DIRTT Reports Third Quarter 2022 Financial Results and Private Placement
DIRTT Environmental Solutions Ltd. announced its financial results for the three months ended September 30, 2022. All financial information in this news release is presented in U.S. dollars, unless otherwise stated. The Company is also pleased to announce that 22 NW Fund, LP ("22NW"), 726 BC LLC and 726 BF LLC (together "726"), and all of the directors and executive officers of the Company have entered into irrevocable subscription agreements to purchase, in aggregate, up to 8,871,494 common shares of the Company ("Common Shares"), having a subscription price of the higher of the Nasdaq Global Select Market ("Nasdaq") closing price of the Common Shares on November 14, 2022 and the volume weighted average trading price of the Common Shares on the Toronto Stock Exchange ("TSX") for the five trading days immediately following today’s announcement. In conjunction with this placement, 22NW and 726, or their principals, have also irrevocably committed to backstopping any rights offering conducted by the Company in the next 12 months to a minimum aggregate value of $2.0 million.
Third Quarter 2022 Highlights
Revenue rose 37% to $46.7 million for the quarter, compared to the prior year’s third quarter, and 5% compared to second quarter 2022.
Gross profit margin rose 780 bps to 15.0% for the quarter, compared to 7.2% in the prior year’s third quarter and 14% in the second quarter 2022 driven by improved demand, pricing and manufacturing costs.
Net loss improved to $(6.7) million by $8.7 million, or 56%, from the prior year’s third quarter and by $12.6 million, or 65%, from second quarter 2022.
Adjusted EBITDA(1) improved to $(5.4) million, by $7.9 million, or 60% from the prior year’s third quarter and by $4.0 million, or 43%, from second quarter 2022
Total sales pipeline increased to $395 million as of October 1, 2022, up 10% from July 1, 2022.
Current available liquidity of $15.8 million, including $6.8 million of unrestricted cash.
As described above, the Company entered into a private placement of Common Shares to our two largest shareholders, 22NW and 726, and all our directors and executive officers having gross proceeds of approximately $3.0 million (the "Private Placement"), subject to certain pricing mechanisms, with at least an additional $2.0 million committed to backstopping any rights offering conducted by the Company in the next 12 months.
Company continues to evaluate certain non-dilutive, strategic cash initiatives expected to generate additional cash flows by early 2023.
Note: (1) See “Non-GAAP Financial Measures”
Management Commentary
“We are pleased to see the improvement in key financial metrics in the third quarter compared to both the second quarter 2022 and prior year’s third quarter. The improved margins in the business are a direct result of the rebalancing of our pricing and our manufacturing team’s focus on improving quality and controlling costs. Like many companies, we continue to navigate uncertain macro-economic market conditions, but we continue to see positive growth trends in quoting, win-rates and order activity,” said Benjamin Urban, Chief Executive Officer. “We remain focused on strengthening our balance sheet, increasing our engagement with our Construction Partners and improving quality and order delivery times.”
Bradley Little, Chief Financial Officer, added “From a financial standpoint, our highest priority is stabilizing and strengthening our balance sheet, including our cash position. While our cash usage remained elevated during the quarter, primarily due to reorganization costs, we are seeing meaningful reductions in our monthly cash usage. Our unrestricted cash position at the end of October was $6.7 million, virtually in line with September, largely benefiting from improved operating results and favorable working capital conversion. We are also actively pursuing several non-dilutive strategic cash initiatives intended to deliver meaningful cash proceeds to the Company by mid-first quarter 2023. Further, we launched a private placement of Common Shares having gross proceeds of approximately $3.0 million, supported by our two largest shareholders, directors, and executive officers, designed to be minimally dilutive and provide additional liquidity as we work to complete these strategic initiatives. Additionally, we expect to receive $7.1 million in cash in 2023 for the U.S. employer retention tax credit.”
Third Quarter 2022 Results
Third quarter 2022 revenues increased to $46.7 million by 5% and 37% over the second quarter of 2022 and the third quarter of 2021, respectively. The improvement over the prior year was predominantly driven by increased demand for our products, which commenced in the first quarter of 2022, particularly in the workplace sector, as pandemic-related health restrictions eased, and employees return to the office. The sequential quarter improvement was driven by commercial discipline from price increases announced earlier in the year.
Third quarter 2022 gross profit and gross profit margin was $7.0 million, or 15.0% of revenue, an increase of $4.6 million, or 186%, from $2.5 million, or 7.2% of revenue, for third quarter 2021. The 780 bps increase in gross profit margin was a result of improved labor efficiency and the benefit of higher revenues on our improved fixed cost structure. Materials, transportation and other variable costs, as a percentage of revenue, were consistent with the prior year as the price increases announced earlier in the year contemplated the rising material and other input costs. Third quarter gross profit included approximately $2.0 million in non-cash expense associated with the write-down of inventory and accelerated amortization associated with discontinued product lines. Gross profit for the third quarter benefited by approximately $0.6 million from the impact of the weakening Canadian dollar on U.S. dollar reported results, which is included in the above variances.
Third quarter 2022 Adjusted Gross Profit and Adjusted Gross Profit Margin (see “Non-GAAP Financial Measures”) were $10.1 million and 21.7%, respectively, or an increase of $5.4 million and 770 basis points compared to the prior year’s third quarter. Adjusted Gross Profit excludes depreciation and amortization costs of $3.1 million, or 6.7% as a percent of revenue in the quarter ended September 30, 2022 and $2.3 million, or 6.8% as a percent of revenue for the third quarter 2021.
Sales and marketing expenses for the quarter were $6.1 million, a $1.4 million decrease from $7.5 million in the prior year’s third quarter. The decrease was largely related to lower salary and benefit expenses due to planned headcount reductions as part of our cost reduction initiatives.
General and administrative expenses for the quarter were $6.5 million, a decrease of $1.0 million from $7.5 million in the prior year’s third quarter. The change is due to reductions in salaries and benefits from planned headcount reductions as part of cost reduction initiatives as well as reduced professional fees during the quarter.
Operations support expenses for the quarter were $2.3 million, a decrease of $0.1 million from $2.4 million in the prior year’s third quarter. The decrease was due to reduced travel costs in the quarter.
Technology and development expenses for the quarter were $1.7 million, a decrease of $0.5 million from $2.2 million in the prior year’s third quarter due to reductions in salaries and benefits expenses. We note we are currently active in hiring ICE engineers and plan to invest in ICE development in coming years as we remain excited about the opportunity within ICE for DIRTT directly. ICE is DIRTT’s proprietary design integration software.
During the quarter, the Company incurred $3.4 million in reorganization costs, which includes termination benefits incurred on headcount reductions and executive changes, as well as costs incurred related to the temporary suspension of operations at the Rock Hill Facility.
Net loss for the quarter was $6.7 million compared to $15.4 million for prior year’s third quarter. The lower net loss is primarily the result of the higher gross profit margin explained above, a $4.2 million increase in government subsidies and a $0.8 million increase in foreign exchange gain. These increases were offset by a $0.6 million increase in operating expenses, inclusive of $3.4 million of reorganization costs, and a $0.5 million increase in interest expense.
Adjusted EBITDA (see “Non-GAAP Financial Measures”) for the quarter was a $5.4 million loss or (11.6)%, an improvement of $7.9 million from a $13.3 million loss or (39.1)% for the prior year’s third quarter. Improvements in Adjusted EBITDA for the quarter were due to the above noted reasons.
Private Placement to Insiders
The Company entered into irrevocable subscription agreements with 22 NW, 726 and all the directors and executive officers of the Company on November 14, 2022 to purchase up to 8,871,494 Common Shares pursuant to the Private Placement. The subscription price for such Common Shares will be equal to the greater of (i) the closing bid price of the Common Shares on the Nasdaq on November 14, 2022, and (ii) the volume weighted average trading price of the Common Shares on the TSX, converted to U.S. dollars based on the Bank of Canada daily exchange rate, for the five trading days immediately following this announcement, being November 15 to November 21 (inclusive) (the "Subscription Price Formula"). The Private Placement is subject to standard regulatory approvals, including the approval of the TSX, and is expected to close on or about November 23, 2022 (the "Closing Date"). The proceeds from the Private Placement are intended to provide additional liquidity as the Company works to complete its strategic initiatives.
22NW, 726 and all the directors and executive officers of the Company together have committed to purchase approximately $3.0 million of Common Shares under the Private Placement. Pursuant to the TSX Company Manual, the Company is not permitted to issue more than 8,871,494 Common Shares under the Private Placement, as a result, the amount of gross proceeds received by the Company pursuant to the Private Placement (in the aggregate and from each purchaser) will depend on the Subscription Price Formula. Each of 22NW and 726, or their affiliated directors, has also committed to purchase Common Shares having an aggregate subscription price of not less than $1.0 million in any rights offering conducted by the Company within one year of the Closing Date. These backstop commitments may be increased to the extent 22NW's and 726's subscriptions under the Private Placement are limited by the TSX's share issuance limit described above. Each of 22NW and 726 will allocate its commitment between itself and its affiliated director (being Aron English and Shaun Noll, respectively). The subscription price for such Common Shares will be the same as the subscription price under the basic subscription privilege to all other shareholders under any such future rights offering.