UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
Alberta, (State or other jurisdiction of incorporation or organization) |
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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 Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Smaller reporting company |
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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 Rule 12b-2 of the Exchange Act). ☐ Yes
The registrant had
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2024
TABLE OF CONTENTS
i
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (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,” “continue,” 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 contained in, or expressed or implied by 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 material adverse effect on our business, financial condition, results of operations and growth prospects can be found in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 21, 2024 (the “Annual Report on Form 10-K”), and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:
ii
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 expressed or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not place 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
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)
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As at March 31, |
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As at December 31, |
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2024 |
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2023 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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Restricted cash |
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Trade and accrued receivables, net of expected credit losses of |
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Other receivables |
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Inventory |
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Prepaids and other current assets |
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Assets held for sale |
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Total Current Assets |
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Property, plant and equipment, net |
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Capitalized software, net |
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Operating lease right-of-use assets, net |
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Other assets |
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Total Assets |
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LIABILITIES |
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Current Liabilities |
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Accounts payable and accrued liabilities |
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Other liabilities |
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Customer deposits and deferred revenue |
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Current portion of long-term debt and accrued interest |
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Current portion of lease liabilities |
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Total Current Liabilities |
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Long-term debt |
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Long-term lease liabilities |
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Total Liabilities |
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SHAREHOLDERS’ EQUITY |
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Common shares, authorized par value, |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total Shareholders’ Equity |
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Total Liabilities and Shareholders’ Equity |
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
4
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Operations
(Unaudited - Stated in thousands of U.S. dollars)
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For the Three Months Ended March 31, |
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2024 |
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2023 |
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Product revenue |
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Service revenue |
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Total revenue |
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Product cost of sales |
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Service cost of sales |
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Total cost of sales |
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Gross profit |
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Expenses |
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Sales and marketing |
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General and administrative |
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Operations support |
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Technology and development |
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Stock-based compensation |
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Reorganization |
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Impairment charge on Rock Hill Facility |
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Related party expense |
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Total operating expenses |
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Operating loss |
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Government subsidies |
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Gain on extinguishment of convertible debt |
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Foreign exchange gain (loss) |
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Interest income |
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Interest expense |
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Net income (loss) before tax |
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Income taxes |
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Current and deferred income tax expense |
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Net income (loss) after tax |
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Net income (loss) per share |
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Net income (loss) per share - basic |
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Net income (loss) per share - diluted |
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Weighted average number of shares outstanding (in thousands) |
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Basic |
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Diluted |
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Interim Condensed Consolidated Statement of Comprehensive Income (Loss)
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For the Three Months Ended March 31, |
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2024 |
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2023 |
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Net income (loss) for the period |
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Exchange differences on translation of foreign operations |
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Comprehensive income (loss) for the period |
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5
Total revenue for the three months ended March 31, 2024 includes $
Interest expense for the three months ended March 31, 2024 includes $
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
6
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)
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Accumulated |
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Number of |
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Additional |
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other |
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Total |
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Common |
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Common |
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paid-in |
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comprehensive |
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Accumulated |
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shareholders’ |
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shares |
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shares |
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capital |
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loss |
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deficit |
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equity |
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As at December 31, 2022 |
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Stock-based compensation |
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Issued on vesting of RSUs and Share Awards |
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- |
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RSUs and Share Awards withheld to settle employee tax obligations |
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Issued for employee share purchase plan |
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Foreign currency translation adjustment |
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Net loss for the period |
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As at March 31, 2023 |
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As at December 31, 2023 |
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Stock-based compensation |
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Issued on vesting of RSUs and Share Awards |
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Issued on Rights Offering |
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Issued for employee share purchase plan |
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RSUs and Share Awards withheld to settle employee tax obligations |
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Foreign currency translation adjustment |
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- |
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Net income for the period |
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As at March 31, 2024 |
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
7
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Cash Flows
(Unaudited – Stated in thousands of U.S. dollars)
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For the Three Months Ended March 31, |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net income (loss) for the period |
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Adjustments: |
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Depreciation and amortization |
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Impairment charge on Rock Hill Facility |
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Stock-based compensation |
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Foreign exchange loss (gain) |
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Gain on extinguishment of convertible debt |
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Accretion of convertible debentures |
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Changes in operating assets and liabilities: |
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Trade and accrued receivables |
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Other receivables |
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Inventory |
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Prepaid and other assets, current and long term |
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Accounts payable and accrued liabilities |
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Other liabilities |
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Customer deposits and deferred revenue |
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Current portion of long-term debt and accrued interest |
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Lease liabilities |
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Net cash flows used in operating activities |
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Cash flows from investing activities: |
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Purchase of property, plant and equipment, net of accounts |
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Capitalized software development expenditures |
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Other asset expenditures |
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Recovery of software development expenditures |
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Proceeds on sale of assets held for sale |
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Net cash flows provided by (used in) investing activities |
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Cash flows from financing activities: |
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Repayment of long-term debt |
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Net proceeds received from rights offering |
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Employee tax payments on vesting of RSUs |
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Net cash flows provided by (used in) financing activities |
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Effect of foreign exchange on cash, cash equivalents and |
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Net increase (decrease) in cash, cash equivalents and |
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Cash, cash equivalents and restricted cash, beginning of year |
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Cash, cash equivalents and restricted cash, end of period |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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Income taxes received |
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. |
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As At March 31, |
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2024 |
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2023 |
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Cash and cash equivalents |
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Restricted cash |
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Total cash, cash equivalents and restricted cash |
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
8
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 subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction. DIRTT's system of physical 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 design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and construction partners of the Company (“Construction Partners”), including Armstrong World Industries, Inc. (“AWI”), which owns a
DIRTT is incorporated under the laws of the province of Alberta, Canada. Its headquarters is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6 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”. Effective October 12, 2023, DIRTT’s common shares ceased to trade on the Nasdaq Capital Market. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol “DRTTF.”
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 Form 10-Q and Article 10 of Regulation S-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 March 31, 2024, and its results of operations and cash flows for the three months ended March 31, 2024 and 2023. The condensed balance sheet at December 31, 2023, 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, 2023 and 2022 and for each of the three years in the period ended December 31, 2023 included in the Annual Report on Form 10-K of the Company as filed with the SEC and applicable securities commission or similar regulatory authorities in Canada.
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 Environmental Solutions Ltd. and its subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.
9
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments, assets held for sale 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.
Seasonality
Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customers’ construction projects can be influenced by a number of factors including the prevailing economic climate and weather.
3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
On December 14, 2023, the FASB issued Accounting Standards Update No. 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”) further disaggregated information on an entity’s tax rate reconciliation and income taxes paid. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, on a prospective basis with an option of retrospective application. The Company is evaluating the impact of the adoption of this standard.
Although there are several other new accounting standards issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its Financial Statements.
4. REORGANIZATION AND ASSETS HELD FOR SALE
Workforce Reductions
During the three months ended March 31, 2023, a review of our costs resulted in the decision to eliminate a number of salaried positions. These actions resulted in the Company incurring certain one-time termination costs. There were no restructuring costs associated with workforce reductions in the three months ended March 31, 2024.
Temporary Suspension of Operations and Subsequent Closure at Rock Hill, South Carolina (the “Rock Hill Facility”)
On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in cost of sales, were $
On September 27, 2023, the Company decided to permanently close the Rock Hill Facility. Certain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. During the three months ended March 31, 2024, $
|
|
As at March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Assets held for sale, opening |
|
|
|
|
|
|
||
Proceeds from sale of assets held for sale |
|
|
( |
) |
|
|
|
|
Impairment charge on reassessment |
|
|
( |
) |
|
|
|
|
Assets held for sale, ending |
|
|
|
|
|
|
||
For the three months ended March 31, 2024, reorganization costs incurred relate to the above mentioned initiatives:
10
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Termination benefits |
|
|
|
|
|
|
||
Phoenix facility closure |
|
|
|
|
|
|
||
Rock Hill Facility temporary suspension and closure of operations |
|
|
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|
|
|
||
Other costs |
|
|
|
|
|
|
||
Total reorganization costs |
|
|
|
|
|
|
||
Reorganization costs in accounts payable and accrued liabilities at January 1, 2023 |
|
|
|
|
Reorganization expense |
|
|
|
|
Reorganization costs paid |
|
|
( |
) |
Reorganization costs in accounts payable and accrued liabilities at December 31, 2023 |
|
|
|
|
Reorganization expense |
|
|
|
|
Reorganization costs paid |
|
|
( |
) |
Reorganization costs in accounts payable and accrued liabilities at March 31, 2024 |
|
|
|
Of the $
5. GAIN ON EXTINGUISHMENT OF CONVERTIBLE DEBENTURES
On February 15, 2024, the Company commenced a substantial issuer bid and tender offer (the “Issuer Bid”) pursuant to which the Company offered to repurchase for cancellation: (i) up to C$
C$
In accordance with GAAP, it was determined that the C$
6. TRADE AND ACCRUED RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and typically do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date, taking into account historical credit loss experience as well as forward-looking information, in order to establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the consolidated statement of operations.
In order to manage 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 well-being of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At March 31, 2024, approximately
11
Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three months ended March 31, 2024, one Construction Partner accounted for greater than
The Company’s aged receivables were as follows:
|
|
As at |
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
Current |
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|
||
Overdue |
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|
||
|
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|
||
Less: expected credit losses |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
No adjustment to our expected credit losses of $
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $
7. OTHER LIABILITIES
|
|
As at, |
|
|||||
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Warranty provisions (1) |
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|
||
DSU liability |
|
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|
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|
||
Income taxes payable |
|
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|
||
Sublease deposits |
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|
||
Other provisions |
|
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|
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|
||
Other liabilities |
|
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|
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|
||
|
|
As at, |
|
|||||
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
As at January 1 |
|
|
|
|
|
|
||
Additions to warranty provision |
|
|
|
|
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|
||
Payments related to warranties |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
12
8. LONG-TERM DEBT
|
|
Revolving |
|
|
Leasing |
|
|
Convertible |
|
|
Total Debt |
|
||||
Balance on January 1, 2023 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accretion of issue costs |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Interest payments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Principal repayments |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Exchange differences |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Balance at December 31, 2023 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Current portion of long-term debt and accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance on January 1, 2024 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accretion of issue costs |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Interest payments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Principal repayments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gain on extinguishment |
|
|
- |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Exchange differences |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2024 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Current portion of long-term debt and accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Revolving Credit Facility
On February 12, 2021, the Company entered into a loan agreement governing a C$
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility had a borrowing base of C$
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$
13
covenant, which resulted in the release of $
Leasing Facilities
The Company has a C$
The Company did not make any draws on the Canadian Leasing Facilities during the first quarter of 2024 (2023 – $nil). The associated financial liabilities are shown on the consolidated balance sheet in the current portion of long-term debt and accrued interest and long-term debt.
Convertible Debentures
On January 25, 2021, the Company completed a C$
On December 1, 2021, the Company completed a C$
14
9. STOCK-BASED COMPENSATION
In May 2020, shareholders approved the DIRTT Environmental Solutions Long Term Incentive Plan (the “2020 LTIP”). The 2020 LTIP replaced the predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and the Amended and Restated Stock Option Plan (“Stock Option 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.
In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated Long-Term Incentive Plan (the “2023 LTIP”) at the annual and special meeting of shareholders. The 2023 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2023 LTIP, the sum of (i)
Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for Non-Employee Directors (as amended and restated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The terms of the DSU Plan are otherwise materially unchanged as incorporated into the 2023 LTIP. Effective May 30, 2023, no new awards will be made under the DSU Plan, but awards previously granted under the DSU Plan will continue to be governed by the DSU Plan. DSUs are settled following cessation of services with the Company.
Stock-based compensation expense
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Equity-settled awards |
|
|
|
|
|
|
||
Cash-settled awards |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
The following summarizes RSUs, 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, 2022 |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Granted |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Vested or settled |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
Withheld to settle employee tax obligations |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding at March 31, 2023 |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Outstanding at December 31, 2023 |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
||||
Granted |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Vested or settled |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Withheld to settle employee tax obligations |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding at March 31, 2024 |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
||||
15
Restricted share units (time-based vesting)
Restricted share units that vest based on time have an aggregate time-based vesting period of
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
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$
Based on share price performance since the date of grant,
|
% of PRSUs Vesting |
|
||||||||||||||||
|
|
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
2021 and 2022 PRSUs |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Share awards
There were no share awards granted or vested during the first quarter of 2024.
In the first quarter of 2023,
Performance share units
During the second quarter of 2023, certain executives were issued a strategic equity grant through Performance share units (“PSUs”). The performance period of the PSUs is from
Deferred share units
Granted under the DSU Plan
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 period. DSUs outstanding at March 31, 2024 had a fair value of $
16
Granted under the 2023 LTIP
DSUs granted after May 30, 2023 (the “New DSUs”) will be settled by way of the provision of cash or shares (or a combination thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common shares. The weighted average fair value of the DSUs granted in 2024 was C$
Options
The following summarizes options forfeited and expired during the periods:
|
|
|
|
Number of |
|
|
Weighted average |
|
||
|
|
|
|
options |
|
|
exercise price C$ |
|
||
Outstanding at December 31, 2022 |
|
|
|
|
|
|
|
|
||
Forfeited or expired |
|
|
|
|
( |
) |
|
|
|
|
Outstanding at March 31, 2023 |
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2023 |
|
|
|
|
|
|
|
|
||
Forfeited |
|
|
|
|
( |
) |
|
|
|
|
Exercisable at March 31, 2024 |
|
|
|
|
|
|
|
|
||
Range of exercise prices outstanding and exercisable at March 31, 2024:
|
|
Options outstanding |
|
|
Options exercisable |
|
||||||||||||||||||
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
||||||
|
|
Number of |
|
|
average |
|
|
average |
|
|
|
|
|
average |
|
|
average |
|
||||||
|
|
options |
|
|
remaining |
|
|
exercise |
|
|
Number |
|
|
remaining |
|
|
exercise |
|
||||||
Range of exercise prices |
|
|
|
|
life |
|
|
price C$ |
|
|
exercisable |
|
|
life |
|
|
price C$ |
|
||||||
C$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
||||||
C$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Dilutive Instruments
For the three months ended March 31, 2024,
For the three months ended March 31, 2023,
17
10. EARNINGS PER SHARE
On November 21, 2023, the Company announced a Rights Offering (refer to Note 14) which distributed to holders of common shares, as of the close of business on December 12, 2023, transferable subscription rights to purchase up to an aggregate of
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net income (loss) per share – basic |
|
|
|
|
|
|
||
Net income (loss) (thousands of U.S. dollars) |
|
$ |
|
|
$ |
( |
) |
|
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
|
NA |
|
|
|
|
||
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
|
|
|
|
||
Net income (loss) per share (U.S. dollars) − basic (as previously calculated, prior to Rights Offering) |
|
NA |
|
|
$ |
( |
) |
|
Net income (loss) per share (U.S. dollars) − basic (as on the Consolidated Statement of Comprehensive Income) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
Net income (loss) per share − diluted |
|
|
|
|
|
|
||
Net income (loss) (thousands of U.S. dollars) |
|
$ |
|
|
$ |
( |
) |
|
Interest on convertible debentures |
|
$ |
|
|
NA |
|
||
|
|
$ |
|
|
$ |
( |
) |
|
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
|
NA |
|
|
|
|
||
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
|
|
|
|
||
Dilutive debentures on convertible debt (thousands of shares) (1) |
|
|
|
|
|
- |
|
|
Dilutive RSUs and PRSUs (thousands of shares) (2) |
|
|
|
|
|
- |
|
|
Dilutive options (thousands of shares) (2) |
|
|
|
|
|
- |
|
|
Dilutive New DSUs (thousands of shares) (3) |
|
|
|
|
|
- |
|
|
Dilutive PSUs (thousands of shares) (3) |
|
|
|
|
|
- |
|
|
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
|
NA |
|
|
|
|
||
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
|
|
|
|
||
Net income (loss) per share (U.S. dollars) − diluted (as previously calculated, prior to Rights Offering) |
|
NA |
|
|
$ |
( |
) |
|
Net income (loss) per share (U.S .dollars) − diluted (as on the Consolidated Statement of Comprehensive Income) |
|
$ |
|
|
$ |
( |
) |
|
(1)
(2)
(3)
18
11. REVENUE
In the following table, revenue is disaggregated by performance obligation and timing of revenue recognition. All revenue comes from contracts with customers. See Note 12 for the disaggregation of revenue by geographic region.
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Product |
|
|
|
|
|
|
||
Transportation |
|
|
|
|
|
|
||
License fees from Construction Partners |
|
|
|
|
|
|
||
Total product revenue |
|
|
|
|
|
|
||
Installation and other services |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
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 from fixed-price contracts is based upon agreed contractual terms with each customer and is not subject to variability.
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
At a point in time |
|
|
|
|
|
|
||
Over time |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Revenue recognized at a point in time represents the majority of the Company’s sales. Revenue is recognized when a customer obtains legal title to the product, which is when ownership of the product is transferred to, or services are delivered to, the customer. Revenue recognized over time is limited to installation and ongoing maintenance contracts with customers and is recorded as performance obligations which are satisfied over the term of the contract.
Contract Liabilities
|
|
As at |
|
|||||||||
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
|
December 31, 2022 |
|
|||
Customer deposits |
|
|
|
|
|
|
|
|
|
|||
Deferred revenue |
|
|
|
|
|
|
|
|
|
|||
Contract liabilities |
|
|
|
|
|
|
|
|
|
|||
Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions. The balance of contract liabilities was lower as at March 31, 2024 compared to December 31, 2023 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 2023 and 2022 totaling $
19
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 March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Commercial |
|
|
|
|
|
|
||
Healthcare |
|
|
|
|
|
|
||
Government |
|
|
|
|
|
|
||
Education |
|
|
|
|
|
|
||
License fees from Construction Partners |
|
|
|
|
|
|
||
Total product and transportation revenue |
|
|
|
|
|
|
||
Installation and other services |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
12. SEGMENT REPORTING
The Company has
Revenue from external customers
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Canada |
|
|
|
|
|
|
||
U.S. |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Non-current assets
|
|
As at March 31, |
|
|
As at December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Canada |
|
|
|
|
|
|
||
U.S. |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
The DIRTT solution segment derives revenues from customers by providing physical products and digital tools through our ICE software to create interior spaces for our customers across the commercial, healthcare, education and government industries.
The chief operating decision maker assesses performance for the solution segment and decides how to allocate resources based on gross profit and net income (loss) that also is reported on the Consolidated Statement of Operations and Comprehensive Loss as consolidated gross profit and net income (loss). The measure of segment assets is reported on the balance sheet as total consolidated assets. The chief operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the solution segment or into other parts of the entity, such as to repay long-term debt.
Gross profit and net income (loss) are used to monitor budget versus actual results. The chief operating decision maker also uses net income (loss) in competitive analysis by benchmarking to DIRTT’s competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation. DIRTT has one reportable segment: Solutions. The solutions segment provides digital tools (access to ICE software) and physical products to create modular interior construction spaces for our customers.
20
DIRTT derives revenue in North America and manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on a single software platform that is deployed to, and implemented by, customers in a similar manner. DIRTT’s chief operating decision maker is the executive leadership team that includes the chief operating officer, chief financial officer, and the chief executive officer.
Segment profit and loss reconciliation to net income (loss) after tax
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
($ in thousands) |
|
|||||
Revenue |
|
|
|
|
|
|
||
Gross Profit |
|
|
|
|
|
|
||
Gross Profit Margin |
|
|
% |
|
|
% |
||
Operating expenses (1) |
|
|
|
|
|
|
||
Operating income (loss) |
|
|
( |
) |
|
|
( |
) |
Other income/(expenses) and gains/(losses) (2) |
|
|
|
|
|
( |
) |
|
Net income (loss) after tax |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Reconciliation of profit or loss |
|
|
|
|
|
|
||
Adjustments and reconciling items |
|
|
|
|
|
|
||
Net income (loss) after tax |
|
|
|
|
|
( |
) |
|
(1)
(2)
13. INCOME TAXES
As at March 31, 2024, the Company had a valuation allowance of $
14. RIGHTS OFFERING
On November 21, 2023, the Company announced that the Board of Directors had approved a rights offering (the “Rights Offering”) to its common shareholders for aggregate gross proceeds of C$
In connection with the Rights Offering, the Company entered into a standby purchase agreement, dated November 20, 2023 (the “Standby Purchase Agreement”) with 22NW Fund, LP (“22NW”) and 726 BC LLC and 726 BF LLC (together, “726”), or their permitted assigns (collectively and including WWT Opportunity #1 LLC, to which 726 transferred all of their common shares to on December 1, 2023, the “Standby Purchasers”). Subject to the terms and conditions of the Standby Purchase Agreement, each Standby Purchaser agreed to exercise its Basic Subscription Privilege (as defined below) in full and to collectively purchase from the Company, at the subscription price, all common shares not subscribed for by holders of Rights (as defined below) under the Basic Subscription Privilege or Additional Subscription Privilege (as defined below), up to a maximum of C$
On January 9, 2024, the Company announced the completion of the Rights Offering to its common shareholders and the issuance of
21
DIRTT issued an aggregate of
15. COMMITMENTS
As at March 31, 2024, the Company had outstanding purchase obligations of approximately $
Subsequent to March 31, 2024, the Company extended the term of the lease agreement for the Calgary headquarters by
16. RELATED PARTY TRANSACTIONS
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the “Debt Settlement Agreement”) with 22NW and Aron English, 22NW’s principal and a director of DIRTT, (together, the “22NW Group”) who, collectively, beneficially owned approximately
Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. The liability as at March 31, 2023 was revalued using the closing common share price at March 31, 2023, and a $
In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of
Other related party transactions for the three months ended March 31, 2024 and March 31, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $nil and $
As at March 31, 2024, C$
22
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.
Summary of Financial Results
DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction. DIRTT’s system of physical 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 design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partners of the Company, including AWI which owns a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI.
Key First Quarter Highlights
23
Pipeline
Qualified leads, defined as quantity of projects being pursued, and our pipeline, defined as working with an engaged client on assessment of DIRTT as a prefabricated interior solution provider are disclosed below. We use these to measure expected near term performance given that our operating environment has been prone to change due to macroeconomic factors such as worksite labor availability, interest rate changes, and potential recessionary impacts on construction projects.
As of April 1, 2024, our twelve-month forward pipeline grew by 7% year-over-year and marginally from January 1, 2024, illustrated in the table below.
|
|
As at |
|
|||||||||||||||||
|
|
April 1, 2024 |
|
|
January 1, 2024 |
|
|
% Change |
|
|
April 1, 2023 |
|
|
% Change |
|
|||||
Twelve Month Forward Pipeline ($ 000s) |
|
|
|
|
|
|
|
|
|
|
||||||||||
Commercial |
|
|
175,203 |
|
|
|
176,789 |
|
|
|
(1 |
) |
|
|
160,636 |
|
|
|
9 |
|
Healthcare |
|
|
45,658 |
|
|
|
41,221 |
|
|
|
11 |
|
|
|
45,900 |
|
|
|
(1 |
) |
Government |
|
|
33,017 |
|
|
|
34,813 |
|
|
|
(5 |
) |
|
|
30,676 |
|
|
|
8 |
|
Education |
|
|
16,505 |
|
|
|
17,117 |
|
|
|
(4 |
) |
|
|
14,987 |
|
|
|
10 |
|
|
|
|
270,383 |
|
|
|
269,940 |
|
|
|
1 |
|
|
|
252,199 |
|
|
|
7 |
|
Leads (#) |
|
|
1,184 |
|
|
|
861 |
|
|
|
38 |
|
|
|
969 |
|
|
|
22 |
|
DIRTT continues to experience pipeline growth as the U.S. economy saw above-trend quarterly GDP growth in the third and fourth quarters of 2023. Our internal and external economic indicators imply continued growth for the twelve-month forward pipeline and the U.S. economy. Our healthcare segment has returned to growth due to several 2025 projects entering our twelve-month view of the pipeline. Due to the inherently long sales cycle in our healthcare segment, this pipeline tends to experience more volatility than our other segments.
We are highly cognizant of two risks facing our business in the year ahead; continued uncertainty in the commercial real estate markets and the possibility of re-inflation in U.S. headline CPI. We are closely monitoring economic data tied to their performance. To mitigate these risks, we are growing the pipeline and implementing strict cost controls to preserve our margins.
24
Outlook
As we continue into 2024, internal indicators and external economic indicators show a positive trajectory for the U.S. economy. Real GDP Growth in the third and fourth quarters of 2023 was above trend. Consumer spending, employment, and construction activity continue to improve from the post-COVID period.
However, we are highly cognizant of two risks facing our business in the year ahead. Firstly, the commercial office market has yet to bottom or return to expansionary activity. As a business with a small overall market penetration, we are focused on cost control and process efficiencies to position ourselves to gain market share. Secondly, we are closely monitoring our input costs amid the likelihood that the U.S. Federal Reserve will not return headline CPI to a 2% annualized rate. Additionally, a recent proposal by President Biden to triple tariffs on Chinese aluminum to 22.5% as well as to sanction Russian aluminum on the London Metal Exchange have created price inflation in our primary material input. If the increase in aluminum prices persists, we will have to consider the effect on our business, including consideration of increasing prices in response.
Even as we face these risks, we have positioned DIRTT over the past year to better withstand adverse economic conditions. Our gross profit margin in the first quarter of 2024 compared to the first quarter of 2023 improved from 23.7% to 35.9%. Our Adjusted Gross Profit Margins have improved from 28.5% to 37.9% year-over-year. Furthermore, our operating expenses decreased by 21% compared to the first quarter of 2023. All these efforts yielded Adjusted EBITDA Margin of 6.5% in the first quarter of 2024 compared to (9.6)% in the first quarter of 2023.
With the Rights Offering completed in the first quarter of 2024, we have improved our cash balance from $8.1 million at March 31, 2023 to $39.0 million as of March 31, 2024. We have also deleveraged our balance sheet through the Issuer Bid, pursuant to which we repurchased C$10.5 million ($7.8 million) principal amount of our Debentures in March 2024.
As we continue to ramp up into our seasonally stronger quarters, we are preparing to preserve our Adjusted Gross Profit Margins and delivering on-time and in-full to our valued customers. We will continue to invest in our commercial business and pursue opportunities and partnerships to support our revenue growth.
Non-GAAP Financial Measures
Note Regarding Use of Non-GAAP Financial Measures
Our condensed consolidated interim financial statements are prepared in accordance with GAAP. These GAAP financial statements include non-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult.
As a result, we also provide financial information 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 these non-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance period-over-period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange movements), asset base (depreciation and amortization), tax consequences, reorganization expense, one-time non-recurring charges or gains (such as gain on extinguishment of debt), and stock-based compensation. We remove the impact of foreign exchange gain (loss) 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. 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 on non-GAAP financial measures, primarily Adjusted EBITDA.
Government subsidies, depreciation and amortization, stock-based compensation expense, reorganization expense, foreign exchange gains and losses and impairment charges are excluded from our non-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those 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.
25
The following non-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 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 to remove foreign exchange gains or losses; impairment charges; reorganization expenses; stock-based compensation expense; government subsidies; one-time, non-recurring charges and gains; and any other non-core gains or losses |
|
|
Adjusted EBITDA Margin |
Adjusted EBITDA divided by revenue |
You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Results of Operations
Three Months Ended March 31, 2024, Compared to the Three Months Ended March 31, 2023
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
|
|
($ in thousands) |
|
|||||||||
Revenue |
|
|
40,847 |
|
|
|
36,708 |
|
|
|
11 |
|
Gross Profit |
|
|
14,648 |
|
|
|
8,682 |
|
|
|
69 |
|
Gross Profit Margin |
|
|
35.9 |
% |
|
|
23.7 |
% |
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|||
Sales and marketing |
|
|
5,920 |
|
|
|
5,515 |
|
|
|
7 |
|
General and administrative |
|
|
4,566 |
|
|
|
5,833 |
|
|
|
(22 |
) |
Operations support |
|
|
1,775 |
|
|
|
1,990 |
|
|
|
(11 |
) |
Technology and development |
|
|
1,251 |
|
|
|
1,539 |
|
|
|
(19 |
) |
Stock-based compensation |
|
|
675 |
|
|
|
796 |
|
|
|
(15 |
) |
Reorganization |
|
|
138 |
|
|
|
1,071 |
|
|
|
(87 |
) |
Impairment charge on Rock Hill Facility |
|
|
530 |
|
|
|
- |
|
|
|
100 |
|
Related party expense |
|
|
- |
|
|
|
2,056 |
|
|
|
(100 |
) |
Total operating expenses |
|
|
14,855 |
|
|
|
18,800 |
|
|
|
(21 |
) |
Operating income (loss) |
|
|
(207 |
) |
|
|
(10,118 |
) |
|
|
98 |
|
Operating margin |
|
|
(0.5 |
)% |
|
|
(27.6 |
)% |
|
|
|
|
Government subsidies |
|
|
- |
|
|
|
148 |
|
|
|
(100 |
) |
Gain on extinguishment of convertible debt |
|
|
2,931 |
|
|
|
- |
|
|
|
100 |
|
Foreign exchange gain (loss) |
|
|
919 |
|
|
|
(261 |
) |
|
|
452 |
|
Interest income |
|
|
489 |
|
|
|
4 |
|
|
|
12,125 |
|
Interest expense |
|
|
(1,054 |
) |
|
|
(1,207 |
) |
|
|
13 |
|
|
|
|
3,285 |
|
|
|
(1,316 |
) |
|
|
350 |
|
Net profit (loss) before tax |
|
|
3,078 |
|
|
|
(11,434 |
) |
|
|
127 |
|
Current and deferred income tax expense |
|
|
33 |
|
|
|
- |
|
|
|
100 |
|
|
|
|
33 |
|
|
|
- |
|
|
|
100 |
|
Net income (loss) after tax |
|
|
3,045 |
|
|
|
(11,434 |
) |
|
|
127 |
|
|
|
|||||||||||
26
Revenue
Revenue reflects sales to our Construction 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:
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
|
|
($ in thousands) |
|
|||||||||
Product |
|
|
34,876 |
|
|
|
31,481 |
|
|
|
11 |
|
Transportation |
|
|
3,955 |
|
|
|
3,788 |
|
|
|
4 |
|
License fees from Construction Partners |
|
|
208 |
|
|
|
207 |
|
|
|
0 |
|
Total product revenue |
|
|
39,039 |
|
|
|
35,476 |
|
|
|
10 |
|
Installation and other services |
|
|
1,808 |
|
|
|
1,232 |
|
|
|
47 |
|
|
|
|
40,847 |
|
|
|
36,708 |
|
|
|
11 |
|
Revenue for the three months ended March 31, 2024, was $40.8 million, an increase of $4.1 million compared to $36.7 million in the comparative period of 2023 as the first quarter of 2024 included a higher volume of larger projects than the first quarter of 2023 in the commercial sector, particularly in the retail and finance industries, as well as the government sector.
Installation and other services revenue was $1.8 million for the quarter ended March 31, 2024 compared to $1.2 million in the quarter ended March 31, 2023. This revenue primarily reflects services performed by our ICE and design teams for third parties. Except in limited circumstances, our Construction Partners, rather than the Company, perform installation services; accordingly, we are not anticipating significant growth in this revenue stream.
Our success is partly dependent on our ability to profitably develop our Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. At March 31, 2024, we had 74 Construction Partners (March 31, 2023: 67; December 31, 2023: 72) servicing multiple locations.
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. While all sectors have been challenged by the macroeconomic factors discussed previously, we are seeing increased growth in our commercial sector. We believe that an increase in new construction starts and the heightened need for adaptability and flexibility in the years after the COVID-19 pandemic have increased the demand for our products. We continue to see growth opportunities in the healthcare and education sectors and have restructured our sales leadership function, prioritizing oversight of these verticals.
The following table presents our product and transportation revenue by vertical market:
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
|
|
($ in thousands) |
|
|||||||||
Commercial |
|
|
30,179 |
|
|
|
24,504 |
|
|
|
23 |
|
Healthcare |
|
|
3,049 |
|
|
|
6,171 |
|
|
|
(51 |
) |
Government |
|
|
3,475 |
|
|
|
2,707 |
|
|
|
28 |
|
Education |
|
|
2,128 |
|
|
|
1,887 |
|
|
|
13 |
|
License fees from Construction Partners |
|
|
208 |
|
|
|
207 |
|
|
|
0 |
|
Total product revenue |
|
|
39,039 |
|
|
|
35,476 |
|
|
|
10 |
|
Service revenue |
|
|
1,808 |
|
|
|
1,232 |
|
|
|
47 |
|
|
|
|
40,847 |
|
|
|
36,708 |
|
|
|
11 |
|
27
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(in %) |
|
|||||
Commercial |
|
|
78 |
|
|
|
70 |
|
Healthcare |
|
|
8 |
|
|
|
17 |
|
Government |
|
|
9 |
|
|
|
8 |
|
Education |
|
|
5 |
|
|
|
5 |
|
Total Product Revenue(1) |
|
|
100 |
|
|
|
100 |
|
(1) Excludes license fees from Construction Partners.
Commercial revenues increased by 23% from the prior year period. Healthcare revenues decreased by 51% in the first quarter of 2024 from the same period of 2023. The quarter ended March 31, 2023 included a higher volume of large healthcare projects compared to the quarter ended March 31, 2024. 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. Government revenues in the first quarter of 2024 increased by 28% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the first quarter of 2024 increased 13% from the same period of 2023. The education sector included a higher magnitude of smaller projects in the first quarter of 2024 than in the first quarter of 2023.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States. The following table presents our revenue dispersion by geography:
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
|
|
($ in thousands) |
|
|||||||||
Canada |
|
|
3,069 |
|
|
|
4,912 |
|
|
|
(38 |
) |
U.S. |
|
|
37,778 |
|
|
|
31,796 |
|
|
|
19 |
|
|
|
|
40,847 |
|
|
|
36,708 |
|
|
|
11 |
|
The first quarter of 2024 included a higher proportion of sales to customers in the United States than to those in Canada, 8% of sales for the period were in Canada, with the rest occurring in the United States, compared to 13% of sales to Canada in the first quarter of 2023. Historically, approximately 11-15% and 85-89% of DIRTT’s revenues have been derived from sales to Canada and the United States, respectively.
Sales and Marketing Expenses
Sales and marketing expenses increased by $0.4 million to $5.9 million for the three months ended March 31, 2024 from $5.5 million for the three months ended March 31, 2023. The increase was driven by a $0.5 million increase in salaries and benefits, a $0.2 million increase in commissions costs and a $0.1 million increase in professional services costs associated with recruiting efforts, offset by a $0.4 million decrease in building and office expenses.
General and Administrative Expenses
General and administrative expenses decreased by $1.3 million to $4.6 million for the three months ended March 31, 2024 from $5.8 million for the three months ended March 31, 2023. The decrease was primarily related to a $0.4 million decrease in professional services costs (which included a $0.8 million insurance recovery and $0.5 million costs associated with the Issuer Bid), a $0.4 million decrease in salaries and benefits costs, a $0.3 million decrease in office costs and communications costs, a $0.2 million decrease in public company costs and Board of Directors fees, and a $0.1 million decrease in travel and entertainment costs. These decreases were offset by $0.2 million higher operating costs in our leased office space.
Operations Support Expenses
Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Construction Partner project execution and our manufacturing operations. Operations support expenses decreased by $0.2 million from $2.0 million for the three months ended March 31, 2023 to $1.8 million for the three months ended March 31, 2024. The decrease was primarily related to a $0.1 million decrease in salaries and benefits costs and a $0.1 million decrease in professional service costs.
28
Technology and Development Expenses
Technology and development expenses relate to non-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 decreased by $0.2 million to $1.3 million for the three months ended March 31, 2024, compared to $1.5 million for the three months ended March 31, 2023, primarily related to a $0.2 million decrease in salaries and benefits costs.
Stock-Based Compensation
Stock-based compensation expense for the three months ended March 31, 2024 was $0.7 million compared to $0.8 million in the same period of 2023. The decrease in this expense was largely due to a higher number of RSUs compared to the prior year’s period. The decrease in RSU expense was offset by a higher DSU expense as a result of a higher share price during the first quarter of 2024.
Reorganization
Reorganization expenses for the quarter of $0.1 million decreased from $1.1 million in the prior period. Current quarter costs relate primarily to movement of inventory from the Rock Hill Facility, while the reorganization costs in the first quarter of 2023 were largely made up of termination costs associated with actions taken to streamline our back office and operational support functions. No new reorganization initiatives were undertaken in the first quarter of 2024.
Impairment Charge on Rock Hill Facility
On September 27, 2023, the Company decided to permanently close the Rock Hill Facility in South Carolina. Certain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. At March 31, 2024, we determined that the assets held for sale balance of $0.5 million was to be reduced to $nil resulting in a $0.5 million impairment charge for the quarter. While we will continue to pursue a sale of the assets, we were not able to determine the likelihood of recoverability based on the current market interest in the equipment.
Gain on Extinguishment of Debt
The Company recognized a gain on extinguishment of debt of C$3.9 million ($2.9 million) following the Issuer Bid. At the expiration of the Issuer Bid, C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of December Debentures were validly deposited and not withdrawn, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Issuer Bid for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)). In accordance with GAAP, it was determined that the C$6.9 million ($5.1 million) repayment on principal triggered an extinguishment of debt. The gain on extinguishment of C$3.9 million ($2.9 million) of debt was calculated as the difference between the repayment and the net carrying value of the extinguished principal less unamortized issuance costs of C$0.4 million ($0.2 million).
Related Party Expense
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW Fund, LP ("22NW") and Aron English, 22NW's principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being $1.6 million (the “Debt”).
Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group.
29
In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by shareholders.
At the annual general and special meeting of shareholders held on May 30, 2023 shareholders voted to approve the issuance of common shares, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.
Government Subsidies
The Company was not eligible for, and did not receive, any new government subsidies in the quarter ended March 31, 2024. Comparatively, the Company received $0.1 million of interest with the collection of the Emergency Retention Credit during the three months ended March 31, 2023.
Interest Expense
Interest expense decreased by $0.1 million from $1.2 million in the quarter ended March 31, 2023, to $1.1 million in the quarter ended March 31, 2024, due to foreign exchange impacts of a weakening Canadian dollar and the decrease in equipment lease balances caused by early settlement of the U.S. Leasing Facility (as defined herein) in the fourth quarter of 2023.
Income Tax
The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. As at March 31, 2024, the Company had a valuation allowance of $33.9 million (December 31, 2023: $34.5 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. The Company will continue to evaluate indicators on whether a valuation allowance continues to be needed. For the quarter ended March 31, 2024, the Company utilized a balance of its non-capital loss carry-forwards in Canada and the United States. As at March 31, 2024, we had C$107.6 million of non-capital loss carry-forwards in Canada and $55.0 million in the United States. These loss carry-forwards will begin to expire in 2035.
Net Income After Tax
Net income after tax increased to $3.0 million or $0.02 basic and $0.01 diluted net income per share, respectively, in the three months ended March 31, 2024, from a net loss after tax of $11.4 million or a $0.10 basic and diluted net loss per share for the three months ended March 31, 2023. The increase in net income is primarily the result of a $6.0 million higher gross profit, a $3.9 million decrease in operating expenses, which includes a $0.9 million decrease in reorganization expenses offset by a $0.5 million impairment charge related to the Rock Hill Facility closure, a $2.9 million gain on extinguishment of debt, a $1.2 million increase in foreign exchange gain, a $0.5 million increase in interest income, and a $0.1 million decrease in interest expense. These were offset by a $0.1 million decrease in government subsidies.
30
EBITDA and Adjusted EBITDA for the Three Months Ended March 31, 2024 and 2023
The following table presents a reconciliation for the results of the three months ended March 31, 2024 and 2023 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
($ in thousands) |
|
|||||
Net income (loss) after tax for the period |
|
|
3,045 |
|
|
|
(11,434 |
) |
Add back (deduct): |
|
|
|
|
|
|
||
Interest expense |
|
|
1,054 |
|
|
|
1,207 |
|
Interest income |
|
|
(489 |
) |
|
|
(4 |
) |
Income tax expense |
|
|
33 |
|
|
|
- |
|
Depreciation and amortization |
|
|
1,534 |
|
|
|
2,675 |
|
EBITDA |
|
|
5,177 |
|
|
|
(7,556 |
) |
Foreign exchange (gain) loss |
|
|
(919 |
) |
|
|
261 |
|
Stock-based compensation |
|
|
675 |
|
|
|
796 |
|
Government subsidies |
|
|
- |
|
|
|
(148 |
) |
Related party expense(2) |
|
|
- |
|
|
|
2,056 |
|
Reorganization expense(3) |
|
|
138 |
|
|
|
1,071 |
|
Gain on extinguishment of convertible debt(3) |
|
|
(2,931 |
) |
|
|
- |
|
Impairment charge on Rock Hill Facility (3) |
|
|
530 |
|
|
|
- |
|
Adjusted EBITDA |
|
|
2,670 |
|
|
|
(3,520 |
) |
Net Income (Loss) Margin(1) |
|
|
7.5 |
% |
|
|
(31.1 |
)% |
Adjusted EBITDA Margin |
|
|
6.5 |
% |
|
|
(9.6 |
)% |
(1) Net income (loss) after tax divided by revenue.
(2) The related party transaction is a non-recurring transaction that is not core to our business and is excluded from the Adjusted EBITDA calculation (Refer to Note 16 of the consolidated interim financial statements).
(3) Reorganization expenses, the gain on extinguishment of convertible debt and the impairment charge on the Rock Hill Facility are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (Refer to Note 4 and Note 5 of the consolidated interim financial statements).
For the three months ended March 31, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $6.2 million to $2.7 million and 6.5%, respectively, from a $3.5 million loss and (9.6)% in the same period of 2023. This primarily reflects a $5.0 million increase in Adjusted Gross Profit, a $0.4 million decrease in professional services costs, a $0.6 million decrease in office, building and communication costs and a $0.2 million decrease in other discretionary operating expenses.
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended March 31, 2024 and 2023
The following table presents a reconciliation for the three months ended March 31, 2024 and 2023 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
($ in thousands) |
|
|||||
Gross profit |
|
|
14,648 |
|
|
|
8,682 |
|
Gross profit margin |
|
|
35.9 |
% |
|
|
23.7 |
% |
Add: Depreciation and amortization expense |
|
|
844 |
|
|
|
1,783 |
|
Adjusted Gross Profit |
|
|
15,492 |
|
|
|
10,465 |
|
Adjusted Gross Profit Margin |
|
|
37.9 |
% |
|
|
28.5 |
% |
For the quarter ended March 31, 2024, gross profit and gross profit margin increased to $14.6 million and 35.9%, respectively, from $8.7 million and 23.7% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to $15.5 million and 37.9% for the three months ended March 31, 2024, from $10.5 million and 28.5% for the three months ended March 31, 2023.
31
The improvement in Adjusted Gross Profit was a result of improved product mix, a reduction in fixed costs, and management of labor hours throughout the period to offset the inflationary impacts on material costs. Fixed costs decreased $0.6 million for the quarter ended March 31, 2024 as we aligned overhead costs and support with current operations after having finalized the decision to close the Rock Hill Facility in the third quarter of 2023. Idle facility costs incurred at the Rock Hill Facility were $0.5 million for the three months ended March 31, 2024 (2023 – $0.4 million). We continue to evaluate options to sublease the Rock Hill Facility to recover the costs of the facility.
Liquidity and Capital Resources
As at March 31, 2024, the Company had $39.0 million of cash on hand and C$10.1 million ($8.5 million) of available borrowings, compared to $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available borrowings as at December 31, 2023. Through the first three months of fiscal 2024, the Company generated $14.1 million of cash flow compared to a cash usage of $2.7 million in the first three months of fiscal 2023. Cash generated included cash flows from the Rights Offering of $21.3 million and improved operational results, offset by a decrease in working capital of $10.6 million (mainly due to timing of payables and $5.2 million repayment of debt under the Issuer Bid).
We have implemented multiple price increases to mitigate the impact of inflation on raw materials and improve liquidity during the past two years. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to stabilize our cash usage to operate the business. Gross profit for the three months ended March 31, 2024 was $14.6 million, or 35.9%. The same period of 2023 generated gross profit of $8.7 million, or 23.7%.
Over the same period, we have executed upon several initiatives to improve liquidity. First, in May 2023, we entered into an agreement with AWI resulting in the receipt of $12.8 million of cash throughout 2023. Second, in March 2023, we entered into an agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024, providing us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities, including our Rock Hill Facility, and expect these initiatives to result in positive cash inflows in 2024. Third, we completed a private placement of 8,667,449 common shares in November 2022 for aggregate gross proceeds of $2.8 million (the “Private Placement”), with certain significant shareholders and directors and officers of the Company to bridge cash requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable subscription agreements with its two largest shareholders, 22NW and 726 BC LLC and 726 BF LLC (together “726” (which subsequently transferred its holdings to WWT Opportunity #1) and all the directors and officers of the Company on November 14, 2022, to issue 8.7 million shares for gross consideration of $2.8 million. The Private Placement closed on November 30, 2022.
On November 21, 2023, the Company announced the Rights Offering, which closed on January 9, 2024, for aggregate gross proceeds of C$30.0 million and net proceeds of $21.3 million.
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets.
On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company offered to repurchase for cancellation: (i) up to C$6,000,000 principal amount of the January Debentures at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of the December Debentures at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tendered and did not withdraw their Debentures received the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures were taken up by the Company. The applicable purchase price was denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for interest, were
32
made in Canadian dollars. The Issuer Bid expired on March 22, 2024 and DIRTT purchased C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of the December Debentures, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Offer for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)).
While we are encouraged by the improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of recent macroeconomic uncertainty. We have implemented multiple restructuring initiatives designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by approximately 16% from January 2022 through March 2024.
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 January 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the January Debentures was adjusted to C$4.03 per common share, representing a conversion rate of 248.1390 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$4.7 million ($3.5 million) of the principal balance of the January Debentures and paid C$0.04 million ($0.03 million) of the interest payable on such January Debentures. As at March 31, 2024, C$18.9 million ($13.9 million) principal amount of the January Debentures are held by a related party, 22NW. Aron English, manager of 22NW Fund GP, LLC, the general partner of 22NW, is a director of the Company.
On December 1, 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 are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and be repayable on December 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the December Debentures was adjusted to C$3.64 per common share, representing a conversion rate of 274.7253 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$5.8 million ($4.3 million) of the principal balance of the December Debentures and paid C$0.08 million ($0.06 million) of the interest payable on such December Debentures. As at March 31, 2024, C$13.6 million ($10.0 million) principal amount of the December Debentures are held by a related party, 22NW.
In February 2021, we entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a borrowing base of C$15 million and a one-year term. Effective October 2023, inventory was scoped out of the Borrowing Base. On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Refer to discussion in “Credit Facility” herein for additional information.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) with RBC of which C$4.4 million ($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%. During 2023, the Company had a $14.0 million equipment leasing facility, with RBC and one of its affiliates, in the United States, of which $13.3 million was drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”). In connection with the Company’s decision to close the Rock Hill Facility, we settled the liability related to the U.S. Leasing Facility ($7.8 million). The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we released $2.6 million of restricted cash during 2023.
33
The following table summarizes our consolidated cash flows for the periods indicated:
|
|
|
|
For The Three Months Ended March 31, |
|
|||||
|
|
|
|
2024 |
|
|
2023 |
|
||
|
|
|
|
($ in thousands) |
|
|||||
Net cash flows used in operating activities |
|
|
|
|
(2,043 |
) |
|
|
(988 |
) |
Net cash flows provided by (used in) investing activities |
|
|
|
|
281 |
|
|
|
(983 |
) |
Net cash flows provided by (used in) financing activities |
|
|
|
|
16,123 |
|
|
|
(668 |
) |
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
|
|
|
(230 |
) |
|
|
(36 |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
14,131 |
|
|
|
(2,675 |
) |
Cash, cash equivalents and restricted cash, beginning of year |
|
|
|
|
25,099 |
|
|
|
14,239 |
|
Cash, cash equivalents and restricted cash, end of period |
|
|
|
|
39,230 |
|
|
|
11,564 |
|
Operating Activities
Net cash flows used in operating activities were $2.0 million for the three months ended March 31, 2024 compared to $1.0 million in the same period of 2023. The increase in cash flows used in operations is largely due to a $10.6 million decrease in working capital compared to the first quarter of 2023, offset by the $6.2 million increase in Adjusted EBITDA and a $0.9 million decrease in reorganization expenses. Working capital in the first quarter of 2023 benefited from the receipt of $4.8 million related to the Employee Retention Credit and the elimination of the quick pay discount for our customers during the third quarter of 2023. First quarter 2024 working capital was impacted by the timing of payables relative to period end.
Investing Activities
We invested $0.3 million in property, plant and equipment during the three months ended March 31, 2024, compared to $0.4 million in the three months ended March 31, 2023. This expenditure consisted of $0.1 million of information technology and $0.2 million of manufacturing upgrades in the first quarter of 2024. We invested $0.4 million on capitalized software during the three months ended March 31, 2024, compared to $0.5 million for the three months ended March 31, 2023. During the first quarter of 2024, we sold $1.0 million of assets classified as held for sale as a result of the closure of the Rock Hill Facility, for proceeds of $1.0 million.
Financing Activities
For the three months ended March 31, 2024, $16.1 million of cash was provided by financing activities compared to $0.7 million of cash used for the same period of the prior year. The cash provided comprised mainly of $21.3 million of net proceeds received from the Rights Offering offset by $5.1 million repayment of Debentures as a result of the Issuer Bid and scheduled payments under the Leasing Facilities. During the three months ended March 31, 2024, we incurred $0.1 million of spend on employee tax payments on vesting of RSUs, compared to $0.03 million in the same period of 2023.
Credit Facility
On February 12, 2021, the Company entered into the RBC Facility. Under the RBC Facility, the Borrowing Base is up to 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. Interest was calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under 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 was subject to a fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR was below 1.10:1 for the three immediately preceding months, the Company was required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. Had an event of default occurred or the Aggregate Excess Availability been less than C$6.25 million for five consecutive business days, the Company would have entered a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances would set-off any borrowings and any remaining amounts made available to the Company.
34
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility had a maximum borrowing base of C$15 million and a one-year term. Interest was calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 200 basis points. Under the Extended RBC Facility, until such time that the trailing twelve-month FCCR was above 1.25 for three consecutive months, a cash balance equivalent to one-year’s worth of Leasing Facilities payments would be maintained. Effective October 2023, inventory was scoped out of the Borrowing Base.
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The maximum availability under the Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case, plus 200 basis points. At March 31, 2024, available borrowings are C$10.1 million ($8.5 million) (December 31, 2023 – C$13.6 million ($10.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The Second Extended RBC Facility removed the three-month FCCR covenant, which resulted in the release of $0.1 million of restricted cash during the first quarter of 2024 (the Company had $0.4 million restricted cash as at December 31, 2023).
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.
As part of the decision to close the Rock Hill Facility, the Company fully settled the liability related to the U.S. Leasing Facility of $7.8 million in the fourth quarter of 2023. The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, $2.6 million was released from restricted cash during 2023.
The Company did not make any draws on the Canadian Leasing Facilities during the first quarter of 2024 and the year ended December 31, 2023 under the Canada Leasing Facility.
We are restricted from paying dividends unless Payment Conditions (as defined in the Second Extended RBC Facility) are met, including having a net borrowing availability of at least C$10 million over the proceeding 30-day period, and having a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. The Second Extended RBC Facility is currently secured by substantially all of our real property located in Canada and the United States.
Contractual Obligations
Since our disclosure in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, the following material contractual changes have occurred:
See Note 15, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information.
Significant Accounting Policies and Estimates
There have been no material changes in our significant accounting policies during the three months ended March 31, 2024, 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 Annual Report on Form 10-K. For information regarding significant accounting policies and estimates, please refer to Item 7 and Item 8 in our Annual Report on Form 10-K. As disclosed in Note 3, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report.
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Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, please refer to Note 3, “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 Annual Report on Form 10-K. For information regarding our exposure to certain market risks, please refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K. The Company’s cash and cash equivalents are predominantly all with one AA rated financial institution.
Item 4. Controls and Procedures
Disclosure 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 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 officers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our principal executive officers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2024. Based upon their evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
DIRTT is pursuing multiple lawsuits against its founders, Mogens Smed and Barrie Loberg, as well as Falkbuilt Ltd. and Falkbuilt, Inc. (collectively, “Falkbuilt”) and related individuals and corporations. DIRTT alleges breaches of fiduciary duties and non-competition and non-solicitation covenants, and the misappropriation of its confidential and proprietary information (in violation of numerous U.S. state and federal laws pertaining to the protection of trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices). Except as described below, there have been no material developments in the legal proceedings previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
DIRTT’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates is comprised of three main lawsuits: (i) an action in the Alberta Court of King’s Bench commenced on May 9, 2019 against Falkbuilt, Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty, fidelity and confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Smed, and other individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade secrets, business intelligence and customer information (the “Utah Misappropriation Case”); and (iii) an action in the U.S. District Court for the Northern District of Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States and intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business intelligence, with the aim of establishing a competing business in the United States market (the “Texas Unfair Competition Case”). DIRTT intends to pursue the cases vigorously.
We recently requested the Court of King’s Bench of Alberta to schedule the summary judgment application for our Canadian litigation. The court has proposed three potential dates in September 2025 and we expect to have the date finalized in the next several weeks. In the Canadian Non-Compete Case, on February 14, 2023, the Court of King’s Bench of Alberta granted DIRTT’s application to schedule the hearing of its summary judgment application and dismissed Falkbuilt’s cross-application to strike the summary judgment application. DIRTT’s. The is aggressively pursuing its summary judgment application has been scheduled for September 22-26, 2025.
In the Utah Misappropriation Case, on April 11, 2023, the United States Court of Appeals for the Tenth Circuit reversed the U.S. District Court for the Northern District of Utah’s decision that Utah was an inconvenient forum for DIRTT’s claims against Falkbuilt and others for the misappropriation of confidential information, trade secrets, business intelligence and customer information. The Utah Court had previously, and erroneously, found that DIRTT’s United States-based claims should be litigated in Canada. The Court of Appeals remanded the matter back to the Utah District Court. Falkbuilt filed motions to stay the Tenth Circuit decision pending its petition for a Writ of Certiorari to the Supreme Court of the United States. The Court of Appeals promptly denied the motion to stay. A similar motion subsequently filed with the Supreme Court of the United States on the same basis was also promptly denied. Fallkbuilt also petitioned the Supreme Court to accept review, even after losing the stay motion, that petition was also denied in early October.
The Texas Unfair Competition Case was dismissed, without prejudice, in reliance upon the now-reversed decision in the Utah Misappropriation Case, described above. DIRTT appealed that decision, and the United States Court of Appeals for the Fifth Circuit stayed the appeal pending the Tenth Circuit ruling at Falkbuilt's request. After prevailing in the Tenth Circuit, DIRTT asked Falkbuilt if it would, consistent with its prior representations, agree to remand the appeal to the Texas Court for disposition to Utah. Falkbuilt refused and DIRTT filed a Motion to Remand. The Court denied the Motion for Remand without prejudice and asked for full briefing. Prior to the argument, DIRTT sought leave to amend the Utah claims to include the Texas claims and notified the Fifth Circuit Court of Appeals of the proposed amendment in Utah. Falkbuilt did not object to the amendment, but answered the Complaint and reserved the right to dismiss the Amended Complaint on grounds of inconvenient forum or international comity. The Amended Complaint not only presents the Texas claims in Utah but also updates DIRTT’s allegations as to events and damages incurred during the time the parties were participating in the appellate process. Argument proceeded on December 7, 2023 in New Orleans. The Tenth Circuit ultimately denied Falkbuilt’s appeal to have the Texas claims joined in Canada and those claims are in Utah. Notwithstanding all the prior litigation, Falkbuilt has again moved to stay the Utah case and move it, including the Texas claims, to Canada. DIRTT has vigorously opposed these motions and commenced discovery. Falkbuilt’s response to pending discovery are due shortly. Briefing on Falkbuilt’s motion to stay the case and renewed motion to move it to Canada will be fully briefed shortly. DIRTT is proceeding as though the Motions will be denied.
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On April 25, 2024, DIRTT filed a Statement of Claim at the Court of the King’s Bench of Alberta against McMillan LLP, one of their partners and several former Directors of DIRTT for negligence and breach of fiduciary duties. The Claim explains that as a result DIRTT has suffered loss and damages and seeks compensation for damages of approximately C$30 million.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
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Item 6. Exhibits
EXHIBIT INDEX
Exhibit No. |
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Description |
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3.1 |
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3.2 |
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4.1 |
|
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4.2 |
|
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4.3 |
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4.4 |
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10.1*† |
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10.2 |
|
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10.3 |
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10.4 |
|
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31.1* |
|
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31.2* |
|
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32.1** |
|
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32.2** |
|
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101.INS* |
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Inline XBRL Instance Document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
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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 |
** |
|
Furnished herewith |
|
|
|
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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.
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DIRTT ENVIRONMENTAL SOLUTIONS LTD. |
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By: |
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/s/ Fareeha Khan |
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Fareeha Khan |
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|
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Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) |
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Date: May 8, 2024 |
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