07 NA (0.08) 0.04 NA Net cash flows provided by operating activities 5,778 3,000 93 7,395 17,881 (59) Net cash flows used in investing activities (3,262) (5,074) (36) (9,679) (10,144) (5)

Additional Financial Highlights

1) Current and long-term portions

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($ thousands) Sep 30, 2020 Dec 31, 2019 Cash and cash equivalents 50,700 47,174 Trade and other receivables, net 20,788 24,941 Inventory 16,867 17,566 Property, plant and equipment, net 44,962 41,365 Capitalized software, net 8,102 8,213 Operating lease right-of-use assets, net1 29,721 20,661 Accounts payable and other liabilities 21,181 20,384 Other current liabilities 3,618 5,187 Long-term debt and other liabilities 5,254 35 Lease liabilities1 30,475 21,403

Non-GAAP Financial Measures

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The following tables present a reconciliation for the three and nine months ended September 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 September 30 ($ thousands) Three months Nine months 2020 2019 2020 2019 Net income (loss) for the period (2,075) 5,802 (7,120) 3,148 Add back (deduct) Interest Expense 100 3 196 77 Interest Income (27) (228) (222) (320) Income Tax Expense 3,392 1,959 2,190 3,667 Depreciation and Amortization 2,780 2,925 8,673 9,260 EBITDA 4,170 10,461 3,717 15,832 Stock-based Compensation 714 (2,389) 1,600 2,403 Non-cash Foreign Exchange Gain on Debt Revaluation

• (211)

Government Subsidies (4,519)

• (8,803)
• Reorganization Expense
• 2,639

Adjusted EBITDA, as previously presented 365 8,072 (3,486) 20,663 Other Foreign Exchange (Gains) Losses 485 (198) (874) 973 Adjusted EBITDA 850 7,874 (4,360) 21,636 Net Income (Loss) Margin (4.5%) 8.9% (5.5%) 1.6% Adjusted EBITDA Margin, as previously presented 0.8% 12.3% (2.7%) 10.6% Adjusted EBITDA Margin 1.8% 12.0% (3.4%) 11.1% For the period-ended September 30 ($ thousands) Three months Nine months 2020 2019 2020 2019 Gross profit 16,212 24,934 41,743 72,959 Gross profit margin 35.1% 38.1% 32.3% 37.5% Add: Depreciation and amortization expense 1,959 2,375 6,128 7,114 Adjusted Gross Profit, as previously presented 18,171 27,309 47,871 80,073 Add: Costs of under-utilized capacity

• 2,010
• Adjusted Gross Profit

18,171 27,309 49,881 80,073 Adjusted Gross Profit Martin, as previously presented 39.3% 41.8% 37.0% 41.2% Adjusted Gross Profit Margin 39.3% 41.8% 38.6% 41.2%