UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2022~~2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)		N/A (IRS Employer Identification No.)

7303 30th Street S.E. Calgary, Alberta, Canada (Address of principal executive offices)		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: None


~~Title of Each Class~~	~~Trading Symbol(s)~~	~~Name of Each Exchange on Which Registered~~
~~Common Shares, without par value~~	~~DRTT~~	~~The Nasdaq Stock Market LLC~~

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	☐	Accelerated filer	☒

Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The registrant had ~~88,714,941~~104,789,358 common shares outstanding as of ~~November 1, 2022.~~October 31, 2023.

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, ~~2022~~2023

TABLE OF CONTENTS


		Page
Cautionary Statement Regarding Forward-Looking Statements		ii
PART I – FINANCIAL INFORMATION		4
Item 1. Financial Statements (Unaudited)		4
Interim Condensed Consolidated Balance Sheets		4
Interim Condensed Consolidated Statement of Operations and Comprehensive Loss		5
Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity		67
Interim Condensed Consolidated Statement of Cash Flows		78
Notes to the Unaudited Interim Condensed Consolidated Financial Statements		89
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2122
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
Item 4. Controls and Procedures		3637

PART II – OTHER INFORMATION		3738

Item 1. Legal Proceedings		3738
Item 1A. Risk Factors		3739
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3. Defaults Upon Senior Securities		39
Item 4. Mine Safety Disclosures		39
Item 5. Other Information		39
Item 6. Exhibits		40

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2022~~2023 (this “Quarterly 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, as amended (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 Quarterly Report, regarding 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 Quarterly 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. 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 contained in, or expressed or implied inby 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 ana material adverse effect on our business, financial condition, results of operations and growth prospects ~~include, but are not limited to, the severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under~~can be found in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February ~~23, 2022~~22, 2023 (the “Annual Report on Form 10-K”) ~~as supplemented by~~, and in our subsequently filed Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022 filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on May 4, 2022 and July 27, 2022 respectively and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:

•

general economic and business conditions in the ~~impact of the COVID-19 pandemic and any strain variants or resurgences thereof on our business;~~jurisdictions in which we operate, including inflation;

•

our ability to implement our strategic plan, including ~~realizing on~~realization of benefits from certain cost-optimization initiatives undertaken in ~~2022;~~2022 and initiatives being taken in 2023 and the ability of our board of directors ("Board of Directors") to successfully implement its transformation plan;

•

~~the effect~~inflation and material fluctuations of ~~the cost saving initiatives the Company announced~~commodity prices, including raw materials and our ability to set prices for our products that satisfactorily adjust for inflation and fluctuations in ~~February and July 2022;~~commodity prices;

•

volatility of our share price;

•

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;

•

~~the~~our history of negative cash flow from operating activities;

•

our ability ~~of our reconstituted board of directors ("Board of Directors")~~ to ~~successfully implement its transformation plan;~~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 asin the construction ~~industry recovers from the COVID-19 pandemic;~~industry;

•

our ability to achieve and manage growth effectively;

•

competition in the interior construction industry;

•

competitive behaviors by our former co-founders and ~~former~~ executives;

•

the condition and changing trends of the overall construction industry;

•

our reliance on our network of construction partners ("Construction Partners"), ~~which we have previously referred to as our Distribution 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;

•

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;

•

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, including the COVID-19 pandemic;~~events;

•

global economic, political and social conditions affecting financial markets, such as the war in Ukraine and ~~financial markets;~~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;

•

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, including those relating to the COVID-19 pandemic;~~laws;

•

the impact of increasing attention to environmental, social and governance (ESG) matters on our ~~ability to generate sufficient revenue to achieve and sustain profitability and achieve positive cash flows;~~business;

•

~~our~~ periodic fluctuations in our results of operations and financial conditions;

•

~~volatility of our share price;~~

•

~~our ability to maintain our listing on Nasdaq;~~

•

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); and

•

future mergers, acquisitions, agreements, consolidations or other corporate transactions we may engage in.

These risks are not exhaustive. Because of these risks and other 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 Quarterly 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 expressed 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.

iii

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Balance Sheets

(Unaudited – Stated in thousands of U.S. dollars)


	As at September 30,			As at December 31,
	2023			2022
ASSETS
Current Assets
Cash and cash equivalents		19,460			10,821
Restricted cash		2,977			3,418
Trade and accrued receivables, net of expected credit losses of $0.1 million at September 30, 2023 and at December 31, 2022		20,516			13,930
Other receivables		852			7,880
Inventory		17,368			22,251
Prepaids and other current assets		4,015			3,825
Assets held for sale		2,317			-
Total Current Assets		67,505			62,125
Property, plant and equipment, net		26,324			41,522
Capitalized software, net		2,168			4,406
Operating lease right-of-use assets, net		30,561			30,490
Other assets		3,776			5,110
Total Assets		130,334			143,653
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		18,761			19,881
Other liabilities		2,021			2,056
Customer deposits and deferred revenue		6,743			4,866
Current portion of long-term debt and accrued interest		8,961			3,306
Current portion of lease liabilities		5,284			5,889
Total Current Liabilities		41,770			35,998
Long-term debt		53,901			62,129
Long-term lease liabilities		28,751			27,534
Total Liabilities		124,422			125,661
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 104,789,358 issued and outstanding at September 30, 2023 and 97,882,844 at December 31, 2022		195,747			191,347
Additional paid-in capital		7,933			9,023
Accumulated other comprehensive loss		(15,957	)		(16,106	)
Accumulated deficit		(181,811	)		(166,272	)
Total Shareholders’ Equity		5,912			17,992
Total Liabilities and Shareholders’ Equity		130,334			143,653

As at
September 30,

As at
December 31,

2022

2021

ASSETS

Current Assets

Cash and cash equivalents

6,818

60,313

Restricted cash

3,611

3,095

Trade and accrued receivables, net of expected credit losses of
$0.1 million at September 30, 2022 and at December 31, 2021

19,553

14,063

Other receivables

8,009

3,477

Inventory

23,295

18,457

Prepaids and other current assets

5,389

4,399

Total Current Assets

66,675

103,804

Property, plant and equipment, net

43,450

51,697

Capitalized software, net

4,634

7,395

Operating lease right-of-use assets, net

31,965

30,880

Other assets

5,192

5,663

Total Assets

151,916

199,439

LIABILITIES

Current Liabilities

Accounts payable and accrued liabilities

26,104

22,751

Other liabilities

1,787

2,379

Customer deposits and deferred revenue

3,027

2,420

Current portion of long-term debt and accrued interest

3,221

3,323

Current portion of lease liabilities

5,626

6,214

Total Current Liabilities

39,765

37,087

Long-term debt

61,997

67,319

Long-term lease liabilities

29,141

27,267

Total Liabilities

130,903

131,673

SHAREHOLDERS’ EQUITY

Common shares, unlimited authorized without par value, 88,266,915 issued
and outstanding at September 30, 2022 and 85,345,433 at December 31, 2021

187,930

181,782

Additional paid-in capital

9,592

13,200

Accumulated other comprehensive loss

(16,143
)

(15,916
)
Accumulated deficit

(160,366
)

(111,300
)
Total Shareholders’ Equity

21,013

67,766

Total Liabilities and Shareholders’ Equity

151,916

199,439

The accompanying notes are an integral part of these interim condensed consolidated financial statements. ~~The prior year comparatives have been revised in line with current year presentation - refer to Note 7.~~

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Operations

(Unaudited - Stated in thousands of U.S. dollars)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,							For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021				2023			2022			2023			2022
Product revenue		44,307			33,054			124,849			101,683				48,095			44,307			127,105			124,849
Service revenue		2,440			1,044			4,885			2,982				1,442			2,440			3,893			4,885
Total revenue		46,747			34,098			129,734			104,665				49,537			46,747			130,998			129,734

Product cost of sales		37,965			30,717			109,757			85,359				31,622			37,965			88,529			109,757
Costs of under-utilized capacity		-			-			-			1,756
Service cost of sales		1,774			931			3,406			2,506				850			1,774			2,165			3,406
Total cost of sales		39,739			31,648			113,163			89,621				32,472			39,739			90,694			113,163
Gross profit		7,008			2,450			16,571			15,044				17,065			7,008			40,304			16,571

Expenses
Sales and marketing		6,089			7,536			21,094			21,770				6,161			6,089			18,302			21,094
General and administrative		6,542			7,546			21,412			22,567				4,669			6,542			16,003			21,412
Operations support		2,321			2,374			7,347			6,884				1,752			2,321			5,564			7,347
Technology and development		1,695			2,146			5,714			6,005				1,239			1,695			4,055			5,714
Stock-based compensation		918			837			3,546			3,792				1,069			918			2,543			3,546
Reorganization		3,426			-			12,281			-				321			3,426			2,857			12,281
Impairment charge on Rock Hill Facility															7,952			-			7,952			-
Related party expense															-			-			1,524			-
Total operating expenses		20,991			20,439			71,394			61,018				23,163			20,991			58,800			71,394

Operating loss		(13,983	)		(17,989	)		(54,823	)		(45,974	)			(6,098	)		(13,983	)		(18,496	)		(54,823	)
Government subsidies		7,141			2,935			7,765			10,434				-			7,141			236			7,765
Foreign exchange gain		1,356			526			1,870			286
Gain on sale of software and patents															-			-			6,145			-
Foreign exchange (loss) gain															822			1,356			(59	)		1,870
Interest income		19			20			50			62				161			19			271			50
Interest expense		(1,276	)		(823	)		(3,935	)		(2,117	)			(1,196	)		(1,276	)		(3,636	)		(3,935	)
		7,240			2,658			5,750			8,665				(213	)		7,240			2,957			5,750
Loss before tax		(6,743	)		(15,331	)		(49,073	)		(37,309	)
Net loss before tax															(6,311	)		(6,743	)		(15,539	)		(49,073	)
Income taxes
Current tax expense (recovery)		(16	)		-			(16	)		210
Deferred tax expense		-			88			-			137
Current and deferred income tax recovery															-			(16	)		-			(16	)
		(16	)		88			(16	)		347				-			(16	)		-			(16	)
Net loss		(6,727	)		(15,419	)		(49,057	)		(37,656	)			(6,311	)		(6,727	)		(15,539	)		(49,057	)

Loss per share
Basic and diluted loss per share		(0.08	)		(0.18	)		(0.57	)		(0.44	)
Net loss per share
Net loss per share - basic and diluted															(0.06	)		(0.08	)		(0.15	)		(0.57	)

Weighted average number of shares outstanding (in thousands)													Weighted average number of shares outstanding (in thousands)
Basic and Diluted		87,446			85,325			86,299			84,922
Basic and diluted															104,449			87,446			101,036			86,229

Interim Condensed Consolidated Statement of Comprehensive Loss


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021			2023			2022			2023			2022
Loss for the period		(6,727	)		(15,419	)		(49,057	)		(37,656	)		(6,311	)		(6,727	)		(15,539	)		(49,057	)
Exchange differences on translation of foreign operations		(66	)		(855	)		(227	)		466			(45	)		(66	)		149			(227	)
Comprehensive loss for the period		(6,793	)		(16,274	)		(49,284	)		(37,190	)		(6,356	)		(6,793	)		(15,390	)		(49,284	)

Total revenue for the nine months ended September 30, 2023 includes $0.3 million earned from related parties. All related party income was earned in the first quarter of 2023.

Interest expense for the three and nine month ended September 30, 2023 includes $0.4 million owing to a related party (refer to Note 16).

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited – Stated in thousands of U.S. dollars, except for share data)

Accumulated

Number of

Additional

other

Total

Common

Common

paid-in

comprehensive

Accumulated

shareholders’

shares

shares

capital

loss

deficit

equity

As at December 31, 2020

84,681,364

180,639

10,175

(17,018
)

(57,265
)

116,531

Stock-based compensation

-

-

796

-

-

796

Foreign currency translation adjustment

-

-

-

605

-

605

Net loss for the period

-

-

-

-

(12,499
)

(12,499
)
As at March 31, 2021

84,681,364

180,639

10,971

(16,413
)

(69,764
)

105,433

Stock-based compensation

-

-

1,285

-

-

1,285

Issued on vesting of RSUs

630,211

1,074

(1,074
)

-

-

-

RSUs and Share Awards withheld to settle employee tax obligations

-

-

(252
)

-

(342
)

(594
)
Foreign currency translation adjustment

-

-

-

716

-

716

Net loss for the period

-

-

-

-

(9,738
)

(9,738
)
As at June 30, 2021

85,311,575

181,713

10,930

(15,697
)

(79,844
)

97,102

Stock-based compensation

-

-

1,177

-

-

1,177

Issued on vesting of RSUs

22,980

49

(49
)

-

-

-

RSUs and Share Awards withheld to settle employee tax obligations

-

-

(35
)

-

(28
)

(63
)
Foreign currency translation adjustment

-

-

-

(855
)

-

(855
)
Net loss for the period

-

-

-

-

(15,419
)

(15,419
)
As at September 30, 2021

85,334,555

181,762

12,023

(16,552
)

(95,291
)

81,942

As at December 31, 2021

85,345,433

181,782

13,200

(15,916
)

(111,300
)

67,766

Stock-based compensation

-

-

1,339

-

-

1,339

Issued on vesting of RSUs and Share Awards

487,544

1,203

(1,203
)

-

-

-

RSUs and Share Awards withheld to settle employee tax obligations

-

-

(189
)

-

(9
)

(198
)
Foreign currency translation adjustment

-

-

-

433

-

433

Net loss for the period

-

-

-

-

(23,042
)

(23,042
)
As at March 31, 2022

85,832,977

182,985

13,147

(15,483
)

(134,351
)

46,298

Stock-based compensation

-

-

1,286

-

-

1,286

Issued on vesting of RSUs and Share Awards

1,155,851

3,268

(3,268
)

-

-

-

RSUs and Share Awards withheld to settle employee tax obligations

-

-

(536
)

-

-

(536
)
Foreign currency translation adjustment

-

-

-

(594
)

-

(594
)
Net loss for the period

-

-

-

-

(19,288
)

(19,288
)
As at June 30, 2022

86,988,828

186,253

10,629

(16,077
)

(153,639
)

27,166

Stock-based compensation

-

-

846

-

-

846

Issued on vesting of RSUs and Share Awards

874,266

1,587

(1,587
)

-

-

-

Issued for employee share purchase plan

403,821

90

-

-

-

90

RSUs and Share Awards withheld to settle employee tax obligations

-

-

(296
)

-

-

(296
)
Foreign currency translation adjustment

-

-

-

(66
)

-

(66
)
Net loss for the period

-

-

-

-

(6,727
)

(6,727
)
As at September 30, 2022

88,266,915

187,930

9,592

(16,143
)

(160,366
)

21,013


								Accumulated
	Number of				Additional			other						Total
	Common		Common		paid-in			comprehensive			Accumulated			shareholders’
	shares		shares		capital			loss			deficit			equity
As at December 31, 2021		85,345,433		181,782		13,200			(15,916	)		(111,300	)		67,766
Stock-based compensation		-		-		1,339			-			-			1,339
Issued on vesting of RSUs and Share Awards		487,544		1,203		(1,203	)		-			-			-
RSUs and Share Awards withheld to settle employee tax obligations		-		-		(189	)		-			(9	)		(198	)
Foreign currency translation adjustment		-		-		-			433			-			433
Net loss for the period		-		-		-			-			(23,042	)		(23,042	)
As at March 31, 2022		85,832,977		182,985		13,147			(15,483	)		(134,351	)		46,298
Stock-based compensation	-		-			1,286		-			-				1,286
Issued on vesting of RSUs and Share Awards		1,155,851		3,268		(3,268	)	-			-			-
RSUs and Share Awards withheld to settle employee tax obligations	-		-			(536	)	-			-				(536	)
Foreign currency translation adjustment	-		-		-				(594	)	-				(594	)
Net loss for the period	-		-		-			-				(19,288	)		(19,288	)
As at June 30, 2022		86,988,828		186,253		10,629			(16,077	)		(153,639	)		27,166
Stock-based compensation		-		-		846			-			-			846
Issued on vesting of RSUs and Share Awards		874,266		1,587		(1,587	)		-			-			-
Issued for employee share purchase plan		403,821		90		-			-			-			90
RSUs and Share Awards withheld to settle employee tax obligations		-		-		(296	)		-			-			(296	)
Foreign currency translation adjustment		-		-		-			(66	)		-			(66	)
Net loss for the period		-		-		-			-			(6,727	)		(6,727	)
As at September 30, 2022		88,266,915		187,930		9,592			(16,143	)		(160,366	)		21,013

As at December 31, 2022		97,882,844		191,347		9,023			(16,106	)		(166,272	)		17,992
Stock-based compensation		-		-		452			-			-			452
Issued on vesting of RSUs and Share Awards		659,473		1,256		(1,256	)		-			-			-
RSUs withheld to settle employee tax obligations		-		-		(26	)		-			-			(26	)
Issued for employee share purchase plan		322,408		128		-			-			-			128
Foreign currency translation adjustment		-		-		-			273			-			273
Net loss for the period		-		-		-			-			(11,434	)		(11,434	)
As at March 31, 2023		98,864,725		192,731		8,193			(15,833	)		(177,706	)		7,385
Stock-based compensation		-		-		625			-			-			625
Issued on vesting of RSUs and Share Awards		1,108,213		1,243		(1,243	)		-			-			-
Issued for employee share purchase plan		572,253		122		-			-			-			122
Issued to settle related party debt		3,899,745		1,524		-			-			-			1,524
Foreign currency translation adjustment		-		-		-			(79	)		-			(79	)
Net income for the period		-		-		-			-			2,206			2,206
As at June 30, 2023		104,444,936		195,620		7,575			(15,912	)		(175,500	)		11,783
Stock-based compensation		-		-		360			-			-			360
Issued on vesting of RSUs and Share Awards		1,011		2		(2	)		-			-			-
Issued for employee share purchase plan		343,411		125		-			-			-			125
Foreign currency translation adjustment		-		-		-			(45	)		-			(45	)
Net loss for the period		-		-		-			-			(6,311	)		(6,311	)
As at September 30, 2023		104,789,358		195,747		7,933			(15,957	)		(181,811	)		5,912

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Cash Flows

(Unaudited – Stated in thousands of U.S. dollars)


		For the Three Months Ended September 30,						For the Nine Months Ended September 30,							For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2022			2021			2022			2021				2023			2022			2023			2022
Cash flows from operating activities:
Net loss for the period			(6,727	)		(15,419	)		(49,057	)		(37,656	)			(6,311	)		(6,727	)		(15,539	)		(49,057	)
Adjustments:
Depreciation and amortization			4,236			3,815			12,202			10,638				2,017			4,236			7,216			12,202
Impairment charge on Rock Hill Facility																7,952			-			7,952			-
Stock-based compensation, net of settlements			888			837			2,596			3,580				1,069			888			2,543			2,596
Foreign exchange gain			(1,365	)		(735	)		(2,147	)		(495	)
Foreign exchange loss (gain)																(577	)		(1,365	)		563			(2,147	)
Gain on sale of software and patents																-			-			(6,145	)		-
Loss (gain) on disposal of equipment																97			44			97			(121	)
Accretion of convertible debentures			163			89			505			236				172			163			515			505
Loss (gain) on disposal of equipment			44			15			(121	)		15
Deferred income tax expense			-			88			-			137
Changes in operating assets and liabilities:
Trade and accrued receivables			(819	)		2,488			(5,814	)		(479	)			(5,130	)		(819	)		(6,639	)		(5,814	)
Other receivables			(7,419	)		1,616			(4,566	)		1,752				(163	)		(7,419	)		7,029			(4,566	)
Inventory			1,052			(944	)		(6,052	)		(1,444	)			1,749			1,052			4,902			(6,052	)
Prepaid and other assets, current and long term			(254	)		(1,858	)		(1,421	)		(1,709	)			477			(254	)		(41	)		(1,421	)
Accounts payable and accrued liabilities			2,748			(2,330	)		5,921			(3,587	)			(77	)		2,748			475			5,921
Other liabilities			(70	)		(1,581	)		(109	)		186				(212	)		(70	)		(421	)		(109	)
Customer deposits and deferred revenue			(3,078	)		1,112			641			2,429				737			(3,078	)		1,702			641
Current portion of long-term debt and accrued interest			(44	)		601			(186	)		1,607				(49	)		(44	)		(64	)		(186	)
Lease liabilities			(22	)		15			99			918				168			(22	)		542			99
Net cash flows used in operating activities			(10,667	)		(12,191	)		(47,509	)		(23,872	)
Net cash flows provided by (used in) operating activities																1,919			(10,667	)		4,687			(47,509	)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts payable changes			(360	)		(1,755	)		(2,247	)		(10,462	)			(255	)		(360	)		(1,304	)		(2,247	)
Capitalized software development expenditures			(385	)		(516	)		(1,286	)		(1,852	)			(425	)		(385	)		(1,530	)		(1,286	)
Other asset expenditures			(86	)		(60	)		(367	)		(387	)			(41	)		(86	)		(186	)		(367	)
Proceeds on sales of equipment			141			-			214			-
Recovery of software development expenditures			46			121			91			145				49			46			131			91
Net cash flows used in investing activities			(644	)		(2,210	)		(3,595	)		(12,556	)
Proceeds on sale of software and patents																-			-			9,964			-
Proceeds on sale of equipment																14			141			14			214
Net cash flows provided by (used in) investing activities																(658	)		(644	)		7,089			(3,595	)
Cash flows from financing activities:
Proceeds received on long-term debt			-			-			647			37,952				-			-			-			647
Repayment of long-term debt			(616	)		(457	)		(1,852	)		(1,217	)			(551	)		(616	)		(3,386	)		(1,852	)
Employee tax payments on vesting of RSUs			(296	)		(63	)		(597	)		(652	)			-			(296	)		(26	)		(597	)
Net cash flows (used in) provided by financing activities			(912	)		(520	)		(1,802	)		36,083
Net cash flows used in financing activities																(551	)		(912	)		(3,412	)		(1,802	)
Effect of foreign exchange on cash, cash equivalents and restricted cash			(293	)		(130	)		(73	)		581				(117	)		(293	)		(166	)		(73	)
Net (decrease) increase in cash, cash equivalents and restricted cash			(12,516	)		(15,051	)		(52,979	)		236
Net increase (decrease) in cash, cash equivalents and restricted cash																593			(12,516	)		8,198			(52,979	)
Cash, cash equivalents and restricted cash, beginning of period			22,945			61,133			63,408			45,846				21,844			22,945			14,239			63,408
Cash, cash equivalents and restricted cash, end of period			10,429			46,082			10,429			46,082				22,437			10,429			22,437			10,429
Supplemental disclosure of cash flow information:
Interest paid			(1,108	)		(1,231	)		(3,439	)		(1,360	)			(1,038	)		(1,108	)		(3,077	)		(3,439	)
Income taxes received			-			369			3,207			321
Income taxes (paid) received																-			-			(10	)		3,207

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets.	The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets.													The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets.

								For the Nine Months Ended September 30,													As at September 30,
								2022			2021										2023			2022
Cash and cash equivalents									6,818			43,288										19,460			6,818
Restricted cash									3,611			2,794										2,977			3,611
Total cash, cash equivalents and restricted cash									10,429			46,082										22,437			10,429

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

DIRTT Environmental Solutions Ltd.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(Amounts 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 ~~global~~ 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, title and interests in all the 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~~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” ~~and~~. Effective October 12, 2023, DIRTT’s common shares ceased to trade on ~~The~~the Nasdaq ~~Global Select Market (“Nasdaq”)~~Capital Market. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol ~~“DRTT”.~~“DRTTF.”

2. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of September 30, ~~2022,~~2023, and its results of operations and cash flows for the three and nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022. The condensed balance sheet at December 31, ~~2021,~~2022, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, ~~2021~~2022 and ~~2020~~2021 and for each of the three years in the period ended December 31, ~~2021~~2022 included in the Annual Report on Form 10-K of the Company as filed with the SEC and applicable securities commission or similar regulatory authorities in Canada. As described in Note 6,3, no new accounting standards were adopted by the Company ~~adopted~~ ~~ASU 2021-10~~, ~~Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance~~ ~~effective~~ ~~January 1, 2022. There was~~ ~~no impact of this standard on our disclosures or accounting for government assistance~~.during the quarter.

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 Environmental Solutions Ltd. and its subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on 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 certain components of stock-based compensation that are measured at fair value.

Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.

Seasonality

Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customer’s construction projects can be influenced by a number of factors including the prevailing economic climate and weather.

3. ~~LIQUIDITY~~ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

The Company has not adopted any new accounting standards effective January 1, 2023. Accounting guidance for assets held for sale was applicable to the Company this quarter and the policy applied has been ~~negatively impacted~~disclosed below. Although there are several new accounting standards issued or proposed by the ~~effect~~Financial Accounting Standards Board, which the Company has adopted or will adopt, as applicable, the Company does not believe any of ~~COVID-19~~these accounting pronouncements has had, or will have, a material impact on its Financial Statements.

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 in the period in which the held for sale criteria are met. Conversely, gains are generally not recognized on the ~~non-residential construction industry, costs incurred associated with~~sale of a long-lived asset until the ~~Company’s contested director elections, reorganization~~date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to ~~reconstitute~~sell at each reporting period until the ~~executive team and align~~asset is no longer classified as held for sale. Adjustments made to the Company’s cost structure with current sales activity, and significant inflation on raw materials costs, which have resulted in a significant usage of cash in recent periods which has been funded through Convertible Debentures and Leasing Facilities entered intofair value are recorded in the ~~prior year (refer~~consolidated statement of operations in the period it is measured. Refer to Note ~~9).~~ 6.

4. LIQUIDITY

As at September 30, ~~2022,~~2023, the Company had $~~6.8~~19.5 million of cash on hand and $C$~~9.0~~14.6 million ($10.8 million) of available borrowings (December 31, ~~2021 -~~2022 – $~~60.3~~10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the first nine months of fiscal year 2023, the Company generated $~~10.4~~4.7 million in cash flows from operations, compared to a cash usage of $47.5 million over the first nine months of fiscal year 2022. The Company benefited from the receipt of $7.3 million of ~~available borrowings).~~

~~We have implemented a number~~government subsidies during the first nine months of ~~restructuring initiatives~~2023 compared to ~~create a reduced cost structure moving forward~~$nil in the nine months ended September 30, 2022 (refer to Note 5) ~~and~~.

We have implemented multiple price increases during the ~~year~~past two years to mitigate the impact of inflation on raw ~~material costs. While these~~materials. These actions ~~combined with an increasing project pipeline is promising, we continue to see unpredictability~~have resulted in a meaningful improvement in our ~~pace~~gross profit margins and higher net profit and have served to reduce our cash usage to operate the business. Gross profit for the nine months ended September 30, 2023 was $40.3 million, or 30.8%, compared to the same period of ~~orders. As a result,~~2022, which generated gross profit of $16.6 million, or 12.8%.

Over the ~~Company has initiated certain strategic actions~~past four quarters, we have also executed upon several cash initiatives. First, in May 2023, we entered into an agreement with AWI (refer to ~~improve our balance sheet~~Note 7) resulting in the ~~short term. First, historically~~receipt of $10.9 million of cash. Second, during March 2023, we ~~have licensed~~entered into an agreement to sublease our Dallas DIRTT Experience Center (“DXC”) to one of our Construction Partners in that region. Under the ~~use~~sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of ~~ICE software to certain strategic partners for use in their business, and DIRTT has provided licensing and developer software support for these counterparties.~~April 1, 2023, through December 31, 2024, which will provide us annualized savings of approximately $1 million. We are ~~in the process of evaluating multiple initiatives related~~continuing to ~~the further use of ICE software by third parties. Second, we have certain~~evaluate other properties ~~that are currently owned that we are evaluating~~ for ~~potential~~ sale and lease back arrangements. We do not intend to vacate these premises as they still serve a valuable aspect of our value proposition, but this type of arrangement would provide us with a one-time cash payment in the near term, in exchange for future rent payments. Weleaseback or sublease opportunities and expect these strategic initiatives to result in positive cash inflows in ~~2023. As these transactions are awaiting finalization,~~2023

and 2024. Third, we ~~are undertaking~~completed a Private Placement ~~(defined in Note 15)~~(as defined herein) of common shares ~~supported by~~in November 2022, with certain significant shareholders and directors and officers of the Company, to bridge ~~any~~ cash requirements ~~between now and~~before the completion and closing of the noted strategic ~~transactions~~transactions.

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 restructuring initiatives (refer to Note ~~15).~~6) designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by 154 employees, or approximately 16% from January 2022 through September 2023.

We have assessed the Company’s liquidity position as at September 30, ~~2022, using multiple scenarios~~2023 taking into account our sales outlook for the next year, our existing cash balances and available credit facilities and ~~the probability of executing the strategic transactions noted above.~~expected early settlements related to our Rock Hill Facility equipment lease (refer to Note 10). Based on this analysis, we believe the Company has sufficient liquidity to support ongoing operations for the next twelve months. However, should anticipated profitable growth and increased labor headcount and manufacturing capacity not occur or should there be a delayed recovery of the North American construction activities from the pandemic, a sustained economic depression and its adverse impacts on customer demand or significant inflationary pressure on raw materials and transportation cost that we are unable to recover through price increases, the Company will need to identify alternative sources of financing, further reduce its cost structure, delay capital expenditures, evaluate potential asset sales and potentially curtail or cease certain operations. While the Company is confident that it will be able to raise additional capital when needed or under acceptable terms, there can be no absolute assurance it will be able to do so.

~~4. COVID-19~~

The impact of the COVID-19 pandemic on our future consolidated results of operations remains uncertain. The extent to which COVID-19 impacts our employees, operations, customers, suppliers and financial results depends on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic (and whether there is a resurgence or multiple resurgences in the future, including the impact of new variants); government actions taken in response to the pandemic, including required shutdowns or vaccine or testing mandates; the availability, acceptance, distribution and continued effectiveness of vaccines; the impact on construction activity, including the effect on our customers’ demand for our ceiling and wall systems; supply chain disruptions; rising inflation; labor shortages; sustained remote or hybrid work models; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. While many of our products support life-sustaining activities and essential construction, we and certain of our customers or suppliers may be impacted by national, federal, state and provincial actions, orders and policies regarding the COVID-19 pandemic, including: temporary closures of non-life-sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement of which vary in each of the jurisdictions in which we operate. We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the three and nine months ended September 30, 2022 and 2021, but future events may require such charges which could have a material adverse effect on our financial condition, liquidity or results of operations.

~~Government subsidies~~5. GOVERNMENT SUBSIDIES

In the United States, the Employee Retention Credit ~~("ERC"~~(“ERC”) was established by Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act ~~(the "CARES 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 ~~has~~ filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). As of September 30, ~~2022 these credits have not~~2023, the $7.3 million claim (plus an additional $0.2 million of interest) has been received ~~and are included~~ in ~~other receivables in the balance sheet.~~

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). The CEWS provided the Company with a taxable subsidy in respect of a specific portion of wages paid to Canadian employees during qualifying periods extending from March 15, 2020 to October 23, 2021 based on the percentage decline of certain of the Company’s Canadian sourced revenues during each qualifying period. The Company’s eligibility for the CEWS was subject to change for each qualifying period and was reviewed by the Company for each qualifying period, with amounts being received by the Company for various, but not each, qualifying period. Pursuant to amendments enacted as part of the 2021 Canadian federal budget, the Company is required to repay a portion of the CEWS amounts received for any qualifying period commencing after June 5, 2021 where the aggregate compensation for “specified executives” (within the meaning of the CEWS) during the 2021 calendar year exceeds the aggregate compensation for “specified executives” during the 2019 calendar year. Upon finalization of 2021 compensation to specified executives, approximately C$~~0.5~~ ~~million ($0.4~~ million) of subsidies was repaid to the Canadian authorities in the second quarter of 2022. The repayment amount was fully provided for in the third quarter of 2021 in accounts payable and accrued liabilities and in the first quarter of 2022 the Company reversed a $~~0.6~~ ~~million incremental provision related to this that is no longer necessary.~~

On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). The CERS provided a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, for qualifying periods extending from September 27, 2020 to October 23, 2021, with the amount of the subsidy available to the Company being based on the percentage decline of certain of the Company’s Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS was subject to change for each qualifying period and was reviewed by the Company for each qualifying period.

The last claim period under the CEWS and CERS programs ended on October 23, 2021. The Company is not eligible and did not receive any new Canadian government subsidies in the three or nine months ended September 30, 2022.full.

5.6. REORGANIZATION AND ASSETS HELD FOR SALE

During the ~~nine month period~~year ended ~~September 30,~~December 31, 2022, and continuing into 2023, the Company undertook 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. During the first quarter of 2022, the Company incurred $1.0 million of accelerated depreciation, recorded in cost of sales, associated with the closure of the Phoenix Facility. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. The Company entered into a sublease arrangement for part of the Phoenix Facility 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 ~~contested~~ 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 nine months ended September 30, ~~2022, which~~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 ~~benefits and recruitment~~ costs.

Temporary Suspension of Operations and Subsequent Closure at Rock Hill, South Carolina (the ~~"Rock~~“Rock Hill ~~Facility"~~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.

~~Reorganization costs incurred:~~

For the Three Months Ended

For the Nine Months Ended

September 30, 2022

September 30, 2022

Termination benefits

2,843

6,870

Insurance costs on change of control

-

3,676

Phoenix Facility closure

-

853

Rock Hill temporary suspension of operations

144

144

Other costs

439

738

Total reorganization costs

3,426

12,281

For the Three Months Ended

For the Nine Months Ended

September 30, 2022

September 30, 2022

Opening reorganization costs in accounts payable and accrued liabilities

1,555

-

Reorganization expense

3,426

12,281

Reorganization costs paid

(3,228
)

(10,528
)
Reorganization costs in accounts payable and accrued liabilities at September 30, 2022

1,753

1,753

~~Of the~~ Costs associated with this idle facility, included in cost of sales, were $~~1.8~~ ~~million payable, $1.5~~ ~~million relates to termination benefits and $0.3~~ ~~million relates to other reorganization costs.~~

~~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~~0.4 million and ~~an acceleration of amortization expense associated with ICE development for Reflect of~~ $~~1.0~~1.4 million ~~in cost of sales.~~

~~Additionally,~~for the ~~Company accelerated the depreciation of certain items of property, plant~~three month and ~~equipment associated with the closure of the Phoenix Facility resulting in an additional $1.1~~ ~~million of depreciation and amortization incurred in the first quarter of 2022.~~ nine month period ended September 30, 2023, respectively.

On September 27, 2023, we decided to permanently close the Rock Hill Facility. As a result of this decision, we incurred $8.0 million of impairment charges associated with the manufacturing equipment located at the Rock Hill Facility. We expect to incur $0.5 million of costs in dismantling and decommissioning the Rock Hill Facility assets. The Company will continue to maintain the building lease and is pursuing a sublease arrangement.

~~These~~For the three and nine months ended September 30, 2023, reorganization costs ~~were included in cost of sales:~~incurred relate to the above mentioned initiatives:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Termination benefits		168		2,843		2,138		6,870
Insurance costs on change of control		-		-		-		3,676
Phoenix Facility closure		24		-		96		853
Rock Hill Facility temporary suspension and closure of operations		129		144		129		144
Other costs		-		439		494		738
Total reorganization costs		321		3,426		2,857		12,281


Reorganization costs in accounts payable and accrued liabilities at January 1, 2022	-
Reorganization expense	13,461
Reorganization costs paid	(11,184	)
Reorganization costs in accounts payable and accrued liabilities at December 31, 2022	2,277
Reorganization expense	2,857
Reorganization costs paid	(3,977	)
Reorganization costs in accounts payable and accrued liabilities at September 30, 2023	1,157

The $1.1 million payable relates to termination benefits (December 2022 – $2.1 million).

Assets classified as held for sale as at September 30, 2023 of $

For the Three Months Ended

For the Nine Months Ended

September 30, 2022

September 30, 2022

Accelerated depreciation and amortization associated with closure of the Phoenix Facility

-

1,054

Accelerated amortization associated with product line discontinuation

1,019

1,019

Provision for inventory of discontinued product lines

1,035

1,035

Incremental cost of sales

2,054

3,108

~~6. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS~~2.3

~~In 2021,~~million consist of manufacturing equipment previously used in the ~~Financial Accounting Standards Board issued Accounting Standards Update No. 2021-10,~~ ~~Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.~~ ~~The ASU provides guidance on required disclosures with respect to government assistance in a company’s notes~~Rock Hill Facility. Prior to the ~~annual financial statements. The amendments in~~decision to permanently close the ~~ASU are effective for periods beginning after December 15, 2021. The Company has~~ ~~adopted~~ ~~this standard effective~~ ~~January 1, 2022~~Rock Hill Facility, the assets were classified as property, plant and ~~notes there is~~ ~~no significant impact~~ ~~of this standard on our accounting or disclosures for government assistance.~~

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.equipment.

7. GAIN ON SALE OF SOFTWARE AND PATENTS

On May 9, 2023, we entered into a Co-Ownership Agreement (the “Co-Ownership 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. Under the Co-Ownership Agreement, we also agreed to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.0 million, which is expected to be received by early 2024. The Co-Ownership 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 Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.

The $10.0 million of proceeds on the sale of the 50% interest in the Applicable ICE code, pursuant to the Co-Ownership Agreement, was received during the second quarter of 2023. In accordance with US 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 and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $0.9 million was received during the second quarter as a prepayment under the ARMSA, which was recognized into revenue as the performance obligation is met. 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 10). A final prepayment of $0.9 million under the ARMSA was received in October 2023.

8. TRADE AND ACCRUED ~~RECEIVABLES AND OTHER~~ RECEIVABLES

Accounts receivable are recorded at the invoiced amount, do not require collateral and typically 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 consolidated 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~~well-being of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At September 30, ~~2022,~~2023, approximately 8380% 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, which have arisen since April 1, 2020 when the trade credit insurance became effective.~~entities.

Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three and nine months ended September 30, ~~2022 and 2021,~~ no ~~Construction Partner accounted for greater than~~ 10~~% of revenue.~~ No2023, one Construction Partner accounted for greater than 10% of revenue (one Construction Partner for the nine months ended September 30, ~~2022 and~~ ~~one~~ ~~Construction Partner accounted for $13.5~~ ~~million of revenue for the nine months ended September 30, 2021, which is greater than~~ 10~~% of total revenue.~~2022). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

The Company’s aged receivables were as follows:


	As at,
	September 30,			December 31,
	2023			2022
Current		16,974			12,381
Overdue		3,642			1,675
		20,616			14,056
Less: expected credit losses		(100	)		(126	)
		20,516			13,930

As at

September 30,

December 31,

2022

2021

Current

17,021

13,572

Overdue

2,658

621

19,679

14,193

Less: expected credit losses

(126
)

(130
)

19,553

14,063

No adjustment to our expected credit losses of $0.1 million was required for the three or nine months ended September 30, ~~2022.~~2023. 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.

~~For the period ended September 30, 2022, the Company classified Other Receivables separately from Trade and Accrued Receivables on the balance sheet, as reconciled below:~~

As at,

September 30,

December 31,

2022

2021

Trade and accrued receivables

19,679

14,193

Allowance for doubtful accounts

(126
)

(130
)
Accounts receivable

19,553

14,063

Sales tax receivable

289

196

Income taxes receivable

2

3,194

Government subsidies

7,141

-

Other receivables

577

87

Other receivables (reclassified on the balance sheet)

8,009

3,477

Total Trade and other receivables, as previously presented

27,562

17,540

8.9. OTHER LIABILITIES


	As at,				As at,
	September 30, 2022		December 31, 2021		September 30, 2023		December 31, 2022
Warranty provisions(1)		1,275		1,451		867		1,278
DSU liability		329		785		971		594
Sublease deposits		138		-		183		139
Other provisions		45		143		-		45
Other liabilities		1,787		2,379		2,021		2,056

(1)

The following table presents a reconciliation of the warranty ~~and other provisions~~ balance:


	As at,
	September 30, 2023			December 31, 2022
As at January 1		1,278			1,451
Additions to warranty provision		845			1,134
Payments related to warranties		(1,056	)		(1,307	)
Adjustments to warranty provision		(200	)		-
		867			1,278

September 30, 2022

December 31, 2021

As at January 1

1,451

1,763

Adjustments to timber provision

-

(500
)
Additions to warranty provision

726

1,019

Payments related to warranties

(902
)

(831
)

1,275

1,451

9.10. LONG-TERM DEBT


	Revolving Credit Facility		Leasing Facilities			Convertible Debentures			Total Debt			Revolving Credit Facility		Leasing Facilities			Convertible Debentures			Total Debt
Balance on December 31, 2020		-		5,967			-			5,967
Balance on January 1, 2022													-		13,909			56,733			70,642
Issuances		-		9,805			55,107			64,912			-		647			-			647
Accretion of issue costs		-		-			352			352			-		-			676			676
Accrued interest		-		556			1,935			2,491			-		735			3,539			4,274
Interest payments		-		(556	)		(987	)		(1,543	)		-		(735	)		(3,688	)		(4,423	)
Principal repayments		-		(1,808	)		-			(1,808	)		-		(2,470	)		-			(2,470	)
Exchange differences		-		(55	)		326			271			-		(274	)		(3,637	)		(3,911	)
Balance at December 31, 2021		-		13,909			56,733			70,642
Balance at December 31, 2022													-		11,812			53,623			65,435
Current portion of long-term debt and accrued interest		-		2,386			937			3,323			-		2,561			745			3,306
Long-term debt		-		11,523			55,796			67,319			-		9,251			52,878			62,129

Balance on December 31, 2021		-		13,909			56,733			70,642
Issuances		-		647			-			647
Balance on December 31, 2022													-		11,812			53,623			65,435
Accretion of issue costs		-		-			505			505			-		-			515			515
Accrued interest		-		562			2,691			3,253			-		447			2,566			3,013
Interest payments		-		(562	)		(2,877	)		(3,439	)		-		(447	)		(2,630	)		(3,077	)
Principal repayments		-		(1,852	)		-			(1,852	)		-		(3,386	)		-			(3,386	)
Exchange differences		-		(267	)		(4,271	)		(4,538	)		-		241			121			362
Balance at September 30, 2022		-		12,437			52,781			65,218
Balance at September 30, 2023													-		8,667			54,195			62,862
Current portion of long-term debt and accrued interest		-		2,520			701			3,221			-		8,250			711			8,961
Long-term debt		-		9,917			52,080			61,997			-		417			53,484			53,901

Revolving Credit Facility ~~Facility~~

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”). ~~At September 30, 2022, available borrowings are C$12.4~~ ~~million ($9.0~~ ~~million), of which no amounts have been drawn.~~ 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~~(defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted ~~cash,~~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 until such time the borrowing availability net of unrestricted cash exceeds C$5.0 million for at least thirty consecutive calendar days.~~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). ~~The Company did not meet the three-month FCCR requirement during the third quarter of 2022 which resulted in requiring the restriction of $3.6million of cash.~~ 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~~offset 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 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. At September 30, 2023, available borrowings are C$14.6 million ($10.8 million) (December 31, 2022 – $10.8 million and 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 third quarter of 2023, which resulted in requiring the restriction of $3.0 million of cash ($3.4 million as at December 31, 2022).

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 ($3.3 million) has been drawn and C$3.8 million ($2.8 million) has been repaid, and a $14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada

Leasing Facility, the “Leasing Facilities”) of which $13.3 million has been drawn and $5.2 million has been repaid, each with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred. The Canadian Leasing ~~Facilities,~~Facility and the U.S. Leasing Facility, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. ~~The~~Refer to Note 6 on the decision to permanently close the Rock Hill Facility. As part of this decision the Company intends to early settle the U.S. Leasing Facility ~~is amortized over a~~ in the next twelve months. The $~~six-year~~8.2 ~~term and extendible~~million balance of the U.S. Leasing Facility has therefore been classified under current liabilities as at September 30, 2023. On October 31, 2023, the ~~Company’s option for an additional year.~~Company paid off $1.0 million of the U.S. Leasing Facility.

The Company did not make any draws on the Leasing Facilities during the three and nine months ended September 30, 2023. During the three and nine months ended September 30, ~~2022, the Company received $nil~~ ~~(twelve months ended December 31, 2021: $9.8~~ million) of cash consideration under the U.S. Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in current other liabilities and long-term debt. In April 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.

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. 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. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission. As at September 30, 2023, C$18.9 million of the January Debentures are held by a related party (refer to Note 16).

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~~September 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. 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. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission. As at September 30, 2023, C$13.6 million of the December Debentures are held by a related party (refer to Note 16).

10.11. STOCK-BASED COMPENSATION

In May 2020, shareholders approved the DIRTT Environmental Solutions 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 ~~“2020~~“2023 LTIP”) at the annual and special meeting of shareholders. The ~~2020~~2023 LTIP gives the

Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, ~~granted in connection with restricted share units, vested Share Awards (as defined below),~~ 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 ~~2020~~2023 LTIP, the sum of (i) ~~5,850,000~~12,350,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May ~~22, 2020,~~30, 2023, expire or are cancelled or terminated without having been exercised in full, have been reserved for issuance under the ~~2020~~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.

Under the terms of the 2020 LTIP, the change of 100% of the Board of Directors combined with the prior Board declining to endorse the incoming board constituted a change of a control as of April 26, 2022. As a result, all outstanding and unvested LTIP awards granted under the 2020 LTIP plan for any holder terminated without cause within one year of the change of control vest immediately upon termination.

~~The Company also maintains~~Deferred share units (“DSUs”) have historically been granted to non-employee directors under the ~~DIRTT Environmental Solutions Ltd.~~ Deferred Share Unit Plan for Non-Employee Directors ~~pursuant~~(as amended and restated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company the ability to ~~which deferred share units (“DSUs”)~~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 ~~Company’s non-employee directors.~~DSU Plan. DSUs are settled ~~solely in cash.~~

~~Prior to~~following cessation of services with the approval of the 2020 LTIP, the Company granted awards of options under the Stock Option Plan and awards of performance share units (“PSUs”) under the DIRTT Environmental Solutions Ltd. Performance Share Unit Plan (the “PSU Plan”). Following the approval of the 2020 LTIP, no further awards were 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.Company.

Stock-based compensation expense


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,				For The Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021			2022		2021		2023		2022		2023		2022
Equity-settled awards		846		1,177			3,471		3,258		594		846		2,106		3,471
Cash-settled awards		72		(340	)		75		534		475		72		437		75
		918		837			3,546		3,792		1,069		918		2,543		3,546

The following summarizes RSUs, ~~(as defined below),~~ Share Awards, PSUs, and DSUs activity during the periods:

RSU Time-

RSU Performance-

Share

Based

Based

Awards

PSU

DSU

Number of

Number of

Number of

Number of

Number of

units

units

units

units

units

Outstanding at December 31, 2020

2,414,066

200,000

-

197,471

363,664

Granted

1,919,102

878,601

-

-

88,880

Vested

(650,898
)

(2,294
)

-

(34,635
)

(55,802
)
Withheld to settle employee tax obligations

(174,103
)

(1,960
)

-

-

-

Forfeited

(237,910
)

(42,314
)

-

(5,636
)

-

Outstanding at September 30, 2021

3,270,257

1,032,033

-

157,200

396,742

Outstanding at December 31, 2021

3,216,536

1,021,739

-

157,200

361,577

Granted

2,303,287

863,279

162,682

-

890,832

Vested or settled

(2,019,550
)

(566,352
)

(94,528
)

-

(501,916
)
Withheld to settle employee tax obligations

(526,259
)

(242,460
)

(68,154
)

-

-

Forfeited

(734,855
)

(502,628
)

-

(157,200
)

-

Outstanding at September 30, 2022

2,239,159

573,578

-

-

750,493


	RSU Time-			RSU Performance-			Share
	Based			Based			Awards			PSU			DSU
	Number of			Number of			Number of			Number of			Number of
	units			units			units			units			units
Outstanding at December 31, 2021		3,216,536			1,021,739			-			157,200			361,577
Granted		2,303,287			863,279			162,682			-			890,832
Vested or settled		(2,019,550	)		(566,352	)		(94,528	)		-			(501,916	)
Withheld to settle employee tax obligations		(526,259	)		(242,460	)		(68,154	)		-			-
Forfeited		(734,855	)		(502,628	)		-			(157,200	)		-
Outstanding at September 30, 2022		2,239,159			573,578			-			-			750,493
Outstanding at December 31, 2022		1,885,337			343,919			-			-			1,165,319
Granted		3,549,500			-			522,883			2,584,161			1,646,420
Vested or settled		(987,054	)		(258,760	)		(522,883	)		-			(220,590	)
Withheld to settle employee tax obligations		(64,230	)		-			-			-			-
Forfeited or expired		(600,345	)		-			-			(738,553	)		-
Outstanding at September 30, 2023		3,783,208			85,159			-			1,845,608			2,591,149

Restricted share units (time-based vesting)

Restricted share units ~~("RSUs")~~ 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.~~grant (“RSUs”). At the end of a three-year term, the 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 2022 and 2023 was C$~~2.49~~2.37 ~~(2021 –~~and C$~~3.14~~0.46), respectively, which was determined using the closing price of the Company’s common shares on their respective grant dates.

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. ~~PRSUs awarded in 2020 were forfeited in January 2022 upon the departure of an executive 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.


	% of PRSUs Vesting
			33.3	%		66.7	%		100.0	%		150.0	%
2022 and 2021 PRSUs		$	3.00		$	4.00		$	5.00		$	7.00

Share awards

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 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 September 30, 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 ~~2022, certain executives~~2023, 738,553 PSUs with a $nil value were ~~provided~~forfeited as a ~~variable compensation plan for the achievement~~result of ~~certain financial targets payable partially in cash~~an executive departure and partially in share awards. Based on the Company's performance to date relative to the financial targets, no share based awards have been recorded under this compensation plan for the quarter ended September 30, 2022. Under the plan, ~~1.2~~ ~~million shares could have been awarded if the maximum targets were achieved based on the Company's share price~~1,845,608 PSUs with a $nil value are outstanding at September 30, ~~2022.~~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 profit or loss for the ~~year.~~period. DSUs outstanding at September 30, ~~2022~~2023 had a fair value of $~~0.3~~0.6 million which is included in other liabilities on the balance sheet (December 31, ~~2021~~2022 – $~~0.8~~0.6 million).

Granted under the 2023 LITP

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 DSUs granted in 2023 was C$0.44 ($0.33), which was determined using the closing price of the Company’s common shares on the grant date. New DSUs outstanding at September 30, 2023 had a fair value of $0.4 million which is included in other liabilities on the balance sheet (December 31, 2022 –$nil).

~~Options~~17

Options

The following summarizes options ~~granted, exercised,~~ forfeited and expired during the periods:


	Number of			Weighted average		Number of			Weighted average
	options			exercise price C$		options			exercise price C$
Outstanding at December 31, 2020		4,774,328			6.52
Forfeited		(39,094	)		7.07
Outstanding at September 30, 2021		4,735,234			6.51
Outstanding at December 31, 2021		4,064,489			6.64		4,064,489			6.64
Forfeited		(2,530,120	)		6.40		(2,530,120	)		6.40
Outstanding at September 30, 2022		1,534,369			7.03		1,534,369			7.03
Exercisable at September 30, 2022		1,534,369			7.03
Outstanding at December 31, 2022							1,480,069			7.03
Forfeited							(989,066	)		6.97
Expired							(263,725	)		6.46
Outstanding and Exercisable at September 30, 2023							227,278			7.95

No options were granted during the three months and nine months ended September 30, 2023.

Range of exercise prices outstanding and exercisable at September 30, ~~2022:~~2023:


	Options outstanding						Options exercisable						Options outstanding						Options exercisable
			Weighted		Weighted				Weighted		Weighted				Weighted		Weighted				Weighted		Weighted
			average		average				average		average		Number of		average		average				average		average
	Number		remaining		exercise		Number		remaining		exercise		options		remaining		exercise		Number		remaining		exercise
Range of exercise prices	outstanding		life		price C$		exercisable		life		price C$				life		price C$		exercisable		life		price C$
C$4.01 – C$5.00		15,025		2.14		4.12		15,025		2.14		4.12
C$6.01 – C$7.00		784,367		1.31		6.33		784,367		1.31		6.33		16,350		0.97	$	6.12		16,350		0.97	$	6.12
C$7.01 – C$8.00		734,977		1.63		7.84		734,977		1.63		7.84
C$7.01 – C$7.84														210,928		0.63	$	7.84		210,928		0.63	$	7.84
Total		1,534,369						1,534,369						227,278						227,278

Dilutive Instruments

For the three and nine months ended September 30, ~~2022,~~2023, 0.2 million options (2022 – 1.5 ~~million options (2021 –~~million) ~~4.7~~ ~~million),~~ ~~2.8~~3.9 million RSUs and PRSUs ~~(2021~~(2022 – ~~4.4~~2.8 million), 1.2 million New DSUs (2022 – nil), 2.6 million PSUs (2022 – nil), 1.1 million shares relating to equity-settled Variable Pay Plan (“VPP”) (2022 – nil), and134.4 million (2022 – 127.5 ~~million~~million) shares ~~which~~ would be issued if the principal amount of the Debentures were settled in our common shares at the quarter end ~~share~~ price ~~(2021 –~~ ~~10.3~~ ~~million),~~and were ~~excluded from~~included in the diluted ~~weighted average number of common shares calculation as their effect would have been anti-dilutive to the net loss per share.~~EPS calculation.

~~11.~~12. REVENUE

In the following table, revenue is disaggregated by performance obligation and timing of revenue recognition. All revenue comes from contracts with customers. See Note 1213 for the disaggregation of revenue by geographic region.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

Product

39,092

29,569

110,383

91,867

Transportation

5,022

3,294

13,878

9,277

License fees from Construction Partners

193

191

588

539

Total product revenue

44,307

33,054

124,849

101,683

Installation and other services

2,440

1,044

4,885

2,982

46,747

34,098

129,734

104,665


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Product		43,132		39,092		113,323		110,383
Transportation		4,767		5,022		13,169		13,878
License fees from Construction Partners		196		193		613		588
Total product revenue		48,095		44,307		127,105		124,849
Installation and other services		1,442		2,440		3,893		4,885
		49,537		46,747		130,998		129,734

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 ~~the~~each customer and is not subject to variability.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
At a point in time		44,114		32,863		124,261		101,144		47,899		44,114		126,492		124,261
Over time		2,633		1,235		5,473		3,521		1,638		2,633		4,506		5,473
		46,747		34,098		129,734		104,665		49,537		46,747		130,998		129,734

Revenue recognized at a point in time represents the majority of the Company’s ~~sales and revenue~~sales. Revenue is recognized when a customer obtains legal title to the product, which is when ownership of ~~products~~the product is transferred to, or services are delivered to, the ~~contract counterparty.~~customer. Revenue recognized over time is limited to installation and ~~other services provided to~~ongoing maintenance contracts with customers and is recorded as performance obligations which are satisfied over the term of the contract.

Contract Liabilities

As at

September 30, 2022

December 31, 2021

December 31, 2020

Customer deposits

2,598

1,959

1,292

Deferred revenue

429

461

527

Contract liabilities

3,027

2,420

1,819


	As at
	September 30, 2023		December 31, 2022		December 31, 2021
Customer deposits		6,396		4,458		1,959
Deferred revenue		347		408		461
Contract liabilities		6,743		4,866		2,420

Contract liabilities primarily relate to deposits received from customers and ~~deferred~~maintenance revenue from license subscriptions. The balance of contract liabilities washigher as at September 30, ~~2022~~2023 compared to December 31, ~~2021~~2022 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 2022 and 2021, ~~and 2020~~respectively, totaling $~~2.4~~4.8 million and $~~1.7~~2.4 million ~~respectively,~~ were recognized as revenue during the nine months ended September 30, 2023 and 2022, ~~and 2021,~~ respectively.

Sales by Industry

The Company periodically reviews the growth of product and transportation revenue by vertical market to evaluate the success of industry-specific sales initiatives. The nature of products sold to the various industries is consistent and therefore review is focused on sales performance.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Commercial		31,796		20,805		85,458		55,981		31,272		31,796		82,154		85,458
Healthcare		3,638		5,017		15,693		25,680		8,483		3,638		25,111		15,693
Government		3,358		3,149		11,680		11,579		4,606		3,358		10,581		11,680
Education		5,322		3,892		11,430		7,904		3,538		5,322		8,646		11,430
License fees from Construction Partners		193		191		588		539		196		193		613		588
Total product and transportation revenue		44,307		33,054		124,849		101,683		48,095		44,307		127,105		124,849
Installation and other services		2,440		1,044		4,885		2,982		1,442		2,440		3,893		4,885
		46,747		34,098		129,734		104,665		49,537		46,747		130,998		129,734

~~12.~~13. SEGMENT REPORTING

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, with periodic international projects from North American Construction Partners.~~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.

Revenue from external customers

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

Canada

7,191

4,405

19,859

11,860

U.S.

39,556

29,693

109,875

92,805

46,747

34,098

129,734

104,665


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Canada		5,665		7,191		14,577		19,859
U.S.		43,872		39,556		116,421		109,875
		49,537		46,747		130,998		129,734

Non-current assets~~(1)~~


	As at				As at
	September 30, 2022		December 31, 2021		September 30, 2023		December 31, 2022
Canada		29,931		34,912		30,396		28,251
U.S.		55,310		60,723		32,433		53,277
		85,241		95,635		62,829		81,528

~~(1)~~

~~Amounts include property, plant and equipment, capitalized software, operating lease right-of-use assets, and other assets.~~

~~13.~~14. INCOME TAXES

As at September 30, ~~2022,~~2023, the Company had a valuation allowance of $~~28.1~~33.4 million against deferred tax assets as the Company has experienced cumulative losses in recent years (December 31, ~~2021~~2022 – $~~17.3~~29.8 million).

~~14.~~15. COMMITMENTS

As at September 30, ~~2022,~~2023, the Company had outstanding purchase obligations of approximately $~~2.1~~4.2 million related to inventory and property, plant and equipment purchases (December 31, ~~2021~~2022 – $~~3.7~~2.2 million). As at September 30, ~~2022,~~2023, the Company had undiscounted operating lease liabilities of $~~53.1~~46.0 million (December 31, ~~2021~~2022 – $~~49.7~~48.7 million). The decrease in undiscounted operating lease liabilities from June 30, 2023 ($61.2 million) was related to a modification on the Rock Hill Facility lease liability, as DIRTT no longer assumes the two 5-year extension options will be exercised (refer to Note 6).

~~15. SUBSEQUENT EVENTS~~16. RELATED PARTY TRANSACTIONS

On ~~November 14, 2022,~~March 15, 2023, the Company entered into ~~irrevocable subscription agreements~~a Debt Settlement Agreement (the "Debt Settlement Agreement") with ~~its two largest shareholders, 22 NW~~22NW Fund, LP ~~(“22NW”~~("22NW") and ~~726 BC LLC~~Aron English, 22NW's principal and ~~726 BF LLC~~a director of DIRTT, (together, ~~“726”~~the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company's issued and ~~all~~outstanding common shares at such time. Pursuant to the ~~directors~~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 ~~officers~~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 ~~issue up~~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 ~~8.8~~3,899,745 ~~million~~common shares ~~for gross proceeds~~at a deemed price of ~~approximately~~ $~~3.0~~0.40 ~~million, based~~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 ~~Nasdaq closing~~deemed price ~~on November 14, 2022,~~of $0.40 per common share and the ~~volume weighted average trading~~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 ~~shares on the Toronto Stock Exchange~~share.

Other related party transactions for the ~~5 days following~~three and nine months ended September 30, 2023, relate to the ~~announcement (the “Private Placement”). In addition, in connection with~~sale of DIRTT products and services to the Private Placement, the two shareholders, or their principals, have irrevocably committed to backstopping any rights offering occurring by the Company in the next twelve months in the aggregate amount of22NW Group for $nil and $~~2.0~~0.3 million, respectively (2022 – $nil). The sale to 22NW Group was based on price lists in force and terms that are available to all employees.

As at September 30, 2023, C$18.9 million and ~~the shortfall, if any, between the maximum anticipated gross proceeds under the Private Placement, being $~~C$~~3.0~~13.6 million of the January Debentures and December Debentures, respectively, are held by 22NW Group. Interest accrued on the ~~actual gross proceeds received by~~debentures for the ~~Company.~~three months ended September 30, 2023 is $0.4 million (2022 – $nil). Interest is earned on terms applicable to all Debenture holders.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Summary of Financial Results

DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a global 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.~~Company, including AWI which owns a 50% interest in the rights, title and interests in all the intellectual property rights in a portion of the ICE Software that is used by AWI.

Key Third Quarter ~~2022~~ Highlights

•

~~Revenues were $46.7~~Revenue for the quarter ended September 30, 2023 was $49.5 million, an increase of ~~$12.6~~$2.8 million or ~~37%~~6% from ~~$34.1~~$46.7 million for the same period in ~~2021,~~2022, and a ~~$2.0~~$4.8 million or 5%11% increase from the second quarter of ~~2022.~~2023. Compared to the same period in 2022, the increase in revenue was primarily driven by an increase in pricing, as well as volume growth in Healthcare and Government sectors. Compared to the first and second quarter of 2023, third quarter activity was higher, in line with seasonal demand patterns and timing of project schedules.

•

In July 2022, the Company announced, and successfully implemented, a price increase of approximately 10% across most product lines. This price increase, along with the increases announced in November 2021 and June 2022, were made in response to rapid and continued inflationary pressures impacting nearly all of our material and labor input costs. Our third quarter product sales reflected approximately half of the price increases previously announced. We expect the price increases to be further realized in the fourth quarter of 2022.

•

Gross profit and gross profit margin for the ~~third~~ quarter ended September 30, 2023 was $17.1 million or 34.4% of ~~2022 was~~revenue, an increase of $10.1 million or 144% from $7.0 million or 15.0% of revenue ~~an increase of $0.7 million or 12% from $6.3 million in the second quarter of 2022, an increase of $4.6 million or 186% from $2.5 million or 7.2% of revenue~~ for the same period of 2021. Cost of sales includes $1.0 million of accelerated amortization on software associated with the Reflect and other discontinued product lines, which were discontinued during the third quarter ofended September 30, 2022.

•

Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the ~~third quarter of 2022~~three months ended September 30, 2023 was ~~$10.1~~$18.3 million. This represents ~~a $1.6~~an $8.2 million ~~(19.8%)~~or 80% increase over the comparative period in 2022 and a $2.1 million or 13% increase from the second quarter of ~~2022 and a $5.4 million (112.5%) increase over the third quarter of 2021.~~2023. Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the third quarter of ~~2022~~2023 was ~~21.7%~~36.9%, a ~~280~~1,520 bps improvement over the comparative period and a 70 bps improvement from the second quarter ~~2022 and a 770 bps improvement over the third quarter 2021. Third quarter results include certain inventory write-downs~~ of ~~$1.0 million (2.1%, as a percent of total revenue), primarily related to the discontinuance of the Reflect and other product lines.~~2023. The ~~improved~~increase in Adjusted Gross Profit and Adjusted Gross Profit Margin have been driven by a combination of improved demand for our products and commercial discipline. The Company benefited from a weakening Canadian dollar with an approximate benefit of $0.6 million on Canadian Dollar denominated manufacturing costs compared to the ~~third quarter of 2021.~~previous and comparative quarters is due to having better leverage over fixed costs through price increases and reduced fixed costs.

•

During the third quarter of 2022, we have continued to align our manufacturing footprint and salaried workforce with our current activity levels. In July 2022, we announced a further reduction of salaried positions and in August 2022, we announced the temporary closure of our Rock Hill Facility as the Calgary manufacturing facility has sufficient capacity to absorb production and meet expected demand for the near term. These changes are expected to result in approximately $5.0 million in annualized savings. One-time costs associated with the reorganization activities in the third quarter were $3.4 million but added back to Adjusted EBITDA.

•

Net loss for the third quarter of ~~2022~~2023 was ~~$6.7~~$6.3 million compared to ~~$15.4~~a $6.7 million net loss for the same period of ~~2021.~~2022. The lower net loss is primarily the result of the higher gross profit margin of $10.1 million (as explained ~~above of $4.6 million,~~above), a ~~$4.2~~$2.2 million increase in ~~government subsidies,~~operating expenses including the $8.0 impairment charge on the Rock Hill Facility, offset by a ~~$0.8~~$3.1 million reduction in reorganization costs, a $0.1 million increase in interest income and $0.1 million decrease in interest expense, offset by a $0.5 million decrease in foreign exchange gain and a ~~$2.9~~$7.1 million ~~reduction~~government subsidy in ~~operating expenses offset by a $0.5~~2022 that did not recur.

•

During the third quarter of 2023, we announced the permanent closure of the Rock Hill Facility. This facility had been temporarily suspended since August 2022. With annual production capacity at DIRTT facilities in Savannah, Georgia and Calgary, Alberta, of approximately $400 million ~~increase~~ in ~~interest expense~~annual revenue, the closure is part of DIRTT’s ongoing focus on realigning the organization, increasing efficiency, and ~~$3.4~~improving profitability. Non-cash impairment charges related to Rock Hill Facility equipment of $8.0 million ~~of reorganization costs.~~has been recorded in the three months ended September 30, 2023.

•

Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the third quarter of ~~2022~~2023 was $5.3 million or 10.6%, an improvement of $10.7 million from a $5.4 million loss or (11.6)%~~, an improvement of $7.9 million from a $13.3 million loss or (39.1)%~~ for the third quarter of ~~2021~~

2022. This improvement was driven by the price increases and ~~an improvement of $4.0 million from a $9.4 million loss or (21.1)% for~~improved product mix, as well as the ~~second quarter of 2022.~~cost reduction measures taken by the Company over the past twenty four months.

•

~~The Company used approximately $12.5~~Approximately $1.9 million of cash was generated by operating activities in the third quarter of 2023 compared to ~~$21.3~~$10.7 million ~~and $19.1 million in the first and second quarter 2022, respectively. This included approximately $3.4 million in the quarter ($15.1 million year to date)~~ of ~~reorganization costs. Excluding these amounts, net of working capital,~~ cash used ~~would have been $9.1 million~~ in the third quarter of 2022, ~~compared to $16.2~~with cash increasing $0.6 million ~~and $12.6 million in the first and second quarter of 2022, respectively.~~

•

On November 14, 2022, the Company entered into a Private Placement of 8.8 million shares to the two largest shareholders and all our directors and officers with expected proceeds of approximately $3.0 million, subject to certain pricing mechanisms, with an additional minimum aggregated value of $2.0 million committed to backstopping any rights offering occurring in the next twelve months.

•

~~The Company continues to evaluate certain non-dilutive, strategic cash initiatives expected to generate additional cash flows by early 2023.~~

~~Outlook~~

Third quarter 2022 revenues were in line with expectations and grew sequentially over the second quarter and the same period last year. As of October 1, 2022, our 12-month forward pipeline, which represents known projects and leads at various stages of maturation which our sales teams are working to convert into orders, increased by 10% to $395 million from $359 million at July 1, 2022. The increase is a function of the impact of our price increases, discussed above, and additional leads added to the pipeline. The pipeline comprises 63% commercial, 22% healthcare, 6% education and 9% government verticals The relative split between verticals remains consistent with pre-pandemic actual percentage results.

Overall, volumes have remained relatively consistent between the second and third quarters of 2022. While the increase in our sales pipeline is a positive indicator of the Company’s future revenue potential, we have been experiencing uneven demand flow in both lead and order conversion. Further, we have experienced higher than usual push out rates on orders, a trend that many other construction and product companies are seeing as well. We believe the primary factor has been jobsite readiness. Further, rising material input costs have forced many contractors to re-evaluate pricing and project profitability. These factors have all served to stretch construction schedules, and by extension, the timing at which our products are ordered. We believe these trends will normalize over time.

The Company’s current and immediate focus continues to be unlocking manufacturing capacity, improving revenues and profitability and accelerating the Company’s near-term progress towards cashflow breakeven and beyond, and managing liquidity. Under new leadership, the following actions have been, or are in the process of being, completed, and are discussed in more detail below:

•

~~Creating a more comprehensive, focused Project Enablement Team to provide first class support to our partners from quote to delivery.~~

•

~~Reestablishing bi-weekly communications and close collaboration with our Partner Advisory Council and monthly discussions with our entire partner network.~~

•

~~Identifying and taking steps to unlock manufacturing capacity through additions to our hourly workforce and implementation of manufacturing improvements.~~

•

~~Offering a suite of newly implemented incentives, including certain rebate and quick pay discount programs to our Construction Partners that are in good standing.~~

•

~~Evaluating several supply chain optimization projects that aim to improve Sales and Operational Planning and reduce slow moving and/or obsolete inventory items.~~

•

~~Tightly managing discretionary spend and overtime during periods of order volatility.~~

As a part of managing our working capital, we are working on managing our inventory levels, which built up during the year (primarily in aluminum extrusions). The increase in our inventory levels primarily reflects our difficulty in increasing order, and, therefore, actual production relative to expectations as previously described, but also reflects the increased cost of raw materials. As communicated in the second quarter, we have taken steps to moderate such supply and saw a drawdown of inventory by $2.0 millionoverall in the third quarter of ~~2022. As~~2023. Our cash flow has improved compared to earlier quarters due to improved gross margin, our cost reduction initiatives, strategic actions and careful working capital management.

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 ~~result of the steps mentioned, we are~~prefabricated interior solution provider. We have begun using these new measures as they better measure expected near term performance given our operating environment has been prone to ~~approaching monthly cashflow breakeven (see “–Liquidity~~change due to macroeconomic factors such as worksite labor availability, interest rate changes, and ~~Capital Resources").~~potential recessionary impacts on construction projects.

As ~~revenues improve, including~~of October 1, 2023, our twelve month forward pipeline is projecting a 9% growth year on year and a 15% growth from January 1, 2023, illustrated in the ~~effect~~table below.


	As at
	October 1, 2023		January 1, 2023		% Change			October 1, 2022		% Change
Twelve Month Forward Pipeline ($ 000s)
Commercial		192,773		141,293		36	%		146,306		32	%
Healthcare		39,230		55,719		(30	%)		67,008		(41	%)
Government		34,866		32,313		8	%		28,526		22	%
Education		16,235		17,201		(6	%)		17,524		(7	%)
		283,104		246,526		15	%		259,364		9	%
Leads (#)		999		721		39	%		678		47	%

Our Commercial segment has benefited from our positioning in Texas and Alberta and exposure to the energy sector. Our healthcare segment pipeline has returned to growth from the previous quarter after delivering several large healthcare projects. Due to the extended sales cycle of healthcare projects our twelve month pipeline experiences higher volatility than our other segments. Our full pipeline for healthcare projects continues to experience growth.

We are cautious on the ~~price increases above,~~timing of our Government and Education pipeline in the ~~cost reduction initiatives take hold, we expect~~forward twelve months due to the uncertainty and risk of a potential U.S. federal government shutdown. We continue to increase our penetration in K-12 education and grow a higher education presence in our Central and Southern regions.

We are constantly scrutinizing our pipeline and believe that our commercial initiatives are reflected in the increased pipeline size and lead activity.

Outlook

Through the first six months of 2023, we experienced continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. These conditions included layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings, resulting in certain projects that were planned earlier in the year being deferred or canceled. We note that we are exiting our seasonally strongest quarter and are entering our typically weaker winter period.

In response and as discussed in our previous quarterly reports on Form 10-Q, we identified and took action to reduce annualized overhead costs by $5.0 million during the first quarter of 2023. Further, on May 8, 2023, the Company reduced its salaried workforce, resulting in annualized savings of $2.6 million. One-time costs associated with these reductions, incurred in the second quarter of 2023, were approximately $0.7 million.

The trend of economic uncertainty has continued into the third quarter of 2023. The conversation on “return to work” continues as some companies are mandating a hybrid “return to work” policy. Various inflation metrics have improved over the three months ended September 30, 2023, although there is no guarantee they will continue to do so.

We believe that wider macroeconomic conditions indicate we are in an uncertain late cycle environment with the near-term potential for deteriorating macroeconomic conditions. The increase in long term interest rates can potentially reduce demand for capital intensive projects in our Commercial, Healthcare, and Education segments. The AIA/Deltek Architecture Billings Index fell into contraction across all geographies in September. Regardless, we continue to focus on what is within our control: supporting our current partners, increasing penetration in targeted geographies, onboarding new Construction Partners, and new strategic partnerships. While we are benefiting from price stability in our input costs as well as a strengthening U.S. dollar, recent unrest in the Middle East may adversely impact our gross margins, and could further impact our pipeline, should energy prices return to 2022 levels.

We have made hard choices and meaningfully reduced our cost footprint and made great progress ~~toward~~lowering our estimated revenue breakeven point. We will continue to evaluate our cost structure and respond to the inflationary impacts to labor, materials and services in an ~~improvement in net loss~~efficient manner consistent with our goal to maintain future healthy gross profit and Adjusted EBITDA breakeven in the fourth quarter of 2022. Unrestricted cash and net working capital at September 30, 2022 was $6.8 million and $26.9 million, compared to $19.7 million and $31.6 million at June 30, 2022, respectively, and $60.3 million and $66.7 million at December 31, 2021, respectively. The Company’s asset backed credit facility, which is based upon a percentage of accounts receivable and inventory, remains undrawn at September 30, 2022 with approximately C$12.4 million ($9.0 million) available. The Company continues to focus on revenue growth and cost initiatives to positively affect DIRTT’s balance sheet, cash flow and profitability and expects to see a trend of increasing monthly working capital by year end.margins while improving our future liquidity.

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, 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 expense, foreign exchange gains and losses and impairment ~~expenses~~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 Quarterly Report, and a description of the calculation for each measure is included.


Adjusted Gross Profit	Gross profit before deductions for costs of under-utilized capacity, depreciation and amortization

Adjusted Gross Profit Margin	Adjusted Gross Profit divided by revenue

EBITDA	Net income before interest, taxes, depreciation and amortization

Adjusted EBITDA	EBITDA adjusted to remove foreign exchange gains or losses; impairment ~~expenses;~~charges; reorganization ~~expenses,~~expenses; stock-based compensation expense; government ~~subsidies,~~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.

Results of Operations

Three and Nine Months Ended September 30, ~~2022,~~2023, Compared to the Three and Nine Months Ended September 30, ~~2021~~2022

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

% Change

2022

2021

% Change

($ in thousands)

($ in thousands)

Revenue

46,747

34,098

37

129,734

104,665

24

Gross Profit(1)

7,008

2,450

186

16,571

15,044

10

Gross Profit Margin

15.0
%

7.2
%

12.8
%

14.4
%

Operating Expenses

Sales and Marketing

6,089

7,536

(19
)

21,094

21,770

(3
)
General and Administrative

6,542

7,546

(13
)

21,412

22,567

(5
)
Operations Support

2,321

2,374

(2
)

7,347

6,884

7

Technology and Development

1,695

2,146

(21
)

5,714

6,005

(5
)
Stock-Based Compensation

918

837

10

3,546

3,792

(6
)
Reorganization

3,426

-

100

12,281

-

100

Total Operating Expenses

20,991

20,439

3

71,394

61,018

17

Operating Loss

(13,983
)

(17,989
)

(22
)

(54,823
)

(45,974
)

19

Operating Margin

(29.9
)%

(52.8
)%

(42.3
)%

(43.9
)%

(1) Gross Profit for the three and nine month periods ended September 30, 2022 includes $1.0 million primarily related to the write off of inventory of discontinued product lines, and $1.0 million and $2.1 million, respectively of accelerated depreciation and amortization on software associated with discontinued product lines and the closure of the Phoenix Facility


	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2023			2022			% Change			2023			2022			% Change
	($ in thousands)									($ in thousands)
Revenue		49,537			46,747			6			130,998			129,734			1
Gross Profit(1)		17,065			7,008			144			40,304			16,571			143
Gross Profit Margin		34.4	%		15.0	%					30.8	%		12.8	%
Operating Expenses
Sales and Marketing		6,161			6,089			1			18,302			21,094			(13	)
General and Administrative		4,669			6,542			(29	)		16,003			21,412			(25	)
Operations Support		1,752			2,321			(25	)		5,564			7,347			(24	)
Technology and Development		1,239			1,695			(27	)		4,055			5,714			(29	)
Stock-Based Compensation		1,069			918			16			2,543			3,546			(28	)
Reorganization		321			3,426			(91	)		2,857			12,281			(77	)
Impairment charge on Rock Hill Facility		7,952			-			100			7,952			-			100
Related Party Expense		-			-		NA				1,524			-			100
Total Operating Expenses		23,163			20,991			10			58,800			71,394			(18	)
Operating Loss		(6,098	)		(13,983	)		(56	)		(18,496	)		(54,823	)		(66	)
Operating Margin		(12.3	)%		(29.9	)%					(14.1	)%		(42.3	)%
Government subsidies		-			7,141			(100	)		236			7,765			(97	)
Gain on sale of software and patents		-			-		NA				6,145			-			100
Foreign exchange (loss) gain		822			1,356			(39	)		(59	)		1,870			(103	)
Interest income		161			19			747			271			50			442
Interest expense		(1,196	)		(1,276	)		(6	)		(3,636	)		(3,935	)		(8	)
		(213	)		7,240			103			2,957			5,750			(49	)
Net loss before tax		(6,311	)		(6,743	)		6			(15,539	)		(49,073	)		68
Current and deferred income tax recovery		-			(16	)		100			-			(16	)		100
		-			(16	)		100			-			(16	)		100
Net loss		(6,311	)		(6,727	)		6			(15,539	)		(49,057	)		68
(1) For the three and nine months ended September 30, 2022, $1.0 million primarily related to the write off of inventory of discounted product lines, and $1.0 million and $2.1 million, respectively 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.

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change		2023		2022		% Change			2023		2022		% Change
	($ in thousands)						($ in thousands)						($ in thousands)							($ in thousands)
Product		39,092		29,569		32		110,383		91,867		20		43,132		39,092		10			113,323		110,383		3
Transportation		5,022		3,294		52		13,878		9,277		50		4,767		5,022		(5	)		13,169		13,878		(5	)
License fees from Construction Partners		193		191		1		588		539		9		196		193		2			613		588		4
Total product revenue		44,307		33,054		34		124,849		101,683		23		48,095		44,307		9			127,105		124,849		2
Installation and other services		2,440		1,044		134		4,885		2,982		64		1,442		2,440		(41	)		3,893		4,885		(20	)
		46,747		34,098		37		129,734		104,665		24		49,537		46,747		6			130,998		129,734		1

~~During the quarter ended September 30, 2022, revenue was $46.7 million, an increase of $12.6 million or 37% from the same period~~Beginning in ~~2021. This also reflects a $2.0 million or 5% increase in revenues from the second quarter of 2022. Revenue for the nine months ended September 30, 2022 was $129.7~~million, an increase of $25.1 million or 24% from the nine months ended September 30, 2021. The first quarter of 2022 marked the transition of the COVID-19 pandemic to an endemic with the broad easing of health restrictions, including work-from-home mandates, across North America.While the resurgence in COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, the Company and our Construction Partners2020, we experienced ~~an uptick in planning activity and opportunity growth in our commercial vertical which began to translate into orders in March 2022 that has continued into the third quarter.~~

~~In response to~~ significant increases in ~~the~~nearly all of our material input costs, ofincluding raw materials, shipping materials, labor, and ~~freight, effective~~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%~~, with the benefits largely expected to be realized in 2022.~~. On February 17, 2022, we implemented 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. ~~Our third quarter product sales reflected approximately 40%~~These increases have improved revenue and ~~15%~~profitability through better recovery of ~~these June and July price increases, respectively. We expect~~ the ~~price increases~~material input costs previously discussed.

Revenue for the nine months ended September 30, 2023, was $131.0 million, an increase of $1.3 million compared to ~~be further realized~~$129.7 million in the ~~fourth~~comparative period of 2022. The first nine months of 2023 were impacted by macroeconomic conditions, including layoffs in the tech sector and rising interest rates, both of which have had an impact on our pipeline. For example, one large project with a customer in the technology sector that was originally scheduled for the first quarter of ~~2022.~~2023 was deferred indefinitely. During the ~~third~~ quarter ~~DIRTT also terminated the 20% pilot price reduction program on its Reflect and Inspire product lines that it announced in February 2022 as a result~~ended September 30, 2023, revenue was $49.5 million, an increase of ~~the combination of increased aluminum prices and the unanticipated impact that the increased demand placed on our productive capacity due~~$2.8 million compared to the ~~immaturity~~comparative period of ~~production processes related to these product lines. In August~~ 2022 ~~with consideration to the production process and profitability, we discontinued the Reflect product line.~~of $46.7 million.

Installation and other services revenue was ~~$2.4 million and $4.9~~$1.4 million for the ~~three~~quarter ended September 30, 2023 compared to $2.4 million in the quarter ended September 30, 2022, and $3.9 million in the nine months ended September 30, ~~2022 respectively,~~2023 compared to ~~$1.0 million and $3.0~~$4.9 million in the same period of ~~2021.~~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, and accordingly, we are not anticipating significant growth in this revenue stream.

Our success is partly dependent on our ability to profitably develop our Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. At September 30, ~~2022,~~2023, we had ~~69 (December~~71 (September 30, 2022: 69; December 31, ~~2021: 69)~~2022: 67) Construction Partners servicing multiple locations. During ~~2021 and~~ the first quarter of 2022, we made several changes and upgrades to our Construction Partner network, expanding our relationships with new and existing partners and ending our relationships with others. In February 2022,nine months ended September 30, 2023, we announced the ~~establishment~~expansion of ~~a Partner Advisory Council to provide a greater link with~~seven of our DIRTT Construction Partners ~~and end clients who they service. The Partner Advisory Council will offer advice on sales and marketing effectiveness, product issues and~~into new ~~market needs, market conditions, competitive landscape, marketing support and other related areas~~markets as we expand the reach of ~~mutual interest.~~DIRTT products in North America.

We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. While the commercial sector has been challenged by the macroeconomic factors discussed previously, we are seeing increased growth in our healthcare sector, as an increase in new construction starts and the heightened need for adaptability and flexibility in the years after COVID-19 have increased the demand for our products. We continue to see growth opportunities in the government and education sectors and have restructured our sales leadership function, prioritizing oversight of these verticals.

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


	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2023		2022		% Change			2023		2022		% Change
	($ in thousands)							($ in thousands)
Commercial		31,272		31,796		(2	)		82,154		85,458		(4	)
Healthcare		8,483		3,638		133			25,111		15,693		60
Government		4,606		3,358		37			10,581		11,680		(9	)
Education		3,538		5,322		(34	)		8,646		11,430		(24	)
License fees from Construction Partners		196		193		2			613		588		4
Total product revenue		48,095		44,307		9			127,105		124,849		2
Service revenue		1,442		2,440		(41	)		3,893		4,885		(20	)
		49,537		46,747		6			130,998		129,734		1


	For the Three Months Ended September 30,							For the Nine Months Ended September 30,							For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		% Change			2022		2021		% Change			2023		2022		2023		2022
	($ in thousands)							($ in thousands)							(in %)				(in %)
Commercial		31,796		20,805		53			85,458		55,981		53			65		72		65		69
Healthcare		3,638		5,017		(27	)		15,693		25,680		(39	)		18		8		20		13
Government		3,358		3,149		7			11,680		11,579		1			10		8		8		9
Education		5,322		3,892		37			11,430		7,904		45			7		12		7		9
License fees from Construction Partners		193		191		1			588		539		9
Total product revenue		44,307		33,054		34			124,849		101,683		23
Service revenue		2,440		1,044		134			4,885		2,982		64
		46,747		34,098		37			129,734		104,665		24
Total Product Revenue(1)																100		100		100		100

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

(in %)

(in %)

Commercial

72

63

69

56

Healthcare

8

15

13

25

Government

8

10

9

11

Education

12

12

9

8

Total Product Revenue(1)

100

100

100

100

(1)

Excludes license fees from Construction Partners.

Commercial revenues decreased by 2% from the prior year period. Healthcare revenues increased by ~~53%~~133% in the ~~three and nine month periods~~third quarter of 2023 from the same period of 2022. The quarter ended September 30, ~~2022~~2023 includes $2.1 million of revenue from ~~the same prior year periods, reflecting improving market conditions as health restrictions and work-from-home requirements ease and include one~~a large customer in the technology sector with revenue of $2.4 million and $7.9 million for the respective periods. Healthcare decreased by 27% and 39% in the three and nine months ended September 30, 2022, respectively, from the same periods in 2021.healthcare customer. Such sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. ~~In 2021, we had one large~~Government revenues in the third quarter of 2023 increased by 37% from the prior year period. Similar to healthcare, ~~project with revenue of $6.9 million which did not recur in 2022.~~

government revenues tend to be larger individual projects. Education sales in the ~~three and~~third quarter of 2023 decreased 34% from the same period of 2022. The education sector included a higher magnitude of smaller projects in the third quarter of 2023 than in the third quarter of 2022.

For the nine months ended September 30, ~~2022~~2023 commercial revenues decreased by 4% from the prior year period. Healthcare revenues increased by ~~37% and 45%, respectively, over~~60% in the first nine months of 2023 from the same period of 2022. Government revenues decreased by 9% from the prior ~~periods. At~~year period. Education sales for the beginning of the pandemic, education spending effectively paused with many institutions suspending in-person classes. There were no individually significant education projects and the increases represent higher volumes of projects due to the easing of health restrictions and many students returning to in-person learning. Government revenues in the three and nine months ended September 30, ~~2022 increased by 7%~~2023 were down 24% from 2022. Both the healthcare and ~~1%, respectively, over the prior year periods.~~education sectors included a higher magnitude of smaller projects in 2023 than 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:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change		2023		2022		% Change			2023		2022		% Change
	($ in thousands)						($ in thousands)						($ in thousands)							($ in thousands)
Canada		7,191		4,405		63		19,859		11,860		67		5,665		7,191		(21	)		14,577		19,859		(27	)
U.S.		39,556		29,693		33		109,875		92,805		18		43,872		39,556		11			116,421		109,875		6
		46,747		34,098		37		129,734		104,665		24		49,537		46,747		6			130,998		129,734		1

Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. ~~In the~~The third quarter ~~ended September 30, 2020, revenues from Canada fell~~of 2023 included a higher volume of sales to ~~9% of total sales while sales to~~customers in the United States ~~increased~~compared to ~~91%. The geographical split for~~Canada resulting in 11% of sales to Canada with the ~~first three quarters of 2022 began to return to historical averages and reflects the easing of health restrictions in Canada which occurred later than~~rest in the United States.

Sales and Marketing Expenses

Sales and marketing expenses ~~decreased~~increased by ~~$1.4 million and $0.7~~$0.1 million to ~~$6.1 million and $21.1~~$6.2 million for the three ~~and nine~~ months ended September 30, ~~2022,~~2023, from ~~$7.5 million and $21.8~~$6.1 million for the three ~~and nine~~ months ended September 30, ~~2021 respectively.~~2022. The ~~decrease~~increase was ~~largely related~~driven by higher commissions costs offset by lower travel and entertainment costs, marketing costs, and building expenses.

Sales and marketing expenses decreased by $2.8 million to ~~a decrease of $1.3~~$18.3 million ~~and $2.2 million~~ for ~~the three and nine months ended September 30, 2022, respectively, in salaries and benefits costs. The decrease in~~ the nine months ended September 30, ~~2022 was offset by~~2023 from $21.1 million from the same period of 2022. The decreases were largely related to a ~~$1.5 million increase in travel, meals~~realignment of back office support and ~~entertainment expenses as business activity has increased~~territory coverage and ~~restrictions on travel have eased.~~cost structure with current demand levels.

General and Administrative Expenses

General and administrative expenses decreased ~~$1.0 million and $1.2~~by $1.9 million to ~~$6.5~~$4.7 million ~~and $21.4 million~~ for ~~the three and nine months ended September 30, 2022 from $7.5 million and $22.6 million for the three and nine months ended September 30, 2021. The decrease in~~ the three months ended September 30, ~~2022~~2023 from $6.5 million for the three months ended September 30, 2022. The decrease was primarily related to ~~lower~~a decrease in professional services costs of $1.0 million, a $0.2 million decrease in office costs, a $0.2 million decrease in communications costs and a $0.5 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of our cost ~~savings initiatives and lower professional services costs.~~ reduction initiatives.

For the nine ~~month period~~months ended September 30, ~~2022, approximately~~2023, general and administrative expenses decreased by $5.4 million to $16.0 million from $21.4 million driven by a $4.1 million reduction in professional services costs, which included $1.8 million related to the costs of ~~incremental professional fees associated with~~ the contested ~~election of directors was offset by lower salaries~~director elections, a $0.6 million reduction in office and ~~benefits cost.~~communication costs and a $0.7 million reduction in depreciation.

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 decreased by ~~$0.1~~$0.6 million from ~~$2.4 million to~~ $2.3 million infor the three months ended September 30, 2022 ~~from~~to $1.8 million for the ~~same period of 2021.~~three months ended September 30, 2023. The decrease was primarily due to ~~reduced travel~~a $0.4 million decrease in salaries and benefits costs inassociated with the ~~quarter.~~

planned headcount reductions as part of our cost reduction initiatives. Operations support expenses ~~increased $0.5 million from $6.9~~decreased $1.8 million for the nine months ended September 30, ~~2021~~2023 to $5.6 million from $7.3 million ~~for~~in the ~~nine months ended September 30, 2022. The increase was due~~same period of 2022 mostly related to a $1.6 million decrease in salaries and benefits capitalized to internal projects of $0.4 million with the completion of the Rock Hill Facility and the DIRTT Experience Centre ("DXC") in Dallas and an increase in salaries and benefits of $0.1 million for the nine month period ended September 30, 2022 compared to the previous year same period.costs.

Technology and Development Expenses

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

Technology and development expenses decreased by $0.5 million to $1.2 million for the three ~~and nine month period~~months ended September 30, 2023, compared to $1.7 million for the three months ended September 30, 2022, ~~decreased by $0.5 million and $0.3 million, respectively, from the prior period costs to $1.7 million and $5.7 million. The decrease was~~primarily related to ~~reductions in~~decreased salaries and benefits ~~offset by lower capitalized~~ costs ~~due to fewer internal projects.~~associated with the planned headcount reductions as part of our cost reduction initiatives. For the nine months ended September 30, ~~2022, professional service fees also~~2023, technology and development costs decreased by ~~$0.2~~$1.7 million ~~compared~~ to $4.1 million from $5.7 million in the ~~prior year period.~~same period of 2022 related to a decrease in salaries and benefits costs and an increase in capitalized software development costs.

Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, ~~2022~~2023 was $1.1 million and $2.5 million, respectively, compared to $0.9 million and $3.5 million ~~compared to $0.8 million and $3.8 million for~~in the same periods ~~in 2021.~~of 2022. The movement in this expense was largely ~~the impact of~~due to grants of RSUs toand share awards which occurred in the ~~Company's employees, including those~~first quarter of 2022 but in 2023 were granted in the second quarter. Grants for RSUs in lieu of cash compensation to the Company’s ~~former~~ interim Chief Executive Officer in ~~January~~ 2022 ~~and~~were not repeated in 2023. DSUs were granted to the Board of Directors, ~~lowered~~but was offset by the impact of fair value adjustments on cash settled awards as a result of our share price decreasing during the ~~quarter and~~ nine months ended September 30, ~~2022. The Board of Directors receives 100% of their remuneration in DSUs.~~2023.

Reorganization

Reorganization expenses for the quarter of $0.3 million decreased from $3.4 million in the prior period. Current quarter costs relate primarily to movement of inventory from the Rock Hill Facility and termination costs associated with actions taken to streamline our back office and operational support functions, as discussed herein and in our quarterly reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023, which are expected to contribute $2.6 million in annualized savings. Second quarter of 2022 reorganization costs were driven by the closure of Phoenix Facility and the one-time costs associated with a reduction of salaried workforce and two executives.

~~For~~Reorganization costs decreased to $2.9 million for the nine months ended September 30, 2023 from $12.3 million for the same period of 2022. Nine month costs in 2023 relate primarily to termination costs and costs to move materials from Rock Hill to Calgary, while the costs in 2022 relate to expenditures in closing the Phoenix Facility and costs associated with workforce reductions and changes in management.

Impairment charge on Rock Hill Facility

On September 27, 2023, the Company decided to permanently close the Rock Hill Facility in South Carolina. The Company reassessed the useful lives of the manufacturing equipment resulting in an $8.0 million impairment charge in the three and nine months ended September 30, ~~2022, we incurred $3.4 million and $12.3 million in reorganization costs, respectively. Reorganization costs~~2023 ($nil for the quarter include termination benefits, and costs associated with the temporary suspension of the Rock Hill Facility. For the nine month period ended September 30, 2022, reorganization costs also include insurance costs incurred on change of control of the board, and costs associated with the closure of the Phoenix Facility.

We have undertaken several initiatives to align our manufacturing footprint with our current activity levels. This included the closure of the Phoenix Facility which was substantially completed in the second quarter of 2022, with related manufacturing to be undertaken by both our Savannah and Calgary aluminum facilities. Of the initial estimate of cost savings of approximately $2.4 million from this closure, we expect to realize annualized savings of approximately $1.0 million as $1.4 million of work force reductions were offset by additions in Calgary and Savannah due to increased demand. On August 23, 2022, we announced the temporary closure of our Rock Hill Facility, as the Calgary manufacturing facility has sufficient capacity to absorb production and meet expected demand for the near term.

Additionally, in February 2022, we announced a reduction of our salaried workforce including manufacturing and office positions which, along with other cost reduction initiatives, were expected to yield annualized savings of approximately $13.0 million. The reductions were followed by a further reduction of salaried positions, as announced in July 2022, and the temporary closure of our Rock Hill Facility, announced in August 2022, which are expected to result in approximately $5.0 million in annualized savings. Of these cost reduction initiatives, $14.0 million was implemented during the first three quarters of 2022, $3.0 million is expected to be implemented in the fourth quarter of 2022, and $1.0 million, comprised of certain manufacturing positions, has been deferred as we work to increase manufacturing headcount in light of increased demand.

~~Government Subsidies~~

During the quarter ended September 30, 2022, the Company determined it was eligible for the ERC in the United States established by Section 2301 of the CARES Act and has a filed a claim for $7.3 million payroll tax credits ($7.1 million net of expenses). The Company received subsidies of $3.4 and $7.5 million during the three and nine months ended September 30, 2022) to reduce the assets to their fair value less costs to sell certain assets being held for sale.

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 "Debt").

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 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 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 quarter ended September 30, 2023. The Company received $0.2 million of interest with the collection of the ERC during the nine months ended September 30, 2023.

Pursuant to amendments enacted as part of the 2021 ~~under~~ Canadian ~~government programs CEWS and CERS.~~federal budget, the Company was required to repay a portion of the Canadian Emergency Wage Subsidy ("CEWS") amounts received for any qualifying period commencing after June 5, 2021 where the aggregate compensation for “specified executives” (within the meaning of the CEWS) during the 2021 calendar year exceeds the aggregate compensation for “specified executives” during the 2019 calendar year. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of ~~previously-received~~ subsidies ~~were repaid~~was expected to be returned to the Canadian authorities in the second quarter of 2022. The amount was fully provided for in the third quarter of 2021 and in the first quarter of 2022 and the Company reversed a $0.6 million incremental provision related to this that was no longer ~~necessary~~necessary.

Gain on sale of software and patents

On May 9, 2023, we entered into the Co-Ownership Agreement and Partial Patent Assignment Agreement with AWI. The agreements provide 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 ~~first quarter~~rights, title and interests in certain intellectual property rights in a portion of ~~2022. The last claim period~~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. We also agreed under the ~~CEWS~~Co-Ownership Agreement to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.0 million, which is expected to be received by early 2024. The Co-Ownership Agreement provides that we and ~~CERS programs expired on October 23, 2021.~~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 Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.

The $10.0 million of proceeds from the Co-Ownership Agreement was received during the second quarter of 2023. In accordance with US GAAP, the proceeds were first applied to the net book value of the related cost of software and patents (other assets) and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $0.9 million was received during the quarter ended June 30, 2023 as prepayment under the ARMSA. 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.

Interest ~~expense~~Expense

Interest expense ~~increased~~decreased by ~~$0.5~~$0.1 million from ~~$0.8~~$1.3 million ~~for~~in the ~~three months~~quarter ended September 30, 2022 to ~~$1.3~~$1.2 million ~~compared to~~in the quarter ended September 30, ~~2021~~2023 and by ~~$1.8~~$0.3 million ~~from $2.1 million in~~for the nine months ended September 30, ~~2022~~2023 to ~~$3.9~~$3.6 million ~~compared~~due to ~~September 30, 2021. The increased interest expense is a result of~~foreign exchange impacts and the ~~issuance of C$35.0 million ($27.4 million) of Debentures~~decrease in ~~December 2021 and draws on the Leasing Facilities.~~equipment lease balances due to principal repayments.

Income Tax

The provision for income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. ~~The Company incurred a minimal income tax recovery during the three and nine months ended September 30, 2022, compared to a $0.1 million and $0.3 million expense for the same period of 2021.~~ As at September 30, ~~2022~~2023 the Company had a valuation allowance of ~~$28.1~~$33.4 million (December 31, ~~2021 $17.3~~2022: $29.8 million) against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at September 30, ~~2022,~~2023, we had C$~~107.2~~ 110.9

million of non-capital loss carry-forwards in Canada and ~~$49.5~~$55.7 million in the United States. These loss carry-forwards will begin to expire in 2032.

Net Loss

Net loss decreased to ~~$6.7~~a $6.3 million loss or ~~$0.08~~$0.06 net loss per share in the three months ended September 30, ~~2022~~2023 from a net loss of ~~$15.4~~$6.7 million or ~~$0.18~~a $0.08 net loss per share for the ~~quarter~~three months ended September 30, ~~2021.~~2022. The ~~decreased~~lower net loss is primarily the result of ~~a $4.6 million increase in~~the higher gross profit margin of $10.1 million, a ~~$4.2 million increase in government subsidies and a $0.8 million increase in foreign exchange gain. These were offset by a $0.6~~$2.2 million increase in operating expenses ~~(which includes $3.4~~(including an $8.0 million impairment charge on the closure of the Rock Hill Facility, offset by a $3.1 million reduction in reorganization ~~expenses)~~costs), ~~and~~ a ~~$0.5~~$0.1 million increase in interest ~~expense.~~income and $0.1 million decrease in interest expense, offset by a $0.5 million decrease in foreign exchange gain and a $7.1 million government subsidy in 2022 that did not recur.

Net loss ~~increased~~decreased to $15.5 million or $0.15 net loss per share in the nine months ended September 30, 2023 from a net loss of $49.1 million or ~~$0.56~~$0.57 net loss per share for the nine months ended September 30, ~~2022 from a net loss of $37.7 million or $0.44 net loss per share for the nine months ended September 30, 2021.~~2022. The ~~increased~~decreased loss is primarily the result of a ~~$10.4~~$23.7 million increase in gross profit, a $12.6 million decrease in operating expenses ~~(which includes $12.3~~(including a $9.4 million ofdecrease in reorganization expenses, and a decrease of $1.8 million of incremental professional fees offset by an $8.0 million impairment charge on the Rock Hill Facility, as described previously), a ~~$1.8~~one-time gain of $6.1 million on the sale of software and patents, a $0.3 million decrease in interest expense, a $0.2 million increase in interest ~~expense~~income, offset by a $1.9 million increase in foreign exchange loss and a ~~$2.7~~$7.5 million decrease in government ~~subsidies offset by an increase in gross margin of $1.5 million and an increase in foreign exchange gain of $1.6 million.~~subsidies.

EBITDA and Adjusted EBITDA for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022

The following table presents a reconciliation for the ~~third quarter and year to date~~ results of ~~2022~~the three and ~~2021~~nine months ended September 30, 2023 and 2022 of EBITDA and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure for the periods presented:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
	($ in thousands)						($ in thousands)
Net loss for the period		(6,311	)		(6,727	)		(15,539	)		(49,057	)
Add back (deduct):
Interest expense		1,196			1,276			3,636			3,935
Interest income		(161	)		(19	)		(271	)		(50	)
Income tax recovery		-			(16	)		-			(16	)
Depreciation and amortization		2,017			4,236			7,216			12,202
EBITDA		(3,259	)		(1,250	)		(4,958	)		(32,986	)
Foreign exchange (gain) loss		(822	)		(1,356	)		59			(1,870	)
Stock-based compensation		1,069			918			2,543			3,546
Government subsidies		-			(7,141	)		(236	)		(7,765	)
Related party expense (2)		-			-			1,524			-
Reorganization expense		321			3,426			2,857			12,281
Gain on sale of software and patents(3)		-			-			(6,145	)		-
Impairment charge on Rock Hill Facility (3)		7,952			-			7,952			-
Adjusted EBITDA		5,261			(5,403	)		3,596			(26,794	)
Net Loss Margin(1)		(12.7	)%		(14.4	)%		(11.9	)%		(37.8	)%
Adjusted EBITDA Margin		10.6	%		(11.6	)%		2.7	%		(20.7	)%

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

($ in thousands)

($ in thousands)

Net loss for the period

(6,727
)

(15,419
)

(49,057
)

(37,656
)
Add back (deduct):

Interest Expense

1,276

823

3,935

2,117

Interest Income

(19
)

(20
)

(50
)

(62
)
Income Tax expense (recovery)

(16
)

88

(16
)

347

Depreciation and Amortization

4,236

3,815

12,202

10,638

EBITDA

(1,250
)

(10,713
)

(32,986
)

(24,616
)
Foreign Exchange Gains

(1,356
)

(526
)

(1,870
)

(286
)
Stock-Based Compensation

918

837

3,546

3,792

Government Subsidies

(7,141
)

(2,935
)

(7,765
)

(10,434
)
Reorganization Expense

3,426

-

12,281

-

Adjusted EBITDA

(5,403
)

(13,337
)

(26,794
)

(31,544
)
Net Loss Margin(1)

(14.4
)%

(45.2
)%

(37.8
)%

(36.0
)%
Adjusted EBITDA Margin

(11.6
)%

(39.1
)%

(20.7
)%

(30.1
)%

(1)

Net loss divided by revenue.

(2) The related party transaction is a non-recurring transaction that is not core to our business and is excluded from the Adjusted EBITDA calculation (Refer to Note 16 of the consolidated interim financial statements).

(3) The gain on sale of software and patents is a non-recurring transaction and the impairment charge on Rock Hill Facility are not core to our business and are excluded from the Adjusted EBITDA calculation (Refer to Note 7 and Note 6, respectively, of the consolidated interim financial statements).

For the three months ended September 30, ~~2022,~~2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by ~~$7.9~~$10.7 million to $5.3 million or 10.6% from a $5.4 million loss or (11.6)% ~~from $13.3 million loss or (39.1)%~~ in the same period of ~~2021.~~2022. This primarily reflects ~~a $5.4~~an $8.2 million increase in Adjusted Gross Profit, ~~$2.1~~a decrease of $1.0 million of professional fees, a $1.1 million decrease in salaries and benefits costs, ~~due to headcount reductions,~~a $0.6 million decrease in office, building and communication costs, and a $0.3 million decrease in travel and entertainment costs in the quarter, offset by a $0.5 million ~~reduction of professional fees and other cost reductions.~~increase in commissions.

For the nine months ended September 30, ~~2022,~~2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by ~~$4.8~~$30.4 million to $3.6 million or 2.7% from a $26.8 million loss or (20.7)% ~~from $31.5 million loss or (30.1)%~~ in the same period of ~~2021.~~2022. This primarily reflects a ~~$2.2~~$19.6 million increase in Adjusted Gross Profit, a decrease of $4.1 million of professional fees, a $5.1 million ~~reduction~~decrease in salaries and benefits costs, ~~due to headcount reductions (offset by~~ a ~~reduction in capitalized salaries of $1.1~~$0.8 million due to fewer internal projects), $1.8 million of costs of underutilized capacity in the first quarter of 2021 that did not recur in 2022, offset by $1.8 million of incremental professional fees as described previously and $1.5 million increasedecrease in travel and entertainment costs, ~~due to increased business activity~~a $0.6 million decrease in marketing costs and ~~easing of travel restrictions.~~a $1.2 million decrease in building, office and communications costs.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022

The following table presents a reconciliation for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021			2023			2022			2023			2022
	($ in thousands)						($ in thousands)						($ in thousands)						($ in thousands)
Gross profit		7,008			2,450			16,571			15,044			17,065			7,008			40,304			16,571
Gross profit margin		15.0	%		7.2	%		12.8	%		14.4	%		34.4	%		15.0	%		30.8	%		12.8	%
Add: Depreciation and amortization expense		3,132			2,321			8,792			6,383			1,231			3,132			4,656			8,792
Add: Costs of under-utilized capacity		-			-			-			1,756
Adjusted Gross Profit		10,140			4,771			25,363			23,183			18,296			10,140			44,960			25,363
Adjusted Gross Profit Margin		21.7	%		14.0	%		19.6	%		22.1	%		36.9	%		21.7	%		34.3	%		19.6	%

There have been significant and industry wide inflationary increases in the realized cost of materials, transportation, labor and packaging which have impacted DIRTT since the second half of 2021. In addition, in the second quarter and in response to a sustained increase in demand that began in the first quarter of 2022, the Company began efforts to increase its manufacturing labor headcount but experienced the ongoing effects of a tight labor market. This has made it more difficult than expected to attract and retain skilled labor, particularly at our Savannah manufacturing facility, and as a result the Company increased hourly rates by 6% on average to increase its overall competitiveness. To address these cost increases, the Company implemented a series of price increases starting with a 6.5% increase effective November 1, 2021, an additional 5% price increase effective June 1, 2022 and a further 10% price increase effective July 21, 2022 and continues to monitor raw material, labor and other costs to determine whether further action is necessary.

~~Gross~~For the quarter ended September 30, 2023, gross profit and gross profit margin increased to $17.1 million or 34.4% from $7.0 million or 15.0% for the ~~three months ended September 30, 2022, from $2.5 million or 7.2% for the three months ended September 30, 2021.~~prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin increased 80% to $18.3 million or 36.9% for the three months ended September 30, 2023, from $10.1 million or 21.7% for the three months ended September 30, ~~2022, from $4.8 million or 14.0% for~~2022.

For the ~~three~~nine months ended September 30, 2021. The 7.7% increase in Adjusted Gross Profit Margin was a result of improved labor efficiency which benefited gross profit by 4.9%, and the benefit of higher revenues on fixed costs which improved gross profit by 5.1%, offset by a $1.0 million charge, or 2.1% of gross profit, due to the write down of inventory related to Reflect and other discontinued product lines. Materials, transportation and other variable costs reduced gross profit by 0.6% as our price increases realized to date did not fully offset cost increases. We expect a higher realization of enacted price increases from the fourth quarter. Gross profit was impacted by a $1.0 million increase in depreciation and amortization in the quarter on account of accelerated depreciation on software associated with discontinued product lines. Gross profit for the third quarter benefited by approximately $0.6 million from the impact of the weakening Canadian dollar on U.S. dollar reported results, which is included in the above variances.

~~For the nine month period ended September 30, 2022,~~2023, gross profit and gross profit margin increased to $40.3 million or 30.8% from $16.6 million or 12.8% ~~from $15.0 million or 14.4%~~ for the ~~nine month period ended September 30, 2021.~~prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin ~~decreased~~increased 77% to $45.0 million or 34.3% for the nine months ended September 30, 2023, from $25.4 million or 19.6% for the nine months ended September 30, ~~2022, from $23.2 million or 22.1%~~2022. Gross profit for the nine months ended September 30, ~~2021.~~ 2022 included $1.1 million of accelerated depreciation and amortization arising from the change in useful lives of the Phoenix Facility's equipment.

The ~~2.6% decrease~~improvement in Adjusted Gross Profit was a result of ~~higher materials, transportation, packaging~~improved product mix, a reduction in fixed costs, management of labor hours throughout the period and ~~other variable costs which reduced gross profit by 4.4%. As previously discussed, price increases that were put in place over~~ the ~~last twelve months lagged cost increases. We expect~~impact of the price increases to ~~be further realized in~~offset the ~~fourth quarter which will reduce variable costs as a percentage of revenues closer to historical levels. As a result of higher sales activities, gross profit benefited by 1.6%~~inflationary impacts on material costs. Labor decreased $0.7 million and ~~2.6% on utilization of labor~~$4.0 million and fixed costs ~~respectively. Labor costs increased $2.3~~decreased $1.1 million and $2.9 million, respectively, for the ~~year-to-date period~~quarter and nine months ended September 30, 2023 as we ~~incurred incremental costs~~closed our Phoenix Facility during the second quarter ~~associated with moving production~~of 2022 and temporarily suspended operations in our Rock Hill Facility in the third quarter of 2022, as well as cost reduction initiatives taken impacting our overheads. Idle facility costs incurred to ~~Calgary and Savannah on closure~~the suspension of ~~the Phoenix Facility, rate increases, and adding capacity following an improvement in demand. Fixed costs increased $1.6 million due to cost inflations and the impact of adding~~operations at the Rock Hill Facility ~~in 2021 to the fixed cost base. In the current year we incurred a $0.8~~of $0.4 million ~~charge, or 0.6% of gross profit, due to the write down of inventory related to Reflect~~ and ~~other discontinued product lines. Prior year Adjusted Gross Profit benefited from the removal of $1.8~~$1.4 million or 1.7% Adjusted Gross Profit impact, on under-utilized capacity not captured in product costs. Gross profit was impacted by $2.1 million of incremental depreciation and amortization on the acceleration of useful lives associated with discontinued product lines and the Phoenix Facility. Gross profit for the ~~year to date benefited by approximately $0.9 million from the impact of the weakening Canadian dollar on U.S. dollar reported results, which is~~three and nine months ended September 30, 2023, respectively, and are included ~~in the above variances.~~

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 2021, we experienced the full impact of the slowdown in non-residential construction activity on our business. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first quarter of 2021 despite the shortfall in revenues relative to capacity. As a result, in the first quarter of 2021 we separately classified $1.8 million as costs related to our under-utilized capacity (1.2% of 2021 first quarter gross profit margin) in cost of sales. ~~For the remaining quarters of 2021 and 2022, we did not have abnormal excess capacity as our workforce was better aligned with current production volumes.~~

Liquidity and Capital Resources

~~Cash and cash equivalents~~As at September 30, ~~2022 totaled $6.8~~2023, the Company had $19.5 million ~~a decrease~~ of $53.5 million from December 31, 2021. The decrease in cash over the nine month period primarily reflects the impact of $47.5 million cash used in operations, of which $1.8 million related to one-time costs associated with the contested director election and $12.3 million of reorganization costs. In addition, capital expenditures totaled $3.6 million and scheduled Leasing Facilities repayments totaled $1.9 million. These outflows were offset by a C$0.9 million ($0.7 million) draw under the Canada Leasing Facility received in April 2022.

The impact of COVID-19 on the Company’s sales and operations has been severe, including a contraction of demand since the beginning of the pandemic and more recently, significant inflation on raw material costs. This has resulted in a significant usage of cash which we have financed through existing cash on hand and ~~financings~~C$14.6 million ($10.8 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 ~~described further below. Furthermore, we have implemented multiple initiatives to reduce our overall fixed cost base, including~~at December 31, 2022. Through the ~~closure~~first nine months of ~~our Phoenix Facility in~~fiscal 2023, the second quarter of 2022, reduction in our hourly headcount in 2021 and salaried headcount reductions and other cost savings initiatives in February 2022 and July 2022. In August 2022 we announced the temporary suspension of operations at the Rock Hill Facility as we have sufficient capacity at our other facilities to manage current demand. This suspension of operations will reduce costs in the interim.Company generated $4.7

3132

million in cash flow from operations, compared to a cash usage of $47.5 million over the first nine months of fiscal 2022. The Company benefited from the receipt of $7.3 million of government subsidies during the first half of 2023.

We have ~~also~~ implemented ~~three~~multiple price increases to mitigate the ~~inflationary effect, comprised~~impact of ~~6.5% effective November 1, 2021, 5% effective June 1, 2022 and a further 10% effective July 21, 2022. We continue to monitor the cost of our~~inflation on raw materials and ~~labor~~improve liquidity during the past two years. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to ~~determine whether further price increases are warranted. Since~~stabilize our cash usage to operate the business. Gross profit for the nine months ended September 30, 2023 was $40.3 million, or 30.8% compared to the same period of 2022, which generated gross profit of $16.6 million, or 12.8%.

Over the past twelve months, 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 $10.9 million of cash. Second, during March ~~2022, however, the Company and its~~2023, we entered into an agreement to sublease our Dallas “DXC” to one of our Construction Partners ~~have experienced an increase~~ in ~~demand, particularly within its commercial~~that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and ~~education verticals, with the broad lifting~~other costs as of health restrictions across North America. In response the Company began efforts to increase manufacturing headcount within its Calgary and Savannah facilities to enable it to meet both near-term demand and anticipated sustained increases. We have increased wage rates in both Canada and the United States to increase our competitiveness in what is proving to be a tight labor market, particularly in Savannah.April 1, 2023, through December 31, 2024, providing us annualized savings of approximately $1 million. We are ~~also taking steps~~continuing to decongest our manufacturing processes to return productivity to pre-pandemic levels. We have started to realize the benefits of the price increases, manufacturing headcount additions, training and debottlenecking in the latter part of the third quarter and expect to see further benefits in the fourth quarter.

The cost reductions and price increases discussed above positively benefited our third quarter results, and have reduced our rate of cash usage. We expect a greater impact of these actions to be realized in the fourth quarter and thereafter. While these actions, combined with an increasing project pipeline is promising, we continue to see unpredictability in our pace of orders.

Accordingly, we are taking several strategic actions to improve our balance sheet in the short term. First, we have determined our eligibility for the ERC for the first three quarters of 2021 and have filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). Second, we have certainevaluate other properties ~~that are currently owned that we are evaluating~~ for sale and ~~leasing back. We do not intend to vacate these premises as they still serve a valuable aspect of~~leaseback or sublease opportunities, including our value proposition, but we expect to receive a one-time cash payment, in exchange for future rent payments. Third, historically we have licensed the use of ICE software to certain strategic partners for use in their business,Rock Hill Facility and DIRTT has provided licensing and developer software support for these counterparties. We are in the process of evaluating multiple initiatives related to the further use of ICE software by third parties. We expect these strategic initiatives to result in positive cash inflows in ~~2023.~~

To2023 and 2024. Third, we completed a Private Placement (as defined herein) of common shares in November 2022, with certain significant shareholders and directors and officers of the Company to bridge ~~any~~ cash requirements ~~between now and~~before the completion and closing of ~~these~~the noted strategic ~~transactions, the~~transactions. The Company entered into irrevocable subscription agreements with its two largest shareholders, 22NW and 726 and all the directors and officers of the Company on November 14, 2022 to issue ~~up to 8.8~~8.7 million shares for gross ~~proceeds~~consideration of ~~approximately $3.0~~$2.8 million ~~based on the higher of the Nasdaq closing price~~(the "Private Placement"). The Private Placement closed on November ~~14, 2022, and the volume weighted average trading price of the common shares on the Toronto Stock Exchange for the 5 days following the announcement.~~30, 2022. In addition, in connection with the Private Placement, ~~the two shareholders,~~22NW and 726, or their principals, have irrevocably committed to backstopping any rights offering occurring by the Company inwithin twelve months of closing the ~~next twelve months~~Private Placement in the aggregate amount of $2.0 ~~million and the shortfall, if any, between the maximum anticipated gross proceeds under the Private Placement, being $3.0 million, and the actual gross proceeds received~~million.

While we are encouraged by the ~~Company.~~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 restructuring initiatives designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by 154 employees, or approximately 16% from January 2022 through September 2023. The reduced overhead has served to offset the impact from the macroeconomic headwinds experienced over the past year.

~~We believe completion~~Furthermore, the Company is evaluating a rights offering to raise additional capital, as described in the registration statement on Form S-1, filed on October 26, 2023 (File No. 333-275172) (the “S-1”) with the SEC (the “Rights Offering”), the proceeds of ~~these strategic transactions and the Private Placement will improve our balance sheet and accordingly confidence~~which, if pursued, are expected to be used for general corporate purposes, which may include investments in our business, ~~benefiting~~funding potential future cash needs or operating losses, funding working capital and capital expenditure needs, or reductions to our ~~pipeline conversion which will enable us to cross the threshold of activity which will get us to cashflow breakeven.~~outstanding indebtedness.

We have assessed the Company’s liquidity ~~using multiple downside and upside scenarios,~~as at September 30, 2023 taking into account ~~these circumstances,~~ our sales outlook for the next twelve months, ~~and actions in combination with~~our existing cash balances and available credit facilities ~~the strategic transactions~~ and ~~Private Placement discussed previously, and potential equity or debt financing.~~expected early settlements related to our Rock Hill Facility equipment lease. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next 12twelve months. However, a number of factors, including ~~our ability to satisfy~~ the ~~expected growth in pipeline demand and those~~macroeconomic factors discussed ~~below,~~above could adversely impact our liquidity over such period.

To the extent that existing cash and cash equivalents and available facilities ~~and increased liquidity from the aforementioned strategic actions~~ 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 ~~are confident in our ability to~~believe we can access capital markets when needed or under acceptable terms, there can be no ~~absolute~~ assurance we will be able to do so.

~~During 2021, we completed financings to increase our liquidity in light of the highly uncertain economic conditions caused by the pandemic.~~ In January 2021, we issued C$40.3 million of 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 the January Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. As at September 30, 2023, C$18.9 million of the January Debentures are held by a related party,

22NW. 22NW holds approximately 22.1% of our issued and outstanding common stock as of October 25, 2023. 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 the RBC Facility, a C$25.0 million senior secured revolving credit facility with RBC. 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 Extended RBC Facility has a borrowing base of C$15 million and a one year term. Available borrowings under the Extended RBC Facility at September 30, ~~2022~~2023 were C$~~12.4~~14.6 million ($~~9.0~~10.8 million).

InOn December 1, 2021, we issued C$35.0 million of the December Debentures for net proceeds after costs of C$32.7 million ($25.6 million). The December Debentures accrue interest at a rate of 6.25% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.20 per common share, or if not converted will mature and be repayable on the December Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. As at September 30, 2023, C$13.6 million of the December Debentures are held by a related party, 22NW.

The Company has a C$5.0 million Canada Leasing Facility of which C$~~4.5~~4.4 million ($~~3.4~~3.3 million) has been drawn, and a $14.0 million U.S. Leasing Facility of which $13.3 million has been drawn with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. In connection with the Company’s decision to close the Rock Hill Facility, we intend to settle the liability related to the U.S. Leasing Facility of $8.2 million in the next twelve months. With the settlement of this liability, we expect approximately $2.6 million to be released from restricted cash. On October 31, 2023, the Company paid off $1.0 million of the U.S. Leasing Facility.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

($ in thousands)

($ in thousands)

Net cash flows (used in) provided by operating activities

(10,667
)

(12,191
)

(47,509
)

(23,872
)
Net cash flows used in investing activities

(644
)

(2,210
)

(3,595
)

(12,556
)
Net cash flows (used in) provided by financing activities

(912
)

(520
)

(1,802
)

36,083

Effect of foreign exchange on cash, cash equivalents and restricted cash

(293
)

(130
)

(73
)

581

Net (decrease) increase in cash, cash equivalents and restricted cash

(12,516
)

(15,051
)

(52,979
)

236

Cash, cash equivalents and restricted cash, beginning of period

22,945

61,133

63,408

45,846

Cash, cash equivalents and restricted cash, end of period

10,429

46,082

10,429

46,082


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
	($ in thousands)						($ in thousands)
Net cash flows provided by (used in) operating activities		1,919			(10,667	)		4,687			(47,509	)
Net cash flows provided by (used in) investing activities		(658	)		(644	)		7,089			(3,595	)
Net cash flows used in financing activities		(551	)		(912	)		(3,412	)		(1,802	)
Effect of foreign exchange on cash, cash equivalents and restricted cash		(117	)		(293	)		(166	)		(73	)
Net increase (decrease) in cash, cash equivalents and restricted cash		593			(12,516	)		8,198			(52,979	)
Cash, cash equivalents and restricted cash, beginning of period		21,844			22,945			14,239			63,408
Cash, cash equivalents and restricted cash, end of period		22,437			10,429			22,437			10,429

Operating Activities

Net cash flows ~~used in~~provided by operating activities were ~~$10.7~~$1.9 million for the three months ended September 30, ~~2022~~2023 compared to ~~$12.2 million in the three months ended September 30, 2021. Included in the~~ $10.7 million used in operating activities in the third quarter of 2022 are $3.4 million of reorganization costs. Excluding these amounts, cashflows used in operations would have been $7.3 million in the third quarter of 2022 compared to $12.2 million cash provided by operations in the same period of ~~2021, with~~2022. The improvement in cash flows used in operations is largely due to the $10.7 million increase in Adjusted EBITDA and a $3.1 million decrease ~~reflecting an increase of $5.4 million of Adjusted Gross Profit~~in reorganization expenses offset by a $1.7 million increase in working capital ~~timing. Apart from~~excluding the ~~above noted items, working capital changes primarily reflect increased accounts payable due to higher activity and timing~~$7.1 million receivable for government subsidies impacting the third quarter of payments, a decrease in inventory as we use the inventory built up in the first half of the year discussed below, and reduced deposits on orders from customers offset by the receivable related to the government subsidies.2022.

Net cash flows ~~used in~~provided by operating activities were ~~$47.5~~$4.7 million for the nine months ended September 30, ~~2022~~2023 compared to ~~$23.9~~$47.5 million used in the same period of 2022. The improved cash flows from operations was driven by the $30.4 million increase in Adjusted EBITDA, a $9.4 million decrease in reorganization expenses, and a $19.0 million net decrease in working capital comprising $11.7 million decrease in routine working capital and a $7.3 million decrease in other receivables relating to the ERC claim. Through September 30, 2023, we have continued to draw down on our inventory supply built up in the first half of 2022.

Investing Activities

Cash flows provided by investing activities during the nine months ended September 30, ~~2021. Included in the $47.5 million used in operating activities in the nine months ended September 30, 2022 are $12.3~~2023 benefited from $10.0 million of ~~reorganization costs, $1.8 million of professional fees associated with the contested director election, and $6.1 million of increased inventory~~

where the Company took on incremental inventory from suppliers to mitigate against potential supply chain disruption, offset by the receipt of a $3.2 million income tax refund related to 2020. We have since taken steps to adjust our aluminum supply and expect to begin drawing down such inventory in the third and fourth quarter. Excluding these amounts, cashflow used in operations would have been $30.6 million in the nine months ended September 30, 2022 compared to $24.3 million cash used in operations in the same period of 2021, with the increase in cash used reflecting a decrease of government subsidies received and working capital timing. Apartproceeds from the ~~above noted items, working capital changes primarily reflect government subsidies receivable offset by higher accounts payable due to higher activity and timing~~AWI transaction during the second quarter of ~~payments.~~

~~Investing Activities~~2023.

We invested ~~$0.4~~$0.3 million and ~~$2.2~~$1.3 million in property, plant and equipment during the three and nine months ended September 30, ~~2022,~~2023, respectively compared to ~~$1.8~~$0.4 million and ~~$10.5~~$2.2 million, respectively, during the three and nine months ended September 30, ~~2021. The~~2022. This expenditure ~~for the three months ended September 30, 2022 comprised~~consisted of ~~$0.1~~$0.3 million of information technology, $0.4 million of DXC refreshes and $0.6 million of manufacturing upgrades ~~$0.1 million of leasehold improvements and $0.1 million related to our website design. The expenditure~~ for the nine months ended September 30, 2022 comprised of $1.0 million of working capital changes, $0.7 million of manufacturing upgrades, $0.2 million related to our website design and $0.3 million related to DXC refreshes and IT equipment. The decrease in investing activities is largely due to reduced spending as the Rock Hill Facility and Dallas DXC were completed in 2021.

2023. We invested $0.4 million and $1.5 million on capitalized software during the three and nine months ended September 30, ~~2022, as~~2023, respectively, compared to ~~$0.5~~$0.4 million ~~in the three months ended September 30, 2021~~ and $1.3 million for the three and nine months ended September 30, ~~2022 compared to $1.9 million for the comparative period.~~

Our 2022 capital expenditure program was comprised of approximately $2.5 million related to refreshes of DXCs, continued enhancement of our customer relationship management system and website redesign, approximately $2.5 million on software development and approximately $2.0 million on manufacturing and other capital upgrades of which actual expenditures have been less than budget.2022.

Financing Activities

For the three and nine months ended September 30, ~~2022,~~2023, $0.6 million and $3.4 million of cash, respectively, was used in financing activities compared to $0.9 million and $1.8 million in the same periods of 2022. The cash ~~was~~ used ~~in financing activities, comprising~~comprised mainly of $0.6 ~~million and $1.9~~ million of scheduled payments under the Leasing Facilities ~~and $0.3 million and $0.6 million relating to taxes paid on RSU vestings~~ for ~~the three and nine month period ended September 30, 2022 respectively.~~both periods. During the second quarter ~~we received C$0.9~~of 2023, an additional $1.6 million ~~($0.7 million) under~~principal repayment was made against the ~~Canada~~Canadian Leasing Facility. ~~For~~This payment was required by RBC as part of their consent for the AWI transaction and resulted in the full settlement of one of the Canadian leasing agreements. In the three and nine months ended September 30, ~~2021, $0.5~~2022, we incurred $0.3 million and $0.6 million of ~~cash was used~~spend on employee tax payments on vesting of RSUs compared to $nil and ~~$36.1~~$0.03 million in the same period of cash was provided by financing activities, respectively, mainly due to the proceeds received from the issuance of C$40.3 million of Debentures in January 2021 and the receipt of $8.4 million of cash consideration under the U.S. Leasing Facility.2023.

We currently expect to fund anticipated future investments with available cash ~~including the proceeds from Debentures issued in 2021,~~ and drawings on the Extended RBC Facility. ~~We also expect to pursue additional~~To date, our strategic actions 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 nine months ended September 30, 2023 and proceeds of $10.9 million received in the second quarter of 2023 through the AWI transaction. We continue to ~~improve available cash, which includes filing an application for ERC for the first three quarters of 2021 for $7.1 million, net of expenses, evaluating~~evaluate properties we own for sale and lease back ~~evaluating multiple initiatives related~~and opportunities to the use of our ICE software and the Private Placement of common shares. Refer to “–Liquidity and Capital Resources" for further details. We do not expect to make any further draws under the Leasing Facilities.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 and will be sufficient for our needs.

Credit Facility

On February 12, 2021, the Company entered into the RBC Facility. Under the RBC Facility, the Borrowing Base is up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. ~~At September 30, 2022, available borrowings~~

~~are C$12.4 million ($9.0 million), of which no amounts have been drawn.~~ 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 is less than C$5.0 million, the Company is subject to a FCCR covenant of 1.10:1 on a trailing twelve-month ~~basis until such time the borrowing availability net of unrestricted cash exceeds C$5.0 million for at least thirty consecutive calendar days.~~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. ~~The Company did not meet the three-month FCCR requirement during the third quarter of 2022, which resulted in requiring the restriction of $3.6 million of cash.~~ 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 has a borrowing base of C$15 million and a one year term. Interest is calculated at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate ("SOFR") plus 200 basis points plus the Term SOFR Adjustment. Under the Extended RBC Facility, if 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 September 30, 2023, available borrowings are C$14.6 million ($10.8 million) (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner described above, of which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the third quarter of 2023, which resulted in requiring the restriction of $3.0 million of cash.

During 2020, the Company entered into the Leasing Facilities, consisting of the C$5.0 million Canada Leasing Facility and the $14.0 million U.S. Leasing Facility with RBC, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. The U.S. Leasing Facility is amortized over a six-year term and is extendible at the Company’s option for an additional year.

The Company has drawn $13.3 million of cash consideration under the U.S. Leasing Facility and commenced the lease term in 2020 for the equipment at the ~~Rock Hill~~South Carolina Facility. The Company has drawn C$~~4.5~~4.4 million ($~~3.4~~3.3 million) of cash consideration under the Canada Leasing Facility and commenced the lease term for the Canadian equipment expenditures during 2020. ~~C$0.9~~In connection with the Company’s decision to close the Rock Hill Facility, we intend to settle the liability related to the U.S. Leasing Facility of $8.2 million ~~($0.7 million)~~in the next twelve months. With the settlement of this liability, we expect approximately $2.6 million to be released from restricted cash. On October 31, 2023, the Company paid off $1.0 million of the ~~Canada~~U.S. Leasing ~~Facility was drawn in the three months ended June 30, 2022.~~Facility.

We are restricted from paying dividends unless Payment Conditions (as defined in the 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 RBC Facility is currently secured by substantially all of our real property located in Canada and the United States.

Contractual Obligations

~~There have been no material changes in~~Since our ~~contractual obligations during the three months ended September 30, 2022, as compared to those disclosed~~disclosure 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~~ the following material contractual changes have occurred:

•

additional commitments related to the extension of one of our ~~headquarters lease~~factory leases in ~~Calgary.~~ Calgary for an additional ten years beyond the original term;

•

our entry into the Debt Settlement Agreement with the 22NW Group; and

•

the modification of our Rock Hill Facility lease.

See Note ~~14,~~15, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information.

Significant Accounting Policies and Estimates

There have been no material changes in our significant accounting policies during the three months ended September 30, ~~2022,~~2023, 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 6,3, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, wethere were no new accounting standards adopted ~~Accounting Standards Update No. 2021-10,~~ ~~Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.~~ ~~The ASU provides guidance on required disclosures with respect to government assistance in a company’s notes~~during the three months ended September 30, 2023. We have disclosed the accounting policy applied for the assets held for sale related to the annual financial statements. The amendments in the ASU are effective for periods beginning after December 15, 2021. The Company has adopted this standard effective January 1, 2022 and notes there is no impact of this standard on our accounting or disclosures of government assistance.Rock Hill Facility.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 6,3, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements and “–Significant Accounting Policies and Estimates” appearing in this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk exposures since our disclosures in our Annual Report on Form 10-K. For information regarding our exposure to certain market risks, please refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K. The Company’s cash and cash equivalents are predominantly all with one AA rated financial institution.

Item 4. Controls and Procedures

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 officers 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 officers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, ~~2022.~~2023. Based upon their evaluation, our principal executive officers 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 September 30, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3637

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

~~We are~~DIRTT is pursuing multiple lawsuits against ~~our~~its former founders, Mogens Smed and Barrie Loberg, ~~their new company~~as well as Falkbuilt Ltd., and ~~other~~Falkbuilt, Inc. (collectively, “Falkbuilt”) and related ~~individual~~individuals and ~~corporate defendants for violations~~corporations. DIRTT alleges breaches of fiduciary duties and ~~noncompetition~~non-competition and non-solicitation covenants, ~~contained in their executive employment agreements,~~ and the misappropriation of ~~our~~its confidential and proprietary information in(in violation of numerous ~~Canadian and~~ U.S. state and federal laws pertaining to the protection of ~~our~~ trade secrets and proprietary information and the prevention of false advertising and deceptive trade ~~practices. There~~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, as supplemented by our Quarterly Report~~10-K.

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 ~~Form 10-Q~~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 ~~quarters ended March 31, 2022~~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 ~~30, 2022,~~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.

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. On April 5, 2023, the parties appeared before the Associate Chief Justice of the Court of King’s Bench of Alberta for a Case Management Conference. In the Conference, the Associate Chief Justice offered the parties an expedited six-week trial on both liability and damage issues, as an alternative to DIRTT proceeding with its summary judgment application, on the condition that the parties could reach an agreement on the terms of the alternative process. The parties have not reached consensus regarding the terms of an expedited six-week trial, however, DIRTT remains fully cooperative with the Court of King’s Bench. In the meantime, DIRTT plans to aggressively pursue 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 ~~SEC~~Supreme Court of the United States on the same basis was also promptly denied. Fallkbuilt also petitioned the Supreme Court to accept review, even after losing the stay motion, that petition was also denied in early October.

The Texas Unfair Competition Case was dismissed, without prejudice, in reliance upon the now-reversed decision in the Utah Misappropriation Case, described above. DIRTT appealed that decision, and ~~applicable securities commissions~~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 is currently scheduled for December 7th, 2023 in New Orleans. The Court will either order the claims transferred to Utah or, ~~similar regulatory authorities~~if it affirms the lower court, those claims would proceed, inconveniently, in ~~Canada on May 4, 2022 and July 27, 2022 respectively.~~Canada. We believe it is very unlikely they would proceed in Texas as neither DIRTT or Falkbuilt currently desires that outcome.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Annual Report on Form 10-K, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and June 30, 2022, filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on May 4, 2022 and July 27, 2022, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.

Our share price has been and may continue to be volatile, which could cause the value of your investment to decline. If we fail to comply with the continuing listing standards of Nasdaq, our securities could be delisted.

Our common shares are ~~currently listed~~quoted on the ~~Toronto Stock Exchange~~OTC’s Pink® Open Market, and there may be a limited trading market in our 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® Open Market under the symbol ~~“DRT” and on Nasdaq under~~“DRTTF.” There may be a limited trading market in our common shares in the ~~symbol “DRTT”. The price~~United States. As a result of the limited trading market of our common shares, ~~has~~investors 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~~may experience limited demand for their shares of ~~volatility~~common shares, which may limit their ability to sell their shares 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.open market.

Further, if the closing bid price of our common shares is below the $1.00 Nasdaq minimum requirement for 30 consecutive business days, we may become subject to delisting proceedings. On September 7, 2022, we received a letter from Nasdaq that we have not been in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5450(a)(1) for a period of 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we are provided a compliance period of 180 calendar days from the date of the notice to regain compliance with the minimum closing bid price requirement. If we do not regain compliance during the compliance period, we may be afforded a second 180 calendar day period to regain compliance if, among other things, we meet certain listing requirements of, and elect to transfer to, the Nasdaq Capital Market. We can achieve compliance with the minimum bid price requirement if, during either compliance period, the closing bid price per share of our common shares is at least $1.00 for a minimum of ten consecutive business days. We intend to monitor the closing bid price of our common shares and assess potential actions to regain compliance, but there is no assurance that we will be able to regain compliance, including under the specified timeframes.

Any delisting of our securities could have an adverse effect on the market price of, and the efficiency of the trading market for, our securities, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts, if any. Also, if in the future we were to determine that we need to seek additional equity capital, having been delisted or being subject to delisting proceedings could have an adverse effect on our ability to raise capital in the public or private markets.

We are under the leadership of a reconstituted Board of Directors who plan to implement 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. We are also undergoing changes at a senior management level, including the appointment of a new Chief Executive Officer in June 2022.

Our Board of Directors was entirely reconstituted at our annual and special meeting of shareholders held on April 26, 2022 and, following that meeting, Geoffrey Krause and Jeffrey Calkins were appointed Interim Co-Chief Executive Officers. In June 2022, Jeffrey Calkins and Jennifer Warawa departed the company and a new Chief Executive Officer, Benjamin Urban was appointed. Messrs. Urban and Noll were also appointed to our Board of Directors in June 2022. On July 27, 2022, the Company announced additional leadership changes, including the departures of Charles Kraus, Senior Vice President and General Counsel and Colin Blehm, Vice President Product Development, and the promotion of Trevor Didluck to Vice President Product Development. Nandini Somayaji has been promoted to Senior Vice President Talent, General Counsel & Corporate Secretary. On August 5, 2022, Mary Garden departed the Board of Directors. Geoffrey Krause, DIRTT’s former Chief Financial Officer retired from the Company, effective September 30, 2022 and Bradley Little was appointed as the incoming Chief Financial Officer effective August 23, 2022. On August 29, 2022, Richard Hunter was appointed as DIRTT's new Chief Operating Officer. On October 20, 2022, Jeff Dopheide as appointed as Chief Revenue Officer, effective November 15, 2022. As a result of these events, the timely integration of senior management will be critical in the successful implementation of the Board of Directors' plans. There can be no assurance that we will be able to successfully implement the plan or otherwise realize the anticipated benefits of the plan, and we may encounter short-term disruptions of certain aspects of our business as elements of the plan are implemented.

In addition to overseeing the changes to DIRTT’s leadership described above, since its election, the reconstituted Board of Directors has undertaken an extensive review of DIRTT’s operations, a process which is still ongoing (see Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook”, above), 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. 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. Specifically, we are addressing the following issues:

•

~~Ability to increase manufacturing capacity to service current pipeline:~~

As at October 1, 2022, DIRTT’s 12-month forward pipeline, which represents known projects and leads at various stages of maturation which our sales teams are working to convert into orders, increased by 10% to $395 million from $359 million as at July 1, 2022 and 24% from $318 million as at April 1, 2022. Servicing of this pipeline and capturing the underlying revenue growth is dependent upon the Company's ability to ramp up production capabilities on a timely basis. The Board of Directors and DIRTT’s management team have prioritized removing constraints in DIRTT’s manufacturing processes and are pursuing a number of initiatives including increased hourly labor, improved hourly labor retention and streamlined manufacturing processes. DIRTT may not be successful in implementing such initiatives and may be negatively impacted by the competitive nature of attracting personnel and other current market conditions. DIRTT may not be able meet such demand and capture the underlying revenue growth which could adversely affect the Company’s results of operations and financial condition.

•

~~Discounting and raw material cost inflation impacts on profitability:~~

DIRTT's gross margins and resulting profitability have been negatively affected by the impacts of material cost inflation and the use of increased discounting to drive higher demand. DIRTT has taken steps to improve gross margin by reducing discounts and increasing prices, including a 5% price increase at June 1, 2022 and a further 10% price increase at July 21, 2022. If we are unable to realize the effects of reduced discounting or price increases, if inflationary increases continue without corresponding increases in our pricing or if such reduced discounting and price increases cause a material impact on demand, DIRTT’s results of operations and financial condition could be adversely impacted.

•

~~The effectiveness of certain elements of DIRTT’s administrative systems:~~

DIRTT has identified the need to upgrade its inventory management and cost accounting systems. Other information technology may require investment in the future. However, the success, in whole or in part, of this investment cannot be guaranteed.

~~We have negative cash flow from operating activities~~

We had negative cash flow from operating activities for the three and nine month period ended September 30, 2022. 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, our ability to execute our strategic plan and confidence in our business. Until we are able to generate positive cash flow from operating activities, 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 anticipate we will have positive cash flow from operating activities in future periods, we cannot guarantee that such future cash flow will be sufficient or that a prolonged recovery from the COVID-19 pandemic, or other changes to our circumstances, will not necessitate additional financial resources to fund our operating activities. In response to our negative cash flow from operations, we have undertaken several strategic actions and a Private Placement to improve our balance sheet in the short term, see “–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 that a prolonged recovery from the COVID-19 pandemic, or other changes to our circumstances, will not necessitate additional financial resources to fund our operating activities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

EXHIBIT INDEX


Exhibit No.		Description

3.1		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).
3.2		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).
4.1		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).
4.2		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 ~~4.2~~4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
4.3		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).
~~10.1~~10.1*		DIRTT Environmental Solutions Ltd. 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).
~~10.2*+~~		Executive Employment Agreement, dated August ~~12, 2022,~~2, 2023, by and between DIRTT Environmental Solutions Inc. and ~~Richard Hunter~~Fareeha Khan
~~10.3+~~10.2		~~Executive Employment Agreement, dated August 17, 2022, by and between DIRTT Environmental Solutions Inc. and Bradley Little~~
~~10.4*+~~		~~Executive Employment Agreement, dated December 24, 2019, by and between DIRTT Environmental Solutions Ltd and Nandini Somayaji~~
~~10.5*+~~		~~Executive Employment Agreement, dated October 19, 2022, by and between DIRTT Environmental Solutions Inc and Jeff Dopheide~~
10.6*		Indemnity Agreement, dated August ~~12, 2022,~~2, 2023, 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~~Fareeha Khan
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.
31.2*		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 (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed herewith
**		Furnished herewith

* Filed herewith

** Furnished herewith

~~+ Compensatory plan or agreement~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DIRTT ENVIRONMENTAL SOLUTIONS LTD.

	By:	/s/ ~~Bradley S. Little~~Fareeha Khan
		~~Bradley S. Little~~Fareeha Khan
		Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal ~~Financial~~Accounting Officer)

Date: November ~~14, 2022~~9, 2023


	As at September 30,			As at December 31,
	2022			2021
ASSETS
Current Assets
Cash and cash equivalents		6,818			60,313
Restricted cash		3,611			3,095
Trade and accrued receivables, net of expected credit losses of $0.1 million at September 30, 2022 and at December 31, 2021		19,553			14,063
Other receivables		8,009			3,477
Inventory		23,295			18,457
Prepaids and other current assets		5,389			4,399
Total Current Assets		66,675			103,804
Property, plant and equipment, net		43,450			51,697
Capitalized software, net		4,634			7,395
Operating lease right-of-use assets, net		31,965			30,880
Other assets		5,192			5,663
Total Assets		151,916			199,439
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		26,104			22,751
Other liabilities		1,787			2,379
Customer deposits and deferred revenue		3,027			2,420
Current portion of long-term debt and accrued interest		3,221			3,323
Current portion of lease liabilities		5,626			6,214
Total Current Liabilities		39,765			37,087
Long-term debt		61,997			67,319
Long-term lease liabilities		29,141			27,267
Total Liabilities		130,903			131,673
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 88,266,915 issued and outstanding at September 30, 2022 and 85,345,433 at December 31, 2021		187,930			181,782
Additional paid-in capital		9,592			13,200
Accumulated other comprehensive loss		(16,143	)		(15,916	)
Accumulated deficit		(160,366	)		(111,300	)
Total Shareholders’ Equity		21,013			67,766
Total Liabilities and Shareholders’ Equity		151,916			199,439


	For the Three Months Ended			For the Nine Months Ended
	September 30, 2022			September 30, 2022
Termination benefits		2,843			6,870
Insurance costs on change of control		-			3,676
Phoenix Facility closure		-			853
Rock Hill temporary suspension of operations		144			144
Other costs		439			738
Total reorganization costs		3,426			12,281

	For the Three Months Ended			For the Nine Months Ended
	September 30, 2022			September 30, 2022
Opening reorganization costs in accounts payable and accrued liabilities		1,555			-
Reorganization expense		3,426			12,281
Reorganization costs paid		(3,228	)		(10,528	)
Reorganization costs in accounts payable and accrued liabilities at September 30, 2022		1,753			1,753