DIRTT ENVIRONMENTAL SOLUTIONS LTD

Previous wording

Revenue for the quarter ended June 30, 2024 was $41.2 million, a decrease of $3.6 million, or 8%, from $44.8 million for the same period of 2023, and an increase of $0.4 million, or 1%, from the first quarter of 2024. The decrease in revenue, as compared to the same period of 2023, was primarily the result of a higher rate of delayed project start dates year-over-year as well as two large healthcare projects and one key education project that were completed in the second quarter of 2023 and were not repeated in the same period in 2024, offset by larger projects in the commercial sector and an increase in volume in the government sector.

Current wording

Revenue for the quarter ended September 30, 2024 was $43.4 million, a decrease of $6.2 million, or 12.4%, from $49.5 million for the same period of 2023, and an increase of $2.2 million, or 5.3%, from the second quarter of 2024. Third quarter revenue was in line with the expected guidance range of $40 million to $44 million provided last quarter. The decrease in revenue, as compared to the same period of 2023, was primarily the result of three large commercial projects and one large healthcare project that were completed in the third quarter of 2023 and were not repeated in the same period in 2024, partially offset by higher volume in the education sector.

Previous 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.

Current wording

Gross profit and gross profit margin for the quarter ended September 30, 2024 were $16.8 million or 38.8% of revenue, a decrease of $0.3 million from $17.1 million or 34.4% of revenue for the quarter ended September 30, 2023. Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the three months ended September 30, 2024 was $17.6 million, a decrease of $0.7 million from $18.3 million for the third quarter of 2023. Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the third quarter of 2024 was 40.7% as compared to 36.9% in the comparative period of 2023. These increases in Adjusted Gross Profit Margin are the result of improved material optimization to offset the inflationary impacts on material costs.

Previous wording

On August 2, 2024, the Company announced it had entered into the Repurchase Agreement with 22NW, DIRTT’s largest shareholder, pursuant to which the Company purchased for cancellation an aggregate of C$18,915,000 principal amount of DIRTT’s outstanding January Debentures at a purchase price of C$684.58 per C$1,000 principal amount of January Debentures and C$13,638,000 principal amount of DIRTT’s outstanding December Debentures at a purchase price of C$665.64 per C$1,000 principal amount of December Debentures, for an aggregate purchase price of C$22,104,591.45, inclusive of a cash payment for all accrued and unpaid interest up to, but excluding, the date on which such Debentures were purchased by the Company. The purchase price of each series of Debentures (excluding the cash payment for accrued and unpaid interest) represented a discount of approximately 4% to the average trading price of the applicable series of Debentures on the TSX for the 20 trading days preceding August 2, 2024. Following the Debenture Repurchase, which closed on August 2, 2024, C$16,642,000 principal amount of the January Debentures and C$15,587,000 principal amount of the December Debentures remain outstanding, and 22NW no longer holds any Debentures.

Current wording

On August 2, 2024, the Company and 22NW closed the Debenture Repurchase in which the Company purchased for cancellation an aggregate of C$18,915,000 principal amount of the January Debentures and C$13,638,000 principal amount of the December Debentures. As at September 30, 2024, C$16,642,000 principal amount of the January Debentures and C$15,587,000 principal amount of the December Debentures remain outstanding, and 22NW no longer holds any Debentures.

Previous wording

On August 2, 2024, the Board of Directors adopted the Amended and Restated SRP which supersedes the plan adopted on March 22, 2024. The Company also entered the Support Agreement with 22NW, DIRTT’s largest shareholder, and WWT, DIRTT’s second largest shareholder. The Support Agreement replaces the previously announced support and standstill agreement entered into with 22NW on March 22, 2024.

Current wording

On August 2, 2024, the Board of Directors adopted the Amended and Restated Shareholder Rights Plan (the “Amended and Restated SRP”) which superseded the plan adopted on March 22, 2024 and was approved by the Company’s shareholders at a special meeting held on September 20, 2024 (the “SRP Meeting”). The Company also entered a support and standstill agreement (the “Support Agreement”) with 22NW, DIRTT’s largest shareholder, and WWT Opportunity #1 LLC (“WWT”), DIRTT’s second largest shareholder. The Support Agreement replaces the previously announced support and standstill agreement entered into with 22NW on March 22, 2024.

Previous 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.

Current wording

As of October 1, 2024, our twelve-month forward pipeline decreased by 10% year-over-year and decreased by 6% from January 1, 2024, illustrated in the table below.

Previous wording

At June 30, 2024, we held $39.5 million in cash on hand with total liquidity (inclusive of borrowing availability) of $50.1 million. Improved operational results have also led to consistent positive cash flow. We have strengthened our balance sheet through the C$30 million rights offering and the retirement of, at the date of this Quarterly Report, 59% of the total debt we held coming into 2024. We believe these transactions put DIRTT in a position to achieve a debt to Adjusted EBITDA ratio of 1x or lower in 2025. Based on current projections, DIRTT is expected to be in a position to pay off or refinance its remaining Debentures when they come due.

Current wording

This quarter we continued on our Journey to Excellence, reporting net profit after tax of $7.1 million and 9.4% Adjusted EBITDA Margin. At September 30, 2024, we held $23.6 million in cash on hand with total liquidity (inclusive of borrowing availability) of $34.3 million. Improved operational results have also led to positive cash flow in the last six quarters. We have strengthened our balance sheet through the repurchase and cancellation of a significant portion of our debt. Our debt at September 30, 2024 is $23.9 million, down from $56.1 million at December 31, 2023. We expect to be in a position to pay off or refinance the remaining Debentures when they come due.

Previous wording

Our operations team remains focused on their journey to zero defects, missed deliveries, and workplace injuries. In the three months ended June 30, 2024, our total recordable incident rate (TRIF) rate was 0.99, which is 78% below the industry average. Our on-time in full (OTIF) delivery performance was 99.7%. We have a 10-day lead time from final order to product shipment. We believe we are well positioned to increase output while delivering quality products, on time and in full, to our end customers.

Current wording

Our operations team continues to excel in its goal of zero defects, missed deliveries, and workplace injuries. For the nine months ended September 30, 2024, our total recordable incident rate (TRIF) rate was 0.63, which is 85% below the industry average. Our on-time in full (OTIF) delivery performance was 99.2% for the quarter.

Previous wording

We believe that DIRTT has significant untapped manufacturing capacity that can serve a multiple of our current revenue base. Improvements of our cost structure, including a materially reduced fixed cost base, and incremental growth in revenue will help us achieve gross profit margin expansion and substantial flow through to Adjusted EBITDA and free cash flow. We do not expect a material increase in capital expenditures in the short-term. After the debenture repurchases completed in 2024, our annual interest expense will halve to $1.5 million. As at June 30, 2024, we had C$110.1 million of non-capital loss carry-forwards in Canada and $51.6 million of non-capital loss carry-forwards in the United States. These loss carry-forwards will begin to expire in 2035.

Current wording

We believe that DIRTT has significant untapped manufacturing capacity that can serve a multiple of our current revenue base. Improvements to our cost structure, including a materially reduced fixed cost base and incremental growth in revenue, will flow through to Adjusted EBITDA and free cash flow.

Previous wording

As explained above, with minimal capital expenditure needs in the short term and the availability of tax losses, we expect most of our Adjusted EBITDA will flow through to free cash flow. DIRTT’s enterprise value at June 30, 2024 before retiring half of our outstanding debentures was $87 million, which values DIRTT at approximately 0.4x the midpoint of 2025 sales guidance and 4.1x the midpoint of 2025 Adjusted EBITDA guidance. We believe the Company will have less than one turn of financial leverage by the end of 2025 and that DIRTT is now a credit worthy company and we expect to have improved access to traditional bank lines.

Current wording

We have minimal capital expenditure needs in the short term and with the availability of tax losses, we expect most of our Adjusted EBITDA will flow through to free cash flow. Our expected 2025 Adjusted EBITDA takes into account planned investments to achieve our strategic breakthroughs. The level of investments made will be finalized as we go through our budget process in the next quarter. We expect the Company will have approximately one turn of debt to Adjusted EBITDA financial leverage by the end of 2025 and we expect to have improved access to traditional bank lines.

Previous wording

DIRTT could not have achieved the past two years of organizational improvements without the support of our resilient and talented employee base. We are working to improve our employee experiences and make DIRTT an employer of choice. Our employees are key to the future success of DIRTT.

Current wording

DIRTT could not have achieved the past two years of organizational improvements without the support of our talented employee base. We are advancing our goal to make DIRTT an employer of choice and we will aspire to maintain this stance in our industry.

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 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.

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, unusual or infrequent charges or gains (such as gain on sale of software and patents, gain on extinguishment of debt, and impairment charges), stock-based compensation, related party expense, and government subsidies. 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

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.

Current wording

Government subsidies, depreciation and amortization, stock-based compensation expense, reorganization expense, foreign exchange gains and losses, gain on extinguishment of debt, impairment charges, gain on sale of software and patents, net interest income on cash deposits, interest expense on outstanding debt and debt facilities, tax expense, and related party expense 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.

Previous wording

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.

Current wording

Revenue mainly 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.

Previous 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.

Current wording

Installation and other services revenue was $0.9 million for the quarter ended September 30, 2024 compared to $1.4 million in the quarter ended September 30, 2023, and $3.7 million in the nine months ended September 30, 2024 compared to $3.9 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 June 30, 2024, we had 76 Construction Partners (June 30, 2023: 68; 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 September 30, 2024, we had 74 Construction Partners (September 30, 2023: 71; December 31, 2023: 72) servicing multiple locations.

Previous wording

The following table presents our product and transportation revenue by vertical market:

Current wording

The following tables present our product and transportation revenue by vertical market:

Previous 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.

Current wording

Commercial revenues decreased by 11% for the third quarter of 2024 from the prior year period. The quarter ended September 30, 2024 included fewer large commercial projects compared to the quarter ended September 30, 2023. Healthcare revenues decreased by 18% in the third quarter of 2024 from the same period of 2023, primarily due to one large healthcare project completed in the third quarter of 2023. 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 third quarter of 2024 decreased by 18% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the third quarter of 2024 increased by 6% from the same period of 2023.

Previous 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.

Current wording

The third quarter of 2024 included a lower proportion of sales to customers in the United States than to those in Canada, with 18% of sales for the period being in Canada and the rest occurring in the United States, compared to 11% of sales to Canada in the third quarter of 2023. The increase in Canadian revenue relative to total revenue is primarily the result of a large commercial project that will be active until 2026. Following completion of this project, we expect revenue to return to historic proportions of approximately 10-20% of revenue derived from Canada and 80-90% of revenue derived from the United States.

Previous wording

Sales and marketing expenses decreased $0.2 million to $12.0 million for the six months ended June 30, 2024 from $12.1 million in the same period of 2023. The decrease was mainly driven by a $0.7 million decrease in pass through charges and a $0.5 million decrease in building and infrastructure costs, offset by a $1.0 million increase in termination benefits, and a $0.1 million increase in commissions.

Current wording

Sales and marketing expenses decreased $1.1 million to $17.2 million for the nine months ended September 30, 2024 from $18.3 million in the same period of 2023. The decrease was mainly driven by a $1.0 million decrease in pass through charges, a $0.6 million decrease in building and infrastructure costs, a $0.1 million decrease in salaries and benefits costs, a $0.2 million decrease in commissions, a $0.1 million decrease in travel, meals and entertainment costs, a $0.1 million decrease in communications costs, and a $0.2 million decrease in depreciation costs, offset by a $0.9 million increase in termination benefits and a $0.3 million increase in marketing and tradeshow expenses.

Previous wording

For the six months ended June 30, 2024, general and administrative expenses decreased $2.4 million to $9.0 million from $11.3 million in the same period of 2023. The decrease was mainly driven by a $0.9 million decrease in salaries and benefits, a $0.4 million decrease in office costs, a $0.4 million decrease in professional services costs, a $0.2 million decrease in public company costs, a $0.2 million decrease in communications costs and a $0.2 million decrease in depreciation and amortization expenses, offset by a $0.2 million increase in building and infrastructure costs.

Current wording

For the nine months ended September 30, 2024, general and administrative expenses decreased $1.2 million to $14.8 million from $16.0 million in the same period of 2023. The decrease was mainly driven by a $0.8 million decrease in salaries and benefits costs, a $0.5 million decrease in office costs, a $0.3 million decrease in communications costs, a $0.2 million decrease in public company costs, and a $0.4 million decrease in other individual costs, offset by a $0.7 million increase in professional services, and a $0.3 million increase in building and infrastructure 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 for the three months ended June 30, 2024 were $1.8 million, consistent with $1.8 million for the comparative period of 2023.

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 September 30, 2024 were $1.9 million, an increase of $0.1 million from $1.8 million for the comparative period of 2023.

Previous wording

Operations support expenses decreased $0.2 million for the six months ended June 30, 2024 to $3.6 million, from $3.8 million in the same period of 2023, driven by a $0.2 million decrease in salaries and benefits.

Current wording

Operations support expenses decreased $0.1 million for the nine months ended September 30, 2024 to $5.5 million, from $5.6 million in the same period of 2023, driven by a $0.2 million decrease in salaries and benefits costs, a $0.1 million decrease in professional services costs, offset by a $0.1 million increase in travel meals and entertainment expenses, and a $0.1 million increase in research & development costs.

Previous 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.

Current wording

For the nine months ended September 30, 2024, technology and development costs decreased by $0.1 million to $4.0 million, from $4.1 million in the same period of 2023. The decrease is primarily related to a $0.3 million decrease in salaries and benefits costs, and a $0.2 million decrease in building and infrastructure costs, offset by a $0.3 million write off of a previously capitalized software project, and a $0.1 million increase in professional services costs.

Previous 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.

Current wording

Stock-based compensation expense for the three and nine months ended September 30, 2024 was $0.8 million and $1.9 million, respectively, compared to $1.1 million and $2.5 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’s period compared to the first nine 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 third quarter of 2024 compared to the third quarter of 2023.

Previous 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.

Current wording

Reorganization expenses for the three and nine months ended September 30, 2024 was $0.6 million and $0.9 million, respectively from $0.3 million and $2.9 million in the three and nine months ended September 30, 2023, respectively. Reorganization expenses for the three and nine months ended September 30, 2024, primarily relate to the movement of inventory and equipment from the Rock Hill Facility for use at the Calgary facility, while the reorganization costs in the third quarter of 2023 were largely made up of termination costs associated with actions taken to streamline our back office and operational support functions.

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 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.

Current wording

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. We were not able to determine the likelihood of recoverability based on the current market interest in the equipment.

Previous wording

Foreign exchange gain or loss increased from a loss of $0.6 million and $0.9 million for the three and six months ended June 30, 2023 to a gain of $0.4 million and $1.3 million for the same periods in 2024. Approximately 60% of DIRTT’s costs are denominated in the Canadian dollar.

Current wording

Foreign exchange gain or loss decreased from a gain of $0.8 million for the three months ended September 30, 2023 to a loss of $0.4 million for the same period in 2024. Foreign exchange gain or loss increased from a $0.1 million loss for the nine months ended September 30, 2023, to a $0.9 million gain for the same period in 2024. Approximately 60% of DIRTT’s costs are denominated in the Canadian dollar.

Previous wording

Interest income for the three and six months ended June 30, 2024 was $0.5 million and $1.0 million compared to $0.1 million and $0.1 million for the same periods of 2023. The higher income is due to the interest earned on the Company’s higher cash equivalents.

Current wording

Interest income for the three and nine months ended September 30, 2024 was $0.3 million and $1.3 million compared to $0.2 million and $0.3 million for the same periods of 2023. The higher income is due to the interest earned on the Company’s higher cash equivalents during the three and nine months ended September 30, 2024 compared to the same periods of 2023.

Previous 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.

Current wording

Income tax expense for the three and nine months ended September 30, 2024 increased to $0.02 million and $0.4 million, respectively, 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 unlikely 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 September 30, 2024, the Company had a valuation allowance of $31.8 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 September 30, 2024, the Company utilized a balance of its non-capital loss carry-forwards in Canada and the United States. As at September 30, 2024, we had C$94.7 million of non-capital loss carry-forwards in Canada and $51.3 million in the United States. These loss carry-forwards will begin to expire in 2037.

Previous wording

Net income after tax increased by $12.9 million to $3.6 million, or $0.02 basic and $0.02 diluted net income per share, in the six months ended June 30, 2024, from a net loss of $9.2 million or $0.08 net loss per share, basic and diluted, in the six months ended June 30, 2023. The increase in net income after tax is primarily the result of a $6.8 million increase in gross profit, a $6.4 million decrease in operating expenses, a $2.9 million gain on extinguishment of debt as a result of the substantial issuer bid (refer to Note 5 to our Interim Condensed Consolidated Financial Statements for additional information), a $2.2 million increase in foreign exchange gain, and a $0.9 million increase in interest income. This was offset by the non-reoccurrence of the $6.1 million gain on sale of software and patents and $0.2 million in government subsidies that were received in the comparative period of 2023 and a $0.3 million increase in income tax expense.

Current wording

Net income after tax increased by $26.3 million to $10.7 million, or $0.06 basic and $0.05 diluted net income per share, in the nine months ended September 30, 2024, from a net loss of $15.5 million or $0.14 net loss per share, basic and diluted, in the nine months ended September 30, 2023. The increase in net income after tax is primarily the result of a $14.0 million decrease in operating expenses, a $10.4 million gain on extinguishment of convertible debt as a result of the Issuer Bid, Debenture Repurchase and NCIB (refer to Note 5 to our Interim Condensed Consolidated Financial Statements for additional information), a $6.5 million increase in gross profit, a $1.0 million increase in foreign exchange gain, and a $1.0 million increase in interest income. This was offset by the non-reoccurrence of the $6.1 million gain on sale of software and patents and $0.2 million in government subsidies that were received in the comparative period of 2023, and a $0.4 million increase in income tax expense.

Previous wording

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

Current wording

EBITDA and Adjusted EBITDA for the Three and Nine Months Ended September 30, 2024 and 2023

Previous 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:

Current wording

The following table presents a reconciliation for the results of the three and nine months ended September 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

For the six months ended June 30, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $7.5 million to $5.8 million or 7.1%, from a $1.7 million loss or (2.0)% in the same period of 2023. This primarily reflects a $5.0 million increase in Adjusted Gross Profit, a $0.7 million decrease in pass through charges, a $0.4 million decrease in building and infrastructure costs, a $1.4 million decrease in salaries and benefits, a $0.8 million decrease in office costs and communication costs, a $0.4 million decrease in professional services costs, a $0.2 million decrease in public company costs, offset by a $1.0 million increase in termination benefits, a $0.1 increase in commissions, and $0.3 million write off of a previously capitalized software development project.

Current wording

For the nine months ended September 30, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $6.3 million to $9.9 million or 7.9%, from $3.6 million or 2.7% in the same period of 2023. This primarily reflects a $4.4 million increase in Adjusted Gross Profit, a $1.3 million decrease in commissions and pass through charges as a result of lower revenues, a $0.6 million decrease in office costs, a $0.5 million decrease in building and infrastructure costs, a $0.4 million decrease in salaries and benefits costs, and a net $0.2 million decrease in individual costs, offset by a $0.8 million increase in professional services and a $0.3 million increase in loss on disposal relating to a write off of a previously capitalized software development project.

Previous wording

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

Current wording

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Nine Months Ended September 30, 2024 and 2023

Previous 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:

Current wording

The following table presents a reconciliation for the three and nine months ended September 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 six months ended June 30, 2024, gross profit and gross profit margin increased to $30.0 million or 36.6% from $23.2 million or 28.5% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to $31.7 million or 38.7% for the six months ended June 30, 2024, from $26.7 million or 32.7% for the six months ended June 30, 2023.

Current wording

For the quarter ended September 30, 2024, gross profit margin increased to 38.8%, from 34.4% for the same period of 2023. Adjusted Gross Profit Margin increased to 40.7% for the three months ended September 30, 2024 on $6.2 million in lower revenue, from 36.9% for the three months ended September 30, 2023.

Previous 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.

Current wording

For the nine months ended September 30, 2024, gross profit margin increased to 37.3% from 30.8% for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin increased to 39.3% for the nine months ended September 30, 2024, from 34.3% for the nine months ended September 30, 2023.

Previous 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.

Current wording

The improvement in Adjusted Gross Profit Margin was a result of material optimization to offset the inflationary impacts on material costs. Fixed costs decreased $0.3 million and $1.4 million for the quarter ended and year to date September 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 $1.3 million for the three and nine months ended September 30, 2024, respectively (2023 – $0.4 million and $1.4 million). We continue to evaluate options to sublease the Rock Hill Facility to recover the costs of the facility.

Previous 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.

Current wording

As at September 30, 2024, the Company had $23.6 million of cash on hand and C$14.4 million ($10.7 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 nine months of 2024, the Company used $1.2 million of cash flow compared to $8.2 million cash generated in the first nine months of 2023. Cash flows were increased by the proceeds of the Rights Offering (as defined herein) of $21.3 million and improved operational results, offset by a $21.3 million repayment of debt under the Issuer Bid, Debenture Repurchase and NCIB, and a decrease in working capital of $7.6 million in the nine months ended September 30, 2024 due to normal seasonal receivable and payable build up. The first nine months of 2023 benefited from the receipt of $10.0 million of cash from the AWI sale (no similar transaction occurred in the first nine months of 2024), and a receipt of the $7.3 million of government subsidies.

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 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.

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 nine months ended September 30, 2024 was $46.8 million, or 37.3% of revenue. The same period of 2023 generated gross profit of $40.3 million, or 30.8% of revenue.