DIRTT 2021
Annual Report
March 31, 2022
Letter to Shareholders
Dear fellow shareholder,
After two years of public health driven challenges organizations are looking to respond to an exciting new
environment. This is less about “returning” to anything, and more about a new future where flexibility and adaptability
are key. If anything, the pandemic accelerated changes that were already underway with how and where people
worked, learned, and spent their time. Many organizations are continuing down the path of hybrid and flexible
settings, and many more are joining them. Layer on top of that a change in how people want to access healthcare,
banking, and other critical services, and it suggests the world we are going into will look very different from the one
we left behind in March 2020.
DIRTT is built to excel in this new world. As a society, we have proven over the last two years that we are more
adaptable than many had thought. As we enter this new phase, many do not want to lose that element of flexibility.
Many organizations are focusing on personalization, flexibility, and adaptability, and the design community is being
called on to create and adapt space at an unprecedented rate. Designers, architects, and contractors are rethinking
how space is built to make it a more inclusive experience, and we help them do that.
The fundamental shifts taking place in the market are only partly attributable to COVID. The competition for talent,
better technology, greater worker mobility and transiency has forced a major rethink of workplace strategy, design,
and management. How and where people expect to obtain services has also shifted. There is ongoing change in
banking as financial institutions are finding the need to downsize larger branches, build smaller ones and make
better use of the space they currently own. In healthcare, we are seeing a continued shift from in-patient care to
outpatient, or ambulatory, care offered in community settings. There is a growing recognition of the importance of
the built environment in educational settings, and colleges, universities and schools are responding with creative
new builds. Sustainable and resilient spaces are high on the priority list for new government builds.
To successfully target this rapidly changing market, we first needed to change our own business, so that we could
be a more strategic, more mature and ultimately, more profitable company. That work began in earnest in early
2022, when the board of directors determined the company needed new leadership to drive the required change.
I assumed the role of interim Chief Executive Officer and we launched a global search for a permanent company
lead. We then got to work on a host of initiatives to change the trajectory of DIRTT so that we were better – and
more efficient – at what we do.
We created a product development filter that will drive a greater focus on our custom construction solutions, offering
clients greater certainty in cost, schedule, and outcomes, while delivering higher margin sales for us. We are also
exploring some important changes to our proprietary ICE® software so that clients can better envision and design
their spaces with more products and greater ease of use.
We are adapting our manufacturing footprint to ensure we have robust capabilities to continue to serve partners and
customers across North America. We will expand aluminum manufacturing in Calgary, AB and Savanah, GA, add
Thermofoil and back-painted glass production in Rock Hill, SC, and close our facility in Phoenix, AZ. These moves
will reduce shipping time and costs for Thermofoil panels to customers in the Midwest and eastern regions of North
America, while reducing our fixed costs.
DIRTT ENVIRONMENTAL SOLUTIONS | 2021 Annual Report - March 2022DIRTT 2021Annual Report Our partners are critical to our success and to better tap their market knowledge and expertise, we established
a Partner Advisory Council. This will be a forum for our team to work in close collaboration with an elite group of
our partners to better pursue opportunities. We also joined the American Institute of Architects as a Cornerstone
Partner to grow awareness about how architects can harness the infinite design freedom provided by industrialized
construction.
We made several changes to how the business is run, how work gets done and how we price our products and
services to improve efficiencies and prioritize the important things we want to continue doing. It was a complex
exercise to balance a need for a leaner operation that can respond to an expanding number of opportunities. We
believe we found that balance and while the efficiencies are expected to reduce our fixed expenses by 14% on an
annualized basis, the closer working relationship with our partners and others in the design and construction space,
coupled with our manufacturing capacity, can make us more responsive to the new market dynamics at play.
While these important structural changes were being made, we never lost sight of the important work we do
with our design and construction partners. Over the last year, we launched a new state-of-the-art flagship DIRTT
Experience Center (DXC) in Dallas, showcasing a wide range of resilient solutions that foster greater collaboration
between people and teams while seamlessly integrating technology, and serving as home to our US headquarters.
We also refreshed our Chicago DXC and announced our plans to update our Calgary DXC, which continues to be
our Canadian headquarters.
Our work with industry thought leaders continues in several forums. We developed a leading editorial platform
called make.space (https://make.space/), providing monthly perspectives and the latest insights on design and
construction. We continue to publish our annual Iconoclast magazine, featuring leading figures in architecture, real
estate, construction, industrial design, and organizational strategy. We sponsored ThinkLab’s Design Hackathon
on product specification in a hybrid world, a six-month cross-functional generative research, survey data from over
1,200 design leaders.
And we’re not done.
In 2022 we intend to rebrand and reposition the company to better address expanding customer needs, new
market drivers and shifting industry landscapes. Our evolved positioning clarifies and reinforces the value DIRTT’s
construction system offers as organizations look to adapt to new markets and target new audiences.
DIRTT is on the path to profitability, rapidly becoming deeper engaged with our strategic accounts, and ready to
respond to a changing world. We are excited about our future and see considerable opportunity ahead.
I would like to thank our entire DIRTT team for their continued efforts, our board of directors for their leadership, our
partners for stepping up to the new challenges we collectively face, and you, our shareholders, who continue to
share in DIRTT’s vision.
Sincerely,
Todd W. Lillibridge
Interim President and Chief Executive Officer
DIRTT ENVIRONMENTAL SOLUTIONS | 2021 Annual Report - March 2022DIRTT 2021Annual Report UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-39061
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
(Exact name of Registrant as specified in its Charter)
Alberta, Canada
(State or other jurisdiction of
incorporation or organization)
7303 30th Street S.E.
Calgary, Alberta, Canada
(Address of principal executive offices)
N/A
(IRS Employer
Identification No.)
T2C 1N6
(Zip code)
Registrant’s telephone number, including area code: (403) 723-5000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Common Shares, without par value
Trading
Symbol(s)
DRTT
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
☒
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
Emerging growth company
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the shares of
common shares on The Nasdaq Stock Market on June 30, 2021, was $364,706,983.
The registrant had 85,351,261 common shares outstanding as of February 23, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the Annual and Special Meeting of Shareholders, scheduled to be held on April 26, 2022, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business ...............................................................................................................................................................
Item 1A.Risk Factors..........................................................................................................................................................
Item 1B. Unresolved Staff Comments ................................................................................................................................
Item 2. Properties .............................................................................................................................................................
Item 3. Legal Proceedings ................................................................................................................................................
Item 4. Mine Safety Disclosures ......................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
[Reserved]
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .............................
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.............................................................................
Item 8. Financial Statements and Supplementary Data....................................................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............................
Item 9A.Controls and Procedures ......................................................................................................................................
Item 9B. Other Information ................................................................................................................................................
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance...................................................................................
Item 11. Executive Compensation......................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............
Item 13. Certain Relationships and Related Transactions, and Director Independence ....................................................
Item 14. Principal Accounting Fees and Services ..............................................................................................................
PART IV
Item 15. Exhibits, Financial Statement Schedules .............................................................................................................
Item 16. Form 10-K Summary ...........................................................................................................................................
Page
6
15
23
23
23
24
24
25
26
42
43
71
71
71
71
72
72
72
72
72
73
76
2
EXPLANATORY NOTE
Currency and Exchange Rate Information
Unless otherwise indicated, references in this Annual Report on Form 10-K (the “Annual Report”) to “$” or “dollars” are
expressed in U.S. dollars (US$). References in this Annual Report to Canadian dollars are noted as “C$.”
Our consolidated financial statements that are included in this Annual Report are presented in U.S. dollars. Unless otherwise
stated, all figures presented in Canadian dollars and translated into U.S. dollars were calculated using the daily average exchange rate
as reported by the H.10 statistical release of the Board of Governors of the Federal Reserve System on January 28, 2022 of C$1.2753
= US$1.00.
Market and Industry Data
Certain market and industry data contained in this Annual Report, including Item 1. “Business” and Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” are based upon information from government or other
third-party publications, reports and websites or based on estimates derived from such publications, reports and websites. Government
and other third-party publications, reports and websites do not guarantee the accuracy or completeness of their information. While
management believes this data to be reliable, market and industry data are subject to variations and cannot be verified with complete
certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process, and other
limitations and uncertainties inherent in any statistical survey.
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual 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 (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 Annual Report, regarding without limitation 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 Annual Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,”
“plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and other
similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such
identifying words. In particular and without limitation, this Annual Report contains forward-looking information pertaining to the
effect of our strategic priorities on increasing value creation; the application of our processes and technology and the benefits
therefrom, forecast operating and financial results, including 2022 revenue and the impact of certain cost-saving measures, the
competitiveness of the Company’s solutions, the liquidity and capital resources of the Company, current claims against the Company
and expiring patents will have on the Company’s business, financial condition, results of operations and growth prospects; our
executive management team and the effect the rating systems established by the U.S. Green Building Council will have on demand for
products, systems and services in the U.S. market. Forward-looking statements are based on certain estimates, beliefs, expectations
and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future
developments, as well as other factors that may be appropriate.
Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes
to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in
forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material
adverse effect on our business, financial condition, results of operations and growth prospects include, but are not limited to, the
severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described in
Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and
elsewhere in this Annual Report. These factors include, but are not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the impact of the COVID-19 pandemic and any strain variants or resurgences thereof on our business;
our ability to implement our strategic plan;
our ability to maintain and manage growth effectively;
competition in the interior construction industry;
competitive behaviors by our co-founders and former executives;
the condition and changing trends of the overall construction industry;
our reliance on our network of Distribution Partners (as defined herein) for sales, marketing and installation of our
solutions;
our ability to introduce new designs, solutions and technology and gain client and market acceptance;
defects in our designing and manufacturing software and warranty and product liability claims brought against us;
material fluctuations of commodity prices, including raw materials;
shortages of supplies of certain key components and materials or disruption in supplies due to global events, including the
COVID-19 pandemic;
global economic, political and social conditions and financial markets;
our exposure to currency exchange rates, tax rates and other fluctuations, including those resulting from changes in laws
or administrative practice;
legal and regulatory proceedings brought against us;
infringement on our patents and other intellectual property;
cyber-attacks and other security breaches of our information and technology systems;
damage to our information technology and software systems;
our requirements to comply with applicable environmental, health and safety laws, including those relating to the COVID-
19 pandemic;
4
•
•
•
•
•
•
•
•
•
•
•
•
the impact of border crossing blockades on our ability to deliver our solutions on anticipated time frames and impacts on
transportation costs;
our ability to generate sufficient revenue to achieve and sustain profitability;
our periodic fluctuations in results of operations and financial conditions;
volatility of our share price;
the effect of being governed by the corporate laws of Alberta, Canada, including obstacles to investors seeking to acquire
control of our company;
the effect of being governed by the corporate laws of a foreign country, including the difficulty of enforcing civil
liabilities against directors and officers residing in a foreign country;
turnover of our key executives, recruitment efforts to find a permanent chief executive officer, and difficulties in
recruiting or retaining key employees;
the impact of the shareholder meeting requisition notice delivered by 22NW Fund and the results thereof;
the availability of capital or financing on acceptable terms, which may impact our liquidity and impair our ability to make
investments in the business;
the availability and treatment of government subsidies (including any current or future requirements to repay or return
such subsidies);
future mergers, acquisitions, agreements, consolidations or other corporate transactions we may engage in; and
other factors and risks described under the heading “Risk Factors” in Item 1A. of this Annual Report.
These risks are not exhaustive. Because of these risks and other risks and uncertainties, our actual results, performance or
achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking
statements in this Annual Report. New risk factors emerge from time to time, and it is not possible for our management to predict all
risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Our past results
of operations are not necessarily indicative of our future results. You should not place undue reliance on any forward-looking
statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of
future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the
future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary
statements.
5
Item 1.
Business.
Overview
PART I
DIRTT Environmental Solutions Ltd. is an innovative manufacturing company featuring proprietary software and virtual reality
visualization platform, coupled with vertically integrated manufacturing that designs, configures and manufactures prefabricated
interior solutions used primarily in commercial spaces across a wide range of industries and businesses. We combine innovative
product design with our industry-leading, proprietary ICE® Software (“ICE” or “ICE Software”), and technology-driven, lean
manufacturing practices and sustainable materials to provide end-to-end solutions for the traditionally inefficient and fragmented
interior construction industry. We create customized interiors with aesthetics of conventional construction but with greater schedule
and cost certainty, shorter lead times, greater future flexibility, and better environmental sustainability than conventional construction.
Our ICE Software allows us to sell, design, visualize (including 3D virtual reality modeling of interiors), configure, price,
communicate, engineer, specify, order and manage projects, thereby reducing challenges associated with traditional construction,
including cost overruns, change orders, inconsistent quality, delays and material waste. While other software programs and virtual
reality tools are used in the architectural and construction industries, our ICE Software provides end-to-end integration, from design
through order engineering, manufacturing and installation. Our interior construction solutions include prefabricated, customized
interior modular walls, ceilings, and floors; decorative and functional millwork; power infrastructure; network infrastructure; and pre-
installed medical gas piping systems. We strive to incorporate environmentally sustainable materials and reusable components into our
solutions while creating flexible, functional and well-designed environments for the people who will use them.
We offer our interior construction solutions throughout the United States and Canada through a network of independent
distribution partners (“Distribution Partners”) and an internal sales team. Our Distribution Partners use ICE to work with stakeholders,
including end users, to envision and design their spaces, and orders are electronically routed through ICE to our manufacturing
facilities for production, packing and shipping. Our Distribution Partners then coordinate the receipt and installations of our interior
solutions at the end users’ locations.
Our name “DIRTT” stands for Doing It Right This Time. DIRTT was incorporated in Alberta, Canada, under the Business
Corporations Act (Alberta) (“ABCA”) on March 4, 2003. Our headquarters are located at 7303 30th Street S.E., Calgary, Alberta, T2C
1N6, Canada, and our telephone number at that address is (403) 723-5000. Our manufacturing facilities are in Calgary, Alberta; Rock
Hill, South Carolina; and Savannah, Georgia.
We completed our initial public offering in Canada in November 2013 and listed our common shares on The Nasdaq Global
Select Market (“Nasdaq”) in October 2019. Our common shares trade on the Toronto Stock Exchange (“TSX”) under the ticker
symbol “DRT” and on Nasdaq under the ticker symbol “DRTT.”
Unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,” “its,” “the Company” or “DIRTT”
mean DIRTT Environmental Solutions Ltd. and, where the context so requires, includes our subsidiaries.
Available Information
We file or furnish annual, quarterly and current reports, proxy statements and other documents with the U.S. Securities and
Exchange Commission (“SEC”) under the Exchange Act. The SEC maintains a website (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers, including DIRTT, that file electronically with the SEC. We are
also subject to requirements of applicable securities laws in Canada, and documents that we file with the securities commissions or
similar regulatory authorities in Canada may be found at www.sedar.com.
We make available free of charge through our website (www.dirtt.com) our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the
SEC or the securities commissions or similar regulatory authorities in Canada. In addition to the reports filed or furnished with the
SEC and the securities commissions or similar regulatory authorities in Canada, we publicly disclose information from time to time in
our press releases, investor presentations posted on our website and at publicly accessible conferences. Such information, including
information posted on or connected to our website, is not a part of, or incorporated by reference in, this Annual Report or any other
document we file with or furnish to the SEC or the securities commissions or similar regulatory authorities in Canada.
6
We will provide without charge to you, upon your request, a copy of our annual report on Form 10-K for the year ended
December 31, 2021 filed with the SEC and the applicable securities commissions or similar regulatory authorities in Canada. Requests
for copies should be addressed to 7303 30th Street S.E., Calgary, Alberta, T2C 1N6, Canada, Attention: Investor Relations.
Our Solutions
We offer a wide array of interior construction solutions powered by technology that address the challenges inherent in
traditional interior designing and construction methods. Unlike traditional interior construction, including traditional prefabricated
products, our solutions do not have predetermined shapes, sizes or configurations, so clients are free to design any shape, size or
configuration that is necessary to meet their needs. Our design and visualization technologies integrate with our manufacturing
capabilities and enable short and precise manufacturing times. With a strong network of Distribution Partners, we are able to complete
an interior construction project in as few as 30 days, from visualization and completion of design to installation and move-in. Because
our solutions remain highly adaptable over time, clients are able to change and customize our solutions even after installation to
maintain satisfaction with the functionality and aesthetics of their space as their needs change.
Sustainability practices are a core part of our business, from design and manufacturing to installation and beyond. Our solutions
are form-fit, so the only waste produced at job sites is packing material, which is biodegradable, recyclable or able to be returned to
DIRTT for reuse.
DIRTT Solutions
Our solutions typically are able to address over 90% of an interior space. Walls, doors, cabinetry, access floor, ceilings, power
solutions, data networks, timber and medical gas components are all fabricated in our manufacturing facilities and shipped to the site
for final assembly and installation. The following table provides a brief description of our primary solutions (together with related
complementary offerings, “DIRTT Solutions”):
DIRTT Solution
Description
DIRTT Walls
Prefabricated, customized, modular solid or glass interior wall solutions that support new and legacy furniture,
that include glass walls, doors or windows, and that support integrated technology for commercial, healthcare,
education, hospitality and other industries and medical gas piping systems for healthcare.
DIRTT Millwork
Fully customized modular cabinetry that may be used in a variety of industries, including commercial,
healthcare, education and hospitality.
DIRTT Floors
Low-profile floors that allow quick access to modular power and network infrastructure, facilitating future
adaptation and reconfiguration in both existing facilities and new buildings.
DIRTT Ceilings
Prefabricated custom ceilings that increase sound privacy and reduce noise. In 2021 we discontinued
manufacturing ceilings and entered into a referral agreement with a major ceiling manufacturer.
DIRTT Power
Quick-connect, pre-tested adaptable power solutions that are prefabricated to arrive on-site in correct lengths
with factory components ready for installation and use, eliminating waste and providing future flexibility.
DIRTT Networks
Prefabricated pre-tested and componentized passive optical networks utilizing single mode fiber cables instead
of traditional copper cables. Similar to DIRTT Power, data infrastructure components arrive on the job site pre-
cut to correct lengths and with components ready for quick-connect installation and use.
DIRTT Timber
Prefabricated timber construction for interior mezzanines, structural elements for low-rise buildings, and other
architectural elements, including completely customized cross-laminated timber and glue-laminated (glulam)
timber.
Our DIRTT Power and DIRTT Networks solutions may be integrated with DIRTT Walls, and DIRTT Networks solutions may
also be integrated with DIRTT Floors and DIRTT Ceilings. DIRTT Millwork solutions may be added to DIRTT Walls for decorative
and functional purposes. Additionally, DIRTT Walls, DIRTT Floors, DIRTT Ceilings and DIRTT Timber may be integrated among
each solution.
ICE® Software
Our manufacturing is built on a foundation of technology, the core of which is our proprietary ICE Software. We use ICE to
sell, design, visualize, configure, price, communicate, engineer, construct, specify and order projects. ICE enables us to efficiently
manufacture fully custom interiors while addressing challenges associated with traditional construction, including cost overruns,
7
inconsistent quality, delays and significant material waste. ICE also gives our clients control over the look, cost and timing of their
interior construction projects.
Clients typically engage an architect or designer and initially design their interior including space planning, materials, colors,
finishes, which are then often presented in two-dimensional renderings or a building information model (“BIM”). A Distribution
Partner imports this design into ICE and prices projects in real time. Clients can make changes after the design is imported into ICE,
which will immediately be reflected in the price quote. Throughout these iterations, clients can explore and walk through their
proposed space in immersive and interactive 3D virtual reality, on-screen computer renderings, and floorplan details so they can more
readily understand the design. Throughout every stage of the process design changes can be made easily and in real time. We believe
this is a significantly enhanced experience for our clients as compared with the experience of reviewing a two-dimensional blueprint
or CAD drawing or user expertise intensive BIM file. In addition to the ICE tools that enable these experiences at each of our
Distribution Partners, we currently have four specialized virtual reality walk-through centers, including one at our corporate
headquarters, that allow clients to use virtual reality headsets to physically walk through a 3D virtual reality model of their design.
Further, ICE’s virtual and augmented reality technology, including applications for phones, tablets and PCs, also allows project
stakeholders in different physical locations to meet in real time to visualize, move about, interact with, discuss and edit their future
spaces from any location. ICE also provides the ability to export a BIM file for use in design reviews of an entire project consisting of
non-DIRTT construction elements coming from many different types of software.
Once the client is satisfied with the design in ICE, the specifications are transmitted to our manufacturing facilities, where the
physical product solutions are created to the exact design standards and specifications set forth in the design. ICE’s detailed bill of
material data output is key to managing the many aspects of the manufacturing process, including product inventory and cataloguing,
price quotation, order submission, parts manufacturing, and production management, thereby facilitating the delivery of custom
solutions with shorter production times. We allocate production among our manufacturing facilities based on proximity to the job site
and available capacity. ICE’s information allows a project to be tracked in detail across the entire life of the project, from sales,
production, delivery, and installation. The ICE file (containing a project’s bill of material and manufacturing data) generated during
the design and specification process is preserved and can be used for optimizing future reconfigurations, renovations, technology
integration initiatives and changes to a client’s space at lower cost than traditional construction methods.
Our Business Strategy
Our goal is to help clients envision and design interior construction projects and then build and deliver those projects faster,
cleaner, more efficiently and with a better overall client experience and satisfaction than traditional construction methods. The
modular aspect of our DIRTT Solutions allows them to be easily reconfigured with a minimal amount of waste as client space needs
change. Our innovative, technology-driven approach includes outstanding product design that is customized for each client application
and delivered on time and on budget.
Our strategy is founded on the following priorities:
•
•
•
•
The identification and pursuit of client segments that benefit most from DIRTT’s value proposition;
Client-centric, continuous innovation in DIRTT Solutions and our technology to enhance product differentiation and drive
market penetration and growth;
Technology-enabled manufacturing processes that facilitate short lead times, a reliable client service platform, and
outstanding quality on a cost-effective basis; and
Ongoing development and support of our Distribution Partners to ensure flawless execution and a superior end client
experience.
In combination with a focus on cost-discipline, a continuous improvement philosophy, and a focused approach to capital
investment, we believe these strategic priorities will drive increased value creation for our employees, clients, Distribution Partners,
and shareholders.
8
Our Competitive Strengths
We believe the following attributes provide us with competitive strengths in the interior solutions manufacturing industry:
•
•
•
•
•
Leader in Integrated Design and Manufacturing Technology. We believe our ICE Software is the only interior
construction technology that efficiently integrates the design, configuration, and virtual reality visualization processes
with the manufacturing process. The use of 3D technology in a design environment, utilizing video game technology for
real time decision making, is an approach pioneered by DIRTT.
Easy and Intuitive Software Interface. Our ICE Software is a fast, powerful tool with an intuitive user interface. Our
software’s ease of use enables rapid time-to-value for our clients and collaboration among all the stakeholders involved in
the design, reconfiguration, budgeting and manufacturing processes. Our use of 3D virtual reality and augmented (mixed)
reality technologies enables clients to visualize and modify their designs before manufacturing begins, thereby reducing
cost and time to completion.
Proprietary Solutions Components. The physical components that comprise our DIRTT Solutions have been designed to
provide clients with numerous options and full modularity. As a result, we are able to create interior environments that are
fully customizable and not limited by a pre-set product list. The modular nature of our components allows them to be
reconfigured easily, with minimal disruption to the occupants of the space and with minimal job site waste.
Strong Distribution Partner and Sales Network. Our strong network of Distribution Partners and DIRTT sales
representatives allows us to maximize our geographic reach, helps build brand awareness in the interior construction
market, and enhances our positioning in our target markets.
Superior Results Compared to Traditional Design and Construction. We believe we produce superior client results as
compared with traditional design and construction methods in sequencing, certainty, budget allocation, and outcome.
•
•
•
•
Effective Sequencing. Conventional construction generally follows a rigid sequencing process. Typically, wall
framing is constructed first, followed by floors and electrical and data networks. This process is then followed by
drywall installation, painting, and flooring, and then installation or building of millwork and fixtures. These steps
generate significant waste and create opportunities for delay, change orders, cost overruns and rework. In contrast,
DIRTT Solutions design and integrate the walls, floors and ceiling, including the finish, electrical wiring and data
networks. They are manufactured off-site and arrive on-site organized, labeled and ready to be installed. This
enables the interior solutions to be produced concurrently with on-site construction work, thereby reducing on-
site time and the overall construction schedule.
Certainty. Our technology-based design and manufacturing solutions address changes in design, communications
with clients, and material costs with more certainty than conventional construction methods, which often involve
retrofitting electrical and data networks, change orders, uncertain timelines, and costly rework. Our controlled
manufacturing environment reduces deficiencies and errors and produces more consistent solutions in predictable
time frames.
Budget. Because of our integrated design, visualization and manufacturing technologies, we can price the effect of
design choices and changes immediately and deliver the fully designed, manufactured interior solutions ready to
install. This provides budget certainty both in the cost of our DIRTT Solutions as well as in on-site labor for the
installation process.
Outcome. Our interior spaces look like the images our clients expect from the design drawings and virtual
visualizations, because those same drawings and visualizations drive the manufacturing process. Plumbing,
electrical, A/V and data networks are integrated into the architecture of our DIRTT Solutions. For example, DIRTT
Walls carry an aesthetic of permanent walls, but if an IT or facilities team needs to get inside the wall for any
reason, they can use a tool to remove the surface of the wall to examine the wall cavity quickly, cleanly and quietly.
This eliminates the need to knock down, and then patch and repaint, drywall or reconfigure fixtures and cabinetry.
Our modular designs offer flexibility and interconnectivity with any technology, furniture, millwork or DIRTT
Solutions that were previously used or that will be used in the future, allowing clients to reconfigure and repurpose
their space while reducing disruptive and time-consuming demolition and waste removal.
Distribution Partners and Sales Network
We primarily sell DIRTT Solutions through a network of independent Distribution Partners working in conjunction with local
DIRTT sales representatives, as well as internal DIRTT industry specialists, business development professionals and a dedicated
Distribution Partner support team. Distribution Partners and local sales representatives are located in cities throughout the United
9
States and Canada. The use of a dispersed network of Distribution Partners greatly enhances our ability to drive awareness of the
DIRTT brand throughout our markets.
As part of our distribution agreements, our Distribution Partners are typically required to invest in their own DIRTT Experience
Center (“DXC”) so that they are able to effectively showcase DIRTT Solutions. These DXCs are showrooms that provide mock-ups of
DIRTT Solutions and related product offerings. As well, DIRTT maintains DXCs in Calgary, Toronto, Chicago, New York City,
Savannah, Salt Lake City and Dallas. On February 22, 2022 we announced our intention to close our Phoenix DXC.
Our Distribution Partners operate under agreements that outline sales goals and marketing territories which are generally non-
exclusive. We expect our Distribution Partners to build regional DIRTT-dedicated teams (sales, design and project management) and
to use our ICE Software in the sales process. In addition to sales and marketing, our Distribution Partners provide value throughout the
construction process. At the pre-construction stage, Distribution Partners provide design assistance services to the architect and
designer; throughout the construction process, Distribution Partners act as a specialty subcontractor to the general contractor and
provide installation and other construction services. Post-move in, Distribution Partners provide warranty work, ongoing maintenance
and reconfiguring support. Local DIRTT sales representatives work closely with the Distribution Partners throughout the process to
ensure successful project implementation and the highest client satisfaction. Distribution Partners generally place orders for DIRTT
Solutions directly with us and pay us directly for such orders.
We have the ability to bring on new Distribution Partners in a wide range of geographic areas, which permits us to quickly
establish a presence in new market areas. Our Distribution Partners also scale our virtual reality technology, such as our phone- and
tablet-based applications, to fit their capacity and needs.
At December 31, 2021, we had a total of 69 Distribution Partners and 65 sales representatives across North America. We are not
dependent on any one Distribution Partner or sales representative.
Manufacturing and Properties
Our DIRTT Solutions are manufactured at our facilities in Calgary, Alberta; Savannah, Georgia; and Rock Hill, South Carolina.
On February 22, 2022 we announced our intention to close the Phoenix manufacturing facility and move related production to the
Calgary and Savannah manufacturing facilities. This includes the Phoenix DXC as discussed in Item 1. Business in this Annual
Report. Our wall surfaces (which we call tiles) are manufactured in Calgary and Rock Hill, casework and timber solutions are
manufactured in Calgary, while aluminum, glass and power components are manufactured in Calgary and Savannah. Through
distributed manufacturing we can shift production of some components among our manufacturing sites, reduce transportation times
and costs, and meet targeted lead times. In 2019, we conducted an evaluation of our aluminum, tile and millwork capacities under
various growth scenarios and concluded that the capacity of our aluminum manufacturing facilities is currently sufficient to support
our anticipated growth. Given the longer lead time to acquire tile and millwork manufacturing equipment, combined with a lack of
redundancy in those manufacturing facilities, we also concluded that we should commence construction of a new combined tile and
millwork facility. In the fourth quarter of 2019, we entered into a lease for a building located in Rock Hill, South Carolina (the “South
Carolina Facility”), which added approximately 130,000 square feet of manufacturing space for the combined tile and millwork
factory. We substantially completed construction of the South Carolina Facility and commissioned the chromacoat tile line in the
second quarter of 2021 with the millwork capabilities deferred until activity improves. In February 2022, we announced our intention
to expand our tile manufacturing capabilities at the South Carolina Facility to include thermofoil through the relocation of existing
underutilized equipment from the Calgary tile facility and back painted glass capabilities through the relocation of equipment from the
Phoenix facility. Should the need arise, we have the right to lease an additional 130,000 square feet of space at our South Carolina
Facility. If we experience additional growth, we may need to add or expand additional manufacturing facilities.
Suppliers and Raw Materials
Our inventory balances consist primarily of raw materials, which are kept on hand as components of our custom manufacturing
process. Managing our raw material inventory is essential to our business, given our short lead times from order to shipment and our
high level of order customization. Our key manufacturing materials are aluminum, hardware, wood and glass. For the twelve months
ended December 31, 2021, aluminum accounted for approximately 30.1% of our purchased materials, while hardware, wood and glass
accounted for approximately 13.9%, 11.1%, and 7.8%, respectively. While we maintain multiple suppliers for key materials, for the
twelve months ended December 31, 2021, one supplier accounted for approximately 59% of our aluminum supply with three
additional suppliers providing approximately 14% each, two suppliers accounted for approximately 58% and 36% of our wood supply
and one supplier accounted for approximately 44% of our hardware supply.
Materials are sourced domestically and, to a much lesser extent, overseas. Approximately 93% of our materials are
manufactured and purchased in North America. Purchase decisions are made on the basis of quality, cost and ability to meet delivery
10
requirements. We do not typically enter into long-term agreements with suppliers. In general, adequate supplies of raw materials are
available to all our operations and to date we have not been materially impacted by supply chain disruptions due to the COVID-19
pandemic, other than inflationary price pressures across substantially all of our raw material requirements, although aluminum
purchases may be subject to market capacity constraints.
Technology and Development
We continue to focus on developing client-centric innovations and enhancements of both ICE Software and DIRTT Solutions
with a primary focus on improving client experience, increasing market penetration and growing key markets. At December 31, 2021,
we employed 100 employees within our technology and development groups and, including capitalized amounts, invested
$11.1 million, $11.6 million and $11.3 million in 2021, 2020 and 2019, respectively, in innovation activities.
Clients
DIRTT’s principal geographic markets are the United States and Canada. Our revenue is derived almost entirely from projects
in North America sold by our North American Distribution Partners.
Our revenue opportunities primarily come from commercial projects, including both new construction projects and renovations
of existing buildings. Clients range from small owner-managed businesses to multinational Fortune 500 companies across a variety of
industries, including healthcare, education, financial services, government and military, manufacturing, non-profit, energy,
professional services, retail, technology and hospitality. We view DIRTT Solutions as generally industry agnostic, with applications in
many different industries with minimal adjustments. We are not dependent on any one client or industry segment. No single client
represented more than 10% of our revenue for the years ended December 31, 2021, 2020, or 2019.
Competition
The overall market for interior construction is fragmented and highly competitive. The principal competitive factors in the
interior construction industry include price (including cost certainty), speed, quality, customization and service. Our main competitors
are comprised primarily of conventional construction firms, individual tradespeople (including framers, drywall installers, and interior
product designers) and modular systems manufacturers. Additionally, conventional construction firms are beginning to develop
customizable wall paneling and other interior construction solutions and may directly compete with our DIRTT Solutions. We also
compete with commercial furniture manufacturers, such as Teknion Corporation, Haworth Inc. and Allsteel Inc., who offer a variety
of prefabricated interior wall solutions. We expect competition to increase as new entrants or solutions enter the interior construction
market. See Item 1A. “Risk Factors”.
Seasonality
The construction industry has also historically experienced seasonal slowdowns related to winter weather conditions and holiday
schedules, which affect shipping and on-site installation dates, in the fourth and first quarters of each calendar year. Our business has
generally, but not always, followed this trend with a slight time lag, leading to stronger sales in the second half of the year versus the
first half. Weather factors can also influence third-party exterior construction schedules and site conditions, which may in turn affect
timing of interior renovations.
Due to the fixed nature of certain of our manufacturing costs, such as our facilities leases and related indirect operating costs,
periods of higher revenue volume tend to generate higher gross profit and operating income margins while periods of lower volume
tend to result in lower gross profit and operating income margins. Quarters that contain consistent monthly manufacturing volumes
tend to generate higher gross profit than those where manufacturing levels vary significantly from month to month.
11
Patent and Intellectual Property Rights
Our success depends, in part, upon our intellectual property rights relating to our products, production processes, our
technology, including our ICE Software, and other operations. We rely on a combination of trade secret, nondisclosure and other
contractual arrangements, as well as patent, copyright and trademark laws, to protect our proprietary rights and competitive advantage.
We register our patents and trademarks as we deem appropriate and take measures to defend patents where we deem others are
infringing on our patents. The following table presents the status as of December 31, 2021 of our issued and pending patents relating
to various aspects of DIRTT Solutions and ICE Software:
Jurisdiction
Canada
United States
European Union
Singapore
Patent Cooperation Treaty
Other
Total
Granted
Patents
Applications
Pending
66
119
48
22
-
82
337
44
22
27
4
8
4
109
Our issued patents expire between 2022 and 2039. We do not believe that the expiration of any individual patent will have a
material adverse effect on our business, financial condition or results of operations. As we develop innovations and new technology,
we expect to file additional and supplemental patents to protect our rights in those innovations and new technology.
Sustainability and Environmental Matters
The construction industry generates a significant amount of waste and is estimated to contribute approximately 39% of global
carbon emissions. In order to address the growing climate challenges and meet the goals set in the Paris Agreement, the construction
industry has begun moving towards decarbonization and sustainable design integration. This includes sustainable material selection
and offsite construction.
Sustainability is an integral component of DIRTT's corporate brand identity. From our solution design and material selection to
installation and beyond, sustainable behaviors are built into our decisions and processes. DIRTT's industrialized construction approach
utilizes lean manufacturing methods and strategic material sourcing to limit waste production. Renewable energy is leveraged to help
reduce the carbon footprint of our operations and solutions. Our innovations and products generally work with prior iterations, and our
solutions can adapt to changing needs. We believe our projects help reduce the wastefulness present in conventional construction
methods because our clients obtain customized spaces that can be more easily reconfigured over time and with higher recycled or
recyclable content.
In 2021, we released our first Environment, Social and Governance (ESG) report outlining our commitment to sustainability
and the environment, as well as providing full disclosure of our current environmental and sustainability impacts. As we continue to
work towards the goals set forth in our ESG report and advance our efforts by setting new goals, we continue to better our business
and solutions for our clients.
Government Regulations
The operation of our business is subject to stringent and complex laws and regulations pertaining to health, safety and the
environment. As an owner or operator of various manufacturing facilities, we must comply with these laws and regulations at the
federal, state, provincial and local levels in both the United States and Canada. Failure to comply with environmental laws and
regulations may trigger a variety of administrative, civil or criminal enforcement actions, including the assessment of monetary
penalties, the imposition of investigative or remedial requirements, or the issuance of orders limiting current or future operations.
Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where hazardous
substances or industrial wastes have been mismanaged or otherwise released.
While we do not believe that compliance with federal, state, provincial or local environmental laws and regulations will have a
material adverse effect on our business, financial position or results of operations, we cannot provide any assurances that future
events, such as changes in existing laws or regulations, the promulgation of new laws or regulations, or the development or discovery
of new facts or conditions related to our operations will not cause us to incur significant costs.
12
Legal and Regulatory Proceedings
We may be involved from time to time in various lawsuits, claims, investigations and other legal matters that arise in the
ordinary course of business, including matters involving our products, intellectual property, relationships with suppliers, relationships
with Distribution Partners, relationships with competitors, employees and other matters. We may, for example, be a party to various
litigation matters that involve product liability, tort liability and claims under other allegations, including claims from our employees
either individually or collectively. We do not believe that any current claims, individually or in the aggregate, will have a material
adverse effect on our financial condition, liquidity or results of operations. For additional information regarding our current legal
proceedings, see Item 3. “Legal Proceedings.”
Implications of Being an Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act enacted in April 2012. Certain
specified reduced reporting and other regulatory requirements are available to public companies that are emerging growth companies.
These provisions include:
•
•
•
•
an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting
required by Section 404 of the Sarbanes-Oxley Act of 2002;
an exemption from the adoption of new or revised financial accounting standards until they would apply to private
companies;
an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board
requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to
provide additional information about our audit and our financial statements; and
reduced disclosure about our executive compensation arrangements.
We will continue to be an emerging growth company until the earliest of:
•
•
•
•
the last day of our fiscal year in which we have total annual gross revenues of $1.07 billion (as such amount is indexed for
inflation every five years by the SEC to reflect the change in the Consumer Price Index for All Urban Consumers
published by the Bureau of Labor Statistics, setting the threshold to the nearest $1 million) or more;
December 31, 2024;
the date on which we have, during the prior three-year period, issued more than $1 billion in non-convertible debt; or
the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market
value of our common shares that is held by non-affiliates (or public float) exceeds $700 million as of the last day of our
second fiscal quarter in our prior fiscal year.
We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report and may elect to take
advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders
may be different than what you might receive from other public reporting companies in which you hold equity interests. However, we
have irrevocably elected not to avail ourselves of the extended transition period for complying with new or revised accounting
standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
Human Capital Resources
As of December 31, 2021, DIRTT employed 1002 employees, 99% full time, 1% part time. We had 989 full-time employees
consisting of 588 employees in production, 110 employees in sales and marketing, 100 employees in technology and development,
112 employees in operations support, and 79 general and administrative employees. At year-end, approximately 56% of our workforce
are salaried employees and approximately 44% are compensated on an hourly basis. As of December 31, 2021, approximately 33% of
our workforce was based in the United States, and approximately 67% was based in Canada. Our 2021 hiring efforts were directed
towards both our manufacturing and non- manufacturing functions. This reflects the build out of our commercial organization,
accounting for 20% of our new hires, and streamlining our operations space, accounting for 59% of our hiring activities. The
Company’s recent gender diversity data shows that 28% (2020 – 28%) of our employees are female company wide. In 2021 we hired
137 employees, with 36% of new employees being female. On February 22, 2022, we announced an intended reduction of our salaried
headcount by approximately 18%.
13
Diversity & Inclusion
DIRTT recognizes the importance of progressing conversations and initiatives around diversity and inclusion. “Grow through
diversity” is one of our core values. Our strategy encompasses leadership training around key topics related to unconscious bias,
allyship and the value of attracting and retaining a diverse and inclusive organization. The strategy further focuses on the
establishment and deployment of learning streams, mentoring circles and incorporation of inclusive language into our offer packages
and benefit materials. Our efforts begin at the early stages of the employee life cycle, where diversity candidates are highlighted and
presented to hiring managers for review. We seek to hire based on talent, skill, capability needs and fit. DIRTT has also incorporated
diversity into various internal programs including succession planning and risk profiles.
Culture & Engagement
DIRTT has put measures in place to assess and enhance the level of engagement and satisfaction of our employees. Specific
activities include the deployment of a performance management tool, catered to drive discussions around team goals, performance and
development opportunities, and greater transparency around policy and procedures, tied to cost and risk mitigation.
In the first quarter of 2021, we introduced a leadership development program with a total of 146 employees registered that
focuses on six core leadership competencies; feedback, communication, conflict, emotional intelligence, leadership presence and
navigating change.
In the fourth quarter of 2021, we deployed our company-wide engagement survey focused on core themes of meaningful work,
supportive management, positive work environment, growth opportunity, trust in leadership and mental health awareness. Targeted
initiatives are being put in place companywide to assess the progression of themes from the survey on overall employee engagement
and experience.
Additional initiatives that we attribute to the progression of culture and engagement include launching learning and
development opportunities, enhanced communication platforms, employee recognition programs, a company-wide philanthropic
organization and a strong focus on virtual social events to further support engagement and connection throughout the COVID-19
pandemic.
Connecting to our community is a critical piece of the DIRTT story. We continue to focus on establishing a stronger
community investment program that demonstrates our drive to put community at the center of the business. This involves developing a
strategy, carving out a roadmap of initiatives and establishing a committee of employees across the organization. As part of our
strategy, we are focusing our efforts on establishing meaningful engagement opportunities, creating inclusive giving campaigns,
driving sustainable impact and enabling our employees to connect on philanthropic efforts. In the fourth quarter of 2021, we
successfully completed our holiday giving campaign which was a coordinated in-person and virtual effort in support of food banks
across North America, focusing on the cities in which we operate. The support for this campaign helped to reconnect DIRTT
employees’ desire to give back with tangible outcomes for their communities.
Our core commitment to organizational safety resulted in a Total Recordable Incident Frequency (“TRIF”) of 0.5 in 2021 and
2020, more than 88% below the industry average and a significant improvement from 4.9 TRIF in 2019. Our enhanced health and
safety protocols have been effective thus far in mitigating the spread of COVID-19 infections within our facilities and have helped us
to avoid any material production disruptions.
We use a range of compensation incentives which vary by role, including annual variable compensation determined based on a
combination of achieving team objectives and financial targets for the Company; quarterly bonuses for our manufacturing personnel
paid on adherence to targets related to safety, quality, delivery, inventory and productivity; and commissions based on sales. We also
use various forms of stock-based compensation as a retention tool and to further align employee interests with the interests of our
shareholders. We monitor our retention by way of voluntary turnover, which was 15% in 2021.
In response to the COVID-19 pandemic, DIRTT established a business continuity and response committee to develop robust
company-wide COVID-19 protocols and guidelines. Our COVID protocols encompass our employees, visitors and our contractors.
The committee has prepared easily accessible COVID-19 guidelines for all areas of the business, including manufacturing, travel,
client tours and day-to-day operations. In addition, we have established protocols for reporting and contact tracing, and we have a
mandate to limit access to our facilities, offices and other spaces to only essential personnel to further minimize the risk of exposure to
COVID-19. DIRTT provides financial support to our employees who test positive or have been identified as a close contact. To ensure
that our teams are healthy and safe, we have implemented regular fogging (sanitization) at all our manufacturing facilities and our
head office. We have also implemented enhanced cleaning protocols (including the use of stronger chemical concentrations with a
focus on high touch areas), increased signage, shift rotations in cafeterias, limited headcounts in conference and meeting rooms, and
14
work-from-home guidelines and other best practices. We provide all our employees, visitors, and contractors with the required
COVID-19 controls including personal protective equipment.
In addition, we have taken measures to address the mental health of our employees through a variety of company-wide
initiatives. We have established a safety champions committee responsible for ensuring any employee or visitor coming into our
spaces is briefed on our COVID-19 protocols and guidelines. Lastly, we have implemented an app for reserving workspaces to help
our employees adhere to our social distancing protocols, provide for greater support of contact tracing and ensure we adhere to
capacity levels that will help us maintain safety protocols related to COVID-19.
None of our employees are covered by collective bargaining agreements. We have never experienced labor-related work
stoppages or strikes, and we believe we currently have a positive relationship with our employees.
Item 1A. Risk Factors.
Investing in our common shares involves a high degree of risk. You should carefully consider the risks described below, as well
as the other information in this Annual Report, including our consolidated financial statements and the related notes and Part II, Item
7. entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in any documents
incorporated in this Annual Report by reference, before deciding whether to invest in our common shares. The occurrence of any of
the events or developments described below could harm our business, financial condition, results of operations, and growth prospects.
In such an event, the market price of our common shares could decline, and you may lose all or part of your investment. Although we
have discussed all known material risks, the risks described below are not the only ones that we may face. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations. Certain
statements below are forward-looking statements. See also “Special Note Regarding Forward-Looking Statements” in this Annual
Report.
15
Risks Related to Our Business and Industry
Our business, financial condition, results of operations and growth could be harmed by the effects of the COVID-
19 pandemic and related government measures.
The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption. The extent to which COVID-
19, or other public health pandemics or epidemics, impact our employees, operations, customers, suppliers and financial results will
depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the COVID-
19 pandemic (and whether there is a resurgence or multiple resurgences of the virus in the future, including as a result of strain
variations); the actions taken by governments and public health officials in response to the pandemic; the availability and effectiveness
of vaccines, approvals thereof and the speed of vaccine distribution; the impact on construction activity (including related supply
chain and labor shortages and their effects on construction schedules and timing); the effect on our customers’ demand for our DIRTT
solutions; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. For example,
while many of our products support life sustaining activities and essential construction, we, and certain of our customers or suppliers,
may be impacted by state or provincial actions, orders and policies regarding the COVID-19 pandemic, including temporary closures
of non-life sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and
enforcement of which may vary by individual jurisdictions. On September 9, 2021, President Biden issued executive orders
establishing, among other things, new vaccination requirements applicable to U.S. federal workers and contractors, large employers
and healthcare workers. Subject to limited exceptions, the executive order requires U.S. employees of federal contractors to be fully
vaccinated against COVID-19 by January 18, 2022. In January 2022, the U.S. District Court for the Southern District of Georgia
issued a ruling enjoining the vaccine mandate portion of the executive order. As a federal contractor, we are subject to the executive
order and, despite the injunction, have implemented mandatory vaccination rules for all U.S. employees and subcontractors to satisfy
the requirements by January 18, 2022. Further, additional vaccine mandates may be announced in jurisdictions in which our
businesses operate. Our implementation of these rules may result in attrition, including attrition of skilled labor, and difficulty
securing future labor needs. Additionally, our implementation of these rules may impact our ability to maintain satisfactory
arrangements with third-party vendors and service providers, to the extent they are subject to vaccination requirements and they or
their employees are unable or unwilling to comply. Any of the foregoing events could have a material adverse effect on our business,
liquidity or results of operations.
The shareholder meeting requisition notice delivered by 22NW Fund, LP (“22NW Fund”) could cause us to incur
substantial costs, disrupt our operations and strategy, divert the board’s and management’s attention, or have other material
adverse effects on us.
On November 17, 2021, 22NW Fund took steps to requisition a special meeting of the Company’s shareholders in order to
remove six of the independent directors of the Company and replace them with hand-picked nominees of Mr. Aron English of 22NW
Fund. The intentions of 22NW Fund may not be aligned with the interests of our other shareholders. Responding to such actions may
be costly and time-consuming, disrupt our operations and strategy, and divert the attention of the board of directors (the “Board”) and
our management team from running our business, executing our strategic plan and maximizing performance for our shareholders. In
addition, the uncertainty arising from the shareholder requisition could lead to the perception of a change in the direction of our
business or instability with our Distribution Partners, clients, suppliers or customers, which may be exploited by our competitors, and
may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and
business partners, any of which could materially and adversely affect our business and operating results. Moreover, the results of the
requisition could impact the strategic direction of the Company in a manner that is adverse to our business and operating results.
We may not be successful in implementing our strategic plan or managing growth.
In November 2019, we unveiled a four-year strategic plan to scale our business based on three key pillars: commercial
execution, manufacturing excellence and innovation. We have implemented several steps in furtherance of our strategic plan,
including improvements in our commercial function and enhancements to our product suite and software platform.
While we are confident in our strategy, we no longer believe that the financial targets articulated in November 2019 will be
achieved by the end of 2023. Implementation of our strategy will require maturity of systems and processes across the organization.
There is also no assurance that successful implementation will lead to sustainable, profitable growth, and may itself be disruptive to
the Company. Failure to implement our strategic plan could materially and adversely affect our near-term sales, commercial activities,
and ability to develop and sustain profitable growth. In addition, the success and timing of our implementation may be dependent upon
external factors outside of our control, including the COVID-19 pandemic and its negative impact on construction activities as a
whole. However, we remain confident that DIRTT’s value proposition will be as or even more relevant in the post-pandemic world.
16
Our strategy also depends in part on our ability to maintain and manage growth effectively. Growth in our headcount and
operations may place significant demands on our management and operational and financial resources. Additionally, managing growth
of our operations and personnel requires continuous improvement of our internal controls and reporting systems and procedures.
Failure to effectively manage growth could result in difficulty providing current DIRTT Solutions and introducing future solutions,
difficulty in securing clients and Distribution Partners, declines in quality or client satisfaction, increases in costs or other operational
difficulties. Any of these difficulties could lead to a loss of investor confidence and adversely affect our business performance,
financial condition and results of operations.
Our industry is highly competitive, and we may not be successful in educating potential clients about the benefits of our
innovative and unique approach to interior construction as compared to traditional interior construction methods.
We operate in the highly competitive interior construction industry that is constantly developing and changing. We compete
against conventional construction firms, individual tradespeople and modular systems and commercial furniture manufacturers. New
market entrants and conventional construction firms are also beginning to develop customizable wall paneling and other modular
interior construction solutions, and we expect this trend to continue. In addition, we may face pricing pressure from competitors or
new market entrants who take on projects at reduced prices or employ other competitive strategies. While we believe our innovative
design, quality, schedule and cost certainty, and network of Distribution Partners makes us well-positioned in the market, increasing
competition could make it difficult to secure new projects at acceptable operating margins.
Our products are unique and offer an alternative to traditional construction techniques. Although offsite construction methods
are gaining market acceptance, this still represents only a fraction of all construction methods and the overall construction market. Our
ability to grow and increase market share depends, in part, on our success in continuing to increase demand for modular construction
methods and products as an alternative to more traditional construction methods. While we intend to follow a strategy of innovative
product development and strategic marketing efforts to enhance our position, there is no assurance that our solutions will attain a
degree of market acceptance sufficient for sustained profitable operations. Failure to compete effectively by, among other things,
meeting consumer preferences, developing and marketing innovative solutions, maintaining strong client service and distribution
relationships, growing market share, and expanding our solutions capabilities could have a material adverse effect on our liquidity,
financial condition, or results of operations.
Our former co-founders’ competitive behavior against us could have an adverse effect on our business, financial condition
and results of operations.
Our co-founders and former executives, Mogens Smed and Barrie Loberg, have started an interior construction and
manufacturing company that we believe competes with us. They, along with a number of our former employees and Distribution
Partners who have joined their company have in-depth knowledge about our business, including our customers, employees, products
and prospects, and we may be adversely affected by increased competition arising out of this business venture. We are engaged in
litigation with Messrs. Smed and Loberg, entities with which they are involved, and other individuals relating to, among other things,
enforcement of non-competition and non-solicitation obligations, alleged patent infringement, and alleged misappropriation of
proprietary information by them or by us. See Note 18 to the Consolidated Financial Statements. If Messrs. Smed and Loberg further
engage in a competitive business against us or if we are not successful in litigation, our business, financial condition and results of
operations may be adversely affected.
We depend heavily on our network of Distribution Partners, and the loss or inattention of our Distribution Partners, or the
failure of our Distribution Partners to meet their obligations to us, could materially and adversely affect our business, financial
condition and results of operations.
We currently do not engage in many direct sales projects and rely almost exclusively on our network of Distribution Partners to
promote brand awareness, sell and market DIRTT Solutions, and provide design, installation, distribution and other services to clients
on each project. While we are not dependent on any single Distribution Partner, sales generated by approximately 10% of our
Distribution Partners comprised approximately 40% of our total revenues for 2021 (2020 – 40%). The loss of any top performing
Distribution Partners, particularly to our competitors, may negatively affect our sales, financial condition or results of operations. It
may further impair our ability to maintain a market presence in a particular geographic region until a new Distribution Partner
relationship is established, which would require significant time and resources.
Although we provide our Distribution Partners with training, education and support, they may be unable to successfully sell our
DIRTT Solutions, execute projects or manage client experiences and relationships. In addition, our Distribution Partners and their
clients may face financial difficulties or may become insolvent, which could result in the delay or cancellation of their plans to
purchase DIRTT Solutions or lead to our inability to obtain payment of accounts receivable that they may owe. If we are unable to
maintain a successful Distribution Partner network, our business, financial condition and results of operations could be materially and
adversely affected.
17
Risks Relating to Our Products and Software
We may be unsuccessful in designing, introducing or selling new, innovative solutions, solution features or software.
Our future success depends in part on our continuing ability to promote and demonstrate the value proposition of DIRTT
Solutions, as well as our ability to develop and sell new, innovative solutions, solution features or software that differentiate our
solutions and achieve market acceptance in a timely and cost-effective manner. We incur significant costs associated with the
investment in our research and development in furtherance of our strategy that may not result in increased revenue or demand for
DIRTT Solutions and that could negatively affect our results of operations. Rapidly changing technology, evolving regulatory and
industry standards, and changing consumer trends, demands and requirements require us to continuously innovate and develop new,
high-quality solutions, solutions features and software. Additionally, such rapid technological changes, standards and preferences
could render the complex and proprietary technology of our software and solutions obsolete. We may also be unable to successfully
address these developments on a timely basis, or at all. New solutions, solution features or software may also be less successful than
we anticipated, and such offerings may fail to achieve market acceptance. If we fail to respond quickly and cost-effectively to a
changing market and changing consumer preferences, our competitive position, financial condition and results of operations could be
materially and adversely affected.
Our software and products may have design defects, deficiencies, or risks, and we may incur additional costs to fix any
defects, deficiencies or risks, or be subject to warranty or product liability claims.
Our software and solutions are complex and must meet the technical requirements of our clients and applicable building codes
and regulations. Our solutions may contain undetected errors or design and manufacturing defects, and our software may experience
quality or reliability problems, or contain bugs or other defects. Software defects may also cause errors in our manufacturing or
miscalculations in ordering pricing and could lead us to incur losses and lose market share to competitors. Product or software defects
could cause us to incur warranty costs, product liability costs, and repair and remediation costs. Although we maintain warranty
reserves based on production, historical claims and estimates, future warranty claims may exceed this amount. Similarly, while we
maintain insurance of the types and amounts we consider commercially prudent and consistent with industry practice, such insurance
coverage may not be sufficient to protect us against substantial claims. Such claims can be expensive to defend, could divert the
attention of management and other personnel for significant periods, regardless of the ultimate outcome, and could result in negative
publicity. Increased costs to address product warranty claims or to defend against product liability claims may result in increased
expenses and adversely affect our financial condition and results of operations.
We are subject to fluctuations in the prices of raw materials and commodities which could adversely affect our liquidity,
operating margins and financial condition.
We purchase raw materials, including aluminum, glass and wood, from a number of local and global suppliers. The costs of
these commodities can fluctuate due to changes in global supply and demand, speculation in commodities futures, and changes in
tariffs or trade barriers, which can also interrupt supply. In addition, we have not historically entered into long-term agreements with
vendors and may be exposed to short-term and long-term price fluctuations as a result.
Aluminum represents the largest component of our raw materials consumption. We have experienced fluctuations in the price of
aluminum and anticipate that these fluctuations will continue in the future. In particular, during 2021 we experienced significant price
inflation across substantially all of our materials, largely due to pandemic-induced supply chain constraints, and it is unclear whether
such price increases will be temporary or permanent in nature. Since 2018, the U.S. government has imposed tariffs on steel and
aluminum and limited the amounts of steel and aluminum coming into the United States based on the countries of origin of those
imports. In 2021 and 2020, we sourced the majority of our aluminum from North America and sourced under 10% of our raw
materials from outside North America. Nonetheless, substantial, prolonged upward trends in aluminum and other commodity prices,
along with tariffs and import limitations, could significantly increase our costs and adversely affect our liquidity, operating margins
and financial condition.
We rely on a limited number of outside suppliers for certain key components and materials, and failure or delay in obtaining
the necessary components or materials could delay or prevent the manufacturing or distribution of our DIRTT Solutions.
We rely on certain key suppliers for raw materials and components, including aluminum, glass, wood and hardware. We
maintain multiple suppliers for key materials, although for the year ended December 31, 2021, one supplier accounted for
approximately 59% of our aluminum supply with three additional suppliers providing approximately 14% each, two suppliers
accounted for approximately 58% and 36% of our wood supply, and one supplier accounted for approximately 44% of our hardware
supply. While we believe there are other vendors for most of our key requirements, certain materials and components meeting our
quality standards are available only through a limited number of vendors. If we are required to obtain another source for these
materials or components, we may not be able to obtain pricing on as favorable terms or on terms comparable to our competitors. Any
failure or delay in obtaining the necessary raw materials or components in the quantities and quality required may result in increased
costs and delays in manufacturing or distributing our products, which could have a material adverse effect on our liquidity, financial
condition, or results of operations. A vendor may also choose, subject to existing contracts, to modify its relationship with us due to
18
general economic concerns or specific concerns relating to that vendor or us, at any time. These modifications might include
additional requirements from our suppliers that we provide them additional security in the form of prepayments or with letters of
credit. Any significant change in the terms that we have with our key suppliers could materially and adversely affect our liquidity,
financial condition or results of operations.
Risks Relating to Market Conditions
Global economic, political and social conditions and financial markets may impact our ability to do business and adversely
affect our liquidity, financial condition and results of operations.
Our industry is cyclical and highly sensitive to macroeconomic conditions. Overall declines or reductions in construction and
renovation due to economic downturns, unemployment and office vacancies, difficulties in the financial services sector and credit
markets, and imposition of trade barriers can impact the demand for our products. Financial difficulties experienced by our suppliers,
Distribution Partners or clients could also result in, among other things, inadequate project financing, project delays, inability to pay
accounts receivable or disruptions in our supply chain. Any general economic, political or social conditions that may contribute to
financial difficulties experienced by us, our suppliers, Distribution Partners or clients may adversely affect our liquidity, financial
condition and results of operations.
We are exposed to currency exchange rates, tax rates and other fluctuations, including those resulting from changes in laws.
Our revenues and expenses are collected and paid in different currencies, including the U.S. dollar and Canadian dollar.
Fluctuations in the relative values of any such currency expose us to foreign exchange risk and could have a material and adverse
effect on our cash flows, revenues and results of operations. We also have currency exchange exposure to the extent of a mismatch
between foreign-currency denominated revenues and expenditures – in particular, where U.S. dollar revenues do not equal U.S. dollar
expenditures. We are not currently using exchange rate derivatives to manage currency exchange rate risks. There are currently no
significant restrictions on the repatriation of capital and distribution of earnings to foreign entities from any of the jurisdictions in
which we operate. There can be no assurance that such restrictions will not be imposed in the future.
Compliance with new or amended tax laws and regulations could have a material adverse effect on our business. We base our
tax positions upon our understanding of the tax laws (including, applicable tax treaties) of the countries in which we have assets or
conduct business activities. However, our tax positions are subject to review and possible challenges by taxing authorities, including
as to the computation and allocation of income, transfer pricing and other complex issues. This includes adverse changes to the
manner in which Canada, the United States and other countries tax local and foreign corporations and interpret or change their tax
laws and applicable tax treaties, including in light of the increased focus by the U.S. Congress, the Canadian government, the
Organisation for Economic Co-operation and Development and other government agencies in jurisdictions where we do business on
issues related to the taxation of multinational corporations. We cannot determine in advance the extent to which such jurisdictions may
amend their tax laws, review our tax positions, or assess additional taxes or interest and penalties on such taxes. In addition, our
effective tax rate may be increased by changes in the valuation of deferred tax assets and liabilities, our cash management strategies,
local tax rates, or interpretations of tax laws.
Risks Relating to Intellectual Property and Information Security
We may be unable to protect our intellectual property adequately from infringement by third parties, and we may also be
subject to claims that we infringe on intellectual property rights of others.
We rely on a combination of contract, copyright, patent, trademark and trade secret laws, confidentiality procedures and other
measures to protect our intellectual property. There can be no assurance that our various patents, copyrights or trademarks will offer
sufficient protection and prevent misappropriation of our proprietary rights in our products, software or processes. We also may not be
granted patents, copyrights or trademarks on our pending or proposed applications, and granted applications may be challenged,
invalidated or circumvented in the future. Despite our precautions, it may be possible for unauthorized third parties to copy our
applications and use information that we regard as proprietary to create products or services that compete with ours. We enforce our
intellectual property rights where appropriate, but the cost of doing so may be substantial and could outweigh the potential benefits,
and we may be unsuccessful in our enforcement efforts. Failure to protect or maintain the proprietary nature of our intellectual
property could adversely affect our ability to sell original products and materially and adversely affect our business, financial
condition and results of operations.
Additionally, our competitors or other third parties may own or claim to own intellectual property in technology areas relating to
our technology, including ICE Software, manufacturing processes, and DIRTT Solutions. Although we do not believe that our
software or DIRTT Solutions infringe on the proprietary rights of any third parties, claims may arise regarding infringement or
invalidity claims (or claims for indemnification resulting from infringement claims). Such assertions or prosecutions, regardless of
their merit, may subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms,
prevent us from assembling or licensing certain of our products, subject us to injunctions restricting our sale of products, cause severe
disruptions to our operations or the marketplaces in which we compete, or require us to satisfy indemnification commitments with our
clients, including contractual provisions under various license arrangements. A damages award against us could include an award of
19
royalties or lost profits and, if the court finds willful infringement, treble damages and attorneys’ fees. This may cause us to expend
significant costs and resources, and could adversely affect our business, financial condition or results of operations.
If we are unable to protect our information systems against data corruption, cyber-based attacks or network security
breaches, our operations could be disrupted and our reputation and profitability could be negatively affected.
In the ordinary course of our business, we generate, collect and store confidential and proprietary information, including
intellectual property and business information. The secure storage, maintenance, and transmission of and access to this information is
important to our operations and reputation. We use automated software and hardware solutions to protect our on-premise and cloud
infrastructure; conduct routine third-party evaluations and vulnerability testing to identify and mitigate risks; and deploy training
programs throughout the company. We have experienced cyber-based attacks, but to our knowledge, we have not experienced any
material disruptions or breaches of our information technology systems or platforms. However, there is no guarantee that our security
systems, processes or procedures are adequate to safeguard against all data security breaches, misuse of data, cyber-attacks, acts of
vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events. Any security breach
involving the misappropriation, loss or other unauthorized disclosure of confidential information of a client, Distribution Partner,
employee, supplier or Company information could result in financial losses, exposure to litigation risks and liability (including
regulatory liability), damage to our reputation, and disruptions in our operations, all of which could have a material adverse effect on
our business, financial condition and results of operations. While we maintain cybersecurity insurance of the types and amounts, we
consider it commercially prudent and consistent with industry practice, such insurance may not be sufficient to cover all losses relating
to an information security breach.
The regulatory environment related to information security, data collection and use, and privacy is increasingly rigorous, with
new and frequently changing requirements, and compliance with those requirements could result in additional costs. The costs
associated with information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs
incurred to prevent or remediate information security breaches, could be substantial and adversely affect our business. A significant
compromise of sensitive employee, Distribution Partner, client or supplier data in our possession could result in legal damages and
regulatory penalties. In addition, the costs of defending such actions or remediating breaches could be material.
Damage to our information technology and software systems could impair our ability to effectively provide DIRTT Solutions
and adversely affect our reputation, relationships with clients, financial condition and results of operations.
Our information technology and software networks and systems, which include the processing, transmission and storage of
information, are integrated with our manufacturing processes and essential to our business operations. These systems are vulnerable
to, among other things, damage or interruption from power outages, network failures or natural disasters, loss or corruption of data,
human error, employee misconduct and difficulties associated with upgrades, installations of major software or hardware, and
integration with new systems. While we maintain retention backups to geo-diverse digital and physical locations and have a recovery
data center, the data center and other protective measures we take could prove to be inadequate. Any disruption in our systems or
unauthorized disclosure of information could result in delayed manufacturing and delivery of our DIRTT Solutions, legal claims, a
loss of intellectual property and a disruption in operations, all of which could adversely affect our reputation, relationships with
clients, financial condition and results of operations.
Risks Relating to Government Regulations and Enforcement
We may incur significant costs complying with environmental, health and safety laws and related claims, and failure to
comply with these laws and regulations could expose us to significant liabilities, which could materially adversely affect our
business and results of operations.
We are subject to laws, regulations, and other requirements with respect to workers’ health and safety and environmental
matters in the United States, Canada and other countries in which we operate. Environmental laws and regulations impose, among
other things, restrictions, liabilities and obligations in connection with the production, processing, preparation, handling, storage,
transportation, disposal and management of wastes and other substances, and the prevention and remediation of environmental effects.
Health and safety laws and regulations impose, among other things, requirements designed to ensure the protection of workers. New
or more stringent laws and regulations, including those relating to climate change and greenhouse gas emissions, may be adopted in
the future and could impact our facilities, raw material suppliers, the transportation and distribution of our solutions, and our clients,
which could reduce demand for our solutions or cause us to incur additional operating costs. In addition, certain foreign laws and
regulations may affect our ability to export products outside of or import products into the United States or Canada. Failure to comply
with these requirements may result in civil or criminal liability, damages and fines, and our operations could be curtailed, suspended
or shutdown and our reputation, ability to attract employees, and results of operations could be adversely affected. Private lawsuits,
including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state and local
regulatory agencies, including enforcement or cost-recovery actions, may materially increase our costs.
20
These factors may materially increase the amount we must invest to bring our processes into compliance with legal requirements
and impose additional expenses on our operations. In addition, any changes in these laws or regulations or changes in our
manufacturing processes may require us to request changes to our existing permits or obtain new permits. We may also be unable to
obtain or maintain, from time to time, all required environmental regulatory approvals. A delay in obtaining any required
environmental regulatory approvals or the failure to obtain and comply with such approvals could materially adversely affect our
business and results of operations.
Risks Relating to Financial Results
We have experienced a history of losses, and despite certain periods of profitability in recent years, we may not be able to
generate sufficient revenue to achieve and sustain profitability.
We have incurred significant losses since commencing business. We incurred net losses of $53.7 million and $11.3 million for
the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, we had an accumulated deficit of $111.3 million.
These losses and accumulated deficits were due in part to the substantial investments made to grow our business and acquire clients, to
further develop our service offerings through product and software development, to ensure that we have sufficient production capacity
and capability to deliver on our commitment of rapid delivery times and to preserve our production, innovation and commercial
capabilities through the economic disruption caused by the global COVID-19 pandemic in anticipation of a significant increase in
construction activity as the pandemic impacts abate. Past results may not be indicative of our future performance, and there can be no
assurance that we will generate net income in the future.
We have experienced, and may experience in the future, quarterly and yearly fluctuations in results of operations and
financial condition.
Our results of operations and financial condition may continue to fluctuate from one quarter or year to another due to a number
of factors, some of which are outside of our control. For example, we usually experience seasonal slowdowns in the first and fourth
quarters of each calendar year, leading to stronger sales in the second half of the year versus the first half, and weather conditions may
also delay delivery and installation on some projects. Furthermore, sales that we anticipate in one quarter may be pushed into another
quarter, affecting both quarters’ results, and our actual or projected results of operations may fail to match our past performance.
These events could in turn cause the market price of our common shares to fluctuate. In particular, if our results of operations do not
meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent
historical results of operations, the market price of our common shares will likely decline. Due to our high fixed manufacturing costs
and operating expenses, quarterly volatility in sales volumes could result in periods of low operating cash flow and negatively affect
our liquidity. Due to these risk factors, quarter-to-quarter or year-to-year comparisons of our results of operations may not be an
indicator of future performance.
We have negative cash flow from operating activities.
We had negative cash flow from operating activities for the year ended December 31, 2021. Continued negative operating cash
flow may compromise our ability to make interest and principal payments on the convertible unsecured subordinated debentures
issued on January 25, 2021 and December 1, 2021 (collectively, the “Debentures”) on a timely basis, or at all, and to execute our
strategic plan. Until we are able to generate positive cash flow from operating activities, our ability to finance our operations will be
dependent on our cash reserves and available credit facilities and, if required, our ability to obtain additional external financing.
Although we anticipate we will have positive cash flow from operating activities in future periods, we cannot guarantee that such
future cash flow will be sufficient or that a prolonged recovery from the COVID-19 pandemic, or other changes to our circumstances,
will not necessitate additional financial resources to fund our operating activities.
In response to our negative cash flow from operations, on February 22, 2022, we commenced the process of closing our Phoenix
aluminum manufacturing facility, shifting related manufacturing to both our Savannah and Calgary aluminum facilities. This is
expected to result in a net headcount reduction of approximately 26 and annualized cost savings of approximately $2.4 million.
Additionally, we announced our intention to eliminate approximately 18% of our salaried workforce including manufacturing and
office positions which, along with other cost reduction initiatives, are expected to yield annualized savings of approximately $13.0.
One-time costs associated with these workforce reductions and other costs savings measures are approximately $5 million.
We have recognized, and may recognize in the future, impairment charges for our goodwill and certain other non-current
assets.
During the year ended December 31, 2021, we impaired the $1.4 million net carrying value of goodwill on our consolidated
balance sheet. Significant negative industry or economic trends, disruptions to our business, planned or unexpected significant
changes in the use of the assets, and sustained market capitalization declines may result in the impairment of goodwill or other
intangible assets. We annually test our goodwill for impairment during the fourth quarter of the calendar year. Based on our testing,
the fair value of goodwill did not exceed the carrying value of its net assets and, accordingly, the entire $1.4 million balance of
21
goodwill was impaired as at December 31, 2021. Any further charges relating to impairments could have a material adverse impact on
our results of operations in the period in which the impairment is recognized.
Risks Related to Our Common Shares and Corporate Structure
Our share price has been and may continue to be volatile, which could cause the value of your investment to decline.
Our common shares are currently listed on the TSX under the symbol “DRT” and on Nasdaq under the symbol “DRTT.” The
price of our common shares has in the past fluctuated significantly, and may fluctuate significantly in the future, depending upon a
number of factors, many of which are beyond our control and may adversely affect the market price of our common shares. These
factors include: (i) variations in quarterly results of operations; (ii) deviations in our earnings from publicly disclosed forward-looking
guidance; (iii) changes in earnings estimates by analysts; (iv) our announcements or our competitors’ announcements of significant
contracts, acquisitions, strategic partnerships or joint ventures; (v) general conditions in the offsite construction and manufacturing
industries; (vi) sales of our common shares by our significant shareholders; (vii) fluctuations in stock market price and volume; and
(viii) other general economic conditions.
In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has
been brought against that company. If our share price is volatile, we may become the target of securities litigation in both the United
States and Canada. Securities litigation could result in substantial costs and divert management’s attention and resources from our
business and could have an adverse effect on our business, financial condition and results of operations.
We are governed by the corporate laws of Alberta, Canada, which in some cases have a different effect on shareholders than
the corporate laws of the United States.
We are governed by the ABCA and other relevant laws, which may affect the rights of shareholders differently than those of a
company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying,
deterring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or
otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between
the ABCA and Delaware General Corporation Law (“DGCL”), that may have the greatest such effect include, but are not limited to,
the following: (i) for certain extraordinary corporate transactions (such as amalgamations or amendments to our articles), the ABCA
generally requires the voting threshold to be a special resolution passed by not less than two-thirds of the votes cast by the
shareholders who voted in respect of the resolution, whereas DGCL generally only requires a majority vote; and (ii) under the ABCA,
registered holders or beneficial owners (as defined in the ABCA) of not less than 5% of our common shares in aggregate can
requisition our directors to call a special meeting of shareholders, whereas such right does not exist under the DGCL. We cannot
predict whether investors will find our company and our common shares less attractive because we are governed by the corporate laws
of Alberta, Canada.
Because we are a corporation incorporated in Alberta and some of our directors and officers are residents of Canada, it may
be difficult for investors in the United States to enforce civil liabilities against us or our directors and officers based solely upon the
federal securities laws of the United States. Similarly, it may be difficult for Canadian investors to enforce civil liabilities against
our directors and officers residing outside of Canada.
We are a corporation amalgamated and existing under the laws of Alberta with our principal place of business in Calgary,
Alberta, Canada. Some of our directors and officers are residents of Canada and a substantial portion of our assets and those of such
persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within
the United States upon us or our directors or officers who are not residents of the United States, or to realize in the United States upon
judgments of courts of the United States predicated upon civil liabilities under the Securities Act of 1933. Investors should not assume
that Canadian courts: (i) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the
civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States or
(ii) would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any
such state securities or blue sky laws.
Similarly, some of our directors and officers are residents of countries other than Canada and all or a substantial portion of the
assets of such persons are located outside Canada. As a result, it may be difficult for Canadian investors to initiate a lawsuit within
Canada against these non-Canadian residents. In addition, it may not be possible for Canadian investors to collect from these non-
Canadian residents judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation of
certain of the provinces and territories of Canada. It may also be difficult for Canadian investors to succeed in a lawsuit in the United
States, based solely on violations of federal, provincial or territorial securities laws.
General Risks
Difficulties in recruiting and retaining qualified officers or employees, or experiencing labor shortages or disruptions, could
have a material adverse effect on our business and results of operations.
22
Our success will depend in part on our ability to attract, develop and retain qualified personnel as needed. We are currently
searching for a permanent replacement for our chief executive officer position; however, the marketplace for attracting senior
executives is competitive, and there can be no assurances concerning the timing or outcome of our search for a new chief executive
officer. Although we anticipate smooth transitions, any changes to members of our senior management may be disruptive to our
operations, including by diverting our Board’s and management’s time and attention and a decline in employee morale. If there are
any delays in this process, our business could be negatively impacted. We may be affected by labor shortages or disruptions,
particularly in locations where we operate manufacturing facilities. If we fail to attract or retain qualified personnel, or experience
labor shortages or disruptions, we could incur higher recruiting expenses, a loss of manufacturing capabilities, or inability to respond
to significant increases in demand, all of which could have a material adverse effect on our business and results of operations.
We may have additional capital needs in the future and may not be able to obtain additional capital or financing on
acceptable terms.
We plan to continually invest in business growth and may require additional funds to respond to business opportunities, such as
expanding our sales and marketing activities, developing new software, acquiring complementary businesses, products or technology,
and expanding or enhancing our manufacturing capabilities, including factory automation. To the extent that our existing capital is
insufficient to meet our requirements, we may need to undertake equity or debt financings to secure additional funds. Further
issuances of equity or convertible debt securities may result in significant share dilution. Additional new equity securities issued could
have rights, preferences and privileges superior to those of our currently issued and outstanding common shares. Additional debt
financings may involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which
may make it more difficult for us to obtain additional capital and to pursue business opportunities. We cannot provide any assurance
that sufficient debt or equity financing will be available for necessary or desirable expenditures or acquisitions, or to cover losses, and
accordingly, our ability to continue to support our business growth and to respond to business challenges could be significantly
limited, and our liquidity could be materially and adversely affected.
We may engage in future mergers, acquisitions, agreements, consolidations or other corporate transactions that could
adversely affect our business, financial condition, and results of operations.
While we currently have no specific plans to acquire any businesses, we may, in the future, seek to expand our business and
capabilities through acquiring compatible technology, products or businesses. Additionally, we may explore other corporate
transactions, including mergers, agreements, consolidations, or joint ventures, that we believe may be beneficial to our business or
further specific business goals. Acquisitions involve certain risks and uncertainties, including, among other things, (i) difficulty
integrating the newly acquired businesses and operations in an efficient and cost-effective manner; (ii) inability to maintain
relationships with key clients, vendors and other business partners of the acquired businesses; (iii) potential loss of key employees of
the acquired businesses; (iv) exposure to litigation or other claims in connection with our assumption of certain claims and liabilities
of the acquired businesses; (v) diversion of management’s time and focus; and (vi) possible write-offs or impairment charges related
to the acquired businesses. The occurrence of any of these risks could adversely affect our business, financial condition, and results of
operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Our principal executive offices are located in Calgary, Alberta, where we lease approximately 73,000 square feet of office and
manufacturing space. Our lease expires in September 2022 and we are in the process of negotiating a five-year extension. Our
principal manufacturing facilities are located in Calgary, Alberta; Rock Hill, South Carolina; and Savannah, Georgia. On February 22,
2022 we announced our intention to close the Phoenix manufacturing facility and DXC as discussed in Item 1. “Business” in this
Annual Report. As a result, in February 2022, we announced our intention to expand our tile manufacturing capabilities at the South
Carolina Facility to include thermofoil through the relocation of existing underutilized equipment from the Calgary tile facility and
back painted glass capabilities through the relocation of equipment from the Phoenix facility.
Our wall surfaces (which we call tiles) are manufactured in Calgary and Rock Hill, casework and timber solutions are
manufactured in Calgary, while aluminum, glass and power components are manufactured in Calgary and Savannah. In Calgary, we
lease an aggregate of approximately 358,000 square feet of manufacturing space across three facilities (excluding our principal
offices), which leases expire in January 2023 and January 2024. In Phoenix, we lease approximately 130,000 square feet of
manufacturing space across two facilities, which leases expire in March 2027 and we intend to sublease the Phoenix manufacturing
facility and DXC upon closure. In Savannah, we lease approximately 81,000 square feet of manufacturing space, which lease expires
in February 2029. In October 2019, we entered into a 15-year lease, which DIRTT may extend for two additional 5 year periods at its
option, for a tile factory of approximately 130,000 square feet in Rock Hill, South Carolina. Should the need arise, we have the
23
expansion rights to lease an additional 130,000 square feet of space. In March 2020, we entered into an 8 year lease, which DIRTT
may extend an additional 5 years at its option, of approximately 18,000 square feet of space for a DXC in Dallas, Texas.
Our ICE development offices are located in Calgary, Alberta and Salt Lake City, Utah. In Calgary, we sublease approximately
8,700 square feet of office space pursuant to a lease that expires on January 31, 2023. In our Salt Lake City development office, which
also houses a DXC, we lease approximately 6,600 square feet of office space pursuant to a lease that expires in December 2023. In
New York City, New York, we lease approximately 4,100 square feet of space to operate a DXC; this lease expires in February 2024.
In Chicago, Illinois, we own approximately 6,200 square feet of office space, which we use to operate a DXC.
Through distributed manufacturing we can shift production of some components among our manufacturing sites, reduce
transportation times and costs, and meet targeted lead times. We believe that our current and planned facilities are adequate for our
current needs and that suitable additional or substitute space would be available if needed.
Item 3.
Legal Proceedings.
We are pursuing multiple lawsuits against our former founders, Mogens Smed and Barrie Loberg, their new company Falkbuilt
Ltd. (“Falkbuilt”), and other related individual and corporate defendants for violations of fiduciary duties and noncompetition and
non-solicitation covenants contained in their executive employment agreements, and the misappropriation of our confidential and
proprietary information in violation of numerous Canadian and U.S. state, and federal laws pertaining to the protection of our trade
secrets and proprietary information and the prevention of false advertising and deceptive trade practices.
As of December 31, 2021, our litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates was comprised of four
main lawsuits: (i) an action in the Alberta Court of Queen’s Bench instituted on May 9, 2019 against Falkbuilt, Messrs. Smed and
Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty,
fidelity and confidentiality, and the misappropriation of our confidential information (the “Canadian Non-Compete Case”); (ii) an
action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Smed, and other
individual and corporate defendants alleging misappropriation of our confidential information, trade secrets, business intelligence and
customer information (the “Utah Misappropriation Case”); (iii) an action for federal patent infringement in the U.S. District Court for
the Northern District of Illinois instituted on August 6, 2020 against Falkbuilt, alleging that Falkbuilt is infringing certain of DIRTT’s
patents relating to our proprietary ICE® software (the “Patent Infringement Case”); and (iv) an action in the U.S. District Court for the
Northern District of Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully used our confidential information in the
United States and intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business
intelligence, with the aim of establishing a competing business in the United States market (the “Texas Unfair Competition Case”).
We intend to pursue the cases vigorously.
In the Canadian Non-Compete Case, we have conducted extensive document production and questioning of the defendants that
support our claims, as follows: (i) Smed and Loberg, and others, breached their duties owed to DIRTT, including their contractual and
fiduciary duties; (ii) Smed, Loberg, and others began developing the new competing company immediately after Smed’s departure;
(iii) before it was called Falkbuilt, the new competing company operated through a covert group comprised of then-current DIRTT
employees and distribution partners known as the TTIMit Group (which stands for “This Time I Mean It”); (iv) members of the
TTIMit Group took steps to conceal their communications by creating and using alias names, using private and personal email
addresses and phone numbers, and holding secret meetings and gatherings; (v) the TTMit Group also used then-current DIRTT
employees to build out Falkbuilt's warehouse premises and offices, source and purchase equipment for Falkbuilt, assist with market
research and develop Falkbuilt's products, build vignettes and drawings, address Falkbuilt's software and computer needs, and name
Falkbuilt; and (vi) members of the TTIMit Group conspired together to solicit DIRTT employees and distribution partners, design and
sell competing products using DIRTT's confidential information, including DIRTT's pricing lists, DIRTT's product designs, DIRTT's
personnel information, and revenue forecast information for DIRTT's distribution partners. DIRTT is seeking, among other things, an
order stopping the defendants from competing with DIRTT, judgment for damages and losses, and an accounting and disgorgement of
the defendants' gains from their wrongful misconduct.
In the Utah Misappropriation Case, the Court dismissed certain of the defendants, Falkbuilt Ltd., Falkbuilt, Inc. and Mogens
Smed without prejudice, finding that Utah was an inconvenient forum. We appealed that ruling and also filed a motion to set aside the
previously granted order granting a partial motion to dismiss without prejudice. The Court denied the Motion and that denial is
consolidated with the initial appeal. The remaining portion of the Utah Misappropriation Case is stayed pending resolution of the
appeal.
24
In the Patent Infringement Case, we are seeking, among other things, an order enjoining Falkbuilt from infringing our patents
and damages for past or continuing infringement. Recently, Falkbuilt was unsuccessful in attempting to initiate an inter partes review
and post grant review of our subject patents. The Patent Office found that Falkbuilt had not shown it would be likely to succeed in its
invalidity challenges to our patents. Following those denials, the U.S. District Court ordered Falkbuilt to produce discovery regarding
our claims. In January 2022, Falkbuilt informed the Court that it had discontinued use of its infringing “Echo Dome” software. On the
basis of this representation, the parties entered into a stipulated dismissal without prejudice, which was filed on February 14, 2022.
In the Texas Unfair Competition Case, we allege violations of the U.S. Lanham Act, the Texas Uniform Trade Secrets Act, the
Federal Defend Trade Secrets Act, the Pennsylvania Uniform Trade Secrets Act, the Colorado Consumer Protection Act, and the Ohio
Deceptive Practices Act, and are seeking preliminary and permanent injunctive relief to restrain Falkbuilt from using or disclosing our
confidential business information in the United States, and awards of compensatory damages, exemplary damages, and attorneys’ fees.
The defendants have moved to dismiss the Texas case without prejudice arguing that Texas is an inconvenient forum.
Falkbuilt also filed a lawsuit against us on November 5, 2019 in the Court of Queen’s Bench of Alberta, alleging that DIRTT
has misappropriated and misused their alleged proprietary information in furtherance of DIRTT’s product development. Falkbuilt
seeks monetary relief and an interim, interlocutory and permanent injunction of DIRTT’s alleged use of the alleged proprietary
information. We believe that the suit is without merit and filed an application for summary judgement to dismiss Falkbuilt’s claim.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information; Holders of Record
Our common shares are traded on the TSX under the symbol “DRT” and on Nasdaq under the symbol “DRTT.”
As of February 23, 2022, there were 85,351,261 common shares outstanding and 192 shareholders of record.
Dividends
We have not declared or paid any cash dividends on our common shares to date. The declaration and payment of dividends is at
the discretion of the Board, taking into account (i) our earnings, capital requirements and financial condition, (ii) restrictions on our
ability to pay dividends under our RBC Facility (as defined below), and (iii) such other factors as the Board considers relevant. Our
RBC Facility generally limits our ability to pay any dividends or make any other distribution on our outstanding common shares. See
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Credit Facility” for more
information.
25
Performance Graph
The following graph illustrates a comparison of the total cumulative shareholder return of our common shares with the
cumulative return of the S&P/TSX Composite Index and the S&P 600 Building Products Index for the period commencing
December 31, 2016 and ending on December 31, 2021. The graph assumes an initial investment of $100 on December 31, 2016, in
our common shares, the shares comprising the S&P/TSX Composite Index, and the shares comprising the S&P 600 Building Products
Index. The below shareholder return calculations are based on the exchange rates as reported by the H.10 statistical release of the
Board of Governors of the Federal Reserve System as of the year-end exchange rate for the applicable period. The comparisons in the
table are required by the SEC and applicable securities laws in Canada and are not intended to forecast or be indicative of possible
future performance of our common shares. This graph and related materials shall not be deemed “soliciting material” or be deemed
“filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that section, and shall not be
deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, whether made before or after the date
hereof and irrespective of any general incorporation language in any such filing.
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
Dec 31, 2016
Dec 31, 2017
Dec 31, 2018
Dec 31, 2019
Dec 31, 2020
Dec 31, 2021
DRT
S&P / TSX Composite Index
S&P 600 Building Products Index
$100 investment in stock
or index
DIRTT Environmental Solutions Ltd.
S&P/TSX Composite Index
S&P 600 Building Products Index
December 31
,
2016
100.00
100.00
100.00
Ticker
DRT
$
SPTSX $
$
SML
December 31
,
2017
115.30
113.73
108.78
$
$
$
December 31
,
2018
95.89
92.19
83.65
$
$
$
December 31
,
2019
70.21
115.61
99.55
$
$
$
December 31
,
2020
51.04
120.83
120.04
$
$
$
December 31
,
2021
40.72
145.88
140.93
$
$
$
Recent Sales of Unregistered Securities; Issuer’s Purchases of Equity Securities
None.
Item 6. [Reserved]
26
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations for the fiscal years
ended December 31, 2021 and 2020 together with our consolidated financial statements and related notes and other financial
information appearing in this Annual Report. The discussion contains forward-looking statements reflecting our current expectations
and estimates and assumptions concerning events and financial trends that may effect 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 “Special Note Cautionary Statement
Regarding Forward Looking Statements” appearing elsewhere in the Annual Report.
Overview
We are an innovative manufacturing company featuring proprietary software and virtual reality visualization platform, coupled
with vertically integrated manufacturing that designs, configures and manufactures prefabricated interior solutions used primarily in
non-residential spaces across a wide range of industries and businesses. We combine innovative product design with our industry-
leading, proprietary ICE Software, and technology-driven, lean manufacturing practices and sustainable materials to provide end-to-
end solutions for the traditionally inefficient and fragmented interior construction industry. We create customized interiors with
aesthetics of conventional construction but with greater schedule and cost certainty, shorter lead times, greater future flexibility, and
better environmental sustainability than conventional construction.
Our ICE Software allows us to sell, design, visualize (including 3D virtual reality modeling of interiors), configure, price,
communicate, engineer, specify, order and manage projects, thereby reducing challenges associated with traditional construction,
including cost overruns, change orders, inconsistent quality, delays and material waste. While other software programs and virtual
reality tools are used in the architectural and construction industries, our ICE Software is the only interior construction technology that
provides end-to-end integration, from design through order engineering, manufacturing and installation. Our interior construction
solutions include prefabricated, customized interior modular walls, ceilings, and floors; decorative and functional millwork; power
infrastructure; network infrastructure; and pre-installed medical gas piping systems. We strive to incorporate environmentally
sustainable materials and reusable components into our solutions while creating flexible, functional and well-designed environments
for the people who will use them.
We offer our interior construction solutions throughout the United States and Canada through a network of independent
Distribution Partners and an internal sales team. Our Distribution Partners use ICE to work with stakeholders, including end users, to
envision and design their spaces, and orders are electronically routed through ICE to our manufacturing facilities for production,
packing and shipping. Our Distribution Partners then coordinate the receipt and installations of our interior solutions at the end users’
locations.
Summary of Financial Results
•
•
•
Revenues for the year ended December 31, 2021 were $147.6 million, a decline of $23.9 million or 14% from $171.5
million for the year ended December 31, 2020. We believe this decrease principally reflects the severe economic and
social impact of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels
in North America due to non-essential business closures, work-from-home requirements, lock-down measures and other
regulatory responses implemented by governments and public health officials. The majority of the decrease was incurred
in the first quarter of 2021 when the full impact of the contraction in construction activity was experienced and with most
of our pre-pandemic projects in process completed in 2020. Additionally, in the third quarter of 2021, a resurgence of
COVID-19 infections due to the Delta variant delayed return to work plans, customer investment decisions and associated
construction activities.
Gross profit for the year ended December 31, 2021 was $23.5 million or 15.9% of revenue, a decline of $29.8 million or
56% from $53.3 million or 31.1% of revenue for the year ended December 31, 2020. The decrease largely reflects lower
revenue levels, significant inflationary increases in the realized cost of materials, transportation and packaging, negative
fixed cost leverage and under-utilized labor capacity, incremental fixed costs of our new South Carolina Facility and the
impact of a stronger Canadian dollar. Of the 15.2% difference in gross profit as a percentage of revenue in 2021 versus
2020, approximately 6% is due to higher material, transportation and packaging costs, 2% is due to negative fixed cost
leverage, 2% is due to the incremental South Carolina facility fixed costs, and 2% is due to a stronger Canadian dollar
with the balance related to inherent labor inefficiency at lower revenue levels and reduced timber provision reversals.
On October 12, 2021 we announced an approximate 6.5% overall increase in our product and transportation prices
effective on new orders subsequent to November 15, 2021 to offset these increased materials, transportation and
packaging costs, the benefits of which are expected to be largely realized in 2022.
27
•
•
•
•
Adjusted Gross Profit and Adjusted Gross Profit Margin (see “Non-GAAP Financial Measures”) for the year ended
December 31, 2021 was $34.0 million or 23.1%, respectively, a decrease from $63.4 million or 37.0%, respectively, for
the year ended December 31, 2020, due to the reasons described above. Excluded from Adjusted Gross Profit for the year
ended December 31, 2021 and 2020 are $1.8 million and $2.0 million, respectively, of overhead costs associated with
operating at lower than normal capacity levels, which were charged directly and separately to cost of sales rather than as a
cost attributable to production.
Net loss for the year ended December 31, 2021 was $53.7 million compared to $11.3 million for the year ended December
31, 2020. The higher net loss is primarily the result of the above noted reduction in gross profit, a $10.8 million increase
in operating expenses, explained below, a $2.8 million increase in interest expense and a $1.3 million decrease of
government subsidies. These decreases were partially offset by a $2.3 million reduction in income tax expense and a $0.2
million decrease in foreign exchange losses.
Operating expenses increased by $10.8 million to $85.4 million in 2021 from $74.6 million in 2020. This increase is
largely due to an estimated $2.7 million impact of a stronger Canadian dollar on Canadian-based operating expenses, $2.4
million of increased stock based compensation costs, $2.1 million of incremental depreciation, primarily from our new
and renovated DXCs, $1.4 million of goodwill impairment charges, $0.9 million of incremental professional fees, higher
salary and wage expenses as we continue to build our sales organization, and increased travel, meals and entertainment
costs due to easing of COVID-19 restrictions. These increases in operating costs were partially offset by $2.5 million of
lower commissions on reduced sales activities. Additionally, in 2020 operating expenses included a $1.2 million reversal
of a provision relating to a claim for severance by one of our former founders and a $0.6 million provision recorded for
expected credit losses against our accounts receivable balances, both of which did not re-occur in 2021.
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2021 was a $41.3 million
loss or (28.0)%, a decline of $34.1 million from a $7.2 million loss or (4.2)% for the year ended December 31, 2020 for
the above noted reasons.
Outlook
DIRTT believes there are two very significant changes taking place in the market that it can capitalize on. The first is that
organizations are beginning to decisively move forward with planning and implementing ‘return to work’ strategies. There is a strong
need to modify their workspace to accommodate a more flexible environment in the short-term, which in turn could change again over
the medium- to long-term as post-pandemic requirements continue to evolve. The second, not related to the pandemic, is one in which
many organizations in different sectors are trying to enhance their physical presence in local communities by adopting a single design
model that works in multiple jurisdictions. We believe we are well-positioned to capitalize on both trends, but DIRTT needs to modify
how it operates to capture these opportunities.
As a result, on January 18, 2022, we announced a change in its leadership, appointing Todd Lillibridge, the Board Chair, as
interim chief executive officer and he is expected to serve until a permanent chief executive officer is selected. Mr. Lillibridge has led
the implementation of a process that the Board was directing since the summer of 2021 to modify and adapt the Company’s strategic
plan.
Subsequent to the change in leadership, DIRTT announced several initiatives to better position itself to pursue these market
opportunities while simultaneously establishing goals to achieve or exceed break-even profitability through both operational efficiency
and improved sales effectiveness in the context of our long-term strategic plan.
We are implementing a master facility plan which will expand aluminum manufacturing in our Calgary and Savannah
manufacturing facilities while closing its Phoenix facility. This is expected to result in net headcount reduction of approximately 26
and annualized cost savings of approximately $2.4 million, excluding severance and other one-time costs of approximately $1.7
million, which costs are expected to be incurred in the first half of 2022. We are also expanding capabilities of the South Carolina
Facility, which produces chromacoat panels, to add thermofoil panels and back-painted glass production. This enhancement will
enable us to significantly cut the shipping time and cost for thermofoil panels to customers located in the East and Midwest regions of
the United States, as well to as leverage the fixed cost base of the South Carolina Facility. This expansion is being achieved through
the transfer of existing equipment from the Calgary and Phoenix facilities and is not expected to incur any material capital costs. This
is the first of several capability enhancements that were envisioned when the South Carolina Facility was launched last year.
After these changes to our manufacturing facilities, we will continue to have manufacturing capacity close to $500 million in
annual revenue, sufficient to remain responsive to fluctuations in demand and to accommodate mid-term growth.
28
The Company is optimizing its order process, which it believes will facilitate a reduction in standby production capacity. DIRTT
is changing its standard payment terms to 50% due on shipment, not order. By separating its deposit requirement from the order entry
process, management believes the Company can encourage earlier order entry, thereby improving both internal revenue forecasting
and production scheduling such that we expect to reduce standby production labor capacity by up to 20%, while continuing to provide
certainty in scheduling.
We have finalized an organization-wide restructuring of positions that reduced our salaried headcount by approximately 18%,
including the elimination of manufacturing and office positions which, along with other cost reduction initiatives are expected to yield
annualized savings of approximately $13 million.
Lastly, the Company is also implementing several initiatives regarding pricing.
•
•
•
Effective June 1, it will introduce a 5% price increase in response to continued inflation in our material costs;
Launching new aggressive pricing strategies on its Reflect® and Inspire® lines of glass fronts and applied headwalls,
with a view to capturing greater market share in an important entry point into its full solution suite of offerings; and
Recognizing the considerable value DIRTT adds during the pre-construction stage of projects, particularly within our
strategic accounts group, we will begin offering certain of those services for a fee.
These steps are in addition to the following actions taken in the fourth quarter of 2021 to preserve financial liquidity and address
inflationary impacts on raw materials and transportation and the effects of that year’s sales softness on our financial position.
• A price increase on our interior solutions and an adjustment to our freight charges, effective November 16, 2021,
•
resulting in an overall increase of approximately 6.5%;
The successful completion of an offering of C$35.0 million (approximately $25.6 million net) aggregate principal
amount of 6.25% convertible unsecured subordinated debentures due 2026; and
• A reduction in 2022 planned capital expenditures to approximately $7.0 million from $14.1 million in 2021 reflecting
the successful completion of our Dallas DXC and our South Carolina Facility. Our 2022 capital expenditure program is
comprised of approximately $2.5 million related to refreshes of DXCs, continued enhancement of our customer
relationship management system and website redesign, approximately $2.5 million on software development and
approximately $2.0 million on manufacturing and other capital upgrades.
Building on the transformative work that has been implemented to date in our commercial function, in 2022 we are focused on
improving our overall sales effectiveness by adopting a more strategic sales focus on our core, innovative products which deliver
higher margins, and which continue to provide clients design freedom, and certainty in cost, schedule, and outcomes.
Our partners have been and remain a key element in our go-to-market strategy. Enhancing both partner effectiveness and
accountability will be a priority in 2022. This includes improving the geographic and capability coverage of our partner network
through recruitment of new partners, including those with general contracting construction experience, clarifying roles and
responsibilities to reduce duplication of effort and improve overall efficiency, and simplifying the sales process through an increased
emphasis on core product sales. Our partners are a direct conduit to many of our end customers and we commenced establishing a
partner council to elevate partner feedback within our organization and provide further insight to support our commercial and
operational decision making.
Strategic accounts are a cornerstone in our strategy to drive long-term sustainable and predictable growth. These types of clients
manage large real estate footprints in numerous locations. For these clients it is advantageous and important to establish consistency in
design and execution, repeatability, and speed to market. While these relationships can take time to develop, once they are established,
the time and resources required to execute additional projects is reduced, creating profitable, predictable revenue streams. In return,
clients benefit from a single point of accountability at DIRTT, a strong North American network of partners, full lifecycle support
from established design standards and pre-construction expert support for their architects, designers and general contractors to field
work and post installation support. At year end, relationships in development with this group expanded to 55. Of those relationships,
we delivered projects in 2021 for 28 and we have identified project opportunities for 42 in 2022. Over half of these are in healthcare
and financial services industries. We will monitor both the expansion of relationships in development and the number of projects for
these clients as a measure of our success.
We intend to continue to invest to advance our capabilities in strategic marketing. These efforts include maturing and evolving
our presence in the market from being champions of our own disruptive concept to being enablers of others’ innovation and growth.
29
The focus is on strengthening our voice in the customer with the architect and design community and driving brand awareness. We
plan to launch a refined brand identity later this year that better demonstrates our improved offering and capabilities.
We are budgeting for annual 2022 revenue of between $170 and $180 million for 2022, based on our product and transportation
project pipeline for 2022 at January 1, 2022 of $302 million at a conversion rate of 55%, which is consistent with historical ranges and
represents an estimated 20% increase in revenues over 2021 pandemic impacted levels. While this 12-month forward pipeline
increased by 8% at January 1, 2022 compared to January 1, 2021, the quality of the pipeline has improved in 2022.
The distribution of our current pipeline among our verticals of commercial, healthcare, education and government is 62%, 17%,
12% and 9%, respectively and is generally consistent with prior years. We anticipate first quarter 2022 revenues will be between $38
million and $42 million compared to first quarter 2021 revenues of $29.5 million.
Based on budgeted annual revenue levels, taking into account the initiatives previously described and excluding our related one-
time restructuring costs and expected incremental professional fees, (1) we believe that our annual Adjusted EBITDA loss and net loss
will demonstrate a significant improvement from 2021 levels, (2) we believe we will shift to positive Adjusted EBITDA in 2023, with
a corresponding decrease in net loss, due to both the improved sales focus and operational efficiencies described above, and assuming
an improved macroeconomic environment as the pandemic recovery takes hold. Nevertheless, we no longer believe that the financial
targets we initially articulated in November 2019 are achievable by the end of 2023.
Non-GAAP Financial Measures
Note Regarding Use of Non-GAAP Financial Measures
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United
States of America (“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 Annual Report that is not prepared in accordance with GAAP and
should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses these non-GAAP
financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP
financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP
results and as a basis to compare our financial performance period-over-period and to compare our financial performance with that of
other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period
to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest
expense on outstanding debt and debt facilities, or foreign exchange movements), asset base (depreciation and amortization), the
impact of under-utilized capacity on gross profit, tax consequences and stock-based compensation. We remove the impact of all
foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the
impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance
sheet and are not reflective of the underlying operations of the Company. We remove the impact of under-utilized capacity from gross
profit, and fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods
where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are
incurred. In addition, management bases certain forward-looking estimates and budgets on non-GAAP financial measures, primarily
Adjusted EBITDA.
Government subsidies, depreciation and amortization, stock-based compensation expense, foreign exchange gains and losses
and impairment expenses are excluded from our non-GAAP financial measures because management considers them to be outside of
the Company’s core operating results, even though some of those receipts and expenses may recur, and because management believes
that each of these items can distort the trends associated with the Company’s ongoing performance. We believe that excluding these
receipts and expenses provides investors and management with greater visibility to the underlying performance of the business
operations, enhances consistency and comparativeness with results in prior periods that do not, or future periods that may not, include
such items, and facilitates comparison with the results of other companies in our industry.
The following non-GAAP financial measures are presented in this Annual Report, and a description of the calculation for each
measure is included.
Adjusted Gross Profit
Gross profit before deductions for costs of under-utilized capacity, depreciation and
amortization
Adjusted Gross Profit Margin
Adjusted Gross Profit divided by revenue
30
EBITDA
Adjusted EBITDA
Net income before interest, taxes, depreciation and amortization
EBITDA adjusted to remove foreign exchange gains or losses; impairment expenses; stock-
based compensation expense; government subsidies; and any other non-core gains or losses
Adjusted EBITDA Margin
Adjusted EBITDA divided by revenue
You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we
consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has
important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP
financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of
our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are
the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial
measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may
not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Results of Operations
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Revenue
Gross Profit
Gross Profit Margin
Operating Expenses
Sales and Marketing
General and Administrative
Operations Support
Technology and Development
Stock-based Compensation
Goodwill Impairment
Total Operating Expenses
Operating Loss
Operating Margin
Revenue
2021
For the Year Ended December 31,
2020
($ in thousands)
% Change
147,593
23,460
171,507
53,283
15.9%
31.1%
31,041
30,595
9,372
8,234
4,713
1,443
85,398
(61,938)
28,049
26,663
9,381
8,111
2,351
-
74,555
(21,272)
(42.0)%
(12.4)%
The following table sets forth the contribution to revenue of our DIRTT Solutions and related offerings.
Product
Transportation
License fees from Distribution Partners
Total product revenue
Installation and other services
2021
For the Year Ended December 31,
2020
($ in thousands)
% Change
129,031
13,231
738
143,000
4,593
147,593
150,004
15,491
1,194
166,689
4,818
171,507
(14)
(56)
11
15
-
2
100
N/A
15
191
(14)
(15)
(38)
(14)
(5)
(14)
31
Our sales activity and associated revenues continue to be impacted by the severe economic and social impact of the COVID-19
pandemic since March 2020, including a major contraction in construction activity levels in North America due to work-from-home
requirements, lock-down measures and other regulatory responses implemented by governments and public health officials. While we
did not experience any material cancellations of projects that were underway at the start of the COVID-19 pandemic, it is uncertain as
to the impact of the pandemic, including effects of resurgent infection rates due to variants, on future projects that are either in the
planning or conceptual stage. It is highly likely that future projects will also experience similar delays as the COVID-19 pandemic
runs its course. See Item 1A. “Risk Factors”.
Revenue decreased in the year ended December 31, 2021 by $23.9 million or 14% compared to 2020. The majority of the
decrease was incurred in the first quarter of 2021 when the full impact of the contraction in construction activity was experienced as
most of the pre-pandemic projects in process were completed in 2020, and a resurgence of COVID-19 infections due to the Delta
variant delayed return to work plans, customer investment decisions and associated construction activity.
Throughout 2020, we were able to partially mitigate the COVID-19 induced slowdown in overall construction activity through
the completion of projects that were in progress when the pandemic started. With most of these projects delivered by the end of the
fourth quarter of 2020, the first quarter of 2021 was the low point for sales and represents $11.5 million of the year over year decrease,
reflecting the full impact of the slowdown in non-residential construction activity on DIRTT’s business. Second quarter 2021 revenues
returned to 2020 levels, driven largely by increased activity with a large strategic health care provider and the delivery of COVID-19
vaccination trailers. Third quarter 2021 revenues, which started out consistent with 2020 levels, were adversely impacted by a
combination of a resurgence in COVID-19 infection rates in late August and September 2021 due to the Delta variant and upstream
supply chain issues, resulting in a $12.1 million decrease in year over year revenues. Fourth quarter 2021 revenues of $42.9 million
returned to 2020 levels, including three significant projects in the banking sector and a large government project.
We have made substantial improvements to our commercial function, as outlined in our strategic plan, including building an
appropriate organizational structure, improving the effectiveness of our existing sales force, attracting new sales talent, establishing
strategic marketing and lead generation functions, as well as expanding and better supporting our Distribution Partner network. While
we believe these actions are critical to driving long-term, sustainable growth, particularly as the recovery from the COVID-19
pandemic commences, these actions did not have a measurable effect on 2021 revenues in light of the severe economic adversity
caused by the pandemic. Additionally, in response to significant increases in the costs of raw materials, shipping materials and freight,
effective November 16, 2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%, with the
benefits largely expected to be realized in 2022.
Installation and other services revenue was $4.6 million for the year ended December 31, 2021 compared to $4.8 million in
2020. The changes in installation and other services revenue are primarily due to the timing of projects. Except in limited
circumstances, our Distribution Partners, rather than the Company, perform installation services, and accordingly, we are not
anticipating significant growth in this revenue stream.
Our success is partly dependent on our ability to profitably develop our Distribution Partner network to expand our market
penetration and ensure best practices are shared across local markets. At December 31, 2021, we had 69 Distribution Partners
servicing multiple locations. During 2020 and 2021, we made several changes and upgrades to our Distribution Partner network,
expanding our relationships with new and existing partners and ending our relationships with others. Our clients, as serviced primarily
through our Distribution Partners, exist within a variety of industries, including healthcare, education, financial services, government
and military, manufacturing, non-profit, energy, professional services, retail, technology and hospitality.
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government
and education. The following table presents our product and transportation revenue by vertical market.
Commercial
Healthcare
Government
Education
License fees from Distribution Partners
Total product revenue
Service revenue
2021
For the Year Ended December 31,
2020
($ in thousands)
% Change
84,488
30,130
16,012
11,632
738
143,000
4,593
147,593
102,245
35,400
14,128
13,722
1,194
166,689
4,818
171,507
(17)
(15)
13
(15)
(38)
(14)
(5)
(14)
32
Commercial
Healthcare
Government
Education
Total Product Revenue(1)
For the Year Ended December 31,
2021
2020
(in %)
60
21
11
8
100
63
21
8
8
100
(1)
Excludes license fees from Distribution Partners.
Revenue decreased in the year ended December 31, 2021 by 14% compared to the year ended December 31, 2020 and was
driven primarily by the full impact of the COVID-19 induced slowdown in non-residential construction activity experienced beginning
in the first quarter of 2021 and by ongoing upstream supply chain issues on overall construction schedules. Commercial revenues
decreased by 17% from the prior year, due largely to the severe impact of COVID-19 on commercial construction activities in North
America since March 2020, particularly in the first and third quarters of 2021 as described in more detail above. 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. In
2021, healthcare sales were 15% lower, respectively, due primarily to the timing of projects with the 2020 period including two large
projects of approximately $4.0 million each that did not re-occur in 2021. Education sales in 2021 decreased by 15% over the prior
period. At the beginning of the pandemic, education spending effectively paused with many institutions suspending in-person classes.
Government revenues increased due to the timing of certain projects.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States.
The following table presents our revenue dispersion by geography:
Canada
U.S.
2021
For the Year Ended December 31,
2020
($ in thousands)
% Change
17,299
130,294
147,593
18,848
152,659
171,507
(8)
(15)
(14)
Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States,
respectively. In 2020 and 2021, revenues from Canada fell to 11% and 12%, respectively, of total sales while sales to the United States
increased to 89% and 88%, respectively, of total sales. COVID-19 infection rates and resulting regulatory responses by governments
and public health officials have varied significantly by region, impacting the relative contribution of sales from each country.
Sales and Marketing Expenses
Sales and marketing expenses increased by $3.0 million to $31.0 million for the year ended December 31, 2021 from $28.0
million for the year ended December 31, 2020. The increases were largely related to increased salary and wage expenses as we
continue to build our sales organization, higher depreciation and operating expenses as we completed our Chicago and Dallas DXCs in
2020 and 2021, respectively, and increased travel, meals and entertainment as restrictions on travel have eased. As economies re-open,
we anticipate travel, meals and entertainment expenses will increase over current levels, the timing and amount of such expenses,
however, are indeterminate at this time. These increases were partially offset by lower commission expense.
Our sales and marketing efforts are focused on establishing the appropriate sales organization and personnel, significantly
improving our marketing approach and driving returns on sales and marketing expenditures, as outlined in our strategic plan. In light
of uncertainty caused by the COVID-19 pandemic, we have prioritized critical hires that are necessary to continue to advance our
overall strategy, including the implementation of necessary systems and tools while ensuring appropriate cost control and cash
conservation.
General and Administrative Expenses
General and administrative (“G&A”) expenses increased $3.9 million to $30.6 million for the year ended December 31, 2021
from $26.7 million for the year ended December 31, 2020. The increase was due to higher salaries, benefits and severance costs and
$0.9 million of incremental professional fees. In addition, the year ended December 31, 2020 included a $1.2 million reversal of a
33
provision relating to a claim for severance by one of our former founders and a $0.6 million credit loss, both of which were not
repeated in 2021.
Operations Support Expenses
Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration
of our Distribution Partner project execution and our manufacturing operations. Operations support expenses of $9.4 million were
consistent with 2020.
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 $0.1 million to $8.2 million for the year ended December 31, 2021,
compared to $8.1 million for the year ended December 31, 2020, primarily related to a decrease in capitalized software development
costs offset by lower variable compensation provision and other burdens in the current year.
Stock-Based Compensation
Stock-based compensation expense for the year ended December 31, 2021 was $4.7 million compared to $2.4 million in 2020.
The increase was largely due to grants of restricted share units and deferred share units, lowered by the impact of fair value
adjustments on cash settled awards as a result of our share price decreasing during the year ended December 31, 2021.
Goodwill Impairment
Goodwill impairment expense for the year ended December 31, 2021 was $1.4 million compared to $nil in 2020. We test
goodwill for impairment annually during the fourth quarter of the calendar year. Due to the ongoing impact of the COVID-19
pandemic on our financial results in 2021, we determined it was necessary to use the quantitative approach to perform our goodwill
impairment test. Based on our testing, the fair value of goodwill did not exceed the carrying value of its net assets and, accordingly,
the entire $1.4 million balance of goodwill was impaired as at December 31, 2021.
Government Subsidies
Government subsidies for the year ended December 31, 2021 was $11.5 million compared to $12.7 million for the same period
of 2020 and all amounts were fully collected at December 31, 2021.
As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the
Canada Emergency Wage Subsidy (“CEWS”), providing employers with a taxable subsidy in respect of a specific portion of wages
paid to Canadian employees during qualifying periods extending from March 15, 2020 to October 23, 2021, based on the percentage
decline of certain Canadian-sourced revenues during each qualifying period. The Company’s eligibility for the CEWS was subject to
change for each qualifying period and was reviewed by the Company for each qualifying period, with amounts being received for
various, but not each, qualifying period. Pursuant to amendments enacted as part of the 2021 Canadian federal budget, the Company
may be required to repay all or a portion of the CEWS amounts for any qualifying period commencing after June 5, 2021 where the
aggregate compensation for “specified executives” (within the meaning of the CEWS) during the 2021 calendar year exceeds the
aggregate compensation for “specified executives” during the 2019 calendar year. On November 19, 2020, the Canadian government
also implemented the Canada Emergency Rent Subsidy (“CERS”), which provided a taxable subsidy to cover eligible expenses for
qualifying properties, subject to certain maximums, for qualifying periods extending from September 27, 2020 to October 23, 2021,
with the amount of the subsidy available to the Company being based on the percentage decline of certain of the Company’s
Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS was subject to change for each
qualifying period and was reviewed by the Company for each qualifying period. The CEWS and CERS programs expired on October
23, 2021.
Income Tax
The provision for income taxes is comprised of U.S. and Canadian federal, state and provincial taxes based on pre-tax income.
Income tax recovery for the year ended December 31, 2021 was $0.2 million, compared to a $2.1 million expense for the same period
of 2020. For the year ended December 31, 2021, the Company recorded valuation allowances of $12.0 million (2020 - $5.2 million)
against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related
decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully
deduct historical losses. As at December 31, 2021, we had C$65.0 million of loss carry-forwards in Canada and $42.2 million in the
United States. These loss carry-forwards will begin to expire in 2032.
34
Net Loss
Net loss increased to $53.7 million or $0.63 net loss per share in the year ended December 31, 2021 from a net loss of $11.3
million or $0.13 net loss per share for the year ended December 31, 2020. The increased loss is primarily the result of a $29.8 million
decrease in gross profit, a $10.8 million increase in operating expenses, a $2.8 million increase in interest expense as a result of the
convertible unsecured subordinated debentures issued on January 25, 2021 and December 1, 2021 (collectively, the “Debentures”) and
draws on the Leasing Facilities (as defined below) and a $1.3 million decrease in government subsidies. These decreases were
partially offset by a $2.3 million decrease in income tax expense and a $0.2 million decrease in foreign exchange losses.
EBITDA and Adjusted EBITDA for the Years Ended December 31, 2021, 2020 and 2019
The following table presents a reconciliation for the year-to-date results of 2021, 2020 and 2019 of EBITDA and Adjusted
EBITDA to our net loss, which is the most directly comparable GAAP measure for the years presented:
Net loss for the year
Add back (deduct):
Interest Expense
Interest Income
Income Tax Expense (Recovery)
Depreciation and Amortization
EBITDA
Foreign Exchange Losses
Stock-based Compensation
Government Subsidies
Goodwill Impairment
Reorganization Expense
Adjusted EBITDA
Net Loss Margin(1)
Adjusted EBITDA Margin
(1) Net loss divided by revenue.
2021
For the Year Ended December 31,
2020
($ in thousands)
2019
(53,668)
3,131
(77)
(204)
14,513
(36,305)
335
4,713
(11,455)
1,443
-
(41,269)
(11,298)
305
(238)
2,104
11,706
2,579
576
2,351
(12,721)
-
-
(7,215)
(4,396)
131
(529)
1,019
12,242
8,467
1,324
3,876
-
-
4,560
18,227
(36.4)%
(28.0)%
(6.6)%
(4.2)%
(1.8)%
7.4%
For the year ended December 31, 2021, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $34.1 million to a
$41.3 million loss or (28.0)% from $7.2 million loss or (4.2)% in the same period of 2020. This reflects a $29.4 million decrease in
Adjusted Gross Profit and $0.3 million in lower costs of underutilized capacity, discussed below, higher salary and wage expenses
reflecting the cumulative effect of hires in line with our strategic plan, $0.9 million of incremental professional fees, as well as the
estimated $2.7 million impact of a stronger Canadian dollar on Canadian-based operating expenses, excluding depreciation and stock-
based compensation. Reductions in Adjusted EBITDA were partially offset by $2.5 million of lower commissions. Additionally, in
2020 operating expenses benefited from a $1.2 million reversal of a provision relating to a claim for severance by one of our former
founders and lower costs as a result of reduced activity due to COVID-19, offset by a $0.6 million provision recorded for expected
credit losses against our accounts receivable balances, which did not re-occur in 2021.
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2021, 2020 and 2019
The following table presents a reconciliation for the years ended December 31, 2021, 2020, and 2019 of Adjusted Gross Profit
to our gross profit, which is the most directly comparable GAAP measure for the periods presented:
Gross profit
Gross profit margin
Add: Depreciation and amortization expense
Add: Costs of under-utilized capacity
Adjusted Gross Profit
Adjusted Gross Profit Margin
2021
For the Year Ended December 31,
2020
($ in thousands)
2019
23,460
15.9%
8,808
1,756
34,024
23.1%
53,283
31.1%
8,110
2,010
63,403
37.0%
86,424
34.9%
9,195
2,240
97,859
39.5%
35
Gross profit and gross profit margin decreased to $23.5 million or 15.9% for the year ended December 31, 2021, from $53.3
million or 31.1% for the year ended December 31, 2020. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $34.0
million or 23.1% for the year ended December 31, 2021, from $63.4 million or 37.0% for the year ended December 31, 2020.
The decrease largely reflects lower revenue levels, significant inflationary increases in the realized cost of materials,
transportation and packaging, negative fixed cost leverage and under-utilized labor capacity, incremental fixed costs of our new South
Carolina Facility and the impact of a stronger Canadian dollar. Of the 15.2% difference in gross profit as a percentage of revenue in
2021 versus 2020, approximately 6% is due to higher material, transportation and packaging costs, 2% is due to negative fixed cost
leverage, 2% is due to the incremental South Carolina Facility fixed costs, and 2% is due to a stronger Canadian dollar with the
balance related to inherent labor inefficiency at lower revenue levels and reduced timber provision reversals. The decrease was largely
due to the impact of fixed costs on lower revenues.
Like many other industries, we experienced a significant increase in the cost of raw materials, transportation and packaging,
largely driven by the effects of the pandemic with much of the increases experienced in the second half of 2021. As previously
discussed and in response, effective November 16, 2021, we increased prices on new orders by approximately 6.5% to effectively
offset these cost increases, with the benefits largely expected to be realized in 2022. We expect such inflationary pressures to continue
into 2022 and accordingly announced a further 5% price increase on February 17, 2022, effective June 1, 2022.
Approximately $28.3 million of our annual costs are fixed, related primarily to rent, utilities and other production overhead
costs including $2.7 million of incremental costs related to our new South Carolina Facility. Furthermore, at these revenue levels our
manufacturing workforce, which would normally be variable, is effectively fixed. We have reduced our manufacturing workforce by
31% since December 31, 2019, not including the net headcount reductions announced on February 22, 2022, while ensuring we can
deliver to our customer lead times given inter-week variability in production volumes.
A stronger Canadian dollar on Canadian-based manufacturing costs negatively impacted gross margin by approximately $2.5
million. The year ended December 31, 2021 included a $0.5 million reversal of a timber provision compared to a $1.8 million reversal
in the year ended December 31, 2020, discussed further below.
During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing
facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales,
representing production overheads that were not attributable to production. In the first quarter of 2020, we separately classified $2.0
million as costs related to our under-utilized capacity (1.2% of 2020 annual gross profit margin) in cost of sales. We took steps to
manage our excess capacity, including the reduction in staffing by 14%, with a further 12% reduction in April 2020 for a total
reduction of 25% from prior year levels, and the undertaking of planned factory curtailments. The staffing reductions realigned our
capacity with expected activity levels; however, our fixed costs continued to affect our Adjusted Gross Profit Margin, which we
expect to remain below historical percentages until sales improve. In the first quarter of 2021, we experienced the full impact of the
slowdown in non-residential construction activity on our business. In anticipation of a recovery in demand for our products and
services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective
furlough days, in the first quarter of 2021 despite the shortfall in revenues relative to capacity. As a result, in the first quarter of 2021
we separately classified $1.8 million as costs related to our under-utilized capacity (1.2% of 2021 annual gross profit margin) in cost
of sales. For the remaining quarters of 2021, we did not have abnormal excess capacity as our workforce was better aligned with
current production volumes.
Following the completion of third party testing in 2019, we determined that timber included in certain projects installed between
2016 and 2019 potentially did not meet the fire-retardant specifications under which the projects were sold. As a result, we recorded a
$2.5 million provision in the fourth quarter of 2019 and began contacting customers to determine whether remedial actions were
required. In the second quarter of 2020, we identified and validated an in-situ solution that we believe will meet the fire-retardant
specification under which the projects were sold and accordingly reduced the associated provision to $1.3 million, which represents
expected costs to prepare impacted sites and apply the in-situ solution. In the third quarter of 2020, we completed building code
reviews of the affected projects and determined that the timber as installed met the requisite building code requirements as it related to
fire retardance. As a result, we further reduced our timber provision by $0.5 million in the third quarter of 2020 as we believe this
reduced any obligation to remediate previously installed projects. Additionally, we entered into agreements with certain customers to
compensate them for product charges not fulfilled. During the year ended December 31, 2021, we incurred no costs (2020 – $0.1
million) associated with remediating previously installed timber projects and we reduced our provision by a further $0.5 million to a
remaining balance of $0.1 million given limited take-up by our customers to remediate these identified projects.
36
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2020
compared to the fiscal year ended December 31, 2019 is included under the heading Item 7. “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,
as filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on February 24, 2021.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2021 totaled $60.3 million, an increase of $14.5 million from December 31, 2020.
The change in cash primarily reflects the impact of $55.1 million of net proceeds from the issuance of the Debentures and $9.8 million
of drawings under our Leasing Facilities (as defined below), less scheduled Leasing Facilities repayments of $1.8 million, offset by
cash used in operations of $31.2 million, capital expenditures of $14.6 million and the restriction of $3.1 million of cash under the
terms of our senior secured credit facility.
In January 2021, we issued C$40.3 million of convertible debentures for net proceeds after costs of C$37.6 million ($29.5
million). These convertible 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.
In February 2021, we entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility (the
“RBC Facility”) with the Royal Bank of Canada (“RBC”). Under the RBC Facility, the “Borrowing Base” is a maximum of 90% of
investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of
eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking
claims. Available borrowings under the RBC Facility at December 31, 2021 were C$13.2 million or $10.4 million.
In December 2021, we issued C$35.0 million of convertible debentures for net proceeds after costs of C$32.7 million ($25.6
million). These convertible 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.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$3.6 million
($2.6 million) has been drawn, and a $14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility”, and
together with the Canada Leasing Facility, the “Leasing Facilities”) of which $13.3 million has been drawn with RBC and one of its
affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred.
In light of the uncertainty caused by the near and potential mid-term impacts of COVID-19, we have evaluated multiple
downside scenarios and have implemented cost control and expenditure management processes. While the previously discussed
COVID-19 impacts and upstream supply chain issues causing project delays during 2021 resulted in a significant usage of cash
reserves, the combination of an improved sales outlook for 2022, our cost optimization activities and our cash reserves and available
credit facilities lead us to believe that we have sufficient liquidity for at least the next twelve months. We assess our financial strength
on an ongoing basis and may seek additional financing to bolster our balance sheet to mitigate the risk of ongoing delays in sales
recovery.
A prolonged and complete cessation of or sustained significant decrease in North American construction activities or a sustained
economic depression and its adverse impacts on customer demand could continue to adversely affect our liquidity. To the extent that
existing cash and cash equivalents and increased liquidity from the aforementioned facilities are not sufficient to fund future activities,
we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of
indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities or contain
instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing
shareholders.
Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of
equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of cash
flow from operations, long-term debt, government subsidies and cash on hand. We had no amounts outstanding under the RBC
Facility as of December 31, 2021, $13.9 million outstanding under the Leasing Facilities and $55.1 million of convertible debentures
outstanding as of December 31, 2021.
The following table summarizes our consolidated cash flows for the years indicated:
37
Net cash flows provided by (used in) operating activities
Net cash flows used in investing activities
Net cash provided by (used in) financing activities
Effect of foreign exchange on cash, cash equivalents and
restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
Operating Activities
2021
For the Year Ended December 31,
2020
($ in thousands)
2019
(31,210)
(14,138)
62,452
458
17,562
45,846
63,408
12,485
(19,392)
5,724
(145)
(1,328)
47,174
45,846
13,359
(15,189)
(5,484)
1,076
(6,238)
53,412
47,174
For the Year Ended December 31,
2021
2020
($ in thousands)
2019
60,313
3,095
63,408
45,846
-
45,846
47,174
-
47,174
Net cash flows used in operating activities were $31.2 million for the year ended December 31, 2021 and $12.5 million provided
by operating activities for the year ended December 31, 2020. The decrease in cash flows from operations is largely due to a decrease
in gross profit, higher operating costs and higher inventory, partially offset by higher accounts payable and accrued liabilities, a
decrease in trade and other receivables and higher customers deposits. For the year ended December 31, 2021, we were eligible for
$11.5 million (2020 - $12.7 million) of government subsidies.
Investing Activities
We invested $11.8 million in property, plant and equipment during the year ended December 31, 2021 compared to $16.6
million during the year ended December 31, 2020.
Our investments during the year ended December 31, 2021 included $3.9 million in costs to complete the construction of the
South Carolina Facility and $4.6 million of investment in our DXCs, primarily related to our DXC in Plano, Texas. These investments
are substantially complete and until pre-COVID revenues return, no new significant capital projects are planned. Maintenance capital
expenditures for the year ended December 31, 2021 were $3.3 million, which includes new equipment to complete our transition to
one-piece flow manufacturing in our aluminum plants as well as equipment necessary to ensure business continuity in our aluminum
plants. We anticipate maintenance capital requirements to be lower in future periods as there are no significant projects ongoing at this
time.
During the year ended December 31, 2020, our spending included $9.9 million related to the construction of the South Carolina
Facility, $2.9 million on our Chicago DXC, $0.5 million on development of our new Dallas DXC and $3.3 million of maintenance
capital.
Software development and capitalized patent costs for the year ended December 31, 2021 were $2.8 million compared to $3.5
million for the year ended December 31, 2020. Software development expenditure primarily consists of the capitalization of salaries of
our software development team members. We expect the level of expenditure to be consistent with the current year, and any
fluctuations will increase or decrease technology and development expenditures on the statement of operations.
Financing Activities
For the year ended December 31, 2021, $62.5 million of cash was provided by financing activities mainly due to the net
proceeds received from the issuance of the Debentures in January and December of 2021 of C$37.5 million ($29.5 million) and
C$32.7 million ($25.6 million), respectively, and the receipt of $9.8 million of cash consideration under the U.S. Leasing Facility,
which was used to finance equipment purchases for our new South Carolina Facility largely paid for in installments in 2019 and 2020.
Cash provided by financing activities for the year ended December 31, 2020 was $5.7 million entirely comprised of draws and
repayments under the Leasing Facilities.
We currently expect to fund anticipated future investments with available cash, including the proceeds from our issuance of the
Debentures and drawings on our Leasing Facilities. Apart from cash flow from operations, issuing equity and debt has been our
primary source of capital to date. Additional debt or equity financing may be pursued in the future as we deem appropriate. We may
38
also use debt or pursue equity financing depending on the share price at the time, interest rates, and nature of the investment
opportunity and economic climate.
Credit Facility
On February 12, 2021, the Company entered into the RBC Facility. Under the RBC Facility, the Borrowing Base is up to a
maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75%
of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential
prior ranking claims. At December 31, 2021, available borrowings are C$13.2 million ($10.4 million), of which no amounts have been
drawn. Interest is calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR
plus 155 basis points. Under the RBC Facility, if the “Aggregate Excess Availability”, defined as the Borrowing Base less any loan
advances or letters of credit or guarantee and if undrawn including unrestricted cash is less than C$5.0 million, the Company is subject
to a fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing twelve month basis. Additionally, if the FCCR has been
below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the
aggregate of one year of payments on outstanding loans on the Leasing Facilities. The Company did not meet the three month FCCR
requirement during the fourth quarter of 2021, which resulted in requiring the restriction of $3.1 million of cash. Should an event of
default occur or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company
would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off
any borrowings and any remaining amounts made available to the Company.
During 2020, the Company entered into the Leasing Facilities, consisting of the C$5.0 million Canada Leasing Facility and the
$14.0 million U.S. Leasing Facility with RBC, which are available for equipment expenditures and certain equipment expenditures
already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. The U.S.
Leasing Facility is amortized over a six-year term and is extendible at the Company’s option for an additional year.
The Company has drawn $13.3 million of cash consideration under the U.S. Leasing Facility and commenced the lease term in
2020 for the equipment at the South Carolina Facility. The Company has drawn C$3.6 million ($2.6 million) of cash consideration
under the Canada Leasing Facility and commenced the lease term for the Canadian equipment expenditures during 2020.
We are restricted from paying dividends unless Payment Conditions (as defined in the RBC Facility) are met, including having a
net borrowing availability of at least C$10 million over the proceeding 30-day period, and having a trailing twelve month fixed charge
coverage ratio above 1.10:1 and certain other conditions. The RBC Facility is currently secured by substantially all of our real
property located in Canada and the United States
Contractual Obligations
The following table summarizes DIRTT’s contractual obligations at December 31, 2021:
Less than
Greater than
1 year
1 to 3 years
3 to 5 years
5 years
Total
Payments due by period
Accounts payable and accrued liabilities
Other liabilities
Customer deposits and deferred revenue
Current and long-term portion of long-term debt and
accrued interest1
Lease liabilities (undiscounted)
Purchase obligations
Total
22,751
2,379
2,420
6,717
6,406
3,732
44,405
($ in thousands)
-
-
-
-
-
-
-
-
-
22,751
2,379
2,420
13,434
7,901
-
21,335
72,309
6,451
-
78,760
157
28,963
-
92,617
49,721
3,732
29,120 173,620
(1)
Includes principal and interest. See Note 12 to our Consolidated Financial Statements for additional information.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements appearing elsewhere in this
Annual Report. Our critical accounting estimates include the areas where we have made what we consider to be particularly difficult,
subjective or complex judgments in making estimates, and where these estimates can significantly affect our financial results under
different assumptions and conditions. We prepare our financial statements in conformity with GAAP. As a result, we are required to
make estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates,
39
judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and reported
amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. Critical
estimates and assumptions made by management include:
Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies
We have warranty obligations with respect to manufacturing defects on most of our manufactured products. Warranty periods
generally range from one to ten years. We have recorded a reserve for estimated warranty and related costs based on historical
experience and periodically adjust these provisions to reflect actual experience. We assess the adequacy of our warranty accrual on a
quarterly basis, and adjust the previous amounts recorded, if necessary, to reflect the change in estimate of the future costs of claims
yet to be serviced. Typically, product deficiencies requiring our warranty are identified and remediated within a year of production.
The following provides information with respect to our warranty accrual. At December 31, 2021 and 2020, we had $1.5 million and
$1.8 million, respectively, accrued for warranty and other provisions, and third-party costs associated with remedying deficiencies
were $0.8 million during the fiscal year ended December 31, 2021, as compared to $1.8 million during the fiscal year ended December
31, 2020. Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed
between 2016 and 2019 potentially did not meet the fire-retardant specifications under which the projects were sold. As a result, we
recorded a $2.5 million provision in the fourth quarter of 2019 and have been contacting customers to determine whether remedial
actions are required. In the second quarter of 2020, we identified and validated an in-situ solution that we believe will meet the fire-
retardant specification under which the projects were sold and reduced the associated provision to $1.3 million, which represents
expected costs to prepare impacted sites and apply the in-situ solution. In the third quarter of 2020, we completed building code
reviews of the affected projects and determined that the timber as installed met the requisite building code requirements as it related to
fire retardance. We further reduced our timber provision by $0.5 million in 2020 as we believe this reduces any obligation to
remediate previously installed projects. Additionally, we entered into agreements with certain customers to compensate them for
product charges not fulfilled. During the fourth quarter of 2021, we reduced our timber provision by an additional $0.5 million to $1.0
million to reflect our expected remaining obligation.
We establish reserves for estimated legal contingencies when we believe a loss on litigation is probable and the amount of the
loss can be reasonably estimated. Revisions to contingent liability reserves are reflected in operations in the period in which there are
changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for
contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. We estimate the
probable cost by evaluating historical precedent as well as the specific facts relating to each contingency (including the opinion of
outside advisors). Should the outcome differ from our assumptions and estimates, or other events result in a material adjustment to the
accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in
the period the new information becomes known. At December 31, 2021 and 2020, we had $0.1 and $0.05 million provided for legal
provisions, respectively.
Estimates of useful lives of depreciable assets and the fair value of long-term assets used for impairment calculations
We evaluate the recoverability of our property, plant and equipment (“PP&E”), capitalized software costs and right of use assets
when events or changes in circumstances indicate a potential impairment exists. If impairment is indicated, the impairment loss is
measured as the amount the assets carrying value exceeds the fair value of the assets.
Our determination of the fair value associated with long-term assets involves significant estimates and assumptions, including
those with respect to the determination of asset groups, future cash inflows and outflows, discount rates, and asset lives. In the current
year, estimates of cash inflows are dependent on the timing and extent of recovery of the slowdown experienced as a result of the
COVID-19 pandemic. These significant estimates require considerable judgment, which could affect our future results if the current
estimates of future performance and fair values change.
We estimate the useful lives of PP&E, capitalized software costs and right of use assets based on the period over which the
assets are expected to be available for use. The estimated useful lives are reviewed annually and are updated if expectations differ
from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the
relevant assets. In addition, the estimation of the useful lives of the relevant assets may be based on internal technical evaluation and
experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the
estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would
be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the PP&E and capitalized
software assets would increase the recorded expenses and decrease the non-current assets.
We test goodwill for impairment annually during the fourth quarter of the calendar year. Due to the ongoing impact of the
COVID-19 pandemic on our financial results in 2021, we determined it was necessary to use the quantitative approach to perform our
40
goodwill impairment test. Based on our testing, the fair value of goodwill did not exceed the carrying value of its net assets and,
accordingly, the entire $1.4 million balance of goodwill was impaired as at December 31, 2021.
Estimates of future taxable earnings used to assess the realizable value of deferred tax assets
We use the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and
liabilities arise from temporary differences between the tax bases of assets and liabilities and their carrying amounts reported in the
financial statements. Deferred income tax assets also reflect the benefit of unutilized tax losses that can be carried forward to reduce
income taxes in future years. Such method requires the exercise of significant judgment in determining whether or not our deferred tax
assets are probable of recovery from taxable income of future years and, therefore, can be recognized in the financial statements. Also,
estimates are required to determine the expected timing upon which tax assets will be realized and upon which tax liabilities will be
settled. We assess the ability to recover our deferred tax assets every quarter and concluded that a valuation allowance was required
against our deferred tax assets at December 31, 2021 of $17.3 million (2020 - $5.3 million).
Tax interpretations, regulations and legislation in the various jurisdictions in which the Company and its subsidiaries
operate
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation
and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the various
U.S. federal and state, and Canadian federal and provincial, jurisdictions. Jurisdictional tax law changes, increases or decreases in
permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances,
and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
We have no liability for uncertain tax positions. However, should we accrue for such liabilities, when and if they arise in the
future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.
Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of the
ultimate payout amount
We use a fair-value based approach for measuring stock-based compensation and record compensation expense over an award’s
vesting period based on the award’s fair value at the date of grant. Our awards vest based on service conditions, and compensation
expense is recognized on a straight-line basis. Stock-based compensation expense is recognized only for those awards that ultimately
vest.
Estimates of ability and timeliness of customer payments of accounts receivable
Our expected credit loss reflects reserves for customer receivables to reduce receivables to amounts expected to be collected.
Management uses significant judgment in estimating expected credit losses. In estimating the Company’s current estimate of expected
credit losses, management considers 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. While we believe these processes effectively address our
exposure for doubtful accounts and credit losses have historically been within expectations, changes in the economy, industry, or
specific customer conditions may require adjustments to the expected credit loss. We have a contract with a trade credit insurance
provider, whereby a portion of our trade receivables are insured. The trade credit insurance provider determines the coverage amount,
if any, on a customer-by-customer basis. Based on our trade receivables balance as at December 31, 2021 and 2020, approximately
90% and 84%, respectively, of that balance was covered by trade credit insurance provider.
At December 31, 2021, we had an allowance for expected credit loss of $0.1 million (2020 - $0.6 million).
Recent Accounting Pronouncements
Please refer to Note 3 to our Consolidated Financial Statements presented elsewhere in this Annual Report.
41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our financial assets and liabilities consist primarily of cash and cash equivalents, restricted cash, trade and other receivables,
long-term deposits and long-term receivables, accounts payable and accrued liabilities, other liabilities, lease liabilities and long-term
debt and accrued interest. We are exposed to market, credit and liquidity risks associated with financial assets and liabilities. We
currently do not use financial derivatives to reduce exposures from changes in foreign exchange rates, commodity prices, or interest
rates. We do not hold or use any derivative instruments for trading or speculative purposes. Our Board has responsibility for the
establishment and approval of overall risk management policies, including those related to financial instruments. Management
performs continuous assessments to ensure that all significant risks related to financial instruments are reviewed and addressed in light
of changes to market conditions and operating activities.
Credit risk
Our principal financial assets are cash and cash equivalents, restricted cash and trade and other receivables.
Our credit risk is primarily concentrated in our trade receivables as we do not believe that we are exposed to any significant
credit risk related to our cash and cash equivalents and restricted cash balances. The amounts disclosed in the consolidated balance
sheet for trade and other receivables are net of allowances for doubtful accounts. Allowances are provided for the Company’s current
estimate of all expected credit losses using the lifetime expected credit loss model. In order to manage and assess our risk,
management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring
of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective
April 1, 2020. At December 31, 2021, approximately 90% of our trade accounts receivable are insured, relating to accounts
receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities, that
have arisen since April 1, 2020, when the trade credit insurance became effective. Our trade balances are spread over a broad
Distribution Partner base, which is geographically dispersed. No Distribution Partner accounts for greater than 10% of revenue. In
addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.
The overall change and uncertainty in the economy as a result of the COVID-19 pandemic had caused us to increase our
expectation of credit losses during the first quarter of 2020, and additionally, we believe the COVID-19 pandemic has affected the
ability of certain Distribution Partners and other customers to pay amounts owed or owing to DIRTT due to the impact of local
shutdowns on businesses in certain markets. During the year ended December 31, 2021, we decreased our provision for expected
credit losses by $0.5 million to $0.1 million which was related to an uncollectable amount written off during 2021.
Market risk
Market risk is the risk that changes in market prices, such as interest rates and foreign currency exchange rates, will affect our
income or the value of the financial instruments held.
Foreign exchange risk
Historically, the majority (approximately 80% to 88%) of our revenue is collected in U.S. dollars, and approximately 45% of
our costs are also incurred in U.S. dollars. Most other revenue and costs are denominated in Canadian dollars. As a result, we are
exposed to fluctuations in the U.S. dollar against the Canadian dollar, which could have a positive or negative impact on our revenue
and costs. The recent weakening of the U.S. dollar versus the Canadian dollar has had a negative impact on results because reported
cost reductions are less than reported revenue reductions.
Our financial instruments are exposed primarily to fluctuations in the Canadian dollar. The following table details our exposure
to currency risk at the reporting dates and a sensitivity analysis to changes in currency. The sensitivity analysis includes Canadian
dollar-denominated monetary items and adjusts their translation at period end for their respective change in the Canadian dollar. For
the respective weakening of the Canadian dollar, there would be an equal and opposite impact on net loss and comprehensive loss.
42
Amount
(C$ in thousands)
Change in
Currency (%)
30,407
4,402
1,723
(14,172)
(1,519)
(5,785)
(74,769)
(59,713)
Effect of net
loss and
comprehensive
loss for the
year ended
December 31, 2021
3,041
440
172
(1,417)
(152)
(579)
(7,477)
(5,972)
10%
10%
10%
10%
10%
10%
10%
Cash and cash equivalents
Trade and other receivables
Long-term deposits and long-term receivables
Accounts payable and accrued liabilities
Other liabilities
Lease liabilities
Long-term debt and accrued interest
Total
Commodity price risk
We consume raw materials such as aluminum, hardware, wood and veneer, timber, plastic, electrical wiring and components,
paint and powder, and fabric and vinyl. While aluminum represents the largest component of our raw materials’ expenditures, overall
aluminum spend comprises only approximately 11% of product revenues and, therefore, absolute exposure to price fluctuations has a
minimal impact on profitability.
Interest rate risk
On February 2021, we entered into the RBC Facility. The RBC Facility replaced the Previous RBC Facility (as defined below)
that was entered into on July 19, 2019 and that had no amounts outstanding at December 31, 2020. An increase in overall interest rates
by 0.5% would have increased interest expense related to these items and decreased net loss and comprehensive loss by $nil for 2021
and 2020. An equal decrease in rates would generate an equal amount of interest savings.
The Company’s Leasing Facilities and Debentures bear interest at fixed interest rates and are therefore not subject to interest
rate risk.
Item 8. Financial Statements and Supplementary Data.
INDEX
Report of Independent Registered Public Accounting Firm (PCAOB ID 271)......................................
Page No.
Consolidated Balance Sheets, as at December 31, 2021 and 2020.........................................................
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31,
2021, 2020 and 2019 ..........................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,
2021, 2020 and 2019 ..........................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 .......
Notes to the Consolidated Financial Statements ....................................................................................
44
45
46
47
48
49
43
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of DIRTT Environmental Solutions Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DIRTT Environmental Solutions Ltd. and its subsidiaries (together,
the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss,
changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the
related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Canada
February 23, 2022
We have served as the Company’s auditor since 2017.
PricewaterhouseCoopers LLP
111-5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
44
DIRTT Environmental Solutions Ltd.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
ASSETS
Current Assets
Cash and cash equivalents
Restricted cash
Trade and other receivables, net of expected credit losses of $0.1
million at December 31, 2021 and $0.6 million at December 31, 2020
Inventory
Prepaids and other current assets
Total Current Assets
Property, plant and equipment, net
Capitalized software, net
Operating lease right-of-use assets, net
Goodwill
Other assets
Total Assets
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities
Other liabilities
Customer deposits and deferred revenue
Current portion of long-term debt and accrued interest
Current portion of lease liabilities
Total Current Liabilities
Deferred tax liabilities, net
Long-term debt
Long-term lease liabilities
Total Liabilities
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 85,345,433 issued
and outstanding at December 31, 2021 and 84,681,364 at December 31, 2020
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
Refer to Note 17 for commitments
The accompanying notes are an integral part of these consolidated financial statements.
As At
December 31,
2021
As at
December 31,
2020
60,313
3,095
17,540
18,457
4,399
103,804
51,697
7,395
30,880
-
5,663
199,439
22,751
2,379
2,420
3,323
6,214
37,087
-
67,319
27,267
131,673
181,782
13,200
(15,916)
(111,300)
67,766
199,439
45,846
-
18,953
15,978
4,068
84,845
49,847
8,344
33,643
1,449
5,016
183,144
20,350
2,779
1,819
898
5,503
31,349
414
5,069
29,781
66,613
180,639
10,175
(17,018)
(57,265)
116,531
183,144
45
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Operations and Comprehensive Loss
(Stated in thousands of U.S. dollars, except per share data)
Product revenue
Service revenue
Total revenue
Product cost of sales
Costs of under-utilized capacity
Service cost of sales
Total cost of sales
Gross profit
Expenses
Sales and marketing
General and administrative
Operations support
Technology and development
Stock-based compensation
Goodwill impairment
Reorganization
Total operating expenses
Operating loss
Government subsidies
Foreign exchange loss
Interest income
Interest expense
Loss before tax
Income taxes
Current tax expense (recovery)
Deferred tax expense (recovery)
Net loss
Loss per share
Basic and diluted loss per share
Weighted average number of shares outstanding (in thousands)
Basic and Diluted
Consolidated Statement of Comprehensive Loss
Loss for the year
Exchange differences on translation of foreign operations
Comprehensive loss for the year
For the Year Ended December 31,
2020
2019
2021
143,000
4,593
147,593
118,525
1,756
3,852
124,133
23,460
31,041
30,595
9,372
8,234
4,713
1,443
-
85,398
(61,938)
11,455
(335)
77
(3,131)
8,066
(53,872)
210
(414)
(204)
(53,668)
166,689
4,818
171,507
113,445
2,010
2,769
118,224
53,283
28,049
26,663
9,381
8,111
2,351
-
-
74,555
(21,272)
12,721
(576)
238
(305)
12,078
(9,194)
(3,521)
5,625
2,104
(11,298)
240,659
7,076
247,735
153,128
2,240
5,943
161,311
86,424
33,939
27,645
11,037
7,818
3,876
-
4,560
88,875
(2,451)
-
(1,324)
529
(131)
(926)
(3,377)
1,064
(45)
1,019
(4,396)
(0.63)
(0.13)
(0.05)
85,027
84,681
84,671
For the Year Ended December 31,
2020
2019
2021
(53,668)
1,102
(52,566)
(11,298)
1,010
(10,288)
(4,396)
4,064
(332)
The accompanying notes are an integral part of these consolidated financial statements.
46
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
(Stated in thousands of U.S. dollars, except for share data)
As at December 31, 2018
Issued on exercise of options
Stock-based compensation
Foreign currency translation adjustment
Net loss for the year
As at December 31, 2019
Stock-based compensation
Foreign currency translation adjustment
Net loss for the year
As at December 31, 2020
Stock-based compensation
Issued on vesting of RSUs
RSUs withheld to settle employee tax obligations
Foreign currency translation adjustment
Net loss for the year
As at December 31, 2021
Number of
Common
shares
Common
shares
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
shareholders’
equity
84,660,319
21,045
-
-
-
84,681,364
-
-
-
84,681,364
-
664,069
-
-
85,345,433
180,562
77
-
-
-
180,639
-
-
-
180,639
-
1,143
-
-
-
181,782
6,615
(1 )
1,729
-
-
8,343
1,832
-
-
10,175
4,453
(1,143 )
(285 )
-
-
13,200
(22,092 )
-
-
4,064
-
(18,028 )
-
1,010
-
(17,018 )
-
-
-
1,102
-
(15,916 )
(41,571 )
-
-
-
(4,396 )
(45,967 )
-
-
(11,298 )
(57,265 )
-
-
(367 )
-
(53,668 )
(111,300 )
123,514
76
1,729
4,064
(4,396 )
124,987
1,832
1,010
(11,298 )
116,531
4,453
-
(652 )
1,102
(53,668 )
67,766
The accompanying notes are an integral part of these consolidated financial statements.
47
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
Cash flows from operating activities:
Net loss for the period
Adjustments:
Depreciation and amortization
Stock-based compensation, net of settlements
Foreign exchange (gain) loss
Accretion of convertible debentures
Loss (gain) on disposal of property, plant and equipment
Deferred income tax expense (recovery)
Goodwill impairment
Changes in operating assets and liabilities:
Trade and other receivables
Inventory
Prepaid and other assets, current and long term
Accounts payable and accrued liabilities
Customer deposits and deferred revenue
Other liabilities
Accrued interest
Lease liabilities
Net cash flows provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts payable changes
Capitalized software development expenditures
Other asset expenditures
Recovery of software development expenditures
Proceeds on sale of property, plant and equipment
Net cash flows used in investing activities
Cash flows from financing activities:
Proceeds received on long-term debt
Repayment of long-term debt
Employee tax payments on vesting of RSUs
Cash received on exercise of options
Net cash flows provided by (used in) financing activities
Effect of foreign exchange on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Supplemental disclosure of cash flow information:
Interest paid
Income taxes (paid) received
For the Year Ended December 31,
2020
2019
2021
(53,668)
(11,298)
14,513
4,248
112
352
12
(414)
1,443
1,452
(2,449)
(1,132)
2,702
601
(213)
948
283
(31,210)
(11,781)
(2,340)
(496)
461
18
(14,138)
64,912
(1,808)
(652)
-
62,452
458
17,562
45,846
63,408
(1,543)
433
11,706
2,351
746
-
(46)
5,625
-
6,067
1,638
(241)
752
(1,754)
(3,971)
-
910
12,485
(16,597)
(2,998)
(517)
674
46
(19,392)
6,130
(406)
-
-
5,724
(145)
(1,328)
47,174
45,846
(103)
1,817
(4,396)
12,242
202
345
-
53
(45)
-
21,025
1,667
(873)
(17,379)
(4,276)
5,196
-
(402)
13,359
(12,303)
(2,604)
(848)
511
55
(15,189)
-
(5,561)
-
77
(5,484)
1,076
(6,238)
53,412
47,174
(99)
(2,518)
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated
balance sheets.
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
For the Year Ended December 31,
2020
2019
2021
60,313
3,095
63,408
45,846
-
45,846
47,174
-
47,174
The accompanying notes are an integral part of these consolidated financial statements.
48
DIRTT Environmental Solutions Ltd.
Notes to the Consolidated Financial Statements
(Amounts stated in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiaries (“DIRTT,” the “Company,” “we” or “our”) is a leading technology-
driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing
ICE® software (“ICE” or “ICE Software”) with integrated in-house manufacturing of its innovative prefabricated interior construction
solutions and an extensive distribution partners network (“Distribution Partners”). ICE provides accurate design, drawing,
specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer
resources than traditional manufacturing methods. ICE is also licensed to unrelated companies and Distribution Partners of the
Company. DIRTT is incorporated under the laws of the province of Alberta, Canada, its headquarters is located at 7303 – 30th Street
S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P
4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and on The Nasdaq Global Select
Market (“Nasdaq”) under the symbol “DRTT”.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements (“Financial Statements”), including comparative figures, have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”).
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars.
DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the
U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT and its subsidiaries. All intercompany balances, income and expenses,
unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated upon consolidation.
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and
stock-based compensation that are measured at fair value, as explained in the accounting policies below. Historical cost is generally
based on the fair value of the consideration given in exchange for assets.
Use of estimates
The preparation of the Financial Statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosure of contingent liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions
and events as of the date of the Financial Statements. Estimates are based on historical data and experience, as well as various other
factors that management considers reasonable under the circumstances. Actual outcomes can differ from these estimates.
Significant estimates and assumptions made by management include:
•
•
•
•
Estimates of ability and timeliness of customer payments of accounts receivable;
Estimates of useful lives of depreciable assets as well as the fair value of long-term assets and future cash flows used for
impairment calculations;
Estimates of future taxable earnings used to assess the realizable value of deferred tax assets;
Tax interpretations, regulations and legislation in the various jurisdictions in which the Company and its subsidiaries
operate;
49
Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of
the ultimate payout amount; and
Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies.
•
•
Segments
Management has determined that DIRTT has one operating segment. The Company’s chief executive officer, who is DIRTT’s
chief operating decision maker, reviews financial information on a consolidated and aggregate basis, together with certain operating
metrics principally to make decisions about how to allocate resources and to measure the Company’s performance.
Foreign currency translation
DIRTT Environmental Solutions Ltd. is a Canadian company and its functional currency is the Canadian dollar. DIRTT’s
wholly owned subsidiary is domiciled in the United States and its functional currency is the U.S. dollar.
Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into
the transacting company’s functional currency at the year-end exchange rate for monetary items and at the historical exchange rates
for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the
related transactions. Foreign exchange gains and losses, other than those arising from the translation of the Company’s net investments
in foreign subsidiaries, are included in income.
The accounts of the Company’s U.S. dollar subsidiary is translated into Canadian dollars, and the Financial Statements are
translated into U.S. dollars for financial statement presentation. Assets and liabilities are translated using year-end exchange rates, and
revenues, expenses, gains and losses are translated using average monthly exchange rates. Foreign exchange gains and losses arising
from the translation of the Company’s assets and liabilities are included in “comprehensive loss for the year”.
Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash on hand held at banks and cash equivalents, which are defined as highly liquid
investments with original maturities of three months or less. Restricted cash is a reserve account not available for immediate or
general business use and is required when certain requirements are not met under the terms of the Company’s senior secured credit
facility (as defined in Note 12).
Trade and other receivables, net of expected credit losses
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company
estimates its allowance for doubtful accounts using the current expected credit loss (“CECL”) methodology, which is designed to
capture the Company’s current estimate of all expected credit losses.
Inventory
Inventory is comprised of raw materials and work in progress. The Company does not typically carry a significant amount of
finished goods inventory. Inventory is valued at the lower of weighted average cost and net realizable value. Net realizable value is
based on an item’s usability in the manufacturing of the Company’s products. The Company records an allowance for obsolescence
when the net realizable value of inventory items declines below weighted average cost, net realizable value is determined based on
current market prices for inventory less the estimated cost to sell. Work in progress is valued at an estimate of cost, including
attributable overheads, based on stage of completion.
Fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods
where production levels are abnormally low, unallocated overheads are separately recognized as an expense in the period in which
they are incurred.
Leases
The Company categorizes leases at their inception as either operating or finance leases. Leases where the Company assumes
substantially all of the rewards or ownership and leases where ownership is transferred at the end of the lease term, or by way of a
bargain purchase option, are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to
the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance
50
charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges
are recognized in the statement of operations.
The Company’s Leasing Facilities (as defined in Note 5) are accounted for as finance leases as ownership of the equipment is
expected to return to the Company at the end of the lease term. These transactions are not accounted for as a sale of the underlying
equipment as the Company continues to control the equipment.
For leases categorized as operating, the Company determines if an arrangement is a lease or contains a lease element at
inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or
equipment for a period of time in exchange for consideration. Operating leases are separately disclosed as operating lease right-of-use
(“ROU”) assets, with a corresponding lease liability split between current and long-term components on the balance sheet. Operating
leases with an initial term of 12 months or less are not included on the balance sheet.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent the
right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments
arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of
lease payments over the lease term.
Property, plant and equipment
Property, plant and equipment are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less
accumulated depreciation and any accumulated impairment losses. Expenditures for repairs and maintenance are expensed as incurred,
while renewals and betterments are capitalized.
Depreciation is charged to the consolidated statement of operations on a straight-line basis over the estimated useful lives of the
assets. The estimated useful lives of the Company’s property, plant and equipment are as follows:
Building ..................................................25 years
Manufacturing equipment.......................10 years
Leasehold improvements ........................Over term of lease (1 to 10 years)
Office equipment ....................................5 years
Tooling and prototypes ...........................4 years
Computer equipment ..............................3 years
Vehicles ..................................................3 years
When assets are disposed of or retired, the cost and accumulated depreciation and impairment losses are removed from the
respective accounts and any resulting loss is reflected in operating expenses.
Capitalized software costs
The Company capitalizes costs related to internally developed software during the application development stage when (i) the
preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project, and (iii) it is
probable that the project will be completed and performed as intended. Capitalized costs includes costs of personnel and related
expenses for employees and third parties directly attributable to the projects. Capitalization of these costs ceases once the project is
substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements
are also capitalized. Costs related to preliminary project activities and post implementation activities, including training, maintenance
and minor modifications or enhancements are expensed as incurred. Capitalized software costs are amortized on a straight-line basis
over the estimated useful life of the developed asset, which is generally three to five years. Management evaluates the useful lives of
these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the
recoverability of the assets.
Software development is considered internal-use as it is used to design and sell the DIRTT products and is not included in the
end client’s product. Revenues received from Distribution Partners for ICE Software are recognized as revenues as they are
considered an element of the product sale. Any incidental third-party revenues received for the ICE Software are credited against
capitalized software costs. The Company follows this accounting policy for cloud computing arrangements that are considered a
service contract, however, these projects are capitalized to prepaids and other assets on the balance sheet and are expensed as an
operating cost, as opposed to amortization, over the expected term of the software service contract. The Company adopted this
amendment on January 1, 2020 using the prospective transition approach and classified $0.7 million as other assets on the
consolidated balance sheet for the year ended December 31, 2021.
51
Impairment of long-lived assets
Management evaluates the recoverability of the Company’s property, plant and equipment, capitalized software costs and ROU
assets when events or changes in circumstances indicate a potential impairment exists. Events and changes in circumstances
considered by the Company in determining whether the carrying value of long-lived assets may not be recoverable include, but are not
limited to, significant changes in performance relative to expected operating results, significant changes in the use of the assets,
significant negative industry or economic trends, and changes in the Company’s business strategy. Impairment testing is performed at
an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets
and liabilities (an “asset group”). In determining if impairment exists, the Company estimates the undiscounted cash flows to be
generated from the use and ultimate disposition of the asset group. If impairment is indicated based on a comparison of the assets’
carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in a
business combination. Goodwill is tested for impairment at the reporting unit level at least annually or whenever changes in
circumstances indicate that goodwill might be impaired. The Company early adopted ASU 2017-04 in 2019, which simplified the
subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.
The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year,
or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors
to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If goodwill is determined
to be impaired, the impairment charge that would be recognized is based on the amount by which a reporting unit’s carrying value
exceeds its fair value, not to exceed the carrying value of goodwill.
Convertible Debentures
The Company accounts for convertible debentures as liabilities. Embedded features included in the convertible debentures that
require bifurcation are accounted for separately. Costs incurred directly related to the issuance of convertible debentures are presented
as a direct deduction against the carrying amount of the convertible debentures and are amortized to interest expense using the
effective interest method.
Income taxes
Income tax expense is comprised of current and deferred tax. Income tax is recognized in the consolidated statement of
operations and comprehensive income (loss) except to the extent it relates to items recognized directly in equity.
Current tax
Current tax expense is based on the results for the year, adjusted for items that are not taxable or not deductible. Current tax is
calculated using tax rates and laws that were enacted at the end of the reporting period. Management periodically evaluates positions
taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established
where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated balance sheet. Deferred income tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period
during which the change occurs.
When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not
be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not
52
that all or some portion of the Company’s deferred tax assets will not be realized, based on management’s judgment using available
evidence about future events.
At times, tax benefits claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are
more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50% likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax
benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
Revenue recognition
The Company accounts for revenue in accordance with topic 606, Revenue from Contracts with Customers, (“ASC 606”) and
Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. Under ASC 606, an entity recognizes revenue in a
manner that reflects the transfer of promised goods or services to customers in an amount which the entity expects to be entitled in
exchange for those goods or services.
The Company recognizes revenue upon transfer of control of promised goods or services to customers at transaction price, an
amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is
calculated as selling price net of variable consideration which may include estimates for sales incentives related to current period
product revenue. Revenue is measured at the fair value of the consideration received or receivable, after discounts, rebates and sales
taxes or income taxes and duties.
Product sales
The Company recognizes revenue upon transfer of control of products to the customer, which typically occurs upon shipment.
The Company’s main performance obligation to customers is the delivery of products in accordance with purchase orders. Each
purchase order defines the transaction price for the products purchased under the arrangement. Distribution Partners typically sell
DIRTT product to end clients and issue purchase orders to the Company to manufacture the product. Distribution Partners utilize ICE
licenses to sell DIRTT products, the ICE licenses sold to Distribution Partners are not considered a separate performance obligation as
they are not distinct, and ICE license revenue is recognized in conjunction with product sales. The Distribution Partner ICE Software
revenue is recognized over the license period.
The Company’s standard sales terms are Free On Board (“FOB”) shipping point, which comprise the majority of sales. The
Company usually requires a 50% progress payment on receipt of certain orders, excluding certain government orders or in some
special contractual situations. Customer deposits received are recognized as a liability on the balance sheet until revenue recognition
criteria is met. At the point of shipment, the customer is generally required to pay the balance of the sales price within 30 days. The
Company’s sales arrangements do not have any material financing components. In addition, the Company’s customer arrangements do
not produce contract assets that are material to its consolidated financial statements.
The Company provides sales commissions to internal and external sales representatives which are earned in the period in which
revenue is recognized.
The Company accounts for product transportation revenue and costs as fulfillment activities and present the associated costs in
costs of goods sold in the period in which the Company sells its product.
Contracts containing multiple performance obligations
The Company offers certain arrangements whereby a customer can purchase products and installation together which are
generally capable of being distinct and accounted for as separate performance obligations. Where multiple performance obligations
exist, the Company determines revenue recognition by (1) identifying the contract with the customer, (2) identifying the performance
obligation in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations
based on the relative standalone selling prices, typically based on cost plus a reasonable margin, and (5) recognizing revenue as the
performance obligations are satisfied.
Installation and other services
The Company provides installation and other services for certain customers as a distinct performance obligation. Revenue from
installation services is recognized over time as the service is performed.
53
Principal vs Agent Considerations
The Company evaluates the presentation of revenue on a gross vs. net basis based on whether it acts as a principal by controlling
the product or service sales to customers. In certain instances, the Company facilitates contracting of certain sales on behalf of
Distribution Partners. The Company records these revenues on a gross basis when the Company is obligated to fulfill the service and
has the risk associated with service delivery. The Company records these revenues on a net basis when the Distribution Partner has the
obligation to fulfill the services and has the risk associated with service delivery.
Distribution Partner rebates
Rebates to Distribution Partners (“Partner Rebates”) are accrued for and recognized as a reduction of revenue at the date of the
sale to the customer. Partner Rebates include amounts collected directly by the Company owed to Distribution Partners in accordance
with their Distribution Partner agreements, being the difference between the price to the end customer and the Distribution Partners’
price. Other sales discounts are deducted immediately from sales invoices.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an unbilled
receivable when revenue is recognized prior to invoicing. As the Company’s contracts are less than one year in duration, the Company
has elected to apply the practical expedients to expense costs related to costs to obtain contracts and not disclose unfulfilled
performance obligations. As deferred revenue and customer deposits are typically recognized during the year the Company does not
account for financing elements.
Warranties
The Company provides a warranty on all products sold to its clients and Distribution Partner’s clients. Warranties are not sold
separately to customers. Provisions for the expected cost of warranty obligations are recognized based on an analysis of historical
costs for warranty claims relative to current activity levels and adjusted for factors based on management’s assessment that increase or
decrease the provision. Warranty provision is recognized in cost of goods sold. Warranty claims have historically not been material
and do not constitute a separate performance obligation.
Stock-based compensation
The Company follows the fair value-based approach to account for options and restricted share units (“RSUs”). Compensation
expense and an increase in “Additional paid-in capital” are recognized for options and RSUs over their vesting period based on their
estimated fair values on the grant date, as determined using the Black-Scholes option pricing model for the majority of options and the
market value of the Company’s common shares on the grant date for RSUs. Certain executive stock options and RSUs have
performance conditions and are valued using a Monte Carlo model.
On exercise of stock options and RSUs, the recorded fair value of the option or RSU is removed from “Additional paid-in
capital” and credited to “Share capital”. For options, any consideration paid by employees is credited to “Share capital” when the
option is exercised. The Company’s stock options and RSUs are not shares of the Company and have no rights to vote, receive
dividends, or any other rights as a shareholder of the Company.
During 2018 and 2019, the Company provided a cash settlement alternative for certain stock options. The fair value on grants
attributable to those awards was reclassified on the balance sheet from shareholders’ equity to other liabilities, and at period end the
liability is adjusted to fair value and the excess of fair value over previously recognized stock-based compensation is expensed. The
fair value of the awards at the date of modification was greater than the grant date fair value of the previously vested equity awards,
therefore the additional fair value was treated as an expense at the date of modification. Increases or decreases in fair value subsequent
to the modification date will be recorded in earnings except that the Company shall not recognize a cumulative expense lower than the
grant date fair value of the original equity awards. On October 9, 2019, following the listing of its common shares on Nasdaq, the
Company ceased cash-settlement of stock options and the associated liability accounting for stock options and returned to equity
settlement accounting for stock options, as described above.
Stock based compensation expense is also recognized for performance share units (“PSUs”) and deferred share units (“DSUs”)
using the fair value method. Compensation expense is recognized over the vesting period and the corresponding amount is recorded as
a liability on the balance sheet.
54
Technology and development expenditures
Technology and development expenses are comprised primarily of salaries and benefits associated with the Company’s product
and software development personnel which do not qualify for capitalization. These costs are expensed as incurred and exclude certain
information and technology costs used in operations which are classified as general and administrative costs.
Government subsidies
The Company accounts for government subsidies on an accrual basis when the conditions for eligibility are met. The Company
has adopted an accounting policy to present government subsidies as other income.
Earnings per share (“EPS”)
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year.
Diluted earnings per share is calculated using the treasury stock method for determining the dilutive impact of stock options. The
Company follows the “if converted” method for accounting for the impact of convertible debentures on earnings (loss) per share,
whereby interest charges applicable to the convertible debentures are added to the numerator and the convertible debentures are
assumed to have been converted at the beginning of the period (or time of issuance, if later), and the resulting common shares are
added to the denominator.
Fair value of financial instruments
ASC 820, “Fair Value Measurements,” requires entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. Fair value is defined as
the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company’s fair value analysis is based on the degree to which the fair value is observable and grouped into categories
accordingly:
•
•
•
Level 1 financial instruments are those which can be derived from quoted market prices (unadjusted) in active markets for
similar financial assets or liabilities.
Level 2 financial instruments are those which can be derived from inputs that are observable for the asset or liability,
either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 2 financial instruments include current and
long-term debt. The carrying amounts of these instruments approximates fair value due to limited changes to interest rates
and the Company’s credit rating since issuance.
Level 3 financial instruments are those derived from valuation techniques that include inputs for the financial asset or
liability which are not based on observable market data (unobservable inputs). The Company does not have any Level 3
financial instruments.
The carrying amounts of cash and cash equivalents and restricted cash; trade and other receivables; accounts payable and
accrued liabilities; other liabilities; and customer deposits approximate fair value due to their short-term nature.
3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
On January 1, 2021, the Company adopted Accounting Standards Update No. 2020- 06, “Debt – Debt with Conversion and
other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)” (the “ASU”).
The ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the
accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement
provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in
cash or shares impact the diluted earnings per share computation. The amendments in the ASU are effective for fiscal years beginning
after March 15, 2021 and early adoption is permitted, but no earlier than fiscal years beginning after March 15, 2020, including
interim periods within those fiscal years.
The Company early adopted this standard on January 1, 2021. The Company had no convertible debt instruments outstanding at
December 31, 2020 and the convertible unsecured subordinated debentures issued in January 2021 and November 2021 (see Note 12)
have been evaluated under this new guidance and there were no other transitional impacts to consider.
55
Although there are several other new accounting standards issued or proposed by the Financial Accounting Standards Board,
which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements
has had or will have a material impact on its Financial Statements.
4. COVID-19
On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization and has had extraordinary
and rapid negative impacts on global societies, workplaces, economies and health systems. The resulting adverse economic conditions
have negatively impacted construction activity and consequently DIRTT’s business, with significant negative impacts extending
through 2021 and potentially beyond.
While many construction sites remain open and re-opening strategies have been implemented across North America, certain
projects have experienced delays, impacted by both the implementation of social distancing and other safety-related measures and the
re-emergence of COVID-19 in certain geographic areas. It is not possible to predict the timing and pace of economic recovery, or the
resumption of delayed construction activity and related demand, nor is it possible to predict the impact of such developments on the
Company’s ability to achieve its business objectives.
COVID-19 has increased the complexity of estimates and assumptions used to prepare the Company’s consolidated financial
statements and the following key sources of estimation uncertainty:
Credit risk
COVID-19 may cause DIRTT’s Distribution Partners and customers to experience liquidity issues and this may result in higher
expected credit losses or slower collections. Management estimated the impact of expected credit losses and increased the provision
by $0.6 million in the first quarter of 2020 (see Note 6) and during 2021 reduced the Company’s provision for an uncollectible amount
that was related to a specific customer. Management has continued to reassess the impact of COVID-19 on the Company’s
Distribution Partners. The estimation of such credit losses is complex because of limited historical precedent for the current economic
situation. In addition, the Company acquired trade credit insurance effective April 1, 2020 which remained in place during 2021 (see
Note 6).
Liquidity risk
The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections as
a result of COVID-19. To address this risk and the uncertainty around the timing of a recovery from COVID-19, the Company issued
convertible unsecured subordinated debentures in January and December of 2021, for net proceeds of $29.5 million and $25.6 million,
respectively, and has credit facilities available. See Note 12 for information about our credit facilities.
Government subsidies
As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the
Canadian Emergency Wage Subsidy (“CEWS”). The CEWS provided the Company with a taxable subsidy in respect of a specific
portion of wages paid to Canadian employees during qualifying periods extending from March 15, 2020 to October 23, 2021 based on
the percentage decline of certain of the Company’s Canadian sourced revenues during each qualifying period. The Company’s
eligibility for the CEWS was subject to change for each qualifying period and was reviewed by the Company for each qualifying
period, with amounts being received by the Company for various, but not each, qualifying period. Pursuant to amendments enacted as
part of the 2021 Canadian federal budget, the Company may be required to repay all or a portion of the CEWS amounts received for
any qualifying period commencing after June 5, 2021 where the aggregate compensation for “specified executives” (within the
meaning of the CEWS) during the 2021 calendar year exceeds the aggregate compensation for “specified executives” during the 2019
calendar year.
On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). The
CERS provided a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, for qualifying
periods extending from September 27, 2020 to October 23, 2021, with the amount of the subsidy available to the Company being
based on the percentage decline of certain of the Company’s Canadian-sourced revenues in each qualifying period. The Company’s
eligibility for the CERS was subject to change for each qualifying period and was reviewed by the Company for each qualifying
period.
The CEWS and CERS programs ended on October 23, 2021.
56
5. LEASES
The Company leases office and factory space under various operating leases. As the Company’s leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in
determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when
calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 24 years. Lease
terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
The weighted average remaining lease term and weighted average discount rate at December 31, 2021 were 14 years (2020 - 14
years) and 5.2% (2020 – 5.1%), respectively.
The following table includes ROU assets included on the balance sheet at December 31, 2021 and 2020:
Cost
ROU Assets
Accumulated
depreciation
Net book value
At January 1, 2020
Additions
Depreciation expense
Exchange differences
At December 31, 2020
Additions
Depreciation expense
Exchange differences
At December 31, 2021
24,778
16,805
-
257
41,840
2,401
-
(186)
44,055
(4,117)
-
(3,884)
(196)
(8,197)
-
(4,989)
11
(13,175)
The following table includes lease liabilities included on the balance sheet at December 31, 2021 and 2020:
At January 1,
Additions
Accretion
Repayment of lease liabilities
Lease inducements
Exchange differences
At December 31,
Current lease liabilities
Long-term lease liabilities
Lease Liability
2021
2020
35,284
2,401
1,758
(6,509)
720
(173)
33,481
6,214
27,267
20,661
16,805
(3,884)
61
33,643
2,401
(4,989)
(175)
30,880
21,403
17,255
1,175
(5,358)
750
59
35,284
5,503
29,781
The following table includes maturities of operating lease liabilities at December 31, 2021:
2022
2023
2024
2025
2026
Thereafter
Total
Total lease liability
Difference between undiscounted cash flows and lease liability
6,406
4,751
3,150
3,184
3,267
28,963
49,721
33,481
16,240
In September 2020, the Company commenced the 15 year lease associated with the construction of the South Carolina Facility.
The lease may be extended for up to two 5 year periods. Undiscounted rent obligations associated with this lease are $28.1 million
57
which includes the initial 15 year term and two 5 year extensions. The rent obligations have been discounted at a rate of 5.5% to
determine the lease liability.
In December 2020, the Company entered into a lease agreement with an initial term of 8 years and one 5 year extension
associated with a new DXC in Dallas, Texas. Undiscounted rent obligations associated with this lease are $6.7 million. The rent
obligations have been discounted at a rate of 4.75% to determine the lease liability.
6. TRADE AND OTHER RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company
estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date taking into account historical
credit loss experience as well as forward-looking information in order to establish rates for each class of financial receivable with
similar risk characteristics. Adjustments to this estimate are recognized in the statement of operations.
In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of
individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In
addition, we acquired trade credit insurance effective April 1, 2020. At December 31, 2021, approximately 90% of our trade accounts
receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding
accounts receivable from government entities, that have arisen since April 1, 2020 when the trade credit insurance became effective.
Our trade balances are spread over a broad Distribution Partner base, which is geographically dispersed. For the years ended
December 31, 2021 and 2020 no Distribution Partner accounted for greater than 10% of revenue. In addition, and where possible, we
collect a 50% deposit on sales, excluding government and certain other clients.
Current
Overdue
Less: expected credit losses
Sales tax receivable
Government subsidies receivable
Income tax receivable
As at December 31,
2021
2020
13,659
621
14,280
(130)
14,150
196
-
3,194
17,540
12,500
1,211
13,711
(588)
13,123
242
1,743
3,845
18,953
Due to the uncertainties associated with the COVID-19 pandemic as well as the disruption to businesses in North America, the
overall credit quality of certain receivables declined at March 31, 2020 compared to January 1, 2020. As a result of this consideration
and the Company’s ongoing review of the credit quality of receivables, expected credit losses were increased by $0.6 million during
the quarter ended March 31, 2020. During 2021, $0.5 million of receivables for a specific customer balance was written off (2020 -
$0.1 million). No significant increase to our expected credit losses was required at December 31, 2021. Receivables are generally
considered to be past due when over 60 days old unless there is a separate payment arrangement in place for the collection of the
receivable.
7. INVENTORY
Raw material
Allowance for obsolescence
Work in progress
As at December 31,
2021
2020
18,388
(646)
715
18,457
16,730
(1,073)
321
15,978
In 2021, the Company provided $0.6 million (2020 - $1.1 million) for inventory that is not expected to be used in future
production and the associated expense was recorded to cost of goods sold. During 2021 and 2020, the Company experienced periods
where it was operating below normal capacity levels. During those periods, overheads included in inventory were not increased and
58
$1.8 million (2020 - $2.0 million) was recognized directly and separately in cost of sales. Production overheads capitalized in work in
progress were $0.1 million at December 31, 2021 (December 31, 2020 - $0.1 million).
8. PROPERTY, PLANT AND EQUIPMENT, NET
Office and computer
equipment
Factory equipment
Leasehold
improvements
Total
Cost
At December 31, 2019
Additions
Disposals
Exchange differences
At December 31, 2020
Additions
Disposals
Exchange differences
At December 31, 2021
Accumulated depreciation and
impairment
At December 31, 2019
Depreciation expense
Disposals
Exchange differences
At December 31, 2020
Depreciation expense
Disposals
Exchange differences
At December 31, 2021
Net book value
At December 31, 2020
At December 31, 2021
22,743
1,139
(28)
1,134
24,988
3,422
-
236
28,646
13,912
1,723
(28)
755
16,362
3,589
-
30
19,981
8,626
8,665
54,640
11,719
(120)
284
66,523
4,515
(53)
499
71,484
32,274
3,059
(120)
311
35,524
3,670
(23)
100
39,271
30,999
32,213
39,231
3,777
(138)
235
43,105
4,372
-
90
47,567
29,063
3,656
(138)
302
32,883
3,817
-
48
36,748
10,222
10,819
116,614
16,635
(286)
1,653
134,616
12,309
(53)
825
147,697
75,249
8,438
(286)
1,368
84,769
11,076
(23)
178
96,000
49,847
51,697
As at December 31, 2021, the Company had $2.2 million of assets in progress of completion which were excluded from assets
subject to depreciation (December 31, 2020 – $16.2 million, primarily related to equipment procured for the South Carolina Facility).
During the year ended December 31, 2021, we impaired goodwill (see Note 10) and determined that this was an indicator of
impairment for property, plant and equipment. The Company estimated the undiscounted cash flows to be generated from the use and
ultimate disposition of the property, plant and equipment assets using the same methodology and assumptions included in the goodwill
impairment test (see Note 10). The results of the test indicated that the fair value exceeded the carrying values of property, plant and
equipment, therefore, no impairment charge was required at December 31, 2021.
59
9. CAPITALIZED SOFTWARE, NET
Cost
As at January 1
Additions
Recovery of software development expenditures
Exchange differences
As at December 31
Accumulated amortization
As at January 1
Amortization expense
Exchange differences
As at December 31
Net book value
For the Year Ended December 31,
2021
2020
35,480
2,340
(461)
133
37,492
27,136
2,878
83
30,097
7,395
32,419
2,998
(674)
737
35,480
24,206
2,428
502
27,136
8,344
Estimated amortization expense on capitalized software is $2.4 million in 2022, $1.5 million in 2023, $0.9 million in 2024,
$0.7 million in 2025, and $0.1 million in 2026.
10. GOODWILL
As at January 1
Goodwill impairment
Exchange differences
For the Year Ended December 31,
2021
2020
1,449
(1,443)
(6)
-
1,421
-
28
1,449
The Company’s goodwill is assessed at the consolidated company level which represents the Company’s sole operating and
reporting unit. The Company tests its goodwill for impairment annually during the fourth quarter of the calendar year. Due to the
ongoing impact of the COVID-19 pandemic on its financial results in 2021, the Company determined it was necessary to use the
quantitative approach to perform its goodwill impairment test. The quantitative impairment test requires estimates to determine the fair
value of the reporting unit, as such, requires the Company to make significant assumptions and judgements.
To estimate the fair value of the reporting unit, the Company applied the income approach using discounted future cash flows.
Sales and cost projections were based on assumptions driven by current economic conditions. Due to the uncertainty around the future
impact of COVID-19, its projections considered various scenarios and the Company probability-weighted the likelihood of each
scenario in determining the reporting unit’s fair value. The average compounded annual growth rate of revenues was 10% and the
Company assumed a 10% - 15% annualized reduction in operating costs in the model. Other key assumptions used in the quantitative
assessment of the reporting unit’s goodwill were applying a discount rate of 13% and a terminal growth rate of 2%.
Based on its testing, the fair value of goodwill did not exceed the recoverable amount and, accordingly, the entire $1.4 million
balance of goodwill was impaired as at December 31, 2021. The impairment charge on goodwill has been separately classified on the
consolidated statement of operations and comprehensive loss.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER LIABILITIES
Trade accounts payable
Accrued liabilities
Wages and commissions payable
Rebates accrued(1)
60
As at December 31,
2021
2020
7,820
9,649
4,275
1,007
22,751
4,921
9,266
4,577
1,586
20,350
(1)
In 2021, $4.1 million of rebates were earned (2020 - $4.5 million) and $4.7 million were paid (2020 - $3.9 million).
Other liabilities
During the year December 31, 2021, the Company separately classified the current portion of long-term debt and accrued
interest on the balance sheet, prior year figures have been reclassified to conform with the current year’s presentation:
Legal provisions(1)
Deferred and performance share unit liability
Warranty and other provisions(2)
Current portion of long-term debt and
accrued interest
Other liabilities, as previously presented
Reclassified to "Current portion of
long-term debt and accrued interest"
Other liabilities
As at December 31,
2021
2020
143
785
1,451
3,323
5,702
(3,323)
2,379
45
971
1,763
898
3,677
(898)
2,779
(1)
(2)
The Company has provided $0.1 million (2020 - $0.05 million) as the estimated amount likely payable for various claims
against the Company. The amount provided for is management’s best estimate of the potential payments for amounts claimed.
The following table presents a reconciliation of the warranty and other provisions balance:
As at January 1
Adjustments to timber provision
Additions to warranty provision
Payments related to warranties
12. LONG-TERM DEBT
Balance on January 1, 2020
Issuances
Accrued interest
Interest payments
Principal repayments
Exchange differences
Balance at December 31, 2020
Current portion of long-term debt and accrued interest
Long-term debt
Balance on December 31, 2020
Issuances
Accretion of issue costs
Accrued interest
Interest payments
Principal repayments
Exchange differences
Balance at December 31, 2021
Current portion of long-term debt and accrued interest
Long-term debt
As at December 31,
2021
2020
1,763
(500)
1,019
(831)
1,451
4,008
(1,750)
1,301
(1,796)
1,763
Leasing
Facilities
Convertible
Debentures
Total Debt
-
6,130
103
(103)
(406)
243
5,967
898
5,069
5,967
9,805
-
556
(556)
(1,808)
(55)
13,909
2,386
11,523
-
-
-
-
-
-
-
-
-
-
55,107
352
1,935
(987)
-
326
56,733
937
55,796
-
6,130
103
(103)
(406)
243
5,967
898
5,069
5,967
64,912
352
2,491
(1,543)
(1,808)
271
70,642
3,323
67,319
Revolving
Credit Facility
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
61
Revolving Credit Facility
On July 19, 2019, the Company entered into a C$50.0 million senior secured revolving credit facility (the “Previous RBC
Facility”) with the Royal Bank of Canada (“RBC”). The Previous RBC Facility had a three-year term and could be extended for up to
two additional years at the Company’s option. Interest was calculated at the Canadian or U.S. prime rate with no adjustment, or the
bankers’ acceptance rate plus 125 basis points. The Previous RBC Facility was subject to a minimum fixed charge coverage ratio of
1.15:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:1 (earnings before interest, tax, depreciation and amortization, non-cash
stock-based compensation, plus or minus extraordinary or unusual non-recurring revenue or expenses) calculated on a trailing four
quarter basis (the “Covenants”).
During the second quarter of 2020, the Company entered into a letter agreement with RBC pursuant to which the Covenants
were waived for the June 30, 2020 and September 30, 2020 quarterly measurement dates (the “Covenant Holiday Period”). In the
fourth quarter of 2020, the Company entered into a letter agreement with RBC pursuant to which the Covenants were waived for the
December 31, 2020 quarterly measurement date (the “Covenant Holiday Period Extension”). During the Covenant Holiday Period and
the Covenant Holiday Period Extension, the Company was able to borrow to a maximum of 75% of eligible accounts receivable and
25% of eligible inventory, less priority payables, subject to an aggregate limit of $50.0 million including amounts borrowed under the
Leasing Facilities. During the Covenant Holiday Period and the Covenant Holiday Period Extension, the Company was required to
maintain a cash balance of C$10.0 million if no loans were drawn under the facility, have Adjusted EBITDA of not less than a loss of
$7.0, $16.5 million and $3.0 million for the twelve month periods ended June 30, September 30, 2020 and December 31, 2020, and
make capital expenditures of no more than $10.7 million during the Covenant Holiday Period and $8.8 million during the Covenant
Holiday Period Extension. As at December 31, 2020, the Previous RBC Facility was undrawn and the available borrowing base was
$10.6 million. The Company was in compliance with the requirements of the covenant holiday as at December 31, 2020.
On February 12, 2021, the Company entered into a C$25.0 million senior secured revolving credit facility with RBC (the “ RBC
Facility”), replacing the Previous RBC Facility. Under the RBC Facility, the Company is able to borrow up to a maximum of 90% of
investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of
eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims
(the “Borrowing Base”). At December 31, 2021, available borrowings are C$13.2 million ($10.4 million), of which no amounts have
been drawn. Interest is calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or
LIBOR plus 155 basis points. Under the RBC Facility, if the Aggregate Excess Availability, defined as the Borrowing Base less any
loan advances or letters of credit or guarantee and if undrawn including unrestricted cash, is less than C$5.0 million, the Company is
subject to a FCCR covenant of 1.10:1 on a trailing twelve month basis. Additionally, if the FCCR has been above 1.10:1 for the 3
immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one-year of payments
on the Leasing Facilities (defined below). The Company did not meet the 3 month FCCR requirement during the fourth quarter of
2021 which would result in requiring the restriction of $3.1 million of cash at December 31, 2021. Should an event of default occur or
the Aggregate Excess Availability be less than C$6.25 million for 5 consecutive business days, the Company would enter a cash
dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off any borrowings and
any remaining amounts made available to the Company.
Leasing Facilities
During 2020, the Company entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment
leasing facility in the United States (the “Leasing Facilities”) with RBC, and one of its affiliates, which are available for equipment
expenditures and certain equipment expenditures already incurred. Pursuant to the Covenant Holiday Period Extension, the equipment
leasing facility in the United States was reduced from US$16 million to US$14 million and the revolving Lease Facilities were
amended to be amortizing facilities. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25%
and 5.59%. The U.S. leasing facility is amortized over a six-year term and extendible at the Company’s option for an additional year.
During 2021, the Company received $9.8 million (2020 - $3.5 million) of cash consideration under the U.S. leasing facility
related to reimbursements for equipment purchases for its South Carolina Facility. During 2021, the Company received $nil (2020 -
C$3.6 million or $2.6 million) of cash consideration under the leasing facility in Canada. The associated financial liabilities are shown
on the consolidated balance sheet in current other liabilities and long-term debt and other liabilities.
Convertible Debentures
On January 25, 2021, the Company completed a C$35 million ($27.5 million) bought-deal financing of convertible unsecured
subordinated debentures with a syndicate of underwriters. On January 29, 2020, the Company issued a further C$5.25 million ($4.1
62
million) of convertible debentures under the terms of an overallotment option granted to the underwriters. These convertible
debentures will mature and be repayable on January 31, 2026 (the “January Notes Maturity Date”) and will accrue interest at the rate
of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021
until the January Notes Maturity Date, interest and principal are payable in cash or shares at the option of the Company. These
convertible debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of
business on the business day prior to the earlier of the January Notes Maturity Date and the date specified by the Company for
redemption of these convertible debentures at a conversion price of C$4.65 per common share, being a ratio of approximately
215.0538 common shares per C$1,000 principal amount of convertible debentures. Costs of the transaction were approximately C$2.7
million, including the underwriters’ commission.
On November 15, 2021, the Company completed a C$35 million ($27.4 million) bought-deal financing of convertible unsecured
subordinated debentures with a syndicate of underwriters. These convertible debentures will mature and be repayable on December
31, 2026 (the “November Notes Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in
arrears on the last day of June and December of each year commencing on June 30, 2022 until the November Notes Maturity Date,
interest and principal are payable in cash or shares at the option of the Company. These convertible debentures will be convertible into
common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier
of the November Notes Maturity Date and the date specified by the Company for redemption of the convertible debentures at a
conversion price of C$4.20 per common share, being a ratio of approximately 238.0952 common shares per C$1,000 principal amount
of convertible debentures. Costs of the transaction were approximately C$2.3 million including the underwriters’ commission.
13. INCOME TAXES
Reconciliation of income taxes
The following reconciles income taxes calculated at the Canadian statutory rate with the actual income tax expense. The
Canadian statutory rate includes federal and provincial income taxes. This rate was used because Canada is the domicile of the parent
entity of the Company.
Net loss before tax
Canadian statutory rate
Expected income tax
Effect on taxes resulting from:
Valuation allowance
Non-deductible expenses
Non-deductible stock-based compensation
Tax rate impacts
Adjustments related to prior year tax filings
Other
Income tax expense (recovery)
Current tax expense (recovery)
Deferred tax expense (recovery)
Income tax expense
2021
For the Year Ended December 31,
2020
2019
(53,872)
23.3%
(12,552)
(9,194)
24.2%
(2,225)
(3,377)
26.5%
(895)
12,046
542
189
(488)
59
-
(204)
210
(414)
(204)
5,241
261
269
(1,288)
(105)
(49)
2,104
(3,521)
5,625
2,104
-
550
674
999
(205)
(104)
1,019
1,064
(45)
1,019
The provision for income taxes is comprised of federal, state, provincial and foreign taxes based on pre-tax income. In the
United States, the CARES Act of 2020 allows, among other provisions, for the recovery of taxes paid over the preceding five years
from current year losses.
Deferred tax assets and liabilities
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2021 and 2020 were as follows:
63
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Assets
At December 31, 2021
Liabilities
Net
24,032
362
-
-
(17,291)
-
7,103
-
-
(7,572)
(2,023)
-
2,492
(7,103)
Assets
At December 31, 2020
Liabilities
Net
9,528
360
-
-
-
1,834
11,722
-
-
(2,218)
(4,588)
(5,330)
-
(12,136)
24,032
362
(7,572)
(2,023)
(17,291)
2,492
-
9,528
360
(2,218)
(4,588)
(5,330)
1,834
(414)
Summary of temporary difference movements during the year:
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Balance
January 1, 2021
Recognized
in Income
Foreign
Exchange
9,528
360
(4,588)
(2,218)
(5,330)
1,834
(414)
14,542
(87)
(2,844)
209
(12,046)
640
414
(38)
89
(140)
(14)
85
18
-
Balance
January 1, 2020
Recognized
in Income
Foreign
Exchange
6,899
353
(1,916)
(2,345)
-
2,373
5,364
2,451
594
(3,600)
251
(5,241)
(80)
(5,625)
178
(587)
928
(124)
(89)
(459)
(153)
Balance
December 31, 2021
24,032
362
(7,572)
(2,023)
(17,291)
2,492
-
Balance
December 31, 2020
9,528
360
(4,588)
(2,218)
(5,330)
1,834
(414)
For the year ended December 31, 2021, the Company recorded valuation allowances of $12.0 million against deferred tax assets
(“DTAs”) incurred during the year as the Company has experienced cumulative losses in recent years (December 31, 2020 –$5.2
million recorded in the Company’s Canadian entity). Although earnings were positive in 2019, ongoing near-term uncertainties on the
business caused by the COVID-19 pandemic and the related decline in business activity impacted the Company’s ability to generate
earnings. Accordingly, it is not more likely than not that the Company’s DTAs will be utilized in the near term.
The provincial corporate tax rate in Alberta, Canada was decreased on June 28, 2019 from 11.5% to 11% for the second half of
2019, and was scheduled to further reduce to 10% for 2020, 9% for 2021 and 8% thereafter. As part of Alberta’s Recovery Plan, the
decrease in provincial tax rates was accelerated such that the provincial corporate tax rate is 8% effective July 1, 2020. As a result of
this rate change, DIRTT reduced its DTAs by $0.9 million with a corresponding deferred income tax expense recorded in the second
quarter of 2019.
64
The amount shown on the balance sheet as deferred income tax liabilities represent the net differences between the tax basis and
book carrying values on the Company’s balance sheet at enacted tax rates.
On an annual basis the Company and its subsidiaries file tax returns in Canada and various foreign jurisdictions. In Canada the
Company’s federal and provincial tax returns for the years 2018 to 2020 remain subject to examination by taxation authorities. In the
United States, both the federal and state tax returns filed for the years 2017 to 2020 remain subject to examination by the taxation
authorities.
Tax loss carryforwards and other tax pools
The significant components of the Company’s net future income tax deductions in these consolidated financial statements are
summarized as follows:
Non-capital loss carry-forwards
Undepreciated capital costs
Scientific research and experimental development
tax incentives
Total future tax deductions
14. STOCK-BASED COMPENSATION
2021
2020
2021
2020
As at December 31,
Canadian Entity C$
64,961
12,267
1,971
79,199
45,299
13,225
1,971
60,495
US Entity $
42,220
10,268
-
52,488
-
3,944
-
3,944
In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at
the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation
rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested share
awards, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and
its affiliates. In accordance with the 2020 LTIP, the sum of (i) 5,850,000 common shares plus (ii) the number of common shares
subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock
Option Plan”) that, following May 22, 2020, expire or are cancelled or terminated without having been exercised in full have been
reserved for issuance under the 2020 LTIP. Upon vesting of certain LTIP awards, the Company may withhold and sell shares as a
means of meeting DIRTT’s tax withholding requirements in respect of the withholding tax remittances required in respect of award
holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess
amount is credited to retained earnings or deficit.
The Company also maintains the DIRTT Environmental Solutions Ltd. Deferred Share Unit Plan for Non-Employee Directors
pursuant to which DSUs are granted to the Company’s non-employee directors. DSUs are settled solely in cash.
Prior to the approval of the 2020 LTIP, the Company granted awards of options under the Stock Option Plan and awards of
performance share units (“PSUs”) under the DIRTT Environmental Solutions Ltd. Performance Share Unit Plan (the “PSU Plan”).
Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but
both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding
Stock-based compensation expense
Equity-settled awards
Cash-settled awards
For the Year Ended December 31,
2021
2020
2019
4,453
260
4,713
1,832
519
2,351
3,512
364
3,876
65
The following summarizes PSUs, DSUs and RSUs granted, exercised, forfeited and expired during the periods:
Outstanding at December 31, 2019
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Granted
Vested
Withheld to settle employee tax obligations
Forfeited
Outstanding at December 31, 2021
Restricted share units (time-based vesting)
RSU Time-
Based
Number of
units
RSU
Performance-
Based
Number of
units
-
2,419,609
-
(5,546)
2,414,063
1,976,697
(661,775)
(174,103)
(338,346)
3,216,536
-
200,000
-
-
200,000
878,601
(2,294)
(1,960)
(52,608)
1,021,739
DSU
Number of
units
PSU
Number of
units
132,597
251,470
(20,403)
-
363,664
144,969
(147,056)
-
-
361,577
223,052
-
-
(25,581)
197,471
-
(34,635)
-
(5,636)
157,200
Restricted share units that vest based on time have an aggregate time-based vesting period of three years and generally one-third
of the RSUs vest every year over a three-year period from the date of grant (the “RSU’s”). At the end of a three-year term, the
associated RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of
the Company. The weighted average fair value of the RSUs granted in 2021 was C$2.78 (2020 – C$2.05) which was determined using
the closing price of the Company’s common shares on their respective grant dates.
Restricted share units (performance-based vesting)
During 2021, restricted share units were granted to executives with service and performance-based conditions for vesting (the
“Performance RSUs” or “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 three-year service period.
The 2020 grant was for one executive, if the Company’s share price increases to C$3.00 for 20 consecutive trading days within
three years of the grant date, then 50% (100,000) of the Performance RSUs will vest at the end of the three-year service period. If the
Company’s share price increases to C$4.00 for 20 consecutive trading days within three years of the grant date, 100% (200,000) of the
Performance RSUs will vest at the end of the three-year service period. If the Company’s share price increases to C$6.00 for 20
consecutive trading days within three years of the grant date, then 150% (300,000) of the Performance RSUs will vest at the end of the
three-year service period. On January 18, 2022, these awards were forfeited upon the departure of the executive from the Company.
The grant date fair value of the 2021 and 2020 Performance RSUs were valued using the Monte Carlo valuation method and
determined to have a weighted average grant date fair value of C$3.27 and C$1.70, respectively.
Based on share price performance since the date of grant, 66.7% of the 2021 PRSUs and 100% of the 2020 PRSUs will vest
upon completion of the three-year service period.
2021 PRSUs
2020 PRSUs
Deferred share units
% of PRSUs vesting
33.3%
$3.00
-
50.0%
-
C$3.00
66.7%
$4.00
-
100.0%
$5.00
C$4.00
150.0%
$7.00
C$6.00
The fair value of the liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each
reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value
recognized in profit or loss for the year. DSUs outstanding at December 31, 2021 had a fair value of $0.8 million which is included in
other liabilities on the balance sheet (2020 – $0.9 million).
66
Performance share units
Under the terms of the PSU Plan, PSUs granted vest at the end of a three-year term. At the end of a three-year term, employees
will be awarded cash, calculated based on certain Adjusted EBITDA, total shareholder return, or revenue growth related to
performance conditions.
The fair value of the liability and the expense attributable to the vesting period is charged to profit or loss at the grant date.
Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any
changes in fair value recognized in profit or loss. As at December 31, 2021, outstanding PSUs had a fair value of $nil which is
included in other liabilities on the balance sheet (2020 – $0.1 million).
Options
In 2018, the Company allowed certain vested stock options to be surrendered by their holders for cash. On October 9, 2019,
following the listing of its common shares on Nasdaq, the Company ceased permitting the cash-settlement of stock options and the
associated liability accounting for stock options. In 2019, $1.8 million was expensed to adjust the liability to fair value, and an
additional $0.4 million was charged back to paid-in capital as, for certain stock options, the cumulative expense calculated was lower
that the grant date fair value of the original equity awards. During 2019, $3.6 million of stock options were surrendered by their
holders for cash.
The following summarizes options granted, exercised, forfeited and expired during the periods:
Outstanding at December 31, 2019
Forfeited
Expired
Outstanding at December 31, 2020
Forfeited
Expired
Outstanding at December 31, 2021
Exercisable at December 31, 2021
Number of
Weighted average
options
exercise price C$
6,156,652
(227,368)
(1,154,956)
4,774,328
(44,102)
(665,737)
4,064,489
2,079,479
6.49
6.81
6.29
6.52
7.05
5.76
6.64
6.71
In 2018, 1,725,000 stock options were granted to an executive with performance conditions for vesting. For 825,000 stock
options, vesting is conditioned upon an increase in the Company’s share price to C$13.26, and for 900,000 stock options, vesting is
conditioned upon an increase in the Company’s share price to C$19.89. These options were valued using the Monte Carlo valuation
method and determined to have a weighted average grant fair value of C$2.14 on original grant. These awards were accounted for at
the fair value attributable to the vesting period until October 9, 2019 when these were reclassified to equity accounting and were re-
valued at a weighted average fair value of C$0.83. On January 18, 2022, these awards were forfeited upon the departure of the
executive from the Company.
Range of exercise prices outstanding at December 31, 2021:
Options outstanding
Weighted Weighted
average
remaining
Options exercisable
Weighted
average
remaining
Weighted
average
exercise
price C$
4.12
-
6.36
7.84
life
2.89
-
1.87
2.37
Number
average
exercise
price C$ exercisable
15,025
-
1,549,301
515,153
4.12
-
6.38
7.84
2,079,479
life
2.89
-
1.79
2.37
Range of exercise prices
C$4.01 – C$5.00
C$5.01 – C$6.00
C$6.01 – C$7.00
C$7.01 – C$8.00
Total
Number
outstanding
22,537
-
3,281,199
760,753
4,064,489
67
Range of exercise prices outstanding at December 31, 2020:
Range of exercise prices
C$4.01 – C$5.00
C$5.01 – C$6.00
C$6.01 – C$7.00
C$7.01 – C$8.00
Total
Options outstanding
Weighted
average
remaining
Weighted
average
exercise
Number
Number
outstanding
life
price C$ exercisable
life
Options exercisable
Weighted
average
remaining
Weighted
average
exercise
price C$
22,537
669,236
3,299,993
782,562
4,774,328
3.89
0.89
2.79
3.37
7,513
4.12
5.76
669,236
6.38 1,126,772
262,417
7.84
2,065,938
3.89
0.89
2.93
3.37
4.12
5.76
6.34
7.84
The stock options granted had a weighted average grant date fair value of C$2.40 in 2019, estimated using the Black-Scholes
option-pricing model with the following assumptions for December 31, 2019: a 3.5 year expected life for all periods, 1.6% risk-free
interest rate; a 4.2% expected forfeitures rate; and 39.2% expected volatility. These awards were accounted for using the fair value
approach as they were accounted for as liabilities until October 9, 2019 when the Company ceased allowing cash surrenders of stock
options. On October 9, 2019, the stock options had a weighted average fair value of C$1.32 estimated using the Black-Scholes option
pricing model with the following assumptions: a 2.9 year expected life, 1.4% risk-free interest rate; and 39.2% expected
volatility.
Dilutive instruments
For the year ended December 31, 2021, 4.1 million options (2020 – 4.8 million, 2019 – 0.5 million) and 3.4 million RSUs and
PRSUs (2020 – 2.7 million, 2019 - nil) and 27.4 million shares which would be issued if the principal amount of the Debentures were
settled in our common shares at the year end share price (2020 and 2019 - nil) were excluded from the diluted weighted average
number of common shares calculation as their effect would have been anti-dilutive to the net loss per share.
15. 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 16 for the disaggregation of revenue by geographic region.
Product
Transportation
License fees from Distribution
Partners
Total product revenue
Installation and other services
2021
For the Year Ended December 31,
2020
2019
129,031
13,231
738
143,000
4,593
147,593
150,004
15,491
1,194
166,689
4,818
171,507
215,109
23,903
1,647
240,659
7,076
247,735
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.
At a point in time
Over time
2021
For the Year Ended December 31,
2020
2019
142,262
5,331
147,593
165,495
6,012
171,507
239,012
8,723
247,735
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.
68
Revenue recognized over time is limited to installation and ongoing maintenance contracts with customers and is recorded as
performance obligations are satisfied over the term of the contract.
Contract Liabilities
Customer deposits
Deferred revenue
Contract liabilities
2021
As at December 31,
2020
2019
1,959
461
2,420
1,292
527
1,819
2,436
1,131
3,567
Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions.
The balance of contract liabilities was higher as at December 31, 2021 compared to the prior year period mainly due to the timing of
orders and payments. Contract liabilities as at December 31, 2020 and 2019, respectively, totaling $1.8 million and $3.6 million were
recognized as revenue during 2021 and 2020, respectively.
Sales by Industry
The Company periodically reviews product revenue by industry vertical market to evaluate trends and the success of industry
specific sales initiatives. The nature of products sold to the various industries is consistent and therefore the periodic review is focused
on sales performance.
Commercial
Healthcare
Government
Education
License fees from Distribution
Partners
Total product revenue
Service revenue
16. SEGMENT REPORTING
2021
For the Year Ended December 31,
2020
2019
84,488
30,130
16,012
11,632
738
143,000
4,593
147,593
102,245
35,400
14,128
13,722
1,194
166,689
4,818
171,507
158,256
44,197
14,879
21,680
1,647
240,659
7,076
247,735
The Company has one reportable and operating segment and operates in two principal geographic locations, Canada and the
United States. Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United
States. The Company’s revenue from operations from external customers, based on location of operations, and information about its
non-current assets, is detailed below.
Revenue from external customers
Canada
U.S.
Non-current assets, excluding deferred tax assets
Canada
U.S.
2021
For the Year Ended December 31,
2020
2019
17,299
130,294
147,593
18,848
152,659
171,507
34,085
213,650
247,735
As at December 31,
2021
2020
34,912
60,723
95,635
42,947
55,352
98,299
69
(1)
Amounts include property, plant and equipment, capitalized software, operating lease right-of-use assets, goodwill and other
assets. Goodwill was included in the Canadian segment.
17. COMMITMENTS
As at December 31, 2021, the Company had outstanding purchase obligations of approximately $3.7 million related to inventory
and property, plant and equipment purchases (December 31, 2020 – $3.2 million). Refer to Note 5 for lease commitments.
18. LEGAL PROCEEDINGS
The Company is pursuing multiple lawsuits against its former founders, Mogens Smed and Barrie Loberg, their new company
Falkbuilt Ltd. (“Falkbuilt”), and other related individual and corporate defendants for violations of fiduciary duties and non-
competition and non-solicitation covenants contained in their executive employment agreements, and the misappropriation of
DIRTT’s confidential and proprietary information in violation of numerous Canadian and U.S. state, and federal laws pertaining to the
protection of DIRTT’s trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices.
As of December 31, 2021, the Company’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates was
comprised of four main lawsuits: (i) an action in the Alberta Court of Queen’s Bench instituted on May 9, 2019 against Falkbuilt,
Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and
duties of loyalty, fidelity and confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-
Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against
Falkbuilt, Smed, and other individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade
secrets, business intelligence and customer information (the “Utah Misappropriation Case”); (iii) an action for federal patent
infringement in the U.S. District Court for the Northern District of Illinois instituted on August 6, 2020 against Falkbuilt, alleging that
Falkbuilt is infringing certain of DIRTT’s patents relating to our proprietary ICE® software (the “Patent Infringement Case”); and (iv)
an action in the U.S. District Court for the Northern District of Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully
used DIRTT’s confidential information in the United States and intentionally caused confusion in the United States in an attempt to
steal customers, opportunities, and business intelligence, with the aim of establishing a competing business in the United States market
(the “Texas Unfair Competition Case”). DIRTT intends to pursue the cases vigorously.
Falkbuilt also filed a lawsuit against the Company on November 5, 2019 in the Court of Queen’s Bench of Alberta, alleging that
DIRTT has misappropriated and misused their alleged proprietary information in furtherance of DIRTT’s product development.
Falkbuilt seeks monetary relief and an interim, interlocutory and permanent injunction of DIRTT’s alleged use of the alleged
proprietary information. The Company believes that the suit is without merit and filed an application for summary judgement to
dismiss Falkbuilt’s claim.
No amounts are accrued for the above legal proceedings.
19. SUBSEQUENT EVENTS
On February 22, 2022, the Company announced the intention to close its Phoenix facility, as well as an 18% reduction in the
Company’s salaried workforce. One-time costs associated with these reductions, to be incurred in the first half of 2022, are expected
to be approximately $5.0 million.
70
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the
Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our principal executive officer and principal financial officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2021. Based
upon their evaluation, our principal executive officer 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.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) and 15(d)-15(f) under the Exchange Act, as amended. Our management conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO framework) to evaluate the
effectiveness of internal control over financial reporting. Management believes that the COSO framework is a suitable framework for
its evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative
measurements of our internal control over financial reporting, is sufficiently complete so that those relevant factors that would alter a
conclusion about the effectiveness of our internal control over financial reporting are not omitted and is relevant to an evaluation of
internal control over financial reporting.
Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that the
Company maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2021, based
on those criteria.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) under
the Exchange Act) during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
71
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated herein by reference to the information that will be contained in our
information circular and proxy statement (“proxy statement”) related to the 2022 Annual Meeting of Shareholders, which we intend to
file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 11.
Executive Compensation.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2022 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2022 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2022 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 14.
Principal Accounting Fees and Services.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2022 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
72
Item 15.
Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of the report:
(1)
Financial Statements
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, as at December 31, 2021 and 2020
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to the Consolidated Financial Statements
(2)
Financial Statement Schedules
All schedules have been omitted as they are either not required or not applicable or the required information is included in
the Consolidated Financial Statements or notes thereto.
(3)
See Item 15(b)
(b)
Exhibits:
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Exhibit or Financial Statement Schedule
Restated Articles of Amalgamation of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1 to
the Registrant’s Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
Amended and Restated Bylaw No.1 of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1 to
the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).
Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on
Form 10-K, File No. 001-39061, filed on February 26, 2020).
Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd., Computershare Trust
Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
Supplemental Indenture, dated January 25, 2021, by and among the Company, Computershare Trust Company of Canada
and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
Second Supplemental Indenture, dated December 1, 2021, by and among the Company, Computershare Trust Company
of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit
4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on December 1, 2021).
Rights Agreement, dated as of December 7, 2021, by and between DIRTT Environmental Solutions Ltd. and
Computershare Trust Company of Canada, as rights agent (incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K, File No. 001-39061, filed on December 8, 2021).
10.1+# Loan Agreement, dated February 12, 2021, by and among the Royal Bank of Canada, DIRTT Environmental Solutions
Ltd. and DIRTT Environmental Solutions, Inc., as borrowers (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on February 19, 2021).
10.2+#
First Amendment and Consent to Loan Agreement, dated November 15, 2021, by and among the Royal Bank of Canada,
as lender, and DIRTT Environmental Solutions Ltd. and DIRTT Environmental Solutions, Inc., as borrowers
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on
November 23, 2021).
73
Exhibit
No.
Exhibit or Financial Statement Schedule
10.3+ Amended and Restated Incentive Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s
Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
10.4+
10.5+
10.6+
10.7+
DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).
Form of Option Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan
(incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, File No. 333-
238689, filed on May 26, 2020).
Form of Time-Based Restricted Share Unit Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-
Term Incentive Plan (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-
8, File No. 333-238689, filed on May 26, 2020).
Form of Performance-Based Restricted Share Unit Award Agreement Under the DIRTT Environmental Solutions Ltd.
Long-Term Incentive Plan (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on
Form S-8, File No. 333-238689, filed on May 26, 2020).
10.8+ Deferred Share Unit Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.4 to the Registrant’s
Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
10.9+ DIRTT Environmental Solutions Ltd. Amended and Restated Employee Share Purchase Plan (incorporated by reference
to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, File No. 333-234143, filed on October 9, 2019).
10.10+ Executive Employment Agreement, dated September 8, 2018, by and between DIRTT Environmental Solutions Ltd. and
Kevin O’Meara (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form 10, File
No. 001-39061, filed on September 20, 2019).
10.11+ Amended and Restated Executive Employment Agreement, dated July 4, 2018, by and between DIRTT Environmental
Solutions Ltd. and Geoffrey Krause (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement
on Form 10, File No. 001-39061, filed on September 20, 2019).
10.12+ Executive Employment Agreement, dated February 27, 2019, by and between DIRTT Environmental Solutions Ltd. and
Jeffrey A. Calkins (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form 10,
File No. 001-39061, filed on September 20, 2019).
10.13+ Executive Employment Agreement, dated January 15, 2019, by and between DIRTT Environmental Solutions Ltd. and
Mark Greffen (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form 10, File
No. 001-39061, filed on September 20, 2019).
10.14+ Employment Agreement, dated August 31, 2019, by and between DIRTT Environmental Solutions Ltd. and Jennifer
Warawa (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form 10, File
No. 001-39061, filed on September 20, 2019).
10.15+
Employment Agreement, dated March 13, 2020, by and between DIRTT Environmental Solutions, Inc. and Charles R.
Kraus (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q, File No. 001-39061, filed on May 6,
2020).
10.16+ Indemnity Agreement, dated August 1, 2020, between the Company and Shauna R. King, together with a schedule
identifying other substantially identical agreements between the Company and each of the other persons identified on the
schedule (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K, File No. 001-
39061, filed on February 24, 2021).
10.17#
Industrial Lease, dated September 15, 2012, by and between Piret (7303-30th Street SE) Holdings Inc. and DIRTT
Environmental Solutions Ltd. (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on
Form 10, File No. 001-39061, filed on September 20, 2019).
74
Exhibit
No.
Exhibit or Financial Statement Schedule
10.18# Agreement of Lease, dated November 5, 2013, by and between Dundee Industrial Twofer (GP) Inc. and DIRTT
Environmental Solutions Ltd., as amended by the Lease Amending Agreement, dated October 21, 2016, by and between
Dream Industrial Twofer (GP) Inc. (formerly known as Dundee Industrial Twofer (GP) Inc.) and DIRTT Environmental
Solutions Ltd. (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form 10, File
No. 001-39061, filed on September 20, 2019).
10.19# Lease of Industrial Space, dated February 12, 2015, by and between Hoopp Realty Inc./Les Immeubles Hoopp Inc., by
its duly authorized agent, Triovest Realty Advisors Inc., and DIRTT Environmental Solutions Ltd., as amended by the
Amendment of Lease, dated April 16, 2015, the Lease Modification Agreement, dated October 27, 2015, the Third
Amendment of Lease, dated November 12, 2015, and the Fourth Amendment of Lease, dated January 8, 2016
(incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form 10, File No. 001-39061,
filed on September 20, 2019).
10.20# Lease Agreement, dated March 29, 2011, by and between EastGroup Properties, L.P. and DIRTT Environmental
Solutions, Inc. (incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form 10, File
No. 001-39061, filed on September 20, 2019).
10.21# Lease, dated July 1, 2015, by and between Majik Ventures, L.L.C. and DIRTT Environmental Solutions, Inc., as
amended by the First Amendment to Lease, dated May 11, 2017, by and between CAM Investment 352 LLC and
DIRTT Environmental Solutions, Inc. (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration
Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
10.22#
Industrial Lease Agreement, dated October 2, 2008, by and between 141 Knowlton Way, LLC and DIRTT
Environmental Solutions, Inc., as amended by the First Amendment to Industrial Lease Agreement, dated March 11,
2009, and the Second Amendment to Industrial Lease Agreement, dated August 23, 2018, by and between SH7-
Savannah, LLC and DIRTT Environmental Solutions, Inc. (incorporated by reference to Exhibit 10.28 to the Registrant’s
Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
10.23# Lease Agreement, dated October 7, 2019, by and between DIRTT Environmental Solutions, Inc. and SP Rock Hill
Legacy East #1, LLC (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q, File No. 001-39061, filed
on November 7, 2019).
10.24#
Second Amendment to Lease made as of the 6th day of July, 2020, by and between SP ROCK HILL LEGACY EAST
#1, LLC, an Indiana limited liability company, and DIRTT ENVIRONMENTAL SOLUTIONS, INC., a Colorado
corporation (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q, File No. 001-39061, filed on July
29, 2020).
10.25#
Lease Agreement between Tennyson Campus Owner, LP and DIRTT Environmental Solutions, Inc. dated March 4, 2020
(incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q, File No. 001-39061, filed on May 6, 2020).
10.26
10.27
10.28+
10.29+
Letter Agreement, dated as of January 18, 2022, by and between Todd W. Lillibridge and DIRTT Environmental
Solutions Ltd. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, File No. 001-39061, filed on
January 19, 2022).
Letter Agreement, dated January 7, 2021, by and among DIRTT Environmental Solutions Ltd., DIRTT Environmental
Solutions, Inc. and Royal Bank of Canada (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on
Form 8-K, File No. 001-39061, filed on January 13, 2021).
Indemnification Agreement, by and between DIRTT Environmental Solutions Ltd. and James A. Lynch, dated March 22,
2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061,
filed on March 23, 2021).
Indemnification Agreement, by and between DIRTT Environmental Solutions Ltd. and Diana R. Rhoten, dated March
22, 2021 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, File No. 001-39061,
filed on March 23, 2021).
75
Exhibit
No.
Exhibit or Financial Statement Schedule
21.1* Subsidiaries of DIRTT Environmental Solutions Ltd.
23.1* Consent of PricewaterhouseCoopers, L.L.P., independent registered public accounting firm.
31.1* Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of the Principal Executive Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** Certification of the Principal Financial Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 (embedded within the Inline XBRL document)
*
**
+
#
Filed herewith.
Furnished herewith.
Compensatory plan or agreement.
Specific terms in this exhibit (indicated therein by asterisks) have been omitted because such terms are both not material and
would likely cause competitive harm to the Company it publicly disclosed.
Item 16.
Form 10-K Summary
None.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 23, 2022
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
By:/s/ Todd Lillibridge
Name: Todd Lillibridge
Title: Interim Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates indicated.
Date
February 23, 2022
February 23, 2022
February 23, 2022
February 23, 2022
February 23, 2022
February 23, 2022
February 23, 2022
February 23, 2022
Signature
/s/ Todd W. Lillibridge
Todd W. Lillibridge
/s/ Geoffrey D. Krause
Geoffrey D. Krause
/s/ Michael Ford
Michael Ford
/s/ Denise Karkkainen
Denise Karkkainen
/s/ Shauna King
Shauna King
/s/ Jim Lynch
Jim Lynch
/s/ Steven Parry
Steven Parry
/s/ Diana Rhoten
Diana Rhoten
Title
Interim Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
Director
Director
77
DIRTT Environmental Solutions Ltd.
List of Subsidiaries
Name
Jurisdiction of Organization
DIRTT Environmental Solutions, Inc.
Colorado
Exhibit 21.1
78
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-234143 and 333-
238689) and Form S-3 (No. 333-251660) of DIRTT Environmental Solutions Ltd. of our report dated February 23, 2022 relating to
the consolidated financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Alberta, Canada
February 23, 2022
79
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, Todd Lillibridge, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “registrant”) for the year ended
December 31, 2021;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Dated: February 23, 2022
By: /s/ Todd Lillibridge
Todd Lillibridge
Interim Chief Executive Officer
(Principal Executive Officer)
80
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, Geoffrey D. Krause, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “registrant”) for the year ended
December 31, 2021;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Dated: February 23, 2022
By: /s/ Geoffrey D. Krause
Geoffrey D. Krause
Chief Financial Officer
(Principal Financial Officer)
81
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 Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “Company”) for the year
ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd
Lillibridge, Interim 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:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 23, 2022
By: /s/ Todd Lillibridge
Todd Lillibridge
Interim Chief Executive Officer
(Principal Executive Officer)
82
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 Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “Company”) for the year
ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Geoffrey D.
Krause, 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:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 23, 2022
By: /s/ Geoffrey D. Krause
Geoffrey D. Krause
Chief Financial Officer
(Principal Financial Officer)
83
DIANA R. RHOTEN
Design and Innovation
Strategist, ∂ifferential design
Elected 2021
Compensation Committee
Nominating and
Governance Committee
DIRTT Board Of Directors
TODD W. LILLIBRIDGE
DIRTT Board Chair and
Interim President and
Chief Executive Officer
President & Chief Executive
Officer, TWL Enterprises LLC
Elected 2017
DENISE E. KARKKAINEN
Corporate Director
Elected 2015
Audit Committee
Compensation Committee
Nominating and
Governance Committee
SHAUNA R. KING
Corporate Director
Elected 2020
Audit Committee
MICHAEL T. FORD
DIRTT Interim Independent
Lead Director
Corporate Vice President
Global Real Estate
and Security,
Microsoft Corporation
Elected 2020
Audit Committee
JAMES (JIM) A. LYNCH
Senior Vice President &
General Manager,
Autodesk Construction
Solutions, Autodesk
Elected 2021
Audit Committee
Nominating and
Governance Committee
STEVE E. PARRY
President,
Skara Brae Strategy
Consultants
Elected 2011
Compensation Committee
DIRTT Executive Officers
TODD W. LILLIBRIDGE
Interim President and
Chief Executive Officer
JEFFREY A. CALKINS
Chief Operating Officer
MARK C. GREFFEN
Chief Technology Officer
GEOFFREY D. KRAUSE
Chief Financial Officer
CHARLES R. KRAUS
Senior Vice President,
General Counsel and
Corporate Secretary
JENNIFER L. WARAWA
Chief Commercial Officer
Corporate Information
CORPORATE HEADQUARTERS
7303 30th Street S.E.
Calgary, Alberta, Canada T2C 1N6
(403) 723-5000
ANNUAL MEETING
The Annual and Special Meeting of Shareholders
will be held in person and virtually on
Tuesday, April 26, 2022 at 10:00 am (MDT).
STOCK EXCHANGE LISTING
The Nasdaq Global Select Market, Ticker Symbol: DRTT
The Toronto Stock Exchange, Ticker Symbol: DRT
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company of Canada
Physical Address
100 University Avenue
8th Floor
Toronto, Ontario, Canada
M5J 2Y1
(416) 263-9200
Mailing Address
135 West Beaver Creek
P.O. Box 300
Richmond Hill, Ontario,
Canada
L4B 4R5
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Suite 3100, 111-5th Avenue SW
Calgary, Alberta, Canada T2P 5L3
(403) 509-7500
Special Note Regarding Forward-Looking Statements
Our Letter to Shareholders contains various statements, including estimates, projections, objectives and expected results, which are “forward-looking statements” and
“forward-looking information” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and within the meaning of applicable Canadian securities laws (collectively, “forward-looking statements”) and are generally identified by the
words “believe,” “expect,” “anticipate,” “intend,” “opportunity,” “plan,” “project,” “will,” “should,” “could,” “would,” “likely” and similar expressions. Forward-looking statements
are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in
these forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to,
the factors discussed in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q under the sections entitled “Risk Factors.” Our forward-looking statements
speak only as of the date hereof or as of the date they are made, and we undertake no obligation to update them, unless required under applicable securities laws.
DIRTT ENVIRONMENTAL SOLUTIONS | 2021 Annual Report - March 2022DIRTT 2021Annual Report