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 ~~June 30,~~March 31, ~~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:


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 ~~86,988,828~~98,889,837 common shares outstanding as of ~~July 21, 2022.~~May 8, 2023.

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

FORM 10-Q

FOR THE QUARTER ENDED ~~JUNE 30, 2022~~MARCH 31, 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		6
Interim Condensed Consolidated Statement of Cash Flows		7
Notes to the Unaudited Interim Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1820
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		33

PART II – OTHER INFORMATION		3534

Item 1. Legal Proceedings		3534
Item 1A. Risk Factors		3534
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3635
Item 3. Defaults Upon Senior Securities		3635
Item 4. Mine Safety Disclosures		3635
Item 5. Other Information		3635
Item 6. Exhibits		3736

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2022~~March 31, 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,” 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 expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have 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 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 our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on May 4, 2022,, 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 to be taken in 2023;

•

the ~~effect~~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 ~~cost saving initiatives the Company announced in February and July 2022;~~business;

•

turnover of our key executives and difficulties in recruiting or retaining key employees;

•

the ability of our reconstituted board of directors ("Board of Directors") to successfully implement its transformation plan;

•

we have a history of negative cash flow from operating activities;

•

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 as the construction industry recovers from the COVID-19 pandemic;

•

the impact of the COVID-19 pandemic and any strain variants or resurgences thereof on our business;

•

our ability to ~~maintain~~achieve and manage growth effectively;

•

competition in the interior construction industry;

•

competitive behaviors by our 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 and financial ~~markets;~~markets, such as the war in Ukraine;

•

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~~laws;

•

the impact of increasing attention to ~~the COVID-19 pandemic;~~environmental, social and governance (ESG) matters on our business;

•

our ability to generate sufficient revenue to achieve and sustain ~~profitability;~~profitability and achieve positive cash flows;

•

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

•

volatility of our share price;

•

our ability to maintain our listing on Nasdaq (as defined herein);

•

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 of capital or financing on acceptable terms, which may impact our liquidity and impair our ability to make investments in the business;~~

•

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 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 June 30,			As at December 31,			As at March 31,			As at December 31,
	2022			2021			2023			2022
ASSETS
Current Assets
Cash and cash equivalents		19,739			60,313			8,146			10,821
Restricted cash		3,206			3,095			3,418			3,418
Trade and other receivables, net of expected credit losses of $0.1 million at June 30, 2022 and at December 31, 2021		19,686			17,540
Trade and accrued receivables, net of expected credit losses of $0.1 million at March 31, 2023 and at December 31, 2022								11,773			13,930
Other receivables								3,149			7,880
Inventory		25,296			18,457			20,972			22,251
Prepaids and other current assets		5,343			4,399			3,487			3,825
Total Current Assets		73,270			103,804			50,945			62,125
Property, plant and equipment, net		46,507			51,697			39,775			41,522
Capitalized software, net		6,252			7,395			4,523			4,406
Operating lease right-of-use assets, net		30,748			30,880			39,046			30,490
Other assets		5,628			5,663			5,005			5,110
Total Assets		162,405			199,439			139,294			143,653
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		24,516			22,751			16,640			19,881
Other liabilities		1,853			2,379			4,240			2,056
Customer deposits and deferred revenue		6,122			2,420			3,845			4,866
Current portion of long-term debt and accrued interest		3,297			3,323			3,293			3,306
Current portion of lease liabilities		5,868			6,214			5,635			5,889
Total Current Liabilities		41,656			37,087			33,653			35,998
Long-term debt		65,948			67,319			61,661			62,129
Long-term lease liabilities		27,635			27,267			36,595			27,534
Total Liabilities		135,239			131,673			131,909			125,661
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 86,988,828 issued and outstanding at June 30, 2022 and 85,345,433 at December 31, 2021		186,253			181,782
Common shares, unlimited authorized without par value, 98,864,725 issued and outstanding at March 31, 2023 and 97,882,844 at December 31, 2022								192,731			191,347
Additional paid-in capital		10,629			13,200			8,193			9,023
Accumulated other comprehensive loss		(16,077	)		(15,916	)		(15,833	)		(16,106	)
Accumulated deficit		(153,639	)		(111,300	)		(177,706	)		(166,272	)
Total Shareholders’ Equity		27,166			67,766			7,385			17,992
Total Liabilities and Shareholders’ Equity		162,405			199,439			139,294			143,653

Included in Trade and accrued receivables is $0.2 million of balances due from related parties and included under Other liabilities is $2.1 million due to related parties (Refer to Note 15).

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Operations

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2022			2021			2022			2021			2023			2022
Product revenue		43,091			40,087			80,542			68,629			35,476			37,451
Service revenue		1,610			1,015			2,445			1,938			1,232			835
Total revenue		44,701			41,102			82,987			70,567			36,708			38,286

Product cost of sales		37,185			31,091			71,792			54,642			27,423			34,607
Costs of under-utilized capacity		-			-			-			1,756
Service cost of sales		1,240			787			1,632			1,575			603			392
Total cost of sales		38,425			31,878			73,424			57,973			28,026			34,999
Gross profit		6,276			9,224			9,563			12,594			8,682			3,287

Expenses
Sales and marketing		7,777			7,564			15,005			14,234			5,515			7,228
General and administrative		6,877			7,780			14,870			15,021			5,833			7,993
Operations support		2,528			2,213			5,026			4,510			1,990			2,498
Technology and development		1,879			1,924			4,019			3,859			1,539			2,140
Stock-based compensation		1,326			1,861			2,628			2,955			796			1,302
Reorganization		5,163			-			8,855			-			1,071			3,692
Related party expense														2,056			-
Total operating expenses		25,550			21,342			50,403			40,579			18,800			24,853

Operating loss		(19,274	)		(12,118	)		(40,840	)		(27,985	)		(10,118	)		(21,566	)
Government subsidies		49			3,431			624			7,499			148			575
Foreign exchange gain (loss)		1,246			(60	)		514			(240	)
Foreign exchange loss														(261	)		(732	)
Interest income		20			23			31			42			4			11
Interest expense		(1,329	)		(794	)		(2,659	)		(1,294	)		(1,207	)		(1,330	)
		(14	)		2,600			(1,490	)		6,007			(1,316	)		(1,476	)
Loss before tax		(19,288	)		(9,518	)		(42,330	)		(21,978	)		(11,434	)		(23,042	)
Income taxes
Current tax expense		-			210			-			210
Deferred tax expense		-			10			-			49
Current and deferred income tax expense (recovery)														-			-
		-			220			-			259			-			-
Net loss		(19,288	)		(9,738	)		(42,330	)		(22,237	)		(11,434	)		(23,042	)

Loss per share
Basic and diluted loss per share		(0.22	)		(0.11	)		(0.49	)		(0.26	)		(0.12	)		(0.27	)

Weighted average number of shares outstanding (in thousands)
Basic and Diluted		86,023			84,752			85,739			84,717			98,091			85,451

Interim Condensed Consolidated Statement of Comprehensive Loss


	For the Three Months Ended March 31,
	2023			2022
Loss for the period		(11,434	)		(23,042	)
Exchange differences on translation of foreign operations		273			433
Comprehensive loss for the period		(11,161	)		(22,609	)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2022

2021

2022

2021

Loss for the period

(19,288
)

(9,738
)

(42,330
)

(22,237
)
Exchange differences on translation of foreign operations

(594
)

716

(161
)

1,321

Comprehensive loss for the period

(19,882
)

(9,022
)

(42,491
)

(20,916
)

Total revenue for the quarter ended March 31, 2023 includes $0.3 million earned from related parties. Total operating expenses includes $2.1 million of related party expenses (Refer to Note 15).

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

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


								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
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

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 June 30,						For the Six Months Ended June 30,							For the Three Months Ended March 31,
		2022			2021			2022			2021				2023			2022
Cash flows from operating activities:
Net loss for the period			(19,288	)		(9,738	)		(42,330	)		(22,237	)			(11,434	)		(23,042	)
Adjustments:
Depreciation and amortization			3,344			3,421			7,966			6,823				2,675			4,622
Stock-based compensation, net of settlements			406			1,649			1,708			2,743				796			1,302
Foreign exchange (gain) loss			(1,433	)		68			(782	)		240
Foreign exchange loss																346			651
Accretion of convertible debentures			177			94			342			147				164			165
Gain on disposal of equipment			(165	)		-			(165	)		-
Deferred income tax expense			-			10			-			49
Changes in operating assets and liabilities:
Trade and other receivables			2,824			(2,588	)		(2,142	)		(2,831	)
Trade and accrued receivables																2,111			(4,785	)
Other receivables																4,732			(181	)
Inventory			(3,661	)		(697	)		(7,104	)		(500	)			1,299			(3,443	)
Prepaid and other assets, current and long term			(1,059	)		770			(1,167	)		(178	)			391			(108	)
Accounts payable and accrued liabilities			713			4,759			3,173			(1,257	)			(3,299	)		2,460
Other liabilities			(39	)		1,260			(39	)		1,767				2,056			-
Customer deposits and deferred revenue			387			(290	)		3,719			1,317				(1,020	)		3,332
Current portion of long-term debt and accrued interest			(86	)		604			(142	)		1,006				(56	)		(56	)
Lease liabilities			80			764			121			903				251			41
Net cash flows (used in) provided by operating activities			(17,800	)		86			(36,842	)		(12,008	)
Net cash flows used in operating activities																(988	)		(19,042	)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts payable changes			(924	)		(5,799	)		(1,887	)		(8,707	)			(371	)		(963	)
Capitalized software development expenditures			(418	)		(631	)		(901	)		(1,336	)			(532	)		(483	)
Other asset expenditures			(107	)		-			(281	)		-				(106	)		(174	)
Proceeds on sales of equipment			73			-			73			-
Recovery of software development expenditures			45			-			45			24				26			-
Net cash flows used in investing activities			(1,331	)		(6,430	)		(2,951	)		(10,019	)			(983	)		(1,620	)
Cash flows from financing activities:
Proceeds received on long-term debt			647			8,407			647			37,952
Repayment of long-term debt			(618	)		(552	)		(1,236	)		(760	)			(642	)		(618	)
Employee tax payments on vesting of RSUs			(92	)		(589	)		(301	)		(589	)			(26	)		(209	)
Net cash flows (used in) provided by financing activities			(63	)		7,266			(890	)		36,603
Net cash flows used in financing activities																(668	)		(827	)
Effect of foreign exchange on cash, cash equivalents and restricted cash			54			408			220			711				(36	)		166
Net (decrease) increase in cash, cash equivalents and restricted cash			(19,140	)		1,330			(40,463	)		15,287
Cash, cash equivalents and restricted cash, beginning of period			42,085			59,803			63,408			45,846
Net decrease in cash, cash equivalents and restricted cash																(2,675	)		(21,323	)
Cash, cash equivalents and restricted cash, beginning of year																14,239			63,408
Cash, cash equivalents and restricted cash, end of period			22,945			61,133			22,945			61,133				11,564			42,085
Supplemental disclosure of cash flow information:
Interest paid			(1,179	)		(67	)		(2,331	)		(129	)			(1,072	)		(1,152	)
Income taxes (paid) received			3,182			(48	)		3,207			(48	)
Income taxes received																5			25

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 Six Months Ended June 30,							For the Three Months Ended March 31,
								2022			2021				2023			2022
Cash and cash equivalents									19,739			58,326				8,146			38,861
Restricted cash									3,206			2,807				3,418			3,224
Total cash, cash equivalents and restricted cash									22,945			61,133				11,564			42,085

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.

DIRTT is incorporated under the laws of the province of Alberta, Canada, its headquarters is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and on The Nasdaq ~~Global Select~~Capital Market (“Nasdaq”) under the symbol “DRTT”. On March 9, 2023, DIRTT's common shares were transferred from The Nasdaq Global Select Market to The Nasdaq Capital Market, under the same symbol.

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 ~~June 30, 2022,~~March 31, 2023, and its results of operations and cash flows for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 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 5,6, 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 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 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. ~~COVID-19~~LIQUIDITY

~~On March 11, 2020, COVID-19 was declared a global pandemic~~The Company has been negatively impacted by the World Health Organization and has had extraordinary and rapid negative impacts on global societies, workplaces, economies and health systems. The resulting adverse economic conditions have negatively impacted construction activity and consequently DIRTT’s business, with significant negative impacts extending through 2021, 2022 and potentially beyond.

While many construction sites remain open and re-opening strategies have been implemented across North America, certain projects have experienced delays, impacted by both the implementation of social distancing and other safety-related measures and the re-emergence of COVID-19 in certain geographic areas. It is not possible to predict the timing and pace of economic recovery, or the resumption of delayed construction activity and related demand, nor is it possible to predict the impact of such developments on the Company’s ability to achieve its business objectives.

~~COVID-19 has increased the complexity of estimates and assumptions used to prepare the Company’s consolidated financial statements and the following key sources of estimation uncertainty:~~

~~Credit risk~~

COVID-19 may cause DIRTT’s Construction Partners and customers to experience liquidity issues and this may result in higher expected credit losses or slower collections. Management continually assesses the impacteffect of COVID-19 on the ~~Company’s Construction Partners and determined~~ 0 ~~change to~~non-residential construction industry, costs incurred associated with the Company’s ~~provision for credit losses~~contested director elections, reorganization costs to reconstitute the executive team and align 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 the Debentures and Leasing Facilities entered into in prior years (refer to Note 9). As at March 31, 2023, the Company had $8.1 million of cash on hand and C$~~0.1~~7.0 million ~~was required~~($5.2 million) of available borrowings (December 31, 2022 - $10.8 million and C$7.2 million ($5.3 million) of available borrowings). The Company’s cash position benefited from the receipt of $5.0 million of government subsidies during the three and six months ended June 30, 2022. The estimation of such credit losses is complex because of limited historical precedent for the current economic situation. In addition, the Company maintains trade credit insurance (seequarter (refer to Note ~~6) as further protection from credit losses.~~4).

~~Liquidity risk~~

~~The~~We have implemented a number of restructuring initiatives to create a reduced cost structure moving forward (refer to Note 5) and have implemented multiple price increases during the past 18 months to mitigate the impact of inflation on raw material costs. While these actions and our project pipeline are promising, we continue to see unpredictability in our pace of orders. As a result, the Company ~~may~~has initiated certain actions to improve our balance sheet in the short term. First, we have ~~lower cash flows~~been evaluating initiatives related to the use of ICE software by third parties to supplement the relatively small revenues we have previously recognized from ~~operating activities available~~our licensing of ICE software to ~~service debts due to lower sales or collections~~certain strategic partners for use in their businesses and our related licensing and developer software support for these counterparties. In April 2023, as a result of ~~COVID-19. To address~~ this ~~risk~~evaluation, we entered into an agreement with Armstrong World Industries, Inc. (refer to Note 16). Second, we have certain properties that are currently owned or leased that we are evaluating for potential sale and lease back or sublease arrangements. We do not intend to vacate these premises as they still serve a valuable aspect of our value proposition, but these types of arrangements would provide us with either a one-time cash payment, or offset rent expense in the near term. During March 2023, we entered into an agreement to sublease our Dallas DIRTT Experience Center ("DXC") to one of our Construction Partners in that region. Under the sublease agreement, the subtenant will assume responsibility for the monthly rent, utilities, maintenance, taxes and other costs from April 1, 2023, through December 31, 2024, and provide annualized savings of approximately $1 million. We are continuing to evaluate other properties and expect these strategic initiatives to result in positive cash inflows in 2023. As these transactions are awaiting finalization, we completed a Private Placement (as defined herein) of common shares in November 2022, supported by significant shareholders and directors and officers of the Company to bridge cash requirements before the completion and closing of the noted strategic transactions.

We have assessed the Company’s liquidity position as at March 31, 2023 using multiple scenarios taking into account our sales outlook for the next year, our existing cash balances and available credit facilities and the ~~uncertainty around~~probability of executing the ~~timing of a recovery from COVID-19,~~strategic transactions noted above. Based on this analysis we believe the Company ~~issued~~has sufficient liquidity to support ongoing operations for the ~~Debentures (as defined below)~~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 ~~January~~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 interior construction 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 months ended March 31, 2023 or the years ended December 31, 2021 and December 31, 2022, but future events may require such charges which could have a material adverse effect on our financial condition, liquidity or results of ~~2021, for net proceeds of $29.5~~ ~~million and $25.6~~ million, respectively, has credit facilities available and has taken steps to reduce its fixed cost base. See Note 8 for information about our credit facilities. See Note 4 for information about reorganization activities.operations.

Government subsidies

~~As part~~In the United States, the Employee Retention Credit ("ERC") was established by Section 2301 of the ~~Canadian federal government’s~~Coronavirus Aid, Relief, and Economic Security Act to provide an incentive for employers to keep their employees on their payroll during COVID-19 ~~Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”).~~closures. The ~~CEWS provided the Company with~~ERC is a ~~taxable subsidy in respect of a specific portion of~~refundable payroll tax credit based on qualified wages paid ~~to Canadian employees~~by an eligible employer between March 12, 2020, and October 1, 2021 for companies experiencing a significant decline in gross receipts 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)~~calendar quarter or having operations fully or partially suspended during the ~~2021 calendar year exceeds~~quarter due to COVID-19. During 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~~determined it was eligible for the ERC for the first three quarters of 2021 and filed a claim for $~~0.6~~7.3 million ~~incremental provision related to this that is no longer necessary.~~in payroll tax credits ($

97.1

~~On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”)~~ million net of expenses). ~~The CERS provided~~As of March 31, 2023, $4.8 million of these credits (plus an additional $0.2 million of interest) have been received, leaving 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~~balance of ~~the subsidy available to the Company being based~~$2.5 million included in other receivables 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.balance sheet.

5. REORGANIZATION

~~The last claim period under the CEWS and CERS programs ended on October 23, 2021. The Company is not eligible and did~~ 0~~t receive any new government subsidies in the quarter or six months ended June 30, 2022.~~

~~Impairment~~During the year ended December 31, 2022, and continuing into 2023, the Company undertook a number of reorganization initiatives:

At June 30, 2022, management determined an impairment provision was not required as our outlook is consistent with the assumptions used in our impairment test undertaken at December 31, 2021. In future periods, if our results or outlook are less than our forecast, this determination may need to be revisited.

~~4. REORGANIZATION~~Closure of Phoenix Aluminum Manufacturing Facility (the “Phoenix Facility”)

On February 22, 2022, we commenced the process of closing our Phoenix ~~aluminum manufacturing facility (the “Phoenix Facility”),~~Facility, shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. ~~Additionally, we announced our intention to eliminate a portion~~During the first quarter of ~~our salaried workforce including manufacturing and office positions along~~2022, the Company incurred $1.0 million of accelerated depreciation, recorded in cost of sales, associated with ~~other cost reduction initiatives.~~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 during the second quarter of 2022, commencing July 1, 2022, which ~~will exceed~~exceeds the contractual lease commitments under the Right of Use ~~assets.~~assets.

~~Reorganization~~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 first quarter of March 31, 2023, we continued to review costs ~~incurred~~and reduced headcount. These actions resulted in the ~~three months ended June 30,~~Company incurring certain termination benefits and recruitment costs.

Temporary Suspension of Operations at Rock Hill, South Carolina (the "Rock Hill Facility")

On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in cost of sales, were $~~5.2million include $3.7~~0.4 million for ~~incremental insurance on change of control of~~ the ~~Board of Directors on April 26, 2022,~~three month period ended March 31, 2023.

For the quarter ended March 31, 2023, reorganization costs incurred continue to relate to the above mentioned initiatives:


	For the Three Months Ended March 31,
	2023		2022
Termination benefits		700		3,074
Phoenix Facility closure		43		111
Recruiting fees		90		-
Other costs		238		507
Total reorganization costs		1,071		3,692


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				1,071
Reorganization costs paid				(1,318	)
Reorganization costs in accounts payable and accrued liabilities at March 31, 2023				2,030

Of the $~~0.9~~2.0 million ~~related~~payable, $1.9 million relates to termination benefits $~~0.5~~ ~~million associated with the closure of the Phoenix Facility,~~ and $0.1 million ofrelates to other ~~costs. Reorganization costs incurred in the six months ended June 30, 2022 of $8.9~~ ~~million include $3.7~~ ~~million for incremental insurance on change of control of the Board of Directors on April 26, 2022, $3.9~~ ~~million related to termination benefits, $0.7~~ ~~million associated with the closure of the Phoenix Facility, and $0.6~~ ~~million of other~~reorganization costs.

~~Of the amount expensed, $1.6~~ ~~million and $7.3~~ ~~million were paid during the three and six months ended June 30, 2022, respectively, and $1.4~~ ~~million of termination benefits and $0.2~~ ~~million of other costs were included in accounts payable and accrued liabilities at June 30, 2022.~~

~~The Company accelerated the depreciation of certain items of property, plant and equipment and capitalized software associated with these decisions resulting in an additional $1.1~~ ~~million of depreciation and amortization incurred in the first quarter of 2022.~~

5.6. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

~~In 2021, 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 to the annual financial statements. The amendments in the ASU are effective for periods beginning after December 15, 2021. The Company has not adopted~~this standard~~ any new accounting standards effective January 1, ~~2022~~2023 ~~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.

6.7. TRADE AND ~~OTHER~~ACCRUED RECEIVABLES

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date

taking into account historical credit loss experience as well as forward-looking information in order to establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the statement of operations.

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At ~~June 30, 2022,~~March 31, 2023, approximately 7585% 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 six~~ months ended ~~June 30, 2022,~~ 0March 31, 2023 one Construction Partner accounted for greater than 10% of ~~revenue. For~~revenue (none for the three ~~and six~~ months ended ~~June 30, 2021,~~ 1 ~~Construction Partner accounted for $8.2~~ ~~million and $11.8~~ ~~million of revenue, which was greater than~~ 10~~% of total revenue for that period.~~March 31, 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						As at
	June 30,			December 31,			March 31,			December 31,
	2022			2021			2023			2022
Current		18,514			13,659			11,087			12,381
Overdue		913			621			812			1,675
		19,427			14,280			11,899			14,056
Less: expected credit losses		(128	)		(130	)		(126	)		(126	)
		19,299			14,150			11,773			13,930
Sales tax receivable		387			196
Income tax receivable		-			3,194
		19,686			17,540

No adjustment to our expected credit losses of $0.1 million was required for the ~~six months~~quarter ended ~~June 30, 2022.~~March 31, 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.

7.8. OTHER LIABILITIES


	As at,				As at,
	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Legal provisions(1)		45		143
Warranty provisions (1)						1,279		1,278
DSU liability		302		785		745		594
Sublease deposits		212		-		137		139
Warranty and other provisions(2)		1,294		1,451
Due to related parties(2)						2,079		-
Other provisions						-		45
Other liabilities		1,853		2,379		4,240		2,056

(1)

~~The Company has provided $0.05million (December 31, 2021 - $0.1~~ ~~million) as the estimated amount likely payable for various claims against the Company. The amount provided for is management’s best estimate of the potential payments for amounts claimed.~~

~~(2)~~

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


	March 31, 2023			December 31, 2022
As at January 1		1,278			1,451
Additions to warranty provision		382			1,134
Payments related to warranties		(381	)		(1,307	)
		1,279			1,278

(2) Refer to Note 15 for details of the related party transaction.

June 30, 2022

December 31, 2021

As at January 1

1,451

1,763

Adjustments to timber provision

-

(500
)
Additions to warranty provision

304

1,019

Payments related to warranties

(461
)

(831
)

1,294

1,451

1112

8.9. 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 January 1, 2023													-		11,812			53,623			65,435
Accretion of issue costs		-		-			342			342			-		-			164			164
Accrued interest		-		379			1,810			2,189			-		165			851			1,016
Interest payments		-		(379	)		(1,952	)		(2,331	)		-		(165	)		(907	)		(1,072	)
Principal repayments		-		(1,236	)		-			(1,236	)		-		(642	)		-			(642	)
Exchange differences		-		(90	)		(918	)		(1,008	)		-		3			50			53
Balance at June 30, 2022		-		13,230			56,015			69,245
Balance at March 31, 2023													-		11,173			53,781			64,954
Current portion of long-term debt and accrued interest		-		2,515			782			3,297			-		2,597			696			3,293
Long-term debt		-		10,715			55,233			65,948			-		8,576			53,085			61,661

Revolving Credit 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 June 30, 2022, available borrowings are C$14.5~~ ~~million ($11.3~~ ~~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. 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 second quarter of 2022 which resulted in requiring the restriction of $3.2million of cash.~~ Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for 5five 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 above 1.25 for three consecutive months, a cash balance equivalent to one-year's worth of Leasing Facilities payments must be maintained. At March 31, 2023, available borrowings are C$7.0 million ($5.2 million), 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 first quarter of 2023 which resulted in requiring the restriction of $3.4 million of cash.

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 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, each with RBC, and one of its affiliates, 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 extendible at the Company’s option for an additional year.

~~During~~The Company did not make any draws on the Leasing Facilities during the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023 and the ~~Company received $NaN~~ ~~(twelve~~three months ended ~~December~~March 31, ~~2021: $9.8~~ ~~million) of cash consideration under the U.S. Leasing Facility.~~2022. The associated financial liabilities are shown on the consolidated balance sheet in current ~~other liabilities~~portion of long-term debt and accrued interest and long-term debt. ~~In April 2022 the Company received C$0.9~~ ~~million ($0.7~~ ~~million) under the Canada Leasing Facility.~~

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.

On December 1, 2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and December of each year commencing on June 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. 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.

9.10. STOCK-BASED COMPENSATION

In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested ~~Share Awards (as defined below),~~share awards, 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 LTIP, the sum of (i) 5,850,000 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, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance under the 2020 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~~The change of 100% of the Board of Directors combined with the prior Board declining to endorse the incoming board constituted a ~~change~~"Change of a ~~control~~Control", under the terms of the 2020 LTIP, 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~~Cause (as defined therein) within ~~one year~~twelve months following the Change of ~~the change of control vest~~Control vested immediately upon such termination.

The Company also maintains the DIRTT Environmental Solutions Ltd. Deferred Share Unit Plan for Non-Employee Directors pursuant to which deferred share units (“DSUs”) are granted to the Company’s non-employee directors. DSUs are settled solely in cash.

Prior to 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 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.

Stock-based compensation expense


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Equity-settled awards		1,286		1,285		2,625		2,081		644		1,339
Cash-settled awards		40		576		3		874		152		(37	)
		1,326		1,861		2,628		2,955		796		1,302

The following summarizes RSUs, Share Awards (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

1,897,281

878,601

-

-

57,898

Vested

(630,042
)

(169
)

-

(9,314
)

(57,380
)
Withheld to settle employee tax obligations

(161,031
)

-

-

-

-

Forfeited

(116,656
)

(9,635
)

-

(1,733
)

-

Outstanding at June 30, 2021

3,403,618

1,068,797

-

186,424

364,182

Outstanding at December 31, 2021

3,216,536

1,021,739

-

157,200

361,577

Granted

2,140,605

863,279

162,682

-

386,083

Vested

(1,245,386
)

(303,568
)

(94,528
)

-

(468,654
)
Withheld to settle employee tax obligations

(526,259
)

(242,460
)

(68,154
)

-

-

Forfeited

��
(685,229
)

(502,628
)

-

(157,200
)

-

Outstanding at June 30, 2022

2,900,267

836,362

-

-

279,006


	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		2,109,205			863,279			162,682			-		180,314
Vested		(393,016	)		-			(94,528	)		-		-
Withheld to settle employee tax obligations		(60,039	)		-			(68,154	)		-		-
Forfeited		(614,151	)		(502,628	)		-			-		-
Outstanding at March 31, 2022		4,258,535			1,382,390			-			157,200		541,891
Outstanding at December 31, 2022		1,885,337			343,919			-			-		1,165,319
Granted		-			-			36,253			-		434,032
Vested or settled		(590,258	)		(32,962	)		(36,253	)		-		-
Withheld to settle employee tax obligations		(64,230	)		-			-			-		-
Forfeited		(44,081	)		-			-			-		-
Outstanding at March 31, 2023		1,186,768			310,957			-			-		1,599,351

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 was C$~~2.39~~2.37 ~~(2021 – C$3.11~~), 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, ~~NaN~~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.

Deferred share units

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. DSUs outstanding at ~~June 30, 2022~~March 31, 2023 had a fair value of $~~0.3~~0.7 million which is included in other liabilities on the balance sheet (December 31, ~~2021~~2022 – $~~0.8~~0.6 million).

Options

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

Number of

Weighted average

options

exercise price C$

Outstanding at December 31, 2020

4,774,328

6.52

Forfeited

(21,588
)

7.21

Outstanding at June 30, 2021

4,752,740

6.52

Outstanding at December 31, 2021

4,064,489

6.64

Forfeited

(2,520,220
)

6.40

Outstanding at June 30, 2022

1,544,269

7.03

Exercisable at June 30, 2022

1,538,337

6.71


	Number of			Weighted average
	options			exercise price C$
Outstanding at December 31, 2021		4,064,489			6.64
Forfeited		(1,740,915	)		6.40
Outstanding at March 31, 2022		2,323,574			6.82
Outstanding at December 31, 2022		1,480,069			7.03
Forfeited		(398,964	)		7.14
Outstanding and Exercisable at March 31, 2023		1,081,105			6.99

No options were granted during the three months ended March 31, 2023.

Range of exercise prices outstanding and exercisable at ~~June 30, 2022:~~March 31, 2023:

Options outstanding

Options exercisable

Weighted

Weighted

Weighted

Weighted

average

average

average

average

Number

remaining

exercise

Number

remaining

exercise

Range of exercise prices

outstanding

life

price C$

exercisable

life

price C$

C$4.01 – C$5.00

15,025

2.40

4.12

15,025

2.40

4.12

C$6.01 – C$7.00

789,017

1.56

6.33

783,085

1.55

6.33

C$7.01 – C$8.00

740,227

1.88

7.84

740,227

1.88

7.84

Total

1,544,269

1,538,337

��

Weighted

Number of

average

options

remaining

exercise

Range of exercise prices

life

price C$

C$6.01 – C$7.00

602,859

0.91

6.31

C$7.01 – C$7.84

478,246

1.13

7.84

Total

1,081,105

Dilutive Instruments

For the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, ~~1.5~~1.1 million options ~~(2021~~(2022 – ~~4.8~~2.3 million), ~~3.7~~1.5 million RSUs and PRSUs ~~(2021~~(2022 – ~~4.5~~5.6 million) and ~~53.8~~119.4 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~~(2022 – ~~8.7~~43.0 million), were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net loss per share. If the proposed transaction disclosed in Note 15 is approved at the upcoming annual and special meeting of shareholders, an additional 3.9 million of shares would be issued and dilutive to earnings per share.

~~10.~~16

11. 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 1112 for the disaggregation of revenue by geographic region.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Product		38,098		36,462		71,291		62,298		31,481		33,193
Transportation		4,795		3,484		8,856		5,983		3,788		4,061
License fees from Construction Partners		198		141		395		348		207		197
Total product revenue		43,091		40,087		80,542		68,629		35,476		37,451
Installation and other services		1,610		1,015		2,445		1,938		1,232		835
		44,701		41,102		82,987		70,567		36,708		38,286

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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
At a point in time		42,893		39,946		80,147		68,281		35,269		37,254
Over time		1,808		1,156		2,840		2,286		1,439		1,032
		44,701		41,102		82,987		70,567		36,708		38,286

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						As at
	June 30, 2022		December 31, 2021		December 31, 2020		March 31, 2023		December 31, 2022		December 31, 2021
Customer deposits		5,683		1,959		1,292		3,342		4,458		1,959
Deferred revenue		439		461		527		503		408		461
Contract liabilities		6,122		2,420		1,819		3,845		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 was~~higher as~~ lower at ~~June 30, 2022~~March 31, 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 $~~2.3~~4.6 million and $~~1.6~~2.1 million ~~respectively,~~ were recognized as revenue during the ~~six~~three months ended ~~June 30,~~March 31, 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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Commercial		29,618		19,032		53,662		35,176		24,504		24,044
Healthcare		5,091		14,176		12,055		20,663		6,171		6,964
Government		5,041		4,249		8,322		8,430		2,707		3,281
Education		3,143		2,489		6,108		4,012		1,887		2,965
License fees from Construction Partners		198		141		395		348		207		197
Total product and transportation revenue		43,091		40,087		80,542		68,629		35,476		37,451
Installation and other services		1,610		1,015		2,445		1,938		1,232		835
		44,701		41,102		82,987		70,567		36,708		38,286

~~11.~~12. SEGMENT REPORTING

The Company has 1one reportable and operating segment and operates in 2two 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 June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Canada		7,417		4,461		12,668		7,456		4,912		5,251
U.S.		37,284		36,641		70,319		63,111		31,796		33,035
		44,701		41,102		82,987		70,567		36,708		38,286

Non-current assets~~(1)~~


	As at				As at
	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Canada		32,304		34,912		36,310		28,251
U.S.		56,831		60,723		52,039		53,277
		89,135		95,635		88,349		81,528

~~(1)~~

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

~~12.~~13. INCOME TAXES

As at ~~June 30, 2022,~~March 31, 2023, the Company had a valuation allowance of $~~27.0~~32.4 million against deferred tax assets as the Company has experienced cumulative losses in recent years (December 31, ~~2021~~2022 – $~~17.3~~29.8 million).

~~13.~~14. COMMITMENTS

As at ~~June 30, 2022,~~March 31, 2023, the Company had outstanding purchase obligations of approximately $~~5.8~~2.7 million related to inventory and property, plant and equipment purchases (December 31, ~~2021~~2022 – $~~3.7~~2.2 million). As at ~~June 30, 2022,~~March 31, 2023, the Company had undiscounted operating lease liabilities of $~~49.0~~63.2 million (December 31, ~~2021~~2022 – $~~49.7~~48.7 million).

~~During~~15. RELATED PARTY TRANSACTIONS

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 (the "2022 Meeting"), being $1,559,898 (the "Debt").

Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. Under the Debt Settlement Agreement, a cash payment shall not be made to settle the Debt unless permitted under the terms of the Extended RBC Facility.

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 Company’s annual general meeting to be held on May 30, 2023.

The liability has been revalued using the closing common share price at March 31, 2023, and a $2.1 million liability and expense has been recorded in the financial statements.

Other related party transactions for the quarter ended ~~June 30, 2022,~~March 31, 2023 relate to the ~~Company extended~~sale of DIRTT products and services to the ~~term~~22NW Group for $0.3 million. $0.2 million was included in the Trade and accrued receivable balance at March 31, 2023. The sale to 22NW Group was based on price lists in force and terms that are available to all employees.

16. SUBSEQUENT EVENTS

On May 9, 2023, we entered into a Co-Ownership Agreement (the “Co-Ownership Agreement”) and Partial Patent Assignment Agreement with Armstrong World Industries, Inc. (“AWI”). The agreements provide a cash payment to us for $10 million, subject to certain routine closing conditions, in exchange for the partial assignment to AWI and co-ownership of an undivided 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ~~lease agreement~~ICE software that is used by AWI (the “Applicable ICE Code”), including an undivided 50% interest in the patent rights that relate to the Applicable ICE Code. We also agreed under the Co-Ownership Agreement to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the ~~Calgary headquarters by~~ knowledge transfer, we will receive an additional cash payment of $~~5 years~~1 ~~effective~~million, which is expected 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 IP 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. ~~October 2022. Undiscounted rent obligations associated with this lease are $2.3~~
~~million.~~

1719

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.

Key Highlights

•

On May 9, 2023, we entered into a Co-Ownership Agreement (the “Co-Ownership Agreement”) and Partial Patent Assignment Agreement with Armstrong World Industries, Inc. (“AWI”). The agreements provide a cash payment to us for $10 million, subject to certain routine closing conditions, in exchange for the partial assignment to AWI and co-ownership of an undivided 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 an undivided 50% interest in the patent rights that relate to the Applicable ICE Code. We also agreed under the 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 million, which is expected 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 IP 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.

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Revenues for the quarter ended ~~June 30, 2022~~March 31, 2023 were ~~$44.7~~$36.7 million, ~~an increase~~a decrease of ~~$3.6~~$1.6 million or 9%4% from ~~$41.1 million for the three months ended June 30, 2021. Revenues increased $12.4 million or 18% to $83.0 million for the six months ended June 30, 2022 from $70.6~~$38.3 million for the same period ~~ended June 30, 2021.While~~in 2022, and a $5.7 million or 13% decrease from the ~~resurgence~~fourth quarter of ~~COVID-19 infections due~~2022. Compared to the ~~Omicron variant at~~same period in 2022, the ~~beginning of~~decrease in revenue is driven by a decrease in total orders, offset by an increase in pricing. Further, we had one large project within the ~~year temporarily sent many employees back~~tech industry, expected to their home offices and delayed return dates, DIRTT and its Construction Partners experienced an uptick in planning activity and opportunities for growth which began to translate into orders in March 2022 primarily in the commercial vertical space. The delivery of some second quarter orders were delayed into the third quarter due mainly to the impacts of a tight labor market on attraction and retention of manufacturing employees as the Company works to increase its labor capacity and productivity in light of improving demand. The full impact of the COVID-19 pandemic was incurred indeliver within the first quarter of ~~2021 when~~2023 that was indefinitely put on hold. Compared to the ~~impact of the contraction~~fourth quarter, first quarter activity is lower, in ~~construction activity was experienced and~~line with ~~most of our pre-pandemic projects in process completed in 2020.~~seasonal demand patterns.

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Gross profit and gross profit margin for the quarter ended ~~June 30, 2022~~March 31, 2023 was ~~$6.3~~$8.7 million or ~~14.0%~~23.7% of revenue, ~~a decrease~~an increase of ~~$2.9~~$5.4 million or ~~32%~~164% from ~~$9.2~~$3.3 million or ~~22.4%~~8.6% of revenue for the quarter ended June 30, 2021. Gross profit and gross profit margin for the six months ended June 30, 2022 was $9.6 million or 11.5% of revenue compared to $12.6 million of 17.8% of revenue for the same period in 2021.March 31, 2022. The ~~decrease~~increase in gross profit ~~margin largely~~ reflects ~~the continued impact of significant inflationary increases in the realized cost of materials, transportation and packaging in excess of realized~~ price increases enacted and ~~incremental fixed costs of~~reductions made to our ~~manufacturing facility in Rock Hill, South Carolina (the “South Carolina Facility”), as well as pressures on labor rates, partially offset by an improved~~ fixed cost leverage as compared to the prior periods as a result of higher activity. The second quarter included labor costs and inefficiency associated with adding and training manufacturing employees in Calgary and Savannah following the closure of the Phoenix Facility. The Company also benefited from a weakening Canadian Dollar this quarter with a $0.8 million benefit on Canadian dollar- denominated manufacturing costs.structure during 2022. Gross profit for the ~~six months~~quarter ended ~~June 30,~~March 31, 2022 ~~also~~ included $1.1 million of accelerated depreciation and amortization arising from a change in useful ~~life of assets, which arose in~~lives.

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Adjusted Gross Profit(see “– Non-GAAP Financial Measures”) for the first quarter of 2023 was $10.5 million. This represents a $3.7 million or 54.8% increase over the ~~year.~~

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~~The Company implemented an approximate 6.5% overall increase~~comparative period in ~~our product and transportation prices effective on new orders subsequent to November 15, 2021 to offset increased materials, transportation and packaging costs. The impact~~2022, but a decrease of ~~these changes was partially realized in~~$3.1 million or 23% from the ~~three and six months ended June 30, 2022 and is expected to be further realized in the second half~~fourth quarter of 2022. ~~Due to~~Adjusted Gross Profit Margin (see “–

Non-GAAP Financial Measures”) for the ~~continued inflationary pressures on material~~first quarter of 2023 was 28.5%, a 1,086 bps improvement over the comparative period and ~~labor costs,~~a decrease of 351 bps from the ~~Company implemented a further 5% price increase effective June 1, 2022 as well as an additional 10% price increase effective July 21, 2022 and eliminated the 20% pilot price reductions, implemented~~fourth quarter of 2022. The decrease in ~~February, on the Reflect and Inspire product lines.~~

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Adjusted Gross Profit and Adjusted Gross Profit Margin ~~(see “– Non-GAAP Financial Measures”) for~~compared to the quarter ended ~~June 30,~~December 31, 2022 ~~was $8.5 million or 18.9%, respectively, a decrease~~is due to the impact of fixed costs on lower volumes. General inflation in services and labor costs have been offset by the favorable impact from ~~$11.3 million or 27.4%, respectively, for~~the weakening Canadian dollar.

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During the quarter ended ~~June 30, 2021. Adjusted Gross Profit and Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”)~~March 31, 2023, the Board of Directors agreed to reimburse the 22NW Group for the six months ended June 30, 2022 was $15.2 million or 18.3%, respectively, a decrease from $18.4 million or 26.1%, respectively, for the six months ended June 30, 2021, due to the reasons described above. For the six month period ended June 30, 2021, $1.8$1.6 million of ~~overhead costs were excluded from Adjusted Gross Profit, as these costs were on account~~legal fees and other expenses incurred by the 22NW Group during the contested director election in 2022, anticipated to be settled by way of ~~operating at lower than normal capacity levels in the first quarter~~issuance of ~~2021 and were accordingly charged directly and separately to cost of sales rather than as a cost attributable to production.~~

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~~Operating expenses~~3,899,745 common shares, in the second quarter of ~~2022 increased by $4.2 million~~2023, subject to $25.6 million from $21.3 million in the same period of 2021. This increase is largely due to $5.2 million of reorganization costs, $1.0 million of higher travel and entertainment costs due to increased business activity and the easing of travel restrictions and $0.3 million of incremental professional fees associated with the contested director elections, offset by lower salaries and wages, stock based compensation and depreciation and amortization. For the six months ended June 30, 2022, operating expenses increased by~~$9.8 million to $50.4million from $40.6 million in the same period of 2021. This increase is largely due to $8.9 million in reorganization costs, $1.8~~million of incremental professional fees associated with the contested director elections and $1.5 million increase in travel, meals and entertainment costs due to increased business activity and the easing of COVID-19 restrictions, offset by decreases in salaries and benefits associated with cost reduction measures. The Company also benefited from a weakening Canadian Dollar in the second quarter of 2022 with a $0.6 million benefit on Canadian dollar- denominated operating costs.shareholder approval.

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Net loss for the ~~three months ended June 30, 2022~~first quarter of 2023 was ~~$19.3~~$11.4 million compared to ~~$9.7~~$23.0 million for the ~~three months ended June 30, 2021.~~same period of 2022. The ~~higher~~lower net loss is primarily the result of the ~~lower~~higher gross profit margin of $5.4 million (as explained ~~above, $4.2~~above), a $5.5 million ~~increase~~reduction in operating expenses, a ~~$3.4~~$2.6 million reduction in ~~government subsidies, and~~reorganization costs, a $0.5 million ~~increase~~decrease in ~~interest expense~~foreign exchange loss offset by a ~~$1.3 million increase in foreign exchange gain.~~

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~~Net loss for the six months ended June 30, 2022 was $42.3 million compared to $22.2 million for the six months ended June 30, 2021. The higher net loss is primarily the result~~one-time related party reimbursement of the lower gross profit margin explained above, $9.8 million increase in operating expenses, a $6.9 million reduction in government subsidies and a $1.4 million increase in interest expense offset by a $0.8 million increase in foreign exchange gain.

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On February 22, 2022, we announced a plan to close the Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum facilities. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. 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. No amounts were realized in the second quarter. Additionally, we eliminated approximately 14% of the expected 18% reduction of our salaried workforce including manufacturing and office positions which, along with other cost reduction initiatives, are expected to yield annualized savings of approximately $13.0$2.1 million. ~~Of these cost reduction initiatives, $9.0 million was implemented during~~During the first ~~and second quarters of 2022, $3.0 million will be implemented in~~quarter we benefited from the second half 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. One-time costs associated with these reductions and other costs savings measures were previously estimated to be $4.4 million for the second quarter, and $8.1 million for the year. For the three and six months ended June 30, 2022, we incurred $5.2 million and $8.9 million in reorganization costs, respectively. Actual costs for the quarter ended June 30, 2022 are higher due to additional termination benefits arising in June 2022 with the departure of two executives.weakening Canadian dollar on Canadian dollar denominated costs.

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Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the first quarter ~~ended June 30, 2022~~of 2023 was a ~~$9.4~~$3.5 million loss or ~~(21.1)~~(9.6)%, ~~a decline~~an improvement of ~~$2.6~~$8.4 million from a ~~$6.8~~$12.0 million loss or ~~(16.6)~~(31.2)% for the quarter ended June 30, 2021. Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the six months ended June 30, 2022 was a $21.4 million loss or (25.8%), a decline of $3.2 million from a $18.2 million loss or (25.8)% for the six months ended June 30, 2021. Reductions for the quarter and year-to-date periods were due to the above noted reasons. For the three and six months ended June 30, 2022, reorganization costs of $5.2 million and $8.9 million respectively, were added back in the calculation of Adjusted EBITDA.

~~Outlook~~

On April 26, 2022, at the Company’s 2022 annual and special meeting of shareholders, shareholders of the Company elected to replace the then-existing board of directors with seven new individuals, all of whom were nominated by 22 NW Fund, LP and other participants named in the definitive proxy statement filed on January 7, 2022, as amended. Following the election and appointment, the Board of Directors terminated the employment of Todd Lillibridge as Interim Chief Executive Officer and appointed Geoffrey Krause and Jeffrey Calkins as Interim Co-Chief Executive Officers, in each case effective as of April 26, 2022.

The Board of Directors in cooperation with management immediately commenced an in-depth review of the Company’s commercial and manufacturing operations, financial performance and outlook as well as accelerated its search for a permanent Chief Executive Officer. That review identified risks to DIRTT that are now being addressed (see “Item 1A. Risk Factors” below). As a result of this review, on June 3, 2022, the Company announced the departure

of Jennifer Warawa as Chief Commercial Officer and Jeffrey Calkins as Chief Operating Officer and Interim Co-Chief Executive Officer. The Company has commenced a search for a permanent Chief Operating Officer.

On June 22, 2022, the Company announced the appointment of Benjamin Urban as DIRTT’s new Chief Executive Officer, effective June 27, 2022 and along with Mr. Urban, the appointment of Shaun Noll to the Board of Directors. With the addition of Messrs. Urban and Noll, the Board of Directors is now comprised of nine highly qualified individuals.

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. Geoffrey Krause, DIRTT’s current Chief Financial Officer, announced his intention to retire from the Company, effective September 30, 2022. A search for a suitable replacement has commenced.

~~Second quarter 2022 revenues were $44.7 million, an increase of 16.8% and 8.8% over~~ the first quarter of 2022 and the second quarter of 2021, respectively, and within the guidance range of between $43 million and $47 million. As at July 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 13% to $359 million from $318 million at April 1, 2022, comprised of 65% commercial, 16% healthcare, 8% education and 11% government verticals. The relative split between verticals remains consistent with pre-pandemic actual percentage results. It is important to note that these figures do not reflect the impact of the 10% price increase nor termination of the Reflect and Inspire pilot price reduction. These pricing changes are expected to increase the Company’s gross margins; however, the net positive or negative impacts on the 12-month forward pipeline are not yet known. Although the current 12-month forward pipeline is a positive indicator of the Company’s future revenue potential, in the context of continued global macroeconomic uncertainty and possible recession risks, our fiscal year 2022 revenue guidance remains unchanged at $175 to $185 million. The midpoint of our 2022 guidance represents an approximate 22% increase over actual 2021 revenue of $147.6 million.

With demand for DIRTT’s product continuing to increase, the Company’s current and immediate focus is to unlock manufacturing capacity, improve revenues and profitability and accelerate the Company’s near-term progress towards cashflow breakeven and beyond. Under new leadership, the following actions have been taken and discussed in more detail below:

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Identifying and taking steps to unlock manufacturing capacity through additions to our hourly workforce and implementation of manufacturing improvements for Reflect and Inspire product lines, which comprise approximately 10% of DIRTT product revenue;2022.

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~~Implementing an additional 10% price increase effective July 21, 2022 to mitigate the impact of ongoing inflationary pressures on raw material and labor costs;~~

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~~Increasing governance over discounting and other similar activities;~~

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~~Executing on $5.0 million of incremental annualized cost reductions through elimination of 36 salaried positions, including the aforementioned leadership changes;~~

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~~Launching a new website, branding and associated sales collateral to generate increased awareness and demand; and~~

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~~Continuing close collaboration with our Construction Partners through the Partner Advisory Council.~~

In the second quarter, we increased our overall manufacturing headcount in Calgary by 9%, following the closure of the Phoenix Facility, where we have commenced a night shift for certain operations. We are experiencing the effects of a tight labor market, which has made it more difficult than expected to attract and retain skilled labor. This has been particularly the case at our Savannah facility. As a result of these challenges, some of our orders were pushed to the third quarter from June 2022 while we worked to ramp up our hourly work force. To increase our competitiveness, we have raised hourly wages in both Calgary and Savannah, established headcount targets and factored in attrition rates in hiring and retention strategies. We are continuing to add to our work force in anticipation of higher activity in the third and fourth quarters to avoid manufacturing capacity constraints that we experienced in the second quarter of 2022. We also commenced operational improvements on our Reflect and Inspire product lines to increase overall productive capacity and improve lead times, with such improvements expected to be complete by

~~August 2022. Finally, we completed the closure of our Phoenix Facility in June 2022 and sublet the associated factory space in July 2022 at a premium to the prior rent commitment.~~

In June 2022, in addition to a 5% price increase effective June 1, 2022, the Company announced a further 10% increase in prices on its products effective July 21, 2022 to further address the impact of ongoing inflationary pressure on raw material and labor costs. DIRTT also terminated the 20% pilot price reduction program on its Reflect and Inspire product lines, which comprise approximately 10% of product revenue for the six months ended June 30, 2022, that it announced in February 2022. This program termination is a result of the combination of increased aluminum prices and the unanticipated impact that the increased demand placed on our productive capacity due to the immaturity of production processes related to these product lines.

Through the course of the pandemic, the Company increased its use of discounting in an attempt to drive higher revenues, with approximately 10.5% of discounts on total revenue in the second quarter of 2022 compared to 8.7% in the same period of 2020. A pricing oversight committee was established in the second quarter to provide increased scrutiny of discounting behaviors and pricing decision making, with the goal of significantly reducing the amount of discounting provided on a go forward basis.

Under the leadership of its new Chief Executive Officer, the Company took further steps in July 2022 to flatten its organization to increase its overall effectiveness and to optimize its fixed salaried cost base in light of current activity levels and strategic needs. This resulted in annualized cost savings of $5.0 million and the elimination of 36 salaried positions, including the leadership changes described earlier. Key objectives of this process include breaking down interdepartmental silos, increasing cross functional communication and joint accountabilities, improving overall productivity across the organization and enhancing DIRTT’s overall approach to Construction Partner recruitment, onboarding, management and accountability. We are making additional investments in the ICE team and investing to support the long-term success of our Partners. These changes include but are not limited to:

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~~Reintegration of supply chain, quality and safety under plant management and elimination of non-core positions;~~

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~~Reallocation of resources to increase order engineering throughput and capacity;~~

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~~Flattening of overall organization and removal of unnecessary layers;~~

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~~Reorganization of Construction Partner development function under new leadership; and~~

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~~Redefining approach to strategic account and market segment management.~~

~~While revenues were in line with expectations and grew sequentially over the first quarter and the same period last year, the~~The Company used approximately ~~$19.1~~$2.7 million of cash in the second quarter compared to $21.3 million in the first quarter 2022. This included approximately $6.0 million in the quarter ($11.1 million year to date) of one-time reorganization and contested director election costs and DSU payments. Excluding these amounts, net of working capital, cash used would have been $13.7 million in the second quarter of 2022 compared to $18.3 million in the first quarter of ~~2022. From a working capital management perspective, we continued~~2023 compared to experience a buildup in inventory, primarily in aluminum extrusions, reflecting our difficulty in increasing productive capacity relative to expectations as described above. Inventory increased by $3.7$3.8 million ~~and $3.2 million in the first and second quarter~~ of ~~2022, respectively. We have taken steps to moderate such supply and expect to begin to reduce our inventory levels in the third and fourth quarters. As a result of the steps mentioned, we expect~~ cash ~~usage to improve as 2022 progresses and to approach monthly cashflow breakeven~~generated in the fourth quarter of 2022, ~~(see “–Liquidity~~ and ~~Capital Resources").~~

~~As revenues improve, including~~compared to cash used of $21.3 million, $19.1 million and $12.5 million in the ~~effect~~first, second and third quarters of ~~the price increases above, and the cost reduction initiatives take hold, we expect~~2022. Our cashflow was reduced compared to ~~continue to progress toward an improvement in net loss and Adjusted EBITDA breakeven in~~ the fourth quarter of ~~2022. Unrestricted~~2022 due to lower sales. However, compared to the earlier quarters of 2022, our cash usage has decreased significantly due to the impact of increased pricing and ~~net~~cost reduction initiatives. Our working capital benefited from the receipt of $5.0 million from the ERC government subsidy during the quarter.

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Management is continuing to evaluate and align our manufacturing footprint and salaried workforce in light of the continued economic uncertainty.

In the first quarter of 2023, we changed our methodology for calculating and disclosing our forward twelve month pipeline as the macroeconomic environment has been impacting our ability to close and convert qualified leads on a timely basis. Accordingly, we are now disclosing qualified leads, defined as quantity of projects being pursued, and our pipeline, defined as working with an engaged client on assessment of DIRTT as a prefabricated interior solution provider. We have begun using these new measures as they better measure expected near term performance given our operating environment has been prone to change due to macroeconomic factors such as worksite labor availability, interest rate changes, and recessionary impacts on construction projects.


	As at(1)
	April 1, 2023		January 1, 2023		% Change			April 1, 2022		% Change
Pipeline ($ 000s)
Commercial		160,636		141,293		14	%		146,986		9	%
Healthcare		45,900		55,719		(18	%)		43,570		5	%
Government		30,676		32,313		(5	%)		32,328		(5	%)
Education		14,987		17,201		(13	%)		19,727		(24	%)
		252,199		246,525		2	%		242,612		4	%
Leads (#)		969		721		34	%		417		132	%
(1) Adjusted for previously presented period pursuant to new methodology

Our forward twelve-month pipeline as of April 1, 2023 was $252 million, a 2% increase from $247 million at ~~June 30, 2022~~January 1, 2023, and a 4% increase from $243 million at April 1, 2022.

Our qualified leads being pursued with expected projects in the next twelve months was ~~$19.7 million and $31.6 million,~~969 as of April 1, 2023, as compared to ~~$38.9 million~~721 at January 1, 2023 and ~~$49.3 million at March 31, 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~~395 as of ~~accounts receivable and inventory, remains undrawn at June 30, 2022 with approximately$11.3 million available~~.January 1, 2022. The Company ~~continues~~has increased its qualified leads as a result of the implementation of our customer relationship management system, as well as improved communication and collaboration 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.~~our commercial organization.

Outlook

Through the first three months of 2023 we have seen continued weakening in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. While our win rate has increased modestly year over year on a project basis, the average project dollar value has decreased 14.8% from $49,860 to $42,473 (whole dollars). We believe this is a result of tightening credit policies in response to rising inflation resulting in smaller order size. Further, these macroeconomic conditions, including layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings, certain larger projects that were planned for the first two quarters of 2023 have been deferred or canceled, resulting in muted growth in our pipeline as of April 1, 2023.

In response to the economic uncertainty and pipeline risk discussed above, we have taken a thoughtful look at our cost structure over the past three months. As discussed in our 2022 Form 10-K, we previously identified and took action to reduce annualized overhead costs by $5 million during 2023. Further, on May 8, 2023, the Company reduced its salaried workforce, resulting in annualized savings of $3.1 million. One-time costs associated with these reductions, to be incurred in the second quarter of 2023, are expected to be approximately $0.7 million.

It should be noted that we have experienced an increase in both our order pace and pipeline beginning in April, being awarded several large projects with Bechtel, Apache and Visa that are expected to deliver $10 to $15 million in aggregated revenue this year. In addition to the pipeline, we use the trailing 28 day order pace to gauge near term revenue and overall demand. As of May 5, 2023, the trailing 28 day order pace reached $16 million, the highest level it has been since mid fourth quarter of 2022. This is not a guarantee of future revenue run rate, but it is a positive indicator for us as it implies improved revenue performance in Q2 and Q3.

We have also continued to execute upon various non-dilutive initiatives designed to improve cash and liquidity. During March 2023, we entered into an arrangement with one of our Construction Partners to sublease our Dallas DXC. Under the sublease agreement, the subtenant will assume responsibility for the monthly rent, utilities, maintenance, taxes and other costs from April 1, 2023, through December 31, 2024 and provide annualized cash savings of approximately $1 million. The quarter also benefited from the receipt of $4.8 million of the $7.3 million previously accrued government subsidy receivable associated with the ERC program. We anticipate receiving the remainder of during the the second quarter of 2023.

As we move into the second quarter of 2023, we are evaluating certain properties that are currently owned for sale and lease back. While we do not currently intend to vacate these premises as they still serve a valuable aspect of our value proposition, if we were to execute sale and lease back transactions, we would expect to receive a one-time cash payment, in exchange for future rent payments.

We have meaningfully reduced our cost footprint and lowered our estimated revenue breakeven point. In tandem with the improved gross profit percentages and the cash initiatives discussed above, we believe we are positioned to weather the current macroeconomic conditions, while continuing to invest in our technology and commercial organizations.

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, 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 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; reorganization ~~expenses,~~expenses; stock-based compensation expense; government subsidies one-time, non-recurring charges; 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 Six~~ Months Ended ~~June 30, 2022,~~March 31, 2023, Compared to Three ~~and Six~~ Months Ended ~~June 30, 2021~~March 31, 2022


	For the Three Months Ended June 30,									For the Six Months Ended June 30,										For the Three Months Ended March 31,
	2022			2021			% Change			2022			2021			% Change				2023			2022			% Change
	($ in thousands)									($ in thousands)										($ in thousands)
Revenue		44,701			41,102			9			82,987			70,567			18				36,708			38,286			(4	)
Gross Profit(1)		6,276			9,224			(32	)		9,563			12,594			(24	)			8,682			3,287			164
Gross Profit Margin		14.0	%		22.4	%					11.5	%		17.8	%						23.7	%		8.6	%
Operating Expenses
Sales and Marketing		7,777			7,564			3			15,005			14,234			5				5,515			7,228			(24	)
General and Administrative		6,877			7,780			(12	)		14,870			15,021			(1	)			5,833			7,993			(27	)
Operations Support		2,528			2,213			14			5,026			4,510			11				1,990			2,498			(20	)
Technology and Development		1,879			1,924			(2	)		4,019			3,859			4				1,539			2,140			(28	)
Stock-Based Compensation		1,326			1,861			(29	)		2,628			2,955			(11	)			796			1,302			(39	)
Reorganization		5,163			-			100			8,855			-			100				1,071			3,692			(71	)
Related party expense																					2,056			-		NA
Total Operating Expenses		25,550			21,342			20			50,403			40,579			24				18,800			24,853			(24	)
Operating Loss		(19,274	)		(12,118	)		59			(40,840	)		(27,985	)		46				(10,118	)		(21,566	)		53
Operating Margin		(43.1	)%		(29.5	)%					(49.2	)%		(39.7	)%						(27.6	)%		(56.3	)%
(1) Gross Profit for the three months ended March 31, 2022 includes $1.1 million of accelerated depreciation associated with the closure of the Phoenix Facility																			(1) Gross Profit for the three months ended March 31, 2022 includes $1.1 million of accelerated depreciation associated with 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 June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2022		2021		% Change		2022		2021		% Change		2023		2022		% Change
	($ in thousands)						($ in thousands)						($ in thousands)
Product		38,098		36,462		4		71,291		62,298		14		31,481		33,193		(5	)
Transportation		4,795		3,484		38		8,856		5,983		48		3,788		4,061		(7	)
License fees from Construction Partners		198		141		40		395		348		14		207		197		5
Total product revenue		43,091		40,087		7		80,542		68,629		17		35,476		37,451		(5	)
Installation and other services		1,610		1,015		59		2,445		1,938		26		1,232		835		48
		44,701		41,102		9		82,987		70,567		18		36,708		38,286		(4	)

~~Our sales activity~~In response to significant increases in the costs of raw materials, shipping materials, labor, and ~~associated revenues continue to be impacted~~freight, effective November 16, 2021, DIRTT increased product and transportation prices on new projects by ~~the severe economic and social impact~~approximately 6.5%. 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. As of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels in North America due to work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials.

~~During the~~fourth quarter ~~ended June 30,~~of 2022, ~~revenue was $44.7 million, an increase~~product sales reflect virtually all of ~~$3.6 million or 9% from the same period in 2021. Revenue for the six months ended June 30, 2022 was $83.0million an increase of 12.4 million~~

~~or 18% from the six months ended June 30, 2021.~~these price increases. 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~~2022 temporarily sent many employees back to their home offices and delayed return dates, the Company and our Construction Partners experienced an uptick in planning activity and opportunity growth in our commercial vertical which began to translate into an increase in orders beginning in March 2022 that has continued into the second quarter. In response, the Company began efforts to increase its manufacturing labor headcount to enable it to capture the increase in demand 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, the case at our Savannah facility. As a result of these challenges in combination with the time to fully onboard new hires up to productive status, some orders had to be pushed to the third quarter from June 2022 while we worked to ramp up our hourly workforce.2022.

~~We remain uncertain as to the ongoing impact~~The first quarter of the ~~pandemic,~~year is seasonally a lower demand quarter. Macroeconomic conditions, including ~~effects of resurgent infection rates due to variants, on future projects that are either~~layoffs in the ~~planning or conceptual stage. It is likely~~tech sector and rising interest rates have had an impact on our pipeline, including one large project with a tech customer that ~~future projects will experience similar delays as~~originally scheduled for the ~~COVID-19 pandemic runs its course and as DIRTT works through~~first quarter of 2023 that was deferred indefinitely. During the ~~aforementioned hiring and training challenges. See Item 1A. “Risk Factors”.~~quarter ended

~~In response to significant increases in the costs~~24

March 31, 2023, revenue was $36.7 million, a decrease of raw materials, shipping materials, labor and freight, 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. Based on experience to date, these increases were not sufficient to offset the significant inflationary impacts on raw materials. Accordingly, on June 21, 2022 an additional price increase of 10% was announced effective July 21, 2022. The benefits of this additional increase are largely expected to be realized in the second half of 2022. 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 of the combination of increased aluminum prices and the unanticipated impact that the increased demand placed on our productive capacity due$1.6 million compared to the ~~immaturity~~comparative period of ~~production processes related to these product lines.~~$38.3 million.

Installation and other services revenue was ~~$1.6 million and $2.4~~$1.2 million for the ~~three and six months~~quarter ended ~~June 30, 2022 respectively,~~March 31, 2023 compared to ~~$1.0 million and $1.9~~$0.8 million in the ~~same period of 2021.~~quarter ended March 31, 2022. This revenue primarily reflects services performed by our ICE and design teams for third parties. Except in limited circumstances, our Construction Partners, rather than the Company, perform installation services, 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 ~~June 30, 2022,~~March 31, 2023, we had 6967 (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,~~March 2023, we announced the ~~establishment~~expansion of ~~a Partner Advisory Council to provide a greater link with~~six 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. The following table presents our product and transportation revenue by vertical market:


	For the Three Months Ended March 31,
	2023		2022		% Change
	($ in thousands)
Commercial		24,504		24,044		2
Healthcare		6,171		6,964		(11	)
Government		2,707		3,281		(17	)
Education		1,887		2,965		(36	)
License fees from Construction Partners		207		197		5
Total product revenue		35,476		37,451		(5	)
Service revenue		1,232		835		48
		36,708		38,286		(4	)


	For the Three Months Ended June 30,							For the Six Months Ended June 30,							For the Three Months Ended March 31,
	2022		2021		% Change			2022		2021		% Change			2023		2022
	($ in thousands)							($ in thousands)							(in %)
Commercial		29,618		19,032		56			53,662		35,176		53			70		64
Healthcare		5,091		14,176		(64	)		12,055		20,663		(42	)		17		19
Government		5,041		4,249		19			8,322		8,430		(1	)		8		9
Education		3,143		2,489		26			6,108		4,012		52			5		8
License fees from Construction Partners		198		141		40			395		348		14
Total product revenue		43,091		40,087		7			80,542		68,629		17
Service revenue		1,610		1,015		59			2,445		1,938		26
		44,701		41,102		9			82,987		70,567		18
Total Product Revenue(1)																100		100

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2022

2021

2022

2021

(in %)

(in %)

Commercial

69

47

67

52

Healthcare

12

36

15

30

Government

12

11

10

12

Education

7

6

8

6

Total Product Revenue(1)

100

100

100

100

(1)

Excludes license fees from Construction Partners.

Commercial revenues increased by ~~56% and 53% in the three and six month periods ended June 30, 2022~~2% from the ~~same~~ prior year ~~periods, reflecting improving market conditions as health restrictions and work-from-home requirements ease and~~period. Commercial revenues include two large customers making up approximately $4.0 million, similar to the first quarter of 2022 which included one large customer in the technology sector ~~with revenue~~ of ~~$2.3 million and $5.6 million for the respective periods.~~over $3.0 million. Healthcare decreased by ~~64% and 42%~~11% in the ~~three and six months ended June 30, 2022, respectively,~~first quarter of 2023 from the same ~~periods in 2021.~~period of 2022. 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 healthcare project with revenue of $6.9 million~~Healthcare revenues in the ~~second~~first quarter ~~which did not recur in 2022.~~

of 2022 included two large projects of approximately $3.0 million while first quarter 2023 revenues included several smaller projects. Education sales in the ~~three and six months ended June 30, 2022 increased~~first quarter of 2023 decreased by ~~26% and 52%, respectively, over~~36% from the prior periods. At 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.period. Government revenues in the ~~three months ended June 30, 2022 increased by 19% and~~first quarter of 2023 decreased by ~~1% for the six month period then ended over~~17% from the prior ~~year periods.~~period. Both Healthcare and Education segments included a higher magnitude of smaller projects in the first quarter of 2023 than in the first quarter of 2022. During 2023, we have experienced an increase in quotes for Healthcare and Education related projects, but these tend to have longer project lifecycles than Commercial projects.

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 June 30,

For the Six Months Ended June 30,

2022

2021

% Change

2022

2021

% Change

($ in thousands)

($ in thousands)

Canada

7,417

4,461

66

12,668

7,456

70

U.S.

37,284

36,641

2

70,319

63,111

11

44,701

41,102

9

82,987

70,567

18


	For the Three Months Ended March 31,
	2023		2022		% Change
	($ in thousands)
Canada		4,912		5,251		(6	)
U.S.		31,796		33,035		(4	)
		36,708		38,286		(4	)

Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. ~~In the quarter ended June 30, 2020, revenues from Canada fell to 10% of total sales while sales~~

to the United States increased to 90%. The geographical split for the quarter ended June 30, 2022 began to return to historical averages and reflects the easing of health restrictions in Canada which was later than the United States.

Sales and Marketing Expenses

Sales and marketing expenses ~~increased~~decreased by ~~$0.2 million and $0.8~~$1.7 million to ~~$7.8 million and $15.0~~$5.5 million for the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, from ~~$7.6 million and $14.2~~$7.2 million for the three ~~and six~~ months ended ~~June 30, 2021 respectively.~~March 31, 2022. The ~~increase~~decrease was largely related to ana realignment of back office support and territory coverage and cost structure with current demand levels. We expect to increase ~~of $0.9 million and $1.3 million for~~ the ~~three and six months ended June 30, 2022, respectively,~~investment in ~~travel, meals and entertainment expenses as business activity has increased and restrictions on travel have eased, offset by lower salary and benefit expenses due~~this function during 2023 in order to ~~planned headcount reductions as part of the cost savings initiatives.~~support organic revenue growth.

General and Administrative Expenses

General and administrative expenses decreased ~~$0.9~~by $2.2 million to ~~$6.9 million and $0.1 million to $14.9~~$5.8 million for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023, from ~~$7.8 million and $15.0~~$8.0 million for the three ~~and six~~ months ended ~~June 30, 2021. In~~March 31, 2022. The decrease was primarily related to a decrease in professional services as the ~~three months ended June 30,~~first quarter of 2022 ~~approximately $0.3~~included $1.5 million of ~~professional fees associated with~~costs related to the contested ~~election of directors was more than offset by lower salaries and benefits costs. For the six month period ended June 30, 2022, approximately $1.8~~director elections with an additional $0.4 million ~~of incremental~~decrease in other professional ~~fees associated with the contested election of directors was offset by lower salaries and benefits cost. Reductions~~services, a $0.2 million decrease in salaries and benefits ~~includes~~costs associated with the planned headcount reductions as part of our cost savings initiatives, ~~as well as the impact of the Chief Executive Officer vacancy~~and a $0.2 million decrease in ~~the periods.~~depreciation expense. The decreases were partially offset by increased travel costs.

Operations Support Expenses

Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Construction Partner project execution and our manufacturing operations. Operations support expenses ~~increased~~decreased by ~~$0.3 million and~~ $0.5 million from ~~$2.2 million and $4.5~~$2.5 million for the three ~~and six~~ months ended ~~June 30, 2021, respectively,~~March 31, 2022 to ~~$2.5 million and $5.0~~$2.0 million for the three ~~and six~~ months ended ~~June 30, 2022.~~March 31, 2023. The ~~increase~~decrease was primarily due to ~~lower costs capitalized to internal projects with the completion of the South Carolina Facility and the DIRTT Experience Centre ("DXC") in Dallas and an increase~~a $0.6 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of ~~$0.2 million and $0.3 million for the three and six month period ended June 30, 2022 compared to the previous year same period.~~our cost savings initiatives.

Technology and Development Expenses

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

Technology and development expenses decreased by $0.6 million to $1.5 million for the three ~~and six month period~~months ended ~~June 30,~~March 31, 2023, compared to $2.1 million for the three months ended March 31, 2022, ~~were consistent with prior period costs as $0.2 million and $0.5 million of lower capitalized costs due~~primarily related to ~~fewer internal projects, respectively, were offset by reductions in~~decreased salaries and benefits ~~expense.~~costs and professional fees associated with our cost savings initiatives and an increase in capitalized software development costs.

Stock-Based Compensation

Stock-based compensation expense for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 was ~~$1.3 million and $2.6~~$0.8 million compared to ~~$1.9~~$1.3 million ~~and $3.0 million for the same periods~~ in ~~2021.~~2022. The ~~movement in this expense~~decrease was largely ~~the impact of~~due to grants of RSUs toand share awards which occurred in 2022 but were not repeated in the ~~Company's employees,~~first quarter of 2023, including those in lieu of cash compensation to the Company’s ~~former~~ interim Chief Executive Officer in ~~January 2022 and~~2022. DSUs were granted to the Board of Directors, lowered by the impact of fair value adjustments on cash settled awards as a result of our share price decreasing during the quarter ~~and six months~~ ended ~~June 30, 2022. The Board of Directors receives 100% of their remuneration in DSUs.~~March 31, 2023.

Reorganization

~~On February 22,~~Reorganization expenses for the quarter of $1.1 million decreased from $3.7 million in the prior period. Current quarter costs relate primarily to termination costs associated with actions taken to streamline our back office and operational support functions, as discussed in our last filing, which are expected to reduce annualized overheads by $5 million in 2023. First quarter 2022 ~~we announced a plan~~costs relate to ~~close~~expenditures in closing the Phoenix Facility ~~shifting related manufacturing to both our Savannah~~ and ~~Calgary aluminum facilities. The closure of the Phoenix Facility was substantially completed~~costs associated with workforce reductions and changes in the second quarter of 2022. 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. No amounts were realized in the second quarter. Additionally, we eliminated approximately 14% of the expected 18% reduction of our salaried workforce including manufacturing and office positions, which, along with other cost reduction initiatives, are expected to yield annualizedmanagement.

~~savings~~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 own approximately ~~$13.0 million. Of these cost reduction initiatives, $9.0~~19.5% of issued and outstanding common shares. 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 (the "2022 Meeting"), being $1,559,898 (the "Debt").

The liability has been revalued using the closing common share price at March 31, 2023, and a $2.1 million ~~was implemented during the first~~liability and ~~second quarters of 2022, $3.0 million will be implemented~~expense has been recorded in the second half 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. One-time costs associated with these reductions and other costs savings measures were previously estimated to be $4.4 million for the second quarter, and $8.1 million for the year. For the three and six months ended June 30, 2022, we incurred $5.2 million and $8.9 million in reorganization costs, respectively. Actual costs for the quarter ended June 30, 2022 are higher due to additional termination benefits arising in June 2022 with the departure of two executives.financial statements.

Government Subsidies

The Company was not eligible and did not receive any new government subsidies in the ~~three and six months~~quarter ended ~~June 30, 2022 compared to $3.4 and $7.5~~March 31, 2023. The Company received $0.2 million of ~~subsidies received~~interest with the collection of the ERC during the ~~three and six months ended~~quarter.

Pursuant to amendments enacted as part of the 2021 Canadian 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 ~~30, 2021.~~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 in the first quarter of 2022. The last claim period under the CEWS and CERS programs expired on October 23, 2021.~~

~~The Company is currently evaluating its eligibility for the Employer Retention Tax Credit in the United States, which, if eligible, could provide additional subsidies to the Company.~~necessary.

Interest expense

Interest expense ~~increased~~decreased by ~~$0.5 million from $0.8 million for the three months ended June 30, 2022 to $1.3 million compared to June 30, 2021 and by $1.4~~$0.1 million from $1.3 million in the ~~six months~~quarter ended ~~June 30,~~March 31, 2022 to ~~$2.7~~$1.2 million ~~compared~~in the quarter ended March 31, 2023 due to ~~June 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 ~~is comprised of~~comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. ~~The Company incurred no income tax expense or recovery during the three and six months ended June 30, 2022, compared to a $0.2 million and $0.3 million expense for the same period of 2021.~~ As at ~~June 30, 2022~~March 31, 2023 the Company had a valuation allowance of ~~$27.0~~$32.4 million (December 31, ~~2021 $17.3~~2022: $29.8 million) against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at ~~June 30, 2022,~~March 31, 2023, we had C$~~89.8~~110.9 million of non-capital loss carry-forwards in Canada and ~~$60.4~~$61.3 million in the United States. These loss carry-forwards will begin to expire in 2032.

Net Loss

Net loss ~~increased~~decreased to ~~$19.3~~$11.4 million or ~~$0.22~~$0.12 net loss per share in the three months ended ~~June 30, 2022~~March 31, 2023 from a net loss of ~~$9.7~~$23.0 million or ~~$0.11~~$0.27 net loss per share for the ~~quarter~~three months ended ~~June 30, 2021.~~March 31, 2022. The ~~increased~~decreased loss is primarily the result of a ~~$2.9~~$5.4 million ~~decrease~~increase in gross profit, a ~~$4.2~~$6.1 million ~~increase~~decrease in operating expenses, ~~(which includes $5.2~~including $2.6 million ofdecrease in reorganization expenses, and ~~$0.3 million~~a decrease of incremental professional fees described previously), a $0.5 million increase in interest expense and a $3.4 million decrease in government subsidies offset by a $1.3 million increase in foreign exchange gain.

Net loss increased to $42.3 million or $0.49 net loss per share in the first half of 2022 from a net loss of $22.2 million or $0.26 net loss per share for the six months ended June 30, 2021. The increased loss is primarily the result of a $3.0 million decrease in gross profit, a $9.8 million increase in operating expenses (which includes $8.9 million of reorganization expenses and $1.8$1.5 million of incremental professional fees as described ~~previously),~~previously, a ~~$1.4~~$0.1 million ~~increase~~decrease in interest expense, and a ~~$6.9~~$0.5 million decrease in foreign exchange loss offset by a $0.4 million decrease in government ~~subsidies offset by a foreign exchange gain of $0.8 million.~~subsidies.

EBITDA and Adjusted EBITDA for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

The following table presents a reconciliation for the ~~second~~first quarter ~~and year to date~~ results of ~~2022~~2023 and ~~2021~~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 June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2022			2021			2022			2021			2023			2022
	($ in thousands)						($ in thousands)						($ in thousands)
Net loss for the period		(19,288	)		(9,738	)		(42,330	)		(22,237	)		(11,434	)		(23,042	)
Add back (deduct):
Interest Expense		1,329			794			2,659			1,294			1,207			1,330
Interest Income		(20	)		(23	)		(31	)		(42	)		(4	)		(11	)
Income Tax Expense		-			220			-			259
Depreciation and Amortization		3,344			3,421			7,966			6,823			2,675			4,622
EBITDA		(14,635	)		(5,326	)		(31,736	)		(13,903	)		(7,556	)		(17,101	)
Foreign Exchange (Gains) Losses		(1,246	)		60			(514	)		240
Foreign Exchange Losses														261			732
Stock-Based Compensation		1,326			1,861			2,628			2,955			796			1,302
Government Subsidies		(49	)		(3,431	)		(624	)		(7,499	)		(148	)		(575	)
Related party expense(2)														2,056			-
Reorganization Expense		5,163			-			8,855			-			1,071			3,692
Adjusted EBITDA		(9,441	)		(6,836	)		(21,391	)		(18,207	)		(3,520	)		(11,950	)
Net Loss Margin(1)		(43.1	)%		(23.7	)%		(51.0	)%		(31.5	)%		(31.1	)%		(60.2	)%
Adjusted EBITDA Margin		(21.1	)%		(16.6	)%		(25.8	)%		(25.8	)%		(9.6	)%		(31.2	)%

(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 15 of the consolidated interim financial statements).

For the three months ended ~~June 30, 2022,~~March 31, 2023, Adjusted EBITDA and Adjusted EBITDA Margin ~~decreased~~increased by ~~$2.6~~$8.4 million to a ~~$9.4~~$3.5 million loss or ~~(21.1)~~(9.6)% from ~~$6.8~~$12.0 million loss or ~~(16.6)~~(31.2)% in the same period of ~~2021.~~2022. This primarily reflects a ~~$2.8~~$3.7 million ~~decrease~~increase in Adjusted Gross Profit, ~~$1.0 million increase in travel and entertainment costs, $0.3~~a decrease of $1.5 million of incremental professional fees as described previously, ~~and, $0.3~~a $2.4 million ~~reduction~~decrease in ~~capitalized costs due to fewer internal projects, offset by $1.4 million of lower~~ salaries and benefits costs, ~~due to headcount reductions and other cost savings.~~

~~For the six months ended June 30, 2022, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $3.2 million to~~ a ~~$21.4 million loss or (25.8)% from $18.2 million loss or (25.8)% in the same period of 2021. This primarily reflects a $3.2~~$0.3 million decrease in ~~Adjusted Gross Profit, $1.8~~marketing costs, and a $0.1 million ~~of incremental professional fees as described previously, $1.5 million increase~~decrease in travel and entertainment costs ~~and $0.7 million reduction in capitalized costs due to fewer internal projects, offset by $1.8 million of costs of underused capacity~~ in the ~~first quarter of 2021 which did not re-occur and $2.6 million lower salaries and benefits costs due to headcount reductions.~~quarter.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

The following table presents a reconciliation for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ 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 June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2022			2021			2022			2021			2023			2022
	($ in thousands)						($ in thousands)						($ in thousands)
Gross profit		6,276			9,224			9,563			12,594			8,682			3,287
Gross profit margin		14.0	%		22.4	%		11.5	%		17.8	%		23.7	%		8.6	%
Add: Depreciation and amortization expense		2,188			2,033			5,660			4,062			1,783			3,472
Add: Costs of under-utilized capacity		-			-			-			1,756
Adjusted Gross Profit		8,464			11,257			15,223			18,412			10,465			6,759
Adjusted Gross Profit Margin		18.9	%		27.4	%		18.3	%		26.1	%		28.5	%		17.7	%

~~Gross~~For the quarter ended March 31, 2023, gross profit and gross profit margin ~~decreased~~increased to ~~$6.3~~$8.7 million or ~~14.0%~~23.7% from $3.3 million or 8.6% for the ~~three months ended June 30, 2022, from $9.2 million or 22.4% for the three months ended June 30, 2021.~~prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin ~~decreased~~increased

10.8% to ~~$8.5~~$10.5 million or ~~18.9%~~28.5% for the three months ended ~~June 30, 2022,~~March 31, 2023, from ~~$11.3~~$6.8 million or ~~27.4%~~17.7% for the three months ended ~~June 30, 2021.~~March 31, 2022. Gross profit for the quarter ended March 31, 2022 included $1.1 million of accelerated depreciation and amortization arising from change in useful lives of the Phoenix Facility's equipment.

~~For the six month period ended June 30, 2022, gross profit and gross profit margin decreased to $9.6 million or 11.5% from $12.6 million or 17.8% for the six month period ended June 30, 2021.~~The improvement in Adjusted Gross Profit ~~and Adjusted Gross Profit Margin decreased to $15.2 million or 18.3% for the six months ended June 30, 2022, from $18.4 million or 26.1% for the six months ended June 30, 2021.~~

The decrease in gross profit margin largely reflects significant and industry wide inflationary increases in the realized cost of materials, transportation, labor and packaging. In addition, in the second quarter and in response towas 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~~result of a ~~tight~~reduction on fixed costs, management of labor ~~market. This has made it more difficult than expected to attract~~hours throughout the period and ~~retain skilled labor, particularly at our Savannah facility, and as a result~~ the ~~Company increased hourly rates by 6% on average to increase its overall competitiveness.~~

~~To address these cost increases,~~impact of the ~~Company implemented a series of~~ price increases ~~including a 6.5% increase effective November 1, 2021 and an additional 5% price increase effective June 1, 2022. As these increases were not sufficient~~ to offset the ~~continuing~~ inflationary ~~pressure,~~impacts on material costs. Labor and fixed costs decreased $1.3 million and $0.9 million, respectively, for the ~~Company announced a further 10% price increase effective July 21, 2022 and will continue to monitor raw material, labor and other costs to determine whether further action is necessary.~~

~~For the three month period ended June 30, 2022, gross profit margin decreased by 8.4% from the same period in 2021~~quarter as material, transportation and packaging costs increased by approximately 5.4% as a percentage of revenue and a negative labor efficiency of 2.3% was realized due to higher labor rates and increased inefficiencies resulting from training and onboarding of new employees. In addition, the Company had previously announced intentions to extend its scheduling lead times, while removing deposit requirements, and accordingly reduce standby production labor capacity by up to 20%. Following further discussions withwe closed our ~~Construction Partners, including the importance of short lead times, we reversed this decision in~~Phoenix Facility during the second quarter of ~~2022. Other~~2022 and temporarily suspended operations in our Rock Hill Facility in the third quarter of 2022, as well as cost ~~increases negatively impacted the gross profit by 1.1% partially offset by marginal fixed cost leverage on account of the 9% increase in revenue compared~~reduction initiatives taken impacting our overheads. Idle facility costs related to the ~~same period last year.~~

For the six month period ended June 30, 2022, gross profit margin decreased by 6.3% from the same period in 2021 as material, transportation and packaging costs increased by approximately 6.7% as a percentageRock Hill Facility incurred since suspension of revenue. Other cost increases negatively impacted the gross profit by 1.4% and gross profit was reduced by approximately 1% due to incremental South Carolina Facility fixed costs. Additional depreciation and amortization due to revision to the useful livesoperations of ~~assets, including the Phoenix Facility, contributed $1.1~~$0.4 million or 1.1% of the gross margin. This increased cost impact was offset by 2.8% of improved fixed cost leverage on account of the $12.4 million or 18% increase in revenue compared to the same period in 2021.

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 expensedare included 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 at ~~June 30, 2022~~March 31, 2023 totaled ~~$19.7~~$8.1 million, a decrease of ~~$40.5~~$2.7 million from December 31, ~~2021.~~2022. The decrease in cash ~~over the six month period~~ primarily reflects the impact of ~~$36.8~~$1.0 million cash used in

operations, ~~of which $1.8 million related to one-time costs associated with the contested director election and $8.9 million of reorganization costs. In addition,~~ capital expenditures ~~totaled $3.0~~of $1.0 million and scheduled Leasing Facilities repayments ~~totaled $1.2~~of $0.6 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 external financings, as described further below. ~~Furthermore,~~In response, we ~~have~~ implemented multiple initiatives in 2022 as well as the first quarter of 2023 to reduce our overall fixed cost base ~~including~~and pricing actions to better recover the ~~closure of our Phoenix Facility in~~inflationary impacts to material, labor and transportation input costs. During the second ~~quarter~~half of 2022, ~~reduction in our hourly headcount in 2021 and salaried headcount reductions and other cost savings initiatives in February 2022 and July 2022. We have also implemented three price increases~~we began to mitigate the inflationary effect, comprised 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 raw materials and labor to determine whether further price increases are warranted. Since March 2022, however, the Company and its Construction Partners have experienced a significant increase in demand, particularly within its commercial and education verticals, with the broad lifting 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. We are also taking steps to decongest our manufacturing processes to return productivity to pre-pandemic levels. We believerealize the benefits of these actions. In the ~~price increases, manufacturing headcount additions, training~~first quarter of 2023, despite a 4% reduction in sales from the comparative quarter, cash utilized was $2.7 million compared to $21.3 million utilized in the quarter ended March 31, 2022. The improved cash flow was driven by a combination of improved Adjusted EBITDA from the pricing initiatives and ~~debottlenecking will begin~~cost reduction initiatives as well as careful working capital management.

We expect the benefit of the 2022 and 2023 actions discussed above to continue to be realized in 2023 and beyond. While these actions, combined with our project pipeline are promising, we continue to see unpredictability in our pace of orders.

Accordingly, we are taking several actions to improve our balance sheet in the ~~middle~~short term.

First, in the latter half of 2022, we determined our eligibility for the ERC claim for the first three quarters of 2021 and filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). During the three months ended March 31, 2023, we received $5.0 million of the ERC claim comprising $4.8 million related to the claim and $0.2 million of interest. We expect to receive the remaining balance in the remainder of 2023.

Second, we have certain properties that are currently owned or leased that we are evaluating for sale and lease back, or sublease arrangements. We do not intend to vacate these premises as they still serve a valuable aspect of our value proposition, but these types of arrangements would provide us with either a one-time cash payment, or offset rent expense in the near term. During March 2023, we entered into an agreement to sublease our Dallas DIRTT Experience Center ("DXC") to one of our Construction Partners in that region. Under the agreement, the subtenant will assume responsibility of rent, utilities, maintenance, taxes, and other monthly expenses from April 1, 2023, through December 31, 2024, providing annualized savings of approximately $1 million. We are continuing to evaluate other properties and expect these strategic initiatives to result in positive cash inflows in 2023

Third, we are evaluating initiatives related to the use of ICE software by third ~~quarter 2022, continuing throughout~~parties to supplement the ~~balance~~relatively small revenues we have previously recognized from our licensing of ICE software to certain strategic partners for use in their businesses and our related licensing and developer software support for these counterparties. On May 9, 2023, as a result of this evaluation and in exchange for a cash payment we entered into the Co-Ownership Agreement and Partial Patent Assignment Agreement with AWI for the partial assignment and co-ownership of a 50% interest in the rights, title and interest in certain intellectual property rights (including related patent rights) in a portion of the ~~year.~~ICE Software.

To finance the Company's short-term cash requirements, 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 8.7 million shares for gross consideration of $2.8 million (the "Private Placement"). The Private Placement closed on November 30, 2022. In addition, in connection with the Private Placement, 22NW and 726, or their principals, have irrevocably committed to backstopping any rights offering occurring by the Company within twelve months of closing the Private Placement in the aggregate amount of $2.0 million.

We have assessed the Company’s liquidity as at March 31, 2023 using multiple downside and upside scenarios, ~~taking into account these circumstances,~~ our sales outlook for the next twelve months ~~and actions~~ in combination with existing cash balances, ~~and~~ available credit ~~facilities.~~facilities, the strategic transactions being evaluated and the Private Placement discussed previously, and potential equity or debt financing. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next 12 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.

Should the recovery of the North American construction activities from the pandemic be delayed, a sustained economic depression and its adverse impacts on customer demand occur, significant inflationary pressure on raw materials and transportation costs continue that we are unable to recover through price increases or should we be unable to economically increase manufacturing labor headcount and related capacity, this could continue to adversely affect our liquidity. To the extent that existing cash and cash equivalents, available facilities and any increased liquidity from the aforementioned ~~facilities~~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 believe we can access capital markets when needed or under acceptable terms, there can be no 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.

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$15 million and a one year term. Available borrowings under the Extended RBC Facility at ~~June 30, 2022~~March 31, 2023 were C$~~14.5~~7.0 million ~~or $11.3 million.~~($5.2 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.

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.

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2022

2021

2022

2021

($ in thousands)

($ in thousands)

Net cash flows (used in) provided by operating activities

(17,800
)

86

(36,842
)

(12,008
)
Net cash flows used in investing activities

(1,331
)

(6,430
)

(2,951
)

(10,019
)
Net cash flows (used in) provided by financing activities

(63
)

7,266

(890
)

36,603

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

54

408

220

711

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

(19,140
)

1,330

(40,463
)

15,287

Cash, cash equivalents and restricted cash, beginning of period

42,085

59,803

63,408

45,846

Cash, cash equivalents and restricted cash, end of period

22,945

61,133

22,945

61,133


	For the Three Months Ended March 31,
	2023			2022
	($ in thousands)
Net cash flows used in by operating activities		(988	)		(19,042	)
Net cash flows used in investing activities		(983	)		(1,620	)
Net cash flows used in financing activities		(668	)		(827	)
Effect of foreign exchange on cash, cash equivalents and restricted cash		(36	)		166
Net decrease in cash, cash equivalents and restricted cash		(2,675	)		(21,323	)
Cash, cash equivalents and restricted cash, beginning of period		14,239			63,408
Cash, cash equivalents and restricted cash, end of period		11,564			42,085

Operating Activities

Net cash flows used in operating activities ~~were $17.8~~was $1.0 million for the first three months ~~ended June 30, 2022~~of 2023 compared to $0.1 million cash flows provided by operating activities in the three months ended June 30, 2021. Included in the $17.8 million used in operating activities in the second quarter of 2022 are $5.2 million of reorganization costs, $0.3 million of professional fees associated with the contested director election, and $3.7 million of increased inventory where the Company took on incremental reserves 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 from operations would have been $11.8$19.0 million in the ~~second~~first three months of 2022. The significant decrease in cash flow used in operations is largely due to the $8.4 million increase in Adjusted EBITDA and a $6.5 million net decrease in working capital comprising $0.4 million increase in routine working capital, $4.8 million decrease in other receivables relating to the ERC claim and an increase of $2.1 million in liabilities relating to the related party transaction described in the financial statements. In the first quarter of ~~2022 compared~~2023, we have continued to $0.1 million cash provided by operations in the same period of 2021, with the decrease reflecting $3.4 million of government subsidies that did not re-occur in 2022, $2.8 million of lower Adjusted Gross Profit, higher interest payments and working capital timing. Apart from the above noted items, working capital changes primarily reflect the timing of insurance renewals and increased accounts payable due to higher activity and timing of payments.

Net cash flows used in operating activities were $36.8 million for the six months ended June 30, 2022 compared to $12.0 million in the six months ended June 30, 2021. Included in the $36.8 million used in operating activitiesdraw down on our inventory supply built up in the first half of 2022 are $8.9 million of reorganization costs, $1.8 million of professional fees associated with the contested director election, and $7.1 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 from operations would have been $22.2 million in the first half of 2022 compared to $12.0 million cash used in operations in the same period of 2021, with the decrease reflecting $7.5 million of government subsidies that did not re-occur in 2022, $1.4 million lower Adjusted Gross Profit before underutilized capacity, higher interest payments and working capital timing. Apart from the above noted items, working capital changes primarily reflect the timing of insurance renewals and increased accounts receivable, accounts payable and customer deposits due to higher activity and timing of payments.2022.

Investing Activities

We invested ~~$0.9 million and $1.9~~$0.4 million in property, plant and equipment during the three ~~and six~~ months ended ~~June 30, 2022, respectively,~~March 31, 2023, compared to ~~$5.8 million and $8.7~~$1.0 million during the three ~~and six~~ months ended

March 31,

~~June 30, 2021.~~ 2022. This expenditure ~~for the three months ended June 30, 2022 comprised~~consisted of $0.1 million of ~~working capital changes, $0.5 million of manufacturing upgrades, $0.1 million related to our website redesign,~~information technology, $0.1 million of ~~leasehold improvements~~DXC refreshes and $0.1 million of ~~DXC refreshes. The expenditure for the six months ended June 30, 2022 comprised of $1.0 million of working capital changes, $0.6 million of~~ manufacturing ~~upgrades, $0.2 million related to our website design and $0.1 million related to DXC refreshes and IT equipment.~~

upgrades. We invested ~~$0.4~~$0.5 million on capitalized software during the three months ended ~~June 30, 2022, as compared to $0.6 million in~~March 31, 2023, consistent with the three months ended ~~June 30, 2021 and $0.9 million for the six months ended June 30, 2022 compared to $1.3 million for the comparative period.~~

Our 2022 capital expenditure program comprises 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. The decrease in cash flows used in investing activities is largely due to reduced spending as the South Carolina Facility and Dallas DXC were completed in 2021.March 31, 2022.

Financing Activities

For the three ~~and six~~ months ended ~~June 30, 2022, $0.1 million and $0.9~~March 31, 2023, $0.7 million of cash was used in financing activities ~~comprising~~compared to $0.8 million in the same period of 2022. The cash used comprised mainly of $0.6 ~~million and $1.2~~ million of scheduled payments under the Leasing Facilities for both periods. In the ~~three and six month period ended June 20, 2022. During the second~~first quarter of 2022, we ~~received C$0.9 million ($0.7 million) under the Canada Leasing Facility. For the three and six months ended June 30, 2021, $7.3 million and $36.6~~incurred $0.2 million of ~~cash was provided by financing activities, respectively, mainly due~~spend on employee tax payments on vesting of RSUs compared to $0.03 million in the ~~proceeds received from the issuance~~first quarter 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~~our strategic actions described in ~~2021,~~this report, and drawings on the Extended RBC Facility. To date, our ~~Credit Facility.~~strategic actions have generated cash through proceeds from the Private Placement in November 2022 and the receipt of $5.0 million of government subsidy through the ERC application which was received in the quarter ended March 31, 2023. We ~~do not expect~~continue to ~~make any significant~~evaluate properties we own for sale and lease back and are evaluating multiple initiatives related to the use of our ICE software. On May 9, 2023, we entered into an agreement with AWI for the partial assignment to AWI and co-ownership of a 50% interest in the rights, title and interest in certain intellectual property rights (including related patent rights) in a portion of the ICE Software for proceeds of $10 million. AWI will pay us an additional $1 million upon completion of a knowledge transfer to AWI relating to certain source code of the ICE software, which is expected by early 2024. Refer to “–Liquidity and Capital Resources" for further ~~draws under the Leasing Facilities.~~details. 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, 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 June 30, 2022, available borrowings are C$14.5 million ($11.3 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. 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 second quarter of 2022, which resulted in requiring the restriction of $3.2 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 March 31, 2023, available borrowings are C$7.0 million ($5.2 million), 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 first quarter of 2023, which resulted in requiring the restriction of $3.4 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 $13.3 million of cash consideration under the U.S. Leasing Facility and commenced the lease term in 2020 for the equipment at the South Carolina Facility. The Company has drawn C$~~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 million ($0.7 million) of the Canada Leasing Facility was drawn in the three months ended June 30, 2022.~~

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 our contractual obligations during the three months ended ~~June 30, 2022,~~March 31, 2023, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, other than the ~~forthcoming~~ additional commitments related to the extension of one of our ~~headquarters lease~~factory leases in ~~Calgary.~~Calgary and our entry into the Debt Settlement Agreement with the 22NW Group. See Note ~~13,~~14, “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 ~~June 30, 2022,~~March 31, 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 5,6, “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 to~~during 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.three months ended March 31, 2023.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 5,6, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing 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 ~~June 30, 2022.~~March 31, 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 ~~June 30, 2022,~~March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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., ("Falkbuilt") and ~~other~~ 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 Queen’s Bench instituted 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 ~~quarter 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 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. The parties are now endeavoring to establish the terms and conditions for the full trial process and developing a litigation plan for all remaining pre-trial steps. DIRTT anticipates that the full trial will proceed in early fall 2024.

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 ~~May 4, 2022.~~the same basis and also promptly denied. DIRTT intends to seek an immediate status conference in Utah now that the case has been returned to the Utah District Court.

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 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.

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, filed with the SEC on May 4, 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.

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 A. 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. Geoffrey Krause, DIRTT’s current Chief Financial Officer, announced his intention to retire from the Company, effective September 30, 2022. A search for a suitable replacement has commenced. 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 July 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 13% to $359 million 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

3534

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.

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.

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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 4.1 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		DIRTT Environmental Solutions Ltd. 2022 Employee Share Purchase Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q File No. 001-39061, filed on May 4, 2022).
~~10.2*¥~~10.2		~~Lease Amending~~Second Amendment to Loan Agreement, dated ~~April 6, 2022,~~February 9, 2023, by and ~~between Piret (7303 - 30th Street SE) Holdings Inc. and~~among DIRTT Environmental Solutions Ltd., DIRTT Environmental Solutions, Inc. and Royal Bank of Canada (incorporated by reference to Exhibit 10.45 to the Registrant's Form 10-K, File No. 001-39061, filed on February 22, 2023).
~~10.3*+~~10.3		~~Executive Employment~~Debt Settlement Agreement, dated ~~May 1, 2019~~March 15, 2023, by and between DIRTT Environmental Solutions Ltd., 22NW Fund, LP and ~~Jeffrey Metcalf.~~Aron English (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, File No. 001-39061, filed on March 21, 2023).
~~10.4*+~~10.4		~~Executive Employment~~Share Issuance Agreement, dated ~~June 22, 2022~~March 15, 2023, by and between DIRTT Environmental Solutions Ltd., 22NW Fund, LP and ~~Benjamin Urban.~~
10.5*		~~Indemnity Agreement, dated June 22, 2022, between DIRTT Environmental Solutions Ltd and Benjamin Urban, together with a schedule identifying other substantially identical agreements between~~Aron English (incorporated by reference to Exhibit 10.2 to the ~~Company and each of the other persons identified~~Registrant's Current Report on ~~the schedule~~Form 8-K, File No. 001-39061, filed on March 21, 2023).
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~~

¥ Information in this exhibit identified by brackets is confidential and has been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is not material and is the type of information that the Company customarily treats as private or confidential. An unredacted copy of this exhibit will be furnished to the Securities and Exchange Commission on a supplemental basis upon request.

3736

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/ ~~Geoffrey D. Krause~~Bradley S. Little
		~~Geoffrey D. Krause~~Bradley S. Little
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Date: ~~July 27, 2022~~May 9, 2023

3837


	Options outstanding						Options exercisable
			Weighted		Weighted				Weighted			Weighted
			average		average				average			average
	Number		remaining		exercise		Number		remaining			exercise
Range of exercise prices	outstanding		life		price C$		exercisable		life			price C$
C$4.01 – C$5.00		15,025		2.40		4.12		15,025		2.40			4.12
C$6.01 – C$7.00		789,017		1.56		6.33		783,085		1.55			6.33
C$7.01 – C$8.00		740,227		1.88		7.84		740,227		1.88			7.84
Total		1,544,269						1,538,337			��