DIRTT 2024
ANNUAL REPORT
ISSUED 2024 02 21
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
7.
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
For the transition period from to
Commission File Number 001-39061
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
(Exact name of Registrant as specified in its Charter)
Alberta, Canada
(State or other jurisdiction of
incorporation or organization)
7303 30th Street S.E.
Calgary, Alberta, Canada
(Address of principal executive offices)
N/A
(IRS Employer
Identification No.)
T2C 1N6
(Zip code)
Registrant’s telephone number, including area code: (403) 723-5000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Trading
Symbol(s)
N/A
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Shares, without par value
N/A
N/A
Name of Each Exchange on Which Registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the common shares on The
Nasdaq Stock Market on June 30, 2023, was $17,074,379.
The registrant had 191,110,385 common shares outstanding as of February 16, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the Annual and Special Meeting of Shareholders, scheduled to be held on May 9, 2024, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business............................................................................................................................................................
Item 1A. Risk Factors ......................................................................................................................................................
Item 1B. Unresolved Staff Comments.............................................................................................................................
Item 1C. Cybersecurity....................................................................................................................................................
Item 2.
Properties..........................................................................................................................................................
Item 3.
Legal Proceedings ............................................................................................................................................
Item 4. Mine Safety Disclosures...................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
[Reserved]
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .........................................................................
Item 8.
Financial Statements and Supplementary Data ................................................................................................
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........................
Item 9A. Controls and Procedures...................................................................................................................................
Item 9B. Other Information.............................................................................................................................................
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections .............................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...............................................................................
Item 11. Executive Compensation ..................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........
Item 13. Certain Relationships and Related Transactions, and Director Independence.................................................
Item 14. Principal Accounting Fees and Services ..........................................................................................................
PART IV
Item 15. Exhibits, Financial Statement Schedules..........................................................................................................
Item 16. Form 10-K Summary........................................................................................................................................
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EXPLANATORY NOTE
Currency and Exchange Rate Information
Unless otherwise indicated, references in this Annual Report on Form 10-K (the “Annual Report”) to “$” or “dollars” are
expressed in U.S. dollars (US$). References in this Annual Report to Canadian dollars are noted as “C$.”
Our consolidated financial statements that are included in this Annual Report are presented in U.S. dollars. Unless otherwise
stated, all figures presented in Canadian dollars and translated into U.S. dollars were calculated using the daily average exchange rate
as reported by the H.10 statistical release of the Board of Governors of the Federal Reserve System on December 29, 2023 of
C$1.3202 = US$1.00.
Market and Industry Data
Certain market and industry data contained in this Annual Report, including Item 1. “Business” and Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” are based upon information from government or other
third-party publications, reports and websites or based on estimates derived from such publications, reports and websites. Government
and other third-party publications, reports and websites do not guarantee the accuracy or completeness of their information. While
management believes this data to be reliable, market and industry data are subject to variations and cannot be verified with complete
certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process, and other
limitations and uncertainties inherent in any statistical survey.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report are “forward-looking statements” within the meaning of “safe harbor”
provisions of the United States Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934 (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All
statements, other than statements of historical fact included in this Annual Report, regarding without limitation our strategy, future
operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are
forward-looking statements. When used in this Annual Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,”
“plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” “continue,” the negatives thereof, variations thereon
and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain
such identifying words. In particular and without limitation, this Annual Report contains forward-looking information pertaining to the
effect of our strategic priorities on increasing value creation; the application of our processes and technology and the benefits
therefrom, forecast operating and financial results, including 2024 revenue, and the impact of certain cost-saving measures, including
anticipated proceeds from the sale of assets at the Rock Hill Facility (as defined herein), the development, timing and success of
strategic accounts, the outcome of non-dilutive strategy initiatives, the competitiveness of the Company’s solutions, the liquidity and
capital resources of the Company, the effects that current claims against the Company and expiring patents will have on the
Company’s business, financial condition, results of operations and growth prospects; our executive management team and the effect
the rating systems established by the U.S. Green Building Council will have on demand for products, systems and services in the U.S.
market. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of
management’s experience and perception of historical trends, current conditions and expected future developments, as well as other
factors that may be appropriate.
Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes
to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in
forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material
adverse effect on our business, financial condition, results of operations and growth prospects can be found in Item 1A. “Risk
Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this
Annual Report. These factors include, but are not limited to, the following:
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general economic and business conditions in the jurisdictions in which we operate;
our ability to implement our strategic plan, including realization of benefits from certain cost-optimization
initiatives undertaken since 2022 and into 2024, and the ability of our board of directors (“Board of Directors”) to
successfully implement its transformation plan;
inflation and material fluctuations of commodity prices, including raw materials, and our ability to set prices for our
products that satisfactorily adjust for inflation and fluctuations in commodity prices;
volatility of our share price and potentially limited liquidity for U.S. investors due to our common shares being quoted
on the “OTC Pink Tier”;
the availability of capital or financing on acceptable terms, or at all, which may impact our liquidity and impair our
ability to make investments in the business;
turnover of our key executives and difficulties in recruiting or retaining key employees;
our history of negative cash flow from operating activities;
our ability to generate sufficient revenue to achieve and sustain profitability and positive cash flows;
our ability to attract, train and retain qualified hourly labor on a timely basis to increase overall productive capacity
in our manufacturing facilities to enable us to capture rising demand in the construction industry;
our ability to achieve and manage growth effectively;
competition in the interior construction industry;
our two largest shareholders are able to exercise a significant amount of control over the Company due to their
significant ownership of our common shares, and their interests may conflict with or differ from the interests of our
other shareholders;
competitive behaviors by our co-founders and former executives;
the condition and changing trends of the overall construction industry;
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our reliance on our network of construction partners for sales, marketing and installation of our solutions;
our ability to introduce new designs, solutions and technology and gain client and market acceptance;
defects in our designing and manufacturing software and warranty and product liability claims brought against us;
the effectiveness of our manufacturing processes and our success in implementing improvements to those processes;
the effectiveness of certain elements of our administrative systems and the need for investment in those systems;
shortages of supplies of certain key components and materials or disruption in supplies due to global events;
global economic, political and social conditions affecting financial markets, such as the war in Ukraine and the
Israel-Hamas war;
our exposure to currency exchange rates, tax rates, interest rates and other fluctuations, including those resulting
from changes in laws or administrative practice;
legal and regulatory proceedings brought against us;
infringement on our patents and other intellectual property and our ability to protect and enforce our intellectual
property rights, including certain intellectual property rights that are jointly owned with a third party;
cyber-attacks and other security breaches of our information and technology systems;
damage to our information technology and software systems;
our requirements to comply with applicable environmental, health and safety laws;
the impact of increasing attention to environmental, social and governance (ESG) matters on our business;
periodic fluctuations in our results of operations and financial conditions;
the effect of being governed by the corporate laws of a foreign country, including the difficulty of enforcing civil
liabilities against directors and officers residing in a foreign country;
the availability and treatment of government subsidies (including any current or future requirements to repay or
return such subsidies);
future mergers, acquisitions, agreements, consolidations or other corporate transactions we may engage in; and
other factors and risks described under the heading “Risk Factors” in Item 1A. of this Annual Report.
These risks are not exhaustive. Because of these risks and other risks and uncertainties, our actual results, performance or
achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking
statements in this Annual Report. New risk factors emerge from time to time, and it is not possible for our management to predict all
risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Our past results
of operations are not necessarily indicative of our future results. You should not place undue reliance on any forward-looking
statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of
future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the
future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary
statements.
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Item 1. Business.
Overview
PART I
DIRTT is an interior construction company whose system of physical products and digital tools empowers design freedom,
drives efficiency, supports sustainability goals, and readily adapts to change. Since 2004, DIRTT has grown to become a leader in
industrialized construction for dynamic interior spaces, translating unique visions into compelling spaces where people work, learn,
and heal.
DIRTT’s construction system offers unrivaled design freedom, accuracy, and quality assurance together with greater certainty in
cost, schedule, and outcomes. By empowering faster decision making, rapid manufacturing, and efficient installation, DIRTT can
reduce construction timelines by as much as 30% compared to conventional construction methods.
DIRTT spaces are built for change and ready to adapt as organizational needs evolve. Design for disassembly ensures
components are interchangeable and can be repurposed for small updates or full reconfigurations without major renovation, cost, or
waste.
Our approach to industrialized construction combines a sophisticated product infrastructure with a dedicated team of
construction experts and advanced digital tools. DIRTT’s first-of-its-kind software called ICE® (“ICE” or “ICE Software”) serves as
the engine for our industrialized construction system, enabling solutions to be designed, visualized, organized, configured, priced, and
manufactured off-site, with final assembly and installation completed at the job site. Our clients’ design visions are translated into the
intelligent software platform, empowering faster decision making during design with real-time changes, visualization, and pricing
information. ICE connects directly to DIRTT manufacturing facilities for end-to-end integration, precise manufacturing, production
management, and coordination of the DIRTT scope. Our ICE Software is also licensed to unrelated companies and Construction
Partners (as defined herein) of the Company, 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. In addition to the
core ICE platform, our cloud-based virtual reality tool and app, called ICEreality, connects teams from anywhere in the world to walk
through their virtual space together, while design changes can be made with real-time feedback on pricing.
We work with some of the most innovative clients, design teams, and construction professionals. We reach our clients through
an internal sales team and international network of independent DIRTT Construction Partners (“Construction Partners” or “Partners”).
Their DIRTT expertise makes them trusted professionals in their regions for pre-construction, order, installation, and adaptation of
interior spaces. DIRTT Construction Partners work with clients and construction teams, ensuring effective management and execution
of the DIRTT scope on every project. Long term, they support reconfigurations, adaptations, and adjustments, continuously protecting
our clients’ investments in DIRTT while ensuring their spaces stay relevant.
DIRTT was incorporated in Alberta, Canada, under the Business Corporations Act (Alberta) (“ABCA”) on March 4, 2003. Our
headquarters are located at 7303 30 Street SE, Calgary, Alberta, T2C 1N6, Canada, and our telephone number at that address is 403-
723-5000. Our manufacturing facilities are in Calgary, Alberta and Savannah, Georgia.
We completed our initial public offering in Canada in November 2013 and listed our common shares on the Nasdaq Global
Select Market (“Nasdaq”) in October 2019. Our common shares trade on the Toronto Stock Exchange (“TSX”) under the symbol
“DRT”. Effective October 12, 2023, DIRTT’s common shares ceased to trade on the Nasdaq. DIRTT’s common shares are quoted on
the OTC markets on the “OTC Pink Tier” under the symbol “DRTTF.”
Unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,” “its,” “the Company” or “DIRTT”
mean DIRTT Environmental Solutions Ltd. and, where the context so requires, includes our subsidiaries.
Available Information
We file or furnish annual, quarterly and current reports, proxy statements and other documents with the U.S. Securities and
Exchange Commission (“SEC”) under the Exchange Act. The SEC maintains a website (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers, including DIRTT, that file electronically with the SEC. We are
also subject to requirements of applicable securities laws in Canada, and documents that we file with the securities commissions or
similar regulatory authorities in Canada may be found at www.sedarplus.ca.
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We make available free of charge through our website (www.dirtt.com) our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC or
the securities commissions or similar regulatory authorities in Canada. In addition to the reports filed or furnished with the SEC and
the securities commissions or similar regulatory authorities in Canada, we publicly disclose information from time to time in our press
releases, investor presentations posted on our website and at publicly accessible conferences. References to such information,
including references to our Environmental, Social, and Governance (ESG) Report, and references to our website in this Annual
Report, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the
information contained on, or available through, the website, and such information should not be considered part of this Annual Report.
We will provide without charge to you, upon your request, a copy of our annual report on Form 10-K for the year ended
December 31, 2023, filed with the SEC and the applicable securities commissions or similar regulatory authorities in Canada.
Requests for copies should be addressed to 7303 30 Street SE, Calgary, Alberta, T2C 1N6, Canada, Attention: Investor Relations.
Our Solutions
Our array of products and integrations give our clients the tools to create high-performing interiors that stay relevant into the
future. Unlike conventional prefabricated products, our solutions do not have predetermined shapes, sizes, or configurations,
empowering clients with design freedom to meet their needs. The core of our product philosophy is a construction system that uses a
universal interface. By allowing interchangeable parts, DIRTT can maximize the life cycle for most of our products. Committed to
sustainability, we subscribe to non-obsolescence, where new DIRTT components work with DIRTT products that came before. Our
solutions can be disassembled and reconfigured with minimal waste. With both design freedom and adaptability benefits, client spaces
are tailored to their unique needs on Day One and can be more easily reconfigured or adapted to stay relevant on Day Two and
beyond.
Our solutions (“DIRTT Solutions”) are typically able to address over 90% of an interior space. Components are manufactured in
DIRTT facilities and shipped to site for installation. The following table provides a brief description of our primary solutions:
DIRTT Solution Description
Solid Walls
Glass Walls
Combination Walls
Leaf Folding
Walls®
Headwalls
Doors
Casework
Timber
Electrical
Networks
Access Floors
DIRTT’s solid walls offer extensive options with 4”, 6”, and 2” furring wall offerings. Solid walls connect seamlessly to other
products in the DIRTT construction system and enable unique finishes, colors, and configurations. Wall cavities support
electric, network, and technology integrations.
DIRTT’s glass walls are available as double pane, classic center-mount, or Inspire™ profiles. DIRTT glass walls can
accommodate base building variance and acoustic requirements.
Solid and glass walls can be combined for a mix of privacy and transparency. Combination walls can be customized and
configured to fit any design with the benefits of the DIRTT system.
The retractable modular wall system adds functionality with an effortless solution to quickly adapt space. Like other walls in the
DIRTT portfolio, dimensions and finishes of Leaf™ can be customized.
This modular, multi-trade healthcare headwall system is an efficient, adaptable approach to healthcare construction. With
extensive customization options and integrations, DIRTT Headwalls are an efficient way to meet unique healthcare compliance
requirements.
DIRTT doors integrate seamlessly with DIRTT solid and glass wall assemblies. A wide range of types and styles are available,
including swing doors, sliding doors, and pivot doors. Door options can meet smoke-rating and acoustic requirements.
DIRTT offers custom cabinets, closets, and storage solutions with consistent quality and efficient installation. Precision-
manufactured casework is delivered with predictable lead times.
Traditional craftsmanship meets advanced, custom manufacturing to create striking designs and structural elements. Engineered
to meet local requirements, DIRTT Timber integrates with broader DIRTT scopes to bring natural elements to spaces with rapid
assembly on-site.
DIRTT’s modular electrical system supports connected infrastructure needs. The pre-wired, modular distribution system
includes pre-mounted and terminated device boxes installed at the factory to reduce project time and cost on-site. Plug-in
connections allow for quick installations and easy modifications.
DIRTT’s Fiber to the Edge networks deliver unlimited bandwidth capability and longer-reaching signal strength while reducing
supporting infrastructure needs and material costs. Industry-leading technology and future-ready infrastructure empowers smart
building benefits. Copper-based network options reduce install time and increase flexibility.
Low-profile, fixed-height access floor provides an adaptable foundation for connected infrastructure with long-term
accessibility for easy moves, additions, and changes.
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In addition to our core product offering, DIRTT enables integrations with technology, custom graphics, writable surfaces, and
Breathe® Living Walls. Further product information can be found on dirtt.com.
Sustainability and Environmental Matters
DIRTT aims to minimize the environmental impact of interior construction through careful material selection, efficient
operations, a system designed for future adaptability, and long product lifecycles. We work with clients to understand their unique
sustainability goals and identify how building with DIRTT can support LEED, WELL, Living Building Challenge, and other green
building standards they may be targeting. Our sustainability team helps to calculate various elements of the DIRTT scope that support
certification.
Approximately 40% of solid waste in the United States derives from construction and demolition. In contrast, DIRTT’s agile
construction system makes it quick, easy, and cost effective to evolve interior spaces through future reconfigurations and relocations,
while reducing waste. Our agile system is designed for disassembly to reduce the carbon footprint of new construction and future
changes. We further reduce waste through efficient manufacturing and pre-assembled solutions.
We regularly evaluate the environmental impact of our materials, considering impact on the wellness of the occupants using the
spaces we build and life cycles of the products we make. DIRTT endeavors to use materials with high recycled content, bio-based
content, and low or no volatile organic compounds (VOCs). Most DIRTT assemblies are certified through Science Certification
Systems (SCS) Indoor Advantage Gold, recognizing their low-emitting properties. DIRTT wall panel and casework facilities are
certified to handle materials with FSC® certification (FSC-C006900), ensuring FSC certified products may be specified.
We recognize the vital importance of reducing embodied carbon within DIRTT products. Our environmentally conscious
production facilities are regularly evaluated by cross-functional teams who assess and implement energy efficiency strategies. For
example, to further reduce our operational carbon footprint, DIRTT’s U.S. factories are powered by renewable energy through our
purchase of Green-e® certified renewable energy credits (RECs). We further reduce the impact of our operations with recycling and
waste diversion programs.
DIRTT releases an annual Environmental, Social, and Governance (ESG) report outlining our commitments to sustainability
and the environment. It also provides disclosure of our current environmental and sustainability impacts. DIRTT has set goals to
reduce landfill waste by 2025 and to source or produce renewable energy to cover 100% of our factory operations.
Further information about DIRTT’s sustainability practices can be found at dirtt.com/sustainability.
Our Business Strategy
Our goal is to help clients envision and design interior construction projects and then build and deliver those projects faster,
cleaner, more efficiently and with a better overall client experience and satisfaction than conventional construction methods. The
modular aspect of our DIRTT construction system allows them to be easily reconfigured with a minimal amount of waste as client
space needs change. Our innovative, technology-driven approach includes outstanding product design that is customized for each
client application, and delivered on time and on budget.
Our strategy is founded on the following priorities:
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The identification and pursuit of client segments that benefit most from DIRTT’s value proposition;
Client-centric, continuous innovation in DIRTT construction systems and our technology to enhance product
differentiation and drive market penetration and growth;
Technology-enabled manufacturing processes that facilitate short lead times, a reliable client service platform, and
outstanding quality on a cost-effective basis; and
Ongoing development and support of our Construction Partners to ensure flawless execution and a superior end client
experience.
In combination with a focus on cost-discipline, a continuous improvement philosophy, and a focused approach to capital
investment, we believe these strategic priorities will drive increased value creation for our employees, clients, Construction Partners,
and shareholders.
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Our Competitive Strengths
We believe the following attributes provide us with competitive strengths in the industrialized construction industry:
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Leader in Integrated Design and Manufacturing Technology. We believe our ICE Software is the only interior
construction technology that efficiently integrates the design, configuration, and virtual reality visualization processes
with the manufacturing process. The use of 3D technology in a design environment, utilizing video game technology for
real time decision making, is an approach pioneered by DIRTT.
Easy and Intuitive Software Interface. Our ICE Software is a fast, powerful tool with an intuitive user interface. Our
software’s ease of use enables rapid time-to-value for our clients and collaboration among all the stakeholders involved in
the design, reconfiguration, budgeting and manufacturing processes. Our use of 3D virtual reality and augmented (mixed)
reality technologies enables clients to visualize and modify their designs before manufacturing begins, thereby reducing
cost and time to completion.
Proprietary Solutions Components. The physical components that comprise our DIRTT construction system have been
designed to provide clients with numerous options and full modularity. As a result, we are able to create interior
environments that are fully customizable and not limited by a pre-set product list. The modular nature of our components
allows them to be reconfigured or adapted easily, with minimal disruption to the occupants of the space and with minimal
job site waste.
Strong Construction Partner and Sales Network. Our strong network of Construction Partners and DIRTT sales
representatives allows us to maximize our geographic reach, helps build brand awareness in the interior construction
market, and enhances our positioning in our target markets.
Superior Results Compared to Conventional Design and Construction. We believe we produce superior client results as
compared with conventional design and construction methods in sequencing, certainty, budget allocation, and outcome.
Effective Sequencing. Conventional construction generally follows a rigid sequencing process. Typically, wall framing is
constructed first, followed by floors and electrical and data networks. This process is then followed by drywall
installation, painting, and flooring, and then installation or building of casework (millwork) and fixtures. These steps
generate significant waste and create opportunities for delay, change orders, cost overruns and rework. In contrast,
DIRTT’s approach integrates various product applications as tailored to specific project needs. They are manufactured
off-site and arrive on-site organized, labeled and ready to be installed. This enables the interior solutions to be produced
concurrently with on-site construction work, thereby reducing on-site time and the overall construction schedule.
Certainty. Our technology-based design and manufacturing solutions address changes in design, communications with
clients, and material costs with more certainty than conventional construction methods, which often involve retrofitting
electrical and data networks, change orders, uncertain timelines, and costly rework. Our controlled manufacturing
environment reduces deficiencies and errors and produces more consistent solutions in predictable time frames.
Budget. Because of our integrated design, visualization and manufacturing technologies, we can price the effect of design
choices and changes immediately and deliver the fully designed, manufactured interior solutions ready to install. This
provides budget certainty both in the cost of our DIRTT Solutions as well as in on-site labor for the installation process.
Outcome. Our interior spaces look like the images our clients expect from the design drawings and virtual visualizations,
because those same drawings and visualizations drive the manufacturing process. Plumbing, electrical, A/V and data
networks are integrated into the architecture of our DIRTT Solutions. For example, DIRTT Walls carry an aesthetic of
permanent walls, but if an IT or facilities team needs to get inside the wall for any reason, they can use a tool to remove
the surface of the wall to examine the wall cavity quickly, cleanly and quietly. This eliminates the need to knock down,
and then patch and repaint, drywall or reconfigure fixtures and cabinetry. Our modular designs offer flexibility and
interconnectivity with any technology, furniture, casework (millwork) or DIRTT Solutions that were previously used or
that may be used in the future, allowing clients to reconfigure and repurpose their space while reducing disruptive and
time-consuming demolition and waste removal.
Construction Partners and Sales Network
We primarily sell DIRTT Solutions through a network of independent Construction Partners working in conjunction with local
DIRTT sales representatives, as well as internal DIRTT industry specialists, business development professionals and a dedicated
Construction Partner support team. Construction Partners and local sales representatives are located in cities throughout the United
States and Canada, with additional locations in Saudi Arabia, Mexico, the United Kingdom and Singapore. The use of a dispersed
network of Construction Partners greatly enhances our ability to drive awareness of the DIRTT brand and understanding of our
approach to construction throughout our markets.
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As part of our distribution agreements, our Construction Partners are typically required to invest in their own DIRTT Experience
Center (“DXC”) so that they are able to effectively showcase DIRTT Solutions. These DXCs are showrooms that provide mock-ups of
DIRTT Solutions and related product offerings. As well, DIRTT maintains DXCs in Calgary, Dallas and Chicago.
Our Construction Partners operate under agreements that outline sales goals and marketing territories which are generally non-
exclusive. We expect our Construction Partners to build regional DIRTT-dedicated teams (sales, design and project management) and
to use our ICE Software in the sales process. In addition to sales and marketing, our Construction Partners provide value throughout
the construction process. At the pre-construction stage, Construction Partners provide design assistance services to the architect and
designer; throughout the construction process, Construction Partners act as a specialty subcontractor to the general contractor and
provide installation and other construction services. Post-move in, Construction Partners provide warranty work, ongoing maintenance
and reconfiguring support. Local DIRTT sales representatives work closely with the Construction Partners throughout the process to
ensure successful project implementation and the highest client satisfaction. Construction Partners generally place orders for DIRTT
Solutions directly with us and pay us directly for such orders.
We have the ability to bring on new Construction Partners in a wide range of geographic areas, which permits us to quickly
establish a presence in new market areas. Our Construction Partners also scale our virtual reality technology, such as our smart phone-
and tablet-based applications, to fit their capacity and needs.
At December 31, 2023, we had a total of 72 Construction Partners and 39 sales representatives across North America. We are
not dependent on any one Construction Partner or sales representative.
Strategic accounts are a cornerstone in our strategy to drive long-term sustainable and predictable growth. These types of clients
manage large real estate footprints in numerous locations. For these clients, it is advantageous and important to establish consistency
in design and execution, repeatability, and speed to market. While these relationships can take time to develop, once they are
established, the time and resources required to execute additional projects is reduced, which we believe will create profitable,
predictable revenue streams. In return, clients benefit from a single point of accountability at DIRTT, a strong network of partners, full
lifecycle support from established design standards and pre-construction expert support for their architects, designers and general
contractors from field work to post installation support.
Manufacturing and Properties
Our DIRTT Solutions are currently manufactured at our facilities in Calgary, Alberta (the “Calgary Facility”) and Savannah,
Georgia (the “Savannah Facility”). On February 22, 2022, we announced the closure of our aluminum manufacturing facility in
Phoenix, Arizona (the “Phoenix Facility”). On August 23, 2022, we announced the temporary suspension of operations at our Rock
Hill, South Carolina facility (the “Rock Hill Facility”). On September 27, 2023, we announced our intention to permanently close the
Rock Hill Facility because the Calgary and Savannah Facilities can meet current demands with annual production capacity of $400
million in revenue. Currently our wall surfaces (which we call panels), casework and timber solutions are manufactured in Calgary,
while aluminum, glass and power components are manufactured in Calgary and Savannah. Through distributed manufacturing, we can
shift production of some components among our manufacturing sites, reduce transportation times and costs, and meet targeted lead
times.
Suppliers and Raw Materials
Our inventory balances consist primarily of raw materials, which are kept on hand as components of our custom manufacturing
process. Managing our raw material inventory is essential to our business, given our short lead times from order to shipment and our
high level of order customization. Our key manufacturing materials are aluminum, hardware, wood and glass. For the twelve months
ended December 31, 2023, aluminum accounted for approximately 31% of our purchased materials, while wood, hardware and
finishing powder & paint accounted for approximately 12%, 9%, and 9%, respectively. While we maintain multiple suppliers for key
materials, for the twelve months ended December 31, 2023, (i) one supplier accounted for approximately 61% of our aluminum supply
and two additional suppliers provided 19% and 18%, respectively, (ii) two suppliers accounted for approximately 46% and 44% of our
wood supply (iii) one supplier accounted for 100% of our paint & powder and (iv) one supplier accounted for approximately 42% of
our hardware supply.
Materials are sourced domestically and, to a much lesser extent, overseas. Approximately 93% of our materials are
manufactured and purchased in North America. Purchase decisions are made on the basis of quality, cost, and ability to meet delivery
requirements. We do not typically enter into long-term agreements with suppliers. In general, adequate supplies of raw materials are
available to all our operations, but we continue to be impacted by inflationary price pressures across substantially all of our raw
material requirements and aluminum purchases may be subject to market capacity constraints.
10
Technology and Development
We continue to focus on developing client-centric innovations and enhancements of both ICE Software and DIRTT Solutions
with a primary focus on improving client experience, increasing market penetration and growing key markets. At December 31, 2023,
we employed 73 employees within our technology and development groups and, including capitalized amounts, invested $8.3 million,
$10.3 million and $11.1 million in 2023, 2022 and 2021, respectively, in innovation activities.
On May 9, 2023, the Company entered into a Partial Patent Assignment Agreement and a Co-Ownership Agreement (the “AWI
Agreement”) with AWI. The AWI Agreements provide for the partial assignment to AWI and co-ownership of an undivided 50%
interest in certain intellectual property rights (including related patents) in a portion of the Company’s ICE software that is used by
AWI (the “Applicable ICE Code”), in exchange for a cash payment of $10.0 million. As part of the AWI Agreements, the Company
has agreed to provide AWI a transfer of knowledge concerning the Applicable ICE Code, upon completion of which the Company
received an additional cash payment of $1 million. This additional cash payment was received in the fourth quarter of 2023. The AWI
Agreement provide that the Company and AWI will have separate exclusive fields of use and restrictive covenants with respect to the
Applicable ICE Code and related intellectual property rights which survive until either party elects to separate its relationship from the
other and for a period of five years thereafter.
Clients
DIRTT’s principal geographic markets are the United States and Canada. Our revenue is derived almost entirely from projects
in North America sold by our North American Construction Partners.
Our revenue opportunities primarily come from commercial projects, including both new construction projects and renovations
of existing buildings. Clients range from small owner-managed businesses to multinational Fortune 500 companies across a variety of
industries, including healthcare, education, financial services, government and military, manufacturing, non-profit, energy,
professional services, retail, technology, and hospitality. We view DIRTT Solutions as generally industry agnostic, with applications
in many different industries with minimal adjustments. We are not dependent on any one client or industry segment. In 2023, one
Construction Partner represented more than 10% of our revenue (12% in 2023), while no single client represented more than 10% of
our revenue for the years ended December 31, 2022 or 2021.
Competition
The overall market for interior construction is fragmented and highly competitive. The principal competitive factors in the
interior construction industry include price (including cost certainty), speed, quality, customization, and service. Our main competitors
are comprised primarily of conventional construction firms, individual tradespeople (including framers, drywall installers, and interior
product designers) and modular systems manufacturers. Additionally, conventional construction firms are beginning to develop
customizable wall paneling and other interior construction solutions and may directly compete with our DIRTT Solutions. We also
compete with commercial furniture manufacturers, such as Teknion Corporation, Haworth Inc. and Allsteel Inc., who offer a variety
of prefabricated interior wall solutions. We expect competition to increase as new entrants or solutions enter the interior construction
market. See Item 1A. “Risk Factors”.
Seasonality
The construction industry has also historically experienced seasonal slowdowns related to winter weather conditions and holiday
schedules, which affect shipping and on-site installation dates, in the fourth and first quarters of each calendar year. Our business has
generally, but not always, followed this trend with a slight time lag, leading to stronger sales in the second half of the year versus the
first half. Weather factors can also influence third-party exterior construction schedules and site conditions, which may in turn affect
timing of interior builds.
Due to the fixed nature of certain manufacturing costs, such as our facilities leases and related indirect operating costs, periods
of higher revenue volume tend to generate higher gross profit and operating income margins, while periods of lower volume tend to
result in lower gross profit and operating income margins. Quarters that contain consistent monthly manufacturing volumes tend to
generate higher gross profit than those where manufacturing levels vary significantly from month to month.
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Patent and Intellectual Property Rights
Our success depends, in part, upon our intellectual property rights relating to our products, production processes, our
technology, including our ICE Software, and other operations. We rely on a combination of trade secret, nondisclosure and other
contractual arrangements, as well as patent, copyright and trademark laws, to protect our proprietary rights and competitive advantage.
We register our patents and trademarks as we deem appropriate and take measures to defend patents where we deem others are
infringing on our patents. The following table presents the status as of December 31, 2023, of our issued and pending patents relating
to various aspects of DIRTT Solutions and ICE Software:
Jurisdiction
Canada
United States
European Union
Singapore
Patent Cooperation Treaty
Other
Total
Granted
Patents
Applications
Pending
78
128
47
8
-
32
293
37
16
3
1
8
-
65
Our issued patents expire between 2024 and 2039. We do not believe that the expiration of any individual patent will have a
material adverse effect on our business, financial condition or results of operations. As we develop innovations and new technology,
we expect to file additional and supplemental patents to protect our rights in those innovations and new technology. As described in
more detail above, the Company entered into the AWI Agreement with AWI, under which AWI owns a 50% interest in the rights, title
and interests in all the Applicable ICE Code, including a 50% interest in the patent rights that relate to the Applicable ICE Code.
Government Regulations
The operation of our business is subject to stringent and complex laws and regulations pertaining to health, safety, and the
environment. As an owner or operator of various manufacturing facilities, we must comply with these laws and regulations at the
federal, state, provincial and local levels in both the United States and Canada. Failure to comply with environmental laws and
regulations may trigger a variety of administrative, civil, or criminal enforcement actions, including the assessment of monetary
penalties, the imposition of investigative or remedial requirements, or the issuance of orders limiting current or future operations.
Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where hazardous
substances or industrial wastes have been mismanaged or otherwise released.
While we do not believe that compliance with federal, state, provincial, or local environmental laws and regulations will have a
material adverse effect on our business, financial position or results of operations, we cannot provide any assurances that future
events, such as changes in existing laws or regulations, the promulgation of new laws or regulations, or the development or discovery
of new facts or conditions related to our operations, will not cause us to incur significant costs.
Legal and Regulatory Proceedings
We may be involved from time to time in various lawsuits, claims, investigations, and other legal matters that arise in the
ordinary course of business, including matters involving our products, intellectual property, relationships with suppliers, relationships
with Construction Partners, relationships with competitors, employees, and other matters. We may, for example, be a party to various
litigation matters that involve product liability, tort liability, and claims under other allegations, including claims from our employees
either individually or collectively. We do not believe that any current claims, individually or in the aggregate, will have a material
adverse effect on our financial condition, liquidity or results of operations. For additional information regarding our current legal
proceedings, see Item 3. “Legal Proceedings.”
Implications of Being an Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act enacted in April 2012. Certain
specified reduced reporting and other regulatory requirements are available to public companies that are emerging growth companies.
These provisions include:
•
•
an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting
required by Section 404 of the Sarbanes-Oxley Act of 2002;
an exemption from the adoption of new or revised financial accounting standards until they would apply to private
companies;
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•
•
an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board
requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to
provide additional information about our audit and our financial statements; and
reduced disclosure about our executive compensation arrangements.
We will continue to be an emerging growth company until the earliest of:
•
•
•
•
the last day of our fiscal year in which we have total annual gross revenues of $1.07 billion (as such amount is indexed for
inflation every five years by the SEC to reflect the change in the Consumer Price Index for All Urban Consumers
published by the Bureau of Labor Statistics, setting the threshold to the nearest $1 million) or more;
December 31, 2024;
the date on which we have, during the prior three-year period, issued more than $1 billion in non-convertible debt; or
the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market
value of our common shares that is held by non-affiliates (or public float) exceeds $700 million as of the last day of our
second fiscal quarter in our prior fiscal year.
We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report and may elect to take
advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders
may be different than what you might receive from other public reporting companies in which you hold equity interests. However, we
have irrevocably elected not to avail ourselves of the extended transition period for complying with new or revised accounting
standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
We expect to lose emerging growth company status by December 31, 2024.
Human Capital Resources
As at December 31, 2023, DIRTT employed 879 employees, 99% full time, 1% part time. We had 874 full-time employees
consisting of 592 employees in production, 100 employees in sales and marketing, 73 employees in technology and development, 48
employees in operations support, and 61 general and administrative employees. At year-end, approximately 45% of our workforce are
salaried employees and approximately 55% are compensated on an hourly basis. As at December 31, 2023, approximately 24% of our
workforce was based in the United States, and approximately 76% was based in Canada. Our 2023 hiring efforts were directed
towards both our manufacturing and non-manufacturing functions. The Company’s recent gender diversity data shows that 25% (2022
– 25%) of our employees are female company wide. In 2023, we hired 174 employees, with 27% of new employees being female.
Diversity & Inclusion
DIRTT recognizes the importance of progressing conversations and initiatives around diversity and inclusion. “Grow through
diversity” is one of our core values. Our strategy encompasses leadership training around key topics related to unconscious bias,
allyship, and the value of attracting and retaining a diverse and inclusive organization. The strategy further focuses on the
establishment and deployment of learning streams, mentoring circles, and incorporation of inclusive language into our offer packages
and benefit materials. Our efforts begin at the early stages of the employee life cycle, where diversity candidates are highlighted and
presented to hiring managers for review. We seek to hire based on talent, skill, capability needs, and fit. DIRTT has also incorporated
diversity into various internal programs including succession planning and risk profiles.
Culture & Engagement
DIRTT has put measures in place to assess and enhance the level of engagement and satisfaction of our employees. Specific
activities include the deployment of a performance management tool catered to drive discussions around team goals, performance and
development opportunities, and greater transparency around policy and procedures tied to cost and risk mitigation.
In 2023, we conducted two employee engagement surveys through a platform called Employee Voice that deployed company-
wide surveys focused on core themes of workplace civility, communication, work-life balance, retention, job satisfaction, employee
engagement and diversity and inclusion. Targeted initiatives are being put in place to assess the progression of themes from the survey
on overall employee engagement and experience.
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Additional initiatives that we attribute to the progression of culture and engagement include launching learning and
development opportunities, enhanced communication platforms, employee recognition programs, a company-wide philanthropic
organization, and a strong focus on virtual social events to further support engagement and connection of remote employees.
Connecting to our community is a critical piece of the DIRTT story. We continue to focus on establishing a stronger
community investment program that demonstrates our drive to put community at the center of the business. This involves developing a
strategy, carving out a roadmap of initiatives, and establishing a committee of employees across the organization. As part of our
strategy, we are focusing our efforts on establishing meaningful engagement opportunities, creating inclusive giving campaigns,
driving sustainable impact, and enabling our employees to connect on philanthropic efforts. In the fourth quarter of 2023, we
successfully completed our holiday giving campaign which was a coordinated in-person and virtual effort in support of food banks
across North America, focusing on the cities in which we operate. The support for this campaign helped to reconnect DIRTT
employees’ desire to give back with tangible outcomes for their communities. We take measures to address the mental health of our
employees through a variety of company-wide initiatives.
Our core commitment to organizational safety resulted in a Total Recordable Incident Frequency (TRIF) of 0.4 in 2023, more
than 92% below the industry average.
We use a range of compensation incentives which vary by role, including annual variable compensation determined based on a
combination of achieving team objectives and financial targets for the Company; quarterly bonuses for our manufacturing personnel
paid on adherence to targets related to safety, quality, delivery, inventory and productivity; and commissions based on sales. We also
use various forms of stock-based compensation as a retention tool and to further align employee interests with the interests of our
shareholders. We monitor our retention by way of voluntary turnover, which was 14% in 2023.
None of our employees are covered by collective bargaining agreements. We have never experienced labor-related work
stoppages or strikes, and we believe we currently have a positive relationship with our employees.
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Item 1A. Risk Factors.
Investing in our common shares involves a high degree of risk. You should carefully consider the risks described below, as well
as the other information in this Annual Report, including our consolidated financial statements and the related notes and Part II, Item
7. entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in any documents
incorporated in this Annual Report by reference, before deciding whether to invest in our common shares. The occurrence of any of
the events or developments described below could harm our business, financial condition, results of operations, and growth prospects.
In such an event, the market price of our common shares could decline, and you may lose all or part of your investment. Although we
have discussed all known material risks, the risks described below are not the only ones that we may face. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial may also impair our business operations. Certain
statements below are forward-looking statements. See also “Special Note Regarding Forward-Looking Statements” in this Annual
Report.
Risks Related to Our Business and Industry
We are under the leadership of a reconstituted Board of Directors who are in the process of implementing a variety of
operational, organizational, cultural and other changes to our business, and we may not be able to achieve some or all of the
anticipated benefits of this transformation plan.
Our Board of Directors was entirely reconstituted at our annual and special meeting of shareholders held on April 26, 2022 and,
since that meeting, there has been significant turnover in the Company’s leadership. In addition to overseeing the changes to DIRTT’s
leadership, the reconstituted Board of Directors has undertaken an extensive review of DIRTT’s operations, a process which is still
ongoing (see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook”), and are
in the process of implementing a variety of operational, organizational, cultural and other changes to our business, including plans to
meet pipeline demand and expand revenues. The timely integration of senior management will be critical in the successful
implementation of the Board of Directors’ plans. We may not be successful in achieving some or all of the anticipated benefits of
these plans, which may have an adverse effect on our results from operations and financial condition.
Certain elements of DIRTT’s administrative systems may not be effective.
DIRTT has identified the need to upgrade its inventory management and cost accounting systems at some point in the future to
enable scalable growth, and other information technology investments may be required in the future. The Company is currently unable
to estimate the costs and timeline related to such upgrades. However, the success, in whole or in part, of such investments cannot be
guaranteed. If the Company does not successfully or timely upgrade its inventory management and cost accounting systems, it may
experience unforeseen challenges to its inventory and pricing strategies.
We may not be successful in implementing our strategic plan or managing growth
Implementation of our strategy will require maturity of systems and processes across the organization. There is also no
assurance that successful implementation will lead to sustainable, profitable growth, and may itself be disruptive to the Company.
Failure to implement our strategic plan could materially and adversely affect our near-term sales, commercial activities, and ability to
develop and sustain profitable growth. In addition, the success and timing of our implementation may be dependent upon external
factors outside of our control.
Our strategy also depends in part on our ability to maintain and manage growth effectively. Growth in our headcount and
operations may place significant demands on our management and operational and financial resources. Additionally, managing growth
of our operations and personnel requires continuous improvement of our internal controls and reporting systems and procedures.
Failure to effectively manage growth could result in difficulty providing current DIRTT Solutions and introducing future solutions,
difficulty in securing clients and Construction Partners, declines in quality or client satisfaction, increases in costs or other operational
difficulties. Any of these difficulties could lead to a loss of investor confidence and adversely affect our business performance,
financial condition and results of operations.
Our industry is highly competitive, and we may not be successful in educating potential clients about the benefits of our
innovative and unique approach to interior construction as compared to conventional interior construction methods.
We operate in the highly competitive interior construction industry that is constantly developing and changing. We compete
against conventional construction firms, individual tradespeople, modular systems, and commercial furniture manufacturers. New
market entrants and conventional construction firms are also beginning to develop customizable wall paneling and other modular
interior construction solutions, and we expect this trend to continue. In addition, we may face pricing pressure from competitors or
new market entrants who take on projects at reduced prices or employ other competitive strategies. While we believe our innovative
design, quality, schedule and cost certainty, and network of Construction Partners makes us well-positioned in the market, increasing
competition could make it difficult to secure new projects at acceptable operating margins.
15
Our products are unique and offer an alternative to conventional construction techniques. Although offsite construction methods
are gaining market acceptance, this still represents only a fraction of all construction methods and the overall construction market. Our
ability to grow and increase market share depends, in part, on our success in continuing to increase demand for modular construction
methods and products as an alternative to more traditional construction methods. While we intend to follow a strategy of innovative
product development and strategic marketing efforts to enhance our position, there is no assurance that our solutions will attain a
degree of market acceptance sufficient for sustained profitable operations. Failure to compete effectively by, among other things,
meeting consumer preferences, developing and marketing innovative solutions, maintaining strong client service and distribution
relationships, growing market share, and expanding our solutions capabilities could have a material adverse effect on our liquidity,
financial condition, or results of operations.
Our co-founders’ and former executives' competitive behavior against us could have an adverse effect on our business,
financial condition and results of operations.
Our co-founders and former executives, Mogens Smed and Barrie Loberg, have started an interior construction and
manufacturing company that we believe competes with us. They, along with a number of our former employees and Construction
Partners who have joined their company, have in-depth knowledge about our business, including our customers, employees, products
and prospects, and we may be adversely affected by increased competition arising out of this business venture. We are engaged in
litigation with Messrs. Smed and Loberg, entities with which they are involved, and other individuals relating to, among other things,
enforcement of non-competition and non-solicitation obligations, and alleged misappropriation of proprietary information by them or
by us. If Messrs. Smed and Loberg further engage in a competitive business against us or if we are not successful in litigation, our
business, financial condition and results of operations may be adversely affected. See Item 3. “Legal Proceedings.”
We depend heavily on our network of Construction Partners, and the loss or inattention of our Construction Partners, or the
failure of our Construction Partners to meet their obligations to us, could materially and adversely affect our business, financial
condition and results of operations.
We currently do not engage in many direct sales projects and rely almost exclusively on our network of Construction Partners to
promote brand awareness, sell and market DIRTT Solutions, and provide design, installation, distribution and other services to clients
on each project. While we are not dependent on any single Construction Partner, sales generated by approximately 10% of our
Construction Partners comprised approximately 37% of our total revenues for 2023 (2022 – 39%) with one Construction partner
making up approximately 12% of total revenues (2022 - 7%). The loss of any top performing Construction Partners, particularly to our
competitors, may negatively affect our sales, financial condition or results of operations. It may further impair our ability to maintain a
market presence in a particular geographic region until a new Construction Partner relationship is established, which would require
significant time and resources, given DIRTT is typically a standalone line of business in their portfolio.
Although we provide our Construction Partners with training, education, and support, they may be unable to successfully sell
our DIRTT Solutions, execute projects or manage client experiences and relationships. In addition, our Construction Partners and their
clients may face financial difficulties or may become insolvent, which could result in the delay or cancellation of their plans to
purchase DIRTT Solutions or lead to our inability to obtain payment of accounts receivable that they may owe. If we are unable to
maintain a successful Construction Partner network, our business, financial condition, and results of operations could be materially
and adversely affected.
Increasing attention to environmental, social and governance (ESG) matters and conservation measures may adversely
impact our or our customers’ business.
Increasing attention to, and societal expectations on companies to address, environmental and social impacts and investor,
regulatory and societal expectations regarding voluntary and mandatory ESG-related disclosures may result in increased costs,
reduced demand for our customers’ products, reduced profits, increased investigations and litigation, negative impacts on our stock
price and reduced access to capital markets.
16
Moreover, while we may publish voluntary disclosures from time to time, certain statements in those voluntary disclosures may
be based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or
forecasts of expected risks or events, including the costs associated therewith. Mandatory ESG-related disclosure is also emerging as
an area where we may be, or may become, subject to required disclosures in certain jurisdictions, and any such mandatory disclosures
may similarly necessitate the use of hypothetical, projected or estimated data, some of which is not controlled by us and is inherently
subject to imprecision. Disclosures reliant upon such expectations and assumptions are necessarily uncertain and may be prone to
error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying,
measuring and reporting on many ESG matters. Further, we have announced various voluntary ESG targets in our annual
Environmental, Social, and Governance (ESG) report outlining our commitments to sustainability, the environment, health and safety,
and diversity and inclusion. However, we cannot guarantee that we will be able to meet such voluntary targets in the manner or on
such a timeline as initially contemplated, including, but not limited to, as a result of unforeseen costs or technical difficulties
associated with achieving such results. Any actual or perceived failure to meet our ESG targets could adversely impact our reputation
and our customers’ image of our products and result in the loss of business or impede our growth initiatives. Adverse publicity
regarding ESG issues and similar matters, whether or not justified, could have a negative impact on our reputation and may result in
the loss of customers and our inability to secure new customer relationships. Further, our customers may be more selective for
products that meet their ESG goals or standards, such as increasing demand for goods that result in lower emissions, and our products
could be less competitive if we are unable to meet these standards. Despite our efforts to adapt to and address these concerns, our
efforts may be insufficient. Additionally, the implementation of these initiatives may increase our costs. It is difficult to predict how
our efforts with respect to social and sustainability matters will be evaluated by current and prospective investors or by our customers
or business partners. Despite our voluntary actions, we may receive pressure from certain investors, lenders, or other groups to adopt
more aggressive ESG-related goals or policies, but we cannot guarantee that we will be able to implement such goals because of
potential costs or technical or operational obstacles.
Furthermore, our reputation, as well as our stakeholder relationships, could be adversely impacted as a result of stakeholder
perceptions of statements made by us, our employees and executives, agents, or other third parties or public pressures from investors
or policy groups to change our policies. Such statements with respect to ESG matters are becoming increasingly subject to heightened
scrutiny from public and governmental authorities related to the risk of potential “greenwashing,” i.e., misleading information or false
claims overstating potential ESG benefits. As a result, we may face increased litigation risks from private parties and governmental
authorities related to our ESG efforts. Moreover, any alleged claims of greenwashing against us or others in our industry may lead to
negative sentiment. To the extent that we are unable to respond timely and appropriately to any negative publicity, our reputation
could be harmed. Damage to our overall reputation could have a negative impact on our financial results and require additional
resources to rebuild our reputation. Additionally, to the extent ESG matters negatively impact our reputation, we may not be able to
compete as effectively to recruit or retain employees, which may adversely affect our operations. Such ESG matters may also impact
our customers, which may result in reduced demand for certain of our products and services.
Risks Relating to Our Products and Software
We may be unsuccessful in designing, introducing, or selling new solutions, solution features, or software, which also may
cause us to become less competitive.
As our competitors and others develop new technologies in the future, we may be placed at a competitive disadvantage if we fail
to keep pace with technological advancements within our industry. Our future success depends in part on our continuing ability to
promote and demonstrate the value of DIRTT Solutions, as well as our ability to develop and sell new solutions, solution features, or
software that differentiate our solutions and achieve market acceptance in a timely and cost-effective manner. We incur significant
costs associated with our research and development that may not result in increased revenue or demand for DIRTT Solutions and that
could negatively affect our results of operations. Rapidly changing technology, evolving regulatory and industry standards, and
changing consumer trends, demands, and requirements require us to continuously innovate and develop new, high-quality solutions,
solutions features and software. Additionally, such rapid technological changes, standards and preferences could render the complex
and proprietary technology of our software and solutions obsolete. We may not be able to implement new technologies on a timely
basis or at an acceptable cost. New solutions, solution features, or software may also be less successful than we anticipated, and such
offerings may fail to achieve market acceptance. If we fail to respond quickly and cost-effectively to a changing market and changing
consumer preferences, our competitive position, financial condition, and results of operations could be adversely affected. Outside of
the ongoing evaluation of new construction market sectors, we are considering various partnerships that aide into the advancement and
development of the construction industry. This includes diversifying our current prefabricated offerings, aligning with sourcing
companies, and establishing initiatives with other companies embracing the mindset of change. While these actions strengthen our
stakes in the prefabrication market, we may be unsuccessful in generating revenue through these initiatives.
17
Our software and products may have design defects, deficiencies, or other unknown risks, and we may incur additional costs
to fix any such defects, deficiencies, or other risks, or be subject to warranty or product liability claims.
Our software and solutions are complex and must meet both the technical requirements of our clients and applicable building
codes and regulations. Our solutions may contain undetected errors or design and manufacturing defects, and our software may
experience quality or reliability problems, or contain bugs or other defects. Software defects may also cause errors in our
manufacturing or miscalculations in ordering and pricing, which could lead us to incur losses and perhaps lose market share to
competitors. Product or software defects could cause us to incur warranty costs, product liability costs, and repair and remediation
costs. Although we maintain warranty reserves based on production, historical claims, and estimates, future warranty claims may
exceed our reserves. Similarly, while we maintain insurance of the types and amounts we consider commercially prudent in view of
industry practice, such insurance coverage may not be sufficient to protect us against substantial claims. Such claims could be
expensive to defend, could divert resources, including the attention of management and other personnel for significant periods, and
regardless of the ultimate outcome could result in negative publicity. Increased costs to address product warranty claims or to defend
against product liability claims, may result in increased expenses and adversely affect our financial condition or results of operations.
We are subject to fluctuations in the prices of raw materials and commodities, which could adversely affect our liquidity,
operating margins and financial condition.
We purchase raw materials, including aluminum, glass, and wood, from a number of local and global suppliers. The costs of
these commodities can fluctuate due to changes in global supply and demand, inflation, speculation in commodities futures, and
changes in tariffs or trade barriers, which can also interrupt supply. In addition, we have not historically entered into long-term
agreements with vendors and may be exposed to short-term and long-term price fluctuations as a result.
Aluminum represents the largest component of our raw materials consumption. We have experienced fluctuations in the price of
aluminum and anticipate that these fluctuations will continue in the future. In particular, during 2021 through 2023, we experienced
significant price inflation across substantially all of our materials, largely due to pandemic-induced supply chain constraints, and it is
unclear whether such price increases will be temporary or permanent in nature. From time to time, the U.S. government has imposed
tariffs on steel and aluminum and limited the amounts of steel and aluminum coming into the United States based on the countries of
origin of those imports. In 2023, we sourced the majority of our aluminum from North America and sourced under 10% of our raw
materials from outside North America. Nonetheless, substantial, prolonged upward trends in aluminum and other commodity prices,
along with tariffs and import limitations, could significantly increase our costs and adversely affect our liquidity, operating margins,
and financial condition.
We rely on a limited number of outside suppliers for certain key components and materials, and failure or delay in obtaining
the necessary components or materials could delay or prevent the manufacturing or distribution of our DIRTT Solutions.
We rely on certain key suppliers for raw materials and components, including aluminum, glass, wood, paint, and hardware. We
maintain multiple suppliers for key materials, although for the year ended December 31, 2023, (i) one supplier accounted for
approximately 61% of our aluminum supply, respectively, and two additional suppliers provided approximately 19% and 18%,
respectively (ii) two suppliers accounted for approximately 46% and 44% of our wood supply, (iii) one supplier accounted for
approximately 100% of our paint and powder supply, and (iv) one supplier accounted for approximately 42% of our hardware supply.
While we believe there are other vendors for most of our key requirements, certain materials and components meeting our
quality standards are available only through a limited number of vendors. If we are required to obtain another source for these
materials or components, we may not be able to obtain pricing on as favorable terms or on terms comparable to our competitors. Any
failure or delay in obtaining the necessary raw materials or components in the quantities and quality required may result in increased
costs and delays in manufacturing or distributing our products, which could have a material adverse effect on our liquidity, financial
condition, or results of operations. A vendor may also choose, subject to existing contracts, to modify its relationship with us due to
general economic concerns or specific concerns relating to that vendor or us, at any time. These modifications might include
additional requirements from our suppliers that we provide them additional security in the form of prepayments or with letters of
credit. Any significant change in the terms that we have with our key suppliers could materially and adversely affect our liquidity,
financial condition, or results of operations.
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Risks Relating to Market Conditions
Global economic, political and social conditions and financial markets, such as the Ukraine and the Israel-Hamas war, may
impact our ability to do business and adversely affect our liquidity, financial condition, and results of operations.
Our industry is cyclical and highly sensitive to macroeconomic conditions. Overall declines or reductions in construction and
renovation due to economic downturns, unemployment and office vacancies, changing return-to-office trends, difficulties in the
financial services sector and credit markets, and imposition of trade barriers can impact the demand for our products. Financial
difficulties experienced by our suppliers, Construction Partners or clients could also result in, among other things, inadequate project
financing, project delays, inability to pay accounts receivable or disruptions in our supply chain. Any general economic, political, or
social conditions that may contribute to financial difficulties experienced by us, our suppliers, Construction Partners, or clients may
adversely affect our liquidity, financial condition and results of operations.
We are exposed to currency exchange rates, interest rates, tax rates, and other fluctuations, including those resulting from
changes in laws.
Our revenues and expenses are collected and paid in different currencies, including the U.S. dollar and Canadian dollar.
Fluctuations in the relative values of any such currency expose us to foreign exchange risk and could have a material and adverse
effect on our cash flows, revenues and results of operations. We also have currency exchange exposure to the extent of a mismatch
between foreign-currency denominated revenues and expenditures – in particular, where U.S. dollar revenues do not equal U.S. dollar
expenditures. We are not currently using exchange rate derivatives to manage currency exchange rate risks. There are currently no
significant restrictions on the repatriation of capital and distribution of earnings to foreign entities from any of the jurisdictions in
which we operate. There can be no assurance that such restrictions will not be imposed in the future.
Most of DIRTT’s debt is on fixed interest rates. The Second Extended RBC Facility (as defined below) is subject to market
interest rates. We are not currently using interest rate derivatives to manage interest rate risks. If interest rates rise, this could have a
material and adverse effect on our cash flows, revenues and results of operations and may adversely affect our ability to access
financing. We are currently undrawn on our Second Extended RBC Facility.
Compliance with new or amended tax laws and regulations could have a material adverse effect on our business. We base our
tax positions upon our understanding of the tax laws (including, applicable tax treaties) of the countries in which we have assets or
conduct business activities. However, our tax positions are subject to review and possible challenges by taxing authorities, including
as to the computation and allocation of income, transfer pricing and other complex issues. This includes adverse changes to the
manner in which Canada, the United States and other countries tax local and foreign corporations and interpret or change their tax
laws and applicable tax treaties, including in light of the increased focus by the U.S. Congress, the Canadian government, the
Organization for Economic Co-operation and Development and other government agencies in jurisdictions where we do business on
issues related to the taxation of multinational corporations. We cannot determine in advance the extent to which such jurisdictions may
amend their tax laws, review our tax positions, or assess additional taxes or interest and penalties on such taxes. In addition, our
effective tax rate may be increased by changes in the valuation of deferred tax assets and liabilities, our cash management strategies,
local tax rates, or interpretations of tax laws.
Risks Relating to Intellectual Property and Information Security
We may be unable to maintain, protect or enforce our intellectual property rights, and we may be accused of infringing
intellectual property rights of others.
We rely on a combination of contract, copyright, patent, trademark and trade secret laws, confidentiality procedures and other
measures to protect our intellectual property. There is no guarantee that our various contractual rights, patents, copyrights, trademarks
and trade secrets will offer sufficient protection of our products and services or prevent misappropriation of our proprietary rights in
our products, software or processes. We also may not be granted patents, copyrights registrations or trademark registrations on our
pending or proposed applications, and granted applications may be challenged, invalidated or circumvented in the future. Despite our
best efforts to maintain and enforce our intellectual property, monitoring unauthorized use of our intellectual property is difficult and
costly, and the steps we have taken may not be sufficient to effectively prevent third parties from infringing, misappropriating, diluting
or otherwise violating our intellectual property rights. Despite our precautions, it may be possible for unauthorized third parties to use
information that we regard as proprietary to create products or services that compete with ours. We enforce our intellectual property
rights where appropriate, but the cost of doing so may be substantial and could outweigh the potential benefits, and we may be
unsuccessful in our enforcement efforts. Failure to protect or maintain the proprietary nature of our intellectual property could
adversely affect our ability to sell original products and adversely affect our business, financial condition and results of operations.
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Additionally, our competitors or other third parties may own, or claim to own, intellectual property in technology areas relating
to our technology, including ICE Software, manufacturing processes, and DIRTT Solutions. Although we do not believe that our
software or DIRTT Solutions infringe or misappropriate the proprietary rights of any third parties, litigation related to such claims,
whether or not meritorious, may subject us to significant liabilities, require us to enter into royalty and licensing arrangements on
unfavorable terms, prevent us from assembling certain of our products or licensing certain of our intellectual property, subject us to
injunctions restricting our sale of products or services, cause severe disruptions to our operations or the marketplaces in which we
compete, or require us to satisfy indemnification commitments with our clients, including contractual provisions under various license
arrangements. A damages award against us could include an award of royalties or lost profits and, if a court finds willful infringement,
treble damages and attorneys’ fees. This may cause us to expend significant costs and resources, and could adversely affect our
business, financial condition or results of operations.
If we are unable to protect our information technology systems against data corruption, cyber-based attacks or network
security breaches, our operations could be disrupted and our reputation and profitability could be negatively affected.
In the ordinary course of our business, we generate, collect and store confidential and proprietary information, including
intellectual property, business information, and other proprietary information. The secure storage, maintenance, and transmission of,
and access to, this information is important to our operations and reputation. We use automated software and hardware solutions to
protect our on-premise and cloud infrastructure; conduct routine third-party evaluations and vulnerability testing to identify and
mitigate risks; and deploy employee training programs throughout the company. Although we have experienced cyber-based attacks,
to our knowledge, we have not experienced any material disruptions or breaches of our information technology systems or platforms.
However, there is no guarantee that our security systems, or processes or procedures designed to protect our information technology
systems are adequate to safeguard against all cybersecurity risks or human error. Any security breach involving the misuse, loss or
other unauthorized disclosure of confidential information of a client, Construction Partner, employee, supplier or Company
information could result in financial losses, exposure to litigation and liability (including regulatory liability), damage to our
reputation, and disruption to our operations, all of which could have a material adverse effect on our business, financial condition or
results of operations. While we maintain commercially prudent cybersecurity insurance consistent with industry practice, such
insurance may not be sufficient to cover all losses relating to data loss or an information security breach.
The regulatory environment related to information security, data collection and use, and privacy is complex and continuously
evolving and compliance with laws, rules, regulations or other requirements could result in additional costs. The costs associated with
information security, such as increased investment in technology, the costs of compliance with privacy laws, and costs incurred to
prevent or remediate information security breaches, could be substantial and adversely affect our business. A significant compromise
of sensitive employee, Construction Partner, client or supplier data in our possession could result in legal damages and regulatory
penalties. In addition, the costs of defending actions, responding to complaints, or remediating breaches could be material.
Damage to our information technology and software systems could impair our ability to effectively provide DIRTT Solutions
and adversely affect our reputation, relationships with clients, financial condition or results of operations.
Our information technology and software networks and systems, which include the processing, transmission and storage of
information, are integrated with our manufacturing processes are essential to our business operations. These systems are vulnerable to,
among other things, damage or interruption from power outages, network failures or natural disasters, loss or corruption of data,
human error, employee misconduct and difficulties associated with upgrades, installations of major software or hardware, and
integration with new systems. While we maintain retention backups to geo-diverse digital and physical locations and have a recovery
data center, the data center and other protective measures we take could prove to be inadequate. Any disruption in our systems or
unauthorized disclosure of information could result in delayed manufacturing and delivery of our DIRTT Solutions, legal claims, a
loss of intellectual property and a disruption in operations, all of which could adversely affect our reputation, relationships with
clients, financial condition or results of operations.
Our core intellectual property in the ICE Code is jointly owned with a third party, who may fail to comply with its contractual
obligations to protect and enforce our intellectual property rights.
AWI owns 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. As part of AWI’s purchase of the Applicable ICE
Code, AWI must comply with contractual obligations designed to protect the Applicable ICE Code from infringement,
misappropriation, misuse or exposure to unauthorized third parties. However, despite our efforts to monitor AWI’s actions, we may
not become aware of AWI’s failure to comply with its obligations or we may not have adequate time to address such failure before
there are adverse impacts to our business. Additionally, even if we attempt to require AWI to comply with its obligations to enforce
our intellectual property rights, AWI may refuse or may not take adequate steps to do so. AWI’s failure to protect or maintain the
proprietary nature of the Applicable ICE Code could adversely affect our ability to sell original products or adversely affect our
business, financial condition or results of operations.
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AWI may fail to meet certain security and non-disclosure obligations designed to prevent our competitors or other unauthorized
third parties from accessing the Applicable ICE Code. Despite our efforts to enforce our rights and monitor any inadequacies, we may
not have access to AWI’s internal security or business practices. Additionally, we may not be successful in preventing AWI from
exposing the source code of the Applicable ICE Code to third parties or in protecting our intellectual property rights in the Applicable
ICE Code. Any unauthorized access to the Applicable ICE Code in AWI’s possession could substantially and adversely affect our
business or competitive advantage and management may have to expend significant time and resources to address unauthorized access
and disclosure, all of which could have a material adverse effect on our business, financial condition or results of operations.
Risks Relating to Government Regulations and Enforcement
We may incur significant costs complying with environmental, health and safety laws and related claims, and failure to
comply with these laws and regulations could expose us to significant liabilities, which could materially adversely affect our
business and results of operations.
We are subject to laws, regulations, and other requirements with respect to workers’ health and safety and environmental
matters in the United States, Canada and other countries in which we operate. Environmental laws and regulations impose, among
other things, restrictions, liabilities and obligations in connection with the production, processing, preparation, handling, storage,
transportation, disposal and management of wastes and other substances, and the prevention and remediation of environmental effects.
Health and safety laws and regulations impose, among other things, requirements designed to ensure the protection of workers. New
or more stringent laws and regulations, including those relating to climate change and greenhouse gas emissions, may be adopted in
the future and could impact our facilities, raw material suppliers, the transportation and distribution of our solutions, and our clients,
which could reduce demand for our solutions or cause us to incur additional operating costs. In addition, certain foreign laws and
regulations may affect our ability to export products outside of, or import products into, the United States or Canada. Failure to
comply with these requirements may result in civil or criminal liability, damages and fines, and our operations could be curtailed,
suspended or shutdown and our reputation, ability to attract employees, and results of operations could be adversely affected. Private
lawsuits, including claims for remediation of contamination, personal injury or property damage, or actions by regional, national, state
and local regulatory agencies, including enforcement or cost-recovery actions, may materially increase our costs.
These factors may materially increase the amount we must invest to bring our processes into compliance with legal requirements
and impose additional expenses on our operations. In addition, any changes in these laws or regulations or changes in our
manufacturing processes may require us to request changes to our existing permits or obtain new permits. We may also be unable to
obtain or maintain, from time to time, all required environmental regulatory approvals. A delay in obtaining any required
environmental regulatory approvals or the failure to obtain and comply with such approvals could materially adversely affect our
business and results of operations.
Risks Relating to Financial Results
We have had negative cash flow from operating activities.
We had negative cash flow from operating activities for prior years, including the years ended December 31, 2022 and 2021.
Continued negative operating cash flow may compromise our ability to make interest and principal payments on the convertible
unsecured subordinated debentures issued on January 25, 2021 and December 1, 2021 (collectively, the “Debentures”) on a timely
basis, or at all, and to execute our strategic plan. Until we are able to generate positive cash flow from operating activities over a
sustained period, our ability to finance our operations will be dependent on our cash reserves and available credit facilities and, if
required, our ability to obtain additional external financing. Although we had $14.8 million in cash provided from operating activities
for the year ended December 31, 2023, and we anticipate we will have positive cash flow from operating activities over at least the
next twelve months, we cannot guarantee that such future cash flow will be sufficient, or other changes to our circumstances will not
necessitate additional financial resources to fund our operating activities.
We have undertaken various actions to improve our cash flow and balance sheet in the short term, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources”. Although we anticipate
these actions will strengthen our balance sheet and liquidity position, we cannot guarantee that such future cash flow will be sufficient
or other changes to our circumstances will not necessitate additional financial resources to fund our operating activities.
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We have experienced a history of losses, and despite certain periods of profitability in recent years, we may not be able to
generate sufficient revenue to achieve and sustain profitability.
We have incurred significant losses since commencing business. We incurred net losses after tax of $14.6 million, $55.0 million
and $53.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. As at December 31, 2023, we had an
accumulated deficit of $180.9 million. These losses and accumulated deficits were due in part to the substantial investments made to
grow our business and acquire clients, to further develop our service offerings through product and software development, to ensure
that we have sufficient production capacity and capability to deliver on our commitment of rapid delivery times and to preserve our
production, innovation and commercial capabilities through the economic disruption caused by the global COVID-19 pandemic in
anticipation of an increase in construction activity as the pandemic impacts abated. Past results may not be indicative of our future
performance, and there can be no assurance that we will generate net income in the future.
We have experienced, and may experience in the future, quarterly and yearly fluctuations in results of operations and
financial condition.
Our results of operations and financial condition may continue to fluctuate from one quarter or year to another due to a number
of factors, some of which are outside of our control. For example, we usually experience seasonal slowdowns in the first and fourth
quarters of each calendar year, leading to stronger sales in the second half of the year versus the first half, and weather conditions may
also delay delivery and installation on some projects. Furthermore, sales that we anticipate in one quarter may be pushed into another
quarter, affecting both quarters’ results, and our actual or projected results of operations may fail to match our past performance.
These events could in turn cause the market price of our common shares to fluctuate. In particular, if our results of operations do not
meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent
historical results of operations, the market price of our common shares will likely decline. Due to our high fixed manufacturing costs
and operating expenses, quarterly volatility in sales volumes could result in periods of low operating cash flow and negatively affect
our liquidity. Due to these risk factors, quarter-to-quarter or year-to-year comparisons of our results of operations may not be an
indicator of future performance.
We have recognized, and may recognize in the future, impairment charges for our goodwill and certain other non-current
assets.
During the year ended December 31, 2021, we impaired the $1.4 million net carrying value of goodwill on our consolidated
balance sheet. Significant negative industry or economic trends, disruptions to our business, planned or unexpected significant
changes in the use of the assets, and sustained market capitalization declines may result in the impairment of non-current assets. In
2022 and 2021, we had an indicator of impairment for our non-current assets. In 2023, we announced our intention to close the Rock
Hill Facility, which resulted in an impairment charge on the reclassification of assets held for use to assets held for sale. As at
December 31, 2023, we did not have any impairment indicators for our non-current assets. Any further charges relating to
impairments could have a material adverse impact on our consolidated statement of operations in the period in which the impairment
is recognized.
Risks Related to Our Common Shares and Corporate Structure
Our share price has been and may continue to be volatile, which could cause the value of your investment to decline.
Our common shares are listed on the TSX under the symbol “DRT” and are quoted on the OTC under the symbol “DRTTF.”
The price of our common shares has in the past fluctuated significantly, and may fluctuate significantly in the future, depending upon
a number of factors, many of which are beyond our control and may adversely affect the market price of our common shares. These
factors include: (i) variations in quarterly results of operations; (ii) deviations in our earnings from publicly disclosed forward-looking
guidance; (iii) changes in earnings estimates by analysts; (iv) our announcements or our competitors’ announcements of significant
contracts, acquisitions, strategic partnerships or joint ventures; (v) general conditions in the offsite construction and manufacturing
industries; (vi) sales of our common shares by our significant shareholders; (vii) fluctuations in stock market price and volume; and
(viii) other general economic conditions.
In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has
been brought against that company. If our share price is volatile, we may become the target of securities litigation in both the United
States and Canada. Securities litigation could result in substantial costs and divert management’s attention and resources from our
business and could have an adverse effect on our business, financial condition and results of operations.
22
Our common shares are quoted on the OTC’s Pink Tier, and there may be a limited trading market in the Company’s
common shares in the United States. As a result of the limited trading market, investors may experience limited liquidity, and may
experience limited ability to sell shares in the open market.
Our common shares are quoted on the OTC’s Pink Tier under the symbol “DRTTF.” There may be a limited trading market in
the Company’s common shares in the United States. As a result of the limited trading market of our common shares, investors in our
common shares may experience limited demand for their common shares, which may limit their ability to sell their shares in the open
market.
We are governed by the corporate laws of Alberta, Canada, which in some cases have a different effect on shareholders than
the corporate laws of the United States.
We are governed by the ABCA and other relevant laws, which may affect the rights of shareholders differently than those of a
company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying,
deterring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or
otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between
the ABCA and Delaware General Corporation Law (“DGCL”), that may have the greatest such effect include, but are not limited to,
the following: (i) for certain extraordinary corporate transactions (such as amalgamations or amendments to our articles), the ABCA
generally requires the voting threshold to be a special resolution passed by not less than two-thirds of the votes cast by the
shareholders who voted in respect of the resolution, whereas DGCL generally only requires a majority vote; and (ii) under the ABCA,
registered holders or beneficial owners (as defined in the ABCA) of not less than 5% of our common shares in aggregate can
requisition our directors to call a special meeting of shareholders, whereas such right does not exist under the DGCL. We cannot
predict whether investors will find our company and our common shares less attractive because we are governed by the corporate laws
of Alberta, Canada.
We will cease to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April
2012, no later than December 31, 2024.
On December 31, 2024, we will cease to be an emerging growth company. Once we cease to be an emerging growth company,
we may be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls if no
other exemptions to such requirements apply. Once it is required to do so, our independent registered public accounting firm may
issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or
reviewed. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be
unable to comply with these requirements in a timely or cost-effective manner.
Additionally, if our independent registered public accounting firm is required to express an opinion on the effectiveness of our
controls when we cease to be an emerging growth company, we may be unable to confirm that our internal control over financial
reporting is effective. If that is the case, or if our independent registered public accounting firm is unable to express an unqualified
opinion on the effectiveness of our controls, we could lose investor confidence in the accuracy and completeness of our financial
reports, which could cause the price of our common shares to decline.
Our two largest shareholders are able to exercise a significant amount of control over the Company due to their significant
ownership of our common shares, and their interests may conflict with or differ from the interests of our other shareholders.
As of February 16, 2024, 22NW Fund, LP and Aron English (collectively, the “22NW Group”) and WWT Opportunity #1 LLC
(“WWT”) each owned 30.1% and 27.9% of our common shares, respectively, together beneficially owning approximately 58.0% of
our common shares. Shaun Noll is the Managing Member of WWT. In addition to the common shares, the 22NW Group owns
C$18,915,000 principal amount of our January Debentures (as defined below) and C$13,638,000 principal amount of our December
Debentures (as defined below). Both the January Debentures and the December Debentures are convertible into common shares in
accordance with the terms thereof. Thus, the 22NW Group could further increase its ownership in the Company through the
conversion of its January Debentures or December Debentures into common shares.
So long as the 22NW Group and WWT and their respective affiliates continue to directly or indirectly own a significant amount
of our common shares, they will be able to exercise a significant level of control over all matters requiring shareholder approval,
including the election of directors, amendments to our amended and restated articles of amalgamation, and approval of significant
corporate transactions, barring any requirement for such shareholder to recuse itself from any such vote pursuant to applicable
securities law, corporate law or the rules and regulations of any applicable stock exchanges. Further, affiliates of the 22NW Group and
WWT also serve as directors on the Company’s Board of Directors. This control could have the effect of delaying or preventing a
change of control of the Company or changes in management and would make the approval of certain transactions difficult or
impossible without the support of these shareholders. Additionally, the perception that these shareholders would have the ability to
control or significantly influence the Company could cause our common shares to be less attractive to certain investors or otherwise
result in a decline in the trading price of our common shares. To the Company’s knowledge, the 22NW Group and the WWT are not
acting in concert and do not constitute a “group” (as defined in Section 13(d)(3) of the Exchange Act).
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Since the 22NW Group and WWT each exercise a significant amount of control over the Company due to their significant
ownership of our common shares, if the 22NW Group and WWT were to disagree about key decisions with respect to the Company
we may not be able to effectively address challenges facing our business, which could adversely affect our business, financial
condition or results of operations.
Because we are a corporation incorporated in Alberta and some of our directors and officers are residents of Canada, it may
be difficult for investors in the United States to enforce civil liabilities against us or our directors and officers based solely upon the
federal securities laws of the United States. Similarly, it may be difficult for Canadian investors to enforce civil liabilities against
our directors and officers residing outside of Canada.
We are a corporation amalgamated and existing under the laws of Alberta with our principal place of business in Calgary,
Alberta, Canada. Some of our directors and officers are residents of Canada and a substantial portion of our assets and those of such
persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within
the United States upon us or our directors or officers who are not residents of the United States, or to realize in the United States upon
judgments of courts of the United States predicated upon civil liabilities under the Securities Act of 1933. Investors should not assume
that Canadian courts: (i) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the
civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States or (ii)
would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such
state securities or blue sky laws.
Similarly, some of our directors and officers are residents of countries other than Canada and all or a substantial portion of the
assets of such persons are located outside Canada. As a result, it may be difficult for Canadian investors to initiate a lawsuit within
Canada against these non-Canadian residents. In addition, it may not be possible for Canadian investors to collect from these non-
Canadian residents judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation of
certain of the provinces and territories of Canada. It may also be difficult for Canadian investors to succeed in a lawsuit in the United
States, based solely on violations of federal, provincial or territorial securities laws.
General Risks
Difficulties in recruiting and retaining qualified officers or employees, or experiencing labor shortages or disruptions, could
have a material adverse effect on our business and results of operations.
Our success will depend in part on our ability to attract, develop, and retain qualified personnel as needed. We have undergone
significant changes at a senior management level during recent years as discussed elsewhere in this Annual Report. Although we
anticipate smooth transitions, any changes to members of our senior management may be disruptive to our operations, including by
diverting our Board of Directors’ and management’s time and attention and a decline in employee morale. If there are any delays in
this process, our business could be negatively impacted. We may be affected by labor shortages or disruptions, particularly in
locations where we operate manufacturing facilities. If we fail to attract or retain qualified personnel, or experience labor shortages or
disruptions, we could incur higher recruiting expenses, a loss of manufacturing capabilities, or inability to respond to significant
increases in demand, all of which could have a material adverse effect on our business and results of operations.
We may have additional capital needs in the future and may not be able to obtain additional capital or financing on
acceptable terms.
We plan to continually invest in business growth and may require additional funds to respond to business opportunities, such as
expanding our sales and marketing activities, developing new software, acquiring complementary businesses, products or technology,
and expanding or enhancing our manufacturing capabilities, including factory automation. To the extent that our existing capital is
insufficient to meet our requirements, we may need to undertake equity or debt financings to secure additional funds. Further
issuances of equity or convertible debt securities may result in significant share dilution. Additional new equity securities issued could
have rights, preferences and privileges superior to those of our currently issued and outstanding common shares. Additional debt
financings may involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which
may make it more difficult for us to obtain additional capital and to pursue business opportunities. We cannot provide any assurance
that sufficient debt or equity financing will be available for necessary or desirable expenditures or acquisitions, or to cover losses, and
accordingly, our ability to continue to support our business growth and to respond to business challenges could be significantly
limited, and our liquidity could be materially and adversely affected.
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We may engage in future mergers, acquisitions, agreements, consolidations, or other corporate transactions that could
adversely affect our business, financial condition, and results of operations.
While we currently have no specific plans to acquire any businesses, we may, in the future, seek to expand our business and
capabilities through acquiring compatible technology, products or businesses. Additionally, we may explore other corporate
transactions, including mergers, agreements, consolidations, or joint ventures, that we believe may be beneficial to our business or
further specific business goals. Acquisitions involve certain risks and uncertainties, including, among other things, (i) difficulty
integrating the newly acquired businesses and operations in an efficient and cost-effective manner; (ii) inability to maintain
relationships with key clients, vendors and other business partners of the acquired businesses; (iii) potential loss of key employees of
the acquired businesses; (iv) exposure to litigation or other claims in connection with our assumption of certain claims and liabilities
of the acquired businesses; (v) diversion of management’s time and focus; and (vi) possible write-offs or impairment charges related
to the acquired businesses. The occurrence of any of these risks could adversely affect our business, financial condition, and results of
operations.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
The security of our information technology systems and Company data is important to our operations and reputation.
Accordingly, we are committed to identifying and managing cybersecurity risks. Our Cybersecurity team performs periodic risk
assessments and, on a quarterly basis, provides to our Enterprise Risk Management Committee (“ERM”) information related to the
Company’s cybersecurity, including statistics on attempted cyber-attacks, status of employee information security training awareness,
and information on any security investigations. The Cybersecurity team advises the ERM of significant global cyber events that
occurred during the quarter and whether they impacted DIRTT. The Cybersecurity team regularly discusses with the ERM the
Company’s cybersecurity posture and whether the Company should implement additional protections and controls to assist the
Company in protecting, responding to, or mitigating potential future cyber-attacks.
DIRTT has developed and implemented a cybersecurity risk management strategy which consists of 5 phases: Identify, Protect,
Detect, Respond, and Recover. Each phase has multiple processes and technologies supporting those processes.
Identify
Identification processes at DIRTT include: system asset identification, threat identification, vulnerability identification and
maintaining cybersecurity policies and standards.
Protect
Protection processes at DIRTT include: cyber awareness training, cyber awareness assessment (each employee is assigned a
cybersecurity awareness grade calculated by a best in class cybersecurity vendor), implementation of identity and access controls,
perimeter and endpoint security, annual vulnerability assessments and remediation, data encryption in transit, key vendor (third
parties) control effectiveness assessment, and pre-implementation of software and systems cybersecurity assessments.
Detect
Detection processes at DIRTT include: automated event collection, collation, analysis, alerting and end user incident reporting.
Respond
Respond processes at DIRTT include: containment, communication, investigation and analysis, and long-term mitigation
planning.
Recover
Recovery processes at DIRTT include: impact identification and analysis, system restoration, internal and external
communications as deemed necessary.
DIRTT engages external assessors annually for specific controls, to assess and provide assurance on the health of DIRTT’s
cybersecurity posture and controls.
25
DIRTT’s Senior Vice President (“SVP”) of Technology, who reports to the CEO, is responsible for DIRTT’s cybersecurity and
has over 15 years of technology experience. The SVP of Technology is supported by dedicated Cybersecurity staff and Governance,
Risk and Compliance (“GRC”) staff. DIRTT’s cybersecurity team leader has over 20 years of experience in cybersecurity, multiple
industry standard cybersecurity certifications, and extensive offensive and defensive cybersecurity tactical skills. DIRTT’s GRC lead
has over 20 years of GRC experience and industry standard certifications. Cybersecurity incidents, response and remediation activities
and statuses are reported directly to the SVP of Technology.
The ERM of the Board of Directors oversees risks resulting from cybersecurity threats. DIRTT’s management, represented by
the SVP of Technology, is responsible for identifying, assessing, and managing risks arising from cybersecurity threats. Quarterly,
DIRTT's SVP of Technology reports to the ERM on the health of DIRTT’s cybersecurity, incidents, and emerging threats and
vulnerabilities that may impact the Company.
As of the date of this Annual Report, the Company has not identified any cybersecurity incidents that have materially affected or
are reasonably likely to materially affect the Company’s results of operations and/or financial condition. See “Item 1A. Risk Factors”
for additional information about cybersecurity risk.
Item 2. Properties.
Our principal executive offices are located in Calgary, Alberta, where we lease approximately 73,000 square feet of office and
manufacturing space. Our lease expires in September 2027. Our principal manufacturing facilities are currently located in Calgary,
Alberta; and Savannah, Georgia. On February 22, 2022, we announced our intention to close the Phoenix manufacturing facility and
DXC. On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility, as discussed in Item 1.
“Business” in this Annual Report.
Our wall surfaces (which we call panels), casework and timber solutions are manufactured in Calgary, while aluminum, glass
and power components are manufactured in Calgary and Savannah. In Calgary, we lease an aggregate of approximately 400,000
square feet of manufacturing space across four facilities (excluding our principal offices), which leases expire in January 2026,
January 2027, September 2027, and January 2034. In Phoenix, we lease approximately 130,000 square feet of manufacturing space
across two facilities, which leases expire in March 2027. We are currently utilizing the Phoenix space as a storage facility and have
subleased the remaining premises. In Savannah, we lease approximately 81,000 square feet of manufacturing space, which lease
expires in February 2029. In October 2019, we entered into a fifteen-year lease, which DIRTT may extend for two additional five-year
periods at its option, for a panel factory of approximately 130,000 square feet in Rock Hill, South Carolina. Should the need arise, we
have the expansion rights to lease an additional 130,000 square feet of space. We are pursuing options to sublease this area following
the September 27, 2023, announcement of our intention to permanently close operations at this location and do not plan to exercise the
additional five-year extension period. In March 2020, we entered into an eight-year lease, which DIRTT may extend an additional five
years at its option, of approximately 18,000 square feet of space for a DXC in Dallas, Texas. During March 2023, we entered into an
agreement to sublease our DXC in Dallas to one of our Construction Partners in that region, from April 1, 2023, through December
31, 2024.
In New York City, New York, we lease approximately 4,100 square feet of space to operate a DXC; this lease expires in
February 2024. In Chicago, Illinois, we own approximately 6,200 square feet of office space, which we use to operate a DXC.
Through distributed manufacturing, we can shift production of some components among our manufacturing sites, reduce
transportation times and costs, and meet targeted lead times. We believe that our current and planned facilities are adequate for our
current needs and that suitable additional or substitute space would be available if needed.
Item 3. Legal Proceedings.
DIRTT is pursuing multiple lawsuits against its founders, Mogens Smed and Barrie Loberg, as well as Falkbuilt Ltd. and
Falkbuilt, Inc. (collectively, “Falkbuilt”) and related individuals and corporations. DIRTT alleges breaches of fiduciary duties and
non-competition and non-solicitation covenants, and the misappropriation of its confidential and proprietary information (in violation
of numerous U.S. state and federal laws pertaining to the protection of trade secrets and proprietary information and the prevention of
false advertising and deceptive trade practices). Except as described below, there have been no material developments in the legal
proceedings previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
26
DIRTT’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates is comprised of three main lawsuits: (i) an
action in the Alberta Court of King’s Bench commenced on May 9, 2019 against Falkbuilt, Messrs. Smed and Loberg, and several
other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty, fidelity and
confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action in
the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Smed, and other individual
and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade secrets, business intelligence and
customer information (the “Utah Misappropriation Case”); and (iii) an action in the U.S. District Court for the Northern District of
Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States
and intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business intelligence, with
the aim of establishing a competing business in the United States market (the “Texas Unfair Competition Case”). DIRTT intends to
pursue the cases vigorously. We recently requested the Court of King’s Bench of Alberta to schedule the summary judgment
application for our Canadian litigation. The court has proposed three potential dates in September 2025 and we expect to have the date
finalized in the next several weeks.
In the Canadian Non-Compete Case, on February 14, 2023, the Court of King’s Bench of Alberta granted DIRTT’s application
to schedule the hearing of its summary judgment application and dismissed Falkbuilt’s cross-application to strike the summary
judgment application. DIRTT is aggressively pursuing its summary judgment application.
In the Utah Misappropriation Case, on April 11, 2023, the United States Court of Appeals for the Tenth Circuit reversed the
U.S. District Court for the Northern District of Utah’s decision that Utah was an inconvenient forum for DIRTT’s claims against
Falkbuilt and others for the misappropriation of confidential information, trade secrets, business intelligence and customer
information. The Utah Court had previously, and erroneously, found that DIRTT’s United States-based claims should be litigated in
Canada. The Court of Appeals remanded the matter back to the Utah District Court. Falkbuilt filed motions to stay the Tenth Circuit
decision pending its petition for a Writ of Certiorari to the Supreme Court of the United States. The Court of Appeals promptly denied
the motion to stay. A similar motion subsequently filed with the Supreme Court of the United States on the same basis was also
promptly denied. Falkbuilt also petitioned the Supreme Court to accept review, even after losing the stay motion, which petition was
also denied in early October 2023. As a result of these appellate orders, the Utah federal trial court assumed jurisdiction over the
pending claims. The Utah judge who issued the erroneous order dismissing DIRTT’s claims recused himself and the newly assigned
judge reaffirmed all prior orders. As such, the case is resumed in the posture it was when the appeals began but with a different Judge.
The Texas Unfair Competition Case was dismissed in March 2022, without prejudice, in reliance upon the now-reversed
decision in the Utah Misappropriation Case, described above. DIRTT appealed that decision, and the United States Court of Appeals
for the Fifth Circuit stayed the appeal pending the Tenth Circuit ruling at Falkbuilt’s request. After prevailing in the Tenth Circuit,
DIRTT asked Falkbuilt if it would, consistent with its prior representations, agree to remand the appeal to the Texas Court for
disposition to Utah. Falkbuilt refused and DIRTT filed a Motion to Remand. The Court denied the Motion for Remand without
prejudice and asked for full briefing. Argument proceeded on December 7, 2023 in New Orleans. The Court will either order the
claims transferred to Utah or, if it affirms the lower court, those claims would proceed, inconveniently, in Canada. We believe it is
very unlikely the claims would proceed in Texas as neither DIRTT or Falkbuilt currently desires that outcome.
Prior to the argument, DIRTT sought leave to amend the Utah claims to include the Texas claims and notified the Fifth Circuit
Court of Appeals of the proposed amendment in Utah. Falkbuilt did not object to the amendment, but answered the Complaint and
reserved the right to dismiss the Amended Complaint on grounds of inconvenient forum or international comity. The Amended
Complaint not only presents the Texas claims in Utah but also updates DIRTT’s allegations as to events and damages incurred during
the time the parties were participating in the appellate process.
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. For additional information, please see Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.
Item 4. Mine Safety Disclosures.
Not applicable.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information; Holders of Record
Our common shares are traded on the TSX under the symbol “DRT” and are quoted on the OTC Markets on the “OTC Pink
Tier” under the symbol “DRTTF”. Quotations of our common shares on the OTC Pink Tier reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of February 16, 2024, there were 191,110,385 common shares outstanding and 158 shareholders of record.
Dividends
We have not declared or paid any cash dividends on our common shares to date. The declaration and payment of dividends is at
the discretion of the Board of Directors, taking into account (i) our earnings, capital requirements and financial condition, (ii)
restrictions on our ability to pay dividends under the Second Extended RBC Facility, and (iii) such other factors as the Board of
Directors considers relevant. The Second Extended RBC Facility generally limits our ability to pay any dividends or make any other
distribution on our outstanding common shares. See Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Credit Facility” for more information. If and when our Board of Directors declares cash dividends on our
common shares, such dividends may be declared and paid in either U.S. dollars or Canadian dollars.
Recent Sales of Unregistered Securities
None.
Item 6. [Reserved]
28
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, 2023 and 2022 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 unrelated companies and Construction
Partners of the Company. As of May 9, 2023, AWI owns a 50% interest in the rights, title and interest 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.
Key Fourth Quarter 2023 Highlights
•
•
•
•
•
•
•
Revenues for the fourth quarter of 2023 were $50.9 million, an increase of $8.5 million or 20% from $42.4 million for the
same period in 2022. The fourth quarter of 2023 benefited from several large projects compared to the fourth quarter of
2022.
Gross profit and gross profit margin for the fourth quarter of 2023 was $19.2 million or 37.8% of revenue, an increase
from $11.6 million or 27.3% of revenue for the same period of 2022.
Adjusted Gross Profit and Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the fourth quarter
of 2023 was $20.1 million or 39.5% of revenue. This represents an improvement from $13.6 million or 32.0% of revenue
in the fourth quarter of 2022. The increase in Adjusted Gross Profit and Adjusted Gross Profit Margin compared to the
comparative quarter is due to having better leverage over fixed costs through price increases and reorganization initiatives,
which have been designed to align our cost structure with current expected levels of demand.
Net income after tax for the fourth quarter of 2023 was $1.0 million compared to a $5.9 million net loss after tax for the
same period of 2022. The increase in net income is primarily the result of the higher gross profit margin, explained above,
of $7.6 million. Other items that impacted net income in the period included a $1.5 million increase in operating expenses
(includes a $1.0 million reduction in reorganization expenses and a decrease in the fair value less costs to sell related to
the Rock Hill Facility assets held for sale, which resulted in an additional $0.8 million impairment charge), receipt of $1.0
million on the sale of software due to the completion of the knowledge transfer to AWI, and a $0.2 million increase in
interest income. These increases were offset by a $0.2 million increase in the foreign exchange loss, a $0.1 million
increase in interest expense, and a $0.3 million increase in tax expense.
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the fourth quarter of 2023 was $4.3 million or 8.5% of
revenue, an improvement of $3.7 million from $0.6 million or 1.4% of revenue for the fourth quarter of 2022.
The Company generated approximately $10.1 million of cash through operations in the fourth quarter of 2023 compared
to $3.2 million in the same period of 2022. During the fourth quarter of 2023, the Company received $1.0 million on the
sale of software to offset cash used for investing activities and repaid outstanding equipment leases related to the Rock
Hill Facility of $7.8 million.
On November 21, 2023, we announced the Rights Offering (as defined herein) to our common shareholders. The Rights
Offering closed on January 9, 2024 with gross proceeds of C$30.0 million.
29
Key Annual 2023 Highlights
•
•
•
•
•
•
•
Revenues for the year ended December 31, 2023, were $181.9 million, an increase of $9.8 million or 6% from $172.2
million for the year ended December 31, 2022, driven primarily by the pricing actions over the past two years.
Gross profit and gross profit margin for the year ended December 31, 2023, was $59.5 million or 32.7% of revenue, an
increase from $28.2 million or 16.4% of revenue for the year ended December 31, 2022.
Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2023, was $65.1 million
or 35.8% of revenue, an increase from $38.9 million or 22.6% of revenue for the year ended December 31, 2022. Adjusted
Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2023, was 35.8%, a 13%
improvement from 22.6% for the year ended December 31, 2022. The improved Adjusted Gross Profit and Adjusted
Gross Profit Margin is due to having better leverage over fixed costs through price increases and reduced fixed costs.
Product cost of sales in 2023 included $2.0 million of idle facility costs related to the Rock Hill Facility ($0.5 million in
the year ended December 31, 2022). We are pursuing options to sublease the Rock Hill Facility to offset these costs in
2024 and beyond.
Management has taken steps to align our manufacturing footprint and salaried workforce with our current activity levels
as well as cost reduction and profitability initiatives. During the third quarter of 2023, we announced the intention to
permanently close the Rock Hill Facility. With annual production capacity at DIRTT facilities in Savannah, Georgia and
Calgary, Alberta, of approximately $400 million in annual revenue, the closure is part of DIRTT’s ongoing focus on
realigning the organization, increasing efficiency, and improving profitability. Non-cash impairment charges related to the
Rock Hill Facility equipment of $8.7 million has been recorded in the year ended December 31, 2023. During the fourth
quarter, we initiated the process to move certain equipment to our Calgary Facility and sell various other assets at the
Rock Hill Facility. We expect to receive $1.6 million for the sale of the assets in the next 12 months.
On May 9, 2023, we entered into the Co-Ownership Agreement and Partial Patent Assignment Agreement with AWI. We
concurrently entered into the Amended and Restated Master Services Agreement (the “ARMSA”) with AWI, under which
AWI has also prepaid certain development services to be provided by DIRTT. Through these arrangements, we received
$12.8 million of cash and recognized a gain on the sale of software and patents of $7.1 million during the year ended
December 31, 2023.
Net loss after tax for the year ended December 31, 2023, was $14.6 million compared to $55.0 million for the year ended
December 31, 2022. The decrease in net loss is primarily the result of the above noted increase in gross profit of $31.4
million. Other items that decreased the net loss in 2023 included a $11.1 million decrease in operating expenses (which
includes an $8.7 million impairment charge and $1.5 million of related party expense in the current year), a $7.1 million
gain on software sale, $0.4 million increase in interest income and a $0.2 million decrease in interest expense. These
increases were offset by a $7.5 million decrease in government subsidies, a $2.1 million decrease in foreign exchange, and
a $0.3 million increase in income tax expense.
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2023 was $7.9 million or
4.4% of revenue, an improvement of $34.1 million from a $26.2 million loss or (15.2)% of revenue for the year ended
December 31, 2022, for the above noted reasons.
Pipeline
In the first quarter of 2023, we changed our methodology for calculating and disclosing our forward twelve month pipeline. We
are now disclosing qualified leads, defined as quantity of projects being pursued, and our pipeline, defined as working with an
engaged client on assessment of DIRTT as a prefabricated interior solution provider. We began using these new measures as we
believe they better measure expected near term performance given that our operating environment has been prone to change due to
macroeconomic factors such as worksite labor availability, interest rate changes, and potential recessionary impacts on construction
projects.
As of January 1, 2024, our twelve-month forward pipeline has grown 9.5% year-over-year and has contracted 4.6% since the
previous quarter. We are focused on refilling our pipeline after achieving above trend revenue in the fourth quarter of 2023.
We continue to focus on pipeline and forecasting integrity as our ten-day lead time is one of DIRTT’s key value propositions.
The ability to produce and ship products in that time frame requires close attention to sales & operational planning.
30
January 1, 2024
Twelve Month Forward Pipeline ($ 000s)
January 1, 2023
As at
% Change
October 1, 2023
% Change
Commercial
Healthcare
Government
Education
Leads (#)
176,789
41,221
34,813
17,117
269,940
861
141,293
55,719
32,313
17,201
246,526
721
25%
(26%)
8%
(0%)
9%
19%
192,773
39,230
34,866
16,235
283,104
999
(8%)
5%
(0%)
5%
(5%)
(14%)
Our Commercial segment continues to benefit from post-COVID return-to-office policies in addition to focusing our strategy on
premium quality products for large corporations. Due to the success of our Healthcare segment in 2023 and the long sales cycle
inherent in Healthcare construction, our pipeline has contracted since the beginning of the year, but continues to grow from our
previous quarter.
Our Government and Education segments continue to provide stability and diversity to our revenues from our more volatile
segments. We are closely monitoring the U.S. Federal Government’s budgeting process and the impact it may have on our revenue
levels.
Outlook
We achieved an annual revenue of $181.9 million, a 6% increase over 2022 revenue of $172.2 million. We are pleased to report
another consecutive year of revenue growth since the COVID-19 pandemic, and despite the volatility in the tech and banking sectors
in early 2023. Our revenue for the fourth quarter of 2023 was the highest quarterly revenue since 2019.
During 2023, we built on our successes in 2022 with further balance sheet improvement ($24.7 million vs. $10.8 million cash
and cash equivalents at year end), expansion of our Gross Profit Margin (32.7% vs. 16.4%) and Adjusted Gross Profit Margins (35.8%
vs. 22.6%), reductions of our net loss after tax from $(55.0) million to $(14.6) million and expansion of our Adjusted EBITDA
Margins (4.4% vs. (15.2%)). In 2023, we saw macroeconomic factors stabilize our supply chains and input costs. Our focus on sales
and operational planning as well as process efficiencies allowed us to achieve significant improvement in our adjusted gross margins.
These actions also led to reductions in labor and inventory carrying costs during 2023. Further, we reduced expenses in our back
office and general and administrative overhead to levels commensurate with our current and expected revenue levels.
In the year ahead, we anticipate continued pipeline and revenue growth, but we also remain cautious about macroeconomic
uncertainty and remain focused on preparing the Company for a variety of economic scenarios. The unprecedented pace of the US
Federal Reserve’s interest rate hikes as well as geopolitical volatility in the Middle East and Asian Pacific have encouraged us to pay
close attention to our fixed cost footprint and supply chain resiliency. The upcoming presidential election in the United States adds to
this uncertainty and may impact the capital expenditure budgets of our clients. As noted in last quarter’s outlook, the first quarter of
the year is typically our seasonally slowest quarter.
As post-pandemic workplaces continue to evolve, the ability of DIRTT’s solutions to anticipate and respond to an uncertain
future is at the core of our value proposition. Encouraging access to our full product offering unlocks workplace transformations with
more flexible and adaptable environments. Our sustainable product offerings, featuring low carbon footprint, high recycled content,
and minimal waste, also enable our Commercial, Government, Healthcare, and Education clients to make meaningful progress toward
their environmental commitments and goals.
On January 9, 2024 we successfully closed a C$30 million Rights Offering. As previously disclosed, we expect to use the
proceeds of the Rights Offering for general corporate purposes, which may include investments in our business, funding potential
future cash needs or operating losses, funding working capital and capital expenditure needs, or reductions to our outstanding
indebtedness. We plan to use some of the funds to invest in our commercial business in all verticals, especially Healthcare, and are
looking at additional opportunities and partnerships to support our revenue growth.
In line with our objectives for the Rights Offering, on February 15, 2024, we announced a Substantial Issuer Bid for our
convertible debentures of C$15 million, intended to strengthen our balance sheet by reducing debt. For additional information, please
see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital
Resources.”
31
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, one-time non-recurring charges or gains
(such as gain on sale of software and patents), and stock-based compensation. We remove the impact of all foreign exchange from
Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S.
and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the
underlying operations of the Company. We remove the impact of under-utilized capacity from gross profit, and fixed production
overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods where production levels are
abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In addition,
management bases certain forward-looking estimates and budgets on non-GAAP financial measures, primarily Adjusted EBITDA.
Government subsidies, depreciation and amortization, stock-based compensation expense, reorganization expenses, foreign
exchange gains and losses and impairment charges are excluded from our non-GAAP financial measures because management
considers them to be outside of the Company’s core operating results, even though some of those receipts and expenses may recur,
and because management believes that each of these items can distort the trends associated with the Company’s ongoing performance.
We believe that excluding these receipts and expenses provides investors and management with greater visibility to the underlying
performance of the business operations, enhances consistency and comparativeness with results in prior periods that do not, or future
periods that may not, include such items, and facilitates comparison with the results of other companies in our industry.
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
Adjusted EBITDA
Net income before interest, taxes, depreciation and amortization
EBITDA adjusted to remove foreign exchange gains or losses; impairment charges;
reorganization expenses; stock-based compensation expense; government subsidies; one-time,
non-recurring charges and gains; and any other non-core gains or losses
Adjusted EBITDA Margin
Adjusted EBITDA divided by revenue
You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we
consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has
important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP
financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of
our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are
the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial
measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may
not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
32
Results of Operations
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
Revenue
Gross Profit(1)
Gross Profit Margin
Operating expenses
Sales and marketing
General and administrative
Operations support
Technology and development
Stock-based compensation
Reorganization
Impairment charge on Rock Hill Facility
Related party expense
Total Operating expenses
Operating loss
Operating margin
Government subsidies
Gain on sale of software and patents
Foreign exchange (loss) gain
Interest income
Interest expense
Net loss before tax
Current income tax expense
2023
For the Year Ended December 31,
2022
($ in thousands)
% Change
181,931
59,542
32.7%
25,235
21,655
7,832
5,820
2,306
3,009
8,716
1,524
76,097
(16,555)
172,161
28,160
16.4%
26,950
25,462
9,498
7,555
4,277
13,461
-
-
87,203
(59,043)
6
111
(6)
(15)
(18)
(23)
(46)
(78)
100
100
(13)
72
(9.1)%
236
7,130
(626)
490
(4,927)
2,303
(14,252)
332
332
(14,584)
(34.3)%
7,765
-
1,445
51
(5,160)
4,101
(54,942)
21
21
(54,963)
(97)
100
(143)
861
5
(44)
74
1,481
1,481
73
Net loss after tax
(1) Gross Profit for the year ended December 31, 2022, included $1.0 million primarily related to the write off of inventory of discounted product lines, and $2.1
million of accelerated depreciation and amortization on software associated with discontinued product lines and the closure of the Phoenix Facility.
Revenue
Revenue reflects sales to our Construction Partners for resale to their clients and, in limited circumstances, our direct sales to
clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add
variability to our financial results and shift revenue between quarters.
Beginning in 2020, we experienced significant increases in nearly all of our material input costs, including raw materials,
shipping materials, labor, and freight. This led to significant gross margin compression in 2021 and 2022. Effective November 16,
2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%. On February 17, 2022, we
announced a further price increase of 5% that came into effect June 1, 2022. On June 21, 2022, an additional price increase of 10%
was announced effective July 21, 2022. The increases have improved revenue and profitability through better recovery of the material
input costs previously discussed.
The following table sets forth the contribution to revenue of our DIRTT Solutions and related offerings.
Product
Transportation
License fees from Construction Partners
Total product revenue
Installation and other services
2023
For the Year Ended December 31,
2022
($ in thousands)
% Change
158,405
17,674
840
176,919
5,012
181,931
147,448
18,030
778
166,256
5,905
172,161
7
(2)
8
6
(15)
6
33
Revenue for the year ended December 31, 2023, was $181.9 million, an increase of $9.8 million or 6% from the year ended
December 31, 2022. Revenue in early 2023 was impacted by macroeconomic conditions, including layoffs in the technology sector
and rising interest rates, both of which have affected our pipeline. For example, one large project with a customer in the technology
sector that was originally scheduled for the first quarter of 2023 was deferred indefinitely. Our fourth quarter revenue was $50.9
million, an increase of $8.5 million or 20% from $42.4 million for the same period in 2022. Historically, our fourth quarter revenue is
lower than second and third quarter revenues due to seasonality. However, we benefited from two large healthcare projects that were
completed in the quarter and from a project delayed earlier in the year that pushed into the fourth quarter. Macroeconomic conditions
showed signs of improvement in late 2023, which also benefited the fourth quarter.
Installation and other services revenue was $5.0 million for the year ended December 31, 2023, compared to $5.9 million in the
year ended December 31, 2022. This revenue primarily reflects services performed by our ICE and design teams for third parties.
Except in limited circumstances, our Construction Partners, rather than the Company, perform installation services.
Our success is partly dependent on our ability to profitably develop our Construction Partner network to expand our market
penetration and ensure best practices are shared across local markets. At December 31, 2023, we had 72 (2022 - 67) Construction
Partners servicing multiple locations. During the year ended December 31, 2023, we announced the expansion of seven of our DIRTT
Construction Partners into new markets, as we expand the reach of DIRTT products, predominantly in North America.
We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government
and education. The following table presents our product and transportation revenue by vertical market.
Commercial
Healthcare
Government
Education
License fees from Construction Partners
Total product revenue
Service revenue
Commercial
Healthcare
Government
Education
Total Product Revenue(1)
(1) Excludes license fees from Construction Partners.
2023
For the Year Ended December 31,
2022
($ in thousands)
% Change
116,693
33,970
13,446
11,970
840
176,919
5,012
181,931
115,102
19,739
16,564
14,073
778
166,256
5,905
172,161
For the Year Ended December 31,
2023
2022
(in %)
66
19
8
7
100
1
72
(19)
(15)
8
6
(15)
6
70
12
10
8
100
Commercial revenues for the year ended December 31, 2023 were consistent with the prior year. Healthcare revenues increased
by 72% in the year ended December 31, 2023, from the prior year, which included $12.1 million from two large projects. Sales in the
healthcare sector tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in
variability in sales levels. Education sales in 2023 decreased by 15% from the prior year and government revenues in 2023 decreased
by 19% from 2022. Both the government and education sectors include a higher volume of smaller projects as compared to fiscal year
2022.
Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States.
The following table presents our revenue dispersion by geography:
34
Canada
U.S.
2023
For the Year Ended December 31,
2022
($ in thousands)
% Change
19,934
161,997
181,931
25,477
146,684
172,161
(22)
10
6
In 2023, 11% of revenue was from Canada, as compared to 15% in 2022. 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 $1.7 million to $25.2 million for the year ended December 31, 2023, from $27.0
million for the year ended December 31, 2022. The decrease was largely related to a realignment of back-office support, territory
coverage and cost structure with current demand levels. The decrease was largely made up of a $1.7 million decrease in salaries and
benefits, a $0.8 million decrease in travel and entertainment costs, a $0.5 million decrease in marketing and tradeshow costs and the
benefit of offsetting our lease costs by subleasing our Dallas DXC during the year. The decreases were offset by a $1.5 million
increase in commissions expenses, a $0.2 million increase in communications costs, and a $0.2 million increase in professional
services related to consulting services.
General and Administrative Expenses
General and administrative expenses decreased $3.8 million to $21.7 million for the year ended December 31, 2023, from $25.5
million for the year ended December 31, 2022. The decrease was driven by a $3.2 million decrease in professional fees made up of
legal and outside consulting costs, a $0.8 million decrease in depreciation costs, and a $0.6 million decrease in office and
communications costs. These decreases were slightly offset by a $0.4 million increase in building costs related to higher costs to
operate in our existing facilities and $0.2 million higher travel and entertainment costs.
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 $7.8 million in 2023
decreased $1.7 million from $9.5 million in 2022. The decrease was largely driven by a $1.4 million decrease in salaries and benefits
and a $0.2 million reduction in travel and entertainment costs related to planned headcount reductions and the reorganization
initiatives undertaken.
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 $1.7 million to $5.8 million for the year ended December 31, 2023,
compared to $7.6 million for the year ended December 31, 2022. The decrease was primarily related to a $1.1 million decrease in
salaries and benefits costs, a $0.2 million decrease in office and communication costs, a $0.2 million decrease in professional fees
related to outside consulting services and a $0.2 million decrease in other expenses.
Stock-Based Compensation
Stock-based compensation expense for the year ended December 31, 2023, was $2.3 million compared to $4.3 million in 2022.
The decrease in this expense was largely due to RSU grants in lieu of cash compensation to the Company’s interim Chief Executive
Officer in 2022, which were not repeated in 2023. DSUs were granted to the Board of Directors but were offset by the impact of fair
value adjustments on cash settled awards as a result of our share price decreasing during the twelve months ended December 31, 2023.
Reorganization
For the year ended December 31, 2023, we incurred $3.0 million of reorganization costs compared to $13.5 million during the
year ended December 31, 2022. Fiscal year 2023 costs related primarily to costs associated with the Rock Hill Facility suspension and
subsequent closure, and termination costs associated with actions taken to streamline our back office and operational support
functions, as discussed herein. Reorganization costs in 2022 were driven by the closure of the Phoenix Facility, the one-time costs
associated with reductions of salaried workforce throughout 2022, and changes in management.
35
Impairment charge on Rock Hill Facility
On September 27, 2023, the Company announced our intention to permanently close the Rock Hill Facility in South Carolina.
For the year ended December 31, 2023, certain assets located at the Rock Hill Facility that were classified as property, plant and
equipment, were reclassified as assets held for sale. Certain Rock Hill Facility assets had been approved by management for sale and
had committed to a formal plan to market these assets, which is expected to be completed within the next twelve months. These were
measured at the lower of the fair value less costs to sell and their net book value, which resulted in an $8.7 million impairment charge
in the year ended December 31, 2023.
Related party expense
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the “Debt Settlement Agreement”) with 22NW
Fund, LP (“22NW”) and Aron English, 22NW’s principal and a director of DIRTT, (together, the “22NW Group”) who, collectively,
beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt
Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection
with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being
$1.6 million (the “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.
Government Subsidies
The Company was not eligible and did not receive any new government subsidies in the year ended December 31, 2023. 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 the AWI Agreement and Partial Patent Assignment Agreement with AWI. The 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 Agreement, 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 Agreement provides that we
and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related
intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter.
We concurrently entered into the ARMSA with AWI, under which AWI has also prepaid for certain development services to be
provided by DIRTT. The ARMSA will automatically terminate if the 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 year ended December 31, 2023. In accordance with GAAP, the proceeds were first applied to the net book value
of the related cost 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 as a prepayment under the
ARMSA, which is recognized into revenue as the performance obligation is met. During the year ended December 31, 2023, $1.6
million of the $1.8 million payment was received into revenue, and $0.2 million remains in customer deposits to be received as
revenue in 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 (refer to Note 14 to our Consolidated Financial Statements for additional information).
36
Foreign Exchange (loss) gain
In the year ended December 31, 2023, we had a foreign exchange loss of $0.6 million compared to a gain of $1.4 million in the
year ended December 31, 2022, due to fluctuations of the Canadian dollar relative to the U.S. dollar.
Interest Income
Interest income increased to $0.5 million for the year ended December 31, 2023, compared to $0.1 million in the year ended
December 31, 2022, as we benefited from higher interest rates on higher cash balances.
Interest expense
Interest expense decreased by $0.2 million from $5.2 million for the year ended December 31, 2022, to $4.9 million for the year
ended December 31, 2023, mostly related to the weaker Canadian dollar relative to the U.S dollar on our interest expense on Canadian
convertible debentures.
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, 2023, was $0.3 million, compared to $0.02 million for the same period of 2022.
For the year ended December 31, 2023, the Company recorded valuation allowances of $4.2 million (2022 - $13.6 million) against
deferred tax assets incurred during the year as the Company has experienced cumulative losses in recent years. Due to the Company’s
three-year 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, 2023, we had C$114.1 million of loss carry-forwards in Canada and $55.5 million in the United States.
These loss carry-forwards will begin to expire in 2032.
Net Loss after tax
Net loss after tax decreased to $14.6 million or $0.13 net loss after tax per share in the year ended December 31, 2023, from a
net loss after tax of $55.0 million or $0.55 net loss after tax per share for the year ended December 31, 2022. The decreased loss is
primarily the result of a $31.4 million increase in gross profit and a $11.1 million decrease in operating expenses (which includes a
$10.5 million decrease in reorganization expenses, $8.7 million of impairment charges on the Rock Hill Facility and a $1.5 million
related party expense), a $0.4 million increase in interest income and a $0.2 million decrease in interest expense, offset by a $7.5
million decrease in government subsidies, a $2.1 million decrease in foreign exchange gain, and a $0.3 million increase in income tax
expense.
Three Months Ended December 31, 2023 Compared to the Three Months ended December 31, 2022
2023
For the Three Months Ended December 31,
2022
($ in thousands)
% Change
Revenue
Gross Profit
Gross Profit Margin
Operating expenses
Sales and marketing
General and administrative
Operations support
Technology and development
Stock-based compensation
Reorganization
Impairment charge on Rock Hill Facility
Total Operating expenses
Operating income (loss)
Operating margin
Gain on sale of software and patents
Foreign exchange (loss) gain
Interest income
Interest expense
Net income (loss) before tax
Current income tax expense
Net income (loss) after tax
42,427
11,589
27.3%
5,856
4,050
2,151
1,841
731
1,180
-
15,809
(4,220)
(9.9)%
-
(425)
1
(1,225)
(1,649)
(5,869)
37
37
(5,906)
20
66
18
40
5
(4)
(132)
(87)
100
9
146
100
(33)
21,800
(5)
60
122
797
797
116
50,933
19,238
37.8%
6,933
5,652
2,268
1,765
(237)
152
764
17,297
1,941
3.8%
985
(567)
219
(1,291)
(654)
1,287
332
332
955
37
Annual 2023 Non-GAAP Measures
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the years ended December 31, 2023, 2022, and 2021 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:
Gross profit
Gross profit margin
Add: Depreciation and amortization expense
Add: Costs of under-utilized capacity
Adjusted Gross Profit
Adjusted Gross Profit Margin
2023
For the Year Ended December 31,
2022
($ in thousands)
2021
59,542
32.7%
5,525
-
65,067
35.8%
28,160
16.4%
10,789
-
38,949
22.6%
23,460
15.9%
8,808
1,756
34,024
23.1%
For the year ended December 31, 2023, gross profit and gross profit margin increased to $59.5 million or 32.7% from $28.2
million or 16.4% for the prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin increased 67% to $65.1 million or
35.8% for the year ended December 31, 2023, from $38.9 million or 22.6% for the year ended December 31, 2022. Gross profit for the
year ended December 31, 2022, included $2.1 million of accelerated depreciation and amortization arising from the change in useful
lives of the Phoenix Facility’s equipment. The improvement in Adjusted Gross Profit was due to having better leverage over fixed
costs through price increases and reduced fixed costs. Labor costs decreased $3.4 million and fixed costs decreased $2.7 million in
2023 compared to 2022 as a result of initiatives to align our fixed costs with anticipated demand. Actions taken that impacted our
overheads included the closure of our Phoenix Facility during the second quarter of 2022 and the temporary suspension of operations
at our Rock Hill Facility in the third quarter of 2022. Idle facility costs incurred since the suspension of operations at the Rock Hill
Facility were $2.0 million for the year ended December 31, 2023, compared to $0.5 million for the previous year, and are included in
cost of sales. We are pursuing options to sublease the Rock Hill Facility to offset idle facility costs in 2024 and beyond.
EBITDA and Adjusted EBITDA for the Years Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the results of 2023, 2022 and 2021 of EBITDA and Adjusted EBITDA to our
net loss, which is the most directly comparable GAAP measure for the years presented, and of Adjusted EBITDA Margin to net loss
margin:
Net loss after tax for the year
Add back (deduct):
Interest expense
Interest income
Income tax expense (recovery)
Depreciation and amortization
EBITDA
Foreign exchange (gain) loss
Stock-based compensation
Government subsidies
Related party expense
Reorganization expense
Gain on sale of software and patents
Impairment charge on Rock Hill Facility
Goodwill impairment
Adjusted EBITDA
Net Loss Margin(1)
Adjusted EBITDA Margin
(1)
Net loss divided by revenue.
For the Year Ended December 31,
2023
2022
2021
($ in thousands)
(14,584)
4,927
(490)
332
8,934
(881)
626
2,306
(236)
1,524
3,009
(7,130)
8,716
-
7,934
(54,963)
5,160
(51)
21
15,119
(34,714)
(1,445)
4,277
(7,765)
-
13,461
-
-
-
(26,186)
(53,668)
3,131
(77)
(204)
14,513
(36,305)
335
4,713
(11,455)
-
-
-
-
1,443
(41,269)
(8.0)%
4.4%
(31.9)%
(15.2)%
(36.4)%
(28.0)%
38
For the year ended December 31, 2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by $34.1 million to $7.9
million or 4.4% from a $26.2 million loss or (15.2)% in the same period of 2022. This reflects a $26.1 million increase in Adjusted
Gross Profit, discussed above, a $4.2 million decrease in salary and wage expenses, reflecting the impact of headcount reductions
resulting from reorganization initiatives, $3.2 million of decreased professional fees, and $0.9 million decrease in other operating
expenses as a result of continued evaluation of our fixed cost structure and overhead costs.
Reconciliation of Q4 2023 Non-GAAP Measures
Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the three months ended December 31, 2023, 2022, and 2021 of Adjusted Gross
Profit to our gross profit, and Adjusted Gross Profit Margin to gross profit margin, which is the most directly comparable GAAP
measure for the periods presented:
Gross profit
Gross profit margin
Add: Depreciation and amortization expense
Adjusted Gross Profit
Adjusted Gross Profit Margin
For the Three Months Ended December 31,
2023
2022
($ in thousands)
2021
19,238
37.8%
869
20,107
39.5%
11,589
27.3%
1,997
13,586
32.0%
8,416
19.6%
2,425
10,841
25.3%
EBITDA and Adjusted EBITDA for the Three Months Ended December 31, 2023, 2022 and 2021
The following table presents a reconciliation for the three months ended results of 2023, 2022 and 2021 of EBITDA and
Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented, and of
Adjusted EBITDA Margin to net income (loss) margin:
Net income (loss) after tax for the period
Add back (deduct):
Interest expense
Interest income
Income tax expense (recovery)
Depreciation and amortization
EBITDA
Foreign exchange (gain) loss
Stock-based compensation
Government subsidies
Reorganization expense
Gain on sale of software and patents
Impairment charge on Rock Hill Facility
Goodwill impairment
Adjusted EBITDA
Net Income (Loss) Margin(1)
Adjusted EBITDA Margin
(1)
Net loss divided by revenue.
Three months ended December 31,
2023
2022
($ in thousands)
2021
955
1,291
(219)
332
1,718
4,077
567
(237)
-
152
(985)
764
-
4,338
1.9%
8.5%
(5,906)
1,225
(1)
37
2,917
(1,728)
425
731
-
1,180
-
-
-
608
(13.9)%
1.4%
(16,012)
1,014
(15)
(551)
3,875
(11,689)
621
921
(1,021)
-
-
-
1,443
(9,725)
(37.3)%
(22.7)%
39
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2022,
compared to the fiscal year ended December 31, 2021, 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, 2022,
as filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on February 22, 2023.
Liquidity and Capital Resources
As at December 31, 2023, the Company had $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available
borrowings, compared to $10.8 million of cash on hand and C$7.2 million ($5.3 million) of available borrowings as at December 31,
2022. Through the year ended December 31, 2023, the Company generated $14.8 million in cash flow from operations, compared to a
cash usage of $44.3 million over fiscal year 2022. The Company benefited from the receipt of $7.3 million of government subsidies
during 2023.
We have implemented multiple price increases during the past two years to mitigate the impact of inflation on raw materials,
costs and improve liquidity. These actions have resulted in a meaningful improvement in our gross profit margins and have served to
reduce our cash usage to operate the business. Gross profit for the year ended December 31, 2023, was $59.5 million, or 32.7% of
revenue, compared to the same period in 2022, which generated gross profit of $28.2 million, or 16.4% of revenue.
Over the same period, we have executed upon several initiatives to improve liquidity. First, in May 2023, we entered into an
agreement with AWI resulting in the receipt of $12.8 million of cash throughout 2023. Second, in March 2023, we entered into an
agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the
subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through
December 31, 2024, providing us annualized savings of approximately $1 million. We are continuing to evaluate other properties for
sale and leaseback or sublease opportunities, including our Rock Hill Facility, and expect these initiatives to result in positive cash
inflows in 2024. Third, we completed a private placement of 8,667,449 common shares in November 2022 for aggregate gross
proceeds of $2.8 million (the “Private Placement”), with certain significant shareholders and directors and officers of the Company to
bridge cash requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable
subscription agreements with its two largest shareholders, 22NW and 726 BC LLC and 726 BF (together “726” (which subsequently
transferred its holdings to WWT)) and all the directors and officers of the Company on November 14, 2022, to issue 8.7 million shares
for gross consideration of $2.8 million. The Private Placement closed on November 30, 2022.
On November 21, 2023, the Company announced a rights offering to common shareholders for aggregate gross proceeds of
C$30.0 million (the “Rights Offering”). The Rights Offering closed on January 9, 2024, for aggregate gross proceeds of C$30.0
million.
On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the
Company will offer to repurchase for cancellation: (i) up to C$6,000,000 principal amount of its issued and outstanding January
Debentures") (or such larger principal amount as the Company, in its sole discretion, may determine it is willing to take-up and pay
for, subject to applicable law) 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 its issued and outstanding 6.25% convertible unsecured subordinated debentures due December 31,
2026 (the "December Debentures", and, together with the January Debentures, the “Debentures” or the “convertible debentures”) (or
such larger principal amount as the Company, in its sole discretion, may determine it is willing to take-up and pay for, subject to
applicable law) at a purchase price of C$600 per C$1,000 principal amount of December Debentures. Holders of Debentures who
validly tender and do not withdraw their Debentures will receive the applicable purchase price, plus a cash payment for all accrued
and unpaid interest up to, but excluding, the date on which such Debentures are taken up by the Company. The applicable purchase
price will be denominated in Canadian dollars and payments of amounts owed to holders of deposited Debentures, including for
interest, will be made in Canadian dollars. The Issuer Bid will remain open for acceptance until 5:00 p.m. (Eastern Standard Time) on
March 22, 2024, unless withdrawn or extended by the Company. If the aggregate principal amount of the Debentures properly
tendered and not withdrawn under the Issuer Bid exceeds C$6,000,000 for the January Debentures or C$9,000,000 for the December
Debentures, the Company will purchase a pro-rated portion of the January Debentures or the December Debentures so tendered, as
applicable (with adjustments to maintain C$1,000 minimum denominations of Debentures). DIRTT will return all Debentures not
purchased under the Issuer Bid, including Debentures not purchased because of pro-ration. Debentures taken up and paid for by the
Company will be immediately cancelled.
The Company intends to fund the Issuer Bid with a portion of the proceeds from the Company’s previously completed rights
offering to its common shareholders, which closed in January 2024 for aggregate gross proceeds of C$30.0 million.
40
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.
While we are encouraged by the improved profitability and cash flow, we have continued to evaluate our fixed cost structure
and overhead in light of recent macroeconomic uncertainty. We have implemented multiple reorganization initiatives designed to
align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by approximately
10%, from January 2022 through December 2023.
We have assessed the Company’s liquidity as at December 31, 2023, 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 January 2021, we issued C$40.3 million of 6.00% convertible unsecured subordinated debentures due January 31, 2026 (the
“January Debentures”) for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate
of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not
converted will mature and be repayable on January 31, 2026. 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. As at December 31,
2023, C$18.9 million of the January Debentures are held by a related party, 22NW. 22NW holds approximately 30.1% of our issued
and outstanding common shares as of February 16, 2024. Aron English, manager of 22NW Fund GP, LLC, the general partner of
22NW, is a director of the Company.
In February 2021, we entered into 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 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, 2023, were C$13.6 million ($10.3 million).
On December 1, 2021, we issued C$35.0 million of 6.25% convertible unsecured subordinated debentures due December 31,
2026 (the “December Debentures” and together with the January Debentures, the “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. As at December 31, 2023, C$13.6 million of the December Debentures are
held by a related party, 22NW.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million
($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the
United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing
Facility, the “Leasing Facilities”) with RBC, 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 $2.6 million of restricted cash.
41
The following table summarizes our consolidated cash flows for the years indicated:
Net cash flows provided by (used in) operating activities
Net cash flows provided by (used in) investing activities
Net cash flows (used in) provided by financing activities
Effect of foreign exchange on cash, cash equivalents and
restricted cash
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash, beginning of
year
Cash, cash equivalents and restricted cash, end of year
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
Operating Activities
2023
For The Year Ended December 31,
2022
($ in thousands)
2021
14,821
7,657
(11,605)
(13)
10,860
14,239
25,099
(44,260)
(4,024)
(874)
(11)
(49,169)
63,408
14,239
For the Year Ended December 31,
2023
2022
2021
24,744
355
25,099
10,821
3,418
14,239
(31,210)
(14,138)
62,452
458
17,562
45,846
63,408
60,313
3,095
63,408
Net cash flows provided by operating activities were $14.8 million for the year ended December 31, 2023, compared to $44.3
million used by operating activities for the year ended December 31, 2022. The improvement in cash flows used in operations is
largely due to the $34.1 million increase in Adjusted EBITDA and a $10.5 million decrease in reorganization costs. We achieved
positive operating cash flows through the realization of price increases and reorganization initiatives which have been designed to
align our cost structure with current expected levels of demand.
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.
We invested $1.2 million in property, plant and equipment during the year ended December 31, 2023, compared to $2.4 million
during the year ended December 31, 2022. Expenditures consisted of $0.3 million of information technology investments, $0.4 million
of DXC refreshes and $0.5 million of manufacturing upgrades for the year ended December 31, 2023. We invested $1.8 million on
capitalized software during the year ended December 31, 2023, compared to $1.7 million for the year ended December 31, 2022.
Financing Activities
For the year ended December 31, 2023, $11.6 million of cash was used in financing activities, comprising $2.2 million of
scheduled repayments and $9.4 million of early repayments under the U.S. Leasing Facility and the Canada Leasing Facility. For the
year ended December 31, 2022, $0.9 million of cash was used in financing activities mainly driven by the scheduled repayments under
the Leasing Facilities, offset by the receipt of $2.0 million net proceeds from the Private Placement and a draw of C$0.9 million ($0.7
million) under the Canada Leasing Facility.
We currently expect to fund anticipated future investments with available cash, proceeds from the Rights Offering and drawings
on the Second Extended RBC Facility. As of December 31, 2023, our strategic initiatives have generated cash through proceeds from
the Private Placement in November 2022, the receipt of $7.3 million of government subsidy through the ERC application during the
year ended December 31, 2023, and proceeds of $12.8 million received in 2023 through the AWI transaction. We continue to evaluate
properties we own for sale and lease back and opportunities to sub-lease available spaces. Apart from cash flow from operations,
issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the
future as we deem appropriate. We may also use debt or pursue equity financing depending on the price of our common shares at the
time, interest rates, and nature of the investment opportunity and economic climate. No assurance can be given that any of these
actions will be successful or will be sufficient for our needs.
42
Consolidated cash flows for the quarter as indicated:
Net cash flows provided by (used in) operating activities
Net cash flows provided by (used in) investing activities
Net cash flows (used in) provided by financing activities
Effect of foreign exchange on cash, cash equivalents and
restricted cash
Net increase in cash, cash equivalents and restricted
cash
Cash, cash equivalents and restricted cash, beginning of
period
Cash, cash equivalents and restricted cash, end of
period
Credit Facility
2023
For the three months ended December 31,
2022
($ in thousands)
2021
10,134
568
(8,193)
153
2,662
22,437
25,099
3,249
(429)
928
62
3,810
10,429
14,239
(7,338)
(1,582)
26,369
(123)
17,326
46,082
63,408
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. At December 31, 2023, available borrowings are C$13.6 million ($10.3 million)
(2022 – C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner as the RBC Facility described above, of
which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the year end 2023, which
resulted in the restriction of $0.4 million of cash (2022 - $3.4 million).
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.
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million
($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the
United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing
Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.
The Company did not make any draws on the Leasing Facilities during 2023. During the year ended December 31, 2022, the
Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.
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.
As part of RBC’s consent to the AWI transaction, one of the Canadian lease agreements of $1.6 million was fully settled using
proceeds from the AWI transaction. This resulted in the release of $0.4 million of restricted cash associated with the one year of
payments on this lease.
43
We are restricted from paying dividends unless Payment Conditions (as defined in the Second Extended RBC Facility) are met,
including having a net borrowing availability of at least C$10 million over the proceeding 30-day period, and having a trailing twelve-
month fixed charge coverage ratio above 1.10:1 and certain other conditions. The Second Extended RBC Facility is currently secured
by substantially all of our real property located in Canada and the United States.
Contractual Obligations
The following table summarizes DIRTT’s contractual obligations at December 31, 2023:
Accounts payable and accrued
liabilities
Other liabilities
Customer deposits and deferred
revenue
Current and long-term portion of long-
term debt and accrued interest1
Lease liabilities (undiscounted)
Purchase obligations
Total
Less than
1 year
Payments due by period
1 to 3 years
3 to 5 years
($ in thousands)
Greater than
5 years
Total
19,880
2,482
5,290
7,190
5,424
2,797
43,063
-
-
-
59,692
11,542
-
71,234
-
-
-
134
8,209
-
8,343
-
-
-
-
19,929
-
19,929
19,880
2,482
5,290
67,016
45,104
2,797
142,569
(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, 2023 and 2022, we had $0.9 million and
$1.3 million, respectively, accrued for warranty and other provisions, and third-party costs associated with remedying deficiencies
were $1.2 million during the fiscal year ended December 31, 2023, as compared to $1.1 million during the fiscal year ended December
31, 2022.
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, 2023 and 2022, we had $0.05 million provided for legal provisions.
44
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.
As at December 31, 2021, the fair value of goodwill did not exceed the carrying value of its net assets and, accordingly, the
entire $1.4 million balance of goodwill was impaired as at December 31, 2021. There was no impairment charge for the year ended
December 31, 2023, or December 31, 2022.
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 the
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 the 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, 2023 of $34.5 million (2022 - $29.8 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.
45
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, 2023 and 2022, approximately
93% and 77%, respectively, of that balance was covered by the trade credit insurance provider.
At December 31, 2023, we had an allowance for expected credit loss of $0.1 million (2022 - $0.1 million).
Recent Accounting Pronouncements
Please refer to Note 3 to our Consolidated Financial Statements presented elsewhere in this Annual Report.
46
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, long-term deposits and long-term receivables, accounts payable and accrued liabilities, other liabilities, lease
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, restricted cash, trade and accrued receivables and other receivables.
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, other receivables and restricted cash balances. 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, 2023 and 2022, 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 wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020.
At December 31, 2023, approximately 93% 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. One Construction Partner accounted for greater than 10% of revenue in 2023 (2022- none). 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 2023 has had a marginally positive impact on results because
reported costs are lower than reported revenue.
47
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 loss and comprehensive loss.
Cash and cash equivalents
Restricted cash
Trade and accrued receivables
Other receivables
Other assets
Accounts payable and accrued liabilities
Other liabilities
Current portion of long-term debt and accrued
interest
Long-term debt
Total
Commodity price risk
Amount
(C$ in thousands)
Change in
Currency (%)
1,623
153
2,538
575
158
16,348
2,048
105
72,560
96,108
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
Effect of net
loss and
comprehensive
loss for the
year ended
December 31, 2023
162
15
254
58
16
1,635
205
11
7,256
9,612
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 9% 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. On February 9, 2023, the Company entered into 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. We did
not draw on the facilities during 2021, 2022 or 2023 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.
48
Item 8. Financial Statements and Supplementary Data.
INDEX
Report of Independent Registered Public Accounting Firm (PCAOB ID 271) ...................................
Page No.
Consolidated Balance Sheets, as at December 31, 2023 and 2022.......................................................
Consolidated Statements of Operations and Comprehensive Loss for the years ended December
31, 2023, 2022 and 2021..................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,
2023, 2022 and 2021........................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021.....
Notes to the Consolidated Financial Statements ..................................................................................
50
51
52
54
55
56
49
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of DIRTT Environmental Solutions Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DIRTT Environmental Solutions Ltd. and its
subsidiaries (together, the Company) as of December 31, 2023 and 2022, and the related consolidated statements of
operations and comprehensive loss, changes in shareholders’ equity and cash flows for each of the three years in the
period ended December 31, 2023, including the related notes (collectively referred to as the consolidated financial
statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Alberta, Canada
February 21, 2024
We have served as the Company’s auditor since 2017.
50
DIRTT Environmental Solutions Ltd.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
ASSETS
Current Assets
Cash and cash equivalents
Restricted cash
Trade and accrued receivables, net of expected credit losses of
$0.1 million at December 31, 2023 and at December 31, 2022
Other receivables
Inventory
Prepaids and other current assets
Assets held for sale
Total Current Assets
Property, plant and equipment, net
Capitalized software, net
Operating lease right-of-use assets, net
Other assets
Total Assets
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities
Other liabilities
Customer deposits and deferred revenue
Current portion of long-term debt and accrued interest
Current portion of lease liabilities
Total Current Liabilities
Long-term debt
Long-term lease liabilities
Total Liabilities
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 105,377,667 issued
and outstanding at December 31, 2023 and 97,882,844 at December 31, 2022
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
Refer to Note 20 for Commitments.
Refer to Note 14 and Note 23 for Subsequent Events.
The accompanying notes are an integral part of these consolidated financial statements.
As at December 31,
2023
As at December 31,
2022
24,744
355
15,787
484
16,577
4,023
1,555
63,525
25,077
2,450
29,813
3,452
124,317
19,880
2,482
5,290
841
5,255
33,748
55,267
28,201
117,216
196,128
7,954
(16,125)
(180,856)
7,101
124,317
10,821
3,418
13,930
7,880
22,251
3,825
-
62,125
41,522
4,406
30,490
5,110
143,653
19,881
2,056
4,866
3,306
5,889
35,998
62,129
27,534
125,661
191,347
9,023
(16,106)
(166,272)
17,992
143,653
51
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Operations and Comprehensive Loss
(Stated in thousands of U.S. dollars, except per share data)
Product revenue
Service revenue
Total revenue
Product cost of sales
Service cost of sales
Total cost of sales
Gross profit
Expenses
Sales and marketing
General and administrative
Operations support
Technology and development
Stock-based compensation
Reorganization
Impairment charge on Rock Hill Facility
Goodwill impairment
Related party expense
Total operating expenses
Operating loss
Government subsidies
Gain on sale of software and patents
Foreign exchange (loss) gain
Interest income
Interest expense
Net loss before tax
Income taxes
Current income tax expense
Deferred income tax recovery
Net loss after tax
Net loss per share
Net loss per share - basic and diluted
For the Year Ended December 31,
2022
2023
2021
176,919
5,012
181,931
119,728
2,661
122,389
59,542
25,235
21,655
7,832
5,820
2,306
3,009
8,716
-
1,524
76,097
(16,555)
236
7,130
(626)
490
(4,927)
2,303
(14,252)
332
-
332
(14,584)
166,256
5,905
172,161
140,058
3,943
144,001
28,160
26,950
25,462
9,498
7,555
4,277
13,461
-
-
-
87,203
(59,043)
7,765
-
1,445
51
(5,160)
4,101
(54,942)
21
-
21
(54,963)
143,000
4,593
147,593
120,281
3,852
124,133
23,460
31,041
30,595
9,372
8,234
4,713
-
-
1,443
-
85,398
(61,938)
11,455
-
(335)
77
(3,131)
8,066
(53,872)
210
(414)
(204)
(53,668)
(0.13)
(0.55)
(0.55)
Weighted average number of shares outstanding (in thousands)
Basic and diluted
116,135
99,826
96,826
Refer to Note 22 for Related Party Transactions included in this statement.
The prior year comparatives have been revised in line with current year presentation - refer to Inventory in Note 10 and Net Loss per
share in Note 17.
The accompanying notes are an integral part of these consolidated financial statements.
52
DIRTT Environmental Solutions Ltd.
Consolidated Statement of Comprehensive Loss
(Stated in thousands of U.S. dollars)
Net loss for the year
Exchange differences on translation of foreign operations
Comprehensive loss for the year
For the Year Ended December 31,
2022
2023
2021
(14,584)
(19)
(14,603)
(54,963)
(190)
(55,153)
(53,668)
1,102
(52,566)
The accompanying notes are an integral part of these consolidated financial statements.
53
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
(Stated in thousands of U.S. dollars, except for share data)
Number of
Common
shares
Common
shares
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Accumulated
deficit
Total
shareholders’
equity
As at December 31, 2020
Stock-based compensation
Issued on vesting of RSUs and Share Awards
RSUs and Share Awards withheld to settle employee tax
obligations
Foreign currency translation adjustment
Net loss for the year
As at December 31, 2021
Stock-based compensation
Issued on vesting of RSUs and Share Awards
RSUs and Share Awards withheld to settle employee tax
obligations
Issued for employee share purchase plan
Issued on private placement
Foreign currency translation adjustment
Net loss for the year
As at December 31, 2022
Stock-based compensation
Issued on vesting of RSUs and Share Awards
Issued for employee share purchase plan
RSUs and Share Awards withheld to settle employee tax
obligations
Issued to settle related party debt
Foreign currency translation adjustment
Net loss for the year
As at December 31, 2023
84,681,364
-
664,069
-
-
-
85,345,433
-
3,149,061
-
720,901
8,667,449
-
-
97,882,844
-
1,886,868
1,708,210
-
3,899,745
-
-
105,377,667
180,639
-
1,143
-
-
-
181,782
-
7,088
-
296
2,181
-
-
191,347
-
2,756
502
-
1,523
-
-
196,128
10,175
4,453
(1,143)
(285)
-
-
13,200
3,943
(7,088)
(1,032)
-
-
-
-
9,023
1,713
(2,756)
-
(26)
-
-
-
7,954
(17,018)
-
-
-
1,102
-
(15,916)
-
-
-
-
-
(190)
-
(16,106)
-
-
-
-
-
(19)
-
(16,125)
(57,265)
-
-
(367)
-
(53,668)
(111,300)
-
-
(9)
-
-
-
(54,963)
(166,272)
-
-
-
-
-
-
(14,584)
(180,856)
116,531
4,453
-
(652)
1,102
(53,668)
67,766
3,943
-
(1,041)
296
2,181
(190)
(54,963)
17,992
1,713
-
502
(26)
1,523
(19)
(14,584)
7,101
The accompanying notes are an integral part of these consolidated financial statements.
54
DIRTT Environmental Solutions Ltd.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
Cash flows from operating activities:
Net loss for the period
Adjustments:
Depreciation and amortization
Impairment charge on Rock Hill Facility
Stock-based compensation, net of settlements
Foreign exchange loss (gain)
Gain on sale of software and patents
Loss (gain) on disposal of equipment
Accretion of convertible debentures
Deferred income tax (recovery)
Goodwill impairment
Changes in operating assets and liabilities:
Trade and accrued receivables
Other receivables
Inventory
Prepaid and other assets, current and long term
Accounts payable and accrued liabilities
Other liabilities
Customer deposits and deferred revenue
Current portion of long-term debt and accrued interest
Lease liabilities
Net cash flows provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts
payable changes
Capitalized software development expenditures
Other asset expenditures
Recovery of software development expenditures
Proceeds on sale of software and patents
Proceeds on sale of equipment
Net cash flows provided by (used in) investing activities
Cash flows from financing activities:
Proceeds received on long-term debt
Repayment of long-term debt
Proceeds issued on private placement
Employee tax payments on vesting of RSUs
Net cash flows (used in) provided by financing activities
Effect of foreign exchange on cash, cash equivalents and
restricted cash
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
Supplemental disclosure of cash flow information:
Interest paid
Income taxes received
For the Year Ended December 31,
2023
2022
2021
(14,584)
(54,963)
(53,668)
8,934
8,716
2,306
1,099
(7,130)
153
698
-
-
(1,833)
7,406
5,961
474
2,137
(421)
243
(40)
702
14,821
(1,242)
(1,794)
(398)
127
10,950
14
7,657
-
(11,579)
-
(26)
(11,605)
(13)
10,860
14,239
25,099
(3,977)
4
15,119
-
3,342
(1,813)
-
(133)
676
-
-
(179)
(4,432)
(4,716)
129
260
(109)
2,477
(149)
231
(44,260)
(2,394)
(1,677)
(443)
263
-
227
(4,024)
647
(2,470)
1,990
(1,041)
(874)
(11)
(49,169)
63,408
14,239
(4,423)
3,212
14,513
-
4,248
112
-
12
352
(414)
1,443
(2,118)
3,570
(2,449)
(1,132)
2,702
(213)
601
948
283
(31,210)
(11,781)
(2,340)
(496)
461
-
18
(14,138)
64,912
(1,808)
-
(652)
62,452
458
17,562
45,846
63,408
(1,543)
433
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated
balance sheets.
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
For the Year Ended December 31,
2023
2022
2021
24,744
355
25,099
10,821
3,418
14,239
60,313
3,095
63,408
The accompanying notes are an integral part of these consolidated financial statements.
55
DIRTT Environmental Solutions Ltd.
Notes to the Consolidated Financial Statements
(Amounts stated in thousands of U.S. dollars unless otherwise stated)
1. GENERAL INFORMATION
DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized
construction. DIRTT’s system of physical products and digital tools empowers organizations, together with construction and design
leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public
sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.
DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and
designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction
Partners of the Company. As of May 9, 2023, Armstrong World Industries, Inc. (“AWI”) owns a 50% interest in the rights, titles and
interest in certain intellectual property rights in a portion of the ICE Software that is used by AWI.
DIRTT is incorporated under the laws of the province of Alberta, Canada, its headquarters is located at 7303 – 30th Street S.E.,
Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7.
DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT”. Effective October 12, 2023, DIRTT’s
common shares ceased to trade on The Nasdaq Capital Markets. DIRTT’s common shares are quoted on the OTC Markets on the
“OTC Pink Tier” under the symbol “DRTTF”.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements (“Financial Statements”), including comparative figures, have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”).
In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars.
DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the
U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.
Principles of consolidation
The Financial Statements include the accounts of DIRTT and its subsidiary. All intercompany balances, income and expenses,
unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated upon consolidation.
Basis of measurement
These Financial Statements have been prepared on the historical cost convention except for certain financial instruments, assets
held for sale and stock-based compensation that are measured at fair value, as explained in the accounting policies below. Historical
cost is generally based on the fair value of the consideration given in exchange for assets.
Use of estimates
The preparation of the Financial Statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosure of contingent liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions
and events as of the date of the Financial Statements. Estimates are based on historical data and experience, as well as various other
factors that management considers reasonable under the circumstances. Actual outcomes can differ from these estimates.
Significant estimates and assumptions made by management include:
•
•
•
Estimates of ability and timeliness of customer payments of trade receivables;
Estimates of useful lives of depreciable assets as well as the fair value of long-term assets and future cash flows used for
impairment calculations;
Determining the fair value less costs to sell of the assets held for sale;
56
Estimates of future taxable earnings used to assess the realizable value of deferred tax assets and the ability to recognize a
deferred tax asset;
Tax interpretations, regulations and legislation in the various jurisdictions in which the Company and its subsidiary
operate;
Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of
the ultimate payout amount; and
Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies.
•
•
•
•
Segments
Management has determined that DIRTT has one operating segment. The Company’s chief executive officer, who is DIRTT’s
chief operating decision maker, reviews financial information on a consolidated and aggregate basis, together with certain operating
metrics principally, to make decisions about how to allocate resources and to measure the Company’s performance.
Foreign currency translation
DIRTT Environmental Solutions Ltd. is a Canadian company and its functional currency is the Canadian dollar. DIRTT’s
wholly owned subsidiary is domiciled in the United States and its functional currency is the U.S. dollar.
Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into
the transacting company’s functional currency at the year-end exchange rate for monetary items, and at the historical exchange rates
for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the
related transactions. Foreign exchange gains and losses, other than those arising from the translation of the Company’s net investments
in its foreign subsidiary, are included in income.
The accounts of the Company’s U.S. dollar subsidiary is translated into Canadian dollars, and the Financial Statements are
translated into U.S. dollars for financial statement presentation. Assets and liabilities are translated using year-end exchange rates, and
revenues, expenses, gains and losses are translated using average monthly exchange rates. Foreign exchange gains and losses arising
from the translation of the Company’s assets and liabilities are included in “comprehensive loss for the year”.
Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash on hand held at banks and cash equivalents, which are defined as highly liquid
investments with original maturities of three months or less. Restricted cash is a reserve account not available for immediate or
general business use and is required when certain requirements are not met under the terms of the Company’s senior secured credit
facility (as defined in Note 14).
Trade and other receivables, net of expected credit losses
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company
estimates its allowance for doubtful accounts using the current expected credit loss (“CECL”) methodology, which is designed to
capture the Company’s current estimate of all expected credit losses.
Inventory
Inventory is comprised of raw materials and work in progress. The Company does not typically carry a significant amount of
finished goods inventory. Inventory is valued at the lower of weighted average cost and net realizable value. Net realizable value is
based on an item’s usability in the manufacturing of the Company’s products. The Company records an allowance for obsolescence
when the net realizable value of inventory items declines below weighted average cost. Net realizable value is determined based on
current market prices for inventory less the estimated cost to sell. Work in progress is valued at an estimate of cost, including
attributable overheads, based on stage of completion.
Fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods
where production levels are abnormally low, unallocated overheads are separately recognized as an expense in the period in which
they are incurred.
57
Assets held for sale
The Company classifies an asset group (“asset”) as held for sale in the period that (i) it has approved and committed to a plan
to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other
actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify
for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively
marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the
plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is
classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this
measurement is recognized in the consolidated statement of operations and comprehensive loss in the period in which the held for sale
criteria are met. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset.
The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no
longer classified as held for sale.
Leases
The Company categorizes leases at their inception as either operating or finance leases. Leases where the Company assumes
substantially all of the rewards or ownership and leases where ownership is transferred at the end of the lease term, or by way of a
bargain purchase option, are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to
the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance
charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges
are recognized in the statement of operations.
The Company’s Leasing Facilities (as defined in Note 8) are accounted for as finance leases as ownership of the equipment is
expected to return to the Company at the end of the lease term. These transactions are not accounted for as a sale of the underlying
equipment as the Company continues to control the equipment.
For leases categorized as operating, the Company determines if an arrangement is a lease or contains a lease element at
inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or
equipment for a period of time in exchange for consideration. Operating leases are separately disclosed as operating lease right-of-use
(“ROU”) assets, with a corresponding lease liability split between current and long-term components on the balance sheet. Operating
leases with an initial term of 12 months or less are not included on the balance sheet.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent the
right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments
arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of
lease payments over the lease term.
Property, plant and equipment
Property, plant and equipment are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less
accumulated depreciation and any accumulated impairment losses. Expenditures for repairs and maintenance are expensed as incurred,
while renewals and betterments are capitalized.
Depreciation is charged to the consolidated statement of operations on a straight-line basis over the estimated useful lives of the
assets. The estimated useful lives of the Company’s property, plant and equipment are as follows:
Building ..................................................25 years
Manufacturing equipment ......................10 years
Leasehold improvements........................Over term of lease (1 to 14 years)
Office equipment ....................................5 years
Tooling and prototypes...........................4 years
Computer equipment ..............................3 years
Vehicles ..................................................3 years
When assets are disposed of or retired, the cost and accumulated depreciation and impairment losses are removed from the
respective accounts and any resulting gain or loss is reflected in operating expenses.
58
Capitalized software costs
The Company capitalizes costs related to internally developed software during the application development stage when (i) the
preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project, and (iii) it is
probable that the project will be completed and performed as intended. Capitalized costs include costs of personnel and related
expenses for employees and third parties directly attributable to the projects. Capitalization of these costs ceases once the project is
substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements
are also capitalized. Costs related to preliminary project activities and post implementation activities, including training, maintenance
and minor modifications or enhancements are expensed as incurred. Capitalized software costs are amortized on a straight-line basis
over the estimated useful life of the developed asset, which is generally three to five years. Management evaluates the useful lives of
these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the
recoverability of the assets.
Software development is considered internal-use as it is used to design and sell the DIRTT products and is not included in the
end client’s product. Revenues received from Construction Partners for ICE Software are recognized as revenues as they are
considered an element of the product sale. Any incidental third-party revenues received for the ICE Software are credited against
capitalized software costs. The Company follows this accounting policy for cloud computing arrangements that are considered a
service contract, however, these projects are capitalized to prepaids and other assets on the balance sheet and are expensed as an
operating cost, as opposed to amortization, over the expected term of the software service contract.
Impairment of long-lived assets
Management evaluates the recoverability of the Company’s property, plant and equipment, capitalized software costs and ROU
assets when events or changes in circumstances indicate a potential impairment exists. Events and changes in circumstances
considered by the Company in determining whether the carrying value of long-lived assets may not be recoverable include, but are not
limited to, significant changes in performance relative to expected operating results, significant changes in the use of the assets,
significant negative industry or economic trends, and changes in the Company’s business strategy. Impairment testing is performed at
an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets
and liabilities (an “asset group”). In determining if impairment exists, the Company estimates the undiscounted cash flows to be
generated from the use and ultimate disposition of the asset group. If impairment is indicated based on a comparison of the assets’
carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Convertible Debentures
The Company accounts for convertible debentures as liabilities. Embedded features included in the convertible debentures that
require bifurcation are accounted for separately. Costs incurred directly related to the issuance of convertible debentures are presented
as a direct deduction against the carrying amount of the convertible debentures and are amortized to interest expense using the
effective interest method.
Income taxes
Income tax expense is comprised of current and deferred tax. Income tax is recognized in the consolidated statement of
operations and comprehensive loss except to the extent it relates to items recognized directly in equity.
Current tax
Current tax expense is based on the results for the year, adjusted for items that are not taxable or not deductible. Current tax is
calculated using tax rates and laws that were enacted at the end of the reporting period. Management periodically evaluates positions
taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established
where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated balance sheet. Deferred income tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
59
The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period
during which the change occurs.
When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not
be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not
that all or some portion of the Company’s deferred tax assets will not be realized, based on management’s judgment using available
evidence about future events.
At times, tax benefits claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are
more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50% likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax
benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
Revenue recognition
The Company accounts for revenue in accordance with topic 606, Revenue from Contracts with Customers, (“ASC 606”) and
Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. Under ASC 606, an entity recognizes revenue in a
manner that reflects the transfer of promised goods or services to customers in an amount which the entity expects to be entitled in
exchange for those goods or services.
The Company recognizes revenue upon transfer of control of promised goods or services to customers at the transaction price,
an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is
calculated as selling price net of variable consideration which may include estimates for sales incentives related to current period
product revenue. Revenue is measured at the fair value of the consideration received or receivable, after discounts, rebates and sales
taxes or income taxes and duties.
Product sales
The Company recognizes revenue upon transfer of control of products to the customer, which typically occurs upon shipment.
The Company’s main performance obligation to customers is the delivery of products in accordance with purchase orders. Each
purchase order defines the transaction price for the products purchased under the arrangement. Construction Partners typically sell
DIRTT product to end clients and issue purchase orders to the Company to manufacture the product. Construction Partners utilize ICE
licenses to sell DIRTT products. The ICE licenses sold to Construction Partners are not considered a separate performance obligation
as they are not distinct, and ICE license revenue is recognized in conjunction with product sales. The Construction Partner ICE
Software revenue is recognized over the license period.
The Company’s standard sales terms are Free On Board (“FOB”) shipping point, which comprise the majority of sales. The
Company usually requires a 50% progress payment on receipt of certain orders, excluding certain government orders or in some
special contractual situations. Customer deposits received are recognized as a liability on the balance sheet until revenue recognition
criteria is met. At the point of shipment, the customer is generally required to pay the balance of the sales price within 30 days. The
Company’s sales arrangements do not have any material financing components. In addition, the Company’s customer arrangements do
not produce contract assets that are material to its consolidated financial statements.
The Company provides sales commissions to internal and external sales representatives which are earned in the period in which
revenue is recognized.
The Company accounts for product transportation revenue and costs as fulfillment activities and presents the associated costs in
costs of goods sold in the period in which the Company sells its product.
Contracts containing multiple performance obligations
The Company offers certain arrangements whereby a customer can purchase products and installation together, which are
generally capable of being distinct and accounted for as separate performance obligations. Where multiple performance obligations
exist, the Company determines revenue recognition by (1) identifying the contract with the customer, (2) identifying the performance
obligation in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations
based on the relative standalone selling prices, typically based on cost plus a reasonable margin, and (5) recognizing revenue as the
performance obligations are satisfied.
60
Installation and other services
The Company provides installation and other services for certain customers as a distinct performance obligation. Revenue from
installation services is recognized over time as the service is performed.
Principal vs Agent Considerations
The Company evaluates the presentation of revenue on a gross vs. net basis based on whether it acts as a principal by controlling
the product or service sales to customers. In certain instances, the Company facilitates contracting of certain sales on behalf of
Construction Partners. The Company records these revenues on a gross basis when the Company is obligated to fulfill the service and
has the risk associated with service delivery. The Company records these revenues on a net basis when the Construction Partner has
the obligation to fulfill the services and has the risk associated with service delivery.
Construction Partner rebates
Rebates to Construction Partners (“Partner Rebates”) are accrued for and recognized as a reduction of revenue at the date of the
sale to the customer. Partner Rebates include amounts collected directly by the Company owed to Construction Partners in accordance
with their Construction Partner agreements, being the difference between the price to the end customer and the Construction Partners’
price. Other sales discounts are deducted immediately from sales invoices.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an unbilled
receivable when revenue is recognized prior to invoicing. As the Company’s contracts are less than one year in duration, the Company
has elected to apply the practical expedients to expense costs related to costs to obtain contracts and not disclose unfulfilled
performance obligations. As deferred revenue and customer deposits are typically recognized during the year, the Company does not
account for financing elements.
Warranties
The Company provides a warranty on all products sold to its clients and Construction Partner’s clients. Warranties are not sold
separately to customers. Provisions for the expected cost of warranty obligations are recognized based on an analysis of historical
costs for warranty claims relative to current activity levels and adjusted for factors based on management’s assessment that increase or
decrease the provision. Warranty provision is recognized in cost of goods sold. Warranty claims have historically not been material
and do not constitute a separate performance obligation.
Stock-based compensation
The Company follows the fair value-based approach to account for options, share awards and restricted share units (“RSUs”).
Compensation expense and an increase in “Additional paid-in capital” are recognized for options and RSUs over their vesting period
based on their estimated fair values on the grant date, as determined using the Black-Scholes option pricing model for the majority of
options and the market value of the Company’s common shares on the grant date for share awards and RSUs. Certain executive stock
options and RSUs have performance conditions and are valued using a Monte Carlo model.
On exercise of stock options and RSUs, the recorded fair value of the option or RSU is removed from “Additional paid-in
capital” and credited to “Share capital”. For options, any consideration paid by employees is credited to “Share capital” when the
option is exercised. The Company’s stock options and RSUs are not shares of the Company and have no rights to vote, receive
dividends, or any other rights as a shareholder of the Company.
Stock-based compensation expense is also recognized for performance share units (“PSUs”) and deferred share units (“DSUs”)
using the fair value method. Compensation expense is recognized over the vesting period and the corresponding amount is recorded as
a liability on the balance sheet.
The Company measures the DSUs granted under the 2023 LTIP (the “New DSUs”) using the closing price of the Company’s
common shares on the grant date as the present intention is to settle the New DSUs in equity. This is recognized as an increase to
stock-based compensation and the corresponding liability on the balance sheet.
61
Technology and development expenditures
Technology and development expenses are comprised primarily of salaries and benefits associated with the Company’s product
and software development personnel which do not qualify for capitalization. These costs are expensed as incurred and exclude certain
information and technology costs used in operations which are classified as general and administrative costs.
Government subsidies
The Company accounts for government subsidies on an accrual basis when the conditions for eligibility are met. The Company
has adopted an accounting policy to present government subsidies as other income. The nature, significant terms and conditions of
government subsidies are disclosed in the Financial Statements.
Earnings per share (“EPS”)
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year and
adjusted for any change in capital structure events triggering retroactive changes to weighted average number of common shares
outstanding. Diluted earnings per share is calculated using the treasury stock method for determining the dilutive impact of stock
options, RSUs, and New DSUs. The Company follows the “if converted” method for accounting for the impact of convertible
debentures on net (loss) per share, whereby interest charges applicable to the convertible debentures are added to the numerator and
the convertible debentures are assumed to have been converted at the beginning of the period (or time of issuance, if later), and the
resulting common shares are added to the denominator.
Fair value of financial instruments
ASC 820, “Fair Value Measurements,” requires entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the consolidated balance sheet, for which it is practicable to estimate fair value. Fair value
is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company’s fair value analysis is based on the degree to which the fair value is observable and grouped into categories
accordingly:
•
•
•
Level 1 financial instruments are those which can be derived from quoted market prices (unadjusted) in active markets for
similar financial assets or liabilities.
Level 2 financial instruments are those which can be derived from inputs that are observable for the asset or liability,
either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 2 financial instruments include current and
long-term debt. The carrying amounts of these instruments approximates fair value due to limited changes to interest rates
and the Company’s credit rating since issuance.
Level 3 financial instruments are those derived from valuation techniques that include inputs for the financial asset or
liability which are not based on observable market data (unobservable inputs). The Company does not have any Level 3
financial instruments.
The carrying amounts of cash and cash equivalents and restricted cash; trade and accrued receivables, other receivables;
accounts payable and accrued liabilities; other liabilities; and customer deposits approximate fair value due to their short-term nature.
62
3. ADOPTION OF NEW ACCOUNTING STANDARDS AND RECENT PRONOUNCEMENTS ISSUED
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-07 "Segment Reporting (Topic
280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant
segment expenses on an annual and interim basis. This guidance will be effective for the annual periods beginning the year ended
December 31, 2024, and for interim periods beginning January 1, 2025. Early adoption is permitted. The Company has chosen to early
adopt. Upon adoption, the guidance is applied retrospectively to all prior periods presented in the financial statements.
On December 14, 2023, the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-09,
“Improvements to Income Tax Disclosures” (the “ASU”) further disaggregated information on an entity’s tax rate reconciliation and
income taxes paid. The amendments in this ASU are effective for fiscal years beginning after December 15, 2024, on a prospective
basis with an option of retrospective application. The Company will continue to evaluate the impact of the adoption of this standard.
Although there are several other new accounting standards issued or proposed by the Financial Accounting Standards Board,
which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements
has had or will have a material impact on its Financial Statements.
4. LIQUIDITY
As at December 31, 2023, the Company had $24.7 million of cash on hand and C$13.6 million ($10.3 million) of available
borrowings (2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the year ended December 31,
2023, the Company generated $14.8 million in cash flows from operations, compared to a cash usage of $44.3 million over fiscal year
2022. The Company benefited from the receipt of $7.3 million of government subsidies during 2023, compared to $nil for the year
ended December 31, 2022 (refer to Note 5).
We have implemented multiple price increases during the past two years to mitigate the impact of inflation on raw materials
and improve liquidity. These actions have resulted in a meaningful improvement in our gross profit margins and have served to reduce
our cash usage to operate the business. Gross profit for the year ended December 31, 2023, was $59.5 million or 32.7% of revenue,
compared to the same period in 2022, which generated gross profit of $28.2 million or 16.4% of revenue.
Over the same period, we have also executed upon several initiatives. First, in May 2023, we entered into an agreement with
AWI (refer to Note 7) resulting in the receipt of $12.8 million of cash during 2023. Second, in March 2023, we entered into an
agreement to sublease our Dallas DIRTT Experience Center (“DXC”) to one of our Construction Partners in that region. Under the
sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of
April 1, 2023, through December 31, 2024, which will provide us annualized savings of approximately $1 million. We are continuing
to evaluate other properties for sale and leaseback or sublease opportunities and expect these strategic initiatives to result in positive
cash inflows in 2024. Third, we completed a private placement of common shares in November 2022 for aggregate proceeds of
$2.8 million (the "Private Placement"), with certain significant shareholders and directors and officers of the Company, to bridge cash
requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable subscription
agreements with its two largest shareholders, 22NW and 726 BC LLC and 726 BF (together “726” (which subsequently transferred its
holdings to WWT)) and all the directors and officers of the Company on November 14, 2022, to issue 8.7 million shares for gross
consideration of $2.8 million. The Private Placement closed on November 30, 2022 (refer to Note 22).
On November 21, 2023, we announced the Rights Offering to common shareholders for aggregate gross proceeds of C$30.0
million (the “Rights Offering”). The Rights Offering closed on January 9, 2024 (refer to Note 23).
While we are encouraged by our improved profitability and cash flow, we have continued to evaluate our fixed cost structure
and overhead in light of macroeconomic uncertainty. We have implemented multiple reorganization initiatives (refer to Note 6)
designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by
approximately 10% from January 2022 through December 2023.
We have assessed the Company’s liquidity position as at December 31, 2023, taking into account our sales outlook for the next
twelve-months, our existing cash balances and available credit facilities. Based on this analysis, we believe the Company has
sufficient liquidity to support ongoing operations for at least the next twelve months.
63
5. GOVERNMENT SUBSIDIES
In the United States, the Employee Retention Credit (“ERC”) was established by Section 2301 of the Coronavirus Aid, Relief,
and Economic Security Act to provide an incentive for employers to keep their employees on their payroll during COVID-19 closures.
The ERC is a refundable payroll tax credit based on qualified wages paid by an eligible employer between March 12, 2020, and
October 1, 2021, for companies experiencing a significant decline in gross receipts during a calendar quarter or having operations
fully or partially suspended during the quarter due to COVID-19. During the third quarter of 2022, the Company determined it was
eligible for the ERC for the first three quarters of 2021 and filed a claim for $7.3 million in payroll tax credits ($7.1 million net of
expenses). As at December 31, 2023, the $7.3 million of these claimed credits (plus an additional $0.2 million of interest) have been
received.
6. REORGANIZATION AND ASSETS HELD FOR SALE
Over the past two years, the Company has undertaken a number of reorganization initiatives:
Closure of Phoenix Aluminum Manufacturing Facility (the “Phoenix Facility”)
On February 22, 2022, we commenced the process of closing our Phoenix Facility, shifting related manufacturing to both our
Savannah and Calgary aluminum manufacturing facilities. The closure of the Phoenix Facility was substantially completed in the
second quarter of 2022. The Company entered into a sublease arrangement during the second quarter of 2022, commencing July 1,
2022, which exceeds the contractual lease commitments under the Right of Use assets.
Workforce Reductions, Board and Management Changes
In February and July of 2022, we announced our intention to eliminate a portion of our salaried workforce, including
manufacturing and office positions, along with other cost reduction initiatives. The Company’s Board of Directors was reconstituted
following a proxy contest in April 2022, which was deemed a change of control under the Company’s insurance policy resulting in
additional insurance expenditures. Further, the Company made changes to several executive officer roles during the year ended
December 31, 2022. During the year ended December 31, 2023, we continued to review costs, resulting in the elimination of
additional salaried positions in the second and third quarters of 2023. These actions resulted in the Company incurring certain one-
time termination costs.
Temporary Suspension of Operations and Subsequent Closure at the Rock Hill Facility
On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related
manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in costs of sales, were $2.0
million (2022 - $0.5 million).
On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility. We plan to move certain assets
to our other facilities and dispose of remaining assets. The assets to be disposed of have been reclassified and measured as assets held
for sale (see table below). As a result of this decision, we incurred $8.7 million of impairment charges associated with the transfer of
assets from held for use to held for sale. We also expect to incur $0.2 million of costs in dismantling and decommissioning the Rock
Hill Facility assets. The Company will continue to maintain the Rock Hill Facility building lease and is pursuing a sublease
arrangement. Based on prevailing market prices in the area, no impairment indicators exist for the Right of Use asset of $6.7 million
and the related leasehold improvements of $2.7 million.
Reorganization costs incurred related to the above-mentioned initiatives:
Termination benefits
Insurance costs on change of control
Phoenix Facility closure
Professional Services
Rock Hill Facility temporary suspension and closure of operations
Other costs
Total reorganization costs
For the Year Ended December 31,
2022
2023
2,162
-
99
-
295
453
3,009
7,042
3,691
756
1,021
129
822
13,461
64
Reorganization costs in accounts payable and accrued liabilities at January 1, 2023
Reorganization expense
Reorganization costs paid
Reorganization costs in accounts payable and accrued liabilities at December 31, 2023
2,277
3,009
(4,690)
596
Of the $0.6 million payable, $0.5 million relates to termination benefits and $0.1 million relates to other reorganization costs
(2022 - of the $2.3 million payable, $2.1 million relates to termination benefits and $0.2 million relates to other reorganization costs).
Assets held for sale
Assets classified as held for sale as at December 31, 2023, of $1.6 million consist of manufacturing equipment previously used in
the Rock Hill Facility (refer to Note 11). As part of the decision to permanently close the Rock Hill Facility, $10.3 million of assets
were assessed against the assets held for sale criteria and reclassified from property, plant and equipment to assets held for sale in the
third quarter of 2023. The assets are measured at the lower of the net book value versus the fair value less cost to sell resulting in an
impairment charge of $8.7 million. In the fourth quarter, the fair value was remeasured and an adjustment of $(0.8) million was recorded.
It is expected that these assets will be sold within the next twelve months.
Assets held for sale, opening
Net book value transferred from property, plant and equipment
Impairment charge on reassessment
Assets held for sale, ending
As at December 31,
2023
2022
-
10,271
(8,716)
1,555
-
-
-
-
To move the assets or dispose of the assets at the Rock Hill Facility, the Company fully settled the principal balance of the U.S.
leasing facility in the fourth quarter of 2023. Principal payments of $7.8 million and interest penalties of $0.4 million were incurred
(refer to Note 14). As a result of this settlement, $2.6 million of restricted cash was released to the Company in the fourth quarter of
2023.
Discontinuation of Reflect Product Line and Other Charges Incurred
In August 2022, the Company discontinued the Reflect and other product lines, resulting in a one-time inventory write-down of
$1.0 million, and an acceleration of amortization expense associated with ICE development for Reflect.
Additionally, the Company accelerated the depreciation of certain items of property, plant and equipment associated with the
closure of the Phoenix Facility resulting in additional depreciation incurred in the first quarter of 2022.
These costs were included in cost of sales:
Provision for inventory of discontinued product lines
Accelerated amortization associated with product line discontinuation
Accelerated depreciation and amortization associated with closure of the Phoenix
Facility
Incremental cost of sales
For the Year Ended December 31,
2022
2023
-
-
-
-
1,035
1,019
1,054
3,108
65
7. GAIN ON SALE OF SOFTWARE
On May 9, 2023, we entered into the AWI Agreement and Partial Patent Assignment Agreement with AWI. The agreements
provided for a cash payment from AWI to the Company of $10.0 million, subject to certain routine closing conditions, in exchange for
the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual
property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the
patent rights that relate to the Applicable ICE Code. Pursuant to the AWI Agreement, 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 additional
cash payment of $1.0 million in the fourth quarter of 2023. The AWI Agreement provides that we and AWI have separate exclusive
fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until
either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into an
Amended and Restated Master Services Agreement (the “ARMSA”) with AWI, under which AWI has also prepaid certain
development services to be provided by DIRTT. The ARMSA will automatically terminate if the 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 year ended December 31, 2023. In accordance with GAAP, the proceeds were first applied to the net book value
of the related cost 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 as a prepayment under the
ARMSA, which is recognized into revenue as the performance obligation is met. During the year ended December 31, 2023, $1.6
million of the $1.8 million payment was recognized into revenue and $0.2 million remains a customer deposit to be recognized as
revenue in the first quarter of 2024. Part of the proceeds of this transaction was used to settle one of our equipment leases of $1.6
million and resulted in the release of $0.4 million of restricted cash (refer to Note 14).
8. LEASES
The Company leases office and factory space under various operating leases. As the Company’s leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in
determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when
calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 14 years. Lease
terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
The weighted average remaining lease term and weighted average discount rate at December 31, 2023, was nine years (2022 -
thirteen years) and 6.3% (2022 – 4.9%), respectively.
The Company entered into a sublease arrangement for part of the Phoenix Facility during the second quarter of 2022, commencing
July 1, 2022. Additionally, the Company entered into a sublease agreement for the Dallas DXC to one of our Construction Partners in
that region, in which the subtenant has assumed responsibility for all monthly rent, utilities, maintenance, taxes and other costs as of
April 1, 2023, through December 31, 2024.
The following table includes ROU assets included on the balance sheet at December 31, 2023 and 2022:
At January 1, 2022
Additions
Modifications
Depreciation expense
Exchange differences
At December 31, 2022
Disposals
Modifications
Depreciation expense
Exchange differences
At December 31, 2023
Cost
ROU Assets
Accumulated
depreciation
Net book value
44,055
139
4,809
-
(943)
48,061
(2,667)
3,866
-
596
49,856
(13,175)
-
50
(5,057)
611
(17,571)
2,308
(196)
(4,312)
(272)
(20,043)
30,880
139
4,859
(5,057)
(332)
30,490
(359)
3,670
(4,312)
324
29,813
66
The components of the lease cost for the years ended December 31, 2023 and 2022 were as follows:
Operating lease cost (1)
Fixed lease cost
Sublease income
Total operating lease cost
For the year ended December 31,
2023
2022
6,688
(1,393)
5,295
6,719
(344)
6,375
(1) The lease costs, net of sublease income, are reflected in the Consolidated Statements of Operations and Comprehensive Loss as
follows:
For the year ended December 31,
2023
2022
Cost of goods sold
Selling and marketing
General and administrative
Technology and development
Total operating lease cost
4,427
793
(113)
188
5,295
The following table includes lease liabilities included on the balance sheet at December 31, 2023 and 2022:
At January 1,
Additions
Disposals
Modifications
Accretion
Repayment of lease liabilities
Lease inducements
Exchange differences
At December 31,
Current lease liabilities
Long-term lease liabilities
Lease Liability
2023
2022
33,423
-
(406)
3,866
2,272
(5,942)
-
243
33,456
5,255
28,201
4,647
1,356
107
265
6,375
33,481
139
-
4,809
1,722
(6,558)
124
(294)
33,423
5,889
27,534
In February 2023, the Company modified an existing agreement for a Calgary manufacturing facility to extend the leasing term
for an additional five years. An extension option period of five years was also determined to be more likely than not to occur.
Undiscounted cash flows associated with this modification are $16.3 million. The rent obligations have been discounted at a rate of
8.58% to determine the lease liability.
In May 2023, the Company modified an existing agreement through early termination for the Seattle DXC. This amendment
caused the derecognition of the lease, albeit DIRTT maintaining guarantor status for the remainder of the original lease term which
terminates in August 2027. Undiscounted cash flows associated with this modification were $0.5 million.
On September 27, 2023, we announced our intention to permanently close the Rock Hill Facility (refer to Note 6). As a result of
this decision, DIRTT no longer assumes the two five-year extension options under the related property lease will be exercised.
67
Undiscounted cash flows associated with this modification were $13.7 million. The rent obligations have been discounted at a rate of
6.77% to determine the lease liability.
The following table includes maturities of operating lease liabilities at December 31, 2023:
2024
2025
2026
2027
2028
Thereafter
Total
Total lease liability
Difference between undiscounted cash flows and lease
liability
5,424
6,051
5,491
4,375
3,834
19,929
45,104
33,456
11,648
9. TRADE AND ACCRUED RECEIVABLES AND OTHER RECEIVABLES
Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company
estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date, taking into account historical
credit loss experience as well as forward-looking information in order to establish rates for each class of financial receivable with
similar risk characteristics. Adjustments to this estimate are recognized in the statement of operations.
In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of
individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In
addition, we acquired trade credit insurance effective April 1, 2020. At December 31, 2023, approximately 93% 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. In addition, and where possible, we collect a 50% deposit on sales, excluding
government and certain other clients.
Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the year ended
December 31, 2023, one Construction Partner accounted for greater than 10% of revenue, compared to 2022 in which no Construction
Partner accounted for greater than 10% of revenue.
Current
Overdue
Less: expected credit losses
As at December 31,
2023
2022
12,070
3,818
15,888
(101)
15,787
12,381
1,675
14,056
(126)
13,930
No change to our expected credit loss was required during the year ended December 31, 2023, or December 31, 2022.
Receivables are generally considered to be past due when over 60 days old, unless there is a separate payment arrangement in place
for the collection of the receivable.
10. INVENTORY
Raw material
Allowance for obsolescence
Work in progress
As at December 31,
2023
2022
16,787
(1,666)
1,456
16,577
22,218
(1,242)
1,275
22,251
68
As of December 31, 2023, the Company had $1.7 million (2022 - $1.2 million) provided for inventory that is not expected to be
used in future production and the associated expense was recorded to cost of goods sold. During 2023, the Company wrote off $1.0
million of inventory against the provision (2022 - $0.5 million) and increased the allowance for obsolescence by $0.4 million (2022 -
$0.9 million). In addition, the Company recorded direct write offs against inventory of $0.5 million (2022 - $0.3 million). Production
overheads capitalized in work in progress were $0.2 million at December 31, 2023 (2022 - $0.2 million).
Additional costs included in cost of goods sold
During 2021, the Company experienced periods where it was operating below normal capacity levels. During that period,
overheads included in inventory were not increased and $1.8 million was included in cost of sales. In 2022, we temporarily suspended
operations at the Rock Hill Facility. On September 27, 2023, we announced our intention to permanently close the Rock Hill
Facility. As of December 31, 2023, the Company leases the Rock Hill Facility and is actively pursuing sublease arrangements. Idle
facility costs being incurred at the Rock Hill Facility are included in cost of sales.
For the Year Ended December 31,
2022
2023
2021
Under-utilized capacity
Idle facility costs
-
1,977
1,977
-
506
506
1,756
-
1,756
Change in presentation in Consolidated Statement of Operations
For the Year Ended December 31,
2022
2023
2021
Product cost of sales, as previously presented
Cost of under-utilized capacity, as previously presented
Product cost of sales, per Statement of Operations
119,728
-
119,728
140,058
-
140,058
118,525
1,756
120,281
69
11. PROPERTY, PLANT AND EQUIPMENT, NET
Office and
computer
equipment
Factory equipment
Leasehold
improvements
Total
Cost
At December 31, 2021
Additions
Disposals
Exchange differences
At December 31, 2022
Additions
Disposals
Transferred to assets held for sale
Exchange differences
At December 31, 2023
Accumulated depreciation and
impairment
At December 31, 2021
Depreciation expense
Disposals
Exchange differences
At December 31, 2022
Depreciation expense
Disposals
Transferred to assets held for sale
Exchange differences
At December 31, 2023
Net book value
At December 31, 2022
At December 31, 2023
28,646
738
(1,347)
(581)
27,456
790
(127)
-
6
28,125
19,981
2,355
(1,272)
(540)
20,524
2,041
(127)
-
124
22,562
6,932
5,563
71,484
775
(2,983)
(3,167)
66,109
320
(375)
(13,260)
870
53,664
39,271
4,425
(2,831)
(2,044)
38,821
3,661
(272)
(2,989)
687
39,908
27,288
13,756
47,567
341
(6,688)
(1,457)
39,763
132
(2,186)
-
619
38,328
36,748
3,680
(6,688)
(1,279)
32,461
1,824
(2,098)
-
383
32,570
7,302
5,758
147,697
1,854
(11,018)
(5,205)
133,328
1,242
(2,688)
(13,260)
1,495
120,117
96,000
10,460
(10,791)
(3,863)
91,806
7,526
(2,497)
(2,989)
1,194
95,040
41,522
25,077
As at December 31, 2023, the Company had $0.2 million of assets in progress of completion which were excluded from assets
subject to depreciation (2022 – $0.1 million).
During the year ended December 31, 2022, depreciation expense included $1.1 million of incremental depreciation on the
acceleration of useful lives associated with the closing of the Phoenix Facility. The year ended December 31, 2023, did not include
any significant amounts related to accelerated depreciation (refer to Note 6).
On September 27, 2023, the Company announced its intention to permanently close the Rock Hill Facility in South Carolina.
$10.3 million of manufacturing equipment at Rock Hill was transferred to assets held for sale (refer to Note 6).
As at December 31, 2023, the Company determined that there were no impairment indicators warranting an impairment test.
During the year ended December 31, 2022, the Company has incurred negative cash flows from operations and accordingly
management determined that this was an indicator of impairment for property, plant and equipment assets. The Company estimated
the undiscounted cash flows to be generated from the use and ultimate disposition of the property, plant and equipment assets. To
estimate the undiscounted cash flows of the reporting unit, the Company applied the income approach. Sales and cost projections were
based on assumptions driven by current economic conditions. The Company considered various scenarios and probability-weighted
the likelihood of each scenario in determining the reporting unit’s fair value. The average compounded annual growth rate of revenues
was 5%-10%. Other key assumptions used in the quantitative assessment of the reporting unit’s undiscounted cashflows was terminal
growth rate of 2%. The Company estimated the undiscounted cash flows to be generated from the use and ultimate disposition of the
property, plant and equipment assets. The results of the test indicated that the undiscounted cash flows exceeded the carrying values of
property, plant and equipment, therefore, no impairment charge was required at December 31, 2022.
70
12. CAPITALIZED SOFTWARE, NET
Cost
As at January 1
Additions
Recovery of software development expenditures
Disposals
Exchange differences
As at December 31
Accumulated amortization
As at January 1
Amortization expense
Disposals
Exchange differences
As at December 31
Net book value
For the Year Ended December 31,
2022
2023
34,546
1,794
(127)
(6,641)
680
30,252
30,140
840
(3,766)
588
27,802
2,450
37,492
1,677
(263)
(1,990)
(2,370)
34,546
30,097
3,887
(1,916)
(1,928)
30,140
4,406
The disposal of capitalized software in 2023 with a net book value of $2.9 million, relates to the AWI transaction (refer to Note
7).
Estimated amortization expense on capitalized software is $0.8 million in 2024, $0.8 million in 2025, $0.5 million in 2026, $0.3
million in 2027, and $0.1 million in 2028.
During the year ended December 31, 2022, amortization expense was impacted by $1.0 million of incremental amortization on
the acceleration of useful lives associated with discontinued product lines (refer to Note 6). Amortization expense for the year ended
December 31, 2023, was not impacted by any incremental amortization of this kind.
13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER LIABILITIES
Trade accounts payable(2)
Accrued liabilities(2)
Wages and commissions payable
Rebates accrued(1)
As at December 31
2023
2022
12,378
5,500
1,688
314
19,880
8,944
5,394
3,410
2,133
19,881
(1)
(2)
In 2023, $2.6 million of rebates were earned (2022 - $4.8 million) and $4.4 million were paid (2022 - $3.7 million).
In 2022, $3.4 million of trade accruals were previously included in the Accrued liabilities balance.
71
Other liabilities
Warranty provisions (1)
DSU liability
Income taxes payable
Sublease deposits
Other provisions
Other liabilities
(1)
The following table presents a reconciliation of the warranty provisions balance:
As at January 1
Additions to warranty provision
Payments related to warranties
14. LONG-TERM DEBT
Balance at December 31, 2021
Issuances
Accretion of issue costs
Accrued interest
Interest payments
Principal repayments
Exchange differences
Balance at December 31, 2022
Current portion of long-term debt and accrued interest
Long-term debt
Balance at December 31, 2022
Accretion of issue costs
Accrued interest
Interest payments
Principal repayments
Exchange differences
Balance at December 31, 2023
Current portion of long-term debt and accrued interest
Long-term debt
Revolving Credit Facility
As at December 31,
2023
2022
873
1,086
289
184
50
2,482
As at December 31,
2023
2022
1,278
1,208
(1,613)
873
1,278
594
-
139
45
2,056
1,451
1,134
(1,307)
1,278
Revolving
Credit Facility
Leasing
Facilities
Convertible
Debentures
Total Debt
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
13,909
647
-
735
(735)
(2,470)
(274)
11,812
2,561
9,251
11,812
-
526
(526)
(11,579)
251
484
79
405
56,733
-
676
3,539
(3,688)
-
(3,637)
53,623
745
52,878
53,623
698
3,411
(3,451)
-
1,343
55,624
762
54,862
70,642
647
676
4,274
(4,423)
(2,470)
(3,911)
65,435
3,306
62,129
65,435
698
3,937
(3,977)
(11,579)
1,594
56,108
841
55,267
On February 12, 2021, the Company entered into a loan agreement governing a C$25.0 million senior secured revolving credit
facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). Under the RBC Facility, the Company is able to
borrow up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the
lesser of (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any
reserves for potential prior ranking claims (the “Borrowing Base”). Interest was 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 was 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 (defined below). 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 offset any borrowings and any remaining amounts made available to the Company.
72
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 the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate (“SOFR”) plus 200 basis points plus the
Term SOFR Adjustment (as defined in the amended loan agreement governing the Extended RBC Facility). Under the Extended RBC
Facility, if the trailing twelve-month FCCR is not above 1.25 for three consecutive months, a cash balance equivalent to one year’s
worth of Leasing Facilities payments must be maintained. Effective October 2023, inventory was scoped out of the Borrowing Base.
At December 31, 2023, available borrowings are C$13.6 million ($10.3 million) (2022 – C$7.2 million ($5.3 million) of available
borrowings), calculated in the same manner as the RBC Facility described above, of which no amounts have been drawn. The
Company did not meet the three-month FCCR requirement during the year end 2023, which resulted in the restriction of $0.4 million
of cash (2022 - $3.4 million).
On February 9, 2024, the Company extended the Extended RBC Facility (the “Second Extended RBC Facility”). The Second
Extended RBC Facility is subject to the borrowing base calculation to a maximum of C$15 million and a one-year term. Interest is
calculated 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.
Leasing Facilities
The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million
($3.4 million) has been drawn and C$3.8 million ($2.9 million) has been repaid, and a $14.0 million equipment leasing facility in the
United States of which $13.3 million has been drawn and repaid (the “U.S. Leasing Facility” and, together with the Canada Leasing
Facility, the “Leasing Facilities”) with RBC. The Canada Leasing Facility has a seven-year term and bears interest at 4.25%.
The Company did not make any draws on the Leasing Facilities during 2023. During the year ended December 31, 2022, the
Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility. The associated financial liabilities are shown on
the consolidated balance sheet in the current portion of long-term debt and accrued interest and long-term debt.
As part of RBC’s consent to the AWI transaction (refer to Note 7), one of the Canadian lease agreements of $1.6 million was
fully settled using AWI proceeds. This resulted in the release of $0.4 million of restricted cash associated with the one year of
payments on this lease, as described above.
Refer to Note 6 on the decision to permanently close the Rock Hill Facility. As part of this decision, the Company fully settled
the $7.8 million principal balance of the U.S. Leasing Facility 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.
Convertible Debentures
On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured
subordinated debentures with a syndicate of underwriters (the “January Debentures”). On January 29, 2021, the Company issued a
further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to the
underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the “January Debentures Maturity Date”)
and will accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each
year commencing on July 31, 2021, until the January Debentures Maturity Date. Interest and principal are payable in cash or shares at
the option of the Company. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission. The
January Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of
business on the business day prior to the earlier of the January Debentures Maturity Date and the date specified by the Company for
redemption of the January Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately
215.0538 common shares per C$1,000 principal amount of the January Debentures. Subsequent to the Rights Offering (refer to Note
23), the conversion price is now C$4.03 per common share representing a conversion rate of approximately 248.1390 common shares
per C$1,000 principal amount of the January Debentures. As at December 31, 2023, C$18.9 million of the January Debentures are
held by a related party (refer to Note 22).
73
On December 1, 2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible
unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January
Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December
Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in arrears on the last day of
June and December of each year commencing on June 30, 2022, until the December Debentures Maturity Date. Interest and principal
are payable in cash or shares at the option of the Company. Costs of the transaction were approximately C$2.3 million, including the
underwriters’ commission. The December Debentures will be convertible into common shares of DIRTT, at the option of the holder,
at any time prior to the close of business on the business day prior to the earlier of the December Debentures Maturity Date and the
date specified by the Company for redemption of the December Debentures at a conversion price of C$4.20 per common share, being
a ratio of approximately 238.0952 common shares per C$1,000 principal amount of the December Debentures. Subsequent to the
Rights Offering (refer to Note 23), the conversion price is now C$3.64 per common share representing a conversion rate of
approximately 274.7253 common shares per C$1,000 principal amount of the December Debentures. As at December 31, 2023,
C$13.6 million of the December Debentures are held by a related party (refer to Note 22).
15. INCOME TAXES
Reconciliation of income taxes
The following reconciles income taxes calculated at the Canadian statutory rate with the actual income tax expense. The
Canadian statutory rate includes federal and provincial income taxes. This rate was used because Canada is the domicile of the parent
entity of the Company.
Net loss before tax
Canadian statutory rate
Expected income tax
Effect on taxes resulting from:
Valuation allowance
Non-deductible expenses
Non-deductible stock-based compensation
Tax rate impacts
Adjustments related to prior year tax filings
Income tax expense
Current tax expense
Deferred tax recovery
Income tax expense
2023
For the Year Ended December 31,
2022
2021
(14,252)
24.6%
(3,506)
4,224
189
-
(243)
(332)
332
332
-
332
(54,942)
24.4%
(13,406)
13,590
422
23
(665)
57
21
21
-
21
(53,872)
23.3%
(12,552)
12,046
542
189
(488)
59
(204)
210
(414)
(204)
The provision for income taxes is comprised of federal, state, provincial and foreign taxes based on pre-tax income. In the
United States, the CARES Act of 2020 allows, among other provisions, for the recovery of taxes paid over the preceding five years
from current year losses.
The Company’s U.S. subsidiary’s result was taxable income for the year ended December 31, 2023. The Company utilized
prior year operating losses against this income; however, U.S. tax law does not allow for the full offset of losses against current year
taxable income to reduce tax payable to zero. This resulted in current tax payable of $0.3 million in 2023.
74
Deferred tax assets and liabilities
Significant components of the Company’s deferred tax assets and liabilities as at December 31, 2023 and 2022 were as follows:
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Assets
As at December 31, 2023
Liabilities
Net
35,690
367
-
-
-
3,388
39,445
-
-
(3,883)
(1,033)
(34,529)
-
(39,445)
Assets
As at December 31, 2022
Liabilities
Net
33,740
336
-
-
-
3,352
37,428
-
-
(6,017)
(1,599)
(29,812)
-
(37,428)
35,690
367
(3,883)
(1,033)
(34,529)
3,388
-
33,740
336
(6,017)
(1,599)
(29,812)
3,352
-
Summary of temporary difference movements during the year:
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Operating losses
Research and development expenditures
Property and equipment
Capitalized software and other assets
Valuation allowance
Other
Net deferred taxes
Balance
January 1,
2023
33,740
336
(6,017)
(1,599)
(29,812)
3,352
-
Recognized
Foreign
Balance
in Income
Exchange
December 31, 2023
1,431
22
2,182
583
(4,224)
6
-
519
9
(48)
(17)
(493)
30
-
35,690
367
(3,883)
(1,033)
(34,529)
3,388
-
Balance
January 1,
2022
Recognized
in Income
Foreign
Exchange
Balance
December 31,
2022
24,032
362
(7,572)
(2,023)
(17,291)
2,492
-
10,924
(3)
1,410
311
(13,590)
948
-
(1,216)
(23)
145
113
1,069
(88)
-
33,740
336
(6,017)
(1,599)
(29,812)
3,352
-
For the year ended December 31, 2023, the Company recorded valuation allowances of $4.2 million against deferred tax assets
(“DTAs”) incurred during the year. A valuation allowance is recognized to the extent that it is more likely than not that the deferred
tax assets will not be realized (2022 – $13.6 million).
On an annual basis, the Company and its subsidiary file tax returns in Canada and various foreign jurisdictions. In Canada, the
Company’s federal and provincial tax returns for the years 2019 to 2022 remain subject to examination by taxation authorities. In the
United States, both the federal and state tax returns filed for the years 2018 to 2022 remain subject to examination by the taxation
authorities.
75
Tax loss carryforwards and other tax pools
The significant components of the Company’s net future income tax deductions in these consolidated financial statements are
summarized as follows:
2023
C$
2022
C$
2023
$
2022
$
Non-capital loss carry-forwards
Undepreciated capital costs
Share issuance costs
Scientific research and experimental development
tax incentives
Total future tax deductions
114,119
3,903
2,454
1,971
122,447
106,730
9,207
3,603
1,971
121,511
55,469
5,626
-
-
61,095
55,654
9,765
-
-
65,419
16. STOCK-BASED COMPENSATION
In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”).
The 2020 LTIP replaced the predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and the Amended and
Restated Stock Option Plan (“Stock Option Plan”). Following the approval of the 2020 LTIP, no further awards will be made under
either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to
such plans and remain outstanding.
In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated Long-Term Incentive
Plan (the “2023 LTIP”) at the annual and special meeting of shareholders. The 2023 LTIP gives the Company the ability to award
options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, and other
share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In
accordance with the 2023 LTIP, the sum of (i) 12,350,000 common shares plus (ii) the number of common shares subject to stock
options previously granted under the Stock Option Plan that, following May 30, 2023, expire or are cancelled or terminated without
having been exercised in full, have been reserved for issuance under the 2023 LTIP. Upon vesting of certain LTIP awards, the
Company may withhold and sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the withholding
tax remittances required in respect of award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant
date fair value of the instrument, the excess amount is credited to retained earnings or deficit.
Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for
Non-Employee Directors (as amended and restated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company
the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The
terms of the DSU Plan are otherwise materially unchanged as incorporated into the 2023 LTIP. Effective May 30, 2023, no new
awards will be made under the DSU Plan, but awards previously granted under the DSU Plan will continue to be governed by the
DSU Plan. DSUs are settled following cessation of services with the Company.
Stock-based compensation expense
Equity-settled awards
Cash-settled awards
For the Year Ended December 31,
2023
2022
2021
2,331
(25)
2,306
3,943
334
4,277
4,453
260
4,713
76
The following summarizes RSUs, Share Awards, PSUs, and DSUs activity during the periods:
Outstanding at December 31, 2021
Granted
Vested or settled
Withheld to settle employee tax obligations
Forfeited
Outstanding at December 31, 2022
Granted
Vested or settled
Withheld to settle employee tax obligations
Forfeited
Expired
Outstanding at December 31, 2023
Restricted share units (time-based vesting)
RSU Time-
Based
Number of
units
3,216,536
2,157,149
(2,199,034)
(526,346)
(762,968)
1,885,337
3,599,500
(1,105,225)
(64,230)
(783,655)
(1,163)
3,530,564
RSU
Performance-
Based
Number of
units
1,021,739
863,279
(796,011)
(242,460)
(502,628)
343,919
-
(258,760)
-
(21,130)
-
64,029
Share
Awards
Number of
units
PSU
Number of
units
DSU
Number of
units
-
222,170
(154,016)
(68,154)
-
-
522,883
(522,883)
-
-
-
-
157,200
-
-
-
(157,200)
-
2,584,161
-
-
(738,553)
-
1,845,608
361,577
1,305,658
(501,916)
-
-
1,165,319
2,276,731
(355,878)
-
-
-
3,086,172
Restricted share units that vest based on time have an aggregate time-based vesting period of three years and generally one-third
of the RSUs vest every year over a three-year period from the date of grant (the “RSUs”). At the end of a three-year term, the
associated RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of
the Company. The weighted average fair value of the RSUs granted in 2023 was C$0.46 (2022 – C$2.37), which was determined
using the closing price of the Company’s common shares on their respective grant dates. During 2023, 150,000 RSUs were granted to
each of the chief executive officer, chief operations officer and chief financial officer which vest in one year.
Restricted share units (performance-based vesting)
During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for
vesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a
percentage of the PRSUs will vest at the end of the three-year service period or on their departure, based on terms agreed. All PRSUs
awarded in 2020 were awarded to a single executive who forfeited those awards in January 2022 upon departure from the Company.
The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to
have a weighted average grant date fair value of C$1.87 and C$3.27, respectively.
Based on share price performance since the date of grant, none of the 2022 PRSUs and 66.7% of the 2021 PRSUs will vest upon
completion of the three-year service period.
2021 and 2022 PRSUs
Share awards
% of PRSUs Vesting
33.3%
66.7%
100.0%
$
3.00
$
4.00
$
5.00
$
150.0%
7.00
During the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive
compensation (“Share Awards”). These Share Awards vested upon grant. The fair value of the Share Awards granted was
C$2.40 ($1.88), which was determined using the closing price of the Company’s common shares on the grant date. In the fourth
quarter of 2022, 59,488 Share Awards were issued to employees as a component of their compensation.
77
In the first quarter of 2023, 36,254 Share Awards were issued to a consultant as compensation for services rendered. During the
second quarter of 2023, certain executives were issued Share Awards in lieu of cash paid variable incentive compensation. These
Share Awards vested upon grant. The fair value of the Share Awards granted was C$0.49 ($0.34), which was determined using the
closing price of the Company’s common shares on the grant date.
Performance share units
During the second quarter of 2023, certain executives were issued a strategic equity grant through Performance Share Units
(“PSUs”). The performance period of the PSUs is from January 1, 2023, to December 31, 2026, with a cliff vesting term for December
31, 2026. 2,584,161 PSUs were granted and depending on the level of performance, the PSUs will vest 100%, 160% or 190% up to a
maximum of 4,909,907 PSUs. Settlement will be made in the form of shares issued from treasury. The performance measures are a
combination of Revenue and Earnings Before Interest, Taxes, Depreciation and Amortization and both targets have to be achieved. As
of December 31, 2023, the fair value of these PSUs have been deemed to be nil based on the likelihood of achieving the targets compared
to current results. During the third quarter of 2023, 738,553 PSUs with a $nil value were forfeited as a result of an executive departure
and 1,845,608 PSUs with a $nil value are outstanding as at December 31, 2023.
Deferred share units
Granted under the DSU Plan
The fair value of the DSU liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at
each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair
value recognized in the statement of operations and comprehensive loss for the period. The weighted average fair value of the DSUs
granted in 2023 was C$0.63 ($0.47), which was determined using the closing price of the Company’s common shares on the grant
date. DSUs outstanding at December 31, 2023, had a fair value of $0.5 million which is included in other liabilities on the balance
sheet (2022 – $0.6 million).
Granted under the 2023 LTIP
DSUs granted after May 30, 2023, (the “New DSUs”) will be settled by way of the provision of cash or shares (or a combination
thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common
shares. The weighted average fair value of the New DSUs granted in 2023 was C$0.46 ($0.34), which was determined using the
closing price of the Company’s common shares on the grant date. New DSUs outstanding at December 31, 2023, had a fair value of
$0.6 million which is included in other liabilities on the balance sheet (2022 – $nil).
Options
The following summarizes options granted, forfeited and expired during the periods:
Outstanding at December 31, 2021
Forfeited or expired
Outstanding at December 31, 2022
Forfeited or expired
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Number of
options
Weighted average
exercise price C$
4,064,489
(2,584,420)
1,480,069
(1,270,660)
209,409
209,409
6.64
6.41
7.03
7.00
7.71
7.71
Range of exercise prices outstanding at December 31, 2023:
Range of exercise prices
C$6.01 – C$7.00
C$7.01 – C$8.00
Total
Options outstanding
Weighted
average
remaining
life
Weighted
average
exercise
price C$
0.71
0.38
$
$
6.12
7.84
Number
outstanding
16,350
193,059
209,409
Number
exercisable
16,350
193,059
209,409
Options exercisable
Weighted
average
remaining
life
Weighted
average
exercise
price C$
0.71
0.38
$
$
6.12
7.84
78
Range of exercise prices outstanding at December 31, 2022:
Range of exercise prices
C$4.01 – C$6.00
C$6.01 – C$7.00
C$7.01 – C$8.00
Total
Dilutive instruments
Options outstanding
Weighted
average
remaining
life
Weighted
average
exercise
price C$
Number
outstanding
15,025
758,142
706,902
1,480,069
1.89
1.07
1.37
4.12
6.33
7.84
Number
exercisable
15,025
758,142
706,902
1,480,069
Options exercisable
Weighted
average
remaining
life
Weighted
average
exercise
price C$
1.89
1.07
1.37
4.12
6.33
7.84
For the year ended December 31, 2023, 0.2 million options (2022 – 1.5 million, 2021 – 4.1 million) and 3.6 million RSUs and
PRSUs (2022 – 2.2 million, 2021 – 3.4 million), 1.8 million new DSUs (2022 and 2021 – nil) and 156.8 million shares which would
be issued if the principal amount of the Debentures were settled in our common shares at the year-end share price (2022 – 109.1
million and 2021 – 27.4 million) were excluded from the diluted weighted average number of common shares calculation as their
effect would have been anti-dilutive to the net loss per share.
17. NET LOSS PER SHARE
On November 21, 2023, the Company announced a Rights Offering which allowed holders of common shares, as of the close of
business on December 12, 2023, transferable subscription rights to purchase up to an aggregate of 85,714,285 common shares at a
subscription price of C$0.35 per common share (refer to Note 23). An adjustment is required on the calculation of net loss per share
for the year ended December 31, 2023, as well as retrospectively for the years ended December 31, 2022 and December 31, 2021, to
account for the bonus factor that resulted from this event.
Net loss per share − basic and diluted
Net loss after tax (thousands of U.S. dollars)
Weighted average number of shares outstanding (thousands of shares as
previously reported)
Weighted average number of shares outstanding (thousands of shares
restated)
Net loss per share − basic and diluted (as previously calculated, prior to
Rights Offering)
Net loss per share − basic and diluted (as on the Consolidated Statement
of Comprehensive Income)
2023
For the year ended December 31,
2022
2021
(14,584) $
(54,963) $
(53,668)
101,984
116,135
87,662
99,826
(0.14) $
(0.13) $
(0.63) $
(0.55) $
85,027
96,826
(0.63)
(0.55)
$
$
$
18. REVENUE
In the following table, revenue is disaggregated by performance obligation and timing of revenue recognition. All revenue
comes from contracts with customers. Refer to Note 19 for the disaggregation of revenue by geographic region.
Product
Transportation
License fees from Construction Partners
Total product revenue
Installation and other services
2023
For the Year Ended December 31,
2022
2021
158,405
17,674
840
176,919
5,012
181,931
147,448
18,030
778
166,256
5,905
172,161
129,031
13,231
738
143,000
4,593
147,593
79
DIRTT sells its products and services pursuant to fixed-price contracts which generally have a term of one year or less. The
transaction price used in determining the amount of revenue to recognize from fixed-price contracts is based upon agreed contractual
terms with each customer and is not subject to variability.
At a point in time
Over time
2023
For the Year Ended December 31,
2022
2021
176,079
5,852
181,931
165,478
6,683
172,161
142,262
5,331
147,593
Revenue recognized at a point in time represents the majority of the Company’s sales. Revenue is recognized when a customer
obtains legal title to the product, which is when ownership of the product is transferred to, or services are delivered to, the customer.
Revenue recognized over time is limited to installation and ongoing maintenance contracts with customers and is recorded as
performance obligations are satisfied over the term of the contract.
Contract Liabilities
Customer deposits
Deferred revenue
Contract liabilities
2023
5,290
-
5,290
As at December 31,
2022
4,458
408
4,866
2021
1,959
461
2,420
Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions.
The balance of contract liabilities was higher as at December 31, 2023, compared to the prior year period mainly due to the timing of
orders and payments. Contract liabilities as at December 31, 2022 and 2021, respectively, totaling $4.9 million and $2.4 million were
recognized as revenue during 2023 and 2022, respectively.
Sales by Industry
The Company periodically reviews product revenue by industry vertical market to evaluate trends and the success of industry
specific sales initiatives. The nature of products sold to the various industries is consistent and therefore the periodic review is focused
on sales performance.
Commercial
Healthcare
Government
Education
License fees from Construction Partners
Total product and transportation revenue
Installation and other services
19. SEGMENT REPORTING
2023
For the Year Ended December 31,
2022
2021
116,693
33,970
13,446
11,970
840
176,919
5,012
181,931
115,102
19,739
16,564
14,073
778
166,256
5,905
172,161
84,488
30,130
16,012
11,632
738
143,000
4,593
147,593
The Company has one reportable and operating segment, and operates in two principal geographic locations, Canada and the
United States. Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United
States. The Company’s revenue from operations from external customers, based on location of operations, and information about its
non-current assets, is detailed below.
80
Revenue from external customers
Canada
U.S.
Non-current assets
Canada
U.S.
For the Year Ended December 31,
2023
2022
2021
19,934
161,997
181,931
25,477
146,684
172,161
17,299
130,294
147,593
As at December 31,
2023
2022
30,033
30,759
60,792
28,251
53,277
81,528
The DIRTT solution segment derives revenues from customers by providing physical products and digital tools through our ICE
software to create interior spaces for our customers across commercial, healthcare, education and government industries. The
accounting policies of the solution segment are the same as those described in Note 2 - significant accounting policies.
The chief operating decision maker assesses performance for the solution segment and decides how to allocate resources based
on gross profit and net loss that also is reported on the consolidated statement of operations and comprehensive loss as consolidated
gross profit and net loss. The measure of segment assets is reported on the balance sheet as total consolidated assets. The chief
operating decision maker uses net income to evaluate income generated from segment assets (return on assets) in deciding whether to
reinvest profits into the solution segment or into other parts of the entity, such as to repay long term debt.
Gross profit and net income (loss) are used to monitor budget versus actual results. The chief operating decision maker also uses
net income in competitive analysis by benchmarking to DIRTT’s competitors. The competitive analysis along with the monitoring of
budgeted versus actual results are used in assessing performance of the segment and in establishing management’s compensation.
DIRTT has one reportable segment: Solutions. The solutions segment provides digital tools (access to ICE software) and
physical products to create modular interior construction spaces for our customers. DIRTT derives revenue in North America and
manages the business activities on a consolidated basis. The technology used in the customer arrangements is based on a single
software platform that is deployed to, and implemented by, customers in a similar manner. DIRTT’s chief operating decision maker is
the executive leadership team that includes the chief operating officer, chief financial officer, and the chief executive officer.
20. COMMITMENTS
As at December 31, 2023, the Company had outstanding purchase obligations of approximately $2.8 million related to inventory
and property, plant and equipment purchases (2022 – $2.2 million). Refer to Note 8 for lease commitments.
21. LEGAL PROCEEDINGS
The Company is pursuing multiple lawsuits against its former founders, Mogens Smed and Barrie Loberg, their new company
Falkbuilt Ltd. (“Falkbuilt”), and other related individual and corporate defendants for violations of fiduciary duties and non-
competition and non-solicitation covenants contained in their executive employment agreements, and the misappropriation of
DIRTT’s confidential and proprietary information in violation of numerous Canadian and U.S. state, and federal laws pertaining to the
protection of DIRTT’s trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices.
81
As of December 31, 2023, the Company’s litigation against Falkbuilt, Messrs. Smed and Loberg, and their associates was
comprised of three main lawsuits: (i) an action in the Alberta Court of King’s Bench instituted on May 9, 2019, against Falkbuilt,
Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and
duties of loyalty, fidelity and confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-
Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019, against
Falkbuilt, Smed, and other individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade
secrets, business intelligence and customer information (the “Utah Misappropriation Case”); and (iii) an action in the U.S. District
Court for the Northern District of Texas instituted on June 24, 2021, alleging that Falkbuilt has unlawfully used DIRTT’s confidential
information in the United States and intentionally caused confusion in the United States in an attempt to steal customers,
opportunities, and business intelligence, with the aim of establishing a competing business in the United States market (the “Texas
Unfair Competition Case”). DIRTT intends to pursue the cases vigorously. We recently requested the Court of King’s Bench of
Alberta to schedule the summary judgment application for our Canadian litigation. The court has proposed three potential dates in
September 2025 and we expect to have the date finalized in the next several weeks.
Falkbuilt also filed a lawsuit against the Company on November 5, 2019, in the Court of King’s Bench of Alberta, alleging that
DIRTT has misappropriated and misused their alleged proprietary information in furtherance of DIRTT’s product development.
Falkbuilt seeks monetary relief and an interim, interlocutory and permanent injunction of DIRTT’s alleged use of the alleged
proprietary information. The Company believes that the suit is without merit and filed an application for summary judgment to dismiss
Falkbuilt’s claim.
No amounts are accrued for the above legal proceedings.
22. RELATED PARTY TRANSACTIONS
On November 30, 2022, the Company closed a private placement of 8,667,449 common shares for aggregate gross
consideration of $2.8 million (the “Private Placement”) with its two largest shareholders, 22 NW Fund, LP (“22NW”) and 726 BC
LLC and 726 BF LLC (together “726”) and all the directors and officers, including 638,996 common shares issued at the deemed per
share price equal to the Subscription Price, as reimbursement for the costs incurred by 726 in connection with the Company’s
contested director elections in 2022.
On March 15, 2023, the Company entered into a Debt Settlement Agreement (the “Debt Settlement Agreement”) with 22NW
and Aron English, 22NW’s principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned
approximately 19.5% of the Company’s issued and outstanding common shares at such time.
Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the
22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company
held on April 26, 2022, being approximately $1.6 million (the “Debt”). Pursuant to the Debt Settlement Agreement, the Company
agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the
issuance of equity securities of the Company to the 22NW Group. In connection with the Debt Settlement Agreement, on March 15,
2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay
the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to
approval by the Company’s shareholders. At the annual general and special meeting of shareholders held on May 30, 2023,
shareholders voted to approve the issuance of common shares to 22NW Group, and on June 2, 2023, the Company issued
3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the
deemed price of $0.40 per common share and the May 30, 2023, market price of $0.38 per common share resulting in a recovery from
the balance recorded at March 31, 2023, which had been valued at a price of $0.53 per common share.
As at December 31, 2023, C$18.9 million and C$13.6 million of the January Debentures and December Debentures,
respectively, are held by 22NW Group. Interest accrued on the debentures owned by 22NW Group for the year ended December 31,
2023, is C$0.4 million and interest expense paid was C$0.5 million (2022 – $nil and $nil respectively). Interest is earned on terms
applicable to all Debenture holders.
Other related party transactions for the year ended December 31, 2023, relate to the sale of DIRTT products and services to the
22NW Group for $0.3 million (2022 – $nil). The sale to 22NW Group was based on price lists in force and terms that are available to
all employees. 2023 reorganization costs include $nil paid to related parties (2022 - $0.2 million).
23. SUBSEQUENT EVENTS
On November 21, 2023, the Company announced that the Board of Directors had approved a Rights Offering to its common
shareholders for aggregate gross proceeds of C$30.0 million.
82
In connection with the Rights Offering, the Company entered into a standby purchase agreement with 22NW Fund, LP
(“22NW”) and 726 dated November 20, 2023 (the “Standby Purchase Agreement”), pursuant to which each of 22NW and 726, or
their permitted assigns (collectively and including WWT Opportunity #1 LLC, to which 726 transferred their entire holdings on
December 1, 2023, the “Standby Purchasers”). Subject to the terms and conditions of the Standby Agreement, each Standby Purchaser
agreed to exercise its Basic Subscription Privilege in full and to collectively purchase from the Company, at the Subscription Price, all
common shares not subscribed for by holders of Rights under the Basic Subscription Privilege or Additional Subscription Privilege,
up to a maximum of C$15.0 million each, so that the maximum number of common shares that may be issued in connection with the
Rights Offering will be issued and the Company will receive aggregate gross proceeds of C$30.0 million. No standby fee will be paid
to the Standby Purchasers in connection with the Rights Offering; however, DIRTT will reimburse the Standby Purchasers for their
reasonable expenses in connection with the Standby Agreement up to a maximum of C$30,000.
On January 9, 2024, the Company announced the completion of the Rights Offering to its common shareholders and the
issuance of 85,714,285 common shares at a price of C$0.35 ($0.26) per whole Common Share for aggregate gross proceeds of C$30.0
million ($22.4 million). Each right distributed under the Rights Offering (each, a “Right”) entitled eligible holders to subscribe for
0.81790023 common shares, exercisable for whole common shares only, meaning 1.22264301 Rights were required to purchase one
Common Share (the “Basic Subscription Privilege”). In accordance with applicable law, the Rights Offering included an additional
subscription privilege (the “Additional Subscription Privilege”) under which eligible holders of Rights who fully exercised the Rights
issued to them under their Basic Subscription Privilege, were entitled to subscribe for additional common shares, on a pro rata basis,
that were not otherwise subscribed for under the Basic Subscription Privilege.
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
Agreement.
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.
On February 15, 2024, the Company announced a substantial issuer bid and tender offer (the "Issuer Bid"), under which the
Company will offer to repurchase for cancellation: (i) up to C$6,000,000 principal amount of its issued and outstanding January
Debentures (or such larger principal amount as the Company, in its sole discretion, may determine it is willing to take-up and pay for,
subject to applicable law) 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 its issued and outstanding December Debentures (or such larger principal amount as the Company,
in its sole discretion, may determine it is willing to take-up and pay for, subject to applicable law) at a purchase price of C$600 per
C$1,000 principal amount of December Debentures. Holders of Debentures who validly tender and do not withdraw their Debentures
will receive the applicable purchase price, plus a cash payment for all accrued and unpaid interest up to, but excluding, the date on
which such Debentures are taken up by the Company. The applicable purchase price will be denominated in Canadian dollars and
payments of amounts owed to holders of deposited Debentures, including for interest, will be made in Canadian dollars. The Issuer
Bid will remain open for acceptance until 5:00 p.m. (Eastern Standard Time) on March 22, 2024, unless withdrawn or extended by the
Company. If the aggregate principal amount of the Debentures properly tendered and not withdrawn under the Issuer Bid exceeds
C$6,000,000 for the January Debentures or C$9,000,000 for the December Debentures, the Company will purchase a pro-rated portion
of the January Debentures or the December Debentures so tendered, as applicable (with adjustments to maintain C$1,000 minimum
denominations of Debentures). DIRTT will return all Debentures not purchased under the Issuer Bid, including Debentures not
purchased because of pro-ration. Debentures taken up and paid for by the Company will be immediately cancelled.
The Company intends to fund the Issuer Bid with a portion of the proceeds from the Company’s previously completed Rights
Offering to its common shareholders, which closed in January 2024 for aggregate gross proceeds of C$30.0 million.
83
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the
Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our principal executive officer and principal financial officer carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2023. Based
upon their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Our management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO framework) to evaluate the effectiveness
of internal control over financial reporting. Management believes that the COSO framework is a suitable framework for its evaluation
of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative measurements of our
internal control over financial reporting, is sufficiently complete so that those relevant factors that would alter a conclusion about the
effectiveness of our internal control over financial reporting are not omitted and is relevant to an evaluation of internal control over
financial reporting.
Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that the
Company maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2023, based
on those criteria.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under
the Exchange Act) during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
84
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item is incorporated herein by reference to the information that will be contained in our
information circular and proxy statement (“proxy statement”) related to the 2024 Annual Meeting of Shareholders, which we intend to
file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2024 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2024 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2024 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy
statement related to the 2024 Annual Meeting of Shareholders, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
85
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of the report:
(1)
Financial Statements
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, as at December 31, 2023 and 2022
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to the Consolidated Financial Statements
(2)
Financial Statement Schedules
All schedules have been omitted as they are either not required or not applicable or the required information is included in
the Consolidated Financial Statements or notes thereto.
(3)
See Item 15(b)
(b)
Exhibits:
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
10.1+#
10.2+#
Exhibit or Financial Statement Schedule
Restated Articles of Amalgamation of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1
to the Registrant’s Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
Amended and Restated Bylaw No.1 of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1
to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).
Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on
Form 10-K, File No. 001-39061, filed on February 26, 2020).
Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd., Computershare Trust
Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference
to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
Supplemental Indenture, dated January 25, 2021, by and among the Company, Computershare Trust Company of
Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit 4.1
to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
Second Supplemental Indenture, dated December 1, 2021, by and among the Company, Computershare Trust
Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference
to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on December 1, 2021).
Loan Agreement, dated February 12, 2021, by and among the Royal Bank of Canada, DIRTT Environmental Solutions
Ltd. and DIRTT Environmental Solutions, Inc., as borrowers (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on February 19, 2021).
First Amendment and Consent to Loan Agreement, dated November 15, 2021, by and among the Royal Bank of
Canada, as lender, and DIRTT Environmental Solutions Ltd. and DIRTT Environmental Solutions, Inc., as borrowers
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed
on November 23, 2021).
10.3+
Amended and Restated Incentive Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s
Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
86
Exhibit
No.
10.4+
10.5+
10.6+
10.7+
10.8+
Exhibit or Financial Statement Schedule
DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).
Form of Option Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan
(incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, File No. 333-238689,
filed on May 26, 2020).
Form of Time-Based Restricted Share Unit Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-
Term Incentive Plan (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-8,
File No. 333-238689, filed on May 26, 2020).
DIRTT Environmental Solutions Ltd. 2022 Employee Share Purchase Plan (incorporated by reference to Exhibit 10.2
to the Registrant’s Quarterly Report on Form 10-Q File No. 001-39061, filed on May 4, 2022).
Form of Performance-Based Restricted Share Unit Award Agreement Under the DIRTT Environmental Solutions Ltd.
Long-Term Incentive Plan (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form
S-8, File No. 333-238689, filed on May 26, 2020).
10.9+
Deferred Share Unit Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.4 to the Registrant’s
Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
10.10+
DIRTT Environmental Solutions Ltd. Amended and Restated Employee Share Purchase Plan (incorporated by
reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, File No. 333-234143, filed on October
9, 2019).
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
Executive Employment Agreement, dated June 22, 2022 by and between DIRTT Environmental Solutions Ltd. and
Benjamin Urban (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q, File No. 001-39061, filed on
July 27, 2022).
Executive Employment Agreement, dated August 12, 2022, by and between DIRTT Environmental Solutions Inc. and
Richard Hunter (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q, File No. 001-39061, filed on
November 14, 2022).
Executive Employment Agreement, dated August 2, 2023, by and between DIRTT Environmental Solutions Inc. and
Fareeha Khan (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q, File No. 001-39061, filed on
November 9, 2023).
Indemnity Agreement, dated April 26, 2022, between the Company and Douglas A. Edwards, together with a schedule
identifying other substantially identical agreements between the Company and each of the other persons identified on
the schedule (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q File No.
001-39061, filed on May 4, 2022).
Indemnity Agreement, dated June 22, 2022, between DIRTT Environmental Solutions Ltd and Benjamin Urban,
together with a schedule identifying other substantially identical agreements between the Company and each of the
other persons identified on the schedule (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q, File
No. 001-39061, filed on July 27, 2022).
Indemnity Agreement, dated August 11, 2022, between DIRTT Environmental Solutions Ltd and Richard Hunter,
together with a schedule identifying other substantially identical agreements between the Company and each of the
other persons identified on the schedule (incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-Q, File
No. 001-39061, filed on November 14, 2022).
10.17+
Indemnity Agreement, dated August 2,2023, between DIRTT Environmental Solutions Ltd and Fareeha Khan
(incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q, File No. 001-39061, filed on November 9,
2023).
87
Exhibit
No.
10.18#
10.19#
10.20#
10.21#
10.22#
10.23#
10.24#
10.25#
10.26#
10.27#
10.28
Exhibit or Financial Statement Schedule
Industrial Lease, dated September 15, 2012, by and between Piret (7303-30th Street SE) Holdings Inc. and DIRTT
Environmental Solutions Ltd. (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on
Form 10, File No. 001-39061, filed on September 20, 2019).
Agreement of Lease, dated November 5, 2013, by and between Dundee Industrial Twofer (GP) Inc. and DIRTT
Environmental Solutions Ltd., as amended by the Lease Amending Agreement, dated October 21, 2016, by and
between Dream Industrial Twofer (GP) Inc. (formerly known as Dundee Industrial Twofer (GP) Inc.) and DIRTT
Environmental Solutions Ltd. (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on
Form 10, File No. 001-39061, filed on September 20, 2019).
Lease of Industrial Space, dated February 12, 2015, by and between Hoopp Realty Inc./Les Immeubles Hoopp Inc., by
its duly authorized agent, Triovest Realty Advisors Inc., and DIRTT Environmental Solutions Ltd., as amended by the
Amendment of Lease, dated April 16, 2015, the Lease Modification Agreement, dated October 27, 2015, the Third
Amendment of Lease, dated November 12, 2015, and the Fourth Amendment of Lease, dated January 8, 2016, the
Fifth Amendment of Lease, dated August 9, 2019, the Sixth Amendment of Lease, dated February 6, 2023
(incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form 10, File No. 001-39061,
filed on September 20, 2019).
Lease Agreement, dated March 29, 2011, by and between EastGroup Properties, L.P. and DIRTT Environmental
Solutions, Inc. (incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form 10, File
No. 001-39061, filed on September 20, 2019).
Lease, dated July 1, 2015, by and between Majik Ventures, L.L.C. and DIRTT Environmental Solutions, Inc., as
amended by the First Amendment to Lease, dated May 11, 2017, by and between CAM Investment 352 LLC and
DIRTT Environmental Solutions, Inc. (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration
Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
Industrial Lease Agreement, dated October 2, 2008, by and between 141 Knowlton Way, LLC and DIRTT
Environmental Solutions, Inc., as amended by the First Amendment to Industrial Lease Agreement, dated March 11,
2009, and the Second Amendment to Industrial Lease Agreement, dated August 23, 2018, by and between SH7-
Savannah, LLC and DIRTT Environmental Solutions, Inc. (incorporated by reference to Exhibit 10.28 to the
Registrant’s Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
Lease Agreement, dated October 7, 2019, by and between DIRTT Environmental Solutions, Inc. and SP Rock Hill
Legacy East #1, LLC (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q, File No. 001-39061,
filed on November 7, 2019).
Second Amendment to Lease made as of the 6th day of July, 2020, by and between SP ROCK HILL LEGACY EAST
#1, LLC, an Indiana limited liability company, and DIRTT ENVIRONMENTAL SOLUTIONS, INC., a Colorado
corporation (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q, File No. 001-39061, filed on July
29, 2020).
Lease Agreement between Tennyson Campus Owner, LP and DIRTT Environmental Solutions, Inc. dated March 4,
2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q, File No. 001-39061, filed on May 6,
2020).
Lease Amending Agreement, dated April 6, 2022, by and between Piret (7303 - 30th Street SE) Holdings Inc. and
DIRTT Environmental Solutions Ltd (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q, File No.
001-39061, filed on July 27, 2022).
Letter Agreement, dated January 7, 2021, by and among DIRTT Environmental Solutions Ltd., DIRTT Environmental
Solutions, Inc. and Royal Bank of Canada (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report
on Form 8-K, File No. 001-39061, filed on January 13, 2021).
88
Exhibit
No.
10.29+
10.30+
10.31+
Exhibit or Financial Statement Schedule
Indemnification Agreement, by and between DIRTT Environmental Solutions Ltd. and James A. Lynch, dated March
22, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-
39061, filed on March 23, 2021).
Subscription Agreement, dated November 14, 2022, by and between DIRTT Environmental Solutions Ltd. and 22NW
Fund, LP, together with a schedule identifying substantially identical agreements between DIRTT Environmental
Solutions Ltd. and each shareholder and U.S. director and executive officer listed on the schedule and identifying the
material differences between each of those agreements and the filed Subscription Agreement (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K, File No. 001-39061, filed on November 18, 2022).
Subscription Agreement, dated November 14, 2022, by and between DIRTT Environmental Solutions Ltd. and Mark
Greffen, together with a together with a schedule identifying substantially identical agreements between DIRTT
Environmental Solutions Ltd. and each shareholder and Canadian executive officer listed on the schedule and
identifying the material differences between each of those agreements and the filed Subscription Agreement
(incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K, File No. 001-39061, filed on November 18,
2022).
10.32
Release, dated November 30, 2022, by and among DIRTT Environmental Solutions Ltd., 726 BC LLC and 726 BF
LLC ((incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K, File No. 001-39061, filed on November
30, 2022).
10.33#†
Second Amendment to Loan Agreement, dated February 9, 2023, by and among DIRTT Environmental Solutions Ltd.,
DIRTT Environmental Solutions, Inc. and Royal Bank of Canada (incorporated by reference to Exhibit 10.45 to the
Registrant's Form 10-K,File No. 001-39061, filed on February 22, 2023).
10.34+#† Co-ownership Agreement by and between DIRTT Environmental Solutions Ltd. and Armstrong World Industries, Inc.,
effective May 9, 2023 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q,File No. 001-39061,
filed on August 2, 2023).
10.35+# DIRTT Environmental Solutions Ltd. Amended and Restated Long Term Incentive Program effective May 30, 2023
(incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q,File No. 001-39061, filed on August 2, 2023).
10.36
10.37
10.38
DIRTT Environmental Solutions Ltd. 2022 Employee Share Purchase Plan (incorporated by reference to Exhibit 10.2
to the Registrant’s Quarterly Report on Form 10-Q File No. 001-39061, filed on May 4, 2022)
Debt Settlement Agreement, dated March 15, 2023, by and between DIRTT Environmental Solutions Ltd., 22NW
Fund, LP and Aron English (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
File No. 001-39061, filed on March 21, 2023).
Share Issuance Agreement, dated March 15, 2023, by and between DIRTT Environmental Solutions Ltd., 22NW Fund,
LP and Aron English (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, File
No. 001-39061, filed on March 21, 2023).
10.39*#† Third Amendment to Loan Agreement, dated February 9, 2024, by and among DIRTT Environmental Solutions Ltd.,
DIRTT Environmental Solutions, Inc. and Royal Bank of Canada
10.40*
Lease Amending Agreement, dated February 6, 2023, by and between HOOPP Realty Inc./Les Immeubles HOOPP
Inc., (6335 - 57th Street SE) and DIRTT Environmental Solutions Ltd.
21.1*
Subsidiaries of DIRTT Environmental Solutions Ltd.
23.1*
Consent of PricewaterhouseCoopers, L.L.P., independent registered public accounting firm.
31.1*
Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
89
Exhibit
No.
31.2*
Exhibit or Financial Statement Schedule
Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of the Principal Executive Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2**
Certification of the Principal Financial Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
** Furnished herewith.
+ Compensatory plan or agreement.
# Information in this exhibit identified by brackets is confidential and has been omitted pursuant to Item 601(b)(10)(iv) of Regulation
S-K because it is not material and is the type of information that the Company customarily treats as private or confidential. An
unredacted copy of this exhibit will be furnished to the Securities and Exchange Commission on a supplemental basis upon request.
† Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or
exhibit will be furnished to the Securities and Exchange Commission upon request.
Item 16. Form 10-K Summary
None.
90
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 21, 2024
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
By:
/s/ Benjamin Urban
Name: Benjamin Urban
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates indicated.
Date
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
Signature
/s/ Benjamin Urban
Benjamin Urban
/s/ Fareeha Khan
Fareeha Khan
/s/ Ken Sanders
Ken Sanders
/s/ Douglas Edwards
Douglas Edwards
/s/ Aron English
Aron English
/s/ Scott Robinson
Scott Robinson
/s/ Shaun Noll
Shaun Noll
/s/ Scott Ryan
Scott Ryan
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
Director
Director
91
Exhibit 10.39
Execution version
SPECIFIC TERMS IN THIS EXHIBIT HAVE BEEN REDACTED BECAUSE SUCH TERMS ARE BOTH
NOT MATERIAL AND ARE THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR
CONFIDENTIAL. THESE REDACTED TERMS HAVE BEEN MARKED IN THIS EXHIBIT WITH THREE
ASTERISKS [***].
THIRD AMENDMENT AND CONSENT TO LOAN AGREEMENT
DATED as of February 9, 2024
AMONG:
DIRTT ENVIRONMENTAL SOLUTIONS LTD., and DIRTT ENVIRONMENTAL
SOLUTIONS, INC., as Borrowers
AND:
ROYAL BANK OF CANADA, as Lender
PREAMBLE
WHEREAS the Borrowers and the Lender entered into that certain Loan Agreement dated as of
February 12, 2021 (as amended pursuant to a First Amendment and Consent dated November 15, 2021,
the Second Amendment to Loan Agreement dated February 9, 2023 (the “Second Amendment”), and as
may be further amended, restated, supplemented, revised, replaced or otherwise modified from time to time,
the “Existing Loan Agreement”);
AND WHEREAS the Borrowers have requested that the Lender consents to a one time repayment
of the Convertible Debentures, not to exceed CAD$15,000,000 in the aggregate (the “Debenture
Repayment”);
AND WHEREAS the Borrowers and the Lender have agreed to extend the Stated Expiry Date of
the Loan Agreement by one year to February 12, 2025 and to amend certain other provisions of the Loan
Agreement, but, in each case, only to the extent and subject to the limitations set forth in this Amendment
(this “Amendment” and, together with the Existing Loan Agreement, the “Loan Agreement”) and without
prejudice to the Lender’s other rights;
NOW THEREFORE for good and valuable consideration (the receipt and sufficiency of which are
hereby acknowledged), the parties hereby agree as follows:
ARTICLE I – INTERPRETATION
1.1
All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed
to such terms in the Loan Agreement.
ARTICLE II – CONSENT
2.1
3.1
In reliance upon the representations and warranties of each Borrower set forth in Article V below
and subject to the satisfaction of the conditions precedent set forth in Article VI below the Lender
hereby consents to the Debenture Repayment.
ARTICLE III – AMENDMENTS TO THE LOAN AGREEMENT
With effect on the Effective Date (hereinafter defined), the Loan Agreement is amended to delete
the stricken text (indicated textually in the same manner as the following example: stricken text) and
to add the double-underlined text (indicated textually in the same manner as the following example:
double-underlined text) as set forth in the pages of the Loan Agreement attached hereto as Exhibit
A. For the avoidance of doubt, Exhibit A incorporates changes made pursuant to the Second
1
Amendment, which changes are not indicated as stricken or added pursuant to this Amendment
Agreement.
3.2
Notwithstanding anything to the contrary herein, any Revolving Credit Advances based upon the
CDOR Rate (as defined in the Existing Loan Agreement) existing as of the Effective Date shall
continue to the end of the applicable Interest Period for such Revolving Credit Advance and the
provisions of the Existing Loan Agreement applicable solely with respect to any existing Revolving
Credit Advances based upon the CDOR Rate that continue past the Effective Date shall continue
to apply as such, mutatis mutandis, until the end of the applicable Interest Period for such Revolving
Credit Advances, after which such provisions shall have no further force or effect.
3.3
As of the Effective Date, Schedules D, G, I, 3.2, 3.6, 3.7, 3.12, 3.13, 3.16, 3.17, and 6.1 are hereby
amended and restated in their entirety in the form attached hereto.
ARTICLE IV – CONDITIONS TO EFFECTIVENESS
4.1
This Amendment shall become effective upon the Borrowers delivering to the Lender each of the
following (such date being referred to herein as the “Effective Date”):
(a)
(b)
(c)
(d)
(e)
(f)
an executed copy of this Amendment by PDF copy transmitted via e-mail or telecopier;
copies of PPSA, UCC, and as applicable, Register of Personal and Movable Real Rights of
Quebec, Bank Act, insolvency, executions, litigation, or other jurisdictional searches, as
applicable, or other evidence satisfactory to Lender, listing all effective, registrations,
financing statements and recordations which name the Credit Parties (under present name,
any previous name or any trade or doing business name) as debtor and together with copies
of such other recordings, registrations and financing statements;
certified copies of all the constating documents, by-laws and resolutions of the directors (or
partners, members or shareholders as required by Lender) authorizing the Loan
Documents, and certificates of incumbency, for Borrowers and each other Credit Party;
certificate of good standing (or other similar instruments) in respect of each of the Credit
Parties;
opinions of counsel to each of the Credit Parties (including opinions relating to
enforceability, the Lender’s security in each relevant jurisdiction and such other matters as
the Lender reasonably considers necessary in its discretion) with respect to this
Amendment and each Loan Document in form and substance satisfactory to Lender;
the Borrowers paying to the Lender an amendment fee equal to $30,000; which fee shall
be non-refundable and fully earned and paid upon the execution of this Agreement and
which fee may be charged as a Revolving Credit Advance and be added to and form part
of a Loan.
ARTICLE V – REPRESENTATIONS AND WARRANTIES
5.1
Each Borrower represents and warrants to the Lender that the following statements are true, correct
and complete:
(a)
Authorization, Validity, and Enforceability of this Amendment. Each Borrower has the
corporate power and authority to execute and deliver this Amendment. Each Borrower has
taken all necessary corporate action (including, without limitation, obtaining approval of its
shareholders if necessary) to authorize the execution and delivery of this Amendment. This
Amendment has been duly executed and delivered by the Borrowers and this Amendment
2
constitutes the legal, valid and binding obligations of the Borrowers, enforceable against
them in accordance with their respective terms without defence, compensation, setoff or
counterclaim. Each Credit Party’s execution and delivery of this Amendment does not and
will not conflict with, or constitute a violation or breach of, or constitute a default under, or
result in the creation or imposition of any lien upon the property of the Borrowers by reason
of the terms of (a) any contract, mortgage, hypothec, lien, lease, agreement, indenture, or
instrument to which any of the Borrowers is a party or which is binding on any of them, (b)
any requirement of law applicable to the Borrowers, or (c) the certificate or articles of
incorporation or amalgamation or bylaws of the Borrowers.
Governmental Authorization. No approval, consent, exemption, authorization, or other
action by, or notice to, or filing with, any governmental authority or other person is necessary
or required in connection with the execution, delivery or performance by, or enforcement
against the Borrowers or any Subsidiaries of this Amendment except for such as have been
obtained or made and filings required in order to perfect and render enforceable the
Lender's security interests.
Incorporation of Representations and Warranties From Loan Agreement.
The
representations and warranties contained in the Loan Agreement are and will be true,
correct and complete in all material respects on and as of the Effective Date to the same
extent as though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Absence of Default. No event has occurred and is continuing or will result from the
consummation of the transactions contemplated by this Amendment that would constitute
an Event of Default.
Security. All security delivered to or for the benefit of the Lender pursuant to the Loan
Agreement and the other Loan Documents remains in full force and effect and secures all
Obligations of the Borrowers under the Loan Agreement and the other Loan Documents to
which they are a party.
ARTICLE VI – MISCELLANEOUS
(b)
(c)
(d)
(e)
6.1
6.2
6.3
6.4
Each Borrower (i) reaffirms its Obligations under the Loan Agreement and the other Loan
Documents to which it is a party, and (ii) agrees that the Loan Agreement and the other Loan
Documents to which it is a party remain in full force and effect, except as amended hereby, and are
hereby ratified and confirmed.
The execution, delivery and performance of this Amendment shall not, except as expressly provided
for herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or
remedy of the Lender under the Loan Agreement or any other document.
Each Borrower acknowledges and agrees that it has read and is fully informed and satisfied with all
the terms and conditions of this Amendment and has had the opportunity to obtain independent
legal advice in connection therewith.
This Amendment shall be governed by, and construed in accordance with, the internal laws of the
Province of Alberta and the federal laws of Canada applicable therein without regard to the
principles of conflict of laws.
3
6.5
This Amendment and each other Loan Document may be executed in one or more counterparts
(and by different parties hereto in different counterparts), each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. Delivery by fax or other
electronic transmission of an executed counterpart of a signature page to this Amendment and each
other Loan Document shall be effective as delivery of an original executed counterpart of this
Amendment and such other Loan Document. The words “execution,” “execute”, “signed,”
“signature,” and words of like import in or related to any document to be signed in connection with
this Amendment or any other Loan Document shall be deemed to include electronic signatures, or
the keeping of records in electronic form, each of which shall be of the same legal effect, validity or
enforceability as a manually executed signature or the use of a paper based recordkeeping system,
as the case may be, to the extent and as provided for in any applicable law, including, without
limitation, as in provided Parts 2 and 3 of the Personal Information Protection and Electronic
Documents Act (Canada), the Electronic Commerce Act, 2000 (Ontario), the Electronic Transaction
Acts (British Columbia), the Electronic Transactions Act (Alberta), or any other similar laws based
on the Uniform Electronic Commerce Act of the Uniform Law Conference of Canada. The Lender
may, in its discretion, require that any such documents and signatures executed electronically or
delivered by fax or other electronic transmission be confirmed by a manually-signed original thereof;
provided that the failure to request or deliver the same shall not limit the effectiveness of any
document or signature executed electronically or delivered by fax or other electronic transmission.
[The next pages are the signature pages]
4
DATED as of the date first stated above.
Lender:
ROYAL BANK OF CANADA,
by its attorneys,
Per:
/s/ Jordan Falkenberg
Name: Jordan Falkenberg
Title: Vice-President, Corporate Client
Group - Finance
Borrower:
Borrower:
- 2 -
DIRTT ENVIRONMENTAL SOLUTIONS
LTD.
Per:
/s/ Fareeha Khan
Name: Fareeha Khan
Title: Chief Financial Officer
DIRTT ENVIRONMENTAL SOLUTIONS,
INC.
Per:
/s/ Fareeha Khan
Name: Fareeha Khan
Title: Chief Financial Officer
- 3 -
EXHIBIT A to THIRD AMENDMENT AND CONSENT
LOAN AGREEMENT
Dated as of February 12, 2021
between
ROYAL BANK OF CANADA
as Lender
and
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
and
DIRTT ENVIRONMENTAL SOLUTIONS, INC.
as Borrowers
and
THE GUARANTORS PARTY HERETO
- 4 -
INDEX OF EXHIBITS AND SCHEDULES
Definitions
Lender’s and Credit Parties’ Addresses for Notices
Letters of Credit
Cash Management System
Fees
Schedule of Documents
Bank Products
RBC Lease Facility
Post-Closing Undertakings
Schedule A:
Schedule B:
Schedule C:
Schedule D:
Schedule E:
Schedule F:
Schedule G: Material Contracts
Schedule H:
Schedule I:
Schedule J:
Disclosure Schedule (3.2):
Disclosure Schedule (3.6):
Disclosure Schedule (3.7):
Disclosure Schedule (3.9):
Disclosure Schedule (3.11):
Disclosure Schedule (3.12):
Disclosure Schedule (3.13):
Disclosure Schedule (3.15):
Disclosure Schedule (3.16):
Disclosure Schedule (3.17):
Disclosure Schedule (3.18):
Disclosure Schedule (5.2(b)):
Disclosure Schedule (5.2(e)):
Disclosure Schedule (6.1):
Exhibit A:
Exhibit B:
Exhibit C:
Exhibit D:
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Form of Notice of Borrowing or Continuation/Conversion
Form of Borrowing Base Certificate
Form of Compliance Certificate
Form of Notice of Repayment
TRANSACTION SUMMARY AS OF THE DATE OF THIS AGREEMENT
REVOLVING CREDIT LOAN
Letter of Credit Sublimit: $5,000,000
Maximum Amount: $15,000,000 or the Equivalent
Amount in U.S.$ if available
One (1) year
Term:
Interest Rate:
RBUSBR plus 0.75% per annum
Adjusted Term CORRA plus 2.00% per annum
Term SOFR Rate plus 2.00% per annum plus the Term
SOFR Adjustment
Unused Line Fee: 0.40% per annum
RBP plus 0.75% per annum
to be determined at time of
Letter of Credit Fee:
issue
Borrowing Base:
by Lender) of Eligible Accounts (other than Investment
Grade or Insured Accounts), 90% of the value (as
determined by Lender) of Eligible Investment Grade or
Insured Accounts; plus
(i) 85% of the value (as determined
OTHER FEES
(ii) the lesser of (I) 85% of the net orderly liquidation
value of Eligible Inventory, and (II) 75% of the book value
of Eligible Inventory; less
(iii) reserves.
Closing Fee:
Collateral Monitoring Fee: $1,000 per month in advance
$75,000
STATED EXPIRY DATE
February 12, 2025
The loans described generally here are established and governed by the terms and conditions set forth
below in this Agreement and the other Loan Documents, and if there is any conflict between this
general description and the express terms and conditions below or elsewhere in the Loan Documents,
such other express terms and conditions shall control.
TABLE OF CONTENTS
SECTION 1 – AMOUNT AND TERMS OF CREDIT ........................................................................................ 1
Loans................................................................................................................................................ 1
1.1
Term and Prepayment................................................................................................................... 2
1.2
1.3 Use of Proceeds ............................................................................................................................. 3
Joint and Several............................................................................................................................ 3
1.4
1.5
Interest ............................................................................................................................................. 3
1.6 Continuation and Conversion Elections...................................................................................... 5
1.7 Cash Management System .......................................................................................................... 6
1.8
Fees.................................................................................................................................................. 6
1.9 Receipt of Payments; Taxes......................................................................................................... 6
1.10 Application and Allocation of Payments...................................................................................... 7
1.11 Accounting....................................................................................................................................... 7
1.12 Indemnity ......................................................................................................................................... 7
1.13 Borrowing Base; Reserves ........................................................................................................... 8
1.14 Funding Losses .............................................................................................................................. 8
1.15 Inability to Determine Rates.......................................................................................................... 8
1.16 Benchmark Replacement Setting ................................................................................................ 9
1.17 Canadian Benchmark Replacement Setting .............................................................................. 13
SECTION 2 – CONDITIONS PRECEDENT ...................................................................................................... 15
2.1 Conditions to the Initial Loans ...................................................................................................... 15
Further Conditions to the Loans................................................................................................... 16
2.2
SECTION 3 – REPRESENTATIONS, WARRANTIES AND AFFIRMATIVE COVENANTS...................... 17
3.1 Corporate Existence; Compliance with Law; Investment Company ...................................... 17
3.2 Executive Offices; Corporate or Other Names .......................................................................... 17
3.3 Corporate Power; Authorization; Enforceable Obligations ...................................................... 17
3.4
Financial Statements and Projections; Books and Records ................................................... 18
3.5 Material Adverse Change.............................................................................................................. 18
3.6 Real Estate; Property..................................................................................................................... 18
3.7 Ventures, Subsidiaries and Affiliates; Outstanding Shares and Indebtedness .................... 19
3.8 Government Regulations .............................................................................................................. 19
3.9
Taxes; Charges .............................................................................................................................. 19
3.10 Payment of Obligations ................................................................................................................. 19
3.11 Pension Plans ................................................................................................................................. 19
3.12 Litigation........................................................................................................................................... 20
3.13 Intellectual Property ....................................................................................................................... 20
3.14 Full Disclosure/Know Your Customer ......................................................................................... 20
3.15 Environmental Matters................................................................................................................... 21
3.16 Insurance ......................................................................................................................................... 21
3.17 Bank Accounts ................................................................................................................................ 21
3.18 Accounts and Inventory................................................................................................................. 22
3.19 Conduct of Business ...................................................................................................................... 22
3.20 Material Contracts .......................................................................................................................... 22
3.21 Further Assurances........................................................................................................................ 22
3.22 Default .............................................................................................................................................. 22
3.23 Sanctions ......................................................................................................................................... 22
3.24 Margin Regulations ........................................................................................................................ 23
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3.25 Post-Closing Undertakings ........................................................................................................... 23
SECTION 4 – FINANCIAL REPORTS, INFORMATION AND NOTICES ..................................................... 23
4.1 Reports and Information................................................................................................................ 23
4.2 Notices ............................................................................................................................................. 24
SECTION 5 – FINANCIAL AND NEGATIVE COVENANTS ........................................................................... 25
5.1
Financial Covenants ...................................................................................................................... 25
5.2 Negative Covenants....................................................................................................................... 25
SECTION 6 – SECURITY INTEREST................................................................................................................ 27
6.1 Grant of Security Interest .............................................................................................................. 27
6.2
Lender’s Rights............................................................................................................................... 28
6.3 Grant of License to Use Intellectual Property Collateral .......................................................... 29
SECTION 7 – EVENTS OF DEFAULT, RIGHTS AND REMEDIES .............................................................. 30
7.1 Events of Default ............................................................................................................................ 30
7.2 Remedies......................................................................................................................................... 32
7.3 Waivers by Credit Parties.............................................................................................................. 33
7.4 Proceeds.......................................................................................................................................... 33
SECTION 8 – MISCELLANEOUS ....................................................................................................................... 34
8.1 Complete Agreement; Modification of Agreement .................................................................... 34
8.2 Expenses ......................................................................................................................................... 34
8.3 No Waiver ........................................................................................................................................ 34
8.4 Severability; Section Titles............................................................................................................ 35
8.5 Authorized Signature ..................................................................................................................... 35
8.6 Notices ............................................................................................................................................. 35
8.7 Counterparts.................................................................................................................................... 35
8.8 Assignments.................................................................................................................................... 36
8.9
Time of the Essence ...................................................................................................................... 36
8.10 Governing Law................................................................................................................................ 36
8.11 Submission to Jurisdiction; Waiver of Jury Trial........................................................................ 36
8.12 Press Releases............................................................................................................................... 37
8.13 Reinstatement................................................................................................................................. 37
8.14 Illegality ............................................................................................................................................ 37
8.15 Set Off and Survival ....................................................................................................................... 38
8.16 Increased Costs.............................................................................................................................. 38
8.17 Conflict ............................................................................................................................................. 39
SECTION 9 – SPECIAL PROVISIONS .............................................................................................................. 39
Interest Act (Canada)..................................................................................................................... 39
9.1
9.2 Excess Resulting from Exchange Rate Change ....................................................................... 40
9.3
Judgment Currency........................................................................................................................ 40
9.4 USA Patriot Act............................................................................................................................... 40
9.5 Calculations..................................................................................................................................... 40
This LOAN AGREEMENT is dated as of February 12, 2021 and agreed to by and between DIRTT
Environmental Solutions Ltd. and DIRTT Environmental Solutions, Inc. (each a “Borrower”, and collectively
the “Borrowers”), each other Credit Party executing this Agreement, and Royal Bank of Canada
(“Lender”).
RECITALS:
A.
is willing to provide the Loans and accommodations all in accordance with the terms of this Agreement.
Borrowers desire to obtain the Loans and other financial accommodations from Lender and Lender
B.
Capitalized terms used herein shall have the meanings assigned to them in Schedule A and, for
purposes of this Agreement and the other Loan Documents, the rules of construction set forth in Schedule
A shall govern. All schedules, attachments, addenda and exhibits hereto, or expressly identified to this
Agreement, are incorporated herein by reference, and taken together with this Agreement, constitute but a
single agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the
parties hereto agree as follows:
SECTION 1 – AMOUNT AND TERMS OF CREDIT
1.1
Loans
(a)
(b)
Advances. Subject to the terms and conditions of this Agreement, from the Closing Date
and until the Commitment Termination Date: (i) Lender agrees to make available to the
Borrowers advances (each, a “Revolving Credit Advance”) in $ based upon RBP or Term
CORRA (subject to a minimum of $500,000 in the case of Revolving Credit Advances made
based upon RBP, $1,000,000 in the case of Revolving Credit Advances made based upon
Term CORRA and in both cases in integral multiples of $100,000 in excess thereof) and
subject to such limits as Lender may specify in U.S.$ based upon RBUSBR or the Term
SOFR Rate (subject to a minimum of U.S.$500,000 in the case of Revolving Credit
Advances made based upon RBUSBR, U.S.$1,000,000 in the case of Revolving Credit
Advances made based upon the Term SOFR Rate and in both cases in integral multiples
of U.S.$100,000 in excess thereof) and to incur Letter of Credit Obligations, subject to the
Letter of Credit Sublimit, in an aggregate outstanding amount not to exceed the Borrowing
Availability; and (ii) a Borrower may at its request from time to time borrow, repay and
reborrow, and may cause Lender to incur Letter of Credit Obligations, under this Section
1.1.
Borrowing. A Borrower shall request each Revolving Credit Advance by written notice to
Lender substantially in the form of Exhibit A (each a “Notice of Borrowing”) given no later
than: (i) 3:00 p.m. (Toronto time) one (1) Business Day prior to the Business Day of the
proposed advance, in the case of Revolving Credit Advances to be made in $ based upon
RBP and in U.S.$ based upon RBUSBR; and (ii) 12:00 p.m. (Toronto time) one (1)
Business Day prior to the Business Day of the proposed advance, in the case of Revolving
Credit Advances to be made in $ based upon Term CORRA; and (iii) 12:00 p.m. (Toronto
time) two (2) Business Days prior to the Business Day of the proposed advance and within
two (2) Business Days of the delivery of the documents and information provided for in
Section 4.1(a), in the case of Revolving Credit Advances to be made in U.S.$ based upon
the Term SOFR Rate. Lender shall be fully protected under this Agreement in relying upon,
and shall be entitled to rely upon: (i) any Notice of Borrowing believed by Lender to be
genuine; and (ii) the assumption that the Persons making electronic requests or executing
and delivering a Notice of Borrowing were duly authorized, unless the responsible
individual acting thereon for Lender shall have actual knowledge to the contrary. As an
accommodation to Borrowers, Lender may permit telephonic (which shall, promptly upon
request be confirmed in writing by a Borrower), electronic, or facsimile requests for a
Revolving Credit Advance and electronic or facsimile transmittal of instructions,
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(c)
(d)
(e)
(f)
authorizations, agreements or reports to Lender by Borrowers. Unless Borrowers
specifically direct Lender in writing not to accept or act upon telephonic, facsimile or
electronic communications from a Borrower, Lender shall have no liability to Borrowers for
any loss or damage suffered by Borrowers as a result of Lender’s honouring of any
requests, execution of any instructions, authorizations or agreements or reliance on any
reports communicated to it telephonically, by facsimile or electronically and purporting to
have been sent to Lender by Borrowers, and Lender shall have no duty to verify the origin
of any such communication or the identity or authority of the Person sending it.
Borrowing Base Certificate. In making any Loan hereunder Lender shall be entitled to rely
upon the most recent Borrowing Base Certificate delivered to Lender by Borrowers and
other information available to Lender. Lender shall be under no obligation to make any
further Revolving Credit Advance or incur any other Obligation if Borrowers shall have
failed to deliver a Borrowing Base Certificate to Lender by the time specified in Section
4.1(a) or if an Event of Default shall be continuing.
Letters of Credit. Subject to the terms and conditions of this Agreement, Borrowers shall
have the right to request, and Lender agrees to incur, the Letter of Credit Obligations for
the account of Borrowers in accordance with Schedule C and for greater certainty, any
amount advanced by Lender on account of the Letter of Credit Obligations shall be deemed
a Loan and Revolving Credit Advance.
Bank Products. Subject to the terms and conditions of this Agreement, Lender may provide
Bank Products to Borrowers in accordance with Schedule H.
Overdrafts. The existence of any overdraft in any of the bank accounts maintained with
Lender in consequence of Lender charging or debiting any amount as provided in Section
1.10 or any cheque or other item presented for payment in an amount greater than the
available balance in such account, whether or not pursuant to any limit established by
Lender in its sole, unfettered discretion (an “Overdraft”) shall be deemed to be a request
for an advance hereunder and shall constitute a Loan and Revolving Credit Advance (being
either an RBP based loan or an RBUSBR based loan, as the case may be) in the amount
of such Overdraft. In addition to all other terms and conditions set out in this Agreement,
Lender shall not, however, have any obligation to honour any Overdraft if such proposed
Overdraft together with all other Overdrafts then outstanding should, in the aggregate,
exceed $1,500,000, or the Equivalent Amount thereof in U.S.$.
1.2
Term and Prepayment
(a)
(b)
(c)
Upon the Commitment Termination Date, the obligation of Lender to make Revolving Credit
Advances and extend other credit hereunder shall immediately terminate and Borrowers
shall pay to Lender in full, in cash: (i) all outstanding Revolving Credit Advances and all
accrued but unpaid interest thereon; (ii) an amount sufficient to enable Lender to hold cash
collateral as specified in Schedule C; and (iv) all other non-contingent Obligations due to
Lender.
If the aggregate Revolving Credit Loans shall at any time exceed the Borrowing Availability,
then Borrowers shall immediately repay the Revolving Credit Loan in the amount of such
excess.
Borrowers shall have the right, at any time upon thirty (30) days prior written notice to
Lender to: (i) terminate voluntarily Borrowers’ right to receive or benefit from, and Lender’s
obligation to make Revolving Credit Advances and to incur Letter of Credit Obligations;
- 3 -
and (ii) prepay all of the Obligations; provided, however, that with respect to Revolving
Credit Advances made based upon Term CORRA or the Term SOFR Rate prepaid by
Borrowers prior to the expiration date of the Interest Period applicable thereto, Borrowers
shall pay to Lender the amounts described in Section 1.14(c). Following receipt of such
notice by Lender, the effective date of termination of the Revolving Credit Loan specified
in such notice shall be deemed to be the Commitment Termination Date. If Borrowers
exercise their right of termination and prepayment, or if Lender’s obligation to make Loans
is terminated for any reason prior to the Stated Expiry Date then in effect (including as a
result of the occurrence of a Default), Borrowers shall pay to Lender the amounts (if any)
described in Section 1.14(c).
1.3
Use of Proceeds
Borrowers shall use the proceeds of the Loans: (i) to refinance on the Closing Date certain
outstanding Indebtedness, if any, as provided in Section 2.1(b); (ii) for working capital and (iii) for
general corporate purposes. The Borrowers agree not to request Loans solely for the purpose of
accumulating and/or maintaining cash or cash equivalents in depository or investment accounts
outside of their ordinary course of business.
1.4
Joint and Several
Except as expressly provided otherwise herein, the term “Borrower” as used herein shall include
DIRTT Environmental Solutions Ltd. and DIRTT Environmental Solutions, Inc. and each of them or
either of them, as the context may require. Each Borrower acknowledges that (i) it is a co-borrower
hereunder and shall be jointly and severally, with the other Borrower, directly and primarily liable to
the Lender for the Obligations regardless of which Borrower actually receives Loans or other
extensions of credit hereunder or the amount of such Loans received or the manner in which the
Lender accounts for such Loans or other extensions of credit on its books and records, (ii) each of
the Obligations shall be secured by all of the Collateral, (iii) each Borrower shall have the obligations
of co-maker and shall be primary obligors with respect to the Loans and the other Obligations, it
being agreed that the Loans to each Borrower inure to the benefit of all Borrowers, and (iv) the
Lender is relying on such joint and several liability of the Borrowers as co-makers in extending the
Loans hereunder. Notwithstanding anything to the contrary contained in this Agreement, the
Lender shall be entitled to rely upon any request, notice or other communication received by it from
either Borrower on behalf of both Borrowers, and shall be entitled to treat its giving of any notice
hereunder pursuant to Section 8.6 hereof as notice to each Borrower.
1.5
Interest
Borrowers shall pay interest to Lender on the aggregate outstanding Revolving Credit Advances
as follows: (i) at a floating per annum rate equal to the RBP plus the Applicable Margin in the case
of RBP based loans; (ii) at a floating per annum rate equal to the RBUSBR plus the Applicable
Margin in the case of RBUSBR based loans; (iii) at a per annum rate equal to the Adjusted Term
CORRA plus the Applicable Margin in the case of Term CORRA Loans; and (iv) at a per annum
rate equal to the Term SOFR Rate plus the Applicable Margin in the case of Term SOFR Loans (in
each case, the “Advance Rate”). All computations of interest in respect of Loans made in $ based
upon RBP or Adjusted Term CORRA or in U.S. $ based upon RBUSBR or the Term SOFR Rate
and all calculations of the Letter of Credit Fee, shall be made by Lender on the basis of a three
hundred and sixty-five (365) or three hundred and sixty-six (366), as applicable, day year, in each
case for the actual number of days occurring in the period for which such interest or fee is payable
and shall be calculated daily and compounded (if unpaid) in arrears on the last day of each calendar
month with respect to Loans made in $ based upon RBP or in U.S. $ based upon RBUSBR and on
each Interest Payment Date with respect to Loans made in $ based upon Adjusted Term CORRA.
- 4 -
In the case of Loans made in U.S.$ based upon the Term SOFR Rate, interest on each advance
will accrue daily on the basis of a year of 360 days, for the actual number of days occurring in the
period for which such interest is payable and shall be calculated daily and compounded (if unpaid)
in arrears on each Interest Payment Date. Any change in RBP or RBUSBR shall be effective as of
the opening of business on the Business Day such change takes place.
(a)
(b)
(c)
(d)
(e)
(f)
Each determination by Lender of an interest rate hereunder shall be conclusive and binding
for all purposes, absent manifest error. If any provision of this Agreement would oblige the
Borrowers to make any payment of interest or other amount payable to the Lender in an
amount or calculated at a rate which would be prohibited by any applicable law or would
result in a receipt by the Lender of “interest” at a “criminal rate” (as such terms are
construed under the Criminal Code (Canada)), then, notwithstanding such provision, such
amount or rate shall be deemed to have been adjusted with retroactive effect to the
maximum amount or rate of interest, as the case may be, as would not be so prohibited by
applicable law or so result in a receipt by the Lender of “interest” at a “criminal rate”, such
adjustment to be effected, to the extent necessary (but only to the extent necessary), as
follows: first, by reducing the amount or rate of interest required to be paid to the Lender
under this section and thereafter, by reducing any fees, commissions, costs, expenses,
premiums and other amounts required to be paid to the Lender which would constitute
interest for purposes of section 347 of the Criminal Code (Canada).
Interest shall be payable on the outstanding Revolving Credit Advances: (i) in arrears for
the preceding calendar month on the first Business Day of each calendar month; (ii) on the
Interest Payment Date, in the case of Revolving Credit Advances based upon Adjusted
Term CORRA or the Term SOFR Rate; (iii) on the Commitment Termination Date; and (iv)
if any interest accrues or remains payable after the Commitment Termination Date, upon
demand by Lender.
Effective upon the occurrence of any Event of Default and for so long as any Event of
Default shall be continuing, the Advance Rate and the Letter of Credit Fee shall in the
discretion of Lender be increased by three percentage points (3%) per annum (such
increased rate, the “Default Rate”), and all outstanding Obligations, including unpaid
interest and Letter of Credit Fees, shall continue to accrue interest from the date of such
Event of Default at the Default Rate applicable to such Obligations.
If any interest or any other payment (including Unused Line Fees and Collateral Monitoring
Fees) to Lender under this Agreement becomes due and payable on a day other than a
Business Day, such payment date shall be extended to the next succeeding Business Day
and interest thereon shall be payable at the then applicable rate during such extension.
Canadian Conforming Changes. In connection with the use or administration of CORRA
or Term CORRA, the Lender will have the right to make Canadian Conforming Changes
from time to time and, notwithstanding anything to the contrary herein or in any other Loan
Document, any amendments implementing such Canadian Conforming Changes will
become effective without any further action or consent of any other party to this Agreement
or any other Loan Document. The Lender will promptly notify the Borrowers of the
effectiveness of any Canadian Conforming Changes in connection with the use or
administration of CORRA or Term CORRA, as applicable.
Interest Rates. The Lender does not warrant or accept responsibility for, and shall not have
any liability with respect to (a) the continuation of, administration of, submission of,
calculation of or any other matter related to RBP, RBUSBR, Term CORRA, Adjusted Term
CORRA, Term SOFR, Adjusted Term SOFR or any component definition thereof or rates
- 5 -
referred to in the definition thereof, or any alternative, successor or replacement rate
thereto (including any Benchmark Replacement or Canadian Benchmark Replacement),
including whether the composition or characteristics of any such alternative, successor or
replacement rate (including any Canadian Benchmark Replacement) will be similar to, or
produce the same value or economic equivalence of, or have the same volume or liquidity
as, RBP, RBUSBR, Term CORRA, Adjusted Term CORRA, Term SOFR, Adjusted Term
SOFR or any other Benchmark or Canadian Benchmark prior to its discontinuance or
unavailability, or (b) the effect, implementation or composition of any Canadian Conforming
Changes or Benchmark Replacement Conforming Changes. The Lender and its affiliates
or other related entities may engage in transactions that affect the calculation of RBP,
RBUSBR, Term CORRA, Adjusted Term CORRA, Term SOFR, Adjusted Term SOFR, any
alternative, successor or replacement rate (including any Benchmark Replacement or
Canadian Benchmark Replacement) or any relevant adjustments thereto, in each case, in
a manner adverse to the Borrowers. The Lender may select information sources or
services in its reasonable discretion to ascertain RBP, RBUSBR, Term CORRA, Adjusted
Term CORRA, Term SOFR, Adjusted Term SOFR or any other Benchmark or Canadian
Benchmark, in each case pursuant to the terms of this Agreement, and shall have no
liability to the Borrowers or any other person or entity for damages of any kind, including
direct or indirect, special, punitive, incidental or consequential damages, costs, losses or
expenses (whether in tort, contract or otherwise and whether at law or in equity), for any
error or calculation of any such rate (or component thereof) provided by any such
information source or service.
1.6
Continuation and Conversion Elections
(a)
Borrowers may, upon irrevocable written notice to Lender in accordance with Section
1.6(b):
(i)
(ii)
elect, as of any Business Day, in the case of Revolving Credit Advances based
upon RBUSBR, to convert any such Revolving Credit Advance (or any part thereof
in an amount not less than U.S.$1,000,000 or that is in an integral multiple of
U.S.$100,000 in excess thereof) into a Revolving Credit Advance based upon the
Term SOFR Rate or, as of any Business Day at the end of any Interest Period
applicable thereto, in the case of Revolving Credit Advances based upon the Term
SOFR Rate, to convert any such Revolving Credit Advance (or any part thereof)
into a Revolving Credit Advance based upon RBUSBR;
elect, as of any Business Day, in the case of Revolving Credit Advances based
upon RBP, to convert any such Revolving Credit Advance (any part thereof in any
amount not less than $1,000,000 or that is in an integral multiple of $100,000 in
excess thereof) into a Revolving Credit Advance based upon Adjusted Term
CORRA or, as of any Business Day at the end of any Interest Period applicable
thereto, in the case of Revolving Credit Advances based upon Adjusted Term
CORRA, to convert any such Revolving Credit Advance (or any part thereof) into
a Revolving Credit Advance based upon RBP;
(iii)
elect, as of the last day of the applicable Interest Period, to continue any Revolving
Credit Advances based upon the Term SOFR Rate having Interest Periods
expiring on such day (or any part thereof in an amount not less than U.S.$500,000
or that is in an integral multiple of U.S.$100,000 in excess thereof); and
(iv)
elect, as of the last day of the applicable Interest Period, to continue any Revolving
Credit Advances based upon Adjusted Term CORRA having Interest Periods
- 6 -
expiring on such day (or any part thereof in an amount not less than $500,000 or
that is in an integral multiple of $100,000 in excess thereof);
provided, that if at any time the aggregate amount of Revolving Credit Advances based upon the
Term SOFR Rate or Adjusted Term CORRA, as applicable, is reduced, by payment, prepayment,
or conversion of part thereof to be less than $1,000,000 in the case of Revolving Credit Advances
based upon Adjusted Term CORRA or U.S.$1,000,000 in the case of Revolving Credit Advances
based upon the Term SOFR Rate, such Revolving Credit Advances based upon the Term SOFR
Rate or Adjusted Term CORRA, as applicable, shall automatically convert (i) in the case of
Revolving Credit Advances based upon the Term SOFR Rate into Revolving Credit Advances
based upon RBUSBR and (ii) in the case of Revolving Credit Advances based upon Adjusted Term
CORRA, into Revolving Credit Advances based upon RBP.
(b)
(c)
(d)
(e)
continuation/conversion
shall deliver a notice of
(“Notice of
Borrowers
Continuation/Conversion”) in the form of Exhibit A to be received by Lender not later than
12:00 p.m. (Toronto time) at least one (1) Business Day in advance of the
Continuation/Conversion Date if the Revolving Credit Advances are to be converted into
or continued as Revolving Credit Advances based upon Adjusted Term CORRA and at
least two (2) Business Days in advance of the Continuation/Conversion Date if the
Revolving Credit Advances are to be converted into or continued as Revolving Credit
Advances based upon the Term SOFR Rate and otherwise by 12:00 p.m. on the
Continuation/Conversion Date if the Revolving Credit Advances are to be converted into
Revolving Credit Advances based upon RBP or RBUSBR.
If by no later than two (2) Business Days prior to the expiration of any Interest Period
applicable to Revolving Credit Advances based upon the Term SOFR Rate or by not later
than one (1) Business Day prior to the expiration of any Interest Period applicable to
Revolving Credit Advances based upon Adjusted Term CORRA, Borrowers have failed to
deliver a Notice of Continuation/Conversion to Lender in respect of such Interest Period to
be applicable to Revolving Credit Advances based upon the Term SOFR Rate or Adjusted
Term CORRA or if any Default or Event of Default then exists, and/or if such Notice of
Continuation/Conversion would apply to a Term SOFR Rate Advance after the date that is
one month prior to the Commitment Termination Date, Borrowers shall be deemed to have
elected to convert such Revolving Credit Advances based upon the Term SOFR Rate into
Revolving Credit Advances based upon RBUSBR or Revolving Credit Advances based
upon Adjusted Term CORRA into Revolving Credit Advances based upon RBP, effective
as of the expiration date of such Interest Period.
During the existence of a Default or Event of Default, Borrowers may not elect to have a
Revolving Credit Advance converted or continued and Revolving Credit Advances during
such period shall be based upon RBP or RBUSBR, as applicable.
After giving effect to any conversion or continuation of Revolving Credit Advances, there
may not be more than five (5) different Interest Periods in effect hereunder unless
consented to by Lender.
1.7
Cash Management System
On or prior to the Closing Date and until the Termination Date, Borrowers will establish and maintain the
cash management system described in Schedule D. All payments in respect of the Collateral shall be made
to or deposited in the Blocked Accounts described in Schedule D in accordance with the terms thereof.
1.8
Fees
- 7 -
Each Borrower agrees to pay to Lender the Fees set forth in Schedule E.
1.9
Receipt of Payments; Taxes
Each Borrower shall make each payment under this Agreement (not otherwise made pursuant to Section
1.10) without set-off, counterclaim or deduction and free and clear of all Taxes on the day when due in
lawful money of Canada in immediately available funds to the Blocked Accounts, except as required by
applicable law. If any Borrower shall be required by applicable law to deduct or withhold any Taxes from
any payment to Lender under any Loan Document, then the amount payable to Lender shall be increased
so that, after making all required deductions and withholdings, Lender receives an amount equal to that
which it would have received had no such deductions and withholdings been made. In addition but without
duplication, each Credit Party shall jointly and severally indemnify Lender, within 10 days after demand
therefor, for any Taxes (including Taxes imposed or asserted on amounts payable pursuant to this
sentence) paid or payable by Lender in respect of any amount paid by Borrower under this Agreement,
together with reasonable out-of-pocket expenses with respect thereto. For purposes of computing interest,
Fees and determining Net Borrowing Availability, all payments shall be deemed received by Lender one (1)
Business Day following receipt of immediately available funds in the Blocked Accounts.
1.10
Application and Allocation of Payments
Each Borrower irrevocably agrees that Lender shall have the continuing and exclusive right to apply any
and all payments against the then due and payable Obligations in such order as Lender may deem
advisable. Lender is authorized to, and at its option may (without prior notice or precondition and at any
time or times), but shall not be obligated to, make or cause to be made Revolving Credit Advances on
behalf of either Borrower, for: (a) payment of all Fees, expenses, indemnities, charges, costs, principal,
interest, or other Obligations owing by such Borrower under this Agreement or any of the other Loan
Documents; (b) the payment, performance or satisfaction of any of such Borrower’s obligations with respect
to preservation of the Collateral; or (c) any premium in whole or in part required in respect of any of the
policies of insurance required by this Agreement, even if the making of any such Revolving Credit Advance
causes the outstanding balance of the Revolving Credit Loan to exceed the Borrowing Availability, and
Borrower agrees to repay immediately, in cash, any amount by which the Revolving Credit Loan exceeds
the Borrowing Availability.
1.11
Accounting
Lender is authorized to record on its books and records the date and amount of each Loan and each
payment of principal thereof and such recordation shall constitute prima facie evidence of the accuracy of
the information so recorded, absent manifest error. Lender shall provide Borrower on a monthly basis a
statement and accounting of such recordations but any failure on the part of Lender to keep any such
recordation (or any errors therein) or to send a statement thereof to Borrowers shall not in any manner
affect the obligation of Borrowers to repay any of the Obligations. Except to the extent that a Borrower
shall, within thirty (30) days after such statement and accounting is sent, notify Lender in writing of any
objection Borrowers may have thereto (stating with particularity the basis for such objection), such
statement and accounting shall be deemed final, binding and conclusive upon Borrowers, absent manifest
error.
1.12
Indemnity
Borrower and each other Credit Party executing this Agreement jointly and severally agree to indemnify
and hold Lender and its Affiliates, and their respective employees, officers, directors, professional advisors
and agents (each, an “Indemnified Person”), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or nature whatsoever (including
legal fees and disbursements and other costs of investigation or defence, including those incurred upon
- 8 -
any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the
result of credit having been extended, suspended or terminated under this Agreement and the other Loan
Documents or with respect to the execution, delivery, enforcement, performance or administration of, or in
any other way arising out of or relating to, this Agreement and the other Loan Documents or any other
documents or transactions contemplated by or referred to herein or therein and any actions or failures to
act with respect to any of the foregoing, including any and all product liabilities, Environmental Liabilities,
Taxes and legal costs and expenses arising out of or incurred in connection with any dispute between or
among any parties to any of the Loan Documents (collectively, “Indemnified Liabilities”), except to the
extent that any such Indemnified Liability is finally determined by a court of competent jurisdiction to have
resulted solely from such Indemnified Person’s gross negligence or wilful misconduct. NO INDEMNIFIED
PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY CREDIT PARTY, ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER
OF ATTORNEY OR FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES
WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR
TERMINATED UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR AS A RESULT OF
ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
1.13
Borrowing Base; Reserves
The Borrowing Base shall be determined by Lender (including the eligibility of Accounts and Inventory)
based on the most recent Borrowing Base Certificate delivered to Lender in accordance with Section 4.1(a)
and such other information available to Lender. The Revolving Credit Loan shall be subject to Lender’s
continuing right to withhold from Borrowing Availability reserves, and to increase and decrease such
reserves from time to time, if and to the extent that in Lender’s good faith credit judgment such reserves
are necessary, including to protect Lender’s interest in the Collateral or to protect Lender against possible
non-payment of Accounts for any reason by Account Debtors or possible diminution of the value of any
Collateral or possible non-payment of any of the Obligations or for any Taxes or in respect of any state of
facts which could constitute a Default. Lender may, at its option, implement reserves by designating as
ineligible a sufficient amount of Accounts or Inventory which would otherwise be Eligible Accounts or
Eligible Inventory, as the case may be, so as to reduce the Borrowing Base by the amount of the intended
reserves.
1.14
Funding Losses
Each Borrower shall jointly and severally reimburse and indemnify Lender and hold Lender harmless from
any loss or expense which Lender may sustain or incur as a consequence of:
(a)
(b)
(c)
the failure of any Borrower to make on a timely basis any payment of principal on any
Revolving Credit Advance made based upon the Term SOFR Rate or Adjusted Term
CORRA;
the failure of any Borrower to borrow, continue or convert a Revolving Credit Advance after
Borrower has given (or is deemed to have given) a Notice of Borrowing or a Notice of
Continuation/Conversion, as the case may be; or
the prepayment or other payment (including after acceleration thereof but excluding
prepayment mandated by the provisions of Section 8.14(b)) of any Revolving Credit
Advance made based upon the Term SOFR Rate or Adjusted Term CORRA on a day that
is not the last day of the relevant Interest Period;
including any such loss of anticipated profit and any loss or expense arising from the liquidation or
reemployment of funds obtained by it to maintain its Revolving Credit Advances made based upon the Term
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SOFR Rate or Adjusted Term CORRA or from fees payable to terminate the deposits from which such
funds were obtained. Borrowers shall also pay any customary and reasonable administrative fees charged
by Lender in connection with the foregoing.
1.15
Inability to Determine Rates
If Lender determines, which determination is final, conclusive and binding upon the Borrowers, that,
(a)
(b)
for any reason, adequate and reasonable means do not exist for determining Term CORRA
or the Term SOFR Rate for any requested Interest Period with respect to a proposed
Revolving Credit Advance made based upon Adjusted Term CORRA or the Term SOFR
Rate (including, without limitation, because such rate is not available from or published on
a current basis by the services used by the Lender to obtain such rate), or
that Adjusted Term CORRA or the Term SOFR Rate for any requested Interest Period with
respect to a proposed Revolving Credit Advance made based upon Adjusted Term CORRA
or the Term SOFR Rate does not adequately and fairly reflect the effective cost to Lender
of funding such Revolving Credit Advance or the costs to the Lender are increased or the
income receivable by the Lender is reduced in respect of Revolving Credit Advance,
then Lender will promptly so notify Borrower. Thereafter, the obligation of Lender to make or maintain
Revolving Credit Advances made based upon Adjusted Term CORRA or the Term SOFR Rate, as
applicable, hereunder shall be suspended until Lender revokes such notice in writing, and the Lender may
request that an existing Term SOFR Loan be converted to a RBUSBR based loan or an existing Term
CORRA Loan be covered to a RBP based loan and any such loans will in any event automatically be
converted on the expiry of the then current Interest Period. Borrowers may revoke any Notice of Borrowing
or Notice of Continuation/Conversion then submitted by it. If Borrowers do not revoke such notice, Lender
shall make the Revolving Credit Advance, as proposed by Borrowers, in the amount specified in the
applicable notice submitted by Borrowers, but such Revolving Credit Advance shall be made as a RBUSBR
based loan instead of a Term SOFR Loan or a RBP based loan instead of a Term CORRA Loan, as the
case may be.
1.16
Benchmark Replacement Setting
(a)
Benchmark Replacement.
(i)
to
replace
Notwithstanding anything to the contrary herein or in any other Loan Document,
upon the occurrence of a Benchmark Transition Event, the Lender may amend this
Agreement
then-current Benchmark with a Benchmark
Replacement. Any such amendment will become effective at 5:00 p.m. (Toronto)
time) on the fifth (5th) Business Day after the date such proposed amendment is
provided to the Borrower without any action or consent of the Borrower. No
replacement of a Benchmark with a Benchmark Replacement pursuant to this
Section will occur prior to the applicable Benchmark Transition Start Date.
the
(ii)
No Fx Facility documentation shall be deemed to be a “Loan Document” for
purposes of this Section.
(b)
the use,
Benchmark Replacement Conforming Changes.
administration, adoption or implementation of a Benchmark Replacement, the Lender will
have the right to make Benchmark Replacement Conforming Changes from time to time
and, notwithstanding anything to the contrary herein or in any other Loan Document, any
amendments implementing such Benchmark Replacement Conforming Changes will
In connection with
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become effective without any further action or consent of any other party to this Agreement
or any other Loan Document.
(c)
Notices; Standards for Decisions and Determinations. The Lender will promptly notify
the Borrower of (i) the implementation of any Benchmark Replacement, and (ii) the
effectiveness of any Benchmark Replacement Conforming Changes. The Lender will
promptly notify the Borrower of the removal or reinstatement of any tenor of a Benchmark
pursuant to Subsection (d). Any determination, decision or election that may be made by
the Lender pursuant to this Section 1.16, including any determination with respect to a
tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance
or date and any decision to take or refrain from taking any action or any selection, will be
conclusive and binding absent manifest error and may be made in its sole discretion and
without consent from any other party hereto, except, in each case, as expressly required
pursuant to this Section.
(d)
Unavailability of Tenor of Benchmark. Notwithstanding anything to the contrary herein
or in any other Loan Document, at any time (including in connection with the
implementation of a Benchmark Replacement):
(i)
(ii)
if the then-current Benchmark is a term rate (including the Term SOFR Reference
Rate), and either (A) any tenor for such Benchmark is not displayed on a screen
or other information service that publishes such rate from time to time as selected
by the Lender in its reasonable discretion, or (B) the administrator of such
Benchmark or the regulatory supervisor for the administrator of this Benchmark
has provided a public statement or publication of information announcing that any
tenor for such Benchmark is not or will not be representative or in compliance with
or aligned with the International Organization of Securities Commissions (IOSCO)
Principles for Financial Benchmarks, then the Lender may modify the definition of
"Interest Period" (or any similar or analogous definition) for any Benchmark
settings at or after such time, to remove such unavailable, non-representative, non-
compliant or non-aligned tenor, and
if a tenor that was removed pursuant to clause (i) above either (A) is subsequently
displayed on a screen or information service for a Benchmark (including a
Benchmark Replacement), or (B) is not, or is no longer, subject to an
announcement that it is not or will not be representative or in compliance with or
aligned with the International Organization of Securities Commissions (IOSCO)
Principles for Financial Benchmarks (including a Benchmark Replacement), then
the Lender may modify the definition of "Interest Period" (or any similar or
analogous definition) for all Benchmark settings at or after such time, to reinstate
such previously removed tenor.
(e)
Benchmark Unavailability Period. Upon the Borrower's receipt of notice of the
commencement of a Benchmark Unavailability Period, the Borrower may revoke any
pending request for a Revolving Credit Advance made based upon the Term SOFR Rate,
conversion to or rollover of a Revolving Credit Advance made based upon the Term SOFR
Rate to be made, converted or rolled over during any Benchmark Unavailability Period and,
failing that, the Borrower will be deemed to have converted any such request into a request
for, or a conversion to, a Loan based on RBUSBR, as applicable.
(f)
Definitions.
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(i)
(ii)
“Available Tenor” means, as of any date of determination and with respect to the
then current Benchmark, as applicable, (x) if such Benchmark is a term rate, any
tenor for such Benchmark (or component thereof) that is or may be used for
determining the length of an Interest Period, or (y) otherwise, any payment period
for interest calculated with reference to such Benchmark (or component thereof)
that is or may be used for determining any frequency of making payments of
interest calculated with reference to such Benchmark, in each case as of such date
and not including any tenor for such Benchmark that is then-removed from the
definition of Interest Period pursuant to Section 1.16(d).
“Benchmark” means, initially, Adjusted Term SOFR; provided that if a Benchmark
Transition Event has occurred with respect to Adjusted Term SOFR or the then-
current Benchmark,
the applicable Benchmark
Replacement to the extent that such Benchmark Replacement has replaced such
prior benchmark rate pursuant to Section 1.16(a).
then “Benchmark” means
(iii)
“Benchmark Replacement” means, with respect to any Benchmark Transition
Event, the sum of:
(A)
the alternative benchmark rate that has been selected by the Lender and
the Borrower giving due consideration
to (a) any selection or
recommendation of a benchmark rate or mechanism for determining such
a rate by the Relevant Governmental Body, and (b) any evolving or then-
prevailing market convention for determining a benchmark rate as a
replacement
for Canadian dollar
then-current Benchmark
denominated bilateral credit facilities in Canada at such time; and
the
to
(B)
the related Benchmark Replacement Adjustment;
provided that if such Benchmark Replacement as so determined would be
less than the Floor, such Benchmark Replacement shall be deemed to be
the Floor for the purposes of this Agreement and the other Loan
Documents.
(iv)
“Benchmark Replacement Adjustment" means, with respect to any replacement
of the then-current Benchmark with an Unadjusted Benchmark Replacement, the
spread adjustment, or method for calculating or determining such spread
adjustment (which may be a positive or negative value or zero), that has been
selected by the Lender and the Borrower giving due consideration to (i) any
selection or recommendation of a spread adjustment, or method for calculating or
determining such spread adjustment, for the replacement of such Benchmark with
the applicable Unadjusted Benchmark Replacement by
the Relevant
Governmental Body, or (ii) any evolving or then-prevailing market convention for
determining a spread adjustment, or method for calculating or determining such
spread adjustment, for the replacement of such Benchmark with the applicable
Unadjusted Benchmark Replacement for Canadian dollar-denominated bilateral
credit facilities in Canada at such time.
(v)
“Benchmark Replacement Conforming Changes” means, with respect to either
the use or adoption of Term SOFR Rate or the use, adoption, administration or
implementation of any Benchmark Replacement, any technical, administrative or
operational changes (including changes to the definition of “RBUSBR”, “Business
Day,” the definition of “Interest Period” or any similar or analogous definition, timing
- 12 -
and frequency of determining rates and making payments of interest, timing of
borrowing requests or prepayment, conversion or rollover notices, the applicability
and length of lookback periods, the applicability of breakage provisions, and other
technical, administrative or operational matters) that the Lender decides may be
appropriate to reflect the adoption and implementation of such rate or to permit the
administration thereof by the Lender in a manner substantially consistent with
market practice (or, if the Lender decides that adoption of any portion of such
market practice is not administratively feasible or if the Lender determines that no
market practice for the administration of such rate exists, in such other manner of
administration as the Lender decides is reasonably necessary in connection with
the administration of this Agreement and the other Loan Documents).
(vi)
"Benchmark Replacement Date" means the earliest to occur of the following
events with respect to the then-current Benchmark:
(A)
(B)
In the case of Clause (A) or Clause (B) of the definition of "Benchmark
Transition Event", the later of (i) the date of the public statement or
publication of information referenced therein, and (ii) the date on which the
administrator of such Benchmark (or the published component used in the
calculation thereof) permanently or indefinitely ceases to provide all
Available Tenors of such Benchmark (or such component thereof); or
In the case of Clause (C) of the definition of "Benchmark Transition Event",
the first date on which such Benchmark (or the published component used
in the calculation thereof) has been determined and announced by or on
behalf of the administrator of such Benchmark (or such component
thereof) or the regulatory supervisor for the administrator of such
Benchmark (or such component thereof) to be non-representative or non-
compliant with or non-aligned with the International Organization of
Securities Commissions (IOSCO) Principles for Financial Benchmarks;
provided that such non-representativeness, noncompliance or non-
alignment will be determined by reference to the most recent statement or
publication referenced in such Clause (C) and even if any Available Tenor
of such Benchmark (or such component thereof) continues to be provided
on such date. For the avoidance of doubt, the "Benchmark Replacement
Date" will be deemed to have occurred in the case of Clause (A) or Clause
(B) of this definition with respect to any Benchmark upon the occurrence
of the applicable event or events set forth therein with respect to all then-
current Available Tenors of such Benchmark (or the published component
used in the calculation thereof).
(vii)
“Benchmark Transition Event” means, with respect to any Benchmark, the
occurrence of one or more of the following events with respect to such then-current
Benchmark:
(A)
a public statement or publication of information by or on behalf of the
administrator of such Benchmark (or the published component used in the
calculation thereof) announcing that such administrator has ceased or will
cease to provide all Available Tenors of such Benchmark (or such
component thereof) permanently or indefinitely; provided that, at the time
of such statement or publication, there is no successor administrator that
will continue to provide any Available Tenor of such Benchmark (or such
component thereof);
- 13 -
(B)
(C)
a public statement or publication of information by the regulatory
supervisor for the administrator of such Benchmark (or the published
component used in the calculation thereof), the Board of Governors of the
Federal Reserve System, the Federal Reserve Bank of New York, the
Term SOFR Administrator, an insolvency official with jurisdiction over the
administrator for such Benchmark (or such component thereof), a
resolution authority with jurisdiction over the administrator for such
Benchmark (or such component thereof) or a court or an entity with similar
insolvency or resolution authority over the administrator for such
the
Benchmark (or such component
administrator of such Benchmark (or such component thereof) has ceased
or will cease to provide all Available Tenors of such Benchmark (or such
component thereof) permanently or indefinitely; provided that, at the time
of such statement or publication, there is no successor administrator that
will continue to provide any Available Tenor of such Benchmark (or such
component thereof); or
thereof), which states
that
a public statement or publication of information by or on behalf of the
administrator of such Benchmark (or the published component used in the
calculation thereof) or the regulatory supervisor for the administrator of
such Benchmark (or such component thereof) announcing that all
Available Tenors of such Benchmark (or such component thereof) are not,
or as of a specified future date will not be, representative or in compliance
with or aligned with
International Association of Securities
Commissions (IOSCO) Principles for Financial Benchmarks.
the
For the avoidance of doubt, a “Benchmark Transition Event” will be
deemed to have occurred with respect to any Benchmark if a public
statement or publication of information set forth above has occurred with
respect to each then-current Available Tenor of such Benchmark (or the
published component used in the calculation thereof).
(viii)
(ix)
(x)
"Benchmark Transition Start Date" means, in the case of a Benchmark
Transition Event, the earlier of (a) the applicable Benchmark Replacement Date,
and (b) if such Benchmark Transition Event is a public statement or publication of
information of a prospective event, the 90th day prior to the expected date of such
event as of the date of such public statement or publication of information (or, if
the expected date of such prospective event is fewer than 90 days after such
statement or publication, the date of such statement or publication).
"Benchmark Unavailability Period" means, the period (if any) (a) beginning at
the time that a Benchmark Replacement Date has occurred if, at such time, no
Benchmark Replacement has replaced the then-current Benchmark for all
purposes hereunder and under any Loan Document in accordance with Section
1.16, and (b) ending at the time that a Benchmark Replacement has replaced the
then-current Benchmark for all purposes hereunder and under any Loan Document
in accordance with Section 1.16.
“Relevant Governmental Body” means the Board of Governors of the Federal
Reserve System of the United States or the Federal Reserve Bank of New York,
or a committee officially endorsed or convened by the Board of Governors of the
Federal Reserve System of the United States or the Federal Reserve Bank of New
York, or any successor thereto.
- 14 -
(xi)
“Unadjusted Benchmark Replacement" means the applicable Benchmark
Replacement excluding the related Benchmark Replacement Adjustment
1.17
Canadian Benchmark Replacement Setting
(a)
(b)
(c)
(d)
Canadian Benchmark Replacement. Notwithstanding anything to the contrary herein or in
any other Loan Document, if a Canadian Benchmark Transition Event and its related
Canadian Benchmark Replacement Date have occurred prior any setting of the then-
current Canadian Benchmark, then (x) if a Canadian Benchmark Replacement is
determined in accordance with clause (a) of the definition of “Canadian Benchmark
Replacement” for such Canadian Benchmark Replacement Date, such Canadian
Benchmark Replacement will replace such Canadian Benchmark for all purposes
hereunder and under any Loan Document in respect of such Canadian Benchmark setting
and subsequent Canadian Benchmark settings without any amendment to, or further action
or consent of any other party to, this Agreement or any other Loan Document and (y) if a
Canadian Benchmark Replacement is determined in accordance with clause (b) of the
definition of “Canadian Benchmark Replacement” for such Canadian Benchmark
Replacement Date, such Canadian Benchmark Replacement will replace such Canadian
Benchmark for all purposes hereunder and under any Loan Document in respect of any
Canadian Benchmark setting at or after 5:00 p.m. (Toronto time) on the fifth (5th) Business
Day after the date notice of such Canadian Benchmark Replacement is provided to the
Borrowers without any amendment to, or further action or consent of any other party to,
this Agreement or any other Loan Document.
Canadian Conforming Changes. In connection with the use, administration, adoption or
implementation of a Canadian Benchmark Replacement, the Lender will have the right to
make such Canadian Conforming Changes from time to time and, notwithstanding anything
to the contrary herein or in any other Loan Document, any amendments implementing such
Canadian Conforming Changes will become effective without any further action or consent
of any other party to this Agreement or any other Loan Document.
Notices; Standards for Decisions and Determinations. The Lender will promptly notify the
Borrowers of (i) the implementation of any Canadian Benchmark Replacement and (ii) the
effectiveness of any such Canadian Conforming Changes in connection with the use,
administration, adoption or implementation of a Canadian Benchmark Replacement. The
Lender will notify the Borrowers of (x) the removal or reinstatement of any tenor of a
Canadian Benchmark pursuant to Section 1.17(d) and (y) the commencement of any
Canadian Benchmark Unavailability Period. Any determination, decision or election that
may be made by the Lender pursuant to this Section 1.17 including any determination with
respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event,
circumstance or date and any decision to take or refrain from taking any action or any
selection, will be conclusive and binding absent manifest error and may be made in its or
their sole discretion and without consent from any other party to this Agreement or any
other Loan Document, except, in each case, as expressly required pursuant to this Section
1.17.
Unavailability of Tenor of Canadian Benchmark. Notwithstanding anything to the contrary
herein or in any other Loan Document, at any time (including in connection with the
implementation of a Canadian Benchmark Replacement), (i) if the then-current Canadian
Benchmark is a term rate (including Term CORRA) and either (A) any tenor for such
Canadian Benchmark is not displayed on a screen or other information service that
publishes such rate from time to time as selected by the Lender in its reasonable discretion
or (B) the regulatory supervisor for the administrator of such Canadian Benchmark has
- 15 -
provided a public statement or publication of information announcing that any tenor for
such Canadian Benchmark is not or will not be representative, then the Lender may modify
the definition of “Interest Period” (or any similar or analogous definition) for any Canadian
Benchmark settings at or after such time to remove such unavailable or non-representative
tenor and (ii) if a tenor that was removed pursuant to clause (i) above either (A) is
subsequently displayed on a screen or information service for a Canadian Benchmark
(including a Canadian Benchmark Replacement) or (B) is not, or is no longer, subject to an
announcement that it is not or will not be representative for a Canadian Benchmark
(including a Canadian Benchmark Replacement), then the Lender may modify the
definition of “Interest Period” (or any similar or analogous definition) for all Canadian
Benchmark settings at or after such time to reinstate such previously removed tenor.
(e)
Canadian Benchmark Unavailability Period. Upon the Borrower’s receipt of notice of the
commencement of a Canadian Benchmark Unavailability Period, the Borrowers may
revoke any pending request for a Revolving Credit Advances of, conversion to or
continuation of Loans, which are of the type that have a rate of interest determined by
reference to the then-current Canadian Benchmark, to be made, converted or continued
during any Canadian Benchmark Unavailability Period and, failing that, the Borrowers will
be deemed to have converted any such request into a request for a Revolving Credit
Advance of or conversion to (i) for a Canadian Benchmark Unavailability Period in respect
of Term CORRA, Daily Compounded CORRA Loans, and (ii) for a Canadian Benchmark
Unavailability Period in respect of a Canadian Benchmark other than RBP based Loans.
SECTION 2 – CONDITIONS PRECEDENT
2.1
Conditions to the Initial Loans
Lender shall not be obligated to make any of the Loans or to perform any other action hereunder, until the
following conditions have been satisfied in a manner satisfactory to Lender in its sole discretion, or waived
in writing by Lender:
(a)
(b)
(c)
(d)
(e)
(f)
the Loan Documents to be delivered on or before the Closing Date shall have been duly
executed and delivered by the appropriate parties, all as set forth in the Schedule of
Documents (Schedule F);
Lender shall have received evidence that all of the obligations of the Credit Parties to Royal
Bank of Canada under the Existing Credit Facility as in effect immediately prior to the
Closing Date will be performed and paid in full from the proceeds of the initial Loans;
Lender shall have received and shall be satisfied with such estoppel letters, landlord
waivers, mortgagee, processor and bailee waivers and such other consents (including
consents from Governmental Authorities) as Lender may require in its discretion;
Lender shall have received and shall be satisfied with such subordination and intercreditor
agreements as Lender may require in its discretion;
the insurance policies provided for in Section 3.16 shall be in full force and effect, together
with appropriate evidence showing loss payable or additional insured clauses or
endorsements in favour of Lender as required under such Section;
as of the Closing Date, Net Borrowing Availability shall be not less than $8,000,000 after
giving effect to the initial Revolving Credit Advances and Letter of Credit Obligations
(calculated on a pro forma basis, with trade payables being paid currently, and expenses
- 16 -
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
and liabilities being paid in the ordinary course of business and without acceleration of
sales);
[reserved];
Lender shall have received opinions of counsel to each of the Credit Parties (including
opinions relating to enforceability, the Lender’s security in each relevant jurisdiction and
such other matters as the Lender reasonably considers necessary in its discretion) with
respect to each Loan Document in form and substance satisfactory to Lender;
Lender (and where applicable, Lender’s counsel) shall have completed and be satisfied
with the results of all business, environmental and legal due diligence (including review
with results satisfactory to Lender of Borrower’s union contracts, if applicable);
Lender shall have received and be satisfied with the results of, Borrower’s field exam, and
with regard to the Collateral, the inventory control systems, the books and records and the
reporting capability of the Credit Parties;
Lender shall have been provided with and be satisfied with its review of, each Credit
Parties’ documents regarding its corporate and capital structure, Material Contracts, debt
instruments and governing documents;
Lender shall have reviewed and be satisfied with Credit Parties’ customers’ contracts
(including distribution agreements, licence agreements and supply agreements) and, if
requested by Lender, the purchase orders relating thereto;
Lender shall have completed and be satisfied with the results of the background and
reference checks on Borrower, senior management of Borrowers and the other Credit
Parties and shall have received all documentation and other information required by
regulatory and governmental authorities under applicable “know-your-customer”, sanctions
and anti-money laundering rules and regulations;
Lender shall have received, and same shall continue to be valid and current, certified
copies of all the constating documents, by-laws and resolutions of the directors (or
partners, members or shareholders as required by Lender) authorizing the Loan
Documents, and certificates of incumbency, for Borrowers and each other Credit Party;
Lender shall have received and be satisfied with the Borrowers’ (i) most recent individual
and consolidated Projections for the 24 months following the Closing Date (including
projections of balance sheet, operating results, cash flows, Capital Expenditures and Net
Borrowing Availability), and (ii) updated aged accounts receivable listing (supported by
detailed rebates payable), aged accounts payable listing and detailed inventory listing;
a Compliance Certificate shall have been submitted prior to the Closing Date confirming all
required covenants have been met; and
the Lender shall have received all fees and other amounts due and payable on or prior to
the Closing Date, including, reimbursement or payment of all for all costs and expenses
(including the fees and expenses of all counsel, advisors, consultants (including
environmental and management consultants), field examiners, appraisers required to be
reimbursed or paid by the Borrowers hereunder or under any other Loan Document.
- 17 -
2.2
Further Conditions to the Loans
Lender shall not be obligated to fund any Loan (including the initial Loan(s)), if, as of the date thereof:
(a)
(b)
(c)
(d)
any representation or warranty by any Credit Party contained herein or in any of the other
Loan Documents shall be untrue or incorrect as of such date, except to the extent that any
such representation or warranty is expressly stated to relate to a specific earlier date, in
which case, such representation and warranty shall be true and correct as of such earlier
date;
any event or circumstance, which has had or reasonably could be expected to have a
Material Adverse Effect, shall have occurred since the Closing Date;
any Default shall have occurred and be continuing or would result after giving effect to such
Loan; or
after giving effect to such Loan, the Revolving Credit Loan would exceed the Borrowing
Availability.
The request and acceptance by a Borrower of the proceeds of any Loan shall be deemed to constitute, as
of the date of such request and the date of such acceptance: (i) a representation and warranty by Borrowers
that the conditions in this Section 2.2 have been satisfied; and (ii) a restatement by Borrowers of each of
the representations and warranties made by it in each Loan Document and a reaffirmation by Borrowers of
the granting and continuance of Lender’s Liens pursuant to the Loan Documents.
SECTION 3 – REPRESENTATIONS, WARRANTIES AND AFFIRMATIVE COVENANTS
To induce Lender to enter into this Agreement and to make the Loans, each Borrower and each other Credit
Party executing this Agreement represent and warrant to Lender (each of which representations and
warranties shall survive the execution and delivery of this Agreement), and promise to and agree with
Lender at all times until the Termination Date as follows:
3.1
Corporate Existence; Compliance with Law; Investment Company
Each Credit Party:
(a)
(b)
is, as of the Closing Date, and will continue to be: (i) a corporation or partnership, as
applicable, duly organized, validly existing, registered and in good standing under the laws
of the jurisdiction of its incorporation or formation; (ii) duly qualified to do business and in
good standing in each other jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification, except where the failure to be so
qualified could not reasonably be expected to have a Material Adverse Effect; and (iii) in
compliance with all Requirements of Law, including without limitation, laws relating to the
prevention of money laundering and terrorist financing and Contractual Obligations, except
to the extent failure to comply therewith could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect;
has and will continue to have: (i) the requisite power and authority and the legal right to
execute, deliver and perform its obligations under the Loan Documents, and to own,
pledge, mortgage or otherwise encumber and operate its properties, to lease the property
it operates under lease, and to conduct its business as now, heretofore or proposed to be
conducted; and (ii) all licenses, permits, franchises, rights, powers, consents or approvals
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from or by all Persons or Governmental Authorities having jurisdiction over such Credit
Party which are necessary or appropriate for the conduct of its business;
is Solvent; and
is not an “investment company”, or a company “controlled” by a “registered investment
company” or a “principal underwriter” of a “registered investment company”, within the
meaning of the Investment Company Act of 1940, as amended.
(c)
(d)
3.2
Executive Offices; Corporate or Other Names
The full legal name of and jurisdiction of organization of each Credit Party and each of its Subsidiaries is
set forth on Disclosure Schedule (3.2). The location of each Credit Party’s chief executive office, corporate
offices, warehouses, other locations of Collateral and locations where records with respect to Collateral are
kept (including in each case the county of such locations) are as set forth in Disclosure Schedule (3.2) and,
except as set forth in such Disclosure Schedule, such locations have not changed during the preceding
twelve (12) months. As of the Closing Date, during the prior five years, except as set forth in Disclosure
Schedule (3.2), no Credit Party has been known as or conducted business in any other name (including
trade or business names). Disclosure Schedule (3.2) also sets forth the corporate organizational chart of
the Credit Parties as of the Closing Date.
3.3
Corporate Power; Authorization; Enforceable Obligations
The execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party,
and the creation of all Liens provided for herein and therein: (a) are and will continue to be within such
Credit Party’s power and authority; (b) have been and will continue to be duly authorized by all necessary
or proper action; (c) are not and will not be in violation of any Requirement of Law or Contractual Obligation
of such Credit Party (except in the case of Contractual Obligations, where such violation would not
reasonably be expected to result in a Material Adverse Effect) ; (d) do not and will not result in the creation
or imposition of any Lien (other than in favour of Lender) upon any of the Collateral; and (e) do not and will
not require the consent or approval of any Governmental Authority (except in the case of the assignment
of any receivables from a Governmental Authority) or any other Person, where such violation would not
reasonably be expected to result in a Material Adverse Effect. As of the Closing Date, each Loan Document
shall have been duly executed and delivered on behalf of each Credit Party thereto, and each such Loan
Document upon such execution and delivery shall be and will continue to be a legal, valid and binding
obligation of such Credit Party, enforceable against it in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency and other similar laws affecting creditors’ rights
generally.
3.4
Financial Statements and Projections; Books and Records
(a)
The Financial Statements delivered by Borrowers to Lender for its most recently ended
Fiscal Year, Fiscal Quarter or and Fiscal Month, as applicable, are true, correct and
complete and reflect fairly and accurately the financial condition of Borrowers as of the date
of each such Financial Statement in accordance with GAAP with the exception that the
monthly statements do not include full note disclosure or tax accruals. The Projections
most recently delivered by Borrowers to Lender have been prepared in good faith, with
care and diligence and use assumptions that are reasonable under the circumstances at
the time such Projections were prepared and as of the date delivered to Lender and all
such assumptions are disclosed in the Projections; and
(b)
Each Borrower and the other Credit Parties shall keep adequate Books and Records with
respect to the Collateral and its business activities in which proper entries, reflecting all
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consolidated and consolidating financial transactions, and payments and credits received
on, and all other dealings with, the Collateral, shall be made in accordance with GAAP and
all Requirements of Law and on a basis consistent with the Financial Statements.
3.5
Material Adverse Change
Between the date of the most recent audited consolidated Financial Statements of the Canadian Borrower
delivered to Lender and the Closing Date: (a) no Credit Party has incurred any obligations (except the
Convertible Debentures), contingent or non-contingent liabilities, or liabilities for Charges, long-term leases
or unusual forward or long-term commitments which are not reflected in the unaudited consolidated monthly
financial statements which could, alone or in the aggregate, reasonably be expected to have a Material
Adverse Effect; and (b) no events have occurred which alone or in the aggregate has had or could
reasonably be expected to have a Material Adverse Effect. No Credit Party is in default, and to such Credit
Party’s knowledge, no third party is in default, under or with respect to any of its Contractual Obligations,
which alone or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect.
3.6
Real Estate; Property
The real estate listed in Disclosure Schedule (3.6) constitutes, as of the Closing Date, all of the (i) real
property owned, or (ii) leased or used by each Credit Party in its business having Collateral in excess of
$50,000, and such Credit Party will not execute any material agreement or contract in respect of the material
real estate after the date of this Agreement without giving Lender prompt prior written notice thereof. Each
Credit Party holds and will continue to hold good and marketable fee simple title to all of its owned real
estate, and good and marketable title to all of its other properties and assets, and valid and insurable
leasehold interests in all of its leases (both as lessor and lessee, sublessee or assignee), and none of the
properties and assets of any Credit Party are or will be subject to any Liens, except Permitted
Encumbrances. With respect to each of the premises identified in Disclosure Schedule (3.6) on or prior to
the Closing Date, a bailee, landlord or mortgagee waiver acceptable to Lender has been obtained except
as expressly noted in Disclosure Schedule (3.6).
3.7
Ventures, Subsidiaries and Affiliates; Outstanding Shares and Indebtedness
As at the Closing Date, the ownership structure of the Canadian Borrower and its Subsidiaries is as set out
in forth in Disclosure Schedule (3.7) and except as set forth in such schedule, no Credit Party has any
Subsidiaries, is engaged in any joint venture or partnership with any other Person, or conducts any of its
business with an Affiliate. Except for the Canadian Borrower, all of the issued and outstanding Shares of
each Credit Party (including all rights to purchase options, warrants or similar rights or agreements pursuant
to which any Credit Party may be required to issue, sell, repurchase or redeem any of its Shares) as of the
Closing Date are registered in the name of each of the Shareholders (and in the amounts) set forth on
Disclosure Schedule (3.7) or an updated Schedule (3.7) delivered pursuant to Section 4.2.
3.8
Government Regulations
To the extent any Credit Party is subject to or regulated under any federal, provincial, territorial or state
statute, rule or regulation that restricts or limits such Person’s ability to incur Indebtedness, pledge,
hypothecate, mortgage or otherwise encumber its assets, or to perform its obligations under the Loan
Documents, any such Credit Party has complied with such laws. The making of the Loans, the application
of the proceeds and repayment thereof, and the consummation of the transactions contemplated by the
Loan Documents do not and will not violate any Requirement of Law.
3.9
Taxes; Charges
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Except as disclosed on Disclosure Schedule (3.9), all tax returns, reports and statements required by any
Governmental Authority to be filed by each Borrower or any other Credit Party have, as of the Closing Date,
been filed and will, until the Termination Date, be filed with the appropriate Governmental Authority and no
tax Lien (other than Permitted Encumbrances) has been filed against any Credit Party or any Credit Party’s
property. Proper and accurate amounts have been and will be withheld by each Borrower and each other
Credit Party from their respective past or present employees for all periods in complete compliance with all
Requirements of Law and such withholdings have been and will be timely paid to the appropriate
Governmental Authorities. Disclosure Schedule (3.9) sets forth as of the Closing Date those taxable years
for which any Credit Party’s tax returns are currently being audited by the Canada Revenue Agency, the
Internal Revenue Service or any other applicable Governmental Authority and any assessments or
threatened assessments in connection with such audit, or otherwise currently outstanding. Except as
described on Disclosure Schedule (3.9), none of the Credit Parties nor their respective predecessors are
liable for any Charges related to taxes: (a) under any agreement (including any tax sharing agreements or
agreement extending the period of assessment of any Charges); or (b) to each Credit Party’s knowledge,
as a transferee.
3.10
Payment of Obligations
Each Credit Party will pay, discharge or otherwise satisfy at or before maturity or before they become
delinquent, as the case may be, all of its Charges and other obligations of whatever nature, except where
the amount or validity thereof is at such time being contested in good faith by appropriate proceedings and
reserves in conformity with GAAP with respect thereto have been provided on the books of such Credit
Party and none of the Collateral is or could reasonably be expected to become subject to any Lien or
forfeiture or loss as a result of such contest.
3.11
Pension Plans
Disclosure Schedule (3.11) lists all Plans applicable to the Credit Parties (other than, for greater certainty,
Plans maintained by the Government of Canada or any Government of a Province of Canada to which a
Credit Party is obligated to contribute under any applicable law). Each Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal, state, provincial or territorial
laws. No Pension Event has occurred or is reasonably expected to occur. The aggregate amount of all
normal contributions (as such term is defined for the purpose of the BIA) accruing due but not paid or
remitted, all amounts withheld from employees and not paid or remitted and other amounts which might
give rise to a Lien giving any priority under the BIA shall never exceed the Minimum Actionable Amount.
Notwithstanding anything to the contrary in this Agreement, to the extent that Lender determines that any
Lien associated with any Pension Event could reasonably be expected to have priority to any Lien
established by Lender, a reserve will immediately be established in an amount that Lender deems
necessary in its sole and absolute discretion (it being understood that such amount may equal the amount
of the obligation secured by such Lien), and to the extent that after the establishment of such reserve the
Revolving Credit Loans exceed Borrowing Availability and such overadvance is not cured within two (2)
days, it shall be an immediate Event of Default. No ERISA Event has occurred or is reasonably expected
to occur. The present value of all accumulated benefit obligations under each Plan (based on the
assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the
date of the most recent financial statements reflecting such amounts, exceed by more than the Minimum
Actionable Amount the fair market value of the assets of such Plan, and the present value of all accumulated
benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of
Financial Accounting Standards No. 87) did not, as of the date of the most recent Financial Statements
reflecting such amounts, exceed by more than the Minimum Actionable Amount, the fair market value of
the assets of all such underfunded Plans.
3.12
Litigation
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No Litigation is pending or, to the knowledge of any Credit Party, threatened against any Credit Party or
against any Credit Party’s properties or revenues: (a) with respect to any of the Loan Documents or any of
the transactions contemplated hereby or thereby; or (b) which, if adversely determined, could reasonably
be expected to have a Material Adverse Effect. Except as set forth on Disclosure Schedule (3.12), as of
the Closing Date, there is no Litigation pending or threatened against any Credit Party which seeks
damages in excess of the Minimum Actionable Amount or injunctive relief or alleges criminal misconduct of
any Credit Party.
3.13
Intellectual Property
As of the Closing Date, all material Intellectual Property owned or used by any Credit Party is listed, together
with application or registration numbers, where applicable, in Disclosure Schedule (3.13). Each Credit
Party owns, or is licensed to use, all Intellectual Property necessary to conduct its business as currently
conducted except for such Intellectual Property the failure of which to own or license could not reasonably
be expected to have a Material Adverse Effect. Each Credit Party will maintain the patenting and
registration of all Intellectual Property owned by it with the appropriate Governmental Authority and each
Credit Party will promptly apply to patent or register, as the case may be, all new Intellectual Property
developed by it and notify Lender in writing five (5) Business Days after filing any such new patent or
registration provided that in each case the patenting or registration of such Intellectual Property is
commercially reasonable or necessary and the failure to patent or register could reasonably be expected
to result in a Material Adverse Effect.
3.14
Full Disclosure/Know Your Customer
No information contained in any Loan Document, the Financial Statements or any written statement
furnished by or on behalf of any Credit Party under any Loan Document, contains any untrue statement of
a material fact or omits to state a material fact necessary to make the statements contained herein or therein
not misleading in light of the circumstances under which they were made. Without limitation to any other
term hereof, each Credit Party shall provide Lender with such documentation and other evidence as is
determined necessary by Lender in or for it to be satisfied that it has complied and all times will comply with
all “know your customer” requirements under all applicable Requirements of Law (including in connection
with any change of laws or requirement or any proposed or actual assignment by Lender). To the extent
applicable, each Credit Party is in compliance, in all material respects, with the (a) Trading with the Enemy
Act, as amended, and each of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) and any other enabling legislation or executive
order relating thereto, and (b) Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism (USA Patriot Act of 2001) (the "Patriot Act"). No part of the proceeds
of the Loans made hereunder will be used by any Credit Party or any of its Affiliates, directly or indirectly,
for any payments to any subsidiary, joint venture partner, governmental official or employee, political party,
official of a political party, candidate for political office, or anyone else acting in an official capacity, or any
other Person (i) in furtherance of an offer, payment, promise to pay or authorization of the payment of giving
of money, or anything else of value, to any Person in violation of the United States Foreign Corrupt Practices
Act of 1977, as amended, and the rules and regulations thereunder, or any other applicable anti-corruption
law.
3.15
Environmental Matters
Except as set forth on Disclosure Schedule (3.15), as of the Closing Date: (a) each real property location
owned, leased or occupied by or otherwise in the charge, management or control of each Credit Party (the
“Real Property”) is maintained free of material contamination that is required by the applicable
Environmental Laws to be removed, remediated or mitigated; (b) no Credit Party is subject to any
Environmental Liabilities or, to any Credit Party’s knowledge, potential Environmental Liabilities, in excess
of the Minimum Actionable Amount in the aggregate; (c) no notice has been received by any Credit Party
- 22 -
identifying it as a “potentially responsible party” or otherwise identifying it as a potentially liable party or
requesting information under the EPA or analogous federal or provincial laws, in each case, to the extent
applicable, and to the knowledge of any Credit Party, there are no facts, circumstances or conditions that
may result in any Credit Party being identified as a “potentially responsible party” under the EPA or
analogous federal or provincial laws, in each case, to the extent applicable; and (d) each Credit Party has
provided to Lender copies of all existing environmental reports, reviews and audits and all written
information pertaining to actual or potential Environmental Liabilities, in each case relating to each Real
Property location. Each Credit Party shall comply in all material respects with all applicable Environmental
Laws and environmental permits.
3.16
Insurance
As of the Closing Date, Disclosure Schedule (3.16) lists all insurance of any nature maintained for current
occurrences by each Credit Party, as well as a summary of the terms of such insurance. Each Credit Party
shall deliver to Lender certificates of insurance evidencing all of its and those of its Subsidiaries: (a) “All
Risks” and business interruption insurance policies naming Lender as loss payee; and (b) commercial
general liability policies naming Lender as an additional insured. All policies of insurance on real and
personal property will be adequate in form, substance, scope and amount and will contain an endorsement,
all in form and substance acceptable to Lender, showing loss payable to Lender (I.B.C. Form 3000 or
equivalent) and extra expense and business interruption endorsements. Such endorsement, or an
independent instrument furnished to Lender, will provide that the insurance companies will give Lender at
least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or
cancelled and that no act or default of any Borrowers or any other Person shall affect the right of Lender to
recover under such policy or policies of insurance in case of loss or damage. Each Credit Party shall direct
all present and future insurers under its “All Risk” policies of insurance to pay all proceeds payable
thereunder directly to Lender. If any insurance proceeds are paid by cheque, draft or other instrument
payable to any Credit Party and Lender jointly, Lender may endorse such Credit Party’s name thereon and
do such other things as Lender may deem advisable to reduce the same to cash. Lender reserves the right
at any time, upon review of each Credit Party’s risk profile, to require additional forms and limits of
insurance, to be obtained on thirty (30) days notice to the applicable Credit Party, provided such insurance
is available and can be obtained on commercially reasonable terms. Each Credit Party shall, on each
anniversary of the Closing Date and from time to time at Lender’s request, deliver to Lender a report by a
reputable insurance broker, satisfactory to Lender, with respect to such Credit Party’s insurance policies.
Each Credit Party will maintain all such insurance in effect during the term of this Agreement.
3.17
Bank Accounts
Each Borrower and the other Credit Parties shall maintain deposit and/or other accounts, including the
Blocked Accounts and Disbursement Accounts, with Lender or an Affiliate of Lender acceptable to Lender
and will not have any other bank accounts except for the accounts shown on Disclosure Schedule (3.17)
without the prior consent of Lender.
3.18
Accounts and Inventory
As of the date of each Borrowing Base Certificate delivered to Lender, each Account listed thereon as an
Eligible Account shall be an Eligible Account and all Inventory listed thereon as Eligible Inventory shall be
Eligible Inventory. No Credit Party has made, and will not make, any agreement with any Account Debtor
for any extension of time for the payment of any Account, any compromise or settlement for less than the
full amount thereof, any release of any Account Debtor from liability therefor, or any deduction therefrom
except a discount or allowance for prompt or early payment allowed by a Credit Party or except for any
extensions of time for payment in the ordinary course of its business consistent with historical practice, or
after taking into account current COVID pandemic conditions, and as previously disclosed to Lender in
writing. Disclosure Schedule (3.18) sets forth each Account Debtor from whom a Credit Party has obtained
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an offset waiver in form and substance satisfactory to Lender. With respect to the Accounts pledged as
collateral pursuant to any Loan Document: (a) the amounts shown on all invoices, statements and reports
which may be delivered to Lender with respect thereto are actually and absolutely owing to the relevant
Credit Party as indicated thereon and are not in any way contingent; (b) no payments have been or shall
be made thereon except payments immediately delivered to the applicable accounts described in paragraph
1 of Schedule D or Lender as required hereunder; and (c) to each Credit Parties’ knowledge, all Account
Debtors have the capacity to contract.
3.19
Conduct of Business
Each Credit Party: (a) shall conduct its business substantially as now conducted or as otherwise permitted
hereunder; and (b) shall at all times maintain, preserve and protect all of the Collateral and all of such Credit
Party’s other property and assets, used or useful in the conduct of its business and keep the same in good
repair, working order and condition and make, or cause to be made, all necessary or appropriate repairs,
replacements and improvements thereto consistent with industry practices.
3.20 Material Contracts
As at the Closing Date, all of the Material Contracts of the Credit Parties are described in Schedule G. No
Credit Party has received any notice of default or termination under any Material Contracts and are not
aware of any default upon the basis of which the other party to any such agreement could terminate such
agreement.
3.21
Further Assurances
At any time and from time to time, upon the written request of Lender and at the sole expense of Borrowers,
Borrowers and each other Credit Party shall promptly and duly execute and deliver any and all such further
financing statements, financing change statements, instruments and documents and take such further
action as Lender may reasonably deem desirable: (a) to obtain the full benefits of this Agreement and the
other Loan Documents; (b) to protect, preserve and maintain Lender’s rights in any Collateral; or (c) to
enable Lender to exercise all or any of the rights and powers herein granted.
3.22
Default
No Default or Event of Default has occurred and is continuing.
3.23
Sanctions
No Credit Party nor any of its Subsidiaries is in violation of any of the country or list based economic and
trade sanctions administered and enforced by OFAC or Canadian Anti-Terrorism Laws. No Credit Party
nor any of its Subsidiaries: (a) is a Sanctioned Person or a Sanctioned Entity; (b) has assets located in
Sanctioned Entities; (c) derives revenues from investments in, or transactions with Sanctioned Persons or
Sanctioned Entities; or (d) engages in any dealing or transactions prohibited by Canadian Anti-Terrorism
Laws. The proceeds of any loan made hereunder will not be used (A) to fund any operations in, finance
any investments or activities in, or make any payments to, a Sanctioned Person or a Sanctioned Entity or
(B) in any other manner that would result in a violation of such sanctions by any Person.
3.24 Margin Regulations
No Credit Party is, or will be, engaged in the business of purchasing or selling Margin Stock or extending
credit for the purpose of purchasing or carrying Margin Stock.
3.25
Post-Closing Undertakings
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The Credit Parties will ensure that all post closing undertakings as set forth in Schedule J (collectively, the
“Post-Closing Undertakings”) have been satisfied within the time periods set forth therein and any failure
to satisfy any of the Post-Closing Undertakings within the applicable time periods shall constitute an Event
of Default.
SECTION 4 – FINANCIAL REPORTS, INFORMATION AND NOTICES
4.1
Reports and Information
From the Closing Date until the Termination Date, the Borrowers shall deliver to Lender:
(a)
as frequently as Lender may reasonably request and in any event no less than (i)
within fifteen (15) Business Days following the end of each Fiscal Month or (ii) during a
Cash Dominion Period, weekly on a day agreed upon between Lender and Borrowers and
by 12:00 p.m. (Toronto time) on that day,
(i)
(ii)
(iii)
(iv)
(v)
a Borrowing Base Certificate in the form of Exhibit B as of the close of business of
the previous Business Day or previous Fiscal Month, as applicable, detailing the
calculation of the Borrowing Base, certified as true and correct by an Authorized
Officer,
an accounts receivable roll forward analysis in the form of Attachment 1 to Exhibit
B,
an Inventory perpetual listing,
Aged accounts payable listing, aged accounts receivable listing and if requested
by the Lender, reconciliations of the aged accounts receivable listing to the general
ledger and from the general ledger to the Financial Statements, and
electronic copies of all accounts receivable, accounts payable and inventory
ledgers, subledgers and other backup as Lender may reasonably require.
(b)
within thirty (30) days following the end of each Fiscal Month:
(i)
(ii)
(iii)
(iv)
for each Borrower, its aged accounts payable listing by creditor, its aged accounts
receivable listing by Account Debtor, its Inventory perpetual or physical listing and
if requested by Lender, reconciliations of the aged accounts receivable listing by
Account Debtor and the Inventory perpetual or physical listing (as the case may
be) to each Borrower’s trial balance and from the trial balance to the Financial
Statements for such Fiscal Month, accompanied by supporting detail and
documentation as Lender may reasonably request;
its trial balance for such Fiscal Month;
for each Borrower, on a consolidated basis, Financial Statements for such Fiscal
Month, which shall provide comparisons to budget and actual results for the
corresponding period during the prior Fiscal Year, both on a monthly and year-to-
date basis;
a Compliance Certificate, together with a statement in the form of Attachment 1 to
Exhibit C, showing the calculations used in determining compliance with the
financial covenants hereunder; and
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(c)
(d)
(v)
an updated Schedule G with the compliance certificate delivered pursuant to
Section 4.1(b)(iv).
within one hundred and twenty (120) days following the end of each Fiscal Year, the
consolidated audited Financial Statements for such Fiscal Year audited without
qualification by an independent qualified accounting firm reasonably acceptable to Lender,
which shall provide comparisons to the prior Fiscal Year, together with any management
letter that may be issued;
within sixty (60) days following the end of each Fiscal Year, consolidated Projections, by
month for the next Fiscal Year prepared by Borrowers in a manner consistent with GAAP
and accompanied by senior management’s discussion and analysis of such plan and
prepared by Borrower in good faith, with care and diligence, and using assumptions which
are reasonable under the circumstances at the time such Projections are delivered to
Lender and disclosed therein when delivered; and
(e)
all the other reports and information set forth in Exhibit B in the time frames set forth therein.
4.2
Notices
(a)
Borrowers shall advise Lender:
(i)
as soon as practicable, on becoming aware, in reasonable detail, of:
(A)
(B)
(C)
(D)
(E)
any Lien, other than Permitted Encumbrances, attaching to or asserted
against any of the Collateral or any occurrence causing a material loss or
decline in value of any Collateral and the estimated (or actual, if available)
amount of such loss or decline;
any material change in the composition of the Collateral;
the occurrence of any Default or other event which has had or could
reasonably be expected to have a Material Adverse Effect;
the existence or commencement of any Litigation against any Credit Party
or any Plan, seeking damages of more than the Minimum Actionable
Amount, in each case, if applicable, or any allegation of criminal
misconduct against any Credit Party; and
any event or circumstance which, to such Credit Parties’ knowledge would
cause Lender to consider any then existing Account or Inventory as no
longer constituting an Eligible Account or Eligible Inventory, as the case
may be.
(ii)
if and when it becomes aware of any Release, on, at, in, under, above, to, from or
about any of its Real Property in writing within seven (7) Business Days and shall
promptly forward to Lender a copy of any order, notice, permit, application, or any
communication or report received by it or any other Credit Party in connection with
any such Release;
(iii)
promptly of any issuance of securities by the U.S. Borrower to any Person other
than the Canadian Borrower; and
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(iv)
as soon as practicable, update Schedule (3.7) to reflect any issuance of securities
by the U.S. Borrower.
(b)
Each Credit Party shall, upon request of Lender, furnish to Lender such other reports and
information in connection with the affairs, business, financial condition, operations,
prospects or management of the Credit Parties or the Collateral as Lender may reasonably
request, all in reasonable detail.
SECTION 5 – FINANCIAL AND NEGATIVE COVENANTS
5.1
Financial Covenants
(a)
Upon an FCCR Trigger and each subsequent Fiscal Month thereafter until the Fiscal Month
in which Net Borrowing Availability exceeds $5,000,000 for at least thirty (30) consecutive
calendar days, the Canadian Borrower shall maintain a consolidated Fixed Charge
Coverage Ratio of not less than 1.10:1.00 calculated on a trailing twelve (12) month basis
and tested as of the end of each Fiscal Month.
5.2
Negative Covenants
Each Credit Party covenants to Lender that so long as this Agreement is in effect:
(a)
(b)
such Credit Party shall not form any Subsidiary or merge with, amalgamate with,
consolidate with, acquire all or substantially all of the assets or capital stock of, or otherwise
combine with or make any investment in or, make a loan or advance to, any Person, except
as provided in Section 5.2(c) below or except for transactions between Credit Parties;
provided that, if any such transaction among Credit Parties involves a Borrower, the
Borrower shall be the continuing or surviving Person or the surviving Person shall expressly
assume the obligations of the Borrower pursuant to documents reasonably acceptable to
the Lender and the Borrower (or, if not the Borrower, the surviving Person) and shall be a
corporation, a limited liability company or partnership organized under the laws of Canada
or the United States;
such Credit Party shall not cancel any debt owing to it (other than the write off of accounts
receivable (excluding Eligible Accounts) in the normal course) or create, incur, assume or
permit to exist any Indebtedness, except: (i) the Obligations; (ii) Indebtedness existing as
of the Closing Date set forth on Disclosure Schedule (5.2(b)); (iii) Indebtedness pursuant
to the RBC Leasing Facility, as amended, modified or supplemented from time to time; (iv)
deferred taxes; (v) by endorsement of instruments or items of payment for deposit to the
general account of such Credit Party; (vi) Guaranteed Indebtedness incurred for the benefit
of Borrower if the primary obligation is permitted by this Agreement; (vii) Capital Lease
Obligations and Indebtedness in respect of Purchase Money Indebtedness not to exceed
$5,000,000; (viii) Indebtedness in respect of corporate credit cards in an amount not to
exceed $1,000,000; (ix) Indebtedness between the Credit Parties; (x) Indebtedness
pursuant to the Convertible Debentures; and (xi) additional Indebtedness incurred after the
Closing Date in an aggregate outstanding amount for all such Credit Parties combined not
exceeding the Minimum Actionable Amount;
(c)
such Credit Party shall not enter into any lending, borrowing or other commercial
transaction with any of its employees, directors, Affiliates or any other Credit Party other
than (i) loans or advances made by one Credit Party to any other Credit Party; (ii) loans or
advances to employees in the ordinary course of business in an aggregate outstanding
amount not exceeding the Minimum Actionable Amount; and (iii) Permitted Investments
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made by the Credit Parties, provided that the aggregate amount of all such Permitted
Investments outstanding at any time (valued at the time such investment was originally
made) shall not exceed the lesser of $5,000,000 and 10% of the Adjusted EBITDA of the
Borrower for the most recently completed twelve month period; and (iv) the sale, at fair
market value, of raw materials, inventory and finished goods between Credit Parties;
such Credit Party shall not make any changes in any of its business objectives, purposes,
or operations which could reasonably be expected to adversely affect repayment of the
Obligations or could reasonably be expected to have a Material Adverse Effect, or engage
in any business other than that presently engaged in, ancillary thereto, except as permitted
by Section 5.2(g) below, or amend its charter or by-laws or other organizational documents;
such Credit Party shall not create or permit any Lien on any of its properties or assets,
except for Permitted Encumbrances;
such Credit Party shall not sell, transfer, convey, assign or otherwise dispose of any of its
assets or properties, including its Accounts or any Shares or engage in any sale-leaseback,
synthetic lease or similar transaction, provided, that the foregoing shall not prohibit (i) the
sale of Inventory or obsolete or unnecessary Equipment in the ordinary course of its
business, (ii) the sale or transfer, at fair market value, of raw materials, inventory and
finished goods from one Credit Party to another Credit Party, (iii) a sale or disposition of
machinery or equipment, provided that the proceeds of sale of such machinery and
equipment shall not in any consecutive 12 month period exceed an amount equal to 10%
of Consolidated Assets, and (iv) the sale of shares by the Canadian Borrower which does
not result in a Change of Control;
such Credit Party shall not change its name, chief executive office, corporate offices,
warehouses or other material locations having Collateral in excess of $50,000, or location
of its records concerning the Collateral, or acquire, lease or use any real estate after the
Closing Date where books and records or Collateral in excess of $50,000 will be located
without such Person, in each instance, giving thirty (30) days prior written notice thereof to
Lender and taking all actions deemed necessary or appropriate by Lender to continuously
protect and perfect Lender’s Liens upon the Collateral;
such Credit Party shall not make or permit any Restricted Payment in any Fiscal Year,
unless, the Payment Conditions have been satisfied; and
no part of such proceeds of the Loans will be used by any Credit Party to purchase or carry
any Margin Stock or to extend credit to others for the purpose of purchasing or carrying
any Margin Stock or to reduce or retire any indebtedness incurred for any such purpose.
No Credit Party nor any of its Subsidiaries are engaged principally or as one of its important
activities in the business of extending credit for the purpose of purchasing or carrying any
Margin Stock.
(d)
(e)
(f)
(g)
(h)
(i)
SECTION 6 – SECURITY INTEREST
6.1
Grant of Security Interest
(a)
As collateral security for the prompt and complete payment and performance of the
Obligations, each Borrower and each other Credit Party executing this Agreement hereby
grants to Lender a security interest in, hypothec on and Lien upon all of its personal
property and assets, tangible or intangible, and whether now owned or hereafter acquired,
or in which it now has or at any time in the future may acquire any right, title, or interest,
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including all of the following property in which it now has or at any time in the future may
acquire any right, title or interest: all Accounts; all bank and deposit accounts and all funds
on deposit therein; all cash and cash equivalents; all commodity contracts (including all
Commodity Contracts (as such term is defined in the UCC)); all investments, Shares and
Investment Property; all Inventory and Equipment; all Goods; all Commercial Tort Claims
(as such term is defined in the UCC), all Chattel Paper, Documents and Instruments; all
Books and Records; all Intangibles; and to the extent not otherwise included, all Proceeds
and products of all and any of the foregoing and all collateral security and guarantees given
by any Person with respect to any of the foregoing, but excluding in all events Hazardous
Waste (all of the foregoing, together with any other collateral pledged to Lender or in
respect of which Lender may acquire any Lien pursuant to each other Loan Document,
collectively, the “Collateral”).
The security in the Collateral shall not extend or apply to consumer goods.
With respect to the US Borrower, the security in the Collateral shall not extend to consumer
goods or Excluded Property as defined in the U.S. Security Agreement.
The security in the Collateral shall not extend or apply to the last day of the term of any
lease or sublease or any agreement for a lease or sublease, now held or hereafter acquired
by the Borrowers in respect of real property, but the Borrowers shall stand possessed of
any such last day upon trust to assign and dispose of it as the Lender may direct.
Nothing in this Section shall constitute an assignment or attempted assignment of any
license, permit, contract or other agreement which by its provisions or by applicable law is
not assignable, which would result in the termination of or a breach under such contract,
or which requires the consent of a third party to its assignment unless such consent has
been obtained. With respect to any contract which the Lender reasonably determines to be
material, the applicable Borrower shall promptly, upon written request by the Lender,
attempt to obtain the consent of any necessary third party to its assignment under this
Agreement. Upon such consent being obtained or waived, this Section shall apply to the
applicable contract without the necessity of any further assurance to effect such
assignment. Unless and until such consent to assignment is obtained, such Borrower shall
hold all benefit to be derived from such contract in trust for the Lender as additional security
for payment of the Obligations and shall deliver up all such benefit to the Lender promptly
upon demand by the Lender.
Notwithstanding any other provisions of this Agreement, the security granted hereunder
with respect to trademarks constitutes a security interest in, and charge, hypothecation and
pledge of such collateral but does not constitute an assignment of such collateral to the
Lender and, notwithstanding the generality of the foregoing, the collateral shall not include
any intent-to-use trademark application prior to the filing of a “Statement of Use” or
“Amendment to Allege Use” with respect thereto, to the extent, if any, that, and solely during
the period, if any, in which the grant of a security interest therein would impair the validity
or enforceability of such intent-to-use trademark application under applicable law.
Each Borrower, Lender and each other Credit Party executing this Agreement agree that
this Agreement creates, and is intended to create, valid and continuing Liens upon the
Collateral in favour of Lender. Each Borrower and each other Credit Party executing this
Agreement represents, warrants and promises to Lender that: (i) each Borrower and each
other Credit Party granting a Lien in Collateral is the sole owner of, or otherwise has a valid
property interest in, each item of the Collateral upon which it purports to grant a Lien
pursuant to the Loan Documents, and has good and marketable title thereto free and clear
(b)
(c)
(d)
(e)
(f)
(g)
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of any and all Liens of others, other than Permitted Encumbrances; (ii) the security
interests, hypothecs and Liens granted pursuant to this Agreement and the Loan
Documents, upon completion of the filings and other actions listed on Disclosure Schedule
(6.1) (which, in the case of all filings, registrations, publications and other documents
referred to in said Disclosure Schedule, have been delivered to Lender in duly executed
form, where applicable) will constitute valid perfected security interests and Liens in all
Collateral in which a security interest may be perfected by filing or taking such other actions
pursuant to the PPSA or the UCC as applicable in favour of Lender as security for the
prompt and complete payment and performance of the Obligations, enforceable in
accordance with the terms hereof against any and all creditors of and purchasers from any
Credit Party (other than purchasers of Inventory in the ordinary course of business) and
such security interests and Liens are prior to all other Liens on the Collateral in existence
on the date hereof except for Permitted Encumbrances which have priority by operation of
law or which are permitted to be prior pursuant to the terms of this Agreement and the other
Loan Documents; and (iii) no effective security agreement, financing statement, deed of
hypothec, equivalent security or Lien covering, charging or hypothecating all or any part of
the Collateral is or will be on file or of record in any public office, except those relating to
Permitted Encumbrances. Each Borrower and each other Credit Party executing this
Agreement promise to defend the right, title and interest of Lender in and to the Collateral
against the claims and demands of all Persons whomsoever (other than Persons holding
Permitted Encumbrances on such Collateral that have priority over the Lender's Lien), and
each shall take such actions, including: (x) upon Lender's request, the prompt delivery of
all original Instruments, Chattel Paper and certificated Shares owned by each Borrower
and each other Credit Party granting a Lien on Collateral to Lender; (y) notification of
Lender’s interest in Collateral at Lender’s request; and (z) the institution of Litigation
against third parties as shall be reasonable and prudent in order to protect and preserve
each Credit Party’s and Lender’s respective and several interests in the Collateral. Upon
Lender’s request, each Borrower (and any other Credit Party granting a Lien on Collateral)
shall mark its Books and Records pertaining to the Collateral to evidence the Loan
Documents and the Liens granted under the Loan Documents. Upon Lender’s request, all
Chattel Paper shall be marked with the following legend: “This writing and the obligations
evidenced or secured hereby are subject to the security interest of Royal Bank of Canada”.
6.2
Lender’s Rights
(a)
(i) upon Lender’s request, Borrower shall cooperate with the Lender to (or subsequent to
an Event of Default Lender may at any time in Lender’s own name or in the name of either
Borrower), communicate with Account Debtors, parties to Contracts, and obligors in
respect of Instruments, Chattel Paper or other Collateral to verify to Lender’s satisfaction,
the existence, amount and terms of any such Accounts, Contracts, Instruments or Chattel
Paper or other Collateral; and (ii) Lender may subsequent to an Event of Default, notify
Account Debtors, parties to Contracts, and obligors in respect of Chattel Paper,
Instruments, or other Collateral that the Collateral has been assigned to or is subject to
Liens in favour of Lender and that payments shall be made directly to Lender. Upon the
request of Lender, each Borrower shall so notify such Account Debtors, parties to
Contracts, and obligors in respect of Instruments, Chattel Paper or other Collateral. Upon
an Event of Default, each Borrower hereby constitutes Lender or Lender’s designee as
such Borrower’s legal attorney, agent and mandatary with power to endorse such
Borrower’s name upon any notes, acceptance drafts, money orders or other evidences of
payment or Collateral.
(b)
Each Borrower shall remain liable under each Contract, Instrument and License to observe
and perform all the conditions and obligations to be observed and performed by it
thereunder, and Lender shall have no obligation or liability whatsoever to any Person under
(c)
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any Contract, Instrument or License (between any Borrower or any other Credit Party and
any Person other than Lender) by reason of or arising out of the execution, delivery or
performance of this Agreement or other Loan Documents and Lender shall not be required
or obligated in any manner: (i) to perform or fulfill any of the obligations of any Borrower or
the other Credit Parties; (ii) to make any payment or inquiry; or (iii) to take any action of
any kind to collect, compromise or enforce any performance or the payment of any
amounts which may have been assigned to it and/or which is the object of any Liens in its
favour or to which it may be entitled at any time or times under or pursuant to any Contract,
Instrument or License.
Each Borrower and each other Credit Party shall, with respect to each owned, leased, or
controlled real property, during normal business hours and upon reasonable advance
notice (unless a Default shall have occurred and be continuing, in which event no notice
shall be required and Lender shall have access at any and all times subject to any
limitations imposed upon the Borrower by any landlord of such real property) and without
disruption to ordinary business operations: (i) provide access to such property to Lender
and any of its officers, employees and agents, as frequently as Lender determines to be
appropriate; (ii) permit Lender and any of its officers, employees and agents to inspect,
audit and make extracts and copies (or take originals if reasonably necessary) from all of
Borrowers’ and such Credit Party’s Books and Records; and (iii) permit Lender to inspect,
review, verify, evaluate and make physical verifications and appraisals of the Inventory and
other Collateral in any manner and through any medium that Lender considers advisable
(a “Field Examination”), and Borrowers and such Credit Party agree to render to Lender,
at Borrowers’ and such Credit Party’s cost and expense, such clerical and other assistance
as may be reasonably requested with regard thereto. Without limiting the generality of the
foregoing, Lender shall be entitled to conduct one (1) Field Examination and one (1)
inventory appraisal per year, provided that, (A) if at any time a Net Borrowing Availability
has been less than $6,250,000 for five (5) consecutive Business Days during such 12-
month period, one (1) additional Field Examination and one (1) additional inventory
appraisal will be permitted in such 12-month period, and (B) if an Event of Default has
occurred and is continuing, the Lender may do any of the foregoing at any time and as
many times in any year during normal business hours and without advance notice,
including, without limitation, additional Field Examinations and Inventory appraisals. The
Credit Parties shall be responsible for the reasonable, documented costs and out of pocket
expenses of all such visits, Field Examinations, inventory appraisals and audits, including
without limitation, the Field Examination Fees.
(d)
After the occurrence and during the continuance of a Default, Borrower, at its own expense,
shall use reasonable commercial efforts to cause its auditors or any appraiser selected by
Lender to deliver to Lender the results of any physical verifications of all or any portion of
the Inventory made or observed by such auditors or appraisers when and if such
verification is conducted. Lender shall be permitted to observe and consult with Borrower’s
accountants or appraisers in the performance of these tasks.
6.3
Grant of License to Use Intellectual Property Collateral
Each Borrower and each other Credit Party executing this Agreement hereby grants to Lender an
irrevocable, non-exclusive license (exercisable upon the occurrence and during the continuance of an Event
of Default without payment of royalty or other compensation to such Borrower or such Credit Party) to use,
transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by
such Borrower or such Credit Party, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be recorded or stored and to all computer
software and programs used for the compilation or printout thereof and represents, promises and agrees
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that any such license or sublicense is not and will not be in conflict with the contractual or commercial rights
of any third Person; provided, that such license will terminate on the Termination Date.
SECTION 7 – EVENTS OF DEFAULT, RIGHTS AND REMEDIES
7.1
Events of Default
The occurrence of any one or more of the following events (regardless of the reason therefor) shall
constitute an “Event of Default” hereunder which shall be deemed to be continuing unless and until waived
in writing by Lender in accordance with Section 8.3:
(a)
(b)
(c)
(d)
(e)
(f)
The Borrower or any other Credit Party shall fail to pay (i) when due and as required to be
paid herein, any amount of principal of any Loan, or (ii) within five (5) Business Days after
the same becomes due and payable, any interest on any Loan or any fee due hereunder,
or any other amount payable hereunder or with respect to any other Loan Document; or
(i) any default occurs in the observance or performance of any of the covenants or
agreements contained in any of Sections 3.16, 3.17, 3.18, 4.1, 4.2, 5.1 or 5.2 of this
Agreement, or (ii) any default occurs in the observance or performance of any of the other
covenants or agreements contained in any other Section of this Agreement or any other
Loan Document to which any Credit Party and Lender are party (including in respect of any
Bank Products) and such default shall continue for thirty (30) days or more after the earlier
to occur of: (i) notice of default from the Lender to the Borrowers of the occurrence, or (ii)
the date any Borrower becomes aware of such default; or
an event of default occurs in respect of the RBC Lease Facility or the Convertible
Debentures;
(A) any Material Contract (excluding the RBC Lease Facility) terminates (other than, in
each case, pursuant to its terms), or otherwise ceases to be legal, valid, binding and
enforceable, (B) if a Credit Party breaches a Material Contract and such breach is not cured
within any applicable period of grace unless such breach is subject to a dispute and the
applicable Credit Party has accrued sufficient reserves in respect thereto in accordance
with GAAP, or (C) an event of default shall occur under any Contractual Obligation of
Borrower or any other Credit Party (other than this Agreement, the other Loan Documents
and the RBC Lease Facility), and such event of default under this clause (C) either: (i)
involves the failure to make any payment (whether or not such payment is blocked pursuant
to the terms of an intercreditor agreement or otherwise), whether of principal, interest or
otherwise, and whether due by scheduled maturity, required prepayment, acceleration,
demand or otherwise, in respect of any Indebtedness (other than the Obligations) of such
Person in an aggregate amount exceeding the Minimum Actionable Amount or which
results in the acceleration of any debt exceeding the Minimum Actionable Amount; or (ii)
causes such Indebtedness, or a portion thereof, in an aggregate amount exceeding the
Minimum Actionable Amount to become due prior to its stated maturity or prior to its
regularly scheduled date of payment; or
any representation or warranty in this Agreement or any other Loan Document is untrue or
incorrect in any material respect (or, in the case of any such representation or warranty
that is qualified as to materially or Material Adverse Effect, untrue or incorrect in any
respect) where made or deemed made; or
there shall be commenced against any Borrower or any other Credit Party any Litigation
seeking or effecting any seizure (whether in execution or otherwise), attachment,
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execution, distraint or similar process against all or any substantial part of its assets which
remain unreleased or undismissed for thirty (30) consecutive days, unless within such thirty
(30) days, any seizure or taking possession of any property of such Credit Party shall have
occurred; or any creditor (other than Lender) takes possession of all or any substantial part
of the assets of any Borrower or any other Credit Party; or any creditor (other than Lender)
enforces or gives notice of its intention to enforce or gives prior notice with respect to the
exercise of any of its hypothecary or other rights under any Liens granted to it by or over
any assets of either Borrower or any other Credit Party which enforcement or exercise of
rights would reasonably be expected to result in a Material Adverse Effect; or any
custodian, receiver, interim receiver, liquidator, assignee, trustee, monitor, sequestrator or
similar official is appointed in respect of either Borrower or any other Credit Party or takes
possession of all or any substantial part of the assets of any Borrower or any other Credit
Party or either Borrower or any other Credit Party commits an “act of bankruptcy” (as
defined under the relevant provisions of the BIA), becomes insolvent or shall have
concealed, removed or permitted to be concealed or removed, any part of its property with
intent to hinder, delay or defraud any of its creditors or make or suffer a transfer of any of
its property or the incurring of an obligation which may be fraudulent, reviewable or the
object of any proceedings under any applicable Federal, provincial, state or foreign
bankruptcy, insolvency, receivership legislation, creditor protection legislation or other
similar laws; or
a petition, proposal, notice of intention to file a proposal, case or proceeding shall have
been commenced involuntarily against any Borrower or any other Credit Party in a court
having competent jurisdiction seeking a declaration, judgment, decree, order or other relief:
(i) under the BIA, CCAA or any other applicable federal, provincial, state or foreign
bankruptcy, insolvency, receivership, or other law providing for suspension of operations
or reorganization of debts or relief of debtors, and seeking either (x) the appointment of a
custodian, receiver, interim receiver, liquidator, assignee, trustee, monitor or sequestrator
(or similar official) for such Person or of any substantial part of its properties, or (y) the
reorganization or winding up or liquidation of the affairs of any such Person, and such
proposal, case or proceeding shall remain undismissed or unstayed for sixty (60)
consecutive days or such court shall enter a declaration, judgment, decree or order
granting the relief sought in such case or proceeding; or (ii) invalidating or denying any
Person’s right, power, or competence to enter into or perform any of its obligations under
any Loan Document or invalidating or denying the validity or enforceability of this
Agreement or any other Loan Document or any action taken hereunder or thereunder; or
any Borrower or any other Credit Party shall: (i) commence any petition, proposal, notice
of intention to file a proposal, case, proceeding or other action under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, suspension of operations, conservatorship or relief of debtors, seeking to
have an order for relief entered with respect to it or seeking appointment of a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official) for it or any
substantial part of its properties; (ii) make a general assignment for the benefit of creditors;
(iii) consent to or take any action in furtherance of, or, indicating its consent to, approval of,
or acquiescence in, any of the acts set forth in paragraphs (e) or (f) of this Section 7.1 or
clauses (i) or (ii) of this paragraph (g); or (iv) shall admit in writing its inability to, or shall be
generally unable to, pay its debts as such debts become due; or
a final judgment or judgments for the payment of money in excess of the Minimum
Actionable Amount in the aggregate shall be rendered against any Borrower or any other
Credit Party, unless the same shall be: (i) fully covered by insurance and the issuer(s) of
the applicable insurance policies shall have acknowledged full coverage in writing within
fifteen (15) days of judgment; or (ii) vacated, stayed, bonded, paid or discharged within a
(g)
(h)
(i)
- 33 -
(j)
(k)
(l)
(m)
period of fifteen (15) days from the date of such judgment, unless within such fifteen (15)
days, any seizure or taking possession of any property of such Credit Party shall have
occurred; or
any other event shall have occurred which has had or could reasonably be expected to
have a Material Adverse Effect; or
any material provision of any Loan Document shall for any reason cease to be valid, binding
and enforceable in accordance with its terms, or any Lien granted, or intended by the Loan
Documents to be granted, to Lender shall cease to be a valid and perfected Lien having
the first priority (or a lesser priority if expressly permitted in the Loan Documents) in any of
the Collateral (or any Credit Party shall so assert any of the foregoing);
a Change of Control shall have occurred; or
a Pension Event or an ERISA Event shall have occurred that, alone or together with any
other Pension Event or ERISA Events that have occurred, in the opinion of Lender, could
give rise to a Material Adverse Effect or could result in any Lien or any liability on the part
of Lender in either case in an aggregate amount exceeding the Minimum Actionable
Amount.
7.2
Remedies
(a)
(b)
If any Default shall have occurred and be continuing, then Lender may terminate or
suspend its obligation to make further Revolving Credit Advances and to incur additional
Letter of Credit or other Obligations. In addition, if any Event of Default shall have occurred
and be continuing, Lender may, without notice, take any one or more of the following
actions: (i) declare all or any portion of the Obligations to be forthwith due and payable,
including contingent liabilities with respect to Letter of Credit Obligations, whereupon such
Obligations shall become and be due and payable; (ii) require that all Letter of Credit
Obligations be fully cash collateralized pursuant to Schedule C; or (iii) exercise any rights
and remedies provided to Lender under the Loan Documents or at law or equity, including
all remedies provided under the PPSA or the UCC; provided, that upon the occurrence of
any Event of Default specified in Sections 7.1(f), 7.1(g) or 7.1(h), the Obligations shall
become immediately due and payable (and any obligation of Lender to make further Loans,
if not previously terminated, shall immediately be terminated) without declaration, notice or
demand by Lender.
Without limiting the generality of the foregoing, each Borrower and each other Credit Party
executing this Agreement expressly agrees that upon the occurrence of any Event of
Default, Lender may collect, receive, assemble, process, appropriate and realize upon the
Collateral, or any part thereof, and may forthwith sell, lease, assign, give an option or
options to purchase or otherwise dispose of and deliver said Collateral (or contract to do
so), or any part thereof, in one or more parcels at public or private sale or sales, at any
exchange or at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. Lender shall have the right upon any such public
sale, to the extent permitted by law, to purchase for the benefit of Lender the whole or any
part of said Collateral so sold, which upon consummation of such purchase will be free of
any right of equity of redemption, which right the Borrowers and each other Credit Party
executing this Agreement hereby releases. Such sales may be adjourned, or continued
from time to time with or without notice. Lender shall have the right to conduct such sales
on any Credit Party’s premises or elsewhere and shall have the right to use any Credit
- 34 -
(c)
Party’s premises without rent or other charge for such sales or other action with respect to
the Collateral for such time as Lender deems necessary or advisable.
Upon the occurrence and during the continuance of an Event of Default and at Lender’s
request, each Borrower and each other Credit Party executing this Agreement further
agrees, to assemble the Collateral and make it available to Lender at places which Lender
shall reasonably select, whether at its premises or elsewhere. Until Lender is able to effect
a sale, lease, or other disposition of the Collateral, Lender shall have the right to complete,
assemble, use or operate the Collateral or any part thereof, to the extent that Lender deems
appropriate, for the purpose of preserving such Collateral or its value or for any other
purpose. Lender shall have no obligation to any Credit Party to maintain or preserve the
rights of any Credit Party as against third parties with respect to any Collateral while such
Collateral is in the possession of Lender. Lender may, if it so elects, seek the appointment
of a receiver or receiver manager to take possession of any Collateral and to enforce any
of Lender’s remedies with respect thereto without prior notice or hearing. To the maximum
extent permitted by applicable law, each Borrower and each other Credit Party executing
this Agreement waives all claims, damages, and demands against Lender, its Affiliates,
agents, and the officers and employees of any of them arising out of the repossession,
retention or sale of any Collateral except such as are determined in a final judgment by a
court of competent jurisdiction to have arisen solely out of the gross negligence or wilful
misconduct of such Person. Each Borrower and each other Credit Party executing this
Agreement agrees that ten (10) days prior notice by Lender to such Credit Party of the time
and place of any public sale or of the time after which a private sale may take place is
reasonable notification of such matters. Each Borrower and each other Credit Party shall
remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral
are insufficient to pay all amounts to which Lender is entitled.
(d)
Lender’s rights and remedies under this Agreement shall be cumulative and nonexclusive
of any other rights and remedies which Lender may have under any Loan Document or at
law or in equity. Recourse to the Collateral shall not be required. All provisions of this
Agreement are intended to be subject to all applicable mandatory provisions of law that
may be controlling and to be limited, to the extent necessary, so that they do not render
this Agreement invalid or unenforceable, in whole or in part.
7.3
Waivers by Credit Parties
Except as otherwise provided for in this Agreement and to the fullest extent permitted by applicable law,
each of Borrower and each other Credit Party executing this Agreement waives: (a) presentment, demand
and protest, and notice of presentment, dishonour, intent to accelerate, acceleration, protest, default, non-
payment, maturity, release, compromise, settlement, extension or renewal of any or all Loan Documents,
commercial paper, Accounts, Contracts, Documents, Instruments, Chattel Paper and guarantees at any
time held by Lender on which such Credit Party may in any way be liable, and hereby ratifies and confirms
whatever Lender may do in this regard; (b) all rights to notice and a hearing prior to Lender’s taking
possession or control of, or to Lender’s replevy, attachment or levy upon, any Collateral or any bond or
security which might be required by any court prior to allowing Lender to exercise any of its remedies; and
(c) the benefit of all valuation, appraisal and exemption laws. Each of Borrower and each other Credit Party
executing this Agreement acknowledges that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the other Loan Documents and the transactions evidenced hereby and
thereby and any rule of construction to the effect that any ambiguities are to be resolved against the drafting
party shall not apply to the construction or interpretation of this Agreement.
7.4
Proceeds
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The Proceeds of any sale, disposition or other realization upon any Collateral shall be applied by Lender
upon receipt to the Obligations in such order as Lender may deem advisable in its sole discretion (including
the cash collateralization of any Letter of Credit Obligations) and after the indefeasible payment and
satisfaction in full in cash of all of the Obligations, and after the payment by Lender of any other amount
required by any provision of law, the surplus, if any, shall be paid to Borrowers or their representatives or
to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may
direct.
SECTION 8 – MISCELLANEOUS
8.1
Complete Agreement; Modification of Agreement
This Agreement and the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior agreements, commitments,
understandings or inducements (oral or written, expressed or implied). No Loan Document may be
modified, altered or amended except by a written agreement signed by Lender and each other Credit Party
that is a party to such Loan Document. Each Borrower and each other Credit Party executing this
Agreement or any other Loan Document shall have all duties and obligations under this Agreement and
such other Loan Documents from the date of its execution and delivery, regardless of whether the initial
Loan has been funded at that time.
8.2
Expenses
Each Borrower jointly and severally agrees to pay or reimburse Lender for all costs and expenses (including
the reasonable fees and expenses of all counsel, advisors, consultants (including environmental and
management consultants), field examiners, appraisers and auditors retained in connection therewith),
incurred in connection with: (a) the preparation, negotiation, execution, delivery, performance and
enforcement of the Loan Documents and the preservation of any rights thereunder; (b) collection, including
deficiency collections; (c) the forwarding to any Borrower or any other Person on behalf of any Borrower by
Lender of the proceeds of any Loan; (d) any amendment, waiver or other modification with respect to any
Loan Document or advice in connection with the administration of the Loans or the rights thereunder; (e)
any litigation, dispute, suit, proceeding or action (whether instituted by or between any combination of
Lender, a Borrower or any other Person), and an appeal or review thereof, in any way relating to the
Collateral, any Loan Document, or any action taken or any other agreements to be executed or delivered
in connection therewith, whether as a party, witness or otherwise; and (f) any effort to: (i) monitor the Loans
(ii) evaluate, observe or assess any Borrower or any other Credit Party or the affairs of such Person; and
(iii) verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of the Collateral.
Without limiting the foregoing, each Borrower will jointly and severally reimburse Lender for the costs
(including reasonable out of pocket expenses plus applicable taxes) related to the Lender’s due diligence
including Field Examinations and the verification, evaluation, assessment and approval of Collateral.
8.3
No Waiver
Neither Lender’s failure, at any time, to require strict performance by any Borrower or any other Credit Party
of any provision of any Loan Document, nor Lender’s failure to exercise, nor any delay in exercising, any
right, power or privilege hereunder, shall operate as a waiver thereof or waive, affect or diminish any right
of Lender thereafter to demand strict compliance and performance therewith. No single or partial exercise
of any right, power or privilege hereunder shall preclude any other or future exercise thereof or the exercise
of any other right, power or privilege. Any suspension or waiver of a Default or other provision under the
Loan Documents shall not suspend, waive or affect any other Default or other provision under any Loan
Document, and shall not be construed as a bar to any right or remedy which Lender would otherwise have
had on any future occasion. None of the undertakings, indemnities, agreements, warranties, covenants and
representations of any Borrower or any other Credit Party to Lender contained in any Loan Document and
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no Default by a Borrower or any other Credit Party under any Loan Document shall be deemed to have
been suspended or waived by Lender, unless such waiver or suspension is by an instrument in writing
signed by an officer or other authorized employee of Lender and directed to any Borrower specifying such
suspension or waiver (and then such waiver shall be effective only to the extent therein expressly set forth),
and Lender shall not, by any act (other than execution of a formal written waiver), delay, omission or
otherwise, be deemed to have waived any of its rights or remedies hereunder.
8.4
Severability; Section Titles
Wherever possible, each provision of the Loan Documents shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of any Loan Document shall be prohibited by
or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the remaining provisions of such Loan
Document. Except as otherwise expressly provided for in the Loan Documents, no termination or
cancellation (regardless of cause or procedure) of any financing arrangement under the Loan Documents
shall in any way affect or impair the Obligations, duties, covenants, representations and warranties,
indemnities, and liabilities of any Borrower or any other Credit Party or the rights of Lender relating to any
unpaid Obligation (due or not due, liquidated, contingent or unliquidated), or any transaction or event
occurring prior to such termination, or any transaction or event, the performance of which is not required
until after the Commitment Termination Date, all of which shall not terminate or expire, but rather shall
survive such termination or cancellation and shall continue in full force and effect until the Termination Date;
provided, that all indemnity obligations of the Credit Parties under the Loan Documents shall survive the
Termination Date. The Section titles contained in any Loan Document are and shall be without substantive
meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto.
8.5
Authorized Signature
Until Lender shall be notified in writing by a Borrower or any other Credit Party to the contrary, the signature
upon any document or instrument delivered pursuant hereto and believed by Lender or any of Lender’s
officers, agents, or employees to be that of a Credit Party or of an officer of any Borrower or such other
Credit Party shall bind such Borrower or such other Credit Party and be deemed to be the act of such
Borrower or such other Credit Party affixed pursuant to and in accordance with resolutions duly adopted by
such Borrower’s or such other Credit Party’s board of directors, and Lender shall be entitled to assume the
authority of each signature and authority of the person whose signature it is or appears to be unless the
person acting in reliance thereon shall have actual knowledge to the contrary.
8.6
Notices
Except as otherwise provided herein, whenever any notice, demand, request or other communication shall
or may be given to or served upon any party by any other party, or whenever any party desires to give or
serve upon any other party any communication with respect to this Agreement, each such communication
shall be in writing and shall be deemed to have been validly served, given or delivered: (a) upon the earlier
of actual receipt (or refusal thereof) and three (3) Business Days after deposit in the mail, registered or
certified mail, return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by
telecopy, e-mail or other similar facsimile or electronic transmission (with such telecopy, e-mail or facsimile
promptly confirmed by delivery of a copy by personal delivery or mail as otherwise provided in this Section
8.6); (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or
(d) when hand-delivered, all of which shall be addressed to the party to be notified and sent to the address
or facsimile number indicated in Schedule B or to such other address (or facsimile number) as may be
substituted by notice given as herein provided. Failure or delay in delivering copies of any such
communication to any Person (other than a Borrower or Lender) designated in Schedule B to receive copies
shall in no way adversely affect the effectiveness of such communication.
8.7
Counterparts
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This Agreement may be executed in any number of counterparts and by facsimile or other electronic format
(including pdf) and by different parties in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one and the same instrument. The
words “execution”, “execute”, “executed”, “signed”, “signature” and words of like import in this Agreement
or in or related to any document to be signed in connection with this Agreement and the transactions
contemplated hereby, shall be deemed to include electronic signatures or the keeping of records in
electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually
executed signature or the use of a paper-based recordkeeping system, as the case may be, in accordance
with applicable law including, without limitation, as in provided Parts 2 and 3 of the Personal Information
Protection and Electronic Documents Act (Canada), the Electronic Commerce Act, 2000 (Ontario), the
Electronic Transactions Act (British Columbia), the Electronic Transactions Act (Alberta), or any other
similar laws based on the Uniform Electronic Commerce Act of the Uniform Law Conference of Canada.
The parties may, in their discretion, require that any such documents and signatures executed electronically
or delivered by fax or other electronic transmission be confirmed by a manually-signed original thereof;
provided that the failure to request or deliver the same shall not limit the effectiveness of any document or
signature executed electronically or delivered by fax or other electronic transmission.
8.8
Assignments
This Agreement shall be binding upon and inure to the benefit of Lender, the Credit Parties and their
respective heirs, executors, administrators, other legal representatives, successors and assigns. Neither
this Agreement nor any interest in this Agreement may be assigned by any Borrower or any other Credit
Party without the prior written consent of Lender. Lender may assign or transfer or grant participations in
its rights or obligations under this Agreement in whole or in part at any time without notice to or consent of
the Credit Parties. Lender may disclose to potential or actual transferees or assignees or participants, any
information regarding the Credit Parties as Lender considers necessary and the Credit Parties consent to
such disclosure.
8.9
Time of the Essence
Time is of the essence for performance of the Obligations under the Loan Documents.
8.10
Governing Law
Except for Loan Documents expressed to be governed by the laws of another jurisdiction, the Loan
Documents and the obligations arising under the Loan Documents shall be governed by, and construed
and enforced in accordance with, the laws of the Province of Alberta applicable to contracts made and
performed in such province, without regard to the principles thereof regarding conflicts of laws, and any
applicable laws and the federal laws of Canada applicable therein.
8.11
Submission to Jurisdiction; Waiver of Jury Trial
(a)
Each Borrower and each other Credit Party executing this Agreement hereby consent and agree
that the courts located in Alberta shall have exclusive jurisdiction to hear and determine any claims
or disputes between a Borrower and such Credit Party and Lender pertaining to this Agreement or
any of the other Loan Documents or to any matter arising out of or related to this Agreement or any
of the other Loan Documents; that nothing in this Agreement shall be deemed or operate to
preclude Lender from bringing suit or taking other legal action in any other jurisdiction to collect the
Obligations, to realize on the Collateral or any other security for the Obligations, or to enforce a
judgment or other court order in favour of Lender. Each Borrower and each other Credit Party
executing this Agreement expressly submit and consent in advance to such jurisdiction in any
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action or suit commenced in any such court, and such Borrower and such Credit Party hereby
waive any objection which they may have based upon lack of personal jurisdiction, improper venue
or forum non conveniens. Each Borrower and each other Credit Party executing this Agreement
hereby waive personal service of the summons, complaint and other process issued in any such
action or suit and agree that service of such summons, complaint and other process may be made
by registered or certified mail addressed to such Borrower or such Credit Party at the address set
forth in Schedule B of this Agreement and that service so made shall be deemed completed upon
the earlier of such Borrower’s or such Credit Party’s actual receipt thereof (or refusal) or three (3)
Business Days after deposit in the mail, proper postage prepaid.
(b)
THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN LENDER, ANY BORROWER AND ANY CREDIT PARTY
ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE LOAN DOCUMENTS OR THE
TRANSACTIONS RELATED THERETO.
8.12
Press Releases
Neither any Credit Party nor any of its Affiliates will in the future issue any press release or other public
disclosure using the name of Royal Bank of Canada or its affiliates without at least two (2) Business Days’
prior notice to Lender and without the prior written consent of Lender unless (and only to the extent that)
such Credit Party or Affiliate is required to do so under law and then, in any event, such Credit Party or
Affiliate will use reasonable commercial efforts to consult with Lender before issuing such press release or
other public disclosure. Each Credit Party consents to the publication (in the ordinary course) by Lender or
Lender’s counsel of customary advertising material (including under league tables, tombstones and for
advertising purposes) relating to the financing transactions contemplated by this Agreement using such
Credit Party’s name, product photographs, logos or trademarks. Such consent shall remain effective until
revoked by such Credit Party in writing to Lender.
8.13
Reinstatement
This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment
of all or any part of the Obligations is rescinded or must otherwise be returned or restored by Lender upon
the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any other Credit
Party, or otherwise, all as though such payments had not been made.
8.14
Illegality
(a)
In the event that Lender determines that, in consequence of any change in any
Requirement of Law or any policy applicable to it that it is illegal, unlawful or prohibited for
it to make or continue to make any Loans, Letter of Credit Obligations, Bank Products, the
RBC Lease Facility or any other Obligations hereunder, it shall have the right to
immediately terminate such Loans, Letter of Credit Obligations, Bank Products, the RBC
Lease Facility or other Obligations as it shall determine necessary or appropriate and to
terminate any commitment to make or continue to make such Loans, Letters of Credit
Obligations, Bank Products, the RBC Lease Facility or other Obligations and/or to
terminate its commitments hereunder and any of the Loan Documents as it shall determine
necessary or appropriate.
(b)
If Lender determines that it is unlawful to make, maintain or fund any Revolving Credit
Advances based upon the Term SOFR Rate or Adjusted Term CORRA, as applicable,
each Borrower shall, upon its receipt of notice of such fact and demand from Lender,
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prepay in full such Revolving Credit Advances then outstanding, together with interest
accrued thereon, either on the last day of the Interest Period thereof, if Lender may lawfully
continue to maintain such Revolving Credit Advances to such day, or immediately, if
Lender may not lawfully continue to maintain such Revolving Credit Advances. No payment
shall be due under Section 1.14 upon prepayment of Revolving Credit Advances based
upon the Term SOFR Rate or Adjusted Term CORRA pursuant to or as a result of the
circumstances described in the preceding sentence. If any Borrower is required to so
prepay any Revolving Credit Advances based upon the Term SOFR Rate or Adjusted Term
CORRA, as applicable, then concurrently with such prepayment, such Borrower shall
borrow from Lender, in the amount of such repayment, Revolving Credit Advances based
upon RBUSBR or RBP, as applicable.
8.15
Set Off and Survival
Without limitation to any other rights or remedies of Lender, Lender shall have the right at all times without
notice to the Credit Parties (which notice is hereby waived to the maximum extent permitted by law) to set
off or apply against any Obligations now and hereafter owing (whether matured or contingent) any deposits
at any time held by, or other indebtedness at any time owing by, Lender or any of its Affiliates to or for the
credit or account of any Credit Party. All indemnities hereunder or under the other Loan Documents shall
survive any termination of the Loan Documents unless expressly released in writing.
8.16
Increased Costs
If, by reason of: (a) any adoption of, taking effect of, or change in any Requirement of Law (including any
change by way of imposition or increase of statutory reserves or other reserve requirements) or the
application, administration, implementation or interpretation thereof; or (b) the compliance with any rule,
directive, guideline or request from any government authority or other Person exercising control over banks
or financial institutions generally (whether or not having the force of law), including the (x) the Dodd-Frank
Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder
or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the
Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or
similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III,
in each case regardless of the date enacted, adopted or issued:
(i)
(ii)
Lender (or its applicable lending office) shall be subject to any Tax with respect to any Loan
(including a Letter of Credit) or a change shall result in the basis of taxation of any payment
to Lender (or its applicable lending office) with respect to its obligation to make or continue
any Loan or issue Letters of Credit or participate in Letter of Credit Obligations; or
any reserve (including any imposed by the board of governors or any other applicable
Governmental Authority), special deposits, compulsory loan, insurance charge or similar
requirement against assets of, deposits with or for the account of, or credit extended by,
Lender (or its applicable lending office) shall be imposed or deemed applicable, or any
other condition, affecting Lender’s (or its applicable lending office’s) obligation to make any
Loans or issue Letters of Credit, shall be imposed on Lender (or its applicable lending
office);
and as a result there shall be an increase in the cost to Lender (or its applicable lending office) of agreeing
to make or making, funding or maintaining Loans, Letters of Credit or Letter of Credit Obligations (except
to the extent already included in determination of the rate of interest), or there shall be a reduction in the
amount received or receivable by Lender (or its applicable office), then Lender shall promptly notify the
Borrowers of such event, and each Borrower jointly and severally agrees to, within five (5) Business Days
following demand therefor, pay Lender the amount of such increased costs or reduced amounts.
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In the event that Lender shall have determined that the adoption, effectiveness, or applicability after the
Closing Date of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any
change therein or in the interpretation or administration thereof by any any government authority, central
bank or comparable agency charged with the interpretation or administration thereof, or compliance by
Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy
(whether or not having the force of law) of any such governmental authority, central bank or comparable
agency (provided that for purposes of this Agreement, (x) the Dodd-Frank Wall Street Reform and
Consumer Protection Act and all requests, rules, guidelines or directives in connection therewith and (y) all
requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel
Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign
regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to have been
adopted and become effective after the date hereof), has or would have the effect of reducing the rate of
return on the capital of Lender or any corporation controlling Lender as a consequence of, or with reference
to, of agreeing to make or making, funding or maintaining Loans, Letters of Credit or Letter of Credit
Obligations (except to the extent already included in determination of the rate of interest) or of maintaining
its obligation to make any such Loan or issue Letters of Credit to a level below that which Lender or such
controlling corporation could have achieved but for such adoption, effectiveness, applicability, change or
compliance (taking into consideration the policies of Lender or such controlling corporation with regard to
capital adequacy), then Lender shall promptly notify the Borrowers of such event, and each Borrower jointly
and severally agrees to, within five (5) Business Days following demand therefor, pay Lender such
additional amount or amounts as will compensate Lender or such controlling corporation on an after-tax
basis for such reduction.
If Lender determines that, because of circumstances described above or any other circumstances arising
hereafter affecting such Lender the Applicable Margin will not adequately and fairly reflect the cost to Lender
of funding Loans or incurring Letter of Credit Obligations or the cost to Lender of issuing Letters of Credit,
then (A) Lender shall promptly notify the Borrowers of such event; and (B) Lender’s obligation to fund Loans
and issue Letters of Credit, shall be immediately suspended, until each condition giving rise to such
suspension no longer exists.
Notwithstanding anything herein to the contrary, each Borrower shall only be required to compensate
Lender in respect of any such increased costs or reduction in the amount received or receivable by Lender
to the extent any Borrower has received a written request for such compensation within ninety (90) days
after Lender has received actual notice of the occurrence of the relevant circumstance giving rise to such
increased costs or reduction in the amount received or receivable by Lender.
8.17
Conflict
If any provision of this Agreement conflicts with and is incapable of being construed together with any other
Loan Document, then the provisions of this Agreement shall prevail to the extent necessary to remove such
conflict. If there is a representation, warranty, covenant, agreement or event of default contained in any
Loan Document which is not contained herein, or vice versa, such additional provision shall not constitute
a conflict.
SECTION 9 – SPECIAL PROVISIONS
9.1
Interest Act (Canada)
For the purposes of this Agreement, whenever interest or a fee to be paid hereunder is to be calculated on
the basis of a year of three hundred and sixty (360) days, as in the case of all Revolving Credit Advances
in U.S.$ made based upon the Term SOFR Rate, or any other period of time that is less than a calendar
year, the yearly rate of interest or the yearly fee to which the rate determined pursuant to such calculation
is equivalent is the rate so determined multiplied by the actual number of days in the calendar year in which
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the same is to be ascertained and divided by either three hundred and sixty (360) or such other period of
time, as the case may be. Each Credit Party confirms that it fully understands and is able to calculate the
rate of interest applicable to Loans under this Agreement based on the methodology for calculating per
annum rates provided for in this Agreement. Each Credit Party hereby irrevocably agrees not to plead or
assert, whether by way of defence or otherwise, in any proceeding relating to this Agreement or any Loan
Documents, that the interest payable under this Agreement and the calculation thereof has not been
adequately disclosed to such Credit Party as required pursuant to Section 4 of the Interest Act (Canada).
9.2
Excess Resulting from Exchange Rate Change
If at any time following one or more fluctuations in the exchange rate of the Canadian Dollar against the
U.S. Dollar (a) the Obligations exceed any limitations hereunder or (b) any part of the Obligations exceeds
any limit set forth herein for such Obligations, each Borrower shall within three (3) Business Days or, if an
Event of Default has occurred and is continuing, immediately: (i) make the necessary payments or
repayments to reduce such Obligations to an amount necessary to eliminate such excess; or (ii) maintain
or cause to be maintained with Lender deposits in an amount equal to or greater than the amount of such
excess, such deposits to be maintained in such form and upon such terms as are acceptable to Lender in
its reasonable discretion. Without in any way limiting the foregoing provisions, Lender shall, weekly or more
frequently in Lender’s sole discretion, make the necessary exchange rate calculations (based upon the rate
of exchange established by Lender as at noon on the date of determination) to determine whether any such
excess exists on such date.
9.3
Judgment Currency
If for the purpose of obtaining judgment in any court it is necessary to convert an amount due hereunder in
the currency in which it is due (the “Original Currency”) into another currency (the “Second Currency”),
the rate of exchange applied shall be that at which, in accordance with normal banking procedures, Lender
could purchase in the Toronto foreign exchange market, the Original Currency with the Second Currency
on the date two (2) Business Days preceding that on which judgment is given. Each Borrower agrees that
its obligation in respect of any Original Currency due from it hereunder shall, notwithstanding any judgment
or payment in such other currency, be discharged only to the extent that, on the Business Day following the
date Lender receives payment of any sum so adjudged to be due hereunder in the Second Currency,
Lender may, in accordance with normal banking procedures, purchase, in the Toronto foreign exchange
market, the Original Currency with the amount of the Second Currency so paid; and if the amount of the
Original Currency so purchased or could have been so purchased is less than the amount originally due in
the Original Currency, each Borrower jointly and severally agrees as a separate obligation and
notwithstanding any such payment or judgment to indemnify Lender against such loss. The term “rate of
exchange” in this Section means the spot rate at which Lender, in accordance with normal practices, is able
on the relevant date to purchase the Original Currency with the Second Currency, and includes any
premium and costs of exchange payable in connection with such purchase.
9.4
USA Patriot Act
Lender hereby notifies each Credit Party that, pursuant to the requirements of the USA Patriot Act (Title III
of Pub. L. 107-56 (signed into law October 26, 2001)), it is required to obtain, verify and record information
that identifies the Credit Parties, which information includes the name and address of each of the parties
hereto and other information that will allow Lender to identify all parties in accordance with said Act. The
Credit Party shall promptly provide such information upon request by Lender.
9.5
Calculations
All references in the Loan Documents to Loans, Letters of Credit, Obligations, Borrowing Base components
and other amounts shall be denominated in Canadian Dollars, unless expressly provided otherwise. The
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Canadian Dollars equivalent of any amounts denominated or reported under a Loan Document in a
currency other than Canadian Dollars shall be determined by Lender on a daily basis, based on its rate of
exchange as determined on the date of determination. The Credit Parties shall report value and other
Borrowing Base components to Lender in the currency invoiced by Borrowers or shown in Borrowers’
financial records, and unless expressly provided otherwise, shall deliver Financial Statements and calculate
financial covenants in Canadian Dollars. Notwithstanding anything herein to the contrary, if any Obligation
is funded and expressly denominated in a currency other than Canadian Dollars, Borrowers shall repay
such Obligation in such other currency.
9.6
Language
The parties hereto confirm that it is their wish that this Agreement and any other document executed in
connection with the transactions contemplated herein be drawn up in the English language only (except if
another language is required under any Applicable Law) and that all other documents contemplated
thereunder or relating thereto, including notices, may also be drawn up in the English language only. Each
party hereto hereby confirms that it was represented by legal counsel and has had the opportunity to
negotiate the terms of this Agreement and any other Loan Documents, including the essential stipulations
thereof, with the assistance of its legal counsel. Les parties aux présentes confirment que c’est leur volonté
que cette convention et les autres documents de crédit soient rédigés en langue anglaise seulement et que
tous les documents, y compris tous avis, envisagés par cette convention et les autres documents peuvent
être rédigés en langue anglaise seulement (sauf si une autre langue est requise en vertu d’une loi
applicable). Chaque partie aux présentes confirme qu’elle a été représentée par des conseillers juridiques
et a eu l’opportunité de négocier les termes de cette convention et des autres documents de crédit, y
compris leurs stipulations essentielles, avec l’aide de ses conseillers juridiques.
[Signature Pages Follow]
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above.
BORROWER:
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
Per:
Per:
Name:
Title:
Name:
Title:
DIRTT ENVIRONMENTAL SOLUTIONS, INC.
Per:
Per:
Name:
Title:
Name:
Title:
Signature Page to Loan Agreement
LENDER:
ROYAL BANK OF CANADA
Per:
Name:
Title: Attorney in Fact
Signature Page to Loan Agreement
SCHEDULE A
DEFINITIONS
Capitalized terms used in this Agreement and the other Loan Documents shall have (unless otherwise
provided elsewhere in this Agreement or in the other Loan Documents) the following respective meanings:
“Account Debtor” shall mean any Person who is or may become obligated with respect to, or on account
of, an Account.
“Accounts” shall mean all “accounts,” as such term is defined in the PPSA or the UCC, as applicable, and
includes any right of any Person to payment for goods sold or leased or for services rendered, whether or
not it has been earned by performance, now owned or hereafter acquired by any Person, including: (i) all
accounts receivable, other receivables, book debts and other forms of obligations whether arising out of
goods sold or leased or services rendered or from any other transaction whatsoever (including any contract
rights); (ii) all of such Person’s rights in, to and under all purchase orders or receipts for goods or services;
(iii) all of such Person’s rights to any goods represented by any of the foregoing (including unpaid sellers’
rights of rescission, replevin, reclamation, stoppage in transit, repossession rights under any statute or law
including those under Section 81.1 of the BIA, and rights to returned, claimed or repossessed goods); (iv)
all monies due or to become due to such Person under all purchase orders and contracts for the sale or
lease of goods or the performance of services or both by such Person or in connection with any other
transaction (whether or not yet earned by performance on the part of such Person), including the right to
receive the proceeds of said purchase orders and contracts; and (v) all collateral security and guarantees
of any kind given by any other Person with respect to any of the foregoing.
“Adjusted EBITDA” means with respect to any Person for any period, the Net Income of such Person for
such period plus, without duplication and to the extent reflected as a charge in the statement of income
included in the financial statements of such Person:
(a)
(b)
(c)
(d)
all amounts deducted in the calculation thereof in respect of Depreciation Expense, and
current and deferred taxes, net losses of Subsidiaries and any other losses incurred in
respect of investments that are in each case accounted for on an equity basis;
Total Interest Expense;
all unrealized hedging losses; and
non-cash stock based compensation expenses (options, performance stock units, deferred
stock units) and any extraordinary, non-recurring or unusual expenses or losses (including,
whether or not otherwise includable as a separate item in such statement of income, losses
on sales outside of the ordinary course of business or on sales of property of a Credit Party
which is leased back to any Credit Party);
less, without duplication and to the extent reflected as a credit in such statement of net income:
(e)
(f)
(g)
(h)
any reduction of income taxes;
all unrealized hedging gains;
amounts included in the calculation thereof in respect of net profits of Subsidiaries and any
other profits in respect of investments that are in each case accounted for on an equity
basis; and
any extraordinary, non-recurring or unusual income or gains (including, whether or not
otherwise includable as a separate item in such statement of income, gains on sales
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outside of the ordinary course of business or on sales of property by a Credit Party that are
leased back to any Credit Party).
“Adjusted Term CORRA” means, for purposes of any calculation, the rate per annum equal to (a) Term
CORRA for such calculation plus (b) the Term CORRA Adjustment; provided that if Adjusted Term CORRA
as so determined shall ever be less than zero, then Adjusted Term CORRA shall be deemed to zero.
“Adjusted Term SOFR” means, for purposes of any calculation, the rate per annum equal to (a) the Term
SOFR Rate for such calculation plus (b) the Term SOFR Adjustment.
“Advance Rate” shall have the meaning assigned to it in Section 1.5.
“Affiliate” shall mean, with respect to a Person: (i) each other Person that, directly or indirectly, owns or
controls, whether beneficially, or as a trustee, guardian or other fiduciary, twenty five percent (25%) or more
of the Shares having ordinary voting power for the election of directors of such Person; (ii) each other
Person that controls, is controlled by or is under common control with such Person or any Affiliate of such
Person; or (iii) each of such Person’s directors, officers, managing members, partners, or trustees. For the
purpose of this definition, “control” of a Person shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of its management or policies, whether through the ownership of voting
securities, by contract or otherwise.
“Agreement” shall mean this Agreement including all appendices, exhibits or schedules attached or
otherwise identified thereto, restatements and modifications and supplements thereto, and any appendices,
exhibits or schedules to any of the foregoing, each as in effect at the time such reference becomes
operative; provided, that except as specifically set forth in this Agreement, any reference to the Disclosure
Schedules to this Agreement shall be deemed a reference to the Disclosure Schedules as in effect on the
Closing Date or in a written amendment thereto executed by Borrowers and Lender.
“Applicable Margin” shall mean, for the purposes of determining the applicable interest rate for the
Revolving Credit Loans:
(a)
(b)
(c)
[***]% per annum in the case of RBP and RBUSBR based loans,
[***]% per annum in the case of Term CORRA Loans, and
[***]% per annum plus the Term SOFR Adjustment in the case of Term SOFR Loans.
“Appraisal Fees” shall have the meaning assigned to it in Schedule E.
“Authorized Officer” shall mean the president, chief financial officer, chief executive officer or such other
officer or signatory of Borrower (as may be appointed by corporate resolution, in writing) as is acceptable
to Lender.
“Bank Products” shall mean any ancillary services, facilities or obligations which Lender may in its sole
discretion undertake in connection with any of the Credit Parties and includes any Foreign Exchange Facility
described in Schedule H hereto.
“Bankruptcy Code” shall mean title 11 of the United States Code, 11 U.S.C. §§ 100. et seq., as in effect
from time to time or at any time.
“BIA” shall mean the Bankruptcy and Insolvency Act (Canada), and any successor act or statute, as in
effect from time to time or at any time.
“Blocked Accounts” shall have the meaning assigned to it in Schedule D.
“Blocked Accounts Agreement” shall have the meaning assigned to it in Schedule D.
- 3 -
“Books and Records” shall mean all books, records, board minutes, contracts, licenses, insurance
policies, environmental audits, business plans, files, computer files, computer discs and other data and
software storage and media devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and instruments relating to the
Collateral or any Borrower’s or any other Credit Party’s business.
“Borrower” shall mean the Persons identified as such in the preamble of this Agreement and includes their
successors.
“Borrowing Availability” shall mean, at any time, the lesser of: (i) the Maximum Amount; and (ii) the
Borrowing Base.
“Borrowing Base” shall mean at any time an amount equal to the sum at such time of: (i) eighty-five
percent (85%) of Eligible Accounts (other than Eligible Investment Grade or Insured Accounts), ninety
percent (90%) of Eligible Investment Grade or Insured Accounts, plus (ii) the lesser of: (a) eighty-five
percent (85%) of the net orderly liquidation value (as determined by an appraisal firm acceptable to Lender)
of Eligible Inventory; and (b) seventy-five percent (75%) of the book value of Eligible Inventory (recorded
at the lower of cost and net realizable value) and, less (iii) reserves, established by Lender from time to
time in its good faith discretion, including the reserves set forth in Section 1.13.
“Borrowing Base Certificate” shall mean a certificate in the form of Exhibit B.
“Business Day” means a day on which chartered banks are open for over-the-counter business in Toronto,
Ontario, and excludes Saturday, Sunday and any other day which is a statutory holiday in Toronto, Ontario,
provided that, when used in connection with Term SOFR Loans or any other calculation or determination
involving SOFR, the term “Business Day” means any day that is only a U.S. Government Securities
Business Day.
“Canadian Anti-Terrorism Laws” shall mean all laws of Canada, or any province, territory or political
subdivision thereof relating to the prevention of money laundering and terrorist financing including without
limitation the Criminal Code (Canada), the Proceeds of Crime (Money Laundering) and Terrorist Financing
Act (Canada), the United Nations Suppression of Terrorism Regulations and the Anti-terrorism Act
(Canada) and all regulations and orders made thereunder.
“Canadian Available Tenor” shall mean, as of any date of determination and with respect to the then-
current Canadian Benchmark, as applicable, (x) if such Canadian Benchmark is a term rate, any tenor for
such Canadian Benchmark (or component thereof) that is or may be used for determining the length of a
Interest Period pursuant to this Agreement or (y) otherwise, any payment period for interest calculated with
reference to such Canadian Benchmark (or component thereof) that is or may be used for determining any
frequency of making payments of interest calculated with reference to such Canadian Benchmark, in each
case, as of such date, and not including, for the avoidance of doubt, any tenor for such Canadian
Benchmark that is then-removed from the definition of “Interest Period” pursuant to Section 1.17(d).
“Canadian Benchmark” means, initially, the Term CORRA Reference Rate; provided that if a Canadian
Benchmark Transition Event has occurred with respect to the Term CORRA Reference Rate, or the then-
current Canadian Benchmark, then “Canadian Benchmark” means the applicable Canadian Benchmark
Replacement to the extent that such Canadian Benchmark Replacement has replaced such prior
benchmark rate pursuant to Section 1.17(a).
“Canadian Benchmark Replacement” means, with respect to any Canadian Benchmark Transition Event,
(a) where a Canadian Benchmark Transition Event has occurred with respect to Term CORRA
Reference Rate, Daily Compounded CORRA; and;
(b) where a Canadian Benchmark Transition Event has occurred with respect to a Canadian
Benchmark other than the Term CORRA Reference Rate, the sum of: (i) the alternate benchmark
rate that has been selected by Lender and the Borrower giving due consideration to (A) any
- 4 -
selection or recommendation of a replacement benchmark rate or the mechanism for determining
such a rate by the Relevant Canadian Governmental Body or (B) any evolving or then-prevailing
market convention for determining a benchmark rate as a replacement to the then-current
Canadian Benchmark for Dollar-denominated syndicated credit facilities and (ii) the related
Canadian Benchmark Replacement Adjustment.
If the Canadian Benchmark Replacement as determined pursuant to clause (a) or (b) above would be less
than zero, the Canadian Benchmark Replacement will be deemed to be zero for the purposes of this
Agreement and the other Loan Documents.
“Canadian Benchmark Replacement Adjustment” means, with respect to any replacement of the then-
current Canadian Benchmark with an Unadjusted Canadian Benchmark Replacement, the spread
adjustment, or method for calculating or determining such spread adjustment, (which may be a positive or
negative value or zero) that has been selected by Lender and the Borrower giving due consideration to (a)
any selection or recommendation of a spread adjustment, or method for calculating or determining such
spread adjustment, for the replacement of such Canadian Benchmark with the applicable Unadjusted
Canadian Benchmark Replacement by the Relevant Canadian Governmental Body or (b) any evolving or
then-prevailing market convention for determining a spread adjustment, or method for calculating or
determining such spread adjustment, for the replacement of such Canadian Benchmark with the applicable
Unadjusted Canadian Benchmark Replacement for Dollar-denominated syndicated credit facilities at such
time.
“Canadian Benchmark Replacement Date” means a date and time determined by the Lender, which date
shall be no later than the earliest to occur of the following events with respect to the then-current Canadian
Benchmark:
(a) in the case of clause (a) or (b) of the definition of “Canadian Benchmark Transition Event,” the later
of (i) the date of the public statement or publication of information referenced therein and (ii) the
date on which the administrator of such Canadian Benchmark (or the published component used
in the calculation thereof) permanently or indefinitely ceases to provide all Canadian Available
Tenors of such Canadian Benchmark (or such component thereof); or
(b) in the case of clause (c) of the definition of “Canadian Benchmark Transition Event,” the first date
on which such Canadian Benchmark (or the published component used in the calculation thereof)
has been determined and announced by the regulatory supervisor for the administrator of such
Canadian Benchmark (or such component thereof) to be non-representative; provided that such
non-representativeness will be determined by reference to the most recent statement or publication
referenced in such clause (c) and even if any of such Canadian Benchmark (or such component
thereof) continues to be provided on such date.
For the avoidance of doubt, the “Canadian Benchmark Replacement Date” will be deemed to have occurred
in the case of clause (a) or (b) with respect to any Canadian Benchmark upon the occurrence of the
applicable event or events set forth therein with respect to all then-current Canadian Available Tenors of
such Canadian Benchmark (or the published component used in the calculation thereof).
“Canadian Benchmark Transition Event” means the occurrence of one or more of the following events
with respect to the then-current Canadian Benchmark:
(a) a public statement or publication of information by or on behalf of the administrator of such
Canadian Benchmark (or the published component used in the calculation thereof) announcing that
such administrator has ceased or will cease to provide all Canadian Available Tenors of such
Canadian Benchmark (or such component thereof), permanently or indefinitely; provided that, at
the time of such statement or publication, there is no successor administrator that will continue to
provide any Canadian Available Tenor of such Canadian Benchmark (or such component thereof);
(b) a public statement or publication of information by the regulatory supervisor for the administrator of
such Canadian Benchmark (or the published component used in the calculation thereof), the Bank
- 5 -
of Canada, an insolvency official with jurisdiction over the administrator for such Canadian
Benchmark (or such component), a resolution authority with jurisdiction over the administrator for
such Canadian Benchmark (or such component) or a court or an entity with similar insolvency or
resolution authority over the administrator for such Canadian Benchmark (or such component),
which states that the administrator of such Canadian Benchmark (or such component) has ceased
or will cease to provide all Canadian Available Tenors of such Canadian Benchmark (or such
component thereof) permanently or indefinitely; provided that, at the time of such statement or
publication, there is no successor administrator that will continue to provide any Canadian Available
Tenor of such Canadian Benchmark (or such component thereof); or
(c) a public statement or publication of information by the regulatory supervisor for the administrator of
such Canadian Benchmark (or the published component used in the calculation thereof)
announcing that all Canadian Available Tenors of such Canadian Benchmark (or such component
thereof) are not, or as of a specified future date will not be, representative.
For the avoidance of doubt, a “Canadian Benchmark Transition Event” will be deemed to have occurred
with respect to any Canadian Benchmark if a public statement or publication of information set forth above
has occurred with respect to each then-current Canadian Available Tenor of such Canadian Benchmark (or
the published component used in the calculation thereof).
“Canadian Benchmark Unavailability Period” means, the period (if any) (a) beginning at the time that a
Canadian Benchmark Replacement Date has occurred if, at such time, no Canadian Benchmark
Replacement has replaced the then-current Canadian Benchmark for all purposes hereunder and under
any Loan Document in accordance with Section 1.17 and (b) ending at the time that a Canadian Benchmark
Replacement has replaced the then-current Canadian Benchmark for all purposes hereunder and under
any Loan Document in accordance with Section 1.17.
“Canadian Borrower” DIRTT Environmental Solutions Ltd., a corporation incorporated under the laws of
the Province of Alberta.
“Canadian Conforming Changes” means, with respect to the use or administration of a Canadian
Benchmark or the use, administration, adoption or implementation of any Canadian Benchmark
Replacement, any technical, administrative or operational changes (including changes to the definition of
“RBP,” the definition of “Business Day,” the definition of “Interest Period” or any similar or analogous
definition (or the addition of a concept of “interest period”), timing and frequency of determining rates and
making payments of interest, timing of borrowing requests or prepayment, conversion or continuation
notices, the applicability and length of lookback periods, the applicability of breakage provisions and other
technical, administrative or operational matters) that the Lender decides may be appropriate to reflect the
adoption and implementation of any such rate or to permit the use and administration thereof by the Lender
in a manner substantially consistent with market practice (or, if the Lender decides that adoption of any
portion of such market practice is not administratively feasible or if the Lender determines that no market
practice for the administration of any such rate exists, in such other manner of administration as the Lender
decides is reasonably necessary in connection with the administration of this Agreement and the other Loan
Documents).
“Canadian Dollars”, “CAD$” or “$” shall mean the lawful currency of Canada.
“Capital Expenditures” means all payments or accruals (including capital lease obligations) for any fixed
assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of
more than one year and that are required to be capitalized under GAAP.
“Capital Lease” shall mean, with respect to any Person, any lease of any real property, fixtures or
equipment by such Person as lessee that, in accordance with GAAP, would be required to be classified
and accounted for as a capital lease or a finance lease on a balance sheet of such Person, other than, in
the case of any Borrower or any Credit Party, any such lease under which any Borrower is the lessor.
- 6 -
“Capital Lease Obligation” shall mean, with respect to any Capital Lease, the amount of the obligation of
the lessee thereunder that, in accordance with GAAP, would be capitalized on a balance sheet of such
lessee in respect of such Capital Lease.
“Cash Collateral Account” shall have the meaning assigned to it in Schedule C.
“Cash Dominion Period” shall mean a period: (i) commencing on the date on which either (x) an Event of
Default has occurred and has been continuing; or (y) Net Borrowing Availability has been less than $
$6,250,000 for five (5) consecutive Business Days; and (ii) ending on the first date thereafter on which both
(x) no Event of Default has existed or been continuing at any time; and (y) Net Borrowing Availability shall
have been not less than $6,250,000 for thirty (30) consecutive calendar days.
"Cash Taxes" means for any Person for any period, the amount of all income Taxes (including federal and
provincial income Taxes) and other Taxes payable by such Person on its net taxable income or its capital
for such period (which for greater certainty, does not include deferred Taxes or refundable Taxes).
“CCAA” shall mean the Companies’ Creditors Arrangement Act (Canada) and any successor legislation
thereto, as in effect from time to time or at any time.
“Change of Control” shall mean, the occurrence of any of the following events:
(a)
(b)
one or more Persons, acting jointly or in concert (within the meaning of the Securities Act
(Alberta)), shall acquire more than 50% of the interests in the Shares of a Borrower; or
a Borrower or any other Credit Party shall cease to own, control or direct 100% of the voting
Shares of any Subsidiary of the Borrower.
“Charges” shall mean all federal, provincial, state, county, city, municipal, local, foreign or other
governmental or quasi-governmental taxes, levies, customs or other duties, assessments, charges, liens,
and all additional charges, interest, penalties, expenses, claims or encumbrances upon or relating to: (i)
the Collateral; (ii) the Obligations; (iii) the employees, payroll, income or gross receipts of any Credit Party;
(iv) the ownership or use of any assets by any Credit Party; or (v) any other aspect of any Credit Party’s
business as well as any and all amounts at any time due and payable by any Credit Party to and/or in
respect of any Plan (whether as a result of under-funding or otherwise).
“Chattel Paper” shall mean a writing or writings which evidence both a monetary obligation and a security
interest in or lease of specific goods, but a charter or other contract involving the use or hire of a vessel is
not Chattel Paper. When a transaction is evidenced by both such a security agreement or a lease and by
an instrument or a series of instruments, the group of writings then together constitutes Chattel Paper. With
respect to property located in the United States, Chattel Paper shall also include “Chattel Paper” as defined
in the UCC and “Electronic chattel paper” as defined in the UCC.
“Closing Date” shall mean the Business Day on which the conditions precedent set forth in Section 2 have
been satisfied or waived in writing by Lender and the initial Loan has been made.
“Closing Fee” shall have the meaning assigned to it in Schedule E.
“Code” means the U.S. Internal Revenue Code of 1986, and the United States Treasury Department
regulations promulgated thereunder, each as amended from time to time.
“Collateral” shall have the meaning assigned to it in Section 6.1.
“Collateral Monitoring Fee” shall have the meaning assigned to it in Schedule E.
“Commitment Termination Date” shall mean the earliest of: (i) the Stated Expiry Date; and (ii) the date
Lender’s obligation to advance funds, issue Letters of Credit or otherwise extend or continue any credit
hereunder is otherwise terminated pursuant to the terms hereof.
- 7 -
“Compliance Certificate” shall mean a certificate in the form of Exhibit C.
“Consolidated Assets” means the total assets of the Canadian Borrower, as determined on a
consolidated basis and as shown on the most recent financial statements of the Borrowers delivered to the
Lender pursuant to Section 4.1.
“Continuation/Conversion Date” shall mean the date on which a Revolving Credit Advance is converted
from or into or continued as a Revolving Credit Advance based upon the Term SOFR Rate or Adjusted
Term CORRA.
“Contracts” shall mean all the contracts, undertakings, or agreements (other than rights evidenced by
Chattel Paper, Documents or Instruments) in or under which any Person may now or hereafter have any
right, title or interest, including any agreement relating to the terms of payment or the terms of performance
of any Account.
“Contractual Obligation” shall mean as to any Person, any provision of any security issued by such Person
or of any agreement, instrument, or other undertaking to which such Person is a party or by which it or any
of its property is bound.
"Convertible Debentures" means (i) the convertible unsecured subordinated debentures of the Canadian
Borrower in a principal amount of $40,250,000 issued pursuant to a first supplemental indenture dated as
of January 25, 2021; and (ii) the convertible unsecured subordinated debentures of the Canadian Borrower
in a principal amount not to exceed $50,000,000 to be issued pursuant to a second supplemental indenture
dated on or about November 2021.
“Copyright License” shall mean rights under any written agreement now owned or hereafter acquired by
any Person granting the right to use any Copyright or Copyright registration.
“Copyrights” shall mean all of the following now owned or hereafter acquired by any Person: (i) all
copyrights in any original work of authorship fixed in any tangible medium of expression, now known or
later developed, all registrations and applications for registration of any such copyrights in the United States,
Canada or any other country, including registrations, recordings and applications, and supplemental
registrations, recordings, and applications in the United States Copyright Office or in the applicable office
in Canada; and (ii) all Proceeds of the foregoing, including license royalties and proceeds of infringement
suits, the right to sue for past, present and future infringements, all rights corresponding thereto throughout
the world and all renewals and extensions thereof.
“CORRA” means the Canadian Overnight Repo Rate Average administered and published by the Bank of
Canada (or any successor administrator).
“Credit Party” shall mean each Borrower and each Guarantor.
“Daily Compounded CORRA” means, for any day (a “Daily Compounded CORRA Rate Day”), a rate per
annum equal to CORRA for the day (such day, the “Daily Compounded CORRA Determination Day”),
that is five (5) Business Days prior to (i) if such Daily Compounded CORRA Rate Day is a Business Day,
such Daily Compounded CORRA Rate Day or (ii) if such Daily Compounded CORRA Rate Day is not a
Business Day, the Business Day immediately preceding such Daily Compounded CORRA Rate Day, in
each case, as CORRA is published by the administrator; provided, however, that if as of 5:00 p.m. (Toronto
time) on any Daily Compounded CORRA Determination Day, CORRA for the applicable tenor has not been
published by the administrator and a Canadian Benchmark Replacement Date with respect to Daily
Compounded CORRA has not occurred, then Daily Compounded CORRA will be CORRA as published by
the administrator on the first preceding Business Day for which CORRA was published by the administrator
so long as such first preceding Business Day is not more than three (3) Business Days prior to such Daily
Compounded CORRA Determination Day; provided, that to the extent such rate as determined above shall,
at any time, be less than zero, such rate shall be deemed to be zero for all purposes herein.
- 8 -
“Default” shall mean the occurrence of any Event of Default or event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
“Default Rate” shall have the meaning assigned to it in Section 1.5(c).
“Depreciation Expense” means, for any period with respect to any Person, depreciation, amortization,
depletion and other like reductions to income of such Person for such period not involving any outlay of
cash.
“Disbursement Accounts” shall have the meaning assigned to it in Schedule D.
“Documents” shall mean all documents of title (as defined in the PPSA), and with respect to property
located in the United States, “Documents” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all bills of lading, dock warrants, dock receipts,
warehouse receipts, and other documents of title, whether negotiable or non-negotiable.
“Eligible Accounts” shall mean as at the date of determination, all Accounts of the Borrowers except any
Account:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
that does not arise from the sale of goods or the performance of services by such Borrower
in the ordinary course of such Borrower’s business;
upon which: (i) such Borrower’s right to receive payment is not absolute or is contingent
upon the fulfillment of any condition whatsoever; or (ii) such Borrower is not able to bring
suit or otherwise enforce its remedies against the Account Debtor through judicial process;
to the extent of any concessions, offsets, deductions, contras, returns, chargebacks or
understandings with the Account Debtor therein that in any way could reasonably be
expected to adversely affect the payment of, or the amount of, such Account, or for which
the Account Debtor has disputed its obligation to pay all or any portion of the Account;
with respect to which an invoice, acceptable to Lender in form and substance, has not
been sent to the Account Debtor;
that is not owned by such Borrower or is subject to any right, claim, or interest of another
Person, other than Permitted Encumbrances which are in favour of Lender or have been
subordinated on terms satisfactory to Lender to Liens in favour of Lender or which
otherwise rank in priority behind the Liens in favour of Lender;
that arises from a sale to or performance of services for an employee, Affiliate, Subsidiary
or Shareholder of such Borrower or any other Credit Party, or an entity which has common
officers or directors with such Borrower or any other Credit Party;
that is the obligation of an Account Debtor that is the federal, state, provincial or territorial
government or a political subdivision thereof, or any department, agency, public
corporation or instrumentality thereof unless Lender has agreed to the contrary in writing;
that is the obligation of an Account Debtor located other than in Canada or the continental
United States unless such Account is supported by a letter of credit in which Lender has a
first priority perfected security interest and Lien by possession or credit insurance
acceptable to Lender (and naming Lender as loss payee);
that is the obligation of an Account Debtor to whom such Borrower is or may become liable
for goods sold or services rendered by the Account Debtor to such Borrower, to the extent
of such Borrower’s liability to such Account Debtor;
- 9 -
(j)
(k)
(l)
that arises with respect to goods which are delivered on a cash-on-delivery basis or placed
on consignment, guaranteed sale or other terms by reason of which the payment by the
Account Debtor may be conditional;
that is an obligation for which the total unpaid Accounts of the Account Debtor exceed 25%
(or 50% in the case of Accounts (i) payable by an Investment Grade Debtor; or (ii) insured
with an insurer which is acceptable to Lender on terms satisfactory to Lender in its sole
discretion) of the aggregate of all gross Accounts as related to accounts receivable
(excluding any inter-company accounts receivable), to the extent of such excess;
that is not paid within sixty (60) days from its due date or ninety (90) days (one hundred
and twenty (120) days in the case of Accounts (i) payable by an Investment Grade Debtor;
or (ii) insured with an insurer which is acceptable to Lender on terms satisfactory to Lender
in its sole discretion) from its invoice date or that are Accounts of an Account Debtor if 50%
or more of the Accounts owing from such Account Debtor remain unpaid within such time
periods;
(m)
that has a due date of more than ninety (90) days from its invoice date;
(n)
(o)
(p)
(q)
(r)
(s)
(t)
that is an obligation of an Account Debtor that has suspended business, made a general
assignment for the benefit of creditors, is unable to pay its debts as they become due or
as to which a petition has been filed (voluntary or involuntary) under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors;
that arises from any pre-billing invoices, progress billing, bill-and-hold or other sale of
goods which remain in such Borrower’s possession or under Borrower’s control;
as to which Lender’s interest therein is not a first priority perfected security interest and
Lien;
to the extent that such Account exceeds any credit limit established by Lender in Lender’s
good faith discretion;
as to which any of Borrower’s representations or warranties pertaining to Accounts are
untrue;
that represents interest payments, late or finance charges, or service charges owing to
such Borrower;
with respect to which the Account Debtor is located in any state of the United States or
province of Canada which requires the filing of a Notice of Business Activities Report or
registration or licensing to carry on business or similar report, registration or licensing in
order to permit Borrower to seek judicial enforcement in such state of the United States or
province of Canada of payment of such Account, unless such Borrower qualifies to do
business in such state or files a Notice of Business Activities Report or registration or
licensing to carry on business or equivalent report, registration or licensing following such
Account Debtor being delinquent in paying the amount due; or
(u)
that is not otherwise acceptable in the good faith discretion of Lender, provided, that Lender
shall have the right to create and adjust eligibility standards and related reserves from time
to time in its good faith discretion.
“Eligible Inventory” shall mean as at the date of determination, all Inventory of the Borrowers, including
Inventory covered by commercial Letters of Credit, that:
- 10 -
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
is not subject to any Liens other than Permitted Encumbrances which are in favour of
Lender or have been subordinated on terms satisfactory to Lender to Liens in favour of
Lender or which otherwise rank in priority behind the Liens in favour of Lender;
is located on premises in Canada or the United States owned or operated by Borrower and
referenced in Disclosure Schedule (3.6) or is located on premises in Canada with respect
to which Lender has received a landlord, bailee or mortgagee letter acceptable in form and
substance to Lender or, in the sole discretion of Lender, in respect of which Lender has
established an appropriate reserve;
is not in transit unless and subject to Lender’s discretion (i) title has been transferred to
Borrower; (ii) the goods are in transit to Borrower’s premises; (iii) the goods are insured to
Lender’s satisfaction with Lender as first loss payee and such insurance has been assigned
to Lender to its satisfaction; (iv) the goods are supported by documentation acceptable to
Lender (including but not limited to the original bill of lading and invoice and the
documentation provided for in paragraph (d)); and (v) any and all amounts in respect of the
purchase and transportation of such Inventory, including duty, freight, brokerage fees,
insurance and other similar costs (all such amounts other than purchase price, the
“Clearance Costs”), are either (A) supported by a letter of credit acceptable to Lender, (B)
paid for by Borrower and such payments have been verified by Lender, (C) as to the
Clearance Costs, reserved for in the Borrowing Base and, as to the purchase price,
reserved for in the Borrowing Base unless waivers of all repossession, revendication or
similar rights of an unpaid supplier have been received to the satisfaction of Lender or (D)
or such other arrangement that may be satisfactory to Lender;
is not covered by a negotiable document of title, unless such document and evidence of
acceptable insurance covering such Inventory has been delivered to Lender;
is of good and merchantable quality, free from any defects and is not obsolete, unsalable,
shopworn, damaged, unfit for further processing or of substandard quality in Lender’s good
faith credit judgment;
does not consist of: (i) discontinued items; (ii) slow-moving or excess items; or (iii) used
items held for resale;
consists of (i) raw materials that are building materials including aluminum, hardware and
millwork, willow glass, and plastics, or (iii) finished goods;
meets all standards imposed by any Governmental Authority, including with respect to its
production, acquisition or importation (as the case may be);
is not placed by Borrower on consignment or held by Borrower on consignment from
another Person;
is not held for rental or lease by or on behalf of Borrower;
meets or does not violate any warranty, representation or covenant contained in this
Agreement or any other Loan Document;
is not subject to any licensing, patent, royalty, trademark, trade name or copyright
agreement with any third parties;
does not require the consent of any Person for the completion or manufacture, sale or other
disposition of such Inventory by Lender and such completion, manufacture or sale does
not constitute a breach or default under any contract or agreement to which Borrower is a
party or to which such Inventory is or may become subject;
- 11 -
(n)
(o)
(p)
is not subject to unpaid suppliers’ repossession rights or retention of title claims; and
is in a location where the aggregate amount of Inventory that would otherwise be
considered eligible, is at least $50,000; and
is otherwise acceptable in the good faith discretion of Lender, provided that, Lender shall
have the right to create and adjust eligibility standards and related reserves from time to
time in its good faith discretion.
“Eligible Investment Grade or Insured Accounts” shall mean Eligible Accounts that are either: (i)
payable by an Investment Grade Debtor; or (ii) insured with an insurer which is acceptable to Lender on
terms satisfactory to Lender in its sole discretion.
“Environmental Laws” shall mean all federal, provincial, state, municipal and local laws, statutes,
ordinances, programs, permits, guidance, orders, decrees and regulations, now or hereafter in effect, and
in each case as amended or supplemented from time to time, and any applicable judicial or administrative
interpretation thereof relating to the regulation and protection of human health, safety, the environment and
natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface
strata, wildlife, aquatic species and vegetation).
“Environmental Liabilities” shall mean all liabilities, obligations, responsibilities, remedial actions, removal
costs, losses, damages of whatever nature, costs and expenses (including all reasonable fees,
disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any claim, suit, action or demand of
whatever nature by any Person and which relate to any health or safety condition regulated under any
Environmental Law, environmental permits or in connection with any Release, threatened Release, or the
presence of a Hazardous Material.
“EPA” shall mean the Environmental Protection and Enhancement Act (Alberta) and the similar laws of
Canada, the United States of America or any other country, including any province, state, territory or other
political subdivision thereof where any Collateral may be located, and any successor law or statute, as in
effect from time to time or at any time.
“Equipment” shall mean all “equipment” as defined in the PPSA (or with respect to property in the US, all
“equipment” as defined in Article 9 of the UCC) and, in any event, shall include tangible or corporeal property
other than Inventory, now or hereafter acquired by any Person, wherever located, including any and all
machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible or corporeal
personal or movable property (other than Inventory) of every kind and description which may be now or
hereafter used in such Person’s operations or which are owned by such Person or in which such Person
may have an interest, and all parts, accessories and accessions thereto and substitutions and replacements
therefor.
“Equivalent Amount” shall mean the amount of U.S.$ to which any amount in $ is equivalent as determined
by Lender based on its rate of exchange as determined at noon (Toronto time) on the date of determination.
“ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and regulations
promulgated thereunder.
“ERISA Affiliate” shall mean any trade or business (whether or not incorporated) under common control
with any Credit Party within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o)
of the Code for purposes of provisions relating to Section 412 of the Code).
“ERISA Event” shall mean (a) a Reportable Event with respect to a Plan, (b) a withdrawal by any Credit
Party or any ERISA Affiliate from a Plan during a plan year in which it was a substantial employer (as
defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal
under Section 4062(e) of ERISA, (c) a complete or partial withdrawal by any Credit Party or any ERISA
Affiliate from a Multi-employer Plan or other Plan regulated or governed by other applicable legislation or
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notification that a Multi-employer Plan or Plan regulated or governed by or other applicable legislation is in
reorganization, (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a
termination under Section 4041 or 4041A of ERISA or other law, or the commencement of proceedings by
the PBGC pursuant to Section 4042 of ERISA or other applicable Governmental Authority to terminate a
Plan or to appoint a trustee to administer any Plan or Multi-employer Plan, or (e) the imposition of any
liability under Title IV of ERISA or other applicable legislation (other than for PBGC premiums due but not
delinquent under Section 4007 of ERISA or other similar legislation) upon any Credit Party or any ERISA
Affiliate.
“Event of Default” shall have the meaning assigned to it in Section 7.1.
“Existing Credit Facility” shall mean the Credit Agreement dated July 19, 2019 between DIRTT
Environmental Solutions Ltd. as Borrower, DIRTT Environmental Solutions, Inc. as Guarantor and Royal
Bank of Canada, as lender, as amended, supplemented and restated from time to time.
“FCCR Trigger” means any time that (i) an Event of Default has occurred and is continuing or (ii) Net
Borrowing Availability is less than $5,000,000.
“Federal Funds Rate” means, for any day, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published
by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that
(a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Business Day as so published on the next succeeding Business Day,
and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for
such day shall be the average rate charged to the Royal Bank on such day on such transactions as
determined by the Lender.
“Fees” shall mean the fees due to Lender as set forth in Schedule E.
“Field Examination” shall have the meaning assigned to it in Section 6.2(c).
“Field Examination Fees” shall have the meaning assigned to it in Schedule E.
“Financial Statements” shall mean for any Person, the income statement, balance sheet and statement
of cash flows of such Person, prepared in accordance with GAAP.
“Fiscal Month” shall mean a monthly accounting period of Borrower or of a Credit Party, as applicable.
“Fiscal Year” shall mean the twelve (12) month period of Borrower ending December 31st of each year.
Subsequent changes of the fiscal year of Borrower shall not change the term “Fiscal Year” unless Lender
shall consent in writing to such change.
“Fixed Charge Coverage Ratio” shall mean with respect to the Canadian Borrower on a consolidated
basis, the ratio of (i) Adjusted EBITDA for the most recently completed twelve month period less Cash
Taxes actually paid during such twelve month period, Unfunded Capital Expenditures actually paid in such
twelve month period, and Restricted Payments actually made in such twelve month period, plus, in each
case without duplication, operating leases and rent, to (ii) Fixed Charges for the same period.
“Fixed Charges” means, with respect to any Person for any period and on a consolidated basis, the sum
of (in each case, without duplication) (i) Total Interest Expense, (ii) all Indebtedness repayments required
to be paid by such Person during such period, (iii) all amounts actually paid by such Person in respect of
Capital Leases during such period, and (iv) all rent and other charges actually paid by such Person during
such period with respect to all operating leases.
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“Floor” means the benchmark rate floor, if any, provided in this Agreement initially (as of the execution of
this Agreement, the modification, amendment or renewal of this Agreement or otherwise) with respect to
Term SOFR. For the avoidance of doubt, the initial Floor for Term SOFR shall be 0.00%.
“FSCO” shall mean the Financial Services Commission of Ontario and any Person succeeding to the
functions thereof and includes the Superintendent under the PBA and any other public authority empowered
or created by the PBA.
“Funded Debt” shall mean, with respect to any Person, all of such Person’s Indebtedness consisting of or
relating to the borrowing of money or the obtaining of credit (other than trade payables incurred in the
ordinary course of business).
“Fx Contracts” shall have the meaning assigned to it in Schedule H.
“Fx Facility” shall have the meaning assigned to it in Schedule H.
“Fx Reserve” shall have the meaning assigned to it in Schedule H.
“GAAP” shall mean United States generally accepted accounting principles adopted by the United States
Securities and Exchange Commission, including United States Accounting Standards and interpretations
together with their accompanying documents which are set by the Financial Accounting Standards Board
and the Emerging Issues Task Force, but only to the extend the same are adopted by the American Institute
of Certified Public Accountants as generally accepted accounting principles in the United States and then
subject top such modifications thereto as are agreed by the American Institute of Certified Public
Accountants on a consistent basis. For greater certainty, for the purposes of this Agreement, including all
financial calculations to be made hereunder, any lease accounted for as an “operating lease” as defined
under U.S. GAAP shall be excluded from Capital Lease calculations.
“Goods” shall mean all “goods,” as such term is defined in the PPSA (or with respect to property located
in the United States, “Goods” as defined in the UCC) and, in any event, includes all things which are
movable at the time Lender’s Liens attach thereto (other than money, Documents, Instruments, Accounts,
Chattel Paper and Intangibles) as well as all fixtures, all now owned or hereafter acquired by any Person,
wherever located, including Equipment, Inventory and all other tangible or corporeal personal or movable
property.
“Goodwill” shall mean all goodwill, trade secrets, proprietary or confidential information, technical
information, procedures, formulae, quality control standards, designs, operating and training manuals,
customer lists, and distribution agreements now owned or hereafter acquired by any Person.
“Governmental Authority” shall mean any nation or government, any state, provincial, territorial or other
political subdivision thereof, and any agency, department or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
“Guarantee” shall mean any guarantee or any other agreement to perform all or any portion of the
Obligations on behalf of any Borrower or any other Credit Party, in favour of, and in form and substance
satisfactory to, Lender, together with all amendments, modifications and supplements thereto and
restatements and replacements thereof, and shall refer to such Guarantee as the same may be in effect at
the time such reference becomes operative.
“Guaranteed Indebtedness” shall mean, as to any Person, any obligation of such Person guaranteeing
any indebtedness, lease, dividend, or other obligation (“primary obligations”) of any other Person (the
“primary obligor”) in any manner, including any obligation or arrangement of such guaranteeing Person
(whether or not contingent): (i) to purchase or repurchase any such primary obligation; (ii) to advance or
supply funds (a) for the purchase or payment of any such primary obligation, or (b) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet condition of the primary obligor; (iii) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to
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make payment of such primary obligation; or (iv) to indemnify the owner of such primary obligation against
loss in respect thereof.
“Guarantor” shall mean each Person which executes a Guarantee in favour of Lender in connection with
the transactions contemplated by this Agreement.
“Hazardous Material” shall mean any substance, material or waste which is regulated by or forms the basis
of liability now or hereafter under, any Environmental Laws, including any material or substance which is:
(i) defined as a “solid waste,” “hazardous waste,” “hazardous material,” “hazardous substance,” “extremely
hazardous waste,” “restricted hazardous waste,” “pollutant,” “contaminant,” “hazardous constituent,”
“special waste,” “toxic substance” or other similar term or phrase under any Environmental Laws; (ii)
petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB’s); or (iii) any
radioactive substance.
“Hazardous Waste” shall include any Hazardous Material as well as any other substance, material or waste
which is now or may hereafter be classified as hazardous (or similarly classified) under any applicable
legislation.
“Indebtedness” of any Person shall mean: (i) all indebtedness of such Person for borrowed money or for
the deferred purchase price of property or services (including reimbursement and all other obligations with
respect to surety bonds, letters of credit and bankers’ acceptances, whether or not matured, but not
including obligations to trade creditors incurred in the ordinary course of business and not more than forty
five (45) days past due); (ii) all obligations evidenced by notes, bonds, debentures or similar instruments;
(iii) all indebtedness created or arising under any conditional sale or other title retention agreements with
respect to property acquired by such Person (even though the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale of such property); (iv) all
Capital Lease Obligations; (v) all Guaranteed Indebtedness; (vi) all Indebtedness referred to in clauses (i),
(ii), (iii), (iv) or (v) above secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contract
rights) owned by such Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness; and (vii) the Obligations.
“Indemnified Liabilities” and “Indemnified Person” shall have the meaning assigned to such terms in
Section 1.12.
“Instruments” shall mean all “instruments,” as defined in the PPSA (and with respect to property located
in the United States, all “Instruments” as defined in the UCC) and, in any event, includes all negotiable
instruments (including all bills of exchange and promissory notes), all certificated securities or any other
writing which evidences a right to the payment of money and is not itself a security agreement or lease and
is of a type which is, in the ordinary course of business, transferred by delivery with any necessary
endorsement or assignment, now owned or hereafter acquired by any Person, wherever located, including
all certificated securities and all notes and other evidences of indebtedness, other than instruments that
constitute, or are a part of a group of writings that constitute, Chattel Paper.
“Intangibles” shall mean all “intangibles” as defined in the PPSA (and with respect to any property located
in the United States, all “General Intangibles” as defined in the UCC) and, in any event, includes intangible
or incorporeal personal property, moveable or immovable now owned or hereafter acquired by any Person,
including all right, title and interest which such Person may now or hereafter have in or under any Contract,
Intellectual Property, interests in partnerships, joint ventures and other business associations, permits,
proprietary or confidential information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise,
experience, processes, models, drawings, materials, Books and Records, Goodwill (including the Goodwill
associated with any Intellectual Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss and casualty, whether covering personal or moveable property, real or
immovable property, tangible rights or intangible rights, corporeal or incorporeal rights, all liability, life, key-
person, and business interruption insurance, and all unearned premiums), uncertificated securities, choses
in action, deposit accounts, rights to receive tax refunds and other payments and rights of indemnification.
- 15 -
“Intellectual Property” shall mean any and all Licenses, Patents, Copyrights, Trademarks, trade secrets
and customer lists.
“Interest Determination Date” shall mean, with respect to any Revolving Credit Advances made based
upon the Term SOFR Rate, the date which is two (2) Business Days before the first day of the Interest
Period for the Term SOFR Rate applicable to such Revolving Credit Advance.
“Interest Payment Date” shall mean, with respect to Revolving Credit Advances made based upon
Adjusted Term CORRA or the Term SOFR Rate, the earlier of thirty (30) days from the Business Day of
the proposed advance of such Revolving Credit Advance and the last day of the Interest Period applicable
to such Revolving Credit Advance and, with respect to each Interest Period of more than 30 days, on each
date that occurs at intervals of 30 days duration after the commencement of the Interest Period.
“Interest Period” means, (a) with respect to each Term CORRA Loan, the initial period (subject to
availability) of one (1), three (3) months or such other period as the Lender permits commencing on and
including the date specified in the Notice of Borrowing or Notice of Continuation/Conversion in the form
attached hereto as Exhibit A, or if the Borrowers elect to continue any Term CORRA Loan in accordance
with Section 1.6(a)(iv), the date the Borrowers have notified the Lender as the date on which to continue
such Term CORRA Loan, as the case may be, as the case may be, applicable to such Term CORRA Loan
and ending on and excluding the last day of such initial period, and thereafter, each successive period
(subject to availability) of approximately one (1) or three (3) months or such other permitted period as
selected by the Borrower and notified to the Lender in writing commencing on and including the last day of
the prior Interest Period, or (b) with respect to each Revolving Credit Advance made based upon the Term
SOFR Rate, the period (subject to market availability) commencing on the Business Day of the proposed
advance of such Revolving Credit Advance or on the Continuation/Conversion Date on which such
Revolving Credit Advance is converted into or continued as a Revolving Credit Advance based upon the
Term SOFR Rate, and ending on the date that is one (1) or three (3) months thereafter as selected by a
Borrower in its Notice of Borrowing or Notice of Continuation/Conversion in the form attached hereto as
Exhibit A, provided that:
(a)
(b)
(c)
(d)
(e)
in the case of any continuation of a Term CORRA Loan pursuant to Section 1.6(a)(iv),
the last day of each Interest Period shall also be the first day of the next Interest Period;
the last day of each Interest Period shall be a Business Day and if not, the Borrower
shall be deemed to have selected an Interest Period the last day of which is the first
Business Day following the last day of the Interest Period selected by the Borrower,
unless such first Business Day is in a succeeding calendar month, in which case, the
last day of such Interest Period shall be the immediately preceding Business Day;
notwithstanding any of the foregoing, the last day of each Interest Period shall be on or
before the Stated Expiry Date;
no tenor that has been removed from this definition pursuant to Section 1.16 shall be
available for specification in such Notice of Borrowing or interest election; and
Interest Periods commencing on the same date for Revolving Credit Advances made
based on the Term SOFR Rate that are part of the same Revolving Credit Advance
shall be of the same duration.
“Inventory” shall mean all “inventory,” as such term is defined in the PPSA (or with respect to property
located in the United States, all “inventory” as such term is defined in the UCC), now or hereafter owned or
acquired by any Person, wherever located, including all inventory, merchandise, goods and other personal
property which are held by or on behalf of such Person for sale or lease or are furnished or are to be
furnished under a contract of service or which constitute raw materials, work in process or materials used
or consumed or to be used or consumed in such Person’s business or in the processing, production,
packaging, promotion, delivery or shipping of the same, including other supplies.
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“Investment Grade Debtor” shall mean a debtor of a Borrower whose long-term unsecured and
unsubordinated indebtedness has been rated as follows by 2 of the 3 rating agencies below:
(a)
(b)
(c)
S&P:
>BBB-
Moody’s:
>Baa3
DBRS:
≥ BBB-
“Investment Property” shall mean all investment property now or hereafter acquired by any Person,
wherever located and includes securities (whether or not certificated), securities entitlement, securities
account, futures contract, commodity contract or commodity account and with respect to property located
in the United States shall include “Investment Property” as such term is defined in the UCC.
“Lender” shall mean Royal Bank of Canada and, if at any time Lender shall decide to assign or syndicate
all or any of the Obligations, such term shall include such assignee or such other members of the syndicate.
“Letters of Credit” shall mean any and all commercial, documentary or standby letters of credit issued at
the request and for the account of a Borrower for which Lender has incurred Letter of Credit Obligations,
and includes any letters of guarantee issued in the discretion of Lender.
“Letter of Credit Fee” shall have the meaning assigned to it in Schedule E.
“Letter of Credit Obligations” shall mean all outstanding obligations (including all duty, freight, taxes,
costs, insurance and any other charges and expenses) incurred by Lender, whether direct or indirect,
contingent or otherwise, due or not due, in connection with the issuance or guarantee, by Lender or another,
of Letters of Credit, all as further set forth in Schedule C.
“Letter of Credit Sublimit” shall mean $5,000,000, or the Equivalent Amount thereof in U.S.$.
“License” shall mean any Copyright License, Patent License, Trademark License or other license of rights
or interests now held or hereafter acquired by any Person.
“Lien” shall mean, whether based on common law, statute or contract, whether choate or inchoate, whether
or not crystallized or fixed, whether or not for amounts due or accruing due: (i) any mortgage, security deed
or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, security title, deemed trust, requirement to pay, easement, reservation, exception, encroachment,
privilege, title exception, garnishment right, prior claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or
title retention agreement and any financing lease having substantially the same economic effect as any of
the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest
under the PPSA the UCC, the Civil Code of Québec or comparable law of any jurisdiction); and (ii) any
rights of repossession or similar right of an unpaid supplier.
“Litigation” shall mean any claim, lawsuit, litigation, investigation or proceeding of or before any arbitrator
or Governmental Authority.
“Loan Documents” shall mean this Agreement, each Guarantee, the Blocked Accounts Agreement, and
the other documents and instruments listed in Schedule F, and all security agreements, hypothecs,
mortgages and all other documents, instruments, certificates, and notices at any time delivered by any
Person (other than Lender and its Affiliates) in connection with any of the foregoing.
“Loans” shall mean the Revolving Credit Loan (including Overdrafts and the Letter of Credit Obligations).
“Material Adverse Effect” shall mean a material adverse effect on:
(a)
the financial condition of the Borrowers and the other Credit Parties, taken as a whole;
- 17 -
(b)
(c)
(d)
the Borrowers' and the other Credit Parties' ability taken as a whole to perform their
respective obligations under the Loan Documents;
the property, business, operations, corporate governance or liabilities of the Borrowers
and the other Credit Parties, taken as a whole; or
the priority ranking of any Collateral, or the rights or remedies intended or purported to
be granted to the Lender under or pursuant to this Agreement or any other Loan
Documents.
“Margin Stock” shall mean “margin stock” as such term is defined in Regulation T, U or X of the Board of
Governors of the Federal Reserve System (or any successor thereto).
“Material Contract” shall mean any agreement to which any Credit Party is party which constitutes a
guarantee in such Credit Party’s favour or otherwise providing for any Lien on another Person’s property,
is essential to a Credit Party’s ability to carry on business as currently conducted (including without
limitation, take or pay contracts and product licenses) or the breach or termination of which could otherwise
give rise to a Material Adverse Effect.
“Maximum Amount” shall mean $15,000,000 or the Equivalent Amount thereof in U.S.$.
“Minimum Actionable Amount” shall mean $500,000 or the Equivalent Amount thereof in U.S.$.
“Miscellaneous Fees” shall have the meaning assigned to it in Schedule E.
“Multi-employer Plan” shall mean a "multi-employer plan" as defined in Section 4001(a)(3) of ERISA which
is or was at any time during the current year or the immediately preceding six (6) years contributed to by
any Credit Party or any ERISA Affiliate.
“Net Borrowing Availability” shall mean at any time the Borrowing Availability less all outstanding
Revolving Credit Loans, plus, for so long as the Borrowers do not have any Loans outstanding (excluding
Letter of Credit Obligations which are fully cash collateralized in the manner set forth in Schedule C),
unrestricted cash of the Borrowers in which Lender has a first priority perfected security interest. For greater
certainty, upon delivery of the first Notice of Borrowing or first request for a Letter of Credit that is not cash
collateralized under this Agreement, Net Borrowing Availability shall be recalculated to exclude the
unrestricted cash of the Borrowers.
“Net Income” shall mean with respect to any Person for any period, the net revenue of such Person for
such period on a consolidated basis, less all expenses and other charges not otherwise deducted in
computing such net revenue for such period, determined in accordance with GAAP, but excluding
extraordinary items as determined in accordance with GAAP, earnings resulting from any reappraisal,
revaluation or other write-up of assets and gains arising from the repurchase of any equity security of such
Person or any Subsidiary.
“Notice of Borrowing” shall have the meaning assigned to it in Section 1.1(b).
“Notice of Continuation/Conversion” shall have the meaning assigned to in Section 1.6(b).
“Obligations” shall mean all loans, advances, debts, expense reimbursement, fees, liabilities, and
obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether
or not such performance is then required or contingent, or amounts are liquidated or determinable) owing
by any Borrowers and any other Credit Party to Lender, of any kind or nature, present or future, whether or
not evidenced by any note, agreement or other instrument, whether arising under any of the Loan
Documents or under any other agreement between Borrower, such Credit Party and Lender, and all
covenants and duties regarding such amounts including all such obligations and liabilities in respect of the
RBC Lease Facility, Bank Products, Overdrafts and reimbursement obligations in respect of Letters of
Credit. This term includes all principal, interest, Fees, Charges, expenses, legal fees and any other sum
- 18 -
chargeable to Borrower under any of the Loan Documents, and all principal and interest due in respect of
the Loans and all obligations and liabilities of any Guarantor under any Guarantee.
"OFAC" means the Office of Foreign Assets Control of the U.S. Department of the Treasury.
“Overdraft” shall have the meaning assigned to it in Section 1.1(f).
“Patent License” shall mean rights under any written agreement now owned or hereafter acquired by any
Person granting any right with respect to any invention on which a Patent is in existence.
“Patents” shall mean all of the following in which any Person now holds or hereafter acquires any interest:
(i) all patents and letters patent of the United States, Canada or any other country, all registrations and
recordings thereof, and all applications for patents and letters patent of the United States, Canada or any
other country, including registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, Canada or any province, state or
territory thereof, or any other country; and (ii) all reissues, continuations, continuations-in-part or extensions
thereof.
“Payment Conditions” shall mean that (a) no Default or Event of Default has occurred and is continuing
or would result from any applicable action, (b) Net Borrowing Availability will be at least $10,000,000 on a
pro forma basis after giving effect to the applicable action and on each of the thirty (30) consecutive calendar
days immediately prior to such action on a pro forma basis after giving effect to the applicable action, (c)
the Fixed Charge Coverage Ratio calculated on a trailing twelve month basis would be at least 1.10:1.00
on a pro forma basis as of the most recent Fiscal Month for which Financial Statements have been delivered
in accordance with Section 4.1, and (d) the Borrowers shall have delivered a customary officer’s certificate
certifying as to compliance with the foregoing conditions and setting forth the calculations thereof in
reasonable detail.
“PBA” shall mean the Pension Benefits Act (Ontario) and the similar laws of any other province or territory
of Canada, as in effect from time to time or at any time.
“PBGC” shall mean the Pension Benefit Guaranty Corporation or any Governmental Authority succeeding
to the functions thereof.
“Pension Event” shall mean: (i) the existence of any unfunded liability or windup or Withdrawal Liability,
including contingent withdrawal or windup liability, or any solvency deficiency in respect of any Plan; (ii) the
whole or partial termination or windup of any Plan or occurrence of any act, event or circumstance which
could give rise to the whole or partial termination or windup of any Plan; (iii) the failure to make any
contribution or remittance in respect of any Plan when due; (iv) the failure to file any report, actuarial
valuation, return, statement or other document, when due, in respect of any Plan; (v) the existence of any
Lien except in respect of current contribution amounts not due in connection with any Plan; (vi) the
establishment or commencement to contribute to any Plan not in existence on the date thereof; or (vii) any
violation of, or non-compliance with, any of the rules or regulations contained in the Employee Retirement
Income Security Act of 1974 as same may be amended from time to time.
“Periodic Term CORRA Determination Day” has the meaning assigned to it under the definition of Term
CORRA.
“Permitted Encumbrances” shall mean (provided same shall not constitute any agreement by Lender to
subordinate any of its Liens to same) the following encumbrances:
(a)
any Lien created by, or arising under a statute or regulation or common law (in contrast
with Liens voluntarily granted) in connection with, without limiting the foregoing, workers’
compensation, employment insurance, employers’ health tax or other social security or
statutory obligations that secure amounts that are not yet due or which are being
contested in good faith by proper proceedings diligently pursued and as to which
- 19 -
adequate reserves have been established on the applicable Credit Parties’ books and
records and a stay of enforcement of the Lien is in effect;
Liens made or incurred in the ordinary course of business to secure the performance of
bids, tenders, contracts (other than for the borrowing of money), leases, statutory
obligations or surety and performance bonds;
any construction, workers’, materialmen’s or other like Lien created by law (in contrast
with Liens voluntarily granted), after the Closing Date arising in connection with
construction or maintenance in the ordinary course of business, in respect of obligations
which are not due or which are being contested in good faith by proper proceedings
diligently pursued and as to which adequate reserves have been established under
GAAP on any Credit Parties’ books and records and a stay of enforcement of the Lien
is in effect;
any Lien for taxes not due or being contested in good faith by appropriate proceedings
diligently pursued and as to which adequate reserves have been established on the
applicable Credit Parties’ books and records and a stay of enforcement of the Lien is in
effect;
minor imperfections in title on real property that do not materially detract from the value
of the real property subject thereto and do not materially impair any Credit Parties’ ability
to carry on its business or Lender’s rights and remedies under the Loan Documents;
restrictions, easements, rights-of-way, servitudes or other similar rights in land
(including rights-of-way, and servitudes for railways, sewers, drains, gas and oil
pipelines, gas and water mains, electric light and power and telephone or telegraph or
cable television conduits, poles, wires and cables) granted to or reserved by other
Persons which in the aggregate do not materially impair the usefulness, in the operation
of the business of any Credit Party, of the real property subject to the restrictions,
easements, rights-of-way, servitudes or other similar rights in land granted to or
reserved by other Persons and, in each case, which do not impair the use and operation
of the business by the Credit Party or impair Lender’s rights and remedies under the
Loan Documents;
the rights reserved to or vested in any Person by the terms of any lease, licence,
franchise, grant or permit held by any Credit Party or by any statutory provision, to
terminate any such lease, licence, franchise, grant or permit, or to require annual or
periodic payments as a condition to the continuance thereof;
the reservations, limitations, provisos and conditions, if any, expressed in any original
grants from the Crown;
restrictive covenants affecting the use to which real property may be put, provided that
the covenants are complied with and do not materially detract from the value of the real
property concerned or materially impair its use in the operations of any Credit Party or
impair Lender’s rights and remedies under the Loan Documents;
Liens in favour of Lender created by the Loan Documents;
Liens disclosed in Disclosure Schedule (5.2(e)) but only to the extent such Liens
conform to their description in Disclosure Schedule (5.2(e)), and includes any extension
or renewal thereof provided the amount secured thereby does not exceed the original
amount secured immediately prior to the extension, renewal or refinancing and the
scope of security creating the Lien is not extended;
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
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(i) Purchase Money Liens securing Purchase Money Indebtedness to the extent
permitted under Section 5.2(b)(vii), and (ii) Liens securing Capital Lease Obligations
permitted under Section 5.2(b)(viii) so long as such Liens do not at any time extend to
or cover any assets (except for replacements, additions and accessions to such assets)
other than the assets subject to such Capital Leases and the proceeds and products
thereof and customary security deposits; provided that individual financings of fixed
assets provided by one lender may be cross collateralized to other financings of fixed
assets provided by such lender;
Liens given to a public utility or any municipality or governmental or other public
authority when required by such utility or other authority in connection with the operation
of the business or the ownership of the assets of the Person, provided that such Liens
do not reduce the value of the assets of the Person or materially interfere with their use
in the operation of the business of the Person or impair Lender’s rights and remedies
under the Loan Documents;
servicing agreements, development agreements, site plan agreements, and other
agreements with governmental entities pertaining to the use or development of any of
the assets of the Person, provided same are complied with and do not reduce the value
of the assets of the Person or materially interfere with their use in the operation of the
business of the Person including, without limitation, any obligations to deliver letters of
credit and other security as required or impair Lender’s rights and remedies under the
Loan Documents;
applicable municipal and other governmental restrictions, including municipal by-laws
and regulations, affecting the use of land or the nature of any structures which may be
erected thereon, provided such restrictions have been complied with and do not reduce
the value of the assets of the Person or materially interfere with their use in the operation
of the business of the Person or impair Lender’s rights and remedies under the Loan
Documents;
Liens granted by the Canadian Borrower to Upper Canada Forrest Products Ltd. that
secure indebtedness owing by the Canadian Borrower to Upper Canada Forest
Products Ltd. for the supply of goods, which Liens are subject to a subordination and
postponement agreement, in form and substance satisfactory to the Lender;
security in cash collateral in an aggregate amount of up to $1,000,000 granted to the
issuer of credit cards in respect of corporate credit cards for the Borrowers and the other
Credit Parties; and
(r)
such other Liens as are agreed to in writing by the Lender.
“Permitted Investment” any direct or indirect (i) acquisition of any shares, partnership interests,
participation interests in any arrangement, options or warrants, or any indebtedness, whether or not
evidenced by any bond, debenture or other written evidence of a Person, or (ii) acquisition, by purchase or
otherwise, of all or substantially all of the business, assets or stock or other evidence of beneficial ownership
of a Person. The amount of any Investment will be the original cost of such Investment, plus the cost of all
additions thereto and minus the amount of any portion of such Investment repaid to such Person in cash
as a return of capital, or repayment of the principal amount of indebtedness, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment. In determining the amount of any Investment involving a transfer of any
property other than cash, such property will be valued at its fair market value at the time of such transfer.
“Person” shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint
venture, trust, unincorporated organization, association, corporation, limited liability company, legal person,
institution, public benefit corporation, entity or government (whether federal, provincial, state, county, city,
- 21 -
municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and
shall include such Person’s successors and assigns.
“Plan” shall mean (i) any employee pension benefit plan which a Credit Party sponsors or maintains or to
which it makes or is making or is required to make contributions, and includes any pension or benefit plan
regulated by the FSCO or similar authority or otherwise subject to the PBA and (ii) any employee pension
benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412
of the Code or Section 302 of ERISA, and in respect of which any Credit Party or any ERISA Affiliate is (or,
if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as
defined in Section 3(5) of ERISA.
“PPSA” shall mean the Personal Property Security Act (or any successor statutes) as the same may, from
time to time, be in effect in the Province of Alberta; provided, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection, non-perfection or priority of Lender’s security
interest in any Collateral is governed by the Personal Property Security Act as in effect in a jurisdiction other
than the Province of Alberta, the term “PPSA” shall mean the Personal Property Security Act or a similar
act or statute as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating
to such attachment, perfection or priority and for purposes of definitions related to such provisions.
“Proceeds” shall mean “proceeds,” as such term is defined in the PPSA (and with respect to property
located in the United States, “Proceeds” as defined in the UCC) and, in any event, includes whatever is
received or receivable upon the sale, exchange, collection or other disposition of the Collateral and, in any
event shall include: (i) any and all proceeds of any insurance, indemnity, warranty or guarantee payable to
any Borrower or any other Credit Party from time to time with respect to any Collateral; (ii) any and all
payments (in any form whatsoever) made or due and payable to any Borrower or any other Credit Party
from time to time in connection with any requisition, confiscation, expropriation, seizure or forfeiture of any
Collateral by any governmental body, authority, bureau or agency (or any person acting under colour of
governmental authority); (iii) any claim of any Borrower or any other Credit Party against third parties (a)
for past, present or future infringement of any Intellectual Property or (b) for past, present or future
infringement or dilution of any Trademark or Trademark License or for injury to the goodwill associated with
any Trademark, Trademark registration or Trademark licensed under any Trademark License; (iv) any
recoveries by any Borrower or any other Credit Party against third parties with respect to any Litigation or
dispute concerning any Collateral; and (v) any and all other amounts from time to time paid or payable
under or in connection with any Collateral, upon disposition or otherwise.
“Projections” shall mean the projected consolidated and, when requested, consolidating, income
statement, balance sheet, and statement of cash flows of Borrower and its Subsidiaries for any future
period, including forecasted Capital Expenditures and Net Borrowing Availability.
“Purchase Money Indebtedness” shall mean: (i) any Indebtedness incurred for the payment of all or any
part of the purchase price of any fixed asset; (ii) any Indebtedness incurred for the sole purpose of financing
or refinancing all or any part of the purchase price of any fixed asset; (iii) any Indebtedness owing to a
supplier incurred in the normal course of business for the sole purpose of financing all or any part of the
purchase price of equipment provided no Lien is registered in respect to such Indebtedness and such
Indebtedness is not overdue; and (iv) any renewals, extensions or refinancings thereof (but not any
increases in the principal amounts thereof outstanding at that time).
“Purchase Money Lien” shall mean any Lien upon any fixed assets which secures the Purchase Money
Indebtedness related thereto but only if such Lien shall at all times be confined solely to the asset the
purchase price of which was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such Purchase Money Indebtedness;
provided that individual financings of fixed assets provided by one lender may be cross collateralized to
other financings of fixed assets provided by such lender.
“RBC Lease Facility” shall mean all leasing arrangements which Royal Bank of Canada (or its Affiliates),
as lessor, may provide to a Credit Party, as lessee, from time to time and all leasing schedules,
- 22 -
supplements, exhibits and lease documentation related thereto (as from time to time amended, modified,
restated, supplemented or replaced) and includes the leasing facilities described in Schedule I hereto.
“RBP” means, with respect to a RBP based loan, on any day the greater of:
(a)
(b)
the annual rate of interest announced from time to time by the Lender as being its
reference rate then in effect on such day for determining interest rates on Canadian
Dollar denominated commercial loans made by it in Canada; and
Adjusted Term CORRA for an interest period of one month in effect from time to time
plus 100 basis points per annum,
and provided that in no event shall RBP be less than zero for the purposes of this Agreement. RBP is a
reference rate and does not necessarily represent the lowest or best rate actually charged to any customer.
Any change in RBP determined by the Lender shall be effective on the date the change becomes effective
generally.
“RBUSBR” and “Royal Bank U.S. Base Prime Rate” means the higher of: (i) the annual rate of interest
announced by the Royal Bank of Canada in Toronto, Ontario from time to time as being its reference rate
in effect for determining interest rates on US Dollar commercial loans made by the Royal Bank of Canada
in Canada, adjusted automatically with each quoted or published change in such rate, all without the
necessity of any notice to Borrower or any other person, provided that, if any such referenced rate is below
zero, then the RBUSBR shall be deemed to be zero, (ii) the Federal Funds Rate in effect on such day plus
½ of 1.00% and (iii) Adjusted Term SOFR for a one-month tenor in effect for such day plus 1.00%; provided
that to the extent such highest rate as calculated above shall, at any time, be less than zero, such rate shall
be deemed to be zero for all purposes herein. Any change in the RBUSBR due to a change in the prime
rate, the Federal Funds Rate or Adjusted Term SOFR shall be effective on the opening of business on the
day specified in the public announcement of such change in the prime rate, the Federal Funds Rate or
Adjusted Term SOFR, respectively.
“Real Property” shall have the meaning assigned to it in Section 3.15.
“Release” shall mean, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit,
disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials in the indoor or
outdoor environment by such Person, including the movement of Hazardous Materials through or in the air,
soil, surface water, ground water or property.
“Relevant Canadian Governmental Body” means the Bank of Canada, or a committee officially endorsed
or convened by the Bank of Canada, or any successor thereto.
“Reportable Event" means any of the events set forth in Section 4043(c) of ERISA or the regulations
thereunder, other than any such event for which the 30 day notice requirement under ERISA has been
waived in regulations issued by the PBGC.
“Requirement of Law” shall mean as to any Person, the certificate or articles of incorporation and by-laws
or other organizational or governing documents of such Person, and any law, treaty, judgment, declaration,
rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case
binding upon such Person or any of its property or to which such Person or any of its property is subject.
“Restricted Payment” shall mean:
(a)
(b)
the declaration or payment of any dividend or the incurrence of any liability to make any
other payment or distribution of cash or other property or assets on or in respect of any
Borrower’s or any other Credit Party’s Shares;
any payment or distribution made in respect of any subordinated Indebtedness of
Borrower or any other Credit Party (excluding, so long as no Event of Default has
- 23 -
(c)
(d)
occurred and is continuing, regularly scheduled payments of interest on Convertible
Debentures) in violation of any subordination or other agreement made in favour of
Lender, but subject in all cases to the subordination, priority or intercreditor agreement
with Lender;
any payment on account of the purchase, redemption, defeasance or other retirement
of Borrower’s or any other Credit Party’s Shares or Indebtedness (excluding the RBC
Leasing Facility and, so long as no Event of Default has occurred and is continuing,
regularly scheduled payments of interest on Convertible Debentures) or any other
payment, voluntary prepayment or distribution made in respect thereof, either directly
or indirectly other than: (i) that arising under this Agreement, or (ii) interest and principal,
when due without acceleration or modification of the amortization as in effect on the
Closing Date, under Indebtedness (not including subordinated Indebtedness, payments
of which shall be permitted only in accordance with the terms of the relevant
subordination, priority or intercreditor agreement made in favour of Lender) described
in Disclosure Schedule (5.2(b)) or otherwise permitted under Section 5.2(b)(vii), (viii),
(ix), and (xi); or
any payment, loan, contribution, or other transfer of funds or other property to any
Shareholder of such Person which is not expressly and specifically permitted in this
Agreement; provided, that no payment to Lender shall constitute a Restricted Payment
and no payment or transfer between Credit Parties shall constitute a Restricted
Payment.
“Revolving Credit Advance” shall have the meaning assigned to it in Section 1.1(a).
“Revolving Credit Loan” shall mean at any time the sum of: (i) the aggregate amount of Revolving Credit
Advances then outstanding; (ii) the total Letter of Credit Obligations incurred by Lender and outstanding at
such time; and (iii) the amount of accrued but unpaid interest thereon and Letter of Credit Fees with respect
thereto.
“Sanctioned Entity" shall mean (a) a country or a government of a country, (b) an agency of the
government of a country, (c) an organization directly or indirectly controlled by a country or its government,
(d) a Person resident in or determined to be resident in a country, in each case, that is subject to a country
sanctions program on
list maintained and published by OFAC and available at
http://www.treas.gov/offices/enforcement/ofac/programs, or as otherwise published from time to time as
such program may be applicable to such country, agency, organization or person.
the
“Sanctioned Person” means a person named on the list of Specially Designated Nationals or Blocked
Persons maintained by OFAC available at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html,
or as otherwise published from time to time.
“Shareholder” shall mean each holder of Shares of any Borrower or any other Credit Party.
“Shares” shall mean all certificated and uncertificated shares, options, warrants, membership interests,
units, general or limited partnership interests, participation or other equivalents (regardless of how
designated) of or in a corporation, partnership, limited partnership, unlimited liability company, limited
liability company or equivalent entity whether voting or nonvoting, including common shares, preferred
shares, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act
of 1934) or “security” (as defined in the Securities Act (Alberta) or any other applicable Canadian provincial
legislation or regulations thereunder).
“SOFR” means a rate per annum equal to the secured overnight financing rate as administered by the
SOFR Administrator.
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“SOFR Administrator” means the Federal Reserve Bank of New York (or a successor administrator of the
secured overnight financing rate).
“SOFR Administrator’s Website” means the website of the Federal Reserve Bank of New York, currently
at http://www.newyorkfed.org, or any successor source for the secured overnight financing rate identified
as such by the SOFR Administrator from time to time.
“Solvent” means, with respect to any Credit Party, that as of the date of determination, (a) the sum of such
Credit Party’s debt and other liabilities (including contingent liabilities) does not exceed the present fair
saleable value of such Credit Party’s present assets as of such date, (b) such Credit Party’s capital is not
unreasonably small in relation to its business as contemplated on such date or with respect to any
transaction contemplated to be undertaken after such date, (c) such Credit Party has not incurred and does
not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts and liabilities
(including contingent liabilities) beyond its ability to pay such debts and liabilities as they become due
(whether at maturity or otherwise) and (d) such Credit Party is “solvent” within the meaning given to that
term and similar terms under applicable law relating to liquidation, administration, conservatorship,
bankruptcy, insolvency, assignment for the benefit of creditors, moratorium, receivership, winding-up,
dissolution, reorganization, restructuring, recapitalization, arrangement or rearrangement, or other similar
debtor relief law from time to time in effect, including without limitation the Bankruptcy and Insolvency Act
(Canada), the CCAA, the Canada Business Corporations Act (Canada), the Corporations Act 2001 (Cth),
the Bankruptcy Act 1966 (Cth) and the Bankruptcy Code and applicable laws relating to fraudulent transfers
and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall
be computed as the amount that, in light of all of the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or matured liability
(irrespective of whether such contingent liabilities meet the criteria for accrual under GAAP).
“Stated Expiry Date” shall mean, unless extended to a later date in the sole, unfettered discretion of Lender
following a written request by Borrower (and subject to an extension fee), February 12, 2025.
“Subsidiary” shall mean, with respect to any Person: (i) any corporation of which an aggregate of more
than 50% of the outstanding Shares having ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether, at the time, Shares of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of
such Person, or with respect to which any such Person has the right to vote or designate the vote of 50%
or more of such Shares whether by proxy, agreement, operation of law or otherwise; and (ii) any partnership
or limited liability company in which such Person or one or more Subsidiaries of such Person has an equity
interest (whether in the form of voting or participation in profits or capital contribution) of more than 50% or
of which any such Person is a general partner or manager or may exercise the powers of a general partner
or manager.
“Taxes” shall mean any and all present or future taxes, duties, levies, imposts, deductions, Charges
withholdings, value added taxes, or any other goods and services, use or sales taxes, assessments, fees
or other charges imposed by any Governmental Authority, including any interest, additions to tax, penalties
or other liabilities with respect thereto, but excluding taxes imposed on or measured by the net income of
Lender.
"Term CORRA” means, for any calculation with respect to a Term CORRA Loan, the Term CORRA
Reference Rate for a tenor comparable to the applicable Interest Period on the day (such day, the “Periodic
Term CORRA Determination Day”) that is two (2) Business Days prior to the first day of such Interest
Period, as such rate is published by the Term CORRA Administrator; provided, however, that if as of 1:00
p.m. (Toronto time) on any Periodic Term CORRA Determination Day the Term CORRA Reference Rate
for the applicable tenor has not been published by the Term CORRA Administrator and a Canadian
Benchmark Replacement Date with respect to the Term CORRA Reference Rate has not occurred, then
Term CORRA will be the Term CORRA Reference Rate for such tenor as published by the Term CORRA
Administrator on the first preceding Business Day for which such Term CORRA Reference Rate for such
- 25 -
tenor was published by the Term CORRA Administrator so long as such first preceding Business Day is
not more than three (3) Business Days prior to such Periodic Term CORRA Determination Day.
“Term CORRA Adjustment” means, with respect to Term CORRA, for an Interest Period of a duration of
(a) one-month a percentage equal to 0.29547% per annum (29.547 basis points), and (b) a percentage
equal to three-months, 0.32138 % per annum (32.138 basis points).
“Term CORRA Administrator” means Candeal Benchmark Administration Services Inc., TSX Inc., or any
successor administrator.
“Term CORRA Loan” means a Loan made pursuant to Section 1.1 that bears interest at a rate based on
Adjusted Term CORRA other than pursuant to clause (ii) of the definition of RBP.
“Term CORRA Reference Rate” means the forward-looking term rate based on CORRA.
"Term SOFR Administrator" means CME Group Benchmark Administration Limited (CBA) (or a successor
administrator of the Term SOFR Reference Rate selected by the Lender in its reasonable discretion).
“Term SOFR Adjustment” shall mean, with respect to Term SOFR, 0.10% (10 basis points) for an Interest
Period of one-month’s duration and 0.15% (15 basis points) for an Interest Period of three-month’s duration.
“Term SOFR Determination Day” has the meaning assigned to it under the definition of Term SOFR Rate.
“Term SOFR Loan” means a Loan that bears interest at a rate based on Adjusted Term SOFR, other than
pursuant to clause (iii) of the definition of “RBUSBR”.
“Term SOFR Rate” means, for any Interest Period for a Term SOFR Loan, the greater of (a) the Term
SOFR Reference Rate (rounded upward to the next one-sixteenth (1/16th) of one percent (0.0625%), if
necessary) for a tenor comparable to the applicable Interest Period on the day (the “Term SOFR
Determination Day”) that is two (2) U.S. Government Securities Business Days prior to the first day of
such Interest Period, as such rate is published by the Term SOFR Administrator and (b) the Floor; provided,
however, that if as of 5:00 p.m. (New York City time) on any Term SOFR Determination Day the Term
SOFR Reference Rate for the applicable tenor has not been published by the Term SOFR Administrator
and a Benchmark Replacement Date with respect to the Term SOFR Reference Rate has not occurred,
then Term SOFR will be the Term SOFR Reference Rate for such tenor as published by the Term SOFR
Administrator on the first preceding U.S. Government Securities Business Day for which such Term SOFR
Reference Rate for such tenor was published by the Term SOFR Administrator so long as such first
preceding U.S. Government Securities Business Day is not more than three (3) U.S. Government Securities
Business Days prior to such Term SOFR Determination Day.
“Term SOFR Reference Rate” means the forward-looking term rate based on SOFR.
“Termination Date” shall mean the date on which the indefeasible payment in full of the Obligations has
occurred and Lender has no further obligation to advance funds, issue Letters of Credit or otherwise extend
or continue any credit hereunder (whether due to the Stated Expiry Date or otherwise pursuant to the terms
hereof).
“Total Interest Expense” means, with respect to any Person for any period, without duplication, the
aggregate amount of interest and other financing charges expensed by such Person on account of such
period with respect to Funded Debt including interest, discount financing fees, commissions, discounts, the
interest or time value of money component of costs related to factoring or securitizing receivables or
monetizing inventory and other fees and charges payable with respect to letters of credit, letters of
guarantee and bankers’ acceptance financing, standby fees, the interest component of Capital Leases and
net payments (if any) pursuant to hedge arrangements involving interest, but excluding any amount, such
as amortization of debt discount and expenses, that would qualify as Depreciation Expense and the amount
reflected in Net Income for such period in respect of gains (or losses) attributable to translation of Funded
- 26 -
Debt from one currency to another currency, all as determined on a consolidated basis in accordance with
Applicable Accounting Standards
“Trademark License” shall mean rights under any written agreement now owned or hereafter acquired by
any Person granting any right to use any Trademark or Trademark registration.
“Trademarks” shall mean all of the following now owned or hereafter acquired by any Person: (i) all
trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other
source or business identifiers, prints and labels on which any of the foregoing have appeared or appear,
designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection therewith, including all registrations,
recordings and applications in the United States Patent and Trademark Office or in any similar office or
agency of the United States, Canada, any Province, State or Territory thereof, or any other country or any
political subdivision thereof; and (ii) all reissues, extensions or renewals thereof.
“UCC” shall mean the Uniform Commercial Code as in effect from time to time in the State of New York;
provided that, if perfection or the effect of perfection or non-perfection or the priority of the security interest
in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the
State of New York, “UCC” means the Uniform Commercial Code as in effect from time to time in such other
jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection or non-
perfection or priority.
“Unadjusted Canadian Benchmark Replacement” means the applicable Canadian Benchmark
Replacement excluding the related Canadian Benchmark Replacement Adjustment.
"Unfunded Capital Expenditures" means the amount of all Capital Expenditures of the Borrower and its
Subsidiaries for the immediately preceding twelve month period, less any Capital Expenditures during such
twelve month period that are funded by cash reserves identified by the Borrower for such purpose from the
incurrence of Funded Debt (other than advances under this Agreement but, for certainty, including the
Convertible Debentures) or the issuance of Shares in the immediately prior twenty four month period.
“United States” and “U.S.” mean the United States of America.
“Unused Line Fee” shall have the meaning assigned to it in Schedule E.
“U.S. Dollars” or “U.S.$” shall mean the lawful currency of the United States of America.
“U.S. Government Securities Business Day” means any day except for (i) a Saturday, (ii) a Sunday or
(iii) a day on which the Securities Industry and Financial Markets Association recommends that the fixed
income departments of its members be closed for the entire day for purposes of trading in United States
government securities.
“U.S. Security Agreement” means that certain Security Agreement, dated as of February 12, 2021, by and
among the U.S. Borrower, the Canadian Borrower and the Lender.
“US Borrower” means DIRTT Environmental Solutions, Inc., a corporation organized under the laws of the
State of Colorado, together with its successors and assigns.
“Visa Facility” shall have the meaning assigned to it in Schedule H.
“Visa Facility Agreements” shall have the meaning assigned to it in Schedule H.
“Visa Limit” shall have the meaning assigned to it in Schedule H.
“Visa Reserve” shall have the meaning assigned to it in Schedule H.
- 27 -
“Withdrawal Liability” shall mean liability to a Multi-employer Plan as a result of a complete or partial
withdrawal from such Multi-employer Plan, as such terms are defined in Part I of Subtitle E of Title IV of
ERISA.
Any accounting term used in this Agreement or the other Loan Documents shall have, unless otherwise
specifically provided therein, the meaning customarily given such term in accordance with GAAP, and all
financial computations thereunder shall be computed, unless otherwise specifically provided therein, in
accordance with GAAP consistently applied; provided, that all financial covenants and calculations in the
Loan Documents shall be made in accordance with GAAP as in effect on the Closing Date unless Borrower
and Lender shall otherwise specifically agree in writing. That certain items or computations are explicitly
modified by the phrase “in accordance with GAAP” shall in no way be construed to limit the foregoing. All
other undefined terms contained in this Agreement or the other Loan Documents shall, unless the context
indicates otherwise, have the meanings provided for by the PPSA with respect to property in Canada, and
the UCC with respect to property located in the United States. The words “herein,” “hereof” and “hereunder”
or other words of similar import refer to this Agreement as a whole, including the exhibits and schedules
thereto, as the same may from time to time be amended, modified or supplemented, and not to any
particular section, subsection or clause contained in this Agreement.
For purposes of this Agreement and the other Loan Documents, the following additional rules of
construction shall apply, unless specifically indicated to the contrary: (a) wherever from the context it
appears appropriate, each term stated in either the singular or plural shall include the singular and the
plural; (b) the term “or” is not exclusive; (c) the term “including” (or any form thereof) shall not be limiting or
exclusive; (d) all references to statutes, acts and related regulations shall include any amendments of same
and any successor statutes and regulations; (e) all references to any instruments or agreements, including
references to any of the Loan Documents, shall include any and all modifications or amendments thereto
and any and all extensions or renewals thereof; (f) the specification of any Lien as a Permitted Encumbrance
shall not constitute any postponement or subordination (or agreement to do so) of Lender’s Liens; and (g)
all references to “$” dollars or amounts of currency shall unless otherwise expressly provided mean lawful
currency of Canada.
The Lender does not warrant or accept any responsibility for, and shall not have any liability with respect
to, (a) the continuation of, the administration of, submission of, calculation of, performance of or any other
matter related to any interest rate used in this Agreement (including, without limitation, the Term SOFR
Rate) or any component definition thereof or rates referred to in the definition thereof, or with respect to any
alternative or successor rate thereto, or replacement rate thereof (including any Benchmark Replacement),
including without limitation, whether the composition or characteristics of any such alternative, successor
or replacement reference rate will be similar to, or produce the same value or economic equivalence of, or
have the same value or economic equivalence of the existing interest rate (or any component thereof) being
replaced or have the same volume or liquidity as did any existing interest rate (or any component thereof)
prior to its discontinuance or unavailability. The Lender and its affiliates and/or other related entities may
engage in transactions that affect the calculation of any interest rate (or component thereof) used in this
Agreement or any alternative, successor or alternative rate (including any Benchmark Replacement) and/or
any relevant adjustments thereto, in each case, in a manner adverse to the Borrower. The Lender may
select information sources or services in its reasonable discretion to ascertain any interest rate used in this
Agreement, any component thereof, or rates referred to in the definition thereof, in each case pursuant to
the terms of this Agreement, and shall have no liability to the Borrower or any other person or entity for
damages of any kind, including direct or indirect, special, punitive, incidental or consequential damages,
costs, losses or expenses (whether in tort, contract or otherwise and whether at law or in equity), for any
error or calculation of any such rate (or component thereof) provided by any such information source or
service.
The Credit Parties confirm and agree that for purposes of any Collateral located in the Province of Quebec
or charged by any deed of hypothec (or any other Loan Document) and for all other purposes pursuant to
which the interpretation or construction of a Loan Document may be subject to the laws of the Province of
Quebec or a court or tribunal exercising jurisdiction in the Province of Québec: (a) “personal property” shall
be deemed to include “movable property”; (b) “real property” shall be deemed to include “immovable
property”; (c) “tangible property” shall be deemed to include “corporeal property”; (d) “intangible property”
- 28 -
shall be deemed to include “incorporeal property”; (e) “security interest” and “mortgage” shall be deemed
to include a “hypothec”; (f) all references to filing, registering or recording under the UCC or the PPSA shall
be deemed to include publication under the Civil Code of Québec; (g) all references to “perfection” of or
“perfected” Liens shall be deemed to include a reference to the “opposability” of such Liens to third parties;
(h) any “right of offset”, “right of setoff” or similar expression shall be deemed to include a “right of
compensation”; (i) “goods” shall be deemed to include “corporeal movable property” other than chattel
paper, documents of title, instruments, money and securities; and (j) an “agent” shall be deemed to include
a “mandatary”.
SCHEDULE B
LENDER’S AND BORROWER’S ADDRESSES FOR NOTICES
Lender’s Address:
200 Bay Street
Royal Bank Plaza
13th Floor, South Tower
Toronto, Ontario
M5J 2J5
Attention: Portfolio Manager
E-MAIL: [***]
Lender’s Address for Borrowing Notices:
20 King Street West, 4th Floor
Toronto, Ontario
M5H 1C4
Attention: Operations, Asset Based Lending Group
Borrowers Address:
7303 30th Street SE
Calgary, Alberta
T2C 1N6
Attention: Chief Financial Officer
Facsimile No.: 403-723-5000
With Copies to:
Bennett Jones LLP
4500, 855 – 2nd Street SW
Calgary, Alberta
T2P 4K7
Attention: Denise Bright
E-MAIL: [***]
1.
2.
3.
4.
5.
6.
SCHEDULE C
LETTERS OF CREDIT
Lender agrees, subject to the terms and conditions hereinafter set forth, to incur Letter of Credit
Obligations in respect of the issuance of Letters of Credit issued on terms acceptable to Lender
and supporting obligations of a Borrower incurred in the ordinary course of such Borrower’s
business, in order to support the payment of such Borrower’s inventory purchase obligations,
capital asset acquisitions, insurance premiums, or utility or other operating expenses or to support
a Borrower's obligations under a contract for performance and obligations, and, in the case of any
letters of guarantee, for such purposes as Lender may agree in its sole discretion, as Borrower
shall request by written notice to Lender that is received by Lender not less than five (5) Business
Days prior to the requested date of issuance of any such Letter of Credit; provided, that: (a) the
aggregate amount of all Letter of Credit Obligations at any one time outstanding (whether or not
then due and payable) shall not exceed the Letter of Credit Sublimit; (b) no Letter of Credit shall
have an expiry date which is later than the Stated Expiry Date or one year following the date of
issuance thereof unless otherwise agreed by the Lender; (c) all letters of guarantee shall be and
shall be continued in the sole discretion of Lender; and (d) Lender shall be under no obligation to
incur any Letter of Credit Obligation if after giving effect to the incurrence of such Letter of Credit
Obligation, the Net Borrowing Availability would be less than zero. A Borrower will enter into an
application and agreement for each such Letter of Credit.
The notice to be provided to Lender requesting that Lender incur Letter of Credit Obligations shall
be in the form of a Letter of Credit application in the form customarily employed by Lender, together
with a written request by Borrower.
In the event that Lender shall make any payment on or pursuant to any Letter of Credit Obligation,
Borrowers shall be unconditionally obligated to reimburse Lender therefor, and such payment shall
then be deemed to constitute a Revolving Credit Advance. For purposes of computing interest
under Section 1.5, a Revolving Credit Advance made in satisfaction of a Letter of Credit Obligation
shall be deemed to have been made as of the date on which Lender makes the related payment
under the underlying Letter of Credit. Each Borrower hereby irrevocably authorizes Lender to debit
the respective Canadian or any other bank account (including any deposit, disbursement or
operating account) of the Borrowers for the purpose of paying all amounts due by the Borrowers
from time to time for each drawing under any Letter of Credit, including all charges and fees
pursuant to such issuance or amendment.
In the event that any Letter of Credit Obligations, whether or not then due or payable, shall for any
reason be outstanding on the Commitment Termination Date, Borrowers will either: (a) cause the
underlying Letter of Credit to be returned and cancelled and each corresponding Letter of Credit
Obligation to be terminated; or (b) pay to Lender, in immediately available funds, an amount equal
to 110% of the maximum amount then available to be drawn under all Letters of Credit not so
returned and cancelled to be held by Lender as cash collateral in an account under the exclusive
dominion and control of Lender (the “Cash Collateral Account”).
In the event that Lender shall incur any Letter of Credit Obligations, Borrowers agree to pay the
Letter of Credit Fee to Lender as compensation to Lender for incurring such Letter of Credit
Obligations.
Borrowers’ Obligations to Lender with respect to any Letter of Credit or Letter of Credit Obligation
shall be evidenced by Lender’s records and shall be absolute, unconditional and irrevocable and
shall not be affected, modified or impaired by: (a) any lack of validity or enforceability of the
transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (b)
any amendment or waiver of or consent to depart from all or any of the terms of the transactions
contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (c) the existence
of any claim, set-off, defense or other right which Borrower or any other Credit Party may have
against Lender or the beneficiary of such Letter of Credit, or any other Person, whether in
- 2 -
7.
8.
connection with this Agreement, any other Loan Document or such Letter of Credit or the
transactions contemplated thereby or any unrelated transactions; or (d) the fact that any draft,
affidavit, letter, certificate, invoice, bill of lading or other document presented under or delivered in
connection with such Letter of Credit or any other Letter of Credit proves to have been forged,
fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue
or incorrect in any respect.
In addition to any other indemnity obligations which Borrowers may have to Lender under this
Agreement and without limiting such other indemnification provisions, each Borrower hereby jointly
and severally agrees to indemnify Lender from and to hold Lender harmless against any and all
claims, liabilities, losses, costs and expenses (including, legal fees and expenses) which Lender
may (other than as a result of its own gross negligence or wilful misconduct) incur or be subject to
as a consequence, directly or indirectly, of: (a) the issuance of or payment of or failure to pay under
any Letter of Credit or Letter of Credit Obligation; or (b) any suit, investigation or proceeding as to
which Lender is or may become a party as a consequence, directly or indirectly, of the issuance of
any Letter of Credit, the incurring of any Letter of Credit Obligation or any payment of or failure to
pay under any Letter of Credit or Letter of Credit Obligation provided that the Borrowers shall have
no obligation to indemnify the Lender if the Lender makes payment in violation of the terms and
conditions set forth in the Letter of Credit. The obligations of each Borrower under this paragraph
shall survive any termination of this Agreement and the payment in full of the Obligations.
Each Borrower hereby assumes all risks of the acts, omissions or misuse of each Letter of Credit
by the beneficiary thereof and, in connection therewith, Lender shall not be responsible for: (a) the
validity, sufficiency, genuineness or legal effect of any document submitted in connection with any
drawing under any Letter of Credit even if it should in fact prove in any respect to be invalid,
insufficient, inaccurate, untrue, fraudulent or forged; (b) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter of Credit or any rights or
benefits thereunder or any proceeds thereof, in whole or in part, even if it should prove to be invalid
or ineffective for any reason; (c) the failure of any beneficiary of any Letter of Credit to comply fully
with the terms thereof, including the conditions required in order to effect or pay a drawing
thereunder; (d) any errors, omissions, interruptions or delays in transmission or delivery of any
messages, by mail, telecopy, telex or otherwise; (e) any loss or delay in the transmission or
otherwise of any document or draft required in order to make a drawing under any Letter of Credit;
or (f) any consequences arising from causes beyond the direct control of Lender.
SCHEDULE D
CASH MANAGEMENT SYSTEM
Each Borrower agrees to establish, and to maintain, until the Termination Date, the cash management
system described below (subject to the post-closing covenant regarding accounts as set forth in Section
3.24):
1. No Credit Party: (i) shall (nor shall it permit any of its Subsidiaries to) open or maintain any deposit,
chequing, operating or other bank account, or similar money handling account, with any bank or
other financial institution except at Lender or as permitted by Lender in its sole discretion and as
identified in Attachment 1 hereto; and (ii) shall close or permit to be closed any of the accounts
identified in Attachment 1 without Lender’s prior written consent, and then only after such Credit
Party has implemented agreements with Lender or bank or financial institution acceptable to
Lender.
2. Attachment 1 is a complete list of all accounts currently held by the Borrowers and Guarantors.
3. Commencing on the Closing Date and until the Termination Date, all monies (which term when
used in this Agreement includes all cheques, bills of exchange and other payment instruments as
well as cash) received by the Borrowers, including, but not limited to, any receipts in payment of
any Accounts or in respect of any insurance proceeds, whether or not a notice and direction has
been sent to the Borrowers’ Account Debtors, shall be received and held, and shall be deemed to
be received and held, in trust for Lender and shall be, and shall be deemed to be, kept separate
and apart from the Borrowers’ own funds and immediately deposited or transfered by it on a daily
basis in one or more blocked accounts set up for this purpose and listed in Attachment 1 hereto
(collectively, the “Blocked Accounts”).
4. The Borrowers shall execute and deliver to Lender, Lender’s standard form Blocked Accounts
agreement (“Blocked Accounts Agreement”), the receipt of which is a condition precedent to any
accommodation of credit hereunder. During a Cash Dominion Period, Lender is hereby irrevocably
and unconditionally authorised and directed by Borrower, in Lender’s discretion, to sweep the
Blocked Accounts on a daily basis and to set-off, compensate and apply any credit balances in the
Blocked Accounts (after conversion into Canadian Dollars or U.S. Dollars, as applicable, as
determined necessary by Lender) to repay any Obligations in such order as Lender sees fit or to
be held by Lender as cash collateral, with any remaining funds then being deposited to the
Borrowers’ disbursement accounts with Lender.
5. Where the perfection of the security interest of Lender in any Account or deposit in any Account, is
governed by the UCC, and such account is identified as “Blocked” on Attachment 1, such Borrower
shall ensure that at all times Lender has “control” of such Accounts or deposits in accounts under
the UCC pursuant to the applicable Blocked Accounts Agreement.
6. Each Borrower may maintain, in its name, accounts (the “Disbursement Accounts”) at Lender or
at an Affiliate of Lender acceptable to Lender into which Lender shall, from time to time, deposit
proceeds of Revolving Credit Advances made pursuant to Section 1.1 for use solely in accordance
with the provisions of Section 1.3. All of the Disbursement Accounts as of the Closing Date are
listed in Attachment 1 hereto.
7. Upon the request of Lender following a Cash Dominion Period, each Credit Party shall forward to
Lender, on a daily basis, evidence of the deposit or transfer of all items of payment received by
such Credit Party into the Blocked Accounts and copies of all such cheques and other items,
together with a statement showing the application of those items relating to payments on Accounts
to outstanding Accounts and a collection report with regard thereto in form and substance
satisfactory to Lender.
- 2 -
ATTACHMENT 1 TO SCHEDULE D
LIST OF BANK ACCOUNTS
Bank
Royal Bank
of Canada
Royal Bank
of Canada
Royal Bank
of Canada
Royal Bank
of Canada
City National
Bank
City National
Bank
City National
Bank
City National
Bank
Bank
Address
Main Branch -
Calgary
339 8th Ave
SW
Calgary, AB
T2P 1C4
Main Branch -
Calgary
339 8th Ave
SW
Calgary, AB
T2P 1C4
Main Branch -
Calgary
339 8th Ave
SW
Calgary, AB
T2P 1C4
Main Branch -
Calgary
339 8th Ave
SW
Calgary, AB
T2P 1C4
555 S. Flower
St.
Los Angeles,
CA 90071
555 S. Flower
St.
Los Angeles,
CA 90071
555 S. Flower
St.
Los Angeles,
CA 90071
555 S. Flower
St.
Account Name
DIRTT
Environmental
Solutions Ltd.
DIRTT
Environmental
Solutions Ltd.
DIRTT
Environmental
Solutions Ltd.
DIRTT
Environmental
Solutions Ltd.
DIRTT
Environmental
Solutions, Inc.
DIRTT
Environmental
Solutions, Inc.
DIRTT
Environmental
Solutions, Inc.
DIRTT
Environmental
Solutions, Inc.
Account
#
[***]
Transit/
Routing #
[***]
Currency Account
CDN
Type
[***]
[***]
[***]
USD
[***]
[***]
[***]
CDN
[***]
[***]
[***]
USD
[***]
[***]
[***]
USD
[***]
[***]
[***]
USD
[***]
[***]
[***]
USD
[***]
[***]
[***]
USD
[***]
- 3 -
DIRTT
Environmental
Solutions Ltd.
[***]
[***]
CAD
[***]
Royal Bank
of Canada
Los Angeles,
CA 90071
Main Branch -
Calgary
339 8th Ave
SW
Calgary, AB
T2P 1C4
SCHEDULE E
FEES
1. Unused Line Fee: For each day from the Closing Date, and through and including the
Commitment Termination Date, the Borrowers, jointly and severally, shall pay to Lender an amount
equal to the Maximum Amount less the aggregate of: (a) the aggregate amount of Revolving Credit
Advances outstanding at the end of each day; and (b) the total Letter of Credit Obligations incurred
by Lender and outstanding at the end of each day, multiplied by 0.40% and divided by 365 or 366,
as applicable, depending on the actual number of days in the year in respect of the period for which
the Unused Line Fee is payable. The Unused Line Fee for each month (except for the month in
which the Commitment Termination Date occurs) is payable in arrears on the first day of each
calendar month following the Closing Date; the final monthly instalment of the Unused Line Fee is
payable on the Commitment Termination Date. Notwithstanding the foregoing, any unpaid Unused
Line Fee is immediately due and payable on the Commitment Termination Date.
2. Letter of Credit Fee: For each day for which Lender maintains Letter of Credit Obligations
outstanding, an amount equal to the amount of the Letter of Credit Obligations outstanding on such
day, multiplied by a percentage to be determined at the time of issuance. The Letter of Credit Fee
is payable quarterly in advance and any out of pocket fees incurred by Lender with respect to a
Letter of Credit are payable on the date of issue of such Letter of Credit. Notwithstanding the
foregoing, any unpaid Letter of Credit Fee is immediately due and payable on the Commitment
Termination Date.
3. Closing Fee: A fully earned non-refundable closing fee of $75,000.
4. Collateral Monitoring Fee: A fully earned and non-refundable collateral monitoring fee of $1,000
per month, payable in advance beginning on the Closing Date and on the first day of each month
thereafter.
6. Field Examination Fees: Borrower will reimburse Lender for Lender’s standard charges in respect
of audit reviews, field examinations and collateral examinations, including the standard charges of
the Lender’s internal field examination group (currently $1,200 per person per day), and all
reasonable out of pocket expenses incurred in connection therewith and applicable taxes. This
shall not be construed to limit Lender’s right to use third parties for such purposes.
7. Appraisal Fees: Borrower will reimburse Lender for all out of pocket expenses incurred by Lender
in connection with the appraisals of Inventory conducted for Lender by an appraisal firm acceptable
to Lender.
8. Miscellaneous Fees: Borrower shall be liable for all of Lender’s customary miscellaneous fees for
activities undertaken by Lender, including additional uploads, amendments, waivers and other
matters.
SCHEDULE F
SCHEDULE OF DOCUMENTS
The obligation of Lender to make the initial Revolving Credit Advances and extend other credit is subject
to satisfaction of the condition precedent that Lender shall have received the following, each, unless
otherwise specified below or the context otherwise requires, dated the Closing Date, in form and substance
satisfactory to Lender and its counsel:
PRINCIPAL LOAN DOCUMENTS
1.
2.
3.
Loan Agreement. The Loan Agreement duly executed by Borrower and the other Credit Parties
party
thereto.
Borrowing Base Certificate. An original Borrowing Base Certificate duly executed by an Authorized
Officer of Borrower.
Notice of Borrowing. An original Notice of Borrowing duly executed by an Authorized Officer of
Borrower.
COLLATERAL DOCUMENTS
1. Acknowledgement Copies of Financing Statements. Acknowledgement copies of proper financing
statements and notices of recording under the PPSA, the applicable UCC and Civil Code of
Quebec, as applicable, duly filed in all jurisdictions as may be necessary or, in the opinion of
Lender, desirable to perfect Lender’s Lien on the Collateral in which a security interest may be
perfected by filing a financing statement or a notice of recording, as applicable, pursuant to the
PPSA, the UCC or the Civil Code of Quebec, as applicable.
Searches. Certified copies of PPSA, UCC, and as applicable, Register of Personal and Movable
Real Rights of Quebec, Bank Act, insolvency, executions, litigation, or other jurisdictional searches,
as applicable, or other evidence satisfactory to Lender, listing all effective, registrations, financing
statements and recordations which name the Credit Parties (under present name, any previous
name or any trade or doing business name) as debtor and together with copies of such other
recordings, registrations and financing statements.
3. GSAs/Hypothecs/Bank Act Security/US Security Agreement. General security agreements and
hypothecs of moveable property from each Credit Party granting a first priority Lien, subject to
Permitted Encumbrances, in favour of Lender, in form and substance satisfactory to Lender in its
sole, unfettered discretion (but not contradicting the terms hereof). Each Borrower shall also grant
security to Lender under section 427 of the Bank Act (Canada) in form and substance satisfactory
to Lender. The U.S. Borrower shall execute and deliver to Lender the U.S. Security Agreement.
Mortgage. Subject to Section 3.25, Mortgage, security agreement, financing statement, fixture fling
and assignment of rents to be granted by the US Borrower in favour of the Lender with respect to
the property known municipally as 325 North Wells St. Unit 1000 Chicago, Illinois Cook County,
with a Tax Parcel No. 17-09-405-007-1002.
Guarantee. A guarantee agreement executed by each Borrower and each of the Guarantors in
favour of Lender whereby such Credit Parties guarantee all of the Obligations of the other Credit
Parties.
Intellectual Property Documents. Agreements relating to the granting to Lender of a security interest
in Intellectual Property of Borrower to the extent applicable in a form suitable for filing with the
appropriate federal filing office.
2.
4.
5.
6.
- 2 -
7.
Other Recordings and Filings. Evidence of the completion of all other recordings and filings
(including termination statements and other Lien release documentation) as may be necessary or,
in the opinion of and at the request of Lender, desirable to perfect Lender’s Lien on the Collateral
and ensure such Collateral is free and clear of other Liens (except Permitted Encumbrances).
THIRD PARTY AGREEMENTS
1.
2.
3.
Landlord and Mortgagee Consents. Unless otherwise agreed to in writing by Lender, duly executed
landlord, bailee and mortgagee waivers and consents from the landlords, bailees and mortgagees
of all of Borrower’s leased or owned locations where Collateral is held, in each case, in form and
substance satisfactory to Lender.
Cash Management System. Duly executed Blocked Accounts Agreement as contemplated by
Schedule D.
Subordination Agreements. The subordination agreement executed by Upper Canada Forest
Products Ltd. in favour of the Lender.
OTHER DOCUMENTS
1.
2.
3.
Environmental Audit. Lender’s standard form environmental questionnaire and copies of all existing
environmental reviews and audits and other information pertaining to actual or potential
environmental claims relating to the Collateral and the Credit Parties, as Lender may require.
Insurance Policies. Originals or copies of certificates of insurance described in Section 3.16,
together with evidence showing loss payable or additional insured clauses or endorsements in
favour of Lender.
Existing Lease Agreements. Copies of any existing real property leases and equipment leases to
which Borrower is a party and any other document or instrument evidencing or relating to existing
Indebtedness of Borrower, together with all certificates, opinions, instruments, security documents
and other documents relating thereto, all of which shall be satisfactory in form and substance to
Lender, certified by an Authorized Officer of Borrower as true, correct and complete copies thereof.
SCHEDULE G
MATERIAL CONTRACTS
DIRTT Environmental Solutions Ltd.
1. Lease between PIRET (7303-30th STREET SE) HOLDINGS INC. and DIRTT Environmental
Solutions Ltd. dated September 15, 2012, as amended by a lease amending agreement dated April
6, 2022
2. Lease between Dream Industrial Twofer (GP) Inc. (formerly known as Dundee Industrial Twofer
(GP) Inc.) and DIRTT Environmental Solutions Ltd. dated November 5, 2013, as amended by a
lease amending agreement dated October 21, 2016, and a lease amending agreement dated
February 14, 2022
3. Lease between HOOPP REALTY INC./LES IMMEUBLES HOOPP INC., by its duly authorized
agent, Triovest Realty Advisors Inc., and DIRTT Environmental Solutions Ltd. dated February 12,
2015, as amended by a lease amending agreement dated April 16, 2015, a lease modification
agreement dated October 27, 2015, a lease amending agreement dated November 12, 2015, a
lease amending agreement dated January 8, 2016, a lease amending agreement dated August 9,
2019, and a lease amending agreement dated February 6, 2023
4. Master Lease Agreement between Royal Bank of Canada and DIRTT Environmental Solutions
Ltd., dated May 4, 2020
5. Convertible unsecured subordinated note indenture dated January 25, 2021 between the Canadian
Borrower, Computershare Trust Company of Canada and Computershare Trust Company, N.A.,
as amended, supplemented and modified from time to time.
DIRTT Environmental Solutions, Inc.
6. Lease between EastGroup Properties, L.P. and DIRTT Environmental Solutions, Inc. dated March
29, 2011, and as amended by a lease amending agreement dated September 30, 2021
7. Lease between GFP Alliance Phoenix, LLC (successor in interest to Majik Ventures, L.L.C and
CAM Investment 352 LLC) and DIRTT Environmental Solutions, Inc. dated July 1, 2015, as
amended by a first amendment to lease dated May 11, 2017
8. Lease between SH7-Savannah, LLC (successor in interest to 141 Knowlton Way, LLC) and DIRTT
Environmental Solutions, Inc. dated October 2, 2008, as amended by a first amendment to
industrial lease agreement dated March 11, 2009, and a second amendment to industrial lease
agreement dated August 23, 2018
9. Lease between Tennyson Campus Owner, LP and DIRTT Environmental Solutions, Inc. dated
March 4, 2020, as amended by a first amendment to lease dated May 8, 2020, and as amended
by a second amendment to lease dated November 1, 2021
10. Lease between STAG Industrial Holdings, LLC (successor in interest to SP Rock Hill Legacy East
#1, LLC) and DIRTT Environmental Solutions, Inc. dated October 7, 2019, as amended by a first
amendment lo lease dated December 2, 2019, a second amendment to lease dated July 6, 2020,
and a notice of conveyance of lease dated November 12, 2020
SCHEDULE H
BANK PRODUCTS
A.
Visa Facility
Provided that Lender will make a corporate visa credit card facility (the “Visa Facility”) available to
Borrowers in such amounts as agreed to in writing by Lender in its sole and absolute discretion (the “Visa
Limit”), subject to the following terms and conditions:
(a)
(b)
notwithstanding any other provision of this Agreement, the Visa Facility is payable on
demand and Lender may cancel or restrict the availability of the Visa Facility, or any
unutilized portion thereof, at any time in its sole and absolute discretion. The Visa Limit
may be reserved, dollar for dollar, from the Borrowing Availability (the “Visa Reserve”);
the Visa Facility will be governed by separate agreements entered into between the
applicable Borrower and Lender (collectively, the “Visa Facility Agreements”) and, in
the event of a conflict between the terms and conditions of this Agreement and the Visa
Facility Agreements, the terms and conditions of the Visa Facility Agreements will govern
and prevail to the extent of such conflict; and
(c)
the Visa Facility shall form part of the Obligations secured by all of Lender’s security.
B.
Foreign Exchange Facility
Provided that no Event of Default has occurred, Lender may at its sole option and discretion, upon a
Borrower’s written request, enter into foreign exchange transactions, agreements or options (“Fx
Contracts”) with such Borrower from time to time on terms and conditions to be negotiated on a transaction-
by-transaction basis (the “Fx Facility”). Lender makes no commitment to enter into or arrange any Fx
Contracts with a Borrower and may at any time, in its sole and absolute discretion, decline to enter into or
terminate any Fx Contracts. In the event that a Borrower requests, and Lender agrees, to enter into any
such Fx Contracts with such Borrower, it will do so subject to the following:
(d)
(e)
(f)
(g)
in no event, shall the “credit exposure” of the Fx Facility, as determined by Lender from
time to time in its discretion, exceed such amounts as agreed to in writing by Lender in
its sole and absolute discretion. Such Fx “credit exposure” may be reserved, dollar for
dollar, from the Borrowing Availability (the “Fx Reserve”);
the applicable Borrower shall promptly issue or countersign and return a confirmation or
acknowledgement of the terms of each such Fx Contract as required by Lender;
the applicable Borrower shall, if required by Lender, promptly enter into a Foreign
Exchange and Options Master Agreement or such other agreement, in form and
substance satisfactory to Lender, to govern such Fx Contracts;
in the event of demand for payment concerning any Fx Contracts, Lender may terminate
all or any other Fx Contracts at its sole option and discretion. If the agreement governing
any such Fx Contracts does not contain provisions governing termination, any such
termination shall be effected in accordance with customary market practice applied by
Lender from time to time. Lender’s determination of amounts owing under any terminated
Fx Contracts shall be conclusive evidence of the amounts owing thereunder, absent
manifest error;
(h)
Lender shall apply any amount owing by Lender to the applicable Borrower on
termination of any such Fx Contracts against the applicable Borrower’s obligations to
- 2 -
Lender and any amount owing by such Borrower to Lender on such termination shall
form part of the Obligations secured by all of Lender’s security;
the applicable Borrower shall pay all required fees in connection with any such Fx
Contracts and both Borrowers jointly and severally indemnify and hold Lender harmless
from and against any and all losses, costs and expenses incurred by Lender in relation
to any Fx Contracts, including, without limitation, the costs of terminating or cancelling
any Fx Contracts;
any rights of Lender in respect of any such Fx Contracts are in addition to and not in
limitation of, or substitution for, any rights of Lender under any agreement governing such
Fx Contracts. In the event that there is any inconsistency at any time between the terms
hereof and any agreement governing such Fx Contracts, the terms of such agreement
governing such Fx Contracts shall prevail to the extent of such inconsistency; and
each Borrower hereby covenants and agrees to report the outstanding amounts of any
and all Fx Contracts to Lender in its Borrowing Base Certificate required to be delivered
to Lender on a weekly basis.
(i)
(j)
(k)
- 3 -
SCHEDULE I
RBC LEASE FACILITY
1. The master lease agreement between the Canadian Borrower and the Lender dated May
4, 2020, as the same may be amended, modified, varied, restated or replaced from time
to time.
- 4 -
SCHEDULE J
POST-CLOSING UNDERTAKINGS
1. On or before February 26, 2021 (or such later date as the Lender may agree to in writing in its sole
discretion), the Lender shall have received the following in form an substance reasonably
satisfactory to the Lender:
a. Mortgage, security agreement, financing statement, fixture fling and assignment of rents
granted by the US Borrower in favour of the Lender with respect to the property known
municipally as 325 North Wells St. Unit 1000 Chicago, Illinois Cook County, with a Tax
Parcel No. 17-09-405-007-1002 (the “Mortgaged Property”);
b.
fully-paid valid title insurance with endorsements and in amounts reasonably acceptable to
the Lender, insuring that the Lender shall have a perfected first priority Lien on the
Mortgaged Property;
c. Opinion of Illinois counsel to the US Borrower in respect of the mortgaged on the
Mortgaged Property
- 5 -
EXHIBIT A
FORM OF NOTICE OF BORROWING OR CONTINUATION/CONVERSION
(Letter to be typed on a Borrower’s Letterhead)
[DATE]
Royal Bank of Canada
20 King Street West, 4th Floor
Toronto, Ontario M5H 1C4
Attention:
FAX:
E-MAIL:
Operations Group
[***]
[***]
cc:
Attention:
E-MAIL:
Portfolio Manager
[***]
BORROWING NOTICE
We refer to the loan agreement dated as of February 12, 2021 (as amended, restated, supplemented,
replaced or otherwise modified from time to time, the “Agreement”; capitalized terms used herein but not
otherwise defined shall have the meanings set forth in the Loan Agreement), DIRTT Environmental
Solutions Ltd. and DIRTT Environmental Solutions, Inc. (each a “Borrower”, and collectively the
“Borrowers”), each other Credit Party executing same and Royal Bank of Canada (“Lender”).
We hereby instruct and authorize Lender to [make advances] [continue/ convert an outstanding loan]
to our disbursement account(s), subject to and in accordance with the terms and provisions of the
Agreement to the account numbers specified below and to charge the Borrowers’ loan account with each
such [advance(s)] [continuation(s)/ conversion(s)].
The Borrower hereby requests [an advance] [the continuation/ conversion of an outstanding loan]
(the “Advance”) be made as follows:
A.
B.
Date of Advance:
_________________
Type/ amount of Advance to be made:
RBP based Advance (CAD$):
__________________
RBUSBR based Advance (U.S.$):
__________________
Adjusted Term CORRA based Advance (CAD$):
__________________
Term SOFR Rate based Advance (U.S.$):
__________________
C.
[Type of Advance resulting from the conversion or continuation (if applicable):
RBP based Advance (CAD$):
__________________
RBUSBR based Advance (U.S.$):
__________________
- 6 -
Adjusted Term CORRA based Advance (CAD$):
__________________
Term SOFR Loan (U.S.$):
__________________]
D.
Proceeds of the Advance are to be directed as follows:
CAD$ #________________________
U.S.$ #________________________
E.
Duration of the Interest Period (for Advances based upon Adjusted Term CORRA or the
Term SORF Rate):
__________________ [1 or 3
months]
Borrower hereby confirms as follows:
(a)
(b)
Each of the representations and warranties made by each of the Credit Parties in or pursuant to
the Agreement and the other Loan Documents are true and correct in all material respects on and
as of the date hereof as if made on and as of such date, except as Lender may have otherwise
agreed to herein or in a separate writing.
No Default has occurred as of the date hereof or will occur after the making of the Advance(s)
requested hereunder.
DATED this __ day of _______, 20__.
BORROWER: __________________
c/s
By:
Name:
Title:
EXHIBIT B
FORM OF BORROWING BASE CERTIFICATE
I, the Authorized Officer of DIRTT Environmental Solutions Ltd. (“Borrower”) hereby certify as of ,
20:
1.
I am familiar with and have examined the provisions of the loan agreement (the “Agreement”) dated
February 12, 2021, DIRTT Environmental Solutions Ltd. and DIRTT Environmental Solutions, Inc.
(each a “Borrower”, and collectively the “Borrowers”) and Royal Bank of Canada (“Lender”) and have
made reasonable investigations of records and inquiries of other officers and senior personnel of
Borrower. Terms defined in the Agreement have the same meanings where used in this certificate.
2.
The Net Borrowing Availability is $, calculated as follows:
U.S.$ exchange rate at (Bank of Canada noon rate for , 20)
[Table of Calculations to be inserted here]
3. The reports and information provided herewith are accurate and complete in all respects and all
amounts included as potential prior ranking claims are current amounts owing and not in arrears
[indicate any claims that are past due other than those specifically noted].
Dated this day of , 20.
Per:_________________________
Authorized Officer
POTENTIAL PRIOR RANKING CLAIMS
- 2 -
GST
HST
PST/QST
employee source deductions
(including EI, CPP and taxes)
CAD$
_____________
_____________
_____________
_____________
past due employer health tax
_____________
past due workers’ compensation
_____________
WEPPA reserve ($2,000/full time employee;
$1,000/part time employee)
_____________
RRSP (employee contributions)
_____________
pension plan contributions
_____________
rent
_____________
[realty/municipal taxes if owned real estate]
_____________
other
total
number of full time employees:
number of part time employees:
_____________
_____________
_____________
_____________
ATTACHMENT “1”TO EXHIBIT B
ACCOUNTS RECEIVABLE ROLL FORWARD
total accounts receivable as of last Borrowing Base Certificate dated
______
CAD$
U.S.$
gross sales invoiced (+)
credit notes (-)
total cash deposits into Blocked Accounts (-)
cash deposits into Blocked Accounts not credited against accounts
receivable (+)
cash deposits into Blocked Accounts not related to accounts receivable
(+)
adjustments (+/-)
total accounts receivable as of current Borrowing Base Certificate dated
______
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
TO:
Royal Bank of Canada (“Lender”)
The undersigned, ____________________ [TITLE of AUTHORIZED OFFICER], of DIRTT Environmental
Solutions Ltd. and DIRTT Environmental Solutions, Inc. (each a “Borrower”, and collectively the
“Borrowers”), pursuant to the provisions of the loan agreement dated as of February 12, 2021, among,
inter alia, Lender and Borrowers (as amended, restated, supplemented, replaced or otherwise modified
from time to time, the “Agreement”), DOES HEREBY CERTIFY in [his/her] capacity as an authorized officer
of each Borrower and not in [his/her] personal capacity that:
1.
2.
3.
hereof:
The Financial Statements attached hereto fairly and accurately represent the Canadian Borrower's
consolidated financial condition at the end of the particular accounting period set out in such
Financial Statements, as well as the Canadian Borrower’s consolidated operating results during
such accounting period, subject to year-end audit adjustments;
A review of such Financial Statements and of the activities of the Credit Parties during the period
covered by such Financial Statements has been made under my supervision with a view to
determining whether the Credit Parties have fulfilled all of their obligations;
From the commencement of the accounting period set out in such Financial Statements to the date
(a)
(b)
(c)
there has been no Default or Event of Default under the Agreement;
no Credit Party is aware of any event or circumstance which could reasonably have or
could reasonably have had a Material Adverse Effect;
the representations and warranties contained in the Agreement and the other Loan
Documents are correct in all material respects on and as of the date hereof as though
made on and as of such date, other than any such representation or warranty which relates
to a specified prior date and except to the extent that Lender has been notified in writing
by a Borrower that any representation or warranty is not correct and Lender has explicitly
waived in writing compliance with such representation or warranty;
(d)
attached hereto is an updated Schedule G listing of Material Contracts of the Credit Parties;
(e)
(f)
(g)
each Credit Party has been in full compliance with all covenants set out in the Agreement,
including Financial Covenants as evidenced by the calculations attached hereto as
Attachment 1;
no new Subsidiaries were formed or acquired since the end of the previous calendar month
[If acquired or formed, indicate for each such Subsidiary, the date of the formation or
acquisition];
no change in GAAP or in the application thereof has occurred since the date of the most
recent audited annual Financial Statements of the Credit Parties delivered to Lender [If a
change has occurred, specify the details of the change and its effect on the
accompanying Financial Statements]; and
- 2 -
[if any of the foregoing is incorrect, revise wording accordingly to include particulars
of any variation.]
4.
Capitalized terms used herein and not otherwise defined shall have the meanings given to such
terms in the Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Compliance Certificate on behalf of each
Borrower as of the _______ day of ________________, 20<>.
By:
Name:
Title of Authorized Officer
- 3 -
ATTACHMENT “1”TO EXHIBIT C
FINANCIAL COVENANTS
COMPANY NAME
______________________________________
MONTHLY CERTIFICATE
_________________________________ 20__
A. Fixed Charge Coverage Ratio
Net Income
plus:
Depreciation Expense
current and deferred taxes
investment losses accounted for by equity
Total Interest Expense
unrealized hedging losses
non-cash stock based compensation expenses
extraordinary, non-recurring and unusual losses
minus:
reduction of income taxes
unrealized hedging gains
investment gains accounted for by equity
extraordinary, non-recurring and unusual gains
Adjusted EBITDA
minus:
cash income taxes paid
Unfunded Capital Expenditures
Restricted Payments
plus
operating leases and rent
(i) TOTAL
Total Interest Expense
scheduled payments of principal on Funded Debt
scheduled payments under Capital Leases
operating lease payments
(ii) TOTAL
Fixed Charge Coverage Ratio = (i)/(ii)
EXHIBIT D
FORM OF NOTICE OF REPAYMENT
(Letter to be typed on a Borrower’s Letterhead)
[DATE]
Royal Bank of Canada
20 King Street West, 4th Floor
Toronto, Ontario M5H 1C4
Attention:
FAX:
E-MAIL:
Operations Group
[***]
[***]
cc:
Attention:
E-MAIL:
Portfolio Manager
[***]
REPAYMENT NOTICE
We refer to the loan agreement dated as of February 12, 2021 (as amended, restated, supplemented,
replaced or otherwise modified from time to time, the “Agreement”; capitalized terms used herein but not
otherwise defined shall have the meanings set forth in the Loan Agreement), DIRTT Environmental
Solutions Ltd. and DIRTT Environmental Solutions, Inc. (each a “Borrower”, and collectively the
“Borrowers”), each other Credit Party executing same and Royal Bank of Canada (“Lender”).
The Borrowers hereby give you notice pursuant to Section 1.2(c) of the Credit Agreement that they intend
to make a prepayment of [RBP] [RBUSBR] [Term CORRA] [Term SOFR Rate] Revolving Loans in the
amount of [U.S.] / [CDN] $________________ on ________________, 20_____.
[Note to Draft: revise wording accordingly to include particulars if the prepayment is conditioned
upon the occurrence or non-occurrence of any event.]
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
Per:
Name:
Title:
DIRTT ENVIRONMENTAL SOLUTIONS, INC.
Per:
Name:
Title:
SIXTH AMENDMENT OF LEASE
This AGREEMENT dated for reference this 6th day of February, 2023
BETWEEN:
HOOPP REALTY INC./LES IMMEUBLES HOOPP INC.,
by its duly authorized agent Triovest Realty Advisors Inc.
(the “Landlord”)
AND:
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
(the “Tenant”)
OF THE FIRST PART
OF THE SECOND PART
WHEREAS:
A. by a lease (the “Original Lease”) dated the 12th day of February, 2015, and made between the Landlord and the Tenant, the Landlord leased
to the Tenant, for and during a term (the “Term”) of five (5) years, commencing on the 1st day of May, 2015, certain premises (the" “Original
Premised”) designated as Unit 1 comprising a Rentable Area of approximately 24,890 square feet shown outlined in red on the plan attached
to the Original Lease as Schedule A and municipally located at 6335-57th Street SE in the building known as Starfield Logistics Centre, Building
2 (the “Building”) in the City of Calgary, in the Province of Alberta;
B. by an agreement (the “Amendment of Lease”) dated the 16th day of April, 2015, the Rentable Area of the Original Premises was amended
to approximately 25,536 square feet;
C. by an agreement (the “Lease Modification Agreement”) dated the 27th day of October, 2015, the parties agreed to relocate the Tenant,
effective February 1, 2016, from the Original Premises to Unit 31 in the Building, comprising a Rentable Area of approximately 173,690 square
feet shown identified on the plan attached to the Lease Modification Agreement as Schedule A (the “Relocation Premises”), as well as extend
the Term of the Original Lease by nine (9) months, to expire on the 31st day of January, 2021, all as more particularly set out therein;
D. by an agreement (the “Third Amendment of Lease”) dated the 12th day of November, 2015, the Deposits were amended as more particularly
set out therein;
E. by an agreement (the “Fourth Amendment of Lease”) dated the 8th day of January, 2016, the Tenant expanded the size of the Relocation
Premises by approximately 25,536 square feet, being the Original Premises, as outlined in red on Schedule “A” attached thereto (the “Expansion
Area”) effective February 1, 2016, which, together with the Relocation Premises, constituted a total area of One Hundred Ninety-Nine Thousand
Two Hundred Twenty-Six (199,226) square feet (the “Premises”); in addition, the Term of the Original Lease was extended by a period of Two
(2) years, commencing on the 1st day of February, 2021 and expiring on the 31st day of January, 2023 on terms and conditions set forth therein;
F. by an agreement (the “Fifth Amendment of Lease”) dated the 9th day of August, 2019, the Term of the Original Lease was extended for one
(1) year, expiring on the 31st day of January, 2024, on terms and conditions as more particularly set out therein;
G. the Original Lease, the Amendment of Lease, the Lease Modification Agreement, the Third Amendment of Lease, the Fourth Amendment of
Lease, and the Fifth Amendment of Lease are hereinafter collectively referred to as the “Lease”; and
H. the Landlord and the Tenant have agreed to extend the Term of the Lease for Five (5) years (the “Second Extended Term”) commencing
on the 1st day of February, 2024 and expiring on the 31st day of January, 2029 on terms and conditions hereinafter set forth.
1
NOW THEREFORE, pursuant to the premises and in consideration of the covenants and agreements herein contained and the sum of
$10.00 and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged), the Landlord and
Tenant covenant and agree to modify the Lease as follows:
1. The parties acknowledge that the foregoing recitals are true in substance and in fact.
2. Capitalized terms that are used in this Agreement and not otherwise defined shall have the meanings ascribed thereto in the Lease.
3. The Term of the Lease is hereby extended for the Second Extended Term, commencing on the 1st day of February, 2024 and
expiring on the 31st day of January, 2029, upon the same terms, covenants and conditions as contained in the Lease except as
amended by this Agreement.
4.
In respect of the Second Extended Term created hereby, the Tenant shall pay to the Landlord for the Premises a Base Rent as
follows:
a)
*February 1, 2024 – January 31, 2025: $1,942,453.50 per annum, payable in advance in equal monthly instalments (to be
made on the first day of each and every calendar month during the period) of $161,871.13 per month based upon a rate of $9.75
per square foot of the Rentable Area of the Premises;
b) February 1, 2025 – January 31, 2026: $2,000,229.04 per annum, payable in advance in equal monthly instalments (to be
made on the first day of each and every calendar month during the period) of $166,685.75 per month based upon a rate of
$10.04 per square foot of the Rentable Area of the Premises;
c)
February 1, 2026 – January 31, 2027: $2,059,996.84 per annum, payable in advance in equal monthly instalments (to be
made on the first day of each and every calendar month during the period) of $171,666.40 per month based upon a rate of
$10.34 per square foot of the Rentable Area of the Premises;
d) February 1, 2027 – January 31, 2028: $2,121,756.90 per annum, payable in advance in equal monthly instalments (to be
made on the first day of each and every calendar month during the period) of $176,813.08 per month based upon a rate of
$10.65 per square foot of the Rentable Area of the Premises; and
e) February 1, 2028 – January 31, 2029: $2,185,509.22 per annum, payable in advance in equal monthly instalments (to be
made on the first day of each and every calendar month during the period) of $182,125.77 per month based upon a rate of
$10.97 per square foot of the Rentable Area of the Premises.
*Provided the Tenant is not and has not been in default under the terms of the Lease, then the Tenant shall be permitted
to occupy the Premises free of Base Rent for the first four (4) months of the Second Extended Term. For clarity, the
Tenants obligation to pay Occupancy Costs and any other Additional Rent shall continue unabated.
5. For clarity, Schedule H, Item 2 (Option to Renew) shall continue in full force and effect.
6. The Tenant is continuing occupation of the Premises on an “as is” basis, and there are no representations or warranties on the part
of Landlord to complete any Landlords Work during the Second Extended Term.
7. The Landlord acknowledges that the sum of $33,367.69 is currently being held by the Landlord, without liability for interest, and may
be applied, in the Landlords discretion, to remedy any default by the Tenant in its performance of any of the terms, covenants and
conditions of the Lease. Upon demand by the Landlord following any such appropriation, the Tenant shall pay to the Landlord an
amount sufficient to restore the amount of the Deposit as outlined herein. If the Tenant complies with all of the terms, covenants and
conditions of the Lease the Deposit shall be returned to the Tenant within thirty (30) days of the expiry or earlier termination of the
Term.
8. This Agreement is supplemental to the Lease, and all covenants, agreements, provisos, stipulations and conditions whatsoever
therein contained shall continue in full force and effect during the Second Extended Term except as to the explicitly amended terms
and conditions set forth herein, and with the exception of any agreements to free rent periods, rental concessions, inducements,
2
allowances and improvements.
9. This Agreement may be executed by the parties in separate counterparts all of which, when taken together, will constitute a single
agreement among the parties. Execution of this Agreement by a party may be evidenced by way of an electronic transfer emailed
(by way of an Adobe Acrobat PDF file) transmission of such partys signature, or by a photocopy of a partys signature, each of which
will constitute the original signature of such party to this Agreement.
3
10. This Agreement will enure to the benefit of and be binding upon the Landlord and Tenant and their respective successors and
permitted assigns.
IN WITNESS WHEREOF the Landlord has executed this Agreement on the ___16__day of __February__ in the year 2023.
4
HOOPP REALTY INC./LES IMMEUBLES HOOPP INC.,
by its duly authorized agent, Triovest Realty Advisors Inc.
(LANDLORD)
____/s/ Brad Merchant___________
Per:
Name & Title: Senior VP Asset Management_____
5
6
IN WITNESS WHEREOF the Landlord has executed this Agreement on the ___16__day of __February__ in the year 2023.
DIRTT ENVIRONMENTAL SOLUTIONS LTD.
(TENANT)
Per:
____/s/ Bradley S. Little___________
Name & Title: Chief Financial Officer____________
DIRTT Environmental Solutions Ltd.
List of Subsidiaries
Exhibit 21.1
Name
Jurisdiction of Organization
DIRTT Environmental Solutions, Inc.
Colorado
1
2
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-234143, 333-
238689 and 333-273622) of DIRTT Environmental Solutions Ltd. of our report dated February 21, 2024 relating to the
consolidated financial statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Alberta, Canada
February 21, 2024
1
Exhibit 31.1
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULE 13A-14(a) OR RULE 15D-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Benjamin Urban, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “registrant”) for the year ended
December 31, 2023;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 21, 2024
By: /s/ Benjamin Urban
Benjamin Urban
Chief Executive Officer
(Principal Executive Officer)
1
Exhibit 31.2
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULE 13A-14(a) OR RULE 15D-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fareeha Khan, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “registrant”) for the year ended
December 31, 2023;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 21, 2024
By: /s/ Fareeha Khan
Fareeha Khan
Chief Financial Officer
(Principal Financial Officer)
1
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “Company”) for the year
ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Benjamin
Urban, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 21, 2024
By: /s/ Benjamin Urban
Benjamin Urban
Chief Executive Officer
(Principal Executive Officer)
1
Exhibit 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of DIRTT Environmental Solutions Ltd. (the “Company”) for the year
ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Fareeha Khan,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 21, 2024
By: /s/ Fareeha Khan
Fareeha Khan
Chief Financial Officer
(Principal Financial Officer)
1