DIRTT dishes out for founder’s digs

Controversial funding of R&D display house

After a couple of own goals — essentially surprise decisions that caused a dramatic share price drop — shareholders of Calgary- based DIRTT Environmental Solutions

Ltd., were wondering, if and when, the final part of the trilogy, would strike.

It still may: DIRTT has a proxy fight on its hands as well as many upset shareholders, who have seen their investment drop, from peak to trough, by about one-third over the past three months.

Meantime the board — which in January replaced the founder and chief executive and the president and acting CFO with interim executives, is confident it has “professionalized the business,” even though the hunt for a permanent chief executive and CFO continues.

Steven Parry, DIRTTs lead director, said the new management team “has come out, for the first time, with proper forward guidance. These are all important steps.”

If so, maybe DIRTT is living up to its name, Doing It Right This Time. Certainly it has the support of the analysts: five rate it a buy and two a hold.

DIRTT’s latest own goal occurred in the release of its fourth- quarter and annual financial statements. The fourth- quarter consensus called for a profit of $0.06 a share; the reality was a loss of $0.09 a share. Tucked in those losses was $ 4.3 million for development costs related to DIRTT’s initiatives in timber and residential, with about 85 per cent ( about $ 3.365 million) being allocated to research and development, and marketing expenses.

Those costs are c o nnected to the construction of the primary residence of its founder Mogens Smed. About $2.9 million was allocated to the construction of the home, known as Hygge, in the fourth quarter.

Hygge, a green learning centre, is different from most residences. While Smed lives there, it’s a “flagship residential project … a working case study to refine DIRTT’s capabilities.” Smed has spent more than $4.1 million on the project — meaning the project has cost almost $ 8 million. Last year it welcomed more than 180 clients.

“It was a successful project from the board’s view in terms of the interest we had created in the residential and timber market,” said Parry.

As for the huge increase in expenditure in the fourth quarter, Parry said it related to different advice the board received on whether a taxable benefit was at work. Previously it was told there was “no material benefit;” lately two advisers said there was a “significant” taxable benefit to Smed.

Parry said it was “very regrettable the process of finding out happened the way it did.”

Because of those two opinions, DIRTT has a benefit while Smed has a CRA taxable benefit. “The house cost far more than it’s worth because of the R&D component. We made up that difference because it’s to the company’s benefit,” noted Parry, adding the amount equals what was spent to cover the R&D costs incurred.

Parry said Smed, who had a blog showing the development of the project, “doesn’t end up with money in his pocket,” though DIRTT is responsible “for covering” the taxable benefit.

With Hygge now completed, DIRTT and Smed are working on a contract to allow the firm and its clients guaranteed long-term access.

Given all the relatedparty issues involved in this arrangement and given the shock shareholders experienced when the news emerged, why didn’t DIRTT develop its own project to show off its latest technology?

Parry said it didn’t want to build, own, staff and maintain a house. “The fact that Smed was prepared to put in (what he did) was a great reason for this combination to occur. It’s more cost effective for DIRTT this way.”