UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20192022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number001-39061
DIRTT ENVIRONMENTAL SOLUTIONS LTD.LTD.
(Exact name of registrant as specified in its charter)
Alberta, Canada | ||
(State or other jurisdiction of incorporation or organization) | N/A (IRS Employer Identification No.) | |
7303 30th Street S.E. Calgary, Alberta, Canada | ||
(Address of principal executive offices) | T2C 1N6 (Zip code) |
(Registrant’s telephone number, including area code): (403)(403) 723-5000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common Shares, without par value | DRTT | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐ Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). ☐ Yes ☒ No
The registrant had 84,681,36486,988,828 common shares of common stock outstanding as of October 31, 2019.July 21, 2022.
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
FORM10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20192022
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSCautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form10-Q for the quarter ended SeptemberJune 30, 20192022 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities 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 Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, 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 on forward-looking statements. Factors that could have a materialan adverse effect on our business, financial condition, results of operations and growth prospects can be found ininclude, but are not limited to, the sectionsseverity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled Risk“Risk Factors” in our Registration StatementAnnual Report on Form 10 (“Registration Statement on Form 10”),10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on September 20, 2019February 23, 2022 (the “Annual Report on Form 10-K”) as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on May 4, 2022, and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:
•
global economic, political•
•
our ability to implement our strategic plan and to maintain and manage growth effectively;
our ability to introduce new designs, solutions and technology and gain client and market acceptance;
loss of our key executives;
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;
ii
•
•
material fluctuations of commodity prices,•
shortages of supplies of certain key components and materials;
our ability to generate sufficient revenue to achieve requisite capacity from and sustain profitability;
•
legal and regulatory proceedings brought against us;
the availability of capital or financing on acceptable terms, which may impact our liquidity and impair our ability to make investments in the business;
ii
other factors and risks described under the heading “Risk Factors” included in our Registration Statement on Form 10.
These risks are not exhaustive. Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Quarterly Report. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not relyplace undue reliance on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary statements.
iii
iii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
|
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Balance Sheets
(Unaudited – Stated in thousands of U.S. dollars)
|
| As at |
|
| As at |
| ||
|
| 2022 |
|
| 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| 19,739 |
|
|
| 60,313 |
|
Restricted cash |
|
| 3,206 |
|
|
| 3,095 |
|
Trade and other receivables, net of expected credit losses of |
|
| 19,686 |
|
|
| 17,540 |
|
Inventory |
|
| 25,296 |
|
|
| 18,457 |
|
Prepaids and other current assets |
|
| 5,343 |
|
|
| 4,399 |
|
Total Current Assets |
|
| 73,270 |
|
|
| 103,804 |
|
Property, plant and equipment, net |
|
| 46,507 |
|
|
| 51,697 |
|
Capitalized software, net |
|
| 6,252 |
|
|
| 7,395 |
|
Operating lease right-of-use assets, net |
|
| 30,748 |
|
|
| 30,880 |
|
Other assets |
|
| 5,628 |
|
|
| 5,663 |
|
Total Assets |
|
| 162,405 |
|
|
| 199,439 |
|
LIABILITIES |
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
| 24,516 |
|
|
| 22,751 |
|
Other liabilities |
|
| 1,853 |
|
|
| 2,379 |
|
Customer deposits and deferred revenue |
|
| 6,122 |
|
|
| 2,420 |
|
Current portion of long-term debt and accrued interest |
|
| 3,297 |
|
|
| 3,323 |
|
Current portion of lease liabilities |
|
| 5,868 |
|
|
| 6,214 |
|
Total Current Liabilities |
|
| 41,656 |
|
|
| 37,087 |
|
Long-term debt |
|
| 65,948 |
|
|
| 67,319 |
|
Long-term lease liabilities |
|
| 27,635 |
|
|
| 27,267 |
|
Total Liabilities |
|
| 135,239 |
|
|
| 131,673 |
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Common shares, unlimited authorized without par value, 86,988,828 issued |
|
| 186,253 |
|
|
| 181,782 |
|
Additional paid-in capital |
|
| 10,629 |
|
|
| 13,200 |
|
Accumulated other comprehensive loss |
|
| (16,077 | ) |
|
| (15,916 | ) |
Accumulated deficit |
|
| (153,639 | ) |
|
| (111,300 | ) |
Total Shareholders’ Equity |
|
| 27,166 |
|
|
| 67,766 |
|
Total Liabilities and Shareholders’ Equity |
|
| 162,405 |
|
|
| 199,439 |
|
As at | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 56,642 | 53,412 | ||||||
Trade and other receivables, net of allowances for doubtful accounts of $0.1 million at both September 30, 2019 and December 31, 2018 | 27,532 | 43,873 | ||||||
Inventory | 18,996 | 18,650 | ||||||
Prepaids and other current assets | 4,257 | 2,217 | ||||||
|
|
|
| |||||
Total Current Assets | 107,427 | 118,152 | ||||||
|
|
|
| |||||
Property, plant and equipment, net | 38,166 | 36,728 | ||||||
Capitalized software, net | 8,292 | 8,335 | ||||||
Operating leaseright-of-use assets, net | 21,530 | — | ||||||
Deferred tax assets, net | 3,487 | 6,083 | ||||||
Goodwill | 1,393 | 1,353 | ||||||
Other assets | 5,472 | 5,260 | ||||||
|
|
|
| |||||
Total Assets | 185,767 | 175,911 | ||||||
|
|
|
| |||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | 22,217 | 32,583 | ||||||
Other liabilities | 4,393 | 5,523 | ||||||
Customer deposits | 7,407 | 7,701 | ||||||
Current portion of lease liabilities | 5,247 | — | ||||||
Current portion of long-term debt | — | 2,500 | ||||||
|
|
|
| |||||
Total Current Liabilities | 39,264 | 48,307 | ||||||
|
|
|
| |||||
Deferred tax liabilities, net | — | 965 | ||||||
Other long-term liabilities | 233 | — | ||||||
Long-term lease liabilities | 17,021 | — | ||||||
Long-term debt | — | 3,125 | ||||||
|
|
|
| |||||
Total Liabilities | 56,518 | 52,397 | ||||||
|
|
|
| |||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at September 30, 2019 and 84,660,319 issued and outstanding at December 31, 2018 | 180,639 | 180,562 | ||||||
Additionalpaid-in capital | 6,591 | 6,615 | ||||||
Accumulated other comprehensive loss | (19,558 | ) | (22,092 | ) | ||||
Accumulated deficit | (38,423 | ) | (41,571 | ) | ||||
|
|
|
| |||||
Total Shareholders’ Equity | 129,249 | 123,514 | ||||||
|
|
|
| |||||
Total Liabilities and Shareholders’ Equity | 185,767 | 175,911 | ||||||
|
|
|
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Operations
(Unaudited - Stated in thousands of U.S. dollars)
For the three months ended September 30, | For the nine months ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||
Product revenue | 63,324 | 71,720 | 188,437 | 193,378 |
|
| 43,091 |
|
|
| 40,087 |
|
|
| 80,542 |
|
|
| 68,629 |
| ||||||||||||
Service revenue | 2,061 | 2,193 | 6,100 | 6,863 |
|
| 1,610 |
|
|
| 1,015 |
|
|
| 2,445 |
|
|
| 1,938 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total revenue | 65,385 | 73,913 | 194,537 | 200,241 |
|
| 44,701 |
|
|
| 41,102 |
|
|
| 82,987 |
|
|
| 70,567 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Product cost of sales | 38,947 | 42,202 | 116,117 | 115,941 |
|
| 37,185 |
|
|
| 31,091 |
|
|
| 71,792 |
|
|
| 54,642 |
| ||||||||||||
Costs of under-utilized capacity |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,756 |
| ||||||||||||||||
Service cost of sales | 1,504 | 1,626 | 5,461 | 4,910 |
|
| 1,240 |
|
|
| 787 |
|
|
| 1,632 |
|
|
| 1,575 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total cost of sales | 40,451 | 43,828 | 121,578 | 120,851 |
|
| 38,425 |
|
|
| 31,878 |
|
|
| 73,424 |
|
|
| 57,973 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Gross profit | 24,934 | 30,085 | 72,959 | 79,390 |
|
| 6,276 |
|
|
| 9,224 |
|
|
| 9,563 |
|
|
| 12,594 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Sales and marketing | 8,568 | 9,995 | 25,898 | 30,169 |
|
| 7,777 |
|
|
| 7,564 |
|
|
| 15,005 |
|
|
| 14,234 |
| ||||||||||||
General and administrative | 7,280 | 7,212 | 21,033 | 21,634 |
|
| 6,877 |
|
|
| 7,780 |
|
|
| 14,870 |
|
|
| 15,021 |
| ||||||||||||
Operations support | 2,419 | 1,937 | 7,771 | 5,933 |
|
| 2,528 |
|
|
| 2,213 |
|
|
| 5,026 |
|
|
| 4,510 |
| ||||||||||||
Technology and development | 1,718 | 922 | 5,881 | 3,048 |
|
| 1,879 |
|
|
| 1,924 |
|
|
| 4,019 |
|
|
| 3,859 |
| ||||||||||||
Stock-based compensation | (2,389 | ) | 2,037 | 2,403 | 3,172 |
|
| 1,326 |
|
|
| 1,861 |
|
|
| 2,628 |
|
|
| 2,955 |
| |||||||||||
Impairment | — | 6,098 | — | 6,098 | ||||||||||||||||||||||||||||
Reorganization | — | 2,236 | 2,639 | 4,646 |
|
| 5,163 |
|
|
| - |
|
|
| 8,855 |
|
|
| - |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total operating expenses | 17,596 | 30,437 | 65,625 | 74,700 |
|
| 25,550 |
|
|
| 21,342 |
|
|
| 50,403 |
|
|
| 40,579 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Operating income (loss) | 7,338 | (352 | ) | 7,334 | 4,690 | |||||||||||||||||||||||||||
Foreign exchange (gain) loss | (198 | ) | 400 | 762 | (805 | ) | ||||||||||||||||||||||||||
Operating loss |
|
| (19,274 | ) |
|
| (12,118 | ) |
|
| (40,840 | ) |
|
| (27,985 | ) | ||||||||||||||||
Government subsidies |
|
| 49 |
|
|
| 3,431 |
|
|
| 624 |
|
|
| 7,499 |
| ||||||||||||||||
Foreign exchange gain (loss) |
|
| 1,246 |
|
|
| (60 | ) |
|
| 514 |
|
|
| (240 | ) | ||||||||||||||||
Interest income | (228 | ) | (101 | ) | (320 | ) | (327 | ) |
|
| 20 |
|
|
| 23 |
|
|
| 31 |
|
|
| 42 |
| ||||||||
Interest expense | 3 | 98 | 77 | 301 |
|
| (1,329 | ) |
|
| (794 | ) |
|
| (2,659 | ) |
|
| (1,294 | ) | ||||||||||||
|
|
|
|
|
| (14 | ) |
|
| 2,600 |
|
|
| (1,490 | ) |
|
| 6,007 |
| |||||||||||||
(423 | ) | 397 | 519 | (831 | ) | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income (loss) before tax | 7,761 | (749 | ) | 6,815 | 5,521 | |||||||||||||||||||||||||||
Loss before tax |
|
| (19,288 | ) |
|
| (9,518 | ) |
|
| (42,330 | ) |
|
| (21,978 | ) | ||||||||||||||||
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Current tax expense | 818 | 1,145 | 1,906 | 2,733 |
|
| - |
|
|
| 210 |
|
|
| - |
|
|
| 210 |
| ||||||||||||
Deferred tax expense (recovery) | 1,141 | (461 | ) | 1,761 | 381 | |||||||||||||||||||||||||||
Deferred tax expense |
|
| - |
|
|
| 10 |
|
|
| - |
|
|
| 49 |
| ||||||||||||||||
|
|
|
|
|
| - |
|
|
| 220 |
|
|
| - |
|
|
| 259 |
| |||||||||||||
Net loss |
|
| (19,288 | ) |
|
| (9,738 | ) |
|
| (42,330 | ) |
|
| (22,237 | ) | ||||||||||||||||
1,959 | 684 | 3,667 | 3,114 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Loss per share |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic and diluted loss per share |
|
| (0.22 | ) |
|
| (0.11 | ) |
|
| (0.49 | ) |
|
| (0.26 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income (loss) | 5,802 | (1,433 | ) | 3,148 | 2,407 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income (loss) per share | ||||||||||||||||||||||||||||||||
Basic and diluted income (loss) per share | 0.07 | (0.02 | ) | 0.04 | 0.03 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Weighted average number of shares outstanding (stated in thousands) | ||||||||||||||||||||||||||||||||
Basic | 84,681 | 84,650 | 84,668 | 84,416 | ||||||||||||||||||||||||||||
Diluted | 85,257 | 84,650 | 84,888 | 84,980 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Interim Condensed Consolidated Statement of Comprehensive Income (loss) | ||||||||||||||||||||||||||||||||
Net income (loss) for the period | 5,802 | (1,433 | ) | 3,148 | 2,407 | |||||||||||||||||||||||||||
Exchange differences on translation | (838 | ) | 1,783 | 2,534 | (3,801 | ) | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Comprehensive income (loss) for the period | 4,964 | 350 | 5,682 | (1,394 | ) | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Weighted average number of shares outstanding (in |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic and Diluted |
|
| 86,023 |
|
|
| 84,752 |
|
|
| 85,739 |
|
|
| 84,717 |
|
Interim Condensed Consolidated Statement of Comprehensive Loss
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Loss for the period |
|
| (19,288 | ) |
|
| (9,738 | ) |
|
| (42,330 | ) |
|
| (22,237 | ) |
Exchange differences on translation of foreign operations |
|
| (594 | ) |
|
| 716 |
|
|
| (161 | ) |
|
| 1,321 |
|
Comprehensive loss for the period |
|
| (19,882 | ) |
|
| (9,022 | ) |
|
| (42,491 | ) |
|
| (20,916 | ) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited – Stated in thousands of U.S. dollars, except for share data)
Number of common shares | Common shares | Additional paid-in capital | Accumulated other comprehensive income | Accumulated deficit | Total shareholders’ equity | |||||||||||||||||||
As at December 31, 2017 | 84,224,527 | 178,397 | 7,355 | (12,112 | ) | (47,121 | ) | 126,519 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Issued on exercise of stock | 435,792 | 2,165 | (627 | ) | — | — | 1,538 | |||||||||||||||||
Stock-based compensation | — | — | 1,568 | — | — | 1,568 | ||||||||||||||||||
Stock option conversion to cash | — | — | (2,718 | ) | — | — | (2,718 | ) | ||||||||||||||||
Foreign currency translation | — | — | — | (3,801 | ) | — | (3,801 | ) | ||||||||||||||||
Net income for the period | — | — | — | — | 2,407 | 2,407 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As at September 30, 2018 | 84,660,319 | 180,562 | 5,578 | (15,913 | ) | (44,714 | ) | 125,513 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As at December 31, 2018 | 84,660,319 | 180,562 | 6,615 | (22,092 | ) | (41,571 | ) | 123,514 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Issued on exercise of stock | 21,045 | 77 | (1 | ) | — | — | 76 | |||||||||||||||||
Stock-based compensation modification adjustment | — | — | (23 | ) | — | — | (23 | ) | ||||||||||||||||
Foreign currency translation | — | — | — | 2,534 | — | 2,534 | ||||||||||||||||||
Net income for the period | — | — | — | — | 3,148 | 3,148 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As at September 30, 2019 | 84,681,364 | 180,639 | 6,591 | (19,558 | ) | (38,423 | ) | 129,249 |
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
| Number of |
|
|
|
|
| Additional |
|
| other |
|
|
|
|
| Total |
| ||||||
| Common |
|
| Common |
|
| paid-in |
|
| comprehensive |
|
| Accumulated |
|
| shareholders’ |
| ||||||
| shares |
|
| shares |
|
| capital |
|
| loss |
|
| deficit |
|
| equity |
| ||||||
As at December 31, 2020 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 10,175 |
|
|
| (17,018 | ) |
|
| (57,265 | ) |
|
| 116,531 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 796 |
|
|
| - |
|
|
| - |
|
|
| 796 |
|
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| 605 |
|
|
| - |
|
|
| 605 |
|
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (12,499 | ) |
|
| (12,499 | ) |
As at March 31, 2021 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 10,971 |
|
|
| (16,413 | ) |
|
| (69,764 | ) |
|
| 105,433 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 1,285 |
|
|
| - |
|
|
| - |
|
|
| 1,285 |
|
Issued on vesting of RSUs |
| 630,211 |
|
|
| 1,074 |
|
|
| (1,074 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (252 | ) |
|
| - |
|
|
| (342 | ) |
|
| (594 | ) |
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| 716 |
|
|
| - |
|
|
| 716 |
|
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (9,738 | ) |
|
| (9,738 | ) |
As at June 30, 2021 |
| 85,311,575 |
|
|
| 181,713 |
|
|
| 10,930 |
|
|
| (15,697 | ) |
|
| (79,844 | ) |
|
| 97,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As at December 31, 2021 |
| 85,345,433 |
|
|
| 181,782 |
|
|
| 13,200 |
|
|
| (15,916 | ) |
|
| (111,300 | ) |
|
| 67,766 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 1,339 |
|
|
| - |
|
|
| - |
|
|
| 1,339 |
|
Issued on vesting of RSUs and Share Awards |
| 487,544 |
|
|
| 1,203 |
|
|
| (1,203 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (189 | ) |
|
| - |
|
|
| (9 | ) |
|
| (198 | ) |
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| 433 |
|
|
| - |
|
|
| 433 |
|
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,042 | ) |
|
| (23,042 | ) |
As at March 31, 2022 |
| 85,832,977 |
|
|
| 182,985 |
|
|
| 13,147 |
|
|
| (15,483 | ) |
|
| (134,351 | ) |
|
| 46,298 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 1,286 |
|
|
| - |
|
|
| - |
|
|
| 1,286 |
|
Issued on vesting of RSUs and Share Awards |
| 1,155,851 |
|
|
| 3,268 |
|
|
| (3,268 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (536 | ) |
|
| - |
|
|
| - |
|
|
| (536 | ) |
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| (594 | ) |
|
| - |
|
|
| (594 | ) |
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (19,288 | ) |
|
| (19,288 | ) |
As at June 30, 2022 |
| 86,988,828 |
|
|
| 186,253 |
|
|
| 10,629 |
|
|
| (16,077 | ) |
|
| (153,639 | ) |
|
| 27,166 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Cash Flows
(Unaudited – Stated in thousands of U.S. dollars)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) for the period | 5,802 | (1,433 | ) | 3,148 | 2,407 | |||||||||||
Adjustments: | ||||||||||||||||
Depreciation and amortization | 2,925 | 3,544 | 9,260 | 10,342 | ||||||||||||
Impairments | — | 6,098 | — | 6,098 | ||||||||||||
Stock-based compensation | (2,646 | ) | 1,200 | (1,217 | ) | 2,335 | ||||||||||
Non-cash interest expense (income) | (9 | ) | — | (55 | ) | — | ||||||||||
Deferred income tax expense (recovery) | 1,141 | (461 | ) | 1,761 | 381 | |||||||||||
Foreign exchange loss (gain) | 23 | 343 | 305 | (451 | ) | |||||||||||
Loss (gain) on disposal of property, plant and | — | (1 | ) | 53 | (15 | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Trade and other receivables | 661 | (9,516 | ) | 15,970 | (24,255 | ) | ||||||||||
Inventory | (436 | ) | (2,947 | ) | 4 | (1,443 | ) | |||||||||
Prepaid and other current assets | (2,043 | ) | 425 | (2,001 | ) | (731 | ) | |||||||||
Other assets | 76 | — | 80 | — | ||||||||||||
Trade accounts payable and other liabilities | (2,151 | ) | 3,808 | (8,560 | ) | (815 | ) | |||||||||
Lease liability | (127 | ) | — | (375 | ) | — | ||||||||||
Customer deposits | (216 | ) | (852 | ) | (492 | ) | (1,367 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net cash flows provided by (used in) operating | 2,998 | 208 | 17,881 | (7,514 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchase of property, plant and equipment | (4,594 | ) | (1,681 | ) | (7,753 | ) | (7,013 | ) | ||||||||
Capitalized software development expenditures | (918 | ) | (1,264 | ) | (2,513 | ) | (4,248 | ) | ||||||||
Recovery of software development expenditures | 89 | — | 194 | — | ||||||||||||
Proceeds on sale of property, plant and equipment | — | — | 55 | 66 | ||||||||||||
Changes in accounts payable related to investing | 349 | (222 | ) | (127 | ) | (371 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net cash flows used in investing activities | (5,074 | ) | (3,167 | ) | (10,144 | ) | (11,566 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Cash flows from financing activities: | ||||||||||||||||
Cash received on exercise of stock options | 61 | 163 | 77 | 1,537 | ||||||||||||
Repayment of long-term debt | — | (684 | ) | (5,561 | ) | (2,620 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net cash flows provided by (used in) financing | 61 | (521 | ) | (5,484 | ) | (1,083 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Effect of foreign exchange on cash and cash | (81 | ) | 97 | 977 | (1,202 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net increase (decrease) in cash and cash | (2,094 | ) | (3,383 | ) | 3,230 | (21,365 | ) | |||||||||
Cash and cash equivalents, beginning of period | 58,736 | 45,502 | 53,412 | 63,484 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Cash and cash equivalents, end of period | 56,642 | 42,119 | 56,642 | 42,119 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Interest paid | 3 | 98 | 77 | 301 | ||||||||||||
Income taxes paid | 953 | 2,071 | 1,403 | 3,136 | ||||||||||||
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss for the period |
|
| (19,288 | ) |
|
| (9,738 | ) |
|
| (42,330 | ) |
|
| (22,237 | ) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
| 3,344 |
|
|
| 3,421 |
|
|
| 7,966 |
|
|
| 6,823 |
|
Stock-based compensation, net of settlements |
|
| 406 |
|
|
| 1,649 |
|
|
| 1,708 |
|
|
| 2,743 |
|
Foreign exchange (gain) loss |
|
| (1,433 | ) |
|
| 68 |
|
|
| (782 | ) |
|
| 240 |
|
Accretion of convertible debentures |
|
| 177 |
|
|
| 94 |
|
|
| 342 |
|
|
| 147 |
|
Gain on disposal of equipment |
|
| (165 | ) |
|
| - |
|
|
| (165 | ) |
|
| - |
|
Deferred income tax expense |
|
| - |
|
|
| 10 |
|
|
| - |
|
|
| 49 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trade and other receivables |
|
| 2,824 |
|
|
| (2,588 | ) |
|
| (2,142 | ) |
|
| (2,831 | ) |
Inventory |
|
| (3,661 | ) |
|
| (697 | ) |
|
| (7,104 | ) |
|
| (500 | ) |
Prepaid and other assets, current and long term |
|
| (1,059 | ) |
|
| 770 |
|
|
| (1,167 | ) |
|
| (178 | ) |
Accounts payable and accrued liabilities |
|
| 713 |
|
|
| 4,759 |
|
|
| 3,173 |
|
|
| (1,257 | ) |
Other liabilities |
|
| (39 | ) |
|
| 1,260 |
|
|
| (39 | ) |
|
| 1,767 |
|
Customer deposits and deferred revenue |
|
| 387 |
|
|
| (290 | ) |
|
| 3,719 |
|
|
| 1,317 |
|
Current portion of long-term debt and accrued interest |
|
| (86 | ) |
|
| 604 |
|
|
| (142 | ) |
|
| 1,006 |
|
Lease liabilities |
|
| 80 |
|
|
| 764 |
|
|
| 121 |
|
|
| 903 |
|
Net cash flows (used in) provided by operating activities |
|
| (17,800 | ) |
|
| 86 |
|
|
| (36,842 | ) |
|
| (12,008 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Purchase of property, plant and equipment, net of accounts |
|
| (924 | ) |
|
| (5,799 | ) |
|
| (1,887 | ) |
|
| (8,707 | ) |
Capitalized software development expenditures |
|
| (418 | ) |
|
| (631 | ) |
|
| (901 | ) |
|
| (1,336 | ) |
Other asset expenditures |
|
| (107 | ) |
|
| - |
|
|
| (281 | ) |
|
| - |
|
Proceeds on sales of equipment |
|
| 73 |
|
|
| - |
|
|
| 73 |
|
|
| - |
|
Recovery of software development expenditures |
|
| 45 |
|
|
| - |
|
|
| 45 |
|
|
| 24 |
|
Net cash flows used in investing activities |
|
| (1,331 | ) |
|
| (6,430 | ) |
|
| (2,951 | ) |
|
| (10,019 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Proceeds received on long-term debt |
|
| 647 |
|
|
| 8,407 |
|
|
| 647 |
|
|
| 37,952 |
|
Repayment of long-term debt |
|
| (618 | ) |
|
| (552 | ) |
|
| (1,236 | ) |
|
| (760 | ) |
Employee tax payments on vesting of RSUs |
|
| (92 | ) |
|
| (589 | ) |
|
| (301 | ) |
|
| (589 | ) |
Net cash flows (used in) provided by financing activities |
|
| (63 | ) |
|
| 7,266 |
|
|
| (890 | ) |
|
| 36,603 |
|
Effect of foreign exchange on cash, cash equivalents and |
|
| 54 |
|
|
| 408 |
|
|
| 220 |
|
|
| 711 |
|
Net (decrease) increase in cash, cash equivalents and |
|
| (19,140 | ) |
|
| 1,330 |
|
|
| (40,463 | ) |
|
| 15,287 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
| 42,085 |
|
|
| 59,803 |
|
|
| 63,408 |
|
|
| 45,846 |
|
Cash, cash equivalents and restricted cash, end of period |
|
| 22,945 |
|
|
| 61,133 |
|
|
| 22,945 |
|
|
| 61,133 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest paid |
|
| (1,179 | ) |
|
| (67 | ) |
|
| (2,331 | ) |
|
| (129 | ) |
Income taxes (paid) received |
|
| 3,182 |
|
|
| (48 | ) |
|
| 3,207 |
|
|
| (48 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
| For the Six Months Ended June 30, |
| ||||||||||
|
|
|
|
|
|
|
| 2022 |
|
| 2021 |
| ||||
Cash and cash equivalents |
|
|
|
|
|
|
|
| 19,739 |
|
|
| 58,326 |
| ||
Restricted cash |
|
|
|
|
|
|
|
| 3,206 |
|
|
| 2,807 |
| ||
Total cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
| 22,945 |
|
|
| 61,133 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiariessubsidiary (“DIRTT”, the “Company”, “we” or the “Company”“our”) is a leading technology-driven manufacturerglobal leader in industrialized construction. DIRTT's system of highly customized interiors. DIRTT combines itsphysical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary 3D design configuration and manufacturingintegration software, ICE® (“ICE®”ICE” or “ICE Software”software”) with integratedin-house, translates the vision of architects and designers into a 3D model that also acts as manufacturing of its innovative prefabricated interior construction solutions and an extensive distribution partners network (“Distribution Partner”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods.information. ICE is also licensed to unrelated companies and distribution partnersConstruction Partners of the Company.
DIRTT is incorporated under the laws of the province of Alberta, Canada, and its headquarters and registered office is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6. DIRTT trades1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and effective October 9, 2019, trades on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form10-Q and Article 10 of RegulationS-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of SeptemberJune 30, 2019,2022, and its results of operations and cash flows for the three and ninesix months ended SeptemberJune 30, 20192022 and 2018.2021. The condensed balance sheet at December 31, 2018,2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, 20182021 and 20172020 and for each of the three years in the period ended December 31, 20182021 included in the Annual Report on Form 1010-K of the Company as filed with the U.S. SecuritiesSEC and Exchange Commission.applicable securities commission or similar regulatory authorities in Canada. As described in Note 3,5, the Company adopted a newASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance effective January 1, 2022. There was no impact of this standard on our disclosures or accounting standard for leases in the current year, which had a material impact on the Financial Statements.government assistance.
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars. DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT and its subsidiaries.subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and certain components of stock-based compensation that are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.
8
Seasonality
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
Seasonality
Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customer’s construction projects can be influenced by a number of factors including the prevailing economic climate and weather. Seasonality
3. COVID-19
On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization and has had extraordinary and rapid negative impacts on global societies, workplaces, economies and health systems. The resulting adverse economic conditions have negatively impacted construction activity and consequently DIRTT’s business, with significant negative impacts extending through 2021, 2022 and potentially beyond.
While many construction sites remain open and re-opening strategies have been implemented across North America, certain projects have experienced delays, impacted by both the implementation of social distancing and other safety-related measures and the re-emergence of COVID-19 in certain geographic areas. It is not possible to predict the timing and pace of economic recovery, or the resumption of delayed construction resultsactivity and related demand, nor is it possible to predict the impact of such developments on the Company’s ability to achieve its business objectives.
COVID-19 has increased the complexity of estimates and assumptions used to prepare the Company’s consolidated financial statements and the following key sources of estimation uncertainty:
Credit risk
COVID-19 may cause DIRTT’s Construction Partners and customers to experience liquidity issues and this may result in demandhigher expected credit losses or slower collections. Management continually assesses the impact of COVID-19 on the Company’s Construction Partners and determined 0 change to the Company’s provision for credit losses of $0.1 million was required during the three and six months ended June 30, 2022. The estimation of such credit losses is complex because of limited historical precedent for the current economic situation. In addition, the Company maintains trade credit insurance (see Note 6) as further protection from credit losses.
Liquidity risk
The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections as a result of COVID-19. To address this risk and the uncertainty around the timing of a recovery from COVID-19, the Company issued the Debentures (as defined below) in January and December of 2021, for net proceeds of $29.5 million and $25.6 million, respectively, has credit facilities available and has taken steps to reduce its fixed cost base. See Note 8 for information about our credit facilities. See Note 4 for information about reorganization activities.
Government subsidies
As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). The CEWS provided the Company with a taxable subsidy in respect of a specific portion of wages paid to Canadian employees during qualifying periods extending from March 15, 2020 to October 23, 2021 based on the percentage decline of certain of the Company’s solutionsCanadian sourced revenues during each qualifying period. The Company’s eligibility for the CEWS was subject to be typically strongerchange for each qualifying period and was reviewed by the Company for each qualifying period, with amounts being received by the Company for various, but not each, qualifying period. Pursuant to amendments enacted as part of the 2021 Canadian federal budget, the Company is required to repay a portion of the CEWS amounts received for any qualifying period commencing after June 5, 2021 where the aggregate compensation for “specified executives” (within the meaning of the CEWS) during the 2021 calendar year exceeds the aggregate compensation for “specified executives” during the 2019 calendar year. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of subsidies was repaid to the Canadian authorities in the second quarter of 2022. The repayment amount was fully provided for in the third quarter of 2021 in accounts payable and fourth quarters comparedaccrued liabilities and in the first quarter of 2022 the Company reversed a $0.6 million incremental provision related to this that is no longer necessary.
9
On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). The CERS provided a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, for qualifying periods extending from September 27, 2020 to October 23, 2021, with the amount of the subsidy available to the firstCompany being based on the percentage decline of certain of the Company’s Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS was subject to change for each qualifying period and was reviewed by the Company for each qualifying period.
The last claim period under the CEWS and CERS programs ended on October 23, 2021. The Company is not eligible and did 0t receive any new government subsidies in the quarter or six months ended June 30, 2022.
Impairment
At June 30, 2022, management determined an impairment provision was not required as our outlook is consistent with the assumptions used in our impairment test undertaken at December 31, 2021. In future periods, if our results or outlook are less than our forecast, this determination may need to be revisited.
4. REORGANIZATION
On February 22, 2022, we commenced the process of closing our Phoenix aluminum manufacturing facility (the “Phoenix Facility”), shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. Additionally, we announced our intention to eliminate a portion of our salaried workforce including manufacturing and office positions along with other cost reduction initiatives. The closure of the Phoenix Facility was substantially completed in the second quarter of its fiscal year.2022. The Company entered into a sublease arrangement during the second quarter of 2022 which will exceed the contractual lease commitments under the Right of Use assets.
3.Reorganization costs incurred in the three months ended June 30, 2022 of $5.2million include $3.7 million for incremental insurance on change of control of the Board of Directors on April 26, 2022, $0.9 million related to termination benefits, $0.5 million associated with the closure of the Phoenix Facility, and $0.1 million of other costs. Reorganization costs incurred in the six months ended June 30, 2022 of $8.9 million include $3.7 million for incremental insurance on change of control of the Board of Directors on April 26, 2022, $3.9 million related to termination benefits, $0.7 million associated with the closure of the Phoenix Facility, and $0.6 million of other costs.
Of the amount expensed, $1.6 million and $7.3 million were paid during the three and six months ended June 30, 2022, respectively, and $1.4 million of termination benefits and $0.2 million of other costs were included in accounts payable and accrued liabilities at June 30, 2022.
The Company accelerated the depreciation of certain items of property, plant and equipment and capitalized software associated with these decisions resulting in an additional $1.1 million of depreciation and amortization incurred in the first quarter of 2022.
5. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
In February 2016,2021, the FASBFinancial Accounting Standards Board issued ASUAccounting Standards Update No. 2016-02, “Leases2021-10, Government Assistance (Topic 842),” and issued subsequent amendments832): Disclosures by Business Entities about Government Assistance. The ASU provides guidance on required disclosures with respect to government assistance in a company’s notes to the initial guidanceannual financial statements. The amendments in January 2018 withinthe ASUNo. 2018-01, in July 2018 within ASUNos. 2018-10 and2018-11, in are effective for periods beginning after December 2018 within ASUNo. 2018-20, and in March 2019 within ASUNo. 2019-01 (collectively, the standard). The standard requires lessees to recognize operating leases on the balance sheet as aright-of-use (“ROU”) asset and a lease liability. The liability is equal to the present value of the lease payments over the remaining lease term. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense.
15, 2021. The Company has adopted thethis standard effective January 1, 2022 and notes there is no significant impact of this standard on January 1, 2019, and electedour accounting or disclosures for government assistance.
Although there are several other new accounting standards issued or proposed by the transition method of adoption,Financial Accounting Standards Board, which allowed the Company to applyhas adopted or will adopt, as applicable, the standard asCompany does not believe any of these accounting pronouncements has had or will have a material impact on its Financial Statements.
6. TRADE AND OTHER RECEIVABLES
Accounts receivable are recorded at the beginning of the period of adoption, the comparative period presented isinvoiced amount, do not adjustedrequire collateral and continues to be reported in accordance with the Company’s historical accounting policy.do not bear interest. The Company optedestimates an allowance for credit losses using the lifetime expected credit loss at each measurement date
10
taking into account historical credit loss experience as well as forward-looking information in order to electestablish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the packagestatement of practical expedientsoperations.
In order to not reassess prior conclusions relatedmanage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At June 30, 2022, approximately 75% of our trade accounts receivable are insured, relating to contracts containing leases, lease classificationaccounts receivables from counterparties deemed creditworthy by the insurer and initial direct costs,excluding accounts receivable from government entities, which have arisen since April 1, 2020 when the trade credit insurance became effective.
Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three and six months ended June 30, 2022, 0 Construction Partner accounted for greater than 10% of revenue. For the three and six months ended June 30, 2021, 1 Construction Partner accounted for $8.2 million and $11.8 million of revenue, which was greater than 10% of total revenue for that period. In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other practical expedients, includingclients.
The Company’s aged receivables were as follows:
|
| As at |
| |||||
|
| June 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Current |
|
| 18,514 |
|
|
| 13,659 |
|
Overdue |
|
| 913 |
|
|
| 621 |
|
|
|
| 19,427 |
|
|
| 14,280 |
|
Less: expected credit losses |
|
| (128 | ) |
|
| (130 | ) |
|
|
| 19,299 |
|
|
| 14,150 |
|
Sales tax receivable |
|
| 387 |
|
|
| 196 |
|
Income tax receivable |
|
| - |
|
|
| 3,194 |
|
|
|
| 19,686 |
|
|
| 17,540 |
|
No adjustment to our expected credit losses of $0.1 million was required for the use of hindsightsix months ended June 30, 2022. Receivables are generally considered to determinebe past due when over 60 days old unless there is a separate payment arrangement in place for the lease term for existing leases and in assessing impairment of theright-of-use asset, and the exception for short-term leases.
Adoptioncollection of the standard had a significant impact on the Company’s condensed consolidated balance sheet due to the recognition of aright-of-use asset and lease liability, as shown in Note 4, upon adoption.receivable.
4. LEASES7. OTHER LIABILITIES
|
| As at, |
| |||||
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Legal provisions(1) |
|
| 45 |
|
|
| 143 |
|
DSU liability |
|
| 302 |
|
|
| 785 |
|
Sublease deposits |
|
| 212 |
|
|
| - |
|
Warranty and other provisions(2) |
|
| 1,294 |
|
|
| 1,451 |
|
Other liabilities |
|
| 1,853 |
|
|
| 2,379 |
|
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make leasepotential payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 12 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
For the three months and nine months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $1.4 million and $4.2 million. The weighted average remaining lease term and weighted average discount rate at September 30, 2019 were 12 years and 4.6%, respectively. claimed.
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
As at January 1 |
|
| 1,451 |
|
|
| 1,763 |
|
Adjustments to timber provision |
|
| - |
|
|
| (500 | ) |
Additions to warranty provision |
|
| 304 |
|
|
| 1,019 |
|
Payments related to warranties |
|
| (461 | ) |
|
| (831 | ) |
|
|
| 1,294 |
|
|
| 1,451 |
|
The following table includes ROU assets included on the balance sheet at September 30, 2019:11
8. LONG-TERM DEBT
ROU Assets | ||||||||||||
Cost | Accumulated Depreciation | Net book value | ||||||||||
At January 1, 2019 | 22,571 | — | 22,571 | |||||||||
Additions | 1,701 | — | 1,701 | |||||||||
Depreciation expense | — | (3,020 | ) | (3,020 | ) | |||||||
Exchange differences | 288 | (10 | ) | 278 | ||||||||
|
|
|
|
|
| |||||||
At September 30, 2019 | 24,560 | (3,030 | ) | 21,530 | ||||||||
|
|
|
|
|
|
|
| Revolving |
|
| Leasing |
|
| Convertible |
|
| Total Debt |
| ||||
Balance on December 31, 2020 |
|
| - |
|
|
| 5,967 |
|
|
| - |
|
|
| 5,967 |
|
Issuances |
|
| - |
|
|
| 9,805 |
|
|
| 55,107 |
|
|
| 64,912 |
|
Accretion of issue costs |
|
| - |
|
|
| - |
|
|
| 352 |
|
|
| 352 |
|
Accrued interest |
|
| - |
|
|
| 556 |
|
|
| 1,935 |
|
|
| 2,491 |
|
Interest payments |
|
| - |
|
|
| (556 | ) |
|
| (987 | ) |
|
| (1,543 | ) |
Principal repayments |
|
| - |
|
|
| (1,808 | ) |
|
| - |
|
|
| (1,808 | ) |
Exchange differences |
|
| - |
|
|
| (55 | ) |
|
| 326 |
|
|
| 271 |
|
Balance at December 31, 2021 |
|
| - |
|
|
| 13,909 |
|
|
| 56,733 |
|
|
| 70,642 |
|
Current portion of long-term debt and accrued interest |
|
| - |
|
|
| 2,386 |
|
|
| 937 |
|
|
| 3,323 |
|
Long-term debt |
|
| - |
|
|
| 11,523 |
|
|
| 55,796 |
|
|
| 67,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance on December 31, 2021 |
|
| - |
|
|
| 13,909 |
|
|
| 56,733 |
|
|
| 70,642 |
|
Issuances |
|
|
|
|
| 647 |
|
|
| - |
|
|
| 647 |
| |
Accretion of issue costs |
|
| - |
|
|
| - |
|
|
| 342 |
|
|
| 342 |
|
Accrued interest |
|
| - |
|
|
| 379 |
|
|
| 1,810 |
|
|
| 2,189 |
|
Interest payments |
|
| - |
|
|
| (379 | ) |
|
| (1,952 | ) |
|
| (2,331 | ) |
Principal repayments |
|
| - |
|
|
| (1,236 | ) |
|
| - |
|
|
| (1,236 | ) |
Exchange differences |
|
| - |
|
|
| (90 | ) |
|
| (918 | ) |
|
| (1,008 | ) |
Balance at June 30, 2022 |
|
| - |
|
|
| 13,230 |
|
|
| 56,015 |
|
|
| 69,245 |
|
Current portion of long-term debt and accrued interest |
|
| - |
|
|
| 2,515 |
|
|
| 782 |
|
|
| 3,297 |
|
Long-term debt |
|
| - |
|
|
| 10,715 |
|
|
| 55,233 |
|
|
| 65,948 |
|
The following table includes lease liabilities included on the balance sheet at September 30, 2019:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
The following table includes maturities of operating lease liabilities at September 30, 2019:Revolving Credit Facility
As at September 30, 2019 | ||||
2019 | 1,326 | |||
2020 | 5,355 | |||
2021 | 5,357 | |||
2022 | 4,817 | |||
2023 | 2,987 | |||
Thereafter | 5,893 | |||
|
| |||
Total | 25,735 | |||
Current lease liability | 5,247 | |||
Long term lease liability | 17,021 | |||
|
| |||
Total lease liability | 22,268 | |||
|
| |||
Difference between undiscounted cash flows and lease liability | 3,467 | |||
|
|
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
Subsequent to September 30, 2019,On February 12, 2021, the Company entered into a leaseloan agreement expected to commence in the second half of 2020, associated with the construction ofgoverning a new combined tile and millwork facility in Rock Hill, South Carolina. Rent obligations associated with this lease are approximately $15.0 million.
5. LONG-TERM DEBT
The Company had an $18.0 million revolving operating facility which expired on June 30, 2019. During the first quarter of 2019, the Company repaid the outstanding principal and interest amounts of its long-term debt, totaling $5.6 million.
On July 19, 2019, the Company entered into a C$50.025.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). TheUnder the RBC Facility, has a three-year term and can be extended forthe Company is able to borrow up to two additional years ata maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the Company’s option.lesser of (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). At June 30, 2022, available borrowings are C$14.5 million ($11.3 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate with no adjustment,plus 30 basis points or at the bankers’ acceptance rateCanadian Dollar Offered Rate or LIBOR plus 125155 basis points. TheUnder the RBC Facility, if the “Aggregate Excess Availability”, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash, is less than C$5.0 million, the Company is subject to a minimum fixed charge coverage ratio (“FCCR”) covenant of 1.15:1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities (defined below). The Company did not meet the three-month FCCR requirement during the second quarter of 2022 which resulted in requiring the restriction of $3.2million of cash. Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for 5 consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off any borrowings and any remaining amounts made available to the Company.
Leasing Facilities
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) and a maximum debt$14.0million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. The U.S. Leasing Facility is amortized over a six-year term and extendible at the Company’s option for an additional year.
During the three and six months ended June 30, 2022, the Company received $NaN (twelve months ended December 31, 2021: $9.8 million) of cash consideration under the U.S. Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in current other liabilities and long-term debt. In April 2022 the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.
12
Convertible Debentures
On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “January Debentures”). On January 29, 2021, the Company issued a further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to Adjusted EBITDAthe underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the “January Debentures Maturity Date”) and will accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021 until the January Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The January Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the January Debentures Maturity Date and the date specified by the Company for redemption of the January Debentures at a conversion price of C$4.65 per common share, being a ratio of 3.0:approximately 215.0538 common shares per C$1,000 principal amount of the January Debentures. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission.
On December 1, (earnings before2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest tax, depreciationat the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and amortization,non-cash stock-based compensation, plusDecember of each year commencing on June 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or minus extraordinary or unusual non-recurring revenue or expenses). Asshares at September 30, 2019, the RBC Facility was undrawnoption of the Company. The December Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the December Debentures Maturity Date and the date specified by the Company was in compliance with allfor redemption of the covenantsDecember Debentures at a conversion price of C$4.20 per common share, being a ratio of approximately 238.0952 common shares per C$1,000 principal amount of the RBC Facility.December Debentures. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission.
6.9. STOCK-BASED COMPENSATION
Stock-based compensation expense (recovery)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Stock options | (2,573 | ) | 2,032 | 1,890 | 3,167 | |||||||||||
Performance Share Units | 110 | 5 | 189 | 5 | ||||||||||||
Deferred Share Units | 74 | — | 324 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
(2,389 | ) | 2,037 | 2,403 | 3,172 | ||||||||||||
|
|
|
|
|
|
|
|
In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd.
Notes Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested Share Awards (as defined below), and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousandsCompany and its affiliates. In accordance with the 2020 LTIP, the sum of U.S. dollars unless otherwise stated)
Stock Options
For(i) 5,850,000 common shares plus (ii) the three months ended September 30, 2019, stock-based compensation recovery relatednumber of common shares subject to stock options was $2.6 million (2018 – $2.0 million expense),previously granted under the Company’s Amended and a $1.9 million expense was recordedRestated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May 22, 2020, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance under the nine months ended September 30, 2019 (2018 – $3.2 million expense). For the three and nine months ended September 30, 2019,2020 LTIP. Upon vesting of certain LTIP awards, the Company paid $0.3 million (2018 – $0.9 million)may withhold and $3.6 million (2018 – $0.9 million) respectively onsell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the surrenderwithholding tax remittances required in respect of cashaward holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.
Under the terms of the 2020 LTIP, the change of 100% of the Board of Directors combined with the prior Board declining to endorse the incoming board constituted a change of a control as of April 26, 2022. As a result, all outstanding and unvested LTIP awards granted under the 2020 LTIP plan for any holder terminated without cause within one year of the change of control vest immediately upon termination.
The Company also maintains the DIRTT Environmental Solutions Ltd. Deferred Share Unit Plan for Non-Employee Directors pursuant to which deferred share units (“DSUs”) are granted to the Company’s non-employee directors. DSUs are settled stock options. At September 30, 2019,solely in cash.
Prior to the approval of the 2020 LTIP, the Company had a liabilitygranted awards of $0.1 million in other liabilities foroptions under the stock options (December 31, 2018 – $1.8 million). On October 9, 2019, following its listing on The Nasdaq Global Select Market, the Company ceased cash-settlementStock Option Plan and awards of stock options and the associated liability accounting for stock options. The following summarizes options granted, exercised, surrendered, forfeited and expired during the periods:
Number of options | Weighted average exercise price (C$) | |||||||
Outstanding at December 31, 2017 | 5,553,393 | 5.31 | ||||||
Granted | 3,327,525 | 6.40 | ||||||
Exercised | (435,792 | ) | 4.78 | |||||
Forfeited | (643,849 | ) | 5.81 | |||||
Expired | (15,420 | ) | 6.01 | |||||
|
|
|
| |||||
Outstanding at September 30, 2018 | 7,785,857 | 5.84 | ||||||
Outstanding at December 31, 2018 | 6,858,376 | 5.88 | ||||||
Granted | 1,359,824 | 7.51 | ||||||
Exercised | (21,045 | ) | 4.81 | |||||
Forfeited | (243,761 | ) | 6.22 | |||||
Surrendered for cash settlement | (1,544,151 | ) | 4.95 | |||||
Expired | (119,336 | ) | 5.63 | |||||
|
|
|
| |||||
Outstanding at September 30, 2019 | 6,289,907 | 6.51 | ||||||
|
|
|
| |||||
Exercisable at September 30, 2019 | 1,940,498 | 5.98 | ||||||
|
|
|
|
Range of exercise prices outstanding at September 30, 2019:
Options outstanding | Options exercisable | |||||||||||||||||||||||
Range of exercise prices | Number outstanding | Weighted average remaining contractual years | Weighted average exercise price (C$) | Number exercisable | Weighted average remaining contractual years | Weighted average exercise price (C$) | ||||||||||||||||||
$5.01 – $6.00 | 806,638 | 2.1 | 5.76 | 479,389 | 2.1 | 5.76 | ||||||||||||||||||
$6.01 – $7.00 | 4,396,537 | 3.3 | 6.32 | 1,461,109 | 1.9 | 6.20 | ||||||||||||||||||
$7.01 – $7.84 | 1,086,732 | 4.6 | 4.84 | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 6,289,907 | 1,940,498 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Performanceperformance share units (“PSUs”) under the DIRTT Environmental Solutions Ltd. Performance Share Unit Plan (the “PSU Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.
As13
Stock-based compensation expense
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Equity-settled awards |
|
| 1,286 |
|
|
| 1,285 |
|
|
| 2,625 |
|
|
| 2,081 |
|
Cash-settled awards |
|
| 40 |
|
|
| 576 |
|
|
| 3 |
|
|
| 874 |
|
|
|
| 1,326 |
|
|
| 1,861 |
|
|
| 2,628 |
|
|
| 2,955 |
|
The following summarizes RSUs (as defined below), Share Awards, PSUs, and DSUs activity during the periods:
|
| RSU Time- |
|
| RSU Performance- |
|
| Share |
|
|
|
|
|
|
| |||||
|
| Based |
|
| Based |
|
| Awards |
|
| PSU |
|
| DSU |
| |||||
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
| |||||
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
| |||||
Outstanding at December 31, 2020 |
|
| 2,414,066 |
|
|
| 200,000 |
|
|
| - |
|
|
| 197,471 |
|
|
| 363,664 |
|
Granted |
|
| 1,897,281 |
|
|
| 878,601 |
|
|
| - |
|
|
| - |
|
|
| 57,898 |
|
Vested |
|
| (630,042 | ) |
|
| (169 | ) |
|
| - |
|
|
| (9,314 | ) |
|
| (57,380 | ) |
Withheld to settle employee tax obligations |
|
| (161,031 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited |
|
| (116,656 | ) |
|
| (9,635 | ) |
|
| - |
|
|
| (1,733 | ) |
|
| - |
|
Outstanding at June 30, 2021 |
|
| 3,403,618 |
|
|
| 1,068,797 |
|
|
| - |
|
|
| 186,424 |
|
|
| 364,182 |
|
Outstanding at December 31, 2021 |
|
| 3,216,536 |
|
|
| 1,021,739 |
|
|
| - |
|
|
| 157,200 |
|
|
| 361,577 |
|
Granted |
|
| 2,140,605 |
|
|
| 863,279 |
|
|
| 162,682 |
|
|
| - |
|
|
| 386,083 |
|
Vested |
|
| (1,245,386 | ) |
|
| (303,568 | ) |
|
| (94,528 | ) |
|
| - |
|
|
| (468,654 | ) |
Withheld to settle employee tax obligations |
|
| (526,259 | ) |
|
| (242,460 | ) |
|
| (68,154 | ) |
|
| - |
|
|
| - |
|
Forfeited |
| �� | (685,229 | ) |
|
| (502,628 | ) |
|
| - |
|
|
| (157,200 | ) |
|
| - |
|
Outstanding at June 30, 2022 |
|
| 2,900,267 |
|
|
| 836,362 |
|
|
| - |
|
|
| - |
|
|
| 279,006 |
|
Restricted share units (time-based vesting)
Restricted share units ("RSUs") that vest based on time have an aggregate time-based vesting period of three years and generally one-third of the RSUs vest every year over a three-year period from the date of grant. At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at September 30, 2019, there were 295,216 PSUs outstanding (December 31, 2018 – 85,728) accounted for at athe discretion of the Company. The weighted average fair value of $0.2the RSUs granted was C$2.39 (2021 – C$3.11) which was determined using the closing price of the Company’s common shares on their respective grant dates.
Restricted share units (performance-based vesting)
During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for vesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a percentage of the PRSUs will vest at the end of the three-year service period. PRSUs awarded in 2020 were forfeited in January 2022 upon the departure of an executive from the Company.
The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$1.87 and C$3.27, respectively.
Based on share price performance since the date of grant, NaN of the 2022 PRSUs and 66.7% of the 2021 PRSUswill vest upon completion of the three-year service period.
| % of PRSUs Vesting |
| ||||||||||||||||
|
|
|
|
| 33.3 | % |
|
| 66.7 | % |
|
| 100.0 | % |
|
| 150.0 | % |
2022 and 2021 PRSUs |
|
|
| $ | 3.00 |
|
| $ | 4.00 |
|
| $ | 5.00 |
|
| $ | 7.00 |
|
Share awards
During the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive compensation (“Share Awards”). These Share Awards vested upon grant. The fair value of the Share Awards
14
granted was C$2.40 ($1.88), which was determined using the closing price of the Company’s common shares on the grant date.
Deferred share units
The fair value of the DSU liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the year. DSUs outstanding at June 30, 2022 had a fair value of $0.3 million (December 31, 2018 – $0.1 million) which is included in other long-term liabilities on the balance sheet.
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
Deferred share units (“DSUs”)
There were 92,889 DSUs outstanding at September 30, 2019 (December 31, 2018 – 25,962) accounted for at a value of $0.4 million included in current portion of other liabilities on the balance sheet (December 31, 20182021 – $0.1$0.8 million).
Options
The following summarizes options granted, exercised, forfeited and expired during the periods:
|
|
|
| Number of |
|
| Weighted average |
| ||
|
|
|
| options |
|
| exercise price C$ |
| ||
Outstanding at December 31, 2020 |
|
|
|
| 4,774,328 |
|
|
| 6.52 |
|
Forfeited |
|
|
|
| (21,588 | ) |
|
| 7.21 |
|
Outstanding at June 30, 2021 |
|
|
|
| 4,752,740 |
|
|
| 6.52 |
|
Outstanding at December 31, 2021 |
|
|
|
| 4,064,489 |
|
|
| 6.64 |
|
Forfeited |
|
|
|
| (2,520,220 | ) |
|
| 6.40 |
|
Outstanding at June 30, 2022 |
|
|
|
| 1,544,269 |
|
|
| 7.03 |
|
Exercisable at June 30, 2022 |
|
|
|
| 1,538,337 |
|
|
| 6.71 |
|
Range of exercise prices outstanding at June 30, 2022:
|
| Options outstanding |
|
| Options exercisable |
| ||||||||||||||||||
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| Weighted |
|
| Weighted |
| ||||||
|
|
|
|
| average |
|
| average |
|
|
|
|
| average |
|
| average |
| ||||||
|
| Number |
|
| remaining |
|
| exercise |
|
| Number |
|
| remaining |
|
| exercise |
| ||||||
Range of exercise prices |
| outstanding |
|
| life |
|
| price C$ |
|
| exercisable |
|
| life |
|
| price C$ |
| ||||||
C$4.01 – C$5.00 |
|
| 15,025 |
|
|
| 2.40 |
|
|
| 4.12 |
|
|
| 15,025 |
|
|
| 2.40 |
|
|
| 4.12 |
|
C$6.01 – C$7.00 |
|
| 789,017 |
|
|
| 1.56 |
|
|
| 6.33 |
|
|
| 783,085 |
|
|
| 1.55 |
|
|
| 6.33 |
|
C$7.01 – C$8.00 |
|
| 740,227 |
|
|
| 1.88 |
|
|
| 7.84 |
|
|
| 740,227 |
|
|
| 1.88 |
|
|
| 7.84 |
|
Total |
|
| 1,544,269 |
|
|
|
|
|
|
|
|
| 1,538,337 |
|
|
| �� |
|
|
|
Dilutive instrumentsInstruments
For the three and ninesix months ended SeptemberJune 30, 2019, 4.32022, 1.5 million and 3.4 million stock options (2018(2021 – 5.1 million and 5.54.8 million), respectively,3.7 million RSUs and PRSUs (2021 – 4.5 million) and 53.8 million shares, which would be issued if the principal amount of the Debentures were settled in our common shares at the quarter end share price (2021 – 8.7 million), were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net income (loss)loss per share.
7.
10. REVENUE
In the following table, revenue is disaggregated by major products and services linesperformance obligation and timing of revenue recognition. All revenue comes from contracts with customers. See Note 911 for the disaggregation of revenue by geographic region.
For the three months ended September 30, | For the nine months ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||
Product | 56,486 | 64,941 | 168,321 | 175,286 |
|
| 38,098 |
|
|
| 36,462 |
|
|
| 71,291 |
|
|
| 62,298 |
| ||||||||||||
Transportation | 6,429 | 6,184 | 18,644 | 16,368 |
|
| 4,795 |
|
|
| 3,484 |
|
|
| 8,856 |
|
|
| 5,983 |
| ||||||||||||
Licenses | 409 | 595 | 1,472 | 1,724 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
License fees from Construction Partners |
|
| 198 |
|
|
| 141 |
|
|
| 395 |
|
|
| 348 |
| ||||||||||||||||
Total product revenue | 63,324 | 71,720 | 188,437 | 193,378 |
|
| 43,091 |
|
|
| 40,087 |
|
|
| 80,542 |
|
|
| 68,629 |
| ||||||||||||
Installation and other services | 2,061 | 2,193 | 6,100 | 6,863 |
|
| 1,610 |
|
|
| 1,015 |
|
|
| 2,445 |
|
|
| 1,938 |
| ||||||||||||
|
|
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 82,987 |
|
|
| 70,567 |
| |||||||||||||
65,385 | 73,913 | 194,537 | 200,241 | |||||||||||||||||||||||||||||
|
|
|
|
15
DIRTT sells its products and services pursuant to fixed-price contracts, which generally have a term of one year or less. The transaction price used in determining the amount of revenue to recognize is based upon agreed contractual terms with the customer and is not subject to variability.
For the three months ended September 30, | For the nine months ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||
At a point in time | 62,915 | 71,125 | 186,965 | 191,654 |
|
| 42,893 |
|
|
| 39,946 |
|
|
| 80,147 |
|
|
| 68,281 |
| ||||||||||||
Over time | 2,470 | 2,788 | 7,572 | 8,587 |
|
| 1,808 |
|
|
| 1,156 |
|
|
| 2,840 |
|
|
| 2,286 |
| ||||||||||||
|
|
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 82,987 |
|
|
| 70,567 |
| |||||||||||||
65,385 | 73,913 | 194,537 | 200,241 | |||||||||||||||||||||||||||||
|
|
|
|
Revenue recognized at a point in time represents the majority of the Company’s sales and revenue is recognized when a customer obtains legal title to the product, which is when ownership of products is transferred to, or services are delivered to the contract counterparty. Revenue recognized over time is limited to installation and other services provided to customers and is recorded as performance obligations which are satisfied over the term of the contract.
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
Contract Liabilities
|
| As at |
| |||||||||
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| December 31, 2020 |
| |||
Customer deposits |
|
| 5,683 |
|
|
| 1,959 |
|
|
| 1,292 |
|
Deferred revenue |
|
| 439 |
|
|
| 461 |
|
|
| 527 |
|
Contract liabilities |
|
| 6,122 |
|
|
| 2,420 |
|
|
| 1,819 |
|
September 30, 2019 | As at December 31, 2018 | December 31, 2017 | ||||||||||
Customer deposits | 6,296 | 6,746 | 5,675 | |||||||||
Deferred revenue | 1,111 | 955 | 701 | |||||||||
|
|
|
|
|
| |||||||
Contract liabilities | 7,407 | 7,701 | 6,376 | |||||||||
|
|
|
|
|
|
Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities was consistenthigher as at SeptemberJune 30, 20192022 compared to December 31, 20182021 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 20182021 and 2017, respectively,2020 totaling $7.5$2.3 million and $5.9$1.6 million, respectively,were recognized as revenue during theyear-to-date periods six months ended SeptemberJune 30, 20192022 and 2018,2021, respectively.
Sales by Industry
The Company periodically reviews the growth of product and transportation revenue by vertical market to evaluate the success of industry-specific sales initiatives. The nature of products sold to the various industries is consistent and therefore review is focused on sales performance.
For the three months ended September 30, | For the nine months ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||
Commercial | 42,910 | 41,117 | 124,248 | 119,021 |
|
| 29,618 |
|
|
| 19,032 |
|
|
| 53,662 |
|
|
| 35,176 |
| ||||||||||||
Healthcare | 9,192 | 18,698 | 32,452 | 40,459 |
|
| 5,091 |
|
|
| 14,176 |
|
|
| 12,055 |
|
|
| 20,663 |
| ||||||||||||
Government | 3,855 | 4,634 | 12,267 | 17,408 |
|
| 5,041 |
|
|
| 4,249 |
|
|
| 8,322 |
|
|
| 8,430 |
| ||||||||||||
Education | 6,958 | 6,676 | 17,998 | 14,766 |
|
| 3,143 |
|
|
| 2,489 |
|
|
| 6,108 |
|
|
| 4,012 |
| ||||||||||||
Licenses fees from Distribution Partners | 409 | 595 | 1,472 | 1,724 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total product revenue | 63,324 | 71,720 | 188,437 | 193,378 | ||||||||||||||||||||||||||||
License fees from Construction Partners |
|
| 198 |
|
|
| 141 |
|
|
| 395 |
|
|
| 348 |
| ||||||||||||||||
Total product and transportation revenue |
|
| 43,091 |
|
|
| 40,087 |
|
|
| 80,542 |
|
|
| 68,629 |
| ||||||||||||||||
Installation and other services | 2,061 | 2,193 | 6,100 | 6,863 |
|
| 1,610 |
|
|
| 1,015 |
|
|
| 2,445 |
|
|
| 1,938 |
| ||||||||||||
|
|
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 82,987 |
|
|
| 70,567 |
| |||||||||||||
65,385 | 73,913 | 194,537 | 200,241 |
8. INCOME TAX
The general provincial tax rate in Alberta, Canada was decreased on June 28, 2019, to 11% for the second half of 2019, 10% for 2020, 9% for 2021 and 8% thereafter. As a result of the enacted rate change, DIRTT reduced its deferred tax asset by $0.9 million with a corresponding deferred income tax expense recorded in the second quarter of 2019.
9.11. SEGMENT REPORTING
The Company has one1 reportable and one operating segment and operates in three2 principal geographic locations –- Canada and the United States. Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, and International. Currently, the majority of revenue fromwith periodic international projects are included in the U.S. revenue amount as these projects are sold by U.S.-based distribution partners and are delivered to international locations.from North American Construction Partners. The Company’s revenue from operations from external customers, based on location of operations, and information about itsnon-current assets, areis detailed below.
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
Revenue from external customers
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Canada |
|
| 7,417 |
|
|
| 4,461 |
|
|
| 12,668 |
|
|
| 7,456 |
|
U.S. |
|
| 37,284 |
|
|
| 36,641 |
|
|
| 70,319 |
|
|
| 63,111 |
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 82,987 |
|
|
| 70,567 |
|
Non-current assets (1)
|
|
|
|
|
| As at |
| |||||
|
|
|
|
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Canada |
|
|
|
|
|
| 32,304 |
|
|
| 34,912 |
|
U.S. |
|
|
|
|
|
| 56,831 |
|
|
| 60,723 |
|
|
|
|
|
|
|
| 89,135 |
|
|
| 95,635 |
|
12. INCOME TAXES
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Canada | 8,956 | 11,627 | 24,795 | 29,998 | ||||||||||||
U.S. | 56,429 | 62,249 | 169,742 | 169,343 | ||||||||||||
International | — | 37 | — | 900 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
65,385 | 73,913 | 194,537 | 200,241 |
Non-current assets(1), excludingAs at June 30, 2022, the Company had a valuation allowance of $27.0 million against deferred tax assets
As at | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
Canada | 47,536 | 36,323 | ||||||
U.S. | 27,317 | 15,353 | ||||||
|
|
|
| |||||
74,853 | 51,676 |
|
10. TRANSACTIONS WITH RELATED PARTIES
A DIRTT Distribution Partner, Lane Office Furniture Inc. (“Lane”), is owned by a former director of as the Company Gregory Burke. Effective June 26, 2018, Mr. Burke ceased to be a director of the Company. For the three and nine months ended September 30, 2018, the Company reported revenue of nil and $3.0 million and rebates of nil and $0.1 million from Lane.has experienced cumulative losses in recent years (December 31, 2021 – $17.3 million).
13. COMMITMENTS
During the three and nine months ended September 30, 2018, a director of the Company, Ronald Kaplan, provided advisory and consulting services of $0.2 million and $0.3 million.
11. COMMITMENTS
As at SeptemberJune 30, 2019,2022, the Company had outstanding purchase obligations of approximately $7.7$5.8 million related to inventory and property, plant and equipment purchases.
12. LEGAL PROCEEDINGS
On May 9, 2019,purchases (December 31, 2021 – $3.7 million). As at June 30, 2022, the Company commenced an action inhad undiscounted operating lease liabilities of $49.0 million (December 31, 2021 – $49.7 million).
During the Court of Queen’s Bench of Alberta against two former executives, their company, Falkbuilt Ltd. (“Falkbuilt”), and other individuals, on the basis of, among other things, a breach of non-compete and non-solicit obligations.
On November 5, 2019, Falkbuilt filed a Statement of Claim (the “Claim”) againstquarter ended June 30, 2022, the Company inextended the Court of Queen’s Bench of Alberta alleging that the Company has misappropriated and misused their alleged proprietary information in furtheranceterm of the Company’s product development. The claim seeks monetary relief, including, among other things, damages of approximately C$30.0 million, disgorgement of profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction oflease agreement for the Company’s use of the alleged proprietary information.
The Company believes the Claim is without merit. The Company intends to defend it vigorously and to continue to pursue its legal remedies against the former employees.Calgary headquarters by 5 years effective October 2022. Undiscounted rent obligations associated with this lease are $2.3 million.
17
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
OutlookSummary of Financial Results
In
Management began 2019 with the expectation that our 2019 revenue growth year-over-year would be more moderate than the 22% revenue growth shown in 2018 IFRS results compared to 2017 IFRS results primarily$12.6 million of 17.8% of revenue for the same period in 2021. The decrease in gross profit margin largely reflects the continued impact of significant inflationary increases in the realized cost of materials, transportation and packaging in excess of realized price increases and incremental fixed costs of our manufacturing facility in Rock Hill, South Carolina (the “South Carolina Facility”), as well as pressures on labor rates, partially offset by an improved fixed cost leverage as compared to the prior periods as a result of our management transitionhigher activity. The second quarter included labor costs and our efforts to scale the Company for sustained, profitable growth. Accordingly, we estimated and announced that our 2019 IFRS revenue would be 5% to 10% higher than 2018 IFRS revenue, with corresponding increases in net income and Adjusted EBITDA. With increasing recognition of challengesinefficiency associated with adding and training manufacturing employees in Calgary and Savannah following the closure of the Phoenix Facility. The Company also benefited from a weakening Canadian Dollar this quarter with a $0.8 million benefit on Canadian dollar- denominated manufacturing costs. Gross profit for the six months ended June 30, 2022 also included $1.1 million of accelerated depreciation and amortization arising from a change in useful life of assets, which arose in the first quarter of the year.
Revenue in third quarter of $65.4 million was 12% lower than 2018. Several factors continue to impact 2019 revenue, including the disruption to our salesforce and distribution partner network from 2018’s management transition, the impact of an immaturego-to-market approach, an inadequately supported sales force working on a long sales cycle as well as the revised timing of various projects and the loss of certain expected projects. As the year has progressed, it has become clear the sales and marketing organization with which we entered the year has been unable to deliver upon the opportunities that it identified and on which the prior guidance was based. This has been driven largely by a historical lack of training, individual accountability and the necessary processes and tools. Our belief in the size of our market opportunity remains unchanged as well as the resonance of DIRTT’s value proposition within it. Accordingly, we have embarked on a comprehensive transformation of these functions that we believe will create a scalable platform from which to generate profitable growth.
We took significant first steps in this commercial transformation in the third quarter. We began implementing our comprehensive commercial strategy based on a sales and marketing plan (the “Sales & Marketing Plan”) that was developed with the assistance of an internationally recognized consulting firm. The total cost to develop the Sales & Marketing Plan was $2.0 million, of which $0.7 million was incurred in the third quarter of 2019. Key components of the Sales & Marketing Plan consist of establishing a strategic marketing function and enhancing sales and performance management. Implementing the strategic marketing function includes the hiring of additional marketing professionals to newly established roles, the implementation of supporting systems and the creation of marketing programs and communications to drive lead generation. Sales force enhancement includes creating new sales management roles to provide support to sales representatives, creating new sales roles to manage strategic national accounts and address large project opportunities and
implementing a newly created Client Relationship Management (“CRM”) system. The commercial (sales and marketing) function will be led by our new Chief Commercial Officer, Jennifer Warawa, who started this role effective September 16, 2019, and the execution of the Sales & Marketing Plan will be managed by Brandon Jones, our new Vice President of Strategy, who started in this role effective September 30, 2019.
In our manufacturing operations, a metric-based approach to lean manufacturing, focusing on Safety, Quality, Delivery, Inventory and Productivity (SQDIP) was introduced earlier this year and is being implemented in all of our facilities along with related systems. In early October 2019, we executed a lease agreement for our previously announced combined tile and millwork factory, which will be located in the Charlotte metropolitan area. In August 2019, we paid deposits totaling $1.6 million to certain equipment suppliers for customized equipment for the new facility, which we anticipate will be deliveredfurther realized in the second half of 2020. The total cost2022. Due to the continued inflationary pressures on material and labor costs, the Company implemented a further 5% price increase effective June 1, 2022 as well as an additional 10% price increase effective July 21, 2022 and eliminated the 20% pilot price reductions, implemented in February, on the Reflect and Inspire product lines.
18
This increase is largely due to $5.2 million of reorganization costs, $1.0 million of higher travel and entertainment costs due to increased business activity and the easing of travel restrictions and $0.3 million of incremental professional fees associated with the contested director elections, offset by lower salaries and wages, stock based compensation and depreciation and amortization. For the six months ended June 30, 2022, operating expenses increased by
$9.8 million to $50.4million from $40.6 million in the same period of 2021. This increase is largely due to $8.9 million in reorganization costs, $1.8million of incremental professional fees associated with the contested director elections and $1.5 million increase in travel, meals and entertainment costs due to increased business activity and the easing of COVID-19 restrictions, offset by decreases in salaries and benefits associated with cost reduction measures. The Company also benefited from a weakening Canadian Dollar in the second quarter of 2022 with a $0.6 million benefit on Canadian dollar- denominated operating costs.Outlook
On April 26, 2022, at the Company’s 2022 annual and special meeting of shareholders, shareholders of the Company elected to replace the then-existing board of directors with seven new individuals, all of whom were nominated by 22 NW Fund, LP and other participants named in the definitive proxy statement filed on January 7, 2022, as amended. Following the election and appointment, the Board of Directors terminated the employment of Todd Lillibridge as Interim Chief Executive Officer and appointed Geoffrey Krause and Jeffrey Calkins as Interim Co-Chief Executive Officers, in each case effective as of April 26, 2022.
The Nasdaq Global Select Market (“Nasdaq”)Board of Directors in cooperation with management immediately commenced an in-depth review of the Company’s commercial and manufacturing operations, financial performance and outlook as well as accelerated its search for a permanent Chief Executive Officer. That review identified risks to DIRTT that are now being addressed (see “Item 1A. Risk Factors” below). As a result of this review, on June 3, 2022, the Nasdaq listing, weCompany announced the departure
19
of Jennifer Warawa as Chief Commercial Officer and Jeffrey Calkins as Chief Operating Officer and Interim Co-Chief Executive Officer. The Company has commenced a search for a permanent Chief Operating Officer.
On June 22, 2022, the Company announced the appointment of Benjamin Urban as DIRTT’s new Chief Executive Officer, effective June 27, 2022 and along with Mr. Urban, the appointment of Shaun Noll to the Board of Directors. With the addition of Messrs. Urban and Noll, the Board of Directors is now comprised of nine highly qualified individuals.
On July 27, 2022, the Company announced additional leadership changes, including the departures of Charles Kraus, Senior Vice President and General Counsel and Colin Blehm, Vice President Product Development, and the promotion of Trevor Didluck to Vice President Product Development. Nandini Somayaji has been promoted to Senior Vice President Talent, General Counsel & Corporate Secretary. Geoffrey Krause, DIRTT’s current Chief Financial Officer, announced his intention to retire from the Company, effective September 30, 2022. A search for a suitable replacement has commenced.
Second quarter 2022 revenues were $44.7 million, an increase of 16.8% and 8.8% over the first quarter of 2022 and the second quarter of 2021, respectively, and within the guidance range of between $43 million and $47 million. As at July 1, 2022, our 12-month forward pipeline, which represents known projects and leads at various stages of maturation which our sales teams are now reporting our financial statements underworking to convert into orders, increased by 13% to $359 million from $318 million at April 1, 2022, comprised of 65% commercial, 16% healthcare, 8% education and 11% government verticals. The relative split between verticals remains consistent with pre-pandemic actual percentage results. It is important to note that these figures do not reflect the accounting principles generally acceptedimpact of the 10% price increase nor termination of the Reflect and Inspire pilot price reduction. These pricing changes are expected to increase the Company’s gross margins; however, the net positive or negative impacts on the 12-month forward pipeline are not yet known. Although the current 12-month forward pipeline is a positive indicator of the Company’s future revenue potential, in the United States (“GAAP”)context of continued global macroeconomic uncertainty and possible recession risks, our fiscal year 2022 revenue guidance remains unchanged at $175 to $185 million. The midpoint of our 2022 guidance represents an approximate 22% increase over actual 2021 revenue of $147.6 million.
With demand for DIRTT’s product continuing to increase, the Company’s current and immediate focus is to unlock manufacturing capacity, improve revenues and profitability and accelerate the Company’s near-term progress towards cashflow breakeven and beyond. Under new leadership, the following actions have been taken and discussed in U.S. dollars. more detail below:
In addition,the second quarter, we ceased offering a cash surrender option for employee stock options.Year-to-dateone-time costsincreased our overall manufacturing headcount in Calgary by 9%, following the closure of the Nasdaq listingPhoenix Facility, where we have commenced a night shift for certain operations. We are experiencing the effects of a tight labor market, which has made it more difficult than expected to attract and retain skilled labor. This has been particularly the case at our Savannah facility. As a result of these challenges, some of our orders were pushed to the third quarter from June 2022 while we worked to ramp up our hourly work force. To increase our competitiveness, we have raised hourly wages in both Calgary and Savannah, established headcount targets and factored in attrition rates in hiring and retention strategies. We are continuing to add to our work force in anticipation of higher activity in the third and fourth quarters to avoid manufacturing capacity constraints that we experienced in the second quarter of 2022. We also commenced operational improvements on our Reflect and Inspire product lines to increase overall productive capacity and improve lead times, with such improvements expected to be complete by
20
August 2022. Finally, we completed the closure of our Phoenix Facility in June 2022 and sublet the associated factory space in July 2022 at a premium to the prior rent commitment.
In June 2022, in addition to a 5% price increase effective June 1, 2022, the Company announced a further 10% increase in prices on its products effective July 21, 2022 to further address the impact of ongoing inflationary pressure on raw material and labor costs. DIRTT also terminated the 20% pilot price reduction program on its Reflect and Inspire product lines, which comprise approximately $2.510% of product revenue for the six months ended June 30, 2022, that it announced in February 2022. This program termination is a result of the combination of increased aluminum prices and the unanticipated impact that the increased demand placed on our productive capacity due to the immaturity of production processes related to these product lines.
Through the course of the pandemic, the Company increased its use of discounting in an attempt to drive higher revenues, with approximately 10.5% of discounts on total revenue in the second quarter of 2022 compared to 8.7% in the same period of 2020. A pricing oversight committee was established in the second quarter to provide increased scrutiny of discounting behaviors and pricing decision making, with the goal of significantly reducing the amount of discounting provided on a go forward basis.
Under the leadership of its new Chief Executive Officer, the Company took further steps in July 2022 to flatten its organization to increase its overall effectiveness and to optimize its fixed salaried cost base in light of current activity levels and strategic needs. This resulted in annualized cost savings of $5.0 million and the elimination of 36 salaried positions, including the leadership changes described earlier. Key objectives of this process include breaking down interdepartmental silos, increasing cross functional communication and joint accountabilities, improving overall productivity across the organization and enhancing DIRTT’s overall approach to Construction Partner recruitment, onboarding, management and accountability. We are making additional investments in the ICE team and investing to support the long-term success of our Partners. These changes include but are not limited to:
While revenues were in line with expectations and grew sequentially over the first quarter and the same period last year, the Company used approximately $19.1 million of cash in the second quarter compared to $21.3 million in the first quarter 2022. This included approximately $6.0 million in the quarter ($11.1 million year to date) of one-time reorganization and contested director election costs and DSU payments. Excluding these amounts, net of working capital, cash used would have been $13.7 million in the second quarter of 2022 compared to $18.3 million in the first quarter of 2022. From a working capital management perspective, we continued to experience a buildup in inventory, primarily in aluminum extrusions, reflecting our difficulty in increasing productive capacity relative to expectations as described above. Inventory increased by $3.7 million and $3.2 million in the first and second quarter of 2022, respectively. We have taken steps to moderate such supply and expect to begin to reduce our inventory levels in the third and fourth quarters. As a result of the steps mentioned, we expect cash usage to incur approximately $0.5 million of additional costsimprove as 2022 progresses and to approach monthly cashflow breakeven in the fourth quarter of 2019. The Nasdaq listing costs are higher than previously anticipated, due in part to our deferral2022 (see “–Liquidity and Capital Resources").
As revenues improve, including the effect of the listing until later inprice increases above, and the year.
In the second half of 2018, we experienced warping in a small portion of our medium density fiberboard tiles, primarily in locations that experience high humidity or significant variability in humidity and temperature. We believe we have identified a permanent solution to the issue and continue to implement the solution to address the tile warping.
As we have noted previously, 2019 is a transition year, and we have made significant strides toward enhancing our management team, commercial organization and sales and marketing strategy, in addition to having our shares listed on Nasdaq. Despite incurring associatedone-time consulting and listing costs,cost reduction initiatives take hold, we expect to exit 2019 maintaining our financial strength with cash on hand comparable to last year with no debt and increased liquidity from a larger credit facility. Furthermore, we continue to believe our significant transformational efforts and investments will resultprogress toward an improvement in attractive revenue growth, improved profitability and strong cash generation into the future.
At our Analyst Day on November 12, 2019 in New York City we will present our strategic plan and revenuenet loss and Adjusted EBITDA Margin targets we arebreakeven in the fourth quarter of 2022. Unrestricted cash and net working capital at June 30, 2022 was $19.7 million and $31.6 million, compared to achieve$38.9 million and $49.3 million at March 31, 2022, respectively, and $60.3 million and $66.7 million at December 31, 2021, respectively. The Company’s asset backed credit facility, which is based upon a percentage of accounts receivable and inventory, remains undrawn at June 30, 2022 with approximately$11.3 million available. The Company continues to focus on revenue growth and cost initiatives to positively affect DIRTT’s balance sheet, cash flow and profitability and expects to see a trend of increasing monthly working capital by the end of 2023.year end.
21
Non-GAAP Financial Measures
Note Regarding Use ofNon-GAAP Financial Measures
Our condensed consolidated interim financial statements are prepared in accordance with GAAP. These GAAP financial statements includenon-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 in this Quarterly Report 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 thesenon-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that thesenon-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 periodperiod-over-period and to compare our financial performance with that of other companies. We believe that thesenon-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 (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange movements on debt revaluation)movements), asset base (depreciation and amortization), the impact of under-utilized capacity on gross profit, tax consequences, reorganization expense and stock-based compensation. We remove the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-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 remove the impact of under-utilized capacity from gross profit, and 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. In addition, management bases certain forward-looking estimates and budgets onnon-GAAP financial measures, primarily Adjusted EBITDA.
Reorganization expenses, impairment expenses,Government subsidies, depreciation and amortization, and stock-based compensation expense, reorganization expense, foreign exchange gains and losses and impairment expenses are excluded from ournon-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those receipts and 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 receipts and 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.
The followingnon-GAAP financial measures are presented in this Quarterly Report, and a description of the calculation for each measure is included.
Adjusted Gross Profit | Gross profit before deductions for costs of under-utilized capacity, depreciation and amortization | |
Adjusted Gross Profit Margin | Adjusted Gross Profit divided by revenue | |
| ||
EBITDA | Net income before interest, taxes, depreciation and amortization | |
Adjusted EBITDA | EBITDA adjusted | |
Adjusted EBITDA Margin | Adjusted EBITDA divided by revenue | |
|
22
You should carefully evaluate thesenon-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of thesenon-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 thesenon-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 thesenon-GAAP financial measures. Because thesenon-GAAP financial measures may be defined differently by other companies in our industry, our definitions of thesenon-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
EBITDA and Adjusted EBITDA for the Three and Nine Months Ended September 30, 2019 and 2018
The following table presents a reconciliation for the third quarter andyear-to-date results of 2019 and 2018 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||
Net income (loss) for the period | $ | 5,802 | $ | (1,433 | ) | $ | 3,148 | $ | 2,407 | |||||||
Add back (deduct): | ||||||||||||||||
Interest Expense | 3 | 98 | 77 | 301 | ||||||||||||
Interest Income | (228 | ) | (101 | ) | (320 | ) | (327 | ) | ||||||||
Income Tax Expense | 1,959 | 684 | 3,667 | 3,114 | ||||||||||||
Depreciation and Amortization | 2,925 | 3,544 | 9,260 | 10,342 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
EBITDA | $ | 10,461 | $ | 2,792 | $ | 15,832 | $ | 15,837 | ||||||||
Stock-based Compensation Expense | (2,389 | ) | 2,037 | 2,403 | 3,172 | |||||||||||
Non-cash Foreign Exchange Loss (Gain) on | — | (101 | ) | (211 | ) | 312 | ||||||||||
Impairment Expense | — | 6,098 | — | 6,098 | ||||||||||||
Reorganization Expense | — | 2,236 | 2,639 | 4,646 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted EBITDA | $ | 8,072 | $ | 13,062 | 20,663 | $ | 30,065 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net Income Margin(1) | 8.9 | % | (1.9 | )% | 1.6 | % | 1.2 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted EBITDA Margin | 12.3 | % | 17.7 | % | 10.6 | % | 15.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2019, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $8.1 million or 12.3% from $13.1 million or 17.7% in the same period of 2018. This reflects the $5.2 million decrease in Adjusted Gross Profit, the impact of $2.4 million ofone-time costs in operating expenses (which included $0.7 million related to the Sales & Marketing Plan, $1.4 million of Nasdaq listing costs, and $0.3 million of operations consulting costs), partially offset by ongoing cost reductions, the reversal of a $1.3 million provision, and a $0.5 million increase in foreign exchange gains.
For the nine months ended September 30, 2019, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $20.7 million or 10.6% from $30.1 million or 15.0% in the same period of 2018. This reflects the $6.5 million decrease in Adjusted Gross Profit, the impacts of $5.5 million ofone-time costs in operating expenses (which included $2.0 million related to the Sales & Marketing Plan, $2.5 million of Nasdaq listing costs, and $1.0 million of operations consulting costs), and a $2.1 million increase in foreign exchange losses partially offset by the reversal of a $1.3 million provision and ongoing cost reductions.
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Nine Months Ended September 30, 2019 and 2018
The following table presents a reconciliation for the three and nine months ended September 30, 2019 and 2018 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
($ in thousands) | ||||||||||||||||
Gross Profit | 24,934 | 30,085 | 72,959 | 79,390 | ||||||||||||
Gross Profit Margin | 38.1 | % | 40.7 | % | 37.5 | % | 39.6 | % | ||||||||
Add: Depreciation and Amortization Expense | 2,375 | 2,422 | 7,114 | 7,196 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted Gross Profit | 27,309 | 32,507 | 80,073 | 86,586 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted Gross Profit Margin | 41.8 | % | 44.0 | % | 41.2 | % | 43.2 | % | ||||||||
|
|
|
|
|
|
|
|
Gross profit and gross profit margin decreased to $24.9 million or 38.1% for the three months ended September 30, 2019, from $30.1 million or 40.7% for the three months ended September 30, 2018. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $27.3 million or 41.8% for the three months ended September 30, 2019, from $32.5 million or 44.0% for the three months ended September 30, 2018. The decreases are largely due to an increase in unused labor capacity and reduced fixed cost leverage on lower revenue levels. Reductions in direct material and transportation costs, due to improved efficiency and product mix, offset the higher material costs of $0.8 million (1.0% reduction in gross profit margin) that mitigate the tile warping issue.
Gross profit and gross profit margin decreased to $73.0 million, or 37.5%, for the nine months ended September 30, 2019, from $79.4 million or 39.6% for the nine months ended September 30, 2018. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $80.1 million or 41.2% for the nine months ended September 30, 2019, from $86.6 million or 43.2% for the nine months ended September 30, 2018. During the period, we incurred $2.8 million of incremental costs (1.1% reduction in gross profit margin) that mitigate the tile warping issue and $3.0 million of costs associated with headcount additions throughout 2018 in anticipation of higher volumes. We also experienced a $0.7 million reduction in gross profit due to decreases in second quarter gross profit on installation revenue. These cost increases were partially offset by the benefits of the operational improvement activities as previously described. We expect to further realize benefits from these activities as the year progresses.
Adjusted Net Income for the Three and Nine Months Ended September 30, 2019 and 2018
The following table presents a reconciliation for the third quarter andyear-to-date results of 2019 and 2018 of Adjusted Net Income (loss) to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
($ in thousands) | ||||||||||||||||
Net Income (Loss) for the Period | $ | 5,802 | $ | (1,433 | ) | $ | 3,148 | $ | 2,407 | |||||||
Add back (deduct): | ||||||||||||||||
Stock-based compensation fair value adjustments | (4,211 | ) | 2,340 | (450 | ) | 2,340 | ||||||||||
Reorganization Expense | — | 4,646 | 2,639 | 4,646 | ||||||||||||
Impairment Expenses | — | 6,098 | — | 6,098 | ||||||||||||
Tax impact of adjustments | — | (2,901 | ) | (713 | ) | (2,901 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted Net Income (Loss) | 1,591 | 8,750 | 4,624 | 12,590 | ||||||||||||
|
|
|
|
|
|
|
|
During the third quarter of 2018, we determined that we no longer qualified as a Foreign Private Issuer (“FPI”) as of June 30, 2018, under the rules of the SEC. To minimize any undue effects on employees, our Board of Directors approved the availability of a cash surrender feature for certain options until such time as we requalified as a FPI or we registered our common shares with the SEC, which occurred on October 9, 2019 upon our listing on Nasdaq. Accordingly, we accounted for the fair value of outstanding stock options at the end of the reporting period as a liability, with changes in the liability recorded through net income as a stock-based compensation fair value adjustment. Adjusted Net Income for the three and nine months ended September 30, 2019 removes the stock option fair value adjustment, because this accounting charge is material and not comparable to prior year charges. As a result, the change in the permitted manner of settlement will trigger a change in the accounting for the plan and result in the recognition of the Option Plan as equity settled awards prospectively from October 9, 2019.
Results of Operations
Three and NineSix Months Ended SeptemberJune 30, 2019,2022, Compared to Three and NineSix Months Ended SeptemberJune 30, 20182021
Three Months Ended September 30, | Nine Months Ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change |
| 2022 |
|
| 2021 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
| |||||||||||||||||||||||||
($ in thousands) |
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 65,385 | $ | 73,913 | (12 | )% | $ | 194,537 | $ | 200,241 | (3 | )% |
|
| 44,701 |
|
|
| 41,102 |
|
|
| 9 |
|
|
| 82,987 |
|
|
| 70,567 |
|
|
| 18 |
| ||||||||||||
Gross Profit | $ | 24,934 | $ | 30,085 | (17 | )% | $ | 72,959 | $ | 79,390 | (8 | )% |
|
| 6,276 |
|
|
| 9,224 |
|
|
| (32 | ) |
|
| 9,563 |
|
|
| 12,594 |
|
|
| (24 | ) | ||||||||||||
|
|
|
|
| �� |
| ||||||||||||||||||||||||||||||||||||||||||
Gross Profit Margin | 38.1 | % | 40.7 | % | (6 | )% | 37.5 | % | 39.6 | % | (5 | )% |
|
| 14.0 | % |
|
| 22.4 | % |
|
|
|
|
| 11.5 | % |
|
| 17.8 | % |
|
|
| ||||||||||||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Sales and Marketing | $ | 8,568 | 9,995 | (14 | )% | 25,898 | $ | 30,169 | (14 | )% |
|
| 7,777 |
|
|
| 7,564 |
|
|
| 3 |
|
|
| 15,005 |
|
|
| 14,234 |
|
|
| 5 |
| ||||||||||||||
General and Administrative | 7,280 | 7,212 | 1 | % | 21,033 | 21,634 | (3 | )% |
|
| 6,877 |
|
|
| 7,780 |
|
|
| (12 | ) |
|
| 14,870 |
|
|
| 15,021 |
|
|
| (1 | ) | ||||||||||||||||
Operations Support | 2,419 | 1,937 | 25 | % | 7,771 | 5,933 | 31 | % |
|
| 2,528 |
|
|
| 2,213 |
|
|
| 14 |
|
|
| 5,026 |
|
|
| 4,510 |
|
|
| 11 |
| ||||||||||||||||
Technology and Development | 1,718 | 922 | 86 | % | 5,881 | 3,048 | 93 | % |
|
| 1,879 |
|
|
| 1,924 |
|
|
| (2 | ) |
|
| 4,019 |
|
|
| 3,859 |
|
|
| 4 |
| ||||||||||||||||
Stock-based compensation | (2,389 | ) | 2,037 | NA | 2,403 | 3,172 | (24 | )% | ||||||||||||||||||||||||||||||||||||||||
Impairment | — | 6,098 | (100 | )% | — | 6,098 | (100 | )% | ||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation |
|
| 1,326 |
|
|
| 1,861 |
|
|
| (29 | ) |
|
| 2,628 |
|
|
| 2,955 |
|
|
| (11 | ) | ||||||||||||||||||||||||
Reorganization | — | 2,236 | (100 | )% | 2,639 | 4,646 | (43 | )% |
|
| 5,163 |
|
|
| - |
|
|
| 100 |
|
|
| 8,855 |
|
|
| - |
|
|
| 100 |
| ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Operating Expenses | $ | 17,596 | $ | 30,437 | (42 | )% | $ | 65,625 | $ | 74,700 | (12 | )% |
|
| 25,550 |
|
|
| 21,342 |
|
|
| 20 |
|
|
| 50,403 |
|
|
| 40,579 |
|
|
| 24 |
| ||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Operating Income (Loss) | $ | 7,338 | $ | (352 | ) | NA | $ | 7,334 | $ | 4,690 | 56 | % | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Operating Loss |
|
| (19,274 | ) |
|
| (12,118 | ) |
|
| 59 |
|
|
| (40,840 | ) |
|
| (27,985 | ) |
|
| 46 |
| ||||||||||||||||||||||||
Operating Margin | 11.2 | % | (0.5 | )% | NA | 3.8 | % | 2.3 | % | 65.2 | % |
|
| (43.1 | )% |
|
| (29.5 | )% |
|
|
|
| (49.2 | )% |
|
| (39.7 | )% |
|
|
|
Revenue
Revenue reflects sales to our DistributionConstruction Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters.
The following table sets forth the contribution to revenue of our DIRTT product and service offerings:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Product | $ | 56,486 | $ | 64,941 | (13 | )% | $ | 168,321 | $ | 175,286 | (4 | )% | ||||||||||||
Transportation | 6,429 | 6,184 | 4 | % | 18,644 | 16,368 | 14 | % | ||||||||||||||||
Licenses | 409 | 595 | (31 | )% | 1,472 | 1,724 | (15 | )% | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total Product Revenue | $ | 63,324 | $ | 71,720 | (12 | )% | $ | 188,437 | $ | 193,378 | (3 | )% | ||||||||||||
Installation and other services | 2,061 | 2,193 | (6 | )% | 6,100 | 6,863 | (11 | )% | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 65,385 | $ | 73,913 | (12 | )% | $ | 194,537 | $ | 200,241 | (3 | )% | ||||||||||||
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
| ||||||
|
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||||||||||
Product |
|
| 38,098 |
|
|
| 36,462 |
|
|
| 4 |
|
|
| 71,291 |
|
|
| 62,298 |
|
|
| 14 |
|
Transportation |
|
| 4,795 |
|
|
| 3,484 |
|
|
| 38 |
|
|
| 8,856 |
|
|
| 5,983 |
|
|
| 48 |
|
License fees from Construction Partners |
|
| 198 |
|
|
| 141 |
|
|
| 40 |
|
|
| 395 |
|
|
| 348 |
|
|
| 14 |
|
Total product revenue |
|
| 43,091 |
|
|
| 40,087 |
|
|
| 7 |
|
|
| 80,542 |
|
|
| 68,629 |
|
|
| 17 |
|
Installation and other services |
|
| 1,610 |
|
|
| 1,015 |
|
|
| 59 |
|
|
| 2,445 |
|
|
| 1,938 |
|
|
| 26 |
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 9 |
|
|
| 82,987 |
|
|
| 70,567 |
|
|
| 18 |
|
Revenue decreasedOur sales activity and associated revenues continue to be impacted by the severe economic and social impact of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels in North America due to work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials.
During the three monthsquarter ended SeptemberJune 30, 2019 by $8.52022, revenue was $44.7 million, an increase of $3.6 million or 12% compared to9% from the same period of 2018. Revenue decreased due to several factors, including the impact of a large project in 2018 that was not replaced in 2019. We also believe the distraction from significant management changes during 2018 on a long sales cycle combined with immature and transitional state of our sales and marketing function limited our ability to take advantage of growth opportunities in our market for 2019. The recent enhancements to our organizational structure and senior management team may have not yet positively affected sales due to, we believe, our long sales cycle.
For the nine months ended September 30, 2019, product revenue decreased by $7.0 million or 4% compared to the same period of 2018 for the same reasons as previously discussed.2021. Revenue for the ninesix months ended SeptemberJune 30, 2018 included2022 was $83.0million an estimated $4.0 to $7.0increase of 12.4 million (2% to 3% ofyear-to-date 2018 revenue) of projects that were delayed
23
or 18% from the fourth quarter of 2017 to thesix months ended June 30, 2021. The first quarter of 20182022 marked the transition of the COVID-19 pandemic to an endemic with the broad easing of health restrictions, including work-from-home mandates, across North America.While the resurgence in COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, the Company and our Construction Partners experienced an uptick in planning activity and opportunity growth in our commercial vertical which began to translate into orders in March 2022 that has continued into the second quarter. In response, the Company began efforts to increase its manufacturing labor headcount to enable it to capture the increase in demand but experienced the ongoing effects of a tight labor market. This has made it more difficult than expected to attract and retain skilled labor particularly, the case at our Savannah facility. As a result of these challenges in combination with the time to fully onboard new hires up to productive status, some orders had to be pushed to the third quarter from June 2022 while we worked to ramp up our hourly workforce.
We remain uncertain as to the ongoing impact of the pandemic, including effects of resurgent infection rates due to variants, on future projects that are either in the planning or conceptual stage. It is likely that future projects will experience similar delays as the COVID-19 pandemic runs its course and as DIRTT works through the aforementioned hiring and training challenges. See Item 1A. “Risk Factors”.
In response to significant increases in the costs of raw materials, shipping materials, labor and freight, effective November 16, 2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%, with the benefits largely expected to be realized in 2022. On February 17, 2022, we implemented a further price increase of 5% that came into effect June 1, 2022. Based on experience to date, these increases were not sufficient to offset the significant inflationary impacts on raw materials. Accordingly, on June 21, 2022 an additional price increase of 10% was announced effective July 21, 2022. The benefits of this additional increase are largely expected to be realized in the second half of 2022. DIRTT also terminated the 20% pilot price reduction program on its Reflect and Inspire product lines that it announced in February 2022 as a result of significant hurricanes in the southern United States affecting 2017 project schedules.combination of increased aluminum prices and the unanticipated impact that the increased demand placed on our productive capacity due to the immaturity of production processes related to these product lines.
Installation and other services revenue of $2.1was $1.6 million and $2.4 million for the three and six months ended SeptemberJune 30, 2019 was $0.12022 respectively, compared to $1.0 million lower thanand $1.9 million in the same period in 2018 and decreased $0.8 million for the nine months ended September 30, 2019 compared to the same period in 2018. The changes in installation revenue are primarily due to the timing of projects.2021. Except in limited circumstances, our DistributionConstruction Partners, rather than the Company, perform installation services, and accordingly, we are not anticipating significant growth in this revenue stream.
Our success is partly dependent on our ability to profitably develop our DistributionConstruction Partner network to expand our market penetration and ensure best practices are shared across local markets. WeAt June 30, 2022, we had 93 Distribution69 (December 31, 2021: 69) Construction Partners at September 30, 2019. Ourservicing multiple locations. During 2021 and the first quarter of 2022, we made several changes and upgrades to our Construction Partner network, expanding our relationships with new and existing partners and ending our relationships with others. In February 2022, we announced the establishment of a Partner Advisory Council to provide a greater link with Construction Partners and end clients as serviced primarily through our Distribution Partners, exist within a varietywho they service. The Partner Advisory Council will offer advice on sales and marketing effectiveness, product issues and new market needs, market conditions, competitive landscape, marketing support and other related areas of industries, including healthcare, education, financial services, government and military, manufacturing,non-profit, energy, professional services, retail, technology and hospitality.mutual interest.
24
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. The following table presents our product and transportation revenue by vertical market:
Three Months Ended September 30, | Nine Months Ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change |
| 2022 |
|
| 2021 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
| |||||||||||||||||||||||||
($ in thousands) |
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 42,910 | $ | 41,117 | 4 | % | $ | 124,248 | $ | 119,021 | 4 | % |
|
| 29,618 |
|
|
| 19,032 |
|
|
| 56 |
|
|
| 53,662 |
|
|
| 35,176 |
|
|
| 53 |
| ||||||||||||
Healthcare | 9,192 | 18,698 | (51 | )% | 32,452 | 40,459 | (20 | )% |
|
| 5,091 |
|
|
| 14,176 |
|
|
| (64 | ) |
|
| 12,055 |
|
|
| 20,663 |
|
|
| (42 | ) | ||||||||||||||||
Government | 3,855 | 4,634 | (17 | )% | 12,267 | 17,408 | (30 | )% |
|
| 5,041 |
|
|
| 4,249 |
|
|
| 19 |
|
|
| 8,322 |
|
|
| 8,430 |
|
|
| (1 | ) | ||||||||||||||||
Education | 6,958 | 6,676 | 4 | % | 17,998 | 14,766 | 22 | % |
|
| 3,143 |
|
|
| 2,489 |
|
|
| 26 |
|
|
| 6,108 |
|
|
| 4,012 |
|
|
| 52 |
| ||||||||||||||||
License fees from Distribution Partners | 409 | 595 | (31 | )% | 1,472 | 1,724 | (15 | )% | ||||||||||||||||||||||||||||||||||||||||
License fees from Construction Partners |
|
| 198 |
|
|
| 141 |
|
|
| 40 |
|
|
| 395 |
|
|
| 348 |
|
|
| 14 |
| ||||||||||||||||||||||||
Total product revenue |
|
| 43,091 |
|
|
| 40,087 |
|
|
| 7 |
|
|
| 80,542 |
|
|
| 68,629 |
|
|
| 17 |
| ||||||||||||||||||||||||
Service revenue |
|
| 1,610 |
|
|
| 1,015 |
|
|
| 59 |
|
|
| 2,445 |
|
|
| 1,938 |
|
|
| 26 |
| ||||||||||||||||||||||||
|
|
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 9 |
|
|
| 82,987 |
|
|
| 70,567 |
|
|
| 18 |
| |||||||||||||||||||||
Total Product Revenue | $ | 63,324 | $ | 71,720 | (12 | )% | $ | 188,437 | $ | 193,378 | (3 | )% | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Installation and other services | $ | 2,061 | $ | 2,193 | (6 | )% | 6,100 | 6,863 | (11 | )% | ||||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | $ | 65,385 | $ | 73,913 | (12 | )% | $ | 194,537 | $ | 200,241 | (3 | )% | ||||||||||||||||||||||||||||||||||||
|
|
|
|
Three Months Ended September 30, | Nine Months Ended September 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||||||||||||||
(in %) |
| (in %) |
|
| (in %) |
| ||||||||||||||||||||||||||||||||||
Commercial | 68 | 58 | 17 | 66 | 62 | 6 |
|
| 69 |
|
|
| 47 |
|
|
| 67 |
|
|
| 52 |
| ||||||||||||||||||
Healthcare | 15 | 26 | (42 | ) | 17 | 21 | (19 | ) |
|
| 12 |
|
|
| 36 |
|
|
| 15 |
|
|
| 30 |
| ||||||||||||||||
Government | 6 | 7 | (14 | ) | 7 | 9 | (22 | ) |
|
| 12 |
|
|
| 11 |
|
|
| 10 |
|
|
| 12 |
| ||||||||||||||||
Education | 11 | 9 | 22 | 10 | 8 | 25 |
|
| 7 |
|
|
| 6 |
|
|
| 8 |
|
|
| 6 |
| ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
% of Product Revenue(1) | 100 | 100 | — | 100 | 100 | — | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total Product Revenue(1) |
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
|
| 100 |
|
|
RevenueCommercial revenues increased by 56% and 53% in the three and six month periods ended June 30, 2022 from the same prior year periods, reflecting improving market conditions as health restrictions and work-from-home requirements ease and include one large customer in the technology sector with revenue of $2.3 million and $5.6 million for the respective periods. Healthcare decreased by 12%64% and 42% in the three and six months ended June 30, 2022, respectively, from the same periods in 2021. Such sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. In 2021, we had one large healthcare project with revenue of $6.9 million in the second quarter which did not recur in 2022.
Education sales in the three and six months ended June 30, 2022 increased by 26% and 52%, respectively, over the prior periods. At the beginning of the pandemic, education spending effectively paused with many institutions suspending in-person classes. There were no individually significant education projects and the increases represent higher volumes of projects due to the easing of health restrictions and many students returning to in-person learning. Government revenues in the three months ended SeptemberJune 30, 20192022 increased by 19% and decreased by 1% for the six month period then ended over the same period in 2018 and was driven primarily by decreased healthcare sales, which reflects the completion of a major healthcare projectthat was not replaced in 2019, and decreased government sales, which was mainly due to the timing of certain projects. This decrease in revenue was partially offset by growth in the commercial and education sectors. For the nine months ended September 30, 2019, revenue was lower by 3% compared to the same period in 2018, with continued growth in the commercial and education sectors, offset by the completion of a major healthcare project in 2018 that was not replaced in 2019 and a reduced number of installation projects.prior year periods.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, with periodic international projects from North American Distribution Partners.States. The following table presents our revenue dispersion by geography:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||||||||||
Canada | $ | 8,956 | $ | 11,627 | (23 | )% | $ | 24,795 | $ | 29,998 | (17 | )% | ||||||||||||
United States | 56,429 | 62,249 | (9 | )% | 169,742 | 169,343 | — | |||||||||||||||||
International | — | 37 | (100 | )% | — | 900 | (100 | )% | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 65,385 | $ | 73,913 | (12 | )% | $ | 194,537 | $ | 200,241 | (3 | )% | ||||||||||||
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
| ||||||
|
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||||||||||
Canada |
|
| 7,417 |
|
|
| 4,461 |
|
|
| 66 |
|
|
| 12,668 |
|
|
| 7,456 |
|
|
| 70 |
|
U.S. |
|
| 37,284 |
|
|
| 36,641 |
|
|
| 2 |
|
|
| 70,319 |
|
|
| 63,111 |
|
|
| 11 |
|
|
|
| 44,701 |
|
|
| 41,102 |
|
|
| 9 |
|
|
| 82,987 |
|
|
| 70,567 |
|
|
| 18 |
|
Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. In the quarter ended June 30, 2020, revenues from Canada fell to 10% of total sales while sales
25
to the United States increased to 90%. The geographical split for the quarter ended June 30, 2022 began to return to historical averages and reflects the easing of health restrictions in Canada which was later than the United States.
Sales and Marketing Expenses
Sales and marketing expenses decreased $1.4increased by $0.2 million and $0.8 million to $8.6$7.8 million and $15.0 million for the three and six months ended SeptemberJune 30, 2019,2022, from $10.0$7.6 million and $14.2 million for the three and six months ended SeptemberJune 30, 2018. Sales and marketing expenses decreased $4.3 million2021 respectively. The increase was largely related to $25.9 million for the nine months ended September 30, 2019, from $30.2 million for the nine months ended September 30, 2018. Included in sales and marketing expenses in the three months and nine months ended September 30, 2019 were $0.7an increase of $0.9 million and $2.0$1.3 million respectively, ofone-time consulting costs related to the Sales & Marketing Plan. These costs were offset by a $1.5 million and $1.6 million reduction in commission expense for the three and ninesix months ended SeptemberJune 30, 2019,2022, respectively, on lower revenues. Additionally, we have continued to realize reductions in travel, meals and entertainment costsexpenses as business activity has increased and cost reductions related to trade shows; however, none of these expense reductions are expected to materially affect our future sales revenue.
Our salesrestrictions on travel have eased, offset by lower salary and marketing efforts in 2019 are largely concentrated on establishing the appropriate sales organization and personnel, significantly improving our marketing approach and driving returns on sales and marketing expenditures. In April 2019, we engaged an internationally recognized consulting firm to evaluate our current sales and marketing approach and assist in the development of action plans necessary to drive accelerated growth. Along with the incremental costs associated with this consulting engagement in 2019, we expect sales and marketing expense to increase in conjunction with higher salesbenefit expenses due to higher commissions,planned headcount reductions as well as investment in sales generating initiatives as we implement our Sales & Marketing Plan, including targeted increases in our commercial organization headcount, expansion and refreshmentpart of our DIRTT Experience Centers (formally known as Green Learning Centers), and implementation of related systems and tools. Our ongoing focus is to continue to control costs by emphasizing return on investment on our sales and marketing expenditures.the cost savings initiatives.
General and Administrative Expenses
General and administrative expenses (“G&A”) increaseddecreased $0.9 million to $6.9 million and $0.1 million to $7.3$14.9 million for the three and six months ended SeptemberJune 30, 20192022 from $7.2$7.8 million and $15.0 million for the three and six months ended SeptemberJune 30, 2018. This includes
$1.42021. In the three months ended June 30, 2022, approximately $0.3 million ofone-time costs related to professional fees associated with the Nasdaq listing incurred in the third quartercontested election of 2019,directors was more than offset by a $1.3lower salaries and benefits costs. For the six month period ended June 30, 2022, approximately $1.8 million reversal of a claims provision.
G&A expenses decreased $0.6 million to $21.0 million forincremental professional fees associated with the nine months ended September 30, 2019 from $21.6 million for the nine months ended September 30, 2018. In 2018, we incurred $1.4 million related to proxy defense costs which did not reoccur in 2019. Additionally, we reversed a $1.3 million claim provision during the third quartercontested election of 2019. These items were partiallydirectors was offset by $2.5 millionlower salaries and benefits cost. Reductions in salaries and benefits includes planned headcount reductions as part of costs related to the Nasdaq listing incurred in the nine months ended September 30, 2019. Beginning in 2020, we anticipate incremental annualnon-listing related costs of approximately $1.5 to $2.0 million, as a result of becoming a U.S. registrant, driven largely by increased director and officer insurance premiums, the costs of maintaining two listings,cost savings initiatives as well as expected increasesthe impact of the Chief Executive Officer vacancy in audit, legal,the periods.
Operations Support Expenses
Operations support is comprised primarily of project managers, order entry and other compliance costs.
Operations Support Expenses
Operations support expenditures includeprofessionals that facilitate the fixed costs associated with deliveryintegration of our Construction Partner project execution and project management of DIRTT Solutions.our manufacturing operations. Operations support expenses increased by $0.3 million and $0.5 million to $2.4from $2.2 million and $4.5 million for the three and six months ended SeptemberJune 30, 2019, from $1.92021, respectively, to $2.5 million and $5.0 million for the three and six months ended SeptemberJune 30, 2018, largely2022. The increase was due to lower costs capitalized to internal projects with the completion of the South Carolina Facility and the DIRTT Experience Centre ("DXC") in Dallas and an increase in consulting costs during this quarter. Operations support costs increased $1.9salaries and benefits of $0.2 million to $7.8and $0.3 million for the nine monthsthree and six month period ended SeptemberJune 30, 2019, from $5.9 million for2022 compared to the nine months ended September 30, 2018, largely due to $1.1 million of consultant costs, as well as increases in personnel costs. The consultant costs incurred were to assist with the evaluation of current operations and to assist with the rectification of the tile warping issue. Increases in personnel costs were due to increased headcount and an increased provision for variable compensation.previous year same period.
Technology and Development Expenses
Technology and development expenses relate tonon-capitalizable costs associated with our product and software development teams and are primarily comprised of salaries and benefits of technical staff.
Technology and development expenses for the three and six month period ended June 30, 2022 were consistent with prior period costs as $0.2 million and $0.5 million of lower capitalized costs due to fewer internal projects, respectively, were offset by reductions in salaries and benefits expense.
Stock-Based Compensation
Stock-based compensation expense for the three and six months ended June 30, 2022 was $1.3 million and $2.6 million compared to $1.9 million and $3.0 million for the same periods in 2021. The movement in this expense was largely the impact of grants of RSUs to the Company's employees, including those in lieu of cash compensation to the Company’s former interim Chief Executive Officer in January 2022 and DSUs granted to the Board of Directors, lowered by the impact of fair value adjustments on cash settled awards as a result of our share price decreasing during the quarter and six months ended June 30, 2022. The Board of Directors receives 100% of their remuneration in DSUs.
Reorganization
On February 22, 2022, we announced a plan to close the Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum facilities. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. Of the initial estimate of cost savings of approximately $2.4 million from this closure, we expect to realize annualized savings of approximately $1.0 million as $1.4 million of work force reductions were offset by additions in Calgary and Savannah due to increased $0.8demand. No amounts were realized in the second quarter. Additionally, we eliminated approximately 14% of the expected 18% reduction of our salaried workforce including manufacturing and office positions, which, along with other cost reduction initiatives, are expected to yield annualized
26
savings of approximately $13.0 million. Of these cost reduction initiatives, $9.0 million was implemented during the first and second quarters of 2022, $3.0 million will be implemented in the second half of 2022, and $1.0 million, comprised of certain manufacturing positions, has been deferred as we work to $1.7increase manufacturing headcount in light of increased demand. One-time costs associated with these reductions and other costs savings measures were previously estimated to be $4.4 million for the second quarter, and $8.1 million for the year. For the three and six months ended June 30, 2022, we incurred $5.2 million and $8.9 million in reorganization costs, respectively. Actual costs for the quarter ended June 30, 2022 are higher due to additional termination benefits arising in June 2022 with the departure of two executives.
Government Subsidies
The Company was not eligible and did not receive any new government subsidies in the three and six months ended June 30, 2022 compared to $3.4 and $7.5 million of subsidies received during the three and six months ended June 30, 2021. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of previously-received subsidies were repaid to the Canadian authorities in the second quarter of 2022. The amount was fully provided for in the third quarter of 2021 and the Company reversed a $0.6 million incremental provision related to this that was no longer necessary in the first quarter of 2022. The last claim period under the CEWS and CERS programs expired on October 23, 2021.
The Company is currently evaluating its eligibility for the Employer Retention Tax Credit in the United States, which, if eligible, could provide additional subsidies to the Company.
Interest expense
Interest expense increased by $0.5 million from $0.8 million for the three months ended SeptemberJune 30, 2019,2022 to $1.3 million compared to $0.9June 30, 2021 and by $1.4 million for the three months ended September 30, 2018. Technology and development expenses increased $2.8 million to $5.9 million for the nine months ended September 30, 2019, compared to $3.0 million for the nine months ended September 30, 2018. These increases are due to a $0.3 million and $1.7 million decrease in capitalized salaries for the three and nine months ended September 30, 2019, respectively, as the current mix of projects undertaken by us included a higher portion of efforts related to business process improvements that were not eligible for capitalization. In addition, technology and development expenses included $0.3 million and $0.5 million of salary and benefit costs that were classified as cost of sales of technical services during the three and nine months ended September 30, 2018, respectively, as well as a higher provision for variable compensation.
Stock-Based Compensation
Stock-based compensation reflected a $2.4 million recovery for the three months ended September 30, 2019, compared to an expense of $2.0 million for the same period of 2018. Stock-based compensation expense was reduced to $2.4 million for the nine months ended September 30, 2019, compared to $3.2 million for the same period of 2018. We recorded fair value adjustments on cash settled stock options during the three and nine months ended September 30, 2019, respectively, with no fair value adjustment required in the respective periods in 2018. As noted previously, following our listing on Nasdaq on October 9, 2019, we ceased allowing cash surrender of employee stock options. As a result, we will cease the associated liability accounting for the Option Plan which required quarterly fair value adjustments.
Impairment Expenses
During 2018, management decided to shift from the early stage development of its DIRTT Timber market to a commercialized approach focused on large, standalone timber projects and as atie-in to our other DIRTT Solutions. Management concluded that this strategy required significantly less timber capacity than existed and took steps toright-size its timber capacity by the end of 2018. Management determined these decisions to be an indicator of impairment of the assets of the DIRTT Timber line.
During 2018, management performed an assessment of the carrying values of DIRTT Timber’s property, plant and equipment (“PP&E”). To determine the impairment of the DIRTT Timber assets, the net book value of the assets was evaluated against the fair value of the assets. The fair value of the DIRTT Timber assets reflects current projected sales for timber projects on a standalone basis and the pull-through impact to other DIRTT Solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT Solutions. The equipment related to the timber market was custom built for DIRTT, and there was no active market for resale. Therefore, the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for other DIRTT Solutions. Management estimated the expected resale values based on the current market and industry knowledge. The fair value of the timber assets was estimated to be $1.1 million. This assessment resulted in an impairment charge of $6.1 million during 2018.
Reorganization Expenses
We incurred $2.6 million of reorganization expenses during the first quarter of 2019, and no material additional reorganization costs in the second or third quarters of 2019, compared to $2.2 million and $4.6$1.3 million in the three and ninesix months ended SeptemberJune 30, 2018, respectively. These costs included severance payments and related legal and consulting costs associated with management and organizational changes. No further material expenditures are anticipated in 2019.
Income Tax
Alberta’s general provincial tax rate was decreased on2022 to $2.7 million compared to June 28, 2019 from 11.5% to 11% for the second half of 2019, to 10% for 2020, to 9% for 2021 and to 8% thereafter. As30, 2021. The increased interest expense is a result of the rate change, we reduced our deferred tax asset by $0.9issuance of C$35.0 million with a corresponding deferred income tax expense recorded($27.4 million) of Debentures in December 2021 and draws on the second quarter of 2019.Leasing Facilities.
Income Tax
The provision for income taxes is comprised of U.S. and Canadian federal, state provincial and foreignprovincial taxes based onpre-tax income. IncomeThe Company incurred no income tax expense foror recovery during the three and six months ended SeptemberJune 30, 2019, inclusive of the previously noted charge associated with the Alberta tax rate change, was $2.0 million,2022, compared to $0.7a $0.2 million and $0.3 million expense for the same period of 2018, and income tax expense for the nine months ended September 30, 2019 was $3.7 million, as compared to $3.1 million for the same period of 2018.2021. As at SeptemberJune 30, 2019,2022 the Company had a valuation allowance of $27.0 million (December 31, 2021 $17.3 million) against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at June 30, 2022, we had C$36.789.8 million of non-capital loss carry-forwards in Canada and none$60.4 million in the United States, compared to C$43.6 million in Canada and none in the United States on December 31, 2018.States. These loss carry-forwards will begin to expire in 2030.2032.
Net Income (Loss)Loss
Net income was $5.8loss increased to $19.3 million or $0.07$0.22 net loss per share in the third quarter of 2019, compared tothree months ended June 30, 2022 from a net loss of $1.4$9.7 million or $0.02$0.11 net loss per share for the third quarter of 2018.ended June 30, 2021. The variances areincreased loss is primarily the result of changesa $2.9 million decrease in gross profit, anda $4.2 million increase in operating expenses (which includes $5.2 million of reorganization expenses and $0.3 million of incremental professional fees described previously), a $0.5 million increase in interest expense and a $3.4 million decrease in government subsidies offset by a $1.3 million increase in foreign exchange gain.
Net loss increased to $42.3 million or $0.49 net loss per share in the first half of 2022 from a net loss of $22.2 million or $0.26 net loss per share for the six months ended June 30, 2021. The increased loss is primarily the result of a $3.0 million decrease in gross profit, a $9.8 million increase in operating expenses (which includes $8.9 million of reorganization expenses and $1.8 million of incremental professional fees as described above. previously), a $1.4 million increase in interest expense and a $6.9 million decrease in government subsidies offset by a foreign exchange gain of $0.8 million.
27
EBITDA and Adjusted EBITDA for the Three and Six Months Ended June 30, 2022 and 2021
The following table presents a reconciliation for the second quarter and year to date results of 2022 and 2021 of EBITDA and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure for the periods presented:
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||
Net loss for the period |
|
| (19,288 | ) |
|
| (9,738 | ) |
|
| (42,330 | ) |
|
| (22,237 | ) |
Add back (deduct): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Expense |
|
| 1,329 |
|
|
| 794 |
|
|
| 2,659 |
|
|
| 1,294 |
|
Interest Income |
|
| (20 | ) |
|
| (23 | ) |
|
| (31 | ) |
|
| (42 | ) |
Income Tax Expense |
|
| - |
|
|
| 220 |
|
|
| - |
|
|
| 259 |
|
Depreciation and Amortization |
|
| 3,344 |
|
|
| 3,421 |
|
|
| 7,966 |
|
|
| 6,823 |
|
EBITDA |
|
| (14,635 | ) |
|
| (5,326 | ) |
|
| (31,736 | ) |
|
| (13,903 | ) |
Foreign Exchange (Gains) Losses |
|
| (1,246 | ) |
|
| 60 |
|
|
| (514 | ) |
|
| 240 |
|
Stock-Based Compensation |
|
| 1,326 |
|
|
| 1,861 |
|
|
| 2,628 |
|
|
| 2,955 |
|
Government Subsidies |
|
| (49 | ) |
|
| (3,431 | ) |
|
| (624 | ) |
|
| (7,499 | ) |
Reorganization Expense |
|
| 5,163 |
|
|
| - |
|
|
| 8,855 |
|
|
| - |
|
Adjusted EBITDA |
|
| (9,441 | ) |
|
| (6,836 | ) |
|
| (21,391 | ) |
|
| (18,207 | ) |
Net Loss Margin(1) |
|
| (43.1 | )% |
|
| (23.7 | )% |
|
| (51.0 | )% |
|
| (31.5 | )% |
Adjusted EBITDA Margin |
|
| (21.1 | )% |
|
| (16.6 | )% |
|
| (25.8 | )% |
|
| (25.8 | )% |
For the three months ended June 30, 2022, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $2.6 million to a $9.4 million loss or (21.1)% from $6.8 million loss or (16.6)% in the same period of 2021. This primarily reflects a $2.8 million decrease in Adjusted Gross Profit, $1.0 million increase in travel and entertainment costs, $0.3 million of incremental professional fees as described previously and, $0.3 million reduction in capitalized costs due to fewer internal projects, offset by $1.4 million of lower salaries and benefits costs due to headcount reductions and other cost savings.
For the six months ended June 30, 2022, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $3.2 million to a $21.4 million loss or (25.8)% from $18.2 million loss or (25.8)% in the same period of 2021. This primarily reflects a $3.2 million decrease in Adjusted Gross Profit, $1.8 million of incremental professional fees as described previously, $1.5 million increase in travel and entertainment costs, and $0.7 million reduction in capitalized costs due to fewer internal projects, offset by $1.8 million of costs of underused capacity in the first quarter of 2021 which did not re-occur and $2.6 million lower salaries and benefits costs due to headcount reductions.
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Six Months Ended June 30, 2022 and 2021
The following table presents a reconciliation for the three and six months ended June 30, 2022 and 2021 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||
Gross profit |
|
| 6,276 |
|
|
| 9,224 |
|
|
| 9,563 |
|
|
| 12,594 |
|
Gross profit margin |
|
| 14.0 | % |
|
| 22.4 | % |
|
| 11.5 | % |
|
| 17.8 | % |
Add: Depreciation and amortization expense |
|
| 2,188 |
|
|
| 2,033 |
|
|
| 5,660 |
|
|
| 4,062 |
|
Add: Costs of under-utilized capacity |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,756 |
|
Adjusted Gross Profit |
|
| 8,464 |
|
|
| 11,257 |
|
|
| 15,223 |
|
|
| 18,412 |
|
Adjusted Gross Profit Margin |
|
| 18.9 | % |
|
| 27.4 | % |
|
| 18.3 | % |
|
| 26.1 | % |
28
Gross profit and gross profit margin decreased to $6.3 million or 14.0% for the three months ended SeptemberJune 30, 2019 includes a $2.42022, from $9.2 million recovery in stock-based compensation, compared to a $2.0 million expense in the same period of 2018, and no reorganization or impairment expenses22.4% for the three months ended SeptemberJune 30, 2019, compared2021. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $2.2$8.5 million or 18.9% for the three months ended June 30, 2022, from $11.3 million or 27.4% for the three months ended June 30, 2021.
For the six month period ended June 30, 2022, gross profit and $6.1gross profit margin decreased to $9.6 million respectively,or 11.5% from $12.6 million or 17.8% for the six month period ended June 30, 2021. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $15.2 million or 18.3% for the six months ended June 30, 2022, from $18.4 million or 26.1% for the six months ended June 30, 2021.
The decrease in gross profit margin largely reflects significant and industry wide inflationary increases in the realized cost of materials, transportation, labor and packaging. In addition, in the second quarter and in response to a sustained increase in demand that began in the first quarter of 2022, the Company began efforts to increase its manufacturing labor headcount but experienced the ongoing effects of a tight labor market. This has made it more difficult than expected to attract and retain skilled labor, particularly at our Savannah facility, and as a result the Company increased hourly rates by 6% on average to increase its overall competitiveness.
To address these cost increases, the Company implemented a series of price increases, including a 6.5% increase effective November 1, 2021 and an additional 5% price increase effective June 1, 2022. As these increases were not sufficient to offset the continuing inflationary pressure, the Company announced a further 10% price increase effective July 21, 2022 and will continue to monitor raw material, labor and other costs to determine whether further action is necessary.
For the three month period ended June 30, 2022, gross profit margin decreased by 8.4% from the same period in 2021 as material, transportation and packaging costs increased by approximately 5.4% as a percentage of 2018.revenue and a negative labor efficiency of 2.3% was realized due to higher labor rates and increased inefficiencies resulting from training and onboarding of new employees. In addition, the Company had previously announced intentions to extend its scheduling lead times, while removing deposit requirements, and accordingly reduce standby production labor capacity by up to 20%. Following further discussions with our Construction Partners, including the importance of short lead times, we reversed this decision in the second quarter of 2022. Other cost increases negatively impacted the gross profit by 1.1% partially offset by marginal fixed cost leverage on account of the 9% increase in revenue compared to the same period last year.
Net incomeFor the six month period ended June 30, 2022, gross profit margin decreased by 6.3% from the same period in 2021 as material, transportation and packaging costs increased by approximately 6.7% as a percentage of revenue. Other cost increases negatively impacted the gross profit by 1.4% and gross profit was $3.1reduced by approximately 1% due to incremental South Carolina Facility fixed costs. Additional depreciation and amortization due to revision to the useful lives of assets, including the Phoenix Facility, contributed $1.1 million or $0.04 per share1.1% of the gross margin. This increased cost impact was offset by 2.8% of improved fixed cost leverage on account of the $12.4 million or 18% increase in revenue compared to the same period in 2021.
During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2021, we experienced the full impact of the slowdown in non-residential construction activity on our business. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first nine monthsquarter of 2019, compared2021 despite the shortfall in revenues relative to net income of $2.4 million or $0.03 net income per share forcapacity. As a result, in the first nine months of 2018. The variances are the result of
changes in gross margin and operating expenses as described above. As discussed previously, we recorded a $6.1 million impairment expense in the third quarter of 2018. Net income for2021 we separately classified $1.8 million as costs related to our under-utilized capacity (1.2% of 2021 first quarter gross profit margin) in cost of sales. For the nine months ended September 30, 2019 includes a $2.4 million expense in stock-based compensation, compared to $3.2 million in the same periodremaining quarters of 2018,2021 and $2.6 million of reorganization costs for the nine months ended September 30, 2019, compared to $4.6 million expense in the same period of 2018.2022, we did not have abnormal excess capacity as our workforce was better aligned with current production volumes.
Liquidity and Capital Resources
Cash and cash equivalents at SeptemberJune 30, 20192022 totaled $56.6$19.7 million, an increasea decrease of $3.2$40.5 million from December 31, 2018. On January 31, 2019, we repaid $5.62021. The decrease in cash over the six month period primarily reflects the impact of $36.8 million cash used in
29
operations, of which $1.8 million related to one-time costs associated with the contested director election and $8.9 million of long-term debt outstanding withreorganization costs. In addition, capital expenditures totaled $3.0 million and scheduled Leasing Facilities repayments totaled $1.2 million. These outflows were offset by a C$0.9 million ($0.7 million) draw under the Canada Leasing Facility received in April 2022.
The impact of COVID-19 on the Company’s sales and operations has been severe, including a contraction of demand since the beginning of the pandemic and more recently, significant inflation on raw material costs. This has resulted in a significant usage of cash which we have financed through existing cash on hand without penalty. Inand financings as described further below. Furthermore, we have implemented multiple initiatives to reduce our overall fixed cost base, including the closure of our Phoenix Facility in the second quarter of 2022, reduction in our hourly headcount in 2021 and salaried headcount reductions and other cost savings initiatives in February 2022 and July 2019, we entered into2022. We have also implemented three price increases to mitigate the inflationary effect, comprised of 6.5% effective November 1, 2021, 5% effective June 1, 2022 and a C$50.0 million revolving credit facilityfurther 10% effective July 21, 2022. We continue to monitor the cost of our raw materials and labor to determine whether further price increases are warranted. Since March 2022, however, the Company and its Construction Partners have experienced a significant increase in demand, particularly within its commercial and education verticals, with the Royal Bankbroad lifting of Canada (the “RBC Facility”). Draw-downs underhealth restrictions across North America. In response the RBC Facility are availableCompany began efforts to increase manufacturing headcount within its Calgary and Savannah facilities to enable it to meet both near-term demand and anticipated sustained increases. We have increased wage rates in both CanadianCanada and U.S. dollars. The RBC Facility replaced the $18.0 million revolvingUnited States to increase our competitiveness in what is proving to be a tight labor market, particularly in Savannah. We are also taking steps to decongest our manufacturing processes to return productivity to pre-pandemic levels. We believe the benefits of the price increases, manufacturing headcount additions, training and debottlenecking will begin to be realized in the middle of the third quarter 2022, continuing throughout the balance of the year.
We have assessed the Company’s liquidity using multiple downside and upside scenarios, taking into account these circumstances, our sales outlook for the next twelve months and actions in combination with existing cash balances and available credit facility with Comerica Bank, which expiredfacilities. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next 12 months. However, a number of factors, including our ability to satisfy the expected growth in pipeline demand and those discussed below could impact our liquidity over such period.
Should the recovery of the North American construction activities from the pandemic be delayed, a sustained economic depression and its adverse impacts on June 30, 2019.
Management believescustomer demand occur, significant inflationary pressure on raw materials and transportation costs continue that we are unable to recover through price increases or should we be unable to economically increase manufacturing labor headcount and related capacity, this could continue to adversely affect our liquidity. To the extent that existing cash and cash equivalents and cash flowsincreased liquidity from operations will be sufficient to support ongoing working capital and capital expenditure requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including growth rate, the continued expansion of sales and marketing activities and the introduction of new solutions, and software and product enhancements. To the extent existing cash and cash equivalents and cash flows from operationsaforementioned facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities and couldor contain covenantsinstruments that restrict operations.may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.
Historically,During 2021, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Cash is primarily usedcompleted financings to fund operations and capital expenditures. Over the past several years, revenue has typically increased from year to year and, as a result, cash flows from account receivable collections have increased. However, operating expenses have also increased as we reinvested capitalincrease our liquidity in growing the business. Our operating cash requirements may increase in the future as management continues to invest in the strategic growthlight of the highly uncertain economic conditions caused by the pandemic. In January 2021, we issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on the January Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company.
Nine Months Ended SeptemberIn February 2021, we entered into the RBC Facility, a C$25.0 million senior secured revolving credit facility with RBC. Under the RBC Facility, the “Borrowing Base” is a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Available borrowings under the RBC Facility at June 30, 20192022 were C$14.5 million or $11.3 million.
In December 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and 2018are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and
30
be repayable on the December Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company.
The Company has a C$5.0 million Canada Leasing Facility of which C$4.5 million ($3.4 million) has been drawn, and a $14.0 million U.S. Leasing Facility of which $13.3 million has been drawn with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred.
The following table summarizes our consolidated cash flows for the nineperiods indicated:
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| ($ in thousands) |
|
| ($ in thousands) |
| ||||||||||
Net cash flows (used in) provided by operating activities |
|
| (17,800 | ) |
|
| 86 |
|
|
| (36,842 | ) |
|
| (12,008 | ) |
Net cash flows used in investing activities |
|
| (1,331 | ) |
|
| (6,430 | ) |
|
| (2,951 | ) |
|
| (10,019 | ) |
Net cash flows (used in) provided by financing activities |
|
| (63 | ) |
|
| 7,266 |
|
|
| (890 | ) |
|
| 36,603 |
|
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
| 54 |
|
|
| 408 |
|
|
| 220 |
|
|
| 711 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
| (19,140 | ) |
|
| 1,330 |
|
|
| (40,463 | ) |
|
| 15,287 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
| 42,085 |
|
|
| 59,803 |
|
|
| 63,408 |
|
|
| 45,846 |
|
Cash, cash equivalents and restricted cash, end of period |
|
| 22,945 |
|
|
| 61,133 |
|
|
| 22,945 |
|
|
| 61,133 |
|
Operating Activities
Net cash flows used in operating activities were $17.8 million for the three months ended SeptemberJune 30, 2019 and 2018:
Nine Months Ended September 30. | ||||||||
2019 | 2018 | |||||||
($ in thousands) | ||||||||
Net cash flows provided by (used in) operating activities | $ | 17,881 | $ | (7,514 | ) | |||
Net cash used in investing activities | (10,144 | ) | (11,566 | ) | ||||
Net cash provided by (used in) financing activities | (5,484 | ) | (1,083 | ) | ||||
Effect of foreign exchange on cash and cash equivalents | 977 | (1,202 | ) | |||||
|
|
|
| |||||
Net increase (decrease) in cash and cash equivalents | 3,230 | (21,365 | ) | |||||
Cash and cash equivalents, beginning of period | $ | 53,412 | $ | 63,484 | ||||
|
|
|
| |||||
Cash and cash equivalents, end of period | $ | 56,642 | $ | 42,119 | ||||
|
|
|
|
Operating Activities
Net2022 compared to $0.1 million cash flows provided by operating activities in the three months ended June 30, 2021. Included in the $17.8 million used in operating activities in the second quarter of 2022 are $5.2 million of reorganization costs, $0.3 million of professional fees associated with the contested director election, and $3.7 million of increased inventory where the Company took on incremental reserves to $17.9mitigate against potential supply chain disruption, offset by the receipt of a $3.2 million income tax refund related to 2020. We have since taken steps to adjust our aluminum supply and expect to begin drawing down such inventory in the third and fourth quarter. Excluding these amounts, cashflow from operations would have been $11.8 million in the second quarter of 2022 compared to $0.1 million cash provided by operations in the same period of 2021, with the decrease reflecting $3.4 million of government subsidies that did not re-occur in 2022, $2.8 million of lower Adjusted Gross Profit, higher interest payments and working capital timing. Apart from the above noted items, working capital changes primarily reflect the timing of insurance renewals and increased accounts payable due to higher activity and timing of payments.
Net cash flows used in operating activities were $36.8 million for the first ninesix months of 2019 from $7.5ended June 30, 2022 compared to $12.0 million net cash flowsin the six months ended June 30, 2021. Included in the $36.8 million used in operating activities in the first nine monthshalf of 2018. The increase2022 are $8.9 million of reorganization costs, $1.8 million of professional fees associated with the contested director election, and $7.1 million of increased inventory where the Company took on incremental inventory from suppliers to mitigate against potential supply chain disruption, offset by the receipt of a $3.2 million income tax refund related to 2020. We have since taken steps to adjust our aluminum supply and expect to begin drawing down such inventory in
cash flows the third and fourth quarter. Excluding these amounts, cashflow from operations is largely due to an increase in collections on accounts receivable balances and lack of an impairment chargewould have been $22.2 million in the first nine monthshalf of 2019. This was partially offset by an increase2022 compared to $12.0 million cash used in foreign exchange lossoperations in the same period of 2021, with the decrease reflecting $7.5 million of government subsidies that did not re-occur in 2022, $1.4 million lower Adjusted Gross Profit before underutilized capacity, higher interest payments and a decrease in tradeworking capital timing. Apart from the above noted items, working capital changes primarily reflect the timing of insurance renewals and increased accounts receivable, accounts payable and other liabilities ascustomer deposits due to higher activity and timing of payments.
Investing Activities
We invested $0.9 million and $1.9 million in property, plant and equipment during the three and six months ended June 30, 2022, respectively, compared to the first nine months of 2018.
Investing Activities
We invested $7.8$5.8 million in PP&E in the nine months ended September 30, 2019, compared to $7.0and $8.7 million during the ninethree and six months ended September
31
June 30, 2018. The increase was primarily due to manufacturing equipment purchases2021. This expenditure for the new tilethree months ended June 30, 2022 comprised of $0.1 million of working capital changes, $0.5 million of manufacturing upgrades, $0.1 million related to our website redesign, $0.1 million of leasehold improvements and millwork facility$0.1 million of which $1.6DXC refreshes. The expenditure for the six months ended June 30, 2022 comprised of $1.0 million was incurred in the third quarter of 2019. working capital changes, $0.6 million of manufacturing upgrades, $0.2 million related to our website design and $0.1 million related to DXC refreshes and IT equipment.
We invested $2.5$0.4 million on capitalized software during the ninethree months ended SeptemberJune 30, 2019,2022, as compared to $4.2$0.6 million in the ninethree months ended SeptemberJune 30, 2018.2021 and $0.9 million for the six months ended June 30, 2022 compared to $1.3 million for the comparative period.
Our 2022 capital expenditure program comprises approximately $2.5 million related to refreshes of DXCs, continued enhancement of our customer relationship management system and website redesign, approximately $2.5 million on software development and approximately $2.0 million on manufacturing and other capital upgrades. The reductiondecrease in cash flows used in investing activities is largely due to reduced spending as the current mix of projects undertaken by the CompanySouth Carolina Facility and included a higher portion of efforts related to business process improvements thatDallas DXC were not eligible for capitalization.completed in 2021.
Financing Activities
For the ninethree and six months ended SeptemberJune 30, 2019, net2022, $0.1 million and $0.9 million of cash was used in financing activities, comprising mainly of $0.6 million and $1.2 million of scheduled payments under the Leasing Facilities for the three and six month period ended June 20, 2022. During the second quarter, we received C$0.9 million ($0.7 million) under the Canada Leasing Facility. For the three and six months ended June 30, 2021, $7.3 million and $36.6 million of cash was $5.5 million. We repaid the balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019. Cash used inprovided by financing activities, was $1.1respectively, mainly due to the proceeds received from the issuance of C$40.3 million forof Debentures in January 2021 and the nine months ended September 30, 2018.receipt of $8.4 million of cash consideration under the U.S. Leasing Facility.
We currently expect to fund anticipated future investments with available cash.cash, including the proceeds from Debentures issued in 2021, and drawings on our Credit Facility. We do not expect to make any significant further draws under the Leasing Facilities. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the future as we may deem appropriate. In the future, weWe may also use debt or pursue equity financing depending on the Company’s share price of our common shares at the time, interest rates, and nature of the investment opportunity and economic climate.
Credit Facility
On July 19, 2019, weFebruary 12, 2021, the Company entered into a C$50 million senior secured revolving credit facility with the Royal Bank of Canada (the “RBC Facility”).TheRBC Facility. Under the RBC Facility, has a three-year term and can be extended forthe Borrowing Base is up to two additional years at our option.a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. At June 30, 2022, available borrowings are C$14.5 million ($11.3 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate with no adjustment,plus 30 basis points or at the bankers’ acceptance rateCanadian Dollar Offered Rate or LIBOR plus 125155 basis points. We are required to comply with certain financial covenants underUnder the RBC Facility, including maintainingif the Aggregate Excess Availability is less than C$5.0 million, the Company is subject to a minimum fixed charge coverage ratioFCCR covenant of 1.15:1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. The Company did not meet the three-month FCCR requirement during the second quarter of 2022, which resulted in requiring the restriction of $3.2 million of cash. Should an event of default occur, or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off any borrowings and any remaining amounts made available to the Company.
During 2020, the Company entered into the Leasing Facilities, consisting of the C$5.0 million Canada Leasing Facility and the $14.0 million U.S. Leasing Facility with RBC, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. The U.S. Leasing Facility is amortized over a maximum debt to Adjusted EBITDA ratiosix-year term and is extendible at the Company’s option for an additional year.
32
The Company has drawn $13.3 million of 3.0:1. cash consideration under the U.S. Leasing Facility and commenced the lease term in 2020 for the equipment at the South Carolina Facility. The Company has drawn C$4.5 million ($3.4 million) of cash consideration under the Canada Leasing Facility and commenced the lease term for the Canadian equipment expenditures during 2020. C$0.9 million ($0.7 million) of the Canada Leasing Facility was drawn in the three months ended June 30, 2022.
We are also required to comply with certainnon-financial covenants, including, among other things, covenants restricting our ability to (i) dispose of our property, (ii) enter into certain transactions intended to effect or otherwise permit a material change in our corporate or capital structure, (iii) incur any debt, other than permitted debt, and (iv) permit certain encumbrances on our property.
We are generally restricted under the RBC Facility from makingpaying dividends or distributions on our outstanding capital shares (other than any distribution by way of the payment of dividends by the issuance of equity securities). We may also declare and pay dividends to our shareholders provided that such dividends do not exceed 50% of the Free Operating Cash Flowunless Payment Conditions (as defined in the RBC Facility) forare met, including having a net borrowing availability of at least C$10 million over the most recently completed fiscal yearproceeding 30-day period, and meethaving a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. We may also make aone-time Permitted Special Distributions (as defined in the RBC Facility) provided that we maintain a minimum balance of at least C$20.0 million in our account and meet certain other conditions.
The RBC Facility is currently secured by substantially all of our real property located in Canada and the United States.
Contractual Obligations
The following table summarizes DIRTT’sThere have been no material changes in our contractual obligations at Septemberduring the three months ended June 30, 2019:2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, other than the forthcoming additional commitments related to the extension of our headquarters lease in Calgary. See Note 13, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information.
Payments due by period | ||||||||||||||||||||
Less than 1 year | 1 to 3 years | 3 to 5 years | Greater than 5 years | Total | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 22,217 | $ | — | $ | — | $ | — | $ | 22,217 | ||||||||||
Other liabilities | 4,393 | — | — | — | 4,393 | |||||||||||||||
Current and long-term debt | — | — | — | — | — | |||||||||||||||
Operating leases | 5,247 | 5,135 | 4,401 | 7,485 | 22,268 | |||||||||||||||
Client deposits | 7,407 | — | — | — | 7,407 | |||||||||||||||
Purchase obligations | 7,655 | — | — | — | 7,655 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 46,919 | $ | 5,135 | $ | 4,401 | $ | 7,485 | $ | 63,940 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Significant Accounting Policies and Estimates
There have been no material changes in our significant accounting policies during the ninethree months ended SeptemberJune 30, 2019,2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our Registration StatementAnnual Report on Form 10.10-K. For information regarding significant accounting policies and estimates, please refer to Item 27 and Item 138 in our Registration StatementAnnual Report on Form 10.
Recent10-K. As disclosed in Note 5, “Adoption of New and Revised Accounting Pronouncements
For information regarding recent accounting pronouncements, please refer to Note 2, “Significant Accounting Policies”Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report.Report, we adopted Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The ASU provides guidance on required disclosures with respect to government assistance in a company’s notes to the annual financial statements. The amendments in the ASU are effective for periods beginning after December 15, 2021. The Company has adopted this standard effective January 1, 2022 and notes there is no impact of this standard on our accounting or disclosures of government assistance.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, please refer to Note 5, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements and “–Significant Accounting Policies and Estimates” appearing in this Quarterly Report.
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk exposures since our disclosures in our Registration StatementAnnual Report on Form 10.10-K. For information regarding our exposure to certain market risks, please refer to Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Registration StatementAnnual Report on Form 10.10-K.
|
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officerofficers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
33
As required by RulesRule 13a-15 under the Exchange Act, our principal executive officerofficers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2019.2022. Based upon their evaluation, our principal executive officerofficers and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act) were effective.
There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 2019,2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
|
On November 5, 2019,Item 1. Legal Proceedings
We are pursuing multiple lawsuits against our former founders, Mogens Smed and Barrie Loberg, their new company Falkbuilt Ltd. (“Falkbuilt”) filed a Statement, and other related individual and corporate defendants for violations of Claims against usfiduciary duties and noncompetition and non-solicitation covenants contained in their executive employment agreements, and the Courtmisappropriation of Queen’s Bench of Alberta, Canada. Falkbuilt alleges that we have misappropriatedour confidential and misused their alleged proprietary information in furtheranceviolation of numerous Canadian and U.S. state, and federal laws pertaining to the protection of our own product development. Falkbuilt seeks monetary relief, including, among other things, damagestrade secrets and proprietary information and the prevention of approximately C$30.0 million, disgorgement of profits, punitive damages,false advertising and attorneys’ fees, and an interim, interlocutory and permanent injunction of our use ofdeceptive trade practices. There have been no material developments in the alleged proprietary information.
Falkbuilt is affiliated with certain of our former employees, including Mogens Smed, our co-founder and former Executive Chairman and Chief Executive Officer, and Barrie Loberg, our former Vice President of Software Development. Aslegal proceedings previously disclosed in our Annual Report on Form 10-K, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 9, 2019, we filed a lawsuit in the Court of Queen’s Bench of Alberta against Mr. Smed and Mr. Loberg, to enforce the terms of our Settlement Agreement and their respective obligations, including non-compete and non-solicit provisions, that we entered into in connection with their departure. We believe that Falkbuilt’s lawsuit against us is part of their litigation strategy related to our lawsuit against them, and we believe it is without merit. We intend to defend it vigorously and to continue to pursue our legal remedies against Messrs. Smed and Loberg and their company, Falkbuilt.4, 2022.
We may, from time to time, become involved in other legal proceedings or be subject to claims arising in the ordinary course of business, including the initiation and defense of proceedings to protect intellectual property rights, product liability claims and employment claims. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, cash flows or results of operations.
|
As ofItem 1A. Risk Factors
In addition to the date ofother information set forth in this Quarterly Report on Form10-Q, there have been no material changes to you should carefully consider the risk factors disclosed in Item 1Aand other cautionary statements described under the heading “Risk Factors” included in our Registration StatementAnnual Report on Form 10.10-K, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 4, 2022, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently knowknown to useus or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
We are under the leadership of a reconstituted Board of Directors who plan to implement a variety of operational, organizational, cultural and other changes to our business, and we may not be able to achieve some or all of the anticipated benefits of this transformation plan. We are also undergoing changes at a senior management level, including the appointment of a new Chief Executive Officer in June 2022.
Our Board of Directors was entirely reconstituted at our annual and special meeting of shareholders held on April 26, 2022 and, following that meeting, Geoffrey Krause and Jeffrey Calkins were appointed Interim Co-Chief Executive Officers. In June 2022, Jeffrey A. Calkins and Jennifer Warawa departed the company and a new Chief Executive Officer, Benjamin Urban was appointed. Messrs. Urban and Noll were also appointed to our Board of Directors in June 2022. On July 27, 2022, the Company announced additional leadership changes, including the departures of Charles Kraus, Senior Vice President and General Counsel and Colin Blehm, Vice President Product Development, and the promotion of Trevor Didluck to Vice President Product Development. Nandini Somayaji has been promoted to Senior Vice President Talent, General Counsel & Corporate Secretary. Geoffrey Krause, DIRTT’s current Chief Financial Officer, announced his intention to retire from the Company, effective September 30, 2022. A search for a suitable replacement has commenced. As a result of these events, the timely integration of senior management will be critical in the successful implementation of the Board of Directors' plans. There can be no assurance that we will be able to successfully implement the plan or otherwise realize the anticipated benefits of the plan, and we may encounter short-term disruptions of certain aspects of our business as elements of the plan are implemented.
In addition to overseeing the changes to DIRTT’s leadership described above, since its election, the reconstituted Board of Directors has undertaken an extensive review of DIRTT’s operations, a process which is still ongoing (see Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook”, above), and are in the process of implementing a variety of operational, organizational, cultural and other changes to our business, including plans to meet pipeline demand and expand revenues. We may not be successful in achieving some or all of the anticipated benefits of these plans, which may have an adverse effect on our results from operations and financial condition. Specifically, we are addressing the following issues:
As at July 1, 2022, DIRTT’s 12-month forward pipeline, which represents known projects and leads at various stages of maturation which our sales teams are working to convert into orders, increased by 13% to $359 million from $318 million as at April 1, 2022. Servicing of this pipeline and capturing the underlying revenue growth is dependent upon the Company's ability to ramp up production capabilities on a timely basis. The Board of Directors and DIRTT’s management team have prioritized removing constraints in DIRTT’s manufacturing processes and are pursuing a number of initiatives including increased hourly labor, improved hourly labor
35
retention and streamlined manufacturing processes. DIRTT may not be successful in implementing such initiatives and may be negatively impacted by the competitive nature of attracting personnel and other current market conditions. DIRTT may not be able meet such demand and capture the underlying revenue growth which could adversely affect the Company’s results of operations and financial condition.
DIRTT's gross margins and resulting profitability have been negatively affected by the impacts of material cost inflation and the use of increased discounting to drive higher demand. DIRTT has taken steps to improve gross margin by reducing discounts and increasing prices, including a 5% price increase at June 1, 2022 and a further 10% price increase at July 21, 2022. If we are unable to realize the effects of reduced discounting or price increases, if inflationary increases continue without corresponding increases in our pricing or if such reduced discounting and price increases cause a material impact on demand, DIRTT’s results of operations and financial condition could be adversely impacted.
DIRTT has identified the need to upgrade its inventory management and cost accounting systems. Other information technology may require investment in the future. However, the success, in whole or in part, of this investment cannot be guaranteed.
|
None.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
|
None.Item 3. Defaults Upon Senior Securities
None.
|
Item 4. Mine Safety Disclosures
Not Applicable.
|
On October 7, 2019, we, through one of our wholly owned subsidiaries, entered into a Lease Agreement (the “Lease”) with SP Rock Hill Legacy East #1, LLC relating to the lease by us of a build-to-suit building which will provide for approximately 130,000 square feet of manufacturing space for our combined tile and millwork factory and will be located in Rock Hill, South Carolina (the “Premises”).Item 5. Other Information
The term of the Lease is currently estimated to commence around September 2020, when construction of the Premises has been substantially completed (the “Commencement Date”). Upon the Commencement Date, the Lease will have an initial term of 15 years, with two consecutive five-year renewal periods at our option. The initial annual base rent will be approximately $851,000, subject to increases in subsequent years and to certain adjustments as set forth in the Lease.
|
Item 6. Exhibits
EXHIBIT INDEX
| |||
Exhibit No. | Description | ||
3.1 | |||
3.2 | |||
4.1 | |||
4.2 | |||
4.3 | |||
10.1 | |||
10.2*¥ | |||
10.3*+ | |||
10.4*+ | |||
10.5* | |||
31.1* | |||
31.2* | |||
32.1** | |||
32.2** | |||
101.INS* | |||
Inline XBRL Instance Document | |||
101.SCH* | |||
Inline XBRL Taxonomy Extension Schema Document | |||
101.CAL* | |||
Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF* | |||
Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB* | |||
Inline XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE* | |||
Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
* Filed herewith
SIGNATURES** Furnished herewith
+ Compensatory plan or agreement
¥ Information in this exhibit identified by brackets is confidential and has been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is not material and is the type of information that the Company customarily treats as private or confidential. An unredacted copy of this exhibit will be furnished to the Securities and Exchange Commission on a supplemental basis upon request.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIRTT ENVIRONMENTAL SOLUTIONS LTD. | ||||
By: | /s/ Geoffrey D. Krause | |||
Geoffrey D. Krause | ||||
Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) | ||||
Date: July 27, 2022 |
Date: November 7, 2019
3238