DIRTT ENVIRONMENTAL SOLUTIONS LTD

Previous wording

Gross profit and gross profit margin for the quarter ended March 31, 2024 was $14.6 million or 35.9% of revenue, an increase from $8.7 million or 23.7% of revenue for the quarter ended March 31, 2023. Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the three months ended March 31, 2024 was $15.5 million. This represents an increase of $5.0 million from the comparative period in 2023. Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the first quarter of 2024 increased to 37.9% from 28.5% in the comparative period. The increase in Adjusted Gross Profit and Adjusted Gross Profit Margin compared to the previous year period is a result of improved product mix, improved labor efficiency, and better fixed cost leverage.

Current wording

Gross profit and gross profit margin for the quarter ended June 30, 2024 was $15.4 million or 37.3% of revenue, an increase of $0.8 million from $14.6 million or 32.5% of revenue for the quarter ended June 30, 2023, and an increase of $0.7 million from $14.6 million or 35.9% of revenue for the first quarter of 2024. Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the three months ended June 30, 2024 was $16.2 million, consistent with the second quarter of 2023 despite lower revenues and higher than the first quarter of 2024 by $0.7 million. Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the second quarter of 2024 increased to 39.4% from 36.2% and 37.9% in the comparative period of 2023 and the first quarter of 2024, respectively. These increases in Adjusted Gross Profit Margin are a result of improved material optimization and reduced fixed costs.

Previous wording

Net income after tax for the first quarter of 2024 was $3.0 million compared to an $11.4 million net loss after tax for the same period of 2023. The increase in net income is primarily the result of a $6.0 million higher gross profit margin (as explained above), a $3.9 million decrease in operating expenses, a $2.9 million increase in gain on extinguishment of debt, a $1.2 million increase in foreign exchange gain, a $0.5 million increase in interest income, and a $0.1 million decrease in interest expense, offset by a $0.1 million decrease in government subsidies.

Current wording

Net income after tax for the second quarter of 2024 was $0.6 million compared to $2.2 million for the same period of 2023. The decrease in net income is primarily the result of a $6.1 million gain on sale of software and patents in the second quarter of 2023, which was not repeated in the second quarter of 2024, and a $0.3 million increase in income tax expense, offset by an $0.8 million increase in gross profit, a $2.5 million decrease in operating expenses, a $1.0 million increase in foreign exchange gain, a $0.4 million increase in interest income and a $0.3 million decrease in interest expense.

Previous wording

Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the first quarter of 2024 was $2.7 million, or 6.5% of revenue, an improvement of $6.2 million from a $3.5 million loss, or (9.6)% of revenue, for the first quarter of 2023. Higher Adjusted EBITDA was driven by improved gross margin and cost reduction measures taken by the Company over the past two years.

Current wording

Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the second quarter of 2024 was $3.2 million, or 7.7% of revenue, an improvement of $1.3 million from $1.9 million, or 4.1% of revenue, for the second quarter of 2023. Higher Adjusted EBITDA was mainly driven by cost reduction measures taken by the Company over the past two years.

Previous wording

As of April 1, 2024, our twelve-month forward pipeline grew by 7% year-over-year and marginally from January 1, 2024, illustrated in the table below.

Current wording

As of July 1, 2024, our twelve-month forward pipeline grew by 20% year-over-year and decreased 3% from January 1, 2024, illustrated in the table below.

Previous wording

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.

Current wording

Our interim condensed consolidated financial statements are prepared in accordance with GAAP. These GAAP financial statements include non-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult.

Previous wording

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), tax consequences, reorganization expense, one-time non-recurring charges or gains (such as gain on extinguishment of debt), and stock-based compensation. We remove the impact of foreign exchange gain (loss) from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In addition, management bases certain forward-looking estimates and budgets on non-GAAP financial measures, primarily Adjusted EBITDA.

Current wording

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), tax consequences, reorganization expense, one-time non-recurring charges or gains (such as gain on sale of software and patents and gain on extinguishment of debt), and stock-based compensation. We remove the impact of foreign exchange gain (loss) from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In addition, management bases certain forward-looking estimates and budgets on non-GAAP financial measures, primarily Adjusted EBITDA.We have not reconciled non-GAAP forward-looking measures, including Adjusted EBITDA guidance, to its corresponding GAAP measures due to the high variability and difficulty in making accurate forecasts and projections, particularly with respect to non-operating income and expenditures, which are difficult to predict and subject to change.

Previous wording

Three Months Ended March 31, 2024, Compared to the Three Months Ended March 31, 2023

Current wording

Three and Six Months Ended June 30, 2024, Compared to the Three and Six Months Ended June 30, 2023

Previous wording

Installation and other services revenue was $1.8 million for the quarter ended March 31, 2024 compared to $1.2 million in the quarter ended 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; accordingly, we are not anticipating significant growth in this revenue stream.

Current wording

Installation and other services revenue was $1.0 million for the quarter ended June 30, 2024 compared to $1.2 million in the quarter ended June 30, 2023, and $2.8 million in the six months ended June 30, 2024 compared to $2.5 million in the same period of 2023. Installation and other services revenue primarily reflects services performed by our ICE and design teams for third parties. Except in limited circumstances where it is beneficial for DIRTT to hold the contract or a requirement of the end customer, the Construction Partner, rather than the Company, perform and are responsible for the installation services.

Previous wording

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 March 31, 2024, we had 74 Construction Partners (March 31, 2023: 67; December 31, 2023: 72) servicing multiple locations.

Current wording

Our success is partly dependent on our ability to profitably develop our Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. At June 30, 2024, we had 76 Construction Partners (June 30, 2023: 68; December 31, 2023: 72) servicing multiple locations.

Previous wording

We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. While all sectors have been challenged by the macroeconomic factors discussed previously, we are seeing increased growth in our commercial sector. We believe that an increase in new construction starts and the heightened need for adaptability and flexibility in the years after the COVID-19 pandemic have increased the demand for our products. We continue to see growth opportunities in the healthcare and education sectors and have restructured our sales leadership function, prioritizing oversight of these verticals.

Current wording

We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. While all of these sectors have been challenged by macroeconomic factors, we are seeing increased growth in our commercial sector. We believe that an increase in new construction starts and the heightened need for adaptability and flexibility in the years after the COVID-19 pandemic have increased the demand for our products. We continue to see growth opportunities in the healthcare and education sectors and have restructured our sales leadership function, prioritizing oversight of these verticals.

Previous wording

Commercial revenues increased by 23% from the prior year period. Healthcare revenues decreased by 51% in the first quarter of 2024 from the same period of 2023. The quarter ended March 31, 2023 included a higher volume of large healthcare 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 first quarter of 2024 increased by 28% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the first quarter of 2024 increased 13% from the same period of 2023. The education sector included a higher magnitude of smaller projects in the first quarter of 2024 than in the first quarter of 2023.

Current wording

Commercial revenues increased by 6% for the second quarter of 2024 from the prior year period. The quarter ended June 30, 2024 included larger commercial projects compared to the quarter ended June 30, 2023. Healthcare revenues decreased by 54% in the second quarter of 2024 from the same period of 2023, primarily due to two large healthcare projects totaling $5.6 million in revenue for the second quarter of 2023 that did not arise in the same period of 2024. Healthcare sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Government revenues in the second quarter of 2024 increased by 56% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the second quarter of 2024 decreased by 35% from the same period of 2023. The education sector included one large project that was completed in the second quarter of 2023 that was not repeated in the same period of 2024 and had a lower volume of projects in the second quarter of 2024 compared to the second quarter of 2023.

Previous wording

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 11-15% and 85-89% of DIRTT’s revenues have been derived from sales to Canada and the United States, respectively.

Current wording

The second quarter of 2024 included a higher proportion of sales to customers in the United States than to those in Canada, with 11% of sales for the period being in Canada and the rest occurring in the United States, compared to 9% of sales to Canada in the second quarter of 2023. Historically, approximately 11-15% and 85-89% of DIRTT’s revenues have been derived from sales to Canada and the United States, respectively.

Previous wording

Sales and marketing expenses increased by $0.4 million to $5.9 million for the three months ended March 31, 2024 from $5.5 million for the three months ended March 31, 2023. The increase was driven by a $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 a $0.4 million decrease in building and office expenses.

Current wording

General and administrative expenses decreased by $1.1 million to $4.4 million for the three months ended June 30, 2024, from $5.5 million for the three months ended June 30, 2023. The decrease was primarily related to a $0.5 million decrease in salaries and benefits costs and a $0.3 million decrease in office costs and communications costs.

Previous wording

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 $0.2 million from $2.0 million for the three months ended March 31, 2023 to $1.8 million for the three months ended March 31, 2024. The decrease was primarily related to a $0.1 million decrease in salaries and benefits costs and a $0.1 million decrease in professional service costs.

Current wording

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 for the three months ended June 30, 2024 were $1.8 million, consistent with $1.8 million for the comparative period of 2023.

Previous wording

Technology and development expenses decreased by $0.2 million to $1.3 million for the three months ended March 31, 2024, compared to $1.5 million for the three months ended March 31, 2023, primarily related to a $0.2 million decrease in salaries and benefits costs.

Current wording

Technology and development expenses increased by $0.2 million to $1.4 million for the three months ended June 30, 2024, compared to $1.3 million for the three months ended June 30, 2023, primarily related to a $0.1 million increase in salaries and benefits costs. For the six months ended June 30, 2024, technology and development costs decreased by $0.1 million to $2.7 million, from $2.8 million in the same period of 2023. The decrease is primarily related to a $0.3 million decrease in salaries and benefits and a $0.1 million decrease in building and infrastructure costs, offset by a $0.3 million write off of a previously capitalized software development project.

Previous wording

Stock-based compensation expense for the three months ended March 31, 2024 was $0.7 million compared to $0.8 million in the same period of 2023. The decrease in this expense was largely due to a higher number of RSUs compared 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 price during the first quarter of 2024.

Current wording

Stock-based compensation expense for the three and six months ended June 30, 2024 was $0.4 million and $1.1 million, respectively, compared to $0.7 million and $1.5 million in the same periods of 2023. The decrease in this expense was largely due to a higher number of RSUs outstanding in the prior year period compared to the first six months of 2024. The decrease in RSU expense was offset by a higher DSU expense, as a result of a higher share price during the second quarter of 2024.

Previous wording

Reorganization expenses for the quarter of $0.1 million decreased from $1.1 million in the prior period. Current quarter costs relate primarily to movement of inventory from the Rock Hill Facility, while 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. No new reorganization initiatives were undertaken in the first quarter of 2024.

Current wording

Reorganization expenses for the three and six months ended June 30, 2024 was $0.2 million and $0.3 million, respectively. Reorganization expenses decreased from $1.5 million and $2.5 million in the three and six months ended June 30, 2023, respectively. Current quarter costs relate primarily to movement of inventory from the Rock Hill Facility, while the reorganization costs in the second quarter of 2023 were largely made up of termination costs associated with actions taken to streamline our back office and operational support functions. No significant reorganization initiatives were undertaken in the second quarter of 2024.

Previous wording

On September 27, 2023, the Company decided to permanently close the Rock Hill Facility in South Carolina. Certain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. At March 31, 2024, we determined that the assets held for sale balance of $0.5 million was to be reduced to $nil resulting in a $0.5 million impairment charge for the 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 equipment.

Current wording

On September 27, 2023, the Company decided to permanently close the Rock Hill Facility in South Carolina. Certain assets, including manufacturing equipment, which met held-for-sale criteria at that time were reclassified from property, plant and equipment. At March 31, 2024, we determined that the assets held for sale balance of $0.5 million was to be reduced to $nil, resulting in a $0.5 million impairment charge for the first quarter of 2024. While we will continue to pursue a sale of the assets, we were not able to determine the likelihood of recoverability based on the current market interest in the equipment.

Previous wording

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 “Debt”).

Current wording

On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW and Aron English, 22NW's principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being approximately $1.6 million (the “Debt”).

Previous wording

Interest expense decreased by $0.1 million from $1.2 million in the quarter ended March 31, 2023, to $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 caused by early settlement of the U.S. Leasing Facility (as defined herein) in the fourth quarter of 2023.

Current wording

Interest expense decreased by $0.3 million from $1.2 million in the quarter ended June 30, 2023, to $0.9 million in the quarter ended June 30, 2024 and by $0.4 million for the six months ended June 30, 2024 to $2.0 million, due to foreign exchange impacts on the interest related to Canadian dollar denominated debt and the decrease in equipment lease balances caused by early settlement of the $7.8 million U.S. Leasing Facility in the fourth quarter of 2023.

Previous wording

The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. As at March 31, 2024, the Company had a valuation allowance of $33.9 million (December 31, 2023: $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 March 31, 2024, we had C$107.6 million of non-capital loss carry-forwards in Canada and $55.0 million in the United States. These loss carry-forwards will begin to expire in 2035.

Current wording

Income tax expense for the three and six months ended June 30, 2024 increased to $0.3 million from $nil in the same periods of 2023. The current tax expense represents the income tax provision after the utilization of non-capital loss carry forwards against current period taxable income. The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. Despite positive indications of future profitability, including the current period profit and strength of our pipeline, the Company has determined that it is not more likely than not that a deferred tax asset will be recognized. Given the recent history of losses, the Company will maintain a valuation allowance against the deferred tax asset. As at June 30, 2024, the Company had a valuation allowance of $33.6 million (December 31, 2023: $34.5 million) against deferred tax assets. The Company will continue to evaluate indicators on whether a valuation allowance continues to be needed. For the quarter ended June 30, 2024, the Company utilized a balance of its non-capital loss carry-forwards in Canada and the United States. As at June 30, 2024, we had C$110.1 million of non-capital loss carry-forwards in Canada and $51.6 million in the United States. These loss carry-forwards will begin to expire in 2035.

Previous wording

Net income after tax increased to $3.0 million or $0.02 basic and $0.01 diluted net income per share, respectively, in the three months ended March 31, 2024, from a net loss after tax of $11.4 million or a $0.10 basic and diluted net loss per share for the three months ended March 31, 2023. The increase in net income is primarily the result of a $6.0 million higher gross profit, a $3.9 million decrease in operating expenses, which includes a $0.9 million decrease in reorganization expenses offset by a $0.5 million impairment charge related to the Rock Hill Facility closure, a $2.9 million gain on extinguishment of debt, a $1.2 million increase in foreign exchange gain, a $0.5 million increase in interest income, and a $0.1 million decrease in interest expense. These were offset by a $0.1 million decrease in government subsidies.

Current wording

Net income after tax decreased by $1.6 million to $0.6 million, or $0.00 basic and diluted net income per share, respectively, in the three months ended June 30, 2024, from net income after tax of $2.2 million or a $0.02 basic and $0.01 diluted net income per share for the three months ended June 30, 2023. The decrease in net income after tax is primarily the result of the $6.1 million gain on sale of software and patents and $0.1 million in government subsidies that were received in the second quarter of 2023 which did not reoccur in the second quarter of 2024, and a $0.3 million increase in income tax expense, offset by a $2.5 million decrease in operating expenses, a $1.0 million increase in foreign exchange gain, $0.8 million higher gross profit, a $0.4 million increase in interest income and a $0.3 million decrease in interest expense in the three months ended June 30, 2024.

Previous wording

EBITDA and Adjusted EBITDA for the Three Months Ended March 31, 2024 and 2023

Current wording

EBITDA and Adjusted EBITDA for the Three and Six Months Ended June 30, 2024 and 2023

Previous wording

The following table presents a reconciliation for the results of the three months ended March 31, 2024 and 2023 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:

Current wording

The following table presents a reconciliation for the results of the three and six months ended June 30, 2024 and 2023 of EBITDA and Adjusted EBITDA to our net income (loss) after tax, and of Adjusted EBITDA Margin to net income (loss) margin, which are the most directly comparable GAAP measures for the periods presented:

Previous wording

(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).

Current wording

(2) The related party transaction is a non-recurring transaction that is not core to our business and is excluded from the Adjusted EBITDA calculation (refer to Note 17 of the interim condensed consolidated financial statements).

Previous wording

(3) Reorganization expenses, the gain on extinguishment of convertible debt and the impairment charge on the Rock Hill Facility are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (Refer to Note 4 and Note 5 of the consolidated interim financial statements).

Current wording

(3) Reorganization expenses, the gain on sale of software and patents, the gain on extinguishment of convertible debt and the impairment charge on the Rock Hill Facility are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (refer to Note 4, Note 5 and Note 6 of the interim condensed consolidated financial statements).

Previous wording

For the three months ended March 31, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $6.2 million to $2.7 million and 6.5%, respectively, from a $3.5 million loss and (9.6)% in the same period of 2023. This primarily reflects a $5.0 million increase in Adjusted Gross Profit, a $0.4 million decrease in professional services costs, a $0.6 million decrease in office, building and communication costs and a $0.2 million decrease in other discretionary operating expenses.

Current wording

For the three months ended June 30, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $1.3 million to $3.2 million and 7.7%, respectively, from $1.9 million and 4.1% in the same period of 2023. This primarily reflects a $0.2 million decrease in travel meals and entertainment, a $0.3 million decrease in individual costs, a $0.6 million decrease in salaries and benefits, a $0.3 million decrease in office costs and communication costs, offset by a $0.7 million increase in termination benefits.

Previous wording

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended March 31, 2024 and 2023

Current wording

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Six Months Ended June 30, 2024 and 2023

Previous wording

The following table presents a reconciliation for the three months ended March 31, 2024 and 2023 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:

Current wording

The following table presents a reconciliation for the three and six months ended June 30, 2024 and 2023 of Adjusted Gross Profit to our gross profit and Adjusted Gross Profit Margin to gross profit margin, which are the most directly comparable GAAP measure for the periods presented:

Previous wording

For the quarter ended March 31, 2024, gross profit and gross profit margin increased to $14.6 million and 35.9%, respectively, from $8.7 million and 23.7% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to $15.5 million and 37.9% for the three months ended March 31, 2024, from $10.5 million and 28.5% for the three months ended March 31, 2023.

Current wording

For the quarter ended June 30, 2024, gross profit and gross profit margin increased to $15.4 million and 37.3%, respectively, from $14.6 million and 32.5% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to $16.2 million and 39.4% for the three months ended June 30, 2024, from $16.2 million and 36.2% for the three months ended June 30, 2023.

Previous wording

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 to offset the inflationary impacts on material costs. Fixed costs decreased $0.6 million for the quarter ended March 31, 2024 as we aligned overhead costs and support with current operations after having finalized the decision to close the Rock Hill Facility in the third quarter of 2023. Idle facility costs incurred at the Rock Hill Facility were $0.5 million for the three months ended March 31, 2024 (2023 – $0.4 million). We continue to evaluate options to sublease the Rock Hill Facility to recover the costs of the facility.

Current wording

The improvement in Adjusted Gross Profit was a result of material optimization, a reduction in fixed costs, and management of labor hours throughout the period to offset the inflationary impacts on material costs. Fixed costs decreased $0.5 million and $1.9 million for the quarter ended and year to date June 30, 2024, respectively, compared to the same periods of 2023 as we aligned overhead costs and support with current operations after having finalized the decision to close the Rock Hill Facility in the third quarter of 2023. Idle facility costs incurred at the Rock Hill Facility were $0.4 million and $0.9 million for the three and six months ended June 30, 2024, respectively (2023 – $0.4 million and $0.9 million). We continue to evaluate options to sublease the Rock Hill Facility to recover the costs of the facility.

Previous wording

As at March 31, 2024, the Company had $39.0 million of cash on hand and C$10.1 million ($8.5 million) of available borrowings, compared to $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available borrowings as at December 31, 2023. Through the first three months of fiscal 2024, the Company generated $14.1 million of cash flow compared to a cash usage of $2.7 million in the first three months of fiscal 2023. Cash generated included cash flows from the Rights Offering of $21.3 million and improved operational results, offset by a decrease in working capital of $10.6 million (mainly due to timing of payables and $5.2 million repayment of debt under the Issuer Bid).

Current wording

As at June 30, 2024, the Company had $39.5 million of cash on hand and C$14.4 million ($10.6 million) of available borrowings, compared to $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available borrowings as at December 31, 2023. Through the first six months of 2024, the Company generated $14.7 million of cash flow compared to $7.6 million cash generated in the first six months of 2023. Cash generated included cash flows from the Rights Offering (as defined herein) of $21.3 million and improved operational results, offset by a $5.2 million repayment of debt under the Issuer Bid and a decrease in working capital of $4.7 million (mainly due to the receipt of $7.3 million of government subsidies during the first half of 2023 that did not occur in 2024). The first six months of 2023 also benefited from the receipt of $10.9 million of cash from the AWI sale.

Previous wording

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 three months ended March 31, 2024 was $14.6 million, or 35.9%. The same period of 2023 generated gross profit of $8.7 million, or 23.7%.

Current wording

We have implemented multiple price increases to mitigate the impact of inflation on raw materials and improve liquidity during the past two years. These actions have resulted in a meaningful improvement in our gross profit margins and higher net income, and have served to stabilize our cash usage to operate the business. Gross profit for the six months ended June 30, 2024 was $30.0 million, or 36.6% of revenue. The same period of 2023 generated gross profit of $23.2 million, or 28.5% of revenue.

Previous wording

Over the 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 $12.8 million of cash throughout 2023. Second, in 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 initiatives to result in positive cash inflows in 2024. Third, we completed a private placement of 8,667,449 common shares in November 2022 for aggregate gross proceeds of $2.8 million (the “Private Placement”), with certain significant shareholders and directors and officers of the Company 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 closed on November 30, 2022.

Current wording

In addition, we have executed upon several initiatives to improve liquidity over the last two years. First, in May 2023, we entered into an agreement with AWI resulting in the receipt of $12.8 million of cash throughout 2023. Second, in May 2024, we extended our agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through October 31, 2028, providing us annualized savings of approximately $1.0 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities, including our Rock Hill Facility, and expect these initiatives to result in positive cash inflows in 2025. Third, we completed a private placement of 8,667,449 common shares in November 2022 for aggregate gross proceeds of $2.8 million (the “Private Placement”) with certain significant shareholders and directors and officers of the Company, which helped bridge cash requirements before the completion and closing of the strategic transactions described above. The Private Placement closed on November 30, 2022.

Previous wording

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.

Current wording

On November 21, 2023, the Company announced that the Board of Directors had approved a Rights Offering to its common shareholders. The Rights Offering closed on January 9, 2024 for aggregate gross proceeds of C$30.0 million and net proceeds of $21.3 million.

Previous wording

On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company offered to repurchase for cancellation: (i) up to C$6,000,000 principal amount of the January Debentures at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of the December Debentures at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tendered and did not withdraw their Debentures received the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures were taken up by the Company. The applicable purchase price was denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for interest, were made in Canadian dollars. The Issuer Bid expired on March 22, 2024 and DIRTT purchased C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of the December Debentures, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the 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)).

Current wording

On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the Company offered to repurchase for cancellation: (i) up to C$6,000,000 principal amount of the January Debentures at a purchase price of C$720 per C$1,000 principal amount of January Debentures; and (ii) up to C$9,000,000 principal amount of the December Debentures at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who validly tendered and did not withdraw their Debentures received the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures were taken up by the Company. The applicable purchase price was denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for interest, were made in Canadian dollars. The Issuer Bid expired on March 22, 2024 and DIRTT purchased C$4.7 million ($3.5 million) aggregate principal amount of the January Debentures and C$5.8 million ($4.3 million) aggregate principal amount of the December Debentures, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at that time. The Company took up all the Debentures tendered pursuant to the Issuer Bid for aggregate consideration of C$7.0 million ($5.2 million) (comprised of C$6.9 million ($5.1 million) repayment on principal and interest of C$0.1 million ($0.1 million)).

Previous wording

In January 2021, we issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on January 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the January Debentures was adjusted to C$4.03 per common 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 March 31, 2024, C$18.9 million ($13.9 million) principal amount of the January Debentures are held by a related party, 22NW. Aron English, manager of 22NW Fund GP, LLC, the general partner of 22NW, is a director of the Company.

Current wording

In January 2021, we issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on January 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the January Debentures was adjusted to C$4.03 per common share, representing a conversion rate of 248.1390 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$4.7 million ($3.5 million) of the principal balance of the January Debentures and paid C$0.04 million ($0.03 million) of the interest payable on such January Debentures. As at June 30, 2024, C$18.9 million ($13.8 million) principal amount of the January Debentures were held by a related party, 22NW and were subsequently repurchased by the Company as a result of the Debenture Repurchase as described below. Aron English, manager of 22NW Fund GP, LLC, the general partner of 22NW, is a director of the Company.

Previous wording

On December 1, 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and be repayable on December 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the December Debentures was adjusted to C$3.64 per common share, representing a conversion rate of 274.7253 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$5.8 million ($4.3 million) of the principal balance of the December Debentures and paid C$0.08 million ($0.06 million) of the interest payable on such December Debentures. As at March 31, 2024, C$13.6 million ($10.0 million) principal amount of the December Debentures are held by a related party, 22NW.

Current wording

On December 1, 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and be repayable on December 31, 2026. Interest and principal are payable in cash or shares at the option of the Company. As a result of the Rights Offering, the conversion price of the December Debentures was adjusted to C$3.64 per common share, representing a conversion rate of 274.7253 common shares per C$1,000 principal amount. On March 22, 2024, the Company completed the Issuer Bid in which the Company repurchased for cancellation C$5.8 million ($4.3 million) of the principal balance of the December Debentures and paid C$0.08 million ($0.06 million) of the interest payable on such December Debentures. As at June 30, 2024, C$13.6 million ($10.0 million) principal amount of the December Debentures were held by a related party, 22NW and were subsequently repurchased by the Company as a result of the Debenture Repurchase as described below.

Previous wording

The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) with RBC of which C$4.4 million ($3.4 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 equipment leasing facility, with RBC and one of its affiliates, in the United States, of which $13.3 million was drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”). In connection with the Company’s decision to close the Rock Hill Facility, we settled the liability related to the U.S. Leasing Facility ($7.8 million). The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we released $2.6 million of restricted cash during 2023.

Current wording

The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) with RBC of which C$4.4 million ($3.3 million) has been drawn and C$3.8 million ($2.9 million) has been repaid. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%. During 2023, the Company had a $14.0 million equipment leasing facility, with RBC and one of its affiliates, in the United States, of which $13.3 million was drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”). In connection with the Company’s decision to close the Rock Hill Facility, we settled the liability related to the U.S. Leasing Facility ($7.8 million). The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, we released $2.6 million of restricted cash during 2023.

Previous wording

Net cash flows used in operating activities were $2.0 million for the three months ended March 31, 2024 compared to $1.0 million in the same period of 2023. The increase in cash flows used in operations is largely due to a $10.6 million decrease in working capital compared to the first quarter of 2023, offset by the $6.2 million increase in Adjusted EBITDA and a $0.9 million decrease in reorganization expenses. Working capital in the first quarter of 2023 benefited from the receipt of $4.8 million related to the Employee Retention Credit and the elimination of the quick pay discount for our customers during the third quarter of 2023. First quarter 2024 working capital was impacted by the timing of payables relative to period end.

Current wording

Net cash flows provided by operating activities were $1.6 million for the three months ended June 30, 2024 compared to $3.8 million in the same period of 2023. The decrease in cash flows provided by operations is largely due to a $0.9 million decrease in working capital compared to a $3.5 million increase in working capital in the second quarter of 2023 (the second quarter of 2023 included the receipt of $2.6 million related to the Employee Retention Credit), offset by the $1.3 million increase in Adjusted EBITDA and a $1.3 million decrease in reorganization expenses.