UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

For the quarterly period ended March 31, 20202021

or

For the transition period from to

Commission file number001-39061

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code): (403)723-5000

Securities registered pursuant to Section 12(b) of the Exchange Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 84,681,36484,694,913 common shares outstanding as of April 30, 2020.May 3, 2021.

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

FORM10-Q

FOR THE QUARTER ENDED MARCH 31, 20202021

TABLE OF CONTENTS

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSCautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form10-Q for the quarter ended March 31, 20202021 (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 adverse effect on our business, financial condition, results of operations and growth prospects include, but are not limited to, the severity and duration of theCOVID-19 coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled “Risk Factors” in our Annual Report on Form10-K for the year ended December 31, 2019,2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 24, 2021 (the “Annual Report on Form10-K”), and in this Quarterly Report under “Part II, Item 1A. Risk Factors.”  These factors include, but are not limited to, the following:

ii

PART I – FINANCIAL INFORMATION

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Balance Sheets

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

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)

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)

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)

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

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 (“DIRTT,”DIRTT”, the “Company,”“Company”, “we” or “our”) is a leading technology-driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing ICE® software (“ICE^®”ICE” or “ICE Software”) with integratedin-house manufacturing of its innovative prefabricated interior construction solutions and an extensive network of distribution partners network (“Distribution Partners”). 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. ICE is also licensed to unrelated companies and Distribution Partners of the Company. DIRTT is incorporated under the laws of the province of Alberta, Canada, its headquarters is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and on The Nasdaq Global Select 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 March 31, 2020,2021, and its results of operations and cash flows for the three months ended March 31, 20202021 and 2019.2020. The condensed balance sheet at December 31, 2019,2020, 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, 20192020 and 20182019 and for each of the three years in the period ended December 31, 20192020 included in the Annual Report on Form10-K of the Company as filed with the U.S. Securities and Exchange Commission. As described in Note 4, the Company adopted a new accounting standardsstandard relating to credit losses and cloud computingconvertible debentures effective January 1, 2020. The2021. Further information on this standard and the impact on the Company of these standards have beenthis standard is described in Note 4.

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. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.

Basis of measurement

These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and certain components of stock-based compensation that are measured at fair value. Historical cost

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

Seasonality

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

3.COVID-19

On March 11, 2020, the coronavirus(“COVID-19”)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 impact ofCOVID-19 on DIRTT’s business in the near andmid-term is highly uncertain. Stay at home policies in multiple jurisdictions combined with resulting adverse economic conditions are expected tohave negatively impactimpacted construction activity in the near term at the very least,and consequently DIRTT’s business, with potential significant negative impacts extending to the endfirst half of 20202021 and beyond.

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

Key sources of estimation uncertainty can be found in the Company’s annual consolidated financial statements for the year ended December 31, 2019. TheCOVID-19 outbreak has increased the complexity of estimates and assumptions used to prepare the interim condensedCompany’s consolidated financial statements particularly relatedand the following key sources of estimation uncertainty:

Credit risk

COVID-19 may cause DIRTT’s Distribution Partners and customers to experience liquidity issues and this may result in higher expected credit losses or slower collections. Management estimated the impact at March 31, 2020 of expected credit losses and have increased the provision by $0.6 million in the first quarter of 2020 (see Note 5). Management will continuehas continued to reassess forward looking information and the impact ofCOVID-19 on our Distribution Partners in subsequent periods and thePartners. The estimation of such credit losses is complex because of limited historical precedent for the current economic situation. In addition, the Company acquired trade credit insurance effective April 1, 2020.

Liquidity risk

The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections. Information about ourTo address this risk and the uncertainty around the timing of a recovery, the Company issued convertible unsecured subordinated debentures in January 2021, for net proceeds of $29.5 million, and has credit facilities is presentedavailable as described in Note 6.

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 provides 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 June 5, 2021 (with an extension to September 25, 2021 having been announced in the 2021 Canadian federal budget), based on the percentage decline of the Company in certain of its Canadian-sourced revenues during each qualifying period. Pursuant to proposed changes announced in the 2021 Canadian federal budget, the Company may be required to repay all or a portion of the CEWS amounts for any qualifying period commencing after June 5, 2021 where the aggregate compensation for specified executives during the 2021 calendar year exceeds the aggregate compensation for specified executives during the 2019 calendar year. The Company’s eligibility for the CEWS may change for each qualifying period and is reviewed by the Company for each qualifying period.

On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). The CERS provides a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, starting on September 27, 2020 to June 5, 2021 (with an extension to September 25, 2021 having been announced in the 2021 Canadian federal budget), with the amount of the subsidy based on the percentage decline of the Company in certain of its Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS may change for each qualifying period and is reviewed by the Company for each qualifying period.

Impairment

At March 31, 2020, our market capitalization was less than the book value of our equity which is an indicator of impairment. Management compared forecasted undiscounted cash flows to the book values ofnon-current assets and2021, management determined an impairment provision was not required as our outlook is consistent with the assumptions used in our impairment test undertaken at MarchDecember 31, 2020. The impact ofCOVID-19 on DIRTT’s Distribution Partners2021. In future periods, if our results or the Company’s operationsoutlook are less than our forecast, this conclusion may change cash flows and impact the recoverability of our assets. Furthermore,COVID-19 is a rapidly evolving situation and may have an impact on our abilityneed to accurately use historical sales trends and cash flows to forecast future results leading to additional estimation uncertainty with respect to impairment testing.

Deferred tax assets (“DTA”)

The Company’s ability to generate future taxable income may be impacted byCOVID-19 which creates additional uncertainty regarding the recoverability of DTAs. To the extent additional taxable losses are generated, this may present significant unfavorable evidence of recoverability of DTAs and require the Company to recognize valuation allowances against DTA.revisited.

4. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

On January 1,August 5, 2020, the Company adopted ASUFinancial Accounting Standards Board issued Accounting Standards Update No. 2016-13, “Financial Instruments2020-06, “Debt – Credit Losses (Topic 326):Measurement of Credit LossesDebt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Financial InstrumentsEntity’s Own Equity (Subtopic 815-40)” and (the subsequent amendments to the initial guidance issued in April 2019 within ASUNo. 2019-04, May 2019 within ASUNo. 2019-05 and February 2020 within ASUNo. 2020-02 (“ASU 326”“ASU”). These ASUs replaceThe ASU eliminates the incurred loss methodology with an expected loss methodology that is referred to as the Current Expected Credit Loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivablesbeneficial conversion andheld-to-maturity debt securities. cash conversion accounting models for convertible instruments. It also applies tooff-balance sheet credit exposures notamends the accounting for certain contracts in an entity’s own equity that are currently accounted for as insurance and net investments in leases recognized by a lessor in accordance with Topic 842 on Leases.derivatives because of specific settlement provisions. In addition, ASC 326 made changes to the accountingnew guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The amendments in the ASU are effective foravailable-for-sale debt securities. fiscal years beginning after March 15, 2021 and early adoption is permitted, but no earlier than fiscal years beginning after March 15, 2020, including interim periods within those fiscal years.

The Company early adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning afterthis standard on January 1, 2021. The Company had 0 convertible debt instruments outstanding at December 31, 2020 and the convertible unsecured subordinated debentures issued in January 2021 have been evaluated under this new guidance and there were no other transitional impacts to consider.

Although there are presented under ASC 326 while prior period amounts continue to be reported in accordance with previouslyseveral other new accounting standards issued or proposed by the Financial Accounting Standards Board, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting principles generally accepted in the United States of America (“GAAP”). The adoption of this standard did notpronouncements has had or will have a significantmaterial impact on the Company, and no adjustment was required to retained earnings as of January 1, 2020 for the cumulative effect of adopting ASC 326.

On January 1, 2020, the Company adopted ASU2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” which amends ASC350-40, “Intangibles – Goodwill and Other –Internal-Use Software” (“ASU2018-15”). ASU2018-15 clarifies that if a company has the contractual right to take possession of the hosted software at any time during the hosting period without incurring a significant penalty and if a company can feasibly run the software on its own hardware or contract with a third party unrelated to the vendor to host the software, the arrangement is not impacted by ASU2018-15. If both these conditions are not met, ASU2018-15 deems the hosting arrangement to be a service contract. The capitalization criteria for implementation costs of a service contract are consistent with the requirements of ASC350-40 and impairment will be assessed consistent with policies applied to long lived assets. However, these capitalized implementation costs will be amortized over the life of the hosting arrangement and will be classified in the balance sheet and statement of operations in the same lines where software license costs are accounted for.

The Company adopted this amendment using the prospective transition approach, and no adjustments were required as a result of adoption.Financial Statements.

5. TRADE AND OTHER RECEIVABLES

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date taking into account historical credit loss experience as well as forward-looking information in order to establish rates for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the statement of operations.

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. The majorityAt March 31, 2021, approximately 85% of our trade accounts receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities, that have arisen since April 1, 2020 when the trade credit insurance became effective.

Our trade balances are spread over a broad Distribution Partner base, which is geographically dispersed. NoFor the three months ended March 31, 2021, 1 Distribution Partner accounts(2020 – none) accounted for $3.6 million of revenue, which is greater than 10% of total revenue. In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

The Company’s aged receivables were as follows:follows:

Due to the uncertainties associated with the COVID 19COVID-19 pandemic as well as the disruption to businesses in North America, the overall credit quality of certain receivables has declined at March 31, 2020 compared to January 1, 2020. As a result of this consideration and the Company’s ongoing review of the credit quality of receivables, expected credit losses were increased by $0.6 million during the quarter ended March 31, 2020. No adjustments to our expected credit losses were required at March 31, 2021. During the first quarters of 2021 and 2020, 0 receivables were written off. Receivables are generally considered to be past due when over 60 days old unless there is a separate payment arrangement in place for the collection of the receivable.

6. LONG-TERM DEBT

Revolving Credit Facility

On July 19, 2019,February 12, 2021, the Company entered into a loan agreement governing a C$50.025.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). TheUnder the RBC Facility, has a three-year term and can be extended forthe Company is able to borrow up to two additional years ata maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the Company’s option.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 (the “Borrowing Base”). At March 31, 2021, available borrowings are C$9.4 million ($7.5 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 rateCanadian Dollar Offered Rate or LIBOR plus 125155 basis points. TheUnder 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 andon a maximum debt to Adjusted EBITDA ratio of 3.0:trailing twelve month basis. Additionally, if the FCCR has been below 1.10:1 (earnings before interest, tax, depreciation and amortization,non-cash stock-based compensation, plus or minus extraordinary or unusualnon-recurring revenue or expenses). As at March 31, 2020,for the RBC Facility was undrawn, 3 immediately preceding months,

the Company wasis 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 3 month FCCR requirement during the first quarter of 2021 which resulted in compliance with allrequiring the restriction of $1.1 million of cash. Should an event of default occur or the covenants of the RBC Facility and the available borrowing base wasAggregate Excess Availability be less than C$30.0 million.

Subsequent to March 31, 2020,6.25 million for 5 consecutive business days, the Company entered intowould 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 $16.0$14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”), 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 3.5%4.50%. The U.S. leasing facilityLeasing Facility is amortized over a six-year term and extendible at the Company’s option for an additional year.

During the first quarter of 2021, the Company received $nil (twelve months ended December 31, 2020: $3.5 million) of cash consideration under the U.S. Leasing Facility. Subsequent to March 31, 2021, we completed a $7.2 milliondraw of ourU.S. Leasing Facility related to reimbursements for equipment purchases for our South Carolina plant, $1.4 million of the proceeds was deposited into restricted cash. During the first quarter of 2021, the Company received $nil (twelve months ended December 31, 2020 – C$3.6 million or $2.6 million) of cash consideration under the Canada Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in current other liabilities and long-term debt and other liabilities.

Convertible Debentures

On January 25, 2021, the Company completed a C$35.0 million bought-deal financing of convertible unsecured subordinated debentures (the “Debentures”) with a syndicate of underwriters. On January 29, 2021, the Company issued a further C$5.25 million of Debentures under the terms of an overallotment option granted to the underwriters. The Debentures will mature and be repayable on January 31, 2026 (the “Maturity Date”), unless earlier redeemed, repurchased or converted. The Debentures 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.

The Debentures are 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 Maturity Date and the date specified by the Company for redemption of the Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately 215.0538 common shares per C$1,000 principal amount of Debentures. The conversion rate is subject to adjustment if certain corporate events occur prior to the Maturity Date.

The net proceeds from the sale of the Debentures were C$37.6 million ($29.5 million), after deducting C$2.7 million of transaction costs which includes the underwriters’ commission and directly attributable professional fees. The Company accounted for the Debentures as a liability as the Debentures meet the definition of traditional convertible debt and there are no embedded derivatives requiring bifurcation. The Debentures are shown on the consolidated balance sheet in long-term debt. Interest expense was determined using the effective interest rate method with an effective interest rate of 7.5%. The contractual interest expense for the Debentures during the three months ended March 31, 2021was $0.3 million which is included in other current liabilities on the balance sheet.

The Debentures are not redeemable by the Company before January 31, 2024, except in certain limited circumstances following a change of control. On and after January 31, 2024 and prior to January 31, 2025, provided that the current market price of our common shares at the time at which notice of redemption is given is at least 125% of the conversion price, the Debentures may be redeemed by the Company, in whole or in part from time to time, at our option on not more than 60 days’ and not less than 30 days’ prior written notice, for an amount equal to the principal amount thereof plus accrued and unpaid interest thereon. On and after January 31, 2025 and prior to the Maturity Date, the Debentures may be redeemed by the Company, in whole or in part from time to time, at our option on not more than 60 days’ and not less than 30 days’ prior written notice, for an amount equal to the principal amount thereof plus accrued and unpaid interest thereon.

7. STOCK-BASED COMPENSATION

In May 2020, our shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested share awards, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2020 LTIP, the sum of (i) 5,850,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May 22, 2020, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance under the 2020 LTIP.

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

Prior to the approval of the 2020 LTIP, the Company granted awards of options under the Stock Option Plan and awards of performance share units (“PSUs”) under the DIRTT Environmental Solutions Ltd. Performance Share Unit Plan (the “PSU Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.

Stock-based compensation expense

Stock

The following summarizes PSUs, DSUs and RSUs (as defined below) granted, exercised, forfeited and expired during the periods:

Restricted share units (time-based vesting)

Restricted share units 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 (“RSUs”). At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The weighted average fair value of the RSUs granted was C$3.11 (2020 – C$2.05) which was determined using the closing price of the Company’s common shares on their respective grant dates.