LEASES

12 Months Ended

Dec. 31, 2023

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:


	ROU Assets
	Cost			Accumulated depreciation			Net book value
At January 1, 2022		44,055			(13,175	)		30,880
Additions		139			-			139
Modifications		4,809			50			4,859
Depreciation expense		-			(5,057	)		(5,057	)
Exchange differences		(943	)		611			(332	)
At December 31, 2022		48,061			(17,571	)		30,490
Disposals		(2,667	)		2,308			(359	)
Modifications		3,866			(196	)		3,670
Depreciation expense		-			(4,312	)		(4,312	)
Exchange differences		596			(272	)		324
At December 31, 2023		49,856			(20,043	)		29,813

The components of the lease cost for the years ended December 31, 2023 and 2022 were as follows:


	For the year ended December 31,
	2023			2022
Operating lease cost (1)
Fixed lease cost		6,688			6,719
Sublease income		(1,393	)		(344	)
Total operating lease cost		5,295			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		4,427			4,647
Selling and marketing		793			1,356
General and administrative		(113	)		107
Technology and development		188			265
Total operating lease cost		5,295			6,375

The following table includes lease liabilities included on the balance sheet at December 31, 2023 and 2022:


	Lease Liability
	2023			2022
At January 1,		33,423			33,481
Additions		-			139
Disposals		(406	)		-
Modifications		3,866			4,809
Accretion		2,272			1,722
Repayment of lease liabilities		(5,942	)		(6,558	)
Lease inducements		-			124
Exchange differences		243			(294	)
At December 31,		33,456			33,423
Current lease liabilities		5,255			5,889
Long-term lease liabilities		28,201			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.

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			5,424
2025			6,051
2026			5,491
2027			4,375
2028			3,834
Thereafter			19,929
Total			45,104
Total lease liability			33,456
Difference between undiscounted cash flows and lease liability			11,648