UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30,March 31, 20232024
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-39061
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
(Exact name of registrant as specified in its charter)
Alberta, Canada (State or other jurisdiction of incorporation or organization) |
| N/A (IRS Employer Identification No.) |
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7303 30th Street S.E. Calgary, Alberta, Canada (Address of principal executive offices) |
| T2C 1N6 (Zip code) |
(Registrant’s telephone number, including area code): (403) 723-5000
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ 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 |
| ☐ | Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
| ☒ |
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| Emerging growth company |
| ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The registrant had 104,789,358191,880,226 common shares outstanding as of October 31, 2023.April 30, 2024.
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2023MARCH 31, 2024
TABLE OF CONTENTS
i
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023March 31, 2024 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” “continue,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.
Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those contained in, or expressed or implied by such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects can be found in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022,2023, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 22, 202321, 2024 (the “Annual Report on Form 10-K”), and in our subsequently filed Quarterly Reports on Form 10-Q and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:
ii
ii
These risks are not exhaustive. Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Quarterly Report. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or expressed or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not place undue reliance on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary statements.
iii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Balance Sheets
(Unaudited – Stated in thousands of U.S. dollars)
|
| As at September 30, |
|
| As at |
|
| As at March 31, |
|
| As at December 31, |
| ||||
|
| 2023 |
|
| 2022 |
|
| 2024 |
|
| 2023 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||||
Current Assets |
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
|
| 19,460 |
|
|
| 10,821 |
|
|
| 38,989 |
|
|
| 24,744 |
|
Restricted cash |
|
| 2,977 |
|
|
| 3,418 |
|
|
| 241 |
|
|
| 355 |
|
Trade and accrued receivables, net of expected credit losses of |
|
| 20,516 |
|
|
| 13,930 |
| ||||||||
Trade and accrued receivables, net of expected credit losses of |
|
| 15,782 |
|
|
| 15,787 |
| ||||||||
Other receivables |
|
| 852 |
|
|
| 7,880 |
|
|
| 476 |
|
|
| 484 |
|
Inventory |
|
| 17,368 |
|
|
| 22,251 |
|
|
| 15,669 |
|
|
| 16,577 |
|
Prepaids and other current assets |
|
| 4,015 |
|
|
| 3,825 |
|
|
| 2,426 |
|
|
| 4,023 |
|
Assets held for sale |
|
| 2,317 |
|
|
| - |
|
|
| - |
|
|
| 1,555 |
|
Total Current Assets |
|
| 67,505 |
|
|
| 62,125 |
|
|
| 73,583 |
|
|
| 63,525 |
|
Property, plant and equipment, net |
|
| 26,324 |
|
|
| 41,522 |
|
|
| 23,801 |
|
|
| 25,077 |
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Capitalized software, net |
|
| 2,168 |
|
|
| 4,406 |
|
|
| 2,700 |
|
|
| 2,450 |
|
Operating lease right-of-use assets, net |
|
| 30,561 |
|
|
| 30,490 |
|
|
| 28,442 |
|
|
| 29,813 |
|
Other assets |
|
| 3,776 |
|
|
| 5,110 |
|
|
| 3,442 |
|
|
| 3,452 |
|
Total Assets |
|
| 130,334 |
|
|
| 143,653 |
|
|
| 131,968 |
|
|
| 124,317 |
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LIABILITIES |
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Current Liabilities |
|
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Accounts payable and accrued liabilities |
|
| 18,761 |
|
|
| 19,881 |
|
|
| 15,360 |
|
|
| 19,880 |
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Other liabilities |
|
| 2,021 |
|
|
| 2,056 |
|
|
| 2,906 |
|
|
| 2,482 |
|
Customer deposits and deferred revenue |
|
| 6,743 |
|
|
| 4,866 |
|
|
| 3,080 |
|
|
| 5,290 |
|
Current portion of long-term debt and accrued interest |
|
| 8,961 |
|
|
| 3,306 |
|
|
| 675 |
|
|
| 841 |
|
Current portion of lease liabilities |
|
| 5,284 |
|
|
| 5,889 |
|
|
| 5,449 |
|
|
| 5,255 |
|
Total Current Liabilities |
|
| 41,770 |
|
|
| 35,998 |
|
|
| 27,470 |
|
|
| 33,748 |
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Long-term debt |
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| 53,901 |
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|
| 62,129 |
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|
| 46,125 |
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|
| 55,267 |
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Long-term lease liabilities |
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| 28,751 |
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| 27,534 |
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| 26,957 |
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|
| 28,201 |
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Total Liabilities |
|
| 124,422 |
|
|
| 125,661 |
|
|
| 100,552 |
|
|
| 117,216 |
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SHAREHOLDERS’ EQUITY |
|
|
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Common shares, unlimited authorized without par value, 104,789,358 issued |
|
| 195,747 |
|
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| 191,347 |
| ||||||||
Common shares, unlimited authorized without par value, 191,880,226 issued and outstanding at March 31, 2024 and 105,377,667 issued and outstanding at December 31, 2023 |
|
| 218,294 |
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| 196,128 |
| ||||||||
Additional paid-in capital |
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| 7,933 |
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| 9,023 |
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| 7,355 |
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|
| 7,954 |
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Accumulated other comprehensive loss |
|
| (15,957 | ) |
|
| (16,106 | ) |
|
| (16,422 | ) |
|
| (16,125 | ) |
Accumulated deficit |
|
| (181,811 | ) |
|
| (166,272 | ) |
|
| (177,811 | ) |
|
| (180,856 | ) |
Total Shareholders’ Equity |
|
| 5,912 |
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|
| 17,992 |
|
|
| 31,416 |
|
|
| 7,101 |
|
Total Liabilities and Shareholders’ Equity |
|
| 130,334 |
|
|
| 143,653 |
|
|
| 131,968 |
|
|
| 124,317 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
4
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Operations
(Unaudited - Stated in thousands of U.S. dollars)
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| 2024 |
|
| 2023 |
| ||||||
Product revenue |
|
| 48,095 |
|
|
| 44,307 |
|
|
| 127,105 |
|
|
| 124,849 |
|
|
| 39,039 |
|
|
| 35,476 |
|
Service revenue |
|
| 1,442 |
|
|
| 2,440 |
|
|
| 3,893 |
|
|
| 4,885 |
|
|
| 1,808 |
|
|
| 1,232 |
|
Total revenue |
|
| 49,537 |
|
|
| 46,747 |
|
|
| 130,998 |
|
|
| 129,734 |
|
|
| 40,847 |
|
|
| 36,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| ||||||
Product cost of sales |
|
| 31,622 |
|
|
| 37,965 |
|
|
| 88,529 |
|
|
| 109,757 |
|
|
| 24,992 |
|
|
| 27,423 |
|
Service cost of sales |
|
| 850 |
|
|
| 1,774 |
|
|
| 2,165 |
|
|
| 3,406 |
|
|
| 1,207 |
|
|
| 603 |
|
Total cost of sales |
|
| 32,472 |
|
|
| 39,739 |
|
|
| 90,694 |
|
|
| 113,163 |
|
|
| 26,199 |
|
|
| 28,026 |
|
Gross profit |
|
| 17,065 |
|
|
| 7,008 |
|
|
| 40,304 |
|
|
| 16,571 |
|
|
| 14,648 |
|
|
| 8,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales and marketing |
|
| 6,161 |
|
|
| 6,089 |
|
|
| 18,302 |
|
|
| 21,094 |
|
|
| 5,920 |
|
|
| 5,515 |
|
General and administrative |
|
| 4,669 |
|
|
| 6,542 |
|
|
| 16,003 |
|
|
| 21,412 |
|
|
| 4,566 |
|
|
| 5,833 |
|
Operations support |
|
| 1,752 |
|
|
| 2,321 |
|
|
| 5,564 |
|
|
| 7,347 |
|
|
| 1,775 |
|
|
| 1,990 |
|
Technology and development |
|
| 1,239 |
|
|
| 1,695 |
|
|
| 4,055 |
|
|
| 5,714 |
|
|
| 1,251 |
|
|
| 1,539 |
|
Stock-based compensation |
|
| 1,069 |
|
|
| 918 |
|
|
| 2,543 |
|
|
| 3,546 |
|
|
| 675 |
|
|
| 796 |
|
Reorganization |
|
| 321 |
|
|
| 3,426 |
|
|
| 2,857 |
|
|
| 12,281 |
|
|
| 138 |
|
|
| 1,071 |
|
Impairment charge on Rock Hill Facility |
|
| 7,952 |
|
|
| - |
|
|
| 7,952 |
|
|
| - |
|
|
| 530 |
|
|
| - |
|
Related party expense |
|
| - |
|
|
| - |
|
|
| 1,524 |
|
|
| - |
|
|
| - |
|
|
| 2,056 |
|
Total operating expenses |
|
| 23,163 |
|
|
| 20,991 |
|
|
| 58,800 |
|
|
| 71,394 |
|
|
| 14,855 |
|
|
| 18,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| ||||||
Operating loss |
|
| (6,098 | ) |
|
| (13,983 | ) |
|
| (18,496 | ) |
|
| (54,823 | ) |
|
| (207 | ) |
|
| (10,118 | ) |
Government subsidies |
|
| - |
|
|
| 7,141 |
|
|
| 236 |
|
|
| 7,765 |
|
|
| - |
|
|
| 148 |
|
Gain on sale of software and patents |
|
| - |
|
|
| - |
|
|
| 6,145 |
|
|
| - |
| ||||||||
Foreign exchange (loss) gain |
|
| 822 |
|
|
| 1,356 |
|
|
| (59 | ) |
|
| 1,870 |
| ||||||||
Gain on extinguishment of convertible debt |
|
| 2,931 |
|
|
| - |
| ||||||||||||||||
Foreign exchange gain (loss) |
|
| 919 |
|
|
| (261 | ) | ||||||||||||||||
Interest income |
|
| 161 |
|
|
| 19 |
|
|
| 271 |
|
|
| 50 |
|
|
| 489 |
|
|
| 4 |
|
Interest expense |
|
| (1,196 | ) |
|
| (1,276 | ) |
|
| (3,636 | ) |
|
| (3,935 | ) |
|
| (1,054 | ) |
|
| (1,207 | ) |
|
| (213 | ) |
|
| 7,240 |
|
|
| 2,957 |
|
|
| 5,750 |
|
|
| 3,285 |
|
|
| (1,316 | ) | |
Net loss before tax |
|
| (6,311 | ) |
|
| (6,743 | ) |
|
| (15,539 | ) |
|
| (49,073 | ) | ||||||||
Net income (loss) before tax |
|
| 3,078 |
|
|
| (11,434 | ) | ||||||||||||||||
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current and deferred income tax recovery |
|
| - |
|
|
| (16 | ) |
|
| - |
|
|
| (16 | ) | ||||||||
Current and deferred income tax expense |
|
| 33 |
|
|
| - |
| ||||||||||||||||
|
| - |
|
|
| (16 | ) |
|
| - |
|
|
| (16 | ) |
|
| 33 |
|
|
| - |
| |
Net loss |
|
| (6,311 | ) |
|
| (6,727 | ) |
|
| (15,539 | ) |
|
| (49,057 | ) | ||||||||
Net income (loss) after tax |
|
| 3,045 |
|
|
| (11,434 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| ||||||
Net loss per share |
|
|
|
|
|
|
|
|
|
|
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| ||||||||||||
Net loss per share - basic and diluted |
|
| (0.06 | ) |
|
| (0.08 | ) |
|
| (0.15 | ) |
|
| (0.57 | ) | ||||||||
Net income (loss) per share |
|
|
|
|
|
| ||||||||||||||||||
Net income (loss) per share - basic |
|
| 0.02 |
|
|
| (0.10 | ) | ||||||||||||||||
Net income (loss) per share - diluted |
|
| 0.01 |
|
|
| (0.10 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average number of shares outstanding (in thousands) | Weighted average number of shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic and diluted |
|
| 104,449 |
|
|
| 87,446 |
|
|
| 101,036 |
|
|
| 86,229 |
| ||||||||
Basic |
|
| 183,668 |
|
|
| 111,702 |
| ||||||||||||||||
Diluted |
|
| 288,479 |
|
|
| 111,702 |
|
Interim Condensed Consolidated Statement of Comprehensive LossIncome (Loss)
|
| For the Three Months Ended September 30, |
|
| For the Nine Months | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| ||||
Loss for the period |
|
| (6,311 | ) |
|
| (6,727 | ) |
|
| (15,539 | ) |
|
| (49,057 | ) |
|
Exchange differences on translation of foreign operations |
|
| (45 | ) |
|
| (66 | ) |
|
| 149 |
|
|
| (227 | ) |
|
Comprehensive loss for the period |
|
| (6,356 | ) |
|
| (6,793 | ) |
|
| (15,390 | ) |
|
| (49,284 | ) |
|
|
| For the Three Months Ended March 31, |
|
| |||||
|
| 2024 |
|
| 2023 |
|
| ||
Net income (loss) for the period |
|
| 3,045 |
|
|
| (11,434 | ) |
|
Exchange differences on translation of foreign operations |
|
| (297 | ) |
|
| 273 |
|
|
Comprehensive income (loss) for the period |
|
| 2,748 |
|
|
| (11,161 | ) |
|
5
Total revenue for the ninethree months ended September 30, 2023March 31, 2024 includes $nil revenue earned from related parties and $nil related party expenses ($0.3 million earned from related parties. All related party income was earned inand $2.1 million for the first quarter of 2023.
5
three months ended March 31, 2023, respectively). Refer to Note 16.
Interest expense for the three and nine monthmonths ended September 30, 2023March 31, 2024 includes $0.4 million owing toearned by a related party (refer($nil for the three months ended March 31, 2023). Refer to Note 16).16.
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
6
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited – Stated in thousands of U.S. dollars, except for share data)
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||||||||||||||||||||
| Number of |
|
|
| Additional |
| other |
|
|
| Total |
| Number of |
|
|
| Additional |
| other |
|
|
| Total |
| ||||||||||||||||||||||
| Common |
| Common |
| paid-in |
| comprehensive |
| Accumulated |
| shareholders’ |
| Common |
| Common |
| paid-in |
| comprehensive |
| Accumulated |
| shareholders’ |
| ||||||||||||||||||||||
| shares |
| shares |
| capital |
| loss |
| deficit |
| equity |
| shares |
|
| shares |
|
| capital |
|
| loss |
|
| deficit |
|
| equity |
| |||||||||||||||||
As at December 31, 2021 |
| 85,345,433 |
|
|
| 181,782 |
|
|
| 13,200 |
|
|
| (15,916 | ) |
|
| (111,300 | ) |
|
| 67,766 |
| |||||||||||||||||||||||
As at December 31, 2022 |
| 97,882,844 |
|
|
| 191,347 |
|
|
| 9,023 |
|
|
| (16,106 | ) |
|
| (166,272 | ) |
|
| 17,992 |
| |||||||||||||||||||||||
Stock-based compensation |
| - |
|
|
| - |
|
|
| 1,339 |
|
|
| - |
|
|
| - |
|
|
| 1,339 |
|
| - |
|
|
| - |
|
|
| 452 |
|
|
| - |
|
|
| - |
|
|
| 452 |
|
Issued on vesting of RSUs and Share Awards |
| 487,544 |
|
|
| 1,203 |
|
|
| (1,203 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
| 659,473 |
|
|
| 1,256 |
|
|
| (1,256 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (189 | ) |
|
| - |
|
|
| (9 | ) |
|
| (198 | ) |
| - |
|
|
| - |
|
|
| (26 | ) |
|
| - |
|
|
| - |
|
|
| (26 | ) |
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| 433 |
|
|
| - |
|
|
| 433 |
| |||||||||||||||||||||||
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,042 | ) |
|
| (23,042 | ) | |||||||||||||||||||||||
As at March 31, 2022 |
| 85,832,977 |
|
|
| 182,985 |
|
|
| 13,147 |
|
|
| (15,483 | ) |
|
| (134,351 | ) |
|
| 46,298 |
| |||||||||||||||||||||||
Stock-based compensation | - |
|
| - |
|
|
| 1,286 |
|
| - |
|
| - |
|
|
| 1,286 |
| |||||||||||||||||||||||||||
Issued on vesting of RSUs and Share Awards |
| 1,155,851 |
|
|
| 3,268 |
|
|
| (3,268 | ) |
| - |
|
| - |
|
| - |
| ||||||||||||||||||||||||||
RSUs and Share Awards withheld to settle employee tax obligations | - |
|
| - |
|
|
| (536 | ) |
| - |
|
| - |
|
|
| (536 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | - |
|
| - |
|
| - |
|
|
| (594 | ) |
| - |
|
|
| (594 | ) | |||||||||||||||||||||||||||
Net loss for the period | - |
|
| - |
|
| - |
|
| - |
|
|
| (19,288 | ) |
|
| (19,288 | ) | |||||||||||||||||||||||||||
As at June 30, 2022 |
| 86,988,828 |
|
|
| 186,253 |
|
|
| 10,629 |
|
|
| (16,077 | ) |
|
| (153,639 | ) |
|
| 27,166 |
| |||||||||||||||||||||||
Stock-based compensation |
| - |
|
|
| - |
|
|
| 846 |
|
|
| - |
|
|
| - |
|
|
| 846 |
| |||||||||||||||||||||||
Issued on vesting of RSUs and Share Awards |
| 874,266 |
|
|
| 1,587 |
|
|
| (1,587 | ) |
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||||||||||
Issued for employee share purchase plan |
| 403,821 |
|
|
| 90 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 90 |
| |||||||||||||||||||||||
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (296 | ) |
|
| - |
|
|
| - |
|
|
| (296 | ) | |||||||||||||||||||||||
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| (66 | ) |
|
| - |
|
|
| (66 | ) | |||||||||||||||||||||||
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,727 | ) |
|
| (6,727 | ) | |||||||||||||||||||||||
As at September 30, 2022 |
| 88,266,915 |
|
|
| 187,930 |
|
|
| 9,592 |
|
|
| (16,143 | ) |
|
| (160,366 | ) |
|
| 21,013 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
As at December 31, 2022 |
| 97,882,844 |
|
|
| 191,347 |
|
|
| 9,023 |
|
|
| (16,106 | ) |
|
| (166,272 | ) |
|
| 17,992 |
| |||||||||||||||||||||||
Stock-based compensation |
| - |
|
|
| - |
|
|
| 452 |
|
|
| - |
|
|
| - |
|
|
| 452 |
| |||||||||||||||||||||||
Issued on vesting of RSUs and Share Awards |
| 659,473 |
|
|
| 1,256 |
|
|
| (1,256 | ) |
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||||||||||
RSUs withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (26 | ) |
|
| - |
|
|
| - |
|
|
| (26 | ) | |||||||||||||||||||||||
Issued for employee share purchase plan |
| 322,408 |
|
|
| 128 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 128 |
|
| 322,408 |
|
|
| 128 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 128 |
|
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| 273 |
|
|
| - |
|
|
| 273 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 273 |
|
|
| - |
|
|
| 273 |
|
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (11,434 | ) |
|
| (11,434 | ) |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (11,434 | ) |
|
| (11,434 | ) |
As at March 31, 2023 |
| 98,864,725 |
|
|
| 192,731 |
|
|
| 8,193 |
|
|
| (15,833 | ) |
|
| (177,706 | ) |
|
| 7,385 |
|
| 98,864,725 |
|
|
| 192,731 |
|
|
| 8,193 |
|
|
| (15,833 | ) |
|
| (177,706 | ) |
|
| 7,385 |
|
As at December 31, 2023 |
| 105,377,667 |
|
|
| 196,128 |
|
|
| 7,954 |
|
|
| (16,125 | ) |
|
| (180,856 | ) |
|
| 7,101 |
| |||||||||||||||||||||||
Stock-based compensation |
| - |
|
|
| - |
|
|
| 625 |
|
|
| - |
|
|
| - |
|
|
| 625 |
|
| - |
|
|
| - |
|
|
| 248 |
|
|
| - |
|
|
| - |
|
|
| 248 |
|
Issued on vesting of RSUs and Share Awards |
| 1,108,213 |
|
|
| 1,243 |
|
|
| (1,243 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
| 521,253 |
|
|
| 771 |
|
|
| (771 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Issued on Rights Offering |
| 85,714,285 |
|
|
| 21,273 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 21,273 |
| |||||||||||||||||||||||
Issued for employee share purchase plan |
| 572,253 |
|
|
| 122 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 122 |
|
| 267,021 |
|
|
| 122 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 122 |
|
Issued to settle related party debt |
| 3,899,745 |
|
|
| 1,524 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,524 |
| |||||||||||||||||||||||
RSUs and Share Awards withheld to settle employee tax obligations |
| - |
|
|
| - |
|
|
| (76 | ) |
|
| - |
|
|
| - |
|
|
| (76 | ) | |||||||||||||||||||||||
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| (79 | ) |
|
| - |
|
|
| (79 | ) |
| - |
|
|
| - |
|
|
| - |
|
|
| (297 | ) |
|
| - |
|
|
| (297 | ) |
Net income for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,206 |
|
|
| 2,206 |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
| 3,045 |
|
|
| 3,045 |
| |
As at June 30, 2023 |
| 104,444,936 |
|
|
| 195,620 |
|
|
| 7,575 |
|
|
| (15,912 | ) |
|
| (175,500 | ) |
|
| 11,783 |
| |||||||||||||||||||||||
Stock-based compensation |
| - |
|
|
| - |
|
|
| 360 |
|
|
| - |
|
|
| - |
|
|
| 360 |
| |||||||||||||||||||||||
Issued on vesting of RSUs and Share Awards |
| 1,011 |
|
|
| 2 |
|
|
| (2 | ) |
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||||||||||
Issued for employee share purchase plan |
| 343,411 |
|
|
| 125 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 125 |
| |||||||||||||||||||||||
Foreign currency translation adjustment |
| - |
|
|
| - |
|
|
| - |
|
|
| (45 | ) |
|
| - |
|
|
| (45 | ) | |||||||||||||||||||||||
Net loss for the period |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (6,311 | ) |
|
| (6,311 | ) | |||||||||||||||||||||||
As at September 30, 2023 |
| 104,789,358 |
|
|
| 195,747 |
|
|
| 7,933 |
|
|
| (15,957 | ) |
|
| (181,811 | ) |
|
| 5,912 |
| |||||||||||||||||||||||
As at March 31, 2024 |
| 191,880,226 |
|
|
| 218,294 |
|
|
| 7,355 |
|
|
| (16,422 | ) |
|
| (177,811 | ) |
|
| 31,416 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
7
DIRTT Environmental Solutions Ltd.
Interim Condensed Consolidated Statement of Cash Flows
(Unaudited – Stated in thousands of U.S. dollars)
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss for the period |
|
| (6,311 | ) |
|
| (6,727 | ) |
|
| (15,539 | ) |
|
| (49,057 | ) |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
| 2,017 |
|
|
| 4,236 |
|
|
| 7,216 |
|
|
| 12,202 |
|
|
Impairment charge on Rock Hill Facility |
|
| 7,952 |
|
|
| - |
|
|
| 7,952 |
|
|
| - |
|
|
Stock-based compensation, net of settlements |
|
| 1,069 |
|
|
| 888 |
|
|
| 2,543 |
|
|
| 2,596 |
|
|
Foreign exchange loss (gain) |
|
| (577 | ) |
|
| (1,365 | ) |
|
| 563 |
|
|
| (2,147 | ) |
|
Gain on sale of software and patents |
|
| - |
|
|
| - |
|
|
| (6,145 | ) |
|
| - |
|
|
Loss (gain) on disposal of equipment |
|
| 97 |
|
|
| 44 |
|
|
| 97 |
|
|
| (121 | ) |
|
Accretion of convertible debentures |
|
| 172 |
|
|
| 163 |
|
|
| 515 |
|
|
| 505 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trade and accrued receivables |
|
| (5,130 | ) |
|
| (819 | ) |
|
| (6,639 | ) |
|
| (5,814 | ) |
|
Other receivables |
|
| (163 | ) |
|
| (7,419 | ) |
|
| 7,029 |
|
|
| (4,566 | ) |
|
Inventory |
|
| 1,749 |
|
|
| 1,052 |
|
|
| 4,902 |
|
|
| (6,052 | ) |
|
Prepaid and other assets, current and long term |
|
| 477 |
|
|
| (254 | ) |
|
| (41 | ) |
|
| (1,421 | ) |
|
Accounts payable and accrued liabilities |
|
| (77 | ) |
|
| 2,748 |
|
|
| 475 |
|
|
| 5,921 |
|
|
Other liabilities |
|
| (212 | ) |
|
| (70 | ) |
|
| (421 | ) |
|
| (109 | ) |
|
Customer deposits and deferred revenue |
|
| 737 |
|
|
| (3,078 | ) |
|
| 1,702 |
|
|
| 641 |
|
|
Current portion of long-term debt and accrued interest |
|
| (49 | ) |
|
| (44 | ) |
|
| (64 | ) |
|
| (186 | ) |
|
Lease liabilities |
|
| 168 |
|
|
| (22 | ) |
|
| 542 |
|
|
| 99 |
|
|
Net cash flows provided by (used in) operating activities |
|
| 1,919 |
|
|
| (10,667 | ) |
|
| 4,687 |
|
|
| (47,509 | ) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Purchase of property, plant and equipment, net of accounts |
|
| (255 | ) |
|
| (360 | ) |
|
| (1,304 | ) |
|
| (2,247 | ) |
|
Capitalized software development expenditures |
|
| (425 | ) |
|
| (385 | ) |
|
| (1,530 | ) |
|
| (1,286 | ) |
|
Other asset expenditures |
|
| (41 | ) |
|
| (86 | ) |
|
| (186 | ) |
|
| (367 | ) |
|
Recovery of software development expenditures |
|
| 49 |
|
|
| 46 |
|
|
| 131 |
|
|
| 91 |
|
|
Proceeds on sale of software and patents |
|
| - |
|
|
| - |
|
|
| 9,964 |
|
|
| - |
|
|
Proceeds on sale of equipment |
|
| 14 |
|
|
| 141 |
|
|
| 14 |
|
|
| 214 |
|
|
Net cash flows provided by (used in) investing activities |
|
| (658 | ) |
|
| (644 | ) |
|
| 7,089 |
|
|
| (3,595 | ) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Proceeds received on long-term debt |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 647 |
|
|
Repayment of long-term debt |
|
| (551 | ) |
|
| (616 | ) |
|
| (3,386 | ) |
|
| (1,852 | ) |
|
Employee tax payments on vesting of RSUs |
|
| - |
|
|
| (296 | ) |
|
| (26 | ) |
|
| (597 | ) |
|
Net cash flows used in financing activities |
|
| (551 | ) |
|
| (912 | ) |
|
| (3,412 | ) |
|
| (1,802 | ) |
|
Effect of foreign exchange on cash, cash equivalents and |
|
| (117 | ) |
|
| (293 | ) |
|
| (166 | ) |
|
| (73 | ) |
|
Net increase (decrease) in cash, cash equivalents and |
|
| 593 |
|
|
| (12,516 | ) |
|
| 8,198 |
|
|
| (52,979 | ) |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
| 21,844 |
|
|
| 22,945 |
|
|
| 14,239 |
|
|
| 63,408 |
|
|
Cash, cash equivalents and restricted cash, end of period |
|
| 22,437 |
|
|
| 10,429 |
|
|
| 22,437 |
|
|
| 10,429 |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest paid |
|
| (1,038 | ) |
|
| (1,108 | ) |
|
| (3,077 | ) |
|
| (3,439 | ) |
|
Income taxes (paid) received |
|
| - |
|
|
| - |
|
|
| (10 | ) |
|
| 3,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. | |||||||||||||||||
|
|
|
|
| As at September 30, | ||||||||||||
|
|
|
|
|
|
|
| 2023 |
|
| 2022 |
|
| ||||
Cash and cash equivalents |
|
|
|
|
|
|
|
| 19,460 |
|
|
| 6,818 |
|
| ||
Restricted cash |
|
|
|
|
|
|
|
| 2,977 |
|
|
| 3,611 |
|
| ||
Total cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
| 22,437 |
|
|
| 10,429 |
|
|
|
| For the Three Months Ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income (loss) for the period |
|
| 3,045 |
|
|
| (11,434 | ) |
Adjustments: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 1,534 |
|
|
| 2,675 |
|
Impairment charge on Rock Hill Facility |
|
| 530 |
|
|
| - |
|
Stock-based compensation |
|
| 675 |
|
|
| 796 |
|
Foreign exchange loss (gain) |
|
| (978 | ) |
|
| 346 |
|
Gain on extinguishment of convertible debt |
|
| (2,931 | ) |
|
| - |
|
Accretion of convertible debentures |
|
| 180 |
|
|
| 164 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Trade and accrued receivables |
|
| (34 | ) |
|
| 2,111 |
|
Other receivables |
|
| (3 | ) |
|
| 4,732 |
|
Inventory |
|
| 597 |
|
|
| 1,299 |
|
Prepaid and other assets, current and long term |
|
| 1,437 |
|
|
| 391 |
|
Accounts payable and accrued liabilities |
|
| (4,072 | ) |
|
| (3,299 | ) |
Other liabilities |
|
| - |
|
|
| 2,056 |
|
Customer deposits and deferred revenue |
|
| (2,202 | ) |
|
| (1,020 | ) |
Current portion of long-term debt and accrued interest |
|
| (152 | ) |
|
| (56 | ) |
Lease liabilities |
|
| 331 |
|
|
| 251 |
|
Net cash flows used in operating activities |
|
| (2,043 | ) |
|
| (988 | ) |
Cash flows from investing activities: |
|
|
|
|
|
| ||
Purchase of property, plant and equipment, net of accounts |
|
| (344 | ) |
|
| (371 | ) |
Capitalized software development expenditures |
|
| (442 | ) |
|
| (532 | ) |
Other asset expenditures |
|
| (79 | ) |
|
| (106 | ) |
Recovery of software development expenditures |
|
| 121 |
|
|
| 26 |
|
Proceeds on sale of assets held for sale |
|
| 1,025 |
|
|
| - |
|
Net cash flows provided by (used in) investing activities |
|
| 281 |
|
|
| (983 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Repayment of long-term debt |
|
| (5,074 | ) |
|
| (642 | ) |
Net proceeds received from rights offering |
|
| 21,273 |
|
|
| - |
|
Employee tax payments on vesting of RSUs |
|
| (76 | ) |
|
| (26 | ) |
Net cash flows provided by (used in) financing activities |
|
| 16,123 |
|
|
| (668 | ) |
Effect of foreign exchange on cash, cash equivalents and |
|
| (230 | ) |
|
| (36 | ) |
Net increase (decrease) in cash, cash equivalents and |
|
| 14,131 |
|
|
| (2,675 | ) |
Cash, cash equivalents and restricted cash, beginning of year |
|
| 25,099 |
|
|
| 14,239 |
|
Cash, cash equivalents and restricted cash, end of period |
|
| 39,230 |
|
|
| 11,564 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
| ||
Interest paid |
|
| (1,005 | ) |
|
| (1,072 | ) |
Income taxes received |
|
| - |
|
|
| 5 |
|
|
|
|
|
|
|
| ||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. |
| |||||||
|
| As At March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Cash and cash equivalents |
|
| 38,989 |
|
|
| 8,146 |
|
Restricted cash |
|
| 241 |
|
|
| 3,418 |
|
Total cash, cash equivalents and restricted cash |
|
| 39,230 |
|
|
| 11,564 |
|
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
8
DIRTT Environmental Solutions Ltd.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction. DIRTT's system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partnersconstruction partners of the Company. As of May 9, 2023,Company (“Construction Partners”), including Armstrong World Industries, Inc. ("AWI"(“AWI”), which owns a 50% interest in the rights, title and interests in all thecertain intellectual property rights in a portion of the ICE Softwaresoftware that is used by AWI.
DIRTT is incorporated under the laws of the province of Alberta, Canada. Its headquarters is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT”. Effective October 12, 2023, DIRTT’s common shares ceased to trade on the Nasdaq Capital Market. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol “DRTTF.”
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of September 30, 2023,March 31, 2024, and its results of operations and cash flows for the three and nine months ended September 30, 2023March 31, 2024 and 2022.2023. The condensed balance sheet at December 31, 2022,2023, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, 20222023 and 20212022 and for each of the three years in the period ended December 31, 20222023 included in the Annual Report on Form 10-K of the Company as filed with the SEC and applicable securities commission or similar regulatory authorities in Canada. As described in Note 3, no new accounting standards were adopted by the Company during the quarter.
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars. DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT Environmental Solutions Ltd. and its subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.
9
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments, assets held for sale and certain components of stock-based compensation that are measured at fair value.
9
Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.
Seasonality
Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customer’scustomers’ construction projects can be influenced by a number of factors including the prevailing economic climate and weather.
3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
On December 14, 2023, the FASB issued Accounting Standards Update No. 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”) further disaggregated information on an entity’s tax rate reconciliation and income taxes paid. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, on a prospective basis with an option of retrospective application. The Company has not adopted any new accounting standards effective January 1, 2023. Accounting guidance for assets held for sale was applicable tois evaluating the Companyimpact of the adoption of this quarter and the policy applied has been disclosed below. standard.
Although there are several other new accounting standards issued or proposed by the Financial Accounting Standards Board,FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its Financial Statements.
Assets held for sale
The Company classifies an asset group (“asset”) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the consolidated statement of operations in the period in which the held for sale criteria are met. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale. Adjustments made to the fair value are recorded in the consolidated statement of operations in the period it is measured. Refer to Note 6.
4. LIQUIDITY
As at September 30, 2023, the Company had $19.5 million of cash on hand and C$14.6 million ($10.8 million) of available borrowings (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the first nine months of fiscal year 2023, the Company generated $4.7 million in cash flows from operations, compared to a cash usage of $47.5 million over the first nine months of fiscal year 2022. The Company benefited from the receipt of $7.3 million of government subsidies during the first nine months of 2023 compared to $nil in the nine months ended September 30, 2022 (refer to Note 5).
We have implemented multiple price increases during the past two years to mitigate the impact of inflation on raw materials. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to reduce our cash usage to operate the business. Gross profit for the nine months ended September 30, 2023 was $40.3 million, or 30.8%, compared to the same period of 2022, which generated gross profit of $16.6 million, or 12.8%.
Over the past four quarters, we have also executed upon several cash initiatives. First, in May 2023, we entered into an agreement with AWI (refer to Note 7) resulting in the receipt of $10.9 million of cash. Second, during March 2023, we entered into an agreement to sublease our Dallas DIRTT Experience Center (“DXC”) to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024, which will provide us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities and expect these strategic initiatives to result in positive cash inflows in 2023
10
and 2024. Third, we completed a Private Placement (as defined herein) of common shares in November 2022, with certain significant shareholders and directors and officers of the Company, to bridge cash requirements before the completion and closing of the noted strategic transactions.
While we are encouraged by our improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of macroeconomic uncertainty. We have implemented multiple restructuring initiatives (refer to Note 6) designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by 154 employees, or approximately 16% from January 2022 through September 2023.
We have assessed the Company’s liquidity position as at September 30, 2023 taking into account our sales outlook for the next year, our existing cash balances and available credit facilities and expected early settlements related to our Rock Hill Facility equipment lease (refer to Note 10). Based on this analysis, we believe the Company has sufficient liquidity to support ongoing operations for the next twelve months.
5. GOVERNMENT SUBSIDIES
In the United States, the Employee Retention Credit (“ERC”) was established by Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act to provide an incentive for employers to keep their employees on their payroll during COVID-19 closures. The ERC is a refundable payroll tax credit based on qualified wages paid by an eligible employer between March 12, 2020, and October 1, 2021 for companies experiencing a significant decline in gross receipts during a calendar quarter or having operations fully or partially suspended during the quarter due to COVID-19. During the third quarter of 2022, the Company determined it was eligible for the ERC for the first three quarters of 2021 and filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). As of September 30, 2023, the $7.3 million claim (plus an additional $0.2 million of interest) has been received in full.
6.4. REORGANIZATION AND ASSETS HELD FOR SALE
Workforce Reductions
During the yearthree months ended DecemberMarch 31, 2022, and continuing into 2023, a review of our costs resulted in the Company undertookdecision to eliminate a number of reorganization initiatives:
Closure of Phoenix Aluminum Manufacturing Facility (the “Phoenix Facility”)
On February 22, 2022, we commenced the process of closing our Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary manufacturing facilities. During the first quarter of 2022, the Company incurred $1.0 million of accelerated depreciation, recorded in cost of sales, associated with the closure of the Phoenix Facility. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. The Company entered into a sublease arrangement for part of the Phoenix Facility during the second quarter of 2022, commencing July 1, 2022, which exceeds the contractual lease commitments under the Right of Use assets.
Workforce Reductions, Board and Management Changes
In February and July of 2022, we announced our intention to eliminate a portion of our salaried workforce, including manufacturing and office positions, along with other cost reduction initiatives. The Company’s Board of Directors was reconstituted following a proxy contest in April 2022, which was deemed a change of control under the Company’s insurance policy resulting in additional insurance expenditures. Further, the Company made changes to several executive officer roles during the year ended December 31, 2022. During the nine months ended September 30, 2023, we continued to review costs resulting in the elimination of additional salaried positions in the second and third quarters of 2023.positions. These actions resulted in the Company incurring certain one-time termination costs. There were no restructuring costs associated with workforce reductions in the three months ended March 31, 2024.
Temporary Suspension of Operations and Subsequent Closure at Rock Hill, South Carolina (the “Rock Hill Facility”)
On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in cost of sales, were $0.4 million and $1.40.5 million for the three month and nine month period ended September 30, 2023, respectively.March 31, 2024 (2023 – $0.4
11 million).
On September 27, 2023, wethe Company decided to permanently close the Rock Hill Facility. As a result of this decision, we incurredCertain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. During the three months ended March 31, 2024, $8.01.0 million of impairment charges associated with the manufacturing equipment located atassets held for sale were sold. At March 31, 2024, we determined to reduce the Rock Hill Facility. We expect to incurassets held for sale balance from $0.5 million of coststo $nil, resulting in dismantling and decommissioninga $0.5 million impairment charge for the Rock Hill Facility assets. The Companyquarter. While we will continue to maintainpursue a sale of the building lease and is pursuing a sublease arrangement.assets, we were not able to determine the likelihood of recoverability based on the current market interest in the equipment.
|
| As at March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Assets held for sale, opening |
|
| 1,555 |
|
|
| - |
|
Proceeds from sale of assets held for sale |
|
| (1,025 | ) |
|
| - |
|
Impairment charge on reassessment |
|
| (530 | ) |
|
| - |
|
Assets held for sale, ending |
|
| - |
|
|
| - |
|
For the three and nine months ended September 30, 2023,March 31, 2024, reorganization costs incurred relate to the above mentioned initiatives:
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Termination benefits |
|
| 168 |
|
|
| 2,843 |
|
|
| 2,138 |
|
|
| 6,870 |
|
Insurance costs on change of control |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,676 |
|
Phoenix Facility closure |
|
| 24 |
|
|
| - |
|
|
| 96 |
|
|
| 853 |
|
Rock Hill Facility temporary suspension and closure of operations |
|
| 129 |
|
|
| 144 |
|
|
| 129 |
|
|
| 144 |
|
Other costs |
|
| - |
|
|
| 439 |
|
|
| 494 |
|
|
| 738 |
|
Total reorganization costs |
|
| 321 |
|
|
| 3,426 |
|
|
| 2,857 |
|
|
| 12,281 |
|
10
|
| For the Three Months Ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Termination benefits |
|
| - |
|
|
| 700 |
|
Phoenix facility closure |
|
| - |
|
|
| 43 |
|
Rock Hill Facility temporary suspension and closure of operations |
|
| 126 |
|
|
| - |
|
Other costs |
|
| 12 |
|
|
| 328 |
|
Total reorganization costs |
|
| 138 |
|
|
| 1,071 |
|
Reorganization costs in accounts payable and accrued liabilities at January 1, |
| |||
|
| |||
|
|
| ||
|
|
| 2,277 |
|
Reorganization expense |
|
|
|
|
Reorganization costs paid |
|
| ( | ) |
Reorganization costs in accounts payable and accrued liabilities at |
|
|
| |
Reorganization expense | 138 | |||
Reorganization costs paid | (438 | ) | ||
Reorganization costs in accounts payable and accrued liabilities at March 31, 2024 | 296 |
|
TheOf the $1.10.3 million reorganization costs in accounts payable and accrued liabilities (December 31, 2023 – $0.6 million), $0.2 million relates to termination benefits (December 202231, 2023 – $2.10.5 million) and $0.1 million relates to other reorganization costs (December 31, 2023 – $0.1 million).
Assets classified as held for sale as at September 30, 2023 of $2.3 million consist of manufacturing equipment previously used in the Rock Hill Facility. Prior to the decision to permanently close the Rock Hill Facility, the assets were classified as property, plant and equipment.
7.5. GAIN ON SALEEXTINGUISHMENT OF SOFTWARE AND PATENTSCONVERTIBLE DEBENTURES
On May 9, 2023, we entered into a Co-Ownership Agreement (the “Co-Ownership Agreement”) and Partial Patent Assignment Agreement with AWI. The agreements provided for a cash payment from AWI toFebruary 15, 2024, the Company of $commenced a substantial issuer bid and tender offer (the “Issuer Bid”) pursuant to which the Company offered to repurchase for cancellation: (i) up to C$10.06.0 million subjectprincipal amount of its issued and outstanding January Debentures (as defined in Note 8) at a purchase price of C$720 per C$1,000 principal amount of January Debentures, and (ii) up to certain routine closing conditions, in exchange for the partial assignment to AWI and resulting co-ownership of a C$50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the patent rights that relate to the Applicable ICE Code. Under the Co-Ownership Agreement, we also agreed to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.09.0 million which is expected to be received by early 2024. The Co-Ownership Agreement provides that weprincipal amount of its issued and AWI have separate exclusive fieldsoutstanding December Debentures (as defined in Note 8), at a purchase price of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into an Amended and Restated Master Services Agreement (the “ARMSA”) with AWI, under which AWI has also prepaid certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fieldsC$600 per C$1,000 principal amount of use or restrictive covenants in the Co-Ownership Agreement.December Debentures.
The $C$10.04.7 million of proceeds on the sale($3.5 million) aggregate principal amount of the January Debentures and C$505.8 million ($4.3 million) aggregate principal amount of December Debentures were validly deposited and not withdrawn at the expiration of the Issuer Bid on March 22, 2024, representing approximately 11.66% interestof the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures (as defined in the Applicable ICE code,Note 8) tendered pursuant to the Co-Ownership Agreement, was received during the second quarterIssuer Bid for aggregate consideration of 2023. C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)).
In accordance with US GAAP, it was determined that the proceeds were first applied toC$6.9 million ($5.1 million) repayment on principal triggered an extinguishment of debt. The gain on extinguishment of C$3.9 million ($2.9 million) was calculated as the difference between the repayment and the net bookcarrying value of the related costextinguished principal less unamortized issuance costs of software of $2.9 million and patents (other assets) of $0.9 million and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $0.9 million was received during the second quarter as a prepayment under the ARMSA, which was recognized into revenue as the performance obligation is met. Part of the proceeds of this transaction were used to
12
settle one of our equipment leases of $1.6 million and resulted in the release of $C$0.4 million of restricted cash($0.2 million) (refer to Note 10)8). A final prepayment of $0.9 million under the ARMSA was received in October 2023.
8.6. TRADE AND ACCRUED RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and typically do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date, taking into account historical credit loss experience as well as forward-looking information, in order to establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the consolidated statement of operations.
In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial well-being of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At September 30, 2023,March 31, 2024, approximately 8097% of our trade accounts receivable are insured, relating to accounts receivablesreceivable from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities.
11
Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three and nine months ended September 30, 2023,March 31, 2024, one Construction Partner accounted for greater than 10% of revenue (one Construction Partner for the ninethree months ended September 30, 2022)March 31, 2023). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.
The Company’s aged receivables were as follows:
|
| As at, |
| |||||
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Current |
|
| 16,974 |
|
|
| 12,381 |
|
Overdue |
|
| 3,642 |
|
|
| 1,675 |
|
|
| 20,616 |
|
|
| 14,056 |
| |
Less: expected credit losses |
|
| (100 | ) |
|
| (126 | ) |
|
| 20,516 |
|
|
| 13,930 |
|
|
| As at |
| |||||
|
| March 31, |
|
| December 31, |
| ||
Current |
|
| 13,297 |
|
|
| 12,070 |
|
Overdue |
|
| 2,585 |
|
|
| 3,818 |
|
|
| 15,882 |
|
|
| 15,888 |
| |
Less: expected credit losses |
|
| (100 | ) |
|
| (101 | ) |
|
| 15,782 |
|
|
| 15,787 |
|
No adjustment to our expected credit losses of $0.1 million was required for the three or nine months ended September 30, 2023.March 31, 2024. 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.
On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets.
9.7. OTHER LIABILITIES
|
| As at, |
|
| As at, |
| ||||||||||
|
| September 30, 2023 |
|
| December 31, 2022 |
|
| March 31, 2024 |
|
| December 31, 2023 |
| ||||
Warranty provisions (1) |
|
| 867 |
|
|
| 1,278 |
|
|
| 866 |
|
|
| 873 |
|
DSU liability |
|
| 971 |
|
|
| 594 |
|
|
| 1,486 |
|
|
| 1,086 |
|
Income taxes payable |
|
| 321 |
|
|
| 289 |
| ||||||||
Sublease deposits |
|
| 183 |
|
|
| 139 |
|
|
| 183 |
|
|
| 184 |
|
Other provisions |
|
| - |
|
|
| 45 |
|
|
| 50 |
|
|
| 50 |
|
Other liabilities |
|
| 2,021 |
|
|
| 2,056 |
|
|
| 2,906 |
|
|
| 2,482 |
|
|
| As at, |
|
| As at, |
| ||||||||||
|
| September 30, 2023 |
|
| December 31, 2022 |
|
| March 31, 2024 |
|
| December 31, 2023 |
| ||||
As at January 1 |
|
| 1,278 |
|
|
| 1,451 |
|
|
| 873 |
|
|
| 1,278 |
|
Additions to warranty provision |
|
| 845 |
|
|
| 1,134 |
|
|
| 205 |
|
|
| 1,208 |
|
Payments related to warranties |
|
| (1,056 | ) |
|
| (1,307 | ) |
|
| (212 | ) |
|
| (1,613 | ) |
Adjustments to warranty provision |
|
| (200 | ) |
|
| - |
| ||||||||
|
|
| 867 |
|
|
| 1,278 |
|
|
| 866 |
|
|
| 873 |
|
1312
10.8. LONG-TERM DEBT
|
| Revolving |
|
| Leasing |
|
| Convertible |
|
| Total Debt |
|
| Revolving |
|
| Leasing |
|
| Convertible |
|
| Total Debt |
| ||||||||
Balance on January 1, 2022 |
|
| - |
|
|
| 13,909 |
|
|
| 56,733 |
|
|
| 70,642 |
| ||||||||||||||||
Issuances |
|
| - |
|
|
| 647 |
|
|
| - |
|
|
| 647 |
| ||||||||||||||||
Balance on January 1, 2023 |
|
| - |
|
|
| 11,812 |
|
|
| 53,623 |
|
|
| 65,435 |
| ||||||||||||||||
Accretion of issue costs |
|
| - |
|
|
| - |
|
|
| 676 |
|
|
| 676 |
|
|
| - |
|
|
| - |
|
|
| 698 |
|
|
| 698 |
|
Accrued interest |
|
| - |
|
|
| 735 |
|
|
| 3,539 |
|
|
| 4,274 |
|
|
| - |
|
|
| 526 |
|
|
| 3,411 |
|
|
| 3,937 |
|
Interest payments |
|
| - |
|
|
| (735 | ) |
|
| (3,688 | ) |
|
| (4,423 | ) |
|
| - |
|
|
| (526 | ) |
|
| (3,451 | ) |
|
| (3,977 | ) |
Principal repayments |
|
| - |
|
|
| (2,470 | ) |
|
| - |
|
|
| (2,470 | ) |
|
| - |
|
|
| (11,579 | ) |
|
| - |
|
|
| (11,579 | ) |
Exchange differences |
|
| - |
|
|
| (274 | ) |
|
| (3,637 | ) |
|
| (3,911 | ) |
|
| - |
|
|
| 251 |
|
|
| 1,343 |
|
|
| 1,594 |
|
Balance at December 31, 2022 |
|
| - |
|
|
| 11,812 |
|
|
| 53,623 |
|
|
| 65,435 |
| ||||||||||||||||
Balance at December 31, 2023 |
|
| - |
|
|
| 484 |
|
|
| 55,624 |
|
|
| 56,108 |
| ||||||||||||||||
Current portion of long-term debt and accrued interest |
|
| - |
|
|
| 2,561 |
|
|
| 745 |
|
|
| 3,306 |
|
|
| - |
|
|
| 79 |
|
|
| 762 |
|
|
| 841 |
|
Long-term debt |
|
| - |
|
|
| 9,251 |
|
|
| 52,878 |
|
|
| 62,129 |
|
|
| - |
|
|
| 405 |
|
|
| 54,862 |
|
|
| 55,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance on December 31, 2022 |
|
| - |
|
|
| 11,812 |
|
|
| 53,623 |
|
|
| 65,435 |
| ||||||||||||||||
Balance on January 1, 2024 |
|
| - |
|
|
| 484 |
|
|
| 55,624 |
|
|
| 56,108 |
| ||||||||||||||||
Accretion of issue costs |
|
| - |
|
|
| - |
|
|
| 515 |
|
|
| 515 |
|
|
| - |
|
|
| - |
|
|
| 180 |
|
|
| 180 |
|
Accrued interest |
|
| - |
|
|
| 447 |
|
|
| 2,566 |
|
|
| 3,013 |
|
|
| - |
|
|
| 9 |
|
|
| 843 |
|
|
| 852 |
|
Interest payments |
|
| - |
|
|
| (447 | ) |
|
| (2,630 | ) |
|
| (3,077 | ) |
|
| - |
|
|
| (9 | ) |
|
| (996 | ) |
|
| (1,005 | ) |
Principal repayments |
|
| - |
|
|
| (3,386 | ) |
|
| - |
|
|
| (3,386 | ) |
|
| - |
|
|
| (19 | ) |
|
| (5,055 | ) |
|
| (5,074 | ) |
Gain on extinguishment |
|
| - |
|
|
| - |
|
|
| (2,931 | ) |
|
| (2,931 | ) | ||||||||||||||||
Exchange differences |
|
| - |
|
|
| 241 |
|
|
| 121 |
|
|
| 362 |
|
|
| - |
|
|
| (11 | ) |
|
| (1,319 | ) |
|
| (1,330 | ) |
Balance at September 30, 2023 |
|
| - |
|
|
| 8,667 |
|
|
| 54,195 |
|
|
| 62,862 |
| ||||||||||||||||
Balance at March 31, 2024 |
|
| - |
|
|
| 454 |
|
|
| 46,346 |
|
|
| 46,800 |
| ||||||||||||||||
Current portion of long-term debt and accrued interest |
|
| - |
|
|
| 8,250 |
|
|
| 711 |
|
|
| 8,961 |
|
|
| - |
|
|
| 78 |
|
|
| 597 |
|
|
| 675 |
|
Long-term debt |
|
| - |
|
|
| 417 |
|
|
| 53,484 |
|
|
| 53,901 |
|
|
| - |
|
|
| 376 |
|
|
| 45,749 |
|
|
| 46,125 |
|
Revolving Credit Facility
On February 12, 2021, the Company entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). Under the RBC Facility, the Company iswas 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 (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). Interest iswas calculated at the Canadian or U.S. prime rate 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”,Availability,” (defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash), iswas 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 hashad been below 1.10:1 for the three immediately preceding months, the Company iswas required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities (defined below). Should an event of default occurhave occurred or the Aggregate Excess Availability bebeen less than C$6.25 million for five consecutive business days, the Company would enterhave entered a cash dominion period whereby the Company’s bank accounts would behave been blocked by RBC and daily balances willwould have offset any borrowings and any remaining amounts made available to the Company.
On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility hashad a borrowing base of C$15 million and a one yearone-year term. Interest iswas calculated as at the Canadian or U.S. prime rate plus 75 basis points or the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate ("SOFR"(“Term SOFR”) plus 200 basis points plus the Term SOFR Adjustment (as defined in the amended loan agreement governing the Extended RBC Facility). Under the Extended RBC Facility, if the trailing twelve month FCCR iswas not above 1.25 for three consecutive months, a cash balance equivalent to one-year'sone-year’s worth of Leasing Facilities payments mustwas required to be maintained. Effective October 2023, inventory was scoped out of the Borrowing Base.
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is calculated at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case plus 200 basis points. At September 30, 2023,March 31, 2024, available borrowings are C$14.610.1 million ($10.88.5 million) (December 31, 20222023 – $10.8 million and C$7.213.6 million ($5.310.3 million) of available borrowings), calculated in the same manner as the RBC facilityFacility described above, of which no amounts have been drawn. The Company did not meetSecond Extended RBC Facility removed the three-month FCCR requirement during the third quarter of 2023,
13
covenant, which resulted in requiring the restrictionrelease of $3.00.1 million of restricted cash ($during the first quarter of 2024 (the Company had $3.40.4 million restricted cash as at December 31, 2022)2023).
Leasing Facilities
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.33.4 million) has been drawn and C$3.8 million ($2.82.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada
14
Leasing Facility, the “Leasing Facilities”) with RBC, of which $13.3 million has been drawn and $5.2 million has been repaid, each with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred.repaid. The CanadianCanada Leasing Facility has a seven-year term and the U.S. Leasing Facility, respectively, have seven and five-year terms and bearbears interest at 4.25% and 5.59%. Refer to Note 64 on the decision to permanently close the Rock Hill Facility. As part of this decision, the Company intends to early settlefully settled the $7.8 million principal balance of the U.S. Leasing Facility in the next twelve months.fourth quarter of 2023. The $8.2 million balance of the U.S. Leasing Facility has therefore been classified under current liabilities as at September 30, 2023. On October 31, 2023, the Company paid off $is no longer available to be drawn on.1.0 million of the U.S. Leasing Facility.
The Company did not make any draws on the Canadian Leasing Facilities during the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.first quarter of 2024 (2023 – $nil). The associated financial liabilities are shown on the consolidated balance sheet in the current portion of long-term debt and accrued interest and long-term debt.
As part of RBC's consent to the AWI transaction (refer to Note 7), one of the Canadian lease agreements of $1.6 million was fully settled using AWI proceeds. This resulted in the release of $0.4 million of restricted cash associated with the one year of payments on this lease, as described above.
Convertible Debentures
On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “January Debentures”). On January 29, 2021, the Company issued a further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to the underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the “January Debentures Maturity Date”) and will accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021 until the January Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The January Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the January Debentures Maturity Date and the date specified by the Company for redemption of the January Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately 215.0538 common shares per C$1,000 principal amount of the January Debentures. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission. As a result of the Rights Offering (as defined herein) (refer to Note 14), the conversion price of the January Debentures was adjusted to C$4.03 per common share representing a conversion rate of 248.1390 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$4.7 million ($3.5 million) of the principal balance of the January Debentures, and paid C$0.04 million ($0.03 million) of the interest payable on such January Debentures (refer to Note 5). As at September 30, 2023,March 31, 2024, C$35.6 million ($26.3 million) principal amount of the January Debentures was outstanding of which C$18.9 million of the January Debentures are($13.9 million) was held by a related party (refer to Note 16).
On December 1, 2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and December of each year commencing on SeptemberJune 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The December Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the December Debentures Maturity Date and the date specified by the Company for redemption of the December Debentures at a conversion price of C$4.20 per common share, being a ratio of approximately 238.0952 common shares per C$1,000 principal amount of the December Debentures. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission. As a result of the Rights Offering (refer to Note 14), the conversion price of the December Debentures was adjusted to C$3.64 per common share representing a conversion rate of 274.7253 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$5.8 million ($4.3 million) of the principal balance of the December Debentures and paid C$0.08 million ($0.06 million) of the interest payable on such December Debentures (refer to Note 5). As at September 30, 2023,March 31, 2024, C$29.2 million ($21.5 million) principal amount of the December Debentures was outstanding of which C$13.6 million of the December Debentures are($10.0 million) was held by a related party (refer to Note 16).
11.14
9. STOCK-BASED COMPENSATION
In May 2020, shareholders approved the DIRTT Environmental Solutions Long Term Incentive Plan (the “2020 LTIP”). The 2020 LTIP replaced the predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and the Amended and Restated Stock Option Plan (“Stock Option Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.
In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated Long-Term Incentive Plan (the “2023 LTIP”) at the annual and special meeting of shareholders. The 2023 LTIP gives the
15
Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2023 LTIP, the sum of (i) 12,350,000 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 30, 2023, expire or are cancelled or terminated without having been exercised in full, have been reserved for issuance under the 2023 LTIP. Upon vesting of certain LTIP awards, the Company may withhold and sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the 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.
Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for Non-Employee Directors (as amended and restated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The terms of the DSU Plan are otherwise materially unchanged as incorporated into the 2023 LTIP. Effective May 30, 2023, no new awards will be made under the DSU Plan, but awards previously granted under the DSU Plan will continue to be governed by the DSU Plan. DSUs are settled following cessation of services with the Company.
Stock-based compensation expense
|
| For The Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| 2024 |
|
| 2023 |
| ||||||
Equity-settled awards |
|
| 594 |
|
|
| 846 |
|
|
| 2,106 |
|
|
| 3,471 |
|
|
| 493 |
|
|
| 644 |
|
Cash-settled awards |
|
| 475 |
|
|
| 72 |
|
|
| 437 |
|
|
| 75 |
|
|
| 182 |
|
|
| 152 |
|
|
| 1,069 |
|
|
| 918 |
|
|
| 2,543 |
|
|
| 3,546 |
|
|
| 675 |
|
|
| 796 |
|
The following summarizes RSUs, Share Awards, PSUs, and DSUs activity during the periods:
|
| RSU Time- |
|
| RSU Performance- |
|
| Share |
|
|
|
|
|
|
|
| RSU Time- |
|
| RSU Performance- |
|
| Share |
|
|
|
|
|
|
| ||||||||||
|
| Based |
|
| Based |
|
| Awards |
|
| PSU |
|
| DSU |
|
| Based |
|
| Based |
|
| Awards |
|
| PSU |
|
| DSU |
| ||||||||||
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
|
| Number of |
| ||||||||||
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
|
| units |
| ||||||||||
Outstanding at December 31, 2021 |
|
| 3,216,536 |
|
|
| 1,021,739 |
|
|
| - |
|
|
| 157,200 |
|
|
| 361,577 |
| ||||||||||||||||||||
Outstanding at December 31, 2022 |
|
| 1,885,337 |
|
|
| 343,919 |
|
|
| - |
|
|
| - |
|
|
| 1,165,319 |
| ||||||||||||||||||||
Granted |
|
| 2,303,287 |
|
|
| 863,279 |
|
|
| 162,682 |
|
|
| - |
|
|
| 890,832 |
|
|
| - |
|
|
| - |
|
|
| 36,253 |
|
|
| - |
|
|
| 434,032 |
|
Vested or settled |
|
| (2,019,550 | ) |
|
| (566,352 | ) |
|
| (94,528 | ) |
|
| - |
|
|
| (501,916 | ) |
|
| (590,258 | ) |
|
| (32,962 | ) |
|
| (36,253 | ) |
|
| - |
|
|
| - |
|
Withheld to settle employee tax obligations |
|
| (526,259 | ) |
|
| (242,460 | ) |
|
| (68,154 | ) |
|
| - |
|
|
| - |
|
|
| (64,230 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited |
|
| (734,855 | ) |
|
| (502,628 | ) |
|
| - |
|
|
| (157,200 | ) |
|
| - |
|
|
| (44,081 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Outstanding at September 30, 2022 |
|
| 2,239,159 |
|
|
| 573,578 |
|
|
| - |
|
|
| - |
|
|
| 750,493 |
| ||||||||||||||||||||
Outstanding at December 31, 2022 |
|
| 1,885,337 |
|
|
| 343,919 |
|
|
| - |
|
|
| - |
|
|
| 1,165,319 |
| ||||||||||||||||||||
Outstanding at March 31, 2023 |
|
| 1,186,768 |
|
|
| 310,957 |
|
|
| - |
|
|
| - |
|
|
| 1,599,351 |
| ||||||||||||||||||||
Outstanding at December 31, 2023 |
|
| 3,530,564 |
|
|
| 64,029 |
|
|
| - |
|
|
| 1,845,608 |
|
|
| 3,086,172 |
| ||||||||||||||||||||
Granted |
|
| 3,549,500 |
|
|
| - |
|
|
| 522,883 |
|
|
| 2,584,161 |
|
|
| 1,646,420 |
|
|
| 350,000 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 496,095 |
|
Vested or settled |
|
| (987,054 | ) |
|
| (258,760 | ) |
|
| (522,883 | ) |
|
| - |
|
|
| (220,590 | ) |
|
| (508,679 | ) |
|
| (12,574 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Withheld to settle employee tax obligations |
|
| (64,230 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (146,343 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Forfeited or expired |
|
| (600,345 | ) |
|
| - |
|
|
| - |
|
|
| (738,553 | ) |
|
| - |
| ||||||||||||||||||||
Outstanding at September 30, 2023 |
|
| 3,783,208 |
|
|
| 85,159 |
|
|
| - |
|
|
| 1,845,608 |
|
|
| 2,591,149 |
| ||||||||||||||||||||
Forfeited |
|
| (29,214 | ) |
|
| (6,278 | ) |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||
Outstanding at March 31, 2024 |
|
| 3,196,328 |
|
|
| 45,177 |
|
|
| - |
|
|
| 1,845,608 |
|
|
| 3,582,267 |
|
15
Restricted share units (time-based vesting)
Restricted share units that vest based on time have an aggregate time-based vesting period of three years and generally one-third of the RSUs vest every year over a three-year period from the date of grant (“RSUs”). At the end of a three-year term, the 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 2022 and 20232024 was C$2.37 and C$0.460.50, respectively, which was determined using the closing price of the Company’s common shares on their respective grant dates.
16
Restricted share units (performance-based vesting)
During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for vesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a percentage of the PRSUs will vest at the end of the three-year service period.
The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$1.87 and C$3.27, respectively.
Based on share price performance since the date of grant, none of the 2022 PRSUs and 66.7% of the 2021 PRSUs vested on March 1, 2024, but none of the 2022 PRSUs will vest upon completion of the three-year service period.
| % of PRSUs Vesting |
| ||||||||||||||||
|
|
|
|
| 33.3 | % |
|
| 66.7 | % |
|
| 100.0 | % |
|
| 150.0 | % |
2022 and 2021 PRSUs |
|
|
| $ | 3.00 |
|
| $ | 4.00 |
|
| $ | 5.00 |
|
| $ | 7.00 |
|
| % of PRSUs Vesting |
| ||||||||||||||||
|
|
|
|
| 33.3 | % |
|
| 66.7 | % |
|
| 100.0 | % |
|
| 150.0 | % |
2021 and 2022 PRSUs |
|
|
| $ | 3.00 |
|
| $ | 4.00 |
|
| $ | 5.00 |
|
| $ | 7.00 |
|
Share awards
DuringThere were no share awards granted or vested during the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive compensation (“Share Awards”). These Share Awards vested upon grant. The fair value of the Share Awards granted was C$2.40 ($1.88), which was determined using the closing price of the Company’s common shares on the grant date.2024.
In the first quarter of 2023, 36,254 Share Awards were issued to a consultant as compensation for services rendered. During the second quarter of 2023, certain executives were issued Share Awards in lieu of cash paid variable incentive compensation. These Share Awards vested upon grant. The fair value of the Share Awards granted was C$0.49 ($0.34), which was determined using the closing price of the Company’s common shares on the grant date.
Performance share units
During the second quarter of 2023, certain executives were issued a strategic equity grant through Performance share units (“PSUs”). The performance period of the PSUs is from January 1, 2023 to December 31, 2026 with a cliff vesting term for December 31, 2026. 2,584,161 PSUs were granted and depending on the level of performance, the PSUs will vest 100%, 160% or 190%190% up to a maximum of 4,909,907 PSUs. Settlement will be made in the form of shares issued from treasury. The performance measures are a combination of Revenue and Earnings Before Interest, Taxes, Depreciation and Amortization and both targets have to be achieved. As of September 30, 2023,March 31, 2024, the fair value of these PSUs have been deemed to be nil based on the likelihood of achieving the targets compared to current results. During the third quarter of 2023, 738,553 PSUs with a $nil value were forfeited as a result of an executive departure and 1,845,608 PSUs with a $nil value are outstanding at September 30, 2023.March 31, 2024.
Deferred share units
Granted under the DSU Plan
The fair value of the DSU liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the period. DSUs outstanding at September 30, 2023March 31, 2024 had a fair value of $0.6 million which is included in other liabilities on the balance sheet (December 31, 20222023 – $0.60.5 million).
16
Granted under the 2023 LITPLTIP
DSUs granted after May 30, 2023 (the "New DSUs"“New DSUs”) will be settled by way of the provision of cash or shares (or a combination thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common shares. The weighted average fair value of the DSUs granted in 20232024 was C$0.440.67 ($0.330.49), which was determined using the closing price of the Company’s common shares on the grant date. New DSUs outstanding at September 30, 2023March 31, 2024 had a fair value of $0.40.8 million which is included in other liabilities on the balance sheet (December 31, 20222023 – $nil)0.6 million).
17
Options
The following summarizes options forfeited and expired during the periods:
|
| Number of |
|
| Weighted average |
| ||
|
| options |
|
| exercise price C$ |
| ||
Outstanding at December 31, 2021 |
|
| 4,064,489 |
|
|
| 6.64 |
|
Forfeited |
|
| (2,530,120 | ) |
|
| 6.40 |
|
Outstanding at September 30, 2022 |
|
| 1,534,369 |
|
|
| 7.03 |
|
Outstanding at December 31, 2022 |
|
| 1,480,069 |
|
|
| 7.03 |
|
Forfeited |
|
| (989,066 | ) |
|
| 6.97 |
|
Expired |
|
| (263,725 | ) |
|
| 6.46 |
|
Outstanding and Exercisable at September 30, 2023 |
|
| 227,278 |
|
|
| 7.95 |
|
|
|
|
| Number of |
|
| Weighted average |
| ||
|
|
|
| options |
|
| exercise price C$ |
| ||
Outstanding at December 31, 2022 |
|
|
|
| 1,480,069 |
|
|
| 7.03 |
|
Forfeited or expired |
|
|
|
| (398,964 | ) |
|
| 7.14 |
|
Outstanding at March 31, 2023 |
|
|
|
| 1,081,105 |
|
|
| 6.99 |
|
Outstanding at December 31, 2023 |
|
|
|
| 209,409 |
|
|
| 7.71 |
|
Forfeited |
|
|
|
| (1,000 | ) |
|
| 7.84 |
|
Exercisable at March 31, 2024 |
|
|
|
| 208,409 |
|
|
| 7.71 |
|
No options were granted during the three months and nine months ended September 30, 2023.
Range of exercise prices outstanding and exercisable at September 30, 2023:March 31, 2024:
|
| Options outstanding |
|
| Options exercisable |
|
| Options outstanding |
|
| Options exercisable |
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| Weighted |
| Weighted |
|
|
|
|
| Weighted |
|
| Weighted |
|
|
|
|
| Weighted |
| Weighted |
| ||||||||||||||
|
| Number of |
|
| average |
|
| average |
|
|
|
|
| average |
| average |
|
| Number of |
|
| average |
|
| average |
|
|
|
|
| average |
| average |
| ||||||||||||||
|
| options |
|
| remaining |
|
| exercise |
|
| Number |
|
| remaining |
| exercise |
|
| options |
|
| remaining |
|
| exercise |
|
| Number |
|
| remaining |
| exercise |
| ||||||||||||||
Range of exercise prices |
|
|
|
| life |
|
| price C$ |
|
| exercisable |
|
| life |
|
| price C$ |
|
|
|
|
| life |
|
| price C$ |
|
| exercisable |
|
| life |
|
| price C$ |
| ||||||||||||
C$6.01 – C$7.00 |
|
| 16,350 |
|
|
| 0.97 |
|
| $ | 6.12 |
|
|
| 16,350 |
|
|
| 0.97 |
|
| $ | 6.12 |
| ||||||||||||||||||||||||
C$7.01 – C$7.84 |
|
| 210,928 |
|
|
| 0.63 |
|
| $ | 7.84 |
|
|
| 210,928 |
|
|
| 0.63 |
|
| $ | 7.84 |
| ||||||||||||||||||||||||
C$6.01 – C$7.00 |
|
| 16,350 |
|
|
| 0.47 |
|
| $ | 6.12 |
|
|
| 16,350 |
|
|
| 0.47 |
|
| $ | 6.12 |
| ||||||||||||||||||||||||
C$7.01 – C$8.00 |
|
| 192,059 |
|
|
| 0.13 |
|
| $ | 7.84 |
|
|
| 192,059 |
|
|
| 0.13 |
|
| $ | 7.84 |
| ||||||||||||||||||||||||
Total |
|
| 227,278 |
|
|
|
|
|
|
|
|
| 227,278 |
|
|
|
|
|
|
|
|
| 208,409 |
|
|
|
|
|
|
|
|
| 208,409 |
|
|
|
|
|
|
|
Dilutive Instruments
For the three and nine months ended September 30, 2023,March 31, 2024, 0.2 million options, (2022 – 1.5 million) 3.93.8 million RSUs and PRSUs, (2022 – 2.8 million), 1.22.3 million New DSUs, (2022 – nil), 2.61.8 million PSUs (2022 – nil),and 96.7 million shares which would be issued if the principal amount of the Debentures were settled in our common shares at the quarter-end price and were included in the diluted EPS calculation. See Note 10 for the dilutive impact on net income (loss) per share.
For the three months ended March 31, 2023, 1.1 million shares relating to equity-settled Variable Pay Plan (“VPP”) (2022 – nil),options, 1.5 million RSUs and PRSUs and 134.4119.4 million (2022 –shares which would have been issued if the principal amount of the Debentures were settled in our common shares at the quarter-end price were excluded in the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net loss per share.
17
10. EARNINGS PER SHARE
On November 21, 2023, the Company announced a Rights Offering (refer to Note 14) which distributed to holders of common shares, as of the close of business on December 12, 2023, transferable subscription rights to purchase up to an aggregate of 127.585,714,285 million)common shares at a subscription price of C$0.35 per common share (refer to Note 14). On January 9, 2024, the Company announced the completion of the Rights Offering, pursuant to which the Company issued an aggregate of 85,714,285 common shares. A retrospective adjustment is required on the calculation of net income (loss) per share for the three months ended March 31, 2023 to account for the bonus factor that resulted from this event.
|
| For the Three Months Ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Net income (loss) per share – basic |
|
|
|
|
|
| ||
Net income (loss) (thousands of U.S. dollars) |
| $ | 3,045 |
|
| $ | (11,434 | ) |
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
| NA |
|
|
| 98,091 |
| |
Weighted average number of shares outstanding (thousands of shares restated) |
|
| 183,668 |
|
|
| 111,702 |
|
Net income (loss) per share (U.S. dollars) − basic (as previously calculated, prior to Rights Offering) |
| NA |
|
| $ | (0.12 | ) | |
Net income (loss) per share (U.S. dollars) − basic (as on the Consolidated Statement of Comprehensive Income) |
| $ | 0.02 |
|
| $ | (0.10 | ) |
|
|
|
|
|
|
| ||
Net income (loss) per share − diluted |
|
|
|
|
|
| ||
Net income (loss) (thousands of U.S. dollars) |
| $ | 3,045 |
|
| $ | (11,434 | ) |
Interest on convertible debentures |
| $ | 843 |
|
| NA |
| |
| $ | 3,888 |
|
| $ | (11,434 | ) | |
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
| NA |
|
|
| 98,091 |
| |
Weighted average number of shares outstanding (thousands of shares restated) |
|
| 183,668 |
|
|
| 111,702 |
|
Dilutive debentures on convertible debt (thousands of shares) (1) |
|
| 96,690 |
|
|
| - |
|
Dilutive RSUs and PRSUs (thousands of shares) (2) |
|
| 3,775 |
|
|
| - |
|
Dilutive options (thousands of shares) (2) |
|
| 208 |
|
|
| - |
|
Dilutive New DSUs (thousands of shares) (3) |
|
| 2,292 |
|
|
| - |
|
Dilutive PSUs (thousands of shares) (3) |
|
| 1,846 |
|
|
| - |
|
Weighted average number of shares outstanding (thousands of shares as previously calculated) |
| NA |
|
|
| 98,091 |
| |
Weighted average number of shares outstanding (thousands of shares restated) |
|
| 288,479 |
|
|
| 111,702 |
|
Net income (loss) per share (U.S. dollars) − diluted (as previously calculated, prior to Rights Offering) |
| NA |
|
| $ | (0.12 | ) | |
Net income (loss) per share (U.S .dollars) − diluted (as on the Consolidated Statement of Comprehensive Income) |
| $ | 0.01 |
|
| $ | (0.10 | ) |
(1) For the three months ended March 31, 2023, the Net loss per share − diluted excludes the effect of 119.4 million shares that would be issued if the principal amount of the Debentures were settled in our common shares at the quarter end price and were included inare excluded as they would be anti-dilutive. For the three months ended March 31, 2024, the Net income per share − diluted EPS calculation.includes the effect of 96.7 million shares related to the Debentures as they would have the potential to dilute basic earnings per share.
(2) For the three months ended March 31, 2023, the Net loss per share − diluted excludes the effect of 1.5 million RSUs and PRSUs and 1.1 million options as these would be anti-dilutive. For the three months ended March 31, 2024, the Net income per share − diluted considers the effect of 3.8 million RSUs and PRSUs and 0.2 million options as they would have the potential to dilute basic earnings per share.
(3) For the three months ended March 31, 2024, the Net income per share − diluted excludes the effect of 2.3 million New DSUs and 1.8 million PSUs. These would have the potential to dilute basic earnings per share.
18
12.11. 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 1312 for the disaggregation of revenue by geographic region.
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, | ||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| ||||
Product |
|
| 43,132 |
|
|
| 39,092 |
|
|
| 113,323 |
|
|
| 110,383 |
|
|
Transportation |
|
| 4,767 |
|
|
| 5,022 |
|
|
| 13,169 |
|
|
| 13,878 |
|
|
License fees from Construction Partners |
|
| 196 |
|
|
| 193 |
|
|
| 613 |
|
|
| 588 |
|
|
Total product revenue |
|
| 48,095 |
|
|
| 44,307 |
|
|
| 127,105 |
|
|
| 124,849 |
|
|
Installation and other services |
|
| 1,442 |
|
|
| 2,440 |
|
|
| 3,893 |
|
|
| 4,885 |
|
|
|
|
| 49,537 |
|
|
| 46,747 |
|
|
| 130,998 |
|
|
| 129,734 |
|
|
18
|
| For the Three Months Ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Product |
|
| 34,876 |
|
|
| 31,481 |
|
Transportation |
|
| 3,955 |
|
|
| 3,788 |
|
License fees from Construction Partners |
|
| 208 |
|
|
| 207 |
|
Total product revenue |
|
| 39,039 |
|
|
| 35,476 |
|
Installation and other services |
|
| 1,808 |
|
|
| 1,232 |
|
|
|
| 40,847 |
|
|
| 36,708 |
|
DIRTT sells its products and services pursuant to fixed-price contracts which generally have a term of one year or less. The transaction price used in determining the amount of revenue to recognize from fixed-price contracts is based upon agreed contractual terms with each customer and is not subject to variability.
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| For the Three Months Ended March 31, |
| |||||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
|
| 2024 |
|
| 2023 |
| ||||||
At a point in time |
|
| 47,899 |
|
|
| 44,114 |
|
|
| 126,492 |
|
|
| 124,261 |
|
|
|
| 38,831 |
|
|
| 35,269 |
|
Over time |
|
| 1,638 |
|
|
| 2,633 |
|
|
| 4,506 |
|
|
| 5,473 |
|
|
|
| 2,016 |
|
|
| 1,439 |
|
|
| 49,537 |
|
|
| 46,747 |
|
|
| 130,998 |
|
|
| 129,734 |
|
|
|
| 40,847 |
|
|
| 36,708 |
|
Revenue recognized at a point in time represents the majority of the Company’s sales. Revenue is recognized when a customer obtains legal title to the product, which is when ownership of the product is transferred to, or services are delivered to, the customer. Revenue recognized over time is limited to installation and ongoing maintenance contracts with customers and is recorded as performance obligations which are satisfied over the term of the contract.
Contract Liabilities
|
| As at |
|
| As at |
| ||||||||||||||||||
|
| September 30, 2023 |
|
| December 31, 2022 |
|
| December 31, 2021 |
|
| March 31, 2024 |
|
| December 31, 2023 |
|
| December 31, 2022 |
| ||||||
Customer deposits |
|
| 6,396 |
|
|
| 4,458 |
|
|
| 1,959 |
|
|
| 2,533 |
|
|
| 5,290 |
|
|
| 4,458 |
|
Deferred revenue |
|
| 347 |
|
|
| 408 |
|
|
| 461 |
|
|
| 547 |
|
|
| - |
|
|
| 408 |
|
Contract liabilities |
|
| 6,743 |
|
|
| 4,866 |
|
|
| 2,420 |
|
|
| 3,080 |
|
|
| 5,290 |
|
|
| 4,866 |
|
Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions. The balance of contract liabilities was higherlower as at September 30, 2023March 31, 2024 compared to December 31, 20222023 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 20222023 and 2021, respectively,2022 totaling $4.85.3 million and $2.44.5 million, respectively, were recognized as revenue during the ninethree months ended September 30,March 31, 2024 and 2023, and 2022, respectively.
19
Sales by Industry
The Company periodically reviews the growth of product and transportation revenue by vertical market to evaluate the success of industry-specific sales initiatives. The nature of products sold to the various industries is consistent and therefore review is focused on sales performance.
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| 2024 |
|
| 2023 |
| ||||||
Commercial |
|
| 31,272 |
|
|
| 31,796 |
|
|
| 82,154 |
|
|
| 85,458 |
|
|
| 30,179 |
|
|
| 24,504 |
|
Healthcare |
|
| 8,483 |
|
|
| 3,638 |
|
|
| 25,111 |
|
|
| 15,693 |
|
|
| 3,049 |
|
|
| 6,171 |
|
Government |
|
| 4,606 |
|
|
| 3,358 |
|
|
| 10,581 |
|
|
| 11,680 |
|
|
| 3,475 |
|
|
| 2,707 |
|
Education |
|
| 3,538 |
|
|
| 5,322 |
|
|
| 8,646 |
|
|
| 11,430 |
|
|
| 2,128 |
|
|
| 1,887 |
|
License fees from Construction Partners |
|
| 196 |
|
|
| 193 |
|
|
| 613 |
|
|
| 588 |
|
|
| 208 |
|
|
| 207 |
|
Total product and transportation revenue |
|
| 48,095 |
|
|
| 44,307 |
|
|
| 127,105 |
|
|
| 124,849 |
|
|
| 39,039 |
|
|
| 35,476 |
|
Installation and other services |
|
| 1,442 |
|
|
| 2,440 |
|
|
| 3,893 |
|
|
| 4,885 |
|
|
| 1,808 |
|
|
| 1,232 |
|
|
| 49,537 |
|
|
| 46,747 |
|
|
| 130,998 |
|
|
| 129,734 |
|
|
| 40,847 |
|
|
| 36,708 |
|
13.12. SEGMENT REPORTING
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.
19
Revenue from external customers
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| 2024 |
|
| 2023 |
| ||||||
Canada |
|
| 5,665 |
|
|
| 7,191 |
|
|
| 14,577 |
|
|
| 19,859 |
|
|
| 3,069 |
|
|
| 4,912 |
|
U.S. |
|
| 43,872 |
|
|
| 39,556 |
|
|
| 116,421 |
|
|
| 109,875 |
|
|
| 37,778 |
|
|
| 31,796 |
|
|
| 49,537 |
|
|
| 46,747 |
|
|
| 130,998 |
|
|
| 129,734 |
|
|
| 40,847 |
|
|
| 36,708 |
|
Non-current assets
|
|
|
|
|
| As at |
| |||||
|
|
|
|
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Canada |
|
|
|
|
|
| 30,396 |
|
|
| 28,251 |
|
U.S. |
|
|
|
|
|
| 32,433 |
|
|
| 53,277 |
|
|
|
|
|
|
| 62,829 |
|
|
| 81,528 |
|
|
| As at March 31, |
|
| As at December 31, |
| ||
|
| 2024 |
|
| 2023 |
| ||
Canada |
|
| 28,837 |
|
|
| 30,033 |
|
U.S. |
|
| 29,548 |
|
|
| 30,759 |
|
|
|
| 58,385 |
|
|
| 60,792 |
|
The DIRTT solution segment derives revenues from customers by providing physical products and digital tools through our ICE software to create interior spaces for our customers across the commercial, healthcare, education and government industries.
The chief operating decision maker assesses performance for the solution segment and decides how to allocate resources based on gross profit and net income (loss) that also is reported on the Consolidated Statement of Operations and Comprehensive Loss as consolidated gross profit and net income (loss). The measure of segment assets is reported on the balance sheet as total consolidated assets. The chief operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to reinvest profits into the solution segment or into other parts of the entity, such as to repay long-term debt.
Gross profit and net income (loss) are used to monitor budget versus actual results. The chief operating decision maker also uses net income (loss) in competitive analysis by benchmarking to DIRTT’s competitors. The competitive analysis along with the monitoring of budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation. DIRTT has one reportable segment: Solutions. The solutions segment provides digital tools (access to ICE software) and physical products to create modular interior construction spaces for our customers.
14.20
DIRTT derives revenue in North America and manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on a single software platform that is deployed to, and implemented by, customers in a similar manner. DIRTT’s chief operating decision maker is the executive leadership team that includes the chief operating officer, chief financial officer, and the chief executive officer.
Segment profit and loss reconciliation to net income (loss) after tax
|
| For the Three Months Ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
| ($ in thousands) |
| |||||
Revenue |
|
| 40,847 |
|
|
| 36,708 |
|
Gross Profit |
|
| 14,648 |
|
|
| 8,682 |
|
Gross Profit Margin |
|
| 35.9 | % |
|
| 23.7 | % |
Operating expenses (1) |
|
| 14,855 |
|
|
| 18,800 |
|
Operating income (loss) |
|
| (207 | ) |
|
| (10,118 | ) |
Other income/(expenses) and gains/(losses) (2) |
|
| 3,252 |
|
|
| (1,316 | ) |
Net income (loss) after tax |
|
| 3,045 |
|
|
| (11,434 | ) |
|
|
|
|
|
|
| ||
Reconciliation of profit or loss |
|
|
|
|
|
| ||
Adjustments and reconciling items |
|
| - |
|
|
| - |
|
Net income (loss) after tax |
|
| 3,045 |
|
|
| (11,434 | ) |
(1) Includes Sales and marketing, General and administrative, Operations support, Technology and development, Stock based compensation, Reorganization costs, Related party expenses, and Impairment charges
(2) Includes Tax expenses, non-recurring gains and losses, government subsidies, foreign exchange gains(losses), interest income, and interest expenses
13. INCOME TAXES
As at September 30, 2023,March 31, 2024, the Company had a valuation allowance of $33.433.9 million against deferred tax assets as the Company has experienced cumulative losses in recent years (December 31, 20222023 – $29.834.5 million).
14. RIGHTS OFFERING
On November 21, 2023, the Company announced that the Board of Directors had approved a rights offering (the “Rights Offering”) to its common shareholders for aggregate gross proceeds of C$30.0 million ($22.4 million).
In connection with the Rights Offering, the Company entered into a standby purchase agreement, dated November 20, 2023 (the “Standby Purchase Agreement”) with 22NW Fund, LP (“22NW”) and 726 BC LLC and 726 BF LLC (together, “726”), or their permitted assigns (collectively and including WWT Opportunity #1 LLC, to which 726 transferred all of their common shares to on December 1, 2023, the “Standby Purchasers”). Subject to the terms and conditions of the Standby Purchase Agreement, each Standby Purchaser agreed to exercise its Basic Subscription Privilege (as defined below) in full and to collectively purchase from the Company, at the subscription price, all common shares not subscribed for by holders of Rights (as defined below) under the Basic Subscription Privilege or Additional Subscription Privilege (as defined below), up to a maximum of C$15.0 million each, so that the maximum number of common shares that could be issued in connection with the Rights Offering would be issued and the Company will receive aggregate gross proceeds of C$30.0 million ($22.4 million). As described below, no standby fee was paid to the Standby Purchasers in connection with the Rights Offering; however, DIRTT reimbursed the Standby Purchasers for their reasonable expenses in the amount of $0.03 million each.
On January 9, 2024, the Company announced the completion of the Rights Offering to its common shareholders and the issuance of 85,714,285 common shares at a price of C$0.35 ($0.26) per whole common share for aggregate gross proceeds of C$30.0 million ($22.4 million) and aggregate net proceeds of $21.3 million ($1.1 million of costs associated with the Rights Offering). Each right distributed under the Rights Offering (each, a “Right”) entitled eligible holders to subscribe for 0.81790023 common shares, exercisable for whole common shares only, meaning 1.22264301 Rights were required to purchase one common share (the “Basic Subscription Privilege”). In accordance with applicable law, the Rights Offering included an additional subscription privilege (the “Additional Subscription Privilege”) under which eligible holders of Rights who fully exercised the Rights issued to them under their Basic Subscription Privilege, were entitled to subscribe for additional common shares, on a pro rata basis, that were not otherwise subscribed for under the Basic Subscription Privilege.
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DIRTT issued an aggregate of 67,379,471 common shares pursuant to the Basic Subscription Privilege and 18,334,814 common shares pursuant to the Additional Subscription Privilege. As a result of the common shares issued under the Basic Subscription Privilege and Additional Subscription Privilege, no common shares were available for issuance pursuant to the Standby Purchase Agreement.
15. COMMITMENTS
As at September 30, 2023,March 31, 2024, the Company had outstanding purchase obligations of approximately $4.21.1 million related to inventory and property, plant and equipment purchases (December 31, 20222023 – $2.22.8 million). As at September 30, 2023,March 31, 2024, the Company had undiscounted operating lease liabilities of $46.043.4 million (December 31, 20222023 – $48.745.1 million). The decrease in undiscounted operating
Subsequent to March 31, 2024, the Company extended the term of the lease liabilities from June 30, 2023 ($agreement for the Calgary headquarters by 61.23 million) was related to a modification on the Rock Hill Facilityyears, effective April 2024. Undiscounted rent obligations associated with this lease liability, as DIRTT no longer assumes the two 5-year extension options will be exercised (refer to Note 6).are $1.4 million.
16. RELATED PARTY TRANSACTIONS
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt“Debt Settlement Agreement"Agreement”) with 22NW Fund, LP ("22NW") and Aron English, 22NW's22NW’s principal and a director of DIRTT, (together, the "22NW Group"“22NW Group”) who, collectively, beneficially owned approximately 19.5% of the Company'sCompany’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being approximately $1.6 million (the "Debt"“Debt”).
Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. The liability as at March 31, 2023 was revalued using the closing common share price at March 31, 2023, and a $2.1 million liability and expense was recorded in the financial statements.
In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by the Company’s shareholders.
Atshareholders which was obtained at the Company’s annual general and special shareholder meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares to 22NW Group, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.
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2023.
Other related party transactions for the three and nine months ended September 30,March 31, 2024 and March 31, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $nil and $0.3 million, respectively (2022 – $nil).respectively. $Nil and $0.2 million was included in the Trade and accrued receivable balance as at March 31, 2024 and March 31, 2023, respectively. The sale to 22NW Group was based on price lists in force and terms that are available to all employees.
As at September 30, 2023,March 31, 2024, C$18.9 million and C$13.6 million of the January Debentures and December Debentures, respectively, are held by 22NW Group.Group (December 31, 2023 – C$18.9 million and C$13.6 million, respectively). Interest accruedearned on the debenturessuch Debentures for the three months ended September 30,March 31, 2024 and March 31, 2023 is $0.4 million (2022 – $nil).and $nil, respectively. Interest is earned on terms applicable to all Debenture holders.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
Summary of Financial Results
DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a global leader in industrialized construction. DIRTT'sDIRTT’s system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partners of the Company, including AWI which owns a 50% interest in the rights, title and interests in all thecertain intellectual property rights in a portion of the ICE Softwaresoftware that is used by AWI.
Key ThirdFirst Quarter Highlights
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Pipeline Qualified leads, defined as quantity of projects being pursued, and our pipeline, defined as working with an engaged client on assessment of DIRTT as a prefabricated interior solution As of As at As at October 1, 2023 January 1, 2023 % Change October 1, 2022 % Change April 1, 2024 January 1, 2024 % Change April 1, 2023 % Change Twelve Month Forward Pipeline ($ 000s) Twelve Month Forward Pipeline ($ 000s) Twelve Month Forward Pipeline ($ 000s) Commercial 192,773 141,293 36 % 146,306 32 % 175,203 176,789 (1 ) 160,636 9 Healthcare 39,230 55,719 (30 %) 67,008 (41 %) 45,658 41,221 11 45,900 (1 ) Government 34,866 32,313 8 % 28,526 22 % 33,017 34,813 (5 ) 30,676 8 Education 16,235 17,201 (6 %) 17,524 (7 %) 16,505 17,117 (4 ) 14,987 10 283,104 246,526 15 % 259,364 9 % 270,383 269,940 1 252,199 7 Leads (#) 999 721 39 % 678 47 % 1,184 861 38 969 22 DIRTT continues to experience pipeline growth as the U.S. economy saw above-trend quarterly GDP growth in the third and fourth quarters of 2023. Our We are headline CPI. We are Outlook However, we With the Rights Offering completed in the first quarter of 2024, we have improved Non-GAAP Financial Measures Note Regarding Use of Non-GAAP Financial Measures Our condensed consolidated interim financial statements are prepared in accordance with GAAP. These GAAP financial statements include non-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult. As a result, we also provide financial information in this Quarterly Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses these non-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance period-over-period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange movements), asset base (depreciation and amortization), Government subsidies, depreciation and amortization, stock-based compensation expense, reorganization expense, foreign exchange gains and losses and impairment charges are excluded from our non-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those receipts and expenses may recur, and because management believes that each of these items can distort the trends associated with the Company’s ongoing performance. We believe that excluding these receipts and expenses provides investors and management with greater visibility to the underlying performance of the business operations, enhances consistency and comparativeness with results in prior periods that do not, or future periods that may not, include such items, and facilitates comparison with the results of other companies in our industry. 25 The following non-GAAP financial measures are presented in this Quarterly Report, and a description of the calculation for each measure is included. Adjusted Gross Profit Gross profit before deductions for costs of Adjusted Gross Profit Margin Adjusted Gross Profit divided by revenue EBITDA Net income before interest, taxes, depreciation and amortization Adjusted EBITDA EBITDA adjusted to remove foreign exchange gains or losses; impairment charges; reorganization expenses; stock-based compensation expense; government subsidies; one-time, non-recurring charges and gains; and any other non-core gains or losses Adjusted EBITDA Margin Adjusted EBITDA divided by revenue You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Results of Operations Three For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change ($ in thousands) ($ in thousands) Revenue 49,537 46,747 6 130,998 129,734 1 Gross Profit(1) 17,065 7,008 144 40,304 16,571 143 Gross Profit Margin 34.4 % 15.0 % 30.8 % 12.8 % Operating Expenses Sales and Marketing 6,161 6,089 1 18,302 21,094 (13 ) General and Administrative 4,669 6,542 (29 ) 16,003 21,412 (25 ) Operations Support 1,752 2,321 (25 ) 5,564 7,347 (24 ) Technology and Development 1,239 1,695 (27 ) 4,055 5,714 (29 ) Stock-Based Compensation 1,069 918 16 2,543 3,546 (28 ) Reorganization 321 3,426 (91 ) 2,857 12,281 (77 ) Impairment charge on Rock Hill Facility 7,952 - 100 7,952 - 100 Related Party Expense - - NA 1,524 - 100 Total Operating Expenses 23,163 20,991 10 58,800 71,394 (18 ) Operating Loss (6,098 ) (13,983 ) (56 ) (18,496 ) (54,823 ) (66 ) Operating Margin (12.3 )% (29.9 )% (14.1 )% (42.3 )% Government subsidies - 7,141 (100 ) 236 7,765 (97 ) Gain on sale of software and patents - - NA 6,145 - 100 Foreign exchange (loss) gain 822 1,356 (39 ) (59 ) 1,870 (103 ) Interest income 161 19 747 271 50 442 Interest expense (1,196 ) (1,276 ) (6 ) (3,636 ) (3,935 ) (8 ) (213 ) 7,240 103 2,957 5,750 (49 ) Net loss before tax (6,311 ) (6,743 ) 6 (15,539 ) (49,073 ) 68 Current and deferred income tax recovery - (16 ) 100 - (16 ) 100 - (16 ) 100 - (16 ) 100 Net loss (6,311 ) (6,727 ) 6 (15,539 ) (49,057 ) 68 (1) For the three and nine months ended September 30, 2022, $1.0 million primarily related to the write off of inventory of discounted product lines, and $1.0 million and $2.1 million, respectively of accelerated depreciation and amortization on software associated with discontinued product lines and the closure of the Phoenix Facility. For the Three Months Ended March 31, 2024 2023 % Change ($ in thousands) Revenue 40,847 36,708 11 Gross Profit 14,648 8,682 69 Gross Profit Margin 35.9 % 23.7 % Operating expenses Sales and marketing 5,920 5,515 7 General and administrative 4,566 5,833 (22 ) Operations support 1,775 1,990 (11 ) Technology and development 1,251 1,539 (19 ) Stock-based compensation 675 796 (15 ) Reorganization 138 1,071 (87 ) Impairment charge on Rock Hill Facility 530 - 100 Related party expense - 2,056 (100 ) Total operating expenses 14,855 18,800 (21 ) Operating income (loss) (207 ) (10,118 ) 98 Operating margin (0.5 )% (27.6 )% Government subsidies - 148 (100 ) Gain on extinguishment of convertible debt 2,931 - 100 Foreign exchange gain (loss) 919 (261 ) 452 Interest income 489 4 12,125 Interest expense (1,054 ) (1,207 ) 13 3,285 (1,316 ) 350 Net profit (loss) before tax 3,078 (11,434 ) 127 Current and deferred income tax expense 33 - 100 33 - 100 Net income (loss) after tax 3,045 (11,434 ) 127 26 Revenue Revenue reflects sales to our Construction Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters. The following table sets forth the contribution to revenue of our DIRTT product and service offerings: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 % Change 2023 2022 % Change ($ in thousands) ($ in thousands) Product 43,132 39,092 10 113,323 110,383 3 Transportation 4,767 5,022 (5 ) 13,169 13,878 (5 ) License fees from Construction Partners 196 193 2 613 588 4 Total product revenue 48,095 44,307 9 127,105 124,849 2 Installation and other services 1,442 2,440 (41 ) 3,893 4,885 (20 ) 49,537 46,747 6 130,998 129,734 1 For the Three Months Ended March 31, 2024 2023 % Change ($ in thousands) Product 34,876 31,481 11 Transportation 3,955 3,788 4 License fees from Construction Partners 208 207 0 Total product revenue 39,039 35,476 10 Installation and other services 1,808 1,232 47 40,847 36,708 11 Revenue for the Installation and other services revenue was Our success is partly dependent on our ability to profitably develop our Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. At We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. While The following table presents our product and transportation revenue by vertical market: For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended March 31, 2023 2022 % Change 2023 2022 % Change 2024 2023 % Change ($ in thousands) ($ in thousands) ($ in thousands) Commercial 31,272 31,796 (2 ) 82,154 85,458 (4 ) 30,179 24,504 23 Healthcare 8,483 3,638 133 25,111 15,693 60 3,049 6,171 (51 ) Government 4,606 3,358 37 10,581 11,680 (9 ) 3,475 2,707 28 Education 3,538 5,322 (34 ) 8,646 11,430 (24 ) 2,128 1,887 13 License fees from Construction Partners 196 193 2 613 588 4 208 207 0 Total product revenue 48,095 44,307 9 127,105 124,849 2 39,039 35,476 10 Service revenue 1,442 2,440 (41 ) 3,893 4,885 (20 ) 1,808 1,232 47 49,537 46,747 6 130,998 129,734 1 40,847 36,708 11 For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (in %) (in %) Commercial 65 72 65 69 Healthcare 18 8 20 13 Government 10 8 8 9 Education 7 12 7 9 Total Product Revenue(1) 100 100 100 100 27 For the Three Months Ended March 31, 2024 2023 (in %) Commercial 78 70 Healthcare 8 17 Government 9 8 Education 5 5 Total Product Revenue(1) 100 100 (1) Excludes license fees from Construction Partners. Commercial revenues Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States. The following table presents our revenue dispersion by geography: For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended March 31, 2023 2022 % Change 2023 2022 % Change 2024 2023 % Change ($ in thousands) ($ in thousands) ($ in thousands) Canada 5,665 7,191 (21 ) 14,577 19,859 (27 ) 3,069 4,912 (38 ) U.S. 43,872 39,556 11 116,421 109,875 6 37,778 31,796 19 49,537 46,747 6 130,998 129,734 1 40,847 36,708 11 The first quarter of 2024 included a higher proportion of sales to customers in the United States than to those in Canada, 8% of sales for the period were in Canada, with the rest occurring in the United States, compared to 13% of sales to Canada in the first quarter of 2023. Historically, approximately Sales and Marketing Expenses Sales and marketing expenses increased by General and Administrative Expenses General and administrative expenses decreased by Operations Support Expenses Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Construction Partner project execution and our manufacturing operations. Operations support expenses decreased by 28 Technology and Development Expenses Technology and development expenses relate to non-capitalizable costs associated with our product and software development teams and are primarily comprised of salaries and benefits of technical staff. Technology and development expenses decreased by Stock-Based Compensation Stock-based compensation expense for the three Reorganization Reorganization expenses for the quarter of Impairment On September 27, 2023, the Company decided to permanently close the Rock Hill Facility in South Carolina. Gain on Extinguishment of Debt The Company recognized a gain on extinguishment of debt of C$3.9 million ($2.9 million) following the Issuer Bid. At the expiration of the Issuer Bid, C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and Related Party Expense On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW Fund, LP ("22NW") and Aron English, 22NW's principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being $1.6 million (the Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. 29 In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by shareholders. At the annual general and special meeting of shareholders held on May 30, 2023 shareholders voted to approve the issuance of common shares, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share. Government Subsidies The Company was not eligible for, and did not receive, any new government subsidies in the quarter ended Interest Expense Interest expense decreased by $0.1 million from Income Tax The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. As at 107.6 million of non-capital loss carry-forwards in Canada and Net Net 30 EBITDA and Adjusted EBITDA for the Three The following table presents a reconciliation for the results of the three For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended March 31, 2023 2022 2023 2022 2024 2023 ($ in thousands) ($ in thousands) ($ in thousands) Net loss for the period (6,311 ) (6,727 ) (15,539 ) (49,057 ) Net income (loss) after tax for the period 3,045 (11,434 ) Add back (deduct): Interest expense 1,196 1,276 3,636 3,935 1,054 1,207 Interest income (161 ) (19 ) (271 ) (50 ) (489 ) (4 ) Income tax recovery - (16 ) - (16 ) Income tax expense 33 - Depreciation and amortization 2,017 4,236 7,216 12,202 1,534 2,675 EBITDA (3,259 ) (1,250 ) (4,958 ) (32,986 ) 5,177 (7,556 ) Foreign exchange (gain) loss (822 ) (1,356 ) 59 (1,870 ) (919 ) 261 Stock-based compensation 1,069 918 2,543 3,546 675 796 Government subsidies - (7,141 ) (236 ) (7,765 ) - (148 ) Related party expense (2) - - 1,524 - - 2,056 Reorganization expense 321 3,426 2,857 12,281 Gain on sale of software and patents(3) - - (6,145 ) - Reorganization expense(3) 138 1,071 Gain on extinguishment of convertible debt(3) (2,931 ) - Impairment charge on Rock Hill Facility (3) 7,952 - 7,952 - 530 - Adjusted EBITDA 5,261 (5,403 ) 3,596 (26,794 ) 2,670 (3,520 ) Net Loss Margin(1) (12.7 )% (14.4 )% (11.9 )% (37.8 )% Net Income (Loss) Margin(1) 7.5 % (31.1 )% Adjusted EBITDA Margin 10.6 % (11.6 )% 2.7 % (20.7 )% 6.5 % (9.6 )% (1) Net (2) The related party transaction is a non-recurring transaction that is not core to our business and is excluded from the Adjusted EBITDA calculation (Refer to Note 16 of the consolidated interim financial statements). (3) For the three months ended Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three The following table presents a reconciliation for the three For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended March 31, 2023 2022 2023 2022 2024 2023 ($ in thousands) ($ in thousands) ($ in thousands) Gross profit 17,065 7,008 40,304 16,571 14,648 8,682 Gross profit margin 34.4 % 15.0 % 30.8 % 12.8 % 35.9 % 23.7 % Add: Depreciation and amortization expense 1,231 3,132 4,656 8,792 844 1,783 Adjusted Gross Profit 18,296 10,140 44,960 25,363 15,492 10,465 Adjusted Gross Profit Margin 36.9 % 21.7 % 34.3 % 19.6 % 37.9 % 28.5 % For the quarter ended 31 The improvement in Adjusted Gross Profit was a result of improved product mix, a reduction in fixed costs, and management of labor hours throughout the period Liquidity and Capital Resources As at $14.1 million We have implemented multiple price increases to mitigate the impact of inflation on raw materials and improve liquidity during the past two years. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to stabilize our cash usage to operate the business. Gross profit for the Over the On November 21, 2023, the Company announced the Rights Offering, which closed on January 9, 2024, for aggregate gross proceeds of C$30.0 million and net proceeds of $21.3 million. On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company offered to repurchase for cancellation: (i) up to C$6,000,000 principal amount of the January Debentures at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of the December Debentures at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tendered and did not withdraw their 32 made in While we are encouraged by the improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of recent macroeconomic uncertainty. We have implemented multiple restructuring initiatives designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by In January 2021, we issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on 22NW. On December 1, 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and be repayable on In February 2021, we entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a borrowing base of C$15 million and a one-year term. Effective October 2023, inventory was scoped out of the Borrowing Base. On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Refer to discussion in “Credit Facility” herein for additional information. The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing 33 The following table summarizes our consolidated cash flows for the periods indicated: For the Three Months Ended September 30, For the Nine Months Ended September 30, For The Three Months Ended March 31, 2023 2022 2023 2022 2024 2023 ($ in thousands) ($ in thousands) ($ in thousands) Net cash flows provided by (used in) operating activities 1,919 (10,667 ) 4,687 (47,509 ) Net cash flows used in operating activities (2,043 ) (988 ) Net cash flows provided by (used in) investing activities (658 ) (644 ) 7,089 (3,595 ) 281 (983 ) Net cash flows used in financing activities (551 ) (912 ) (3,412 ) (1,802 ) Net cash flows provided by (used in) financing activities 16,123 (668 ) Effect of foreign exchange on cash, cash equivalents and restricted cash (117 ) (293 ) (166 ) (73 ) (230 ) (36 ) Net increase (decrease) in cash, cash equivalents and restricted cash 593 (12,516 ) 8,198 (52,979 ) 14,131 (2,675 ) Cash, cash equivalents and restricted cash, beginning of period 21,844 22,945 14,239 63,408 Cash, cash equivalents and restricted cash, beginning of year 25,099 14,239 Cash, cash equivalents and restricted cash, end of period 22,437 10,429 22,437 10,429 39,230 11,564 Operating Activities Net cash flows period end. Investing Activities We invested $0.3 Financing Activities For the three 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. Interest 34 On February 9, 2023, the Company extended the RBC On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The maximum availability under the Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case, plus 200 basis points. At The Company has As part of the The Company did not make any draws on the Canadian Leasing Facilities during the first quarter of 2024 and the year ended December 31, 2023 under the We are restricted from paying dividends unless Payment Conditions (as defined in the Second Extended RBC Facility) are met, including having a net borrowing availability of at least C$10 million over the proceeding 30-day period, and having a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. The Second Extended RBC Facility is currently secured by substantially all of our real property located in Canada and the United States. Contractual Obligations Since our disclosure in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, the following material contractual changes have occurred: See Note 15, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information. Significant Accounting Policies and Estimates There have been no material changes in our significant accounting policies during the three months ended 35 Recent Accounting Pronouncements For information regarding recent accounting pronouncements, please refer to Note 3, “Adoption of New and Revised Accounting Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to our market risk exposures since our disclosures in our Annual Report on Form 10-K. For information regarding our exposure to certain market risks, please refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K. The Company’s cash and cash equivalents are predominantly all with one AA rated financial institution. Item 4. Controls and Procedures Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by Rule 13a-15 under the Exchange Act, our principal executive officers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended PART II – OTHER INFORMATION Item 1. Legal Proceedings DIRTT is pursuing multiple lawsuits against its DIRTT’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates is comprised of three main lawsuits: (i) an action in the Alberta Court of King’s Bench commenced 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”); and (iii) an action in the U.S. District Court for the Northern District of Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States and intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business intelligence, with the aim of establishing a competing business in the United States market (the “Texas Unfair Competition Case”). DIRTT intends to pursue the cases vigorously. We recently requested the Court of King’s Bench of Alberta to schedule the summary judgment application for our Canadian litigation. The court has proposed three potential dates in September 2025 and we expect to have the date finalized in the next several weeks. In the Canadian Non-Compete Case, on February 14, 2023, the Court of King’s Bench of Alberta granted In the Utah Misappropriation Case, on April 11, 2023, the United States Court of Appeals for the Tenth Circuit reversed the U.S. District Court for the Northern District of Utah’s decision that Utah was an inconvenient forum for DIRTT’s claims against Falkbuilt and others for the misappropriation of confidential information, trade secrets, business intelligence and customer information. The Utah Court had previously, and erroneously, found that DIRTT’s United States-based claims should be litigated in Canada. The Court of Appeals remanded the matter back to the Utah District Court. Falkbuilt filed motions to stay the Tenth Circuit decision pending its petition for a Writ of Certiorari to the Supreme Court of the United States. The Court of Appeals promptly denied the motion to stay. A similar motion subsequently filed with the Supreme Court of the United States on the same basis was also promptly denied. Fallkbuilt also petitioned the Supreme Court to accept review, even after losing the stay motion, that petition was also denied in early October. The Texas Unfair Competition Case was dismissed, without prejudice, in reliance upon the now-reversed decision in the Utah Misappropriation Case, described above. DIRTT appealed that decision, and the United States Court of Appeals for the Fifth Circuit stayed the appeal pending the Tenth Circuit ruling at Falkbuilt's request. After prevailing in the Tenth Circuit, DIRTT asked Falkbuilt if it would, consistent with its prior representations, agree to remand the appeal to the Texas Court for disposition to Utah. Falkbuilt refused and DIRTT filed a Motion to Remand. The Court denied the Motion for Remand without prejudice and asked for full briefing. Prior to the argument, DIRTT sought leave to amend the Utah claims to include the Texas claims and notified the Fifth Circuit Court of Appeals of the proposed amendment in Utah. Falkbuilt did not object to the amendment, but answered the Complaint and reserved the right to dismiss the Amended Complaint on grounds of inconvenient forum or international comity. The Amended Complaint not only presents the Texas claims in Utah but also updates DIRTT’s allegations as to events and damages incurred during the time the parties were participating in the appellate process. Argument 37 On April 25, 2024, DIRTT Item 1A. Risk Factors In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not Applicable. Item 5. Other Information Not Applicable. Item 6. Exhibits EXHIBIT INDEX Exhibit No. Description 3.1 3.2 4.1 4.2 4.3 10.2 10.3 10.4 31.1* 31.2* 32.1** 32.2** 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Filed herewith ** Furnished herewith SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIRTT ENVIRONMENTAL SOLUTIONS LTD. By: /s/ Fareeha Khan Fareeha Khan Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) Date: Inin the first quarter of 2023, we changed our methodology for calculating2024 benefited from net proceeds of $21.3 million from the Rights Offering and disclosing our forward twelve month pipeline. We are now disclosing qualifiedimproved operational results, offset by a decrease in working capital of $10.6 million (mainly due to timing of payables and $5.2 million of debt payment under the Issuer Bid).provider.provider are disclosed below. We have begun usinguse these new measures as they betterto measure expected near term performance given that our operating environment has been prone to change due to macroeconomic factors such as worksite labor availability, interest rate changes, and potential recessionary impacts on construction projects.OctoberApril 1, 2023,2024, our twelve monthtwelve-month forward pipeline is projecting a 9% growth year on yeargrew by 7% year-over-year and a 15% growthmarginally from January 1, 2023,2024, illustrated in the table below.Commercial segment has benefited from our positioning in Texasinternal and Albertaexternal economic indicators imply continued growth for the twelve-month forward pipeline and exposure to the energy sector.U.S. economy. Our healthcare segment pipeline has returned to growth fromdue to several 2025 projects entering our twelve-month view of the previous quarter after delivering several large healthcare projects.pipeline. Due to the extendedinherently long sales cycle ofin our healthcare projects our twelve monthsegment, this pipeline experiences highertends to experience more volatility than our other segments. Our full pipeline for healthcare projects continues to experience growth.cautious on the timinghighly cognizant of two risks facing our Government and Education pipelinebusiness in the forward twelve months due toyear ahead; continued uncertainty in the uncertaintycommercial real estate markets and riskthe possibility of a potentialre-inflation in U.S. federal government shutdown. We continue to increase our penetration in K-12 education and grow a higher education presence in our Central and Southern regions.constantly scrutinizing ourclosely monitoring economic data tied to their performance. To mitigate these risks, we are growing the pipeline and believe thatimplementing strict cost controls to preserve our commercial initiatives are reflected in the increased pipeline size and lead activity.margins.2324ThroughAs we continue into 2024, internal indicators and external economic indicators show a positive trajectory for the first six monthsU.S. economy. Real GDP Growth in the third and fourth quarters of 2023 was above trend. Consumer spending, employment, and construction activity continue to improve from the post-COVID period.experienced continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. These conditions included layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings, resulting in certain projects that were planned earlierare highly cognizant of two risks facing our business in the year being deferredahead. Firstly, the commercial office market has yet to bottom or canceled. We note thatreturn to expansionary activity. As a business with a small overall market penetration, we are exitingfocused on cost control and process efficiencies to position ourselves to gain market share. Secondly, we are closely monitoring our seasonally strongest quarter and are enteringinput costs amid the likelihood that the U.S. Federal Reserve will not return headline CPI to a 2% annualized rate. Additionally, a recent proposal by President Biden to triple tariffs on Chinese aluminum to 22.5% as well as to sanction Russian aluminum on the London Metal Exchange have created price inflation in our typically weaker winter period.primary material input. If the increase in aluminum prices persists, we will have to consider the effect on our business, including consideration of increasing prices in response.In response andEven as discussedwe face these risks, we have positioned DIRTT over the past year to better withstand adverse economic conditions. Our gross profit margin in the first quarter of 2024 compared to the first quarter of 2023 improved from 23.7% to 35.9%. Our Adjusted Gross Profit Margins have improved from 28.5% to 37.9% year-over-year. Furthermore, our previous quarterly reports on Form 10-Q, we identified and took actionoperating expenses decreased by 21% compared to reduce annualized overhead costs by $5.0 million during the first quarter of 2023. Further, on May 8, 2023, the Company reduced its salaried workforce, resulting in annualized savingsAll these efforts yielded Adjusted EBITDA Margin of $2.6 million. One-time costs associated with these reductions, incurred6.5% in the secondfirst quarter of 2023, were approximately $0.7 million.The trend of economic uncertainty has continued into2024 compared to (9.6)% in the thirdfirst quarter of 2023. The conversation on “return to work” continues as some companies are mandating a hybrid “return to work” policy. Various inflation metricsoverour cash balance from $8.1 million at March 31, 2023 to $39.0 million as of March 31, 2024. We have also deleveraged our balance sheet through the three months ended September 30, 2023, although there is no guarantee they will continueIssuer Bid, pursuant to do so.which we repurchased C$10.5 million ($7.8 million) principal amount of our Debentures in March 2024.We believe that wider macroeconomic conditions indicate we are in an uncertain late cycle environment with the near-term potential for deteriorating macroeconomic conditions. The increase in long term interest rates can potentially reduce demand for capital intensive projects in our Commercial, Healthcare, and Education segments. The AIA/Deltek Architecture Billings Index fell into contraction across all geographies in September. Regardless,As we continue to focus on what is withinramp up into our control: supporting our current partners, increasing penetration in targeted geographies, onboarding new Construction Partners, and new strategic partnerships. Whileseasonally stronger quarters, we are benefiting from price stability inpreparing to preserve our input costs as well as a strengthening U.S. dollar, recent unrest in the Middle East may adversely impactAdjusted Gross Profit Margins and delivering on-time and in-full to our gross margins, and could further impact our pipeline, should energy prices return to 2022 levels.We have made hard choices and meaningfully reduced our cost footprint and made great progress lowering our estimated revenue breakeven point.valued customers. We will continue to evaluateinvest in our cost structurecommercial business and respondpursue opportunities and partnerships to the inflationary impacts to labor, materials and services in an efficient manner consistent withsupport our goal to maintain future healthy gross profit and Adjusted EBITDA margins while improving our future liquidity.revenue growth.the impact of under-utilized capacity on gross profit, tax consequences, reorganization expense, one-time non-recurring charges or gains (such as gain on saleextinguishment of software and patents)debt), and stock-based compensation. We remove the impact of all foreign exchange gain (loss) from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. 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.24 under-utilized capacity, depreciation and amortization25and Nine Months Ended September 30, 2023,March 31, 2024, Compared to the Three and Nine Months Ended September 30, 2022March 31, 2023Beginning in 2020, we experienced significant increases in nearly all of our material input costs, including raw materials, shipping materials, labor, and freight. This led to significant gross margin compression in 2021 and 2022. Effective November 16, 2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%. On February 17, 2022, we implemented a further price increase of 5% that came into effect June 1, 2022. On26June 21, 2022 an additional price increase of 10% was announced effective July 21, 2022. These increases have improved revenue and profitability through better recovery of the material input costs previously discussed.ninethree months ended September 30, 2023,March 31, 2024, was $131.0$40.8 million, an increase of $1.3$4.1 million compared to $129.7$36.7 million in the comparative period of 2022. The2023 as the first nine monthsquarter of 2023 were impacted by macroeconomic conditions, including layoffs in the tech sector and rising interest rates, both2024 included a higher volume of which have had an impact on our pipeline. For example, one large project with a customer in the technology sector that was originally scheduled forlarger projects than the first quarter of 2023 was deferred indefinitely. Duringin the quarter ended September 30, 2023, revenue was $49.5 million, an increase of $2.8 million compared tocommercial sector, particularly in the comparative period of 2022 of $46.7 million.retail and finance industries, as well as the government sector.$1.4$1.8 million for the quarter ended September 30, 2023March 31, 2024 compared to $2.4$1.2 million in the quarter ended September 30, 2022, and $3.9 million in the nine months ended September 30, 2023 compared to $4.9 million in the same period of 2022.March 31, 2023. This revenue primarily reflects services performed by our ICE and design teams for third parties. Except in limited circumstances, our Construction Partners, rather than the Company, perform installation services, andservices; accordingly, we are not anticipating significant growth in this revenue stream.September 30, 2023,March 31, 2024, we had 71 (September 30, 2022: 69;74 Construction Partners (March 31, 2023: 67; December 31, 2022: 67) Construction Partners2023: 72) servicing multiple locations. During the nine months ended September 30, 2023, we announced the expansion of seven of our DIRTT Construction Partners into new markets as we expand the reach of DIRTT products in North America.the commercial sector hasall sectors have been challenged by the macroeconomic factors discussed previously, we are seeing increased growth in our healthcare sector, ascommercial sector. We believe that an increase in new construction starts and the heightened need for adaptability and flexibility in the years after the COVID-19 pandemic have increased the demand for our products. We continue to see growth opportunities in the governmenthealthcare and education sectors and have restructured our sales leadership function, prioritizing oversight of these verticals.27decreasedincreased by 2%23% from the prior year period. Healthcare revenues increaseddecreased by 133%51% in the thirdfirst quarter of 20232024 from the same period of 2022.2023. The quarter ended September 30,March 31, 2023 includes $2.1 millionincluded a higher volume of revenue from a large healthcare customer.projects compared to the quarter ended March 31, 2024. Such sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Government revenues in the thirdfirst quarter of 20232024 increased by 37%28% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the thirdfirst quarter of 2023 decreased 34%2024 increased 13% from the same period of 2022.2023. The education sector included a higher magnitude of smaller projects in the thirdfirst quarter of 20232024 than in the thirdfirst quarter of 2022.2023.For the nine months ended September 30, 2023 commercial revenues decreased by 4% from the prior year period. Healthcare revenues increased by 60% in the first nine months of 2023 from the same period of 2022. Government revenues decreased by 9% from the prior year period. Education sales for the nine months ended September 30, 2023 were down 24% from 2022. Both the healthcare and education sectors included a higher magnitude of smaller projects in 2023 than 2022.15-25%11-15% and 75-85%85-89% of DIRTT’s revenues arehave been derived from sales to Canada and the United States, respectively. The third quarter of 2023 included a higher volume of sales to customers in the United States compared to Canada resulting in 11% of sales to Canada with the rest in the United States.$0.1$0.4 million to $6.2$5.9 million for the three months ended September 30, 2023,March 31, 2024 from $6.1$5.5 million for the three months ended September 30, 2022.March 31, 2023. The increase was driven by highera $0.5 million increase in salaries and benefits, a $0.2 million increase in commissions costs and a $0.1 million increase in professional services costs associated with recruiting efforts, offset by lower travela $0.4 million decrease in building and entertainment costs, marketing costs, and buildingoffice expenses.Sales and marketing expenses decreased by $2.8 million to $18.3 million for the nine months ended September 30, 2023 from $21.1 million from the same period of 2022. The decreases were largely related to a realignment of back office support and territory coverage and cost structure with current demand levels.$1.9$1.3 million to $4.7$4.6 million for the three months ended September 30, 2023March 31, 2024 from $6.5$5.8 million for the three months ended September 30, 2022.March 31, 2023. The decrease was primarily related to a $0.4 million decrease in professional services costs of $1.0(which included a $0.8 million insurance recovery and $0.5 million costs associated with the Issuer Bid), a $0.2 million decrease in office costs, a $0.2 million decrease in communications costs and a $0.5$0.4 million decrease in salaries and benefits costs, associated with the planned headcount reductions as part of our cost reduction initiatives.For the nine months ended September 30, 2023, general and administrative expenses decreased by $5.4a $0.3 million to $16.0 million from $21.4 million driven by a $4.1 million reduction in professional services costs, which included $1.8 million related to the costs of the contested director elections, a $0.6 million reductiondecrease in office and communication costs and communications costs, a $0.7$0.2 million reductiondecrease in depreciation.public company costs and Board of Directors fees, and a $0.1 million decrease in travel and entertainment costs. These decreases were offset by $0.2 million higher operating costs in our leased office space.$0.6$0.2 million from $2.3$2.0 million for the three months ended September 30, 2022March 31, 2023 to $1.8 million for the three months ended September 30, 2023.March 31, 2024. The decrease was primarily duerelated to a $0.4$0.1 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of our cost reduction initiatives. Operations support expenses decreased $1.8 million for the nine months ended September 30, 2023 to $5.6 million from $7.3 million in the same period of 2022 mostly related toand a $1.6$0.1 million decrease in salaries and benefitsprofessional service costs.$0.5$0.2 million to $1.2$1.3 million for the three months ended September 30, 2023,March 31, 2024, compared to $1.7$1.5 million for the three months ended September 30, 2022,March 31, 2023, primarily related to decreased salaries and benefits costs associated with the planned headcount reductions as part of our cost reduction initiatives. For the nine months ended September 30, 2023, technology and development costs decreased by $1.7a $0.2 million to $4.1 million from $5.7 million in the same period of 2022 related to a decrease in salaries and benefits costs and an increase in capitalized software development costs.and nine months ended September 30, 2023March 31, 2024 was $1.1$0.7 million and $2.5 million, respectively, compared to $0.9 million and $3.5$0.8 million in the same periodsperiod of 2022.2023. The movementdecrease in this expense was largely due to grantsa higher number of RSUs andcompared to the prior year’s period. The decrease in RSU expense was offset by a higher DSU expense as a result of a higher share awards which occurred inprice during the first quarter of 2022 but in 2023 were granted in the second quarter. Grants for RSUs in lieu of cash compensation to the Company’s interim Chief Executive Officer in 2022 were not repeated in 2023. DSUs were granted to the Board of Directors, but was offset by the impact of fair value adjustments on cash settled awards as a result of our share price decreasing during the nine months ended September 30, 2023.2024.$0.3$0.1 million decreased from $3.4$1.1 million in the prior period. Current quarter costs relate primarily to movement of inventory from the Rock Hill Facility, andwhile the reorganization costs in the first quarter of 2023 were largely made up of termination costs associated with actions taken to streamline our back office and operational support functions, as discussed herein andfunctions. No new reorganization initiatives were undertaken in our quarterly reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023, which are expected to contribute $2.6 million in annualized savings. Secondfirst quarter of 2022 reorganization costs were driven by the closure of Phoenix Facility and the one-time costs associated with a reduction of salaried workforce and two executives.Reorganization costs decreased to $2.9 million for the nine months ended September 30, 2023 from $12.3 million for the same period of 2022. Nine month costs in 2023 relate primarily to termination costs and costs to move materials from Rock Hill to Calgary, while the costs in 2022 relate to expenditures in closing the Phoenix Facility and costs associated with workforce reductions and changes in management.2024.chargeCharge on Rock Hill FacilityThe Company reassessed the useful lives of theCertain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. At March 31, 2024, we determined that the assets held for sale balance of $0.5 million was to be reduced to $nil resulting in an $8.0a $0.5 million impairment charge for the quarter. While we will continue to pursue a sale of the assets, we were not able to determine the likelihood of recoverability based on the current market interest in the threeequipment.nine months ended September 30, 2023C$5.8 million ($nil4.3 million) aggregate principal amount of December Debentures were validly deposited and not withdrawn, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Issuer Bid for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)). In accordance with GAAP, it was determined that the threeC$6.9 million ($5.1 million) repayment on principal triggered an extinguishment of debt. The gain on extinguishment of C$3.9 million ($2.9 million) of debt was calculated as the difference between the repayment and nine months ended September 30, 2022) to reduce the assets to their fairnet carrying value of the extinguished principal less unamortized issuance costs to sell certain assets being held for sale.of C$0.4 million ($0.2 million)."Debt"“Debt”).29September 30, 2023. TheMarch 31, 2024. Comparatively, the Company received $0.2$0.1 million of interest with the collection of the ERCEmergency Retention Credit during the ninethree months ended September 30,March 31, 2023.Pursuant to amendments enacted as part of the 2021 Canadian federal budget, the Company was required to repay a portion of the Canadian Emergency Wage Subsidy ("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. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of subsidies was expected to be returned to the Canadian authorities in the second quarter of 2022. The amount was fully provided for in the third quarter of 2021 and in the first quarter of 2022 and the Company reversed a $0.6 million incremental provision related to this that was no longer necessary.Gain on sale of software and patentsOn May 9, 2023, we entered into the Co-Ownership Agreement and Partial Patent Assignment Agreement with AWI. The agreements provide for a cash payment from AWI to the Company of $10.0 million, subject to certain routine closing conditions, in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the patent rights that relate to the Applicable ICE Code. We also agreed under the Co-Ownership Agreement to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.0 million, which is expected to be received by early 2024. The Co-Ownership Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into the ARMSA with AWI, under which AWI has also prepaid for certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.The $10.0 million of proceeds from the Co-Ownership Agreement was received during the second quarter of 2023. In accordance with US GAAP, the proceeds were first applied to the net book value of the related cost of software and patents (other assets) and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $0.9 million was received during the quarter ended June 30, 2023 as prepayment under the ARMSA. Part of the proceeds of this transaction were used to settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash.$1.3 million in the quarter ended September 30, 2022 to $1.2 million in the quarter ended September 30, 2023 and by $0.3 million for the nine months ended September 30,March 31, 2023, to $3.6$1.1 million in the quarter ended March 31, 2024, due to foreign exchange impacts of a weakening Canadian dollar and the decrease in equipment lease balances due to principal repayments.caused by early settlement of the U.S. Leasing Facility (as defined herein) in the fourth quarter of 2023.September 30, 2023March 31, 2024, the Company had a valuation allowance of $33.4$33.9 million (December 31, 2022: $29.82023: $34.5 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. The Company will continue to evaluate indicators on whether a valuation allowance continues to be needed. For the quarter ended March 31, 2024, the Company utilized a balance of its non-capital loss carry-forwards in Canada and the United States. As at September 30, 2023,March 31, 2024, we had C$110.930$55.7$55.0 million in the United States. These loss carry-forwards will begin to expire in 2032.2035.LossIncome After Taxloss decreasedincome after tax increased to a $6.3$3.0 million loss or $0.06$0.02 basic and $0.01 diluted net lossincome per share, respectively, in the three months ended September 30, 2023March 31, 2024, from a net loss after tax of $6.7$11.4 million or a $0.08$0.10 basic and diluted net loss per share for the three months ended September 30, 2022.March 31, 2023. The lowerincrease in net lossincome is primarily the result of thea $6.0 million higher gross profit, margin of $10.1a $3.9 million a $2.2 million increasedecrease in operating expenses, (including an $8.0which includes a $0.9 million decrease in reorganization expenses offset by a $0.5 million impairment charge on the closure ofrelated to the Rock Hill Facility offset byclosure, a $3.1$2.9 million reductiongain on extinguishment of debt, a $1.2 million increase in reorganization costs),foreign exchange gain, a $0.1$0.5 million increase in interest income, and a $0.1 million decrease in interest expense,expense. These were offset by a $0.5 million decrease in foreign exchange gain and a $7.1 million government subsidy in 2022 that did not recur.Net loss decreased to $15.5 million or $0.15 net loss per share in the nine months ended September 30, 2023 from a net loss of $49.1 million or $0.57 net loss per share for the nine months ended September 30, 2022. The decreased loss is primarily the result of a $23.7 million increase in gross profit, a $12.6 million decrease in operating expenses (including a $9.4 million decrease in reorganization expenses, and a decrease of $1.8 million of incremental professional fees offset by an $8.0 million impairment charge on the Rock Hill Facility, as described previously), a one-time gain of $6.1 million on the sale of software and patents, a $0.3 million decrease in interest expense, a $0.2 million increase in interest income, offset by a $1.9 million increase in foreign exchange loss and a $7.5$0.1 million decrease in government subsidies.and Nine Months Ended September 30,March 31, 2024 and 2023 and 2022and nine months ended September 30,March 31, 2024 and 2023 and 2022 of EBITDA and Adjusted EBITDA to our net loss,income (loss), which is the most directly comparable GAAP measure for the periods presented:lossincome (loss) after tax divided by revenue.TheReorganization expenses, the gain on saleextinguishment of software and patents is a non-recurring transactionconvertible debt and the impairment charge on the Rock Hill Facility are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (Refer to Note 74 and Note 6, respectively,5 of the consolidated interim financial statements).31September 30, 2023,March 31, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $10.7$6.2 million to $5.3$2.7 million or 10.6%and 6.5%, respectively, from a $5.4$3.5 million loss or (11.6)and (9.6)% in the same period of 2022.2023. This primarily reflects an $8.2a $5.0 million increase in Adjusted Gross Profit, a decrease of $1.0 million of professional fees, a $1.1$0.4 million decrease in salaries and benefitsprofessional services costs, a $0.6 million decrease in office, building and communication costs and a $0.3$0.2 million decrease in travel and entertainment costs in the quarter, offset by a $0.5 million increase in commissions.For the nine months ended September 30, 2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by $30.4 million to $3.6 million or 2.7% from a $26.8 million loss or (20.7)% in the same period of 2022. This primarily reflects a $19.6 million increase in Adjusted Gross Profit, a decrease of $4.1 million of professional fees, a $5.1 million decrease in salaries and benefits costs, a $0.8 million decrease in travel and entertainment costs, a $0.6 million decrease in marketing costs and a $1.2 million decrease in building, office and communications costs.other discretionary operating expenses.and Nine Months Ended September 30,March 31, 2024 and 2023 and 2022and nine months ended September 30,March 31, 2024 and 2023 and 2022 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:September 30, 2023,March 31, 2024, gross profit and gross profit margin increased to $17.1$14.6 million or 34.4%and 35.9%, respectively, from $7.0$8.7 million or 15.0%and 23.7% for the prior period.same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased 80% to $18.3$15.5 million or 36.9%and 37.9% for the three months ended September 30, 2023,March 31, 2024, from $10.1$10.5 million or 21.7%and 28.5% for the three months ended September 30, 2022.March 31, 2023.For the nine months ended September 30, 2023, gross profit and gross profit margin increased to $40.3 million or 30.8% from $16.6 million or 12.8% for the prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin increased 77% to $45.0 million or 34.3% for the nine months ended September 30, 2023, from $25.4 million or 19.6% for the nine months ended September 30, 2022. Gross profit for the nine months ended September 30, 2022 included $1.1 million of accelerated depreciation and amortization arising from the change in useful lives of the Phoenix Facility's equipment. and the impact of the price increases to offset the inflationary impacts on material costs. Labor decreased $0.7 million and $4.0 million and fixedFixed costs decreased $1.1$0.6 million and $2.9 million, respectively, for the quarter and nine months ended September 30, 2023March 31, 2024 as we closed our Phoenix Facility duringaligned overhead costs and support with current operations after having finalized the second quarter of 2022 and temporarily suspended operations in ourdecision to close the Rock Hill Facility in the third quarter of 2022, as well as cost reduction initiatives taken impacting our overheads.2023. Idle facility costs incurred to the suspension of operations at the Rock Hill Facility of $0.4 million and $1.4were $0.5 million for the three and nine months ended September 30, 2023, respectively, and are included in costMarch 31, 2024 (2023 – $0.4 million). We continue to evaluate options to sublease the Rock Hill Facility to recover the costs of sales.the facility.September 30, 2023,March 31, 2024, the Company had $19.5$39.0 million of cash on hand and C$14.610.1 million ($10.88.5 million) of available borrowings, compared to $10.8$24.7 million of cash on hand and C$7.213.6 million ($5.310.3 million) of available borrowings as at December 31, 2022.2023. Through the first ninethree months of fiscal 2023,2024, the Company generated $4.732inof cash flow from operations, compared to a cash usage of $47.5$2.7 million overin the first ninethree months of fiscal 2022. The Company benefited2023. Cash generated included cash flows from the receiptRights Offering of $7.3$21.3 million and improved operational results, offset by a decrease in working capital of government subsidies during$10.6 million (mainly due to timing of payables and $5.2 million repayment of debt under the first half of 2023.Issuer Bid).ninethree months ended September 30, 2023March 31, 2024 was $40.3$14.6 million, or 30.8% compared to the35.9%. The same period of 2022, which2023 generated gross profit of $16.6$8.7 million, or 12.8%23.7%.past twelve months,same period, we have executed upon several initiatives to improve liquidity. First, in May 2023, we entered into an agreement with AWI resulting in the receipt of $10.9$12.8 million of cash.cash throughout 2023. Second, duringin March 2023, we entered into an agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024, providing us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities, including our Rock Hill Facility, and expect these strategic initiatives to result in positive cash inflows in 2023 and 2024. Third, we completed a Private Placement (as defined herein)private placement of 8,667,449 common shares in November 2022 for aggregate gross proceeds of $2.8 million (the “Private Placement”), with certain significant shareholders and directors and officers of the Company to bridge cash requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable subscription agreements with its two largest shareholders, 22NW and 726 BC LLC and 726 BF LLC (together “726” (which subsequently transferred its holdings to WWT Opportunity #1) and all the directors and officers of the Company on November 14, 2022, to issue 8.7 million shares for gross consideration of $2.8 million (the "Private Placement").million. The Private Placement closed on November 30, 2022.addition, in connection withreturn, the Private Placement, 22NWCompany has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and 726, orunderwriting costs, plus a multiple of such funded amount based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets.principals, have irrevocably committedDebentures received the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, backstopping any rights offering occurringbut excluding, the date on which such Debentures were taken up by the Company within twelve monthsCompany. The applicable purchase price was denominated in Canadian dollars and payments of closing the Private Placementamounts owed to holders of deposited Debentures, including for interest, weretheCanadian dollars. The Issuer Bid expired on March 22, 2024 and DIRTT purchased C$4.7 million ($3.5 million) aggregate principal amount of $2.0 million.the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of the December Debentures, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Offer for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)).154 employees, or approximately 16% from January 2022 through September 2023. The reduced overhead has served to offset the impact from the macroeconomic headwinds experienced over the past year.March 2024.Furthermore, the Company is evaluating a rights offering to raise additional capital, as described in the registration statement on Form S-1, filed on October 26, 2023 (File No. 333-275172) (the “S-1”) with the SEC (the “Rights Offering”), the proceeds of which, if pursued, are expected to be used for general corporate purposes, which may include investments in our business, funding potential future cash needs or operating losses, funding working capital and capital expenditure needs, or reductions to our outstanding indebtedness.We have assessed the Company’s liquidity as at September 30, 2023 taking into account our sales outlook for the next twelve months, our existing cash balances and available credit facilities and expected early settlements related to our Rock Hill Facility equipment lease. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next twelve months. However, a number of factors, including the macroeconomic factors discussed above could adversely impact our liquidity over such period.To the extent that existing cash and cash equivalents and available facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders. While we believe we can access capital markets when needed or under acceptable terms, there can be no assurance we will be able to do so.the January Debenture Maturity Date.31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the January Debentures was adjusted to C$4.03 per common share, representing a conversion rate of 248.1390 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$4.7 million ($3.5 million) of the principal balance of the January Debentures and paid C$0.04 million ($0.03 million) of the interest payable on such January Debentures. As at September 30, 2023,March 31, 2024, C$18.9 million ($13.9 million) principal amount of the January Debentures are held by a related party,33 22NW holds approximately 22.1% of our issued and outstanding common stock as of October 25, 2023. Aron English, manager of 22NW Fund GP, LLC, the general partner of 22NW, is a director of the Company.In February 2021, we entered into the RBC Facility, a C$25.0 million senior secured revolving credit facility with 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. On February 9, 2023, the Company extended the RBC Facility. The Extended RBC Facility has a borrowing base of C$15 million and a one year term. Available borrowings under the Extended RBC Facility at September 30, 2023 were C$14.6 million ($10.8 million).the December Debenture Maturity Date.31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the December Debentures was adjusted to C$3.64 per common share, representing a conversion rate of 274.7253 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$5.8 million ($4.3 million) of the principal balance of the December Debentures and paid C$0.08 million ($0.06 million) of the interest payable on such December Debentures. As at September 30, 2023,March 31, 2024, C$13.6 million ($10.0 million) principal amount of the December Debentures are held by a related party, 22NW.FacilityFacility”) with RBC of which C$4.4 million ($3.33.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%. During 2023, the Company had a $14.0 million U.S. Leasing Facility of which $13.3 million has been drawnequipment leasing facility, with RBC and one of its affiliates. Theaffiliates, in the United States, of which $13.3 million was drawn and repaid (the “U.S. Leasing Facilities are available for equipment expendituresFacility” and, certain equipment expenditures already incurred.together with the Canada Leasing Facility, the “Leasing Facilities”). In connection with the Company’s decision to close the Rock Hill Facility, we intend to settlesettled the liability related to the U.S. Leasing Facility of $8.2 million in the next twelve months.($7.8 million). The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we expect approximatelyreleased $2.6 million to be released fromof restricted cash. On October 31, 2023, the Company paid off $1.0 million of the U.S. Leasing Facility.cash during 2023.provided byused in operating activities were $1.9$2.0 million for the three months ended September 30, 2023March 31, 2024 compared to $10.7$1.0 million used in the same period of 2022.2023. The improvementincrease in cash flows used in operations is largely due to a $10.6 million decrease in working capital compared to the $10.7first quarter of 2023, offset by the $6.2 million increase in Adjusted EBITDA and a $3.1$0.9 million decrease in reorganization expenses offset by a $1.7expenses. Working capital in the first quarter of 2023 benefited from the receipt of $4.8 million increase in working capital excludingrelated to the $7.1 million receivableEmployee Retention Credit and the elimination of the quick pay discount for government subsidies impactingour customers during the third quarter of 2022.Net cash flows provided by operating activities were $4.7 million for the nine months ended September 30, 2023 compared to $47.5 million used in the same period of 2022. The improved cash flows from operations2023. First quarter 2024 working capital was drivenimpacted by the $30.4 million increase in Adjusted EBITDA, a $9.4 million decrease in reorganization expenses, and a $19.0 million net decrease in working capital comprising $11.7 million decrease in routine working capital and a $7.3 million decrease in other receivables relatingtiming of payables relative to the ERC claim. Through September 30, 2023, we have continued to draw down on our inventory supply built up in the first half of 2022.34Cash flows provided by investing activities during the nine months ended September 30, 2023 benefited from $10.0 million of proceeds from the AWI transaction during the second quarter of 2023. million and $1.3 million in property, plant and equipment during the three and nine months ended September 30, 2023, respectivelyMarch 31, 2024, compared to $0.4 million and $2.2 million, respectively, duringin the three and nine months ended September 30, 2022.March 31, 2023. This expenditure consisted of $0.3$0.1 million of information technology $0.4 million of DXC refreshes and $0.6$0.2 million of manufacturing upgrades forin the nine months ended September 30, 2023.first quarter of 2024. We invested $0.4 million and $1.5 million on capitalized software during the three and nine months ended September 30, 2023, respectively,March 31, 2024, compared to $0.4 million and $1.3$0.5 million for the three and nine months ended September 30, 2022.March 31, 2023. During the first quarter of 2024, we sold $1.0 million of assets classified as held for sale as a result of the closure of the Rock Hill Facility, for proceeds of $1.0 million.and nine months ended September 30, 2023, $0.6 million and $3.4March 31, 2024, $16.1 million of cash respectively, was used inprovided by financing activities compared to $0.9$0.7 million and $1.8 million inof cash used for the same periodsperiod of 2022.the prior year. The cash usedprovided comprised mainly of $0.6$21.3 million of net proceeds received from the Rights Offering offset by $5.1 million repayment of Debentures as a result of the Issuer Bid and scheduled payments under the Leasing Facilities for both periods.Facilities. During the second quarter of 2023, an additional $1.6 million principal repayment was made against the Canadian Leasing Facility. This payment was required by RBC as part of their consent for the AWI transaction and resulted in the full settlement of one of the Canadian leasing agreements. In the three and nine months ended September 30, 2022,March 31, 2024, we incurred $0.3 million and $0.6$0.1 million of spend on employee tax payments on vesting of RSUs, compared to $nil and $0.03 million in the same period of 2023.We currently expect to fund anticipated future investments with available cash and drawings on the Extended RBC Facility. To date, our strategic actions have generated cash through proceeds from the Private Placement in November 2022, the receipt of $7.3 million of government subsidy through the ERC application during the nine months ended September 30, 2023 and proceeds of $10.9 million received in the second quarter of 2023 through the AWI transaction. We continue to evaluate properties we own for sale and lease back and opportunities to sub lease available spaces. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing, may be pursued in the future as we deem appropriate. We may also use debt or pursue equity financing depending on the price of our common shares at the time, interest rates, and nature of the investment opportunity and economic climate. No assurance can be given that any of these actions will be successful and will be sufficient for our needs.iswas 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“Aggregate Excess AvailabilityAvailability”, 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 iswas subject to a FCCRfixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has beenwas below 1.10:1 for the three immediately preceding months, the Company iswas required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. ShouldHad an event of default occur,occurred or the Aggregate Excess Availability bebeen less than C$6.25 million for five consecutive business days, the Company would enterhave entered a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances willwould set-off any borrowings and any remaining amounts made available to the Company.Facility.Facility (the “Extended RBC Facility”). The Extended RBC Facility hashad a maximum borrowing base of C$15 million and a one yearone-year term. Interest iswas calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate ("SOFR")LIBOR plus 200 basis points plus the Term SOFR Adjustment.points. Under the Extended RBC Facility, ifuntil such time that the trailing twelve monthtwelve-month FCCR iswas above 1.25 for three consecutive months, a cash balance equivalent to one-year'sone-year’s worth of Leasing Facilities payments mustwould be maintained. Effective October 2023, inventory was scoped out of the Borrowing Base.September 30, 2023,March 31, 2024, available borrowings are C$14.610.1 million ($10.88.5 million) (December 31, 20222023 – $10.8C$13.6 million and C$7.2 million ($5.310.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The Company did not meetSecond Extended RBC Facility removed the three-month FCCR requirement during the third quarter of 2023,covenant, which resulted in requiring the restrictionrelease of $3.0$0.1 million of cash.35During 2020,restricted cash during the first quarter of 2024 (the Company entered into the Leasing Facilities, consisting of the C$5.0had $0.4 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 interestrestricted cash as at 4.25% and 5.59%December 31, 2023). The U.S. Leasing Facility is amortized over a six-year term and is extendible at the Company’s option for an additional year.drawn $13.3a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) 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 drawnwhich C$4.4 million ($3.33.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of cash consideration underwhich $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and commencedbears interest at 4.25%. lease term for the Canadian equipment expenditures during 2020. In connection with the Company’s decision to close the Rock Hill Facility, we intend to settlethe Company fully settled the liability related to the U.S. Leasing Facility of $8.2$7.8 million in the next twelve months.fourth quarter of 2023. The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we expect approximately $2.6 million to bewas released from restricted cash. On Octobercash during 2023.Company paid off $1.0 million of the U.S.Canada Leasing Facility.one of our factory leases in Calgary headquarters for an additional tenthree years beyond the original term;our entry into the Debt Settlement Agreement with the 22NW Group;repurchase and•the modification cancellation of C$10.5 million of principal of our Rock Hill Facility lease.convertible debt under the Issuer BidSeptember 30, 2023,March 31, 2024, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K. For information regarding significant accounting policies and estimates, please refer to Item 7 and Item 8 in our Annual Report on Form 10-K. As disclosed in Note 3, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, there were no new accounting standards adopted during the three months ended September 30, 2023. We have disclosed the accounting policy applied for the assets held for sale related to the Rock Hill Facility.Report.Standards”Standards,” to our condensed consolidated interim financial statements and “–Significant Accounting Policies and Estimates” appearing in this Quarterly Report.36September 30, 2023.March 31, 2024. Based upon their evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.September 30, 2023,March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.3736 former founders, Mogens Smed and Barrie Loberg, as well as Falkbuilt Ltd. and Falkbuilt, Inc. (collectively, “Falkbuilt”) and related individuals and corporations. DIRTT alleges breaches of fiduciary duties and non-competition and non-solicitation covenants, and the misappropriation of its confidential and proprietary information (in violation of numerous U.S. state and federal laws pertaining to the protection of trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices). Except as described below, there have been no material developments in the legal proceedings previously disclosed in our Annual Report on Form 10-K.10-K for the year ended December 31, 2023.DIRTT'sDIRTT’s application to schedule the hearing of its summary judgment application and dismissed Falkbuilt’s cross-application to strike the summary judgment application. On April 5, 2023, the parties appeared before the Associate Chief Justice of the Court of King’s Bench of Alberta for a Case Management Conference. In the Conference, the Associate Chief Justice offered the parties an expedited six-week trial on both liability and damage issues, as an alternative to DIRTT proceeding withDIRTT’s. The is aggressively pursuing its summary judgment application on the condition that the parties could reach an agreement on the terms of the alternative process. The parties have not reached consensus regarding the terms of an expedited six-week trial, however, DIRTT remains fully cooperative with the Court of King’s Bench. In the meantime, DIRTT plans to aggressively pursue its summary judgment application.has been scheduled for September 22-26, 2025.is currently scheduled forproceeded on December 7th,7, 2023 in New Orleans. The Court will either orderTenth Circuit ultimately denied Falkbuilt’s appeal to have the Texas claims transferred to Utah or, if it affirms the lower court,joined in Canada and those claims would proceed, inconveniently,are in Utah. Notwithstanding all the prior litigation, Falkbuilt has again moved to stay the Utah case and move it, including the Texas claims, to Canada. We believeDIRTT has vigorously opposed these motions and commenced discovery. Falkbuilt’s response to pending discovery are due shortly. Briefing on Falkbuilt’s motion to stay the case and renewed motion to move it to Canada will be fully briefed shortly. DIRTT is very unlikely they would proceed in Texasproceeding as neitherthough the Motions will be denied.or Falkbuilt currently desiresfiled a Statement of Claim at the Court of the King’s Bench of Alberta against McMillan LLP, one of their partners and several former Directors of DIRTT for negligence and breach of fiduciary duties. The Claim explains that outcome.as a result DIRTT has suffered loss and damages and seeks compensation for damages of approximately C$30 million.38Our common shares are quoted on the OTC’s Pink® Open Market, and there may be a limited trading market in our common shares in the United States. As a result of the limited trading market, investors may experience limited liquidity, and may experience limited ability to sell shares in the open market.Our common shares are quoted on the OTC’s Pink® Open Market under the symbol “DRTTF.” There may be a limited trading market in our common shares in the United States. As a result of the limited trading market of our common shares, investors in our common shares may experience limited demand for their shares of common shares, which may limit their ability to sell their shares in the open market.393810.1*4.410.2*10.1*†4039 (DulyNovember 9, 2023May 8, 20244140