Dirtt Environmental Solutions Ltd 10-Q for FY2024 Q2
Dirtt Environmental Solutions Ltd (DRTTF)
About this 10-Q
Dirtt Environmental Solutions Ltd filed this 10-Q on August 7, 2024, covering the quarter ended June 30, 2024 (FY2024 Q2).
Headline figures
Quarter ended June 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $41.2M
- down 7.9% from $44.75M a year earlier
- Net income
- $596K
- down 73.0% from net income of $2.21M a year earlier
- Diluted EPS
- $0.00
- compared with $0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
Alberta, (State or other jurisdiction of incorporation or organization) |
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(Registrant’s telephone number, including area code): (
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes
The registrant had
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2024
TABLE OF CONTENTS
i
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” “continue,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.
Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those contained in, or expressed or implied by such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects can be found in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 21, 2024 (the “Annual Report on Form 10-K”), as supplemented by the risk factors in our subsequently filed Quarterly Reports on Form 10-Q and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:
ii
These risks are not exhaustive. Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Quarterly Report. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or expressed or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not place undue reliance on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary statements.
iii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Balance Sheets
(Unaudited – Stated in thousands of U.S. dollars)
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As at June 30, |
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As at December 31, |
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2024 |
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2023 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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Restricted cash |
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Trade and accrued receivables, net of expected credit losses of |
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Other receivables |
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Inventory |
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Prepaids and other current assets |
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Assets held for sale |
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Total Current Assets |
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Property, plant and equipment, net |
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Capitalized software, net |
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Operating lease right-of-use assets, net |
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Other assets |
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Total Assets |
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LIABILITIES |
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Current Liabilities |
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Accounts payable and accrued liabilities |
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Other liabilities |
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Customer deposits and deferred revenue |
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Current portion of long-term debt and accrued interest |
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Current portion of lease liabilities |
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Total Current Liabilities |
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Long-term debt |
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Long-term lease liabilities |
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Total Liabilities |
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SHAREHOLDERS’ EQUITY |
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Common shares, authorized par value, |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total Shareholders’ Equity |
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Total Liabilities and Shareholders’ Equity |
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
4
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Operations
(Unaudited - Stated in thousands of U.S. dollars)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Product revenue |
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Service revenue |
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Total revenue |
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Product cost of sales |
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Service cost of sales |
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Total cost of sales |
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Gross profit |
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Expenses |
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Sales and marketing |
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General and administrative |
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Operations support |
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Technology and development |
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Stock-based compensation |
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Reorganization |
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Impairment charge on Rock Hill Facility |
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Related party expense (recovery) |
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Total operating expenses |
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Operating income (loss) |
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Government subsidies |
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Gain on extinguishment of convertible debt |
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Gain on sale of software and patents |
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Foreign exchange gain (loss) |
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Interest income |
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Interest expense |
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Net income (loss) before tax |
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Income taxes |
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Current and deferred income tax expense |
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Net income (loss) after tax |
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Net income (loss) per share |
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Net income (loss) per share - basic |
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Net income (loss) per share - diluted |
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Weighted average number of shares outstanding (in thousands) |
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Basic |
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Diluted |
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Interim Condensed Consolidated Statement of Comprehensive Income (Loss)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net income (loss) for the period |
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Exchange differences on translation of foreign operations |
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Comprehensive income (loss) for the period |
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5
Total revenue for the three and six months ended June 30, 2024 includes $
Interest expense for the three and six months ended June 30, 2024 includes $
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
6
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited – Stated in thousands of U.S. dollars, except for share data)
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Accumulated |
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Number of |
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Additional |
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other |
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Total |
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Common |
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Common |
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paid-in |
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comprehensive |
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Accumulated |
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shareholders’ |
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shares |
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shares |
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capital |
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loss |
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deficit |
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equity |
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As at December 31, 2022 |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Issued on vesting of RSUs and Share Awards |
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( |
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- |
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- |
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- |
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RSUs and Share Awards withheld to settle employee tax obligations |
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- |
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( |
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- |
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- |
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( |
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Issued for employee share purchase plan |
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- |
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- |
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- |
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Foreign currency translation adjustment |
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- |
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- |
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- |
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Net loss for the period |
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- |
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- |
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- |
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( |
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( |
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As at March 31, 2023 |
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( |
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( |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Issued on vesting of RSUs and Share Awards |
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( |
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- |
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- |
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- |
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Issued for employee share purchase plan |
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- |
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- |
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- |
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Issued to settle related party debt |
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- |
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- |
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- |
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Foreign currency translation adjustment |
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- |
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- |
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- |
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( |
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- |
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( |
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Net income for the period |
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- |
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- |
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- |
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- |
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As at June 30, 2023 |
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As at December 31, 2023 |
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( |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Issued on vesting of RSUs and Share Awards |
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( |
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- |
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- |
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- |
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Issued on Rights Offering |
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- |
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- |
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- |
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Issued for employee share purchase plan |
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- |
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- |
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RSUs withheld to settle employee tax obligations |
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- |
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( |
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- |
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- |
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( |
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Foreign currency translation adjustment |
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- |
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- |
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- |
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( |
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- |
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( |
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Net income for the period |
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- |
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- |
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As at March 31, 2024 |
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( |
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Stock-based compensation |
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Issued on vesting of RSUs and Share Awards |
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( |
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- |
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Issued for employee share purchase plan |
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- |
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- |
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RSUs withheld to settle employee tax obligations |
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- |
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( |
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- |
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( |
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Foreign currency translation adjustment |
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- |
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- |
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( |
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- |
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( |
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Net income for the period |
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- |
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- |
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- |
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- |
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As at June 30, 2024 |
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The accompanying notes are an integral part of these interim condensed consolidated financial statements.
7
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Cash Flows
(Unaudited – Stated in thousands of U.S. dollars)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2024 |
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2023 |
|
|
2024 |
|
|
2023 |
|
||||
Cash flows from operating activities: |
|
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|
|
|
|
|
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|
||||
Net income (loss) after tax for the period |
|
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|
|
|
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|
|
( |
) |
|||
Adjustments: |
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|
||||
Depreciation and amortization |
|
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|
||||
Impairment charge on Rock Hill Facility |
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|
||||
Stock-based compensation |
|
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|
||||
Foreign exchange loss (gain) |
|
|
( |
) |
|
|
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|
|
( |
) |
|
|
|
||
Gain on extinguishment of convertible debt |
|
|
|
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|
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|
|
( |
) |
|
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|
|||
Gain on sale of software and patents |
|
|
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|
|
( |
) |
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( |
) |
||
Accretion of convertible debentures |
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|
||||
Loss on disposal |
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|
||||
Changes in operating assets and liabilities: |
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|
||||
Trade and accrued receivables |
|
|
( |
) |
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|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other receivables |
|
|
( |
) |
|
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|
|
( |
) |
|
|
|
||
Inventory |
|
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|
||||
Prepaid and other assets, current and long term |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
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( |
) |
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|
|||
Other liabilities |
|
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|
( |
) |
|
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|
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|
( |
) |
||
Customer deposits and deferred revenue |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Current portion of long-term debt and accrued interest |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Lease liabilities |
|
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|
|
|
|
|
|
|
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|
||||
Net cash flows provided by (used in) operating activities |
|
|
|
|
|
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( |
) |
|
|
|
|||
Cash flows from investing activities: |
|
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|
|
|
|
|
|
|
||||
Purchase of property, plant and equipment, net of accounts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Capitalized software development expenditures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other asset expenditures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Recovery of software development expenditures |
|
|
|
|
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|
|
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|
|
||||
Proceeds on sale of software and patents |
|
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|
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|
||||
Proceeds on sale of property, plant, and equipment |
|
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|
||||
Proceeds on sale of assets held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net cash flows provided by (used in) investing activities |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Repayment of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net proceeds received from rights offering |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Employee tax payments on vesting of RSUs |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net cash flows provided by (used in) financing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Effect of foreign exchange on cash, cash equivalents and |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net increase in cash, cash equivalents and |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash, cash equivalents and restricted cash, beginning of period |
|
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|
|
|
|
|
|
|
|
|
|
||||
Cash, cash equivalents and restricted cash, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income taxes received (paid) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. |
|
|||||||||||||||
|
|
|
|
|
As At June 30, |
|
||||||||||
|
|
|
|
|
|
|
|
2024 |
|
|
2023 |
|
||||
Cash and cash equivalents |
|
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|
|
|
|
|
|
|
||||
Restricted cash |
|
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|
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|
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|
||||
Total cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
|
|
|
||||
8
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
9
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction. DIRTT’s system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and construction partners of the Company (“Construction Partners”), including Armstrong World Industries, Inc. (“AWI”), which owns a
DIRTT is incorporated under the laws of the province of Alberta, Canada. Its headquarters is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT”. Effective October 12, 2023, DIRTT’s common shares ceased to trade on the Nasdaq Capital Market. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol “DRTTF.”
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of June 30, 2024, and its results of operations and cash flows for the three and six months ended June 30, 2024 and 2023. The condensed balance sheet at December 31, 2023, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023 included in the Annual Report on Form 10-K of the Company as filed with the SEC and applicable securities commission or similar regulatory authorities in Canada.
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars. DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT Environmental Solutions Ltd. and its subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.
10
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments, assets held for sale and certain components of stock-based compensation that are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.
Seasonality
Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customers’ construction projects can be influenced by a number of factors including the prevailing economic climate and weather.
3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
On December 14, 2023, the FASB issued Accounting Standards Update No. 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”) further disaggregated information on an entity’s tax rate reconciliation and income taxes paid. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, on a prospective basis with an option of retrospective application. The Company is evaluating the impact of the adoption of this standard.
Although there are several other new accounting standards issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its Financial Statements.
4. REORGANIZATION AND ASSETS HELD FOR SALE
Workforce Reductions
Beginning in early 2023, a review of our costs resulted in the decision to eliminate a number of salaried positions. These actions resulted in the Company incurring certain one-time termination costs. There were no restructuring costs associated with workforce reductions in the three and six months ended June 30, 2024.
Temporary Suspension of Operations and Subsequent Closure at Rock Hill, South Carolina (the “Rock Hill Facility”)
On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in cost of sales, were $
On September 27, 2023, the Company decided to permanently close the Rock Hill Facility. Certain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. During the three months ended March 31, 2024, $
|
|
As at June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Assets held for sale, opening |
|
|
|
|
|
|
||
Proceeds from sale of assets held for sale |
|
|
( |
) |
|
|
|
|
Impairment charge on reassessment |
|
|
( |
) |
|
|
|
|
Assets held for sale, ending |
|
|
|
|
|
|
||
For the three months and six months ended June 30, 2024, reorganization costs incurred relate to the above mentioned initiatives:
11
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Phoenix facility closure |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rock Hill Facility temporary suspension and closure of operations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total reorganization costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Reorganization costs in accounts payable and accrued liabilities at January 1, 2023 |
|
|
|
|
Reorganization expense |
|
|
|
|
Reorganization costs paid |
|
|
( |
) |
Reorganization costs in accounts payable and accrued liabilities at December 31, 2023 |
|
|
|
|
Reorganization expense |
|
|
|
|
Reorganization costs paid |
|
|
( |
) |
Reorganization costs in accounts payable and accrued liabilities at June 30, 2024 |
|
|
|
Of the $
5. GAIN ON EXTINGUISHMENT OF CONVERTIBLE DEBENTURES
On February 15, 2024, the Company commenced a substantial issuer bid and tender offer (the “Issuer Bid”) pursuant to which the Company offered to repurchase for cancellation: (i) up to C$
C$
In accordance with GAAP, it was determined that the C$
6. GAIN ON SALE OF SOFTWARE AND PATENTS
There were no sales of software and patents during the three and six months ended June 30, 2024.
On May 9, 2023, the Company entered into a Co-Ownership Agreement (the “Co-Ownership Agreement”) and a partial patent assignment agreement with AWI. The agreements provided for a cash payment from AWI to the Company of $
12
under which AWI had also prepaid certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.
The $
7. TRADE AND ACCRUED RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and typically do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date, taking into account historical credit loss experience as well as forward-looking information, in order to establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the consolidated statement of operations.
In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial well-being of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At June 30, 2024, approximately
Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three and six months ended June 30, 2024, one Construction Partner accounted for greater than
The Company’s aged receivables were as follows:
|
|
As at |
|
|||||
|
|
June 30, |
|
|
December 31, |
|
||
Current |
|
|
|
|
|
|
||
Overdue |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: expected credit losses |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
No adjustment to our expected credit losses of $
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $
13
based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets.
8. OTHER LIABILITIES
|
|
As at, |
|
|||||
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Warranty provisions (1) |
|
|
|
|
|
|
||
DSU liability |
|
|
|
|
|
|
||
Income taxes payable |
|
|
|
|
|
|
||
Sublease deposits |
|
|
|
|
|
|
||
Other provisions |
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
||
|
|
As at, |
|
|||||
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
As at January 1, |
|
|
|
|
|
|
||
Additions to warranty provision |
|
|
|
|
|
|
||
Payments related to warranties |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
9. LONG-TERM DEBT
|
|
Revolving |
|
|
Leasing |
|
|
Convertible |
|
|
Total Debt |
|
||||
Balance on January 1, 2023 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accretion of issue costs |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Interest payments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Principal repayments |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Exchange differences |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Balance at December 31, 2023 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Current portion of long-term debt and accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance on January 1, 2024 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accretion of issue costs |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Interest payments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Principal repayments |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gain on extinguishment |
|
|
- |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Exchange differences |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at June 30, 2024 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Current portion of long-term debt and accrued interest |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|||
Revolving Credit Facility
On February 12, 2021, the Company entered into a loan agreement governing a C$
14
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility had a borrowing base of C$
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$
Leasing Facilities
The Company has a C$
The Company did not make any draws on the Canada Leasing Facility during the first six months of 2024 (2023 – $nil). The associated financial liabilities are shown on the consolidated balance sheet in the current portion of long-term debt and accrued interest and long-term debt.
Convertible Debentures
On January 25, 2021, the Company completed a C$
15
Company completed the Issuer Bid in which the Company repurchased for cancellation C$
On December 1, 2021, the Company completed a C$
10. STOCK-BASED COMPENSATION
In May 2020, shareholders approved the DIRTT Environmental Solutions Long Term Incentive Plan (the “2020 LTIP”). The 2020 LTIP replaced the predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and the Amended and Restated Stock Option Plan (“Stock Option Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.
In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated Long-Term Incentive Plan (the “2023 LTIP”) at the annual and special meeting of shareholders. The 2023 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2023 LTIP, the sum of (i)
In May 2024, shareholders approved the DIRTT Environmental Solutions Ltd. Second Amended and Restated Long-Term Incentive Plan (the “2024 LTIP”) at the annual and special meeting of shareholders. The effective date of the 2024 LTIP is May 9, 2024. The 2024 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2024 LTIP, the sum of (i)
16
extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.
Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for Non-Employee Directors (as amended and restated, the “DSU Plan”) and settleable only in cash. The 2024 LTIP gives the Company the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The terms of the DSU Plan are otherwise materially unchanged as incorporated into the 2024 LTIP. Effective May 30, 2023, no new awards will be made under the DSU Plan, but awards previously granted under the DSU Plan will continue to be governed by the DSU Plan. DSUs are settled following cessation of services with the Company.
Stock-based compensation expense
|
|
For the Three Months Ended June 30, |
|
|
For The Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Equity-settled awards |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash-settled awards |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
The following summarizes RSUs, share awards, PSUs, and DSUs activity during the periods:
|
|
RSU Time- |
|
|
RSU Performance- |
|
|
Share |
|
|
|
|
|
|
|
|||||
|
|
Based |
|
|
Based |
|
|
Awards |
|
|
PSU |
|
|
DSU |
|
|||||
|
|
Number of |
|
|
Number of |
|
|
Number of |
|
|
Number of |
|
|
Number of |
|
|||||
|
|
units |
|
|
units |
|
|
units |
|
|
units |
|
|
units |
|
|||||
Outstanding at December 31, 2022 |
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Granted |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
||||
Vested or settled |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Withheld to settle employee tax obligations |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Expired |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding at June 30, 2023 |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
||||
Outstanding at December 31, 2023 |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
||||
Granted |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Vested or settled |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Withheld to settle employee tax obligations |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding at June 30, 2024 |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
||||
Restricted share units (time-based vesting)
Restricted share units that vest based on time have an aggregate time-based vesting period of
Restricted share units (performance-based vesting)
During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for vesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a percentage of the PRSUs will vest at the end of the
The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$
17
Based on share price performance since the date of grant,
|
% of PRSUs Vesting |
|
||||||||||||||||
|
|
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
2021 and 2022 PRSUs |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Share awards
There were no share awards granted or vested during the first six months of 2024.
In the first quarter of 2023,
Performance share units
During the second quarter of 2023, certain executives were issued a strategic equity grant through Performance share units (“PSUs”). The performance period of the PSUs is from
Deferred share units
Granted under the DSU Plan
The fair value of the DSU liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the period. DSUs outstanding at June 30, 2024 had a fair value of $
Granted under the 2023 and 2024 LTIP
DSUs granted after May 30, 2023 (the “New DSUs”) will be settled by way of the provision of cash or shares (or a combination thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common shares. The weighted average fair value of the DSUs granted in 2024 was C$
Options
The following summarizes options forfeited and expired during the periods:
|
|
|
|
Number of |
|
|
Weighted average |
|
||
|
|
|
|
options |
|
|
exercise price C$ |
|
||
Outstanding at December 31, 2022 |
|
|
|
|
|
|
|
|
||
Forfeited |
|
|
|
|
( |
) |
|
|
|
|
Outstanding at June 30, 2023 |
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2023 |
|
|
|
|
|
|
|
|
||
Forfeited or expired |
|
|
|
|
( |
) |
|
|
|
|
Exercisable at June 30, 2024 |
|
|
|
|
|
|
|
|
||
18
Range of exercise prices outstanding and exercisable at June 30, 2024:
|
|
Options outstanding |
|
|
Options exercisable |
|
||||||||||||||||||
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
||||||
|
|
Number of |
|
|
average |
|
|
average |
|
|
|
|
|
average |
|
|
average |
|
||||||
|
|
options |
|
|
remaining |
|
|
exercise |
|
|
Number |
|
|
remaining |
|
|
exercise |
|
||||||
Range of exercise prices |
|
|
|
|
life |
|
|
price C$ |
|
|
exercisable |
|
|
life |
|
|
price C$ |
|
||||||
C$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Dilutive Instruments
For the three and six months ended June 30, 2024,
For the three months ended June 30, 2023,
19
11. EARNINGS PER SHARE
On November 21, 2023, the Company announced a Rights Offering (refer to Note 15) which distributed to holders of common shares, as of the close of business on December 12, 2023, transferable subscription rights to purchase up to an aggregate of
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net income (loss) per share – basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) (thousands of U.S. dollars) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
|
NA |
|
|
|
|
|
NA |
|
|
|
|
||||
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per share (U.S. dollars) − basic (as previously calculated, prior to Rights Offering) |
|
NA |
|
|
$ |
|
|
NA |
|
|
$ |
( |
) |
|||
Net income (loss) per share (U.S. dollars) − basic (as on the Consolidated Statement of Comprehensive Income) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per share − diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) (thousands of U.S. dollars) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Interest on convertible debentures |
|
$ |
|
|
|
|
|
$ |
|
|
NA |
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
|
NA |
|
|
|
|
|
NA |
|
|
|
|
||||
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive debentures on convertible debt (thousands of shares) (1) |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|||
Dilutive RSUs and PRSUs (thousands of shares) (2) |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|||
Dilutive New DSUs (thousands of shares) (2)(3) |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|||
Dilutive PSUs (thousands of shares) (2)(3) |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Dilutive VPP (thousands of shares) (2)(3) |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
|
NA |
|
|
|
|
|
NA |
|
|
|
|
||||
Weighted average number of shares outstanding (thousands of shares restated) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per share (U.S. dollars) − diluted (as previously calculated, prior to Rights Offering) |
|
NA |
|
|
$ |
|
|
NA |
|
|
$ |
( |
) |
|||
Net income (loss) per share (U.S .dollars) − diluted (as on the Consolidated Statement of Comprehensive Income) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
(1)
(2)
(3)
20
12. 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 13 for the disaggregation of revenue by geographic region.
|
|
For the Three Months Ended June 30, |
|
|
For The Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Product |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
License fees from Construction Partners |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total product revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Installation and other services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
DIRTT sells its products and services pursuant to fixed-price contracts which generally have a term of one year or less. The transaction price used in determining the amount of revenue to recognize from fixed-price contracts is based upon agreed contractual terms with each customer and is not subject to variability.
|
|
For the Three Months Ended June 30, |
|
|
For The Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
At a point in time |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Over time |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue recognized at a point in time represents the majority of the Company’s sales. Revenue is recognized when a customer obtains legal title to the product, which is when ownership of the product is transferred to, or services are delivered to, the customer. Revenue recognized over time is limited to installation and ongoing maintenance contracts with customers and is recorded as performance obligations which are satisfied over the term of the contract.
Contract Liabilities
|
|
As at |
|
|||||||||
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
|
December 31, 2022 |
|
|||
Customer deposits |
|
|
|
|
|
|
|
|
|
|||
Deferred revenue |
|
|
|
|
|
|
|
|
|
|||
Contract liabilities |
|
|
|
|
|
|
|
|
|
|||
Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions. The balance of contract liabilities was lower as at June 30, 2024 compared to December 31, 2023 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 2023 and 2022 totaling $
21
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, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Healthcare |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Government |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Education |
|
|
|
|
|
|
|
|
|
|
|
|
||||
License fees from Construction Partners |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total product and transportation revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Installation and other services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
13. SEGMENT REPORTING
The Company has
Revenue from external customers
|
|
For the Three Months Ended June 30, |
|
|
For The Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-current assets
|
|
As At |
|
|||||
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Canada |
|
|
|
|
|
|
||
U.S. |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
DIRTT has one reportable segment: Solutions. The DIRTT solutions segment derives revenues from customers by providing physical products and digital tools through our ICE software to create interior spaces for our customers across the commercial, healthcare, education and government industries. The solutions segment provides digital tools (access to ICE software) and physical products to create modular interior construction spaces for our customers.
The chief operating decision maker assesses performance for the solutions segment and decides how to allocate resources based on gross profit and net income (loss) that also is reported on the Consolidated Statement of Operations and Comprehensive Loss as consolidated gross profit and net income (loss). The measure of segment assets is reported on the balance sheet as total consolidated assets. The chief operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the solutions segment or into other parts of the entity, such as to repay long-term debt.
Gross profit and net income (loss) are used to monitor budget versus actual results. The chief operating decision maker also uses net income (loss) in competitive analysis by benchmarking to DIRTT’s competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.
22
DIRTT derives revenue in North America and manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on a single software platform that is deployed to, and implemented by, customers in a similar manner. DIRTT’s chief operating decision maker is the executive leadership team that includes the chief operating officer, chief financial officer, and the chief executive officer.
Segment profit and loss reconciliation to net income (loss) after tax
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Profit Margin |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Operating expenses (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Other income/(expenses) and gains/(losses) (2) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Net income (loss) after tax |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Reconciliation of profit or loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustments and reconciling items |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) after tax |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
(1)
(2)
14. INCOME TAXES
As at June 30, 2024, the Company had a valuation allowance of $
15. RIGHTS OFFERING
On November 21, 2023, the Company announced that the Board of Directors had approved a rights offering (the “Rights Offering”) to its common shareholders for aggregate gross proceeds of C$
In connection with the Rights Offering, the Company entered into a standby purchase agreement, dated November 20, 2023 (the “Standby Purchase Agreement”) with 22NW Fund, LP (“22NW”) and 726 BC LLC and 726 BF LLC (together, “726”), or their permitted assigns (collectively and including WWT Opportunity #1 LLC (“WWT”), to which 726 transferred all of their common shares to on December 1, 2023, the “Standby Purchasers”). Subject to the terms and conditions of the Standby Purchase Agreement, each Standby Purchaser agreed to exercise its Basic Subscription Privilege (as defined below) in full and to collectively purchase from the Company, at the subscription price, all common shares not subscribed for by holders of Rights (as defined below) under the Basic Subscription Privilege or Additional Subscription Privilege (as defined below), up to a maximum of C$
On January 9, 2024, the Company announced the completion of the Rights Offering to its common shareholders and the issuance of
23
DIRTT issued an aggregate of
16. COMMITMENTS
As at June 30, 2024, the Company had outstanding purchase obligations of approximately $
17. RELATED PARTY TRANSACTIONS
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the “Debt Settlement Agreement”) with 22NW and Aron English, 22NW’s principal and a director of DIRTT, (together, the “22NW Group”) who, collectively, beneficially owned approximately
Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. The liability as at March 31, 2023 was revalued using the closing common share price at March 31, 2023, and a $
In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of
Other related party transactions for the six months ended June 30, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $
As at June 30, 2024, C$
See Subsequent Events (Note 18).
18. SUBSEQUENT EVENTS
On August 2, 2024, the Company entered into a Convertible Debenture Repurchase Agreement (the “Repurchase Agreement”) with 22NW, pursuant to which the Company purchased for cancellation an aggregate of C$
24
Following the Debenture Repurchase, C$
Also on August 2, 2024, DIRTT entered into a support and standstill agreement (the “Support Agreement”) with 22NW and WWT, DIRTT’s second largest shareholder. The Support Agreement replaces the previously announced support and standstill agreement entered into with 22NW on March 22, 2024. Under the Support Agreement, both 22NW and WWT have agreed to certain voting and standstill obligations, including voting in favor of the management director nominees at each of DIRTT’s next two annual general meetings and voting in favor of the ratification of the Amended and Restated SRP (as defined below). Additionally, each of 22NW and WWT has the right to designate a director nominee at each of DIRTT’s next two annual general meetings, and are each subject to certain restrictions with respect to commencing a take-over bid for the Company. The Support Agreement also permits WWT to acquire up to
To give effect to the terms of the Support Agreement, the Board has adopted an amended and restated shareholder rights plan effective August 2, 2024 (the “Amended and Restated SRP”) that amends and restates the Company's shareholder rights plan agreement originally adopted by the Board on March 22, 2024 (the “Original SRP”), which remains subject to shareholder approval. The Amended and Restated SRP revises the definition of “Exempt Acquisition” in the Amended and Restated SRP in order to permit WWT to acquire additional common shares without triggering the provisions of the Amended and Restated SRP. The Amended and Restated SRP is otherwise consistent with the Original SRP and is substantially similar to the rights plan adopted by the Company in 2021. Like the Original SRP, the Amended and Restated SRP is intended to help ensure that all shareholders of the Company are treated fairly and equally in connection with any unsolicited take-over bid or other acquisition of control of the Company (including by way of a “creeping” take-over bid). The Amended and Restated SRP is not being adopted in response to any specific proposal to acquire control of the Company, and the Board is not aware of any pending or potential take-over bid for the Company.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
Summary of Financial Results
DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction. DIRTT’s system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partners of the Company, including AWI which owns a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI.
Key Second Quarter Highlights
26
Pipeline
The table below presents our qualified leads and twelve-month forward pipeline as at July 1, 2024, January 1, 2024 and July 1, 2023. We define qualified leads as the quantity of projects being pursued as of the date presented, and define our pipeline as the estimated potential revenue from qualified leads where a client has engaged DIRTT and is assessing DIRTT as a potential provider of prefabricated interior solutions. We believe these metrics are helpful to estimate near-term performance, particularly given the macroeconomic factors that affect our operating environment, including labor availability, interest rate changes, and potential recessionary impacts on construction projects.
As of July 1, 2024, our twelve-month forward pipeline grew by 20% year-over-year and decreased 3% from January 1, 2024, illustrated in the table below.
|
|
As at |
|
|||||||||||||||||
|
|
July 1, 2024 |
|
|
January 1, 2024 |
|
|
% Change |
|
|
July 1, 2023 |
|
|
% Change |
|
|||||
Twelve Month Forward Pipeline ($ 000s) |
|
|
|
|
|
|
|
|
|
|
||||||||||
Commercial |
|
|
148,300 |
|
|
|
176,789 |
|
|
|
(16 |
) |
|
|
145,750 |
|
|
|
2 |
|
Healthcare |
|
|
55,497 |
|
|
|
41,221 |
|
|
|
35 |
|
|
|
35,124 |
|
|
|
58 |
|
Government |
|
|
35,358 |
|
|
|
34,813 |
|
|
|
2 |
|
|
|
29,724 |
|
|
|
19 |
|
Education |
|
|
23,703 |
|
|
|
17,117 |
|
|
|
38 |
|
|
|
9,260 |
|
|
|
156 |
|
|
|
|
262,858 |
|
|
|
269,940 |
|
|
|
(3 |
) |
|
|
219,858 |
|
|
|
20 |
|
Leads (#) |
|
|
1,098 |
|
|
|
861 |
|
|
|
28 |
|
|
|
872 |
|
|
|
26 |
|
27
Outlook – DIRTT’s Journey to Excellence
In the second quarter of 2024, we released an investor presentation, DIRTT’s “Journey to Excellence”, highlighting DIRTT’s organizational improvements since the changes in our Board of Directors and executive leadership in 2022. Midway through 2022, DIRTT reported gross profit margin and Adjusted Gross Profit Margin of 11.5% and 18.3%, respectively, a net loss of $42.3 million and Adjusted EBITDA Margin of (25.8)% on $83.0 million of revenue for the six months ended June 30, 2022. Two years later, DIRTT is reporting gross profit margin and Adjusted Gross Profit Margin of 36.6% and 38.7%, respectively, and net income of $3.6 million and Adjusted EBITDA Margin of 7.1% on $82.0 million of revenue for the six months ended June 30, 2024. We were able to expand Adjusted Gross Profit Margins even as the aluminum market experienced pricing volatility in the second quarter of 2024, due to our operational strategy and the risk management strategies we have in place. DIRTT’s journey to excellence is still in its early stages, and while we are proud of the progress we have made to date, we have more to do in order to realize the Company’s long-term vision of significant growth in revenue and profitability.
DIRTT operates in the multibillion-dollar interior construction industry, with end customers looking for ways to save money, save time, and meet their sustainability goals. We believe our business proposition of a better, more sustainable way to build is becoming even more relevant and necessary as prioritizing environmental, social and governance issues becomes a focus for companies across North America. Over time, our goal is for DIRTT to gain market share and outpace the growth of the construction industry.
At June 30, 2024, we held $39.5 million in cash on hand with total liquidity (inclusive of borrowing availability) of $50.1 million. Improved operational results have also led to consistent positive cash flow. We have strengthened our balance sheet through the C$30 million rights offering and the retirement of, at the date of this Quarterly Report, 59% of the total debt we held coming into 2024. We believe these transactions put DIRTT in a position to achieve a debt to Adjusted EBITDA ratio of 1x or lower in 2025. Based on current projections, DIRTT is expected to be in a position to pay off or refinance its remaining Debentures when they come due.
Our operations team remains focused on their journey to zero defects, missed deliveries, and workplace injuries. In the three months ended June 30, 2024, our total recordable incident rate (TRIF) rate was 0.99, which is 78% below the industry average. Our on-time in full (OTIF) delivery performance was 99.7%. We have a 10-day lead time from final order to product shipment. We believe we are well positioned to increase output while delivering quality products, on time and in full, to our end customers.
With these operational and financial achievements complete, our focus turns to accelerating revenue growth in all sectors – commercial, healthcare, educational and government. In the second quarter of 2024, we secured a large contract in the aviation industry, demonstrating how DIRTT’s solutions are agnostic to industries as well as reinforcing our continued diversification across verticals and broadening the addressable market into areas we have not historically pursued. Further, we are building our commercial organization to ensure support in our go-to-market efforts for our construction partners to tap into the multibillion-dollar interior construction industry. DIRTT’s Board of Directors and management team remain focused on strengthening the Company’s competitive advantages, product portfolio and go-to-market strategy.
DIRTT innovates by identifying the needs of the market and of our customers and through collaborating with world-class firms to solve industry problems. During the second quarter of 2024, we introduced several new products into the market including Spectra Double pane butt-hinge, curved glass corners, our telescoping walls and Class A timber solutions. At our Connext tradeshow in Chicago, we transformed our DIRTT Experience Center by showcasing improved innovative products for all verticals. At Connext, we also released the Clinical Observation Vertical Exam (the “COVE™”), a new innovative product designed to help improve patient care in emergency rooms. We built the COVE™ in collaboration with HKS, a leading global architecture and design firm that focuses on innovative healthcare design.
We are also investing in our proprietary design integration software, ICE® (“ICE software”). We efficiently integrate the design, configurations, and virtual reality visualization process while also automating the manufacturing process. Use of the ICE software provides design and cost certainty, which we believe is a game changer in an industry where costs frequently change as a project progresses. The ICE team has been working on modernizing the ICE platform, and earlier this week, we released the new ICE Manager and purpose-built designer application Design Editor, two new and foundational pieces of the ICE architecture moving forward. These new applications will allow us to push out more frequent releases to the business in the form of new products, features and enhancements. This will allow us to improve the end user experience. This modernization of ICE also provides us with the opportunity to commercialize the technology to a broader customer base, which we believe will provide us with additional revenue opportunities.
28
We believe that DIRTT has significant untapped manufacturing capacity that can serve a multiple of our current revenue base. Improvements of our cost structure, including a materially reduced fixed cost base, and incremental growth in revenue will help us achieve gross profit margin expansion and substantial flow through to Adjusted EBITDA and free cash flow. We do not expect a material increase in capital expenditures in the short-term. After the debenture repurchases completed in 2024, our annual interest expense will halve to $1.5 million. As at June 30, 2024, we had C$110.1 million of non-capital loss carry-forwards in Canada and $51.6 million of non-capital loss carry-forwards in the United States. These loss carry-forwards will begin to expire in 2035.
DIRTT could not have achieved the past two years of organizational improvements without the support of our resilient and talented employee base. We are working to improve our employee experiences and make DIRTT an employer of choice. Our employees are key to the future success of DIRTT.
As we look forward to 2025, we are observing positive indicators of our revenue growth focus. Our year-over-year 12-month pipeline has grown 20% and our multi-year pipeline has grown even more. Our projected revenue and Adjusted EBITDA for the remainder of 2024 and 2025 are:
|
|
As at June 30, |
|
|
As at December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Market capitalization(1) |
|
|
80,362 |
|
|
|
38,244 |
|
Add: Total debt(2)(3) |
|
|
46,572 |
|
|
|
56,108 |
|
Less: Unrestricted cash(2) |
|
|
39,529 |
|
|
|
24,744 |
|
Enterprise Value |
|
|
87,405 |
|
|
|
69,608 |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Adjusted EBITDA Multiple for 2025 |
|
4.1x |
|
|
|
|
||
Revenue Multiple for 2025 |
|
0.4x |
|
|
|
|
||
(1)Market capitalization is calculated by multiplying the closing share price by the number of outstanding shares at June 30, 2024 and December 31, 2023, respectively. (The closing share price at June 28, 2024 was C$0.57 ($0.42) and outstanding shares were 192,967,643. The closing share price at December 29, 2023 was C$0.48 ($0.36) and outstanding shares were 105,377,667). |
|
|||||||
(2)Total debt and Unrestricted cash do not consider the impacts of the Debenture Repurchase on August 2, 2024. Refer to Note 18. |
|
|||||||
(3)Total debt includes Long-term debt and Current portion of long-term debt and accrued interest on the balance sheet as at June 30, 2024 and December 31, 2023, respectively. |
|
|||||||
As explained above, with minimal capital expenditure needs in the short term and the availability of tax losses, we expect most of our Adjusted EBITDA will flow through to free cash flow. DIRTT’s enterprise value at June 30, 2024 before retiring half of our outstanding debentures was $87 million, which values DIRTT at approximately 0.4x the midpoint of 2025 sales guidance and 4.1x the midpoint of 2025 Adjusted EBITDA guidance. We believe the Company will have less than one turn of financial leverage by the end of 2025 and that DIRTT is now a credit worthy company and we expect to have improved access to traditional bank lines.
Non-GAAP Financial Measures
Note Regarding Use of Non-GAAP Financial Measures
Our interim condensed consolidated 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
29
and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange movements), asset base (depreciation and amortization), tax consequences, reorganization expense, one-time non-recurring charges or gains (such as gain on sale of software and patents and gain on extinguishment of debt), and stock-based compensation. We remove the impact of foreign exchange gain (loss) from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In addition, management bases certain forward-looking estimates and budgets on non-GAAP financial measures, primarily Adjusted EBITDA.We have not reconciled non-GAAP forward-looking measures, including Adjusted EBITDA guidance, to its corresponding GAAP measures due to the high variability and difficulty in making accurate forecasts and projections, particularly with respect to non-operating income and expenditures, which are difficult to predict and subject to change.
Government subsidies, depreciation and amortization, stock-based compensation expense, reorganization expense, foreign exchange gains and losses and impairment charges are excluded from our non-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those receipts and expenses may recur, and because management believes that each of these items can distort the trends associated with the Company’s ongoing performance. We believe that excluding these receipts and expenses provides investors and management with greater visibility to the underlying performance of the business operations, enhances consistency and comparativeness with results in prior periods that do not, or future periods that may not, include such items, and facilitates comparison with the results of other companies in our industry.
The following non-GAAP financial measures are presented in this Quarterly Report, and a description of the calculation for each measure is included.
Adjusted Gross Profit |
Gross profit before deductions for depreciation and amortization |
|
|
Adjusted Gross Profit Margin |
Adjusted Gross Profit divided by revenue |
|
|
EBITDA |
Net income before interest, taxes, depreciation and amortization |
|
|
Adjusted EBITDA |
EBITDA adjusted to remove foreign exchange gains or losses; impairment charges; reorganization expenses; stock-based compensation expense; government subsidies; one-time, non-recurring charges and gains; and any other non-core gains or losses |
|
|
Adjusted EBITDA Margin |
Adjusted EBITDA divided by revenue |
You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
30
Results of Operations
Three and Six Months Ended June 30, 2024, Compared to the Three and Six Months Ended June 30, 2023
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||||||||||
Revenue |
|
|
41,201 |
|
|
|
44,753 |
|
|
|
(8 |
) |
|
|
82,048 |
|
|
|
81,461 |
|
|
|
1 |
|
Gross Profit |
|
|
15,375 |
|
|
|
14,557 |
|
|
|
6 |
|
|
|
30,023 |
|
|
|
23,239 |
|
|
|
29 |
|
Gross Profit Margin |
|
|
37.3 |
% |
|
|
32.5 |
% |
|
|
|
|
|
36.6 |
% |
|
|
28.5 |
% |
|
|
|
||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Sales and marketing |
|
|
6,062 |
|
|
|
6,626 |
|
|
|
(9 |
) |
|
|
11,982 |
|
|
|
12,141 |
|
|
|
(1 |
) |
General and administrative |
|
|
4,391 |
|
|
|
5,501 |
|
|
|
(20 |
) |
|
|
8,957 |
|
|
|
11,334 |
|
|
|
(21 |
) |
Operations support |
|
|
1,841 |
|
|
|
1,822 |
|
|
|
1 |
|
|
|
3,616 |
|
|
|
3,812 |
|
|
|
(5 |
) |
Technology and development |
|
|
1,436 |
|
|
|
1,277 |
|
|
|
12 |
|
|
|
2,687 |
|
|
|
2,816 |
|
|
|
(5 |
) |
Stock-based compensation |
|
|
427 |
|
|
|
678 |
|
|
|
(37 |
) |
|
|
1,102 |
|
|
|
1,474 |
|
|
|
(25 |
) |
Reorganization |
|
|
202 |
|
|
|
1,465 |
|
|
|
(86 |
) |
|
|
340 |
|
|
|
2,536 |
|
|
|
(87 |
) |
Impairment charge on Rock Hill Facility |
|
|
- |
|
|
|
- |
|
|
NA |
|
|
|
530 |
|
|
|
- |
|
|
|
100 |
|
|
Related party expense (recovery) |
|
|
- |
|
|
|
(532 |
) |
|
|
(100 |
) |
|
|
- |
|
|
|
1,524 |
|
|
|
100 |
|
Total operating expenses |
|
|
14,359 |
|
|
|
16,837 |
|
|
|
(15 |
) |
|
|
29,214 |
|
|
|
35,637 |
|
|
|
(18 |
) |
Operating income (loss) |
|
|
1,016 |
|
|
|
(2,280 |
) |
|
|
145 |
|
|
|
809 |
|
|
|
(12,398 |
) |
|
|
107 |
|
Operating margin |
|
|
2.5 |
% |
|
|
(5.1 |
)% |
|
|
|
|
|
1.0 |
% |
|
|
(15.2 |
)% |
|
|
|
||
Government subsidies |
|
|
- |
|
|
|
88 |
|
|
|
(100 |
) |
|
|
- |
|
|
|
236 |
|
|
|
(100 |
) |
Gain on extinguishment of convertible debt |
|
|
- |
|
|
|
- |
|
|
NA |
|
|
|
2,931 |
|
|
|
- |
|
|
|
100 |
|
|
Gain on sale of software and patents |
|
|
- |
|
|
|
6,145 |
|
|
|
(100 |
) |
|
|
- |
|
|
|
6,145 |
|
|
|
(100 |
) |
Foreign exchange gain (loss) |
|
|
358 |
|
|
|
(620 |
) |
|
|
158 |
|
|
|
1,277 |
|
|
|
(881 |
) |
|
|
245 |
|
Interest income |
|
|
482 |
|
|
|
106 |
|
|
|
355 |
|
|
|
971 |
|
|
|
110 |
|
|
|
783 |
|
Interest expense |
|
|
(945 |
) |
|
|
(1,233 |
) |
|
|
(23 |
) |
|
|
(1,999 |
) |
|
|
(2,440 |
) |
|
|
(18 |
) |
|
|
|
(105 |
) |
|
|
4,486 |
|
|
|
(102 |
) |
|
|
3,180 |
|
|
|
3,170 |
|
|
|
0 |
|
Net income (loss) before tax |
|
|
911 |
|
|
|
2,206 |
|
|
|
(59 |
) |
|
|
3,989 |
|
|
|
(9,228 |
) |
|
|
143 |
|
Current and deferred income tax expense |
|
|
315 |
|
|
|
- |
|
|
|
100 |
|
|
|
348 |
|
|
|
- |
|
|
|
100 |
|
|
|
|
315 |
|
|
|
- |
|
|
|
100 |
|
|
|
348 |
|
|
|
- |
|
|
|
100 |
|
Net income (loss) after tax |
|
|
596 |
|
|
|
2,206 |
|
|
|
(73 |
) |
|
|
3,641 |
|
|
|
(9,228 |
) |
|
|
139 |
|
Revenue
Revenue reflects sales to our Construction Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters.
The following table sets forth the contribution to revenue of our DIRTT product and service offerings:
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||||||||||
Product |
|
|
36,141 |
|
|
|
38,710 |
|
|
|
(7 |
) |
|
|
71,017 |
|
|
|
70,191 |
|
|
|
1 |
|
Transportation |
|
|
3,859 |
|
|
|
4,614 |
|
|
|
(16 |
) |
|
|
7,814 |
|
|
|
8,402 |
|
|
|
(7 |
) |
License fees from Construction Partners |
|
|
176 |
|
|
|
210 |
|
|
|
(16 |
) |
|
|
384 |
|
|
|
417 |
|
|
|
(8 |
) |
Total product revenue |
|
|
40,176 |
|
|
|
43,534 |
|
|
|
(8 |
) |
|
|
79,215 |
|
|
|
79,010 |
|
|
|
0 |
|
Installation and other services |
|
|
1,025 |
|
|
|
1,219 |
|
|
|
(16 |
) |
|
|
2,833 |
|
|
|
2,451 |
|
|
|
16 |
|
|
|
|
41,201 |
|
|
|
44,753 |
|
|
|
(8 |
) |
|
|
82,048 |
|
|
|
81,461 |
|
|
|
1 |
|
Revenue for the three months ended June 30, 2024 was $41.2 million, a decrease of $3.6 million compared to $44.8 million in the comparative period of 2023, primarily due to two large healthcare projects totaling $5.6 million and one key education project that were completed in the three months ended June 30, 2023, which did not repeat in
31
the same period of 2024. Revenue for the six months ended June 30, 2024 was $82.0 million, an increase of $0.6 million from $81.5 million in the comparative period of 2023.
Installation and other services revenue was $1.0 million for the quarter ended June 30, 2024 compared to $1.2 million in the quarter ended June 30, 2023, and $2.8 million in the six months ended June 30, 2024 compared to $2.5 million in the same period of 2023. Installation and other services revenue primarily reflects services performed by our ICE and design teams for third parties. Except in limited circumstances where it is beneficial for DIRTT to hold the contract or a requirement of the end customer, the Construction Partner, rather than the Company, perform and are responsible for the installation services.
Our success is partly dependent on our ability to profitably develop our Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. At June 30, 2024, we had 76 Construction Partners (June 30, 2023: 68; December 31, 2023: 72) servicing multiple locations.
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. While all of these sectors have been challenged by macroeconomic factors, we are seeing increased growth in our commercial sector. We believe that an increase in new construction starts and the heightened need for adaptability and flexibility in the years after the COVID-19 pandemic have increased the demand for our products. We continue to see growth opportunities in the healthcare and education sectors and have restructured our sales leadership function, prioritizing oversight of these verticals.
The following table presents our product and transportation revenue by vertical market:
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||||||||||
Commercial |
|
|
28,018 |
|
|
|
26,378 |
|
|
|
6 |
|
|
|
58,197 |
|
|
|
50,882 |
|
|
|
14 |
|
Healthcare |
|
|
4,800 |
|
|
|
10,457 |
|
|
|
(54 |
) |
|
|
7,849 |
|
|
|
16,628 |
|
|
|
(53 |
) |
Government |
|
|
5,092 |
|
|
|
3,268 |
|
|
|
56 |
|
|
|
8,567 |
|
|
|
5,975 |
|
|
|
43 |
|
Education |
|
|
2,090 |
|
|
|
3,221 |
|
|
|
(35 |
) |
|
|
4,218 |
|
|
|
5,108 |
|
|
|
(17 |
) |
License fees from Construction Partners |
|
|
176 |
|
|
|
210 |
|
|
|
(16 |
) |
|
|
384 |
|
|
|
417 |
|
|
|
(8 |
) |
Total product revenue |
|
|
40,176 |
|
|
|
43,534 |
|
|
|
(8 |
) |
|
|
79,215 |
|
|
|
79,010 |
|
|
|
0 |
|
Service revenue |
|
|
1,025 |
|
|
|
1,219 |
|
|
|
(16 |
) |
|
|
2,833 |
|
|
|
2,451 |
|
|
|
16 |
|
|
|
|
41,201 |
|
|
|
44,753 |
|
|
|
(8 |
) |
|
|
82,048 |
|
|
|
81,461 |
|
|
|
1 |
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(in %) |
|
|
(in %) |
|
||||||||||
Commercial |
|
|
70 |
|
|
|
61 |
|
|
|
74 |
|
|
|
65 |
|
Healthcare |
|
|
12 |
|
|
|
24 |
|
|
|
10 |
|
|
|
21 |
|
Government |
|
|
13 |
|
|
|
8 |
|
|
|
11 |
|
|
|
8 |
|
Education |
|
|
5 |
|
|
|
7 |
|
|
|
5 |
|
|
|
6 |
|
Total Product Revenue(1) |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
(1) Excludes license fees from Construction Partners.
32
Commercial revenues increased by 6% for the second quarter of 2024 from the prior year period. The quarter ended June 30, 2024 included larger commercial projects compared to the quarter ended June 30, 2023. Healthcare revenues decreased by 54% in the second quarter of 2024 from the same period of 2023, primarily due to two large healthcare projects totaling $5.6 million in revenue for the second quarter of 2023 that did not arise in the same period of 2024. Healthcare sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Government revenues in the second quarter of 2024 increased by 56% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the second quarter of 2024 decreased by 35% from the same period of 2023. The education sector included one large project that was completed in the second quarter of 2023 that was not repeated in the same period of 2024 and had a lower volume of projects in the second quarter of 2024 compared to the second quarter of 2023.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States. The following table presents our revenue dispersion by geography:
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||||||||||
Canada |
|
|
4,659 |
|
|
|
4,000 |
|
|
|
16 |
|
|
|
7,728 |
|
|
|
8,912 |
|
|
|
(13 |
) |
U.S. |
|
|
36,542 |
|
|
|
40,753 |
|
|
|
(10 |
) |
|
|
74,320 |
|
|
|
72,549 |
|
|
|
2 |
|
|
|
|
41,201 |
|
|
|
44,753 |
|
|
|
(8 |
) |
|
|
82,048 |
|
|
|
81,461 |
|
|
|
1 |
|
The second quarter of 2024 included a higher proportion of sales to customers in the United States than to those in Canada, with 11% of sales for the period being in Canada and the rest occurring in the United States, compared to 9% of sales to Canada in the second quarter of 2023. Historically, approximately 11-15% and 85-89% of DIRTT’s revenues have been derived from sales to Canada and the United States, respectively.
Sales and Marketing Expenses
Sales and marketing expenses decreased by $0.6 million to $6.1 million for the three months ended June 30, 2024 from $6.6 million for the three months ended June 30, 2023. The decrease was driven by a $0.6 million decrease in pass through charges, a $0.2 million decrease in travel meals and entertainment, a $0.3 million decrease in other individual costs and a $0.1 million decrease in salaries and benefits. These decreases were offset by a $0.7 million increase in termination benefits. Sales and marketing expenses in the second quarter of 2024 included $0.5 million related to our Connext tradeshow and internal sales Masterclass events.
Sales and marketing expenses decreased $0.2 million to $12.0 million for the six months ended June 30, 2024 from $12.1 million in the same period of 2023. The decrease was mainly driven by a $0.7 million decrease in pass through charges and a $0.5 million decrease in building and infrastructure costs, offset by a $1.0 million increase in termination benefits, and a $0.1 million increase in commissions.
General and Administrative Expenses
General and administrative expenses decreased by $1.1 million to $4.4 million for the three months ended June 30, 2024, from $5.5 million for the three months ended June 30, 2023. The decrease was primarily related to a $0.5 million decrease in salaries and benefits costs and a $0.3 million decrease in office costs and communications costs.
For the six months ended June 30, 2024, general and administrative expenses decreased $2.4 million to $9.0 million from $11.3 million in the same period of 2023. The decrease was mainly driven by a $0.9 million decrease in salaries and benefits, a $0.4 million decrease in office costs, a $0.4 million decrease in professional services costs, a $0.2 million decrease in public company costs, a $0.2 million decrease in communications costs and a $0.2 million decrease in depreciation and amortization expenses, offset by a $0.2 million increase in building and infrastructure costs.
Operations Support Expenses
Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Construction Partner project execution and our manufacturing operations. Operations
33
support expenses for the three months ended June 30, 2024 were $1.8 million, consistent with $1.8 million for the comparative period of 2023.
Operations support expenses decreased $0.2 million for the six months ended June 30, 2024 to $3.6 million, from $3.8 million in the same period of 2023, driven by a $0.2 million decrease in salaries and benefits.
Technology and Development Expenses
Technology and development expenses relate to non-capitalizable costs associated with our product and software development teams, and are primarily comprised of salaries and benefits of technical staff.
Technology and development expenses increased by $0.2 million to $1.4 million for the three months ended June 30, 2024, compared to $1.3 million for the three months ended June 30, 2023, primarily related to a $0.1 million increase in salaries and benefits costs. For the six months ended June 30, 2024, technology and development costs decreased by $0.1 million to $2.7 million, from $2.8 million in the same period of 2023. The decrease is primarily related to a $0.3 million decrease in salaries and benefits and a $0.1 million decrease in building and infrastructure costs, offset by a $0.3 million write off of a previously capitalized software development project.
Stock-Based Compensation
Stock-based compensation expense for the three and six months ended June 30, 2024 was $0.4 million and $1.1 million, respectively, compared to $0.7 million and $1.5 million in the same periods of 2023. The decrease in this expense was largely due to a higher number of RSUs outstanding in the prior year period compared to the first six months of 2024. The decrease in RSU expense was offset by a higher DSU expense, as a result of a higher share price during the second quarter of 2024.
Reorganization
Reorganization expenses for the three and six months ended June 30, 2024 was $0.2 million and $0.3 million, respectively. Reorganization expenses decreased from $1.5 million and $2.5 million in the three and six months ended June 30, 2023, respectively. Current quarter costs relate primarily to movement of inventory from the Rock Hill Facility, while the reorganization costs in the second quarter of 2023 were largely made up of termination costs associated with actions taken to streamline our back office and operational support functions. No significant reorganization initiatives were undertaken in the second quarter of 2024.
Impairment Charge on Rock Hill Facility
On September 27, 2023, the Company decided to permanently close the Rock Hill Facility in South Carolina. Certain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. At March 31, 2024, we determined that the assets held for sale balance of $0.5 million was to be reduced to $nil, resulting in a $0.5 million impairment charge for the first quarter of 2024. While we will continue to pursue a sale of the assets, we were not able to determine the likelihood of recoverability based on the current market interest in the equipment.
Related Party Expense
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW and Aron English, 22NW's principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being approximately $1.6 million (the “Debt”).
Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group.
34
In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by shareholders.
At the annual general and special meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.
Gain on Extinguishment of Debt
The Company recognized a gain on extinguishment of debt of C$3.9 million ($2.9 million) following the Issuer Bid. At the expiration of the Issuer Bid, C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of December Debentures were validly deposited and not withdrawn, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Issuer Bid for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)). In accordance with GAAP, it was determined that the C$6.9 million ($5.1 million) repayment on principal triggered an extinguishment of debt. The gain on extinguishment of C$3.9 million ($2.9 million) of debt was calculated as the difference between the repayment and the net carrying value of the extinguished principal less unamortized issuance costs of C$0.4 million ($0.2 million).
Gain on Sale of Software and Patents
On May 9, 2023, we entered into a Co-Ownership Agreement (the “AWI Agreement”) and a partial patent assignment agreement with Armstrong World Industries, Inc. (“AWI”). The agreements provided for a cash payment from AWI to the Company of $10.0 million in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in the Applicable ICE Code, including a 50% interest in the patent rights that relate to the Applicable ICE Code. Pursuant to the AWI Agreement, we also provided AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we received an additional cash payment of $1.0 million in the fourth quarter of 2023. The AWI Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into the ARMSA with AWI, under which AWI has also prepaid for certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the AWI Agreement is terminated or expires and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the AWI Agreement.
The $10.0 million of proceeds on the sale of the 50% interest in the Applicable ICE code, pursuant to the Co-Ownership Agreement, was received during the second quarter of 2023. In accordance with GAAP, the proceeds were first applied to the net book value of the related cost of software of $2.9 million and patents (other assets) of $0.9 million and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $1.8 million was received during 2023 as a prepayment under the ARMSA, which was recognized into revenue during 2023 and the first quarter of 2024. Part of the proceeds of this transaction were used to settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash.
Foreign exchange gain or loss
Foreign exchange gain or loss increased from a loss of $0.6 million and $0.9 million for the three and six months ended June 30, 2023 to a gain of $0.4 million and $1.3 million for the same periods in 2024. Approximately 60% of DIRTT’s costs are denominated in the Canadian dollar.
35
Interest Income
Interest income for the three and six months ended June 30, 2024 was $0.5 million and $1.0 million compared to $0.1 million and $0.1 million for the same periods of 2023. The higher income is due to the interest earned on the Company’s higher cash equivalents.
Interest Expense
Interest expense decreased by $0.3 million from $1.2 million in the quarter ended June 30, 2023, to $0.9 million in the quarter ended June 30, 2024 and by $0.4 million for the six months ended June 30, 2024 to $2.0 million, due to foreign exchange impacts on the interest related to Canadian dollar denominated debt and the decrease in equipment lease balances caused by early settlement of the $7.8 million U.S. Leasing Facility in the fourth quarter of 2023.
Income Tax
Income tax expense for the three and six months ended June 30, 2024 increased to $0.3 million from $nil in the same periods of 2023. The current tax expense represents the income tax provision after the utilization of non-capital loss carry forwards against current period taxable income. The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. Despite positive indications of future profitability, including the current period profit and strength of our pipeline, the Company has determined that it is not more likely than not that a deferred tax asset will be recognized. Given the recent history of losses, the Company will maintain a valuation allowance against the deferred tax asset. As at June 30, 2024, the Company had a valuation allowance of $33.6 million (December 31, 2023: $34.5 million) against deferred tax assets. The Company will continue to evaluate indicators on whether a valuation allowance continues to be needed. For the quarter ended June 30, 2024, the Company utilized a balance of its non-capital loss carry-forwards in Canada and the United States. As at June 30, 2024, we had C$110.1 million of non-capital loss carry-forwards in Canada and $51.6 million in the United States. These loss carry-forwards will begin to expire in 2035.
Net Income After Tax
Net income after tax decreased by $1.6 million to $0.6 million, or $0.00 basic and diluted net income per share, respectively, in the three months ended June 30, 2024, from net income after tax of $2.2 million or a $0.02 basic and $0.01 diluted net income per share for the three months ended June 30, 2023. The decrease in net income after tax is primarily the result of the $6.1 million gain on sale of software and patents and $0.1 million in government subsidies that were received in the second quarter of 2023 which did not reoccur in the second quarter of 2024, and a $0.3 million increase in income tax expense, offset by a $2.5 million decrease in operating expenses, a $1.0 million increase in foreign exchange gain, $0.8 million higher gross profit, a $0.4 million increase in interest income and a $0.3 million decrease in interest expense in the three months ended June 30, 2024.
Net income after tax increased by $12.9 million to $3.6 million, or $0.02 basic and $0.02 diluted net income per share, in the six months ended June 30, 2024, from a net loss of $9.2 million or $0.08 net loss per share, basic and diluted, in the six months ended June 30, 2023. The increase in net income after tax is primarily the result of a $6.8 million increase in gross profit, a $6.4 million decrease in operating expenses, a $2.9 million gain on extinguishment of debt as a result of the substantial issuer bid (refer to Note 5 to our Interim Condensed Consolidated Financial Statements for additional information), a $2.2 million increase in foreign exchange gain, and a $0.9 million increase in interest income. This was offset by the non-reoccurrence of the $6.1 million gain on sale of software and patents and $0.2 million in government subsidies that were received in the comparative period of 2023 and a $0.3 million increase in income tax expense.
36
EBITDA and Adjusted EBITDA for the Three and Six Months Ended June 30, 2024 and 2023
The following table presents a reconciliation for the results of the three and six months ended June 30, 2024 and 2023 of EBITDA and Adjusted EBITDA to our net income (loss) after tax, and of Adjusted EBITDA Margin to net income (loss) margin, which are the most directly comparable GAAP measures for the periods presented:
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||
Net income (loss) after tax for the period |
|
|
596 |
|
|
|
2,206 |
|
|
|
3,641 |
|
|
|
(9,228 |
) |
Add back (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
945 |
|
|
|
1,233 |
|
|
|
1,999 |
|
|
|
2,440 |
|
Interest income |
|
|
(482 |
) |
|
|
(106 |
) |
|
|
(971 |
) |
|
|
(110 |
) |
Tax expense |
|
|
315 |
|
|
|
- |
|
|
|
348 |
|
|
|
- |
|
Depreciation and amortization |
|
|
1,521 |
|
|
|
2,524 |
|
|
|
3,055 |
|
|
|
5,199 |
|
EBITDA |
|
|
2,895 |
|
|
|
5,857 |
|
|
|
8,072 |
|
|
|
(1,699 |
) |
Foreign exchange (gain) loss |
|
|
(358 |
) |
|
|
620 |
|
|
|
(1,277 |
) |
|
|
881 |
|
Stock-based compensation |
|
|
427 |
|
|
|
678 |
|
|
|
1,102 |
|
|
|
1,474 |
|
Government subsidies |
|
|
- |
|
|
|
(88 |
) |
|
|
- |
|
|
|
(236 |
) |
Related party expense (recovery) (2) |
|
|
- |
|
|
|
(532 |
) |
|
|
- |
|
|
|
1,524 |
|
Reorganization expense(3) |
|
|
202 |
|
|
|
1,465 |
|
|
|
340 |
|
|
|
2,536 |
|
Gain on sale of software and patents(3) |
|
|
- |
|
|
|
(6,145 |
) |
|
|
- |
|
|
|
(6,145 |
) |
Gain on extinguishment of convertible debt(3) |
|
|
- |
|
|
|
- |
|
|
|
(2,931 |
) |
|
|
- |
|
Impairment charge on Rock Hill Facility (3) |
|
|
- |
|
|
|
- |
|
|
|
530 |
|
|
|
- |
|
Adjusted EBITDA |
|
|
3,166 |
|
|
|
1,855 |
|
|
|
5,836 |
|
|
|
(1,665 |
) |
Net Income (Loss) Margin(1) |
|
|
1.4 |
% |
|
|
4.9 |
% |
|
|
4.4 |
% |
|
|
(11.3 |
)% |
Adjusted EBITDA Margin |
|
|
7.7 |
% |
|
|
4.1 |
% |
|
|
7.1 |
% |
|
|
(2.0 |
)% |
(1) Net income (loss) after tax divided by revenue.
(2) The related party transaction is a non-recurring transaction that is not core to our business and is excluded from the Adjusted EBITDA calculation (refer to Note 17 of the interim condensed consolidated financial statements).
(3) Reorganization expenses, the gain on sale of software and patents, the gain on extinguishment of convertible debt and the impairment charge on the Rock Hill Facility are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (refer to Note 4, Note 5 and Note 6 of the interim condensed consolidated financial statements).
For the three months ended June 30, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $1.3 million to $3.2 million and 7.7%, respectively, from $1.9 million and 4.1% in the same period of 2023. This primarily reflects a $0.2 million decrease in travel meals and entertainment, a $0.3 million decrease in individual costs, a $0.6 million decrease in salaries and benefits, a $0.3 million decrease in office costs and communication costs, offset by a $0.7 million increase in termination benefits.
For the six months ended June 30, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $7.5 million to $5.8 million or 7.1%, from a $1.7 million loss or (2.0)% in the same period of 2023. This primarily reflects a $5.0 million increase in Adjusted Gross Profit, a $0.7 million decrease in pass through charges, a $0.4 million decrease in building and infrastructure costs, a $1.4 million decrease in salaries and benefits, a $0.8 million decrease in office costs and communication costs, a $0.4 million decrease in professional services costs, a $0.2 million decrease in public company costs, offset by a $1.0 million increase in termination benefits, a $0.1 increase in commissions, and $0.3 million write off of a previously capitalized software development project.
37
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Six Months Ended June 30, 2024 and 2023
The following table presents a reconciliation for the three and six months ended June 30, 2024 and 2023 of Adjusted Gross Profit to our gross profit and Adjusted Gross Profit Margin to gross profit margin, which are the most directly comparable GAAP measure for the periods presented:
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||
Gross profit |
|
|
15,375 |
|
|
|
14,557 |
|
|
|
30,023 |
|
|
|
23,239 |
|
Gross profit margin |
|
|
37.3 |
% |
|
|
32.5 |
% |
|
|
36.6 |
% |
|
|
28.5 |
% |
Add: Depreciation and amortization expense |
|
|
845 |
|
|
|
1,643 |
|
|
|
1,689 |
|
|
|
3,425 |
|
Adjusted Gross Profit |
|
|
16,220 |
|
|
|
16,200 |
|
|
|
31,712 |
|
|
|
26,664 |
|
Adjusted Gross Profit Margin |
|
|
39.4 |
% |
|
|
36.2 |
% |
|
|
38.7 |
% |
|
|
32.7 |
% |
For the quarter ended June 30, 2024, gross profit and gross profit margin increased to $15.4 million and 37.3%, respectively, from $14.6 million and 32.5% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to $16.2 million and 39.4% for the three months ended June 30, 2024, from $16.2 million and 36.2% for the three months ended June 30, 2023.
For the six months ended June 30, 2024, gross profit and gross profit margin increased to $30.0 million or 36.6% from $23.2 million or 28.5% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to $31.7 million or 38.7% for the six months ended June 30, 2024, from $26.7 million or 32.7% for the six months ended June 30, 2023.
The improvement in Adjusted Gross Profit was a result of material optimization, a reduction in fixed costs, and management of labor hours throughout the period to offset the inflationary impacts on material costs. Fixed costs decreased $0.5 million and $1.9 million for the quarter ended and year to date June 30, 2024, respectively, compared to the same periods of 2023 as we aligned overhead costs and support with current operations after having finalized the decision to close the Rock Hill Facility in the third quarter of 2023. Idle facility costs incurred at the Rock Hill Facility were $0.4 million and $0.9 million for the three and six months ended June 30, 2024, respectively (2023 – $0.4 million and $0.9 million). We continue to evaluate options to sublease the Rock Hill Facility to recover the costs of the facility.
Liquidity and Capital Resources
As at June 30, 2024, the Company had $39.5 million of cash on hand and C$14.4 million ($10.6 million) of available borrowings, compared to $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available borrowings as at December 31, 2023. Through the first six months of 2024, the Company generated $14.7 million of cash flow compared to $7.6 million cash generated in the first six months of 2023. Cash generated included cash flows from the Rights Offering (as defined herein) of $21.3 million and improved operational results, offset by a $5.2 million repayment of debt under the Issuer Bid and a decrease in working capital of $4.7 million (mainly due to the receipt of $7.3 million of government subsidies during the first half of 2023 that did not occur in 2024). The first six months of 2023 also benefited from the receipt of $10.9 million of cash from the AWI sale.
We have implemented multiple price increases to mitigate the impact of inflation on raw materials and improve liquidity during the past two years. These actions have resulted in a meaningful improvement in our gross profit margins and higher net income, and have served to stabilize our cash usage to operate the business. Gross profit for
38
the six months ended June 30, 2024 was $30.0 million, or 36.6% of revenue. The same period of 2023 generated gross profit of $23.2 million, or 28.5% of revenue.
We have assessed the Company’s liquidity as at June 30, 2024, taking into account our sales outlook for the next twelve months, our existing cash balances and available credit facilities. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next twelve months.
To the extent that existing cash and cash equivalents and available facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders. While we believe we can access capital markets when needed or under acceptable terms, there can be no assurance we will be able to do so.
In addition, we have executed upon several initiatives to improve liquidity over the last two years. First, in May 2023, we entered into an agreement with AWI resulting in the receipt of $12.8 million of cash throughout 2023. Second, in May 2024, we extended our agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through October 31, 2028, providing us annualized savings of approximately $1.0 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities, including our Rock Hill Facility, and expect these initiatives to result in positive cash inflows in 2025. Third, we completed a private placement of 8,667,449 common shares in November 2022 for aggregate gross proceeds of $2.8 million (the “Private Placement”) with certain significant shareholders and directors and officers of the Company, which helped bridge cash requirements before the completion and closing of the strategic transactions described above. The Private Placement closed on November 30, 2022.
On November 21, 2023, the Company announced that the Board of Directors had approved a Rights Offering to its common shareholders. The Rights Offering closed on January 9, 2024 for aggregate gross proceeds of C$30.0 million and net proceeds of $21.3 million.
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets.
On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company offered to repurchase for cancellation: (i) up to C$6,000,000 principal amount of the January Debentures at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of the December Debentures at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tendered and did not withdraw their Debentures received the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures were taken up by the Company. The applicable purchase price was denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for interest, were made in Canadian dollars. The Issuer Bid expired on March 22, 2024 and DIRTT purchased C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of the December Debentures, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Issuer Bid for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)).
In January 2021, we issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on January 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the January Debentures was adjusted to C$4.03 per common
39
share, representing a conversion rate of 248.1390 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$4.7 million ($3.5 million) of the principal balance of the January Debentures and paid C$0.04 million ($0.03 million) of the interest payable on such January Debentures. As at June 30, 2024, C$18.9 million ($13.8 million) principal amount of the January Debentures were held by a related party, 22NW and were subsequently repurchased by the Company as a result of the Debenture Repurchase as described below. Aron English, manager of 22NW Fund GP, LLC, the general partner of 22NW, is a director of the Company.
On December 1, 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and be repayable on December 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the December Debentures was adjusted to C$3.64 per common share, representing a conversion rate of 274.7253 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$5.8 million ($4.3 million) of the principal balance of the December Debentures and paid C$0.08 million ($0.06 million) of the interest payable on such December Debentures. As at June 30, 2024, C$13.6 million ($10.0 million) principal amount of the December Debentures were held by a related party, 22NW and were subsequently repurchased by the Company as a result of the Debenture Repurchase as described below.
On August 2, 2024, the Company entered into an agreement with 22NW, to purchase for cancellation an aggregate of C$18,915,000 principal amount of the January Debentures at a purchase price of C$684.58 per C$1,000 principal amount of January Debentures and C$13,638,000 principal amount of the December Debentures at a purchase price of C$665.64 per C$1,000 principal amount of December Debentures, for an aggregate purchase price of C$22,104,591.45, inclusive of a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures were purchased by the Company. The purchase price of each series of Debentures (excluding the cash payment for accrued and unpaid interest) represented a discount of approximately 4% to the average trading price of the applicable series of Debentures on the TSX for the 20 trading days preceding August 2, 2024. Following the Debenture Repurchase, which closed on August 2, 2024, C$16,642,000 principal amount of the January Debentures and C$15,587,000 principal amount of the December Debentures remain outstanding, and 22NW no longer holds any Debentures.
In February 2021, we entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a borrowing base of C$15 million and a one-year term. Effective October 2023, inventory was scoped out of the Borrowing Base. On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Refer to discussion in “Credit Facility” herein for additional information.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) with RBC of which C$4.4 million ($3.3 million) has been drawn and C$3.8 million ($2.9 million) has been repaid. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%. During 2023, the Company had a $14.0 million equipment leasing facility, with RBC and one of its affiliates, in the United States, of which $13.3 million was drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”). In connection with the Company’s decision to close the Rock Hill Facility, we settled the liability related to the U.S. Leasing Facility ($7.8 million). The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we released $2.6 million of restricted cash during 2023.
40
The following table summarizes our consolidated cash flows for the periods indicated:
|
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
|
|
($ in thousands) |
|
|
($ in thousands) |
|
||||||||||
Net cash flows provided by (used in) operating activities |
|
|
|
|
1,643 |
|
|
|
3,756 |
|
|
|
(400 |
) |
|
|
2,768 |
|
Net cash flows provided by (used in) investing activities |
|
|
|
|
(844 |
) |
|
|
8,730 |
|
|
|
(563 |
) |
|
|
7,747 |
|
Net cash flows provided by (used in) financing activities |
|
|
|
|
(150 |
) |
|
|
(2,193 |
) |
|
|
15,973 |
|
|
|
(2,861 |
) |
Effect of foreign exchange on cash, cash equivalents and restricted cash |
|
|
|
|
(109 |
) |
|
|
(13 |
) |
|
|
(339 |
) |
|
|
(49 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
|
|
540 |
|
|
|
10,280 |
|
|
|
14,671 |
|
|
|
7,605 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
39,230 |
|
|
|
11,564 |
|
|
|
25,099 |
|
|
|
14,239 |
|
Cash, cash equivalents and restricted cash, end of period |
|
|
|
|
39,770 |
|
|
|
21,844 |
|
|
|
39,770 |
|
|
|
21,844 |
|
Operating Activities
Net cash flows provided by operating activities were $1.6 million for the three months ended June 30, 2024 compared to $3.8 million in the same period of 2023. The decrease in cash flows provided by operations is largely due to a $0.9 million decrease in working capital compared to a $3.5 million increase in working capital in the second quarter of 2023 (the second quarter of 2023 included the receipt of $2.6 million related to the Employee Retention Credit), offset by the $1.3 million increase in Adjusted EBITDA and a $1.3 million decrease in reorganization expenses.
Net cash flows used by operating activities were $0.4 million for the six months ended June 30, 2024 compared to $2.8 million provided in the same period of 2023. The decrease in cash flow from operations was driven by a $15.0 million decrease in working capital changes (the first half of 2023 included the receipt of $7.3 million related to the Employee Retention Credit), offset by the $7.5 million increase in Adjusted EBITDA and a $2.2 million decrease in reorganization expenses.
Investing Activities
We invested $0.3 million and $0.7 million in property, plant and equipment during the three and six months ended June 30, 2024, compared to $0.7 million and $1.0 million in the three and six months ended June 30, 2023. This expenditure consisted of $0.6 million of manufacturing upgrades and $0.1 million of information technology in the six months ended June 30, 2024. We invested $0.5 million and $0.9 million on capitalized software during the three and six months ended June 30, 2024, compared to $0.6 million and $1.1 million for the three and six months ended June 30, 2023. During the first six months of 2024, we sold $1.0 million of assets classified as held for sale as a result of the closure of the Rock Hill Facility, for proceeds of $1.0 million. The Company benefited $10.0 million from the proceeds on sale of software and patents in the three and six months ended June 30, 2023.
Financing Activities
For the three months ended June 30, 2024, $0.2 million of cash was used in financing activities and $16.0 million was provided by financing activities for the six months ended June 30, 2024 compared to $2.2 million and $2.9 million, respectively, of cash used for the same periods of 2023. The cash provided in the six months ended June 30, 2024 comprised mainly of $21.3 million of net proceeds received from the Rights Offering offset by a $5.1 million principal repayment of Debentures as a result of the Issuer Bid, $0.2 million relating to employee tax payments on vesting RSUs and scheduled payments under the Leasing Facilities compared to the $2.8 million routine debt repayments made during the six month ended June 30, 2023.
Credit Facility
On February 12, 2021, the Company entered into the RBC Facility. Under the RBC Facility, the Borrowing Base is up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts
41
receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Interest was calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under the RBC Facility, if the “Aggregate Excess Availability”, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash is less than C$5.0 million, the Company was subject to a fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR was below 1.10:1 for the three immediately preceding months, the Company was required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. Had an event of default occurred or the Aggregate Excess Availability been less than C$6.25 million for five consecutive business days, the Company would have entered a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances would set-off any borrowings and any remaining amounts made available to the Company.
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility had a maximum borrowing base of C$15 million and a one-year term. Interest was calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 200 basis points. Under the Extended RBC Facility, until such time that the trailing twelve-month FCCR was above 1.25 for three consecutive months, a cash balance equivalent to one-year’s worth of Leasing Facilities payments would be maintained. Effective October 2023, inventory was scoped out of the Borrowing Base.
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The maximum availability under the Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case, plus 200 basis points. At June 30, 2024, available borrowings are C$14.4 million ($10.6 million) (December 31, 2023 – C$13.6 million ($10.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The Second Extended RBC Facility removed the three-month FCCR covenant, which resulted in the release of $0.1 million of restricted cash during the first quarter of 2024 (the Company had $0.4 million restricted cash as at December 31, 2023).
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.3 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.
As part of the decision to close the Rock Hill Facility, the Company fully settled the liability related to the U.S. Leasing Facility of $7.8 million in the fourth quarter of 2023. The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, $2.6 million was released from restricted cash during 2023.
The Company did not make any draws on the Canadian Leasing Facility during the second quarter of 2024 and the year ended December 31, 2023.
We are restricted from paying dividends unless Payment Conditions (as defined in the Second Extended RBC Facility) are met, including having a net borrowing availability of at least C$10 million over the proceeding 30-day period, and having a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. The Second Extended RBC Facility is currently secured by substantially all of our real property located in Canada and the United States.
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount
42
based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets.
Contractual Obligations
Since our disclosure in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, the following material contractual changes have occurred:
See Note 16, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information. Additionally, refer to Note 18, “Subsequent Events” for the Debenture Repurchase subsequent to June 30, 2024.
Significant Accounting Policies and Estimates
There have been no material changes in our significant accounting policies during the three months ended June 30, 2024, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K. For information regarding significant accounting policies and estimates, please refer to Item 7 and Item 8 in our Annual Report on Form 10-K. As disclosed in Note 3, “Adoption of New and Revised Accounting Standards” to our interim condensed consolidated financial statements appearing in this Quarterly Report, there were no new accounting standards adopted during the three months ended June 30, 2024.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, please refer to Note 3, “Adoption of New and Revised Accounting Standards,” to our condensed consolidated interim financial statements and “–Significant Accounting Policies and Estimates” appearing in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk exposures since our disclosures in our Annual Report on Form 10-K. For information regarding our exposure to certain market risks, please refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K. The Company’s cash and cash equivalents are predominantly all with one AA rated financial institution.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our principal executive officers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based upon their evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
43
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, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the legal proceedings previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 except as described below regarding DIRTT’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates.
With respect to the Utah Unfair Competition Case, Falkbuilt has refused to respond to discovery or supplement its prior discovery, and DIRTT is preparing for motion practice. While Falkbuilt also resisted the entry of a scheduling order, after motion practice and an order from the magistrate judge, the Court entered a scheduling order requiring discovery to be completed by February 2025. The Court set a pretrial conference for October 17, 2025. DIRTT has also retained two experts. Briefing on Falkbuilt’s motion to stay the case and renewed motion to move the case to Canada is fully briefed. DIRTT is proceeding as though the motion will be denied.
In the Canadian Non-Compete Case, as a potential alternative to the summary judgment application on liability, DIRTT recently took advantage of a new pilot project introduced by the Alberta Court of King's Bench to seek a full trial on both liability and damages in an effort to expedite the matter to conclusion. That application is scheduled for August 30, 2024.
Item 1A. Risk Factors
In addition to the risk factors set forth below and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
Our two largest shareholders, 22NW and WWT, are able to exercise a significant amount of control over the Company due to their significant ownership of our common shares, and their interests may conflict with or differ from the interests of our other shareholders. In addition, the Amended and Restated SRP and the Support Agreement will limit the concentration of ownership of our common shares by shareholders other than 22NW and WWT, which may make it more difficult for a shareholder to acquire the Company.
As of August 5, 2024, 22NW and Aron English (collectively, the “22NW Group”) and WWT and Shaun Noll (collectively, the “WWT Group”) each owned 29.8% and 27.7% of our common shares, respectively, together beneficially owning approximately 57.5% of our common shares. So long as the 22NW Group and WWT Group and their respective affiliates continue to directly or indirectly own a significant amount of our common shares, they will be able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendments to our amended and restated articles of amalgamation, and approval of significant corporate transactions, barring any requirement for such shareholder to recuse itself from any such vote pursuant to applicable securities law, corporate law or the rules and regulations of any applicable stock exchanges. Further, Aron English and Shaun Noll, who serve as the investment manager and Managing Member of the 22NW Group and WWT Group, respectively, also serve as directors on the Company’s Board of Directors. This control could have the effect of delaying or preventing a change of control of the Company or changes in management, and would make the approval of certain transactions difficult or impossible without the support of these shareholders.
Since the 22NW Group and WWT Group each exercise a significant amount of control over the Company due to their significant ownership of our common shares, if the 22NW Group and WWT Group were to disagree about key decisions with respect to the Company we may not be able to effectively address challenges facing our business, which could adversely affect our business, financial condition or results of operations.
In addition, the Board has adopted the Amended and Restated SRP in order to help ensure that all shareholders of the Company are treated fairly and equally in connection with any unsolicited take-over bid or other acquisition of control of the Company. The Amended and Restated SRP may discourage, delay, or prevent a change of control or acquisition of the Company, even if such action may be considered beneficial by some shareholders, and could limit the price that investors would be willing to pay in the future for the Company’s common shares. The Amended and Restated SRP is currently effective but is subject to ratification by shareholders at the SRP Meeting to be held later this year. If ratified, the Amended and Restated SRP may prevent any current or prospective shareholder from
45
obtaining a number of common shares that would allow it to exercise a similar level of control or influence over the Company as the 22NW Group and WWT Group currently have.
The repurchase and cancellation of our Debentures in 2024 may not enhance shareholder value and could adversely affect the price or liquidity of the Debentures.
On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$4.7 million of the principal balance of the January Debentures and C$5.8 million of the principal balance of the December Debentures.
On August 2, 2024, the Company and 22NW closed the Debenture Repurchase in which the Company purchased for cancellation an aggregate of C$18,915,000 principal amount of the January Debentures and C$13,638,000 principal amount of the December Debentures. Following the Issuer Bid and Debenture Repurchase, C$16,642,000 principal amount of the January Debentures and C$15,587,000 principal amount of the December Debentures remain outstanding.
The Issuer Bid and Debenture Repurchase decreased the number of outstanding Debentures, and therefore could decrease their liquidity in the market of the Debentures and increase the volatility of the prices at which they trade. The Debenture Repurchase may also cause the prices of the Debentures to differ from what they would be in the absence of the Debenture Repurchase. While the Debenture Repurchase decreased our indebtedness, it also decreased our cash reserves, which could impact our ability to operate and develop our business. There can be no assurance the Debenture Repurchase will ultimately enhance shareholder value.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
46
Item 6. Exhibits
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
|
|
3.1 |
|
|
3.2 |
|
|
4.1 |
|
|
4.2 |
|
|
4.3 |
|
|
4.4 |
|
|
4.5 |
|
|
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
31.1* |
|
|
31.2* |
|
|
32.1** |
|
|
32.2** |
|
|
101.INS* |
|
Inline XBRL Instance Document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* |
|
Filed herewith |
** |
|
Furnished herewith |
|
|
|
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
DIRTT ENVIRONMENTAL SOLUTIONS LTD. |
||
|
|
|
|
|
By: |
|
/s/ Fareeha Khan |
|
|
|
Fareeha Khan |
|
|
|
Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
Date: August 7, 2024 |
|
|
|
48
Exhibit 31.1
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULE 13A-14(a) OR RULE 15D-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Benjamin Urban, certify that:
Dated: August 7, 2024 |
By: |
|
/s/ Benjamin Urban |
|
|
|
Benjamin Urban |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULE 13A-14(a) OR RULE 15D-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fareeha Khan, certify that:
Dated: August 7, 2024 |
By: |
|
/s/ Fareeha Khan |
|
|
|
Fareeha Khan |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of DIRTT Environmental Solutions Ltd. (the “Company”) for the quarter ended June 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Benjamin Urban, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Dated: August 7, 2024 |
By: |
|
/s/ Benjamin Urban |
|
|
|
Benjamin Urban |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of DIRTT Environmental Solutions Ltd. (the “Company”) for the quarter ended June 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Fareeha Khan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Dated: August 7, 2024 |
By: |
|
/s/ Fareeha Khan |
|
|
|
Fareeha Khan |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial Officer) |