The Management's Discussion and Analysis of Financial Condition and Results of Operations for DIRTT Environmental Solutions Ltd. is also included in the Form 10-K for the year ended December 31, 2024 filed on SEDAR+ on February 26, 2025 in its entirety.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 2024 and 2023 together with our consolidated financial statements and related notes and other financial information appearing in this Annual Report. The discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements” appearing elsewhere in the Annual Report.

Summary of Financial Results

DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction for interior spaces. DIRTT’s system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.

DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to our Construction Partners and certain third parties, including Armstrong World Industries, Inc. (“AWI”) which owns a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI.

Key Fourth Quarter 2024 Highlights and Other Recent Developments

Revenues for the fourth quarter of 2024 were $48.9 million, a decrease of $2.0 million or 4.0% from $50.9 million for the same period in 2023. The decrease in revenue, as compared to the same period of 2023, was primarily the result of a higher volume of large projects completed in the fourth quarter of 2023.
Gross profit and gross profit margin for the fourth quarter of 2024 was $17.5 million or 35.9% of revenue, a decrease from $19.2 million or 37.8% of revenue for the same period of 2023. Adjusted Gross Profit and Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the fourth quarter of 2024 was $19.0 million or 38.8% of revenue. This represents a decrease from $20.1 million or 39.5% of revenue in the fourth quarter of 2023. These decreases in Adjusted Gross Profit Margin are the result of lower revenues and a $0.7 million increase to our inventory obsolescence provision.
Net income after tax for the fourth quarter of 2024 was $4.0 million compared to a $1.0 million net income after tax for the same period of 2023. The increase in net income is primarily the result of a $2.0 million decrease in operating expenses (operating expenses in the fourth quarter of 2023 included a $0.8 million impairment charge on the Rock Hill Facility which was not repeated in the fourth quarter of 2024), a $2.6 million increase in foreign exchange gain, a $0.8 million decrease in interest expense and a $0.3 million decrease in tax expense. These benefits were offset by a $1.7 million decrease in gross profit, and a $1.0 million decrease of gain on sale of software and patents that resulted from the completion of the knowledge transfer to AWI that occurred in the fourth quarter of 2023 and was not repeated in 2024.
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the fourth quarter of 2024 was $5.5 million, or 11.2% of revenue, an improvement of $1.2 million from $4.3 million or 8.5% of revenue for the fourth quarter of 2023. Higher Adjusted EBITDA was mainly driven by the decrease in operating expenses, offset by the decrease in Adjusted Gross Profit due to the above noted reasons.
Cash on hand increased by $5.7 million in the fourth quarter of 2024 to $29.5 million, compared to a $2.7 million increase in cash in the fourth quarter of 2023. The increase in cash in the fourth quarter of 2024 was driven by $6.2 million of cash flows from operations and a positive impact of $0.3 million foreign exchange gain, offset by $0.7 million in capital expenditures and $0.1 million from repayment of debt and other financing activities.
On November 26, 2024, the Company announced that Holly Hess Groos joined our board of directors (“Board” or “Board of Directors”) and was appointed as the Chair of the Audit Committee.
On December 18, 2024, the Company announced a normal course issuer bid for its common shares (the “Shares NCIB”), which commenced on December 20, 2024 and will terminate no later than December 19, 2025. The Shares NCIB permits DIRTT to acquire up to 7,515,233 of its common shares. All purchases will be made on the open market through the facilities of the Toronto Stock Exchange (“TSX”) at the market price of common shares at the time of acquisition. Any common shares acquired through the Shares NCIB will be immediately cancelled.

On February 5, 2025, the US District Court for the Northern District of Utah dismissed DIRTT’s lawsuit against Falkbuilt Ltd. (“Falkbuilt”) in Utah on procedural grounds. In DIRTT’s similar lawsuit against Falkbuilt in Canada, the Court of King’s Bench of Alberta has scheduled an eight-week trial to commence February 2, 2026. With the Canadian trial commencing less than a year away, DIRTT is pursuing damages and losses it suffered in Canada, the United States, and abroad in the Court of King’s Bench of Alberta.
On February 13, 2025, the Company entered into a share repurchase with NGEN III, LP (“NGEN”) pursuant to which the Company purchased for cancellation 3,920,844 common shares of DIRTT at a purchase price of $0.80 per common share purchased from NGEN (the “Share Repurchase”). The purchase of $0.80 per share was a 1% discount to the closing price of the common shares on the TSX on January 27, 2025 (converted into U.S. Dollars using the February 13, 2025 closing exchange rate published by the Bank of Canada). The common shares repurchased under the Share Repurchase were counted against DIRTT’s annual normal course issuer bid share limit (the “NCIB Annual Limit”). Following completion of the Share Repurchase, the Company’s outstanding NCIB Annual Limit was reduced to 3,422,494. The Share Repurchase closed on February 14, 2025.

Key Annual 2024 Highlights

Revenues for the year ended December 31, 2024, were $174.3 million, a decrease of $7.6 million or 4% from $181.9 million for the year ended December 31, 2023. The decrease in revenue, as compared to the same period of 2023, was primarily the result of three large healthcare projects, one key education project and a larger volume of commercial projects that were completed in 2023 and were not repeated in 2024. Annual revenue was in line with the expected guidance range of $165 million to $175 million provided in the second quarter of 2024.
Gross profit and gross profit margin for the year ended December 31, 2024, was $64.4 million or 36.9% of revenue, an increase from $59.5 million or 32.7% of revenue for the year ended December 31, 2023. Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2024, was $68.3 million, an increase from $65.1 million for the year ended December 31, 2023. Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2024, was 39.2%, an improvement from 35.8% for the year ended December 31, 2023. The improved Adjusted Gross Profit and Adjusted Gross Profit Margin are the result of improved material optimization to offset the inflationary impacts on material costs. Fixed costs decreased $2.3 million compared to 2023 as we aligned overhead costs and support costs with current operations after having finalized the decision to close the Rock Hill Facility in the third quarter of 2023.
Net income after tax for the year ended December 31, 2024, was $14.8 million compared to a $14.6 million net loss after tax for the year ended December 31, 2023. The increase in net income after tax was the result of a $4.8 million increase in gross profit, a $15.9 million decrease in operating expenses (which includes an $8.2 million decrease in impairment charge on the Rock Hill Facility and a decrease of $1.9 million in reorganization expenses), a $10.4 million gain on extinguishment of debt relating to the Issuer Bid, Debenture Repurchase and the Debentures NCIB (each as defined herein), a $1.1 million increase in interest income, a $0.9 million decrease in interest expense and a $3.6 million increase in foreign exchange gain, offset by a $7.1 million gain on software sale from 2023 not repeated in 2024, and a $0.2 million decrease in government subsidies.
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2024 was $15.4 million or 8.8% of revenue, an improvement of $7.5 million from $7.9 million or 4.4% of revenue for the year ended December 31, 2023, for the above noted reasons. Adjusted EBITDA for the year ended December 31, 2024 exceeded the guidance range of $12 to $15 million.
On January 9, 2024, the Company announced the completion of the rights offering to its common shareholders, resulting in the issuance of 85,714,285 common shares at a price of $0.35 ($0.26) per whole common share for aggregate gross proceeds of $30.0 million ($22.4 million) (the “Rights Offering”). DIRTT issued an aggregate of 67,379,471 common shares pursuant to the Basic Subscription Privilege and 18,334,814 common shares pursuant to the Additional Subscription Privilege. As a result of the common shares issued under the Basic Subscription Privilege and Additional Subscription Privilege, no common shares were available for issuance pursuant to the Standby Purchase Agreement (each as defined in Note 16 to our Consolidated Financial Statements).
On February 15, 2024, the Company commenced a substantial issuer bid and tender offer (the “Issuer Bid”), for our Debentures. Upon expiration of the Issuer Bid on March 22, 2024, DIRTT purchased C$4.7 million aggregate principal amount of its January Debentures and C$5.8 million aggregate principal amount of its December Debentures, representing approximately 11.66% of the January Debentures and 16.50% of the December Debentures issued and outstanding at the time. The Company took up all the Debentures tendered pursuant to the Issuer Bid for aggregate consideration of C$7.0 million (including interest of C$0.1 million) resulting in a $2.9 million gain on extinguishment of debt.

On June 30, 2024, then-Chair of the Board of Directors Mr. Ken Sanders retired from the Board of Directors. On July 1, 2024, the Company announced that the Board of Directors elected Mr. Scott Robinson to serve as Board Chair to replace Mr. Sanders.
On August 2, 2024, the Company and 22NW Fund, L.P. (“22NW”) closed the Debenture Repurchase in which the Company purchased for cancellation an aggregate of C$18.9 million ($14.0 million) principal amount of the January Debentures and C$13.6 million ($10.1 million) principal amount of the December Debentures from 22NW. As at December 31, 2024, C$16.6 million ($11.6 million) principal amount of the January Debentures and C$15.3 million ($10.6 million) principal amount of the December Debentures remained outstanding, and 22NW no longer held any Debentures.
On August 2, 2024, the Board of Directors adopted the Amended and Restated SRP, which superseded the previous Shareholder Rights Plan adopted on March 22, 2024. The Amended and Restated SRP was approved by the Company’s shareholders at a special meeting held on September 20, 2024 (the “SRP Meeting”). The Company also entered into 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.
On August 28, 2024, the Company commenced the Debentures NCIB, which permits DIRTT to acquire up to C$1,664,200 principal amount of the January Debentures and C$1,558,700 principal amount of the December Debentures. As at December 31, 2024, C$0.3 million ($0.2 million) and C$0.01 million ($0.01 million) principal amounts of the December Debentures and January Debentures, respectively, had been acquired through the Debentures NCIB.

Pipeline

The table below presents our qualified leads and twelve-month forward pipeline as at January 1, 2025 and January 1, 2024. We define qualified leads as the quantity of projects being pursued as of the date presented, and define our pipeline as the estimated potential revenue from qualified leads where a client has engaged DIRTT and is assessing DIRTT as a potential provider of prefabricated interior solutions. We believe these metrics are helpful to estimate near-term performance, particularly given the macroeconomic factors that affect our operating environment, including labor availability, interest rate changes, and potential recessionary impacts on construction projects.

As of January 1, 2025, our twelve-month forward pipeline increased by 3% from January 1, 2024, illustrated in the table below.

	As at
	January 1, 2025	January 1, 2024	% Change
Twelve-Month Forward Pipeline ($ 000s)
Commercial	147,609	176,789	(17)
Healthcare	51,214	41,221	24
Government	55,203	34,813	59
Education	24,292	17,117	42
	278,318	269,940	3
Leads (#)	1,012	861	18

The January 1, 2024 pipeline included a large commercial project awarded to us in the first quarter of 2024, but the project was phased over a three-year period. As a result, the twelve-month forward pipeline decreased by $22.9 million while the project value remained in the full pipeline. After accounting for this phasing, the twelve-month pipeline increased by $31.3 million.

We believe our pipeline has higher integrity and has more projects further along the process, and therefore we are maintaining our revenue guidance for 2025 at $194 million to $209 million.

Outlook

The segment of construction that DIRTT operates in represents a $40 billion addressable market with increasing expansion opportunities. DIRTT continues to capture more market share by solving construction’s key challenges through innovative product development, technology-enabled efficiency, and a simplified installation process. Adoption of offsite, prefabricated construction is accelerating due to sustainability goals, trade labor shortages, and rising costs. DIRTT pioneered its unique construction method over 20 years ago and remains able to deliver schedule acceleration, cost certainty, unlimited aesthetic customization, and an end product that can be repurposed and reused to minimize waste. Everything we manufacture is de-mountable and infinitely re-configurable to adapt to the ever-changing needs of our customers.

Last quarter, we shared our strategic priorities through 2027, including revenue growth, continued expansion of DIRTT's proprietary ICE software, accelerated innovation, and investment in talent. In the fourth quarter of 2024, we continued mapping our path to growth with a focus on innovating how we go to market. Our primary source of revenue remains our extensive network of independent DIRTT Construction Partners ("Construction Partners" or "Partners"). While we continue to develop and expand this network, including advancing 15 Partners to a higher status tier in 2025, we are also mapping additional growth paths to unlock greater pipeline. For example, we believe there are geographic areas of North America that lack sufficient coverage by our existing network into which we can expand and we are also expanding our offering to include more estimating, pre-construction, and installation services, both directly and through Partners. In 2024, we launched an additional go-to-market channel called Integrated Solutions. This team provides sales, design, estimating, and project delivery services with our Construction Partners and DIRTT sales representatives. Integrated Solutions increases our sales network's capacity as well as targets revenues in channels without existing coverage. There are three key opportunity areas Integrated Solutions is focusing on; diversifying our customer profile, increasing volumes in smaller markets, and expanding into new sectors. Through these efforts, Integrated Solutions aims to simplify our go-to-market strategy and increase access to DIRTT's portfolio of products.

Raw material prices continue to increase and on February 11, 2025, we announced a price increase of 5% on all orders placed after March 18, 2025, and price adjustments on certain products in response to market feedback and to mitigate the impact of these rising costs.

We continue to advance our ICE offering, including the addition of several new features that streamline processes and reduce customer inquiries. In response to user feedback, we optimized the ICE Manager application to improve the interface and added an "Early Access" feature to allow beta testers and developers to access applications for further testing and improvement. An update in December 2024 introduced itemized part pricing and automated casework plan details, saving DIRTT 50 to 75 hours per week in designer time and improving efficiency for customers. We continue to evaluate artificial intelligence ("AI") for software development, including catalogue creation. DIRTT is evaluating a code generative AI resource to develop a web-based freight quoting tool, with the potential to save approximately 200 hours of development time and remove a manual touch-point for our customers.

DIRTT has made significant strides with product innovation and partnerships. For example, the COVE™, our low-acuity solution for emergency departments, officially launched in November 2024 and is already earning significant industry recognition. In addition to previously announced product awards from the 2024 Healthcare Facilities Symposium and Expo, we were recently awarded the Gold Touchstone Award from the Center for Health Design, and will be recognized in March at the 2025 International Summit & Exhibition on Health Facility Planning, Design & Construction PDC Summit. In the fourth quarter of 2024, we also released curved solid corners for our solid wall solution, which is already seeing strong demand with active project quotes in the market. We are also innovating our market approach through strategic partnerships. In December 2024, DIRTT joined the Siemen's Xcelerator program to further drive our digital transformation in the construction sector by leveraging automation, Internet of Things and digital twin technology to seamlessly connect our physical assets with their digital counterparts. This will help enable continuous monitoring, predictive maintenance, optimized space utilization, and enhanced process efficiency.

We have a bold operations goal of zero defects, missed deliveries, and workplace injuries. In 2024, DIRTT's on time in full (OTIF) delivery performance was 99.1%, the highest in our history. We also achieved a total recordable incident rate (TRIF) of 0.82 for 2024, which is 80% below the industry average.

Through the fourth quarter of 2024, the US economy continued its economic expansion post-COVID with inflation reaching closer to the Federal Reserve 2% target. The recent pause in interest rate cuts by the Federal Reserve highlights a commitment to reaching a 2% target. The new administration in the United States has expressed support for deregulation, lower taxes, and creating a favorable economic climate for businesses in America. Return to office mandates have increased, with financial services and technology leading the way. Additionally, a favorable environment for mergers and acquisitions will be an additional demand driver for interior construction. The Kastle Systems weekly occupancy index continues to trend upwards. On the other hand, recent reports of Department of Government Efficiency suggests there may be decreased demand on our General Services Administration Contract, which represented less than 0.6% of our revenues in 2024. The impact of these various developments on our business is uncertain.

We see continued demand growth in our healthcare segment with national spending growing significantly since pre-COVID and are dedicating resources to capture this trend. Similarly, national education construction spending surpassed its pre-COVID highs in 2024. Overall, excluding the tariff risk described below, we are observing a supportive macro-economic environment in the United States that we believe will support increasing demand of our products.

The announcement in February 2025 of a 25% tariff on all Canadian imports into the U.S., and Canada’s subsequent announcement of retaliatory tariffs on U.S. good imported into Canada, has created uncertainty across multiple sectors, including the construction industry. While Canada and the U.S. have agreed to delay the imposition of such tariffs until March 6, 2025, the ultimate extent and duration of such tariffs is unknown, and significant uncertainty continues to exist in respect of future tariffs or other trade barriers in general. In addition, on February 10, 2025, an Executive Order was issued by the White House imposing 25% tariffs on steel and aluminum entering the U.S., effective March 12, 2025. As at the date hereof, the outcome and extent of these tariffs is uncertain. 92% of DIRTT’s raw materials are from North America, and DIRTT has manufacturing facilities both in the U.S. and Canada. Our Canadian facilities import some raw materials from the U.S., and our U.S. facilities import some raw materials from Canada. While tariffs would have a cost impact on our business, we believe our presence in both Canada and the U.S. provides us with strategic flexibility. We have been, and continue to be, proactively preparing for potential tariffs and we believe that we have multiple paths to mitigate the impact of tariffs on our business, including alternative material sourcing and manufacturing locations.

We are maintaining our previously provided 2025 guidance, which is set forth below. Given the significant uncertainty surrounding tariffs, our 2025 guidance may not be realized should any significant tariff impacts arise subsequent to the date hereof.

2025 Revenue: $194 to 209 million
2025 Adjusted EBITDA: $18 to 25 million

We finalized our 2025 budget in early January 2025. We plan to increase our capital expenditure by more than 50% from 2024, as we continue to invest in improving efficiencies in our plants, investing in our DXC footprint and investments in ICE.

Non-GAAP Financial Measures

Note Regarding Use of Non-GAAP Financial Measures

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These GAAP financial statements include non-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult.

As a result, we also provide financial information in this Annual Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses these non-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance period-over-period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange movements), asset base (depreciation and amortization), the impact of under-utilized capacity on gross profit, tax consequences, 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 forward-looking non-GAAP 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.

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.

The following non-GAAP financial measures are presented in this Annual Report, and a description of the calculation for each measure is included.

Adjusted Gross Profit	Gross profit before deductions for depreciation and amortization
Adjusted Gross Profit Margin	Adjusted Gross Profit divided by revenue
EBITDA	Net income before interest, taxes, depreciation and amortization
Adjusted EBITDA	EBITDA adjusted to remove foreign exchange gains or losses; impairment charges; reorganization expenses; stock-based compensation expense; government subsidies; unusual or infrequent charges and gains such as gain on sale of software and patents and gain on extinguishment of debt; related party expense; and any other non-core gains or losses
Adjusted EBITDA Margin	Adjusted EBITDA divided by revenue

You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Results of Operations

Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

	For the Year Ended December 31,
	2024	2023	% Change
	($ in thousands)
Revenue	174,313	181,931	(4)
Gross Profit	64,375	59,542	8
Gross Profit Margin	36.9%	32.7%
Operating expenses
Sales and marketing	22,938	25,235	(9)
General and administrative	19,903	21,655	(8)
Operations support	7,438	7,832	(5)
Technology and development	5,262	5,820	(10)
Stock-based compensation	2,965	2,306	29
Reorganization	1,113	3,009	(63)
Impairment charge on Rock Hill Facility	530	8,716	(94)
Related party expense	-	1,524	(100)
Total operating expenses	60,149	76,097	(21)
Operating income (loss)	4,226	(16,555)	126
Operating margin	2.4%	(9.1)%
Gain on extinguishment of convertible debt	10,426		100
Foreign exchange (loss) gain	2,974	(626)	575
Interest income	1,587	490	224
Interest expense	(3,995)	(4,927)	(19)
Gain on sale of software and patents	-	7,130	(100)
Government subsidies	-	236	(100)
	10,992	2,303	377
Net income (loss) before tax	15,218	(14,252)	207
Current and deferred income tax expense	448	332	35
	448	332	35
Net income (loss) after tax	14,770	(14,584)	201

Revenue

Revenue reflects sales to our Construction Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters.

The following table sets forth the contribution to revenue of our product and service offerings.

	For the Year Ended December 31,
	2024	2023	% Change
	($ in thousands)
Product	152,856	158,405	(4)
Transportation	16,066	17,674	(9)
License fees from Construction Partners	738	840	(12)
Total product revenue	169,660	176,919	(4)
Installation and other services	4,653	5,012	(7)
	174,313	181,931	(4)

Revenue for the year ended December 31, 2024, was $174.3 million, a decrease of $7.6 million or 4% from the year ended December 31, 2023, primarily due to three healthcare projects, one key education project and a larger volume of high value commercial projects that were completed in 2023 and were not repeated in 2024.

Installation and other services revenue was $4.7 million for the year ended December 31, 2024, compared to $5.0 million in the year ended December 31, 2023. This revenue primarily reflects services performed by our ICE design teams for third parties. Except in limited circumstances, our Construction Partners, rather than the Company, perform installation services.

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 December 31, 2024, we had 71 (2023 - 72) Construction Partners servicing multiple locations.

We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education.

	For the Year Ended December 31,
	2024	2023	% Change
	($ in thousands)
Commercial	121,518	116,693	4
Healthcare	21,230	33,970	(38)
Government	17,114	13,446	27
Education	9,060	11,970	(24)
License fees from Construction Partners	738	840	(12)
Total product revenue	169,660	176,919	(4)
Service revenue	4,653	5,012	(7)
	174,313	181,931	(4)

For the Year Ended December 31,
	2024	2023
	(in %)
Commercial	72	66
Healthcare	13	19
Government	10	8
Education	5	7
Total Product Revenue^{(1)}	100	100

(1) Excludes license fees from Construction Partners.

Commercial sales increased by 4% for the year ended December 31, 2024. Healthcare revenues decreased by 38% in the year ended December 31, 2024, from the prior year, primarily due to three large healthcare projects which were completed in 2023 and did not repeat in 2024. Sales in the healthcare sector tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. We have made several investments in new product solutions (such as COVE and Applied Headwalls) and additions to the business development team to increase product placement in future construction projects. This had led to multiple project commitments set to commence in 2025. Those investments continue in 2025 and are expected to expand into life sciences. Government sales increased by 27% from the prior year. Similar to healthcare, government revenues tend to be larger individual projects. We plan to update our government agreements in 2025 and expect an expansion in the number of our state government agreements. Education sales in 2024 decreased by 24% from the prior year, primarily due to one $1.4 million education project that was completed in 2023. Our sales team has focused on southern markets with high public funding activity to build a stronger education pipeline.

Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States. The following table presents our revenue dispersion by geography:

For the Year Ended December 31,
	2024	2023	% Change
	($ in thousands)
Canada	23,921	19,934	20
U.S.	150,392	161,997	(7)
	174,313	181,931	(4)

In 2024, 14% of revenue was from Canada, as compared to 11% in 2023. Historically, approximately 11-15% and 85-89% of revenues are derived from sales to Canada and the United States, respectively.

Sales and marketing expenses

Sales and marketing expenses decreased by $2.3 million to $22.9 million for the year ended December 31, 2024, from $25.2 million for the year ended December 31, 2023. The decrease was largely made up of a $1.0 million decrease in pass through charges, a $0.9 million decrease in building and infrastructure costs, a $0.7 million decrease in commissions, and a $0.3 million decrease in office costs and communication costs. The decreases were offset by an increase of $0.3 million in salaries and benefits and a $0.3 million increase in marketing and tradeshow costs related to the "Partner Camp" event hosted by the Company for our Construction Partners held at the end of the third quarter of 2024.

General and administrative expenses

General and administrative expenses decreased $1.8 million to $19.9 million for the year ended December 31, 2024, from $21.7 million for the year ended December 31, 2023. The decrease was driven by a $0.9 million decrease in salaries and benefits, a $0.9 million decrease in office costs, a $0.3 million decrease in depreciation, a $0.3 million decrease in communication costs, a $0.2 million decrease in public company costs, a $0.1 million decrease in travel and entertainment, a $0.1 million decrease in building and infrastructure costs, and a $0.1 million increase in gain on disposal. These decreases were offset by a $1.2 million increase in professional legal fees as a result of the SRP Meeting, the Debenture Repurchase, the Support Agreement and the Debentures NCIB which occurred in the third quarter of 2024, and the Shares NCIB that we commenced in the fourth quarter of 2024.

Operations support expenses

Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Construction Partner project execution and our manufacturing operations. Operations support expenses of $7.4 million in 2024 decreased $0.4 million from $7.8 million in 2023. The decrease was largely driven by a $0.6 million decrease in salaries and benefits and was slightly offset by a $0.1 million increase in travel and entertainment costs.

Technology and development expenses

Technology and development expenses relate to non-capitalizable costs associated with our product and software development teams and are primarily comprised of salaries and benefits of technical staff.

Technology and development expenses decreased by $0.6 million to $5.3 million for the year ended December 31, 2024, compared to $5.8 million for the year ended December 31, 2023. The decrease was primarily related to a $0.7 million decrease in salaries and benefits costs, a $0.2 million decrease in building and infrastructure costs, and a $0.1 million decrease in depreciation expense. These decreases were offset by a $0.3 million write off of a previously capitalized software development project, and a $0.1 million increase in professional services costs.

Stock-based compensation

Stock-based compensation expense for the year ended December 31, 2024, was $3.0 million compared to $2.3 million in 2023. The increase was due to fair value adjustments on cash settled DSU awards as a result of the increased share price between December 31, 2023 and December 31, 2024.

Reorganization

For the year ended December 31, 2024, we incurred $1.1 million of reorganization costs compared to $3.0 million during the year ended December 31, 2023. Reorganization expenses for the year ended December 31, 2024 primarily relate to the movement of inventory and equipment from the Rock Hill Facility for use at our facility in Calgary, Alberta, while the reorganization costs in the year ended December 31, 2023 were largely made up of termination costs associated with actions taken to streamline our back office and operational support functions.

Impairment charge on Rock Hill Facility

The Company finalized the decision to close the Rock Hill Facility in the third quarter of 2023. The Company's reassessment of the useful lives of the manufacturing equipment at the Rock Hill Facility resulted in an $8.7 million impairment charge in the twelve months ended December 31, 2023.

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.

Related party expense

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 $1.6 million (the "22NW Debt").

Pursuant to the Debt Settlement Agreement, the Company agreed to repay the 22NW Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group.

In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the 22NW Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by shareholders.

At the annual general and special meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the 22NW Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023, market price of $0.38 per common share, resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.

Gain on extinguishment of convertible debt

During the year ended December 31, 2024, C$43.4 million ($31.8 million) in principal amount of Debentures was repurchased for cancellation through the Issuer Bid, Debenture Repurchase, and Debentures NCIB which triggered an extinguishment of debt. The gain on extinguishment of $10.4 million for the year ended December 31, 2024, was calculated as the difference between the repayment and the net carrying value of the extinguished principal less unamortized issuance costs of C$1.2 million ($0.9 million) (refer to Note 7 of our Consolidated Financial Statements for additional information).

Foreign exchange gain (loss)

In the year ended December 31, 2024, we had a foreign exchange gain of $3.0 million compared to a loss of $0.6 million in the year ended December 31, 2023, due to the weakening of the Canadian dollar relative to the U.S. dollar.

Interest income

Interest income increased to $1.6 million for the year ended December 31, 2024, compared to $0.5 million in the year ended December 31, 2023, as we benefited from higher interest rates on higher cash balances.

Interest expense

Interest expense decreased by $0.9 million from $4.9 million for the year ended December 31, 2023, to $4.0 million for the year ended December 31, 2024. This decrease is largely due to repayment of debt throughout the year ended December 31, 2024, offset by $0.9 million of unamortized issuance costs related to Debentures that were expensed as a result of the repurchase and cancellation of such debt.

Government subsidies

The Company was not eligible and did not receive any new government subsidies in the year ended December 31, 2024. The Company received $0.2 million of interest with the collection of the Employee Retention Credit ("ERC") during the year ended December 31, 2023.

Gain on sale of software and patents

On May 9, 2023, we entered into a Co-Ownership Agreement and a Partial Patent Assignment agreement (collectively, the "AWI Agreements") with AWI. The AWI Agreements provided for a cash payment from AWI to the Company of $10.0 million in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in the Applicable ICE Code, including a 50% interest in the patent rights that relate to the Applicable ICE Code. Pursuant to the AWI Agreements, we also provided AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we received an additional cash payment of $1.0 million in the fourth quarter of 2023. The AWI Agreements provide that we and AWI have separate exclusive fields of use and includes certain restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into an Amended and Restated Master Services Agreement (the "ARMSA") with AWI, under which AWI has also prepaid for certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the AWI Agreement is terminated or expires and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the AWI Agreement.

The $11.0 million of proceeds on the sale of the 50% interest in the Applicable ICE code, pursuant to the AWI Agreement, was received during the second quarter of 2023. In accordance with GAAP, the proceeds were first applied to the net book value of the related costs of software of $2.9 million and patents (other assets) of $0.9 million. The residual amount of $7.1 million was recognized as a gain in the consolidated statement of operations. Further, $1.8 million was received during 2023 as a prepayment under the ARMSA, which payment was recognized into revenue during 2023 and the first quarter of 2024. Part of the proceeds of this transaction were used to settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash.

Income tax

The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. Income tax expense for the year ended December 31, 2024, was $0.4 million, compared to $0.3 million for the same period of 2023. For the year ended December 31, 2024, the Company recorded valuation allowances of $3.8 million (2023 - $4.2 million) against deferred tax assets incurred during the year as the Company has experienced cumulative losses in recent years. Due to the Company's history of negative earnings, it is not more likely than not that the Company's deferred tax assets will be utilized in the near term.

As at December 31, 2024, we had C$86.1 million of loss carry-forwards in Canada and $51.3 million in the United States. These loss carry-forwards will begin to expire in 2032.

Net income after tax

Net income after tax increased to $14.8 million or $0.07 net income after tax per share (diluted) in the year ended December 31, 2024, from a net loss after tax of $14.6 million or $0.13 net loss after tax per share in the year ended December 31, 2023. The increased income is primarily the result of a $4.8 million increase in gross profit and a $15.9 million decrease in operating expenses (which includes an $8.2 million decrease in impairment charge on the Rock Hill Facility and a decrease of $1.9 million in reorganization expenses), a $10.4 million gain on extinguishment of debt relating to the Issuer Bid, Debenture Repurchase and the Debentures NCIB, a $1.1 million increase in interest income, a $0.9 million decrease in interest expense and a $3.6 million increase in foreign exchange gain, offset by a $7.1 million gain on sale of software and patents from the AWI sale in 2023 that did not repeat in 2024, and a $0.2 million decrease in government subsidies.

Three Months Ended December 31, 2024 Compared to the Three Months ended December 31, 2023

	For the Three Months Ended December 31,
	2024	2023	% Change
	($ in thousands)
Revenue	48,890	50,933	(4)
Gross Profit	17,539	19,238	(9)
Gross Profit Margin	35.9%	37.8%
Operating expenses
Sales and marketing	5,773	6,933	(17)
General and administrative	5,112	5,652	(10)
Operations support	1,907	2,268	(16)
Technology and development	1,281	1,765	(27)
Stock-based compensation	1,060	(237)	547
Reorganization	169	152	11
Impairment charge on Rock Hill Facility	-	764	100
Total Operating expenses	15,302	17,297	(12)
Operating income	2,237	1,941	15
Operating margin	4.6%	3.8%
Gain on extinguishment of convertible debt	17	-	100
Foreign exchange gain (loss)	2,057	(567)	463
Interest income	275	219	26
Interest expense	(471)	(1,291)	(64)
Gain on sale of software and patents	-	985	(100)
	1,878	(654)	387
Net income before tax	4,115	1,287	220
Current and deferred income tax expense	77	332	(77)
	77	332	(77)
Net income after tax	4,038	955	323

Our fourth quarter revenue was $48.9 million, a decrease of $2.0 million or 4% from $50.9 million for the same period in 2023. Historically, our fourth quarter revenue is lower than second and third quarter revenues due to seasonality. The fourth quarter of 2023 had a higher commercial volume of commercial projects, offset by the benefit from four large commercial projects that were completed in the fourth quarter of 2024.

Annual 2024 Non-GAAP Measures

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2024, 2023 and 2022

The following table presents a reconciliation for the years ended December 31, 2024, 2023, and 2022 of Adjusted Gross Profit to our gross profit and Adjusted Gross Profit Margin to gross profit margin, which are the most directly comparable GAAP measures for the periods presented:

	For the Year Ended December 31,
	2024	2023	2022
	($ in thousands)
Gross profit	64,375	59,542	28,160
Gross profit margin	36.9%	32.7%	16.4%
Add: Depreciation and amortization expense	3,953	5,525	10,789
Adjusted Gross Profit	68,328	65,067	38,949
Adjusted Gross Profit Margin	39.2%	35.8%	22.6%

For the year ended December 31, 2024, gross profit and gross profit margin increased to $65.0 million or 36.9% from $59.5 million or 32.7% for the prior year. Adjusted Gross Profit and Adjusted Gross Profit Margin increased $68.3 million or 39.2% for the year ended December 31, 2024, from $65.1 million or 35.8% for the year ended December 31, 2023.

The improvement in Adjusted Gross Profit was a result of material optimization to offset the inflationary impacts on material costs. Fixed costs decreased $2.3 million compared to 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 since the suspension of operations at the Rock Hill Facility were $1.7 million for the year ended December 31, 2024, compared to $2.0 million for the previous year, and are included in cost of sales. We are pursuing options to sublease the Rock Hill Facility to offset idle facility costs in 2025 and beyond.

EBITDA and Adjusted EBITDA for the Years Ended December 31, 2024, 2023 and 2022

The following table presents a reconciliation for the results of 2024, 2023 and 2022 of EBITDA and Adjusted EBITDA to our net income (loss), and of Adjusted EBITDA Margin to net income (loss) margin, which are the most directly comparable GAAP measures for the years presented:

	For the Year Ended December 31,
	2024	2023	2022
	($ in thousands)
Net income (loss) after tax for the period	14,770	(14,584)	(54,963)
Add back (deduct):
Interest expense	3,995	4,927	5,160
Interest income	(1,587)	(490)	(51)
Tax expense	448	332	21
Depreciation and amortization	6,575	8,934	15,119
EBITDA	24,201	(881)	(34,714)
Foreign exchange (gain) loss	(2,974)	626	(1,445)
Stock-based compensation	2,965	2,306	4,277
Reorganization expense(3)	1,113	3,009	13,461
Gain on extinguishment of convertible debt(3)	(10,426)	-	-
Impairment charge on Rock Hill Facility(5)	530	8,716	-
Gain on sale of software and patents(3)	-	(7,130)	-
Related party expense(2)	-	1,524	-
Government subsidies(3)	-	(236)	(7,765)
Adjusted EBITDA	15,409	7,934	(26,186)
Net Income (Loss) Margin(1)	8.5%	(8.0)%	(31.9)%
Adjusted EBITDA Margin	8.8%	4.4%	(15.2)%

(1) Net income (loss) divided by revenue.
(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 24 of the consolidated financial statements).
(3) Reorganization expenses, the gain on sale of software and patents, the gain on extinguishment of convertible debt, the impairment charge on the Rock Hill Facility, related party expense and government subsidies are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (refer to Note 4, Note 5, Note 6 and Note 7 of the consolidated financial statements).

For the year ended December 31, 2024, Adjusted EBITDA and Adjusted EBITDA Margin increased by $7.5 million to $15.4 million or 8.8% of revenue from $7.9 million or 4.4% of revenue in the same period of 2023. This reflects a $3.3 million increase in Adjusted Gross Profit, discussed above, a $1.9 million decrease in salaries and benefits costs, a $1.7 million decrease in pass through charge and commissions as a result of lower revenues, a $1.2 million decrease in building and infrastructure costs, a $1.0 million decrease in office costs, offset by a $1.3 million increase in professional services as a result of the SRP Meeting held in the third quarter as well as costs associated with the Debenture Repurchase, the Support Agreement, the Shares NCIB, the Debentures NCIB and a $0.3 million net increase in individual costs.

Reconciliation of Q4 2024 Non-GAAP Measures

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended December 31, 2024, 2023 and 2022

The following table presents a reconciliation for the three months ended December 31, 2024, 2023, and 2022 of Adjusted Gross Profit to our gross profit, and Adjusted Gross Profit Margin to gross profit margin, which is the most directly comparable GAAP measures for the periods presented:

	For the Three Months Ended December 31,
	2024	2023	2022
	($ in thousands)
Gross profit	17,539	19,238	11,589
Gross profit margin	35.9%	37.8%	27.3%
Add: Depreciation and amortization expense	1,441	869	1,997
Adjusted Gross Profit	18,980	20,107	13,586
Adjusted Gross Profit Margin	38.8%	39.5%	32.0%

EBITDA and Adjusted EBITDA for the Three Months Ended December 31, 2024, 2023 and 2022

The following table presents a reconciliation for the results of three months ended December 31, 2024, 2023 and 2022 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 years presented:

	Three months ended December 31,
	2024	2023	2022
	($ in thousands)
Net income (loss) for the period	4,038	955	(5,906)
Add back (deduct):
Interest expense	471	1,291	1,225
Interest income	(275)	(219)	(1)
Income tax expense	77	332	37
Depreciation and amortization	2,033	1,718	2,917
EBITDA	6,344	4,077	(1,728)
Foreign exchange (gain) loss	(2,057)	567	425
Stock-based compensation	1,060	(237)	731
Reorganization expense(3)	169	152	1,180
Gain on extinguishment of convertible debt(3)	(17)	-	-
Impairment charge on Rock Hill Facility(3)	-	764	-
Gain on sale of software and patents(3)	-	(985)	-
Adjusted EBITDA	5,499	4,338	608
Net Income (Loss) Margin(1)	8.3%	1.9%	(13.9)%
Adjusted EBITDA Margin	11.2%	8.5%	1.4%

(1) Net income (loss) divided by revenue.
(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 24 of the consolidated financial statements).
(3) Reorganization expenses, the gain on sale of software and patents, the gain on extinguishment of convertible debt, the impairment charge on the Rock Hill Facility and government subsidies are not core to our business and are therefore excluded from the Adjusted EBITDA calculation (refer to Note 4, Note 5, Note 6 and Note 7 of the consolidated financial statements).

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2023, compared to the fiscal year ended December 31, 2022, is included under the heading Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on February 21, 2024.

Liquidity and Capital Resources

As at December 31, 2024, the Company had $29.3 million of cash on hand and C$14.4 million ($10.0 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 year ended December 31, 2024, the Company generated $4.4 million in cash flows compared to $10.9 million over fiscal year 2023. Gross profit for the year ended December 31, 2024, was $65.0 million, or 36.9% of revenue, compared to the same period in 2023, which generated gross profit of $59.5 million, or 32.7% of revenue. Cash flows were increased in 2024 by the proceeds of the Rights Offering (as defined herein) of $21.3 million and improved operational results, offset by a $21.5 million repayment of debt under the Issuer Bid, Debenture Repurchase and Debentures NCIB. In 2023, the Company benefited from the receipt of $11.0 million of cash from the AWI sale (no similar transaction occurred in 2024), and a receipt of the $7.3 million of government subsidies.

The Issuer Bid, Debenture Repurchase, Debentures NCIB and Shares NCIB were initiated after careful consideration of cash flow, and the Company continues to evaluate uses of cash on hand. As discussed in the "Risk Factors" section, proposed tariffs on Canadian exports into the United States may have a material impact on future cash flows and liquidity, which the Company will continue to monitor.

We have executed upon several initiatives to improve liquidity over the last two years. In May 2023, we entered into an agreement with AWI resulting in the receipt of $12.8 million of cash throughout 2023. In May 2024, we extended our agreement to sublease our Plano 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. In September 2024, we entered into an agreement to sublease the remainder of our facility in Phoenix. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of October 1, 2024, through March 31, 2027, providing us annualized savings of approximately $0.6 million. We are continuing to pursue sublease opportunities for the Rock Hill Facility and expect these initiatives to result in positive cash inflows in 2025.

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 (net proceeds of $21.3 million).

In January 2021, we issued C$40.3 million of 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. As a result of the Rights Offering, the conversion price was adjusted to C$4.03 per common share. Interest and principal are payable in cash or shares at the option of the Company.

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. As a result of the Rights Offering, the conversion price was adjusted to C$3.64 per common share. Interest and principal are payable in cash or shares at the option of the Company.

On February 15, 2024, the Company announced 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)).

On August 2, 2024, the Company entered into an agreement with 22NW, to purchase for cancellation an aggregate of C$18,915,000 principal amount of the 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 the 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, 22NW no longer held any Debentures.

On August 28, 2024, the Debentures NCIB commenced and will terminate no later than August 27, 2025. Under the Debentures NCIB, DIRTT is permitted to acquire up to C$1,664,200 principal amount of the January Debentures and C$1,558,700 principal amount of the December Debentures. As at December 31, 2024, C$0.3 million ($0.2 million) and C$0.01 million ($0.01 million) principal amounts of the December Debentures and January Debentures had been acquired through the Debentures NCIB, respectively. As at December 31, 2024, C$16.6 million ($11.6 million) principal amount of the January Debentures and C$15.2 million ($10.6 million) principal amount of the December Debentures were outstanding.

On February 4, 2024, the Company entered into a Litigation Funding Agreement with a third party for the funding of up to $4.0 million of litigation costs in respect of specific claims against Falkbuilt, Inc., Falkbuilt Ltd. and Henderson. In return, the Company has agreed to pay from any proceeds received from the settlement of such claims, a reimbursement of funded amounts plus diligence and underwriting costs, plus a multiple of such funded amount based on certain milestones. As part of this agreement, the Company is subject to a general security arrangement over its assets. The agreement was terminated in December 2024. The Company is currently considering whether to pursue further litigation funding, as we believe we have sufficient funds to finance the litigation. There is additional timeline certainty as the Canadian litigation trial date has been set for February 2, 2026.

On December 20, 2024, the Shares NCIB commenced and will terminate no later than December 19, 2025. Under the Shares NCIB, DIRTT is permitted to acquire up to 7,515,233 common shares. All purchases will be made on the open market at the market price of common shares at the time of acquisition. Any common shares acquired through the Shares NCIB will be immediately cancelled. As at December 31, 2024, 58,478 common shares had been repurchased and cancelled for proceeds of C$0.1 million ($0.04 million).

On February 13, 2025, the Company entered into the Share Repurchase with NGEN to purchase for cancellation 3,920,844 common shares of DIRTT (“Common Shares”) currently held by NGEN (the “NGEN Shares”) at a purchase price of $0.80 per NGEN Share. Following the Share Repurchase, there were 189,643,903 Common Shares outstanding, and NGEN no longer held any Common Shares. The NGEN Shares repurchased under the Share Repurchase were counted against the NCIB Annual Limit. Following completion of the Share Repurchase, the Company’s outstanding NCIB Annual Limit is 3,422,494 Common Shares.

As explained above, initiating the share buyback was done after careful consideration of cash flow and with consideration to the risk of proposed tariffs.

We have assessed the Company's liquidity as at December 31, 2024, taking into account our sales outlook for the next twelve months, our existing cash balances and available credit facilities. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next twelve months.

To the extent that existing cash and cash equivalents and available facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders. While we believe we can access capital markets when needed or under acceptable terms, there can be no assurance we will be able to do so.

In February 2021, we entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada ("RBC"), as lender (the "RBC Facility"). Under the RBC Facility, the "Borrowing Base" is a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. On February 9, 2023, the Company extended the RBC Facility. The maximum availability under the Extended RBC Facility was subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Effective October 2023, inventory was scoped out of the Borrowing Base. On February 9, 2024, the Company extended the Extended RBC Facility (the "Second Extended RBC Facility"). The Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Available borrowings under the Extended RBC Facility as at December 31, 2024, were C$14.4 million ($10.0 million). On February 11, 2025, the Company extended the Second Extended RBC Facility (the "Third Extended RBC Facility") for a period of two weeks up to February 25, 2025 whilst the Company and RBC completed negotiations.

On February 20, 2025, the Company entered into the Fourth Extended RBC Facility (the "Fourth Extended RBC Facility"). The Fourth Extended RBC Facility is subject to the borrowing base calculation based on accounts receivable balances to a maximum of C$25.0 million and matures on November 30, 2025. Interest is calculated as the Canadian or U.S. prime rate plus 50 basis points or at the Term CORRA Rate as adjusted by the Term CORRA Adjustment or Term SOFR plus the Term SOFR Adjustment, in each case plus 175 basis points. The Fourth Extended RBC Facility also includes a new letter of credit facility guaranteed by the Export Development of Canada of C$5 million. The Company has also entered into a bonding facility with Great Midwest Insurance Company, and any other company that is part of or added to Skyward Specialty Insurance Group, Inc. ("Skyward"), which allows access to a $15 million bonding facility subject to an individual maximum of $5 million. Under the terms of the facility with Skyward, any bonds issued will be secured through Letters of Credit issued pursuant to the Fourth Extended RBC Facility.

The Company has a C$5.0 million equipment leasing facility in Canada (the "Canada Leasing Facility") of which, as of December 31, 2024, C$4.4 million ($3.1 million) has been drawn and C$3.9 million ($2.7 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid, as of December 31, 2024, (the "U.S. Leasing Facility" and, together with the Canada Leasing Facility, the "Leasing Facilities") with RBC, and one of its affiliates. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%. 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.

The following table summarizes our consolidated cash flows for the years indicated:

	For the Year Ended December 31,
	2024	2023	2022
	($ in thousands)
Net cash flows provided by (used in) operating activities	7,344	14,821	(44,260)
Net cash flows (used in) provided by investing activities	(1,900)	7,657	(4,024)
Net cash flows used in financing activities	(415)	(11,605)	(874)
Effect of foreign exchange on cash, cash equivalents and restricted cash	(597)	(13)	(11)
Net increase (decrease) in cash, cash equivalents and restricted cash	4,432	10,860	(49,169)
Cash, cash equivalents and restricted cash, beginning of period	25,099	14,239	63,408
Cash, cash equivalents and restricted cash, end of period	29,531	25,099	14,239

	For the Year Ended December 31,
	2024	2023	2022
Cash and cash equivalents	29,288	24,744	10,821
Restricted cash	243	355	3,418
Total cash, cash equivalents and restricted cash	29,531	25,099	14,239

Operating Activities

Net cash flows provided by operating activities were $7.3 million for the year ended December 31, 2024, compared to $14.8 million provided by operating activities for the year ended December 31, 2023. The decrease in cash flows provided by operations is due to the receipt of $7.3 million cash proceeds from government subsidies, which was not repeated in 2024, offset by $5.9 million in other working capital changes. This decrease was offset by an increase in cash flows due to improved operational results (including a $7.5 million increase in Adjusted EBITDA and a $1.9 million decrease in reorganization expenses) in the year ended December 31, 2024 compared to 2023.

Investing Activities

Cash flows provided by investing activities during the year ended December 31, 2023, benefited from $11.0 million of proceeds from the AWI transaction which was not repeated in 2024.

We invested $1.4 million in property, plant and equipment during the year ended December 31, 2024, which was consistent with the prior year's investment in property, plant and equipment of $1.2 million. Expenditures consisted of $0.5 million of leasehold improvements, $0.2 million of marketing investments, $0.3 million of information technology investments and $0.4 million of manufacturing upgrades for the year ended December 31, 2024. We invested $1.6 million on capitalized software during the year ended December 31, 2024, compared to $1.8 million for the year ended December 31, 2023.

Financing Activities

For the year ended December 31, 2024, $0.4 million of cash was used in financing activities, comprising $21.5 million repayment of debt under the Issuer Bid, Debenture Repurchase, Debentures NCIB and $0.2 million relating to employee tax payments on vesting RSUs, $0.1 million of scheduled repayments under the Canada Leasing Facility, offset by $21.3 million of proceeds received from the Rights Offering. For the year ended December 31, 2023, $11.6 million of cash was used in financing activities mainly driven by $2.2 million of scheduled repayments and $9.4 million of early repayments under the U.S. Leasing Facility and the Canada Leasing Facility.

Consolidated cash flows for the quarter as indicated:

	For the Three Months Ended December 31,
	2024	2023	2022
	($ in thousands)
Net cash flows provided by operating activities	6,222	10,134	3,249
Net cash flows (used in) provided by investing activities	(741)	568	(429)
Net cash flows (used in) provided by financing activities	(126)	(8,193)	928
Effect of foreign exchange on cash, cash equivalents and restricted cash	309	153	62
Net increase in cash, cash equivalents and restricted cash	5,664	2,662	3,810
Cash, cash equivalents and restricted cash, beginning of period	23,867	22,437	10,429
Cash, cash equivalents and restricted cash, end of period	29,531	25,099	14,239

Credit Facility

On February 12, 2021, the Company entered into the RBC Facility. Under the RBC Facility, the Borrowing Base is up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Interest is calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under the RBC Facility, if the "Aggregate Excess Availability", defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash is less than C$5.0 million, the Company is subject to a fixed charge coverage ratio ("FCCR") covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company's bank accounts would be blocked by RBC and daily balances will set-off any borrowings and any remaining amounts made available to the Company.

On February 9, 2023, the Company extended the RBC Facility (the "Extended RBC Facility"). The Extended RBC Facility has a maximum borrowing base of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 200 basis points. Under the Extended RBC Facility, until such time that the trailing twelve-month FCCR is above 1.25 for three consecutive months, a cash balance equivalent to one-year's worth of Leasing Facilities payments must be maintained.

On February 9, 2024, the Company extended the Extended RBC Facility (the "Second Extended RBC Facility"). The maximum availability under the Second Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case, plus 200 basis points. At December 31, 2024, available borrowings were C$14.4 million ($10.0 million) (2023 - C$13.6 million ($10.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The Second Extended RBC Facility removed the three-month FCCR covenant, which resulted in the release of $0.1 million of restricted cash during the first quarter of 2024 (the Company had $0.4 million restricted cash as at December 31, 2023). On February 11, 2025, the Company entered the Third Extended RBC Facility for a period of two weeks up to February 25, 2025 whilst the Company and RBC completed negotiations.

On February 20, 2025, the Company entered into the Fourth Extended RBC Facility. The Fourth Extended RBC Facility is subject to the borrowing base calculation based on accounts receivable balances to a maximum of C$25.0 million and matures on November 30, 2025. Interest is calculated as the Canadian or U.S. prime rate plus 50 basis points or at the Term CORRA Rate as adjusted by the Term CORRA Adjustment or Term SOFR plus the Term SOFR Adjustment, in each case plus 175 basis points. The Fourth Extended RBC Facility also includes a new letter of credit facility guaranteed by the Export Development of Canada of C$5 million. The Company has also entered into a bonding facility with Great Midwest Insurance Company, and any other company that is part of or added to Skyward, which allows access to a $15 million bonding facility subject to an individual maximum of $5 million. Under the terms of the facility with Skyward, any bonds issued will be secured through Letters of Credit issued pursuant to the Fourth Extended RBC Facility.

The Company has a C$5.0 million equipment leasing facility in Canada under the Canada Leasing Facility of which C$4.4 million ($3.1 million) has been drawn and C$3.9 million ($2.7 million) has been repaid, and a $14.0 million equipment leasing facility in the United States of which $13.3 million has been drawn and repaid under the U.S. Leasing Facility with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.

As part of the decision to close the Rock Hill Facility, the Company fully settled the liability related to the U.S. Leasing Facility of $7.8 million in the fourth quarter of 2023. The U.S. Leasing Facility is no longer available to be drawn on. With the settlement of this liability, $2.6 million was released from restricted cash during 2023.

The Company did not make any draws on the Leasing Facilities during the years ended December 31, 2024 and 2023.

We are restricted from paying dividends unless Payment Conditions (as defined in the Fourth Extended RBC Facility) are met, including having a net borrowing availability of at least C$5 million over the proceeding 30-day period, and having a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. The Fourth Extended RBC Facility is currently secured by substantially all of our real and personal property located in Canada and the United States.

Contractual Obligations

The following table summarizes DIRTT's contractual obligations at December 31, 2024:

	Payments due by period
	Less than 1 year	1 to 3 years	3 to 5 years	Greater than 5 years	Total
	($ in thousands)
Accounts payable and accrued liabilities	16,352	-	-	-	16,352
Other liabilities	3,217	-	-	-	3,217
Customer deposits and deferred revenue	4,028	-	-	-	4,028
Current and long-term portion of long-term debt and accrued interest^{1}	1,461	23,371	123	-	24,955
Lease liabilities (undiscounted)	5,812	9,627	7,906	16,196	39,541
Purchase obligations	4,238	-	-	-	4,238
Total	35,108	32,998	8,029	16,196	92,331

(1) Includes principal and interest. Refer to Note 14 of our Consolidated Financial Statements for additional information.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements appearing in Item 8 of this Annual Report. Our critical accounting estimates include the areas where we have made what we consider to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly affect our financial results under different assumptions and conditions. We prepare our financial statements in conformity with GAAP. As a result, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. Critical estimates and assumptions made by management include:

Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies

We have warranty obligations with respect to manufacturing defects on most of our manufactured products. Warranty periods generally range from one to ten years. We have recorded a reserve for estimated warranty and related costs based on historical experience and periodically adjust these provisions to reflect actual experience. We assess the adequacy of our warranty accrual on a quarterly basis, and adjust the previous amounts recorded, if necessary, to reflect the change in estimate of the future costs of claims yet to be serviced. Typically, product deficiencies requiring our warranty are identified and remediated within a year of production. The following provides information with respect to our warranty accrual. At December 31, 2024 and 2023, we had $0.8 million and $0.9 million, respectively, accrued for warranty and other provisions, and third-party costs associated with remedying deficiencies were $0.6 million during the fiscal year ended December 31, 2024, as compared to $1.2 million during the fiscal year ended December 31, 2023.

We establish reserves for estimated legal contingencies when we believe a loss on litigation is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liability reserves are reflected in operations in the period in which there are changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. We estimate the probable cost by evaluating historical precedent as well as the specific facts relating to each contingency (including the opinion of outside advisors). Should the outcome differ from our assumptions and estimates, or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known. At December 31, 2024 and 2023, we had $0.05 million provided for legal provisions.

Estimates of useful lives of depreciable assets, the fair value of long-term assets used for impairment calculations and the fair value less costs to sell for assets held for sale

We evaluate the recoverability of our property, plant, and equipment (“PP&E”), capitalized software costs and right of use assets when events or changes in circumstances indicate a potential impairment exists. If impairment is indicated, the impairment loss is measured as the amount the assets carrying value exceeds the fair value of the assets.

Our determination of the fair value associated with long-term assets involves significant estimates and assumptions, including those with respect to the determination of asset groups, future cash inflows and outflows, discount rates, and asset lives. These significant estimates require considerable judgment, which could affect our future results if the current estimates of future performance and fair values change.

We estimate the useful lives of PP&E, capitalized software costs and right of use assets based on the period over which the assets are expected to be available for use. The estimated useful lives are reviewed annually and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of the relevant assets may be based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the PP&E and capitalized software assets would increase the recorded expenses and decrease the non-current assets.

The Company classifies an asset group ("asset") as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the consolidated statement of operations and comprehensive loss in the period in which the held for sale criteria are met. We estimate the fair value less costs to sell based on market prices and discussions with potential buyers on the assets that are held for sale. The amounts and timing that the assets held for sale are sold could be impacted on the ability to market and sell the assets held for sale, and find a suitable buyer.

Estimates of future taxable earnings used to assess the realizable value of deferred tax assets

We use the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their carrying amounts reported in our Consolidated Financial Statements. Deferred income tax assets also reflect the benefit of unutilized tax losses that can be carried forward to reduce income taxes in future years. Such method requires the exercise of significant judgment in determining whether or not it is more likely than not our deferred tax assets may be realized and, therefore, can be recognized in our Consolidated Financial Statements. Also, estimates are required to determine the expected timing upon which tax assets will be realized and upon which tax liabilities will be settled. We assess the ability to recover our deferred tax assets every quarter and concluded that a valuation allowance was required against our deferred tax assets at December 31, 2024 of $30.0 million (2023 - $34.5 million).

Tax interpretations, regulations, and legislation in the various jurisdictions in which the Company and its subsidiary operate

The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, and Canadian federal and provincial, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

We have no liability for uncertain tax positions. However, should we accrue for such liabilities, when and if they arise in the future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.

Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of the ultimate payout amount

We use a fair-value based approach for measuring stock-based compensation and record compensation expense over an award's vesting period based on the award's fair value at the date of grant. Our awards vest based on service conditions, and compensation expense is recognized on a straight-line basis. Stock-based compensation expense is recognized only for those awards that ultimately vest.

Estimates of ability and timeliness of customer payments of accounts receivable

Our expected credit loss reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating expected credit losses. In estimating the Company’s current estimate of expected credit losses, management considers historical credit loss experience as well as forward-looking information in order to establish rates for each class of financial receivable with similar risk characteristics. While we believe these processes effectively address our exposure for doubtful accounts and credit losses which have historically been within expectations, changes in the economy, industry, or specific customer conditions may require adjustments to the expected credit loss. We have a contract with a trade credit insurance provider, whereby a portion of our trade receivables are insured. The trade credit insurance provider determines the coverage amount, if any, on a customer-by-customer basis. Based on our trade receivables balance as at December 31, 2024 and 2023, approximately 82% and 93%, respectively, of that balance was covered by the trade credit insurance provider.

At December 31, 2024, we had an allowance for expected credit loss of $0.1 million (2023 - $0.1 million).

Recent Accounting Pronouncements

Please refer to Note 3 to our Consolidated Financial Statements presented elsewhere in this Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our financial assets and liabilities consist primarily of cash and cash equivalents, restricted cash, trade and accrued receivables, other receivables, deposits and long-term receivables, accounts payable and accrued liabilities, other liabilities, and long-term debt and accrued interest. We are exposed to market, credit and liquidity risks associated with financial assets and liabilities. We currently do not use financial derivatives to reduce exposures from changes in foreign exchange rates, commodity prices, or interest rates. We do not hold or use any derivative instruments for trading or speculative purposes. Our Board of Directors has responsibility for the establishment and approval of overall risk management policies, including those related to financial instruments. Management performs continuous assessments to ensure that all significant risks related to financial instruments are reviewed and addressed in light of changes to market conditions and operating activities.

Credit risk

Our principal financial assets are cash and cash equivalents, trade and accrued receivables, other receivables and deposits.

Our credit risk is primarily concentrated in our trade and accrued receivables as we do not believe that we are exposed to any significant credit risk related to our cash and cash equivalents and prepaid expenses. The amounts disclosed in the consolidated balance sheet for trade and accrued receivables and other receivables are net of allowances for doubtful accounts. Allowances are provided for the Company's current estimate of all expected credit losses using the lifetime expected credit loss model. As at December 31, 2024 and 2023, our allowance was $0.1 million. In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial well-being of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At December 31, 2024, approximately 82% of our trade accounts receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities, that have arisen since April 1, 2020, when the trade credit insurance became effective. Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. No single Construction Partner accounted for greater than 10% of revenue in 2024 (2023- one). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

Market risk

Market risk is the risk that changes in market prices, such as interest rates and foreign currency exchange rates, will affect our income or the value of the financial instruments held.

Foreign exchange risk

The majority (approximately 85% to 90%) of our revenue is collected in U.S. dollars, and approximately 40% of our costs are also incurred in U.S. dollars. Most other revenue and costs are denominated in Canadian dollars. As a result, we are exposed to fluctuations in the U.S. dollar against the Canadian dollar, which could have a positive or negative impact on our revenue and costs. The recent strengthening of the U.S. dollar versus the Canadian dollar in 2024 has had a positive impact on results.

Our financial instruments are exposed primarily to fluctuations in the Canadian dollar. The following table details our exposure to currency risk at the reporting dates and a sensitivity analysis to changes in currency. The sensitivity analysis includes Canadian dollar-denominated monetary items and adjusts their translation at period end for their respective change in the Canadian dollar. For the respective weakening of the Canadian dollar, there would be an equal and opposite impact on net income (loss) and comprehensive income (loss).

| | Amount
(C$ in thousands) | Change in
Currency (%) | Effect of net
income and
comprehensive
income for the
year ended
December 31, 2024 |
| --- | --- | --- | --- |
| Cash and cash equivalents | 4,387 | 10% | 439 |
| Trade and accrued receivables | 5,593 | 10% | 559 |
| Other receivables | 481 | 10% | 48 |
| Other assets | 333 | 10% | 33 |
| Accounts payable and accrued liabilities | 15,659 | 10% | 1,566 |
| Other liabilities | 3,342 | 10% | 334 |
| Current portion of long-term debt and accrued
interest | 113 | 10% | 11 |
| Long-term debt | 31,231 | 10% | 3,123 |
| Total | 61,139 | 10% | 6,113 |

Commodity price risk

We consume raw materials such as aluminum, hardware, wood and veneer, timber, plastic, electrical wiring and components, paint and powder, fabric and vinyl. While aluminum represents the largest component of our raw materials' expenditures, overall aluminum spend comprises only approximately 10% of product revenues and, therefore, absolute exposure to price fluctuations has a minimal impact on profitability.

Interest rate risk

In February 2021, we entered into the RBC Facility which was extended on February 9, 2023 under the Extended RBC Facility. On February 9, 2024, the Company extended the Extended RBC Facility under the Second Extended RBC Facility. The Second Extended RBC Facility has a maximum borrowing base of C$15 million and a one-year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Adjusted Term CORRA or Term SOFR plus the Term SOFR Adjustment, in each case, plus 200 basis points. On February 20, 2025, the Company entered into the Fourth Extended RBC Facility. The Fourth Extended RBC Facility is subject to the borrowing base calculation based on accounts receivable balances to a maximum of C$25.0 million and matures on November 30, 2025. Interest is calculated as the Canadian or U.S. prime rate plus 50 basis points or at the Term CORRA Rate as adjusted by the Term CORRA Adjustment or Term SOFR plus the Term SOFR Adjustment, in each case plus 175 basis points. We did not draw on the facilities during 2022, 2023 or 2024 and were, therefore not exposed to any interest rate risk.

The Company's Leasing Facilities and Debentures bear interest at fixed interest rates and are therefore not subject to interest rate risk.