UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20202021
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-39061
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
(Exact name of registrant as specified in its charter)
Alberta, Canada (State or other jurisdiction of incorporation or organization) | N/A (IRS Employer Identification No.) | |
7303 30th Street S.E. Calgary, Alberta, Canada (Address of principal executive offices) | T2C 1N6 (Zip code) | |
(Registrant’s telephone number, including area code): (403) 723-5000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common Shares, without par value | DRTT | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). files. ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒No
The registrant had 84,681,36485,328,082 common shares outstanding as of July 29, 2020.30, 2021.
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 20202021
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSCautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 20202021 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular and without limitation, this Quarterly Report contains forward-looking statements pertaining to the competitiveness of the Company's solutions, the Company's business, financial condition, results of operations and growth prospects and the financial position of the Company. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.
Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a materialan adverse effect on our business, financial condition, results of operations and growth prospects include, but are not limited to, the severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 24, 2021 (the “Annual Report on Form 10-K”), as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 5, 2021, and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:
• | the impact of the COVID-19 pandemic and any strain variants or resurgences thereof on our business; |
• | our ability to implement our strategic plan; |
• | our ability to maintain and manage growth effectively; |
• | competition in the interior construction industry; |
• | competitive behaviors by our co-founders and former executives; |
• | our reliance on our network of Distribution Partners (as defined herein) for sales, marketing and installation of our solutions; |
• | our ability to introduce new designs, solutions and technology and gain client and market acceptance; |
• | defects in our designing and manufacturing software and warranty and product liability claims brought against us; |
• | material fluctuations of commodity prices, including raw materials; |
• | shortages of supplies of certain key components and materials or disruption in supplies due to global events; |
• | global economic, political and social conditions and financial markets; |
• | our exposure to currency exchange rates, tax rates and other fluctuations, including those resulting from changes in laws or administrative practice; |
• | legal and regulatory proceedings brought against us; |
• | infringement on our patents and other intellectual property; |
• | cyber-attacks and other security breaches of our information and technology systems; |
• | damage to our information technology and software systems; |
ii
competition in and changes to the interior construction industry;
• | our requirements to comply with applicable environmental, health and safety laws; |
global economic, political, health and social conditions and financial markets, including those related to pandemics such as the COVID-19 pandemic;
• | our ability to generate sufficient revenue to achieve and sustain profitability; |
the condition and changing trends of the overall construction industry;
• | our periodic fluctuations in results of operations and financial conditions; |
our reliance on our network of Distribution Partners (as defined herein) for sales, marketing and installation of our solutions;
• | volatility of our share price; |
our ability to maintain and manage growth effectively;
• | the effect of being governed by the corporate laws of Alberta, Canada, including obstacles to investors seeking to acquire control of our company; |
our ability to introduce new designs, solutions and technology and gain client and market acceptance;
• | the effect of being governed by the corporate laws of a foreign country, including the difficulty of enforcing civil liabilities against directors and officers residing in a foreign country; |
loss of our key executives;
• | turnover of our key executives and difficulties in recruiting or retaining key employees; |
labor overcapacity or shortages and disruptions in our manufacturing facilities;
• | the availability of capital or financing on acceptable terms, which may impair our ability to make investments in the business; |
product liability, product defects and warranty claims brought against us;
• | the availability of government subsidies; |
defects in our designing and manufacturing software;
• | the construction, expansion and commissioning of our facilities and buildings; and |
infringement on our patents and other intellectual property;
| • | future mergers, acquisitions, agreements, consolidations or other corporate transactions we may engage in. |
These risks are not exhaustive. Because of these risks and other risks and uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Quarterly Report. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not place undue reliancerely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary statements.
iiiii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) |
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Balance Sheets
(Unaudited – Stated in thousands of U.S. dollars)
|
| As at June 30, |
|
| As at December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 58,326 |
|
|
| 45,846 |
|
Restricted cash |
|
| 2,807 |
|
|
| - |
|
Trade and other receivables, net of expected credit losses of $0.6 million at June 30, 2021 and December 31, 2020 |
|
| 21,918 |
|
|
| 18,953 |
|
Inventory |
|
| 16,753 |
|
|
| 15,978 |
|
Prepaids and other current assets |
|
| 4,074 |
|
|
| 4,068 |
|
Total Current Assets |
|
| 103,878 |
|
|
| 84,845 |
|
Property, plant and equipment, net |
|
| 53,131 |
|
|
| 49,847 |
|
Capitalized software, net |
|
| 8,424 |
|
|
| 8,344 |
|
Operating lease right-of-use assets, net |
|
| 31,405 |
|
|
| 33,643 |
|
Goodwill |
|
| 1,489 |
|
|
| 1,449 |
|
Other assets |
|
| 5,196 |
|
|
| 5,016 |
|
Total Assets |
|
| 203,523 |
|
|
| 183,144 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
| 20,190 |
|
|
| 20,350 |
|
Other liabilities |
|
| 3,664 |
|
|
| 2,779 |
|
Customer deposits and deferred revenue |
|
| 3,148 |
|
|
| 1,819 |
|
Current portion of long-term debt and accrued interest |
|
| 3,295 |
|
|
| 898 |
|
Current portion of lease liabilities |
|
| 6,373 |
|
|
| 5,503 |
|
Total Current Liabilities |
|
| 36,670 |
|
|
| 31,349 |
|
Deferred tax liabilities, net |
|
| 464 |
|
|
| 414 |
|
Long-term debt |
|
| 41,710 |
|
|
| 5,069 |
|
Long-term lease liabilities |
|
| 27,577 |
|
|
| 29,781 |
|
Total Liabilities |
|
| 106,421 |
|
|
| 66,613 |
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common shares, unlimited authorized without par value, 85,311,575 issued and outstanding at June 30, 2021 and 84,681,364 at December 31, 2020 |
|
| 181,713 |
|
|
| 180,639 |
|
Additional paid-in capital |
|
| 10,930 |
|
|
| 10,175 |
|
Accumulated other comprehensive loss |
|
| (15,697 | ) |
|
| (17,018 | ) |
Accumulated deficit |
|
| (79,844 | ) |
|
| (57,265 | ) |
Total Shareholders’ Equity |
|
| 97,102 |
|
|
| 116,531 |
|
Total Liabilities and Shareholders’ Equity |
|
| 203,523 |
|
|
| 183,144 |
|
As at | ||||||||
June 30, 2020 | December 31, 2019 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | 44,626 | 47,174 | ||||||
Trade and other receivables, net of expected credit losses of $0.7 million at June 30, 2020 and $0.1 million December 31, 2019 | 21,281 | 24,941 | ||||||
Inventory | 17,651 | 17,566 | ||||||
Prepaids and other current assets | 3,571 | 3,340 | ||||||
|
|
|
| |||||
Total Current Assets | 87,129 | 93,021 | ||||||
|
|
|
| |||||
Property, plant and equipment, net | 42,094 | 41,365 | ||||||
Capitalized software, net | 8,073 | 8,213 | ||||||
Operating lease right-of-use assets, net | 18,111 | 20,661 | ||||||
Deferred tax assets, net | 6,073 | 5,364 | ||||||
Goodwill | 1,354 | 1,421 | ||||||
Other assets | 4,989 | 5,518 | ||||||
|
|
|
| |||||
Total Assets | 167,823 | 175,563 | ||||||
|
|
|
| |||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | 20,458 | 20,384 | ||||||
Other liabilities | 4,071 | 5,187 | ||||||
Customer deposits and deferred revenue | 5,256 | 3,567 | ||||||
Current portion of lease liabilities | 5,136 | 5,287 | ||||||
|
|
|
| |||||
Total Current Liabilities | 34,921 | 34,425 | ||||||
|
|
|
| |||||
Other long-term liabilities | 2,277 | 35 | ||||||
Long-term lease liabilities | 13,638 | 16,116 | ||||||
|
|
|
| |||||
Total Liabilities | 50,836 | 50,576 | ||||||
|
|
|
| |||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at June 30, 2020 and December 31, 2019 | 180,639 | 180,639 | ||||||
Additional paid-in capital | 9,274 | 8,343 | ||||||
Accumulated other comprehensive loss | (21,914 | ) | (18,028 | ) | ||||
Accumulated deficit | (51,012 | ) | (45,967 | ) | ||||
|
|
|
| |||||
Total Shareholders’ Equity | 116,987 | 124,987 | ||||||
|
|
|
| |||||
Total Liabilities and Shareholders’ Equity | 167,823 | 175,563 | ||||||
|
|
|
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Operations
(Unaudited –- Stated in thousands of U.S. dollars)
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Product revenue | 40,765 | 61,273 | 81,064 | 125,113 | ||||||||||||
Service revenue | 1,390 | 2,818 | 2,072 | 4,039 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | 42,155 | 64,091 | 83,136 | 129,152 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Product cost of sales | 26,751 | 37,102 | 54,041 | 77,170 | ||||||||||||
Costs of under-utilized capacity | — | — | 2,010 | — | ||||||||||||
Service cost of sales | 1,188 | 2,568 | 1,554 | 3,957 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total cost of sales | 27,939 | 39,670 | 57,605 | 81,127 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross profit | 14,216 | 24,421 | 25,531 | 48,025 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Expenses | ||||||||||||||||
Sales and marketing | 6,177 | 9,543 | 13,585 | 17,330 | ||||||||||||
General and administrative | 6,194 | 6,856 | 14,019 | 13,753 | ||||||||||||
Operations support | 2,251 | 2,870 | 4,783 | 5,352 | ||||||||||||
Technology and development | 2,082 | 2,046 | 4,247 | 4,163 | ||||||||||||
Stock-based compensation | 425 | (1,655 | ) | 886 | 4,792 | |||||||||||
Reorganization | — | — | — | 2,639 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 17,129 | 19,660 | 37,520 | 48,029 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | (2,913 | ) | 4,761 | (11,989 | ) | (4 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Government subsidies | (4,284 | ) | — | (4,284 | ) | — | ||||||||||
Foreign exchange (gain) loss | 960 | 441 | (1,359 | ) | 960 | |||||||||||
Interest income | (57 | ) | (38 | ) | (195 | ) | (92 | ) | ||||||||
Interest expense | 61 | 25 | 96 | 74 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
(3,320 | ) | 428 | (5,742 | ) | 942 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before tax | 407 | 4,333 | (6,247 | ) | (946 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Income taxes | ||||||||||||||||
Current tax expense (recovery) | 366 | 936 | (215 | ) | 1,088 | |||||||||||
Deferred tax expense (recovery) | (242 | ) | 786 | (987 | ) | 620 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
124 | 1,722 | (1,202 | ) | 1,708 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | 283 | 2,611 | (5,045 | ) | (2,654 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) per share | ||||||||||||||||
Basic and diluted income (loss) per share | 0.00 | 0.03 | (0.06 | ) | (0.03 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average number of shares outstanding (in thousands) | ||||||||||||||||
Basic | 84,681 | 84,661 | 84,681 | 84,661 | ||||||||||||
Diluted | 85,094 | 85,573 | 84,681 | 84,661 | ||||||||||||
|
|
|
|
|
|
|
|
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Interim Condensed Consolidated Statement of Comprehensive Income (Loss) | ||||||||||||||||
Income (loss) for the period | 283 | 2,611 | (5,045 | ) | (2,654 | ) | ||||||||||
Exchange differences on translation of foreign operations | 2,882 | 1,276 | (3,886 | ) | 3,372 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Comprehensive income (loss) for the period | 3,165 | 3,887 | (8,931 | ) | 718 | |||||||||||
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Product revenue |
|
| 40,087 |
|
|
| 40,765 |
|
|
| 68,629 |
|
|
| 81,064 |
|
Service revenue |
|
| 1,015 |
|
|
| 1,390 |
|
|
| 1,938 |
|
|
| 2,072 |
|
Total revenue |
|
| 41,102 |
|
|
| 42,155 |
|
|
| 70,567 |
|
|
| 83,136 |
|
Product cost of sales |
|
| 31,091 |
|
|
| 26,751 |
|
|
| 54,642 |
|
|
| 54,041 |
|
Costs of under-utilized capacity |
|
| - |
|
|
| - |
|
|
| 1,756 |
|
|
| 2,010 |
|
Service cost of sales |
|
| 787 |
|
|
| 1,188 |
|
|
| 1,575 |
|
|
| 1,554 |
|
Total cost of sales |
|
| 31,878 |
|
|
| 27,939 |
|
|
| 57,973 |
|
|
| 57,605 |
|
Gross profit |
|
| 9,224 |
|
|
| 14,216 |
|
|
| 12,594 |
|
|
| 25,531 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 7,564 |
|
|
| 6,177 |
|
|
| 14,234 |
|
|
| 13,585 |
|
General and administrative |
|
| 7,780 |
|
|
| 6,194 |
|
|
| 15,021 |
|
|
| 14,019 |
|
Operations support |
|
| 2,213 |
|
|
| 2,251 |
|
|
| 4,510 |
|
|
| 4,783 |
|
Technology and development |
|
| 1,924 |
|
|
| 2,082 |
|
|
| 3,859 |
|
|
| 4,247 |
|
Stock-based compensation |
|
| 1,861 |
|
|
| 425 |
|
|
| 2,955 |
|
|
| 886 |
|
Total operating expenses |
|
| 21,342 |
|
|
| 17,129 |
|
|
| 40,579 |
|
|
| 37,520 |
|
Operating loss |
|
| (12,118 | ) |
|
| (2,913 | ) |
|
| (27,985 | ) |
|
| (11,989 | ) |
Government subsidies |
|
| 3,431 |
|
|
| 4,284 |
|
|
| 7,499 |
|
|
| 4,284 |
|
Foreign exchange gain (loss) |
|
| (60 | ) |
|
| (960 | ) |
|
| (240 | ) |
|
| 1,359 |
|
Interest income |
|
| 23 |
|
|
| 57 |
|
|
| 42 |
|
|
| 195 |
|
Interest expense |
|
| (794 | ) |
|
| (61 | ) |
|
| (1,294 | ) |
|
| (96 | ) |
|
|
| 2,600 |
|
|
| 3,320 |
|
|
| 6,007 |
|
|
| 5,742 |
|
Income (loss) before tax |
|
| (9,518 | ) |
|
| 407 |
|
|
| (21,978 | ) |
|
| (6,247 | ) |
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (recovery) |
|
| 210 |
|
|
| 366 |
|
|
| 210 |
|
|
| (215 | ) |
Deferred tax expense (recovery) |
|
| 10 |
|
|
| (242 | ) |
|
| 49 |
|
|
| (987 | ) |
|
|
| 220 |
|
|
| 124 |
|
|
| 259 |
|
|
| (1,202 | ) |
Net income (loss) |
|
| (9,738 | ) |
|
| 283 |
|
|
| (22,237 | ) |
|
| (5,045 | ) |
Income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
| (0.11 | ) |
| 0.00 |
|
|
| (0.26 | ) |
|
| (0.06 | ) | |
Weighted average number of shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
| 84,752 |
|
|
| 84,681 |
|
|
| 84,717 |
|
|
| 84,681 |
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Interim Condensed Consolidated Statement of Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) for the period |
|
| (9,738 | ) |
|
| 283 |
|
|
| (22,237 | ) |
|
| (5,045 | ) |
Exchange differences on translation of foreign operations |
|
| 716 |
|
|
| 2,882 |
|
|
| 1,321 |
|
|
| (3,886 | ) |
Comprehensive income (loss) for the period |
|
| (9,022 | ) |
|
| 3,165 |
|
|
| (20,916 | ) |
|
| (8,931 | ) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited – Stated in thousands of U.S. dollars, except for share data)
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Number of | Additional | Accumulated other | Total | Number of |
|
|
|
|
|
| Additional |
|
| other |
|
|
|
|
|
| Total |
| |||||||||||||||||||||||||
Common | Common | paid-in | comprehensive | Accumulated | shareholders’ | Common |
|
| Common |
|
| paid-in |
|
| comprehensive |
|
| Accumulated |
|
| shareholders’ |
| |||||||||||||||||||||||||
shares | shares | capital | income (loss) | deficit | equity | shares |
|
| shares |
|
| capital |
|
| income (loss) |
|
| deficit |
|
| equity |
| |||||||||||||||||||||||||
As at December 31, 2018 | 84,660,319 | 180,562 | 6,615 | (22,092 | ) | (41,571 | ) | 123,514 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Issued on exercise of options | 1,053 | 4 | (1 | ) | — | — | 3 | ||||||||||||||||||||||||||||||||||||||||
As at December 31, 2019 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 8,343 |
|
|
| (18,028 | ) |
|
| (45,967 | ) |
|
| 124,987 |
| ||||||||||||||||||||||||
Stock-based compensation | — | — | (429 | ) | — | — | (429 | ) |
| - |
|
|
| - |
|
|
| 663 |
|
|
| - |
|
|
| - |
|
|
| 663 |
| ||||||||||||||||
Foreign currency translation adjustment | — | — | — | 2,096 | — | 2,096 |
| - |
|
|
| - |
|
|
| - |
|
|
| (6,768 | ) |
|
| - |
|
|
| (6,768 | ) | ||||||||||||||||||
Net loss for the period | — | — | — | — | (5,265 | ) | (5,265 | ) |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,328 | ) |
|
| (5,328 | ) | ||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at March 31, 2019 | 84,661,372 | 180,566 | 6,185 | (19,996 | ) | (46,836 | ) | 119,919 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Issued on exercise of options | 3,825 | 13 | — | — | — | 13 | |||||||||||||||||||||||||||||||||||||||||
As at March 31, 2020 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 9,006 |
|
|
| (24,796 | ) |
|
| (51,295 | ) |
|
| 113,554 |
| ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — |
| - |
|
|
| - |
|
|
| 268 |
|
|
| - |
|
|
| - |
|
|
| 268 |
| ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 1,276 | — | 1,276 |
| - |
|
|
| - |
|
|
| - |
|
|
| 2,882 |
|
|
| - |
|
|
| 2,882 |
| ||||||||||||||||||
Net income for the period | — | — | — | — | 2,611 | 2,611 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 283 |
|
|
| 283 |
| ||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at June 30, 2019 | 84,665,197 | 180,579 | 6,185 | (18,720 | ) | (44,225 | ) | 123,819 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at December 31, 2019 | 84,681,364 | 180,639 | 8,343 | (18,028 | ) | (45,967 | ) | 124,987 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at June 30, 2020 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 9,274 |
|
|
| (21,914 | ) |
|
| (51,012 | ) |
|
| 116,987 |
| ||||||||||||||||||||||||
As at December 31, 2020 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 10,175 |
|
|
| (17,018 | ) |
|
| (57,265 | ) |
|
| 116,531 |
| ||||||||||||||||||||||||
Stock-based compensation | — | — | 663 | — | — | 663 |
| - |
|
|
| - |
|
|
| 796 |
|
|
| - |
|
|
| - |
|
|
| 796 |
| ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (6,768 | ) | — | (6,768 | ) |
| - |
|
|
| - |
|
|
| - |
|
|
| 605 |
|
|
| - |
|
|
| 605 |
| ||||||||||||||||
Net loss for the period | — | — | — | — | (5,328 | ) | (5,328 | ) |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (12,499 | ) |
|
| (12,499 | ) | ||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at March 31, 2020 | 84,681,364 | 180,639 | 9,006 | (24,796 | ) | (51,295 | ) | 113,554 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at March 31, 2021 |
| 84,681,364 |
|
|
| 180,639 |
|
|
| 10,971 |
|
|
| (16,413 | ) |
|
| (69,764 | ) |
|
| 105,433 |
| ||||||||||||||||||||||||
Stock-based compensation | — | — | 268 | — | — | 268 |
| - |
|
|
| - |
|
|
| 1,285 |
|
|
| - |
|
|
| - |
|
|
| 1,285 |
| ||||||||||||||||||
Issued on vesting of RSUs |
| 630,211 |
|
|
| 1,074 |
|
|
| (1,074 | ) |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||
RSUs withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (252 | ) |
|
| - |
|
|
| (342 | ) |
|
| (594 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 2,882 | — | 2,882 |
| - |
|
|
| - |
|
|
| - |
|
|
| 716 |
|
|
| - |
|
|
| 716 |
| ||||||||||||||||||
Net income for the period | — | — | — | — | 283 | 283 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
As at June 30, 2020 | 84,681,364 | 180,639 | 9,274 | (21,914 | ) | (51,012 | ) | 116,987 | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (9,738 | ) |
|
| (9,738 | ) | ||||||||||||||||||||||||
As at June 30, 2021 |
| 85,311,575 |
|
|
| 181,713 |
|
|
| 10,930 |
|
|
| (15,697 | ) |
|
| (79,844 | ) |
|
| 97,102 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Cash Flows
(Unaudited – Stated in thousands of U.S. dollars)
For the three months ended June 30, | For the six months ended June 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net income (loss) for the period | 283 | 2,611 | (5,045 | ) | (2,654 | ) |
|
| (9,738 | ) |
|
| 283 |
|
|
| (22,237 | ) |
|
| (5,045 | ) | ||||||||||
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Depreciation and amortization | 2,761 | 2,940 | 5,893 | 6,335 |
|
| 3,421 |
|
|
| 2,761 |
|
|
| 6,823 |
|
|
| 5,893 |
| ||||||||||||
Stock-based compensation, net of settlements | 425 | (4,252 | ) | 886 | 1,429 |
|
| 1,649 |
|
|
| 425 |
|
|
| 2,743 |
|
|
| 886 |
| |||||||||||
Foreign exchange (gain) loss | 958 | 284 | (1,256 | ) | 282 |
|
| 68 |
|
|
| 958 |
|
|
| 240 |
|
|
| (1,256 | ) | |||||||||||
(Gain) loss on disposal of property, plant and equipment | (46 | ) | (9 | ) | (46 | ) | 53 | |||||||||||||||||||||||||
Accretion of convertible debentures |
|
| 94 |
|
|
| - |
|
|
| 147 |
|
|
| - |
| ||||||||||||||||
Gain on disposal of property, plant and equipment |
|
| - |
|
|
| (46 | ) |
|
| - |
|
|
| (46 | ) | ||||||||||||||||
Deferred income tax expense (recovery) | (242 | ) | 786 | (987 | ) | 620 |
|
| 10 |
|
|
| (242 | ) |
|
| 49 |
|
|
| (987 | ) | ||||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Trade and other receivables | 2,010 | 8,345 | 3,446 | 15,263 |
|
| (2,588 | ) |
|
| 2,010 |
|
|
| (2,831 | ) |
|
| 3,446 |
| ||||||||||||
Inventory | (671 | ) | 1 | (636 | ) | 440 |
|
| (697 | ) |
|
| (671 | ) |
|
| (500 | ) |
|
| (636 | ) | ||||||||||
Prepaid and other current assets | 565 | 343 | (332 | ) | 42 |
|
| 770 |
|
|
| 609 |
|
|
| (178 | ) |
|
| (115 | ) | |||||||||||
Other assets | 44 | (108 | ) | 217 | 4 | |||||||||||||||||||||||||||
Trade accounts payable and other liabilities | (4,300 | ) | (4,783 | ) | (2,170 | ) | (6,409 | ) | ||||||||||||||||||||||||
Trade accounts payable and accrued liabilities |
|
| 4,759 |
|
|
| (3,368 | ) |
|
| (1,257 | ) |
|
| 741 |
| ||||||||||||||||
Other liabilities |
|
| 1,260 |
|
|
| (932 | ) |
|
| 1,767 |
|
|
| (2,911 | ) | ||||||||||||||||
Current portion of long-term debt and accrued interest |
|
| 604 |
|
|
| - |
|
|
| 1,006 |
|
|
| - |
| ||||||||||||||||
Lease liabilities | (34 | ) | (102 | ) | (61 | ) | (248 | ) |
|
| 764 |
|
|
| (34 | ) |
|
| 903 |
|
|
| (61 | ) | ||||||||
Customer deposits and deferred revenue | 624 | 1,424 | 1,708 | (276 | ) |
|
| (290 | ) |
|
| 624 |
|
|
| 1,317 |
|
|
| 1,708 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net cash flows provided by operating activities | 2,377 | 7,480 | 1,617 | 14,881 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net cash flows provided by (used in) operating activities |
|
| 86 |
|
|
| 2,377 |
|
|
| (12,008 | ) |
|
| 1,617 |
| ||||||||||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Purchase of property, plant and equipment | (4,508 | ) | (1,775 | ) | (6,186 | ) | (3,159 | ) | ||||||||||||||||||||||||
Purchase of property, plant and equipment, net of accounts payable changes |
|
| (5,799 | ) |
|
| (3,203 | ) |
|
| (8,707 | ) |
|
| (4,763 | ) | ||||||||||||||||
Capitalized software development expenditures and other asset expenditures | (945 | ) | (1,092 | ) | (1,915 | ) | (1,595 | ) |
|
| (631 | ) |
|
| (945 | ) |
|
| (1,336 | ) |
|
| (1,915 | ) | ||||||||
Recovery of software development expenditures | 140 | 30 | 215 | 105 |
|
| - |
|
|
| 140 |
|
|
| 24 |
|
|
| 215 |
| ||||||||||||
Proceeds on sale of property, plant and equipment | 46 | 11 | 46 | 55 |
|
| - |
|
|
| 46 |
|
|
| - |
|
|
| 46 |
| ||||||||||||
Changes in accounts payable related to investing activities | 1,305 | (140 | ) | 1,423 | (476 | ) | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net cash flows used in investing activities | (3,962 | ) | (2,966 | ) | (6,417 | ) | (5,070 | ) |
|
| (6,430 | ) |
|
| (3,962 | ) |
|
| (10,019 | ) |
|
| (6,417 | ) | ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash received on exercise of options | — | 11 | — | 16 | ||||||||||||||||||||||||||||
Proceeds received on leasing facilities | 2,591 | — | 2,591 | — | ||||||||||||||||||||||||||||
Repayment on leasing facilities | (64 | ) | — | (64 | ) | — | ||||||||||||||||||||||||||
Proceeds received on long-term debt |
|
| 8,407 |
|
|
| 2,591 |
|
|
| 37,952 |
|
|
| 2,591 |
| ||||||||||||||||
Repayment of long-term debt | — | — | — | (5,561 | ) |
|
| (552 | ) |
|
| (64 | ) |
|
| (760 | ) |
|
| (64 | ) | |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net cash flows provided by (used in) financing activities | 2,527 | 11 | 2,527 | (5,545 | ) | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Effect of foreign exchange on cash and cash equivalents | 224 | 152 | (275 | ) | 1,058 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,166 | 4,677 | (2,548 | ) | 5,324 | |||||||||||||||||||||||||||
Cash and cash equivalents, beginning of period | 43,460 | 54,059 | 47,174 | 53,412 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Cash and cash equivalents, end of period | 44,626 | 58,736 | 44,626 | 58,736 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Employee tax payments on vesting of RSUs |
|
| (589 | ) |
|
| - |
|
|
| (589 | ) |
|
| - |
| ||||||||||||||||
Net cash flows provided by financing activities |
|
| 7,266 |
|
|
| 2,527 |
|
|
| 36,603 |
|
|
| 2,527 |
| ||||||||||||||||
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
| 408 |
|
|
| 224 |
|
|
| 711 |
|
|
| (275 | ) | ||||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| 1,330 |
|
|
| 1,166 |
|
|
| 15,287 |
|
|
| (2,548 | ) | ||||||||||||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 59,803 |
|
|
| 43,460 |
|
|
| 45,846 |
|
|
| 47,174 |
| ||||||||||||||||
Cash, cash equivalents and restricted cash, end of period |
|
| 61,133 |
|
|
| 44,626 |
|
|
| 61,133 |
|
|
| 44,626 |
| ||||||||||||||||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Interest paid | (61 | ) | (25 | ) | (96 | ) | (74 | ) |
|
| (67 | ) |
|
| (61 | ) |
|
| (129 | ) |
|
| (96 | ) | ||||||||
Income taxes paid | (58 | ) | (402 | ) | (58 | ) | (450 | ) |
|
| (48) |
|
|
| (58 | ) |
|
| (48) |
|
|
| (58 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the interim condensed consolidated balance sheets. | The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the interim condensed consolidated balance sheets. |
| ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
| June 30, |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
| 58,326 |
|
|
| 44,626 |
| ||||||||||||||||
Restricted cash |
|
|
|
|
|
|
|
|
|
| 2,807 |
|
|
| - |
| ||||||||||||||||
Total cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
| 61,133 |
|
|
| 44,626 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiaries (“DIRTT,”DIRTT”, the “Company,”“Company”, “we” or “our”) is a leading technology-driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing ICE® software (“ICE®”ICE” or “ICE Software”) with integrated in-house manufacturing of its innovative prefabricated interior construction solutions and an extensive network of distribution partners network (“Distribution Partners”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods. ICE is also licensed to unrelated companies and Distribution Partners of the Company. DIRTT is incorporated under the laws of the province of Alberta, Canada, its headquarters is located at 7303 – 30th30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of June 30, 2020,2021, and its results of operations and cash flows for the three and six months ended June 30, 20202021 and 2019.2020. The condensed balance sheet at December 31, 2019,2020, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, 20192020 and 20182019 and for each of the three years in the period ended December 31, 20192020 included in the Company’s Annual Report on Form 10-K. The10-K of the Company as filed with the U.S. Securities and Exchange Commission and applicable securities commissions or similar regulatory authorities in Canada. As described in Note 4, the Company adopted a new accounting standardsstandard relating to credit losses and cloud computingconvertible debentures effective January 1, 2020.2021. Further information on these standardsthis standard and the impact on the Company of these standardsthis standard is described in Note 4.
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars. DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT and its subsidiaries. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and certain components of stock-based compensation that are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.
Seasonality
Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customer’s construction projects can be influenced by a number of factors including the prevailing economic climate and weather.
3. COVID-19
On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization and has had extraordinary and rapid negative impacts on global societies, workplaces, economies and health systems. The impact of COVID-19 on DIRTT’s business in the near and mid-term remains uncertain. The resulting adverse economic conditions are expected tohave negatively impactimpacted construction activity in the near term at the very least,and consequently DIRTT’s business, with potential significant negative impacts extending tothrough the first half of 2021 and potentially beyond.
While many construction sites remain open and re-opening strategies have been implemented across North America, certain projects currently underway are experiencinghave experienced delays, impacted by both the implementation of social distancing and other safety relatedsafety-related measures and the re-emergence of COVID-19 in certain geographic areas. TheIt is not possible to predict the timing and pace of economic recovery, or the resumption of delayed construction activity and related demand, nor is notit possible to predict northe impact of such developments on the Company’s ability to achieve its impact on achievement of DIRTT’s business objectives.
Key sources of estimation uncertainty can be found in the Company’s annual consolidated financial statements for the year ended December 31, 2019. COVID-19 has increased the complexity of estimates and assumptions used to prepare the interim condensedCompany’s consolidated financial statements particularly related toand the following key sources of estimation uncertainty:
Credit risk
COVID-19 may cause DIRTT’s Distribution Partners and customers to experience liquidity issues and this may result in higher expected credit losses or slower collections. Management estimated the impact of expected credit losses and increased the provision by $0.6 million in the first quarter of 2020 (see Note 5). Management will continuehas continued to reassess the impact of COVID-19 on our Distribution Partners in subsequent periods and thePartners. The estimation of such credit losses is complex because of limited historical precedent for the current economic situation. In addition, wethe Company acquired trade credit insurance effective April 1, 2020.
Liquidity risk
The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections. Information about ourcollections as a result of COVID-19. To address this risk and the uncertainty around the timing of a recovery from COVID-19, the Company issued convertible unsecured subordinated debentures in January 2021, for net proceeds of $29.5 million, and has credit facilities is presentedavailable as described in Note 6.
Government subsidies
As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). As originally implemented, theThe CEWS provides the Company with a taxable subsidy in respect of up to 75%a specific portion of wages paid to Canadian employees during thequalifying periods extending from March 15, 2020 to June 6, 2020 (subsequently extended to August 29, 2020), provided thatSeptember 25, 2021 based on the percentage decline of the Company in certain of its Canadian-sourced revenues decline by over 15 – 30%, computed generally onduring each qualifying period. Pursuant to changes enacted as part of the basis2021 Canadian federal budget, the Company may be required to repay all or a portion of monthly revenues year-over-yearthe CEWS amounts received for any qualifying period commencing after June 5, 2021 where the aggregate compensation for specified executives during the available periods.
2021 calendar year exceeds the aggregate compensation for specified executives during the 2019 calendar year. The Company reviews itsCompany’s eligibility for the CEWS may change for each qualifying period and is reviewed by the Company for each qualifying period.
On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). The CERS provides a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, for qualifying periods extending from September 27, 2020 to September 25, 2021, with the amount of the subsidy based on the percentage decline of the Company in certain of its Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS may change for each qualifying period and is reviewed by the Company accounts for such 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. An optional accounting policy would be to net consideration received with the related expenses on the statement of operations.each qualifying period.
Impairment
At June 30, 2020, our market capitalization was less than the book value of our equity which is a potential indicator of impairment. For the first quarter of 2020, management compared forecasted undiscounted cash flows to the book values of non-current assets and determined an impairment provision was not required. At June 30, 20202021, management determined an impairment provision of non-current assets was not required as our outlook had improved sinceis consistent with the assumptions used in our initial assessment andimpairment test undertaken at December 31, 2020. In future periods, if our share price has increased. The impact of COVID-19 on DIRTT’s Distribution Partners or the Company’s operationsresults are less than our forecast, this conclusion may change cash flows and impact the recoverability of our assets in the future. Furthermore, COVID-19 and its related economic and social impacts are rapidly evolving and may affect our abilityneed to accurately use historical sales trends and cash flows to forecast future results leading to additional estimation uncertainty with respect to impairment testing.
Deferred tax assets (“DTA”)
The Company’s ability to generate future taxable income may be impacted by COVID-19 which creates additional uncertainty regarding the recoverability of DTAs. To the extent additional taxable losses are generated, this may present significant unfavorable evidence of recoverability of DTAs and require the Company to recognize valuation allowances against DTA.revisited.
4. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
On January 1,August 5, 2020, the Company adoptedFinancial Accounting Standards Board issued Accounting Standards Update No. 2020-06, “Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)” (the “ASU”). The ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments”eliminates the beneficial conversion and the subsequent amendments to the initial guidance issued in April 2019 within ASU No. 2019-04, May 2019 within ASU No. 2019-05 and February 2020 within ASU No. 2020-02 (“ASU 326”). These ASUs replace the incurred loss methodology with an expected loss methodology that is referred to as the Current Expected Credit Loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.cash conversion accounting models for convertible instruments. It also applies to off-balance sheet credit exposures notamends the accounting for certain contracts in an entity’s own equity that are currently accounted for as insurance and net investments in leases recognized by a lessor in accordance with Topic 842 on Leases.derivatives because of specific settlement provisions. In addition, ASC 326 made changes to the accountingnew guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The amendments in the ASU are effective for available-for-sale debt securities.fiscal years beginning after March 15, 2021 and early adoption is permitted, but no earlier than fiscal years beginning after March 15, 2020, including interim periods within those fiscal years.
The Company early adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning afterthis standard on January 1, 2021. The Company had 0 convertible debt instruments outstanding at December 31, 2020 and the convertible unsecured subordinated debentures issued in January 2021 have been evaluated under this new guidance and there were no other transitional impacts to consider.
Although there are presented under ASC 326 while prior period amounts continue to be reported in accordance with previouslyseveral other new accounting standards issued or proposed by the Financial Accounting Standards Board, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting principles generally accepted in the United States of America (“GAAP”). The adoption of this standard did notpronouncements has had or will have a significantmaterial impact on the Company, and no adjustment was required to retained earnings as of January 1, 2020 for the cumulative effect of adopting ASC 326.
On January 1, 2020, the Company adopted ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” which amends ASC 350-40, “Intangibles – Goodwill and Other – Internal-Use Software” (“ASU 2018-15”). ASU 2018-15 clarifies that if a company has the contractual right to take possession of the hosted software at any time during the hosting period without incurring a significant penalty and if a company can feasibly run the software on its own hardware or contract with a third party unrelated to the vendor to host the software, the arrangement is not impacted by ASU 2018-15. If both these conditions are not met, ASU 2018-15 deems the hosting arrangement to be a service contract. The capitalization criteria for implementation costs of a service contract are consistent with the requirements of ASC 350-40 and impairment will be assessed consistent with policies applied to long lived assets. However, these capitalized implementation costs will be amortized over the life of the hosting arrangement and will be classified in the balance sheet and statement of operations in the same lines where software license costs are accounted for.
The Company adopted this amendment using the prospective transition approach, and no adjustments were required as a result of adoption.financial statements.
5. TRADE AND OTHER RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date taking into account historical credit loss experience as well as forward-looking information in order to establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the statement of operations.
In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At June 30, 2020,2021, approximately 80%88% 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. 2020 when the trade credit insurance became effective.
Our trade balances are spread over a broad Distribution Partner base, which is geographically dispersed. NoFor the three and six months ended June 30, 2021, 1 Distribution Partner accountsaccounted for $8.2 million and $11.8 million of revenue, which is greater than 10% of total revenue. No Distribution Partners accounted for more than 10% of total revenue for the three and six months ended June 30, 2020. In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.
The Company’s aged receivables were as follows:follows:
| As at |
| ||||||||||||||
As at |
| June 30, |
|
| December 31, |
| ||||||||||
June 30, 2020 | December 31, 2019 |
| 2021 |
|
| 2020 |
| |||||||||
Current | 16,249 | 20,087 |
|
| 14,706 |
|
|
| 12,500 |
| ||||||
Overdue | 777 | 2,401 |
|
| 1,307 |
|
|
| 1,211 |
| ||||||
|
|
|
| 16,013 |
|
|
| 13,711 |
| |||||||
17,026 | 22,488 | |||||||||||||||
Less: expected credit losses | (742 | ) | (84 | ) |
|
| (588 | ) |
|
| (588 | ) | ||||
|
|
|
| 15,425 |
|
|
| 13,123 |
| |||||||
16,284 | 22,404 | |||||||||||||||
Other receivables | 64 | 402 | ||||||||||||||
Sales tax receivable |
|
| 314 |
|
|
| 242 |
| ||||||||
Government subsidies receivable | 2,771 | — |
|
| 2,496 |
|
|
| 1,743 |
| ||||||
Income tax receivable | 2,162 | 2,135 |
|
| 3,683 |
|
|
| 3,845 |
| ||||||
|
|
|
| 21,918 |
|
|
| 18,953 |
| |||||||
21,281 | 24,941 | |||||||||||||||
|
|
Due to the uncertainties associated with the COVID 19COVID-19 pandemic as well as the disruption to businesses in North America, the overall credit quality of certain receivables declined at March 31,June 30, 2020 compared to January 1, 2020. As a result of this consideration and the Company’s ongoing review of the credit quality of receivables, expected credit losses were increased by $0.6 million during the quartersix month period ended March 31,June 30, 2020. No further adjustments to our expected credit losses were required at June 30, 2020.2021. During the first six months of 2021 and 2020, 0 receivables were written off. 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.
6. LONG-TERM DEBT AND OTHER LIABILITIES
|
| Revolving Credit Facility |
|
| Leasing Facilities |
|
| Convertible Debentures |
|
| Total Debt |
| ||||
Balance on December 31, 2019 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Issuances |
|
| - |
|
|
| 6,165 |
|
|
| - |
|
|
| 6,165 |
|
Repayments |
|
| - |
|
|
| (420 | ) |
|
| - |
|
|
| (420 | ) |
Exchange differences |
|
| - |
|
|
| 222 |
|
|
| - |
|
|
| 222 |
|
Balance at December 31, 2020 |
|
| - |
|
|
| 5,967 |
|
|
| - |
|
|
| 5,967 |
|
Current liabilities |
|
| - |
|
|
| 898 |
|
|
| - |
|
|
| 898 |
|
Long-term liabilities |
|
| - |
|
|
| 5,069 |
|
|
| - |
|
|
| 5,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on December 31, 2020 |
|
| - |
|
|
| 5,967 |
|
|
| - |
|
|
| 5,967 |
|
Issuances |
|
| - |
|
|
| 8,407 |
|
|
| 29,545 |
|
|
| 37,952 |
|
Accretion |
|
| - |
|
|
| - |
|
|
| 147 |
|
|
| 147 |
|
Accrued interest |
|
| - |
|
|
| - |
|
|
| 812 |
|
|
| 812 |
|
Repayments |
|
| - |
|
|
| (760 | ) |
|
| - |
|
|
| (760 | ) |
Exchange differences |
|
| - |
|
|
| 100 |
|
|
| 787 |
|
|
| 887 |
|
Balance at June 30, 2021 |
|
| - |
|
|
| 13,714 |
|
|
| 31,291 |
|
|
| 45,005 |
|
Current liabilities |
|
| - |
|
|
| 2,483 |
|
|
| 812 |
|
|
| 3,295 |
|
Long-term liabilities |
|
| - |
|
|
| 11,231 |
|
|
| 30,479 |
|
|
| 41,710 |
|
Revolving Credit Facility
On July 19, 2019,February 12, 2021, the Company entered into a loan agreement governing a C$50.025.0 million senior secured revolving credit facility (the “RBC Facility”) with the Royal Bank of Canada ( “RBC”(“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 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 (the “Borrowing Base”). At June 30, 2021, available borrowings are C$10.3 million ($8.3 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate with no adjustment,plus 30 basis points or at the bankers’ acceptance rateCanadian Dollar Offered Rate or LIBOR plus 125155 basis points. TheUnder the RBC Facility, if the Aggregate Excess Availability, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash, is less than C$5.0 million, the Company is subject to a minimum fixed charge coverage ratio (“FCCR”) covenant of 1.15:1.10:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:1 (earnings before interest, tax, depreciation and amortization, non-cash stock-based compensation, plus or minus extraordinary or unusual non-recurring revenue or expenses) calculated on a trailing four quarter basis (the “Covenants”).
Duringtwelve month basis. Additionally, if the second quarter of 2020, the Company entered into a letter agreement with RBC (the “Letter Agreement”). Under the Letter Agreement, the Covenants are waivedFCCR has been below 1.10:1 for the period April 1 to September 30, 2020 (the “Covenant Holiday Period”). During the Covenant Holiday Period, the Company is able to borrow to a maximum of 75% of eligible accounts receivable and 25% of eligible inventory, less priority payables, subject to an aggregate limit of C$50.0 million including amounts borrowed under Leasing Facilities (as defined herein). During the Covenant Holiday Period3 immediately preceding months, the Company is required to maintain a cash balancereserve account equal to the aggregate of $10.0 million if noone year of payments on outstanding loans are drawn underon the facility, have Adjusted EBITDA ofLeasing Facilities (defined below). The Company did not less than a loss of $7.0 and $16.5 million formeet the twelve3 month periods ended June 30 and September 30, 2020, and make capital expenditures of no more than $10.7 millionFCCR requirement during the Covenant Holiday Period. Asfirst and second quarters of 2021 which resulted in requiring the restriction of $2.8 million of cash at June 30, 2020,2021. Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for 5 consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC Facility was undrawn and daily balances would set-off any borrowings and any remaining amounts made available to the available borrowing base was $12.8 million. Company.
Leasing Facilities
The Company was in compliance with the covenants of the RBC Facility as at June 30, 2020.
During the three months ended June 30, 2020, the Company entered intohas a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) and a $16.0$14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”), with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 3.5%5.77%. The U.S. leasing facilityLeasing Facility is amortized over a six-year term and extendible at the Company’s option for an additional year.
As atDuring the six months ended June 30, 2020,2021, the Company received C$3.6$8.4 million ($2.6(twelve months ended December 31, 2020: $3.5 million) of cash consideration under the leasing facility inU.S. Leasing Facilityrelated to reimbursements for equipment purchases for our South Carolina plant. During the six months ended June 30, 2021, the Company received $nil (twelve months ended December 31, 2020 – C$3.6 million or $2.6 million) of cash consideration under the Canada and commenced the lease term for the Canadian equipment expenditures.Leasing Facility. The associated financial liability isliabilities are shown on the consolidated balance sheet in other current portion of long-term debt and otheraccrued interest and long-term liabilities.debt.
Convertible Debentures
On January 25, 2021, the Company completed a C$35.0 million bought-deal financing of convertible unsecured subordinated debentures (the “Debentures”) with a syndicate of underwriters. On January 29, 2021, the Company issued a further C$5.25 million of Debentures under the terms of an overallotment option granted to the underwriters. The Leasing FacilitiesDebentures will mature and be repayable on January 31, 2026 (the “Maturity Date”), unless earlier redeemed, repurchased or converted. The Debentures 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.
The Debentures are accounted for as finance leases as ownershipconvertible into common shares of DIRTT, at the option of the equipment is expected to returnholder, at any time prior to the Company atclose of business on the endbusiness day prior to the earlier of the lease term. These transactions are not accountedMaturity Date and the date specified by the Company for asredemption of the Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately 215.0538 common shares per C$1,000 principal amount of Debentures. The conversion rate is subject to adjustment if certain corporate events occur prior to the Maturity Date.
The net proceeds from the sale of the underlying equipmentDebentures were C$37.6 million ($29.5 million), after deducting C$2.7 million of transaction costs which includes the underwriters’ commission and directly attributable professional fees. The Company accounted for the Debentures as a liability as the Debentures meet the definition of traditional convertible debt and there are no embedded derivatives requiring bifurcation. The Debentures are shown on the consolidated balance sheet in long-term debt. Interest expense was determined using the effective interest rate method with an effective interest rate of 7.5%. The contractual interest expense for the Debentures during the three and six months ended June 30, 2021was $0.3 million and $0.8 million, respectively, which is included in current portion of long-term debt and accrued interest on the balance sheet.
The Debentures are not redeemable by the Company continuesbefore January 31, 2024, except in certain limited circumstances following a change of control. On and after January 31, 2024 and prior to controlJanuary 31, 2025, provided that the equipment.current market price of our common shares at the time at which notice of redemption is given is at least 125% of the conversion price, the Debentures may be redeemed by the Company, in whole or in part from time to time, at our option on not more than 60 days’ and not less than 30 days’ prior written notice, for an amount equal to the principal amount thereof plus accrued and unpaid interest thereon. On and after January 31, 2025 and prior to the Maturity Date, the Debentures may be redeemed by the Company, in whole or in part from time to time, at our option on not more than 60 days’ and not less than 30 days’ prior written notice, for an amount equal to the principal amount thereof plus accrued and unpaid interest thereon.
7. STOCK-BASED COMPENSATION
In May 2020, our shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested share awards, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2020 LTIP, the sum of (i) 5,850,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May 22, 2020, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance under the 2020 LTIP. As at June 30, 2020, 3,188,123 commonUpon vesting of certain LTIP awards, the Company may withhold shares were available for issuance underas a means of meeting DIRTT’s tax withholding requirements in respect of the 2020 LTIP.tax payable by 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.
The Company also maintains the DIRTT Environmental Solutions Ltd. Deferred Share Unit Plan for Non-Employee Directors pursuant to which deferred share units (“DSUs”) are granted to the Company’s non-employee directors. DSUs are settled solely in cash.
Prior to the approval of the 2020 LTIP, the Company granted awards of options under the Stock Option Plan and awards of performance share units (“PSUs”) under the DIRTT Environmental Solutions Ltd. Performance Share Unit Plan (the “PSU Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.
Stock-based compensation expense
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Options | 226 | (1,811 | ) | 889 | 4,463 | |||||||||||
PSUs | 6 | 61 | (2 | ) | 79 | |||||||||||
DSUs | 151 | 95 | (43 | ) | 250 | |||||||||||
RSUs | 42 | — | 42 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
425 | (1,655 | ) | 886 | 4,792 | ||||||||||||
|
|
|
|
|
|
|
|
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Equity-settled awards |
|
| 1,285 |
|
|
| 268 |
|
|
| 2,081 |
|
|
| 931 |
|
Cash-settled awards |
|
| 576 |
|
|
| 157 |
|
|
| 874 |
|
|
| (45 | ) |
|
|
| 1,861 |
|
|
| 425 |
|
|
| 2,955 |
|
|
| 886 |
|
Options
During the three and six months ended June 30, 2019, the Company accounted for the fair value of outstanding 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 (“cash-settlement”). On October 9, 2019, following its listing on Nasdaq, the Company ceased cash-settlement of options and the associated liability accounting for options. For the three and six months ended June 30, 2019, the Company paid $2.6 million and $3.4 million respectively on the surrender of cash settled options. The following summarizes optionsPSUs, DSUs and RSUs (as defined below) granted, exercised, surrendered, forfeited and expired during the periods:
|
| RSU Time- |
|
| RSU Performance- |
|
|
|
|
|
|
|
|
| ||
|
| Based |
|
| Based |
|
| DSU |
|
| PSU |
| ||||
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
| ||||
|
| units |
|
| units |
|
| units |
|
| units |
| ||||
Outstanding at December 31, 2019 |
|
| - |
|
|
| - |
|
|
| 132,597 |
|
|
| 223,052 |
|
Granted |
|
| 2,378,971 |
|
|
| 200,000 |
|
|
| 158,133 |
|
|
| - |
|
Forfeited |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (25,581 | ) |
Outstanding at June 30, 2020 |
|
| 2,378,971 |
|
|
| 200,000 |
|
|
| 290,730 |
|
|
| 197,471 |
|
Outstanding at December 31, 2020 |
|
| 2,414,066 |
|
|
| 200,000 |
|
|
| 363,664 |
|
|
| 197,471 |
|
Granted |
|
| 1,897,281 |
|
|
| 878,601 |
|
|
| 57,898 |
|
|
| - |
|
Vested |
|
| (630,042 | ) |
|
| (169 | ) |
|
| (57,380 | ) |
|
| (9,314 | ) |
Withheld to settle employee tax obligations |
|
| (161,031 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited |
|
| (116,656 | ) |
|
| (9,635 | ) |
|
| - |
|
|
| (1,733 | ) |
Outstanding at June 30, 2021 |
|
| 3,403,618 |
|
|
| 1,068,797 |
|
|
| 364,182 |
|
|
| 186,424 |
|
Number of | Weighted average | |||||||
options | exercise price C$ | |||||||
Outstanding at December 31, 2018 | 6,858,376 | 5.88 | ||||||
Granted | 1,095,182 | 7.84 | ||||||
Surrendered for cash | (1,651,008 | ) | 5.32 | |||||
Exercised | (4,878 | ) | 3.62 | |||||
Forfeited | (52,375 | ) | 4.90 | |||||
Expired | (51,291 | ) | 4.17 | |||||
|
|
|
| |||||
Outstanding at June 30, 2019 | 6,194,006 | 6.56 | ||||||
|
|
|
| |||||
Outstanding at December 31, 2019 | 6,156,652 | 6.49 | ||||||
Forfeited | (550,259 | ) | 6.79 | |||||
|
|
|
| |||||
Outstanding at June 30, 2020 | 5,606,393 | 6.46 | ||||||
Exercisable at June 30, 2020 | 2,435,733 | 6.25 | ||||||
|
|
|
|
Range of exercise prices of options outstanding at June 30, 2020:
Options outstanding | Options exercisable | |||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||
average | average | average | average | |||||||||||||||||||||
Number | remaining | exercise | Number | remaining | exercise | |||||||||||||||||||
Range of exercise prices | outstanding | life | price C$ | exercisable | life | price C$ | ||||||||||||||||||
C$4.01 – C$5.00 | 22,537 | 4.39 | 4.12 | — | ||||||||||||||||||||
C$5.01 – C$6.00 | 677,733 | 1.39 | 5.76 | 677,733 | 1.39 | 5.76 | ||||||||||||||||||
C$6.01 – C$7.00 | 4,115,530 | 2.67 | 6.32 | 1,494,310 | 1.70 | 6.20 | ||||||||||||||||||
C$7.01 – C$8.00 | 790,593 | 3.88 | 7.84 | 263,690 | 3.88 | 7.84 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total | 5,606,393 | 2,435,733 | ||||||||||||||||||||||
|
|
|
|
PSUs
As at June 30, 2020, there were 197,471 PSUs outstanding (December 31, 2019 – 223,052) accounted for at a value of $0.02 million (December 31, 2019 – $0.2 million) which is included in other long-term liabilitiesRestricted share units that vest based on the balance sheet.
DSUs
As at June 30, 2020, there were 290,730 DSUs outstanding (December 31, 2019 – 132,597) accounted for at a value of $0.4 million, which is included in current portion of other liabilities on the balance sheet (December 31, 2019 – $0.4 million).
RSUs
On June 17, 2020, the Company granted 2,578,971 RSUs. Of the RSUs granted, 2,378,971 RSUstime have an aggregate time-based vesting period of three years and generally one-third of the RSUs vest one third every year over a three-year period from the date of grant.grant (“RSUs”). At the end of a three-year term,each vesting period, the associated RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The weighted average fair value of the RSUs granted was
C$3.11 (2020 – C$1.89) which was determined to be C$1.89, which wasusing the volume weighted averageclosing price of the Company’s common shares on thetheir respective grant date.dates.
Of the RSUs granted, 200,000 RSUs wereRestricted share units (performance-based vesting)
The Company granted to an executivecertain executives and senior employees restricted share units with service and performance-based conditions for vesting (the “Performance RSUs”“PRSUs”). If the Company’s share price increases to C$3.00certain values for 20 consecutive trading days, within three yearsas outlined below, a percentage of the grant date, then 50% (100,000) of the Performance RSUs will vest at the end of the three-year service period. If the Company’s share price increases to C$4.00 for 20 consecutive trading days within three years of the grant date, 100% (200,000) of the Performance RSUs will vest at the end of the three-year service period. If the Company’s share price increases to C$6.00 for 20 consecutive trading days within three years of the grant date, then 150% (300,000) of the Performance RSUsPRSUs will vest at the end of the three-year service period. The grant date fair value of the Performance RSUsPRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$1.70.3.27 (2020 – C$1.70). Based on share price performance since the date of grant, 33.3% of the 2021 PRSUs and 100% of the 2020 PRSUs will vest upon completion of the three-year service period.
| % of PRSUs vesting | ||||
| 33.3% | 50.0% | 66.7% | 100.0% | 150.0% |
2021 PRSUs | $3.00 | - | $4.00 | $5.00 | $7.00 |
2020 PRSUs | - | C$3.00 | - | C$4.00 | C$6.00 |
Deferred share units
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 the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the year. DSUs outstanding at June 30, 2021 had a fair value of $1.6 million which is included in other liabilities on the balance sheet (December 31, 2020 –$0.9 million).
Performance share units
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 of directors of the Company, calculated based on certain Adjusted EBITDA (see “Non-GAAP Financial Measures” in this Quarterly Report), total shareholder return, or revenue growth related to performance conditions.
The fair value of the liability and the expense attributable to the vesting period is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss. As at June 30, 2021, outstanding PSUs had a fair value of $0.1 million which is included in other liabilities on the balance sheet (December 31, 2020 – $0.1 million).
Options
The following summarizes options granted, exercised, forfeited and expired during the periods:
|
| Number of |
|
| Weighted average |
| ||
|
| options |
|
| exercise price C$ |
| ||
Outstanding at December 31, 2019 |
|
| 6,156,652 |
|
|
| 6.49 |
|
Forfeited |
|
| (550,259 | ) |
|
| 6.79 |
|
Outstanding at June 30, 2020 |
|
| 5,606,393 |
|
|
| 6.46 |
|
Outstanding at December 31, 2020 |
|
| 4,774,328 |
|
|
| 6.52 |
|
Forfeited |
|
| (21,588 | ) |
|
| 7.21 |
|
Outstanding at June 30, 2021 |
|
| 4,752,740 |
|
|
| 6.52 |
|
Exercisable at June 30, 2021 |
|
| 2,324,160 |
|
|
| 6.50 |
|
In 2018, 1,725,000 stock options were granted to an executive with performance conditions for vesting. For 825,000 stock options, vesting is upon an increase in the Company’s share price to C$13.26, and for 900,000 stock options, vesting is upon an increase in the Company’s share price to C$19.89. These options 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 accounting and were re-valued at a weighted average fair value of C$0.83.
Range of exercise prices outstanding at June 30, 2021:
|
| Options outstanding |
|
| Options exercisable |
| ||||||||||||||||||
|
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
|
| Weighted |
|
| Weighted |
| ||||
|
|
|
|
|
| average |
|
| average |
|
|
|
|
|
| average |
|
| average |
| ||||
|
| Number |
|
| remaining |
|
| exercise |
|
| Number |
|
| remaining |
|
| exercise |
| ||||||
Range of exercise prices |
| outstanding |
|
| life |
|
| price C$ |
|
| exercisable |
|
| life |
|
| price C$ |
| ||||||
C$4.01 – C$5.00 |
|
| 22,537 |
|
|
| 3.39 |
|
|
| 4.12 |
|
|
| 7,513 |
|
|
| 3.39 |
|
|
| 4.12 |
|
C$5.01 – C$6.00 |
|
| 669,153 |
|
|
| 0.39 |
|
|
| 5.76 |
|
|
| 669,153 |
|
|
| 0.39 |
|
|
| 5.76 |
|
C$6.01 – C$7.00 |
|
| 3,290,598 |
|
|
| 2.30 |
|
|
| 6.38 |
|
|
| 1,126,638 |
|
|
| 2.34 |
|
|
| 6.36 |
|
C$7.01 – C$8.00 |
|
| 770,452 |
|
|
| 2.88 |
|
|
| 7.84 |
|
|
| 520,856 |
|
|
| 2.88 |
|
|
| 7.84 |
|
Total |
|
| 4,752,740 |
|
|
|
|
|
|
|
|
|
|
| 2,324,160 |
|
|
|
|
|
|
|
|
|
Dilutive instrumentsInstruments
For the three and six months ended June 30, 2020, 5.62021, 4.8 million options (2019(2020 – 1.15.6 million), 4.6 million and 4.2 million)4.0 million RSUs and PRSUs (2020 – nil and 2.7 million), respectively and 8.7 million RSUs (2019shares which would be issued if the principal amount of the convertible debentures were settled in our common shares at the quarter end share price (2020 – nil) respectively, 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.
8. REVENUE
In the following table, revenue is disaggregated by performance obligation and timing of revenue recognition. All revenue comes from contracts with customers. See Note 9 for the disaggregation of revenue by geographic region.
|
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Product |
|
| 36,462 |
|
|
| 36,921 |
|
|
| 62,298 |
|
|
| 72,919 |
|
Transportation |
|
| 3,484 |
|
|
| 3,545 |
|
|
| 5,983 |
|
|
| 7,540 |
|
License fees from Distribution Partners |
|
| 141 |
|
|
| 299 |
|
|
| 348 |
|
|
| 605 |
|
Total product revenue |
|
| 40,087 |
|
|
| 40,765 |
|
|
| 68,629 |
|
|
| 81,064 |
|
Installation and other services |
|
| 1,015 |
|
|
| 1,390 |
|
|
| 1,938 |
|
|
| 2,072 |
|
|
|
| 41,102 |
|
|
| 42,155 |
|
|
| 70,567 |
|
|
| 83,136 |
|
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Product | 36,921 | 54,886 | 72,919 | 111,835 | ||||||||||||
Transportation | 3,545 | 5,856 | 7,540 | 12,215 | ||||||||||||
License fees from Distribution Partners | 299 | 531 | 605 | 1,063 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total product revenue | 40,765 | 61,273 | 81,064 | 125,113 | ||||||||||||
Installation and other services | 1,390 | 2,818 | 2,072 | 4,039 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
42,155 | 64,091 | 83,136 | 129,152 | |||||||||||||
|
|
|
|
|
|
|
|
DIRTTThe Company sells its products and services pursuant to fixed-price contracts, which generally have a term of one year or less. The transaction price used in determining the amount of revenue to recognize is based upon agreed contractual terms with the customer and is not subject to variability.
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
At a point in time | 40,466 | 60,742 | 80,459 | 124,050 | ||||||||||||
Over time | 1,689 | 3,349 | 2,677 | 5,102 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
42,155 | 64,091 | 83,136 | 129,152 | |||||||||||||
|
|
|
|
|
|
|
|
Revenue recognized at a point in time represents the majority of the Company’s sales and revenue is recognized when a customer obtains legal title to the product, which is when ownership of products is transferred to, or services are delivered to the contract counterparty. Revenue recognized over time is limited to installation and other services provided to customers and is recorded as performance obligations which are satisfied over the term of the contract.
Contract Liabilities
As at |
| As at |
| |||||||||||||||||||||
June 30, 2020 | December 31, 2019 | December 31, 2018 |
| June 30, 2021 |
|
| December 31, 2020 |
|
| December 31, 2019 |
| |||||||||||||
Customer deposits | 4,423 | 2,436 | 6,746 |
|
| 2,668 |
|
|
| 1,292 |
|
|
| 2,436 |
| |||||||||
Deferred revenue | 833 | 1,131 | 955 |
|
| 480 |
|
|
| 527 |
|
|
| 1,131 |
| |||||||||
|
|
| ||||||||||||||||||||||
Contract liabilities | 5,256 | 3,567 | 7,701 |
|
| 3,148 |
|
|
| 1,819 |
|
|
| 3,567 |
| |||||||||
|
|
|
Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities washigher as at June 30, 20202021 compared to December 31, 20192020 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 20192020 and 2018,2019, respectively, totaling $2.7$1.6 million and $7.2$2.7 millionwere recognized as revenue during the year-to-date periodssix months ended June 30, 2021 and 2020, and 2019, respectively.
Sales by Industry
The Company periodically reviews the growth of product and transportation revenue by vertical market to evaluate the success of industry-specific sales initiatives. The nature of products sold to the various industries is consistent and therefore review is focused on sales performance.
For the three months ended June 30, | For the six months ended June 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||||
Commercial | 25,096 | 39,189 | 53,370 | 81,338 |
|
| 19,032 |
|
|
| 25,096 |
|
|
| 35,176 |
|
|
| 53,370 |
| ||||||||||||
Healthcare | 7,417 | 10,346 | 12,480 | 23,260 |
|
| 14,176 |
|
|
| 7,417 |
|
|
| 20,663 |
|
|
| 12,480 |
| ||||||||||||
Government | 3,960 | 4,313 | 7,087 | 8,412 |
|
| 4,249 |
|
|
| 3,960 |
|
|
| 8,430 |
|
|
| 7,087 |
| ||||||||||||
Education | 3,993 | 6,894 | 7,522 | 11,040 |
|
| 2,489 |
|
|
| 3,993 |
|
|
| 4,012 |
|
|
| 7,522 |
| ||||||||||||
License fees from Distribution Partners | 299 | 531 | 605 | 1,063 |
|
| 141 |
|
|
| 299 |
|
|
| 348 |
|
|
| 605 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total product and transportation revenue | 40,765 | 61,273 | 81,064 | 125,113 |
|
| 40,087 |
|
|
| 40,765 |
|
|
| 68,629 |
|
|
| 81,064 |
| ||||||||||||
Installation and other services | 1,390 | 2,818 | 2,072 | 4,039 |
|
| 1,015 |
|
|
| 1,390 |
|
|
| 1,938 |
|
|
| 2,072 |
| ||||||||||||
|
|
|
|
|
| 41,102 |
|
|
| 42,155 |
|
|
| 70,567 |
|
|
| 83,136 |
| |||||||||||||
42,155 | 64,091 | 83,136 | 129,152 | |||||||||||||||||||||||||||||
|
|
|
|
`
9. SEGMENT REPORTING
The Company has one1 reportable and operating segment and operates in two2 principal geographic locations –- Canada and the United States. Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, with periodic international projects from North American Distribution Partners. The Company’s revenue from operations from external customers, based on location of operations, and information about its non-current assets, areis detailed below.
Revenue from external customers
For the three months ended June 30, | For the six months ended June 30, |
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||||
Canada | 4,341 | 8,771 | 10,327 | 15,839 |
|
| 4,461 |
|
|
| 4,341 |
|
|
| 7,456 |
|
|
| 10,327 |
| ||||||||||||
U.S. | 37,814 | 55,320 | 72,809 | 113,313 |
|
| 36,641 |
|
|
| 37,814 |
|
|
| 63,111 |
|
|
| 72,809 |
| ||||||||||||
|
|
|
|
|
| 41,102 |
|
|
| 42,155 |
|
|
| 70,567 |
|
|
| 83,136 |
| |||||||||||||
42,155 | 64,091 | 83,136 | 129,152 | |||||||||||||||||||||||||||||
|
|
|
|
Non-current assets excluding deferred tax assets
As at | ||||||||
June 30, 20201 | December 31, 20191 | |||||||
Canada | 43,335 | 47,892 | ||||||
U.S. | 31,286 | 29,286 | ||||||
|
|
|
| |||||
74,621 | 77,178 | |||||||
|
|
|
|
|
| As at |
| |||||
|
| June 30, 2021 |
|
| December 31, 2020 |
| ||
Canada |
|
| 40,565 |
|
|
| 42,947 |
|
U.S. |
|
| 59,080 |
|
|
| 55,352 |
|
|
|
| 99,645 |
|
|
| 98,299 |
|
(1) | Amounts include property, plant and equipment, capitalized software, operating lease right-of-use assets, goodwill and other assets. |
10. INCOME TAXES
Certain stock based compensation expenseFor the three and six month periods ended June 30, 2021, the Company recorded valuation allowances of C$2.7 million and C$6.3 million, respectively ($2.3 million and $5.1 million) against deferred tax assets (“DTAs”) incurred
during the periods in its Canadian entity as the Company’s Canadian entity has experienced cumulative losses in recent years (December 31, 2020 – C$6.6 million or $5.2 million). Although earnings were positive in 2019, ongoing near-term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity impacted the Canadian entity’s ability to generate earnings. Accordingly, it is not deductiblemore likely than not that the Canadian entity’s DTAs will be utilized in the calculation of income taxes in Canada. Accordingly, the fair value adjustment recorded duringnear term.
11. OTHER LIABILITIES
For the period ended June 30, 2019 impacted our effective tax rate during that period.2021, the Company separately classified the current portion of long-term debt and accrued interest on the balance sheet, as reconciled below:
|
| As at, |
| |||||
|
| June 30, 2021 |
|
| December 31, 2020 |
| ||
Legal provision |
|
| 45 |
|
|
| 45 |
|
Deferred share unit liability |
|
| 1,661 |
|
|
| 971 |
|
Warranty and other provisions(1) |
|
| 1,958 |
|
|
| 1,763 |
|
Interest accrued on Debentures |
|
| 812 |
|
|
| - |
|
Current portion of long-term debt |
|
| 2,483 |
|
|
| 898 |
|
Other liabilities, as previously presented |
|
| 6,959 |
|
|
| 3,677 |
|
Reclassified to "Current portion of long-term debt and accrued interest" |
|
| (3,295 | ) |
|
| (898 | ) |
Other liabilities |
|
| 3,664 |
|
|
| 2,779 |
|
|
| As at, |
| |||||
|
| June 30, 2021 |
|
| December 31, 2020 |
| ||
As at January 1 |
|
| 1,763 |
|
|
| 4,008 |
|
Adjustments to timber provision |
|
| - |
|
|
| (1,750 | ) |
Additions to warranty provision |
|
| 668 |
|
|
| 1,301 |
|
Payments related to warranties |
|
| (473 | ) |
|
| (1,796 | ) |
|
|
| 1,958 |
|
|
| 1,763 |
|
11.
12. COMMITMENTS
As at June 30, 2020,2021, the Company had outstanding purchase obligations of approximately $5.5$4.5 million related to inventory and property, plant and equipment purchases.purchases (December 31, 2020 – $3.2 million). As at June 30, 2020,2021, the Company had undiscounted operating lease liabilities of $21.7 million.
During 2019, the Company entered into a lease agreement with a term of 25 years, expected to commence in the second half of$50.9 million (December 31, 2020 associated with the construction of a new combined tile and millwork facility in Rock Hill, South Carolina (“South Carolina Plant”)– $44.3 million). Undiscounted rent obligations associated with this lease are $28.9 million.
During the first quarter of 2020, the Company entered into a lease agreement with a term of 12 years, expected to commence in the second half of 2020, associated with a new DIRTT Experience Center (“DXC”) in Plano, Texas. Undiscounted rent obligations associated with this lease are $6.3 million.
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
We have revised our calculation of Adjusted EBITDA and Adjusted Gross Profit, non-GAAP financial measures, for the presented periods compared to the comparable prior periods. For additional information, see “– Non-GAAP Financial Measures – EBITDA and Adjusted EBITDA for the Three and Six Months Ended June 30, 2020 and 2019.” and “– Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Six Months Ended June 30, 2020 and 2019.”
Summary of Financial Results
Revenue for the quarter ended June 30, 2020 was $42.2 million, a decline of $21.9 million or 34% from $64.1 million for the quarter ended June 30, 2019. Revenue decreased by 36% to $83.1 million for the six months ended June 30, 2020, compared to $129.2 million for the six months ended June 30, 2019. We believe the decline is principally related to the ongoing effects of disruptions in our sales activity levels stemming from the transitional state of our commercial function as we implement our strategic plan combined with project delays or deferrals due mainly to impacts of the COVID-19 pandemic on construction schedules.
• | Revenues for the quarter ended June 30, 2021 were $41.1 million, a decline of $1.1 million or 2% from $42.2 million for the quarter ended June 30, 2020. Revenue decreased 15% to $70.6 million for the six months ended June 30, 2021 compared to $83.1 million for the six months ended June 30, 2020. For the three months ended June 30, 2021 revenues have returned to quarterly ranges experienced in the first half of 2020 and have increased by $11.6 million from the first quarter of 2021. On a year-to-date basis, we believe this decrease principally reflects the severe economic and social impact of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels in North America due to non-essential business closures, work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials. |
Gross profit for the quarter ended June 30, 2020 was $14.2 million or 33.7% of revenue, a decline of $10.2 million or 42%from $24.4 million or 38.1% of revenue for the quarter ended June 30, 2019. Gross profit margin decreased to 30.7% for the six months ended June 30, 2020, compared to 37.2% for the six months ended June 30, 2019. This reduction was attributable to our decline in revenues and the impact of fixed costs on lower revenues and during the three and six month periods ended June 30, 2020, we incurred $0.5 million and $1.0 million of severance costs, respectively, offset by a $1.2 million timber provision reversal in the second quarter of 2020, following the validation of an in situ remediation solution that enabled us to meet certain building code specifications under which certain projects were sold, thereby significantly reducing the prior estimated timber liability. Additionally, the three and six month periods ended June 30, 2019 include $0.5 million and $2.0 million of costs, respectively, incurred to mitigate future tile warping.
• | Gross profit for the quarter ended June 30, 2021 was $9.2 million or 22.4% of revenue, a decline of $5.0 million or 35% from $14.2 million or 33.7% of revenue for the quarter ended June 30, 2020. The reduction was attributable to $1.3 million of higher transportation costs due to third party trucking cost increases, $1.3 million of higher direct material costs due to the combined impact of a 5% increase in the cost of materials and a specialized project that required additional third party manufactured inputs, $0.5 million of incremental costs related to our new highly automated panel manufacturing facility in Rock Hill, South Carolina (the “South Carolina Facility”) as well as the $1.1 million negative impact of a stronger Canadian dollar on Canadian based manufacturing costs. In addition, the three months ended June 30, 2020 included a $1.2 million reversal of a timber provision that did not reoccur in 2021. |
Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the quarter ended June 30, 2020 was $16.1 million or 38.2% of revenue, a $10.9 million or 40% decline from $27.0 million or 42.1% of revenue for the quarter ended June 30, 2019. Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the six months ended June 30, 2020 was $31.7 million or 38.1% of revenue, a $21.1 million or 40% decline from $52.8 million or 40.9% of revenue for the six months ended June 30, 2019. Declines in Adjusted Gross Profit for both periods are for the reasons noted above. Excluded from Adjusted Gross Profit in the six months ended June 30, 2020 are $2.0 million of overhead costs associated with operating at lower than normal capacity levels, which were charged directly and separately to cost of sales rather than as a cost attributable to production. Between January and April, 2020, we reduced our manufacturing workforce by 25% to bring labor capacity in line with current activity levels.
• | Gross profit for the six month period ended June 30, 2021 was $12.6 million or 17.8% of revenue, a decline of $12.9 million or 51% from $25.5 million or 30.7% of revenue for the six month period ended June 30, 2020. The decrease was largely due to the impact of fixed costs and excess labor capacity on lower revenues. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days despite the shortfall in revenues relative to capacity. The reduction was also attributable to $1.6 million of higher transportation costs from third party trucking cost increases, $1.6 million higher direct material costs due to the combined impact of a 3% increase in the cost of materials and a specialized project that required additional third party manufactured inputs, $1.0 million of incremental costs related to our new South Carolina Facility as well as the $1.6 million negative impact of a stronger Canadian dollar on Canadian based manufacturing costs. In addition, the six months ended June 30, 2020 included a $1.2 million reversal of a timber provision that did not reoccur in 2021. |
Net income for the quarter ended June 30, 2020 was $0.3 million, compared to net income of $2.6 million for the quarter ended June 30, 2019. The decrease in net income is
• | Adjusted Gross Profit (see “Non-GAAP Financial Measures”) for the quarter ended June 30, 2021 was $11.3 million or 27.4% of revenue, a $4.9 million or 30% decline from $16.1 million or 38.2% of revenue for the quarter ended June 30, 2020 for the reasons described above. |
• | Adjusted Gross Profit for the six months ended June 30, 2021 was $18.4million or 26.1% of revenue compared to $31.7million or 38.1% of revenue for the six months ended June 30, 2020. Excluded from Adjusted Gross Profit for the six months ended June 30, 2021 and 2020 are $1.8 million and $2.0 million, respectively, of overhead costs associated with operating at lower than normal capacity levels, which were charged directly and separately to cost of sales rather than as a cost attributable to production. Between January and April 2020, we reduced our manufacturing workforce by 25% to bring labor capacity in line with expected future requirements as a result of impacts of the COVID-19 pandemic on the construction industry. We did not make further adjustments to our manufacturing workforce in the first six months of 2021 in anticipation of a recovery of demand. |
• | Net loss for the three months ended June 30, 2021 was $9.7 million compared to net income of $0.3 million for the three months ended June 30, 2020. The higher net loss is primarily the result of the above noted reduction in gross profit, a $4.2 million increase in operating expenses, which was largely due to increased stock based compensation, one-time severance costs and salary and wage expenses as we continue to build our sales organization and execute on our strategic plan and increased travel, meals and entertainment costs due to the easing of COVID-19 restrictions, a $0.9 million reduction of government subsidies and a $0.7 increase in interest expense as well as the estimated $1.3 million impact of a stronger Canadian dollar on Canadian based operating expenses. These amounts were partially offset by a $0.9 million reduction in foreign exchange losses. |
• | Net loss for the six months ended June 30, 2021 was $22.2 million compared to $5.0 million for the six months ended June 30, 2020. The higher net loss is primarily the result of the above noted reduction in gross profit, a $3.1 million increase in operating expenses, which was largely due to higher one-time severance and salary and wage expenses as discussed above
Outlook
As expected, second quarter 2021 revenue of $41.1 million was nearly forty percent higher than the first quarter of 2021 and within the quarterly revenue ranges experienced in the first half of 2020. Signs of economic recovery continued in the second quarter of 2021 with the easing of pandemic restrictions across North America. Third party construction indices that are leading indicators of future non-residential activity, including the Dodge Momentum Index and the Architectural Billing Index, were in expansionary territory in the quarter. However, we are closely monitoring potential surges in COVID infection rates, driven by the Delta variant, and the resulting impact on demand, labor availability, supply chains and our own operations. At the same time, conventional construction has experienced dramatic increases in input costs, particularly steel, alongside significant material and labor shortages. These factors, along with permitting backlogs, are resulting in increases to construction costs and long schedule delays, including both the number of projects experiencing delay and the longer duration of the delay. We believe that rising input costs for conventional construction are allowing our solutions to become more price competitive on a day one basis. While we have experienced some inflation in the cost of our core raw materials of aluminum, medium density fiberboard and glass, those increases have lagged increases in the cost of steel and other conventional construction raw materials. In addition, to date we have not experienced any major raw material shortages and have been able to maintain sufficient inventory levels to mitigate such risk. As a result, we have strategically elected not to pass along raw material price increases in order to enhance our relative price competitiveness versus conventional construction. We will continue to monitor the impact of input cost inflation; however, we expect that the increased price competitiveness of our solutions will drive higher demand, allowing us to improve profitability through absorption of unused labor capacity and fixed cost leverage within our plants. Schedule delays have served to further highlight the benefits of our prefabricated approach to interior construction. DIRTT’s short lead and installation times allow clients to recapture a portion of the time lost to schedule delays, which we believe makes DIRTT a more attractive option compared to conventional construction. Further, we believe we are uniquely positioned to reduce labor required for interior construction through the combination of prefabrication in facilities emphasizing Lean manufacturing techniques as well as deploying automation as showcased in our recently opened South Carolina Facility. While our ability to deliver on short lead times is a distinct advantage, our products are installed in the final stages of a project and as such, delays in the project schedule prior to our installation will negatively impact the timing of delivery and the recognition of related sales revenue. Many of our end customers are experiencing high pre-installation schedule delays, which has resulted in a corresponding shift of projects from the second half of 2021 into 2022. As a result, we are now expecting a slower pace of recovery in the second half of 2021, with third quarter revenue anticipated to be similar to the second quarter. Companies are expressing an increasing interest in flexible, adaptable spaces and prefabricated, offsite construction as they reoccupy their space and explore new ways of working with their teams. We believe DIRTT is uniquely positioned to address this new built environment. Notwithstanding a slower-than-anticipated return to sales growth, we remain encouraged by the sales activity levels within our business, including increased quoting and large project request for proposal (RFP) activity relative to 2020. These activities, while not directly tied to contracted revenue, are indicative of both the overall increasing interest and demand, and the potential strength of our transformed commercial capabilities. In June 2021, the number of client tours, both physically and virtually, that we hosted at our DIRTT Experience Centres (DXCs), including our Dallas DXC that was under construction, was at a 30-month high and we continue to experience increasing engagement with our existing and potential strategic accounts. Strategic accounts provide us the opportunity to generate repeat sales based on existing relationships and we have expanded our strategic account relationships in the second quarter to 44 from 40 relationships in the first quarter of 2021. Additionally. we have been successful on a number of large strategic account RFPs, which we define as being projects exceeding $2.0 million, with delivery dates anticipated to begin in 2022. Our strong financial position has allowed us to continue to advance the development of our commercial function. During the second quarter, we continued with selective hiring and completed the rollout of our Customer Relationship Management system to all our sales representatives. We anticipate that our Dallas DXC will be ready for occupancy late in the third quarter of this year. Finally, we welcomed three new Distribution Partners in the quarter and are finalizing the onboarding of two major general contractors that we expect will join our distribution partner network in the third quarter of 2021. We are identifying and establishing relationships with potential new Distribution Partners in underserved regions. On June 8, 2021, we formally opened our new highly automated panel manufacturing facility in Rock Hill South Carolina for a total cost of $17.6 million. This compares to an initial budget of $18.5 million, reflecting the deferral of the casework component to a later date and the addition of priming and UV equipment not contemplated in the original budget. The plant is fully operational, and we are balancing production and resulting labor requirements with our Calgary panel plant. The South Carolina Facility requires one-sixth the labor of the Calgary facility for the same level of output and improves shipping time up to four days with commensurate reductions in freight costs for our East Coast customers. The South Carolina Facility is also a key asset to enhance our customer experience, we believe representing the future of industrialized construction and how it can improve the quality of the built environment. In preparation for increasing demand, we are continuing to deliberately retain manufacturing capacity, which is expected to negatively impact gross margins due to both negative fixed cost leverage and excess labor capacity. As activity improves, we expect gross margins to improve accordingly. Our financial position remained strong at June 30, 2021, with $58.3 million of cash on hand at June 30, 2021 compared to $58.7 million at March 31, 2021 and $45.8 million at December 31, 2020. Net working capital of $67.2 million compared to $70.5 million at March 31, 2021 and $53.5 million at December 31, 2020. In the second quarter of
Our strong balance sheet and our prudent focus on liquidity during this uncertain period provides us the Non-GAAP Financial Measures Note Regarding Use of Non-GAAP Financial Measures Our condensed consolidated interim financial statements are prepared in accordance with GAAP. These GAAP financial statements include non-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult. As a result, we also provide financial information in this Quarterly Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses these non-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance period over period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debtand debt facilities, or foreign exchange movements), asset base (depreciation and amortization), the impact of under-utilized capacity on gross profit, tax consequences and stock-based compensation.
The following non-GAAP financial measures are presented in this Quarterly Report, and a description of the calculation for each measure is included.
You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. EBITDA and Adjusted EBITDA for the Three and Six Months Ended June 30, The following table presents a reconciliation for the second quarter and year-to-date results of
For the three months ended June 30, impact of a strengthening of the Canadian dollar on Canadian based operating expenses, excluding depreciation and For the six months ended June 30, Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Six Months Ended June 30, The following table presents a reconciliation for the three months and six months ended June 30,
Gross profit and gross profit margin decreased to Gross profit and gross profit margin decreased to $12.6 million or 17.8% for the six months ended June 30, 2021, from$25.5 million or 30.7% for the six months ended June 30, 2020. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $18.4million or 26.1% for the six months ended June 30, 2021, from $31.7 million or 38.1% for the six months ended June 30, During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2020, we separately classified $2.0 million as costs related to our under-utilized capacity by 14%, with a further 12% reduction in April 2020 for a total reduction of 25% from prior year levels, and the undertaking of planned factory curtailments. The staffing reductions realigned our capacity with Following the completion of
Results of Operations Three and Six Months Ended June 30,
Revenue Revenue reflects sales to our Distribution Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters. The following table sets forth the contribution to revenue of our DIRTT product and service offerings:
Revenue decreased in the three We are in the process of making substantial improvements to our commercial function, as outlined in our strategic plan, including building an appropriate organizational structure, improving the effectiveness of our existing sales force, 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, particularly as the recovery from the COVID-19 pandemic commences, these actions did not have a measurable effect on
Installation and other services revenue Our success is partly dependent on our ability to profitably develop our Distribution Partner network to expand our market penetration and ensure best practices are shared across local markets. 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:
Revenue decreased by Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United
Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. In 2020 and 2021, revenues from Canada fell to 10% of total sales while sales to the United States increased to 90%, reflecting the impact of pandemic related restrictions on activity levels in the related jurisdictions. Sales and Marketing Expenses Sales and marketing expenses Our sales and marketing efforts continue to focus on establishing the appropriate sales organization and personnel, significantly improving our marketing approach and driving returns on sales and marketing expenditures, as outlined in our strategic plan. In light of uncertainty caused by the COVID-19 pandemic, we have prioritized critical hires that are necessary to continue to advance our overall strategy, including the implementation of necessary systems and tools while ensuring appropriate cost control and cash conservation. General and Administrative Expenses General and administrative expenses
For the quarter ended June 30, 2021, the increase was the result of the Operations Support Expenses Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Distribution Partner project execution and our manufacturing operations. Operations support 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 Stock-Based Compensation
Stock-based compensation expense for the three
As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government CEWS amounts for any qualifying period commencing after June 5, 2021 where the aggregate compensation for specified executives during the 2021 calendar year exceeds the aggregate compensation for specified executives during the 2019 calendar year. The Company’s eligibility for the CEWS may change for each qualifying period and is reviewed by the Company for each qualifying period. On November 19, 2020, the Canadian government Income Tax The provision for income taxes is comprised of U.S. and Canadian federal, state Net Net Net loss
Liquidity and Capital Resources Cash and cash equivalents at June 30, used in operations of $11.9 million, capital expenditures of $10.0 million and scheduled Leasing Facilities repayments of $0.8 million. In In February 2021, we entered into a loan agreement governing a C$
In light of the uncertainty caused by the near and potential mid-term impacts of COVID-19, we have evaluated multiple downside scenarios and have implemented cost control and expenditure management processes. Based on these analyses and the implementation of these spending control processes, we believe that existing cash and cash equivalents combined with increased liquidity from the aforementioned A prolonged and complete cessation of or sustained significant decrease in North American construction activities or a sustained economic depression and its adverse impacts on customer demand could adversely affect our liquidity. To the extent that existing cash and cash equivalents and increased liquidity from the Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of The following table summarizes our consolidated cash flows for the three and six months ended June 30,
Operating Activities Net cash flows provided by operating activities was $0.1 million for the three months ended June 30, 2021 and $12.0 million used in operating activities for the six months ended June 30, 2021 compared to $2.4 million and $1.6 million Investing Activities We invested $5.8 million and
Financing Activities For the three and six months ended June 30, We currently expect to fund anticipated future investments Credit On
During The Company has drawn $11.9 million of cash consideration under the million) of cash consideration under the Canada Leasing Facility and commenced the lease term for the Canadian equipment We are restricted from paying dividends unless Payment Conditions (as defined in the RBC Facility) are met, including having a net borrowing availability of at least C$10 million over the proceeding 30 day period, and having a trailing twelve month fixed charge coverage ratio above 1.10:1 and certain other conditions The RBC Facility is currently secured by substantially all of our real property located in Canada and the United States. Contractual Obligations There have been no material changes in our contractual obligations during the six months ended June 30, Significant Accounting Policies and Estimates There have been no material changes in our significant accounting policies during the six months ended June 30, Recent Accounting Pronouncements For information regarding recent accounting pronouncements, please refer to Note 4, “Adoption of New and Revised Accounting Standards” to our
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 by Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30,
Our litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates is currently comprised of four main lawsuits: (i) an action in the Alberta Court of Queen’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 misappropriation of DIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Smed, and other individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade secrets, business intelligence and customer information (the “Utah Misappropriation Case”); (iii) an action for federal patent infringement in the U.S. District Court for the Northern District of Illinois instituted on August 6, 2020 against Falkbuilt, alleging that Falkbuilt infringes certain of DIRTT’s patents relating to In the Canadian Non-Compete Case, we are seeking, among other things, an order stopping the defendants from unlawfully competing with us, and payment of lost revenue and damages. We recently obtained a consent order forcing certain individuals, including defendants Smed and Loberg, to attend depositions beginning in September, 2021. To date, we have questioned six individual defendants or witnesses in the Canadian Non-Compete Case. We are pleased with the results of the questioning to date and believe they give strong support to our allegations. We intend to continue to pursue the case vigorously. In the Utah Misappropriation Case, the court recently ruled that certain of our claims, particularly those against Falkbuilt and Mr. Smed (a Canadian corporation and Canadian resident, respectively), should be dismissed under the doctrine of forum non-conveniens. DIRTT disagrees with this decision, and has appealed to the U.S. Court of Appeals for the Tenth Circuit. Notwithstanding this ruling, the Utah Misappropriation Case continues against the remaining individual and corporate defendants, and we expect to begin taking depositions in the third quarter of 2021. In the Patent Infringement Case, we are seeking, among other things, an order enjoining Falkbuilt from infringing our patents and damages for past or continuing infringement. Falkbuilt is attempting to initiate an inter partes review and post grant review of DIRTT’s subject patents, and has filed a In the Texas Unfair Competition Case, DIRTT alleges violations of the U.S. Lanham Act, the Texas Uniform Trade Secrets Act, the Federal Defend Trade Secrets Act, the Pennsylvania Unform Trade Secrets Act, the Colorado Consumer Protection Act, and the Ohio Deceptive Practices Act, and is seeking preliminary and permanent injunctive relief to restrain Falkbuilt from using or disclosing DIRTT confidential business information in the United States, and awards of No amounts are accrued for the above legal proceedings. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 5, 2021, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations. Our business, financial condition, results of operations and growth could be harmed by the effects of the COVID-19 pandemic. The COVID-19 pandemic has
On January 11, 2021, we commenced the underwritten public offering of C$35.0 million aggregate principal amount of the Debentures (the “Offering”). The Debentures were offered to the public pursuant to an Underwriting Agreement dated January 11, 2021, by and among DIRTT, National Bank Financial Inc., Craig-Hallum Capital Group LLC, Raymond James Ltd. and Paradigm Capital Inc., with National Bank Financial Inc. as lead manager and book-runner. The Offering was completed on January 25, 2021. On January 29, 2021, we issued a further C$5.25 million of Debentures under the terms of an overallotment option granted to the underwriters. The offer and sale of the Debentures in the U.S. were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a registration statement on Form S-3, as amended (File No. 333-251660), which was declared effective by the SEC on January 6, 2021, and the offer and sale of the Debentures in Canada (excluding Quebec) were registered pursuant to a short form prospectus under Canadian law. The Debentures are convertible into common shares of DIRTT. The net proceeds from the Offering were C$37.6 million ($29.5 million), after deducting C$2.7 million of transaction costs which includes the underwriters’ commission and directly attributable professional fees. The Company expects to use a portion of the net proceeds from the Offering, together with borrowings under the Leasing Facilities and cash reserves on hand, for capital expenditures, including investments in the Company’s technology None. Not Applicable. Not Applicable. EXHIBIT INDEX
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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