UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q


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

For the quarterly period ended ~~September~~June 30, ~~2019~~2022


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

For the transition period fromto

Commission file number001-39061

DIRTT ENVIRONMENTAL SOLUTIONS ~~LTD.~~LTD.

(Exact name of registrant as specified in its charter)


Alberta, Canada		~~N/A~~
(State or other jurisdiction of of incorporation or organization)		N/A (IRS Employer Identification No.)


7303 30th Street S.E. Calgary, Alberta, Canada		~~T2C 1N6~~
(Address of principal executive offices)		T2C 1N6 (Zip code)

(Registrant’s telephone number, including area code): ~~(403)~~(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☐ ~~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 RegulationS-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, anon-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 Rule12b-2 of the Exchange Act.

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 Rule12b-2 of the Exchange Act). ☐ Yes ☒ No

The registrant had ~~84,681,364~~86,988,828 common shares ~~of common stock~~ outstanding as of ~~October 31, 2019.~~July 21, 2022.

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

FORM10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2022

TABLE OF CONTENTS


		Page
			~~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 ~~Statements~~Statement of Operations and Comprehensive ~~Income (Loss)~~Loss			5
	Interim Condensed Consolidated ~~Statements~~Statement of Changes in Shareholders’ Equity			6
	Interim Condensed Consolidated ~~Statements~~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			16	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			28	33
Item 4.	Controls and Procedures			28	33

PART II – OTHER INFORMATION		30	35

Item 1.	Legal Proceedings			30	35
Item 1A.	Risk Factors			30	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			30	36
Item 3.	Defaults Upon Senior Securities			30	36
Item 4.	Mine Safety Disclosures			30	36
Item 5.	Other Information			30	36
Item 6.	Exhibits			30	37

~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS~~Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form10-Q for the quarter ended ~~September~~June 30, ~~2019~~2022 (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 ~~a material~~an adverse effect on our business, financial condition, results of operations and growth prospects ~~can be found in~~include, but are not limited to, the ~~sections~~severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled ~~Risk~~“Risk Factors” in our ~~Registration Statement~~Annual Report on Form ~~10 (“Registration Statement on Form 10”),~~10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on ~~September 20, 2019~~February 23, 2022 (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:

•

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

•

our ability to implement our strategic plan, including realizing on certain cost-optimization initiatives undertaken in 2022;

•

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

•

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;

•

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;

•

our ability to maintain and manage growth effectively;

•

competition in the interior construction industry;

~~global economic, political~~•

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

•

the condition and ~~financial markets;~~

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 ~~(as defined herein)~~ for sales, marketing and installation of our solutions;

~~our ability to implement our strategic plan and to maintain and manage growth effectively;~~

•

our ability to introduce new designs, solutions and technology and gain client and market acceptance;

~~loss of our key executives;~~

•

~~labor shortages and disruptions in our manufacturing facilities;~~

~~product liability, product defects and warranty claims brought against us;~~

defects in our designing and manufacturing ~~software;~~

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;

•

global economic, political and social conditions and financial markets;

•

our exposure to currency exchange rates, tax 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;

~~material fluctuations of commodity prices,~~•

damage to our information technology and software systems;

•

our requirements to comply with applicable environmental, health and safety laws, including ~~raw materials;~~

those relating to the COVID-19 pandemic;

~~shortages of supplies of certain key components and materials;~~

•

our ability to generate sufficient revenue to achieve ~~requisite capacity from~~ and sustain profitability;

•

our ~~existing manufacturing facilities;~~

periodic fluctuations in results of operations and financial conditions;

•

volatility of our ~~exposure to currency exchange rate, tax rate~~share price;

•

the effect of being governed by the corporate laws of a foreign country, including the difficulty of enforcing civil liabilities against directors and ~~other fluctuations that result from general economic conditions and changes~~officers residing in ~~laws;~~

a foreign country;

~~legal and regulatory proceedings brought against us;~~

•

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.

~~other factors and risks described under the heading “Risk Factors” included in our Registration Statement on Form 10.~~

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 ~~rely~~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

~~iii~~

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

~~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,
	2022			2021
ASSETS
Current Assets
Cash and cash equivalents		19,739			60,313
Restricted cash		3,206			3,095
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
Inventory		25,296			18,457
Prepaids and other current assets		5,343			4,399
Total Current Assets		73,270			103,804
Property, plant and equipment, net		46,507			51,697
Capitalized software, net		6,252			7,395
Operating lease right-of-use assets, net		30,748			30,880
Other assets		5,628			5,663
Total Assets		162,405			199,439
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		24,516			22,751
Other liabilities		1,853			2,379
Customer deposits and deferred revenue		6,122			2,420
Current portion of long-term debt and accrued interest		3,297			3,323
Current portion of lease liabilities		5,868			6,214
Total Current Liabilities		41,656			37,087
Long-term debt		65,948			67,319
Long-term lease liabilities		27,635			27,267
Total Liabilities		135,239			131,673
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
Additional paid-in capital		10,629			13,200
Accumulated other comprehensive loss		(16,077	)		(15,916	)
Accumulated deficit		(153,639	)		(111,300	)
Total Shareholders’ Equity		27,166			67,766
Total Liabilities and Shareholders’ Equity		162,405			199,439

   As at
   September 30,
2019 December 31,
2018
ASSETS

Current Assets

Cash and cash equivalents
   56,642 53,412
Trade and other receivables, net of allowances for doubtful accounts of $0.1 million at both September 30, 2019 and December 31, 2018
   27,532 43,873
Inventory
   18,996 18,650
Prepaids and other current assets
   4,257 2,217


Total Current Assets
   107,427 118,152


Property, plant and equipment, net
   38,166 36,728
Capitalized software, net
   8,292 8,335
Operating leaseright-of-use assets, net
   21,530 —
Deferred tax assets, net
   3,487 6,083
Goodwill
   1,393 1,353
Other assets
   5,472 5,260


Total Assets
   185,767 175,911


LIABILITIES

Current Liabilities

Accounts payable and accrued liabilities
   22,217 32,583
Other liabilities
   4,393 5,523
Customer deposits
   7,407 7,701
Current portion of lease liabilities
   5,247 —
Current portion of long-term debt
   —   2,500


Total Current Liabilities
   39,264 48,307


Deferred tax liabilities, net
   —   965
Other long-term liabilities
   233 —
Long-term lease liabilities
   17,021 —
Long-term debt
   —   3,125


Total Liabilities
   56,518 52,397


SHAREHOLDERS’ EQUITY

Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at September 30, 2019 and 84,660,319 issued and outstanding at December 31, 2018
   180,639 180,562
Additionalpaid-in capital
   6,591 6,615
Accumulated other comprehensive loss
   (19,558 ) (22,092 )
Accumulated deficit
   (38,423 ) (41,571 )


Total Shareholders’ Equity
   129,249 123,514


Total Liabilities and Shareholders’ Equity
   185,767 175,911

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 September 30,						For the nine months ended September 30,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018			2022			2021			2022			2021
Product revenue		63,324			71,720			188,437			193,378			43,091			40,087			80,542			68,629
Service revenue		2,061			2,193			6,100			6,863			1,610			1,015			2,445			1,938

Total revenue		65,385			73,913			194,537			200,241			44,701			41,102			82,987			70,567

Product cost of sales		38,947			42,202			116,117			115,941			37,185			31,091			71,792			54,642
Costs of under-utilized capacity														-			-			-			1,756
Service cost of sales		1,504			1,626			5,461			4,910			1,240			787			1,632			1,575

Total cost of sales		40,451			43,828			121,578			120,851			38,425			31,878			73,424			57,973

Gross profit		24,934			30,085			72,959			79,390			6,276			9,224			9,563			12,594

Expenses
Sales and marketing		8,568			9,995			25,898			30,169			7,777			7,564			15,005			14,234
General and administrative		7,280			7,212			21,033			21,634			6,877			7,780			14,870			15,021
Operations support		2,419			1,937			7,771			5,933			2,528			2,213			5,026			4,510
Technology and development		1,718			922			5,881			3,048			1,879			1,924			4,019			3,859
Stock-based compensation		(2,389	)		2,037			2,403			3,172			1,326			1,861			2,628			2,955
Impairment		—			6,098			—			6,098
Reorganization		—			2,236			2,639			4,646			5,163			-			8,855			-

Total operating expenses		17,596			30,437			65,625			74,700			25,550			21,342			50,403			40,579

Operating income (loss)		7,338			(352	)		7,334			4,690
Foreign exchange (gain) loss		(198	)		400			762			(805	)
Operating loss														(19,274	)		(12,118	)		(40,840	)		(27,985	)
Government subsidies														49			3,431			624			7,499
Foreign exchange gain (loss)														1,246			(60	)		514			(240	)
Interest income		(228	)		(101	)		(320	)		(327	)		20			23			31			42
Interest expense		3			98			77			301			(1,329	)		(794	)		(2,659	)		(1,294	)
														(14	)		2,600			(1,490	)		6,007
		(423	)		397			519			(831	)

Income (loss) before tax		7,761			(749	)		6,815			5,521
Loss before tax														(19,288	)		(9,518	)		(42,330	)		(21,978	)
Income taxes
Current tax expense		818			1,145			1,906			2,733			-			210			-			210
Deferred tax expense (recovery)		1,141			(461	)		1,761			381
Deferred tax expense														-			10			-			49
														-			220			-			259
Net loss														(19,288	)		(9,738	)		(42,330	)		(22,237	)
		1,959			684			3,667			3,114
Loss per share
Basic and diluted loss per share														(0.22	)		(0.11	)		(0.49	)		(0.26	)

Net income (loss)		5,802			(1,433	)		3,148			2,407

Income (loss) per share
Basic and diluted income (loss) per share		0.07			(0.02	)		0.04			0.03

Weighted average number of shares outstanding (stated in thousands)
Basic		84,681			84,650			84,668			84,416
Diluted		85,257			84,650			84,888			84,980

Interim Condensed Consolidated Statement of Comprehensive Income (loss)
Net income (loss) for the period		5,802			(1,433	)		3,148			2,407
Exchange differences on translation		(838	)		1,783			2,534			(3,801	)

Comprehensive income (loss) for the period		4,964			350			5,682			(1,394	)

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

Interim Condensed Consolidated Statement of Comprehensive Loss


	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	)

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)

   Number of
common
shares    Common
shares    Additional
paid-in
capital Accumulated
other
comprehensive
income Accumulated
deficit Total
shareholders’
equity
As at December 31, 2017
   84,224,527    178,397    7,355 (12,112 ) (47,121 ) 126,519






Issued on exercise of stock
options
   435,792    2,165    (627 ) —   —   1,538
Stock-based compensation
   —      —      1,568 —   —   1,568
Stock option conversion to cash
settled
   —      —      (2,718 ) —   —   (2,718 )
Foreign currency translation
adjustment
   —      —      —   (3,801 ) —   (3,801 )
Net income for the period
   —      —      —   —   2,407 2,407






As at September 30, 2018
   84,660,319    180,562    5,578 (15,913 ) (44,714 ) 125,513






As at December 31, 2018
   84,660,319    180,562    6,615 (22,092 ) (41,571 ) 123,514






Issued on exercise of stock
options
   21,045    77    (1 ) —   —   76
Stock-based compensation modification adjustment
   —      —      (23 ) —   —   (23 )
Foreign currency translation
adjustment
   —      —      —   2,534 —   2,534
Net income for the period
   —      —      —   —   3,148 3,148






As at September 30, 2019
   84,681,364    180,639    6,591 (19,558 ) (38,423 ) 129,249


								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

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Cash Flows

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

   For the three months ended
September 30, For the nine months ended
September 30,
            2019                 2018                 2019                 2018
Cash flows from operating activities:

Net income (loss) for the period
   5,802 (1,433 ) 3,148 2,407
Adjustments:

Depreciation and amortization
   2,925 3,544 9,260 10,342
Impairments
   —   6,098 —   6,098
Stock-based compensation
   (2,646 ) 1,200 (1,217 ) 2,335
Non-cash interest expense (income)
   (9 ) —   (55 ) —
Deferred income tax expense (recovery)
   1,141 (461 ) 1,761 381
Foreign exchange loss (gain)
   23 343 305 (451 )
Loss (gain) on disposal of property, plant and
equipment
   —   (1 ) 53 (15 )
Changes in operating assets and liabilities:

Trade and other receivables
   661 (9,516 ) 15,970 (24,255 )
Inventory
   (436 ) (2,947 ) 4 (1,443 )
Prepaid and other current assets
   (2,043 ) 425 (2,001 ) (731 )
Other assets
   76 —   80 —
Trade accounts payable and other liabilities
   (2,151 ) 3,808 (8,560 ) (815 )
Lease liability
   (127 ) —   (375 ) —
Customer deposits
   (216 ) (852 ) (492 ) (1,367 )


Net cash flows provided by (used in) operating
activities
   2,998 208 17,881 (7,514 )


Cash flows from investing activities:

Purchase of property, plant and equipment
   (4,594 ) (1,681 ) (7,753 ) (7,013 )
Capitalized software development expenditures
   (918 ) (1,264 ) (2,513 ) (4,248 )
Recovery of software development expenditures
   89 —   194 —
Proceeds on sale of property, plant and equipment
   —   —   55 66
Changes in accounts payable related to investing
activities
   349 (222 ) (127 ) (371 )


Net cash flows used in investing activities
   (5,074 ) (3,167 ) (10,144 ) (11,566 )


Cash flows from financing activities:

Cash received on exercise of stock options
   61 163 77 1,537
Repayment of long-term debt
   —   (684 ) (5,561 ) (2,620 )


Net cash flows provided by (used in) financing
activities
   61 (521 ) (5,484 ) (1,083 )


Effect of foreign exchange on cash and cash
equivalents
   (81 ) 97 977 (1,202 )


Net increase (decrease) in cash and cash
equivalents
   (2,094 ) (3,383 ) 3,230 (21,365 )
Cash and cash equivalents, beginning of period
   58,736 45,502 53,412 63,484


Cash and cash equivalents, end of period
   56,642 42,119 56,642 42,119


Supplemental disclosure of cash flow information:

Interest paid
   3 98 77 301
Income taxes paid
   953 2,071 1,403 3,136


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2022			2021			2022			2021
Cash flows from operating activities:
Net loss for the period		(19,288	)		(9,738	)		(42,330	)		(22,237	)
Adjustments:
Depreciation and amortization		3,344			3,421			7,966			6,823
Stock-based compensation, net of settlements		406			1,649			1,708			2,743
Foreign exchange (gain) loss		(1,433	)		68			(782	)		240
Accretion of convertible debentures		177			94			342			147
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	)
Inventory		(3,661	)		(697	)		(7,104	)		(500	)
Prepaid and other assets, current and long term		(1,059	)		770			(1,167	)		(178	)
Accounts payable and accrued liabilities		713			4,759			3,173			(1,257	)
Other liabilities		(39	)		1,260			(39	)		1,767
Customer deposits and deferred revenue		387			(290	)		3,719			1,317
Current portion of long-term debt and accrued interest		(86	)		604			(142	)		1,006
Lease liabilities		80			764			121			903
Net cash flows (used in) provided by operating activities		(17,800	)		86			(36,842	)		(12,008	)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts payable changes		(924	)		(5,799	)		(1,887	)		(8,707	)
Capitalized software development expenditures		(418	)		(631	)		(901	)		(1,336	)
Other asset expenditures		(107	)		-			(281	)		-
Proceeds on sales of equipment		73			-			73			-
Recovery of software development expenditures		45			-			45			24
Net cash flows used in investing activities		(1,331	)		(6,430	)		(2,951	)		(10,019	)
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	)
Employee tax payments on vesting of RSUs		(92	)		(589	)		(301	)		(589	)
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
Supplemental disclosure of cash flow information:
Interest paid		(1,179	)		(67	)		(2,331	)		(129	)
Income taxes (paid) received		3,182			(48	)		3,207			(48	)

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,
							2022			2021
Cash and cash equivalents								19,739			58,326
Restricted cash								3,206			2,807
Total cash, cash equivalents and restricted cash								22,945			61,133

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 ~~subsidiaries~~subsidiary (“DIRTT”, the “Company”, “we” or ~~the “Company”~~“our”) is a ~~leading technology-driven manufacturer~~global leader in industrialized construction. DIRTT's system of ~~highly customized interiors. DIRTT combines its~~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 3D design ~~configuration and manufacturing~~integration software, ICE® (“~~ICE~~^®”ICE” or “ICE ~~Software”~~software”) ~~with integratedin-house~~, translates the vision of architects and designers into a 3D model that also acts as manufacturing of its innovative prefabricated interior construction solutions and an extensive distribution partners network (“Distribution Partner”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods.information. ICE is also licensed to unrelated companies and ~~distribution partners~~Construction Partners of the Company.

DIRTT is incorporated under the laws of the province of Alberta, Canada, ~~and~~ its headquarters ~~and registered office~~ is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C ~~1N6. DIRTT trades~~1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and ~~effective October 9, 2019, trades~~ on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.

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 Form10-Q and Article 10 of RegulationS-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of ~~September~~June 30, ~~2019,~~2022, and its results of operations and cash flows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2022 and ~~2018.~~2021. The condensed balance sheet at December 31, ~~2018,~~2021, 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, ~~2018~~2021 and ~~2017~~2020 and for each of the three years in the period ended December 31, ~~2018~~2021 included in the Annual Report on Form 1010-K of the Company as filed with the ~~U.S. Securities~~SEC and ~~Exchange Commission.~~applicable securities commission or similar regulatory authorities in Canada. As described in Note 3,5, the Company adopted ~~a new~~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 ~~standard~~ for ~~leases in the current year, which had a material impact on the Financial Statements.~~government assistance.

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 ~~subsidiaries.~~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

~~DIRTT Environmental Solutions Ltd.~~

~~Notes to the Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands of U.S. dollars unless otherwise stated)~~

~~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. ~~Seasonality~~

3. COVID-19

On March 11, 2020, COVID-19 was declared a global pandemic 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 ~~results~~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 ~~demand~~higher expected credit losses or slower collections. Management continually assesses the impact of COVID-19 on the Company’s Construction Partners and determined 0 change to the Company’s provision for credit losses of $0.1 million was required 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 (see Note 6) as further protection from credit losses.

Liquidity risk

The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections as a result of COVID-19. To address this risk and the uncertainty around the timing of a recovery from COVID-19, the Company issued the Debentures (as defined below) in January and December 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.

Government subsidies

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

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

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

Impairment

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

On February 22, 2022, we commenced the process of closing our Phoenix aluminum manufacturing facility (the “Phoenix Facility”), shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. Additionally, we announced our intention to eliminate a portion of our salaried workforce including manufacturing and office positions along with other cost reduction initiatives. The closure of the Phoenix Facility was substantially completed in the second quarter of ~~its fiscal year.~~2022. The Company entered into a sublease arrangement during the second quarter of 2022 which will exceed the contractual lease commitments under the Right of Use assets.

3.Reorganization costs incurred in the three months ended June 30, 2022 of $5.2million include $3.7 million for incremental insurance on change of control of the Board of Directors on April 26, 2022, $0.9 million related to termination benefits, $0.5 million associated with the closure of the Phoenix Facility, and $0.1 million of 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 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. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

In ~~February 2016,~~2021, the ~~FASB~~Financial Accounting Standards Board issued ~~ASU~~Accounting Standards Update No. ~~2016-02,~~ ~~“Leases~~2021-10, Government Assistance (Topic ~~842),” and issued subsequent amendments~~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 ~~initial guidance~~annual financial statements. The amendments in ~~January 2018 within~~the ASU~~No. 2018-01,~~ ~~in July 2018 within ASUNos. 2018-10~~ ~~and2018-11,~~ in are effective for periods beginning after December ~~2018 within ASUNo. 2018-20,~~ ~~and in March 2019 within ASUNo. 2019-01~~ ~~(collectively, the standard). The standard requires lessees to recognize operating leases on the balance sheet as aright-of-use~~ (“ROU”) asset and a lease liability. The liability is equal to the present value of the lease payments over the remaining lease term. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense.

15, 2021. The Company has adopted ~~the~~this standard effective January 1, 2022 and notes there is no significant impact of this standard on ~~January 1, 2019, and elected~~our accounting or disclosures for government assistance.

Although there are several other new accounting standards issued or proposed by the ~~transition method of adoption,~~Financial Accounting Standards Board, which ~~allowed~~ the Company ~~to apply~~has adopted or will adopt, as applicable, the ~~standard as~~Company does not believe any of these accounting pronouncements has had or will have a material impact on its Financial Statements.

6. TRADE AND OTHER RECEIVABLES

Accounts receivable are recorded at the ~~beginning of the period of adoption, the comparative period presented is~~invoiced amount, do not ~~adjusted~~require collateral and ~~continues to be reported in accordance with the Company’s historical accounting policy.~~do not bear interest. The Company ~~opted~~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 ~~elect~~establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the ~~package~~statement of ~~practical expedients~~operations.

In order to ~~not reassess prior conclusions related~~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, approximately 75% of our trade accounts receivable are insured, relating to ~~contracts containing leases, lease classification~~accounts receivables from counterparties deemed creditworthy by the insurer and ~~initial direct costs,~~excluding accounts receivable from government entities, which have arisen since April 1, 2020 when the trade credit insurance became effective.

Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three and six months ended June 30, 2022, 0 Construction Partner accounted for greater than 10% of revenue. 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. In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other ~~practical expedients, including~~clients.

The Company’s aged receivables were as follows:


	As at
	June 30,			December 31,
	2022			2021
Current		18,514			13,659
Overdue		913			621
		19,427			14,280
Less: expected credit losses		(128	)		(130	)
		19,299			14,150
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 ~~use of hindsight~~six months ended June 30, 2022. Receivables are generally considered to ~~determine~~be past due when over 60 days old unless there is a separate payment arrangement in place for the ~~lease term for existing leases and in assessing impairment of theright-of-use~~ ~~asset, and the exception for short-term leases.~~

~~Adoption~~collection of the ~~standard had a significant impact on the Company’s condensed consolidated balance sheet due to the recognition of aright-of-use~~ ~~asset and lease liability, as shown in Note 4, upon adoption.~~receivable.

~~4. LEASES~~7. OTHER LIABILITIES


	As at,
	June 30, 2022		December 31, 2021
Legal provisions(1)		45		143
DSU liability		302		785
Sublease deposits		212		-
Warranty and other provisions(2)		1,294		1,451
Other liabilities		1,853		2,379

(1)

The Company ~~leases office and factory space under~~has provided $0.05million (December 31, 2021 - $0.1 million) as the estimated amount likely payable for various ~~operating leases.~~claims against the Company. The ~~Company determines if an arrangement~~amount provided for is ~~a lease or contains a lease element at inception. The arrangement is a lease if it conveys~~management’s best estimate of the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases are separately disclosed as operating lease ROU assets, with a corresponding lease liability split between current and long-term components on the balance sheet. Operating leases with an initial term of 12 months or less are not included on the balance sheet.

The Company recognizes lease expense for these leases on a straight-line basis over the lease term. ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make leasepotential payments ~~arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.~~

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 12 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

~~DIRTT Environmental Solutions Ltd.~~

~~Notes to the Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands of U.S. dollars unless otherwise stated)~~

~~For the three months and nine months ended September 30, 2019, cash paid~~ for amounts included in the measurement of operating lease liabilities was $1.4 million and $4.2 million. The weighted average remaining lease term and weighted average discount rate at September 30, 2019 were 12 years and 4.6%, respectively. claimed.

(2)

The following table ~~includes supplemental cash flow information for~~presents a reconciliation of the ~~nine months ended September 30, 2019~~warranty and ~~supplemental balance sheet information at September 30, 2019 related to operating leases (in thousands):~~other provisions balance:


	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

~~The following table includes ROU assets included on the balance sheet at September 30, 2019:~~11

8. LONG-TERM DEBT

   ROU Assets
   Cost    Accumulated
Depreciation    Net book
value
At January 1, 2019
   22,571    —      22,571
Additions
   1,701    —      1,701
Depreciation expense
   —      (3,020 )    (3,020 )
Exchange differences
   288    (10 )    278






At September 30, 2019
   24,560    (3,030 )    21,530


	Revolving Credit Facility		Leasing Facilities			Convertible Debentures			Total Debt
Balance on December 31, 2020		-		5,967			-			5,967
Issuances		-		9,805			55,107			64,912
Accretion of issue costs		-		-			352			352
Accrued interest		-		556			1,935			2,491
Interest payments		-		(556	)		(987	)		(1,543	)
Principal repayments		-		(1,808	)		-			(1,808	)
Exchange differences		-		(55	)		326			271
Balance at December 31, 2021		-		13,909			56,733			70,642
Current portion of long-term debt and accrued interest		-		2,386			937			3,323
Long-term debt		-		11,523			55,796			67,319

Balance on December 31, 2021		-		13,909			56,733			70,642
Issuances				647			-			647
Accretion of issue costs		-		-			342			342
Accrued interest		-		379			1,810			2,189
Interest payments		-		(379	)		(1,952	)		(2,331	)
Principal repayments		-		(1,236	)		-			(1,236	)
Exchange differences		-		(90	)		(918	)		(1,008	)
Balance at June 30, 2022		-		13,230			56,015			69,245
Current portion of long-term debt and accrued interest		-		2,515			782			3,297
Long-term debt		-		10,715			55,233			65,948

~~The following table includes lease liabilities included on the balance sheet at September 30, 2019:~~


~~Opening balance (Note 3)~~	~~23,912~~
~~Additions~~	~~1,673~~
~~Accretion~~	~~829~~
~~Repayment of lease liabilities~~	~~(4,237~~	)
~~Lease cancellation~~	~~(196~~	)
~~Exchange differences~~	~~287~~

	~~22,268~~
~~Current lease liabilities~~	~~5,247~~
~~Long-term lease liabilities~~	~~17,021~~

~~The following table includes maturities of operating lease liabilities at September 30, 2019:~~Revolving Credit Facility

   As at
September 30, 2019
2019
   1,326
2020
   5,355
2021
   5,357
2022
   4,817
2023
   2,987
Thereafter
   5,893


Total
   25,735
Current lease liability
   5,247
Long term lease liability
   17,021


Total lease liability
   22,268


Difference between undiscounted cash flows and lease liability
   3,467

~~DIRTT Environmental Solutions Ltd.~~

~~Notes to the Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands of U.S. dollars unless otherwise stated)~~

~~Subsequent to September 30, 2019,~~On February 12, 2021, the Company entered into a ~~lease~~loan agreement ~~expected to commence in the second half of 2020, associated with the construction of~~governing a ~~new combined tile and millwork facility in Rock Hill, South Carolina. Rent obligations associated with this lease are approximately $15.0 million.~~

~~5. LONG-TERM DEBT~~

The Company had an $18.0 million revolving operating facility which expired on June 30, 2019. During the first quarter of 2019, the Company repaid the outstanding principal and interest amounts of its long-term debt, totaling $5.6 million.

~~On July 19, 2019, the Company entered into a~~ C$~~50.0~~25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). ~~The~~Under the RBC Facility, ~~has a three-year term and can be extended for~~the Company is able to borrow up to ~~two additional years at~~a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the ~~Company’s option.~~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 ~~with no adjustment,~~plus 30 basis points or at the ~~bankers’ acceptance rate~~Canadian Dollar Offered Rate or LIBOR plus ~~125~~155 basis points. ~~The~~Under the RBC Facility, if the “Aggregate Excess Availability”, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash, is less than C$5.0 million, the Company is subject to a ~~minimum~~ fixed charge coverage ratio (“FCCR”) covenant of ~~1.15:~~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 5 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.

Leasing Facilities

The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) and a ~~maximum debt~~$14.0million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) 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 three and six months ended June 30, 2022, the Company received $NaN (twelve months ended December 31, 2021: $9.8 million) of cash consideration under the U.S. Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in current other liabilities and long-term debt. In April 2022 the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.

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 ~~Adjusted EBITDA~~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 ~~3.0:~~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, ~~(earnings before~~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 ~~tax, depreciation~~at the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and ~~amortization,non-cash~~ ~~stock-based compensation, plus~~December of each year commencing on June 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or ~~minus extraordinary or unusual non-recurring revenue or expenses). As~~shares at ~~September 30, 2019,~~ the ~~RBC Facility was undrawn~~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 ~~was in compliance with all~~for redemption of the ~~covenants~~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 ~~RBC Facility.~~December Debentures. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission.

6.9. STOCK-BASED COMPENSATION

~~Stock-based compensation expense (recovery)~~

   For the three months ended
September 30,    For the nine months ended
September 30,
         2019                2018                2019                    2018
Stock options
   (2,573 )    2,032    1,890    3,167
Performance Share Units
   110    5    189    5
Deferred Share Units
   74    —      324    —








   (2,389 )    2,037    2,403    3,172

In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd.

~~Notes~~ 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), and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the ~~Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands~~Company and its affiliates. In accordance with the 2020 LTIP, the sum of ~~U.S. dollars unless otherwise stated)~~

~~Stock Options~~

~~For~~(i) 5,850,000 common shares plus (ii) the ~~three months ended September 30, 2019, stock-based compensation recovery related~~number of common shares subject to stock options ~~was $2.6 million (2018 – $2.0 million expense),~~previously granted under the Company’s Amended and ~~a $1.9 million expense was recorded~~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 ~~nine months ended September 30, 2019 (2018 – $3.2 million expense). For the three and nine months ended September 30, 2019,~~2020 LTIP. Upon vesting of certain LTIP awards, the Company ~~paid $0.3 million (2018 – $0.9 million)~~may withhold and ~~$3.6 million (2018 – $0.9 million) respectively on~~sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the ~~surrender~~withholding tax remittances required in respect of ~~cash~~award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.

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

The Company also maintains 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 ~~stock options. At September 30, 2019,~~solely in cash.

Prior to the approval of the 2020 LTIP, the Company ~~had a liability~~granted awards of ~~$0.1 million in other liabilities for~~options under the ~~stock options (December 31, 2018 – $1.8 million). On October 9, 2019, following its listing on The Nasdaq Global Select Market, the Company ceased cash-settlement~~Stock Option Plan and awards of ~~stock options and the associated liability accounting for stock options. The following summarizes options granted, exercised, surrendered, forfeited and expired during the periods:~~

   Number of
options    Weighted
average exercise
price (C$)
Outstanding at December 31, 2017
   5,553,393    5.31
Granted
   3,327,525    6.40
Exercised
   (435,792 )    4.78
Forfeited
   (643,849 )    5.81
Expired
   (15,420 )    6.01




Outstanding at September 30, 2018
   7,785,857    5.84
Outstanding at December 31, 2018
   6,858,376    5.88
Granted
   1,359,824    7.51
Exercised
   (21,045 )    4.81
Forfeited
   (243,761 )    6.22
Surrendered for cash settlement
   (1,544,151 )    4.95
Expired
   (119,336 )    5.63




Outstanding at September 30, 2019
   6,289,907    6.51




Exercisable at September 30, 2019
   1,940,498    5.98

~~Range of exercise prices outstanding at September 30, 2019:~~

   Options outstanding    Options exercisable
Range of exercise prices
   Number
outstanding    Weighted
average
remaining
contractual
years    Weighted
average
exercise
price (C$)    Number
exercisable    Weighted
average
remaining
contractual
years    Weighted
average
exercise
price (C$)
$5.01 – $6.00
   806,638    2.1    5.76    479,389    2.1    5.76
$6.01 – $7.00
   4,396,537    3.3    6.32    1,461,109    1.9    6.20
$7.01 – $7.84
   1,086,732    4.6    4.84    —












Total
   6,289,907          1,940,498

~~Performance~~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.

As13

Stock-based compensation expense


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Equity-settled awards		1,286		1,285		2,625		2,081
Cash-settled awards		40		576		3		874
		1,326		1,861		2,628		2,955

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


	RSU Time-			RSU Performance-			Share
	Based			Based			Awards			PSU			DSU
	Number of			Number of			Number of			Number of			Number of
	units			units			units			units			units
Outstanding at December 31, 2020		2,414,066			200,000			-			197,471			363,664
Granted		1,897,281			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

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. 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 ~~September 30, 2019, there were 295,216 PSUs outstanding (December 31, 2018 – 85,728) accounted for at a~~the discretion of the Company. The weighted average fair value of ~~$0.2~~the RSUs granted was C$2.39 (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 of the 2022 PRSUs and 66.7% of the 2021 PRSUswill 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.

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 had a fair value of $0.3 million ~~(December 31, 2018 – $0.1 million)~~ which is included in ~~other long-term liabilities on the balance sheet.~~

~~DIRTT Environmental Solutions Ltd.~~

~~Notes to the Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands of U.S. dollars unless otherwise stated)~~

~~Deferred share units (“DSUs”)~~

~~There were 92,889 DSUs outstanding at September 30, 2019 (December 31, 2018 – 25,962) accounted for at a value of $0.4 million included in current portion of~~ other liabilities on the balance sheet (December 31, ~~2018~~2021 – ~~$0.1~~$0.8 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

Range of exercise prices outstanding at June 30, 2022:

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

��

Dilutive ~~instruments~~Instruments

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, 4.3~~2022, 1.5 million ~~and 3.4 million stock~~ options ~~(2018~~(2021 – ~~5.1 million and 5.5~~4.8 million), ~~respectively,~~3.7 million RSUs and PRSUs (2021 – 4.5 million) and 53.8 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 – 8.7 million), were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net ~~income (loss)~~loss per share.

10. REVENUE

In the following table, revenue is disaggregated by ~~major products and services lines~~performance obligation and timing of revenue recognition. All revenue comes from contracts with customers. See Note 911 for the disaggregation of revenue by geographic region.


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018		2022		2021		2022		2021
Product		56,486		64,941		168,321		175,286		38,098		36,462		71,291		62,298
Transportation		6,429		6,184		18,644		16,368		4,795		3,484		8,856		5,983
Licenses		409		595		1,472		1,724

License fees from Construction Partners										198		141		395		348
Total product revenue		63,324		71,720		188,437		193,378		43,091		40,087		80,542		68,629
Installation and other services		2,061		2,193		6,100		6,863		1,610		1,015		2,445		1,938
										44,701		41,102		82,987		70,567
		65,385		73,913		194,537		200,241

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 is based upon agreed contractual terms with the customer and is not subject to variability.


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018		2022		2021		2022		2021
At a point in time		62,915		71,125		186,965		191,654		42,893		39,946		80,147		68,281
Over time		2,470		2,788		7,572		8,587		1,808		1,156		2,840		2,286
										44,701		41,102		82,987		70,567
		65,385		73,913		194,537		200,241

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

~~DIRTT Environmental Solutions Ltd.~~

~~Notes to the Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands of U.S. dollars unless otherwise stated)~~

Contract Liabilities


	As at
	June 30, 2022		December 31, 2021		December 31, 2020
Customer deposits		5,683		1,959		1,292
Deferred revenue		439		461		527
Contract liabilities		6,122		2,420		1,819

   September 30,
2019    As at December 31,
2018    December 31,
2017
Customer deposits
   6,296    6,746    5,675
Deferred revenue
   1,111    955    701






Contract liabilities
   7,407    7,701    6,376

Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities was ~~consistent~~higher as at ~~September~~June 30, ~~2019~~2022 compared to December 31, ~~2018~~2021 mainly due to the timing of orders and payments. Contract liabilities as at December 31, ~~2018~~2021 and ~~2017, respectively,~~2020 totaling ~~$7.5~~$2.3 million and ~~$5.9~~$1.6 million, respectively,were recognized as revenue during the~~year-to-date~~ ~~periods~~ six months ended ~~September~~June 30, ~~2019~~2022 and ~~2018,~~2021, respectively.

Sales by Industry

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


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018		2022		2021		2022		2021
Commercial		42,910		41,117		124,248		119,021		29,618		19,032		53,662		35,176
Healthcare		9,192		18,698		32,452		40,459		5,091		14,176		12,055		20,663
Government		3,855		4,634		12,267		17,408		5,041		4,249		8,322		8,430
Education		6,958		6,676		17,998		14,766		3,143		2,489		6,108		4,012
Licenses fees from Distribution Partners		409		595		1,472		1,724

Total product revenue		63,324		71,720		188,437		193,378
License fees from Construction Partners										198		141		395		348
Total product and transportation revenue										43,091		40,087		80,542		68,629
Installation and other services		2,061		2,193		6,100		6,863		1,610		1,015		2,445		1,938
										44,701		41,102		82,987		70,567
		65,385		73,913		194,537		200,241

~~8. INCOME TAX~~

The general provincial tax rate in Alberta, Canada was decreased on June 28, 2019, to 11% for the second half of 2019, 10% for 2020, 9% for 2021 and 8% thereafter. As a result of the enacted rate change, DIRTT reduced its deferred tax asset by $0.9 million with a corresponding deferred income tax expense recorded in the second quarter of 2019.

9.11. SEGMENT REPORTING

The Company has ~~one~~1 reportable and ~~one~~ operating segment and operates in ~~three~~2 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, ~~and International. Currently, the majority of revenue from~~with periodic international projects ~~are included in the U.S. revenue amount as these projects are sold by U.S.-based distribution partners and are delivered to international locations.~~from North American Construction Partners. The Company’s revenue from operations from external customers, based on location of operations, and information about itsnon-current assets, ~~are~~is detailed below.

~~DIRTT Environmental Solutions Ltd.~~

~~Notes to the Unaudited Interim Condensed Consolidated Financial Statements~~

~~(Amounts in thousands of U.S. dollars unless otherwise stated)~~

Revenue from external customers


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Canada		7,417		4,461		12,668		7,456
U.S.		37,284		36,641		70,319		63,111
		44,701		41,102		82,987		70,567

Non-current assets (1)


	As at
	June 30, 2022		December 31, 2021
Canada		32,304		34,912
U.S.		56,831		60,723
		89,135		95,635

(1)

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

12. INCOME TAXES

   For the three months ended
September 30,    For the nine months ended
September 30,
         2019                2018                2019                2018
Canada
   8,956    11,627    24,795    29,998
U.S.
   56,429    62,249    169,742    169,343
International
   —      37    —      900








   65,385    73,913    194,537    200,241

~~Non-current~~ ~~assets(1), excluding~~As at June 30, 2022, the Company had a valuation allowance of $27.0 million against deferred tax assets

   As at
   September 30,
2019    December 31,
2018
Canada
   47,536    36,323
U.S.
   27,317    15,353




   74,853    51,676

~~(1)~~

~~Amounts include property, plant and equipment, capitalized software, operating lease ROU assets, goodwill and other assets.~~

~~10. TRANSACTIONS WITH RELATED PARTIES~~

~~A DIRTT Distribution Partner, Lane Office Furniture Inc. (“Lane”), is owned by a former director of~~ as the Company Gregory Burke. Effective June 26, 2018, Mr. Burke ceased to be a director of the Company. For the three and nine months ended September 30, 2018, the Company reported revenue of nil and $3.0 million and rebates of nil and $0.1 million from Lane.has experienced cumulative losses in recent years (December 31, 2021 – $17.3 million).

13. COMMITMENTS

~~During the three and nine months ended September 30, 2018, a director of the Company, Ronald Kaplan, provided advisory and consulting services of $0.2 million and $0.3 million.~~

~~11. COMMITMENTS~~

As at ~~September~~June 30, ~~2019,~~2022, the Company had outstanding purchase obligations of approximately ~~$7.7~~$5.8 million related to inventory and property, plant and equipment ~~purchases.~~

~~12. LEGAL PROCEEDINGS~~

~~On May 9, 2019,~~purchases (December 31, 2021 – $3.7 million). As at June 30, 2022, the Company ~~commenced an action in~~had undiscounted operating lease liabilities of $49.0 million (December 31, 2021 – $49.7 million).

During the Court of Queen’s Bench of Alberta against two former executives, their company, Falkbuilt Ltd. (“Falkbuilt”), and other individuals, on the basis of, among other things, a breach of non-compete and non-solicit obligations.

~~On November 5, 2019, Falkbuilt filed a Statement of Claim (the “Claim”) against~~quarter ended June 30, 2022, the Company inextended the ~~Court of Queen’s Bench of Alberta alleging that the Company has misappropriated and misused their alleged proprietary information in furtherance~~term of the Company’s product development. The claim seeks monetary relief, including, among other things, damages of approximately C$30.0 million, disgorgement of profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction oflease agreement for the ~~Company’s use of the alleged proprietary information.~~

~~The Company believes the Claim is without merit. The Company intends to defend it vigorously and to continue to pursue its legal remedies against the former employees.~~Calgary headquarters by 5 years effective October 2022. Undiscounted rent obligations associated with this lease are $2.3 million.

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

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.

~~Outlook~~Summary of Financial Results

•

Revenues for the quarter ended June 30, 2022 were $44.7 million, an increase of $3.6 million or 9% 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 million for the same period ended June 30, 2021.While the resurgence of COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, 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 ~~2019, we continued to focus~~a tight labor market on ~~our plan to transform~~attraction and retention of manufacturing employees as the Company ~~into~~works to increase its labor capacity and productivity in light of improving demand. The full impact of the COVID-19 pandemic was incurred in the first quarter of 2021 when the impact of the contraction in construction activity was experienced and with most of our pre-pandemic projects in process completed in 2020.

•

Gross profit and gross profit margin for the quarter ended June 30, 2022 was $6.3 million or 14.0% of revenue, a ~~scalable growth platform to drive market penetration~~decrease of $2.9 million or 32% from $9.2 million or 22.4% of revenue for the quarter ended June 30, 2021. Gross profit and improve profitability. Our plan focuses on developing and implementing an efficient and effective sales and marketing function, improving manufacturing efficiency and increasing capacity to serve future growth. Concurrently, we remain committed to innovation within our primary solutions and related complementary offerings, (“DIRTT Solutions”), includinggross profit margin for the ~~introduction~~six months ended June 30, 2022 was $9.6 million or 11.5% of ~~new products and enhancements to existing products and our proprietary ICE Software platform (“ICE” or “ICE Software”).~~

~~Management began 2019 with the expectation that our 2019~~ revenue ~~growth year-over-year would be more moderate than the 22% revenue growth shown in 2018 IFRS results~~ compared to ~~2017 IFRS results primarily~~$12.6 million of 17.8% of revenue for the same period in 2021. The decrease 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 and incremental fixed costs of 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 ~~our management transition~~higher activity. The second quarter included labor costs and our efforts to scale the Company for sustained, profitable growth. Accordingly, we estimated and announced that our 2019 IFRS revenue would be 5% to 10% higher than 2018 IFRS revenue, with corresponding increases in net income and Adjusted EBITDA. With increasing recognition of challengesinefficiency 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. Gross profit for the six months ended June 30, 2022 also included $1.1 million of accelerated depreciation and amortization arising from a change in useful life of assets, which arose in the first quarter of the year.

•

The Company implemented an approximate 6.5% overall ~~management~~increase 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 of these changes was partially realized in the three and ~~the immature nature of our commercial function, we revised that expectation downward as the year progressed. In addition, we previously stated that we~~six months ended June 30, 2022 and is expected ~~Adjusted EBITDA~~ to be ~~impacted by certainone-time~~ costs related to the sales and marketing plan, Nasdaq listing, and operating consulting costs. Management now expects 2019 revenue in U.S. GAAP to be 7% to 10% lower than 2018 U.S. GAAP revenue, which equates to estimated fourth quarter revenue of between $52 million and $60 million. Management also expects Adjusted EBITDA to be negatively impacted by deleveraging of fixed costs on lower revenue.

Revenue in third quarter of $65.4 million was 12% lower than 2018. Several factors continue to impact 2019 revenue, including the disruption to our salesforce and distribution partner network from 2018’s management transition, the impact of an immature~~go-to-market~~ approach, an inadequately supported sales force working on a long sales cycle as well as the revised timing of various projects and the loss of certain expected projects. As the year has progressed, it has become clear the sales and marketing organization with which we entered the year has been unable to deliver upon the opportunities that it identified and on which the prior guidance was based. This has been driven largely by a historical lack of training, individual accountability and the necessary processes and tools. Our belief in the size of our market opportunity remains unchanged as well as the resonance of DIRTT’s value proposition within it. Accordingly, we have embarked on a comprehensive transformation of these functions that we believe will create a scalable platform from which to generate profitable growth.

We took significant first steps in this commercial transformation in the third quarter. We began implementing our comprehensive commercial strategy based on a sales and marketing plan (the “Sales & Marketing Plan”) that was developed with the assistance of an internationally recognized consulting firm. The total cost to develop the Sales & Marketing Plan was $2.0 million, of which $0.7 million was incurred in the third quarter of 2019. Key components of the Sales & Marketing Plan consist of establishing a strategic marketing function and enhancing sales and performance management. Implementing the strategic marketing function includes the hiring of additional marketing professionals to newly established roles, the implementation of supporting systems and the creation of marketing programs and communications to drive lead generation. Sales force enhancement includes creating new sales management roles to provide support to sales representatives, creating new sales roles to manage strategic national accounts and address large project opportunities and

implementing a newly created Client Relationship Management (“CRM”) system. The commercial (sales and marketing) function will be led by our new Chief Commercial Officer, Jennifer Warawa, who started this role effective September 16, 2019, and the execution of the Sales & Marketing Plan will be managed by Brandon Jones, our new Vice President of Strategy, who started in this role effective September 30, 2019.

In our manufacturing operations, a metric-based approach to lean manufacturing, focusing on Safety, Quality, Delivery, Inventory and Productivity (SQDIP) was introduced earlier this year and is being implemented in all of our facilities along with related systems. In early October 2019, we executed a lease agreement for our previously announced combined tile and millwork factory, which will be located in the Charlotte metropolitan area. In August 2019, we paid deposits totaling $1.6 million to certain equipment suppliers for customized equipment for the new facility, which we anticipate will be deliveredfurther realized in the second half of ~~2020. The total cost~~2022. Due to the continued inflationary pressures on material and labor costs, 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 in February, on the Reflect and Inspire product lines.

•

Adjusted Gross Profit and Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the quarter ended June 30, 2022 was $8.5 million or 18.9%, respectively, a decrease from $11.3 million or 27.4%, respectively, for the quarter ended June 30, 2021. Adjusted Gross Profit and Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) 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 million of ~~the facility is expected to be approximately $18.5 million, and we anticipate that the commencement~~overhead costs were excluded from Adjusted Gross Profit, as these costs were on account of ~~commercial operations will begin during~~operating at lower than normal capacity levels in the first quarter of 2021 and were accordingly charged directly and separately to cost of sales rather than as a cost attributable to production.

•

Operating expenses in the second quarter of 2022 increased by $4.2 million 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, $1.8million 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.

•

Net loss for the three months ended June 30, 2022 was $19.3 million compared to $9.7 million for the three months ended June 30, 2021. The higher net loss is primarily the result of the lower gross profit margin explained above, $4.2 million increase in operating expenses, a $3.4 million reduction in government subsidies, and a $0.5 million increase in interest expense offset by a $1.3 million increase in foreign exchange gain.

•

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 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.

•

On ~~October 9, 2019,~~February 22, 2022, we ~~commenced trading~~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 ~~common shares~~salaried workforce including manufacturing and office positions which, along with other cost reduction initiatives, are expected to yield annualized savings of approximately $13.0 million. Of these cost reduction initiatives, $9.0 million was implemented during the first and second quarters of 2022, $3.0 million will be implemented 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.

•

Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the quarter ended June 30, 2022 was a $9.4 million loss or (21.1)%, a decline of $2.6 million from a $6.8 million loss or (16.6)% 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 ~~Nasdaq Global Select Market (“Nasdaq”)~~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 ~~Nasdaq listing, we~~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 ~~now reporting our financial statements under~~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 ~~accounting principles generally accepted~~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 ~~United States (“GAAP”)~~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 ~~U.S. dollars.~~ more detail below:

•

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;

•

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

•

Increasing governance over discounting and other similar activities;

•

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

•

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

•

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

In ~~addition,~~the second quarter, we ~~ceased offering a cash surrender option for employee stock options.Year-to-dateone-time~~ ~~costs~~increased our overall manufacturing headcount in Calgary by 9%, following the closure of the ~~Nasdaq listing~~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 ~~$2.5~~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:

•

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

•

Reallocation of resources to increase order engineering throughput and capacity;

•

Flattening of overall organization and removal of unnecessary layers;

•

Reorganization of Construction Partner development function under new leadership; and

•

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 Company used approximately $19.1 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 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 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 ~~incur approximately $0.5 million of additional costs~~improve as 2022 progresses and to approach monthly cashflow breakeven in the fourth quarter of ~~2019. The Nasdaq listing costs are higher than previously anticipated, due in part to our deferral~~2022 (see “–Liquidity and Capital Resources").

As revenues improve, including the effect of the ~~listing until later in~~price increases above, and the ~~year.~~

In the second half of 2018, we experienced warping in a small portion of our medium density fiberboard tiles, primarily in locations that experience high humidity or significant variability in humidity and temperature. We believe we have identified a permanent solution to the issue and continue to implement the solution to address the tile warping.

As we have noted previously, 2019 is a transition year, and we have made significant strides toward enhancing our management team, commercial organization and sales and marketing strategy, in addition to having our shares listed on Nasdaq. Despite incurring associated~~one-time~~ ~~consulting and listing costs,~~cost reduction initiatives take hold, we expect to ~~exit 2019 maintaining our financial strength with cash on hand comparable to last year with no debt and increased liquidity from a larger credit facility. Furthermore, we~~ continue to ~~believe our significant transformational efforts and investments will result~~progress toward an improvement in ~~attractive revenue growth, improved profitability and strong cash generation into the future.~~

~~At our Analyst Day on November 12, 2019 in New York City we will present our strategic plan and revenue~~net loss and Adjusted EBITDA ~~Margin targets we are~~breakeven in the fourth quarter of 2022. Unrestricted cash and net working capital at June 30, 2022 was $19.7 million and $31.6 million, compared to ~~achieve~~$38.9 million 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 of accounts receivable and inventory, remains undrawn at June 30, 2022 with approximately$11.3 million available. The Company continues to focus on revenue growth and cost initiatives to positively affect DIRTT’s balance sheet, cash flow and profitability and expects to see a trend of increasing monthly working capital by ~~the end of 2023.~~year end.

Non-GAAP Financial Measures

Note Regarding Use ofNon-GAAP Financial Measures

Our condensed consolidated interim financial statements are prepared in accordance with GAAP. These GAAP financial statements includenon-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 thesenon-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that thesenon-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 ~~from period to period~~period-over-period and to compare our financial performance with that of other companies. We believe that thesenon-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~~ (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange ~~movements on debt revaluation)~~movements), asset base (depreciation and amortization), the impact of under-utilized capacity on gross profit, tax consequences, reorganization expense 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 onnon-GAAP financial measures, primarily Adjusted EBITDA.

~~Reorganization expenses, impairment expenses,~~Government subsidies, depreciation and amortization, ~~and~~ stock-based compensation expense, reorganization expense, foreign exchange gains and losses and impairment expenses are excluded from ournon-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 followingnon-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~~
EBITDA	Net income before interest, taxes, depreciation and amortization


Adjusted EBITDA		EBITDA adjusted ~~fornon-cash~~to remove foreign exchange gains or ~~losses on debt revaluation;~~losses; impairment expenses; reorganization expenses, stock-based compensation expense; ~~reorganization expenses;~~government subsidies, and any othernon-core gains or losses


Adjusted EBITDA Margin		Adjusted EBITDA divided by revenue

~~Adjusted Net Income~~		~~Net income excluding the tax effected impact of impairment, reorganization expenses, and stock-based compensation fair value adjustment~~

You should carefully evaluate thesenon-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of thesenon-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 thesenon-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 thesenon-GAAP financial measures. Because thesenon-GAAP financial measures may be defined differently by other companies in our industry, our definitions of thesenon-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

~~EBITDA and Adjusted EBITDA for the Three and Nine Months Ended September 30, 2019 and 2018~~

~~The following table presents a reconciliation for the third quarter andyear-to-date~~ ~~results of 2019 and 2018 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2019 2018 2019 2018
   ($ in thousands) ($ in thousands)
Net income (loss) for the period
   $ 5,802 $ (1,433 ) $ 3,148 $ 2,407
Add back (deduct):

Interest Expense
   3 98 77 301
Interest Income
   (228 ) (101 ) (320 ) (327 )
Income Tax Expense
   1,959 684 3,667 3,114
Depreciation and Amortization
   2,925 3,544 9,260 10,342


EBITDA
   $ 10,461 $ 2,792 $ 15,832 $ 15,837
Stock-based Compensation Expense
(Recovery)
   (2,389 ) 2,037 2,403 3,172
Non-cash Foreign Exchange Loss (Gain) on
Debt Revaluation
   —   (101 ) (211 ) 312
Impairment Expense
   —   6,098 —   6,098
Reorganization Expense
   —   2,236 2,639 4,646


Adjusted EBITDA
   $ 8,072 $ 13,062 20,663 $ 30,065


Net Income Margin(1)
   8.9 % (1.9 )% 1.6 % 1.2 %


Adjusted EBITDA Margin
   12.3 % 17.7 % 10.6 % 15.0 %

~~(1)~~

~~Net income divided by revenue.~~

For the three months ended September 30, 2019, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $8.1 million or 12.3% from $13.1 million or 17.7% in the same period of 2018. This reflects the $5.2 million decrease in Adjusted Gross Profit, the impact of $2.4 million of~~one-time~~ costs in operating expenses (which included $0.7 million related to the Sales & Marketing Plan, $1.4 million of Nasdaq listing costs, and $0.3 million of operations consulting costs), partially offset by ongoing cost reductions, the reversal of a $1.3 million provision, and a $0.5 million increase in foreign exchange gains.

For the nine months ended September 30, 2019, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $20.7 million or 10.6% from $30.1 million or 15.0% in the same period of 2018. This reflects the $6.5 million decrease in Adjusted Gross Profit, the impacts of $5.5 million of~~one-time~~ costs in operating expenses (which included $2.0 million related to the Sales & Marketing Plan, $2.5 million of Nasdaq listing costs, and $1.0 million of operations consulting costs), and a $2.1 million increase in foreign exchange losses partially offset by the reversal of a $1.3 million provision and ongoing cost reductions.

~~Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Nine Months Ended September 30, 2019 and 2018~~

The following table presents a reconciliation for the three and nine months ended September 30, 2019 and 2018 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:

   Three Months Ended
September 30, Nine Months Ended
September 30,
       2019         2018         2019         2018
   ($ in thousands)
Gross Profit
   24,934 30,085 72,959 79,390
Gross Profit Margin
   38.1 % 40.7 % 37.5 % 39.6 %
Add: Depreciation and Amortization Expense
   2,375 2,422 7,114 7,196


Adjusted Gross Profit
   27,309 32,507 80,073 86,586


Adjusted Gross Profit Margin
   41.8 % 44.0 % 41.2 % 43.2 %

Gross profit and gross profit margin decreased to $24.9 million or 38.1% for the three months ended September 30, 2019, from $30.1 million or 40.7% for the three months ended September 30, 2018. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $27.3 million or 41.8% for the three months ended September 30, 2019, from $32.5 million or 44.0% for the three months ended September 30, 2018. The decreases are largely due to an increase in unused labor capacity and reduced fixed cost leverage on lower revenue levels. Reductions in direct material and transportation costs, due to improved efficiency and product mix, offset the higher material costs of $0.8 million (1.0% reduction in gross profit margin) that mitigate the tile warping issue.

Gross profit and gross profit margin decreased to $73.0 million, or 37.5%, for the nine months ended September 30, 2019, from $79.4 million or 39.6% for the nine months ended September 30, 2018. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $80.1 million or 41.2% for the nine months ended September 30, 2019, from $86.6 million or 43.2% for the nine months ended September 30, 2018. During the period, we incurred $2.8 million of incremental costs (1.1% reduction in gross profit margin) that mitigate the tile warping issue and $3.0 million of costs associated with headcount additions throughout 2018 in anticipation of higher volumes. We also experienced a $0.7 million reduction in gross profit due to decreases in second quarter gross profit on installation revenue. These cost increases were partially offset by the benefits of the operational improvement activities as previously described. We expect to further realize benefits from these activities as the year progresses.

~~Adjusted Net Income for the Three and Nine Months Ended September 30, 2019 and 2018~~

~~The following table presents a reconciliation for the third quarter andyear-to-date~~ ~~results of 2019 and 2018 of Adjusted Net Income (loss) to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2019    2018    2019    2018
   ($ in thousands)
Net Income (Loss) for the Period
   $ 5,802    $ (1,433 )    $ 3,148    $ 2,407
Add back (deduct):

Stock-based compensation fair value adjustments
   (4,211 )    2,340    (450 )    2,340
Reorganization Expense
   —      4,646    2,639    4,646
Impairment Expenses
   —      6,098    —      6,098
Tax impact of adjustments
   —      (2,901 )    (713 )    (2,901 )








Adjusted Net Income (Loss)
   1,591    8,750    4,624    12,590

During the third quarter of 2018, we determined that we no longer qualified as a Foreign Private Issuer (“FPI”) as of June 30, 2018, under the rules of the SEC. To minimize any undue effects on employees, our Board of Directors approved the availability of a cash surrender feature for certain options until such time as we requalified as a FPI or we registered our common shares with the SEC, which occurred on October 9, 2019 upon our listing on Nasdaq. Accordingly, we accounted for the fair value of outstanding stock options at the end of the reporting period as a liability, with changes in the liability recorded through net income as a stock-based compensation fair value adjustment. Adjusted Net Income for the three and nine months ended September 30, 2019 removes the stock option fair value adjustment, because this accounting charge is material and not comparable to prior year charges. As a result, the change in the permitted manner of settlement will trigger a change in the accounting for the plan and result in the recognition of the Option Plan as equity settled awards prospectively from October 9, 2019.

Results of Operations

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019,~~2022, Compared to Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2021


	Three Months Ended September 30,									Nine Months Ended September 30,									For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2019			2018			% Change			2019			2018			% Change			2022			2021			% Change			2022			2021			% Change
	($ in thousands)																		($ in thousands)									($ in thousands)
Revenue	$	65,385		$	73,913			(12	)%	$	194,537		$	200,241			(3	)%		44,701			41,102			9			82,987			70,567			18
Gross Profit	$	24,934		$	30,085			(17	)%	$	72,959		$	79,390			(8	)%		6,276			9,224			(32	)		9,563			12,594			(24	)
														��
Gross Profit Margin		38.1	%		40.7	%		(6	)%		37.5	%		39.6	%		(5	)%		14.0	%		22.4	%					11.5	%		17.8	%
Operating Expenses
Sales and Marketing	$	8,568			9,995			(14	)%		25,898		$	30,169			(14	)%		7,777			7,564			3			15,005			14,234			5
General and Administrative		7,280			7,212			1	%		21,033			21,634			(3	)%		6,877			7,780			(12	)		14,870			15,021			(1	)
Operations Support		2,419			1,937			25	%		7,771			5,933			31	%		2,528			2,213			14			5,026			4,510			11
Technology and Development		1,718			922			86	%		5,881			3,048			93	%		1,879			1,924			(2	)		4,019			3,859			4
Stock-based compensation		(2,389	)		2,037			NA			2,403			3,172			(24	)%
Impairment		—			6,098			(100	)%		—			6,098			(100	)%
Stock-Based Compensation																				1,326			1,861			(29	)		2,628			2,955			(11	)
Reorganization		—			2,236			(100	)%		2,639			4,646			(43	)%		5,163			-			100			8,855			-			100

Total Operating Expenses	$	17,596		$	30,437			(42	)%	$	65,625		$	74,700			(12	)%		25,550			21,342			20			50,403			40,579			24

Operating Income (Loss)	$	7,338		$	(352	)		NA		$	7,334		$	4,690			56	%

Operating Loss																				(19,274	)		(12,118	)		59			(40,840	)		(27,985	)		46
Operating Margin		11.2	%		(0.5	)%		NA			3.8	%		2.3	%		65.2	%		(43.1	)%		(29.5	)%					(49.2	)%		(39.7	)%

Revenue

Revenue reflects sales to our ~~Distribution~~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:

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2019    2018    % Change 2019    2018    % Change
   ($ in thousands)
Product
   $ 56,486    $ 64,941    (13 )% $ 168,321    $ 175,286    (4 )%
Transportation
   6,429    6,184    4 % 18,644    16,368    14 %
Licenses
   409    595    (31 )% 1,472    1,724    (15 )%









Total Product Revenue
   $ 63,324    $ 71,720    (12 )% $ 188,437    $ 193,378    (3 )%
Installation and other services
   2,061    2,193    (6 )% 6,100    6,863    (11 )%









Total
   $ 65,385    $ 73,913    (12 )% $ 194,537    $ 200,241    (3 )%


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2022		2021		% Change		2022		2021		% Change
	($ in thousands)						($ in thousands)
Product		38,098		36,462		4		71,291		62,298		14
Transportation		4,795		3,484		38		8,856		5,983		48
License fees from Construction Partners		198		141		40		395		348		14
Total product revenue		43,091		40,087		7		80,542		68,629		17
Installation and other services		1,610		1,015		59		2,445		1,938		26
		44,701		41,102		9		82,987		70,567		18

~~Revenue decreased~~Our sales activity and associated revenues continue to be impacted by the severe economic and social impact 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 ~~three months~~quarter ended ~~September~~June 30, ~~2019 by $8.5~~2022, revenue was $44.7 million, an increase of $3.6 million or ~~12% compared to~~9% from the same period ~~of 2018. Revenue decreased due to several factors, including the impact of a large project~~ in 2018 that was not replaced in 2019. We also believe the distraction from significant management changes during 2018 on a long sales cycle combined with immature and transitional state of our sales and marketing function limited our ability to take advantage of growth opportunities in our market for 2019. The recent enhancements to our organizational structure and senior management team may have not yet positively affected sales due to, we believe, our long sales cycle.

~~For the nine months ended September 30, 2019, product revenue decreased by $7.0 million or 4% compared to the same period of 2018 for the same reasons as previously discussed.~~2021. Revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2018 included~~2022 was $83.0million an ~~estimated $4.0 to $7.0~~increase of 12.4 million ~~(2% to 3% ofyear-to-date~~ ~~2018 revenue) of projects that were delayed~~

or 18% from the ~~fourth quarter of 2017 to the~~six months ended June 30, 2021. The first quarter of ~~2018~~2022 marked the transition of the COVID-19 pandemic to an endemic with the broad easing of health restrictions, including work-from-home mandates, across North America.While the resurgence in COVID-19 infections due to the Omicron variant at the beginning of the year temporarily sent many employees back to their home offices and delayed return dates, the Company and our Construction Partners experienced an uptick in planning activity and opportunity growth in our commercial vertical which began to translate into orders in March 2022 that has continued into the 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.

We remain uncertain as to the ongoing impact of the pandemic, including effects of resurgent infection rates due to variants, on future projects that are either in the planning or conceptual stage. It is likely that future projects will experience similar delays as the COVID-19 pandemic runs its course and as DIRTT works through the aforementioned hiring and training challenges. See Item 1A. “Risk Factors”.

In response to significant increases in the costs 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 ~~significant hurricanes in~~ the ~~southern United States affecting 2017 project schedules.~~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.

Installation and other services revenue ~~of $2.1~~was $1.6 million and $2.4 million for the three and six months ended ~~September~~June 30, ~~2019 was $0.1~~2022 respectively, compared to $1.0 million ~~lower than~~and $1.9 million in the same period ~~in 2018 and decreased $0.8 million for the nine months ended September 30, 2019 compared to the same period in 2018. The changes in installation revenue are primarily due to the timing~~ of ~~projects.~~2021. Except in limited circumstances, our ~~Distribution~~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 ~~Distribution~~Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. WeAt June 30, 2022, we had ~~93 Distribution~~69 (December 31, 2021: 69) Construction Partners ~~at September 30, 2019. Our~~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, we announced the establishment of a Partner Advisory Council to provide a greater link with Construction Partners and end clients ~~as serviced primarily through our Distribution Partners, exist within a variety~~who they service. The Partner Advisory Council will offer advice on sales and marketing effectiveness, product issues and new market needs, market conditions, competitive landscape, marketing support and other related areas of ~~industries, including healthcare, education, financial services, government and military, manufacturing,non-profit,~~ ~~energy, professional services, retail, technology and hospitality.~~mutual interest.

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:


	Three Months Ended September 30,							Nine Months Ended September 30,							For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2019		2018		% Change			2019		2018		% Change			2022		2021		% Change			2022		2021		% Change
	($ in thousands)														($ in thousands)							($ in thousands)
Commercial	$	42,910	$	41,117		4	%	$	124,248	$	119,021		4	%		29,618		19,032		56			53,662		35,176		53
Healthcare		9,192		18,698		(51	)%		32,452		40,459		(20	)%		5,091		14,176		(64	)		12,055		20,663		(42	)
Government		3,855		4,634		(17	)%		12,267		17,408		(30	)%		5,041		4,249		19			8,322		8,430		(1	)
Education		6,958		6,676		4	%		17,998		14,766		22	%		3,143		2,489		26			6,108		4,012		52
License fees from Distribution Partners		409		595		(31	)%		1,472		1,724		(15	)%
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	$	63,324	$	71,720		(12	)%	$	188,437	$	193,378		(3	)%

Installation and other services	$	2,061	$	2,193		(6	)%		6,100		6,863		(11	)%

Total Revenue	$	65,385	$	73,913		(12	)%	$	194,537	$	200,241		(3	)%


	Three Months Ended September 30,							Nine Months Ended September 30,							For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		% Change			2019		2018		% Change			2022		2021		2022		2021
	(in %)														(in %)				(in %)
Commercial		68		58		17			66		62		6			69		47		67		52
Healthcare		15		26		(42	)		17		21		(19	)		12		36		15		30
Government		6		7		(14	)		7		9		(22	)		12		11		10		12
Education		11		9		22			10		8		25			7		6		8		6

% of Product Revenue(1)		100		100		—			100		100		—

Total Product Revenue(1)																100		100		100		100

(1)

Excludes license fees from Construction Partners.

~~(1)~~

~~excluding license fees from Distribution Partners~~

~~Revenue~~Commercial revenues increased by 56% and 53% in the three and six month periods ended June 30, 2022 from the same prior year periods, reflecting improving market conditions as health restrictions and work-from-home requirements ease and include one large customer in the technology sector with revenue of $2.3 million and $5.6 million for the respective periods. Healthcare decreased by ~~12%~~64% and 42% in the three and six months ended June 30, 2022, respectively, from the same periods in 2021. 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 in the second quarter which did not recur in 2022.

Education sales in the three and six months ended June 30, 2022 increased by 26% and 52%, respectively, over 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. Government revenues in the three months ended ~~September~~June 30, ~~2019~~2022 increased by 19% and decreased by 1% for the six month period then ended over the same period in 2018 and was driven primarily by decreased healthcare sales, which reflects the completion of a major healthcare projectthat was not replaced in 2019, and decreased government sales, which was mainly due to the timing of certain projects. This decrease in revenue was partially offset by growth in the commercial and education sectors. For the nine months ended September 30, 2019, revenue was lower by 3% compared to the same period in 2018, with continued growth in the commercial and education sectors, offset by the completion of a major healthcare project in 2018 that was not replaced in 2019 and a reduced number of installation projects.prior year periods.

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

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2019    2018    % Change 2019    2018    % Change
   ($ in thousands) ($ in thousands)
Canada
   $ 8,956    $ 11,627    (23 )% $ 24,795    $ 29,998    (17 )%
United States
   56,429    62,249    (9 )% 169,742    169,343    —
International
   —      37    (100 )% —      900    (100 )%









Total
   $ 65,385    $ 73,913    (12 )% $ 194,537    $ 200,241    (3 )%


	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

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 ~~decreased $1.4~~increased by $0.2 million and $0.8 million to ~~$8.6~~$7.8 million and $15.0 million for the three and six months ended ~~September~~June 30, ~~2019,~~2022, from ~~$10.0~~$7.6 million and $14.2 million for the three and six months ended ~~September~~June 30, ~~2018. Sales and marketing expenses decreased $4.3 million~~2021 respectively. The increase was largely related to $25.9 million for the nine months ended September 30, 2019, from $30.2 million for the nine months ended September 30, 2018. Included in sales and marketing expenses in the three months and nine months ended September 30, 2019 were $0.7an increase of $0.9 million and ~~$2.0~~$1.3 million ~~respectively, ofone-time~~ ~~consulting costs related to the Sales & Marketing Plan. These costs were offset by a $1.5 million and $1.6 million reduction in commission expense~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2022, respectively, ~~on lower revenues. Additionally, we have continued to realize reductions~~ in travel, meals and entertainment ~~costs~~expenses as business activity has increased and ~~cost reductions related to trade shows; however, none of these expense reductions are expected to materially affect our future sales revenue.~~

~~Our sales~~restrictions on travel have eased, offset by lower salary and marketing efforts in 2019 are largely concentrated on establishing the appropriate sales organization and personnel, significantly improving our marketing approach and driving returns on sales and marketing expenditures. In April 2019, we engaged an internationally recognized consulting firm to evaluate our current sales and marketing approach and assist in the development of action plans necessary to drive accelerated growth. Along with the incremental costs associated with this consulting engagement in 2019, we expect sales and marketing expense to increase in conjunction with higher salesbenefit expenses due to ~~higher commissions,~~planned headcount reductions as ~~well as investment in sales generating initiatives as we implement our Sales & Marketing Plan, including targeted increases in our commercial organization headcount, expansion and refreshment~~part of our DIRTT Experience Centers (formally known as Green Learning Centers), and implementation of related systems and tools. Our ongoing focus is to continue to control costs by emphasizing return on investment on our sales and marketing expenditures.the cost savings initiatives.

General and Administrative Expenses

General and administrative expenses ~~(“G&A”) increased~~decreased $0.9 million to $6.9 million and $0.1 million to ~~$7.3~~$14.9 million for the three and six months ended ~~September~~June 30, ~~2019~~2022 from ~~$7.2~~$7.8 million and $15.0 million for the three and six months ended ~~September~~June 30, ~~2018. This includes~~

~~$1.4~~2021. In the three months ended June 30, 2022, approximately $0.3 million of~~one-time~~ ~~costs related to~~ professional fees associated with the ~~Nasdaq listing incurred in the third quarter~~contested election of ~~2019,~~directors was more than offset by ~~a $1.3~~lower salaries and benefits costs. For the six month period ended June 30, 2022, approximately $1.8 million ~~reversal~~ of ~~a claims provision.~~

~~G&A expenses decreased $0.6 million to $21.0 million for~~incremental professional fees associated with the nine months ended September 30, 2019 from $21.6 million for the nine months ended September 30, 2018. In 2018, we incurred $1.4 million related to proxy defense costs which did not reoccur in 2019. Additionally, we reversed a $1.3 million claim provision during the third quartercontested election of ~~2019. These items were partially~~directors was offset by ~~$2.5 million~~lower salaries and benefits cost. Reductions in salaries and benefits includes planned headcount reductions as part of ~~costs related to the Nasdaq listing incurred in the nine months ended September 30, 2019. Beginning in 2020, we anticipate incremental annualnon-listing~~ related costs of approximately $1.5 to $2.0 million, as a result of becoming a U.S. registrant, driven largely by increased director and officer insurance premiums, the costs of maintaining two listings,cost savings initiatives as well as ~~expected increases~~the impact of the Chief Executive Officer vacancy in ~~audit, legal,~~the periods.

Operations Support Expenses

Operations support is comprised primarily of project managers, order entry and other ~~compliance costs.~~

~~Operations Support Expenses~~

~~Operations support expenditures include~~professionals that facilitate the ~~fixed costs associated with delivery~~integration of our Construction Partner project execution and ~~project management of DIRTT Solutions.~~our manufacturing operations. Operations support expenses increased by $0.3 million and $0.5 million ~~to $2.4~~from $2.2 million and $4.5 million for the three and six months ended ~~September~~June 30, ~~2019, from $1.9~~2021, respectively, to $2.5 million and $5.0 million for the three and six months ended ~~September~~June 30, ~~2018, largely~~2022. The increase was 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 in ~~consulting costs during this quarter. Operations support costs increased $1.9~~salaries and benefits of $0.2 million ~~to $7.8~~and $0.3 million for the ~~nine months~~three and six month period ended ~~September~~June 30, ~~2019, from $5.9 million for~~2022 compared to the nine months ended September 30, 2018, largely due to $1.1 million of consultant costs, as well as increases in personnel costs. The consultant costs incurred were to assist with the evaluation of current operations and to assist with the rectification of the tile warping issue. Increases in personnel costs were due to increased headcount and an increased provision for variable compensation.previous year same period.

Technology and Development Expenses

Technology and development expenses relate tonon-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 for the three and six month period ended June 30, 2022 were consistent with prior period costs as $0.2 million and $0.5 million of lower capitalized costs due to fewer internal projects, respectively, were offset by reductions in salaries and benefits expense.

Stock-Based Compensation

Stock-based compensation expense for the three and six months ended June 30, 2022 was $1.3 million and $2.6 million compared to $1.9 million and $3.0 million for the same periods in 2021. The movement in this expense was largely the impact of grants of RSUs to the Company's employees, including those in lieu of cash compensation to the Company’s former interim Chief Executive Officer in January 2022 and DSUs 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.

Reorganization

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 ~~$0.8~~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 million. Of these cost reduction initiatives, $9.0 million was implemented during the first and second quarters of 2022, $3.0 million will be implemented in the second half of 2022, and $1.0 million, comprised of certain manufacturing positions, has been deferred as we work to ~~$1.7~~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.

Government Subsidies

The Company was not eligible and did not receive any new government subsidies in the three and six months ended June 30, 2022 compared to $3.4 and $7.5 million of subsidies received during the three and six months ended June 30, 2021. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of previously-received subsidies were repaid to the Canadian authorities in the second quarter of 2022. The amount was fully provided for in the third quarter of 2021 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.

Interest expense

Interest expense increased by $0.5 million from $0.8 million for the three months ended ~~September~~June 30, ~~2019,~~2022 to $1.3 million compared to ~~$0.9~~June 30, 2021 and by $1.4 million for the three months ended September 30, 2018. Technology and development expenses increased $2.8 million to $5.9 million for the nine months ended September 30, 2019, compared to $3.0 million for the nine months ended September 30, 2018. These increases are due to a $0.3 million and $1.7 million decrease in capitalized salaries for the three and nine months ended September 30, 2019, respectively, as the current mix of projects undertaken by us included a higher portion of efforts related to business process improvements that were not eligible for capitalization. In addition, technology and development expenses included $0.3 million and $0.5 million of salary and benefit costs that were classified as cost of sales of technical services during the three and nine months ended September 30, 2018, respectively, as well as a higher provision for variable compensation.

~~Stock-Based Compensation~~

Stock-based compensation reflected a $2.4 million recovery for the three months ended September 30, 2019, compared to an expense of $2.0 million for the same period of 2018. Stock-based compensation expense was reduced to $2.4 million for the nine months ended September 30, 2019, compared to $3.2 million for the same period of 2018. We recorded fair value adjustments on cash settled stock options during the three and nine months ended September 30, 2019, respectively, with no fair value adjustment required in the respective periods in 2018. As noted previously, following our listing on Nasdaq on October 9, 2019, we ceased allowing cash surrender of employee stock options. As a result, we will cease the associated liability accounting for the Option Plan which required quarterly fair value adjustments.

~~Impairment Expenses~~

~~During 2018, management decided to shift~~ from ~~the early stage development of its DIRTT Timber market to a commercialized approach focused on large, standalone timber projects and as atie-in~~ ~~to our other DIRTT Solutions. Management concluded that this strategy required significantly less timber capacity than existed and took steps toright-size~~ ~~its timber capacity by the end of 2018. Management determined these decisions to be an indicator of impairment of the assets of the DIRTT Timber line.~~

During 2018, management performed an assessment of the carrying values of DIRTT Timber’s property, plant and equipment (“PP&E”). To determine the impairment of the DIRTT Timber assets, the net book value of the assets was evaluated against the fair value of the assets. The fair value of the DIRTT Timber assets reflects current projected sales for timber projects on a standalone basis and the pull-through impact to other DIRTT Solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT Solutions. The equipment related to the timber market was custom built for DIRTT, and there was no active market for resale. Therefore, the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for other DIRTT Solutions. Management estimated the expected resale values based on the current market and industry knowledge. The fair value of the timber assets was estimated to be $1.1 million. This assessment resulted in an impairment charge of $6.1 million during 2018.

~~Reorganization Expenses~~

We incurred $2.6 million of reorganization expenses during the first quarter of 2019, and no material additional reorganization costs in the second or third quarters of 2019, compared to $2.2 million and $4.6$1.3 million in the ~~three and nine~~six months ended ~~September~~June 30, 2018, respectively. These costs included severance payments and related legal and consulting costs associated with management and organizational changes. No further material expenditures are anticipated in 2019.

~~Income Tax~~

~~Alberta’s general provincial tax rate was decreased on~~2022 to $2.7 million compared to June ~~28, 2019 from 11.5% to 11% for the second half of 2019, to 10% for 2020, to 9% for 2021 and to 8% thereafter. As~~30, 2021. The increased interest expense is a result of the ~~rate change, we reduced our deferred tax asset by $0.9~~issuance of C$35.0 million ~~with a corresponding deferred income tax expense recorded~~($27.4 million) of Debentures in December 2021 and draws on the ~~second quarter of 2019.~~Leasing Facilities.

Income Tax

The provision for income taxes is comprised of U.S. and Canadian federal, state ~~provincial~~ and ~~foreign~~provincial taxes based onpre-tax income. ~~Income~~The Company incurred no income tax expense ~~for~~or recovery during the three and six months ended ~~September~~June 30, ~~2019, inclusive of the previously noted charge associated with the Alberta tax rate change, was $2.0 million,~~2022, compared to ~~$0.7~~a $0.2 million and $0.3 million expense for the same period of ~~2018, and income tax expense for the nine months ended September 30, 2019 was $3.7 million, as compared to $3.1 million for the same period of 2018.~~2021. As at ~~September~~June 30, ~~2019,~~2022 the Company had a valuation allowance of $27.0 million (December 31, 2021 $17.3 million) against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at June 30, 2022, we had C$~~36.7~~89.8 million of non-capital loss carry-forwards in Canada and ~~none~~$60.4 million in the United ~~States, compared to C$43.6 million in Canada and none in the United States on December 31, 2018.~~States. These loss carry-forwards will begin to expire in ~~2030.~~2032.

Net ~~Income (Loss)~~Loss

Net ~~income was $5.8~~loss increased to $19.3 million or ~~$0.07~~$0.22 net loss per share in the ~~third quarter of 2019, compared to~~three months ended June 30, 2022 from a net loss of ~~$1.4~~$9.7 million or ~~$0.02~~$0.11 net loss per share for the ~~third~~ quarter ~~of 2018.~~ended June 30, 2021. The ~~variances are~~increased loss is primarily the result of ~~changes~~a $2.9 million decrease in gross profit, ~~and~~a $4.2 million increase in operating expenses (which includes $5.2 million of reorganization expenses and $0.3 million 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 million of incremental professional fees as described ~~above.~~ previously), a $1.4 million increase in interest expense and a $6.9 million decrease in government subsidies offset by a foreign exchange gain of $0.8 million.

EBITDA and Adjusted EBITDA for the Three and Six Months Ended June 30, 2022 and 2021

The following table presents a reconciliation for the second quarter and year to date results of 2022 and 2021 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,
	2022			2021			2022			2021
	($ in thousands)						($ in thousands)
Net loss for the period		(19,288	)		(9,738	)		(42,330	)		(22,237	)
Add back (deduct):
Interest Expense		1,329			794			2,659			1,294
Interest Income		(20	)		(23	)		(31	)		(42	)
Income Tax Expense		-			220			-			259
Depreciation and Amortization		3,344			3,421			7,966			6,823
EBITDA		(14,635	)		(5,326	)		(31,736	)		(13,903	)
Foreign Exchange (Gains) Losses		(1,246	)		60			(514	)		240
Stock-Based Compensation		1,326			1,861			2,628			2,955
Government Subsidies		(49	)		(3,431	)		(624	)		(7,499	)
Reorganization Expense		5,163			-			8,855			-
Adjusted EBITDA		(9,441	)		(6,836	)		(21,391	)		(18,207	)
Net Loss Margin(1)		(43.1	)%		(23.7	)%		(51.0	)%		(31.5	)%
Adjusted EBITDA Margin		(21.1	)%		(16.6	)%		(25.8	)%		(25.8	)%

(1)

Net ~~income~~loss divided by revenue.

For the three months ended June 30, 2022, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $2.6 million to a $9.4 million loss or (21.1)% from $6.8 million loss or (16.6)% in the same period of 2021. This primarily reflects a $2.8 million decrease in Adjusted Gross Profit, $1.0 million increase in travel and entertainment costs, $0.3 million of incremental professional fees as described previously and, $0.3 million reduction 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 million decrease in Adjusted Gross Profit, $1.8 million of incremental professional fees as described previously, $1.5 million increase 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.

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

The following table presents a reconciliation for the three and six months ended June 30, 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,
	2022			2021			2022			2021
	($ in thousands)						($ in thousands)
Gross profit		6,276			9,224			9,563			12,594
Gross profit margin		14.0	%		22.4	%		11.5	%		17.8	%
Add: Depreciation and amortization expense		2,188			2,033			5,660			4,062
Add: Costs of under-utilized capacity		-			-			-			1,756
Adjusted Gross Profit		8,464			11,257			15,223			18,412
Adjusted Gross Profit Margin		18.9	%		27.4	%		18.3	%		26.1	%

Gross profit and gross profit margin decreased to $6.3 million or 14.0% for the three months ended ~~September~~June 30, ~~2019 includes a $2.4~~2022, from $9.2 million ~~recovery in stock-based compensation, compared to a $2.0 million expense in the same period of 2018, and no reorganization~~ or ~~impairment expenses~~22.4% for the three months ended ~~September~~June 30, ~~2019, compared~~2021. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to ~~$2.2~~$8.5 million or 18.9% for the three months ended June 30, 2022, from $11.3 million or 27.4% for the three months ended June 30, 2021.

For the six month period ended June 30, 2022, gross profit and ~~$6.1~~gross profit margin decreased to $9.6 million ~~respectively,~~or 11.5% from $12.6 million or 17.8% for the six month period ended June 30, 2021. 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 to a sustained increase in demand that began in the first quarter of 2022, the Company began efforts to increase its manufacturing labor headcount but experienced the ongoing effects of a tight labor market. This has made it more difficult than expected to attract and retain skilled labor, particularly at our Savannah facility, and as a result the Company increased hourly rates by 6% on average to increase its overall competitiveness.

To address these cost increases, the Company implemented a series of price increases, 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, 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 as material, transportation and packaging costs increased by approximately 5.4% as a percentage of ~~2018.~~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 with our Construction Partners, including the importance of short lead times, we reversed this decision in the second quarter of 2022. Other 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 to the same period last year.

~~Net income~~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 percentage of revenue. Other cost increases negatively impacted the gross profit by 1.4% and gross profit was ~~$3.1~~reduced by approximately 1% due to incremental South Carolina Facility fixed costs. Additional depreciation and amortization due to revision to the useful lives of assets, including the Phoenix Facility, contributed $1.1 million or ~~$0.04 per share~~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 expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2021, we experienced the full impact of the slowdown in non-residential construction activity on our business. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first ~~nine months~~quarter of ~~2019, compared~~2021 despite the shortfall in revenues relative to ~~net income of $2.4 million or $0.03 net income per share for~~capacity. As a result, in the first ~~nine months of 2018. The variances are the result of~~

~~changes in gross margin and operating expenses as described above. As discussed previously, we recorded a $6.1 million impairment expense in the third~~ quarter of ~~2018. Net income for~~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 ~~nine months ended September 30, 2019 includes a $2.4 million expense in stock-based compensation, compared to $3.2 million in the same period~~remaining quarters of ~~2018,~~2021 and ~~$2.6 million of reorganization costs for the nine months ended September 30, 2019, compared to $4.6 million expense in the same period of 2018.~~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 ~~September~~June 30, ~~2019~~2022 totaled ~~$56.6~~$19.7 million, ~~an increase~~a decrease of ~~$3.2~~$40.5 million from December 31, ~~2018. On January 31, 2019, we repaid $5.6~~2021. The decrease in cash over the six month period primarily reflects the impact of $36.8 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 ~~long-term debt outstanding with~~reorganization costs. In addition, capital expenditures totaled $3.0 million and scheduled Leasing Facilities repayments totaled $1.2 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 ~~without penalty. In~~and financings as described further below. Furthermore, we have implemented multiple initiatives to reduce our overall fixed cost base, including the closure of our Phoenix Facility in the second quarter of 2022, reduction in our hourly headcount in 2021 and salaried headcount reductions and other cost savings initiatives in February 2022 and July ~~2019, we entered into~~2022. We have also implemented three price increases to mitigate the inflationary effect, comprised of 6.5% effective November 1, 2021, 5% effective June 1, 2022 and a ~~C$50.0 million revolving credit facility~~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 ~~Royal Bank~~broad lifting of ~~Canada (the “RBC Facility”). Draw-downs under~~health restrictions across North America. In response the ~~RBC Facility are available~~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 ~~Canadian~~Canada and ~~U.S. dollars. The RBC Facility replaced~~ the ~~$18.0 million revolving~~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 believe the benefits of the price increases, manufacturing headcount additions, training and debottlenecking will begin to be realized in the middle of the third quarter 2022, continuing throughout the balance of the year.

We have assessed the Company’s liquidity 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 ~~facility with Comerica Bank, which expired~~facilities. 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 discussed below could 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 ~~June 30, 2019.~~

~~Management believes~~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 and ~~cash flows~~increased liquidity from ~~operations will be sufficient to support ongoing working capital and capital expenditure requirements for at least~~ the next twelve months. Our future capital requirements will depend on many factors, including growth rate, the continued expansion of sales and marketing activities and the introduction of new solutions, and software and product enhancements. To the extent existing cash and cash equivalents and cash flows from operationsaforementioned facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities ~~and could~~or contain ~~covenants~~instruments that ~~restrict operations.~~may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.

~~Historically,~~During 2021, we ~~have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Cash is primarily used~~completed financings to fund operations and capital expenditures. Over the past several years, revenue has typically increased from year to year and, as a result, cash flows from account receivable collections have increased. However, operating expenses have also increased as we reinvested capitalincrease our liquidity in ~~growing the business. Our operating cash requirements may increase in the future as management continues to invest in the strategic growth~~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.

~~Nine Months Ended September~~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. Available borrowings under the RBC Facility at June 30, ~~2019~~2022 were C$14.5 million or $11.3 million.

In December 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 ~~2018~~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 million ($3.4 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 ~~nine~~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

Operating Activities

Net cash flows used in operating activities were $17.8 million for the three months ended ~~September~~June 30, ~~2019 and 2018:~~

   Nine Months Ended
September 30.
   2019    2018
   ($ in thousands)
Net cash flows provided by (used in) operating activities
   $ 17,881    $ (7,514 )
Net cash used in investing activities
   (10,144 )    (11,566 )
Net cash provided by (used in) financing activities
   (5,484 )    (1,083 )
Effect of foreign exchange on cash and cash equivalents
   977    (1,202 )




Net increase (decrease) in cash and cash equivalents
   3,230    (21,365 )
Cash and cash equivalents, beginning of period
   $ 53,412    $ 63,484




Cash and cash equivalents, end of period
   $ 56,642    $ 42,119

~~Operating Activities~~

~~Net~~2022 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 ~~$17.9~~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 million in the second quarter of 2022 compared 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 ~~first nine~~six months ~~of 2019 from $7.5~~ended June 30, 2022 compared to $12.0 million ~~net cash flows~~in the six months ended June 30, 2021. Included in the $36.8 million used in operating activities in the first ~~nine months~~half of ~~2018. The increase~~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

~~cash flows~~ the third and fourth quarter. Excluding these amounts, cashflow from operations ~~is largely due to an increase in collections on accounts receivable balances and lack of an impairment charge~~would have been $22.2 million in the first ~~nine months~~half of ~~2019. This was partially offset by an increase~~2022 compared to $12.0 million cash used in ~~foreign exchange loss~~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 ~~a decrease in trade~~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 ~~other liabilities as~~customer deposits due to higher activity and timing of payments.

Investing Activities

We invested $0.9 million and $1.9 million in property, plant and equipment during the three and six months ended June 30, 2022, respectively, compared to ~~the first nine months of 2018.~~

~~Investing Activities~~

~~We invested $7.8~~$5.8 million ~~in PP&E in the nine months ended September 30, 2019, compared to $7.0~~and $8.7 million during the ~~nine~~three and six months ended ~~September~~

June 30, ~~2018. The increase was primarily due to manufacturing equipment purchases~~2021. This expenditure for the ~~new tile~~three months ended June 30, 2022 comprised of $0.1 million of working capital changes, $0.5 million of manufacturing upgrades, $0.1 million related to our website redesign, $0.1 million of leasehold improvements and ~~millwork facility~~$0.1 million of ~~which $1.6~~DXC refreshes. The expenditure for the six months ended June 30, 2022 comprised of $1.0 million ~~was incurred in the third quarter~~ of ~~2019.~~ 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.

We invested ~~$2.5~~$0.4 million on capitalized software during the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2022, as compared to ~~$4.2~~$0.6 million in the ~~nine~~three months ended ~~September~~June 30, ~~2018.~~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 ~~reduction~~decrease in cash flows used in investing activities is largely due to reduced spending as the ~~current mix of projects undertaken by the Company~~South Carolina Facility and ~~included a higher portion of efforts related to business process improvements that~~Dallas DXC were ~~not eligible for capitalization.~~completed in 2021.

Financing Activities

For the ~~nine~~three and six months ended ~~September~~June 30, ~~2019, net~~2022, $0.1 million and $0.9 million of cash was used in financing activities, comprising mainly of $0.6 million and $1.2 million of scheduled payments under the Leasing Facilities for the three and six month period ended June 20, 2022. During the second quarter, 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 million of cash was ~~$5.5 million. We repaid the balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019. Cash used in~~provided by financing activities, ~~was $1.1~~respectively, mainly due to the proceeds received from the issuance of C$40.3 million ~~for~~of Debentures in January 2021 and the ~~nine months ended September 30, 2018.~~receipt of $8.4 million of cash consideration under the U.S. Leasing Facility.

We currently expect to fund anticipated future investments with available ~~cash.~~cash, including the proceeds from Debentures issued in 2021, and drawings on our Credit Facility. We do not expect to make any significant further draws under the Leasing Facilities. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the future as we ~~may~~ deem appropriate. ~~In the future, we~~We may also use debt or pursue equity financing depending on the ~~Company’s share~~ price of our common shares at the time, interest rates, and nature of the investment opportunity and economic climate.

Credit Facility

On ~~July 19, 2019, we~~February 12, 2021, the Company entered into ~~a C$50 million senior secured revolving credit facility with~~ the ~~Royal Bank of Canada (the “RBC Facility”).The~~RBC Facility. Under the RBC Facility, ~~has a three-year term and can be extended for~~the Borrowing Base is up to ~~two additional years at our option.~~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 ~~with no adjustment,~~plus 30 basis points or at the ~~bankers’ acceptance rate~~Canadian Dollar Offered Rate or LIBOR plus ~~125~~155 basis points. ~~We are required to comply with certain financial covenants under~~Under the RBC Facility, ~~including maintaining~~if the Aggregate Excess Availability is less than C$5.0 million, the Company is subject to a ~~minimum fixed charge coverage ratio~~FCCR covenant of ~~1.15:~~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.

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 ~~maximum debt to Adjusted EBITDA ratio~~six-year term and is extendible at the Company’s option for an additional year.

The Company has drawn $13.3 million of ~~3.0:1.~~ 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 million ($3.4 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 ~~also required to comply with certainnon-financial~~ covenants, including, among other things, covenants restricting our ability to (i) dispose of our property, (ii) enter into certain transactions intended to effect or otherwise permit a material change in our corporate or capital structure, (iii) incur any debt, other than permitted debt, and (iv) permit certain encumbrances on our property.

~~We are generally~~ restricted ~~under the RBC Facility~~ from ~~making~~paying dividends or distributions on our outstanding capital shares (other than any distribution by way of the payment of dividends by the issuance of equity securities). We may also declare and pay dividends to our shareholders provided that such dividends do not exceed 50% of the Free Operating Cash Flowunless Payment Conditions (as defined in the RBC Facility) ~~for~~are met, including having a net borrowing availability of at least C$10 million over the ~~most recently completed fiscal year~~proceeding 30-day period, and ~~meet~~having a trailing twelve-month fixed charge coverage ratio above 1.10:1 and certain other conditions. ~~We may also make aone-time~~ ~~Permitted Special Distributions (as defined in the RBC Facility) provided that we maintain a minimum balance of at least C$20.0 million in our account and meet certain other conditions.~~

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

Contractual Obligations

~~The following table summarizes DIRTT’s~~There have been no material changes in our contractual obligations ~~at September~~during the three months ended June 30, ~~2019:~~2022, 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 our headquarters lease in Calgary. See Note 13, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information.

   Payments due by period
   Less than 1
year    1 to 3 years    3 to 5 years    Greater than 5
years    Total
   ($ in thousands)
Accounts payable and accrued liabilities
   $ 22,217    $ —      $ —      $ —      $ 22,217
Other liabilities
   4,393    —      —      —      4,393
Current and long-term debt
   —      —      —      —      —
Operating leases
   5,247    5,135    4,401    7,485    22,268
Client deposits
   7,407    —      —      —      7,407
Purchase obligations
   7,655    —      —      —      7,655










Total
   $ 46,919    $ 5,135    $ 4,401    $ 7,485    $ 63,940

Significant Accounting Policies and Estimates

There have been no material changes in our significant accounting policies during the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2022, 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 ~~Registration Statement~~Annual Report on Form ~~10.~~10-K. For information regarding significant accounting policies and estimates, please refer to Item 27 and Item 138 in our ~~Registration Statement~~Annual Report on Form ~~10.~~

~~Recent~~10-K. As disclosed in Note 5, “Adoption of New and Revised Accounting ~~Pronouncements~~

~~For information regarding recent accounting pronouncements, please refer to Note 2, “Significant Accounting Policies”~~Standards” to our condensed consolidated interim financial statements appearing in this Quarterly ~~Report.~~Report, we 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 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.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 5, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements and “–Significant Accounting Policies and Estimates” appearing in this Quarterly Report.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

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 ~~Registration Statement~~Annual Report on Form ~~10.~~10-K. For information regarding our exposure to certain market risks, please refer to Item ~~2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative~~7A. “Quantitative and Qualitative Disclosures about Market Risk” in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K.

~~Item 4.~~

~~Controls and Procedures~~

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 ~~Securities~~ Exchange Act ~~of 1934, as amended (the “Exchange Act”),~~ is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive ~~officer~~officers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As required by ~~Rules~~Rule 13a-15 under the Exchange Act, our principal executive ~~officer~~officers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September~~June 30, ~~2019.~~2022. Based upon their evaluation, our principal executive ~~officer~~officers and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-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 Rule13a-15(f) under the Exchange Act) during the quarter ended ~~September~~June 30, ~~2019,~~2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

~~On November 5, 2019,~~Item 1. Legal Proceedings

We are pursuing multiple lawsuits against our former founders, Mogens Smed and Barrie Loberg, their new company Falkbuilt Ltd. ~~(“Falkbuilt”) filed a Statement~~, and other related individual and corporate defendants for violations of ~~Claims against us~~fiduciary duties and noncompetition and non-solicitation covenants contained in their executive employment agreements, and the ~~Court~~misappropriation of ~~Queen’s Bench of Alberta, Canada. Falkbuilt alleges that we have misappropriated~~our confidential and ~~misused their alleged~~ proprietary information in ~~furtherance~~violation of numerous Canadian and U.S. state, and federal laws pertaining to the protection of our ~~own product development. Falkbuilt seeks monetary relief, including, among other things, damages~~trade secrets and proprietary information and the prevention of ~~approximately C$30.0 million, disgorgement of profits, punitive damages,~~false advertising and ~~attorneys’ fees, and an interim, interlocutory and permanent injunction of our use of~~deceptive trade practices. There have been no material developments in the ~~alleged proprietary information.~~

Falkbuilt is affiliated with certain of our former employees, including Mogens Smed, our co-founder and former Executive Chairman and Chief Executive Officer, and Barrie Loberg, our former Vice President of Software Development. Aslegal proceedings previously disclosed 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 9, 2019, we filed a lawsuit in the Court of Queen’s Bench of Alberta against Mr. Smed and Mr. Loberg, to enforce the terms of our Settlement Agreement and their respective obligations, including non-compete and non-solicit provisions, that we entered into in connection with their departure. We believe that Falkbuilt’s lawsuit against us is part of their litigation strategy related to our lawsuit against them, and we believe it is without merit. We intend to defend it vigorously and to continue to pursue our legal remedies against Messrs. Smed and Loberg and their company, Falkbuilt.4, 2022.

We may, from time to time, become involved in other legal proceedings or be subject to claims arising in the ordinary course of business, including the initiation and defense of proceedings to protect intellectual property rights, product liability claims and employment claims. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, cash flows or results of operations.

~~Item 1A.~~

~~Risk Factors~~

~~As of~~Item 1A. Risk Factors

In addition to the ~~date of~~other information set forth in this Quarterly Report on Form10-Q, ~~there have been no material changes to~~ you should carefully consider the risk factors ~~disclosed in Item 1A~~and other cautionary statements described under the heading “Risk Factors” included in our ~~Registration Statement~~Annual Report on Form ~~10.~~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 ~~know~~known to ~~use~~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

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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~Item 3.~~

~~Defaults Upon Senior Securities~~

~~None.~~Item 3. Defaults Upon Senior Securities

None.

~~Item 4.~~

~~Mine Safety Disclosures~~

Item 4. Mine Safety Disclosures

Not Applicable.

~~Item 5.~~

~~Other Information~~

On October 7, 2019, we, through one of our wholly owned subsidiaries, entered into a Lease Agreement (the “Lease”) with SP Rock Hill Legacy East #1, LLC relating to the lease by us of a build-to-suit building which will provide for approximately 130,000 square feet of manufacturing space for our combined tile and millwork factory and will be located in Rock Hill, South Carolina (the “Premises”).Item 5. Other Information

The term of the Lease is currently estimated to commence around September 2020, when construction of the Premises has been substantially completed (the “Commencement Date”). Upon the Commencement Date, the Lease will have an initial term of 15 years, with two consecutive five-year renewal periods at our option. The initial annual base rent will be approximately $851,000, subject to increases in subsequent years and to certain adjustments as set forth in the Lease.

Not Applicable.

~~Item 6.~~

~~Exhibits~~

Item 6. Exhibits

EXHIBIT INDEX


~~Exhibit No.~~		~~Description~~
Exhibit No.		Description
~~3.1~~
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, FileNo. 001-39061, filed on September 20, 2019).
3.2
~~3.2~~		Amended and Restated Bylaw No. 1 of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit ~~3.2~~3.1 to the Registrant’s ~~Registration Statement~~Current Report on Form ~~10,~~8-K, FileNo. 001-39061, filed on ~~September 20, 2019)~~May 22, 2020).
4.1
~~10.1~~		Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd. ~~Amended~~, Computershare Trust Company of Canada and ~~Restated~~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. Employee Share Purchase Plan (incorporated by reference to Exhibit ~~4.4~~10.2 to the Registrant’s ~~Registration Statement~~Quarterly Report onForm ~~S-8,~~10-Q File No. ~~333-234143,~~001-39061, filed on ~~October 9, 2019)~~May 4, 2022).
10.2*¥
~~10.2~~		~~Credit~~Lease Amending Agreement, dated ~~July 19, 2019,~~April 6, 2022, by and ~~among the Royal Bank of Canada, DIRTT Environmental Solutions Ltd., as borrower,~~between Piret (7303 - 30th Street SE) Holdings Inc. and DIRTT Environmental Solutions ~~Inc., as guarantor (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form 10, FileNo. 001-39061,~~ ~~filed on September 20, 2019).~~Ltd.
10.3*+
~~10.3~~		Executive Employment Agreement, dated ~~August 31,~~May 1, 2019 by and between DIRTT Environmental Solutions Ltd. ~~And Jennifer Warawa (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form 10, FileNo. 001-39061,~~ ~~filed on September 20, 2019).~~and Jeffrey Metcalf.
10.4*+
10.4*		~~Lease~~Executive Employment Agreement, dated ~~October 7, 2019,~~June 22, 2022 by and between DIRTT Environmental Solutions ~~Inc.~~Ltd. and ~~SP Rock Hill Legacy East #1, LLC.~~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 the Company and each of the other persons identified on the schedule
31.1*		Certification of the Principal Executive Officer required by Rule13a-14(a) or Rule15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
31.2*		Certification of the Principal Financial Officer required by Rule13a-14(a) or Rule15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
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**
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*
101.INS*		Inline XBRL Instance Document
101.SCH*
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
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

~~SIGNATURES~~** 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.

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:~~	By:	/s/ Geoffrey D. Krause
			Geoffrey D. Krause
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Date: July 27, 2022

~~Date: November 7, 2019~~

3238


	As at
	September 30, 2019			December 31, 2018
ASSETS
Current Assets
Cash and cash equivalents		56,642			53,412
Trade and other receivables, net of allowances for doubtful accounts of $0.1 million at both September 30, 2019 and December 31, 2018		27,532			43,873
Inventory		18,996			18,650
Prepaids and other current assets		4,257			2,217

Total Current Assets		107,427			118,152

Property, plant and equipment, net		38,166			36,728
Capitalized software, net		8,292			8,335
Operating leaseright-of-use assets, net		21,530			—
Deferred tax assets, net		3,487			6,083
Goodwill		1,393			1,353
Other assets		5,472			5,260

Total Assets		185,767			175,911

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		22,217			32,583
Other liabilities		4,393			5,523
Customer deposits		7,407			7,701
Current portion of lease liabilities		5,247			—
Current portion of long-term debt		—			2,500

Total Current Liabilities		39,264			48,307

Deferred tax liabilities, net		—			965
Other long-term liabilities		233			—
Long-term lease liabilities		17,021			—
Long-term debt		—			3,125

Total Liabilities		56,518			52,397

SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at September 30, 2019 and 84,660,319 issued and outstanding at December 31, 2018		180,639			180,562
Additionalpaid-in capital		6,591			6,615
Accumulated other comprehensive loss		(19,558	)		(22,092	)
Accumulated deficit		(38,423	)		(41,571	)

Total Shareholders’ Equity		129,249			123,514

Total Liabilities and Shareholders’ Equity		185,767			175,911


	Number of common shares		Common shares		Additional paid-in capital			Accumulated other comprehensive income			Accumulated deficit			Total shareholders’ equity
As at December 31, 2017		84,224,527		178,397		7,355			(12,112	)		(47,121	)		126,519

Issued on exercise of stock options		435,792		2,165		(627	)		—			—			1,538
Stock-based compensation		—		—		1,568			—			—			1,568
Stock option conversion to cash settled		—		—		(2,718	)		—			—			(2,718	)
Foreign currency translation adjustment		—		—		—			(3,801	)		—			(3,801	)
Net income for the period		—		—		—			—			2,407			2,407

As at September 30, 2018		84,660,319		180,562		5,578			(15,913	)		(44,714	)		125,513

As at December 31, 2018		84,660,319		180,562		6,615			(22,092	)		(41,571	)		123,514

Issued on exercise of stock options		21,045		77		(1	)		—			—			76
Stock-based compensation modification adjustment		—		—		(23	)		—			—			(23	)
Foreign currency translation adjustment		—		—		—			2,534			—			2,534
Net income for the period		—		—		—			—			3,148			3,148

As at September 30, 2019		84,681,364		180,639		6,591			(19,558	)		(38,423	)		129,249


	ROU Assets
	Cost		Accumulated Depreciation			Net book value
At January 1, 2019		22,571		—			22,571
Additions		1,701		—			1,701
Depreciation expense		—		(3,020	)		(3,020	)
Exchange differences		288		(10	)		278

At September 30, 2019		24,560		(3,030	)		21,530


	As at September 30, 2019
2019		1,326
2020		5,355
2021		5,357
2022		4,817
2023		2,987
Thereafter		5,893

Total		25,735
Current lease liability		5,247
Long term lease liability		17,021

Total lease liability		22,268

Difference between undiscounted cash flows and lease liability		3,467


	Number of options			Weighted average exercise price (C$)
Outstanding at December 31, 2017		5,553,393			5.31
Granted		3,327,525			6.40
Exercised		(435,792	)		4.78
Forfeited		(643,849	)		5.81
Expired		(15,420	)		6.01

Outstanding at September 30, 2018		7,785,857			5.84
Outstanding at December 31, 2018		6,858,376			5.88
Granted		1,359,824			7.51
Exercised		(21,045	)		4.81
Forfeited		(243,761	)		6.22
Surrendered for cash settlement		(1,544,151	)		4.95
Expired		(119,336	)		5.63

Outstanding at September 30, 2019		6,289,907			6.51

Exercisable at September 30, 2019		1,940,498			5.98


	Options outstanding						Options exercisable
Range of exercise prices	Number outstanding		Weighted average remaining contractual years		Weighted average exercise price (C$)		Number exercisable		Weighted average remaining contractual years		Weighted average exercise price (C$)
$5.01 – $6.00		806,638		2.1		5.76		479,389		2.1		5.76
$6.01 – $7.00		4,396,537		3.3		6.32		1,461,109		1.9		6.20
$7.01 – $7.84		1,086,732		4.6		4.84		—

Total		6,289,907						1,940,498


	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


	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			��


	September 30, 2019		As at December 31, 2018		December 31, 2017
Customer deposits		6,296		6,746		5,675
Deferred revenue		1,111		955		701

Contract liabilities		7,407		7,701		6,376


	Nine Months Ended September 30.
	2019			2018
	($ in thousands)
Net cash flows provided by (used in) operating activities	$	17,881		$	(7,514	)
Net cash used in investing activities		(10,144	)		(11,566	)
Net cash provided by (used in) financing activities		(5,484	)		(1,083	)
Effect of foreign exchange on cash and cash equivalents		977			(1,202	)

Net increase (decrease) in cash and cash equivalents		3,230			(21,365	)
Cash and cash equivalents, beginning of period	$	53,412		$	63,484

Cash and cash equivalents, end of period	$	56,642		$	42,119


	Payments due by period
	Less than 1 year		1 to 3 years		3 to 5 years		Greater than 5 years		Total
	($ in thousands)
Accounts payable and accrued liabilities	$	22,217	$	—	$	—	$	—	$	22,217
Other liabilities		4,393		—		—		—		4,393
Current and long-term debt		—		—		—		—		—
Operating leases		5,247		5,135		4,401		7,485		22,268
Client deposits		7,407		—		—		—		7,407
Purchase obligations		7,655		—		—		—		7,655

Total	$	46,919	$	5,135	$	4,401	$	7,485	$	63,940

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company