Employees
As ofWe expect to lose emerging growth company status by December 31, 2019, we2024.
Human Capital Resources
As at December 31, 2023, DIRTT employed 879 employees, 99% full time, 1% part time. We had 1,169874 full-time employees consisting of 790592 employees in production, 102100 employees in sales and marketing, 11973 employees in technology and development, 8448 employees in operations support, and 7161 general and administrative employees. At year-end, approximately 45% of our workforce are salaried employees and approximately 55% are compensated on an hourly basis. As at December 31, 2023, approximately 24% of our workforce was based in the United States, and approximately 76% was based in Canada. Our 2023 hiring efforts were directed towards both our manufacturing and non-manufacturing functions. The Company’s recent gender diversity data shows that 25% (2022 – 25%) of our employees are female company wide. In 2023, we hired 174 employees, with 27% of new employees being female.
Diversity & Inclusion
DIRTT recognizes the importance of progressing conversations and initiatives around diversity and inclusion. “Grow through diversity” is one of our core values. Our strategy encompasses leadership training around key topics related to unconscious bias, allyship, and the value of attracting and retaining a diverse and inclusive organization. The strategy further focuses on the establishment and deployment of learning streams, mentoring circles, and incorporation of inclusive language into our offer packages and benefit materials. Our efforts begin at the early stages of the employee life cycle, where diversity candidates are highlighted and presented to hiring managers for review. We seek to hire based on talent, skill, capability needs, and fit. DIRTT has also incorporated diversity into various internal programs including succession planning and risk profiles.
Culture & Engagement
DIRTT has put measures in place to assess and enhance the level of engagement and satisfaction of our employees. Specific activities include the deployment of a performance management tool catered to drive discussions around team goals, performance and development opportunities, and greater transparency around policy and procedures tied to cost and risk mitigation.
In 2023, we conducted two employee engagement surveys through a platform called Employee Voice that deployed company-wide surveys focused on core themes of workplace civility, communication, work-life balance, retention, job satisfaction, employee engagement and diversity and inclusion. Targeted initiatives are being put in place to assess the progression of themes from the survey on overall employee engagement and experience.
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Additional initiatives that we attribute to the progression of culture and engagement include launching learning and development opportunities, enhanced communication platforms, employee recognition programs, a company-wide philanthropic organization, and a strong focus on virtual social events to further support engagement and connection of remote employees.
Connecting to our community is a critical piece of the DIRTT story. We continue to focus on establishing a stronger community investment program that demonstrates our drive to put community at the center of the business. This involves developing a strategy, carving out a roadmap of initiatives, and establishing a committee of employees across the organization. As part of our strategy, we are focusing our efforts on establishing meaningful engagement opportunities, creating inclusive giving campaigns, driving sustainable impact, and enabling our employees to connect on philanthropic efforts. In the fourth quarter of 2023, we successfully completed our holiday giving campaign which was a coordinated in-person and virtual effort in support of food banks across North America, focusing on the cities in which we operate. The support for this campaign helped to reconnect DIRTT employees’ desire to give back with tangible outcomes for their communities. We take measures to address the mental health of our employees through a variety of company-wide initiatives.
Our core commitment to organizational safety resulted in a Total Recordable Incident Frequency (TRIF) of 0.4 in 2023, more than 92% below the industry average.
We use a range of compensation incentives which vary by role, including annual variable compensation determined based on a combination of achieving team objectives and financial targets for the Company; quarterly bonuses for our manufacturing personnel paid on adherence to targets related to safety, quality, delivery, inventory and productivity; and commissions based on sales. We also use various forms of stock-based compensation as a retention tool and to further align employee interests with the interests of our shareholders. We monitor our retention by way of voluntary turnover, which was 14% in 2023.
None of our employees are covered by collective bargaining agreements. We have never experienced labor-related work stoppages or strikes, and we believe we currently have a positive relationship with our employees.
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Item 1A. Risk Factors.
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Investing in our common shares involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Annual Report, including our consolidated financial statements and the related notes and Part II, Item 7. entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in any documents incorporated in this Annual Report by reference, before deciding whether to invest in our common shares. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our common shares could decline, and you may lose all or part of your investment. Although we have discussed all known material risks, the risks described below are not the only ones that we may face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations. Certain statements below are forward-looking statements. See also “Special Note Regarding Forward-Looking Statements” in this Annual Report.
Risks Related to Our Business and Industry
We are under the leadership of a reconstituted Board of Directors who are in the process of implementing 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, since that meeting, there has been significant turnover in the Company’s leadership. In addition to overseeing the changes to DIRTT’s leadership, the reconstituted Board of Directors has undertaken an extensive review of DIRTT’s operations, a process which is still ongoing (see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook”), and are in the process of implementing a variety of operational, organizational, cultural and other changes to our business, including plans to meet pipeline demand and expand revenues. The timely integration of senior management will be critical in the successful implementation of the Board of Directors’ plans. We may not be successful in achieving some or all of the anticipated benefits of these plans, which may have an adverse effect on our results from operations and financial condition.
Certain elements of DIRTT’s administrative systems may not be effective.
DIRTT has identified the need to upgrade its inventory management and cost accounting systems at some point in the future to enable scalable growth, and other information technology investments may be required in the future. The Company is currently unable to estimate the costs and timeline related to such upgrades. However, the success, in whole or in part, of such investments cannot be guaranteed. If the Company does not successfully or timely upgrade its inventory management and cost accounting systems, it may experience unforeseen challenges to its inventory and pricing strategies.
We may not be successful in implementing our strategic plan or managing growth
Implementation of our strategy will require maturity of systems and processes across the organization. There is also no assurance that successful implementation will lead to sustainable, profitable growth, and may itself be disruptive to the Company. Failure to implement our strategic plan could materially and adversely affect our near-term sales, commercial activities, and ability to develop and sustain profitable growth. In addition, the success and timing of our implementation may be dependent upon external factors outside of our control.
Our strategy also depends in part on our ability to maintain and manage growth effectively. Growth in our headcount and operations may place significant demands on our management and operational and financial resources. Additionally, managing growth of our operations and personnel requires continuous improvement of our internal controls and reporting systems and procedures. Failure to effectively manage growth could result in difficulty providing current DIRTT Solutions and introducing future solutions, difficulty in securing clients and Construction Partners, declines in quality or client satisfaction, increases in costs or other operational difficulties. Any of these difficulties could lead to a loss of investor confidence and adversely affect our business performance, financial condition and results of operations.
Our industry is highly competitive, and our success depends on our ability to continue to persuadewe may not be successful in educating potential clients to utilizeabout the benefits of our innovative and unique approach to interior construction rather than traditionalas compared to conventional interior construction methods. Our failure to compete effectively by not offering compelling products and services or by not pricing our solutions competitively could materially and adversely affect our market share, liquidity, financial condition and results of operations.
We operate in athe highly competitive interior construction industry that is constantly developing and changing. We compete on the basis of, among other things, price, predictability of timing and cost, speed, quality, customization, and product design. Our main competitors primarily consist ofagainst conventional construction firms, individual tradespeople, (including framers, drywall installers, and interior product designers) and modular systems, and commercial furniture manufacturers. In addition, newNew market entrants and conventional construction firms are also beginning to develop customizable wall paneling and other modular interior construction solutions. We also compete with commercial furniture manufacturers, such as Teknion Corporation, Haworth Inc.solutions, and Allsteel Inc., who offer a variety of prefabricated interior wall solutions. Our competitors may have greater financial, technical, sales, production and marketing resources, and they may develop products that achieve greater market acceptance, hire key personnel, or introduce competing or disruptive technology, all of which may reduce demand for DIRTT Solutions.we expect this trend to continue. In addition, we may face pricing pressure on large construction projects from our competitors or new market entrants who take on projects at reduced prices or employ other competitive strategies. While we believe our innovative design, quality, schedule and cost certainty, and network of Construction Partners makes us well-positioned in the market, increasing competition could make it difficult to secure new projects at a loss to ensure continuity of work. If we are unable to provide competitive pricing terms for DIRTT Solutions, our sales may be reduced. If we reduce our pricing to compete in these situations, our revenues andacceptable operating margins may decrease.margins.
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Our products are unique and offer an alternative to traditionalconventional construction techniques. Market acceptance ofAlthough offsite construction methods is growing, butare gaining market acceptance, this still represents only a fraction of all construction methods and the overall construction market. Our ability to grow and increase market share depends, in part, on our success in continuing to increase demand for modular construction methods and products as an alternative to more traditional construction methods. While we intend to follow a strategy of continuinginnovative product development and strategic marketing efforts to enhance our position, to the extent practicable, we cannot assure you that we will be able to maintain our current position in the industry or continue to compete successfully against current and future sources of competition. Therethere is no guarantee that we, together with our Distribution Partners, can increase our client base orassurance that our solutions will attain a degree of market acceptance sufficient for sustained profitable operations. Failure to compete effectively by, among other things, meeting consumer preferences, developing and marketing innovative solutions, maintaining strong client service and distribution relationships, growing market share, and expanding our solutions capabilities could have a material adverse effect on our liquidity, financial condition, or results of operations.
Additionally, the competition for highly skilled technical, researchOur co-founders’ and development, management, sales and other employees is high in our industry. There can be no assurance that we will be able to attract qualified personnel or retain our current personnel. If we are unable to attract and retain appropriate executives and employees,former executives' competitive behavior against us could have an adverse effect on our business, results of operations and liquidity could be materially and adversely affected.
Risks Related to Our Business
Global economic, political and social conditions and financial markets may impact our ability to do business and adversely affect our liquidity, financial condition and results of operations.
Our industry is cyclicalco-founders and highly sensitive to macroeconomic conditions.former executives, Mogens Smed and Barrie Loberg, have started an interior construction and manufacturing company that we believe competes with us. They, along with a number of our former employees and Construction Partners who have joined their company, have in-depth knowledge about our business, including our customers, employees, products and prospects, and we may be adversely affected by increased competition arising out of this business venture. We are subject to global economic, politicalengaged in litigation with Messrs. Smed and social conditions that may cause an overall decline or reduction in construction and renovation due to economic downturns, difficulties in the financial services sector and credit markets, geopolitical uncertainties, tariffsLoberg, entities with which they are involved, and other macroeconomic factors. individuals relating to, among other things, enforcement of non-competition and non-solicitation obligations, and alleged misappropriation of proprietary information by them or by us. If Messrs. Smed and Loberg further engage in a competitive business against us or if we are not successful in litigation, our business, financial condition and results of operations may be adversely affected. See Item 3. “Legal Proceedings.”
We face risks that may arise from financial difficulties experienced bydepend heavily on our suppliers, Distributionnetwork of Construction Partners, and the loss or inattention of our Construction Partners, or clients. For example,the failure of our DistributionConstruction Partners to meet their obligations to us, could materially and adversely affect our business, financial condition and results of operations.
We currently do not engage in many direct sales projects and rely almost exclusively on our network of Construction Partners to promote brand awareness, sell and market DIRTT Solutions, and provide design, installation, distribution and other services to clients on each project. While we are not dependent on any single Construction Partner, sales generated by approximately 10% of our Construction Partners comprised approximately 37% of our total revenues for 2023 (2022 – 39%) with one Construction partner making up approximately 12% of total revenues (2022 - 7%). The loss of any top performing Construction Partners, particularly to our competitors, may negatively affect our sales, financial condition or results of operations. It may further impair our ability to maintain a market presence in a particular geographic region until a new Construction Partner relationship is established, which would require significant time and resources, given DIRTT is typically a standalone line of business in their portfolio.
Although we provide our Construction Partners with training, education, and support, they may be unable to successfully sell our DIRTT Solutions, execute projects or manage client experiences and relationships. In addition, our Construction Partners and their clients may face financial difficulties or may become insolvent, which could result in the delay or cancellation of their plans to purchase DIRTT Solutions or lead to our inability to obtain payment of accounts receivable that they may owe. Such clients or potential clients may also be unable to obtain financing for their construction projects, including purchases of DIRTT Solutions. Our suppliers of raw materials, finished products or components may face financial difficulties or may become insolvent, which could lead to disruption in our manufacturing processes. Additionally, our business could be adversely affected by the effects of health epidemics, particularly in regions where we have key suppliers. For example, we rely on suppliers in China for certain of our raw materials and consequences of the coronavirus could include quarantines, labor shortages, and reduced output of these suppliers. Any general economic, political or social conditions that may contribute to financial difficulties experienced by us, our suppliers, Distribution Partners or clients may adversely affect our liquidity, financial condition and results of operations.
We depend heavily on our network of Distribution Partners for distribution and sales, and the loss or inattention of our Distribution Partners could materially and adversely affect our business, financial condition and results of operations.
We currently do not engage in many direct sales projects and rely almost exclusively on our network of Distribution Partners to promote brand awareness, sell and market DIRTT Solutions, and provide design, installation, distribution and other services to clients on each project. While we are not dependent on any single Distribution Partner, sales generated by approximately 10% of our Distribution Partners comprised approximately 32.6% of our total revenues for 2019. The loss of any top performing Distribution Partners, or their failure to adequately penetrate local markets, may negatively affect our sales, financial condition or results of operations. The loss of a Distribution Partner could also impair our ability to maintain a presence in a particular geographic region while we establish another Distribution Partner relationship in that region, which would require significant time and resources.
Our arrangements with our Distribution Partners are generally not exclusive, meaning that our Distribution Partners may market and sell both DIRTT Solutions and the products of our competitors. We may have multiple Distribution Partners in a geographic region depending on the size of the region. We offer our DIRTT Solutions at the same prices to our Distribution Partners, and, while we make recommendations on pricing terms to clients, our Distribution Partners may implement different pricing models that may be in excess of what clients in their territory would be willing to pay for DIRTT Solutions or that may be detrimental to other Distribution Partners who may offer different pricing terms.
We provide training and education to our Distribution Partners covering DIRTT Solutions and installation, sales, client service and experience, and maintenance of client relationships. However, our Distribution Partners may not be able to successfully sell our DIRTT Solutions or manage client experiences and relationships. Additionally, Distribution Partners may not successfully transport, deliver or install DIRTT Solutions, which could damage their relationships with clients and harm our reputation. Our ability to generate revenue in the future will depend in part on our success in maintaining effective working relationships with our Distribution Partners, choosing quality Distribution Partners, assisting our Distribution Partners to independently sell and to correctly install our DIRTT Solutions, and training our Distribution Partners to develop and maintain successful client relationships. If we are unable to maintain a successful relationships with our Distribution Partners, or if our Distribution Partners are unable to maintain successful relationships with clients,Construction Partner network, our business, financial condition, and results of operations could be materially and adversely affected.
Increasing attention to environmental, social and governance (ESG) matters and conservation measures may adversely impact our or our customers’ business.
Increasing attention to, and societal expectations on companies to address, environmental and social impacts and investor, regulatory and societal expectations regarding voluntary and mandatory ESG-related disclosures may result in increased costs, reduced demand for our customers’ products, reduced profits, increased investigations and litigation, negative impacts on our stock price and reduced access to capital markets.
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We
Moreover, while we may encounterpublish voluntary disclosures from time to time, certain statements in those voluntary disclosures may be based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Mandatory ESG-related disclosure is also emerging as an area where we may be, or may become, subject to required disclosures in certain jurisdictions, and any such mandatory disclosures may similarly necessitate the use of hypothetical, projected or estimated data, some of which is not controlled by us and is inherently subject to imprecision. Disclosures reliant upon such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. Further, we have announced various voluntary ESG targets in our annual Environmental, Social, and Governance (ESG) report outlining our commitments to sustainability, the environment, health and safety, and diversity and inclusion. However, we cannot guarantee that we will be able to meet such voluntary targets in the manner or on such a timeline as initially contemplated, including, but not limited to, as a result of unforeseen costs or technical difficulties associated with achieving such results. Any actual or perceived failure to meet our ESG targets could adversely impact our reputation and our customers’ image of our products and result in managingthe loss of business or impede our growth initiatives. Adverse publicity regarding ESG issues and expanding our operations successfully.
Our success will depend in partsimilar matters, whether or not justified, could have a negative impact on our ability to maintain and manage growth effectively. We have experienced,reputation and may continueresult in the loss of customers and our inability to experience, growthsecure new customer relationships. Further, our customers may be more selective for products that meet their ESG goals or standards, such as increasing demand for goods that result in lower emissions, and our products could be less competitive if we are unable to meet these standards. Despite our efforts to adapt to and address these concerns, our efforts may be insufficient. Additionally, the implementation of these initiatives may increase our costs. It is difficult to predict how our efforts with respect to social and sustainability matters will be evaluated by current and prospective investors or by our customers or business partners. Despite our voluntary actions, we may receive pressure from certain investors, lenders, or other groups to adopt more aggressive ESG-related goals or policies, but we cannot guarantee that we will be able to implement such goals because of potential costs or technical or operational obstacles.
Furthermore, our reputation, as well as our stakeholder relationships, could be adversely impacted as a result of stakeholder perceptions of statements made by us, our employees and executives, agents, or other third parties or public pressures from investors or policy groups to change our policies. Such statements with respect to ESG matters are becoming increasingly subject to heightened scrutiny from public and governmental authorities related to the risk of potential “greenwashing,” i.e., misleading information or false claims overstating potential ESG benefits. As a result, we may face increased litigation risks from private parties and governmental authorities related to our ESG efforts. Moreover, any alleged claims of greenwashing against us or others in our headcountindustry may lead to negative sentiment. To the extent that we are unable to respond timely and operations, which has placed, and may continueappropriately to place, significant demandsany negative publicity, our reputation could be harmed. Damage to our overall reputation could have a negative impact on our managementfinancial results and operational and financial resources.require additional resources to rebuild our reputation. Additionally, to the extent ESG matters negatively impact our reputation, we expectmay not be able to scale our business for sustainable, profitable growthcompete as part of our overall business strategy. Managing growth of our operations and personnel requires continuous improvement of our internal controls and reporting systems and procedures. Failureeffectively to effectively manage growth could result in difficulty in providing current DIRTT Solutions and introducing future solutions, difficulty in securing clients and Distribution Partners, declines in qualityrecruit or client satisfaction, increases in costs or other operational difficulties. Any of these difficulties could lead to loss of investor confidence andretain employees, which may adversely affect our business performance, financial condition and results of operations.
We Such ESG matters may not be successfulalso impact our customers, which may result in implementing our strategic plan.
In November 2019, we unveiled a four-year strategic planreduced demand for the Company, based on three key pillars of commercial execution, manufacturing excellence and innovation, to scale our business. We began implementing the strategic plan in the fourth quarter of 2019, including through hiring for key positions and the expansioncertain of our Distribution Partner network. Failureproducts and services.
Risks Relating to implement our strategic plan could materiallyOur Products and adversely affect our near term sales, commercial activities, and ability to develop and sustain profitable growth. Additionally, while we believe that the strategic plan will result in increased revenue and profitability, there is no guarantee that the strategic plan, even if successfully implemented, will lead to sustainable, profitable growth. Implementing the strategic plan may itself be disruptive to the Company. Any of these difficulties could materially and adversely affect our business performance, financial condition and results of operations.Software
We may be unsuccessful in designing, introducing, or selling new innovative solutions, solution features, or software.software, which also may cause us to become less competitive.
As our competitors and others develop new technologies in the future, we may be placed at a competitive disadvantage if we fail to keep pace with technological advancements within our industry. Our future success depends in part on our continuing ability to promote and demonstrate the value proposition of DIRTT Solutions, as well as our ability to develop and sell new innovative solutions, or solution features, or software that differentiate our solutions and achieve market acceptance in a timely and cost-effective manner. We incur significant costs associated with the investment in our research and development in furtherance of our strategy that may not result in increased revenue or demand for DIRTT Solutions and that could negatively affect our results of operations. Rapidly changing technology, evolving regulatory and industry standards, and changing consumer trends, demands, and requirements require us to continuously innovate and develop new, high-quality solutions, solutions features and software. Additionally, such rapid technological changes, standards and preferences could render the complex and proprietary technology of our software and solutions obsolete. We may alsonot be unableable to successfully address these developmentsimplement new technologies on a timely basis or at all.an acceptable cost. New solutions, solution features, or software may also be less successful than we anticipated, and such offerings may fail to achieve market acceptance. If we fail to respond quickly and cost-effectively to a changing market and changing consumer preferences, our competitive position, financial condition, and results of operations could be materiallyadversely affected. Outside of the ongoing evaluation of new construction market sectors, we are considering various partnerships that aide into the advancement and adversely affected.
We have experienced,development of the construction industry. This includes diversifying our current prefabricated offerings, aligning with sourcing companies, and may experienceestablishing initiatives with other companies embracing the mindset of change. While these actions strengthen our stakes in the future, quarterly and yearly fluctuations in results of operations and financial condition.
Our results of operations and financial condition may continue to fluctuate from one quarter or year to another due to a number of factors, some of which are outside of our control. Furthermore, our actual or projected results of operations may fail to match our past performance. These events could in turn cause theprefabrication market, price of our common shares to fluctuate. In particular, if our results of operations do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical results of operations, the market price of our common shares will likely decline. Due to our high fixed manufacturing costs and operating expenses, quarterly volatility in sales volumes could result in periods of low operating cash flow and negatively affect our liquidity.
The construction industry has also historically experienced seasonal slowdowns related to winter weather conditions and holiday schedules in the first and fourth quarters of each calendar year. Our business has generally followed this trend with a slight time lag, leading to stronger sales in the second half of the year versus the first half. Weather conditions, such as unseasonably warm, cold or wet weather, which affect, and sometimes delay or accelerate, delivery and installation of some of our products, may significantly affect our results of operations. For example, during the fourth quarter of 2017, the extreme weather conditions experienced in the United States negatively affected the delivery of projects and our financial condition. Sales that we anticipate in one quarter may occur in another quarter, affecting both quarters’ results and potentially the trading price of our common shares. In addition, we typically ship orders within two weeks of when we receive them and maintain inventory levels to allow us to operate with little backlog. The efficiency of our inventory system, and our ability to avoid backlogs and potential loss of clients, is closely tied to our ability to accurately predict seasonal and quarterly variances. Our planned expenditures are also based primarily on sales forecasts. Our sales cycle is generally long, making our sales forecasts more uncertain than in businesses with short sales cycles. When sales do not meet our expectations, our results of operations will be reduced for the relevant quarters, as we will have already incurred expenses based on those expectations. Additionally, while we can adjust our direct labor headcount by virtue of more or fewer shifts, our ability to quickly react to significant swings in revenue may be limited by how quickly we can adjust our headcount. Due tounsuccessful in generating revenue through these riskfactors, quarter-to-quarter or year-to-year comparisons of our results of operations may not be an indicator of future performance.initiatives.
Turnover of our key executives, and difficulty of recruiting and retaining key employees, could have a material adverse effect on our business and results of operations.
The performance of key personnel is essential to our business. Our success will depend in part on our ability to attract, develop and retain qualified key personnel as needed. We have experienced executive-level changes since 2017, which could negatively affect our ability to retain other key executives and employees. Between September 2018 and January 2019, two of our threeco-founders left the Company, and commenced a competing business. Our thirdco-founder retired in November 2019. Our business has a long sales cycle, and we believe the distraction from significant management changes since 2017 has adversely affected our sales efforts during 2018, and therefore our 2019 revenues, to a greater extent than we anticipated. While we believe that these management changes will ultimately position the Company for growth, we cannot provide any assurance that we will effectively manage these or any other management transitions. Failure to effectively manage these transitions may affect our ability to retain our new or remaining key executives and employees and could have a material adverse effect on our business and results of operations.
Labor shortages and disruptions in our manufacturing facilities may delay or impede production and could have a material adverse effect on our financial condition, liquidity or results of operations.
Our manufacturing processes and technology development largely depend on human labor, although certain parts are automated or integrated with technology. Our distributed manufacturing approach allows us to shift production among our manufacturing facilities, although not all production can be moved. As a custom manufacturer, we do not carry finished goods inventory that can withstand a labor shortage or disruption for an extended period of time. We may therefore be affected by labor shortages or disruptions, particularly in the United States. Both our profitability and our ability to scale could be adversely affected if we encounter difficulty in attracting and retaining qualified personnel. If we are unable to continue to attract and retain qualified personnel, or if we experience any labor shortages or disruptions, we could incur higher recruiting expenses or a loss of manufacturing capabilities, all of which could have a material adverse effect on our business, financial condition, liquidity or results of operations.
We may be exposed to product liability and warranty claims on DIRTT Solutions, which if successfully asserted, could have a material adverse effect on our financial condition, liquidity or results of operations.
Our DIRTT Solutions are generally backed by warranties, some of which are up to 10 years. We may, from time to time, be involved in product liability and product warranty claims relating to DIRTT Solutions that could adversely affect our financial condition, results of operations, and cash flows. For example, in 2019, we incurred costs in the amount of $2.6 million in connection with remediating deficiencies in our solutions, including in costs related to tile warping, and we provided an incremental $2.5 million to our liability related to potential costs to remediate DIRTT Timber installed on projects between 2016 and 2019 that may not have met fire retardant standards under which they were sold. We are in discussions with our insurance carrier to determine how much, if any, of this liability is covered by insurance. Although we maintain warranty and other reserves in an amount based primarily on production, historical and anticipated warranty claims, future warranty claims may exceed this amount resulting in a need to increase the reserve. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could also result in clients rejecting our products and damage to our reputation, all of which could materially and adversely affect our financial condition, results of operations and liquidity.17
We have also on occasion found flaws and deficiencies in the design, manufacturing, assembling, labeling, product formulations or testing of DIRTT Solutions. DIRTT Timber is occasionally integrated as structural components in projects; therefore, any future flaws and deficiencies in certain DIRTT Timber projects may compromise the structure of the project. Some flaws and deficiencies have not been apparent until after the solutions were installed. If any flaws or deficiencies exist in our products and if such flaws or deficiencies are not discovered and corrected before DIRTT Solutions are installed or otherwise incorporated into the structures, damages could result, including collapse, fire, personal injury or death. Product liability claims can be expensive to defend, could divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome, and could result in negative publicity. Increased costs to address product warranty claims or to defend against product liability claims may result in increased expenses and adversely affect our financial condition and results of operations.
We may be exposed to potential claims arising from the conduct of general contractors and theirsub-contractors, which could materially and adversely affect our business, results of operations and financial condition.
Errors in the installation of DIRTT Solutions, even if the products are free of flaws and deficiencies, could also cause personal injury or death. To the extent that such damage or injury is not covered by our product liability insurance and we are held to be liable, we could be required to correct such damage and to compensate persons who might have suffered injury or death, and our reputation, business and financial condition could be materially and adversely affected. Additionally, we may incur additional costs to refund clients or repair or recall DIRTT Solutions, including costs to remedy the affected structures. We also may not be able to maintain insurance on acceptable terms that provide adequate protection against potential liabilities. Any such claims, if asserted, could require us to expend material time and efforts defending or resolving the claim and may materially and adversely affect our business, results of operations and financial condition.
Our software and products may have design defects, deficiencies, or other unknown risks, and we may incur additional costs to fix any such defects, deficiencies, or risks.other risks, or be subject to warranty or product liability claims.
Our software and solutions are complex and must meet both the technical requirements of our clients and applicable building codes and regulations. Our solutions may contain undetected errors or design and manufacturing defects, and our software may experience quality or reliability problems, or contain bugs or other defects. Software defects may also cause errors in our manufacturing or miscalculations in ordering and pricing, andwhich could lead us to incur losses and perhaps lose market share to competitors. Product or software defects could cause us to incur warranty costs, product liability costs, and repair and remediation costs. Although we maintain commercial general liabilitywarranty reserves based on production, historical claims, and errorsestimates, future warranty claims may exceed our reserves. Similarly, while we maintain insurance of the types and omissions liability insurance,amounts we consider commercially prudent in view of industry practice, such insurance coverage may not be sufficient to protect us against substantial claims.
Our formerco-founders’ competitive behavior against us Such claims could have a material adverse effect on our business, financial conditionbe expensive to defend, could divert resources, including the attention of management and results of operations.
On September 10, 2018, ourco-founderother personnel for significant periods, and former Executive Chairman and Chief Executive Officer, Mogens Smed, left the Company. In connection with his departure, Mr. Smed entered into a settlement agreement (the “Settlement Agreement”) with the Company that provided, among other things, for the continued adherence to thenon-compete andnon-solicit obligations of his employment agreement. Mr. Smed, along with another former founder, Barrie Loberg, who was our former Vice President of Software Development, have started an interior construction and manufacturing company that we believe competes with us. Since January 2019, a number of our employees have departed to join this new company. Mr. Smed, Mr. Loberg and a number of our former employees who have joined their company havein-depth knowledge about our business, such as our customers, employees, Distribution Partners, consultants, products, policies, practices and prospects, and we may be adversely affected by increased competition arising out of this competing business venture. We believe that Messrs. Smed and Loberg are not permitted to solicit our current and former employees, Distribution Partners and customers or otherwise engage in competitive behavior. On May 9, 2019, we filed a lawsuit in the Court of Queen’s Bench of Alberta against Messrs. Smed and Loberg to enforce the termsregardless of the Settlement Agreement and their respective obligations, includingnon-compete andnon-solicit provisions, and they have deniedultimate outcome could result in negative publicity. Increased costs to address product warranty claims or to defend against product liability and counterclaimed asserting rights to further compensation and damages for defamation. We are engagedclaims, may result in other litigation with Messrs. Smed and Loberg, or entities with which they are involved, relating to similar claims and disputes over alleged misappropriation of proprietary information by them or by us. See Item 3. “Legal Proceedings.” If Messrs. Smed and Loberg further engage in a competitive business against us or if we are not successful in enforcing the Settlement Agreement, our business, financial condition and results of operations may be adversely affected.
We may be unable to protect our intellectual property adequately from infringement by third parties, and we may also be subject to claims that we infringe on intellectual property rights of others.
We expend considerable efforts to protect our intellectual property and to operate without infringing on the intellectual property rights of others. We rely on a combination of contract, copyright, patent, trademark and trade secret laws, confidentiality procedures and other measures to protect our proprietary information. There can be no assurance that our various patents, copyrights or trademarks will offer sufficient protection and prevent misappropriation of our proprietary rights. Additionally, our software copyright and other protections might not be adequate to protect our software and application code. We also may not be granted patents, copyrights or trademarks on our pending or proposed applications, and granted applications may be challenged, invalidated or circumvented in the future.
We will not be able to protect our intellectual property, trade secrets, or other proprietary information if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Additionally, we may be required to spend significant resources to monitor and protect our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our applications and use information that we regard as proprietary to create products or services that compete with ours. We enforce our intellectual property rights where appropriate, but the cost of doing so may be substantial and could outweigh the potential benefits, and we may be unsuccessful in our enforcement efforts. Failure to protect or maintain the proprietary nature of our intellectual property could adversely affect our ability to sell original products and materiallyincreased expenses and adversely affect our business, financial condition and results of operations.
Additionally, our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property in technology areas relating to our technology, including ICE Software, manufacturing processes, and DIRTT Solutions. Although we do not believe that our software or DIRTT Solutions infringe on the proprietary rights of any third parties, claims may arise regarding infringement or invalidity claims (or claims for indemnification resulting from infringement claims). Such assertions or prosecutions, regardless of their merit, may subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from assembling or licensing certain of our products, subject us to injunctions restricting our sale of products, cause severe disruptions to our operations or the marketplaces in which we compete, or require us to satisfy indemnification commitments with our clients, including contractual provisions under various license arrangements. A damages award against us could include an award of royalties or lost profits and, if the court finds willful infringement, treble damages and attorneys’ fees. This may cause us to expend significant costs and resources, and could adversely affect our business, financial condition or results of operations.
If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, our operations could be disrupted and our reputation and profitability could be negatively affected.
In the ordinary course of our business, we generate, collect and store confidential and proprietary information, including intellectual property and business information. While we do not generally collect information from clients and Distribution Partners, we may obtain certain of their information from time to time during the ordinary course of business. The secure storage, maintenance, and transmission of and access to this information is important to our operations and reputation. Various third parties, including computer hackers, who are continually becoming more aggressive and sophisticated, may attempt to penetrate our network security and, if successful, misappropriate confidential client, Distribution Partner, employee or supplier information. In addition, one of our Distribution Partners, employees, or other third parties with whom we do business may attempt to circumvent our security measures in order to obtain such information or may inadvertently cause a breach involving such information. There is no guarantee that our security systems, processes or procedures are adequate to safeguard against all data security breaches, misuse of data, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information of a client, Distribution Partner, employee, supplier or Company information could result in financial losses, exposure to litigation risks and liability (including regulatory liability), damages to our reputation, and disruptions in our operations, all of which could have a material adverse effect on our business, financial condition and results of operations.
The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with new and frequently changing requirements, and compliance with those requirements could result in additional costs. These costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could be substantial and adversely affect our business. A significant compromise of sensitive employee, Distribution Partner, client or supplier data in our possession could result in legal damages and regulatory penalties. In addition, the costs of defending such actions or remediating breaches could be material.
Damage to our information technology and software systems could impair our ability to effectively provide DIRTT Solutions, harm our reputation, and adversely affect our business.
Our information technology and software networks and systems, which include the processing, transmission and storage of information, are integrated with our manufacturing processes and essential to our business operations. These systems are vulnerable to, among other things, damage or interruption from power outages, network failures or natural disasters, loss or corruption of data, human error, employee misconduct and difficulties associated with upgrades, installations of major software or hardware, and integration with new systems. While we maintain retention backupsto geo-diverse digital and physical locations and have a recovery data center, the data center and other protective measures we take could prove to be inadequate. Any disruption in our systems or unauthorized disclosure of information could result in delayed manufacturing and delivery of our DIRTT Solutions, legal claims, a loss of intellectual property and a disruption in operations, all of which could adversely affect our reputation, relationships with clients, financial condition and results of operations.
We are subject to fluctuations in the prices of our commodities, including raw materials and commodities, which could adversely affect our liquidity, operating margins and financial condition and results of operations.condition.
We experience fluctuations in the cost of ourpurchase raw materials, including aluminum, glass, and wood. A varietywood, from a number of factors over which we have no control, such aslocal and global suppliers. The costs of these commodities can fluctuate due to changes in global supply and demand, for aluminum, fluctuations in transportation costs,inflation, speculation in commodities futures, and changes in lawstariffs or regulations, and the creation of new materials or products based on new technologies may affect the purchase and transportation costs and availability of raw materials that we use to manufacture DIRTT Solutions. These factors maytrade barriers, which can also magnify the effect of economic cycles on our business.interrupt supply. In addition, we have not historically entered into long-term agreements with vendors and if we continue to do so, we may be exposed to short-term and long-term price fluctuations as a result.
Aluminum represents the largest component of our raw materials consumption. Substantial, prolonged upward trends in aluminum prices could significantly increase the cost of our aluminum needs and have an adverse effect on our financial condition and results of operations. We have experienced fluctuations in the price of aluminum and anticipate that these fluctuations will continue in the future. In 2018,particular, during 2021 through 2023, we experienced significant price inflation across substantially all of our materials, largely due to pandemic-induced supply chain constraints, and it is unclear whether such price increases will be temporary or permanent in nature. From time to time, the U.S. government has imposed tariffs on steel and aluminum and limited the amounts of steel and aluminum coming into the United States based on the countries of origin of those imports. In 2018 and 2019,2023, we sourced the majority of our aluminum from North America and sourced under 10% of our raw materials from outside North America. Nonetheless, substantial, prolonged upward trends in aluminum and other commodity prices, along with tariffs and import limitations, maycould significantly increase the prices we pay for aluminum. Increases in the price that we pay for our commodities, including raw materials, couldcosts and adversely affect our liquidity, operating margins, and financial condition.
We rely on a limited number of outside suppliers for certain key components and materials, and failure or delay in obtaining the necessary components or materials could delay or prevent the manufacturing or distribution of our DIRTT Solutions.
We rely on certain key suppliers for raw materials and components, including aluminum, glass, wood, paint, and wood.hardware. We maintain multiple suppliers for key materials, although two suppliers accounted for approximately 32% and 21% of our aluminum supply for the year ended December 31, 2019. 2023, (i) one supplier accounted for approximately 61% of our aluminum supply, respectively, and two additional suppliers provided approximately 19% and 18%, respectively (ii) two suppliers accounted for approximately 46% and 44% of our wood supply, (iii) one supplier accounted for approximately 100% of our paint and powder supply, and (iv) one supplier accounted for approximately 42% of our hardware supply.
While we believe there are other vendors for most of our key requirements, certain materials and components meeting our quality standards are available only through a limited number of vendors. If we are required to obtain another source for these materials or components, we may not be able to obtain pricing on as favorable terms or on terms comparable to our competitors. Any failure or delay in obtaining the necessary raw materials or components in the quantities and quality required may result in increased costs and delays in manufacturing or distributing our products, which could have a material adverse effect on our liquidity, financial condition, or results of operations. A vendor may also choose, subject to existing contracts, to modify its relationship with us due to general economic concerns or specific concerns relating to that vendor or us, at any time. These modifications might include additional requirements from our suppliers that we provide them additional security in the form of prepayments or with letters of credit. Any significant change in the terms that we have with our key suppliers could materially and adversely affect our liquidity, financial condition, or results of operations.
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Risks Relating to Market Conditions
Our current manufacturing facilitiesGlobal economic, political and social conditions and financial markets, such as the Ukraine and the Israel-Hamas war, may reach capacity, and we may have difficulty procuring adequate manufacturing spaceimpact our ability to meet our needs.
We have manufacturing facilities in Calgary, Alberta; Phoenix, Arizona; and Savannah, Georgia. Our wall tiles, millwork and timber solutions are manufactured in Calgary, while aluminum, glass and power components are manufactured in all three locations. We may be constrained by physical capacity in our facilities. While we may address increased short-term demands through the addition of production shifts in our manufacturing facilities, we may need to expand our current manufacturing capabilities and add or expand facilities within the next two to three years. For example, we are in the process of constructing abuild-to-suit combined tile and millwork factory in Rock Hill, South Carolina. If we are unable to timely meet increased demands, we could experience delays in production and shipments of product due to both the loss of inventory and materials storage and production capacity, which would materiallydo business and adversely affect our liquidity, financial condition, and results of operations.
We may incur significant costs complying with environmental, healthOur industry is cyclical and safety lawshighly sensitive to macroeconomic conditions. Overall declines or reductions in construction and related claims,renovation due to economic downturns, unemployment and failure to comply with these laws and regulations could expose us to significant liabilities, which could materially adversely affect our results of operations.
We are subject to laws, regulations, and other requirements with respect to workers’ health and safety and environmental mattersoffice vacancies, changing return-to-office trends, difficulties in the United States, Canadafinancial services sector and credit markets, and imposition of trade barriers can impact the demand for our products. Financial difficulties experienced by our suppliers, Construction Partners or clients could also result in, among other countriesthings, inadequate project financing, project delays, inability to pay accounts receivable or disruptions in which we operate. The costs of compliance with such laws and regulations couldour supply chain. Any general economic, political, or social conditions that may contribute to financial difficulties experienced by us, our suppliers, Construction Partners, or clients may adversely affect our liquidity, financial condition or results of operations. Environmental laws and regulations impose, among other things, restrictions, liabilities and obligations in connection with the production, processing, preparation, handling, storage, transportation, disposal and management of wastes and other substances, and the prevention and remediation of environmental effects. More stringent laws and regulations relating to climate change and emission of greenhouse gases may be adopted in the future and could impact our facilities, raw material suppliers, the transportation and distribution of our solutions, and our clients, which could reduce demand for our solutions or cause us to incur additional operating costs. Health and safety laws and regulations impose, among other things, requirements designed to ensure the protection of workers. In addition, we are required to obtain numerous governmental permits in order to operate our facilities and in connection with the design, development, manufacture and transport of our products and the storage, use, handling and disposal of hazardous substances, including environmental, health and safety laws, regulations and permits governing air emissions. If we fail to comply with these requirements, we could be subject to civil or criminal liability, damages and fines, and our operations could be curtailed, suspended or shutdown and our reputation, ability to attract employees, and results of operations could be adversely affected. In addition, certain foreign laws and regulations may affect our ability to export products outside of or import into the United States or Canada. Although we handle minimal quantities of hazardous substances, existing environmental, health and safety laws and regulations apply to our operations, new laws and regulations could be adopted or become applicable to us or our products, and future changes in environmental, health and safety laws and regulations could occur. These factors may materially increase the amount we must invest to bring our processes into compliance with legal requirements and impose additional expenses on our operations.
Private lawsuits, including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state and local regulatory agencies, including enforcement or cost-recovery actions, may materially increase our costs. Certain environmental laws make us potentially liable on a joint and several basis for the remediation of contamination at or emanating from properties or facilities that we currently or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability may require us to pay more than our proportionate share based on our contribution to the amount or type of waste we dispose and could require us to address contamination caused by others. Any changes in these laws or regulations or changes in our manufacturing processes may require us to request changes to our existing permits or obtain new permits. Any requests to change our existing permits or obtain new permits may be delayed or denied and may require us to modify our manufacturing processes, which could be costly and time consuming and could adversely affect our business and results of operations.
We may not be able to obtain or maintain, from time to time, all required environmental regulatory approvals. A delay in obtaining any required environmental regulatory approvals or failure to obtain and comply with them could materially adversely affect our business and results of operations.
We are exposed to currency exchange rates, interest rates, tax rates, and other fluctuations, including those resulting from changes in laws.
Our revenues and expenses are collected and paid in different currencies, including the U.S. dollar and Canadian dollar. Fluctuations in the valuerelative values of any such currency expose us to foreign exchange risk and could have a material and adverse effect on our cash flows, revenues and results of operations. We also have currency exchange exposure to the extent of a mismatch between foreign-currency denominated revenues and expenditures – in particular, where U.S. dollar revenues do not equal U.S. dollar expenditures. We are not currently using exchange rate derivatives to manage currency exchange rate risks. There are currently no significant restrictions on the repatriation of capital and distribution of earnings to foreign entities from any of the jurisdictions in which we operate. There can be no assurance that such restrictions will not be imposed in the future.
Most of DIRTT’s debt is on fixed interest rates. The Second Extended RBC Facility (as defined below) is subject to market interest rates. We are not currently using interest rate derivatives to manage interest rate risks. If interest rates rise, this could have a material and adverse effect on our cash flows, revenues and results of operations and may adversely affect our ability to access financing. We are currently undrawn on our Second Extended RBC Facility.
Compliance with new or amended tax laws and regulations could have a material adverse effect on our business. We operate in multiple jurisdictions, including the United States and Canada, and may therefore be subject to the tax laws and regulations of such jurisdictions. For instance, the U.S. 2017 Tax Cuts and Jobs Act was enacted on December 22, 2017, and significantly affected U.S. tax law; it also affected our business and financial condition because historically, approximately 80% to 85% of our revenue has been derived from U.S. projects.
We base our tax positions upon our understanding of the tax laws of and(including, applicable tax treaties intreaties) of the various countries in which we have assets or conduct business activities. However, our tax positions are subject to review and possible challenges by taxing authorities, including as to the computation and allocation of income, transfer pricing and other complex issues. This includes adverse changes to the manner in which Canada, the United States and other countries tax local and foreign corporations and interpret or change their tax laws and applicable tax treaties.treaties, including in light of the increased focus by the U.S. Congress, the Canadian government, the Organization for Economic Co-operation and Development and other government agencies in jurisdictions where we do business on issues related to the taxation of multinational corporations. We cannot determine in advance the extent to which such jurisdictions may amend their tax laws, review our tax positions, or assess additional taxes or interest and penalties on such taxes. In addition, our effective tax rate may be increased by changes in the valuation of deferred tax assets and liabilities, our cash management strategies, local tax rates, or interpretations of tax laws.
Risks Relating to Intellectual Property and Information Security
We may be subjectunable to legalmaintain, protect or enforce our intellectual property rights, and regulatory proceedingswe may be accused of infringing intellectual property rights of others.
We rely on a combination of contract, copyright, patent, trademark and trade secret laws, confidentiality procedures and other measures to protect our intellectual property. There is no guarantee that our various contractual rights, patents, copyrights, trademarks and trade secrets will offer sufficient protection of our products and services or prevent misappropriation of our proprietary rights in our products, software or processes. We also may not be granted patents, copyrights registrations or trademark registrations on our pending or proposed applications, and granted applications may be challenged, invalidated or circumvented in the future. Despite our best efforts to maintain and enforce our intellectual property, monitoring unauthorized use of our intellectual property is difficult and costly, and the steps we have taken may not be sufficient to effectively prevent third parties from infringing, misappropriating, diluting or otherwise violating our intellectual property rights. Despite our precautions, it may be possible for a varietyunauthorized third parties to use information that we regard as proprietary to create products or services that compete with ours. We enforce our intellectual property rights where appropriate, but the cost of doing so may be substantial and could outweigh the potential benefits, and we may be unsuccessful in our enforcement efforts. Failure to protect or maintain the proprietary nature of our intellectual property could adversely affect our ability to sell original products and adversely affect our business, financial condition and results of operations.
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Additionally, our competitors or other third parties may own, or claim to own, intellectual property in technology areas relating to our technology, including ICE Software, manufacturing processes, and DIRTT Solutions. Although we do not believe that our software or DIRTT Solutions infringe or misappropriate the proprietary rights of any third parties, litigation related to such claims, which couldwhether or not meritorious, may subject us to significant costsliabilities, require us to enter into royalty and judgments and divert management’s attentionlicensing arrangements on unfavorable terms, prevent us from assembling certain of our business.
From timeproducts or licensing certain of our intellectual property, subject us to time we may become involved in litigation for a varietyinjunctions restricting our sale of claims relatingproducts or services, cause severe disruptions to our operations or the marketplaces in which we compete, or require us to satisfy indemnification commitments with our clients, including contractual provisions under various license arrangements. A damages award against us could include an award of royalties or lost profits and, if a court finds willful infringement, treble damages and attorneys’ fees. This may cause us to expend significant costs and resources, and could adversely affect our business, financial condition or results of operations.
If we are unable to protect our information technology systems against data corruption, cyber-based attacks or network security breaches, our operations could be disrupted and our reputation and profitability could be negatively affected.
In the ordinary course of our business, we generate, collect and store confidential and proprietary information, including intellectual property, business information, and other proprietary information. The secure storage, maintenance, and transmission of, and access to, this information is important to our operations and reputation. We use automated software and hardware solutions contracts, relationshipsto protect our on-premise and cloud infrastructure; conduct routine third-party evaluations and vulnerability testing to identify and mitigate risks; and deploy employee training programs throughout the company. Although we have experienced cyber-based attacks, to our knowledge, we have not experienced any material disruptions or breaches of our information technology systems or platforms. However, there is no guarantee that our security systems, or processes or procedures designed to protect our information technology systems are adequate to safeguard against all cybersecurity risks or human error. Any security breach involving the misuse, loss or other circumstances,unauthorized disclosure of confidential information of a client, Construction Partner, employee, supplier or Company information could result in financial losses, exposure to litigation and liability (including regulatory liability), damage to our reputation, and disruption to our operations, all of which could have a material adverse effect on our business, financial condition or results of operations. While we maintain commercially prudent cybersecurity insurance consistent with industry practice, such insurance may not be sufficient to cover all losses relating to data loss or an information security breach.
The regulatory environment related to information security, data collection and use, and privacy is complex and continuously evolving and compliance with laws, rules, regulations or other requirements could result in additional costs. The costs associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to prevent or remediate information security breaches, could be substantial and adversely affect our business. A significant compromise of sensitive employee, Construction Partner, client or supplier data in our possession could result in legal damages and regulatory penalties. In addition, the costs of defending actions, responding to complaints, or remediating breaches could be material.
Damage to our information technology and software systems could impair our ability to effectively provide DIRTT Solutions and adversely affect our reputation, relationships with clients, financial condition or results of operations.
Our information technology and software networks and systems, which include the processing, transmission and storage of information, are integrated with our manufacturing processes are essential to our business operations. These systems are vulnerable to, among other things, damage or interruption from power outages, network failures or natural disasters, loss or corruption of data, human error, employee misconduct and difficulties associated with upgrades, installations of major software or hardware, and integration with new systems. While we maintain retention backups to geo-diverse digital and physical locations and have a recovery data center, the data center and other protective measures we take could prove to be inadequate. Any disruption in our systems or unauthorized disclosure of information could result in delayed manufacturing and delivery of our DIRTT Solutions, legal claims, a loss of intellectual property and a disruption in operations, all of which could adversely affect our reputation, relationships with clients, financial condition or results of operations.
Our core intellectual property in the ICE Code is jointly owned with a third party, who may fail to comply with its contractual obligations to protect and enforce our intellectual property rights.
AWI owns a 50% interest in the rights, title and interests in certain intellectual property rights in the Applicable ICE Code, including a 50% interest in the patent rights that relate to the Applicable ICE Code. As part of AWI’s purchase of the Applicable ICE Code, AWI must comply with contractual obligations designed to protect the Applicable ICE Code from infringement, misappropriation, misuse or exposure to unauthorized third parties. However, despite our efforts to monitor AWI’s actions, we may not become aware of AWI’s failure to comply with its obligations or we may not have adequate time to address such failure before there are adverse impacts to our business. Additionally, even if we attempt to require AWI to comply with its obligations to enforce our intellectual property rights, AWI may refuse or may become involvednot take adequate steps to do so. AWI’s failure to protect or maintain the proprietary nature of the Applicable ICE Code could adversely affect our ability to sell original products or adversely affect our business, financial condition or results of operations.
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AWI may fail to meet certain security and non-disclosure obligations designed to prevent our competitors or other unauthorized third parties from accessing the Applicable ICE Code. Despite our efforts to enforce our rights and monitor any inadequacies, we may not have access to AWI’s internal security or business practices. Additionally, we may not be successful in preventing AWI from exposing the source code of the Applicable ICE Code to third parties or in protecting our intellectual property rights in the Applicable ICE Code. Any unauthorized access to the Applicable ICE Code in AWI’s possession could substantially and adversely affect our business or competitive advantage and management may have to expend significant time and resources to address unauthorized access and disclosure, all of which could have a material adverse effect on our business, financial condition or results of operations.
Risks Relating to Government Regulations and Enforcement
We may incur significant costs complying with environmental, health and safety laws and related claims, and failure to comply with these laws and regulations could expose us to significant liabilities, which could materially adversely affect our business and results of operations.
We are subject to laws, regulations, and other requirements with respect to workers’ health and safety and environmental matters in the United States, Canada and other countries in which we operate. Environmental laws and regulations impose, among other things, restrictions, liabilities and obligations in connection with the production, processing, preparation, handling, storage, transportation, disposal and management of wastes and other substances, and the prevention and remediation of environmental effects. Health and safety laws and regulations impose, among other things, requirements designed to ensure the protection of workers. New or more stringent laws and regulations, including those relating to climate change and greenhouse gas emissions, may be adopted in the future and could impact our facilities, raw material suppliers, the transportation and distribution of our solutions, and our clients, which could reduce demand for our solutions or cause us to incur additional operating costs. In addition, certain foreign laws and regulations may affect our ability to export products outside of, or import products into, the United States or Canada. Failure to comply with these requirements may result in civil or criminal liability, damages and fines, and our operations could be curtailed, suspended or shutdown and our reputation, ability to attract employees, and results of operations could be adversely affected. Private lawsuits, including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state and local regulatory proceedings.agencies, including enforcement or cost-recovery actions, may materially increase our costs.
These factors may materially increase the amount we must invest to bring our processes into compliance with legal requirements and impose additional expenses on our operations. In addition, any changes in these laws or regulations or changes in our manufacturing processes may require us to request changes to our existing permits or obtain new permits. We may also be subjectunable to claims arisingobtain or maintain, from personal injuriestime to time, all required environmental regulatory approvals. A delay in obtaining any required environmental regulatory approvals or workers’ compensation occurringthe failure to obtain and comply with such approvals could materially adversely affect our business and results of operations.
Risks Relating to Financial Results
We have had negative cash flow from operating activities.
We had negative cash flow from operating activities for prior years, including the years ended December 31, 2022 and 2021. Continued negative operating cash flow may compromise our ability to make interest and principal payments on the convertible unsecured subordinated debentures issued on January 25, 2021 and December 1, 2021 (collectively, the “Debentures”) on a timely basis, or at all, and to execute our strategic plan. Until we are able to generate positive cash flow from operating activities over a sustained period, our ability to finance our operations will be dependent on our properties, includingcash reserves and available credit facilities and, if required, our manufacturing facilities. ability to obtain additional external financing. Although we had $14.8 million in cash provided from operating activities for the year ended December 31, 2023, and we anticipate we will have positive cash flow from operating activities over at least the next twelve months, we cannot guarantee that such future cash flow will be sufficient, or other changes to our circumstances will not necessitate additional financial resources to fund our operating activities.
We are partyhave undertaken various actions to potentially material legal proceedings. See Item 3. “Legal Proceedings.” improve our cash flow and balance sheet in the short term, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources”. Although we anticipate these actions will strengthen our balance sheet and liquidity position, we cannot guarantee that such future cash flow will be sufficient or other changes to our circumstances will not necessitate additional financial resources to fund our operating activities.
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We arehave experienced a history of losses, and despite certain periods of profitability in recent years, we may not currently partybe able to any material regulatory proceedings against us. The defensegenerate sufficient revenue to achieve and sustain profitability.
We have incurred significant losses since commencing business. We incurred net losses after tax of litigation, including fees$14.6 million, $55.0 million and $53.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. As at December 31, 2023, we had an accumulated deficit of legal counsel, expert witnesses$180.9 million. These losses and related costs, is expensiveaccumulated deficits were due in part to the substantial investments made to grow our business and difficultacquire clients, to forecast accurately. In general, such costs are unrecoverable even iffurther develop our service offerings through product and software development, to ensure that we ultimately prevailhave sufficient production capacity and capability to deliver on our commitment of rapid delivery times and to preserve our production, innovation and commercial capabilities through the economic disruption caused by the global COVID-19 pandemic in litigation and could represent a significant useanticipation of an increase in construction activity as the pandemic impacts abated. Past results may not be indicative of our capital resources. To defend lawsuits, it is also necessary for us to divert the attentionfuture performance, and resources of officers and other employees from their normal business functions to gather evidence, give testimony and otherwise support litigation efforts.
The outcome of any litigation, regardless of its merits, is inherently uncertain. Given the inherent uncertainties in evaluating certain exposures, actual costs to be incurred in future periods may vary from our estimates for such contingent liabilities. Therethere can be no assurance that we will be able togenerate net income in the future.
We have experienced, and may experience in the future, quarterly and yearly fluctuations in results of operations and financial condition.
Our results of operations and financial condition may continue to successfully avoid, managefluctuate from one quarter or year to another due to a number of factors, some of which are outside of our control. For example, we usually experience seasonal slowdowns in the first and defend such matters. Iffourth quarters of each calendar year, leading to stronger sales in the second half of the year versus the first half, and weather conditions may also delay delivery and installation on some projects. Furthermore, sales that we are unsuccessfulanticipate in defendingone quarter may be pushed into another quarter, affecting both quarters’ results, and our actual or projected results of operations may fail to match our past performance. These events could in turn cause the market price of our common shares to fluctuate. In particular, if our results of operations do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical results of operations, the market price of our common shares will likely decline. Due to our high fixed manufacturing costs and operating expenses, quarterly volatility in sales volumes could result in periods of low operating cash flow and negatively affect our liquidity. Due to these risk factors, quarter-to-quarter or year-to-year comparisons of our results of operations may not be an indicator of future performance.
We have recognized, and may recognize in the future, impairment charges for our goodwill and certain other non-current assets.
During the year ended December 31, 2021, we impaired the $1.4 million net carrying value of goodwill on our consolidated balance sheet. Significant negative industry or economic trends, disruptions to our business, planned or unexpected significant changes in the use of the assets, and sustained market capitalization declines may result in the impairment of non-current assets. In 2022 and 2021, we had an indicator of impairment for our non-current assets. In 2023, we announced our intention to close the Rock Hill Facility, which resulted in an impairment charge on the reclassification of assets held for use to assets held for sale. As at December 31, 2023, we did not have any litigation or claims, weimpairment indicators for our non-current assets. Any further charges relating to impairments could facehave a material judgments or awards against us,adverse impact on our consolidated statement of operations in the period in which the impairment is recognized.
Risks Related to Our Common Shares and Corporate Structure
Our share price has been and may continue to be volatile, which could cause the value of your investment to decline.
Our common shares are listed on the TSX under the symbol “DRT” and are quoted on the OTC under the symbol “DRTTF.” The price of our common shares has in the past fluctuated significantly, and may fluctuate significantly in the future, depending upon a number of factors, many of which are beyond our control and may adversely affect the market price of our reputation,common shares. These factors include: (i) variations in quarterly results of operations; (ii) deviations in our earnings from publicly disclosed forward-looking guidance; (iii) changes in earnings estimates by analysts; (iv) our announcements or our competitors’ announcements of significant contracts, acquisitions, strategic partnerships or joint ventures; (v) general conditions in the offsite construction and manufacturing industries; (vi) sales of our common shares by our significant shareholders; (vii) fluctuations in stock market price and volume; and (viii) other general economic conditions.
In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has been brought against that company. If our share price is volatile, we may become the target of securities litigation in both the United States and Canada. Securities litigation could result in substantial costs and divert management’s attention and resources from our business and could have an adverse effect on our business, financial condition and results of operations.
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We
Our common shares are quoted on the OTC’s Pink Tier, and there may be subject to increased counterparty credit risk resulting from, among other things, an increasea limited trading market in the numberCompany’s common shares in the United States. As a result of Distribution Partnersthe limited trading market, investors may experience limited liquidity, and clients.may experience limited ability to sell shares in the open market.
Continued growthOur common shares are quoted on the OTC’s Pink Tier under the symbol “DRTTF.” There may be a limited trading market in the Company’s common shares in the United States. As a result of the limited trading market of our Distribution Partner networkcommon shares, investors in our common shares may experience limited demand for their common shares, which may limit their ability to sell their shares in the open market.
We are governed by the corporate laws of Alberta, Canada, which in some cases have a different effect on shareholders than the corporate laws of the United States.
We are governed by the ABCA and client base increasesother relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our exposurecharter documents, have the effect of delaying, deterring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to credit risk relatedoffer in such an instance. The material differences between the ABCA and Delaware General Corporation Law (“DGCL”), that may have the greatest such effect include, but are not limited to, amountsthe following: (i) for certain extraordinary corporate transactions (such as amalgamations or amendments to our articles), the ABCA generally requires the voting threshold to be a special resolution passed by not less than two-thirds of the votes cast by the shareholders who voted in respect of the resolution, whereas DGCL generally only requires a majority vote; and (ii) under the ABCA, registered holders or beneficial owners (as defined in the ABCA) of not less than 5% of our common shares in aggregate can requisition our directors to call a special meeting of shareholders, whereas such right does not exist under the DGCL. We cannot predict whether investors will find our company and our common shares less attractive because we are governed by the corporate laws of Alberta, Canada.
We will cease to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, no later than December 31, 2024.
On December 31, 2024, we will cease to be an emerging growth company. Once we cease to be an emerging growth company, we may be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls if no other exemptions to such requirements apply. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
Additionally, if our independent registered public accounting firm is required to express an opinion on the effectiveness of our controls when we cease to be an emerging growth company, we may be unable to confirm that our internal control over financial reporting is effective. If that is the case, or if our independent registered public accounting firm is unable to express an unqualified opinion on the effectiveness of our controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common shares to decline.
Our two largest shareholders are able to exercise a significant amount of control over the Company due fromto their significant ownership of our Distribution Partnerscommon shares, and their clients. Our Distribution Partners purchase DIRTT Solutionsinterests may conflict with or differ from us directly. We routinely monitor the financial conditioninterests of our Distribution Partnersother shareholders.
As of February 16, 2024, 22NW Fund, LP and Aron English (collectively, the “22NW Group”) and WWT Opportunity #1 LLC (“WWT”) each owned 30.1% and 27.9% of our common shares, respectively, together beneficially owning approximately 58.0% of our common shares. Shaun Noll is the Managing Member of WWT. In addition to the common shares, the 22NW Group owns C$18,915,000 principal amount of our January Debentures (as defined below) and C$13,638,000 principal amount of our December Debentures (as defined below). Both the January Debentures and the December Debentures are convertible into common shares in accordance with the terms thereof. Thus, the 22NW Group could further increase its ownership in the Company through the conversion of its January Debentures or December Debentures into common shares.
So long as the 22NW Group and WWT and their clients, and review the credit historyrespective affiliates continue to directly or indirectly own a significant amount of our new Distribution Partners and their clients,common shares, they will be able to establish credit limits. While we establish an allowance for doubtful accounts that correspondsexercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendments to our estimateamended and restated articles of amalgamation, and approval of significant corporate transactions, barring any requirement for such shareholder to recuse itself from any such vote pursuant to applicable securities law, corporate law or the rules and regulations of any applicable stock exchanges. Further, affiliates of the credit risk22NW Group and WWT also serve as directors on the Company’s Board of Directors. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and would make the approval of certain transactions difficult or impossible without the support of these shareholders. Additionally, the perception that these shareholders would have the ability to control or significantly influence the Company could cause our common shares to be less attractive to certain investors or otherwise result in a decline in the trading price of our Distribution Partnerscommon shares. To the Company’s knowledge, the 22NW Group and the WWT are not acting in concert and do not constitute a “group” (as defined in Section 13(d)(3) of the Exchange Act).
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Since the 22NW Group and WWT each exercise a significant amount of control over the Company due to their clients based on historical trendssignificant ownership of our common shares, if the 22NW Group and economic circumstances, there canWWT were to disagree about key decisions with respect to the Company we may not be no assurances thatable to effectively address challenges facing our estimates and assumptions regarding allowance for doubtful accounts will prove to be accurate. Webusiness, which could realize additional losses if Distribution Partners or their clients default on their outstanding balance beyond our allowance for doubtful accounts, which would adversely affect our liquidity,business, financial condition or results of operations.
Because we are a corporation incorporated in Alberta and some of our directors and officers are residents of Canada, it may be difficult for investors in the United States to enforce civil liabilities against us or our directors and officers based solely upon the federal securities laws of the United States. Similarly, it may be difficult for Canadian investors to enforce civil liabilities against our directors and officers residing outside of Canada.
We are a corporation amalgamated and existing under the laws of Alberta with our principal place of business in Calgary, Alberta, Canada. Some of our directors and officers are residents of Canada and a substantial portion of our assets and those of such persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us or our directors or officers who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the Securities Act of 1933. Investors should not assume that Canadian courts: (i) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States or (ii) would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.
Similarly, some of our directors and officers are residents of countries other than Canada and all or a substantial portion of the assets of such persons are located outside Canada. As a result, it may be difficult for Canadian investors to initiate a lawsuit within Canada against these non-Canadian residents. In addition, it may not be possible for Canadian investors to collect from these non-Canadian residents judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation of certain of the provinces and territories of Canada. It may also be difficult for Canadian investors to succeed in a lawsuit in the United States, based solely on violations of federal, provincial or territorial securities laws.
General Risks
Difficulties in recruiting and retaining qualified officers or employees, or experiencing labor shortages or disruptions, could have a material adverse effect on our business and results of operations.
Our success will depend in part on our ability to attract, develop, and retain qualified personnel as needed. We have undergone significant changes at a senior management level during recent years as discussed elsewhere in this Annual Report. Although we anticipate smooth transitions, any changes to members of our senior management may be disruptive to our operations, including by diverting our Board of Directors’ and management’s time and attention and a decline in employee morale. If there are any delays in this process, our business could be negatively impacted. We may be affected by labor shortages or disruptions, particularly in locations where we operate manufacturing facilities. If we fail to attract or retain qualified personnel, or experience labor shortages or disruptions, we could incur higher recruiting expenses, a loss of manufacturing capabilities, or inability to respond to significant increases in demand, all of which could have a material adverse effect on our business and results of operations.
We may have futureadditional capital needs in the future and may not be able to obtain additional capital or financing on acceptable terms.
We plan to continually invest in business growth and may require additional funds to respond to business opportunities. Such investments may relate toopportunities, such as expanding our sales and marketing activities; developing our Distribution Partner network;activities, developing new software, products or features; enhancing our operating infrastructure; acquiring complementary businesses, products or technology, and technologies; expanding or enhancing our manufacturing capacity; or investing in innovation and operational capacity ahead of anticipated growth,capabilities, including commencing factory automation. To the extent that our existing capital is insufficient to meet our requirements, we may need to undertake equity or debt financings to secure additional funds. Further issuances of equity or convertible debt securities may result in significant share dilution. Additional new equity securities issued could have rights, preferences and privileges superior to those of our currently issued and outstanding common shares.
Additional debt financings may involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. We cannot provide any assurance that sufficient debt or equity financing will be available for necessary or desirable expenditures or acquisitions, or to cover losses, and accordingly, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our liquidity could be materially and adversely affected.
The agreements that govern our indebtedness contain a number of covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in activities that may be in our best long-term interests.
On October 21, 2013, we entered into an Amended and Restated Loan Agreement (as amended, the “Comerica Credit Facility”) with Comerica Bank, as subsequently amended, pursuant to which we had access to a $18.0 million revolving operating facility. The Comerica Credit Facility expired on June 30, 2019.
On July 19, 2019, we entered into a C$50 million senior secured revolving credit facility with the Royal Bank of Canada (the “RBC Credit Facility”). The RBC Credit Facility includes covenants that, among other things, impose significant operating and financial restrictions, including restrictions on our ability to engage in activities that may be in our best long-term interests. These covenants may restrict our ability to (i) make certain acquisitions or dispose of our property; (ii) consolidate, amalgamate, merge, or otherwise permit a material change in our corporate or capital structure; (iii) incur additional debt, other than permitted debt; (iv) permit encumbrances on certain assets to secure debt; and (v) pay dividends on or make other distributions in respect of our common shares or redeem, repurchase or retire our common shares or subordinated debt or make certain other restricted payments.24
We are also required to maintain specified financial ratios. Our ability to meet these ratios could be affected by events beyond our control, and we cannot assure you that we will meet them. A breach of any of the restrictive covenants or ratios may result in an event of default, or may limit our ability to borrow, under the RBC Credit Facility. If any such default occurs, the lender under the RBC Credit Facility may be able to elect to declare all outstanding borrowings, together with accrued and unpaid interest and other fees, to be immediately due and payable, or enforce their security interest. The lender may also have the right in these circumstances to terminate commitments to provide further borrowings.
We have experienced a history of losses, and despite certain periods of profitability in recent years, we may not be able to generate sufficient revenue to achieve and sustain profitability.
We have incurred significant losses since commencing business. We incurred net losses of $4.4 million and $7.7 million for the years ended December 31, 2019 and 2017, respectively. At December 31, 2019, we had an accumulated deficit of $46.0 million. These losses and accumulated deficits were due in part to the substantial investments made to grow our business and acquire clients, to further develop our service offerings through product and software development, and to ensure that we have sufficient production capacity and capability to deliver on our commitment of rapid delivery times. Past results may not be indicative of our future performance, and there can be no assurance that we will generate net income in the future.
We may not have insurance adequate in amount or coverage to protect us from all claims that may arise in connection with our business and operations.
While we currently maintain insurance of the types and amounts we consider commercially prudent and consistent with industry practice, including directors and officers, errors and omissions, property, and general liability insurance, we may not be fully insured against all risks incident to our business. There can be no assurance that insurance coverage will be available in the future on commercially reasonable terms or at commercially reasonable rates. There can also be no assurance that the amounts for which we are insured, or the proceeds of such insurance, will fully compensate us for any losses. In addition, the insurance coverage obtained with respect to our business and facilities will be subject to limits and exclusions or limitations on coverage that are considered by management to be reasonable, given the cost of procuring insurance and current operating conditions. If a significant event occurs that is not fully insured, it could adversely affect our financial condition and results of operations.
We may engage in future mergers, acquisitions, agreements, consolidations, or other corporate transactions that could adversely affect our business, financial condition, and results of operations.
While we currently have no specific plans to acquire any businesses, we may, in the future, seek to expand our business and capabilities through acquiring compatible technology, products or businesses. Additionally, we may explore other corporate transactions, including mergers, agreements, consolidations, or joint ventures, that we believe may be beneficial to our business or further specific business goals. Acquisitions involve certain risks and uncertainties, including, among other things, (i) difficulty integrating the newly acquired businesses and operations in an efficient and cost-effective manner; (ii) inability to maintain relationships with key clients, vendors and other business partners of the acquired businesses; (iii) potential loss of key employees of the acquired businesses; (iv) exposure to litigation or other claims in connection with our assumption of certain claims and liabilities of the acquired businesses; (v) diversion of management’s time and focus; and (vi) possible write-offs or impairment charges related to the acquired business.businesses. The occurrence of any of these risks could adversely affect our business, results of operations, and financial condition.
To the extent we are successful in identifying suitable businesses or products for acquisition, we may deem it necessary or advisable to finance such acquisitions through issuing common shares, securities convertible into common shares, debt financing, or a combination thereof. In such cases, issuing common shares or convertible securities could result in dilution to our shareholders at the time of such issuance or conversion. We may also pursue issuing debt to finance acquisitions, which may result in, among other things, the encumbrance of certain of our assets, impediment of our ability to obtain bank financing, and a decrease in our liquidity.
Risks Related to Our Common Shares
Our share price has been and may continue to be volatile, which could cause the value of your investment to decline.
Our common shares are currently listed on the TSX under the symbol “DRT” and on Nasdaq under the symbol “DRTT.” The price of our common shares has in the past fluctuated significantly, and may fluctuate significantly in the future, depending upon a number of factors, many of which are beyond our control and may adversely affect the market price of our common shares. These factors include: (i) variations in quarterly results of operations; (ii) deviations in our earnings from publicly disclosed forward-looking guidance; (iii) changes in earnings estimates by analysts; (iv) our announcements or our competitors’ announcements of significant contracts, acquisitions, strategic partnerships or joint ventures; (v) general conditions in the offsite construction and manufacturing industries; (vi) sales of our common shares by our significant shareholders; (vii) fluctuations in stock market price and volume; and (viii) other general economic conditions.
In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation have been brought against that company. If our share price is volatile, we may become the target of securities litigation in both the United States and Canada. Securities litigation could result in substantial costs and divert management’s attention and resources from our business and could have an adverse effect on our business, financial condition, and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
The requirementssecurity of beingour information technology systems and Company data is important to our operations and reputation. Accordingly, we are committed to identifying and managing cybersecurity risks. Our Cybersecurity team performs periodic risk assessments and, on a public companyquarterly basis, provides to our Enterprise Risk Management Committee (“ERM”) information related to the Company’s cybersecurity, including statistics on attempted cyber-attacks, status of employee information security training awareness, and information on any security investigations. The Cybersecurity team advises the ERM of significant global cyber events that occurred during the quarter and whether they impacted DIRTT. The Cybersecurity team regularly discusses with the ERM the Company’s cybersecurity posture and whether the Company should implement additional protections and controls to assist the Company in the United Statesprotecting, responding to, or mitigating potential future cyber-attacks.
DIRTT has developed and Canadaimplemented a cybersecurity risk management strategy which consists of 5 phases: Identify, Protect, Detect, Respond, and Recover. Each phase has multiple processes and technologies supporting those processes.
Identify
Identification processes at DIRTT include: system asset identification, threat identification, vulnerability identification and maintaining cybersecurity policies and standards.
Protect
Protection processes at DIRTT include: cyber awareness training, cyber awareness assessment (each employee is assigned a dual listingcybersecurity awareness grade calculated by a best in class cybersecurity vendor), implementation of identity and access controls, perimeter and endpoint security, annual vulnerability assessments and remediation, data encryption in transit, key vendor (third parties) control effectiveness assessment, and pre-implementation of software and systems cybersecurity assessments.
Detect
Detection processes at DIRTT include: automated event collection, collation, analysis, alerting and end user incident reporting.
Respond
Respond processes at DIRTT include: containment, communication, investigation and analysis, and long-term mitigation planning.
Recover
Recovery processes at DIRTT include: impact identification and analysis, system restoration, internal and external communications as deemed necessary.
DIRTT engages external assessors annually for specific controls, to assess and provide assurance on both Nasdaqthe health of DIRTT’s cybersecurity posture and controls.
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DIRTT’s Senior Vice President (“SVP”) of Technology, who reports to the TSX, including compliance withCEO, is responsible for DIRTT’s cybersecurity and has over 15 years of technology experience. The SVP of Technology is supported by dedicated Cybersecurity staff and Governance, Risk and Compliance (“GRC”) staff. DIRTT’s cybersecurity team leader has over 20 years of experience in cybersecurity, multiple industry standard cybersecurity certifications, and extensive offensive and defensive cybersecurity tactical skills. DIRTT’s GRC lead has over 20 years of GRC experience and industry standard certifications. Cybersecurity incidents, response and remediation activities and statuses are reported directly to the reporting requirementsSVP of Technology.
The ERM of the Exchange Act, the requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and applicable securities laws of Canada, may strain our resources, increase our costs, and require significant management time and resources.
As a public company in the United States, we need to comply with new laws, regulations and requirements, certain corporate governance provisions of Sarbanes-Oxley, related regulations of the SEC and the requirements of Nasdaq, with which we are not required to comply as a public company in Canada listed on the TSX. Specifically, we may incur significant additional accounting, legal, reporting and other expenses in order to maintain a dual listing on both Nasdaq and the TSX, including the costs of listing on two exchanges. Complying with these statutes, regulations and requirements, as well as any applicable securities laws of Canada, occupies a significant amount of time of our Board of Directors (the “Board”)oversees risks resulting from cybersecurity threats. DIRTT’s management, represented by the SVP of Technology, is responsible for identifying, assessing, and managementmanaging risks arising from cybersecurity threats. Quarterly, DIRTT's SVP of Technology reports to the ERM on the health of DIRTT’s cybersecurity, incidents, and increases our costsemerging threats and expenses, including an increased reliance on outside counsel and accountants. We also prepare and distribute periodic public reports in compliance with our obligations undervulnerabilities that may impact the U.S. federal securities laws, in additionCompany.
As of the date of this Annual Report, the Company has not identified any cybersecurity incidents that have materially affected or are reasonably likely to applicable securities laws of Canada.
Shareholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which could then result in additional compliance costs andmaterially affect the manner in which we operate our business. Moreover, any new regulations Company’s results of operations and/or disclosure obligations may increase our legal and financial compliance costs and may make some activities more time-consuming and costly.
Furthermore, while we generally must comply with Section 404 of Sarbanes-Oxleycondition. See “Item 1A. Risk Factors” for our fiscal year ending December 31, 2019, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of the Exchange Act. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and use significant management time and resources, and we may be unable to comply with these requirements in a timely or cost-effective manner.
In addition, we expect that being a public company in the United States subject to these rules and regulations may make it more difficult and more expensive for us to obtain or maintain additional director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain or maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board or as executive officers. We cannot predict or estimate the amount of additional costs we may incur in the future or the timing of such costs in order to maintain the same or similar coverage.
For as long as we are an “emerging growth company,” we will not be required to comply with certain reporting requirements that apply to some other public companies, and such reduced disclosures requirement may make our Common Shares less attractive.
As an “emerging growth company” as defined in the JOBS Act, we may take advantage of exemptions from certain disclosure requirements applicable to other public companies that are not emerging growth companies. We are an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the first sale of common equity securities pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have, during the previous three-year period, issued more than $1 billionin non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC.
For so long as we remain an “emerging growth company,” we will not be required to, among other things:
have an auditor report on our internal control over financial reporting pursuant to Sarbanes-Oxley;
comply with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about our audit and our financial statements;
include detailed compensation discussion and analysis in our filings under the Exchange Act and instead may provide a reduced level of disclosure concerning executive compensation; and
hold anon-binding stockholder advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Because of these exemptions, some investors may find our common shares less attractive, which may result in a less active trading market for our common shares, and our share price may be more volatile.cybersecurity risk.
We historically have not paid dividends on our common shares.Item 2. Properties.
We have not declared or paid any dividends on common shares to date. The declaration and payment of dividends is at the discretion of the Board, taking into account our earnings, capital requirements and financial condition, restrictions on our ability to pay dividends under our credit facilities, and such other factors as the Board considers relevant. Our RBC Credit Facility generally limits our ability to pay any dividends or make any other distribution on our outstanding capital shares. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Credit Facility” for more information.
We are governed by the corporate laws of Alberta, Canada, which in some cases have a different effect on shareholders than the corporate laws of the United States.
We are governed by the ABCA and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deterring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between the ABCA and Delaware General Corporation Law (“DGCL”), that may have the greatest such effect include, but are not limited to, the following: (i) for certain extraordinary corporate transactions (such as amalgamations or amendments to our articles), the ABCA generally requires the voting threshold to be a special resolution passed by a majority of not less thantwo-thirds of the votes cast by the shareholders who voted in respect of the resolution, whereas DGCL generally only requires a majority vote; and (ii) under the ABCA, registered holders or beneficial owners (as defined in the ABCA) of not less than 5% of our common shares in aggregate can requisition our directors to call a special meeting of shareholders, whereas such right does not exist under the DGCL. We cannot predict whether investors will find our company and our common shares less attractive because we are governed by foreign laws.
Because we are a corporation incorporated in Alberta and some of our directors and officers are resident in Canada, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United States. Similarly, it may be difficult for Canadian investors to enforce civil liabilities against our directors and officers residing outside of Canada.
We are a corporation amalgamated and existing under the laws of Alberta with our principal place of business in Calgary, Alberta, Canada. Some of our directors and officers are residents of Canada and a substantial portion of our assets and those of such persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us or our directors or officers who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the Securities Act. Investors should not assume that Canadian courts: (1) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States or (2) would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.
Similarly, some of our directors and officers are residents of countries other than Canada and all or a substantial portion of the assets of such persons are located outside Canada. As a result, it may be difficult for Canadian investors to initiate a lawsuit within Canada against thesenon-Canadian residents. In addition, it may not be possible for Canadian investors to collect from thesenon-Canadian residents judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation of certain of the provinces and territories of Canada. It may also be difficult for Canadian investors to succeed in a lawsuit in the United States, based solely on violations of federal, provincial or territorial securities laws.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our common shares depends on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not have any control over these analysts and cannot assure you that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our common shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
We could be treated as a “passive foreign investment company” for U.S. federal income tax purposes under certain circumstances, which would have adverse U.S. federal income tax consequences to U.S. Holders of our common shares.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes if 75% or more of its gross income for any taxable year consists of passive income or 50% or more of the average value of its assets produce, or are held for the production of, passive income. For purposes of these tests, passive income generally includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. We do not believe that we are currently a PFIC, and we do not anticipate becoming a PFIC in the foreseeable future. However, because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.
If we are or have been a PFIC in any taxable year, a U.S. Holder (as defined below) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of our common shares and on the receipt of distributions on our common shares to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules, and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our common shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our common shares. Please see “Certain United States Federal Income Tax Considerations for U.S. Holders – Passive Foreign Investment Company Considerations” for a more detailed discussion of the U.S. federal income tax consequences to U.S. Holders if we are treated as a PFIC.
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our common shares that is for U.S. federal income tax purposes any of the following: an individual who is a citizen or resident of the United States; a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; an estate the income of which is subject to U.S. federal income tax regardless of its source; or a trust (i) the administration of which is subject to the primary supervision of a U.S. court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (ii) which has made a valid election under applicable U.S. Treasury regulations to be treated as a United States person.
Nasdaq or the TSX may delist our securities from its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Our securities may fail to meet the continued listing requirements to be listed on the Nasdaq or TSX. If Nasdaq or the TSX delists our common shares from trading on its exchange, we could face significant material adverse consequences, including:
a limited availability of market quotations for our securities;
reduced liquidity with respect to our securities;
a determination that our common shares are a “penny stock,” which will require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares;
a limited amount of news and analyst coverage for our company; and
a decreased ability to issue additional securities or obtain additional financing in the future.
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None.
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Our principal executive offices are located in Calgary, Alberta, where we lease approximately 73,000 square feet of office and manufacturing space. Our lease expires in September 2022.2027. Our principal manufacturing facilities are currently located in Calgary, Alberta; Phoenix, Arizona; and Savannah, Georgia. On February 22, 2022, we announced our intention to close the Phoenix manufacturing facility and DXC. On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility, as discussed in Item 1. “Business” in this Annual Report.
Our wall tiles, millworksurfaces (which we call panels), casework and timber solutions are manufactured in Calgary, while aluminum, glass and power components are manufactured in all three locations.Calgary and Savannah. In Calgary, we lease an aggregate of approximately 358,000400,000 square feet of manufacturing space across threefour facilities (excluding our principal offices), which leases expire in January 20232026, January 2027, September 2027, and January 2024.2034. In Phoenix, we lease approximately 130,000 square feet of manufacturing space across two facilities, which leases expire in March 20222027. We are currently utilizing the Phoenix space as a storage facility and March 2027.have subleased the remaining premises. In Savannah, we lease approximately 81,000 square feet of manufacturing space, which lease expires in February 2029. In October 2019, we entered into a15-year fifteen-year lease, which DIRTT may extend for two additional five-year periods at its option, for abuild-to-suit combined tile and millwork panel factory of approximately 130,000 square feet in Rock Hill, South Carolina. Should the need arise, we have the expansion rights to lease an additional 130,000 square feet of space.
Our ICE development offices We are located in Calgary, Albertapursuing options to sublease this area following the September 27, 2023, announcement of our intention to permanently close operations at this location and Salt Lake City, Utah.do not plan to exercise the additional five-year extension period. In Calgary,March 2020, we subleaseentered into an eight-year lease, which DIRTT may extend an additional five years at its option, of approximately 8,70018,000 square feet of office space pursuant to a lease that expires on July 31, 2021. In our Salt Lake City development office, which also housesfor a DXC in Dallas, Texas. During March 2023, we entered into an agreement to sublease our DXC in Dallas to one of our Construction Partners in that region, from April 1, 2023, through December 31, 2024.
In New York City, New York, we lease approximately 6,6004,100 square feet of office space pursuant to operate a DXC; this lease that expires in December 2023.February 2024. In Chicago, Illinois, we own approximately 6,200 square feet of office space, which we use to operate a DXC.
Through distributed manufacturing, we can shift production of some productscomponents among our manufacturing sites, reduce transportation times and costs, and meet targeted lead times. We believe that our current and planned facilities are adequate for our current needs and that suitable additional or substitute space would be available if needed.
Item 3. Legal Proceedings.
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On November 5, 2019, Falkbuilt Ltd. (“Falkbuilt”) filed a lawsuitDIRTT is pursuing multiple lawsuits against us in the Court of Queen’s Bench of Alberta, Canada. Falkbuilt alleges that we have misappropriated and misused their alleged proprietary information in furtherance of our own product development. Falkbuilt seeks monetary relief, including, among other things, damages of approximately C$30.0 million, disgorgement of profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction of our use of the alleged proprietary information. Falkbuilt is affiliated with certain of our former employees, includingits founders, Mogens Smed ourco-founder and former Executive Chairman and Chief Executive Officer, and Barrie Loberg, our former Vice Presidentas well as Falkbuilt Ltd. and Falkbuilt, Inc. (collectively, “Falkbuilt”) and related individuals and corporations. DIRTT alleges breaches of Software Development. Asfiduciary duties and non-competition and non-solicitation covenants, and the misappropriation of its confidential and proprietary information (in violation of numerous U.S. state and federal laws pertaining to the protection of trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices). Except as described below, there have been no material developments in the legal proceedings previously disclosed in our Annual Report on May 9, 2019, we filed a lawsuit inForm 10-K for the Court of Queen’s Bench of Albertayear ended December 31, 2022.
26
DIRTT’s litigation against Mr. Smed and Mr. Loberg, to enforce the terms of our Settlement Agreement and their respective obligations, includingnon-compete andnon-solicit provisions, that we entered into in connection with their departure. Subsequently, on June 14, 2019, Falkbuilt, filed a counterclaim alleging, among other things, breach of contractual obligations and defamation, and seeking damages in excess of C$2.0 million, plus punitive damages. We believe that Falkbuilt’s lawsuit against us is part of their litigation strategy related to our lawsuit against them, and we believe it is without merit. We intend to defend it vigorously and to continue to pursue our legal remedies against Messrs. Smed and Loberg, and their company, Falkbuilt. Consistent with that intent,associates is comprised of three main lawsuits: (i) an action in the Alberta Court of King’s Bench commenced on December 11,May 9, 2019 we filed a federal lawsuitagainst Falkbuilt, Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty, fidelity and confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Falk Mountain States, LLC, Kristy Henderson,Smed, and former DIRTT employee Lance Henderson. This action seeks to restrain theother individual and corporate defendants from misappropriatingalleging misappropriation of DIRTT’s confidential information, trade secrets, business intelligence and customer information (the “Utah Misappropriation Case”); and using(iii) an action in the U.S. District Court for the Northern District of Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States and intentionally caused confusion in the United States in an attempt to advancesteal customers, opportunities, and business intelligence, with the aim of establishing a competing business in the United States market (the “Texas Unfair Competition Case”). DIRTT intends to pursue the cases vigorously. We recently requested the Court of King’s Bench of Alberta to schedule the summary judgment application for our Canadian litigation. The court has proposed three potential dates in September 2025 and we expect to have the date finalized in the next several weeks.
In the Canadian Non-Compete Case, on February 14, 2023, the Court of King’s Bench of Alberta granted DIRTT’s application to schedule the hearing of its summary judgment application and dismissed Falkbuilt’s cross-application to strike the summary judgment application. DIRTT is aggressively pursuing its summary judgment application.
In the Utah Misappropriation Case, on April 11, 2023, the United States Court of Appeals for the Tenth Circuit reversed the U.S. businessesDistrict Court for the Northern District of Utah’s decision that Utah was an inconvenient forum for DIRTT’s claims against Falkbuilt and others for the misappropriation of confidential information, trade secrets, business intelligence and customer information. The Utah Court had previously, and erroneously, found that DIRTT’s United States-based claims should be litigated in Canada. The Court of Appeals remanded the matter back to the detrimentUtah District Court. Falkbuilt filed motions to stay the Tenth Circuit decision pending its petition for a Writ of DIRTT. Certiorari to the Supreme Court of the United States. The Court of Appeals promptly denied the motion to stay. A similar motion subsequently filed with the Supreme Court of the United States on the same basis was also promptly denied. Falkbuilt also petitioned the Supreme Court to accept review, even after losing the stay motion, which petition was also denied in early October 2023. As a result of these appellate orders, the Utah federal trial court assumed jurisdiction over the pending claims. The Utah judge who issued the erroneous order dismissing DIRTT’s claims recused himself and the newly assigned judge reaffirmed all prior orders. As such, the case is resumed in the posture it was when the appeals began but with a different Judge.
The Texas Unfair Competition Case was dismissed in March 2022, without prejudice, in reliance upon the now-reversed decision in the Utah Misappropriation Case, described above. DIRTT appealed that decision, and the United States Court of Appeals for the Fifth Circuit stayed the appeal pending the Tenth Circuit ruling at Falkbuilt’s request. After prevailing in the Tenth Circuit, DIRTT asked Falkbuilt if it would, consistent with its prior representations, agree to remand the appeal to the Texas Court for disposition to Utah. Falkbuilt refused and DIRTT filed a Motion to Remand. The Court denied the Motion for Remand without prejudice and asked for full briefing. Argument proceeded on December 7, 2023 in New Orleans. The Court will either order the claims transferred to Utah or, if it affirms the lower court, those claims would proceed, inconveniently, in Canada. We believe it is very unlikely the claims would proceed in Texas as neither DIRTT or Falkbuilt currently desires that outcome.
Prior to the argument, DIRTT sought leave to amend the Utah claims to include the Texas claims and notified the Fifth Circuit Court of Appeals of the proposed amendment in Utah. Falkbuilt did not object to the amendment, but answered the Complaint and reserved the right to dismiss the Amended Complaint on grounds of inconvenient forum or international comity. The Amended Complaint not only presents the Texas claims in Utah but also updates DIRTT’s allegations as to events and damages incurred during the time the parties were participating in the appellate process.
On February 5, 2020, Falkbuilt filed its answer to our U.S. claim, together4, 2024, the Company entered into a Litigation Funding Agreement with a counterclaim alleging defamation and intentional interference with economic relations. Falkbuilt is seeking damagesthird party for the funding of up to $4.0 million of litigation costs in excessrespect of $3.0 million, plus punitive damages. Again, we believe Falkbuilt’s claim is without merit and we intend to defend it vigorously and to continue to pursue our legal remediesspecific claims against Falkbuilt, Falk Mountain States, LLC, Ms. HendersonInc., Falkbuilt Ltd. and Mr. Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones. For additional information, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.
We may, from time to time, become involved in other legal proceedings or be subject to claims arising in the ordinary course of business, including the initiation and defense of proceedings to protect intellectual property rights, product liability claims and employment claims. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, cash flows or results of operations.Item 4. Mine Safety Disclosures.
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Not applicable.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
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Market Information; Holders of Record
Our common shares are traded on the TSX under the symbol “DRT” and are quoted on Nasdaqthe OTC Markets on the “OTC Pink Tier” under the symbol “DRTT.”“DRTTF”. Quotations of our common shares on the OTC Pink Tier reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of February 19, 2020,16, 2024, there were 84,681,364191,110,385 common shares outstanding and 214158 shareholders of record.
Dividends
We have not declared or paid any cash dividends on our common shares to date. The declaration and payment of dividends is at the discretion of the Board of Directors, taking into account (i) our earnings, capital requirements and financial condition, (ii) restrictions on our ability to pay dividends under ourthe Second Extended RBC Credit Facility, and (iii) such other factors as the Board of Directors considers relevant. OurThe Second Extended RBC Credit Facility generally limits our ability to pay any dividends or make any other distribution on our outstanding capitalcommon shares. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Credit Facility” for more information.
Performance Graph
The following graph illustrates a comparison If and when our Board of the total cumulative shareholder return ofDirectors declares cash dividends on our common shares, with the cumulative return of the S&P/TSX Composite Indexsuch dividends may be declared and the S&P 600 Building Products Index for the period commencing December 31, 2014 and ending on December 31, 2019. The graph assumes an initial investment of $100 on December 31, 2014,paid in our common shares, the shares comprising the S&P/TSX Composite Index, and the shares comprising the S&P 600 Building Products Index. The below shareholder return calculations are based on the exchange rates as reported by the H.10 statistical release of the Board of Governors of the Federal Reserve System as of theyear-end exchange rate for the applicable period. The comparisons in the table are required by the SEC and applicable securities laws in Canada and are not intended to forecasteither U.S. dollars or be indicative of possible future performance of our common shares.This graph and related materials shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.Canadian dollars.
$100 investment in stock or index | Ticker | December 31, 2014 | December 31, 2015 | December 31, 2016 | December 31, 2017 | December 31, 2018 | December 31, 2019 | |||||||||||||||||||
DIRTT Environmental Solutions Ltd. | DRT | $ | 100.00 | $ | 192.78 | $ | 174.17 | $ | 187.22 | $ | 169.72 | $ | 118.06 | |||||||||||||
S&P/TSX Composite Index | SPTSX | $ | 100.00 | $ | 75.28 | $ | 91.18 | $ | 103.70 | $ | 84.06 | $ | 105.41 | |||||||||||||
S&P 600 Building Products Index | SML | $ | 100.00 | $ | 119.97 | $ | 155.69 | $ | 187.18 | $ | 148.26 | $ | 210.89 | |||||||||||||
Recent Sales of Unregistered Securities; Issuer’s Purchases of Equity Securities
None.
Item 6. [Reserved]
28
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The selected consolidated financial data set forth below are derived from our audited consolidated financial statements and may not be indicative of future operating results. The following selected consolidated financial data should be read in conjunction with Item 7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report. The consolidated selected financial data in this section are not intended to replace our consolidated financial statements and the related notes included elsewhere in this Annual Report. Our historical results are not necessarily indicative of our future results.Operations
| Years Ended December 31, | ||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | |||||||||||||
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Revenue | ||||||||||||||||
Product revenue | $ | 240,659 | $ | 266,434 | $ | 216,216 | $ | 196,482 | ||||||||
Service revenue | 7,046 | 8,247 | 10,323 | 4,882 | ||||||||||||
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Total revenue | 247,735 | 274,681 | 226,539 | 201,364 | ||||||||||||
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Cost of sales | ||||||||||||||||
Product cost of sales | 153,128 | 161,844 | 131,326 | 117,600 | ||||||||||||
Costs of under-utilized capacity | 2,240 | — | — | — | ||||||||||||
Service cost of sales | 5,943 | 5,828 | 9,724 | 4,620 | ||||||||||||
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Total cost of sales | 161,311 | 167,672 | 141,050 | 122,220 | ||||||||||||
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Gross profit | 86,424 | 107,009 | 85,489 | 79,144 | ||||||||||||
Total operating expenses(1)(2) | 88,875 | 101,315 | 91,990 | 72,114 | ||||||||||||
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Operating income (loss) | (2,451 | ) | 5,694 | (6,501 | ) | 7,030 | ||||||||||
Foreign exchange (gain) loss | 1,324 | (3,214 | ) | 665 | 433 | |||||||||||
Interest income | (529 | ) | (425 | ) | (399 | ) | (457 | ) | ||||||||
Interest expense | 131 | 503 | 500 | 213 | ||||||||||||
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Net income (loss) before tax | (3,377 | ) | 8,830 | (7,267 | ) | 6,841 | ||||||||||
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Income taxes | 1,019 | 3,280 | 458 | 2,942 | ||||||||||||
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Net income (loss) | $ | (4,396 | ) | $ | 5,550 | $ | (7,725 | ) | $ | 3,899 | ||||||
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Income (loss) per share | ||||||||||||||||
Basic | $ | (0.05 | ) | $ | 0.07 | $ | (0.09 | ) | $ | 0.05 | ||||||
Diluted | $ | (0.05 | ) | $ | 0.07 | $ | (0.09 | ) | $ | 0.05 | ||||||
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| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
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Balance Sheet | ||||||||||||
Cash and cash equivalents | $ | 47,174 | $ | 53,412 | $ | 63,484 | ||||||
Total Assets | $ | 175,563 | $ | 175,911 | $ | 174,438 | ||||||
Total Liabilities | $ | 50,576 | $ | 52,397 | $ | 47,919 | ||||||
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You should read the following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 20192023 and 20182022 together with our consolidated financial statements and related notes and other financial information appearing in this Annual Report. SomeThe 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 the informationevents may differ materially from those contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, operations, and product candidates, includesthese forward-looking statements that involve risks and uncertainties. You should reviewdue to a number of factors, including those described under the sections of this Annual Report captionedheadings “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements containedappearing elsewhere in the following discussionAnnual Report.
Summary of Financial Results
DIRTT Environmental Solutions Ltd. and analysis.its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction for interior spaces. DIRTT’s system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
We have revised our calculationDIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partners of the Company. As of May 9, 2023, AWI owns a 50% interest in the rights, title and interest in certain intellectual property rights in the Applicable ICE Code, including a 50% interest in the patent rights that relate to the Applicable ICE Code.
Key Fourth Quarter 2023 Highlights
Overview
We are an innovative manufacturing company featuringfourth quarter of 2023 was $1.0 million compared to a proprietary software and virtual reality visualization platform, coupled with vertically integrated manufacturing that designs, configures and manufactures prefabricated interior solutions used primarily in commercial, healthcare and educational spaces across a wide range of industries and businesses. We combine innovative product design with our industry-leading, proprietary ICE Software, and technology-driven, lean manufacturing practices and sustainable materials to provideend-to-end solutions$5.9 million net loss after tax for the traditionally inefficientsame period of 2022. The increase in net income is primarily the result of the higher gross profit margin, explained above, of $7.6 million. Other items that impacted net income in the period included a $1.5 million increase in operating expenses (includes a $1.0 million reduction in reorganization expenses and fragmented interior construction industry. We create customized interiors witha decrease in the aesthetics of conventional construction but with greater schedule and cost certainty, shorter lead times, greater future flexibility, and better environmental sustainability than conventional construction.
Our ICE Software allows usfair value less costs to sell design, visualize (including 3D virtual reality modelingrelated to the Rock Hill Facility assets held for sale, which resulted in an additional $0.8 million impairment charge), receipt of interiors), configure, price, communicate, engineer, specify, order$1.0 million on the sale of software due to the completion of the knowledge transfer to AWI, and manage projects, thereby reducing challenges associated with traditional construction, including cost overruns, change orders, inconsistent quality, delays and material waste. While other software programs and virtual reality tools are useda $0.2 million increase in interest income. These increases were offset by a $0.2 million increase in the architecturalforeign exchange loss, a $0.1 million increase in interest expense, and construction industries, we believe our ICE Software is the only interior construction technology that providesend-to-end integration and management, from design through engineering, manufacturing and installation. Our interior construction solutions include prefabricated, customized interior modular walls, ceilings, and floors; decorative and functional millwork; power infrastructure; network infrastructure; andpre-installed medical gas piping systems. We strive to incorporate environmentally sustainable materials and reusable components into our solutions while creating flexible, functional and well-designed environmentsa $0.3 million increase in tax expense.
We offer our interior construction solutions throughoutfourth quarter of 2023 was $4.3 million or 8.5% of revenue, an improvement of $3.7 million from $0.6 million or 1.4% of revenue for the United Statesfourth quarter of 2022.
Summary of Financial Results
29
Key Annual 2023 Highlights
Grossgross profit margin for the year ended December 31, 20192023, was $86.4$59.5 million or 34.9%32.7% of revenue, a decline of $20.6an increase from $28.2 million or 19% from $107.0 million or 39.0%16.4% of revenue for the year ended December 31, 2018. This reduction was attributable to our decline in revenues, the impact of fixed costs on lower revenues, $2.5 million of incremental costs to mitigate a previously disclosed tile warping issue, and a $2.5 million increase in our provision because we determined that timber included in certain projects installed between 2016 and 2019 may not meet certain building class fire retardant specifications under which they were sold. We are in the process of notifying customers and are actively testing solutions which, if successful, could significantly reduce this liability.
•
Net loss for the year ended December 31, 2019 was $4.4 million, a reduction of $10.0 million from net income of $5.6 million for the year ended December 31, 2018. The decline reflects the above noted reduction in gross profit, $5.7 million ofone-time costs, discussed below, $1.3 million of litigation costs and a $4.5 million increase in foreign exchange loss. These cost increases were partially offset by a $3.4 million reduction in commission expenses, a $2.8 million reduction in reorganization expenditures, no impairments in 2019 compared to an $8.7 million impairment in 2018, a $2.3 million reduction in income tax expense, and other operating expenditure reductions.
Adjusted EBITDAMargin (see “–Non-GAAP Financial Measures”) for the year ended December 31, 20192023, was $18.2 million or 7.4%35.8%, a decline of $20.9 million or 53%13% improvement from $39.1 million or 14.2%22.6% for the year ended December 31, 20182022. The improved Adjusted Gross Profit and Adjusted Gross Profit Margin is due to having better leverage over fixed costs through price increases and reduced fixed costs. Product cost of sales in 2023 included $2.0 million of idle facility costs related to the Rock Hill Facility ($0.5 million in the year ended December 31, 2022). We are pursuing options to sublease the Rock Hill Facility to offset these costs in 2024 and beyond.
Pipeline
In the current period,first quarter of 2023, we changed our calculationmethodology for calculating and disclosing our forward twelve month pipeline. We are now disclosing qualified leads, defined as quantity of Adjusted EBITDAprojects being pursued, and our pipeline, defined as working with an engaged client on assessment of DIRTT as a prefabricated interior solution provider. We began using these new measures as we believe they better measure expected near term performance given that our operating environment has been prone to excludechange due to macroeconomic factors such as worksite labor availability, interest rate changes, and potential recessionary impacts on construction projects.
As of January 1, 2024, our twelve-month forward pipeline has grown 9.5% year-over-year and has contracted 4.6% since the impacts of foreign exchange to improveyear-on-year comparability of Adjusted EBITDA.
Outlook
On November 12, 2019, DIRTT unveiled a four-year strategic plan for the Company, basedprevious quarter. We are focused on three key pillars: commercial execution, manufacturing excellence and innovation. This plan lays out a roadmap to transform a founder-led start-up into a professionally managed operating company. Our objective is to scalerefilling our operations to profitably capture the significant market opportunity available from driving conversion from conventional construction to DIRTT’s process of modular, prefabricated interiors.
The strategic plan is designed to create a foundation for sustainable and profitable growth; however, in the interim, we have been subject to a disruption in sales activity levels particularly as it relates to larger projects, as discussed below, beginning in 2018 and carrying through 2019. This disruption stems from the distraction of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function, which limited our ability to take advantage of growth opportunities in our market for 2019. Ourpipeline after achieving above trend revenue in 2019 was directly affected by this disruption and we experienced a sequential decrease in revenues in the fourth quarter of 20192023.
We continue to focus on pipeline and forecasting integrity as our ten-day lead time is one of DIRTT’s key value propositions. The ability to produce and ship products in that time frame requires close attention to sales & operational planning.
30
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| As at |
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Twelve Month Forward Pipeline ($ 000s) |
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Commercial |
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| 176,789 |
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| 141,293 |
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| 25 | % |
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| 192,773 |
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| (8 | %) |
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Healthcare |
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| 41,221 |
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| 55,719 |
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| (26 | %) |
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| 39,230 |
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| 5 | % |
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Government |
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| 34,813 |
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| 32,313 |
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| 8 | % |
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| 34,866 |
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| (0 | %) |
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Education |
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| 17,117 |
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| 17,201 |
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| (0 | %) |
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| 16,235 |
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| 5 | % |
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| 269,940 |
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| 246,526 |
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| 9 | % |
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| 283,104 |
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| (5 | %) |
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Leads (#) |
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| 861 |
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| 721 |
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| 19 | % |
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| 999 |
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| (14 | %) |
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Our Commercial segment continues to benefit from the third quarter of 2019. A similar percentage decrease has continued into the first two months of 2020 relativepost-COVID return-to-office policies in addition to focusing our strategy on premium quality products for large corporations. Due to the first two monthssuccess of our Healthcare segment in 2023 and the long sales cycle inherent in Healthcare construction, our pipeline has contracted since the beginning of the year, but continues to grow from our previous quarter.
Our Government and Education segments continue to provide stability and diversity to our revenues from our more volatile segments. We are closely monitoring the U.S. Federal Government’s budgeting process and the impact it may have on our revenue levels.
Outlook
We achieved an annual revenue of $181.9 million, a 6% increase over 2022 revenue of $172.2 million. We are pleased to report another consecutive year of revenue growth since the COVID-19 pandemic, and despite the volatility in the tech and banking sectors in early 2023. Our revenue for the fourth quarter of 2023 was the highest quarterly revenue since 2019.
We have a stable base business of small- to mid-size projects thatDuring 2023, we built on our distribution partnerssuccesses in 2022 with further balance sheet improvement ($24.7 million vs. $10.8 million cash and sales representatives are well positioned to maintain and grow, but we currently lack a pipeline of larger projects. We consider larger projects as projects or clients greater than $2 million with such projects often spanning multiple reporting periods. We are actively working to build this pipeline with our new strategic accounts and large project teams and an enhanced commercial function. This is a key goalcash equivalents at year end), expansion of our strategic plan; however, such projects require a longer sales cycleGross Profit Margin (32.7% vs. 16.4%) and as discussed atAdjusted Gross Profit Margins (35.8% vs. 22.6%), reductions of our November 12, 2019 Analyst Day, the realizationnet loss after tax from $(55.0) million to $(14.6) million and expansion of sales from our activities is not expected until the second half of 2020 at the earliest or into 2021.
Within the commercial function – which encompasses peopleAdjusted EBITDA Margins (4.4% vs. (15.2%)). In 2023, we saw macroeconomic factors stabilize our supply chains and organizational structure; strategic marketing; sales excellence and Distribution Partner experience – we have been actively recruiting for the 50 newly-created or open positions we identified as key to building out ourinput costs. Our focus on sales and marketing organization. As of February 25, 2020, we have hired 11 individuals. These include the key roles of vice president of strategic marketing, who will be critical to creating a strategic marketing capability that has never existed at DIRTT,operational planning as well as process efficiencies allowed us to achieve significant improvement in our adjusted gross margins. These actions also led to reductions in labor and inventory carrying costs during 2023. Further, we reduced expenses in our back office and general and administrative overhead to levels commensurate with our current and expected revenue levels.
In the year ahead, we anticipate continued pipeline and revenue growth, but we also remain cautious about macroeconomic uncertainty and remain focused on preparing the Company for a vice presidentvariety of commercial operations, who is expected to significantly enhance our sales analysis and forecasting. Although identifying and recruitingeconomic scenarios. The unprecedented pace of the right mix of experience and talent is a time-consuming process, our goal remains to have all open positions filled by the end of 2020.
Our targeted approach to developing and growing strategic national accounts is showing early promise. In particular, we are actively working on agreements for four new accounts and the expansion of two existing accounts with several other relationships in development. These opportunities often entail a multi-year sales effort and generally start with smaller projects, growing over timeUS Federal Reserve’s interest rate hikes as the commercial relationship strengthens. We expect several small projects to commencewell as geopolitical volatility in the second half of 2020.
EnhancingMiddle East and Asian Pacific have encouraged us to pay close attention to our Distribution Partner network, an integral partfixed cost footprint and supply chain resiliency. The upcoming presidential election in the United States adds to this uncertainty and may impact the capital expenditure budgets of our go-to-market strategy, remains a priority.clients. As of February 25, 2020, we have increased our regional coverage with seven existing Distribution Partners expanding into new regions, including twonoted in a major commercial real estate market inlast quarter’s outlook, the Eastern U.S. that was highly underpenetrated and contains substantial growth opportunities. These are strong partners with a demonstrated track record of success and commitment to DIRTT and who appreciate how we can work together to capitalize on market opportunities. In 2019, these partners accounted for approximately 14% of DIRTT’s sales.
In late 2019 and early 2020, we terminated relationships with four underperforming Distribution Partners representing 1.5% of 2019 sales in the aggregate who did not align with our partnership model and strategic growth priorities.
In February 2020, we launched two digital marketing campaigns, a first for our organization, to increase brand awareness. These target general contractors and key decision makers in our healthcare and education market verticals. We also began a full refresh of our Chicago DIRTT Experience Center (“DXC”) which we anticipate being completed in time to host our annual Connext tradeshow in June. In addition, we are exploring the development or refresh of DXCs in other key geographic areas.
Within our manufacturing operation, we achieved a 50% reduction in safety-related total recordable incident frequency (TRIF) rates at year end compared to 2018, and in January of 2020, we had a recordable injury-free month. We believe our goal of having TRIF rates below the Bureau of Labor Statistics standard is achievable in 2020. We are recording improvements in both quality and delivery objectives, a key contributor to achieving sales excellence with our partners and clients, which will continue to be a focus in 2020. In February 2020, we commissioned a new manufacturing line enabling us to bring in-house the priming function that addresses the tile warping issue that occurred in 2018 and 2019. At a total cost of $1.8 million, we anticipate a payback of 18 to 24 months.
In late 2019 and early 2020, we identified and addressed excess labor capacity in our factories. Initiatives undertaken and planned include both planned shutdowns of our production facilities during slower periods and a 14% head count reduction of factory employees. We believe that the productivity and efficiency improvements outlined in our strategic plan will enable us to return to higher revenue levels without reinstating headcount. We will continue to monitor activity levels over the coursequarter of the year is typically our seasonally slowest quarter.
As post-pandemic workplaces continue to evolve, the ability of DIRTT’s solutions to anticipate and adjust as necessary.
Innovation remainsrespond to an uncertain future is at the core of our strategyvalue proposition. Encouraging access to our full product offering unlocks workplace transformations with more flexible and adaptable environments. Our sustainable product offerings, featuring low carbon footprint, high recycled content, and minimal waste, also enable our Commercial, Government, Healthcare, and Education clients to make meaningful progress toward their environmental commitments and goals.
On January 9, 2024 we continuesuccessfully closed a C$30 million Rights Offering. As previously disclosed, we expect to use the proceeds of the Rights Offering for general corporate purposes, which may include investments in our business, funding potential future cash needs or operating losses, funding working capital and capital expenditure needs, or reductions to our outstanding indebtedness. We plan to use some of the funds to invest accordingly. We are working to bringin our newest innovations, the Inspire low profile and Reflect ultra-sleek glass wall systems, into our proprietary ICE software systemcommercial business in the second and third quarters of 2020, respectively. This simplifies the design and specification for the sales function, streamlines the interaction with the factory and speeds up the delivery of new products to meet the strong reception we have received from partners and clients. We are also developing related sales and marketing materials for our Distribution Partners.
We are focused on maintaining a strong balance sheetall verticals, especially Healthcare, and are actively managing both operationallooking at additional opportunities and capital expenditures even as we continue to make investments that directly support our commercial strategy and innovation efforts. Our capital investments are focused on improving safety and advancing our commercial and innovation strategies. Excluding the South Carolina facility, discussed in more detail below, capital expenditures in 2020 are expected to be between $12 million and $15 million. These expenditures include our Chicago DXC refresh, CRM implementation and software development activities as well as ongoing sustaining activities in our plants and offices.
With respect to our new South Carolina tile and millwork facility, approximately $4.5 million of equipment deposits were paid in 2019. This facility reduces single plant reliance risk and is designed to improve material yield and significantly improved labor efficiency. Construction of the building shell by the developer is underway, and key components of the manufacturing equipment are expected to be delivered to site in the third quarter of 2020, with related 2020 spending of approximately $7.5 million. The $6.5 million balance of the facility’s $18.5 million expected cost relates primarily to commissioning and other activities. We are on schedule and on budget for the commencement of commercial operations in the first quarter of 2021. We have flexibility to defer the $6.5 million of expenditures and amend the commissioning date based on business activity levels.
During 2019, we made substantial progress in our working capital management, finishing the year with net working capital of $58.6 million compared to $69.8 million at December 31, 2018. This included cash balances of $47.2 million with no debt compared to cash, net of debt, at December 31, 2018 of $47.8 million. We will continue this focus on working capital efficiency in 2020.
Looking forward, we see early indications of improvements in activity levels and are encouraged by ongoing discussions with Distribution Partners. We are enthused about the quality of candidates we have hired into the sales and marketing organization and have had strong reception to the new products we introduced in October. It remains too early to quantify the impact that this progress will have on our revenues for 2020. We remain confident in the roadmap we laid out to deliver positive change within the organization; however, given the slower start to the year, 2020 may be a lower revenue year than 2019. We are intently focused on exiting the year with the organizational foundation in placepartnerships to support our strategic planrevenue growth.
In line with our objectives for the Rights Offering, on February 15, 2024, we announced a Substantial Issuer Bid for our convertible debentures of C$15 million, intended to strengthen our balance sheet by reducing debt. For additional information, please see Item 7, “Management’s Discussion and achieve our financial targets for 2023, which call for revenueAnalysis of $450 million to $550 millionFinancial Condition and an Adjusted EBITDA MarginResults of 18% - 22%.Operations – Liquidity and Capital Resources.”
31
Non-GAAP Financial Measures
Note Regarding Use ofNon-GAAP Financial Measures
Our consolidated financial statements are prepared in accordance with GAAP.accounting principles generally accepted in the United States of America (“GAAP”). These GAAP financial statements includenon-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult.
As a result, we also provide financial information in this Annual Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses thesenon-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that thesenon-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance from period-over-period and to compare our financial performance with that of other companies. We believe that thesenon-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net 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, one-time non-recurring charges or gains (such as gain on sale of software and patents), and stock-based compensation. In addition, management bases certain forward-looking estimates and budgets onnon-GAAP financial measures, primarily Adjusted EBITDA.
For the current year, we removedWe remove the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantlyperiod-on-period period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. We have presented a reconciliation to our prior calculationremove the impact of Adjusted EBITDA for all years presented. Additionally, in the current year, we have excludedunder-utilized capacity from Adjusted Gross Profit costs associated with under-utilized capacity. Fixedgross 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.
Reorganization expenses, impairment expenses,Government subsidies, depreciation and amortization, stock-based compensation andexpense, reorganization expenses, foreign exchange gains and losses and impairment charges are excluded from ournon-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those receipts and expenses may recur, and because management believes that each of these items can distort the trends associated with the Company’s ongoing performance. We believe that excluding these receipts and expenses provides investors and management with greater visibility to the underlying performance of the business operations, enhances consistency and comparativeness with results in prior periods that do not, or future periods that may not, include such items, and facilitates comparison with the results of other companies in our industry.
The followingnon-GAAP financial measures are presented in this Annual Report, and a description of the calculation for each measure is included.
Adjusted Gross Profit | Gross profit before deductions for depreciation and amortization | |
| ||
Adjusted Gross Profit Margin | Adjusted Gross Profit divided by revenue | |
| ||
EBITDA | Net income before interest, taxes, depreciation and amortization | |
| ||
Adjusted EBITDA | EBITDA adjusted | |
Adjusted EBITDA Margin | Adjusted EBITDA divided by revenue | |
You should carefully evaluate thesenon-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of thesenon-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of thesenon-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in thesenon-GAAP financial measures. Because thesenon-GAAP financial measures may be defined differently by other companies in our industry, our definitions of thesenon-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
32
EBITDA and Adjusted EBITDA for the Years Ended December 31, 2019, 2018 and 2017
The following table presents a reconciliation for theyear-to-date results of 2019, 2018 and 2017 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:
| Year ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| $ (in thousands) | ||||||||||||
Net income (loss) for the period | (4,396 | ) | 5,550 | (7,725 | ) | |||||||
Add back (deduct): | ||||||||||||
Interest Expense | 131 | 503 | 500 | |||||||||
Interest Income | (529 | ) | (425 | ) | (399 | ) | ||||||
Income Tax Expense | 1,019 | 3,280 | 458 | |||||||||
Depreciation and Amortization | 12,242 | 13,699 | 12,856 | |||||||||
|
|
|
|
|
| |||||||
EBITDA | 8,467 | 22,607 | 5,690 | |||||||||
Stock-based Compensation Expense (Recovery) | 3,876 | 3,661 | 2,738 | |||||||||
Foreign exchange (Gain) Loss on Debt Revaluation | (211 | ) | 546 | (731 | ) | |||||||
Reorganization Expense | 4,560 | 7,380 | 1,143 | |||||||||
Impairment Expense | — | 8,680 | — | |||||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA, as previously presented(1) | 16,692 | 42,874 | 8,840 | |||||||||
Other Foreign Exchange (Gains) Losses | 1,535 | (3,760 | ) | 1,396 | ||||||||
Adjusted EBITDA | 18,227 | 39,114 | 10,236 | |||||||||
|
|
|
|
|
| |||||||
Net Income Margin(2) | (1.8 | %) | 2.0 | % | (3.4 | %) | ||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA, Margin as previously presented(1) | 6.7 | % | 15.6 | % | 3.9 | % | ||||||
|
|
|
|
|
| |||||||
Adjusted EBITDA Margin | 7.4 | % | 14.2 | % | 4.5 | % | ||||||
|
|
|
|
|
| |||||||
|
|
As discussed above, we have removed the impact of all foreign exchange from Adjusted EBITDA and have presented a reconciliation to our prior calculation of Adjusted EBITDA for the periods presented above.
For the year ended December 31, 2019, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $18.2 million or 7.4% from $39.1 million or 14.2% in the same period of 2018. This reflects a $18.6 million decrease in Adjusted Gross Profit as discussed below, the $2.2 million costs of underutilized capacity, the impacts of $5.7 million ofone-time costs in operating expenses (which included $2.0 million related to the Sales & Marketing Plan, as defined below, $2.6 million of costs associated with our listing of common shares on Nasdaq (the “U.S. Listing”) and $1.1 million of operations consulting costs) compared to $2.1 million ofone-time costs in 2018 related to advisory and other costs associated with activist defense and board, advisor and other costs associated with the work of a special committee of the Board in response to an unsolicited and unsuccessful acquisition bid by a third party. In addition, approximately $1.3 million of litigation costs incurred in 2019 were partially offset by ongoing cost reductions. The change in calculation of Adjusted EBITDA, discussed previously, benefited 2019 with the exclusion of an additional $1.5 million in net foreign exchange losses and 2018 Adjusted EBITDA was reduced by the exclusion of $3.8 million of foreign exchange gains.
Adjusted EBITDA and Adjusted EBITDA Margin increased respectively to $39.1 million or to 14.2% of revenue in 2018 from $10.2 million or 4.5% of revenue in 2017. These increases were due to increased sales activity and associated gross profit and a reduction in operating expenses. Additionally, revenue and associated Adjusted EBITDA for the fourth quarter of 2017 were reduced by construction delays resulting from hurricanes in parts of the United States. These reductions in 2017 partially contributed to the increases to 2018 revenue and Adjusted EBITDA. The change in calculation of Adjusted EBITDA, discussed previously, reduced 2018 Adjusted EBITDA due to the exclusion of $3.8 million of foreign exchange gains, whereas 2017 Adjusted EBITDA benefited from the exclusion of $1.4 million of foreign exchange losses.
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2019, 2018 and 2017
The following table presents a reconciliation for the years ended December 31, 2019, 2018, and 2017 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| ($ in thousands) | ||||||||||||
Gross Profit | 86,424 | 107,009 | 85,489 | |||||||||
|
|
|
|
|
| |||||||
Gross Profit Margin | 34.9 | % | 39.0 | % | 37.7 | % | ||||||
|
|
|
|
|
| |||||||
Add: Depreciation and Amortization Expense | 9,195 | 9,528 | 8,705 | |||||||||
|
|
|
|
|
| |||||||
Adjusted Gross Profit, as previously presented | 95,619 | 116,537 | 94,194 | |||||||||
Add: Costs of under-utilized capacity | 2,240 | — | — | |||||||||
|
|
|
|
|
| |||||||
Adjusted Gross Profit | 97,859 | 116,537 | 94,194 | |||||||||
|
|
|
|
|
| |||||||
Adjusted Gross Profit Margin, as previously presented | 38.6 | % | 42.4 | % | 41.6 | % | ||||||
|
|
|
|
|
| |||||||
Adjusted Gross Profit Margin | 39.5 | % | 42.4 | % | 41.6 | % | ||||||
|
|
|
|
|
| |||||||
Gross profit and gross profit margin decreased to $86.4 million, or 34.9%, for the year ended December 31, 2019, from $107.0 million or 39.0% for the year ended December 31, 2018. The decrease is largely due to reduced fixed cost leverage due to a $27.0 million decline in revenues. During the year, we incurred $2.5 million of incremental costs (1.1% reduction in gross profit margin) to mitigate further warping of our tiles. Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications that the projects were sold under. As a result, we recorded an additional $2.5 million liability and are in the process of contacting customers to determine appropriate remedial actions, if any. We are also in the process of evaluating solutions which, if successful, could significantly reduce the associated liability. We also experienced a $0.7 million reduction in gross profit due to reductions in second quarter gross profit on installation revenue. During the fourth quarter of 2019, we determined that we were carrying abnormally excess capacity in our manufacturing facilities as a result of the slowdown in sales. Accordingly, we separately classified $2.2 million as costs attributable to our under-utilized capacity (0.9% in gross profit margin) in cost of sales. Subsequent to year end, we took further steps to manage our excess capacity, including the reduction in staffing by 14% and planned factory shutdowns.
Results of Operations
Year Ended December 31, 20192023 Compared to the Year Ended December 31, 20182022
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| % Change |
| |||
|
| ($ in thousands) |
| |||||||||
Revenue |
|
| 181,931 |
|
|
| 172,161 |
|
|
| 6 |
|
Gross Profit(1) |
|
| 59,542 |
|
|
| 28,160 |
|
|
| 111 |
|
Gross Profit Margin |
|
| 32.7 | % |
|
| 16.4 | % |
|
|
| |
Operating expenses |
|
|
|
|
|
|
|
|
| |||
Sales and marketing |
|
| 25,235 |
|
|
| 26,950 |
|
|
| (6 | ) |
General and administrative |
|
| 21,655 |
|
|
| 25,462 |
|
|
| (15 | ) |
Operations support |
|
| 7,832 |
|
|
| 9,498 |
|
|
| (18 | ) |
Technology and development |
|
| 5,820 |
|
|
| 7,555 |
|
|
| (23 | ) |
Stock-based compensation |
|
| 2,306 |
|
|
| 4,277 |
|
|
| (46 | ) |
Reorganization |
|
| 3,009 |
|
|
| 13,461 |
|
|
| (78 | ) |
Impairment charge on Rock Hill Facility |
|
| 8,716 |
|
|
| - |
|
|
| 100 |
|
Related party expense |
|
| 1,524 |
|
|
| - |
|
|
| 100 |
|
Total Operating expenses |
|
| 76,097 |
|
|
| 87,203 |
|
|
| (13 | ) |
Operating loss |
|
| (16,555 | ) |
|
| (59,043 | ) |
|
| 72 |
|
Operating margin |
|
| (9.1 | )% |
|
| (34.3 | )% |
|
|
| |
Government subsidies |
|
| 236 |
|
|
| 7,765 |
|
|
| (97 | ) |
Gain on sale of software and patents |
|
| 7,130 |
|
|
| - |
|
|
| 100 |
|
Foreign exchange (loss) gain |
|
| (626 | ) |
|
| 1,445 |
|
|
| (143 | ) |
Interest income |
|
| 490 |
|
|
| 51 |
|
|
| 861 |
|
Interest expense |
|
| (4,927 | ) |
|
| (5,160 | ) |
|
| 5 |
|
|
| 2,303 |
|
|
| 4,101 |
|
|
| (44 | ) | |
Net loss before tax |
|
| (14,252 | ) |
|
| (54,942 | ) |
|
| 74 |
|
Current income tax expense |
|
| 332 |
|
|
| 21 |
|
|
| 1,481 |
|
|
| 332 |
|
|
| 21 |
|
|
| 1,481 |
| |
Net loss after tax |
|
| (14,584 | ) |
|
| (54,963 | ) |
|
| 73 |
|
(1) Gross Profit for the year ended December 31, 2022, included $1.0 million primarily related to the write off of inventory of discounted product lines, and $2.1 million of accelerated depreciation and amortization on software associated with discontinued product lines and the closure of the Phoenix Facility. |
| |||||||||||
Revenue
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | % Change | ||||||||||
| ($ in thousands) | ||||||||||||
Revenue | 247,735 | 274,681 | (10 | ) | ||||||||
Gross Profit | 86,424 | 107,009 | (19 | ) | ||||||||
Gross Profit Margin | 34.9 | % | 39.0 | % | (11 | ) | ||||||
Operating Expenses(1) | ||||||||||||
Sales and Marketing | 33,939 | 40,627 | (16 | ) | ||||||||
General and Administrative | 27,645 | 28,722 | (4 | ) | ||||||||
Operations Support | 11,037 | 8,069 | 37 | |||||||||
Technology and Development | 7,818 | 4,176 | 87 | |||||||||
Stock-based Compensation | 3,876 | 3,661 | 6 | |||||||||
Reorganization | 4,560 | 7,380 | (38 | ) | ||||||||
Impairment | — | 8,680 | (100 | ) | ||||||||
|
|
|
|
|
| |||||||
Total Operating Expenses | 88,875 | 101,315 | (12 | ) | ||||||||
|
|
|
|
|
| |||||||
Operating Income (Loss) | (2,451 | ) | 5,694 | NA | ||||||||
|
|
|
|
|
| |||||||
Operating Margin | (1.0 | %) | 2.1 | % | NA | |||||||
|
|
|
|
|
| |||||||
|
Revenue reflects sales to our Construction Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters.
Beginning in 2020, we experienced significant increases in nearly all of our material input costs, including raw materials, shipping materials, labor, and freight. This led to significant gross margin compression in 2021 and 2022. Effective November 16, 2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%. On February 17, 2022, we announced a further price increase of 5% that came into effect June 1, 2022. On June 21, 2022, an additional price increase of 10% was announced effective July 21, 2022. The increases have improved revenue and profitability through better recovery of the material input costs previously discussed.
The following table sets forth the contribution to revenue of our DIRTT Solutions and related offerings.
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| % Change |
| |||
|
| ($ in thousands) |
| |||||||||
Product |
|
| 158,405 |
|
|
| 147,448 |
|
|
| 7 |
|
Transportation |
|
| 17,674 |
|
|
| 18,030 |
|
|
| (2 | ) |
License fees from Construction Partners |
|
| 840 |
|
|
| 778 |
|
|
| 8 |
|
Total product revenue |
|
| 176,919 |
|
|
| 166,256 |
|
|
| 6 |
|
Installation and other services |
|
| 5,012 |
|
|
| 5,905 |
|
|
| (15 | ) |
|
| 181,931 |
|
|
| 172,161 |
|
|
| 6 |
| |
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | % Change | ||||||||||
| ($ in thousands) | ||||||||||||
Product | 215,109 | 240,482 | (11 | ) | ||||||||
Transportation | 23,903 | 24,552 | (3 | ) | ||||||||
Licenses | 1,647 | 1,400 | 18 | |||||||||
|
|
|
|
|
| |||||||
Total Product Revenue | 240,659 | 266,434 | (10 | ) | ||||||||
|
|
|
|
|
| |||||||
Installation and other services | 7,076 | 8,247 | (14 | ) | ||||||||
|
|
|
|
|
| |||||||
Total | 247,735 | 274,681 | (10 | ) | ||||||||
|
|
|
|
|
| |||||||
Product revenue decreased in33
Revenue for the year ended December 31, 2019 by $25.42023, was $181.9 million, an increase of $9.8 million or 11%, compared to6% from the year ended December 31, 2022. Revenue in early 2023 was impacted by macroeconomic conditions, including layoffs in the technology sector and rising interest rates, both of which have affected our pipeline. For example, one large project with a customer in the technology sector that was originally scheduled for the first quarter of 2023 was deferred indefinitely. Our fourth quarter revenue was $50.9 million, an increase of $8.5 million or 20% from $42.4 million for the same period of 2018. Revenue decreasedin 2022. Historically, our fourth quarter revenue is lower than second and third quarter revenues due to several factors as discussed above in “– Summary of Financial Results” and “– Outlook”, including the impact of certainseasonality. However, we benefited from two large healthcare projects in 2018 that were not replaced in 2019. We have been subject to a disruption in sales activity levels particularly as it relates to larger projects, as discussed below, beginning in 2018 and carrying through 2019. This disruption stems from the distraction of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function, which limited our ability to take advantage of growth opportunities in our market for 2019. Due to the long sales cycle, particularly for larger projects which can be two years or more, this had a corresponding negative effect on our revenue in 2019, especiallycompleted in the last half ofquarter and from a project delayed earlier in the year and continuingthat pushed into 2020. The effectthe fourth quarter. Macroeconomic conditions showed signs of this has lasted longer than we had anticipated. We areimprovement in late 2023, which also benefited the process of making substantial improvements to our commercial function, including building an appropriate organizational structure, improving the sales effectiveness of our existing sales force and attracting new sales talent, establishing strategic marketing and lead generation functions, as well as expanding and better supporting our Distribution
Partner network. While we believe these actions are critical to driving long-term, sustainable growth, these actions did not have a measurable effect on 2019 revenues.
Installation and other services revenue of $7.1was $5.0 million for the year ended December 31, 2019 was $1.22023, compared to $5.9 million lowerin the year ended December 31, 2022. This revenue primarily reflects services performed by our ICE and design teams for third parties. Except in limited circumstances, our Construction Partners, rather than the same period in 2018. The decrease in installation revenue is primarily due to the timing of projects. Except under certain circumstances, our Distribution PartnersCompany, perform installation services rather than us; accordingly, we do not anticipate significant growth in this revenue stream.services.
Our success is partly dependent on our ability to profitably develop our DistributionConstruction Partner network to expand our market penetration and ensure best practices are shared across local markets. We had 87 Distribution Partners atAt December 31, 2019. Our clients,2023, we had 72 (2022 - 67) Construction Partners servicing multiple locations. During the year ended December 31, 2023, we announced the expansion of seven of our DIRTT Construction Partners into new markets, as serviced primarily through our Distribution Partners, exist within a varietywe expand the reach of industries, including healthcare, education, financial services, government and military, manufacturing,non-profit, energy, professional services, retail, technology and hospitality.DIRTT products, predominantly in North America.
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. The following table presents our product and transportation revenue by vertical market.
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| % Change |
| |||
|
| ($ in thousands) |
| |||||||||
Commercial |
|
| 116,693 |
|
|
| 115,102 |
|
|
| 1 |
|
Healthcare |
|
| 33,970 |
|
|
| 19,739 |
|
|
| 72 |
|
Government |
|
| 13,446 |
|
|
| 16,564 |
|
|
| (19 | ) |
Education |
|
| 11,970 |
|
|
| 14,073 |
|
|
| (15 | ) |
License fees from Construction Partners |
|
| 840 |
|
|
| 778 |
|
|
| 8 |
|
Total product revenue |
|
| 176,919 |
|
|
| 166,256 |
|
|
| 6 |
|
Service revenue |
|
| 5,012 |
|
|
| 5,905 |
|
|
| (15 | ) |
|
| 181,931 |
|
|
| 172,161 |
|
|
| 6 |
| |
|
| For the Year Ended December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in %) |
| |||||
Commercial |
|
| 66 |
|
|
| 70 |
|
Healthcare |
|
| 19 |
|
|
| 12 |
|
Government |
|
| 8 |
|
|
| 10 |
|
Education |
|
| 7 |
|
|
| 8 |
|
Total Product Revenue(1) |
|
| 100 |
|
|
| 100 |
|
(1) Excludes license fees from Construction Partners.
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | % Change | ||||||||||
| ($ in thousands) | ||||||||||||
Commercial | 158,256 | 163,199 | (3 | ) | ||||||||
Healthcare | 44,197 | 60,748 | (27 | ) | ||||||||
Government | 14,879 | 21,477 | (31 | ) | ||||||||
Education | 21,680 | 19,610 | 11 | |||||||||
License fee from Distribution Partners | 1,647 | 1,400 | 18 | |||||||||
|
|
|
|
|
| |||||||
Total Product Revenue | 240,659 | 266,434 | (10 | ) | ||||||||
|
|
|
|
|
| |||||||
Installation and other services | 7,076 | 8,247 | (14 | ) | ||||||||
|
|
|
|
|
| |||||||
Total Revenue | 247,735 | 274,681 | (10 | ) | ||||||||
|
|
|
|
|
| |||||||
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | % Change | ||||||||||
| (in %) | ||||||||||||
Commercial | 67 | 62 | 8 | |||||||||
Healthcare | 18 | 23 | (22 | ) | ||||||||
Government | 6 | 8 | (25 | ) | ||||||||
Education | 9 | 7 | 29 | |||||||||
|
|
|
|
|
| |||||||
Total Product Revenue(1) | 100 | 100 | NA | |||||||||
|
|
|
|
|
| |||||||
|
Revenue decreased by 10%Commercial revenues for the year ended December 31, 2019 compared to2023 were consistent with the prior year. Healthcare revenues increased by 72% in the year ended December 31, 2023, from the prior year, primarilywhich included $12.1 million from two large projects. Sales in the healthcare sector tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Education sales in 2023 decreased healthcare sales, which reflectsby 15% from the completionprior year and government revenues in 2023 decreased by 19% from 2022. Both the government and education sectors include a higher volume of a major healthcare project in 2018that was not replaced in 2019 and reductions in government sales mainlysmaller projects as a result of the timing of projects and reduced installation activity, partially offset by growth in the education sector.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, with periodic international projects from North American Distribution Partners.States. The following table presents our revenue dispersion by geography.geography:
34
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| % Change |
| |||
|
| ($ in thousands) |
| |||||||||
Canada |
|
| 19,934 |
|
|
| 25,477 |
|
|
| (22 | ) |
U.S. |
|
| 161,997 |
|
|
| 146,684 |
|
|
| 10 |
|
|
| 181,931 |
|
|
| 172,161 |
|
|
| 6 |
| |
In 2023, 11% of revenue was from Canada, as compared to 15% in 2022. Historically, approximately 11-15% and 85-89% of revenues are derived from sales to Canada and the United States, respectively.
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | % Change | ||||||||||
| ($ in thousands) | ||||||||||||
Canada | 34,085 | 41,153 | (17 | ) | ||||||||
United States | 213,650 | 232,035 | (8 | ) | ||||||||
International | — | 1,493 | NA | |||||||||
|
|
|
|
|
| |||||||
Total | 247,735 | 274,681 | (10 | ) | ||||||||
|
|
|
|
|
| |||||||
Sales &and Marketing Expenses
Sales and marketing expenses decreased $6.7by $1.7 million to $33.9$25.2 million for the year ended December 31, 2019,2023, from $40.6$27.0 million for the year ended December 31, 2018. Included in sales and marketing expenses for the year ended December 31, 2019 were $2.0 million ofone-time consulting costs2022. The decrease was largely related to a realignment of back-office support, territory coverage and cost structure with current demand levels. The decrease was largely made up of a $1.7 million decrease in salaries and benefits, a $0.8 million decrease in travel and entertainment costs, a $0.5 million decrease in marketing and tradeshow costs and the sales and marketing plan developed withbenefit of offsetting our lease costs by subleasing our Dallas DXC during the assistance of an internationally recognized consulting firm (“Sales & Marketing Plan”). These costsyear. The decreases were offset by a reduction of $3.4$1.5 million increase in commission expense for the year ended December 31, 2019, respectively, on lower revenues. We reduced travel mealscommissions expenses, a $0.2 million increase in communications costs, and entertainment by $2.6a $0.2 million dueincrease in professional services related to continued attention to cost reductions. None of these expense reductions are expected to materially affect our future sales revenue. Salaries and benefits declined $1.0 million due to reductions in sales and marketing personnel year on year, of which we are working to appropriately fill open positions as previously discussed. Finally, the current year includes a $0.9 million reduction from 2018 as a result of lower rent and operating costs associated with closure of certain of the Company’s DXC’s at the end of 2018.consulting services.
Our sales and marketing efforts in 2019 were largely concentrated on commencing the establishment of an appropriate sales organization, significantly improving our marketing approach and driving returns on sales and marketing expenditures. In the second and third quarters of 2019, we developed our Sales & Marketing Plan to evaluate our current sales and marketing approach and assist in the development of action plans necessary to drive accelerated growth. These action plans are a key component of the strategic plan which we presented in November 2019. As we implement this plan, we expect sales and marketing expense to increase as a percentage of revenues, reflecting targeted increases in our commercial organization headcount, establishment of strategic marketing campaigns, and implementation of related systems and tools to improve both the effectiveness of our sales force and our overall Distribution Partner support. Our ongoing focus is to continue to control costs by emphasizing return on investment on our sales and marketing expenditures.
General and Administrative Expenses
General and administrative (“G&A”) expenses decreased $1.1$3.8 million to $27.6$21.7 million for the year ended December 31, 20192023, from $28.7$25.5 million for the year ended December 31, 2018. In 2019, personnel2022. The decrease was driven by a $3.2 million decrease in professional fees made up of legal and outside consulting costs, a $0.8 million decrease in depreciation costs, and a $0.6 million decrease in office and communications costs. These decreases were lower as a result of reductions in headcount and variable compensationslightly offset by $1.3a $0.4 million increase in costs associated with ongoing litigation, as discussed in this Annual Report. In 2018, we incurred $1.4 million in costs associated with activist defense and $0.7 million of board, advisor and other costs associated with the work of a special committee of the Board in response to an unsolicited and unsuccessful acquisition bid by a third party. These reductions were partially offset by $2.6 million ofbuilding costs related to the U.S. Listing incurredhigher costs to operate in the year ended December 31, 2019. We anticipate in 2020 that ongoingour existing facilities and incrementalnon-U.S. Listing related costs as a result of becoming a U.S. registrant will be approximately $1.5 to $2.0$0.2 million higher in 2020 than in 2019, driven largely by increased directortravel and officer insurance premiums, the costs of maintaining two listings, and expected increases in audit, legal, and other complianceentertainment costs.
Operations Support Expenses
Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our DistributionConstruction Partner project execution and our manufacturing operations. Operations support expenses increased $3.0of $7.8 million in 2023 decreased $1.7 million from $9.5 million in 2022. The decrease was largely driven by a $1.4 million decrease in salaries and benefits and a $0.2 million reduction in travel and entertainment costs related to planned headcount reductions and the reorganization initiatives undertaken.
Technology and Development Expenses
Technology and development expenses relate to non-capitalizable costs associated with our product and software development teams and are primarily comprised of salaries and benefits of technical staff.
Technology and development expenses decreased by $1.7 million to $11.0$5.8 million for the year ended December 31, 2019, from $8.12023, compared to $7.6 million for the year ended December 31, 2018,2022. The decrease was primarily related to a $1.1 million decrease in salaries and benefits costs, a $0.2 million decrease in office and communication costs, a $0.2 million decrease in professional fees related to outside consulting services and a $0.2 million decrease in other expenses.
Stock-Based Compensation
Stock-based compensation expense for the year ended December 31, 2023, was $2.3 million compared to $4.3 million in 2022. The decrease in this expense was largely due to an increaseRSU grants in consultinglieu of cash compensation to the Company’s interim Chief Executive Officer in 2022, which were not repeated in 2023. DSUs were granted to the Board of Directors but were offset by the impact of fair value adjustments on cash settled awards as a result of our share price decreasing during the twelve months ended December 31, 2023.
Reorganization
For the year ended December 31, 2023, we incurred $3.0 million of reorganization costs compared to $13.5 million during the year as well as increases in personnel costs. Consultantended December 31, 2022. Fiscal year 2023 costs of $1.1 million were incurredrelated primarily to assistcosts associated with the evaluationRock Hill Facility suspension and subsequent closure, and termination costs associated with actions taken to streamline our back office and operational support functions, as discussed herein. Reorganization costs in 2022 were driven by the closure of current operationsthe Phoenix Facility, the one-time costs associated with reductions of salaried workforce throughout 2022, and changes in management.
35
Impairment charge on Rock Hill Facility
On September 27, 2023, the Company announced our intention to assistpermanently close the Rock Hill Facility in South Carolina. For the year ended December 31, 2023, certain assets located at the Rock Hill Facility that were classified as property, plant and equipment, were reclassified as assets held for sale. Certain Rock Hill Facility assets had been approved by management for sale and had committed to a formal plan to market these assets, which is expected to be completed within the next twelve months. These were measured at the lower of the fair value less costs to sell and their net book value, which resulted in an $8.7 million impairment charge in the year ended December 31, 2023.
Related party expense
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the “Debt Settlement Agreement”) with 22NW Fund, LP (“22NW”) and Aron English, 22NW’s principal and a director of DIRTT, (together, the “22NW Group”) who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the rectificationcontested director election at the annual and special meeting of shareholders of the tile warping issueCompany held on April 26, 2022, being $1.6 million (the “22NW Debt”).
Pursuant to the Debt Settlement Agreement, the Company agreed to repay the 22NW Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group.
In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the 22NW Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by shareholders.
At the annual general and increasesspecial meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the 22NW Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023, market price of $0.38 per common share, resulting in personnel costsa recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.
Government Subsidies
The Company was not eligible and did not receive any new government subsidies in the year ended December 31, 2023. The Company received $0.2 million of interest with the collection of the Employee Retention Credit (“ERC”) during the year ended December 31, 2023.
Gain on sale of software and patents
On May 9, 2023, we entered into the AWI Agreement and Partial Patent Assignment Agreement with AWI. The agreements provided for a cash payment from AWI to the Company of $10.0 million in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in the Applicable ICE Code, including a 50% interest in the patent rights that relate to the Applicable ICE Code. Pursuant to the AWI Agreement, we also provided AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we received an additional cash payment of $1.0 million in the fourth quarter of 2023. The AWI Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into the ARMSA with AWI, under which AWI has also prepaid for certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the AWI Agreement is terminated or expires and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the AWI Agreement.
The $11.0 million of proceeds on the sale of the 50% interest in the Applicable ICE code, pursuant to the AWI Agreement, was received during the year ended December 31, 2023. In accordance with GAAP, the proceeds were first applied to the net book value of the related cost of software of $2.9 million and patents (other assets) of $0.9 million. The residual amount of $7.1 million was recognized as a gain in the consolidated statement of operations. Further, $1.8 million was received as a prepayment under the ARMSA, which is recognized into revenue as the performance obligation is met. During the year ended December 31, 2023, $1.6 million of the $1.8 million payment was received into revenue, and $0.2 million remains in customer deposits to be received as revenue in 2024. Part of the proceeds of this transaction were used to settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash (refer to Note 14 to our Consolidated Financial Statements for additional information).
36
Foreign Exchange (loss) gain
In the year ended December 31, 2023, we had a foreign exchange loss of $0.6 million compared to a gain of $1.4 million in the year ended December 31, 2022, due to fluctuations of the Canadian dollar relative to the U.S. dollar.
Interest Income
Interest income increased headcount to better support project execution and support of our Distribution Partners.
Technology and Development Expenses
Technology and development includes our software development teams and our product development activities. Technology and development expenses increased $3.6 million to $7.8$0.5 million for the year ended December 31, 2019,2023, compared to $4.2$0.1 million in the year ended December 31, 2022, as we benefited from higher interest rates on higher cash balances.
Interest expense
Interest expense decreased by $0.2 million from $5.2 million for the year ended December 31, 2018. These increases are due2022, to a $1.7 million decrease in capitalized salaries for the year ended December 31, 2019, as the current mix of projects undertaken by us included a higher portion of efforts related to business process improvements that were not eligible for capitalization. Additionally, for the year ended December 31, 2019 we had additional salary and benefit costs of $0.7 million that were classified as cost of sales of technical services during the year ended December 31, 2018.
Stock-Based Compensation
During the third quarter of 2018, we determined that we no longer qualified as a Foreign Private Issuer (“FPI”) under the rules of the SEC. To minimize any undue effects on employees, our Board approved the availability of a cash surrender feature for certain options, including options issued under our Amended and Restated Incentive Stock Option Plan (“Option Plan”), until such time as we requalified as a FPI or we registered our common shares with the SEC, which occurred on October 9, 2019 upon our listing on Nasdaq. Accordingly, we accounted for the fair value of outstanding stock options at the end of the reporting period as a liability, with changes in the liability recorded through net income as a stock-based compensation fair value adjustment. On October 9, 2019, we ceased allowing cash surrender of options and returned to equity accounting under the Option Plan without quarterly fair value adjustments at that date.
Stock-based compensation for the year ended December 31, 2019 was $3.9 million compared to $3.7 million for the same period of 2018. Prior to the return to equity settled accounting, we had a liability of $1.8 million. Stock-based compensation for the year ended December 31, 2018 included a $0.2 million fair value adjustments on cash settled stock options.
Reorganization Expenses
We recorded $4.6 million of reorganization expenses in 2019 compared to $7.4$4.9 million for the year ended December 31, 2018. These costs included severance payments, and related legal and consulting costs associated with management and organizational changes.
Impairment Expenses
DIRTT Timber
During 2018, management decided to shift from the early stage development of its DIRTT Timber market to a commercialized approach focused on large, standalone timber projects and as atie-in to our other DIRTT Solutions. Management concluded that this strategy required significantly less timber capacity than existed and took steps to adjust its timber capacity by the end of 2018. Management determined these decisions to be an indicator of impairment of the assets of the DIRTT Timber solution.
During 2018, management performed an assessment of the carrying values of DIRTT Timber’s property, plant and equipment (“PP&E”). To determine the impairment of the DIRTT Timber assets, the net book value of the assets was evaluated against the fair value of the assets. The fair value of the DIRTT Timber assets reflects current projected sales for timber projects on a standalone basis and the pull-through impact to other DIRTT Solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT Solutions. The equipment2023, mostly related to the timber market was custom built for DIRTT, and there is no active market for resale. Therefore,weaker Canadian dollar relative to the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for other DIRTT Solutions. Management estimated the expected resale values basedU.S dollar on the current market and industry knowledge. The fair value of the timber assets was estimated to be $1.1 million. This assessment resulted in an impairment charge of $6.1 million during 2018.our interest expense on Canadian convertible debentures.
Leasehold and Other Assets
During 2018, management reviewed the facilities used in our operations and the corresponding leases in place to determine whether assets were impaired or whether the costs of meeting lease obligations exceeded the economic benefits expected to be received. The outcome of this review was the consolidation of our production in Kelowna, British Columbia, into other plants, the consolidation of a distribution center in Calgary, Alberta, into an existing facility, and discontinued use of other locations that were not considered necessary in our operations. In 2018, we recognized a lease exit liability of $0.5 million related to these facilities, net of $1.0 million of estimated recoveries from subleases.
The lease exit liability represents the present value of the difference between the minimum future lease payments that we are obligated to make under thenon-cancellable operating lease contract and any estimated sublease recoveries. This estimate may vary as a result of changes in estimated sublease recoveries. The lease exit liability is estimated to be settled in periods up to and including the year 2023.
In connection with management’s review of our facilities, certain leasehold assets were identified as no longer having future value. These assets related to leases of locations where activity is being relocated, as well as projects in process that were eliminated. These leasehold and other assets represented assets with a carrying value of $2.0 million in 2018. As these assets cannot be resold and there is no future use for the assets, the entire carrying amount was impaired and a corresponding impairment charge of $2.0 million was recorded.
Income Tax
Alberta’s general provincial tax rate decreased on June 28, 2019 from 11.5% to 11% for the second half of 2019, to 10% for 2020, to 9% for 2021 and to 8% thereafter. As a result of this rate change, we reduced our deferred tax asset by $0.9 million, with a corresponding deferred income tax expense recorded in the second quarter of 2019.
The provision for income taxes is comprised ofcomprises U.S. and Canadian federal, state provincial and foreignprovincial taxes based onpre-tax income. Income tax expense for the year ended December 31, 2019, inclusive of the previously noted charge associated with the Alberta tax rate change,2023, was $1.0$0.3 million, compared to $3.3$0.02 million for the year-endedsame period of 2022. For the year ended December 31, 2018. The reduction was primarily due2023, the Company recorded valuation allowances of $4.2 million (2022 - $13.6 million) against deferred tax assets incurred during the year as the Company has experienced cumulative losses in recent years. Due to a reductionthe Company’s three-year history of negative earnings, it is not more likely than not that the Company’s deferred tax assets will be utilized in current taxes as a result of lower activity. the near term.
As at December 31, 2019,2023, we had C$38.1114.1 million of loss carry-forwards in Canada and none$55.5 million in the United States, compared to C$43.6 million in Canada and none in the United States on December 31, 2018.States. These loss carry-forwards will begin to expire in 2030.2032.
Net Income (loss)Loss after tax
On ayear-to-date basis,Net loss after tax decreased to $14.6 million or $0.13 net loss was $4.4after tax per share in the year ended December 31, 2023, from a net loss after tax of $55.0 million or $0.05$0.55 net loss after tax per share for the year ended December 31, 2019, compared to net income of $5.6 million or $0.07 net income per share for the prior year.2022. The variances aredecreased loss is primarily the result of a $20.6$31.4 million decreaseincrease in gross margin, partially offset byprofit and a $12.4$11.1 million decrease in operating expenses as described above, as well as(which includes a foreign exchange loss$10.5 million decrease in reorganization expenses, $8.7 million of $1.3impairment charges on the Rock Hill Facility and a $1.5 million related party expense), a $0.4 million increase in 2019 compared tointerest income and a $0.2 million decrease in interest expense, offset by a $7.5 million decrease in government subsidies, a $2.1 million decrease in foreign exchange gain, and a $0.3 million increase in income tax expense.
Three Months Ended December 31, 2023 Compared to the Three Months ended December 31, 2022
|
| For the Three Months Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| % Change |
| |||
|
| ($ in thousands) |
| |||||||||
Revenue |
|
| 50,933 |
|
|
| 42,427 |
|
|
| 20 |
|
Gross Profit |
|
| 19,238 |
|
|
| 11,589 |
|
|
| 66 |
|
Gross Profit Margin |
|
| 37.8 | % |
|
| 27.3 | % |
|
|
| |
Operating expenses |
|
|
|
|
|
|
|
|
| |||
Sales and marketing |
|
| 6,933 |
|
|
| 5,856 |
|
|
| 18 |
|
General and administrative |
|
| 5,652 |
|
|
| 4,050 |
|
|
| 40 |
|
Operations support |
|
| 2,268 |
|
|
| 2,151 |
|
|
| 5 |
|
Technology and development |
|
| 1,765 |
|
|
| 1,841 |
|
|
| (4 | ) |
Stock-based compensation |
|
| (237 | ) |
|
| 731 |
|
|
| (132 | ) |
Reorganization |
|
| 152 |
|
|
| 1,180 |
|
|
| (87 | ) |
Impairment charge on Rock Hill Facility |
|
| 764 |
|
|
| - |
|
|
| 100 |
|
Total Operating expenses |
|
| 17,297 |
|
|
| 15,809 |
|
|
| 9 |
|
Operating income (loss) |
|
| 1,941 |
|
|
| (4,220 | ) |
|
| 146 |
|
Operating margin |
|
| 3.8 | % |
|
| (9.9 | )% |
|
|
| |
Gain on sale of software and patents |
|
| 985 |
|
|
| - |
|
|
| 100 |
|
Foreign exchange (loss) gain |
|
| (567 | ) |
|
| (425 | ) |
|
| (33 | ) |
Interest income |
|
| 219 |
|
|
| 1 |
|
|
| 21,800 |
|
Interest expense |
|
| (1,291 | ) |
|
| (1,225 | ) |
|
| (5 | ) |
|
| (654 | ) |
|
| (1,649 | ) |
|
| 60 |
| |
Net income (loss) before tax |
|
| 1,287 |
|
|
| (5,869 | ) |
|
| 122 |
|
Current income tax expense |
|
| 332 |
|
|
| 37 |
|
|
| 797 |
|
|
| 332 |
|
|
| 37 |
|
|
| 797 |
| |
Net income (loss) after tax |
|
| 955 |
|
|
| (5,906 | ) |
|
| 116 |
|
37
Annual 2023 Non-GAAP Measures
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the years ended December 31, 2023, 2022, and 2021 of Adjusted Gross Profit to our gross profit and Adjusted Gross Profit Margin to gross profit margin, which are the most directly comparable GAAP measures for the periods presented:
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
| ($ in thousands) |
| |||||||||
Gross profit |
|
| 59,542 |
|
|
| 28,160 |
|
|
| 23,460 |
|
Gross profit margin |
|
| 32.7 | % |
|
| 16.4 | % |
|
| 15.9 | % |
Add: Depreciation and amortization expense |
|
| 5,525 |
|
|
| 10,789 |
|
|
| 8,808 |
|
Add: Costs of under-utilized capacity |
|
| - |
|
|
| - |
|
|
| 1,756 |
|
Adjusted Gross Profit |
|
| 65,067 |
|
|
| 38,949 |
|
|
| 34,024 |
|
Adjusted Gross Profit Margin |
|
| 35.8 | % |
|
| 22.6 | % |
|
| 23.1 | % |
For the year ended December 31, 2023, gross profit and gross profit margin increased to $59.5 million or 32.7% from $28.2 million or 16.4% for the prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin increased 67% to $65.1 million or 35.8% for the year ended December 31, 2023, from $38.9 million or 22.6% for the year ended December 31, 2022. Gross profit for the year ended December 31, 2022, included $2.1 million of accelerated depreciation and amortization arising from the change in useful lives of the Phoenix Facility’s equipment. The improvement in Adjusted Gross Profit was due to having better leverage over fixed costs through price increases and reduced fixed costs. Labor costs decreased $3.4 million and fixed costs decreased $2.7 million in 2023 compared to 2022 as a result of initiatives to align our fixed costs with anticipated demand. Actions taken that impacted our overheads included the closure of our Phoenix Facility during the second quarter of 2022 and the temporary suspension of operations at our Rock Hill Facility in the third quarter of 2022. Idle facility costs incurred since the suspension of operations at the Rock Hill Facility were $2.0 million for the year ended December 31, 2023, compared to $0.5 million for the previous year, and are included in cost of sales. We are pursuing options to sublease the Rock Hill Facility to offset idle facility costs in 2024 and beyond.
EBITDA and Adjusted EBITDA for the Years Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the results of 2023, 2022 and 2021 of EBITDA and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure for the years presented, and of Adjusted EBITDA Margin to net loss margin:
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
| ($ in thousands) |
|
|
|
| ||||||
Net loss after tax for the year |
|
| (14,584 | ) |
|
| (54,963 | ) |
|
| (53,668 | ) |
Add back (deduct): |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| 4,927 |
|
|
| 5,160 |
|
|
| 3,131 |
|
Interest income |
|
| (490 | ) |
|
| (51 | ) |
|
| (77 | ) |
Income tax expense (recovery) |
|
| 332 |
|
|
| 21 |
|
|
| (204 | ) |
Depreciation and amortization |
|
| 8,934 |
|
|
| 15,119 |
|
|
| 14,513 |
|
EBITDA |
|
| (881 | ) |
|
| (34,714 | ) |
|
| (36,305 | ) |
Foreign exchange (gain) loss |
|
| 626 |
|
|
| (1,445 | ) |
|
| 335 |
|
Stock-based compensation |
|
| 2,306 |
|
|
| 4,277 |
|
|
| 4,713 |
|
Government subsidies |
|
| (236 | ) |
|
| (7,765 | ) |
|
| (11,455 | ) |
Related party expense |
|
| 1,524 |
|
|
| - |
|
|
| - |
|
Reorganization expense |
|
| 3,009 |
|
|
| 13,461 |
|
|
| - |
|
Gain on sale of software and patents |
|
| (7,130 | ) |
|
| - |
|
|
| - |
|
Impairment charge on Rock Hill Facility |
|
| 8,716 |
|
|
| - |
|
|
| - |
|
Goodwill impairment |
|
| - |
|
|
| - |
|
|
| 1,443 |
|
Adjusted EBITDA |
|
| 7,934 |
|
|
| (26,186 | ) |
|
| (41,269 | ) |
Net Loss Margin(1) |
|
| (8.0 | )% |
|
| (31.9 | )% |
|
| (36.4 | )% |
Adjusted EBITDA Margin |
|
| 4.4 | % |
|
| (15.2 | )% |
|
| (28.0 | )% |
38
For the year ended December 31, 2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by $34.1 million to $7.9 million or 4.4% from a $26.2 million loss or (15.2)% in the same period of 2022. This reflects a $26.1 million increase in Adjusted Gross Profit, discussed above, a $4.2 million decrease in salary and wage expenses, reflecting the impact of headcount reductions resulting from reorganization initiatives, $3.2 million of decreased professional fees, and $0.9 million decrease in 2018. Foreign exchange gains or losses are primarily derived from U.S. dollar denominated cashother operating expenses as a result of continued evaluation of our fixed cost structure and intercompany account balances inoverhead costs.
Reconciliation of Q4 2023 Non-GAAP Measures
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Canadian parent company.Three Months Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the three months ended December 31, 2023, 2022, and 2021 of Adjusted Gross Profit to our gross profit, and Adjusted Gross Profit Margin to gross profit margin, which is the most directly comparable GAAP measure for the periods presented:
|
| For the Three Months Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
| ($ in thousands) |
| |||||||||
Gross profit |
|
| 19,238 |
|
|
| 11,589 |
|
|
| 8,416 |
|
Gross profit margin |
|
| 37.8 | % |
|
| 27.3 | % |
|
| 19.6 | % |
Add: Depreciation and amortization expense |
|
| 869 |
|
|
| 1,997 |
|
|
| 2,425 |
|
Adjusted Gross Profit |
|
| 20,107 |
|
|
| 13,586 |
|
|
| 10,841 |
|
Adjusted Gross Profit Margin |
|
| 39.5 | % |
|
| 32.0 | % |
|
| 25.3 | % |
EBITDA and Adjusted EBITDA for the Three Months Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the three months ended results of 2023, 2022 and 2021 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented, and of Adjusted EBITDA Margin to net income (loss) margin:
|
| Three months ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
| ($ in thousands) |
| |||||||||
Net income (loss) after tax for the period |
|
| 955 |
|
|
| (5,906 | ) |
|
| (16,012 | ) |
Add back (deduct): |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| 1,291 |
|
|
| 1,225 |
|
|
| 1,014 |
|
Interest income |
|
| (219 | ) |
|
| (1 | ) |
|
| (15 | ) |
Income tax expense (recovery) |
|
| 332 |
|
|
| 37 |
|
|
| (551 | ) |
Depreciation and amortization |
|
| 1,718 |
|
|
| 2,917 |
|
|
| 3,875 |
|
EBITDA |
|
| 4,077 |
|
|
| (1,728 | ) |
|
| (11,689 | ) |
Foreign exchange (gain) loss |
|
| 567 |
|
|
| 425 |
|
|
| 621 |
|
Stock-based compensation |
|
| (237 | ) |
|
| 731 |
|
|
| 921 |
|
Government subsidies |
|
| - |
|
|
| - |
|
|
| (1,021 | ) |
Reorganization expense |
|
| 152 |
|
|
| 1,180 |
|
|
| - |
|
Gain on sale of software and patents |
|
| (985 | ) |
|
| - |
|
|
| - |
|
Impairment charge on Rock Hill Facility |
|
| 764 |
|
|
| - |
|
|
| - |
|
Goodwill impairment |
|
| - |
|
|
| - |
|
|
| 1,443 |
|
Adjusted EBITDA |
|
| 4,338 |
|
|
| 608 |
|
|
| (9,725 | ) |
Net Income (Loss) Margin(1) |
|
| 1.9 | % |
|
| (13.9 | )% |
|
| (37.3 | )% |
Adjusted EBITDA Margin |
|
| 8.5 | % |
|
| 1.4 | % |
|
| (22.7 | )% |
39
Year Ended December 31, 20182022 Compared to the Year Ended December 31, 20172021
Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 20182022, compared to the fiscal year ended December 31, 20172021, is included under the heading Item 2. “Financial Information – Management’s7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Registration StatementAnnual Report on Form 10,10-K for the fiscal year ended December 31, 2022, as filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on September 20, 2019.February 22, 2023.
Seasonality
The construction industry has historically seen seasonal slowdowns related to winter weather conditions and holiday schedules in the fourth and first quarters. Our business has generally, but not always, followed this trend with a slight time lag, leading to stronger sales in the second half of the year versus the first half.
Due to the fixed nature of some of our manufacturing costs, periods of higher revenue volume tend to generate higher gross profit and operating income. Quarters that contain consistent monthly manufacturing volumes tend to generate higher gross profit than those where manufacturing levels vary significantly from month to month. Product and service revenue mix also tends to impact gross profit, as simplistic product and service revenue mix can result in lower gross profit, while “full solution” or comprehensive product and service revenue mixes tend to have higher gross profit.
Liquidity and Capital Resources
Cash and cash equivalentsAs at December 31, 2019 totaled $47.22023, the Company had $24.7 million a decrease of $6.2 million from $53.4 million on December 31, 2018. On January 31, 2019, we repaid $5.6 million of long-term debt outstanding with cash on hand without penalty. In July 2019,and C$13.6 million ($10.3 million) of available borrowings, compared to $10.8 million of cash on hand and C$7.2 million ($5.3 million) of available borrowings as at December 31, 2022. Through the year ended December 31, 2023, the Company generated $14.8 million in cash flow from operations, compared to a cash usage of $44.3 million over fiscal year 2022. The Company benefited from the receipt of $7.3 million of government subsidies during 2023.
We have implemented multiple price increases during the past two years to mitigate the impact of inflation on raw materials, costs and improve liquidity. These actions have resulted in a meaningful improvement in our gross profit margins and have served to reduce our cash usage to operate the business. Gross profit for the year ended December 31, 2023, was $59.5 million, or 32.7% of revenue, compared to the same period in 2022, which generated gross profit of $28.2 million, or 16.4% of revenue.
Over the same period, we have executed upon several initiatives to improve liquidity. First, in May 2023, we entered into an agreement with AWI resulting in the receipt of $12.8 million of cash throughout 2023. Second, in March 2023, we entered into an agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024, providing us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities, including our Rock Hill Facility, and expect these initiatives to result in positive cash inflows in 2024. Third, we completed a C$50.0private placement of 8,667,449 common shares in November 2022 for aggregate gross proceeds of $2.8 million revolving operating facility(the “Private Placement”), with certain significant shareholders and directors and officers of the Company to bridge cash requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable subscription agreements with its two largest shareholders, 22NW and 726 BC LLC and 726 BF (together “726” (which subsequently transferred its holdings to WWT)) and all the directors and officers of the Company on November 14, 2022, to issue 8.7 million shares for gross consideration of $2.8 million. The Private Placement closed on November 30, 2022.
On November 21, 2023, the Company announced a rights offering to common shareholders for aggregate gross proceeds of C$30.0 million (the “Rights Offering”). The Rights Offering closed on January 9, 2024, for aggregate gross proceeds of C$30.0 million.
On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company will offer to repurchase for cancellation: (i) up to C$6,000,000 principal amount of its issued and outstanding January Debentures") (or such larger principal amount as the Company, in its sole discretion, may determine it is willing to take-up and pay for, subject to applicable law) at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of its issued and outstanding 6.25% convertible unsecured subordinated debentures due December 31, 2026 (the "December Debentures", and, together with the Royal BankJanuary Debentures, the “Debentures” or the “convertible debentures”) (or such larger principal amount as the Company, in its sole discretion, may determine it is willing to take-up and pay for, subject to applicable law) at a purchase price of Canada (“RBC Credit Facility”). Draw-downsC$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tender and do not withdraw their Debentures will receive the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures are taken up by the Company. The applicable purchase price will be denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for interest, will be made in Canadian dollars. The Issuer Bid will remain open for acceptance until 5:00 p.m. (Eastern Standard Time) on March 22, 2024, unless withdrawn or extended by the Company. If the aggregate principal amount of the Debentures properly tendered and not withdrawn under the RBC Credit FacilityIssuer Bid exceeds C$6,000,000 for the January Debentures or C$9,000,000 for the December Debentures, the Company will purchase a pro-rated portion of the January Debentures or the December Debentures so tendered, as applicable (with adjustments to maintain C$1,000 minimum denominations of Debentures). DIRTT will return all Debentures not purchased under the Issuer Bid, including Debentures not purchased because of pro-ration. Debentures taken up and paid for by the Company will be immediately cancelled.
The Company intends to fund the Issuer Bid with a portion of the proceeds from the Company’s previously completed rights offering to its common shareholders, which closed in January 2024 for aggregate gross proceeds of C$30.0 million.
40
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones.
While we are encouraged by the improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of recent macroeconomic uncertainty. We have implemented multiple reorganization initiatives designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by approximately 10%, from January 2022 through December 2023.
We have assessed the Company’s liquidity as at December 31, 2023, taking into account our sales outlook for the next twelve months, our existing cash balances and available in both Canadian and U.S. dollars. The RBC Credit Facility replacedcredit facilities. Based upon this analysis, we believe the $18.0 million revolving operating facility with Comerica Bank (“Comerica Credit Facility”) that expired on June 30, 2019.Company has sufficient liquidity to remain a going concern for at least the next twelve months.
Management believesTo the extent that existing cash and cash equivalents and cash flows from operations will be sufficient to support ongoing working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including growth rate, the continued expansion of sales and marketing activities and the introduction of new solutions, software and product enhancements. To the extent existing cash and cash equivalents and cash flows from operationsavailable facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities and couldor contain covenantsinstruments that restrict operations.may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders. While we believe we can access capital markets when needed or under acceptable terms, there can be no assurance we will be able to do so.
Since inception,In January 2021, we have financed operations primarily throughissued C$40.3 million of 6.00% convertible unsecured subordinated debentures due January 31, 2026 (the “January Debentures”) for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on January 31, 2026. As a result of the Rights Offering, the conversion price was adjusted to C$4.03 per common share. Interest and principal are payable in cash flows from operations, long-term debt, andor shares at the saleoption of equity securities. Over the past three years, the we have funded our operations and capital expenditures through a combination of cashflow from operations and cash on hand. We had no amount outstanding under the RBC Credit FacilityCompany. As at December 31, 2019.2023, C$18.9 million of the January Debentures are held by a related party, 22NW. 22NW holds approximately 30.1% of our issued and outstanding common shares as of February 16, 2024. Aron English, manager of 22NW Fund GP, LLC, the general partner of 22NW, is a director of the Company.
In February 2021, we entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). 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. On February 9, 2023, the Company extended the RBC Facility. The maximum availability under the Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Available borrowings under the Extended RBC Facility as at December 31, 2023, were C$13.6 million ($10.3 million).
On December 1, 2021, we issued C$35.0 million of 6.25% convertible unsecured subordinated debentures due December 31, 2026 (the “December Debentures” and together with the January Debentures, the “Debentures”) for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted, will mature and be repayable on December 31, 2026. As a result of the Rights Offering, the conversion price was adjusted to C$3.64 per common share.Interest and principal are payable in cash or shares at the option of the Company. As at December 31, 2023, C$13.6 million of the December Debentures are held by a related party, 22NW.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC, and one of its affiliates. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%. In connection with the Company’s decision to close the Rock Hill Facility, we settled the liability related to the U.S. Leasing Facility ($7.8 million). The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we released $2.6 million of restricted cash.
41
The following table summarizes our consolidated cash flows for the years indicated:
|
|
|
| For The Year Ended December 31, |
| |||||||||
|
|
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
|
|
| ($ in thousands) |
| |||||||||
Net cash flows provided by (used in) operating activities |
|
|
|
| 14,821 |
|
|
| (44,260 | ) |
|
| (31,210 | ) |
Net cash flows provided by (used in) investing activities |
|
|
|
| 7,657 |
|
|
| (4,024 | ) |
|
| (14,138 | ) |
Net cash flows (used in) provided by financing activities |
|
|
|
| (11,605 | ) |
|
| (874 | ) |
|
| 62,452 |
|
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
|
|
| (13 | ) |
|
| (11 | ) |
|
| 458 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
| 10,860 |
|
|
| (49,169 | ) |
|
| 17,562 |
|
Cash, cash equivalents and restricted cash, beginning of year |
|
|
|
| 14,239 |
|
|
| 63,408 |
|
|
| 45,846 |
|
Cash, cash equivalents and restricted cash, end of year |
|
|
|
| 25,099 |
|
|
| 14,239 |
|
|
| 63,408 |
|
| Years ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| ($ in thousands) | ||||||||||||
Cash flows provided by (used in) operating activities | 13,359 | 10,065 | 19,432 | |||||||||
Cash provided by (used in) investing activities | (15,189 | ) | (13,462 | ) | (19,499 | ) | ||||||
Cash provided by (used in) financing activities | (5,484 | ) | (3,069 | ) | (9,109 | ) | ||||||
Effect of foreign exchange on cash and cash equivalents | 1,076 | (3,606 | ) | 2,984 | ||||||||
|
|
|
|
|
| |||||||
Net decrease in cash and cash equivalents | (6,238 | ) | (10,072 | ) | (6,192 | ) | ||||||
Cash and cash equivalents, beginning of period | 53,412 | 63,484 | 69,676 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of period | 47,174 | 53,412 | 63,484 | |||||||||
|
|
|
|
|
| |||||||
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cash and cash equivalents |
|
| 24,744 |
|
|
| 10,821 |
|
|
| 60,313 |
|
Restricted cash |
|
| 355 |
|
|
| 3,418 |
|
|
| 3,095 |
|
Total cash, cash equivalents and restricted cash |
|
| 25,099 |
|
|
| 14,239 |
|
|
| 63,408 |
|
Operating Activities
Net cash flows provided by operating activities increased to $13.4were $14.8 million for the year ended December 31, 2019 from $10.12023, compared to $44.3 million used by operating activities for the comparative period in 2018. Net cash flows from operations before changes in operating assets and liabilities was $8.4 million (calculated as $4.4 million of net loss plus $12.8 million ofnon-cash adjustments) in 2019, compared to $29.1 million (calculated as $5.6 million of net income plus $23.5 million ofnon-cash adjustments) in 2018, which largely reflects the 2019 reduction in adjusted gross profit discussed above.Non-cash adjustments include, among other things, depreciation and amortization expense, impairment expense, stock-based compensation net of cash paid on surrenders of stock options, and unrealized foreign exchange impacts.year ended December 31, 2022. The increaseimprovement in cash flows fromused in operations is largely due to anthe $34.1 million increase in collections on accounts receivable balances partially offset byAdjusted EBITDA and a $10.5 million decrease in accounts payable resultingreorganization costs. We achieved positive operating cash flows through the realization of price increases and reorganization initiatives which have been designed to align our cost structure with current expected levels of demand.
Investing Activities
Cash flows provided by investing activities during the year ended December 31, 2023, benefited from timing$11.0 million of payments.proceeds from the AWI transaction.
Investing Activities
We invested $12.7$1.2 million in PP&Eproperty, plant and equipment during 2019the year ended December 31, 2023, compared to $8.6$2.4 million in 2018. The increase was primarily due toduring the year ended December 31, 2022. Expenditures consisted of $0.3 million of information technology investments, $0.4 million of DXC refreshes and $0.5 million of manufacturing equipment purchasesupgrades for the new tile and millwork facility, of which $4.5 million was incurred in the second half of 2019.year ended December 31, 2023. We invested $3.5$1.8 million on capitalized software and other assets during 2019, asthe year ended December 31, 2023, compared to $5.2$1.7 million in 2018. The reduction is due tofor the current mixyear ended December 31, 2022.
Financing Activities
For the year ended December 31, 2023, $11.6 million of projects undertaken by the Company and included a higher portion of efforts related to business process improvements that were not eligible for capitalization.
Financing Activities
Net cash was used in financing activities, was $5.5comprising $2.2 million in 2019. We repaidof scheduled repayments and $9.4 million of early repayments under the balanceU.S. Leasing Facility and the Canada Leasing Facility. For the year ended December 31, 2022, $0.9 million of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019. Cashcash was used in financing activities was $3.1mainly driven by the scheduled repayments under the Leasing Facilities, offset by the receipt of $2.0 million in 2018.net proceeds from the Private Placement and a draw of C$0.9 million ($0.7 million) under the Canada Leasing Facility.
We currently expect to fund anticipated future investments with available cash.cash, proceeds from the Rights Offering and drawings on the Second Extended RBC Facility. As of December 31, 2023, our strategic initiatives have generated cash through proceeds from the Private Placement in November 2022, the receipt of $7.3 million of government subsidy through the ERC application during the year ended December 31, 2023, and proceeds of $12.8 million received in 2023 through the AWI transaction. We continue to evaluate properties we own for sale and lease back and opportunities to sub-lease available spaces. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the future as we may deem appropriate. We may also use debt or pursue equity financing depending on the share price of our common shares at the time, interest rates, and nature of the investment opportunity and economic climate. No assurance can be given that any of these actions will be successful or will be sufficient for our needs.
42
Consolidated cash flows for the quarter as indicated:
|
|
|
| For the three months ended December 31, |
| |||||||||
|
|
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
|
|
|
| ($ in thousands) |
| |||||||||
Net cash flows provided by (used in) operating activities |
|
|
|
| 10,134 |
|
|
| 3,249 |
|
|
| (7,338 | ) |
Net cash flows provided by (used in) investing activities |
|
|
|
| 568 |
|
|
| (429 | ) |
|
| (1,582 | ) |
Net cash flows (used in) provided by financing activities |
|
|
|
| (8,193 | ) |
|
| 928 |
|
|
| 26,369 |
|
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
|
|
| 153 |
|
|
| 62 |
|
|
| (123 | ) |
Net increase in cash, cash equivalents and restricted cash |
|
|
|
| 2,662 |
|
|
| 3,810 |
|
|
| 17,326 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
| 22,437 |
|
|
| 10,429 |
|
|
| 46,082 |
|
Cash, cash equivalents and restricted cash, end of period |
|
|
|
| 25,099 |
|
|
| 14,239 |
|
|
| 63,408 |
|
Credit Facility
At December 31, 2019, we had no amounts drawn on our RBC Credit Facility, and we were in compliance with all covenants thereunder. In 2018, we did not draw onOn February 12, 2021, the Comerica Credit Facility. The Comerica Credit Facility expired on June 30, 2019.
On July 19, 2019, weCompany entered into a C$50.0 million senior secured revolving credit facility with the Royal Bank of Canada.The RBC CreditFacility. Under the RBC Facility, has a three-year term and can be extended forthe Borrowing Base is up to two additional years at our option.a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Interest is calculated at the Canadian or U.S. prime rate with no adjustment,plus 30 basis points or at the bankers’ acceptance rateCanadian Dollar Offered Rate or LIBOR plus 125155 basis points. We are required to comply with certain financial covenants underUnder the RBC Credit Facility, if the “Aggregate Excess Availability”, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including maintainingunrestricted cash is less than C$5.0 million, the Company is subject to a minimum fixed charge coverage ratio (“FCCR”) covenant of 1.15:1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. 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.
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a maximum borrowing base of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 200 basis points. Under the Extended RBC Facility, until such time that the trailing twelve-month FCCR is above 1.25 for three consecutive months, a cash balance equivalent to one-year’s worth of Leasing Facilities payments must be maintained. At December 31, 2023, available borrowings are C$13.6 million ($10.3 million) (2022 – C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the year end 2023, which resulted in the restriction of $0.4 million of cash (2022 - $3.4 million).
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The maximum debtavailability under the Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted EBITDA ratioTerm CORRA or Term SOFR plus the Term SOFR Adjustment, in each case, plus 200 basis points.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of 3.0:1. which C$4.4 million ($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.
The Company did not make any draws on the Leasing Facilities during 2023. During the year ended December 31, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.
As part of the decision to close the Rock Hill Facility, the Company fully settled the liability related to the U.S. Leasing Facility of $7.8 million in the fourth quarter of 2023. The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, $2.6 million was released from restricted cash.
As part of RBC’s consent to the AWI transaction, one of the Canadian lease agreements of $1.6 million was fully settled using proceeds from the AWI transaction. This resulted in the release of $0.4 million of restricted cash associated with the one year of payments on this lease.
43
We are also required to comply with certainnon-financial covenants, including, among other things, covenants restricting our ability to (i) dispose of our property, (ii) enter into certain transactions intended to effect or otherwise permit a material change in our corporate or capital structure, (iii) incur any debt, other than permitted debt, and (iv) permit certain encumbrances on our property.
We are generally restricted from makingpaying dividends or distributions on our outstanding capital shares (other than any distribution by way of the payment of dividends by the issuance of equity securities). We may also declare and pay dividends to our shareholders provided that such dividends do not exceed 50% of the Free Operating Cash Flowunless Payment Conditions (as defined in the Second Extended RBC Credit Facility) forare met, including having a net borrowing availability of at least C$10 million over the most recently completed fiscal yearproceeding 30-day period, and meethaving a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. We may also make aone-time Permitted Special Distributions (as defined in theThe Second Extended RBC Credit Facility) provided that we maintain a minimum balance of at least C$20.0 million in our account and meet certain other conditions.
The RBC Credit Facility is currently secured by substantially all of our real property located in Canada and the United States.
Contractual Obligations
The following table summarizes DIRTT’s contractual obligations at December 31, 2019:2023:
| Payments due by period |
| ||||||||||||||||||||||||||||||||||||||
| Payments due by period |
| Less than |
|
|
|
|
|
|
| Greater than |
|
|
| |||||||||||||||||||||||||||
| Less than 1 year | 1 to 3 years | 3 to 5 years | Greater than 5 years | Total |
| 1 year |
|
| 1 to 3 years |
|
| 3 to 5 years |
|
| 5 years |
|
| Total |
| |||||||||||||||||||||
| ($ in thousands) |
| ($ in thousands) |
| |||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | 20,384 | — | — | — | 20,384 |
|
| 19,880 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,880 |
| |||||||||||||||
Other liabilities | 5,187 | — | — | — | 5,187 |
|
| 2,482 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,482 |
| |||||||||||||||
Current and long-term debt | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Customer deposits and deferred revenue | 3,567 | — | — | — | 3,567 |
|
| 5,290 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,290 |
| |||||||||||||||
Current and long-term portion of long-term debt and accrued interest1 |
|
| 7,190 |
|
|
| 59,692 |
|
|
| 134 |
|
|
| - |
|
|
| 67,016 |
| ||||||||||||||||||||
Lease liabilities (undiscounted) | 5,419 | 10,296 | 4,439 | 4,469 | 24,623 |
|
| 5,424 |
|
|
| 11,542 |
|
|
| 8,209 |
|
|
| 19,929 |
|
|
| 45,104 |
| |||||||||||||||
Purchase obligations | 6,807 | — | — | — | 6,807 |
|
| 2,797 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,797 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total | 41,364 | 10,296 | 4,439 | 4,469 | 60,568 |
|
| 43,063 |
|
|
| 71,234 |
|
|
| 8,343 |
|
|
| 19,929 |
|
|
| 142,569 |
| |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
SignificantCritical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements appearing elsewhere in Item 8 of this Annual Report. Our critical accounting estimates include the areas where we have made what we consider to be particularly difficult, subjective or complex judgementsjudgments in making estimates, and where these estimates can significantly affect our financial results under different assumptions and conditions. We prepare our financial statements in conformity with GAAP. As a result, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. Critical estimates and assumptions made by management include:
Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies
We have warranty obligations with respect to manufacturing defects on most of our manufactured products. Warranty periods generally range from 1one to 10ten years. We have recorded a reserve for estimated warranty and related costs based on historical experience and periodically adjust these provisions to reflect actual experience. We assess the adequacy of our warranty accrual on a quarterly basis, and adjust the previous amounts recorded, if necessary, to reflect the change in estimate of the future costs of claims yet to be serviced. Typically, product deficiencies requiring our warranty are identified and remediated within a year of production. The following provides information with respect to our warranty accrual. At December 31, 20192023 and 2018,2022, we had $4.0$0.9 million and $1.5$1.3 million, respectively, accrued for warranty and other provisions, and third-party costs associated with remedying deficiencies were $2.6$1.2 million during the fiscal 2019,year ended December 31, 2023, as compared to $2.1$1.1 million during the fiscal 2018. Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications that the projects were sold under. As a result, we recorded a $2.5 million liability and are in the process of contacting customers to determine appropriate remedial actions, if any. We are in discussions with our insurance carrier to determine how much, if any, of this liability is covered by insurance. We have ceased selling timber to projects with those particular specifications until such time as we have a permanent solution. We are also in the process of evaluating solutions which, if successful, could significantly reduce the associated liability. The current year expenditures primarily relates to the previously noted increase in the incidence of tile warping as a result of a change in the composition of the underlying medium density fiberboard substrate. This issue is currently being addressed, and our warranty provision may change as the assessment of this issue changes.ended December 31, 2022.
We establish reserves for estimated legal contingencies when we believe a loss on litigation is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liability reserves are reflected in operations in the period in which there are changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. We estimate the probable cost by evaluating historical precedent as well as the specific facts relating to each contingency (including the opinion of outside advisors). Should the outcome differ from our assumptions and estimates, or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known. At December 31, 20192023 and 2018,2022, we had $0.7$0.05 million and $2.0 million, respectively, provided for legal provisions.
44
Estimates of useful lives of depreciable assets, and the fair value of long-term assets used for impairment calculations and the fair value less costs to sell for assets held for sale
We evaluate the recoverability of our property, plant, and equipment (“PP&E and&E”), capitalized software costs and right of use assets when events or changes in circumstances indicate a potential impairment exists. If impairment is indicated, the impairment loss is measured as the amount the assets carrying value exceeds the fair value of the assets.
Our determination of the fair value associated with long-term assets involveinvolves significant estimates and assumptions, including those with respect to the determination of asset groups, future cash inflows and outflows, discount rates, and asset lives. These significant estimates require considerable judgment, which could affect our future results if the current estimates of future performance and fair values change.
We estimate the useful lives of PP&E, and capitalized software costs and right of use assets based on the period over which the assets are expected to be available for use. The estimated useful lives are reviewed annually and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of the relevant assets may be based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the PP&E and capitalized software assets would increase the recorded expenses and decreasethe non-current assets.
As at December 31, 2021, the fair value of goodwill did not exceed the carrying value of its net assets and, accordingly, the entire $1.4 million balance of goodwill was impaired as at December 31, 2021. There was no impairment charge for the year ended December 31, 2023, or December 31, 2022.
The Company classifies an asset group (“asset”) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the consolidated statement of operations and comprehensive loss in the period in which the held for sale criteria are met. We estimate the fair value less costs to sell based on market prices and discussions with potential buyers on the assets that are held for sale. The amounts and timing that the assets held for sale are sold could be impacted on the ability to market and sell the assets held for sale, and find a suitable buyer.
Estimates of future taxable earnings used to assess the realizable value of deferred tax assets
We use the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their carrying amounts reported in the financial statements. Deferred income tax assets also reflect the benefit of unutilized tax losses that can be carried forward to reduce income taxes in future years. Such method requires the exercise of significant judgment in determining whether or not it is more likely than not our deferred tax assets are probable of recovery from taxable income of future yearsmay be realized and, therefore, can be recognized in the financial statements. Also, estimates are required to determine the expected timing upon which tax assets will be realized and upon which tax liabilities will be settled. We assess the ability to recover our deferred tax assets every quarter and concluded that a valuation allowance was required against our deferred tax assets should be recovered in the normal courseat December 31, 2023 of operations.$34.5 million (2022 - $29.8 million).
Tax interpretations, regulations, and legislationslegislation in the various jurisdictions in which the Company and its subsidiariessubsidiary operate
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, and Canadian federal and provincial, jurisdictions. Jurisdictional tax law changes, increaseincreases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
We have no liability for uncertain tax positions. However, should we accrue for such liabilities, when and if they arise in the future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.
45
Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of the ultimate payout amount
We use a fair-value based approach for measuring stock-based compensation and record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. Our awards vest based on service conditions, and compensation expense is recognized on a straight-line basis. Stock-based compensation expense is recognized only for those awards that ultimately vest.
Prior to October 2019, we allowed certain vested share options to be surrendered for cash, resulting in the share options being accounted for as liabilities at fair value every period, which increases the sensitivity of our accounting to share price movements.
Estimates of ability and timeliness of customer payments of accounts receivable
Our allowance for doubtful accountsexpected credit loss reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts.expected credit losses. In estimating uncollectible accounts,the Company’s current estimate of expected credit losses, management considers factors suchhistorical credit loss experience as current overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance.well as forward-looking information in order to establish rates for each class of financial receivable with similar risk characteristics. While we believe these processes effectively address our exposure for doubtful accounts and credit losses which have historically been within expectations, changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts.expected credit loss. We have a contract with a trade credit insurance provider, whereby a portion of itsour trade receivables are insured. The trade credit insurance provider determines the coverage amount, if any, ona customer-by-customer basis. Based on our trade receivables balance as at December 31, 20192023 and 2018, nil2022, approximately 93% and 70%77%, respectively, of that balance was covered by the trade credit insurance provider.
At December 31, 2019 and 2018,2023, we had an allowance for doubtful accountsexpected credit loss of $0.1 million.million (2022 - $0.1 million).
Recent Accounting Pronouncements
Please refer to Note 3 to our Consolidated Financial Statements presented elsewhere in this Annual Report.
46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
|
Our financial assets and liabilities consist primarily of cash and cash equivalents, restricted cash, trade and accrued receivables, other receivables, long-term deposits and long-term receivables, accounts payable and accrued liabilities, other liabilities, lease liabilities and long-term debt.debt and accrued interest. We are exposed to market, credit and liquidity risks associated with financial assets and liabilities. We currently do not use financial derivatives to reduce exposures from changes in foreign exchange rates, commodity prices, or interest rates. We do not hold or use any derivative instruments for trading or speculative purposes. Our Board of Directors has responsibility for the establishment and approval of overall risk management policies, including those related to financial instruments. Management performs continuous assessments to ensure that all significant risks related to financial instruments are reviewed and addressed in light of changes to market conditions and operating activities.
Credit risk
Our principal financial assets are cash and cash equivalents, andrestricted cash, trade and accrued receivables and other receivables.
Our credit risk is primarily concentrated in our trade and accrued receivables as we do not believe that we are exposed to any significant credit risk related to our cash and cash equivalents.equivalents, other receivables and restricted cash balances. The amounts disclosed in the consolidated balance sheet for trade and accrued receivables and other receivables are net of allowances for doubtful accounts. Allowances are provided for known and anticipatedthe Company’s current estimate of all expected credit losses using the lifetime expected credit loss model. As at December 31, 2023 and disputed amounts.2022, our allowance was $0.1 million. In order to reducemanage and assess our risk, management maintains credit policies that include regular review of credit limits of individual Distribution Partnersreceivables and systematic monitoring of aging of trade receivables. Tradereceivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At December 31, 2023, approximately 93% of our trade accounts receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities, that have arisen since April 1, 2020, when the trade credit insurance became effective. Our trade balances are spread over a broad DistributionConstruction Partner base, which is geographically dispersed. No DistributionOne Construction Partner accountsaccounted for greater than 10% of revenue.revenue in 2023 (2022- none). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.
Prior to October 1, 2019, we had a contract with a trade credit insurance provider, whereby a portion of our trade receivables were insured. The trade credit insurance provider determined the coverage amount, if any, on an individual Distribution Partner or client basis. We discontinued this insurance before the end of 2019. Based on our trade receivables balance for 2018, 70% of that balance was covered by the trade credit insurance provider. We discontinued trade credit insurance as our sales are typically to our Distribution Partners with whom we have had ongoing relationships and historically we have had limited instances ofnon-collections.
Market risk
Market risk is the risk that changes in market prices, such as interest rates and foreign currency exchange rates, will affect our income or the value of the financial instruments held.
Foreign exchange risk
Historically, theThe majority (approximately 80%85% to 85%90%) of our revenue is collected in U.S. dollars, and approximately 60%40% of our costs are also incurred in U.S. dollars. Most other revenue and costs are denominated in Canadian dollars. As a result, we are exposed to fluctuations in the U.S. dollar against the Canadian dollar, which could have a positive or negative impact on our revenue and costs. The recent weakeningstrengthening of the U.S. dollar versus the Canadian dollar in 2023 has had a negativemarginally positive impact on results because reported cost reductionscosts are lesslower than reported revenue reductions.revenue.
47
Our financial instruments are exposed primarily to fluctuations in the Canadian dollar. The following table details our exposure to currency risk at the reporting dates and a sensitivity analysis to changes in currency. The sensitivity analysis includes Canadian dollar-denominated monetary items and adjusts their translation at period end for their respective change in the Canadian dollar. For the respective weakening of the Canadian dollar, there would be an equal and opposite impact on net incomeloss and comprehensive income.loss.
|
|
|
|
|
|
|
| Effect of net |
| |||||||||||||||||
|
|
|
|
|
|
|
| loss and |
| |||||||||||||||||
|
|
|
|
|
|
|
| comprehensive |
| |||||||||||||||||
|
|
|
|
|
|
|
|
| loss for the |
| ||||||||||||||||
|
|
| Amount |
|
| Change in |
|
| year ended |
| ||||||||||||||||
| Amount (C$ in thousands) | Change in currency (%) | Effect of net income and comprehensive income for the year ended December 31, 2019 |
|
|
| (C$ in thousands) |
|
| Currency (%) |
|
| December 31, 2023 |
| |||||||||||||
Cash and cash equivalents | C$ | 880 | 10.0 | % | C$ | 88 |
|
| 1,623 |
|
|
| 10 | % |
|
| 162 |
| ||||||||
Trade and other receivables | 7,156 | 10.0 | % | 716 | ||||||||||||||||||||||
Inventory | 15,423 | 10.0 | % | 1,542 | ||||||||||||||||||||||
Prepaids and other current assets | 3,326 | 10.0 | % | 333 | ||||||||||||||||||||||
Restricted cash |
|
| 153 |
|
|
| 10 | % |
|
| 15 |
| ||||||||||||||
Trade and accrued receivables |
|
| 2,538 |
|
|
| 10 | % |
|
| 254 |
| ||||||||||||||
Other receivables |
|
| 575 |
|
|
| 10 | % |
|
| 58 |
| ||||||||||||||
Other assets |
|
| 158 |
|
|
| 10 | % |
|
| 16 |
| ||||||||||||||
Accounts payable and accrued liabilities | (16,961 | ) | 10.0 | % | (1,696 | ) |
|
| 16,348 |
|
|
| 10 | % |
|
| 1,635 |
| ||||||||
Other liabilities | (400 | ) | 10.0 | % | (40 | ) |
|
| 2,048 |
|
|
| 10 | % |
|
| 205 |
| ||||||||
Customer deposits and deferred revenue | (498 | ) | 10.0 | % | (50 | ) | ||||||||||||||||||||
|
| |||||||||||||||||||||||||
Current portion of long-term debt and accrued interest |
|
| 105 |
|
|
| 10 | % |
|
| 11 |
| ||||||||||||||
Long-term debt |
|
| 72,560 |
|
|
| 10 | % |
|
| 7,256 |
| ||||||||||||||
Total | C$ | 8,926 | 10.0 | % | C$ | 893 |
|
| 96,108 |
|
|
| 10 | % |
|
| 9,612 |
| ||||||||
|
| |||||||||||||||||||||||||
Commodity price risk
We consume raw materials such as aluminum, hardware, wood and veneer, timber, plastic, electrical wiring and components, paint and powder, and fabric and vinyl. While aluminum represents the largest component of our raw materials’ expenditures, overall aluminum spend comprises only approximately 11%9% of product revenues and, therefore, absolute exposure to price fluctuations has a minimal impact on profitability.
Interest rate risk
In July 2019,February 2021, we entered into the RBC Facility. On February 9, 2023, the Company entered into the Extended RBC Facility. The Extended RBC Facility has a maximum borrowing base of C$50.015 million senior secured revolving credit facility with no amounts outstandingand a one-year term. Interest is calculated as at December 31, 2019. Historically, certain of our financial liabilitiesthe Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 200 basis points. We did not draw on the facilities during 2021, 2022 or 2023 and were, therefore, not exposed to any interest rate risk.
The Company’s Leasing Facilities and Debentures bear interest at fixed interest rates and are therefore not subject to interest charges at floating ratesrate risk.
48
Item 8. Financial Statements and are exposed to fluctuations in interest rates. Term loans under the previous revolving operating facility were repaid without penalty in January of 2019. At December 31, 2018, $5.6 million was outstanding on the previous revolving operating facility and was subject to floating interest rates. An increase in overall interest rates by 0.5% would have increased interest expense related to these items and decrease net income (loss) and comprehensive income (loss) by $nil for 2019 and $0.1 million for 2018. An equal decrease in rates would generate an equal amount of interest savings.Supplementary Data.
|
INDEX | Page No. | |||
Report of Independent Registered Public Accounting Firm (PCAOB ID 271) | ||||
Consolidated Balance | ||||
51 | ||||
52 | ||||
54 | ||||
55 | ||||
56 | ||||
49
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of DIRTT Environmental Solutions Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DIRTT Environmental Solutions Ltd. and its subsidiaries (together, the Company) as of December 31, 20192023 and 2018,2022, and the related consolidated statements of operations and comprehensive income (loss),loss, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,2023, including the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192023 and 2018,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192023 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 due to the adoption of ASC Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Alberta, Canada
February 25, 202021, 2024
We have served as the Company’s auditor since 2017.
| ||
|
DIRTT Environmental Solutions Ltd.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
| As at December 31, |
| As at December 31, |
|
| As at December 31, |
| ||||||||||
| 2019 | 2018 |
| 2023 |
|
| 2022 |
| |||||||||
ASSETS |
|
|
|
|
| |||||||||||
Current Assets |
|
|
|
|
| |||||||||||
Cash and cash equivalents | 47,174 | 53,412 |
|
| 24,744 |
|
|
| 10,821 |
| ||||||
Trade and other receivables, net of allowances for doubtful accounts of $0.1 millionat both December 31, 2019 and 2018 | 24,941 | 43,873 | ||||||||||||||
Restricted cash |
|
| 355 |
|
|
| 3,418 |
| ||||||||
Trade and accrued receivables, net of expected credit losses of |
|
| 15,787 |
|
|
| 13,930 |
| ||||||||
Other receivables |
|
| 484 |
|
|
| 7,880 |
| ||||||||
Inventory | 17,566 | 18,650 |
|
| 16,577 |
|
|
| 22,251 |
| ||||||
Prepaids and other current assets | 3,340 | 2,217 |
|
| 4,023 |
|
|
| 3,825 |
| ||||||
|
| |||||||||||||||
Assets held for sale |
|
| 1,555 |
|
|
| - |
| ||||||||
Total Current Assets | 93,021 | 118,152 |
|
| 63,525 |
|
|
| 62,125 |
| ||||||
|
| |||||||||||||||
Property, plant and equipment, net | 41,365 | 36,728 |
|
| 25,077 |
|
|
| 41,522 |
| ||||||
Capitalized software, net | 8,213 | 8,335 |
|
| 2,450 |
|
|
| 4,406 |
| ||||||
Operating leaseright-of-use assets, net | 20,661 | — |
|
| 29,813 |
|
|
| 30,490 |
| ||||||
Deferred tax assets, net | 5,364 | 6,083 | ||||||||||||||
Goodwill | 1,421 | 1,353 | ||||||||||||||
Other assets | 5,518 | 5,260 |
|
| 3,452 |
|
|
| 5,110 |
| ||||||
|
| |||||||||||||||
Total Assets | 175,563 | 175,911 |
|
| 124,317 |
|
|
| 143,653 |
| ||||||
|
| |||||||||||||||
LIABILITIES |
|
|
|
|
| |||||||||||
Current Liabilities |
|
|
|
|
| |||||||||||
Accounts payable and accrued liabilities | 20,384 | 31,283 |
|
| 19,880 |
|
|
| 19,881 |
| ||||||
Other liabilities | 5,187 | 6,823 |
|
| 2,482 |
|
|
| 2,056 |
| ||||||
Customer deposits and deferred revenue | 3,567 | 7,701 |
|
| 5,290 |
|
|
| 4,866 |
| ||||||
Current portion of lease liability | 5,287 | — | ||||||||||||||
Current portion of long-term debt | — | 2,500 | ||||||||||||||
|
| |||||||||||||||
Current portion of long-term debt and accrued interest |
|
| 841 |
|
|
| 3,306 |
| ||||||||
Current portion of lease liabilities |
|
| 5,255 |
|
|
| 5,889 |
| ||||||||
Total Current Liabilities | 34,425 | 48,307 |
|
| 33,748 |
|
|
| 35,998 |
| ||||||
|
| |||||||||||||||
Deferred tax liabilities, net | — | 965 | ||||||||||||||
Other long-term liabilities | 35 | — | ||||||||||||||
Long-term debt |
|
| 55,267 |
|
|
| 62,129 |
| ||||||||
Long-term lease liabilities | 16,116 | — |
|
| 28,201 |
|
|
| 27,534 |
| ||||||
Long-term debt | — | 3,125 | ||||||||||||||
|
| |||||||||||||||
Total Liabilities | 50,576 | 52,397 |
|
| 117,216 |
|
|
| 125,661 |
| ||||||
|
| |||||||||||||||
SHAREHOLDERS’ EQUITY |
|
|
|
|
| |||||||||||
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at December 31, 2019 and 84,660,319 issued and outstanding at December 31, 2018 | 180,639 | 180,562 | ||||||||||||||
Common shares, unlimited authorized without par value, 105,377,667 issued |
|
| 196,128 |
|
|
| 191,347 |
| ||||||||
Additionalpaid-in capital | 8,343 | 6,615 |
|
| 7,954 |
|
|
| 9,023 |
| ||||||
Accumulated other comprehensive loss | (18,028 | ) | (22,092 | ) |
|
| (16,125 | ) |
|
| (16,106 | ) | ||||
Accumulated deficit | (45,967 | ) | (41,571 | ) |
|
| (180,856 | ) |
|
| (166,272 | ) | ||||
|
| |||||||||||||||
Total Shareholders’ Equity | 124,987 | 123,514 |
|
| 7,101 |
|
|
| 17,992 |
| ||||||
|
| |||||||||||||||
Total Liabilities and Shareholders’ Equity | 175,563 | 175,911 |
|
| 124,317 |
|
|
| 143,653 |
| ||||||
|
| |||||||||||||||
Refer to Note 20 for Commitments.
Refer to Note 14 and Note 23 for Subsequent Events.
The accompanying notes are an integral part of these consolidated financial statements.
51
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Operations and Comprehensive Income (Loss)Loss
(Stated in thousands of U.S. dollars, except per share data)
| For the year ended December 31, |
| For the Year Ended December 31, |
| |||||||||||||||||||||
| 2019 | 2018 | 2017 |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||||||||||||
Product revenue | 240,659 | 266,434 | 216,216 |
|
| 176,919 |
|
|
| 166,256 |
|
|
| 143,000 |
| |||||||||
Service revenue | 7,076 | 8,247 | 10,323 |
|
| 5,012 |
|
|
| 5,905 |
|
|
| 4,593 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total revenue1 | 247,735 | 274,681 | 226,539 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total revenue |
|
| 181,931 |
|
|
| 172,161 |
|
|
| 147,593 |
| ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Product cost of sales | 153,128 | 161,844 | 131,326 |
|
| 119,728 |
|
|
| 140,058 |
|
|
| 120,281 |
| |||||||||
Costs of under-utilized capacity | 2,240 | — | — | |||||||||||||||||||||
Service cost of sales | 5,943 | 5,828 | 9,724 |
|
| 2,661 |
|
|
| 3,943 |
|
|
| 3,852 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total cost of sales | 161,311 | 167,672 | 141,050 |
|
| 122,389 |
|
|
| 144,001 |
|
|
| 124,133 |
| |||||||||
|
|
| ||||||||||||||||||||||
Gross profit | 86,424 | 107,009 | 85,489 |
|
| 59,542 |
|
|
| 28,160 |
|
|
| 23,460 |
| |||||||||
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Expenses |
|
|
|
|
|
|
|
|
| |||||||||||||||
Sales and marketing | 33,939 | 40,627 | 46,192 |
|
| 25,235 |
|
|
| 26,950 |
|
|
| 31,041 |
| |||||||||
General and administrative | 27,645 | 28,722 | 28,370 |
|
| 21,655 |
|
|
| 25,462 |
|
|
| 30,595 |
| |||||||||
Operations support | 11,037 | 8,069 | 7,212 |
|
| 7,832 |
|
|
| 9,498 |
|
|
| 9,372 |
| |||||||||
Technology and development | 7,818 | 4,176 | 6,335 |
|
| 5,820 |
|
|
| 7,555 |
|
|
| 8,234 |
| |||||||||
Stock-based compensation | 3,876 | 3,661 | 2,738 |
|
| 2,306 |
|
|
| 4,277 |
|
|
| 4,713 |
| |||||||||
Reorganization | 4,560 | 7,380 | 1,143 |
|
| 3,009 |
|
|
| 13,461 |
|
|
| - |
| |||||||||
Impairment | — | 8,680 | — | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Impairment charge on Rock Hill Facility |
|
| 8,716 |
|
|
| - |
|
|
| - |
| ||||||||||||
Goodwill impairment |
|
| - |
|
|
| - |
|
|
| 1,443 |
| ||||||||||||
Related party expense |
|
| 1,524 |
|
|
| - |
|
|
| - |
| ||||||||||||
Total operating expenses | 88,875 | 101,315 | 91,990 |
|
| 76,097 |
|
|
| 87,203 |
|
|
| 85,398 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | (2,451 | ) | 5,694 | (6,501 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Foreign exchange (gain) loss | 1,324 | (3,214 | ) | 665 | ||||||||||||||||||||
Operating loss |
|
| (16,555 | ) |
|
| (59,043 | ) |
|
| (61,938 | ) | ||||||||||||
Government subsidies |
|
| 236 |
|
|
| 7,765 |
|
|
| 11,455 |
| ||||||||||||
Gain on sale of software and patents |
|
| 7,130 |
|
|
| - |
|
|
| - |
| ||||||||||||
Foreign exchange (loss) gain |
|
| (626 | ) |
|
| 1,445 |
|
|
| (335 | ) | ||||||||||||
Interest income | (529 | ) | (425 | ) | (399 | ) |
|
| 490 |
|
|
| 51 |
|
|
| 77 |
| ||||||
Interest expense | 131 | 503 | 500 |
|
| (4,927 | ) |
|
| (5,160 | ) |
|
| (3,131 | ) | |||||||||
|
|
|
|
| 2,303 |
|
|
| 4,101 |
|
|
| 8,066 |
| ||||||||||
Net loss before tax |
|
| (14,252 | ) |
|
| (54,942 | ) |
|
| (53,872 | ) | ||||||||||||
Income taxes |
|
|
|
|
|
|
|
|
| |||||||||||||||
Current income tax expense |
|
| 332 |
|
|
| 21 |
|
|
| 210 |
| ||||||||||||
Deferred income tax recovery |
|
| - |
|
|
| - |
|
|
| (414 | ) | ||||||||||||
| 926 | (3,136 | ) | 766 |
|
| 332 |
|
|
| 21 |
|
|
| (204 | ) | |||||||||
Net loss after tax |
|
| (14,584 | ) |
|
| (54,963 | ) |
|
| (53,668 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) before tax | (3,377 | ) | 8,830 | (7,267 | ) | |||||||||||||||||||
Net loss per share |
|
|
|
|
|
|
|
|
| |||||||||||||||
Net loss per share - basic and diluted |
|
| (0.13 | ) |
|
| (0.55 | ) |
|
| (0.55 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income taxes | ||||||||||||||||||||||||
Current tax expense | 1,064 | 2,178 | 3,277 | |||||||||||||||||||||
Deferred tax expense (recovery) | (45 | ) | 1,102 | (2,819 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
| 1,019 | 3,280 | 458 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net income (loss) for the year | (4,396 | ) | 5,550 | (7,725 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Income (loss) per share | ||||||||||||||||||||||||
Basic and diluted income (loss) per share | (0.05 | ) | 0.07 | (0.09 | ) | |||||||||||||||||||
Weighted average number of shares outstanding (stated in thousands) | ||||||||||||||||||||||||
Basic | 84,671 | 84,477 | 84,679 | |||||||||||||||||||||
Diluted | 84,671 | 85,009 | 84,679 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Weighted average number of shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
| |||||||||||||||
Basic and diluted |
|
| 116,135 |
|
|
| 99,826 |
|
|
| 96,826 |
| ||||||||||||
|
Consolidated Statement of Comprehensive Income (Loss)
Refer to Note 22 for Related Party Transactions included in this statement.
| For the year ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
Net income (loss) for the year | (4,396 | ) | 5,550 | (7,725 | ) | |||||||
Exchange differences on translation of foreign operations, net of tax | 4,064 | (9,980 | ) | 7,417 | ||||||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) for the year | (332 | ) | (4,430 | ) | (308 | ) | ||||||
|
|
|
|
|
| |||||||
The prior year comparatives have been revised in line with current year presentation - refer to Inventory in Note 10 and Net Loss per share in Note 17.
The accompanying notes are an integral part of these consolidated financial statements.
52
DIRTT Environmental Solutions Ltd.
Consolidated StatementsStatement of Changes in Shareholders’ EquityComprehensive Loss
(Stated in thousands of U.S. dollars, except for share data)dollars)
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net loss for the year |
|
| (14,584 | ) |
|
| (54,963 | ) |
|
| (53,668 | ) |
Exchange differences on translation of foreign operations |
|
| (19 | ) |
|
| (190 | ) |
|
| 1,102 |
|
Comprehensive loss for the year |
|
| (14,603 | ) |
|
| (55,153 | ) |
|
| (52,566 | ) |
| Number of Common shares | Common shares | Warrants | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Total shareholders’ equity | ||||||||||||||||||||||
As at December 31, 2016 | 84,878,891 | 177,712 | 217 | 5,632 | (19,529 | ) | (34,655 | ) | 129,377 | |||||||||||||||||||
Shares repurchased | (1,672,187 | ) | (2,989 | ) | — | — | — | (4,741 | ) | (7,730 | ) | |||||||||||||||||
Warrant fair value adjustment | — | — | 34 | — | — | — | 34 | |||||||||||||||||||||
Issued on exercise of warrants | 50,325 | 251 | (251 | ) | — | — | — | — | ||||||||||||||||||||
Issued on exercise of stock options | 967,498 | 3,423 | — | (1,015 | ) | — | — | 2,408 | ||||||||||||||||||||
Stock-based compensation | — | — | — | 2,738 | — | — | 2,738 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 7,417 | — | 7,417 | |||||||||||||||||||||
Net loss for the year | — | — | — | — | — | (7,725 | ) | (7,725 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As at December 31, 2017 | 84,224,527 | 178,397 | — | 7,355 | (12,112 | ) | (47,121 | ) | 126,519 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Issued on exercise of stock options | 435,792 | 2,165 | — | (628 | ) | — | — | 1,537 | ||||||||||||||||||||
Stock-based compensation | — | — | — | 2,190 | — | — | 2,190 | |||||||||||||||||||||
Stock option conversion to cash-settled awards | — | — | — | (2,302 | ) | — | — | (2,302 | ) | |||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (9,980 | ) | — | (9,980 | ) | |||||||||||||||||||
Net income for the year | — | — | — | — | — | 5,550 | 5,550 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As at December 31, 2018 | 84,660,319 | 180,562 | — | 6,615 | (22,092 | ) | (41,571 | ) | 123,514 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Issued on exercise of stock options | 21,045 | 77 | — | (1 | ) | — | — | 76 | ||||||||||||||||||||
Stock-based compensation | — | — | — | 1,729 | — | — | 1,729 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 4,064 | — | 4,064 | |||||||||||||||||||||
Net loss for the year | — | — | — | — | — | (4,396 | ) | (4,396 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As at December 31, 2019 | 84,681,364 | 180,639 | — | 8,343 | (18,028 | ) | (45,967 | ) | 124,987 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
53
DIRTT Environmental Solutions Ltd.
(Stated in thousands of U.S. dollars)dollars, except for share data)
| For the year ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) for the year | (4,396 | ) | 5,550 | (7,725 | ) | |||||||
Adjustments: | ||||||||||||
Depreciation and amortization | 12,242 | 13,699 | 12,856 | |||||||||
Stock-based compensation, net of cash settlements | 202 | 1,870 | 2,738 | |||||||||
Foreign exchange (gain) loss | 345 | (1,902 | ) | (199 | ) | |||||||
Loss on disposal of property, plant and equipment | 53 | 67 | 27 | |||||||||
Deferred income tax expense (recovery) | (45 | ) | 1,102 | (2,819 | ) | |||||||
Impairment | — | 8,680 | — | |||||||||
Warrant fair value adjustments | — | — | 34 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade and other receivables | 21,025 | (26,613 | ) | 6,120 | ||||||||
Inventory | 1,667 | (285 | ) | (2,215 | ) | |||||||
Prepaid and other current assets | (1,035 | ) | (319 | ) | (378 | ) | ||||||
Other assets | 162 | 181 | (60 | ) | ||||||||
Trade accounts payable and other liabilities | (12,183 | ) | 6,132 | 8,664 | ||||||||
Lease liabilities | (402 | ) | — | — | ||||||||
Customer deposits | (4,276 | ) | 1,903 | 2,389 | ||||||||
|
|
|
|
|
| |||||||
Net cash flows provided by operating activities | 13,359 | 10,065 | 19,432 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property, plant and equipment | (12,702 | ) | (8,634 | ) | (14,396 | ) | ||||||
Capitalized software development and other asset expenditures | (3,452 | ) | (5,234 | ) | (5,496 | ) | ||||||
Recovery of software development expenditures | 511 | 178 | 203 | |||||||||
Proceeds on sale of property, plant and equipment | 55 | 60 | 109 | |||||||||
Changes in accounts payable related to investing activities | 399 | 168 | 81 | |||||||||
|
|
|
|
|
| |||||||
Net cash flows used in investing activities | (15,189 | ) | (13,462 | ) | (19,499 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities: | ||||||||||||
Cash received on exercise of stock options | 77 | 1,537 | 2,408 | |||||||||
Repayment of long-term debt | (5,561 | ) | (4,606 | ) | (3,787 | ) | ||||||
Shares repurchased | — | — | (7,730 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash flows used in financing activities | (5,484 | ) | (3,069 | ) | (9,109 | ) | ||||||
|
|
|
|
|
| |||||||
Effect of foreign exchange on cash and cash equivalents | 1,076 | (3,606 | ) | 2,984 | ||||||||
|
|
|
|
|
| |||||||
Net decrease in cash and cash equivalents | (6,238 | ) | (10,072 | ) | (6,192 | ) | ||||||
Cash and cash equivalents, beginning of year | 53,412 | 63,484 | 69,676 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | 47,174 | 53,412 | 63,484 | |||||||||
|
|
|
|
|
| |||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Interest paid | (99 | ) | (503 | ) | (609 | ) | ||||||
Income taxes paid | (2,518 | ) | (3,816 | ) | (2,760 | ) | ||||||
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
| Number of |
|
|
|
|
| Additional |
|
| other |
|
|
|
|
| Total |
| ||||||
| Common |
|
| Common |
|
| paid-in |
|
| comprehensive |
|
| Accumulated |
|
| shareholders’ |
| ||||||
| shares |
|
| shares |
|
| capital |
|
| loss |
|
| deficit |
|
| equity |
| ||||||
As at December 31, 2020 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 10,175 |
|
|
| (17,018 | ) |
|
| (57,265 | ) |
|
| 116,531 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 4,453 |
|
|
| - |
|
|
| - |
|
|
| 4,453 |
|
Issued on vesting of RSUs and Share Awards |
| 664,069 |
|
|
| 1,143 |
|
|
| (1,143 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (285 | ) |
|
| - |
|
|
| (367 | ) |
|
| (652 | ) |
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,102 |
|
|
| - |
|
|
| 1,102 |
|
Net loss for the year |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (53,668 | ) |
|
| (53,668 | ) |
As at December 31, 2021 |
| 85,345,433 |
|
|
| 181,782 |
|
|
| 13,200 |
|
|
| (15,916 | ) |
|
| (111,300 | ) |
|
| 67,766 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 3,943 |
|
|
| - |
|
|
| - |
|
|
| 3,943 |
|
Issued on vesting of RSUs and Share Awards |
| 3,149,061 |
|
|
| 7,088 |
|
|
| (7,088 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (1,032 | ) |
|
| - |
|
|
| (9 | ) |
|
| (1,041 | ) |
Issued for employee share purchase plan |
| 720,901 |
|
|
| 296 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 296 |
|
Issued on private placement |
| 8,667,449 |
|
|
| 2,181 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,181 |
|
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| (190 | ) |
|
| - |
|
|
| (190 | ) |
Net loss for the year |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (54,963 | ) |
|
| (54,963 | ) |
As at December 31, 2022 |
| 97,882,844 |
|
|
| 191,347 |
|
|
| 9,023 |
|
|
| (16,106 | ) |
|
| (166,272 | ) |
|
| 17,992 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 1,713 |
|
|
| - |
|
|
| - |
|
|
| 1,713 |
|
Issued on vesting of RSUs and Share Awards |
| 1,886,868 |
|
|
| 2,756 |
|
|
| (2,756 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Issued for employee share purchase plan |
| 1,708,210 |
|
|
| 502 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502 |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (26 | ) |
|
| - |
|
|
| - |
|
|
| (26 | ) |
Issued to settle related party debt |
| 3,899,745 |
|
|
| 1,523 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,523 |
|
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| (19 | ) |
|
| - |
|
|
| (19 | ) |
Net loss for the year |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (14,584 | ) |
|
| (14,584 | ) |
As at December 31, 2023 |
| 105,377,667 |
|
|
| 196,128 |
|
|
| 7,954 |
|
|
| (16,125 | ) |
|
| (180,856 | ) |
|
| 7,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
The accompanying notes are an integral part of these consolidated financial statements.
54
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
Net loss for the period |
|
| (14,584 | ) |
|
| (54,963 | ) |
|
| (53,668 | ) |
Adjustments: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 8,934 |
|
|
| 15,119 |
|
|
| 14,513 |
|
Impairment charge on Rock Hill Facility |
|
| 8,716 |
|
|
| - |
|
|
| - |
|
Stock-based compensation, net of settlements |
|
| 2,306 |
|
|
| 3,342 |
|
|
| 4,248 |
|
Foreign exchange loss (gain) |
|
| 1,099 |
|
|
| (1,813 | ) |
|
| 112 |
|
Gain on sale of software and patents |
|
| (7,130 | ) |
|
| - |
|
|
| - |
|
Loss (gain) on disposal of equipment |
|
| 153 |
|
|
| (133 | ) |
|
| 12 |
|
Accretion of convertible debentures |
|
| 698 |
|
|
| 676 |
|
|
| 352 |
|
Deferred income tax (recovery) |
|
| - |
|
|
| - |
|
|
| (414 | ) |
Goodwill impairment |
|
| - |
|
|
| - |
|
|
| 1,443 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| |||
Trade and accrued receivables |
|
| (1,833 | ) |
|
| (179 | ) |
|
| (2,118 | ) |
Other receivables |
|
| 7,406 |
|
|
| (4,432 | ) |
|
| 3,570 |
|
Inventory |
|
| 5,961 |
|
|
| (4,716 | ) |
|
| (2,449 | ) |
Prepaid and other assets, current and long term |
|
| 474 |
|
|
| 129 |
|
|
| (1,132 | ) |
Accounts payable and accrued liabilities |
|
| 2,137 |
|
|
| 260 |
|
|
| 2,702 |
|
Other liabilities |
|
| (421 | ) |
|
| (109 | ) |
|
| (213 | ) |
Customer deposits and deferred revenue |
|
| 243 |
|
|
| 2,477 |
|
|
| 601 |
|
Current portion of long-term debt and accrued interest |
|
| (40 | ) |
|
| (149 | ) |
|
| 948 |
|
Lease liabilities |
|
| 702 |
|
|
| 231 |
|
|
| 283 |
|
Net cash flows provided by (used in) operating activities |
|
| 14,821 |
|
|
| (44,260 | ) |
|
| (31,210 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||
Purchase of property, plant and equipment, net of accounts |
|
| (1,242 | ) |
|
| (2,394 | ) |
|
| (11,781 | ) |
Capitalized software development expenditures |
|
| (1,794 | ) |
|
| (1,677 | ) |
|
| (2,340 | ) |
Other asset expenditures |
|
| (398 | ) |
|
| (443 | ) |
|
| (496 | ) |
Recovery of software development expenditures |
|
| 127 |
|
|
| 263 |
|
|
| 461 |
|
Proceeds on sale of software and patents |
|
| 10,950 |
|
|
| - |
|
|
| - |
|
Proceeds on sale of equipment |
|
| 14 |
|
|
| 227 |
|
|
| 18 |
|
Net cash flows provided by (used in) investing activities |
|
| 7,657 |
|
|
| (4,024 | ) |
|
| (14,138 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||
Proceeds received on long-term debt |
|
| - |
|
|
| 647 |
|
|
| 64,912 |
|
Repayment of long-term debt |
|
| (11,579 | ) |
|
| (2,470 | ) |
|
| (1,808 | ) |
Proceeds issued on private placement |
|
| - |
|
|
| 1,990 |
|
|
| - |
|
Employee tax payments on vesting of RSUs |
|
| (26 | ) |
|
| (1,041 | ) |
|
| (652 | ) |
Net cash flows (used in) provided by financing activities |
|
| (11,605 | ) |
|
| (874 | ) |
|
| 62,452 |
|
Effect of foreign exchange on cash, cash equivalents and |
|
| (13 | ) |
|
| (11 | ) |
|
| 458 |
|
Net increase (decrease) in cash, cash equivalents and |
|
| 10,860 |
|
|
| (49,169 | ) |
|
| 17,562 |
|
Cash, cash equivalents and restricted cash, beginning of year |
|
| 14,239 |
|
|
| 63,408 |
|
|
| 45,846 |
|
Cash, cash equivalents and restricted cash, end of year |
|
| 25,099 |
|
|
| 14,239 |
|
|
| 63,408 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| |||
Interest paid |
|
| (3,977 | ) |
|
| (4,423 | ) |
|
| (1,543 | ) |
Income taxes received |
|
| 4 |
|
|
| 3,212 |
|
|
| 433 |
|
|
|
|
|
|
|
|
|
|
| |||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. |
| |||||||||||
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cash and cash equivalents |
|
| 24,744 |
|
|
| 10,821 |
|
|
| 60,313 |
|
Restricted cash |
|
| 355 |
|
|
| 3,418 |
|
|
| 3,095 |
|
Total cash, cash equivalents and restricted cash |
|
| 25,099 |
|
|
| 14,239 |
|
|
| 63,408 |
|
The accompanying notes are an integral part of these consolidated financial statements.
55
DIRTT Environmental Solutions Ltd.
Notes to the Consolidated Financial Statements
(Amounts stated in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiariessubsidiary (“DIRTT”, the “Company”, “we” or the “Company”“our”) is a leading technology-driven manufacturerleader in industrialized construction. DIRTT’s system of highly customized interiors. DIRTT combines itsphysical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary 3D design configuration and manufacturingintegration software, ICE® (“ICE®”ICE” or “ICE Software”software”) with integratedin-house, translates the vision of architects and designers into a 3D model that also acts as manufacturing of its innovative prefabricated interior construction solutions and an extensive distribution partners network. ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods.information. ICE is also licensed to unrelated companies and distribution partnersConstruction Partners of the Company. As of May 9, 2023, Armstrong World Industries, Inc. (“AWI”) owns a 50% interest in the rights, titles and interest in certain intellectual property rights in a portion of the ICE Software that is used by AWI.
DIRTT is incorporated under the laws of the province of Alberta, Canada, and its headquarters and registered office is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6. DIRTT trades1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange “TSX” under the symbol “DRT” and, effective. Effective October 9, 2019, trades12, 2023, DIRTT’s common shares ceased to trade on The Nasdaq Global Select MarketCapital Markets. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol “DRTT”“DRTTF”.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements (“Financial Statements”), including comparative figures, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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.
Reclassification
Certain comparative figures have been reclassified to conform to the current year presentation (see Note 16).
Principles of consolidation
The Financial Statements include the accounts of DIRTT and its subsidiaries.subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated upon consolidation.
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments, assets held for sale and stock-based compensation that are measured at fair value, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Use of estimates
The preparation of the Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the Financial Statements. Estimates are based on historical data and experience, as well as various other factors that management considers reasonable under the circumstances. Actual outcomes can differ from these estimates.
Significant estimates and assumptions made by management include:
•
•
56
•
•
•
Segments
Management has determined that DIRTT has one operating segment. The Company’s chief executive officer, who is DIRTT’s chief operating decision maker, reviews financial information on a consolidated and aggregate basis, together with certain operating metrics principally, to make decisions about how to allocate resources and to measure the Company’s performance.
Foreign currency translation
DIRTT Environmental Solutions LtdLtd. is a Canadian Companycompany and its functional currency is the Canadian dollar. DIRTT’s wholly owned subsidiary is domiciled in the United States and its functional currency is the U.S. dollar.
Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into the transacting company’s functional currency at theyear-end exchange rate for monetary items, and at the historical exchange rates fornon-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the related transactions. Foreign exchange gains and losses, other than those arising from the translation of the Company’s net investments in its foreign subsidiaries,subsidiary, are included in income.
The accounts of the Company’s U.S. dollar subsidiary is translated into Canadian dollars, and the Financial Statements are translated into U.S. dollars for financial statement presentation. Assets and liabilities are translated usingyear-end exchange rates, and revenues, expenses, gains and losses are translated using average monthly exchange rates. Foreign exchange gains and losses arising from the translation of the Company’s assets and liabilities are included in “other comprehensive income (loss)”“comprehensive loss for the year”.
Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash on hand held at banks and cash equivalents, which are defined as highly liquid investments with original maturities of three months or less. Restricted cash is a reserve account not available for immediate or general business use and is required when certain requirements are not met under the terms of the Company’s senior secured credit facility (as defined in Note 14).
Trade and other receivables, net of allowance for doubtful accountsexpected credit losses
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates its allowance for doubtful accounts by evaluating specific accounts where information indicatesusing the current expected credit loss (“CECL”) methodology, which is designed to capture the Company’s customers may have an inability to meet financial obligations, such as bankruptcy and significantly aged receivables outstanding.current estimate of all expected credit losses.
Inventory
Inventory
Inventory is comprised of raw materials and work in progress. The Company does not typically carry a significant amount of finished goods inventory. Inventory is valued at the lower of weighted average cost and net realizable value. Net realizable value is based on an item’s usability in the manufacturing of the Company’s products. The Company records an allowance for obsolescence when the net realizable value of inventory items declines below weighted average cost, netcost. Net realizable value is determined based on current market prices for inventory less the estimated cost to sell. Work in progress is valued at an estimate of cost, including attributable overheads, based on stage of completion.
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 separately recognized as an expense in the period in which they are incurred.
57
Assets held for sale
LeasesThe Company classifies an asset group (“asset”) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the consolidated statement of operations and comprehensive loss in the period in which the held for sale criteria are met. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset.
ForThe Company assesses the year-ended December 31, 2019,fair value of assets held for sale less any costs to sell at each reporting period until the Company’s leases policy wasasset is no longer classified as follows:held for sale.
Leases
The Company categorizes leases at their inception as either operating or finance leases. Leases where the Company assumes substantially all of the rewards or ownership and leases where ownership is transferred at the end of the lease term, or by way of a bargain purchase option, are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges are recognized in the statement of operations.
The Company’s Leasing Facilities (as defined in Note 8) are accounted for as finance leases as ownership of the equipment is expected to return to the Company at the end of the lease term. These transactions are not accounted for as a sale of the underlying equipment as the Company continues to control the equipment.
For leases categorized as operating, the Company determines if an arrangement is a lease or contains a lease element at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases are separately disclosed as operating leaseright-of-use (“ROU”) assets, with a corresponding lease liability split between current and long-term components on the balance sheet. Operating leases with an initial term of 12 months or less are not included on the balance sheet.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
Prior Accounting Policy
For the year-ended December 31, 2018, the Company’s leases policy was as follows:
The Company categorizes leases at their inception as either operating or capital leases. Leases where the Company assumes substantially all the risks and rewards of ownership are classified as capital leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges are recognized in the statement of operations. Other leases that qualify as operating leases are not recognized in the Company’s balance sheet.
In certain lease agreements, the Company may receive rent holidays or other incentives. The Company recognizes lease costs on a straight-line basis once control of the asset is achieved, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.
Property, plant and equipment
Property, plant and equipment are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated depreciation and any accumulated impairment losses. Expenditures for repairs and maintenance are expensed as incurred, while renewals and betterments are capitalized.
Depreciation is charged to the consolidated statement of operations on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s property, plant and equipment are as follows:
Building | 25 years | |
Manufacturing equipment | 10 years | |
Leasehold improvements | Over term of lease | |
Office equipment | 5 years | |
Tooling and prototypes | 4 years | |
Computer equipment | 3 years | |
Vehicles | 3 years |
When assets are disposed of or retired, the cost and accumulated depreciation and amortizationimpairment losses are removed from the respective accounts and any resulting gain or loss is reflected in operating expenses.
58
Capitalized software costs
The Company capitalizes costs related to internally developed software during the application development stage when (i) the preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project, and (iii) it is probable that the project will be completed and performed as intended. Capitalized costs includesinclude costs of personnel and related expenses for employees and third parties directly attributable to the projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements are also capitalized. Costs related to preliminary project activities and post implementation activities, including training, maintenance and minor modifications or enhancements are expensed as incurred. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the developed asset, which is generally three to five years.years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of the assets.
Software development is consideredinternal-use as it is used to design and sell the DIRTT products and is not included in the end client’s product. Revenues received from distribution partnersConstruction Partners for ICE Software are recognized as revenues as they are considered an element of the product sale. Any incidental third-party revenues received for the ICE Software are credited against capitalized software costs. The Company follows this accounting policy for cloud computing arrangements that are considered a service contract, however, these projects are capitalized to prepaids and other assets on the balance sheet and are expensed as an operating cost, as opposed to amortization, over the expected term of the software service contract.
Impairment of long-lived assets
Management evaluates the recoverability of the Company’s property, plant and equipment, and capitalized software costs and ROU assets when events or changes in circumstances indicate a potential impairment exists. Events and changes in circumstances considered by the Company in determining whether the carrying value of long-lived assets may not be recoverable include, but are not limited to, significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, and changes in the Company’s business strategy. Impairment testing is performed at an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (an “asset group”). In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of the asset group. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Except
Convertible Debentures
The Company accounts for convertible debentures as disclosed,liabilities. Embedded features included in the Company determinedconvertible debentures that there were no events or changes in circumstances that potentially indicated thatrequire bifurcation are accounted for separately. Costs incurred directly related to the Company’s long-lived assets were impaired duringissuance of convertible debentures are presented as a direct deduction against the years ended December 31, 2019, 2018 and 2017.
Goodwill
Goodwill represents the excesscarrying amount of the purchase price overconvertible debentures and are amortized to interest expense using the fair value of net assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment at the reporting unit level at least annually or whenever changes in circumstances indicate that goodwill might be impaired. The Company early adopted ASU2017-04, which simplified the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.effective interest method.
The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year, or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If goodwill is determined to be impaired, the impairment charge that would be recognized is based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
Income taxes
Income tax expense is comprised of current and deferred tax. Income tax is recognized in the consolidated statement of operations and comprehensive (loss) incomeloss except to the extent it relates to items recognized directly in equity.
Current tax
Current tax expense is based on the results for the year, adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that were enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated balance sheet. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse.
59
The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period during which the change occurs.
When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not that all or some portion of the Company’s deferred tax assets will not be realized, based on management’s judgment using available evidence about future events.
At times, tax benefits claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50%50% likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
Revenue recognition
The Company accounts for revenue in accordance with topic 606, Revenue from Contracts with Customers, (“ASC 606”) and Subtopic340-40, Other Assets and Deferred Costs – Contracts with Customers. Under ASC 606, an entity recognizes revenue in a manner that reflects the transfer of promised goods or services to customers in an amount which the entity expects to be entitled in exchange for those goods or services.
The Company recognizes revenue upon transfer of control of promised goods or services to customers at the transaction price, an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is calculated as selling price net of variable consideration which may include estimates for sales incentives related to current period product revenue. Revenue is measured at the fair value of the consideration received or receivable, after discounts, rebates and sales taxes or income taxes and duties.
Product sales
The Company recognizes revenue upon transfer of control of products to the customer, which typically occurs upon shipment. The Company’s main performance obligation to customers is the delivery of products in accordance with purchase orders. Each purchase order defines the transaction price for the products purchased under the arrangement. Distribution partnersConstruction Partners typically sell DIRTT product to end clients and issue purchase orders to the Company to manufacture the product. Distribution partnersConstruction Partners utilize ICE licenses to sell DIRTT products, theproducts. The ICE licenses sold to distribution partnersConstruction Partners are not considered a separate performance obligation as they are not distinct, and ICE license revenue is recognized in conjunction with product sales. The distribution partnerConstruction Partner ICE Software revenue is recognized over the license period.
The Company’s standard sales terms are Free On Board (“FOB”) shipping point, which comprise the majority of sales. The Company usually requires a 50%50% progress payment on receipt of certain orders, excluding certain government orders or in some special contractual situations. Customer deposits received are recognized as a liability on the balance sheet until revenue recognition criteria is met. At the point of shipment, the customer is generally required to pay the balance of the sales price within 30 days. The Company’s sales arrangements do not have any material financing components. In addition, the Company’s customer arrangements do not produce contract assets that are material to its consolidated financial statements.
The Company provides sales commissions to internal and external sales representatives which are earned in the period in which revenue is recognized.
The Company accounts for product transportation revenue and costs as fulfillment activities and presentpresents the associated costs in costs of goods sold in the period in which the Company sells its product.
Contracts containing multiple performance obligations
The Company offers certain arrangements whereby a customer can purchase products and installation together, which are generally capable of being distinct and accounted for as separate performance obligations. Where multiple performance obligations exist, the Company determines revenue recognition by (1) identifying the contract with the customer, (2) identifying the performance obligation in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations based on the relative standalone selling prices, typically based on cost plus a reasonable margin, and (5) recognizing revenue as the performance obligations are satisfied.
60
Installation and other services
The Company provides installation and other services for certain customers as a distinct performance obligation. Revenue from installation services is recognized over time as the service is performed.
Principal vs Agent Considerations
The Company evaluates the presentation of revenue on a gross vs. net basis based on whether it acts as a principal by controlling the product or service sales to customers. In certain instances, the Company facilitates contracting of certain sales on behalf of distribution partners.Construction Partners. The Company records these revenues on a gross basis when the Company is obligated to fulfill the servicesservice and has the risk associated with service delivery. The Company records these revenues on a net basis when the distribution partnerConstruction Partner has the obligation to fulfill the services and has the risk associated risk ofwith service delivery.
Distribution partnerConstruction Partner rebates
Rebates to distribution partnersConstruction Partners (“Partner Rebates”) are accrued for and recognized as a reduction of revenue at the date of the sale to the customer. Partner Rebates include amounts collected directly by the Company owed to distribution partnersConstruction Partners in accordance with their distribution partnerConstruction Partner agreements, being the difference between the price to the end customer and the distribution partners’Construction Partners’ price. Other sales discounts including early pay promotions, are deducted immediately from sales invoices.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an unbilled receivable when revenue is recognized prior to invoicing. As the Company’s contracts are less than one year in duration, the Company has elected to apply the practical expedients to expense costs related to costs to obtain contracts and not disclose unfulfilled performance obligations. As deferred revenue and customer deposits are typically recognized during the year, the Company does not account for financing elements.
Warranties
The Company provides a warranty on all products sold to its clients and distribution partner’sConstruction Partner’s clients. Warranties are not sold separately to customers. Provisions for the expected cost of warranty obligations are recognized based on an analysis of historical costs for warranty claims relative to current activity levels and adjusted for factors based on management’s assessment that increase or decrease the provision. Warranty provision is recognized in cost of goods sold. Warranty claims have historically not been material and do not constitute a separate performance obligation.
Stock-based compensation
The Company follows the fair value-based approach to account for stock options.options, share awards and restricted share units (“RSUs”). Compensation expense and an increase in “Additionalpaid-in capital” are recognized for stock options and RSUs over their vesting period based on their estimated fair values on the grant date, as determined using the Black-Scholes option pricing model for the majority of stock-options.options and the market value of the Company’s common shares on the grant date for share awards and RSUs. Certain executive stock options and RSUs have performance conditions and are valued using a Monte Carlo model.
AnyOn exercise of stock options and RSUs, the recorded fair value of the option or RSU is removed from “Additional paid-in capital” and credited to “Share capital”. For options, any consideration paid by employees on exercise of stock options is credited to “Share capital” when the option is exercised, and the recorded fair value of the option is removed from “Additionalpaid-in capital” and credited to “Share capital”.exercised. The Company’s stock options and RSUs are not shares of the Company and have no rights to vote, receive dividends, or any other rights as a shareholder of the Company.
During 2018 and 2019, the Company provided a cash settlement alternative for certain stock options. The fair value on grants attributable to those awards was reclassified on the balance sheet from shareholders’ equity to other liabilities, and at period end the liability is adjusted to fair value and the excess of fair value over previously recognized stock-based compensation is expensed. The fair value of the awards at the date of modification was greater than the grant date fair value of the previously vested equity awards, therefore the additional fair value was treated as an expense at the date of modification. Increases or decreases in fair value subsequent to the modification date will be recorded in earnings except that the Company shall not recognize a cumulative expense lower than the grant date fair value of the original equity awards. On October 9, 2019, following its listing on The Nasdaq Global Select Market, the Company ceased cash-settlement of stock options and the associated liability accounting for stock options and returned to equity settlement accounting for stock options, as described above.
Stock basedStock-based compensation expense is also recognized for performance share units (“PSUs”) and deferred share units (“DSUs”) using the fair value method. Compensation expense is recognized over the vesting period and the corresponding amount is recorded as a liability on the balance sheet.
The Company measures the DSUs granted under the 2023 LTIP (the “New DSUs”) using the closing price of the Company’s common shares on the grant date as the present intention is to settle the New DSUs in equity. This is recognized as an increase to stock-based compensation and the corresponding liability on the balance sheet.
61
Technology and development expenditures
Technology and development expenses are comprised primarily of salaries and benefits associated with the Company’s product and software development personnel which do not qualify for capitalization. These costs are expensed as incurred and exclude certain information and technology costs used in operations which are classified as general and administrative costs.
Government subsidies
The Company accounts for government subsidies on an accrual basis when the conditions for eligibility are met. The Company has adopted an accounting policy to present government subsidies as other income. The nature, significant terms and conditions of government subsidies are disclosed in the Financial Statements.
Earnings per share (“EPS”)
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year.year and adjusted for any change in capital structure events triggering retroactive changes to weighted average number of common shares outstanding. Diluted earnings per share is calculated using the treasury stock method for determining the dilutive impact of stock options.options, RSUs, and New DSUs. The Company follows the “if converted” method for accounting for the impact of convertible debentures on net (loss) per share, whereby interest charges applicable to the convertible debentures are added to the numerator and the convertible debentures are assumed to have been converted at the beginning of the period (or time of issuance, if later), and the resulting common shares are added to the denominator.
Fair value of financial instruments
ASC 820, “Fair Value Measurements,” requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the consolidated balance sheet, for which it is practicable to estimate fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company’s fair value analysis is based on the degree to which the fair value is observable and grouped into categories accordingly:
•
•
•
The carrying amounts of cash and cash equivalents;equivalents and restricted cash; trade and accrued receivables, other receivables; trade accounts payable and accrued liabilities; other liabilities; and customer deposits approximate fair value due to their short-term nature.
62
3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS AND RECENT PRONOUNCEMENTS ISSUED
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU2016-02
No. 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. This guidance will be effective for the annual periods beginning the year ended December 31, 2024, and for interim periods beginning January 1, 2025. Early adoption is permitted. The Company adopted ASUNo. 2016-02, “Leases (Topic 842)” on January 1, 2019 (see Note 5), and elected the modified retrospective method of adoption, which allowed the Companyhas chosen to apply the standard as of the beginning of the period ofearly adopt. Upon adoption, the comparative periodguidance is applied retrospectively to all prior periods presented is not adjustedin the financial statements.
On December 14, 2023, the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-09, “Improvements to Income Tax Disclosures” (the “ASU”) further disaggregated information on an entity’s tax rate reconciliation and continues to be reportedincome taxes paid. The amendments in accordance with the Company’s historical accounting policy. The Company opted to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain other practical expedients, including the use of hindsight to determine the lease term for existing leases and in assessing impairment of theright-of-use asset, and the exception for short-term leases.
This new guidance requires lessees to recognize a liability to make lease payments and aright-of-use asset representing its right to use the underlying asset for the lease term, with limited exceptions. The accounting applied by a lessor is largely unchanged from that applied under existing U.S. GAAP.
In August 2018, the FASB issuedthis ASU2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract,” which amends ASC350-40 Intangibles – Goodwill and Other –Internal-Use Software. The ASU requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if these costs were capitalized by the customer in a software licensing arrangement. This guidance is are effective for fiscal years beginning after December 15, 2019. The Company does not believe adoption will have2024, on a material impact on its financial condition or resultsprospective basis with an option of operations.
In June 2016, the FASB issuedASU2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments,” and issued subsequent amendments to the initial guidance in April 2019 within ASU No.2019-04, and May 2019 within ASUNo. 2019-05. The ASU amends the guidance on the impairment of financial instruments and adds an impairment model, known as the current expected credit loss (CECL) model. The CECL model requires an entity to recognize its current estimate of all expected credit losses, rather than incurred losses, and applies to trade receivables and other receivables. The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied using the modified-retrospective approach.retrospective application. The Company will adoptcontinue to evaluate the guidance on January 1, 2020. The Company does not believeimpact of the adoption will have a material impact on its financial condition or results of operations.this standard.
Although there are several other new accounting standards issued or proposed by the FASB,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.
4. LIQUIDITY
4. IMPAIRMENT
| For the year ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
DIRTT Timber | — | 6,098 | — | |||||||||
Leasehold and other assets | — | 2,582 | — | |||||||||
|
|
|
|
|
| |||||||
| — | 8,680 | — | ||||||||||
|
|
|
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|
| |||||||
DIRTT Timber
During 2018, management decidedAs at December 31, 2023, the Company had $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available borrowings (2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the year ended December 31, 2023, the Company generated $14.8 million in cash flows from operations, compared to shifta cash usage of $44.3 million over fiscal year 2022. The Company benefited from the early stage developmentreceipt of $7.3 million of government subsidies during 2023, compared to $nil for the year ended December 31, 2022 (refer to Note 5).
We have implemented multiple price increases during the past two years to mitigate the impact of inflation on raw materials and improve liquidity. These actions have resulted in a meaningful improvement in our gross profit margins and have served to reduce our cash usage to operate the business. Gross profit for the year ended December 31, 2023, was $59.5 million or 32.7% of revenue, compared to the same period in 2022, which generated gross profit of $28.2 million or 16.4% of revenue.
Over the same period, we have also executed upon several initiatives. First, in May 2023, we entered into an agreement with AWI (refer to Note 7) resulting in the receipt of $12.8 million of cash during 2023. Second, in March 2023, we entered into an agreement to sublease our Dallas DIRTT Experience Center (“DXC”) to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024, which will provide us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities and expect these strategic initiatives to result in positive cash inflows in 2024. Third, we completed a private placement of common shares in November 2022 for aggregate proceeds of $2.8 million (the "Private Placement"), with certain significant shareholders and directors and officers of the Company, to bridge cash requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable subscription agreements with its DIRTT Timber markettwo largest shareholders, 22NW and 726 BC LLC and 726 BF (together “726” (which subsequently transferred its holdings to WWT)) and all the directors and officers of the Company on November 14, 2022, to issue 8.7 million shares for gross consideration of $2.8 million. The Private Placement closed on November 30, 2022 (refer to Note 22).
On November 21, 2023, we announced the Rights Offering to common shareholders for aggregate gross proceeds of C$30.0 million (the “Rights Offering”). The Rights Offering closed on January 9, 2024 (refer to Note 23).
While we are encouraged by our improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of macroeconomic uncertainty. We have implemented multiple reorganization initiatives (refer to Note 6) designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by approximately 10% from January 2022 through December 2023.
We have assessed the Company’s liquidity position as at December 31, 2023, taking into account our sales outlook for the next twelve-months, our existing cash balances and available credit facilities. Based on this analysis, we believe the Company has sufficient liquidity to support ongoing operations for at least the next twelve months.
63
5. GOVERNMENT SUBSIDIES
In the United States, the Employee Retention Credit (“ERC”) was established by Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act to provide an incentive for employers to keep their employees on their payroll during COVID-19 closures. The ERC is a commercialized approach focusedrefundable payroll tax credit based on large, standalone timber projectsqualified wages paid by an eligible employer between March 12, 2020, and asOctober 1, 2021, for companies experiencing a pull-throughsignificant decline in gross receipts during a calendar quarter or having operations fully or partially suspended during the quarter due to COVID-19. During the third quarter of 2022, the Company determined it was eligible for the ERC for the first three quarters of 2021 and filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). As at December 31, 2023, the $7.3 million of these claimed credits (plus an additional $0.2 million of interest) have been received.
6. REORGANIZATION AND ASSETS HELD FOR SALE
Over the past two years, the Company has undertaken a number of reorganization initiatives:
Closure of Phoenix Aluminum Manufacturing Facility (the “Phoenix Facility”)
On February 22, 2022, we commenced the process of closing our Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. The Company entered into a sublease arrangement during the second quarter of 2022, commencing July 1, 2022, which exceeds the contractual lease commitments under the Right of Use assets.
Workforce Reductions, Board and Management Changes
In February and July of 2022, we announced our intention to eliminate a portion of our salaried workforce, including manufacturing and office positions, along with other DIRTT solutions. Management concluded thatcost reduction initiatives. The Company’s Board of Directors was reconstituted following a proxy contest in April 2022, which was deemed a change of control under the Company’s insurance policy resulting in additional insurance expenditures. Further, the Company made changes to several executive officer roles during the year ended December 31, 2022. During the year ended December 31, 2023, we continued to review costs, resulting in the elimination of additional salaried positions in the second and third quarters of 2023. These actions resulted in the Company incurring certain one-time termination costs.
Temporary Suspension of Operations and Subsequent Closure at the Rock Hill Facility
On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this strategy required significantly less timber capacity than currently existsidle facility, included in costs of sales, were $2.0 million (2022 - $0.5 million).
On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility. We plan to move certain assets to our other facilities and therefore took steps toright-size its timber capacity by the enddispose of 2018. Management determined these decisionsremaining assets. The assets to be an indicatordisposed of have been reclassified and measured as assets held for sale (see table below). As a result of this decision, we incurred $8.7 million of impairment charges associated with the transfer of assets from held for use to held for sale. We also expect to incur $0.2 million of costs in dismantling and decommissioning the Rock Hill Facility assets. The Company will continue to maintain the Rock Hill Facility building lease and is pursuing a sublease arrangement. Based on prevailing market prices in the area, no impairment indicators exist for the Right of Use asset of $6.7 million and the related leasehold improvements of $2.7 million.
Reorganization costs incurred related to the above-mentioned initiatives:
|
| For the Year Ended December 31, |
|
| |||||
|
| 2023 |
|
| 2022 |
|
| ||
Termination benefits |
|
| 2,162 |
|
|
| 7,042 |
|
|
Insurance costs on change of control |
|
| - |
|
|
| 3,691 |
|
|
Phoenix Facility closure |
|
| 99 |
|
|
| 756 |
|
|
Professional Services |
|
| - |
|
|
| 1,021 |
|
|
Rock Hill Facility temporary suspension and closure of operations |
|
| 295 |
|
|
| 129 |
|
|
Other costs |
|
| 453 |
|
|
| 822 |
|
|
Total reorganization costs |
|
| 3,009 |
|
|
| 13,461 |
|
|
64
Reorganization costs in accounts payable and accrued liabilities at January 1, 2023 | 2,277 | |||
Reorganization expense | 3,009 | |||
Reorganization costs paid | (4,690 | ) | ||
Reorganization costs in accounts payable and accrued liabilities at December 31, 2023 | 596 |
Of the $0.6 million payable, $0.5 million relates to termination benefits and $0.1 million relates to other reorganization costs (2022 - of the $2.3 million payable, $2.1 million relates to termination benefits and $0.2 million relates to other reorganization costs).
Assets held for sale
Assets classified as held for sale as at December 31, 2023, of $1.6 million consist of manufacturing equipment previously used in the Rock Hill Facility (refer to Note 11). As part of the decision to permanently close the Rock Hill Facility, $10.3 million of assets were assessed against the assets held for sale criteria and reclassified from property, plant and equipment to assets held for sale in the third quarter of 2023. The assets are measured at the lower of the net book value versus the fair value less cost to sell resulting in an impairment charge of $8.7 million. In the fourth quarter, the fair value was remeasured and an adjustment of $(0.8) million was recorded. It is expected that these assets will be sold within the next twelve months.
|
| As at December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Assets held for sale, opening |
|
| - |
|
|
| - |
|
Net book value transferred from property, plant and equipment |
|
| 10,271 |
|
|
| - |
|
Impairment charge on reassessment |
|
| (8,716 | ) |
|
| - |
|
Assets held for sale, ending |
|
| 1,555 |
|
|
| - |
|
To move the assets or dispose of the assets at the Rock Hill Facility, the Company fully settled the principal balance of the DIRTT Timber solution line. In determining if impairment exists,U.S. leasing facility in the fourth quarter of 2023. Principal payments of $7.8 million and interest penalties of $0.4 million were incurred (refer to Note 14). As a result of this settlement, $2.6 million of restricted cash was released to the Company estimatedin the undiscountedfourth quarter of 2023.
Discontinuation of Reflect Product Line and Other Charges Incurred
In August 2022, the Company discontinued the Reflect and other product lines, resulting in a one-time inventory write-down of $1.0 million, and an acceleration of amortization expense associated with ICE development for Reflect.
Additionally, the Company accelerated the depreciation of certain items of property, plant and equipment associated with the closure of the Phoenix Facility resulting in additional depreciation incurred in the first quarter of 2022.
These costs were included in cost of sales:
|
| For the Year Ended December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Provision for inventory of discontinued product lines |
|
| - |
|
|
| 1,035 |
|
Accelerated amortization associated with product line discontinuation |
|
| - |
|
|
| 1,019 |
|
Accelerated depreciation and amortization associated with closure of the Phoenix Facility |
|
| - |
|
|
| 1,054 |
|
Incremental cost of sales |
|
| - |
|
|
| 3,108 |
|
65
7. GAIN ON SALE OF SOFTWARE
On May 9, 2023, we entered into the AWI Agreement and Partial Patent Assignment Agreement with AWI. The agreements provided for a cash flowspayment from AWI to the Company of $10.0 million, subject to certain routine closing conditions, in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the patent rights that relate to the Applicable ICE Code. Pursuant to the AWI Agreement, we also provided AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we received additional cash payment of $1.0 million in the fourth quarter of 2023. The AWI Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into an Amended and Restated Master Services Agreement (the “ARMSA”) with AWI, under which AWI has also prepaid certain development services to be generated fromprovided by DIRTT. The ARMSA will automatically terminate if the AWI Agreement is terminated or expires and may also be terminated if either party breaches the exclusive fields of use and ultimate dispositionor restrictive covenants in the AWI Agreement.
The $11.0 million of proceeds on the sale of the asset group and determined50% interest in the undiscounted cash flowsApplicable ICE code, pursuant to the AWI Agreement, was received during the year ended December 31, 2023. In accordance with GAAP, the proceeds were less than the carrying value of the assets.
To determine the impairment of the DIRTT Timber assets,first applied to the net book value of the assetsrelated cost of software of $2.9 million and patents (other assets) of $0.9 million. The residual amount of $7.1 million was evaluated againstrecognized as a gain in the fair valueconsolidated statement of operations. Further, $1.8 million was received as a prepayment under the ARMSA, which is recognized into revenue as the performance obligation is met. During the year ended December 31, 2023, $1.6 million of the assets. The fair value$1.8 million payment was recognized into revenue and $0.2 million remains a customer deposit to be recognized as revenue in the first quarter of 2024. Part of the DIRTT Timber assets reflects current projected sales for timber projects on a standalone basisproceeds of this transaction was used to settle one of our equipment leases of $1.6 million and the pull-through impact to other DIRTT solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT solutions. The equipment related to the timber market was custom built for DIRTT and there is no active market for resale. Therefore, the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for DIRTT’s other solutions. Management estimated the expected resale values based on the current market and on experience of managementresulted in the industry. The fair valuerelease of the DIRTT Timber assets was estimated to be $1.1 million. This assessment resulted in an impairment charge of $6.1 million during 2018.
Leasehold and other assets
At December 31, 2018, the Company recognized a lease exit liability of $0.6 million related to certain contracts (December 31, 2017 – nil). During 2018, management reviewed its facilities used in operations and the corresponding leases in place. The outcome of this review was the consolidation of the Company’s production in Kelowna, British Columbia, into other plants, and discontinued use of other locations that were not considered necessary in the Company’s current operations.
These leases were considered impaired as the costs of meeting lease obligations exceeded the economic benefits expected to be received. The lease exit liability represents the present value of the difference between the minimum future lease payments the Company is obligated to make under thenon-cancellable operating lease contract and any estimated sublease recoveries. This estimate may vary as a result of changes in estimated sublease recoveries. The liability is estimated to be settled in periods up to and including the year 2023. The provision is net of $1.0$0.4 million of estimated recoveries from subleases.restricted cash (refer to Note 14).
8. LEASES
In relation to the review noted in the paragraph above, certain assets were identified as no longer having future value to the Company. These assets related to leasehold improvements for locations where activity is being relocated, as well as projects in process that were curtailed. These leasehold and other assets represented assets with a carrying value of $2.0 million at December 31, 2018, of which the entire amount was expensed as there is no future value attributable to these assets or market for resale.
At December 31, 2019, the Company reviewed the above impaired assets and determined that there were no indicators of impairment recovery.
5. LEASES
The Company leases office and factory space under various operating leases. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 914 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
For the year ended December 31, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $5.6 million The weighted average remaining lease term and weighted average discount rate at December 31, 2019 were 62023, was nine years (2022 - thirteen years) and 4.8%6.3% (2022 – 4.9%), respectively.
The Company entered into a sublease arrangement for part of the Phoenix Facility during the second quarter of 2022, commencing July 1, 2022. Additionally, the Company entered into a sublease agreement for the Dallas DXC to one of our Construction Partners in that region, in which the subtenant has assumed responsibility for all monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024.
The following table includes ROU assets included on the balance sheet at December 31, 2019:2023 and 2022:
|
| ROU Assets |
| |||||||||
|
| Cost |
|
| Accumulated depreciation |
|
| Net book value |
| |||
At January 1, 2022 |
|
| 44,055 |
|
|
| (13,175 | ) |
|
| 30,880 |
|
Additions |
|
| 139 |
|
|
| - |
|
|
| 139 |
|
Modifications |
|
| 4,809 |
|
|
| 50 |
|
|
| 4,859 |
|
Depreciation expense |
|
| - |
|
|
| (5,057 | ) |
|
| (5,057 | ) |
Exchange differences |
|
| (943 | ) |
|
| 611 |
|
|
| (332 | ) |
At December 31, 2022 |
|
| 48,061 |
|
|
| (17,571 | ) |
|
| 30,490 |
|
Disposals |
|
| (2,667 | ) |
|
| 2,308 |
|
|
| (359 | ) |
Modifications |
|
| 3,866 |
|
|
| (196 | ) |
|
| 3,670 |
|
Depreciation expense |
|
| - |
|
|
| (4,312 | ) |
|
| (4,312 | ) |
Exchange differences |
|
| 596 |
|
|
| (272 | ) |
|
| 324 |
|
At December 31, 2023 |
|
| 49,856 |
|
|
| (20,043 | ) |
|
| 29,813 |
|
66
The components of the lease cost for the years ended December 31, 2023 and 2022 were as follows:
| ROU Assets | ||||||||||||
| Cost | Accumulated depreciation | Net book value | ||||||||||
At January 1, 2019 | 22,571 | — | 22,571 | |||||||||
Additions | 1,673 | — | 1,673 | |||||||||
Depreciation expense | — | (4,061 | ) | (4,061 | ) | |||||||
Exchange differences | 534 | (56 | ) | 478 | ||||||||
|
|
|
|
|
| |||||||
At December 31, 2019 | 24,778 | (4,117 | ) | 20,661 | ||||||||
|
|
|
|
|
| |||||||
|
|
|
| For the year ended December 31, |
| |||||
|
|
|
| 2023 |
|
| 2022 |
| ||
Operating lease cost (1) |
|
|
|
|
|
|
|
| ||
Fixed lease cost |
|
|
|
| 6,688 |
|
|
| 6,719 |
|
Sublease income |
|
|
|
| (1,393 | ) |
|
| (344 | ) |
Total operating lease cost |
|
|
|
| 5,295 |
|
|
| 6,375 |
|
|
|
|
|
|
|
|
|
| ||
(1) The lease costs, net of sublease income, are reflected in the Consolidated Statements of Operations and Comprehensive Loss as follows: |
| |||||||||
|
|
|
| For the year ended December 31, |
| |||||
|
|
|
| 2023 |
|
| 2022 |
| ||
Cost of goods sold |
|
|
|
| 4,427 |
|
|
| 4,647 |
|
Selling and marketing |
|
|
|
| 793 |
|
|
| 1,356 |
|
General and administrative |
|
|
|
| (113 | ) |
|
| 107 |
|
Technology and development |
|
|
|
| 188 |
|
|
| 265 |
|
Total operating lease cost |
|
|
|
| 5,295 |
|
|
| 6,375 |
|
The following table includes lease liabilities included on the balance sheet at December 31, 2019:2023 and 2022:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
| Lease Liability |
| |||||
|
| 2023 |
|
| 2022 |
| ||
At January 1, |
|
| 33,423 |
|
|
| 33,481 |
|
Additions |
|
| - |
|
|
| 139 |
|
Disposals |
|
| (406 | ) |
|
| - |
|
Modifications |
|
| 3,866 |
|
|
| 4,809 |
|
Accretion |
|
| 2,272 |
|
|
| 1,722 |
|
Repayment of lease liabilities |
|
| (5,942 | ) |
|
| (6,558 | ) |
Lease inducements |
|
| - |
|
|
| 124 |
|
Exchange differences |
|
| 243 |
|
|
| (294 | ) |
At December 31, |
|
| 33,456 |
|
|
| 33,423 |
|
Current lease liabilities |
|
| 5,255 |
|
|
| 5,889 |
|
Long-term lease liabilities |
|
| 28,201 |
|
|
| 27,534 |
|
In February 2023, the Company modified an existing agreement for a Calgary manufacturing facility to extend the leasing term for an additional five years. An extension option period of five years was also determined to be more likely than not to occur. Undiscounted cash flows associated with this modification are $16.3 million. The rent obligations have been discounted at a rate of 8.58% to determine the lease liability.
In May 2023, the Company modified an existing agreement through early termination for the Seattle DXC. This amendment caused the derecognition of the lease, albeit DIRTT maintaining guarantor status for the remainder of the original lease term which terminates in August 2027. Undiscounted cash flows associated with this modification were $0.5 million.
On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility (refer to Note 6). As a result of this decision, DIRTT no longer assumes the two five-year extension options under the related property lease will be exercised.
67
Undiscounted cash flows associated with this modification were $13.7 million. The rent obligations have been discounted at a rate of 6.77% to determine the lease liability.
The following table includes maturities of operating lease liabilities at December 31, 2019:2023:
| As at December 31, 2019 | ||||||||
2020 | 5,419 | |||||||
2021 | 5,420 | |||||||
2022 | 4,876 | |||||||
2023 | 3,013 | |||||||
2024 | 1,426 |
|
| 5,424 |
| |||
2025 |
|
| 6,051 |
| ||||
2026 |
|
| 5,491 |
| ||||
2027 |
|
| 4,375 |
| ||||
2028 |
|
| 3,834 |
| ||||
Thereafter | 4,469 |
|
| 19,929 |
| |||
| ||||||||
Total | 24,623 |
|
| 45,104 |
| |||
| ||||||||
Total lease liability | 21,403 |
|
| 33,456 |
| |||
| ||||||||
Difference between undiscounted cash flows and lease liability | 3,220 |
|
| 11,648 |
| |||
| ||||||||
During 2019,
9. TRADE AND ACCRUED RECEIVABLES AND OTHER RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company enteredestimates an allowance for credit losses using the lifetime expected credit loss at each measurement date, taking into a lease agreement, expectedaccount historical credit loss experience as well as forward-looking information in order to commenceestablish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the second halfstatement of 2020, associated withoperations.
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 constructionfinancial wellbeing of a new combined tile and millwork facility in Rock Hill, South Carolina. Rent obligations associated with this lease are estimated at $14.4 million using a discount rate of 5.2% ($26.6 million undiscounted).
6. TRADE AND OTHER RECEIVABLES
| As at December 31, | ||||||||
| 2019 | 2018 | |||||||
Trade receivables | 22,488 | 42,582 | ||||||
Sales tax receivable | 402 | 482 | ||||||
Income tax receivable | 2,135 | 892 | ||||||
|
|
|
| |||||
| 25,025 | 43,956 | |||||||
Allowance for doubtful accounts | (84 | ) | (83 | ) | ||||
|
|
|
| |||||
| 24,941 | 43,873 | |||||||
|
|
|
| |||||
Prior to October 1, 2019, the Company had a contract with aour customers. In addition, we acquired trade credit insurance provider, wherebyeffective April 1, 2020. At December 31, 2023, approximately 93% of our trade accounts receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities. In addition, and where possible, we collect a portion of its trade receivables were insured (December 31, 2018 – 70%). The trade credit insurance provider determined the coverage amount, if any,50% deposit on acustomer-by-customer basis. Subsequent to October 1, 2019, DIRTT performed this function internally. The Company usually collects a 50% progress payment on order placements,sales, excluding government and certain other customers.clients.
The Company provides forOur trade balances determined to have risk of collection and hadare spread over a provision of $0.1 million at bothbroad Construction Partner base, which is geographically dispersed. For the year ended December 31, 2019 and 2018. The2023, one Construction Partner accounted for greater than 10% of revenue, compared to 2022 in which no Construction Partner accounted for greater than 10% of revenue.
|
| As at December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Current |
|
| 12,070 |
|
|
| 12,381 |
|
Overdue |
|
| 3,818 |
|
|
| 1,675 |
|
|
| 15,888 |
|
|
| 14,056 |
| |
Less: expected credit losses |
|
| (101 | ) |
|
| (126 | ) |
|
| 15,787 |
|
|
| 13,930 |
| |
No change to our expected credit loss was required during the year ended December 31, 2023, or December 31, 2022.Receivables are generally considered to be past due when over 60 days old, unless there is a separate payment arrangement in place for the collection of the receivable.
10. INVENTORY
|
| As at December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Raw material |
|
| 16,787 |
|
|
| 22,218 |
|
Allowance for obsolescence |
|
| (1,666 | ) |
|
| (1,242 | ) |
Work in progress |
|
| 1,456 |
|
|
| 1,275 |
|
|
|
| 16,577 |
|
|
| 22,251 |
|
68
As of December 31, 2023, the Company had no customers with receivables$1.7 million (2022 - $1.2 million) provided for inventory that is not expected to be used in excessfuture production and the associated expense was recorded to cost of 10%goods sold. During 2023, the Company wrote off $1.0 million of inventory against the total accounts receivable balanceprovision (2022 - $0.5 million) and increased the allowance for obsolescence by $0.4 million (2022 - $0.9 million). In addition, the Company recorded direct write offs against inventory of $0.5 million (2022 - $0.3 million). Production overheads capitalized in work in progress were $0.2 million at December 31, 2019 and had one customer over this threshold at December 31, 2018 ($4.82023 (2022 - $0.2 million).
7. INVENTORY
Additional costs included in cost of goods sold
| As at December 31, | ||||||||
| 2019 | 2018 | |||||||
Raw material | 17,339 | 17,212 | ||||||
Allowance for obsolescence | (512 | ) | (365 | ) | ||||
Work in progress | 739 | 1,803 | ||||||
|
|
|
| |||||
| 17,566 | 18,650 | |||||||
|
|
|
| |||||
During 2019,2021, the Company experienced periods where it was operating below normal capacity levels. During those periods,that period, overheads included in inventory were not increased and $2.2$1.8 million was recognized directly and separatelyincluded in cost of sales. Production overheads capitalized in work in progress were $0.1 millionIn 2022, we temporarily suspended operations at the Rock Hill Facility. On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility. As of December 31, 2019 (December 31, 2018: $0.2 million). In 2019,2023, the Companywrote-off $0.4 million of inventory that was determined to be obsolete leases the Rock Hill Facility and is actively pursuing sublease arrangements. Idle facility costs being incurred at the associated expense was recorded toRock Hill Facility are included in cost of goods sold.sales.
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Under-utilized capacity |
|
| - |
|
|
| - |
|
|
| 1,756 |
|
Idle facility costs |
|
| 1,977 |
|
|
| 506 |
|
|
| - |
|
|
|
| 1,977 |
|
|
| 506 |
|
|
| 1,756 |
|
Change in presentation in Consolidated Statement of Operations
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Product cost of sales, as previously presented |
|
| 119,728 |
|
|
| 140,058 |
|
|
| 118,525 |
|
Cost of under-utilized capacity, as previously presented |
|
| - |
|
|
| - |
|
|
| 1,756 |
|
Product cost of sales, per Statement of Operations |
|
| 119,728 |
|
|
| 140,058 |
|
|
| 120,281 |
|
69
8.
11. PROPERTY, PLANT AND EQUIPMENT, NET
|
| Office and computer equipment |
|
| Factory equipment |
|
| Leasehold improvements |
|
| Total |
| ||||
Cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
At December 31, 2021 |
|
| 28,646 |
|
|
| 71,484 |
|
|
| 47,567 |
|
|
| 147,697 |
|
Additions |
|
| 738 |
|
|
| 775 |
|
|
| 341 |
|
|
| 1,854 |
|
Disposals |
|
| (1,347 | ) |
|
| (2,983 | ) |
|
| (6,688 | ) |
|
| (11,018 | ) |
Exchange differences |
|
| (581 | ) |
|
| (3,167 | ) |
|
| (1,457 | ) |
|
| (5,205 | ) |
At December 31, 2022 |
|
| 27,456 |
|
|
| 66,109 |
|
|
| 39,763 |
|
|
| 133,328 |
|
Additions |
|
| 790 |
|
|
| 320 |
|
|
| 132 |
|
|
| 1,242 |
|
Disposals |
|
| (127 | ) |
|
| (375 | ) |
|
| (2,186 | ) |
|
| (2,688 | ) |
Transferred to assets held for sale |
|
| - |
|
|
| (13,260 | ) |
|
| - |
|
|
| (13,260 | ) |
Exchange differences |
|
| 6 |
|
|
| 870 |
|
|
| 619 |
|
|
| 1,495 |
|
At December 31, 2023 |
|
| 28,125 |
|
|
| 53,664 |
|
|
| 38,328 |
|
|
| 120,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accumulated depreciation and impairment |
|
|
|
|
|
|
|
|
|
|
|
| ||||
At December 31, 2021 |
|
| 19,981 |
|
|
| 39,271 |
|
|
| 36,748 |
|
|
| 96,000 |
|
Depreciation expense |
|
| 2,355 |
|
|
| 4,425 |
|
|
| 3,680 |
|
|
| 10,460 |
|
Disposals |
|
| (1,272 | ) |
|
| (2,831 | ) |
|
| (6,688 | ) |
|
| (10,791 | ) |
Exchange differences |
|
| (540 | ) |
|
| (2,044 | ) |
|
| (1,279 | ) |
|
| (3,863 | ) |
At December 31, 2022 |
|
| 20,524 |
|
|
| 38,821 |
|
|
| 32,461 |
|
|
| 91,806 |
|
Depreciation expense |
|
| 2,041 |
|
|
| 3,661 |
|
|
| 1,824 |
|
|
| 7,526 |
|
Disposals |
|
| (127 | ) |
|
| (272 | ) |
|
| (2,098 | ) |
|
| (2,497 | ) |
Transferred to assets held for sale |
|
| - |
|
|
| (2,989 | ) |
|
| - |
|
|
| (2,989 | ) |
Exchange differences |
|
| 124 |
|
|
| 687 |
|
|
| 383 |
|
|
| 1,194 |
|
At December 31, 2023 |
|
| 22,562 |
|
|
| 39,908 |
|
|
| 32,570 |
|
|
| 95,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net book value |
|
|
|
|
|
|
|
|
|
|
|
| ||||
At December 31, 2022 |
|
| 6,932 |
|
|
| 27,288 |
|
|
| 7,302 |
|
|
| 41,522 |
|
At December 31, 2023 |
|
| 5,563 |
|
|
| 13,756 |
|
|
| 5,758 |
|
|
| 25,077 |
|
| Office and computer equipment | Factory equipment | Leasehold improvements | Total | |||||||||||||
Cost | ||||||||||||||||
At December 31, 2017 | 19,556 | 43,248 | 36,182 | 98,986 | ||||||||||||
Additions | 2,008 | 4,140 | 2,486 | 8,634 | ||||||||||||
Disposals | (45 | ) | — | (174 | ) | (219 | ) | |||||||||
Exchange differences | (975 | ) | (2,966 | ) | (2,521 | ) | (6,462 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
At December 31, 2018 | 20,544 | 44,422 | 35,973 | 100,939 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Additions | 1,630 | 8,757 | 2,315 | 12,702 | ||||||||||||
Disposals | — | (396 | ) | (298 | ) | (694 | ) | |||||||||
Exchange differences | 569 | 1,857 | 1,241 | 3,667 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
At December 31, 2019 | 22,743 | 54,640 | 39,231 | 116,614 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated depreciation and impairment | ||||||||||||||||
At December 31, 2017 | 10,641 | 20,810 | 19,022 | 50,473 | ||||||||||||
Depreciation expense | 1,795 | 4,032 | 3,909 | 9,736 | ||||||||||||
Disposals | (32 | ) | — | (59 | ) | (91 | ) | |||||||||
Impairments | — | 5,890 | 2,233 | 8,123 | ||||||||||||
Exchange differences | (656 | ) | (1,798 | ) | (1,576 | ) | (4,030 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
At December 31, 2018 | 11,748 | 28,934 | 23,529 | 64,211 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Depreciation expense | 1,643 | 2,297 | 4,929 | 8,869 | ||||||||||||
Disposals | — | (293 | ) | (293 | ) | (586 | ) | |||||||||
Exchange differences | 521 | 1,336 | 898 | 2,755 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
At December 31, 2019 | 13,912 | 32,274 | 29,063 | 75,249 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net book value | ||||||||||||||||
At December 31, 2018 | 8,796 | 15,488 | 12,444 | 36,728 | ||||||||||||
At December 31, 2019 | 8,831 | 22,366 | 10,168 | 41,365 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
As at December 31, 2019,2023, the Company had $8.5$0.2 million of assets in progress of completion which were excluded from assets subject to depreciation (December(2022 – $0.1 million).
During the year ended December 31, 2018 – $0.9 million)2022, depreciation expense included $1.1 million of incremental depreciation on the acceleration of useful lives associated with the closing of the Phoenix Facility. The year ended December 31, 2023, did not include any significant amounts related to accelerated depreciation (refer to Note 6).
9.
On September 27, 2023, the Company announced its intention to permanently close the Rock Hill Facility in South Carolina. $10.3 million of manufacturing equipment at Rock Hill was transferred to assets held for sale (refer to Note 6).
As at December 31, 2023, the Company determined that there were no impairment indicators warranting an impairment test.
During the year ended December 31, 2022, the Company has incurred negative cash flows from operations and accordingly management determined that this was an indicator of impairment for property, plant and equipment assets. The Company estimated the undiscounted cash flows to be generated from the use and ultimate disposition of the property, plant and equipment assets. To estimate the undiscounted cash flows of the reporting unit, the Company applied the income approach. Sales and cost projections were based on assumptions driven by current economic conditions. The Company considered various scenarios and probability-weighted the likelihood of each scenario in determining the reporting unit’s fair value. The average compounded annual growth rate of revenues was 5%-10%. Other key assumptions used in the quantitative assessment of the reporting unit’s undiscounted cashflows was terminal growth rate of 2%. The Company estimated the undiscounted cash flows to be generated from the use and ultimate disposition of the property, plant and equipment assets. The results of the test indicated that the undiscounted cash flows exceeded the carrying values of property, plant and equipment, therefore, no impairment charge was required at December 31, 2022.
70
12. CAPITALIZED SOFTWARE, NET
| For the year ended December 31, | For the Year Ended December 31, |
| |||||||||||||
| 2019 | 2018 | 2023 |
|
| 2022 |
| |||||||||
Cost |
|
|
|
|
| ||||||||||
As at January 1 | 28,831 | 27,195 |
| 34,546 |
|
|
| 37,492 |
| ||||||
Additions | 2,604 | 5,234 |
| 1,794 |
|
|
| 1,677 |
| ||||||
Recovery of software development expenditures | (511 | ) | (178 | ) |
| (127 | ) |
|
| (263 | ) | ||||
Disposals |
| (6,641 | ) |
|
| (1,990 | ) | ||||||||
Exchange differences | 1,495 | (3,420 | ) |
| 680 |
|
|
| (2,370 | ) | |||||
|
| ||||||||||||||
As at December 31 | 32,419 | 28,831 |
| 30,252 |
|
|
| 34,546 |
| ||||||
|
| ||||||||||||||
Accumulated amortization |
|
|
|
|
| ||||||||||
As at January 1 | 20,496 | 18,873 |
| 30,140 |
|
|
| 30,097 |
| ||||||
Amortization expense | 2,637 | 3,306 |
| 840 |
|
|
| 3,887 |
| ||||||
Disposals |
| (3,766 | ) |
|
| (1,916 | ) | ||||||||
Exchange differences | 1,073 | (1,683 | ) |
| 588 |
|
|
| (1,928 | ) | |||||
|
| ||||||||||||||
As at December 31 | 24,206 | 20,496 |
| 27,802 |
|
|
| 30,140 |
| ||||||
|
| ||||||||||||||
Net book value | 8,213 | 8,335 |
| 2,450 |
|
|
| 4,406 |
| ||||||
|
| ||||||||||||||
Estimated amortization expense on capitalized software is $2.8$0.8 million in 2020, $2.32024, $0.8 million in 2021, $1.62025, $0.5 million in 2022, $0.72026, $0.3 million in 2023,2027, and $0.2$0.1 million in 2024.2028.
10. GOODWILL
| 2019 | 2018 | |||||||
As at January 1 | 1,353 | 1,471 | ||||||
Exchange differences | 68 | (118 | ) | |||||
|
|
|
| |||||
As at December 31 | 1,421 | 1,353 | ||||||
|
|
|
| |||||
The Company’s goodwill is assessed atDuring the consolidated company level which representsyear ended December 31, 2022, amortization expense was impacted by $1.0 million of incremental amortization on the Company’s sole operating and reporting segment. The Company tests its goodwillacceleration of useful lives associated with discontinued product lines (refer to Note 6). Amortization expense for impairment annually during the fourth quarteryear ended December 31, 2023, was not impacted by any incremental amortization of the calendar year. For 2019, and 2018, the Company used the quantitative approach to perform its annual goodwill impairment test. The Company’s fair value exceeded the carrying value of its net assets and, accordingly, goodwill was not impaired.this kind.
11.13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER LIABILITIES
|
| As at December 31 |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Trade accounts payable(2) |
|
| 12,378 |
|
|
| 8,944 |
|
Accrued liabilities(2) |
|
| 5,500 |
|
|
| 5,394 |
|
Wages and commissions payable |
|
| 1,688 |
|
|
| 3,410 |
|
Rebates accrued(1) |
|
| 314 |
|
|
| 2,133 |
|
|
|
| 19,880 |
|
|
| 19,881 |
|
71
Other liabilities
|
| As at December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Warranty provisions (1) |
|
| 873 |
|
|
| 1,278 |
|
DSU liability |
|
| 1,086 |
|
|
| 594 |
|
Income taxes payable |
|
| 289 |
|
|
| - |
|
Sublease deposits |
|
| 184 |
|
|
| 139 |
|
Other provisions |
|
| 50 |
|
|
| 45 |
|
Other liabilities |
|
| 2,482 |
|
|
| 2,056 |
|
|
| As at December 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
As at January 1 |
|
| 1,278 |
|
|
| 1,451 |
|
Additions to warranty provision |
|
| 1,208 |
|
|
| 1,134 |
|
Payments related to warranties |
|
| (1,613 | ) |
|
| (1,307 | ) |
|
|
| 873 |
|
|
| 1,278 |
|
14. LONG-TERM DEBT
| As at December 31, | ||||||||
| 2019 | 2018 | |||||||
Trade accounts payable | 7,620 | 10,272 | ||||||
Accrued liabilities | 8,193 | 8,714 | ||||||
Wages and commissions payable | 3,546 | 5,544 | ||||||
Rebates accrued(1) | 1,025 | 6,305 | ||||||
Taxes payable | — | 448 | ||||||
|
|
|
| |||||
| 20,384 | 31,283 | |||||||
|
|
|
| |||||
|
| Revolving |
|
| Leasing |
|
| Convertible |
|
| Total Debt |
| ||||
Balance at December 31, 2021 |
|
| - |
|
|
| 13,909 |
|
|
| 56,733 |
|
|
| 70,642 |
|
Issuances |
|
| - |
|
|
| 647 |
|
|
| - |
|
|
| 647 |
|
Accretion of issue costs |
|
| - |
|
|
| - |
|
|
| 676 |
|
|
| 676 |
|
Accrued interest |
|
| - |
|
|
| 735 |
|
|
| 3,539 |
|
|
| 4,274 |
|
Interest payments |
|
| - |
|
|
| (735 | ) |
|
| (3,688 | ) |
|
| (4,423 | ) |
Principal repayments |
|
| - |
|
|
| (2,470 | ) |
|
| - |
|
|
| (2,470 | ) |
Exchange differences |
|
| - |
|
|
| (274 | ) |
|
| (3,637 | ) |
|
| (3,911 | ) |
Balance at December 31, 2022 |
|
| - |
|
|
| 11,812 |
|
|
| 53,623 |
|
|
| 65,435 |
|
Current portion of long-term debt and accrued interest |
|
| - |
|
|
| 2,561 |
|
|
| 745 |
|
|
| 3,306 |
|
Long-term debt |
|
| - |
|
|
| 9,251 |
|
|
| 52,878 |
|
|
| 62,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2022 |
|
| - |
|
|
| 11,812 |
|
|
| 53,623 |
|
|
| 65,435 |
|
Accretion of issue costs |
|
| - |
|
|
| - |
|
|
| 698 |
|
|
| 698 |
|
Accrued interest |
|
| - |
|
|
| 526 |
|
|
| 3,411 |
|
|
| 3,937 |
|
Interest payments |
|
| - |
|
|
| (526 | ) |
|
| (3,451 | ) |
|
| (3,977 | ) |
Principal repayments |
|
| - |
|
|
| (11,579 | ) |
|
| - |
|
|
| (11,579 | ) |
Exchange differences |
|
| - |
|
|
| 251 |
|
|
| 1,343 |
|
|
| 1,594 |
|
Balance at December 31, 2023 |
|
| - |
|
|
| 484 |
|
|
| 55,624 |
|
|
| 56,108 |
|
Current portion of long-term debt and accrued interest |
|
| - |
|
|
| 79 |
|
|
| 762 |
|
|
| 841 |
|
Long-term debt |
|
| - |
|
|
| 405 |
|
|
| 54,862 |
|
|
| 55,267 |
|
|
Other liabilities
| As at December 31, | ||||||||
| 2019 | 2018 | |||||||
Legal provisions(1) | 745 | 1,995 | ||||||
Stock option liability | — | 1,649 | ||||||
Deferred share unit liability | 434 | 116 | ||||||
Warranty and other provision | 4,008 | 1,493 | ||||||
Lease exit liability | — | 820 | ||||||
Lease inducements | — | 750 | ||||||
|
|
|
| |||||
| 5,187 | 6,823 | |||||||
|
|
|
| |||||
|
12. LONG-TERM DEBT
In July 2019,On February 12, 2021, the Company entered into a loan agreement governing a C$50.025.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). TheUnder the RBC Facility, has a three-year term and can be extended forthe Company is able to borrow up to two additional years ata maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the Company’s option.lesser of (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). Interest iswas calculated at the Canadian or U.S. prime rate with no adjustment,plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under the RBC Facility, if the “Aggregate Excess Availability”, (defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash), is less than C$5.0 million, the Company was subject to a fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities (defined below). Should an event of default occur or the bankers’ acceptanceAggregate 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 offset any borrowings and any remaining amounts made available to the Company.
72
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a maximum borrowing base of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 12575 basis points.points or the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate (“SOFR”) plus 200 basis points plus the Term SOFR Adjustment (as defined in the amended loan agreement governing the Extended RBC Facility). Under the Extended RBC Facility, if the trailing twelve-month FCCR is not above 1.25 for three consecutive months, a cash balance equivalent to one year’s worth of Leasing Facilities payments must be maintained. Effective October 2023, inventory was scoped out of the Borrowing Base. At December 31, 2023, available borrowings are C$13.6 million ($10.3 million) (2022 – C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the year end 2023, which resulted in the restriction of $0.4 million of cash (2022 - $3.4 million).
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a minimum fixed charge coveragemaximum of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case plus 200 basis points.
Leasing Facilities
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.
The Company did not make any draws on the Leasing Facilities during 2023. During the year ended December 31, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in the current portion of long-term debt and accrued interest and long-term debt.
As part of RBC’s consent to the AWI transaction (refer to Note 7), one of the Canadian lease agreements of $1.6 million was fully settled using AWI proceeds. This resulted in the release of $0.4 million of restricted cash associated with the one year of payments on this lease, as described above.
Refer to Note 6 on the decision to permanently close the Rock Hill Facility. As part of this decision, the Company fully settled the $7.8 million principal balance of the U.S. Leasing Facility in the fourth quarter of 2023. The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, $2.6 million was released from restricted cash.
Convertible Debentures
On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “January Debentures”). On January 29, 2021, the Company issued a further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to the underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the “January Debentures Maturity Date”) and will accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021, until the January Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission. The January Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the January Debentures Maturity Date and the date specified by the Company for redemption of the January Debentures at a conversion price of C$4.65 per common share, being a ratio of 1.15:1 andapproximately 215.0538 common shares per C$1,000 principal amount of the January Debentures. Subsequent to the Rights Offering (refer to Note 23), the conversion price is now C$4.03 per common share representing a maximum debt to earnings before interest, tax, depreciation and amortization,non-cash stock-based compensation, plus or minus extraordinary or unusualnon-recurring revenue or expenses (“Adjusted EBITDA”) ratioconversion rate of 3.0 to 1.approximately 248.1390 common shares per C$1,000 principal amount of the January Debentures. As at December 31, 2019,2023, C$18.9 million of the RBC Facility was undrawn andJanuary Debentures are held by a related party (refer to Note 22).
73
On December 1, 2021, the Company wascompleted a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in compliance with all covenantsarrears on the last day of the facility.
The Company had an $18.0 million revolving operating facility which expiredJune and December of each year commencing on June 30, 2019. Advances of $5.6 million under2022, until the revolving operating facility were subject to interestDecember Debentures Maturity Date. Interest and principal are payable in cash or shares at the lender’s prime rate minus 0.25% for Canadian dollar advancesoption of the Company. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission. The December Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the December Debentures Maturity Date and the U.S. primedate specified by the Company for redemption of the December Debentures at a conversion price of C$4.20 per common share, being a ratio of approximately 238.0952 common shares per C$1,000 principal amount of the December Debentures. Subsequent to the Rights Offering (refer to Note 23), the conversion price is now C$3.64 per common share representing a conversion rate minus 0.25% for U.S. dollar advances and are repayable at any time.of approximately 274.7253 common shares per C$1,000 principal amount of the December Debentures. As at December 31, 2018,2023, C$13.6 million of the Company was in compliance with all of its lender’s covenants. During the first quarter of 2019, the Company repaid the outstanding principal and interest amounts of its long-term debt, totaling $5.6 million.December Debentures are held by a related party (refer to Note 22).
13.
15. INCOME TAXES
Reconciliation of income taxes
The following reconciles income taxes calculated at the Canadian statutory rate with the actual income tax expense. The Canadian statutory rate includes federal and provincial income taxes. This rate was used asbecause Canada is the domicile of the parent entity of the Company.
| For the year ended December 31, | For the Year Ended December 31, |
| |||||||||||||||||||||
| 2019 | 2018 | 2017 | 2023 |
|
| 2022 |
|
| 2021 |
| |||||||||||||
Net income (loss) before tax | (3,377 | ) | 8,830 | (7,267 | ) | ||||||||||||||||||
Net loss before tax |
| (14,252 | ) |
|
| (54,942 | ) |
|
| (53,872 | ) | ||||||||||||
Canadian statutory rate | 26.5 | % | 27.0 | % | 27.0 | % |
| 24.6 | % |
|
| 24.4 | % |
|
| 23.3 | % | ||||||
|
|
| |||||||||||||||||||||
Expected income tax | (895 | ) | 2,384 | (1,962 | ) |
| (3,506 | ) |
|
| (13,406 | ) |
|
| (12,552 | ) | |||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Effect on taxes resulting from: |
|
|
|
|
|
|
|
| |||||||||||||||
Valuation allowance |
| 4,224 |
|
|
| 13,590 |
|
|
| 12,046 |
| ||||||||||||
Non-deductible expenses | 550 | 447 | 264 |
| 189 |
|
|
| 422 |
|
|
| 542 |
| |||||||||
Non-deductible stock-based compensation | 674 | 1,080 | 689 |
| - |
|
|
| 23 |
|
|
| 189 |
| |||||||||
Tax rate impacts | 999 | (420 | ) | 487 |
| (243 | ) |
|
| (665 | ) |
|
| (488 | ) | ||||||||
U.S. Federal rate reduction from 35% to 21% | — | — | 722 | ||||||||||||||||||||
Adjustments related to prior year tax filings | (205 | ) | (257 | ) | 212 |
| (332 | ) |
|
| 57 |
|
|
| 59 |
| |||||||
Other | (104 | ) | 46 | 46 | |||||||||||||||||||
|
|
| |||||||||||||||||||||
Income tax expense | 1,019 | 3,280 | 458 |
| 332 |
|
|
| 21 |
|
|
| (204 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Current tax expense | 1,064 | 2,178 | 3,277 |
| 332 |
|
|
| 21 |
|
|
| 210 |
| |||||||||
Deferred tax expense (recovery) | (45 | ) | 1,102 | (2,819 | ) | ||||||||||||||||||
|
|
| |||||||||||||||||||||
Deferred tax recovery |
| - |
|
|
| - |
|
|
| (414 | ) | ||||||||||||
Income tax expense | 1,019 | 3,280 | 458 |
| 332 |
|
|
| 21 |
|
|
| (204 | ) | |||||||||
|
|
| |||||||||||||||||||||
The Company’s U.S. subsidiary’s result was taxable income for the year ended December 31, 2023. The Company utilized prior year operating losses against this income; however, U.S. tax law does not allow for the full offset of losses against current year taxable income to reduce tax payable to zero. This resulted in current tax payable of $0.3 million in 2023.
74
Deferred tax assets and liabilities
Significant components of the Company’s deferred tax assets and liabilities as at December 31, 20192023 and 20182022 were as follows:
| At December 31, 2019 | As at December 31, 2023 |
| |||||||||||||||||||||
| Assets | Liabilities | Net | Assets |
| Liabilities |
| Net |
| |||||||||||||||
Operating losses | 6,899 | — | 6,899 |
| 35,690 |
|
|
| - |
|
|
| 35,690 |
| |||||||||
Research and development expenditures | 353 | — | 353 |
| 367 |
|
|
| - |
|
|
| 367 |
| |||||||||
Property and equipment | — | (1,916 | ) | (1,916 | ) |
| - |
|
|
| (3,883 | ) |
|
| (3,883 | ) | |||||||
Capitalized software and other assets | — | (2,345 | ) | (2,345 | ) |
| - |
|
|
| (1,033 | ) |
|
| (1,033 | ) | |||||||
Valuation allowance |
| - |
|
|
| (34,529 | ) |
|
| (34,529 | ) | ||||||||||||
Other | 2,373 | — | 2,373 |
| 3,388 |
|
|
| - |
|
|
| 3,388 |
| |||||||||
|
|
| |||||||||||||||||||||
Net deferred taxes | 9,625 | (4,261 | ) | 5,364 |
| 39,445 |
|
|
| (39,445 | ) |
|
| - |
| ||||||||
|
|
| |||||||||||||||||||||
| At December 31, 2018 | As at December 31, 2022 |
| |||||||||||||||||||||
| Assets | Liabilities | Net | Assets |
| Liabilities |
| Net |
| |||||||||||||||
Operating losses | 8,213 | — | 8,213 |
| 33,740 |
|
|
| - |
|
|
| 33,740 |
| |||||||||
Research and development expenditures | 389 | — | 389 |
| 336 |
|
|
| - |
|
|
| 336 |
| |||||||||
Property and equipment | — | (2,408 | ) | (2,408 | ) |
| - |
|
|
| (6,017 | ) |
|
| (6,017 | ) | |||||||
Capitalized software and other assets | — | (2,283 | ) | (2,283 | ) |
| - |
|
|
| (1,599 | ) |
|
| (1,599 | ) | |||||||
Valuation allowance |
| - |
|
|
| (29,812 | ) |
|
| (29,812 | ) | ||||||||||||
Other | 1,725 | (518 | ) | 1,207 |
| 3,352 |
|
|
| - |
|
|
| 3,352 |
| ||||||||
|
|
| |||||||||||||||||||||
Net deferred taxes | 10,327 | (5,209 | ) | 5,118 |
| 37,428 |
|
|
| (37,428 | ) |
|
| - |
| ||||||||
|
|
| |||||||||||||||||||||
Summary of temporary difference movements during the year:
Balance |
|
| Recognized |
|
| Foreign |
|
| Balance |
| |||||||||||||||||||||
| Balance January 1, 2019 | Recognized in Income | Foreign Exchange | Balance December 31, 2019 | January 1, 2023 |
| in Income |
| Exchange |
|
| December 31, 2023 |
| |||||||||||||||||||
Operating losses | 8,213 | (1,772 | ) | 458 | 6,899 |
| 33,740 |
|
|
| 1,431 |
|
|
| 519 |
|
|
| 35,690 |
| |||||||||||
Research and development | 389 | (59 | ) | 23 | 353 | ||||||||||||||||||||||||||
Research and development expenditures |
| 336 |
|
|
| 22 |
|
|
| 9 |
|
|
| 367 |
| ||||||||||||||||
Property and equipment | (2,408 | ) | 652 | (160 | ) | (1,916 | ) |
| (6,017 | ) |
|
| 2,182 |
|
|
| (48 | ) |
|
| (3,883 | ) | |||||||||
Intangible assets | (2,283 | ) | 425 | (487 | ) | (2,345 | ) | ||||||||||||||||||||||||
Capitalized software and other assets |
| (1,599 | ) |
|
| 583 |
|
|
| (17 | ) |
|
| (1,033 | ) | ||||||||||||||||
Valuation allowance |
| (29,812 | ) |
|
| (4,224 | ) |
|
| (493 | ) |
|
| (34,529 | ) | ||||||||||||||||
Other | 1,207 | 799 | 367 | 2,373 |
| 3,352 |
|
|
| 6 |
|
|
| 30 |
|
|
| 3,388 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Net deferred taxes | 5,118 | 45 | 201 | 5,364 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Balance |
|
| Recognized |
|
| Foreign |
|
| Balance |
| |||||||||||||||||||||
| Balance January 1, 2018 | Recognized in Income | Foreign Exchange | Balance December 31, 2018 | January 1, 2022 |
| in Income |
| Exchange |
|
| December 31, 2022 |
| |||||||||||||||||||
Operating losses | 9,968 | (1,015 | ) | (740 | ) | 8,213 |
| 24,032 |
|
|
| 10,924 |
|
|
| (1,216 | ) |
|
| 33,740 |
| ||||||||||
Research and development | 423 | — | (34 | ) | 389 | ||||||||||||||||||||||||||
Research and development expenditures |
| 362 |
|
|
| (3 | ) |
|
| (23 | ) |
|
| 336 |
| ||||||||||||||||
Property and equipment | (2,397 | ) | (273 | ) | 262 | (2,408 | ) |
| (7,572 | ) |
|
| 1,410 |
|
|
| 145 |
|
|
| (6,017 | ) | |||||||||
Intangible assets | (2,301 | ) | (178 | ) | 196 | (2,283 | ) | ||||||||||||||||||||||||
Capitalized software and other assets |
| (2,023 | ) |
|
| 311 |
|
|
| 113 |
|
|
| (1,599 | ) | ||||||||||||||||
Valuation allowance |
| (17,291 | ) |
|
| (13,590 | ) |
|
| 1,069 |
|
|
| (29,812 | ) | ||||||||||||||||
Other | 904 | 364 | (61 | ) | 1,207 |
| 2,492 |
|
|
| 948 |
|
|
| (88 | ) |
|
| 3,352 |
| |||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Net deferred taxes | 6,597 | (1,102 | ) | (377 | ) | 5,118 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||
|
|
|
| ||||||||||||||||||||||||||||
The general provincial tax rate in Alberta, Canada was decreased on June 28, 2019 to 11 percent for
For the second halfyear ended December 31, 2023, the Company recorded valuation allowances of 2019, 10 percent for 2020, 9 percent for 2021 and 8 percent thereafter. As a result of the enacted rate change, DIRTT reduced its$4.2 million against deferred tax asset by $0.9 million with a corresponding deferred income tax expense recorded inassets (“DTAs”) incurred during the second quarter of 2019.
The U.S. Tax Cuts and Jobs Act (the “Act”) became law on December 22, 2017. The Act includes significant changesyear. A valuation allowance is recognized to the U.S. corporate income tax system, including a federal corporate rate reduction from 35 percent to 21 percent beginning in 2018, changes to capital depreciation, limitations onextent that it is more likely than not that the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. As a result of the Act, the Company remeasured its U.S. deferred tax liability based upon the new statutory federal rate of 21 percent.assets will not be realized (2022 – $13.6 million).
The amount shown on the balance sheet as deferred income tax assets and liabilities represent the net differences between the tax basis and book carrying values on the Company’s balance sheet at enacted tax rates.
On an annual basis, the Company and its subsidiariessubsidiary file tax returns in Canada and various foreign jurisdictions. In Canada, the Company’s federal and provincial tax returns for the years 20162019 to 20182022 remain subject to examination by taxation authorities. In the United States, both the federal and state tax returns filed for the years 20152018 to 20182022 remain subject to examination by the taxation authorities.
75
Tax loss carryforwards and other tax pools
The significant components of the Company’s net future income tax deductions in these consolidated financial statements are summarized as follows:
| For the year ended December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| |||||||||||||||||
| C$ | C$ | $ | $ | C$ |
| C$ |
| $ |
| $ |
| ||||||||||||||||||||
Non-capital loss carry-forwards | 38,084 | 43,616 | — | — |
| 114,119 |
|
|
| 106,730 |
|
|
| 55,469 |
|
|
| 55,654 |
| ||||||||||||
Undepreciated capital costs | 23,274 | 25,211 | 11,992 | 12,748 |
| 3,903 |
|
|
| 9,207 |
|
|
| 5,626 |
|
|
| 9,765 |
| ||||||||||||
Share issuance costs | — | 519 | — | — |
| 2,454 |
|
|
| 3,603 |
|
|
| - |
|
|
| - |
| ||||||||||||
Scientific research and experimental development tax incentives | 1,971 | 1,971 | — | — |
| 1,971 |
|
|
| 1,971 |
|
|
| - |
|
|
| - |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Total future tax deductions | 63,329 | 71,317 | 11,992 | 12,748 |
| 122,447 |
|
|
| 121,511 |
|
|
| 61,095 |
|
|
| 65,419 |
| ||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
14.
16. STOCK-BASED COMPENSATION
Stock-based compensation expense
| For the year ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
Stock options | 1,729 | 2,076 | 2,738 | |||||||||
PSUs | 58 | 44 | — | |||||||||
DSUs | 306 | 120 | — | |||||||||
Charge on stock option modification | — | 1,181 | — | |||||||||
Stock option fair value adjustment | 1,783 | 240 | — | |||||||||
|
|
|
|
|
| |||||||
| 3,876 | 3,661 | 2,738 | ||||||||||
|
|
|
|
|
| |||||||
Stock Options
In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”). The Company has a stock option plan which was approved by2020 LTIP replaced the Board of Directors (the “Board”predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and by itsthe Amended and Restated Stock Option Plan (“Stock Option Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.
In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated Long-Term Incentive Plan (the “2023 LTIP”) at the annual and special meeting of shareholders held on May 5, 2016, wherebyshareholders. The 2023 LTIP gives the aggregateCompany the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2023 LTIP, the sum of (i) 12,350,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Stock Option Plan that, following May 30, 2023, expire or are cancelled or terminated without having been exercised in full, have been reserved for issuance shall not exceed 10%under the 2023 LTIP. Upon vesting of certain LTIP awards, the Company may withhold and sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the issuedwithholding tax remittances required in respect of award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.
Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for Non-Employee Directors (as amended and outstandingrestated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The terms of the DSU Plan are otherwise materially unchanged as atincorporated into the time of grant of any stock options. Except as noted below, stock options2023 LTIP. Effective May 30, 2023, no new awards will be made under the DSU Plan, but awards previously granted under the planDSU Plan will continue to be governed by the DSU Plan. DSUs are settled following cessation of services with the Company.
Stock-based compensation expense
|
| For the Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Equity-settled awards |
|
| 2,331 |
|
|
| 3,943 |
|
|
| 4,453 |
|
Cash-settled awards |
|
| (25 | ) |
|
| 334 |
|
|
| 260 |
|
|
| 2,306 |
|
|
| 4,277 |
|
|
| 4,713 |
| |
76
The following summarizes RSUs, Share Awards, PSUs, and DSUs activity during the periods:
|
| RSU Time- |
|
| RSU Performance- |
|
| Share |
|
|
|
|
|
|
| |||||
|
| Based |
|
| Based |
|
| Awards |
|
| PSU |
|
| DSU |
| |||||
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
| |||||
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
| |||||
Outstanding at December 31, 2021 |
|
| 3,216,536 |
|
|
| 1,021,739 |
|
|
| - |
|
|
| 157,200 |
|
|
| 361,577 |
|
Granted |
|
| 2,157,149 |
|
|
| 863,279 |
|
|
| 222,170 |
|
|
| - |
|
|
| 1,305,658 |
|
Vested or settled |
|
| (2,199,034 | ) |
|
| (796,011 | ) |
|
| (154,016 | ) |
|
| - |
|
|
| (501,916 | ) |
Withheld to settle employee tax obligations |
|
| (526,346 | ) |
|
| (242,460 | ) |
|
| (68,154 | ) |
|
| - |
|
|
| - |
|
Forfeited |
|
| (762,968 | ) |
|
| (502,628 | ) |
|
| - |
|
|
| (157,200 | ) |
|
| - |
|
Outstanding at December 31, 2022 |
|
| 1,885,337 |
|
|
| 343,919 |
|
|
| - |
|
|
| - |
|
|
| 1,165,319 |
|
Granted |
|
| 3,599,500 |
|
|
| - |
|
|
| 522,883 |
|
|
| 2,584,161 |
|
|
| 2,276,731 |
|
Vested or settled |
|
| (1,105,225 | ) |
|
| (258,760 | ) |
|
| (522,883 | ) |
|
| - |
|
|
| (355,878 | ) |
Withheld to settle employee tax obligations |
|
| (64,230 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited |
|
| (783,655 | ) |
|
| (21,130 | ) |
|
| - |
|
|
| (738,553 | ) |
|
| - |
|
Expired |
|
| (1,163 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Outstanding at December 31, 2023 |
|
| 3,530,564 |
|
|
| 64,029 |
|
|
| - |
|
|
| 1,845,608 |
|
|
| 3,086,172 |
|
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 have a termone-third of five years andthe RSUs vest one third every year over a three-year period from the date of grant.
In 2018,grant (the “RSUs”). At the Company allowed certain vested share optionsend of a three-year term, the associated RSUs will be settled by way of the provision of cash or shares to be surrendered for cash. Onemployees (or a combination thereof), at the datediscretion of modification, the Company. The weighted average fair value of the liabilityRSUs granted in 2023 was C$0.46 (2022 – C$2.37), which was determined using the closing price of options eligiblethe Company’s common shares on their respective grant dates. During 2023, 150,000 RSUs were granted to each of the chief executive officer, chief operations officer and chief financial officer which vest in one year.
Restricted share units (performance-based vesting)
During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for cash surrendervesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a percentage of $1.2 million was reclassifiedthe PRSUs will vest at the end of the three-year service period or on their departure, based on terms agreed. All PRSUs awarded in 2020 were awarded to a single executive who forfeited those awards in January 2022 upon departure from the balance sheet from shareholders’ equity to other liabilities and a $0.2 million was expensed to adjust the liability to the fair value atyear-end, and an additional $0.5 million was charged back to additionalpaid-in capital as, for certain stock options, the cumulative expense calculated was lower than theCompany.
The grant date fair value of the original equity awards. During 2018, $1.8 million of stock options were surrendered for cash2022 and at year end the Company had a liability of $1.8 million in other liabilities for the remaining stock options.
In 2019, $1.8 million was expensed to adjust the liability to fair value, and an additional $0.4 million was charged back topaid-in capital as, for certain stock options, the cumulative expense calculated was lower that the grant date fair value of the original equity awards. During the year, $3.6 million of share options were surrendered for cash. On October 9, 2019, following its listing on The Nasdaq Global Select Market, the Company ceased cash-settlement of stock options and the associated liability accounting for stock options.
The following summarizes options granted, exercised, forfeited and expired during the periods:
| Number of options | Weighted average exercise price C$ | |||||||
Outstanding at December 31, 2017 | 5,553,393 | 5.31 | ||||||
Granted | 3,327,525 | 6.40 | ||||||
Exercised | (435,792 | ) | 4.78 | |||||
Surrendered for cash | (1,365,348 | ) | 5.17 | |||||
Forfeited | (203,516 | ) | 5.26 | |||||
Expired | (17,886 | ) | 6.02 | |||||
|
|
|
| |||||
Outstanding at December 31, 2018 | 6,858,376 | 5.88 | ||||||
Granted | 1,382,311 | 7.45 | ||||||
Exercised | (21,045 | ) | 4.81 | |||||
Surrendered for cash | (1,544,151 | ) | 5.02 | |||||
Forfeited | (298,508 | ) | 5.02 | |||||
Expired | (220,331 | ) | 6.01 | |||||
|
|
|
| |||||
Outstanding at December 31, 2019 | 6,156,652 | 6.49 | ||||||
Exercisable at December 31, 2019 | 2,454,910 | 6.05 | ||||||
Included in the 2018 stock option grant above, 1,725,000 stock options were granted to an executive with performance conditions for vesting. For 825,000 share options, vesting is upon an increase in the Company’s share price to C$13.26, and for 900,000 share options, vesting is upon an increase in the Company’s share price to C$19.89. These options2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant fair value of C$2.14 on original grant. These awards were accounted for at the fair value attributable to the vesting period until October 9, 2019 when these were reclassified to equity accounted and werere-valued at a weighted average fair value of C$0.83.
Range of exercise prices outstanding at December 31, 2019:
| Options outstanding | Options exercisable | |||||||||||||||||||||||
Range of exercise prices | Number outstanding | Weighted average remaining life | Weighted average exercise price C$ | Number exercisable | Weighted average remaining life | Weighted average exercise price C$ | ||||||||||||||||||
C$4.01 – C$5.00 | 22,537 | 4.89 | 4.12 | — | ||||||||||||||||||||
C$5.01 – C$6.00 | 783,889 | 1.80 | 5.76 | 783,889 | 1.80 | 5.76 | ||||||||||||||||||
C$6.01 – C$7.00 | 4,339,187 | 3.04 | 6.32 | 1,671,021 | 2.00 | 6.19 | ||||||||||||||||||
C$7.01 – C$8.00 | 1,011,039 | 3.86 | 7.84 | — | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | 6,156,652 | 2,454,910 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Range of exercise prices outstanding at December 31, 2018:
| Options outstanding | Options exercisable | |||||||||||||||||||||||
Range of exercise prices | Number outstanding | Weighted average remaining life | Weighted average exercise price C$ | Number exercisable | Weighted average remaining life | Weighted average exercise price C$ | ||||||||||||||||||
C$2.01 – C$3.00 | 31,600 | 0.4 | 2.93 | 31,600 | 0.4 | 2.93 | ||||||||||||||||||
C$3.01 – C$4.00 | 804,883 | 0.5 | 3.59 | 804,883 | 0.5 | 3.59 | ||||||||||||||||||
C$5.01 – C$6.00 | 1,162,669 | 2.9 | 5.76 | 746,028 | 2.9 | 5.76 | ||||||||||||||||||
C$6.01 – C$6.47 | 4,859,224 | 3.7 | 6.31 | 1,540,858 | 1.6 | 6.10 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | 6,858,376 | 3,123,369 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
The stock options granted had a weighted average grant date fair value of C$2.40 (2018 –1.87 and C$2.13, 2017 – C$2.11) estimated using3.27, respectively.
Based on share price performance since the Black-Scholes option-pricing model withdate of grant, none of the following assumptions for December 31, 20192022 PRSUs and 2018: a 3.5 year expected life for all periods, 1.6% risk-free interest rate (2018 – 2.2% and 2017 – 0.8%); a 4.2% expected forfeitures rate (2018- 3.8% and 2017 – 5%); and 39.2% expected volatility (2018 – 42%, 2017 – 45%66.7% of the 2021 PRSUs will vest upon completion of the three-year service period.
| % of PRSUs Vesting |
| ||||||||||||||||
|
|
|
|
| 33.3 | % |
|
| 66.7 | % |
|
| 100.0 | % |
|
| 150.0 | % |
2021 and 2022 PRSUs |
|
|
| $ | 3.00 |
|
| $ | 4.00 |
|
| $ | 5.00 |
|
| $ | 7.00 |
|
Share awards
During the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive compensation (“Share Awards”). These awards were accounted for using the fair value approach as they were accounted for as liabilities until October 9, 2019 when the Company ceased allowing cash surrenders of stock options. On October 9, 2019, the stock options had a weighted average fair value of C$1.32 estimated using the Black-Scholes option pricing model with the following assumptions: a 2.9 year expected life, 1.4% risk-free interest rate; and 39.2% expected volatility.
Performance share units
The Company has a PSU Plan for certain employees of the Company. Under the terms of the PSU Plan, PSUs granted vest at the end of a three-year term. At the end of a three-year term, employees will be awarded cash at the discretion of the Board, calculated based on certain Adjusted EBITDA, total shareholder return, or revenue growth related performance conditions.
Share Awards vested upon grant. The fair value of the Share Awards granted was C$2.40 ($1.88), which was determined using the closing price of the Company’s common shares on the grant date. In the fourth quarter of 2022, 59,488 Share Awards were issued to employees as a component of their compensation.
77
In the first quarter of 2023, 36,254 Share Awards were issued to a consultant as compensation for services rendered. During the second quarter of 2023, certain executives were issued Share Awards in lieu of cash paid variable incentive compensation. These Share Awards vested upon grant. The fair value of the Share Awards granted was C$0.49 ($0.34), which was determined using the closing price of the Company’s common shares on the grant date.
Performance share units
During the second quarter of 2023, certain executives were issued a strategic equity grant through Performance Share Units (“PSUs”). The performance period of the PSUs is from January 1, 2023, to December 31, 2026, with a cliff vesting term for December 31, 2026. 2,584,161 PSUs were granted and depending on the level of performance, the PSUs will vest 100%, 160% or 190% up to a maximum of 4,909,907 PSUs. Settlement will be made in the form of shares issued from treasury. The performance measures are a combination of Revenue and Earnings Before Interest, Taxes, Depreciation and Amortization and both targets have to be achieved. As of December 31, 2023, the fair value of these PSUs have been deemed to be nil based on the likelihood of achieving the targets compared to current results. During the third quarter of 2023, 738,553 PSUs with a $nil value were forfeited as a result of an executive departure and 1,845,608 PSUs with a $nil value are outstanding as at December 31, 2023.
Deferred share units
Granted under the DSU Plan
The fair value of the DSU liability and the corresponding 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 December 31, 2019, there were 223,052 PSUs outstanding (2018 – 85,728) with athe statement of operations and comprehensive loss for the period. The weighted average fair value of $0.2 millionthe DSUs granted in 2023 was C$0.63 ($0.47), which is included in other long term liabilities on the balance sheet (2018 – $0.1 million).
Deferred share units
During 2018, the Company initiated a DSU plan for itsnon-employee directors. Under the terms of the DSU plan, DSUs awarded will vest immediately and will be settled with cash in the amount equal towas determined using the closing price of the Company’s common shares on the date the director resigns from the Board.
The fair value of the liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between 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. There were 132,597 DSUs outstanding at December 31, 2019 (2018 – 25,861) with2023, had a fair value of $0.4$0.5 million which is included in other liabilities on the balance sheet (2018(2022 – $0.1$0.6 million).
Granted under the 2023 LTIP
DSUs granted after May 30, 2023, (the “New DSUs”) will be settled by way of the provision of cash or shares (or a combination thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common shares. The weighted average fair value of the New DSUs granted in 2023 was C$0.46 ($0.34), which was determined using the closing price of the Company’s common shares on the grant date. New DSUs outstanding at December 31, 2023, had a fair value of $0.6 million which is included in other liabilities on the balance sheet (2022 –$nil).
Options
The following summarizes options granted, forfeited and expired during the periods:
|
|
|
| Number of |
|
| Weighted average |
| ||
|
|
|
| options |
|
| exercise price C$ |
| ||
Outstanding at December 31, 2021 |
|
|
|
| 4,064,489 |
|
|
| 6.64 |
|
Forfeited or expired |
|
|
|
| (2,584,420 | ) |
|
| 6.41 |
|
Outstanding at December 31, 2022 |
|
|
|
| 1,480,069 |
|
|
| 7.03 |
|
Forfeited or expired |
|
|
|
| (1,270,660 | ) |
|
| 7.00 |
|
Outstanding at December 31, 2023 |
|
|
|
| 209,409 |
|
|
| 7.71 |
|
Exercisable at December 31, 2023 |
|
|
|
| 209,409 |
|
|
| 7.71 |
|
Range of exercise prices outstanding at December 31, 2023:
|
| 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$6.01 – C$7.00 |
|
| 16,350 |
|
|
| 0.71 |
|
| $ | 6.12 |
|
|
| 16,350 |
|
|
| 0.71 |
|
| $ | 6.12 |
|
C$7.01 – C$8.00 |
|
| 193,059 |
|
|
| 0.38 |
|
| $ | 7.84 |
|
|
| 193,059 |
|
|
| 0.38 |
|
| $ | 7.84 |
|
Total |
|
| 209,409 |
|
|
|
|
|
|
|
|
| 209,409 |
|
|
|
|
|
|
| ||||
78
Range of exercise prices outstanding at December 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$6.00 |
|
| 15,025 |
|
|
| 1.89 |
|
|
| 4.12 |
|
|
| 15,025 |
|
|
| 1.89 |
|
|
| 4.12 |
|
C$6.01 – C$7.00 |
|
| 758,142 |
|
|
| 1.07 |
|
|
| 6.33 |
|
|
| 758,142 |
|
|
| 1.07 |
|
|
| 6.33 |
|
C$7.01 – C$8.00 |
|
| 706,902 |
|
|
| 1.37 |
|
|
| 7.84 |
|
|
| 706,902 |
|
|
| 1.37 |
|
|
| 7.84 |
|
Total |
|
| 1,480,069 |
|
|
|
|
|
|
|
|
| 1,480,069 |
|
|
|
|
|
|
| ||||
Dilutive instruments
For the year-endedyear ended December 31, 2019, 0.52023, 0.2 million options (2018(2022 – 6.31.5 million, 20172021 – 5.64.1 million) and 3.6 million RSUs and PRSUs (2022 – 2.2 million, 2021 – 3.4 million), respectively,1.8 million new DSUs (2022 and 2021 – nil) and 156.8 million shares which would be issued if the principal amount of the Debentures were settled in our common shares at the year-end share price (2022 – 109.1 million and 2021 – 27.4 million) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net income (loss)loss per share.
17. NET LOSS PER SHARE
On November 21, 2023, the Company announced a Rights Offering which allowed holders of common shares, as of the close of business on December 12, 2023, transferable subscription rights to purchase up to an aggregate of 85,714,285 common shares at a subscription price of C$0.35 per common share (refer to Note 23). An adjustment is required on the calculation of net loss per share for the year ended December 31, 2023, as well as retrospectively for the years ended December 31, 2022 and December 31, 2021, to account for the bonus factor that resulted from this event.
|
|
| For the year ended December 31, |
| |||||||||
|
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net loss per share − basic and diluted |
|
|
|
|
|
|
|
|
|
| |||
Net loss after tax (thousands of U.S. dollars) |
|
| $ | (14,584 | ) |
| $ | (54,963 | ) |
| $ | (53,668 | ) |
Weighted average number of shares outstanding (thousands of shares as previously reported) |
|
|
| 101,984 |
|
|
| 87,662 |
|
|
| 85,027 |
|
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
| 116,135 |
|
|
| 99,826 |
|
|
| 96,826 |
|
|
|
|
|
|
|
|
|
|
|
| |||
Net loss per share − basic and diluted (as previously calculated, prior to Rights Offering) |
|
| $ | (0.14 | ) |
| $ | (0.63 | ) |
| $ | (0.63 | ) |
Net loss per share − basic and diluted (as on the Consolidated Statement of Comprehensive Income) |
|
| $ | (0.13 | ) |
| $ | (0.55 | ) |
| $ | (0.55 | ) |
15.18. REVENUE
In the following table, revenue is disaggregated by performance obligation and timing of revenue recognition. All revenue comes from contracts with customers. SeeRefer to Note 1719 for the disaggregation of revenue by geographic region.
| For the year ended December 31, |
| For the Year Ended December 31, |
|
| |||||||||||||||||||||
| 2019 | 2018 | 2017 |
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||
Product | 215,109 | 240,482 | 195,676 |
|
| 158,405 |
|
|
| 147,448 |
|
|
| 129,031 |
|
| |||||||||
Transportation | 23,903 | 24,552 | 19,519 |
|
| 17,674 |
|
|
| 18,030 |
|
|
| 13,231 |
|
| |||||||||
Licenses | 1,647 | 1,400 | 1,021 | ||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
License fees from Construction Partners |
|
| 840 |
|
|
| 778 |
|
|
| 738 |
|
| ||||||||||||
Total product revenue | 240,659 | 266,434 | 216,216 |
|
| 176,919 |
|
|
| 166,256 |
|
|
| 143,000 |
|
| |||||||||
Installation and other services | 7,076 | 8,247 | 10,323 |
|
| 5,012 |
|
|
| 5,905 |
|
|
| 4,593 |
|
| |||||||||
|
|
|
|
| 181,931 |
|
|
| 172,161 |
|
|
| 147,593 |
|
| ||||||||||
| 247,735 | 274,681 | 226,539 | |||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
79
DIRTT sells its products and services pursuant to fixed-price contracts which generally have a term of one year or less. The transaction price used in determining the amount of revenue to recognize from fixed-price contracts is based upon agreed contractual terms with theeach customer and is not subject to variability.
| For the year ended December 31, |
| For the Year Ended December 31, |
|
| |||||||||||||||||||||
| 2019 | 2018 | 2017 |
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||
At a point in time | 239,012 | 265,034 | 215,195 |
|
| 176,079 |
|
|
| 165,478 |
|
|
| 142,262 |
|
| |||||||||
Over time | 8,723 | 9,647 | 11,344 |
|
| 5,852 |
|
|
| 6,683 |
|
|
| 5,331 |
|
| |||||||||
|
|
|
|
| 181,931 |
|
|
| 172,161 |
|
|
| 147,593 |
|
| ||||||||||
| 247,735 | 274,681 | 226,539 | |||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
Revenue recognized at a point in time represents the majority of the Company’s sales and revenuesales. Revenue is recognized when a customer obtains legal title to the product, which is when ownership of productsthe product is transferred to, or services are delivered to, the contract counterparty.customer. Revenue recognized over time is limited to installation and ongoing maintenance contracts with customers and is recorded as performance obligations are satisfied over the term of the contract.
Contract Liabilities
| For the year ended December 31, |
| As at December 31, |
| |||||||||||||||||
| 2019 | 2018 |
| 2023 |
|
| 2022 |
|
| 2021 |
| ||||||||||
Customer deposits | 2,436 | 6,746 |
|
| 5,290 |
|
|
| 4,458 |
|
|
| 1,959 |
| ||||||
Deferred revenue | 1,131 | 955 |
|
| - |
|
|
| 408 |
|
|
| 461 |
| ||||||
|
| |||||||||||||||||||
Contract liabilities | 3,567 | 7,701 |
|
| 5,290 |
|
|
| 4,866 |
|
|
| 2,420 |
| ||||||
|
| |||||||||||||||||||
Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions. The balance of contract liabilities was lowerhigher as at December 31, 20192023, compared to the prior year period mainly due to lower 2018 fourth quarterthe timing of orders and revenues.payments. Contract liabilities as at December 31, 20182022 and 2017,2021, respectively, totaling $7.4$4.9 million and $5.9$2.4 million were recognized as revenue during 20192023 and 2018,2022, respectively.
Sales by Industry
The Company periodically reviews the growth or product and transportation revenue by industry vertical market to evaluate trends and the success of industry specific sales initiatives. The nature of products sold to the various industries is consistent and therefore the periodic review is focused on sales performance.
| For the year ended December 31, |
| For the Year Ended December 31, |
|
| |||||||||||||||||||||
| 2019 | 2018 | 2017 |
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||
Commercial | 158,256 | 163,199 | 142,494 |
|
| 116,693 |
|
|
| 115,102 |
|
|
| 84,488 |
|
| |||||||||
Healthcare | 44,197 | 60,748 | 38,455 |
|
| 33,970 |
|
|
| 19,739 |
|
|
| 30,130 |
|
| |||||||||
Government | 14,879 | 21,477 | 18,927 |
|
| 13,446 |
|
|
| 16,564 |
|
|
| 16,012 |
|
| |||||||||
Education | 21,680 | 19,610 | 15,319 |
|
| 11,970 |
|
|
| 14,073 |
|
|
| 11,632 |
|
| |||||||||
Licenses | 1,647 | 1,400 | 1,021 | ||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
License fees from Construction Partners |
|
| 840 |
|
|
| 778 |
|
|
| 738 |
|
| ||||||||||||
Total product and transportation revenue | 240,659 | 266,434 | 216,216 |
|
| 176,919 |
|
|
| 166,256 |
|
|
| 143,000 |
|
| |||||||||
Installation and other services | 7,076 | 8,247 | 10,323 |
|
| 5,012 |
|
|
| 5,905 |
|
|
| 4,593 |
|
| |||||||||
|
|
|
|
| 181,931 |
|
|
| 172,161 |
|
|
| 147,593 |
|
| ||||||||||
| 247,735 | 274,681 | 226,539 | |||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
16. OPERATING EXPENSES
The Company changed its presentation of 2018 and 2017 operating expenses to separate stock-based compensation from each function to provide financial statement readers with a better understanding of DIRTT’s operations. The following table provides a reconciliation from last year’s financial statement presentation to current year presentation:
| For the year ended December 31, 2018 | Previously stated | Adjustment | Currently stated | |||||||||
Sales and marketing | 40,731 | (104 | ) | 40,627 | ||||||||
General and administrative | 30,861 | (2,139 | ) | 28,722 | ||||||||
Operations support | 8,960 | (891 | ) | 8,069 | ||||||||
Technology and development | 4,703 | (527 | ) | 4,176 | ||||||||
Stock-based compensation | — | 3,661 | 3,661 | |||||||||
Reorganization | 7,380 | — | 7,380 | |||||||||
Impairments | 8,680 | — | 8,680 | |||||||||
|
|
|
|
|
| |||||||
| 101,315 | — | 101,315 | ||||||||||
|
|
|
|
|
| |||||||
| For the year ended December 31, 2017 | Previously stated | Adjustment | Currently stated | |||||||||
Sales and marketing | 46,355 | (163 | ) | 46,192 | ||||||||
General and administrative | 29,383 | (1,013 | ) | 28,370 | ||||||||
Operations support | 8,234 | (1,022 | ) | 7,212 | ||||||||
Technology and development | 6,875 | (540 | ) | 6,335 | ||||||||
Stock-based compensation | — | 2,738 | 2,738 | |||||||||
Reorganization | 1,143 | — | 1,143 | |||||||||
Impairments | — | — | — | |||||||||
|
|
|
|
|
| |||||||
| 91,990 | — | 91,990 | ||||||||||
|
|
|
|
|
| |||||||
17.19. SEGMENT REPORTING
The Company has one reportable and operating segment, and operates in threetwo principal geographic locations, Canada and the United StatesStates. Revenue continues to be derived almost exclusively from projects in North America and International. Currently,predominantly from the majority of revenue from international projects are included in the U.S. revenue amount as these projects are sold by U.S.-based distribution partners and are delivered to international locations.United States. The Company’s revenue from operations from external customers, based on location of operations, and information about itsnon-current assets, areis detailed below.
80
Revenue from external customers
| For the year ended December 31, |
| For the Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 |
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||
Canada | 34,085 | 41,153 | 35,035 |
|
| 19,934 |
|
|
| 25,477 |
|
|
| 17,299 |
|
| |||||||||
U.S. | 213,650 | 232,035 | 190,245 |
|
| 161,997 |
|
|
| 146,684 |
|
|
| 130,294 |
|
| |||||||||
International | — | 1,493 | 1,259 | ||||||||||||||||||||||
|
|
|
|
| 181,931 |
|
|
| 172,161 |
|
|
| 147,593 |
|
| ||||||||||
| 247,735 | 274,681 | 226,539 | |||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
Non-current assets excluding deferred tax assets
| As at December 31, |
|
| As at December 31, |
|
| ||||||||||||||
| 20191 | 20181 |
|
| 2023 |
|
| 2022 |
|
| ||||||||||
Canada | 47,892 | 36,323 |
|
| 30,033 |
|
|
| 28,251 |
|
| ||||||||
U.S. | 29,286 | 15,353 |
|
| 30,759 |
|
|
| 53,277 |
|
| ||||||||
|
|
|
| 60,792 |
|
|
| 81,528 |
|
| |||||||||
| 77,178 | 51,676 | ||||||||||||||||||
|
| ||||||||||||||||||
|
18. TRANSACTIONS AND BALANCES WITH RELATED PARTIES
During the year ended December 31, 2017, the Company reportedThe DIRTT solution segment derives revenues of $0.9 million from a former directorcustomers by providing physical products and digital tools through our ICE software to create interior spaces for our customers across commercial, healthcare, education and government industries. The accounting policies of the Company (2018 and 2019 – nil). solution segment are the same as those described in Note 2 - significant accounting policies.
The Company had no accounts receivable balance from this former directorchief operating decision maker assesses performance for the years ended December 31, 2019solution segment and 2018decides how to allocate resources based on gross profit and net loss that also is reported on the consolidated statement of operations and comprehensive loss as consolidated gross profit and net loss. The measure of segment assets is reported on the balance was fully repaid during 2018.sheet as total consolidated assets. The saleschief operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the former director during 2017 weresolution segment or into other parts of the entity, such as to repay long term debt.
Gross profit and net income (loss) are used to monitor budget versus actual results. The chief operating decision maker also uses net income in competitive analysis by benchmarking to DIRTT’s competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.
DIRTT has one reportable segment: Solutions. The solutions segment provides digital tools (access to ICE software) and physical products to create modular interior construction spaces for our customers. DIRTT derives revenue in North America and manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on price listsa single software platform that is deployed to, and implemented by, customers in forcea similar manner. DIRTT’s chief operating decision maker is the executive leadership team that includes the chief operating officer, chief financial officer, and terms that would be available to all employees. Effective September 10, 2018, this individual ceased to be a director of the Company.chief executive officer.
20. COMMITMENTS
One of the Company’s distribution partners is owned by a former director of the Company. Effective June 26, 2018, this individual ceased to be a director of the Company. Up until June 26, 2018, the Company reported revenue of $2.9 million and rebates paid of $0.1 million from and to the distribution partner. For the year ended December 31, 2017, the Company reported revenue of $5.8 million and rebates of $0.1 million from and to the distribution partner, respectively.
A director of the Company provided advisory and consulting services to the Company of $0.3 million during the year ended December 31, 2018.
19. COMMITMENTS
As at December 31, 2019,2023, the Company had outstanding purchase obligations of approximately $6.8$2.8 million related to inventory and property, plant and equipment purchases (December 31, 2018(2022 – $2.7$2.2 million). Refer to Note 58 for lease commitments.
20.21. LEGAL PROCEEDINGS
On May 9, 2019, theThe Company commenced an action in the Court of Queen’s Bench of Albertais pursuing multiple lawsuits against twoits former executives,founders, Mogens Smed and Barrie Loberg, their new company Falkbuilt Ltd. (“Falkbuilt”), and other individuals,related individual and corporate defendants for violations of fiduciary duties and non-competition and non-solicitation covenants contained in their executive employment agreements, and the misappropriation of DIRTT’s confidential and proprietary information in violation of numerous Canadian and U.S. state,and federal laws pertaining to the protection of DIRTT’s trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices.
81
As of December 31, 2023, the Company’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates was comprised of three main lawsuits: (i) an action in the Alberta Court of King’s Bench instituted on May 9, 2019, against Falkbuilt, Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty, fidelity and confidentiality, and the basismisappropriation of amongDIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019, against Falkbuilt, Smed, and other things,individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade secrets, business intelligence and customer information (the “Utah Misappropriation Case”); and (iii) an action in the U.S. District Court for the Northern District of Texas instituted on June 24, 2021, alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States and intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business intelligence, with the aim of establishing a breachcompeting business in the United States market (the “Texas Unfair Competition Case”). DIRTT intends to pursue the cases vigorously. We recently requested the Court ofnon-compete King’s Bench of Alberta to schedule the summary judgment application for our Canadian litigation. The court has proposed three potential dates in September 2025 andnon-solicit obligations. we expect to have the date finalized in the next several weeks.
Falkbuilt also filed a response and counterclaim alleging, among other things, breach of contractual obligations and defamation, and is seeking damages of approximately C$2.0 million.
Onlawsuit against the Company on November 5, 2019, Falkbuilt commenced an action against the Company in the Court of Queen’sKing’s Bench of Alberta, alleging that the CompanyDIRTT has misappropriated and misused their alleged proprietary information in furtherance of the Company’sDIRTT’s product development. Falkbuilt seeks monetary relief including, among other things, damages of approximately C$30.0 million, disgorgement of profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction of the Company’sDIRTT’s alleged use of the alleged proprietary information. The Company believes that the Claimsuit is without merit. merit and filed an application for summary judgment to dismiss Falkbuilt’s claim.
No amounts are accrued for the above legal proceedings.
22. RELATED PARTY TRANSACTIONS
On November 30, 2022, the Company closed a private placement of 8,667,449 common shares for aggregate gross consideration of $2.8 million (the “Private Placement”) with its two largest shareholders, 22 NW Fund, LP (“22NW”) and 726 BC LLC and 726 BF LLC (together “726”) and all the directors and officers, including 638,996 common shares issued at the deemed per share price equal to the Subscription Price, as reimbursement for the costs incurred by 726 in connection with the Company’s contested director elections in 2022.
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the “Debt Settlement Agreement”) with 22NW and Aron English, 22NW’s principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time.
Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being approximately $1.6 million (the “Debt”). Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by the Company’s shareholders. At the annual general and special meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares to 22NW Group, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023, market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023, which had been valued at a price of $0.53 per common share.
As at December 31, 2023, C$18.9 million and C$13.6 million of the January Debentures and December Debentures, respectively, are held by 22NW Group. Interest accrued on the debentures owned by 22NW Group for the year ended December 31, 2023, is C$0.4 million and interest expense paid was C$0.5 million (2022 – $nil and $nil respectively). Interest is earned on terms applicable to all Debenture holders.
Other related party transactions for the year ended December 31, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $0.3 million (2022 – $nil). The sale to 22NW Group was based on price lists in force and terms that are available to all employees. 2023 reorganization costs include $nil paid to related parties (2022 - $0.2 million).
23. SUBSEQUENT EVENTS
On November 21, 2023, the Company announced that the Board of Directors had approved a Rights Offering to its common shareholders for aggregate gross proceeds of C$30.0 million.
82
In connection with the Rights Offering, the Company entered into a standby purchase agreement with 22NW Fund, LP (“22NW”) and 726 dated November 20, 2023 (the “Standby Purchase Agreement”), pursuant to which each of 22NW and 726, or their permitted assigns (collectively and including WWT Opportunity #1 LLC, to which 726 transferred their entire holdings on December 1, 2023, the “Standby Purchasers”). Subject to the terms and conditions of the Standby Agreement, each Standby Purchaser agreed to exercise its Basic Subscription Privilege in full and to collectively purchase from the Company, at the Subscription Price, all common shares not subscribed for by holders of Rights under the Basic Subscription Privilege or Additional Subscription Privilege, up to a maximum of C$15.0 million each, so that the maximum number of common shares that may be issued in connection with the Rights Offering will be issued and the Company will receive aggregate gross proceeds of C$30.0 million. No standby fee will be paid to the Standby Purchasers in connection with the Rights Offering; however, DIRTT will reimburse the Standby Purchasers for their reasonable expenses in connection with the Standby Agreement up to a maximum of C$30,000.
On January 9, 2024, the Company announced the completion of the Rights Offering to its common shareholders and the issuance of 85,714,285 common shares at a price of C$0.35 ($0.26) per whole Common Share for aggregate gross proceeds of C$30.0 million ($22.4 million). Each right distributed under the Rights Offering (each, a “Right”) entitled eligible holders to subscribe for 0.81790023 common shares, exercisable for whole common shares only, meaning 1.22264301 Rights were required to purchase one Common Share (the “Basic Subscription Privilege”). In accordance with applicable law, the Rights Offering included an additional subscription privilege (the “Additional Subscription Privilege”) under which eligible holders of Rights who fully exercised the Rights issued to them under their Basic Subscription Privilege, were entitled to subscribe for additional common shares, on a pro rata basis, that were not otherwise subscribed for under the Basic Subscription Privilege.
DIRTT issued an aggregate of 67,379,471 common shares pursuant to the Basic Subscription Privilege and 18,334,814 common shares pursuant to the Additional Subscription Privilege. As a result of the common shares issued under the Basic Subscription Privilege and Additional Subscription Privilege, no common shares were available for issuance pursuant to the Standby Agreement.
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones.
On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company will offer to repurchase for cancellation: (i) up to C$6,000,000 principal amount of its issued and outstanding January Debentures (or such larger principal amount as the Company, in its sole discretion, may determine it is willing to take‑up and pay for, subject to applicable law) at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of its issued and outstanding December Debentures (or such larger principal amount as the Company, in its sole discretion, may determine it is willing to take‑up and pay for, subject to applicable law) at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tender and do not withdraw their Debentures will receive the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures are taken up by the Company. The applicable purchase price will be denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for interest, will be made in Canadian dollars. The Issuer Bid will remain open for acceptance until 5:00 p.m. (Eastern Standard Time) on March 22, 2024, unless withdrawn or extended by the Company. If the aggregate principal amount of the Debentures properly tendered and not withdrawn under the Issuer Bid exceeds C$6,000,000 for the January Debentures or C$9,000,000 for the December Debentures, the Company will purchase a pro-rated portion of the January Debentures or the December Debentures so tendered, as applicable (with adjustments to maintain C$1,000 minimum denominations of Debentures). DIRTT will return all Debentures not purchased under the Issuer Bid, including Debentures not purchased because of pro-ration. Debentures taken up and paid for by the Company will be immediately cancelled.
The Company intends to defend itself vigorously and to continue to pursue its legal remedies againstfund the former executives.
On December 11, 2019,Issuer Bid with a portion of the Company commenced an action in U.S. District Court of Utah against Falkbuilt, Falk Mountain States, LLC, and two other individuals. This action seeks to restrain the defendantsproceeds from misappropriating the Company’s confidential information, trade secrets, business intelligencepreviously completed Rights Offering to its common shareholders, which closed in January 2024 for aggregate gross proceeds of C$30.0 million.
83
Item 9. Changes in and customer information,Disagreements With Accountants on Accounting and using that information to advance Falkbuilt’s U.S. businesses to the detriment of the Company. Falkbuilt filed a responseFinancial Disclosure.
None.
Item 9A. Controls and counterclaim alleging, among other things, defamation and interference with economic relations, and is seeking damages of approximately $3.0 million. The Company believes the counterclaim is without merit. The Company intends to defend itself vigorously against these counterclaims.
UNAUDITED SUPPLEMENTARY INFORMATION
Summary of Quarterly Results
| Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | Q3 2018 | Q2 2018 | Q1 2018 | |||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
Revenue | 53,198 | 65,385 | 64,091 | 65,061 | 74,440 | 73,913 | 62,480 | 63,848 | ||||||||||||||||||||||||
Gross Profit | 13,465 | 24,934 | 24,421 | 23,604 | 27,619 | 30,085 | 23,331 | 25,974 | ||||||||||||||||||||||||
Gross Profit Margin | 25.3 | % | 38.1 | % | 38.1 | % | 36.3 | % | 37.1 | % | 40.7 | % | 37.3 | % | 40.7 | % | ||||||||||||||||
Adjusted Gross Profit Margin(3) | 33.4 | % | 41.8 | % | 42.1 | % | 39.6 | % | 40.2 | % | 43.4 | % | 40.6 | % | 43.7 | % | ||||||||||||||||
Net income (loss)(1)(2) | (7,544 | ) | 5,802 | 2,611 | (5,265 | ) | 3,143 | (1,433 | ) | 770 | 3,070 | |||||||||||||||||||||
Net income (loss) per share – basic and diluted(1)(2) | (0.09 | ) | 0.07 | 0.03 | (0.06 | ) | 0.04 | (0.02 | ) | 0.01 | 0.04 | |||||||||||||||||||||
Adjusted EBITDA as previously presented(3)(4) | (3,971 | ) | 8,072 | 5,605 | 6,986 | 12,809 | 13,062 | 6,612 | 10,391 | |||||||||||||||||||||||
Other Foreign Exchange (Gains) Losses | 562 | (198 | ) | 441 | 730 | (2,643 | ) | 501 | (629 | ) | (989 | ) | ||||||||||||||||||||
Adjusted EBITDA(3) | (3,409 | ) | 7,874 | 6,046 | 7,716 | 10,166 | 13,563 | 5,983 | 9,402 | |||||||||||||||||||||||
Adjusted EBITDA Margin(3) | (6.4 | %) | 12.0 | % | 9.4 | % | 11.9 | % | 13.7 | % | 18.3 | % | 9.6 | % | 14.7 | % | ||||||||||||||||
|
|
|
|
|
None.
|
Evaluation of 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 officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required byRule 13a-15 under the Exchange Act, our principal executive officer and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019.2023. Based upon their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act) were effective.
Management’s Annual Report on Internal Control Over Financial Reporting; Attestation Report of the Registered Public Accounting FirmReporting
This Annual Report does not include a report of management’s assessment regardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, oras such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Our management conducted an attestation reportevaluation of the effectiveness of our independent registered public accounting firm due to a transition period establishedinternal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the rulesCommittee of Sponsoring Organizations of the SEC.Treadway Commission (COSO framework) to evaluate the effectiveness of internal control over financial reporting. Management believes that the COSO framework is a suitable framework for its evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative measurements of our internal control over financial reporting, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of our internal control over financial reporting are not omitted and is relevant to an evaluation of internal control over financial reporting.
Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that the Company maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2023, based on those criteria.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) and15(d)-15(f) 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2019,2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
|
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
84
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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The information required by this Item is incorporated herein by reference to the information that will be contained in our information circular and proxy statement (“proxy statement”) related to the 20202024 Annual and Special Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form10-K.
Item 11. Executive Compensation.
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The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20202024 Annual and Special Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
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The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20202024 Annual and Special Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form10-K.
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The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20202024 Annual and Special Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form10-K.
Item 14. Principal Accounting Fees and Services.
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The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20202024 Annual and Special Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form10-K.
85
PART IV
Item 15. Exhibits, Financial Statement Schedules.
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Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet,Sheets, as at December 31, 20192023 and 20182022
Consolidated Statements of Operations and Comprehensive Income (Loss)Loss for the Years Ended December 31, 2019, 20182023, 2022 and 20172021
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2019, 20182023, 2022 and 20172021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 20182023, 2022 and 20172021
Notes to the Consolidated Financial Statements
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All schedules have been omitted as they are either not required or not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.
(b) Exhibits:
Exhibit No. | Exhibit or Financial Statement Schedule | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
10.1+# | ||
10.2+# | ||
10.3+ | ||
86
Exhibit No. | Exhibit or Financial Statement Schedule | |
10.4+ | ||
10.5+ | ||
10.6+ | ||
10.7+ | ||
10.8+ | ||
10.9+ |
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10.14+ | ||
10.15+ | ||
10.16+ | ||
10.17+ | ||
87
Exhibit No. | Exhibit or Financial Statement Schedule | |
10.18# | ||
10.19# | ||
10.20# | ||
10.21# | ||
10.22# | ||
10.23# | ||
10.24# | ||
10.25# | ||
10.26# | ||
10.27# | ||
10.28 | ||
88
Exhibit No. | Exhibit or Financial Statement Schedule | |
10.29+ | ||
10.30+ | ||
10.31+ | ||
10.32 | ||
10.33#† | ||
10.34+#† | ||
10.35+# | DIRTT Environmental Solutions Ltd. Amended and Restated Long Term Incentive Program effective May 30, 2023(incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q,File No. 001-39061, filed on August 2, 2023). | |
10.36 | ||
10.37 | ||
10.38 | ||
10.39*#† | ||
10.40* | ||
21.1* | ||
23.1* | Consent of PricewaterhouseCoopers, L.L.P., independent registered public accounting firm. |
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31.1* | ||
89
Exhibit No. | Exhibit or Financial Statement Schedule | |
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 |
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104 |
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* Filed herewith.
** Furnished herewith.
+ Compensatory plan or agreement.
# Information in this exhibit identified by brackets is confidential and has been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is not material and is the type of information that the Company customarily treats as private or confidential. An unredacted copy of this exhibit will be furnished to the Securities and Exchange Commission on a supplemental basis upon request.
† Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the Securities and Exchange Commission upon request.
Item 16. Form 10-K Summary
None.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIRTT ENVIRONMENTAL SOLUTIONS LTD. | |||||||
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Date: February 21, 2024 | By: | /s/ Benjamin Urban | |||||
Name: Benjamin Urban | |||||||
Title: Chief Executive Officer | |||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature | Title | Date | ||
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/s/
Benjamin Urban | Chief Executive Officer and Director (Principal Executive Officer) | February | ||
| 21, 2024 | ||||
/s/
Fareeha Khan | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February | ||
| 21, 2024 | ||||
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/s/
Ken Sanders | Director | February | ||
| 21, 2024 | ||||
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/s/
Douglas Edwards | Director | February | ||
| 21, 2024 | ||||
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/s/
Aron English | Director | February | ||
| 21, 2024 | ||||
/s/
Scott Robinson | Director | February | ||
/s/ Shaun Noll Shaun Noll | Director | February 21, 2024 | ||
/s/ Scott Ryan Scott Ryan | Director | February 21, 2024 | ||
9091