..
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) |
|
N/A (IRS Employer Identification No.) |
|
|
|
|
|
(Address of principal executive offices) |
|
(Zip code) |
(Registrant’s telephone number, including area code): (
Securities registered pursuant to Section 12(b) of the Exchange Act:
|
Title of Each Class |
|
Trading Symbol(s) |
|
Name of Each Exchange on Which Registered |
|
|
|
|
|
|
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 |
|
☐ |
|
|
☒ |
|
|
|
|
|
|
|
|
Non-accelerated filer |
|
☐ |
Smaller reporting company |
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging growth company |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The registrant had
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
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, 2022 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.
Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects include, but are not limited to, the severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 23, 2022 (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:
|
|
• |
the impact of the COVID-19 pandemic and any strain variants or resurgences thereof on our business; |
|
|
• |
our ability to implement our strategic plan, including realizing on certain cost-optimization initiatives undertaken in 2022; |
|
|
• |
the effect of the cost saving initiatives the Company announced in February 2022; |
|
|
• |
turnover of our key executives, recruitment efforts to find a permanent chief executive officer, and difficulties in recruiting or retaining key employees; |
|
|
• |
the ability of our reconstituted board of directors to successfully implement its transformation plan; |
|
|
• |
our ability to maintain and manage growth effectively; |
|
|
• |
competition in the interior construction industry; |
|
|
• |
competitive behaviors by our co-founders and former executives; |
|
|
• |
the condition and changing trends of the overall construction industry; |
|
|
• |
our reliance on our network of Distribution Partners (as defined herein) for sales, marketing and installation of our solutions; |
|
|
• |
our ability to introduce new designs, solutions and technology and gain client and market acceptance; |
|
|
• |
defects in our designing and manufacturing software and warranty and product liability claims brought against us; |
|
|
• |
material fluctuations of commodity prices, including raw materials; |
|
|
• |
shortages of supplies of certain key components and materials or disruption in supplies due to global events, including the COVID-19 pandemic; |
|
|
• |
global economic, political and social conditions and financial markets; |
|
|
• |
our exposure to currency exchange rates, tax rates and other fluctuations, including those resulting from changes in laws or administrative practice; |
ii
|
|
• |
legal and regulatory proceedings brought against us; |
|
|
• |
infringement on our patents and other intellectual property; |
|
|
• |
cyber-attacks and other security breaches of our information and technology systems; |
|
|
• |
damage to our information technology and software systems; |
|
|
• |
our requirements to comply with applicable environmental, health and safety laws, including those relating to the COVID-19 pandemic; |
|
|
• |
our ability to generate sufficient revenue to achieve and sustain profitability; |
|
|
• |
our periodic fluctuations in results of operations and financial conditions; |
|
|
• |
volatility of our share price; |
|
|
• |
the effect of being governed by the corporate laws of a foreign country, including the difficulty of enforcing civil liabilities against directors and officers residing in a foreign country; |
|
|
• |
the availability of capital or financing on acceptable terms, which may impact our liquidity and impair our ability to make investments in the business; |
|
|
• |
the availability and treatment of government subsidies (including any current or future requirements to repay or return such subsidies); and |
|
|
• |
future mergers, acquisitions, agreements, consolidations or other corporate transactions we may engage in. |
These risks are not exhaustive. Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Quarterly Report. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not 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)
|
|
|
As at March 31, |
|
|
As at December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
Trade and other receivables, net of expected credit losses of $ |
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
|
|
|
Prepaids and other current assets |
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|
Capitalized software, net |
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets, net |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
Customer deposits and deferred revenue |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and accrued interest |
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities |
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
Long-term lease liabilities |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
Common shares, unlimited authorized without par value, and outstanding at March 31, 2022 and |
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
|
Total Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
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)
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Product revenue |
|
|
|
|
|
|
|
|
|
Service revenue |
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
Product cost of sales |
|
|
|
|
|
|
|
|
|
Costs of under-utilized capacity |
|
|
- |
|
|
|
|
|
|
Service cost of sales |
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
Operations support |
|
|
|
|
|
|
|
|
|
Technology and development |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
Reorganization |
|
|
|
|
|
|
- |
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
( |
) |
|
|
( |
) |
|
Government subsidies |
|
|
|
|
|
|
|
|
|
Foreign exchange loss |
|
|
( |
) |
|
|
( |
) |
|
Interest income |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
|
|
|
Loss before tax |
|
|
( |
) |
|
|
( |
) |
|
Income taxes |
|
|
|
|
|
|
|
|
|
Deferred tax expense |
|
|
- |
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net loss |
|
|
( |
) |
|
|
( |
) |
|
Loss per share |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
|
( |
) |
|
|
( |
) |
|
Weighted average number of shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
|
|
|
|
|
|
Interim Condensed Consolidated Statement of Comprehensive Loss
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Loss for the period |
|
|
( |
) |
|
|
( |
) |
|
Exchange differences on translation of foreign operations |
|
|
|
|
|
|
|
|
|
Comprehensive loss for the period |
|
|
( |
) |
|
|
( |
) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
5
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
||||
|
|
Common |
|
|
Common |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
shareholders’ |
|
||||||
|
|
shares |
|
|
shares |
|
|
capital |
|
|
loss |
|
|
deficit |
|
|
equity |
|
||||||
|
As at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Stock-based compensation |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Foreign currency translation adjustment |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net loss for the period |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
As at March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
As at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Stock-based compensation |
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Issued on vesting of RSUs and Share Awards |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
RSUs and Share Awards withheld to settle employee tax obligations |
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Foreign currency translation adjustment |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net loss for the period |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
As at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
6
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Cash Flows
(Unaudited – Stated in thousands of U.S. dollars)
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
( |
) |
|
|
( |
) |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Stock-based compensation, net of settlements |
|
|
|
|
|
|
|
|
|
Foreign exchange loss |
|
|
|
|
|
|
|
|
|
Accretion of convertible debentures |
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
|
|
- |
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
|
( |
) |
|
|
( |
) |
|
Inventory |
|
|
( |
) |
|
|
|
|
|
Prepaid and other assets, current and long term |
|
|
( |
) |
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
( |
) |
|
Other liabilities |
|
|
- |
|
|
|
|
|
|
Customer deposits and deferred revenue |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and accrued interest |
|
|
( |
) |
|
|
|
|
|
Lease liabilities |
|
|
|
|
|
|
|
|
|
Net cash flows used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment, net of accounts payable changes |
|
|
( |
) |
|
|
( |
) |
|
Capitalized software development expenditures |
|
|
( |
) |
|
|
( |
) |
|
Other asset expenditures |
|
|
( |
) |
|
|
- |
|
|
Recovery of software development expenditures |
|
|
- |
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds received on long-term debt |
|
|
- |
|
|
|
|
|
|
Repayment of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Employee tax payments on vesting of RSUs |
|
|
( |
) |
|
|
- |
|
|
Net cash flows (used in) provided by financing activities |
|
|
( |
) |
|
|
|
|
|
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
( |
) |
|
|
( |
) |
|
Income taxes received |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
7
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 leading technology-driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing ICE® software (“ICE” or “ICE Software”) with integrated in-house manufacturing of its innovative prefabricated interior construction solutions and an extensive network of distribution partners (“Distribution Partners”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods. ICE is also licensed to unrelated companies and Distribution Partners of the Company. 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” and on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to 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, 2022, and its results of operations and cash flows for the three months ended March 31, 2022 and 2021. The condensed balance sheet at December 31, 2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021 included in the Annual Report on Form 10-K of the Company as filed with the U.S. Securities and Exchange Commission and applicable securities commission or similar regulatory authorities in Canada. As described in Note 5, the Company adopted ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance effective
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars. DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT and its subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and certain components of stock-based compensation that are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.
8
Seasonality
Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customer’s construction projects can be influenced by a number of factors including the prevailing economic climate and weather.
3. COVID-19
On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization and has had extraordinary and rapid negative impacts on global societies, workplaces, economies and health systems. The resulting adverse economic conditions have negatively impacted construction activity and consequently DIRTT’s business, with significant negative impacts extending through 2021, 2022 and potentially beyond.
While many construction sites remain open and re-opening strategies have been implemented across North America, certain projects have experienced delays, impacted by both the implementation of social distancing and other safety-related measures and the re-emergence of COVID-19 in certain geographic areas. It is not possible to predict the timing and pace of economic recovery, or the resumption of delayed construction activity and related demand, nor is it possible to predict the impact of such developments on the Company’s ability to achieve its business objectives.
COVID-19 has increased the complexity of estimates and assumptions used to prepare the Company’s consolidated financial statements and the following key sources of estimation uncertainty:
Credit risk
COVID-19 may cause DIRTT’s Distribution Partners and customers to experience liquidity issues and this may result in higher expected credit losses or slower collections. Management continually assesses the impact of COVID-19 on the Company’s Distribution Partners and determined
Liquidity risk
The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections as a result of COVID-19. To address this risk and the uncertainty around the timing of a recovery from COVID-19, the Company issued the Debentures (as defined below) in January and December of 2021, for net proceeds of $
Government subsidies
As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). The CEWS provided the Company with a taxable subsidy in respect of a specific portion of wages paid to Canadian employees during qualifying periods extending from March 15, 2020 to October 23, 2021 based on the percentage decline of certain of the Company’s Canadian sourced revenues during each qualifying period. The Company’s eligibility for the CEWS was subject to change for each qualifying period and was reviewed by the Company for each qualifying period, with amounts being received by the Company for various, but not each, qualifying period. Pursuant to amendments enacted as part of the 2021 Canadian federal budget, the Company is required to repay a portion of the CEWS amounts received for any qualifying period commencing after June 5, 2021 where the aggregate compensation for “specified executives” (within the meaning of the CEWS) during the 2021 calendar year exceeds the aggregate compensation for “specified executives” during the 2019 calendar year. Upon finalization of 2021 compensation to specified executives, approximately C$
9
On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). The CERS provided a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, for qualifying periods extending from September 27, 2020 to October 23, 2021, with the amount of the subsidy available to the Company being based on the percentage decline of certain of the Company’s Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS was subject to change for each qualifying period and was reviewed by the Company for each qualifying period.
The CEWS and CERS programs ended on October 23, 2021. The Company is not eligible and did
Impairment
At March 31, 2022, management determined an impairment provision was not required as our outlook is consistent with the assumptions used in our impairment test undertaken at December 31, 2021. In future periods, if our results or outlook are less than our forecast, this determination may need to be revisited.
4. REORGANIZATION
On February 22, 2022, we commenced the process of closing our Phoenix aluminum manufacturing facility (the “Phoenix Facility”), shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. Additionally, we announced our intention to eliminate a portion of our salaried workforce including manufacturing and office positions along with other cost reduction initiatives. The closure of the Phoenix Facility is expected to be substantially completed in the second quarter of 2022. The Company did
Reorganization costs incurred in the quarter of $
The Company accelerated the depreciation of certain items of property, plant and equipment and capitalized software associated with these decisions resulting in an additional $
5. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
In 2021, the Financial Accounting Standards Board issued Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The ASU provides guidance on required disclosures with respect to government assistance in a company’s notes to the annual financial statements. The amendments in the ASU are effective for periods beginning after December 15, 2021. The Company has adopted this standard effective
Although there are several other new accounting standards issued or proposed by the Financial Accounting Standards Board, 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.
6. TRADE AND OTHER RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and 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
10
for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the 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 wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At March 31, 2022, approximately
Our trade balances are spread over a broad Distribution Partner base, which is geographically dispersed. For the three months ended March 31, 2022
The Company’s aged receivables were as follows:
|
|
|
As at |
|
|||||
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Current |
|
|
|
|
|
|
|
|
|
Overdue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: expected credit losses |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Sales tax receivable |
|
|
|
|
|
|
|
|
|
Income tax receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No adjustment to our expected credit losses of $
7. OTHER LIABILITIES
|
|
|
As at, |
|
|||||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Legal provisions(1) |
|
|
|
|
|
|
|
|
|
DSU liability |
|
|
|
|
|
|
|
|
|
Warranty and other provisions(2) |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
(1) |
The Company has provided $ |
|
(2) |
The following table presents a reconciliation of the warranty and other provisions balance: |
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
As at January 1 |
|
|
|
|
|
|
|
|
|
Adjustments to timber provision |
|
|
- |
|
|
|
( |
) |
|
Additions to warranty provision |
|
|
|
|
|
|
|
|
|
Payments related to warranties |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
11
8. LONG-TERM DEBT
|
|
|
Revolving Credit Facility |
|
|
Leasing Facilities |
|
|
Convertible Debentures |
|
|
Total Debt |
|
||||
|
Balance on January 1, 2021 |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Issuances |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of issue costs |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Principal repayments |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Exchange differences |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on December 31, 2021 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of issue costs |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Principal repayments |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Exchange differences |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2022 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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$
Leasing Facilities
The Company has a C$
During the first quarter of 2022, the Company received $nil (twelve months ended December 31, 2021: $
12
consolidated balance sheet in current other liabilities and long-term debt. Subsequent to March 31, 2022, the Company received C$
Convertible Debentures
On January 25, 2021, the Company completed a C$
On December 1, 2021, the Company completed a C$
9. STOCK-BASED COMPENSATION
In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested share awards, 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 2020 LTIP, the sum of (i)
The Company also maintains the DIRTT Environmental Solutions Ltd. Deferred Share Unit Plan for Non-Employee Directors pursuant to which deferred share units (“DSUs”) are granted to the Company’s non-employee directors. DSUs are settled solely in cash.
Prior to the approval of the 2020 LTIP, the Company granted awards of options under the Stock Option Plan and awards of performance share units (“PSUs”) under the DIRTT Environmental Solutions Ltd. Performance Share Unit Plan (the “PSU Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.
13
Stock-based compensation expense
|
|
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
|
|
2022 |
|
|
2021 |
|
||
|
Equity-settled awards |
|
|
|
|
|
|
|
|
|
|
|
Cash-settled awards |
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes RSUs, Share Awards (as defined below), PSUs, and DSUs activity during the periods:
|
|
|
RSU Time- |
|
|
RSU Performance- |
|
|
Share |
|
|
|
|
|
|
|
|
|
|||
|
|
|
Based |
|
|
Based |
|
|
Awards |
|
|
PSU |
|
|
DSU |
|
|||||
|
|
|
Number of |
|
|
Number of |
|
|
Number of |
|
|
Number of |
|
|
Number of |
|
|||||
|
|
|
units |
|
|
units |
|
|
units |
|
|
units |
|
|
units |
|
|||||
|
Outstanding at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Outstanding at March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
Withheld to settle employee tax obligations |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
Forfeited |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Outstanding at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
Restricted share units (time-based vesting)
Restricted share units that vest based on time have an aggregate time-based vesting period of three years and generally one-third of the RSUs vest every year over a period from the date of grant (“RSUs”). At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The weighted average fair value of the RSUs granted was C$
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 service period. PRSUs awarded in 2020 were forfeited in January 2022 upon the departure of an executive from the Company.
The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$
Based on share price performance since the date of grant,
|
|
% of PRSUs Vesting |
|
||||||||||||||||||
|
|
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
2022 and 2021 PRSUs |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Share awards
During the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive compensation (“Share Awards”). These Share Awards vested upon grant. The fair value of the Share Awards
14
granted was C$
Deferred share units
The fair value of the DSU liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the year. DSUs outstanding at March 31, 2022 had a fair value of $
Performance share units
Under the terms of the PSU Plan, PSUs granted vest at the end of a term. At the end of a three-year term, employees will be awarded cash at the discretion of the board of directors of the Company, calculated based on Adjusted EBITDA, total shareholder return, or revenue growth related to performance conditions.
The fair value of the liability and the expense attributable to the vesting period 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. As at March 31, 2022, outstanding PSUs had a fair value of $nil which is included in other liabilities on the balance sheet (December 31, 2021 – $nil).
Options
The following summarizes options granted, exercised, forfeited and expired during the periods:
|
|
|
|
|
Number of |
|
|
Weighted average |
|
||
|
|
|
|
|
options |
|
|
exercise price C$ |
|
||
|
Outstanding at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
( |
) |
|
|
|
|
|
Outstanding at March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
( |
) |
|
|
|
|
|
Outstanding at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Range of exercise prices outstanding at March 31, 2022:
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
||||
|
|
|
|
|
|
|
|
|
average |
|
|
average |
|
|
|
|
|
|
average |
|
|
average |
|
||||
|
|
|
|
|
Number |
|
|
remaining |
|
|
exercise |
|
|
Number |
|
|
remaining |
|
|
exercise |
|
||||||
|
Range of exercise prices |
|
|
|
outstanding |
|
|
life |
|
|
price C$ |
|
|
exercisable |
|
|
life |
|
|
price C$ |
|
||||||
|
C$4.01 – C$5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C$5.01 – C$6.00 |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
C$6.01 – C$7.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C$7.01 – C$8.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive Instruments
For the three months ended March 31, 2022,
15
10. 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 11 for the disaggregation of revenue by geographic region.
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Product |
|
|
|
|
|
|
|
|
|
Transportation |
|
|
|
|
|
|
|
|
|
License fees from Distribution 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 is based upon agreed contractual terms with the customer and is not subject to variability.
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
At a point in time |
|
|
|
|
|
|
|
|
|
Over time |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue recognized at a point in time represents the majority of the Company’s sales and revenue is recognized when a customer obtains legal title to the product, which is when ownership of products is transferred to, or services are delivered to the contract counterparty. Revenue recognized over time is limited to installation and other services provided to customers and is recorded as performance obligations which are satisfied over the term of the contract.
Contract Liabilities
|
|
|
As at |
|
|||||||||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|||
|
Customer deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities was higher as at March 31, 2022 compared to December 31, 2021 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 2021 and 2020, respectively, totaling $
16
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, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Commercial |
|
|
|
|
|
|
|
|
|
Healthcare |
|
|
|
|
|
|
|
|
|
Government |
|
|
|
|
|
|
|
|
|
Education |
|
|
|
|
|
|
|
|
|
License fees from Distribution Partners |
|
|
|
|
|
|
|
|
|
Total product and transportation revenue |
|
|
|
|
|
|
|
|
|
Installation and other services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. SEGMENT REPORTING
The Company has
Revenue from external customers
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Canada |
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets, excluding deferred tax assets
|
|
|
As at |
|
|||||
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Canada |
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts include property, plant and equipment, capitalized software, operating lease right-of-use assets, and other assets. |
12. INCOME TAXES
As at March 31, 2022, the Company had a valuation allowance of $
13. COMMITMENTS
As at March 31, 2022, the Company had outstanding purchase obligations of approximately $
17
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
Summary of Financial Results
|
• |
Revenues for the quarter ended March 31, 2022 were $38.3 million, an increase of $8.8 million or 30% from $29.5 million for the period ended March 31, 2021. While the resurgence of COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, DIRTT and its partners experienced an uptick in planning activity and opportunities growth which began to translate into orders in March 2022. The full impact of the COVID-19 pandemic was incurred in the first quarter of 2021 when the impact of the contraction in construction activity was experienced and with most of our pre-pandemic projects in process completed in 2020. |
|
• |
Gross profit and gross profit margin for the quarter ended March 31, 2022 was $3.3 million or 8.6% of revenue, a decrease of $0.1 million or 2% from $3.4 million or 11.4% of revenue for the quarter ended March 31, 2021. The decrease in gross profit margin largely reflects the impact of significant inflationary increases in the realized cost of materials, transportation and packaging and incremental fixed costs of our new manufacturing facility in Rock Hill, South Carolina (the “South Carolina Facility”), partially offset by an improved fixed cost leverage as compared to the prior period as a result of higher activity. Gross profit for the quarter ended March 31, 2022 also included $1.1 million of accelerated depreciation and amortization arising from a change in useful life of assets. |
|
• |
The Company implemented an approximate 6.5% overall increase in our product and transportation prices effective on new orders subsequent to November 15, 2021 to offset increased materials, transportation and packaging costs. The impact of these changes was partially realized in the quarter ended March 31, 2022 and is expected to be realized in the latter quarters of 2022. Additionally, the Company announced a further 5% price increase effective June 1, 2022, in response to the continued inflationary impacts to material costs. These increases will be slightly offset by new pricing strategies on Reflect and Inspire product lines. |
|
• |
Adjusted Gross Profit and Adjusted Gross Profit Margin (see “Non-GAAP Financial Measures”) for the quarter ended March 31, 2022 was $6.8 million or 17.7%, respectively, a decrease from $7.2 million or 24.3%, respectively, for the quarter ended March 31, 2021, due to the reasons described above. For the quarter ended March 31, 2021 $1.8 million of overhead costs were excluded from Adjusted Gross Profit, as these costs were on account of operating at lower than normal capacity levels and were accordingly charged directly and separately to cost of sales rather than as a cost attributable to production. |
|
• |
Operating expenses increased by $5.6 million to $24.9 million in 2022 from $19.2 million in 2021. This increase is largely due to $3.7 million in reorganization expenses (discussed below), $1.5 million of incremental professional fees associated with the contested director elections and an increase in commissions, travel, meals and entertainment costs due to increased business activity and the easing of COVID-19 restrictions. These costs were offset by decreases in salaries and benefits associated with cost reduction measures which were partially realized during the quarter. |
|
• |
Net loss for the three months ended March 31, 2022 was $23.0 million compared to $12.5 million for the three months ended March 31, 2021. The higher net loss is primarily the result of the $5.6 million increase in operating expenses, a $3.5 million reduction in government subsidies, a $0.6 million increase in foreign exchange loss and a $0.8 million increase in interest expense. |
|
• |
On February 22, 2022, we announced a plan to close the Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum facilities. This is expected to result in a net headcount reduction of approximately 26 and annualized cost savings of approximately $2.4 million. The closure of the Phoenix Facility is expected to be substantially completed in the second quarter of 2022. Additionally, we announced our intention to eliminate approximately 18% of our salaried workforce including manufacturing and office positions which, |
18
|
along with other cost reduction initiatives, are expected to yield annualized savings of approximately $13.0 million. One-time costs associated with these reductions and other costs savings measures are approximately $5.0 million. For the quarter ended March 31, 2022, we incurred $3.7 million in reorganization costs. |
|
• |
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the quarter ended March 31, 2022 was a $12.0 million loss or (31.2)%, a decline of $0.6 million from a $11.4 million loss or (38.6)% for the quarter ended March 31, 2021 for the above noted reasons. For the quarter ended March 31, 2022, reorganization costs of $3.7 million were added back in the calculation of Adjusted EBITDA. |
Outlook
On April 26, 2022, at the Company's 2022 annual and special meeting of shareholders, shareholders of the Company elected seven individuals to the Company’s board of directors. In total, there were 14 director nominees, seven of whom were nominated by 22 NW Fund, LP and other participants (“22NW”) named in the definitive proxy statement filed on January 7, 2022, as amended. At the meeting, the Company’s shareholders elected all seven candidates recommended by 22NW to the board of directors to serve for one-year terms expiring at the Company’s 2023 annual meeting of shareholders. Following election and appointment, the board of directors terminated the employment of Todd Lillibridge as Interim Chief Executive Officer and appointed Geoffrey D. Krause and Jeffrey A. Calkins as Interim Co-Chief Executive Officers, in each case effective as of April 26, 2022.
The first quarter of 2022 marked the transition of the COVID-19 pandemic to an endemic with the broad easing of health restrictions, including work-from-home mandates, across North America. While the resurgence of COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, DIRTT and its partners experienced an uptick in planning activity and opportunities growth which began to translate into orders in March 2022. As at April 1, our 12-month forward pipeline including leads increased by 5% to $318 million from $302 million at January 1, 2022, comprising of 60% commercial, 19% healthcare, 8% education and 13% government opportunities.
As a result of the slow start to the year, 46% of first quarter revenue was generated in March, which marked the highest revenue month for the company since October 2020 and the second highest revenue month since the start of the pandemic. Our first quarter 2022 revenue of $38.2 million was at the low end of our estimate of between $38 and $42 million, but an increase of 30% over the same period of 2021. To date in the second quarter, activity has been relatively consistent with the March 2022 period. We also continue to experience increased tours, both in person and virtually through our DIRTT Experience Centers (“ DXCs”). As a result, we currently expect second quarter revenue to be between $43 million and $47 million, an increase of between 13% and 23% from the first quarter of 2022 and between 5% and 14% from the same period of 2021. Based on improving activity levels, we increased our full year revenue targets by $5 million to between $175 and $185 million, with opportunity for additional upside as the year plays out.
During the first quarter of 2022, we made progress on our goal of enhancing partner effectiveness and accountability. On March 28, 2022, we held our first Partner Advisory Council meeting to elevate partner feedback within our organization and provide further insight to support our commercial and operational decision making. This first meeting established the overall objectives and cadence of the Partner Advisory Council and provided initial partner feedback, which the Company is currently evaluating. The Partner Advisory Council is comprised of 17 Distribution Partners that provide both geographic and vertical representation across North America.
Strategic accounts remain a cornerstone in our go to market strategy. In the first quarter of 2022, we refined our strategic account targets to 48 from 55 previously as a result of headcount reductions and an increase in focus. During the quarter, sales to strategic accounts totaled approximately $6.0 million with product delivered to 22 of the 48 accounts. For the remainder of 2022, we have identified and continue to develop opportunities with 32 of the 48 accounts.
Gross margin and Adjusted Gross Margin were 8.6% and 17.7% respectively, negatively impacted by both the negative leverage in the first two months of 2022 and continued inflationary pressure on raw materials and transportation costs. In response to continued inflationary pressures, we announced a 5% price increase effective June 1, 2022 in addition to the price increase announced in the fourth quarter of 2021. Approximately 75% of our first quarter 2022 revenues reflected the new fourth quarter pricing as we honored pricing previously quoted for
19
projects in process. In the near to mid-term, we expect inflationary pressures to continue, driven by both increased energy prices and the impact of global tensions on supply as well as a trucking labor shortage. We will continue to assess and implement mitigation strategies where appropriate.
On April 8, 2022, we completed our final shift at the Phoenix Facility and commenced decommissioning activities, including redeployment of certain pieces of manufacturing equipment to Calgary and Rock Hill, shipping and rationalization of aluminum inventory to other aluminum frame plants and subletting of the space. Decommissioning is expected to be complete by the end of the second quarter of 2022 and is expected to eliminate approximately $2.4 million of annualized costs. Given the uptick in sales activity, in April we began to actively increase variable labor capacity at both our Savannah and Calgary aluminum manufacturing facilities to ensure we can meet our end customer lead times.
In February 2022, we commenced an organization wide restructuring of positions to reduce fixed expenses, resulting in the elimination of approximately 18% of our salaried workforce (excluding those associated with the Phoenix Facility closure) which was largely completed in the first quarter. This, along with other cost reduction initiatives, are expected to result in annualized savings of up to $13 million. As a result of these activities, including the closure of the Phoenix Facility, we expect to incur reorganization costs of approximately $5 million, of which $3.7 million were incurred in the first quarter. We anticipate a further $4.4 million of reorganization costs in the second quarter, as the Company incurred a $3.1 million charge for incremental insurance on change of control of the board on April 26, 2022.
We finished the quarter with net working capital of $49.3 million (December 31, 2021 - $66.7 million), including unrestricted cash of $39.0 million (December 31, 2021 - $60.3 million). Cash usage was driven by the slow start to the quarter which resulted in working capital build combined with one-time reorganization costs and professional fees related to the contested election of directors. We expect cash usage to improve as 2022 progresses as a result of sequential improvements in revenues and a lower fixed cost base, approaching monthly cashflow breakeven in the third or fourth quarters of 2022. That said, we expect one-time costs, comprising of reorganization expenses and activist costs, for the second quarter of 2022 to be consistent with the first quarter of 2022 due to certain insurance payments required on account of the change of control at the board level.
Based on budgeted annual revenue levels, taking into account the initiatives previously described and excluding our related one-time reorganization costs and expected incremental professional fees, (1) we believe that our 2022 net loss and Adjusted EBITDA loss will demonstrate a significant improvement from 2021 levels and, (2) we believe we will experience a decrease in net loss and, correspondingly, a shift to positive Adjusted EBITDA in 2023. This is due to both the improved sales focus and operational efficiencies described above, and an improved macroeconomic environment as the pandemic recovery takes hold and accelerates for DIRTT.
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), the impact of under-utilized capacity on gross profit, tax consequences, reorganization expense and stock-based compensation. We remove the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the
20
underlying operations of the Company. We remove the impact of under-utilized capacity from gross profit, and fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In addition, management bases certain forward-looking estimates and budgets 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 expenses 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.
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 under-utilized capacity, depreciation and amortization |
|
|
|
|
Adjusted Gross Profit Margin |
Adjusted Gross Profit divided by revenue |
|
|
|
|
EBITDA |
Net income before interest, taxes, depreciation and amortization |
|
|
|
|
Adjusted EBITDA |
EBITDA adjusted to remove foreign exchange gains or losses; impairment expenses; reorganization expenses, stock-based compensation expense; government subsidies, 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.
21
Results of Operations
Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021
|
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
|
|
|
($ in thousands) |
|
|
|
|
|
|||||
|
Revenue |
|
|
38,286 |
|
|
|
29,465 |
|
|
|
30 |
|
|
Gross Profit |
|
|
3,287 |
|
|
|
3,370 |
|
|
|
(2 |
) |
|
Gross Profit Margin |
|
|
8.6 |
% |
|
|
11.4 |
% |
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing |
|
|
7,228 |
|
|
|
6,670 |
|
|
|
8 |
|
|
General and Administrative |
|
|
7,993 |
|
|
|
7,241 |
|
|
|
10 |
|
|
Operations Support |
|
|
2,498 |
|
|
|
2,297 |
|
|
|
9 |
|
|
Technology and Development |
|
|
2,140 |
|
|
|
1,935 |
|
|
|
11 |
|
|
Stock-Based Compensation |
|
|
1,302 |
|
|
|
1,094 |
|
|
|
19 |
|
|
Reorganization |
|
|
3,692 |
|
|
|
- |
|
|
|
100 |
|
|
Total Operating Expenses |
|
|
24,853 |
|
|
|
19,237 |
|
|
|
29 |
|
|
Operating Loss |
|
|
(21,566 |
) |
|
|
(15,867 |
) |
|
|
36 |
|
|
Operating Margin |
|
|
(56.3 |
)% |
|
|
(53.9 |
)% |
|
|
|
|
Revenue
Revenue reflects sales to our Distribution 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, |
|
|||||||||
|
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
|
|
|
($ in thousands) |
|
|
|
|
|
|||||
|
Product |
|
|
33,193 |
|
|
|
25,836 |
|
|
|
28 |
|
|
Transportation |
|
|
4,061 |
|
|
|
2,499 |
|
|
|
63 |
|
|
License fees from Distribution Partners |
|
|
197 |
|
|
|
207 |
|
|
|
(5 |
) |
|
Total product and transportation revenue |
|
|
37,451 |
|
|
|
28,542 |
|
|
|
31 |
|
|
Installation and other services |
|
|
835 |
|
|
|
923 |
|
|
|
(10 |
) |
|
|
|
|
38,286 |
|
|
|
29,465 |
|
|
|
30 |
|
Our sales activity and associated revenues continue to be impacted by the severe economic and social impact of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels in North America due to work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials.
During the quarter ended March 31, 2022, revenue was $38.3 million, an increase of $8.8 million or 30% from the same period in 2021 and of which 46% was generated in March 2022. The first quarter of 2022 marked the transition of the COVID-19 pandemic to an endemic with the broad easing of health restrictions, including work-from-home mandates, across North America. While the resurgence in COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, the Company and our Distribution Partners experienced an uptick in planning activity and opportunities growth in our commercial vertical which began to translate into orders in March 2022 that has continued into the second quarter. We remain uncertain as to the ongoing impact of the pandemic, including effects of resurgent infection rates due to variants, on future projects that are either in the planning or conceptual stage. It is likely that future projects will experience similar delays as the COVID-19 pandemic runs its course. See Item 1A. “Risk Factors”.
In response to significant increases in the costs of raw materials, shipping materials and freight, effective November 16, 2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%, with
22
the benefits largely expected to be realized in 2022. On February 17, 2022, we announced a further price increase of 5% effective June 1, 2022 as well as pricing strategy changes on our Reflect and Inspire lines of glass wall products, which we expect to result in increased sales volumes of these products. The benefits of these changes are largely expected to be realized in the latter quarters of 2022.
Installation and other services revenue was $0.8 million for the three months ended March 31, 2022 compared to $0.9 million in the same period of 2021. Except in limited circumstances, our Distribution Partners, rather than the Company, perform installation services, and accordingly, we are not anticipating significant growth in this revenue stream.
Our success is partly dependent on our ability to profitably develop our Distribution Partner network to expand our market penetration and ensure best practices are shared across local markets. At March 31, 2022, we had 70 Distribution Partners servicing multiple locations. During 2021 and the first quarter of 2022, we made several changes and upgrades to our Distribution Partner network, expanding our relationships with new and existing partners and ending our relationships with others. In February 2022, we announced the establishment of a Partner Advisory Council to provide a greater link with Distribution Partners and end clients who they service. The Partner Advisory Council will offer advice on sales and marketing effectiveness, product issues and new market needs, market conditions, competitive landscape, marketing support and other related areas of mutual interest.
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. The following table presents our product and transportation revenue by vertical market:
|
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
|
|
|
($ in thousands) |
|
|
|
|
|
|||||
|
Commercial |
|
|
24,044 |
|
|
|
16,144 |
|
|
|
49 |
|
|
Healthcare |
|
|
6,964 |
|
|
|
6,487 |
|
|
|
7 |
|
|
Government |
|
|
3,281 |
|
|
|
4,181 |
|
|
|
(22 |
) |
|
Education |
|
|
2,965 |
|
|
|
1,523 |
|
|
|
95 |
|
|
License fees from Distribution Partners |
|
|
197 |
|
|
|
207 |
|
|
|
(5 |
) |
|
Total product revenue |
|
|
37,451 |
|
|
|
28,542 |
|
|
|
31 |
|
|
Service revenue |
|
|
835 |
|
|
|
923 |
|
|
|
(10 |
) |
|
|
|
|
38,286 |
|
|
|
29,465 |
|
|
|
30 |
|
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in %) |
|
|||||
|
Commercial |
|
|
64 |
|
|
|
57 |
|
|
Healthcare |
|
|
19 |
|
|
|
23 |
|
|
Government |
|
|
9 |
|
|
|
15 |
|
|
Education |
|
|
8 |
|
|
|
5 |
|
|
Total Product Revenue(1) |
|
|
100 |
|
|
|
100 |
|
|
(1) |
Excludes license fees from Distribution Partners. |
Commercial revenues increased by 49% from the prior year period, reflecting improving market conditions as health restrictions and work-from-home requirements ease and include one large customer in the technology sector of over $3 million. Healthcare increased by 7% in the first quarter of 2022 from the same period in 2021. Such sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Current quarter healthcare revenues included two large projects of approximately $3 million, which is consistent with same period of 2021 where we had two separate large projects of approximately $3 million. Education sales in the first quarter of 2022 increased by 95% over the prior period. At the beginning of the pandemic, education spending effectively paused with many institutions suspending in-person classes. There were no individually significant education projects and the 95% increase represents higher volumes of projects due to the easing of health restrictions and many students returning to in-person learning. Government revenues in the first quarter of 2022
23
decreased by 22% over the prior period due to a one-time project in the prior period of approximately $0.8 million that did not recur in the first quarter of 2022.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States. The following table presents our revenue dispersion by geography:
|
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
|
|
|
($ in thousands) |
|
|
|
|
|
|||||
|
Canada |
|
|
5,251 |
|
|
|
2,995 |
|
|
|
75 |
|
|
U.S. |
|
|
33,035 |
|
|
|
26,470 |
|
|
|
25 |
|
|
|
|
|
38,286 |
|
|
|
29,465 |
|
|
|
30 |
|
Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. In the quarter ended March 31, 2020, revenues from Canada fell to 10% of total sales while sales to the United States increased to 90%. The geographical split for the quarter ended March 31, 2022 began to return to historical averages and reflects the easing of health restrictions in Canada which was later than the United States.
Sales and Marketing Expenses
Sales and marketing expenses increased by $0.6 million to $7.2 million for the three months ended March 31, 2022 from $6.7 million for the three months ended March 31, 2021. The increase was largely related to an increase of $0.4 million in travel, meals and entertainment expenses as business activity has increased and restrictions on travel have eased, a $0.3 million increase in commissions due to higher sales volumes and increased facilities costs related to the Dallas DXC which opened in the third quarter of 2021, offset by a decrease in salaries and benefits costs.
General and Administrative Expenses
General and administrative expenses increased $0.8 million to $8.0 million for the three months ended March 31, 2022 from $7.2 million for the three months ended March 31, 2021. The increase reflects $1.5 million of incremental professional fees associated with the contested election of directors offset by a $0.7 million decrease in salaries and benefits costs.
Operations Support Expenses
Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Distribution Partner project execution and our manufacturing operations. Operations support expenses increased by $0.2 million from $2.3 million for the three months ended March 31, 2021 to $2.5 million for the three months ended March 31, 2022. The increase was due to lower costs capitalized to internal projects with the completion of the South Carolina Facility and Dallas DXC.
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 increased by $0.2 million to $2.1 million for the three months ended March 31, 2022, compared to $1.9 million for the three months ended March 31, 2021, primarily related to a decrease in capitalized software development costs.
24
Stock-Based Compensation
Stock-based compensation expense for the three months ended March 31, 2022 was $1.3 million compared to $1.1 million in 2021. The increase was largely due to grants of RSUs, including those in lieu of cash compensation to the Company’s interim Chief Executive Officer and DSUs granted to the board of directors, lowered by the impact of fair value adjustments on cash settled awards as a result of our share price decreasing during the quarter ended March 31, 2022.
Reorganization
On February 22, 2022, we announced a plan to close the Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. Additionally, we announced our intention to eliminate approximately 18% of our salaried workforce including manufacturing and office positions which, along with other cost reduction initiatives, are expected to yield annualized savings of approximately $13.0 million. One-time costs associated with these reductions and other costs savings measures were previously estimated to be $5 million. For the quarter ended March 31, 2022, we incurred $3.7 million in reorganization costs, and we anticipate a further $4.4 million of reorganization costs in the second quarter, as the Company incurred a $3.1 million charge for incremental insurance on change of control of the board on April 26, 2022.
Government Subsidies
The Company was not eligible and did not receive any new government subsidies in the quarter ended March 31, 2022 compared to $4.1 million of subsidies received during the quarter ended March 31, 2021. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of subsidies is expected to be returned to the Canadian authorities in the second quarter of 2022. The amount was fully provided for in the third quarter of 2021 and in the first quarter of 2022 and the Company reversed a $0.6 million incremental provision related to this that is no longer necessary. The CEWS and CERS programs expired on October 23, 2021.
Interest expense
Interest expense increased by $0.8 million from $0.5 million in the quarter ended March 31, 2021 to $1.3 million in the quarter ended March 31, 2022 as a result of the issuance of C$70.3 million of the Debentures in 2021 and draws on the Leasing Facilities.
Income Tax
The provision for income taxes is comprised of U.S. and Canadian federal, state and provincial taxes based on pre-tax income. The Company incurred no income tax expense or recovery during the quarter ended March 31, 2022, compared to a $0.04 million expense for the same period of 2021. As at March 31, 2022 the Company had a valuation allowance of $22.8 million (December 31, 2021 $17.3 million) against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at March 31, 2022, we had C$76.3 million of non-capital loss carry-forwards in Canada and $53 million in the United States. These loss carry-forwards will begin to expire in 2032.
Net Loss
Net loss increased to $23.0 million or $0.27 net loss per share in the three months ended March 31, 2022 from a net loss of $12.5 million or $0.15 net loss per share for the three months ended March 31, 2021. The increased loss is primarily the result of a $0.1 million decrease in gross profit, a $5.6 million increase in operating expenses including $3.7 million of reorganization expenses and $1.5 million of incremental professional fees as described previously, a $0.8 million increase in interest expense, a $0.6 million increase in foreign exchange loss and a $3.5 million decrease in government subsidies.
25
EBITDA and Adjusted EBITDA for the Three Months Ended March 31, 2022 and 2021
The following table presents a reconciliation for the first quarter results of 2022 and 2021 of EBITDA and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure for the periods presented:
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
($ in thousands) |
|
|||||
|
Net loss for the period |
|
|
(23,042 |
) |
|
|
(12,499 |
) |
|
Add back (deduct): |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
1,330 |
|
|
|
500 |
|
|
Interest Income |
|
|
(11 |
) |
|
|
(19 |
) |
|
Income Tax Expense |
|
|
- |
|
|
|
39 |
|
|
Depreciation and Amortization |
|
|
4,622 |
|
|
|
3,402 |
|
|
EBITDA |
|
|
(17,101 |
) |
|
|
(8,577 |
) |
|
Foreign Exchange Losses |
|
|
732 |
|
|
|
180 |
|
|
Stock-Based Compensation |
|
|
1,302 |
|
|
|
1,094 |
|
|
Government Subsidies |
|
|
(575 |
) |
|
|
(4,068 |
) |
|
Reorganization Expense |
|
|
3,692 |
|
|
|
- |
|
|
Adjusted EBITDA |
|
|
(11,950 |
) |
|
|
(11,371 |
) |
|
Net Loss Margin(1) |
|
|
(60.2 |
)% |
|
|
(42.4 |
)% |
|
Adjusted EBITDA Margin |
|
|
(31.2 |
)% |
|
|
(38.6 |
)% |
|
(1) |
Net loss divided by revenue. |
For the three months ended March 31, 2022, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $0.6 million to a $12.0 million loss or (31.2)% from $11.4 million loss or (38.6)% in the same period of 2021. This primarily reflects a $0.4 million decrease in Adjusted Gross Profit, $1.5 million of incremental professional fees as described previously, $0.4 million reduction in capitalized costs due to fewer internal projects, $0.4 million increase in sales travel and entertainment costs and $0.3 million of higher commission expense due to increased activity, offset by $1.8 million of costs of underused capacity in the first quarter of 2021 which did not re-occur and lower salaries and benefits costs due to headcount reductions.
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended March 31, 2022 and 2021
The following table presents a reconciliation for the three months ended March 31, 2022 and 2021 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
($ in thousands) |
|
|||||
|
Gross profit |
|
|
3,287 |
|
|
|
3,370 |
|
|
Gross profit margin |
|
|
8.6 |
% |
|
|
11.4 |
% |
|
Add: Depreciation and amortization expense |
|
|
3,472 |
|
|
|
2,029 |
|
|
Add: Costs of under-utilized capacity |
|
|
- |
|
|
|
1,756 |
|
|
Adjusted Gross Profit |
|
|
6,759 |
|
|
|
7,155 |
|
|
Adjusted Gross Profit Margin |
|
|
17.7 |
% |
|
|
24.3 |
% |
Gross profit and gross profit margin decreased to $3.3 million or 8.6% for the three months ended March 31, 2022, from $3.4 million or 11.4% for the three months ended March 31, 2021. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $6.8 million or 17.7% for the three months ended March 31, 2022, from $7.2 million or 24.3% for the three months ended March 31, 2021.
The decrease in gross profit margin largely reflects significant inflationary increases in the realized cost of materials, transportation and packaging, partially offset by improved labor utilization and fixed cost leverage on higher revenues. Gross profit decreased as material, transportation and packaging costs increased by approximately 9% as a percentage of revenue, and gross profit was reduced by approximately 1% due to incremental South Carolina Facility
26
fixed costs. Additional depreciation and amortization due to revision to the useful lives of assets, including the Phoenix Facility, contributed $1.1 million or 2% of the gross margin. This 12% increased cost impact was offset by 3% of improved labor utilization and fixed cost leverage on account of the $8.8 million or 30% increase in revenue compared to the same period in 2021.
Like many other industries and as noted above, we experienced a significant increase in the cost of raw materials, transportation and packaging, largely driven by the effects of the pandemic with much of the increases experienced in the second half of 2021. In response, effective November 16, 2021, we increased prices on new orders by approximately 6.5% to effectively offset these cost increases, with the benefits largely expected to be realized in the latter half of 2022. We expect such inflationary pressures to continue into 2022 and accordingly announced a further 5% price increase on February 17, 2022, effective June 1, 2022. We did not realize the full benefit of the initial price increase in the first quarter, and in addition we incurred higher than historical discounts on sales which further compressed our gross profit margin.
During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2021, we experienced the full impact of the slowdown in non-residential construction activity on our business. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first quarter of 2021 despite the shortfall in revenues relative to capacity. As a result, in the first quarter of 2021 we separately classified $1.8 million as costs related to our under-utilized capacity (1.2% of 2021 first quarter gross profit margin) in cost of sales. For the remaining quarters of 2021 and 2022, we did not have abnormal excess capacity as our workforce was better aligned with current production volumes.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2022 totaled $38.9 million, a decrease of $21.5 million from December 31, 2021. The decrease in cash primarily reflects the impact of $19.0 million cash used in operations, capital expenditures of $1.6 million and scheduled Leasing Facilities repayments of $0.6 million.
In January 2021, we issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on the January Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company.
In February 2021, we entered into the RBC Facility, a C$25.0 million senior secured revolving credit facility with RBC. Under the RBC Facility, the “Borrowing Base” is a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Available borrowings under the RBC Facility at March 31, 2022 were C$14.5 million or $11.6 million.
In December 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and 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 the December Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company.
The Company has a C$5.0 million Canada Leasing Facility of which C$3.6 million ($2.6 million) has been drawn, and a $14.0 million U.S. Leasing Facility of which $13.3 million has been drawn with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. Subsequent to March 31, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.
In light of the uncertainty caused by the near and potential mid-term impacts of COVID-19, we have evaluated multiple downside scenarios and have implemented cost control and expenditure management processes. On February
27
22, 2022 we announced multiple initiatives to improve liquidity and return to a positive EBITDA position by 2023. These initiatives include the rationalizing of our manufacturing footprint through the closure of the Phoenix Facility, organization-wide restructuring of positions that will contribute to the reduction of fixed expenses and the conversion of certain payroll costs into shares rather than cash. To offset the impacts of continued inflationary pressure on the cost of raw materials and transportation, a price increase of 5% effective June 1, 2022 was announced as well as pricing strategy changes on our Reflect and Inspire lines of glass walls to drive increased sales of these products.
The first quarter of 2022 included the impact of one-time costs associated with our reorganization, and professional fees incurred as described previously. These costs will be largely completed in the second quarter with an additional $1.3 million of reorganization expenses expected and $3.1 million for run-off directors and officers insurance purchased by the previous board on the change of control.
While the previously discussed COVID-19 impacts and upstream supply chain issues causing project delays during 2021 resulted in a significant usage of cash reserves, the combination of an improved sales outlook for 2022, our cost optimization activities and our cash reserves and available credit facilities lead us to believe that we have sufficient liquidity for at least the next twelve months.
Should the recovery of the North American construction activities from the pandemic be delayed or a sustained economic depression and its adverse impacts on customer demand occur, this could continue to adversely affect our liquidity. To the extent that existing cash and cash equivalents and increased liquidity from the aforementioned facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.
Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of cash flow from operations, long-term debt, government subsidies and cash on hand. As at March 31, 2022, we had no amounts outstanding under the RBC Facility, $13.3 million outstanding under the Leasing Facilities and $57.7 million of Debentures outstanding.
The following table summarizes our consolidated cash flows for the periods indicated:
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
($ in thousands) |
|
|||||
|
Net cash flows used in operating activities |
|
|
(19,042 |
) |
|
|
(12,094 |
) |
|
Net cash flows used in investing activities |
|
|
(1,620 |
) |
|
|
(3,589 |
) |
|
Net cash (used in) provided by financing activities |
|
|
(827 |
) |
|
|
29,337 |
|
|
Effect of foreign exchange on cash, cash equivalents and restricted Cash |
|
|
166 |
|
|
|
303 |
|
|
Net (decrease) increase in cash, cash equivalents and restricted Cash |
|
|
(21,323 |
) |
|
|
13,957 |
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
63,408 |
|
|
|
45,846 |
|
|
Cash, cash equivalents and restricted cash, end of period |
|
|
42,085 |
|
|
|
59,803 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash flows used in operating activities was $19.0 million for the first three months of 2022 compared to $12.1 million in the first three months of 2021. The decrease is cash flows from operations is largely due to reorganization costs of $3.7 million and a $2.7 million net increase in operating assets and liabilities. Accounts receivable increased by $5.0 million as our March revenues were higher than January and February by a corresponding amount while inventory increased by $3.4 million. As a result of ongoing supply chain issues, the Company increased its inventory to ensure it can meet its end customers’ expectations of lead times. Offsetting this increase in operating assets was a $3.3 million increase in customer deposits and deferred revenue and a $2.4 million increase in accounts payable and accrued liabilities, both reflecting the increased activity in March 2022. For the quarter ended March 31,
28
2021 we were eligible for $4.1 million of government subsidies compared to $0.6 million in the quarter ended March 31, 2022.
Investing Activities
We invested $1.0 million in property, plant and equipment during the three months ended March 31, 2022, compared to $2.9 million during the three months ended March 31, 2021. This expenditure comprised of $0.4 million of working capital changes, $0.3 million of information technology and the continued enhancement of our customer relationship management system and website redesign, $0.1 million of DXC refreshes and $0.1 million of manufacturing upgrades. Our 2022 capital expenditure program is comprised of approximately $2.5 million related to refreshes of DXCs, continued enhancement of our customer relationship management system and website redesign, approximately $2.5 million on software development and approximately $2.0 million on manufacturing and other capital upgrades. The decrease is due to reduced spending as the South Carolina Facility and Dallas DXC were completed in 2021. We invested $0.5 million on capitalized software during the three months ended March 31, 2022, as compared to $0.7 million in the three months ended March 31, 2021.
Financing Activities
For the three months ended March 31, 2022, $0.8 million of cash was used in financing activities comprising mainly of $0.6 million of scheduled payments under the Leasing Facilities. In the same period last year, we received $29.5 million of cash from the issuance of the January Debentures and had lower Leasing Facility scheduled payments of $0.2 million due to a lower outstanding Leasing Facility balance at March 31, 2021.
We currently expect to fund anticipated future investments with available cash, including the proceeds from our issuance of Debentures issued in 2021, and drawings on our Leasing Facilities. Subsequent to March 31, 2022, C$0.9 million ($0.7 million) was drawn under the Canada Leasing Facility. We do not expect to make any significant further draws under the Leasing Facilities. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the future as we deem appropriate. We may also use debt or pursue equity financing depending on the share price at the time, interest rates, and nature of the investment opportunity and economic climate.
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. At March 31, 2022, available borrowings are C$14.5 million ($11.6 million), of which no amounts have been drawn. Interest is 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 is less than C$5.0 million, the Company is subject to a FCCR covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. The Company did not meet the three-month FCCR requirement during the first quarter of 2022, which resulted in requiring the restriction of $3.2 million of cash. Should an event of default occur, or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off any borrowings and any remaining amounts made available to the Company.
During 2020, the Company entered into the Leasing Facilities, consisting of the C$5.0 million Canada Leasing Facility and the $14.0 million U.S. Leasing Facility with RBC, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. The U.S. Leasing Facility is amortized over a six-year term and is extendible at the Company’s option for an additional year.
The Company has drawn $13.3 million of cash consideration under the U.S. Leasing Facility and commenced the lease term in 2020 for the equipment at the South Carolina Facility. The Company has drawn C$3.6 million ($2.6
29
million) of cash consideration under the Canada Leasing Facility and commenced the lease term for the Canadian equipment expenditures during 2020. Subsequent to March 31, 2022, C$0.9 million ($0.7 million) was drawn under the Canada Leasing Facility.
We are restricted from paying dividends unless Payment Conditions (as defined in the 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 RBC Facility is currently secured by substantially all of our real property located in Canada and the United States.
Contractual Obligations
There have been no material changes in our contractual obligations during the three months ended March 31, 2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K. See Note 13, “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, 2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our 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 5, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, we adopted Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The ASU provides guidance on required disclosures with respect to government assistance in a company’s notes to the annual financial statements. The amendments in the ASU are effective for periods beginning after December 15, 2021. The Company has adopted this standard effective January 1, 2022 and notes there is no impact of this standard on our accounting or disclosures of government assistance.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, please refer to Note 5, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing and “–Significant Accounting Policies and Estimates” 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.
|
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, 2022. Based upon their evaluation, our principal executive officers and principal financial
30
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, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
31
PART II – OTHER INFORMATION
|
Item 1. |
Legal Proceedings |
We are pursuing multiple lawsuits against our former founders, Mogens Smed and Barrie Loberg, their new company Falkbuilt Ltd. (“Falkbuilt”), and other related individual and corporate defendants for violations of fiduciary duties and noncompetition and non-solicitation covenants contained in their executive employment agreements, and the misappropriation of our confidential and proprietary information in violation of numerous Canadian and U.S. state, and federal laws pertaining to the protection of our 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.
On March 10, 2022, the U.S. District Court for the Northern District of Texas dismissed our complaint by DIRTT Environmental Solutions Inc., a Colorado corporation, against Falkbuilt Inc., a Delaware corporation, under the doctrine of forum non conveniens. We disagree with the decision and have filed a notice of appeal with the Fifth Circuit Court of Appeals.
|
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.
We are under the leadership of a reconstituted board of directors and new Interim Co-Chief Executive Officers who plan to implement a variety of operational, organizational, cultural and other changes to our business, and we may not be able to achieve some or all of the anticipated benefits of this transformation plan.
Our board of directors was entirely reconstituted at our annual and special meeting of shareholders held on April 26, 2022 and, following that meeting, Geoffrey D. Krause and Jeffrey A. Calkins were appointed Interim Co-Chief Executive Officers. As a result of these events, during the second quarter of 2022, we expect to record severance payments and other compensation expense associated with the departure of certain of our officers and other employees, and we may incur other similar types of expenses and charges during the second quarter and thereafter related to other employee departures or otherwise associated with implementation of the new board’s plan. In addition, while we believe that the successful implementation of the plan will improve our operational and financial performance, there can be no assurance that we will be able to successfully implement the plan or otherwise realize the anticipated benefits of the plan, and we may encounter short-term disruptions of certain aspects of our business as elements of the plan are implemented.
|
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.
32
|
Item 6. |
Exhibits |
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
3.1 |
|
|
|
3.2 |
|
|
|
4.1 |
|
|
|
4.2 |
|
|
|
4.3 |
|
|
|
10.1 |
|
|
|
10.2* |
|
DIRTT Environmental Solutions Ltd. Employee Share Purchase Plan. |
|
10.3* |
|
|
|
31.1* |
|
|
|
31.2* |
|
|
|
32.1** |
|
|
|
32.2** |
|
|
|
101.INS* |
|
Inline XBRL Instance Document |
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
|
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
DIRTT ENVIRONMENTAL SOLUTIONS LTD. |
||
|
|
|
|
|
|
|
By: |
|
/s/ Geoffrey D. Krause |
|
|
|
|
Geoffrey D. Krause |
|
|
|
|
Interim Co-Chief Executive Officer & Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
|
|
|
|
|
|
Date: May 4, 2022 |
|
|
|
34