DRTT Dirtt Environmental Solutions Ltd

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.

We have revised our calculation of Adjusted EBITDA and Adjusted Gross Profit, non-GAAP financial measures, for the presented periods compared to the comparable prior period. For additional information, see “– Non-GAAP Financial Measures – EBITDA and Adjusted EBITDA for the Three Months Ended March 31, 2020 and 2019.” and “– Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended March 31, 2020 and 2019.”

Summary of Financial Results

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Outlook

On November 12, 2019, DIRTT unveiled a four-year strategic plan for the Company, based on three key pillars: commercial execution, manufacturing excellence and innovation. This plan lays out a roadmap to transform a founder-led start-up into a professionally managed operating company. Our long-term objective is to scale our operations to profitably capture the significant market opportunity created by driving conversion from conventional construction to DIRTT’s process of modular, prefabricated interiors.

In the first quarter of 2020, we continued our focus on implementing our strategic plan, including the creation of a more comprehensive and effective sales and marketing function. In March, with the onset of the COVID-19 crisis and associated world-wide economic uncertainties, we evaluated cost control initiatives and conducted a thorough assessment of our financial liquidity. In response to the global pandemic, we quickly took the following series of actions:

The impact of COVID-19 on our business in the near and mid-term is uncertain. Stay-at-home policies in multiple jurisdictions combined with the resulting adverse economic conditions are likely to negatively impact commercial construction activity in the near term, with potential significant negative impacts extending to the end of 2020 and beyond. While many construction sites remain open across North America, several DIRTT projects currently underway are experiencing delays, impacted by the implementation of social distancing and other safety-related measures.

The pandemic-related stresses placed upon North American healthcare systems have spurred increased immediate spending but are also expected to drive ongoing mid- and long-term investments in healthcare infrastructure. With our new capabilities in sales and marketing, we were able to develop a Rapid Response Healthcare Solution quickly and increase our visibility substantially with healthcare end users. The relationships initiated during this time of crisis are an important opportunity to nurture in the post pandemic environment and our strategic plan has positioned us to do so.

We are working closely with our Distribution Partners to understand expected activity levels and are monitoring our opportunity pipeline and our daily order entry relative to our plant capacity and labor force requirements. We are also actively working to expand our distribution network, including recently bringing on strong new Distribution Partners, one in Texas and one in Wisconsin. In addition, we have been increasing our activities with general contractors and government agencies to introduce new audiences to DIRTT’s modular solutions.

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Average daily orders for the month of April 2020 were slightly lower than the average daily orders experienced in the first quarter of 2020. Consequently, in April, we reduced both our Savannah and Phoenix plants to a single shift and further reduced production headcount in our Calgary plants. As a result of these actions and taking into account the reductions that occurred between January and April, 2020, our plant headcount is approximately 25% lower than that at December 31, 2019, which we believe is right sized for current activity levels. We will continue to evaluate plant capacity within the context of daily order trends, expected revenues and forecasted demand and adjust our labor capacity upwards or downwards accordingly.

In response to the COVID-19 pandemic, both the US and Canadian governments enacted federal aid programs, including both credit support and payroll subsidies. We have determined that the US programs, in their current form, are either not applicable or not beneficial. In Canada, we intend to apply for the Canada Emergency Wage Subsidy; however, there is uncertainty as to whether we qualify under the current enacted legislation due to the exclusion of non-arms length sales to our US subsidiary in the eligibility calculations. Therefore, there can be no assurance that our application will be accepted by the Canadian authorities nor the subsidy received.

As maintaining liquidity through this uncertain period is paramount, we are highly focused on cash conservation and conversion of working capital to cash. This includes an increased focus on accounts receivable collections. Despite this focus, we increased our expected credit losses during the quarter by $0.6 million to reflect increased collection risk related to certain Distribution Partners. In April 2020, we acquired trade credit insurance effective April 1, 2020. Net working capital as at March 31, 2020 was $51.0 million ($58.6 million at December 31, 2019) and included $43.5 million of cash with no debt ($47.2 million with no debt at December 31, 2019).

At the end of the first quarter, we had C$30 million of unused capacity under our revolving credit facility. Subsequent to March 31, 2020, we entered into a 7-year revolving C$5.0 million equipment capital lease facility to fund approximately C$3.8 million of equipment purchases in 2019 and future equipment purchases at an implied lease rate of 4.25%. We also entered into a 5-year $16.0 million equipment capital lease facility to fund equipment purchases for our new South Carolina Plant, including $4.7 million of equipment purchases and deposits made in 2019. The facility is extendible by an additional year at our option and is at an implied lease rate of 3.5%. In addition, we reached an agreement in principle, subject to completion of final documentation, with our lender to provide near-term covenant relief on our existing revolving credit facility, modifying the borrowing base to be based on working capital subject to an aggregate cap of C$50 million including the aforementioned leasing facilities. The covenant relief extends until October 2020, at which point we will seek further relief if necessary.

While we have taken significant measures to reduce COVID-19-related disruption risks within our plants, the pandemic highlights the risk of single plant manufacturing for our tile and millwork solutions. Accordingly, with the establishment of the US equipment leasing facility and the increased liquidity it provides, we expect that commissioning activities for our new, highly automated South Carolina Plant’s chromacoat production line will begin in the second half of 2020. We expect commercial operations to commence in the first half of 2021. With significant automation and the US east coast location, we believe the South Carolina Plant will provide substantial improvements in cost and labor efficiency, material yield and transportation savings. The incremental cash cost of commissioning the South Carolina Plant is approximately $4 million, of which approximately $2 million is expected to be funded with our new capital lease facility and approximately $2 million will be funded with cash on hand. We will defer the millwork component, expected to cost approximately $2 million of the total $18.5 million cost, until later in 2021.

The timing and pace of economic recovery, or the resumption of construction activity and related demand, and its effect on achievement of our long-term strategic plan is not possible to predict at this time. Regardless, we believe that the pandemic is likely to have major impacts on the modern workplace environment. This could lead to a reduction in open office environments and increased demand for social spacing and separation within the workplace. Alternative work arrangements, such as work from home, may become more prevalent. We strongly

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believe DIRTT’s modular approach to construction, which both provides future flexibility and reduces on-site job labor, will play a meaningful role going forward and that the strategic plan we are implementing positions us to take advantage of opportunities.

Our priorities in this challenging time are straightforward. First and foremost, we believe that we are taking every precaution and making every accommodation required to keep our employees safe. We are taking steps that we believe may facilitate adequate financial liquidity to see us through to a resumption of pre-pandemic business activity. We are managing our costs and investments prudently so that we emerge from this global pandemic a stronger company, including mitigating manufacturing risk and increasing efficiencies with continued focus on lean manufacturing and the commissioning of our new South Carolina Plant. We are also prudently moving ahead with a sales and marketing organization highly focused on execution such that whatever the timing and pace of economic recovery and related demand for our solutions, we are well positioned to capture the significant market opportunities in our sector.

Non-GAAP Financial Measures

Note Regarding Use of Non-GAAP Financial Measures

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

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

In the fourth quarter of 2019, we removed 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 have presented a reconciliation to our prior calculation of Adjusted EBITDA for the quarters presented. Additionally, since the fourth quarter of 2019, we have excluded from Adjusted Gross Profit costs associated with under-utilized capacity. 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.

Reorganization expenses, depreciation and amortization, stock-based compensation expense, and foreign exchange gains and losses 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 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 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.

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

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.

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For the three months ended March 31, 2020, Adjusted EBITDA and Adjusted EBITDA Margin decreased to negative $5.5 million and (13.4)% respectively, from $7.7 million and 11.9% in the same period of 2019, respectively. This reflects: a $10.2 million decrease in Adjusted Gross Profit and $2.0 million of costs of underutilized capacity, discussed below; $0.8 million of higher litigation costs in 2020; and $0.6 million increase to our provision for expected credit losses. These reductions in Adjusted EBITDA were partially offset by reductions in variable compensation provisions and other cost reductions. Additionally, in the first quarter of 2019 we incurred $0.7 million of costs related to the listing of our common shares on Nasdaq.

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Gross profit and gross profit margin decreased to $11.3 million or 27.6% for the three months ended March 31, 2020, from $23.6 million or 36.3% for the three months ended March 31, 2019. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $15.6 million or 38.0% for the three months ended March 31, 2020, from $25.8 million or 39.6% for the three months ended March 31, 2019. The decreases are largely due to reduced fixed cost leverage due to a $24.1 million reduction in revenues and excess labor capacity prior to headcount reductions discussed below. During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2020, we separately classified $2.0 million as costs related to our under-utilized capacity (5% of gross profit margin) in cost of sales. During the quarter we took steps to manage our excess capacity, including the reduction in staffing by 14%, with a further 12% reduction in April 2020, and the undertaking of planned factory curtailments. The reduction in staffing resulted in a onetime $0.5 million cost for severances, included in cost of sales for the period ended March 31, 2020 with an additional $0.4 million incurred in April. The staffing reductions realigned our capacity with then expected activity levels; however, our fixed costs will affect our Adjusted Gross Profit Margin which we expect to remain below historical percentages until sales improve. Prospectively, we expect our fixed cost of sales to be approximately $6.0 million per quarter, and remaining costs of sales to be approximately 54% of revenues comprising materials which are variable, and labor which is quasi-variable as we match our shifts to order volumes.

In the first quarter of 2020 we commissioned new equipment to prime our medium density fiberboard (“MDF”). The use of primed MDF addressed the tile warping issues that occurred in late 2018 and early 2019 due to higher than expected moisture absorption. Additionally, our costs associated with remediating deficiencies decreased in the current period.

In the first quarter of 2019 we incurred approximately $1.5 million of costs, representing 2.3% of gross profit margin, to mitigate future warping of our tiles. Gross profit was additionally affected by headcount additions that occurred in 2018.

Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications that the projects were sold under. As a result, we recorded an additional $2.5 million liability in the fourth quarter of

2019 and have been contacting customers to determine whether remedial actions are required. We continue to

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evaluate solutions which, if successful, could significantly reduce the associated liability. During the quarter ended March 31, 2020, we incurred $0.1 million of costs associated with remediating previously installed timber projects, which were recorded against the liability.

Revenue

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

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

Revenue decreased in the three months ended March 31, 2020 by $24.1 million or 37% compared to the same period of 2019. Revenue decreased due to several factors as discussed above in “– Summary of Financial Results” and “– Outlook”. We have been subject to a disruption in sales activity levels particularly as it relates to larger projects, as discussed below, beginning in 2018 and carrying through the current quarter. This disruption stems from the distraction of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function, which limited our ability to take

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advantage of growth opportunities in our market. Due to the long sales cycle, particularly for larger projects which can be two years or more, this had a corresponding negative effect on our revenue, especially in the last half of 2019 and continuing into 2020. This effect has lasted longer than we had anticipated. We are in the process of making substantial improvements to our commercial function, as outlined in our strategic plan, including building an appropriate organizational structure, improving the effectiveness of our existing sales force, attracting new sales talent, establishing strategic marketing and lead generation functions, as well as expanding and better supporting our Distribution Partner network. While we believe these actions are critical to driving long-term, sustainable growth, these actions did not have a measurable effect on the current quarter revenues.

Installation and other services revenue of $0.7 million for the three months ended March 31, 2020 was $0.5 million lower than the same period in 2019. The changes in installation revenue are primarily due to the timing of projects. Except in limited circumstances, our Distribution Partners, rather than the Company, perform installation services, and accordingly, we are not anticipating significant growth in this revenue stream.

Our success is partly dependent on our ability to profitably develop our Distribution Partner network to expand our market penetration and ensure best practices are shared across local markets. At March 31, 2020 we had 78 Distribution Partners, servicing 93 locations. We recently added a Distribution Partner in Dallas, Texas, and a Distribution Partner with locations in eastern Wisconsin, and terminated two underperforming partners. Our clients, as serviced primarily through our Distribution Partners, exist within a variety of industries, including healthcare, education, financial services, government and military, manufacturing, non-profit, energy, professional services, retail, technology and hospitality.

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:

Revenue decreased by 37% in the three months ended March 31, 2020 over the same period in 2019 and was driven primarily by decreased commercial sales which reflects the disruption in sales activity levels noted above and the completion of a major project that was not replaced. Decreased healthcare sales reflect the completion of several major healthcare projects that were not replaced in 2020 and decreased government sales, which was mainly due to the timing of certain projects.

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Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, with periodic international projects from North American Distribution Partners. The following table presents our first quarter revenue dispersion by geography:

Sales and Marketing Expenses

Sales and marketing expenses decreased $0.4 million to $7.4 million for the three months ended March 31, 2020, from $7.8 million for the three months ended March 31, 2019. The decrease was largely related to a reduction in commission expense for the three months ended March 31, 2020 on lower revenues.

Our sales and marketing efforts continue to focus on establishing the appropriate sales organization and personnel, significantly improving our marketing approach and driving returns on sales and marketing expenditures, as outlined in our strategic plan. However, in light of uncertainty caused by the COVID-19 pandemic, we are currently evaluating the timing of planned increases to our commercial organizational headcount, prioritizing critical hires that are necessary to continue to advance our overall strategy, including the implementation of necessary systems and tools while ensuring appropriate cost control and cash conservation.

General and Administrative Expenses

General and administrative expenses (“G&A”) increased $0.9 million to $7.8 million for the three months ended March 31, 2020 from $6.9 million for the three months ended March 31, 2019. In the first quarter of 2020, we incurred higher professional fees of $0.8 million due to ongoing litigation matters. Additionally, in the first quarter of 2020 we recorded expected credit losses of $0.6 million against our accounts receivable balance.

These increases were offset by lower variable compensation provisions in the current quarter. Further, in the first quarter of 2019 we incurred $0.7 million of professional fees related to the listing of our common shares on Nasdaq.

Operations Support Expenses

Operations support expenditures include the fixed costs associated with delivery and project management of DIRTT solutions. Operations support expenses of $2.5 million in the first three months of 2020 were consistent with the prior year period. In the first quarter of 2019 we incurred $0.3 million of consulting costs to assist with the rectification of the tile warping issue. Decreases in consulting costs were offset by increases in personnel costs due to increased headcount to better support project execution and support of our Distribution Partners.

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 increased by $0.1 million to $2.2 million for the three months ended March 31, 2020, compared to $2.1 million for the three months ended March 31, 2019. These increases are due to an increase in headcount offset by a $0.5 million increase in capitalized software development costs for the three months ended March 31, 2020. During the first quarter of 2019, a higher proportion of activity was related to business process improvements that were not eligible for capitalization.

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Stock-Based Compensation

In the third quarter of 2018, we determined that we no longer qualified as a Foreign Private Issuer (“FPI”) under the rules of the SEC. To minimize any undue effects on employees, our board of directors approved the availability of a cash surrender feature for certain options, including options issued under our Amended and Restated Incentive Stock Option Plan (“Option Plan”), until such time as we requalified as a FPI or we registered our common shares with the SEC. Accordingly, we accounted for the fair value of outstanding stock options at the end of March 31, 2019 as a liability, with changes in the liability recorded through net income as a stock-based compensation fair value adjustment. On October 9, 2019, we ceased allowing cash surrender of options and returned to equity accounting under the Option Plan without quarterly fair value adjustments at that date.

Stock-based compensation expense for the three months ended March 31, 2020 was $0.5 million, compared to $6.5 million for the same period of 2019. Stock-based compensation for the first quarter of 2019 included a $5.7 million fair value adjustment on cash settled stock options, as explained above.

Reorganization Expenses

In the first quarter of 2019, we incurred $2.6 million of reorganization expenses, including severance payments and related legal and consulting costs associated with management and organizational changes. We do not consider current period severances related to our plant workforce to be reorganization in nature.

Income Tax

The provision for income taxes is comprised of federal, state, provincial and foreign taxes based on pre-tax income. Income tax recovery for the three months ended March 31, 2020 was $1.3 million, compared to a $0.01 million recovery for the same period of 2019. As at March 31, 2020, we had C$41.4 million of loss carry-forwards in Canada and none in the United States. These loss carry-forwards will begin to expire in 2030.

Net Loss

Net loss was $5.3 million or $0.06 net loss per share in the first quarter of 2020, consistent with a net loss of $5.3 million or $0.06 net loss per share for the first quarter of 2019. The loss remained flat as a result of changes in gross profit and operating expenses as described above, offset by increased foreign exchange gains and income tax recoveries. Net loss for the three months ended March 31, 2019 included $6.4 million of stock-based compensation expense and $2.6 million of reorganization expenses, compared to $0.5 million and $nil, respectively, in the same period of 2020.

Liquidity and Capital Resources

Cash and cash equivalents at March 31, 2020 totaled $43.5 million, a decrease of $3.6 million from December 31, 2019. In July 2019, we entered into a C$50.0 million revolving credit facility with the Royal Bank of Canada (the “RBC Facility”). Draw-downs under the RBC Facility are available in both Canadian and U.S. dollars. We currently have C$30.0 million available under the RBC Facility as amounts available under the RBC Facility are limited to three times our twelve-month trailing Adjusted EBITDA, excluding certain non-recurring items. As a result of our decline in revenues, discussed previously, and the potential impact of the COVID-19 pandemic on our outlook, we have reached an agreement in principle, subject to completion of final documentation, to allow a six-month covenant holiday from the Royal Bank of Canada, which amends our borrowing base to 75% of eligible accounts receivable and 25% of inventory, subject to an aggregate limit of C$50.0 million including amounts borrowed under leasing facilities. Subsequent to March 31, 2020, we entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States, of which we expect to utilize $7.4 million in May 2020 related to expenditures already incurred. These facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 3.5%. The U.S. leasing facility is extendible for an additional year.

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In light of the uncertainty caused by the near and potential mid-term impacts of COVID-19, we have evaluated multiple downside scenarios and have implemented cost control and expenditure management processes. Based on these analyses and the implementation of these spending control processes, we believe that existing cash and cash equivalents combined with increased liquidity from the aforementioned leasing facility should, except in very extreme cases, be sufficient to support ongoing working capital and capital expenditure requirements for at least the next twelve months.

A prolonged and complete cessation of or sustained significant decrease in North American construction activities or a sustained economic depression and its adverse impacts on customer demand could adversely affect our liquidity. To the extent that existing cash and cash equivalents and increased liquidity from the aforementioned 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 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.

Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of cashflow from operations and cash on hand. We had no amounts outstanding under the RBC Facility as of March 31, 2020.

The following table summarizes our consolidated cash flows for the three months ended March 31, 2020 and 2019:

Financing Activities

For the three months ended March 31, 2020, no cash was used in or provided by financing activities. Cash used in financing activities for the three months ended March 31, 2019 was $5.6 million. We repaid the balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019.

We currently expect to fund anticipated future investments through the combination of available cash and equipment leasing facilities. 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 may deem appropriate. In the future, we may also use debt or pursue equity financing depending on the Company’s share price, interest rates, and nature of the investment opportunity and economic climate.

Credit Facility

At March 31, 2020, we had no amounts drawn on our RBC Facility, and we were in compliance with all covenants thereunder. We currently have C$30.0 million available under the RBC Facility as amounts available under the RBC Facility are limited to three times our twelve-month trailing Adjusted EBITDA, excluding certain non-recurring items. As a result of our decline in revenues, discussed previously, and the potential impact of the COVID-19 pandemic on our outlook, we have reached an agreement in principle, subject to completion of final documentation, to allow a six-month covenant holiday from the Royal Bank of Canada, which amends our borrowing base to 75% of eligible accounts receivable and 25% of inventory, subject to an aggregate limit of C$50.0 million including amounts borrowed under leasing facilities. Subsequent to March 31, 2020, we entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States, of which we expect to utilize $7.4 million in May 2020 related to expenditures already incurred. These facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 3.5%. The U.S. leasing facility is extendible for an additional year.

On July 19, 2019, we entered into the RBC Facility, a C$50.0 million senior secured revolving credit facility with the Royal Bank of Canada. The RBC Facility has a three-year term and can be extended for up to two additional years at our option. Interest is calculated at the Canadian or U.S. prime rate with no adjustment, or the bankers’ acceptance rate plus 125 basis points. We are required to comply with certain financial covenants under the RBC Facility, including maintaining a minimum fixed charge coverage ratio of 1.15:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:1. We are also required to comply with certain non-financial covenants, including, among other things, covenants restricting our ability to (i) dispose of our property, (ii) enter into certain transactions intended to effect or otherwise permit a material change in our corporate or capital structure, (iii) incur any debt, other than permitted debt, and (iv) permit certain encumbrances on our property.

We are generally restricted from making dividends or distributions on our outstanding capital shares (other than any distribution by way of the payment of dividends by the issuance of equity securities). We may also declare and pay dividends to our shareholders provided that such dividends do not exceed 50% of the Free Operating Cash Flow (as defined in the RBC Facility) for the most recently completed fiscal year and meet certain other conditions. We may also make a one-time Permitted Special Distributions (as defined in the RBC Facility) provided that we maintain a minimum balance of at least C$20.0 million in our account and meet certain other conditions.

The RBC Facility is secured by substantially all of our real property located in Canada and the United States.

Contractual Obligations

There have been no material changes in our contractual obligations during the three months ended March 31, 2020, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, other than

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forthcoming additional commitments related to the South Carolina Plant and DXC in Plano, Texas, as described in Note 11, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report.

Significant Accounting Policies and Estimates

There have been no material changes in our significant accounting policies during the three months ended March 31, 2020, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K. For information regarding significant accounting policies and estimates, please refer to Item 7 and Item 8 in our Annual Report on Form 10-K. As disclosed in Note 4, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, we adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments”. Adoption of this amendment has impacted the way we determine expected credit loss on trade receivables. The methodology now applied has been explained in the referenced note.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 4, “Adoption of New and Revised Accounting Standards” to our interim condensed consolidated financial statements and “–Significant Accounting Policies and Estimates” in this Quarterly Report.

As required by Rules 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 March 31, 2020. 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.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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