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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The registrant had ~~84,694,913~~85,867,270 common shares outstanding as of May ~~3, 2021.~~

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021~~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 adverse effect on our business, financial condition, results of operations and growth prospects include, but are not limited to, the severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, 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~~23, 2022 (the “Annual Report on Form 10-K”), and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:

These risks are not exhaustive. Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Quarterly Report. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Our past results of operations are not necessarily indicative of our future results. You should not place undue reliance on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under applicable securities laws. We qualify all of our forward-looking statements by these cautionary statements.

	As at March 31,			As at December 31,			As at March 31,			As at December 31,
	2021			2020			2022			2021
ASSETS
Current Assets
Cash and cash equivalents		58,656			45,846			38,861			60,313
Restricted cash		1,147			-			3,224			3,095
Trade and other receivables, net of expected credit losses of $0.6 million at March 31, 2021 and December 31, 2020		19,249			18,953
Trade and other receivables, net of expected credit losses of $0.1 million at March 31, 2022 and at December 31, 2021								22,590			17,540
Inventory		15,912			15,978			22,114			18,457
Prepaids and other current assets		4,874			4,068			4,497			4,399
Total Current Assets		99,838			84,845			91,286			103,804
Property, plant and equipment, net		51,322			49,847			48,742			51,697
Capitalized software, net		8,337			8,344			6,709			7,395
Operating lease right-of-use assets, net		32,512			33,643			31,932			30,880
Goodwill		1,467			1,449
Other assets		5,212			5,016			5,787			5,663
Total Assets		198,688			183,144			184,456			199,439
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		15,747			20,350			24,437			22,751
Other liabilities		4,495			3,677			2,359			2,379
Customer deposits and deferred revenue		3,430			1,819			5,768			2,420
Current portion of long-term debt and accrued interest								3,321			3,323
Current portion of lease liabilities		5,662			5,503			6,113			6,214
Total Current Liabilities		29,334			31,349			41,998			37,087
Deferred tax liabilities, net		453			414
Long-term debt		34,837			5,069			67,673			67,319
Long-term lease liabilities		28,631			29,781			28,487			27,267
Total Liabilities		93,255			66,613			138,158			131,673
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at March 31, 2021 and December 31, 2020		180,639			180,639
Common shares, unlimited authorized without par value, 85,832,977 issued and outstanding at March 31, 2022 and 85,345,433 at December 31, 2021								182,985			181,782
Additional paid-in capital		10,971			10,175			13,147			13,200
Accumulated other comprehensive loss		(16,413	)		(17,018	)		(15,483	)		(15,916	)
Accumulated deficit		(69,764	)		(57,265	)		(134,351	)		(111,300	)
Total Shareholders’ Equity		105,433			116,531			46,298			67,766
Total Liabilities and Shareholders’ Equity		198,688			183,144			184,456			199,439

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

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2021			2020			2022			2021
Product revenue		28,542			40,299			37,451			28,542
Service revenue		923			682			835			923
Total revenue		29,465			40,981			38,286			29,465
Product cost of sales		23,551			27,290			34,607			23,551
Costs of under-utilized capacity		1,756			2,010			-			1,756
Service cost of sales		788			366			392			788
Total cost of sales		26,095			29,666			34,999			26,095
Gross profit		3,370			11,315			3,287			3,370
Expenses
Sales and marketing		6,670			7,408			7,228			6,670
General and administrative		7,241			7,825			7,993			7,241
Operations support		2,297			2,532			2,498			2,297
Technology and development		1,935			2,165			2,140			1,935
Stock-based compensation		1,094			461			1,302			1,094
Reorganization								3,692			-
Total operating expenses		19,237			20,391			24,853			19,237
Operating loss		(15,867	)		(9,076	)		(21,566	)		(15,867	)
Government subsidies		4,068			-			575			4,068
Foreign exchange gain (loss)		(180	)		2,319
Foreign exchange loss								(732	)		(180	)
Interest income		19			138			11			19
Interest expense		(500	)		(35	)		(1,330	)		(500	)
		3,407			2,422			(1,476	)		3,407
Loss before tax		(12,460	)		(6,654	)		(23,042	)		(12,460	)
Income taxes
Current tax expense (recovery)		-			(581	)
Deferred tax expense (recovery)		39			(745	)
Deferred tax expense								-			39
		39			(1,326	)		-			39
Net loss		(12,499	)		(5,328	)		(23,042	)		(12,499	)
Loss per share
Basic and diluted loss per share		(0.15	)		(0.06	)		(0.27	)		(0.15	)
Weighted average number of shares outstanding (in thousands)
Basic and diluted		84,681			84,681
Basic and Diluted								85,451			84,681

Interim Condensed Consolidated Statement of Comprehensive Loss

	For the Three Months Ended March 31,
	2021			2020			For the Three Months Ended March 31,
							2022			2021
Loss for the period		(12,499	)		(5,328	)		(23,042	)		(12,499	)
Exchange differences on translation of foreign operations		605			(6,768	)		433			605
Comprehensive loss for the period		(11,894	)		(12,096	)		(22,609	)		(11,894	)

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

							Accumulated																Accumulated
	Number of				Additional		other						Total			Number of				Additional			other						Total
	Common		Common		paid-in		comprehensive			Accumulated			shareholders’			Common		Common		paid-in			comprehensive			Accumulated			shareholders’
	shares		shares		capital		income (loss)			deficit			equity			shares		shares		capital			loss			deficit			equity
As at December 31, 2019		84,681,364		180,639		8,343		(18,028	)		(45,967	)		124,987
Stock-based compensation		-		-		663		-			-			663
Foreign currency translation adjustment		-		-		-		(6,768	)		-			(6,768	)
Net loss for the period		-		-		-		-			(5,328	)		(5,328	)
As at March 31, 2020		84,681,364		180,639		9,006		(24,796	)		(51,295	)		113,554
As at December 31, 2020		84,681,364		180,639		10,175		(17,018	)		(57,265	)		116,531			84,681,364		180,639		10,175			(17,018	)		(57,265	)		116,531
Stock-based compensation		-		-		796		-			-			796			-		-		796			-			-			796
Foreign currency translation adjustment		-		-		-		605			-			605			-		-		-			605			-			605
Net loss for the period		-		-		-		-			(12,499	)		(12,499	)		-		-		-			-			(12,499	)		(12,499	)
As at March 31, 2021		84,681,364		180,639		10,971		(16,413	)		(69,764	)		105,433			84,681,364		180,639		10,971			(16,413	)		(69,764	)		105,433
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

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

	For the Three Months Ended March 31,							For the Three Months Ended March 31,
	2021			2020				2022			2021
Cash flows from operating activities:
Net loss for the period		(12,499	)		(5,328	)			(23,042	)		(12,499	)
Adjustments:
Depreciation and amortization		3,402			3,132				4,622			3,402
Stock-based compensation		1,094			461
Foreign exchange (gain) loss		172			(2,214	)
Stock-based compensation, net of settlements									1,302			1,094
Foreign exchange loss									651			172
Accretion of convertible debentures		53			-				165			53
Deferred income tax expense (recovery)		39			(745	)
Deferred income tax expense									-			39
Changes in operating assets and liabilities:
Trade and other receivables		(243	)		1,436				(4,966	)		(243	)
Inventory		197			35				(3,443	)		197
Prepaid and other current assets		(948	)		(724	)
Trade accounts payable and accrued liabilities		(5,614	)		4,109
Prepaid and other assets, current and long term									(108	)		(948	)
Accounts payable and accrued liabilities									2,460			(5,934	)
Other liabilities		507			(1,979	)			-			507
Customer deposits and deferred revenue									3,332			1,607
Current portion of long-term debt and accrued interest									(56	)		320
Lease liabilities		139			(27	)			41			139
Customer deposits and deferred revenue		1,607			1,084
Net cash flows used in operating activities		(12,094	)		(760	)			(19,042	)		(12,094	)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts payable changes		(2,908	)		(1,560	)			(963	)		(2,908	)
Capitalized software development expenditures and other asset expenditures		(705	)		(970	)
Capitalized software development expenditures									(483	)		(705	)
Other asset expenditures									(174	)		-
Recovery of software development expenditures		24			75				-			24
Net cash flows used in investing activities		(3,589	)		(2,455	)			(1,620	)		(3,589	)
Cash flows from financing activities:
Proceeds received on long-term debt		29,545			-				-			29,545
Repayment of long-term debt		(208	)		-				(618	)		(208	)
Net cash flows provided by financing activities		29,337			-
Employee tax payments on vesting of RSUs									(209	)		-
Net cash flows (used in) provided by financing activities									(827	)		29,337
Effect of foreign exchange on cash, cash equivalents and restricted cash		303			(499	)			166			303
Net increase (decrease) in cash, cash equivalents and restricted cash		13,957			(3,714	)
Net (decrease) increase in cash, cash equivalents and restricted cash									(21,323	)		13,957
Cash, cash equivalents and restricted cash, beginning of period		45,846			47,174				63,408			45,846
Cash, cash equivalents and restricted cash, end of period		59,803			43,460				42,085			59,803
Supplemental disclosure of cash flow information:
Interest paid		(62	)		(35	)			(1,152	)		(62	)
Income taxes received (paid)		-			-
Income taxes received									25			-

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

								For the Three Months Ended March 31,
								2022			2021
Cash and cash equivalents									38,861			58,656
Restricted cash									3,224			1,147
Total cash, cash equivalents and restricted cash									42,085			59,803

~~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. and its ~~subsidiaries~~subsidiary (“DIRTT”, the “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” or “ICE Software”) with integrated in-house manufacturing of its innovative prefabricated interior construction solutions and an extensive network of distribution partners (“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”.

The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of March 31, ~~2021,~~2022, and its results of operations and cash flows for the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021. The condensed balance sheet at December 31, ~~2020,~~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, ~~2020~~2021 and ~~2019~~2020 and for each of the three years in the period ended December 31, ~~2020~~2021 included in the Annual Report on Form 10-K of the Company as filed with the U.S. Securities and Exchange ~~Commission.~~Commission and applicable securities commission or similar regulatory authorities in Canada. As described in Note 4,5, the Company adopted ~~a new accounting standard relating to convertible debentures~~ ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance effective January 1, ~~2021. Further information on this standard and the~~2022. There was no impact ~~on the Company~~ of this standard ~~is described in Note 4.~~on our disclosures or accounting for 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.

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.

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.

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.

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 ~~potential~~ significant negative impacts extending ~~to the first half of~~through 2021, 2022 and potentially beyond.

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

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

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 of expected credit losses and increased the provision by $0.6 million in the first quarter of 2020 (see Note 5). Management has continued to reassess~~continually assesses the impact of COVID-19 on ~~our~~the Company’s Distribution ~~Partners.~~Partners and determined 0 change to the Company’s provision for credit losses of $0.1 million was required during the first quarter of 2022. The estimation of such credit losses is complex because of limited historical precedent for the current economic situation. In addition, the Company ~~acquired~~maintains trade credit insurance ~~effective April 1, 2020.~~(see Note 6) as further protection from credit losses.

The Company may have lower cash flows from operating activities available to service debts due to lower sales or ~~collections.~~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 ~~convertible unsecured subordinated debentures~~the Debentures (as defined below) in January and December of 2021, for net proceeds of $29.5 million and $25.6 million, respectively, and has credit facilities ~~available as described in~~available. See Note 6.8 for information about our credit facilities. See Note 4 for information about reorganization activities.

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~~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 ~~June 5,~~October 23, 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~~the Company’s Canadian sourced revenues during each qualifying period. The Company’s eligibility for the CEWS was subject to change for each qualifying period and was reviewed by the Company for each qualifying period, with amounts being received by the Company for various, but not each, qualifying period. Pursuant to ~~proposed changes announced in~~amendments enacted as part of the 2021 Canadian federal budget, the Company ~~may be~~is required to repay ~~all or~~ a portion of the CEWS amounts received for any qualifying period commencing after June 5, 2021 where the aggregate compensation for ~~specified executives~~“specified executives” (within the meaning of the CEWS) during the 2021 calendar year exceeds the aggregate compensation for ~~specified executives~~“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 is expected to be repaid to the Canadian authorities in the second quarter of 2022. The ~~Company’s eligibility~~repayment amount was fully provided for in the ~~CEWS may change for each qualifying period~~third quarter of 2021 in accounts payable and ~~is reviewed by~~accrued liabilities and in the first quarter of 2022 the Company ~~for each qualifying period.~~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 ~~provides~~provided a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, ~~starting on~~for qualifying periods extending from September 27, 2020 to ~~June 5,~~October 23, 2021, ~~(with an extension to September 25, 2021 having been announced in the 2021 Canadian federal budget),~~ with the amount of the subsidy available to the Company being based on the percentage decline of ~~the Company in~~ certain of ~~its~~the Company’s Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the CERS ~~may~~was subject to change for each qualifying period and iswas reviewed by the Company for each qualifying period.

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 ended March 31, 2022.

At March 31, ~~2021,~~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 ~~conclusion~~determination may need to be revisited.

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 is expected to be substantially completed in the second quarter of 2022. The Company did 0t impair its Right of Use assets associated with the Phoenix Facility as the Company expects to be able to sublease the Phoenix Facility and recover the $5.1 million of contractual lease commitments.

Reorganization costs incurred in the quarter of $3.7 million include $3.1 million related to termination benefits, $0.1 million associated with the closure of the Phoenix Facility, and $0.5 million of other costs. Of the amount expensed, $1.6 million was paid and $1.9 million of termination benefits and $0.2 million of other costs were included in accounts payable and accrued liabilities at March 31, 2022. We anticipate a further $4.4 million of costs in the second quarter of 2022, as the Company incurred a $3.1 million charge for incremental insurance on change of control of the board on April 26, 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 quarter.

~~On August 5, 2020,~~In 2021, the Financial Accounting Standards Board issued Accounting Standards Update No. ~~2020-06,~~2021-10, ~~“Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”~~Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. ~~(the “ASU”).~~ The ASU ~~eliminates~~provides guidance on required disclosures with respect to government assistance in a company’s notes to the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation.annual financial statements. The amendments in the ASU are effective for ~~fiscal years~~periods beginning after ~~March~~December 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.~~

2021. The Company ~~early~~has adopted this standard oneffective January 1, ~~2021. The Company had 0 convertible debt instruments outstanding at December 31, 2020~~2022 and ~~the convertible unsecured subordinated debentures issued in January 2021 have been evaluated under~~notes there is no significant impact of this ~~new guidance and there were no other transitional impacts to consider.~~standard on our accounting or disclosures for government assistance.

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

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates an allowance for credit losses using the lifetime expected credit loss at each measurement date taking into account historical credit loss experience as well as forward-looking information in order to establish rates

for each class of financial receivable with similar risk characteristics. Adjustments to this estimate are recognized in the statement of operations.

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At March 31, ~~2021,~~2022, approximately ~~85%~~82% 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~~which 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. For the three months ended March 31, ~~2021, 1~~2022 0 Distribution Partner ~~(2020 – none)~~ accounted for ~~$3.6 million of revenue, which is~~ greater than 10% of ~~total revenue.~~revenue (2021: NaN Distribution Partner: $3.6 million). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

	As at						As at
	March 31,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Current		12,362			12,500			18,167			13,659
Overdue		1,074			1,211			977			621
		13,436			13,711			19,144			14,280
Less: expected credit losses		(588	)		(588	)		(132	)		(130	)
		12,848			13,123			19,012			14,150
Sales tax receivable		302			242			411			196
Government subsidies receivable		2,254			1,743
Income tax receivable		3,845			3,845			3,167			3,194
		19,249			18,953			22,590			17,540

~~Due~~ No adjustment to the uncertainties associated with the COVID-19 pandemic as well as the disruption to businesses in North America, the overall credit quality of certain receivables 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,our expected credit losses ~~were increased by $0.6~~of $0.1 million ~~during~~was required for 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.~~2022. 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.

Revolving Credit Facility

Leasing Facilities

Convertible Debentures

Total Long-Term Debt

Balance on December 31, 2019

-

-

-

-

Issuances

-

6,165

-

6,165

Repayments

-

(420
)

-

(420
)
Exchange differences

-

222

-

222

Balance at December 31, 2020

-

5,967

-

5,967

Current liabilities

-

898

-

898

Long-term liabilities

-

5,069

-

5,069

Balance on December 31, 2020

-

5,967

-

5,967

Issuances

-

-

29,545

29,545

Accretion

-

-

53

53

Repayments

-

(208
)

-

(208
)
Exchange differences

-

31

351

382

Balance at March 31, 2021

-

5,790

29,949

35,739

Current liabilities

-

902

-

902

Long-term liabilities

-

4,888

29,949

34,837

	Revolving Credit Facility		Leasing Facilities			Convertible Debentures			Total Debt
Balance on January 1, 2021		-		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
Accretion of issue costs		-		-			165			165
Accrued interest		-		187			909			1,096
Interest payments		-		(187	)		(965	)		(1,152	)
Principal repayments		-		(618	)		-			(618	)
Exchange differences		-		30			831			861
Balance at March 31, 2022		-		13,321			57,673			70,994
Current portion of long-term debt and accrued interest		-		2,423			898			3,321
Long-term debt		-		10,898			56,775			67,673

On February 12, 2021, the Company entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). Under the RBC Facility, the Company is able to borrow up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). At March 31, ~~2021,~~2022, available borrowings are C$~~9.4~~14.5 million ($~~7.5~~11.6 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under the RBC Facility, if the ~~Aggregate~~“Aggregate Excess ~~Availability,~~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 fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing ~~twelve month~~twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the 3three 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 ~~3 month~~three-month FCCR requirement during the first quarter of ~~2021~~2022 which resulted in requiring the restriction of ~~$1.1~~$3.2 million 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.

The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) and a $14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) 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 ~~4.50%~~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 first quarter of ~~2021,~~2022, the Company received $nil (twelve months ended December 31, ~~2020: $3.5~~2021: $9.8 million) of cash consideration under the U.S. Leasing Facility. ~~Subsequent to March 31, 2021, we completed a $7.2 million~~ ~~draw of our~~U.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.~~debt.Subsequent to March 31, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility.

On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured subordinated debentures ~~(the “Debentures”)~~ with a syndicate of ~~underwriters.~~underwriters (the “January Debentures”). On January 29, 2021, the Company issued a further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to the underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the ~~“Maturity~~“January Debentures Maturity Date”)~~, unless earlier redeemed, repurchased or converted. The Debentures~~ 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.~~

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 ~~are~~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 Notes Maturity Date and the date specified by the Company for redemption of the January Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately 215.0538 common shares per C$1,000 principal amount of the January Debentures. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission.

On December 1, 2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and December of each year commencing on June 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The ~~conversion rate is subject to adjustment if certain corporate events occur~~December Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the ~~Maturity Date.~~

~~The net proceeds from~~close of business on the ~~sale~~business day prior to the earlier of the December Debentures ~~were C$37.6 million ($29.5 million), after deducting C$2.7 million of transaction costs which includes~~Maturity Date and 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, 2021~~was $0.3 million which is included in other current liabilities on the balance sheet.~~

~~The Debentures are not redeemable~~date specified by the Company ~~before January 31, 2024, except in certain limited circumstances following~~for redemption of the December Debentures at a ~~change of control. On and after January 31, 2024 and prior to January 31, 2025, provided that the current market~~conversion price of ~~our~~C$4.20 per common share, being a ratio of approximately 238.0952 common shares ~~at the time at which notice of redemption is given is at least 125%~~per C$1,000 principal amount of the ~~conversion price,~~December Debentures. Costs of the ~~Debentures may be redeemed by~~transaction were approximately C$2.3 million, including 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~~ underwriters’ commission.~~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~~.

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. Upon vesting of certain LTIP awards, the Company may withhold and sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the withholding tax remittances required in respect of award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.

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.

	For the Three Months Ended March 31,					For the Three Months Ended March 31,
	2021		2020			2022			2021
Equity-settled awards		796		663			1,339			796
Cash-settled awards		298		(202	)		(37	)		298
		1,094		461			1,302			1,094

The following summarizes ~~PSUs, DSUs and~~ RSUs, Share Awards (as defined below) ~~granted, exercised, forfeited~~, PSUs, and ~~expired~~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		1,890,987			878,601			-			-		31,837
Forfeited		(5,588	)		-			-			-		-
Outstanding at March 31, 2021		4,299,465			1,078,601			-			197,471		395,501
Outstanding at December 31, 2021		3,216,536			1,021,739			-			157,200		361,577
Granted		2,109,205			863,279			162,682			-		180,314
Vested		(393,016	)		-			(94,528	)		-		-
Withheld to settle employee tax obligations		(60,039	)		-			(68,154	)		-		-
Forfeited		(614,151	)		(502,628	)		-			-		-
Outstanding at March 31, 2022		4,258,535			1,382,390			-			157,200		541,891

RSU Time-

RSU Performance-

Based

Based

DSU

PSU

Number of

Number of

Number of

Number of

units

units

units

units

Outstanding at December 31, 2019

-

-

132,597

223,052

Granted

-

-

83,915

-

Forfeited

-

-

-

(25,581
)
Outstanding at March 31, 2020

-

-

216,512

197,471

Outstanding at December 31, 2020

2,414,066

200,000

363,664

197,471

Granted

1,890,987

878,601

31,837

-

Forfeited

(5,588
)

-

-

-

Outstanding at March 31, 2021

4,299,465

1,078,601

395,501

197,471

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$~~3.11 (2020~~2.40 (2021 – C$~~2.05)~~3.11) which was determined using the closing price of the Company’s common shares on their respective grant dates.

~~The Company~~During 2022 and 2021, restricted share units were granted to ~~certain~~ executives ~~and senior employees restricted share units~~ 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, ~~(2020 – C$1.70).~~ 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.

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.

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 March 31, ~~2021~~2022 had a fair value of ~~$1.2~~$0.8 million which is included in other liabilities on the balance sheet (December 31, ~~2020~~2021 – $~~0.9~~0.8 million).

Under the terms of the PSU Plan, PSUs granted vest at the end of a three-year term. At the end of a three-year term, employees will be awarded cash at the discretion of the board of directors of the Company, calculated based on ~~certain~~ Adjusted EBITDA, total shareholder return, or revenue growth related to performance conditions.

The fair value of the liability and the expense attributable to the vesting period 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. As at March 31, ~~2021,~~2022, outstanding PSUs had a fair value of ~~$0.1 million~~$nil which is included in other liabilities on the balance sheet (December 31, ~~2020~~2021 – ~~$0.1 million)~~$nil).

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

	Number of			Weighted average		Number of			Weighted average
	options			exercise price C$		options			exercise price C$
Outstanding at December 31, 2019		6,156,652			6.49
Forfeited		(523,549	)		6.80
Outstanding at March 31, 2020		5,633,103			6.46
Outstanding at December 31, 2020		4,774,328			6.52		4,774,328			6.52
Forfeited		(3,213	)		6.81		(3,213	)		6.81
Outstanding at March 31, 2021		4,771,115			6.52		4,771,115			6.52
Exercisable at March 31, 2021		2,065,938			6.35
Outstanding at December 31, 2021							4,064,489			6.64
Forfeited							(1,740,915	)		6.40
Outstanding at March 31, 2022							2,323,574			6.82
Exercisable at March 31, 2022							2,069,176			6.71

In 2018, 1,725,000 stock options were granted to an executive with performance conditions for vesting. For 825,000 stock options, vesting is upon an increase in the Company’s share price to C$13.26, and for 900,000 stock options, vesting is upon an increase in the Company’s share price to C$19.89. These options were valued using the Monte Carlo valuation method and determined to have a weighted average grant fair value of C$2.14 on original grant. These awards were accounted for at the fair value attributable to the vesting period until October 9, 2019 when these were reclassified to equity accounting and were re-valued at a weighted average fair value of C$0.83.

	Options outstanding						Options exercisable						Options outstanding						Options exercisable
			Weighted		Weighted				Weighted		Weighted				Weighted		Weighted				Weighted		Weighted
			average		average				average		average				average		average				average		average
	Number		remaining		exercise		Number		remaining		exercise		Number		remaining		exercise		Number		remaining		exercise
Range of exercise prices	outstanding		life		price C$		exercisable		life		price C$		outstanding		life		price C$		exercisable		life		price C$
C$4.01 – C$5.00		22,537		3.64		4.12		7,513		3.64		4.12		22,537		2.64		4.12		15,025		2.64		4.12
C$5.01 – C$6.00		669,236		0.64		5.76		669,236		0.64		5.76		-		-		-		-		-		-
C$6.01 – C$7.00		3,298,644		2.54		6.38		1,126,772		2.59		6.34		1,549,833		1.63		6.36		1,543,901		1.63		6.36
C$7.01 – C$8.00		780,698		3.13		7.84		262,417		3.13		7.84		751,204		2.13		7.84		510,250		2.13		7.84
Total		4,771,115						2,065,938						2,323,574						2,069,176

For the three months ended March 31, ~~2021, 4.8~~2022, 2.3 million options ~~(2020~~(2021 – ~~5.6~~4.8 million), ~~4.4~~5.6 million RSUs and PRSUs ~~(2020~~(2021 – ~~nil)~~4.4 million) and ~~11.0~~43.0 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 ~~(2020~~(2021 – ~~nil)~~11.0 million) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net loss per share.

In the following table, revenue is disaggregated by 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 March 31,				For the Three Months Ended March 31,
	2021		2020		2022		2021
Product		25,836		35,998		33,193		25,836
Transportation		2,499		3,995		4,061		2,499
License fees from Distribution Partners		207		306		197		207
Total product revenue		28,542		40,299		37,451		28,542
Installation and other services		923		682		835		923
		29,465		40,981		38,286		29,465

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 March 31,				For the Three Months Ended March 31,
	2021		2020		2022		2021
At a point in time		28,335		39,993		37,254		28,335
Over time		1,130		988		1,032		1,130
		29,465		40,981		38,286		29,465

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.

	As at						As at
	March 31, 2021		December 31, 2020		December 31, 2019		March 31, 2022		December 31, 2021		December 31, 2020
Customer deposits		2,975		1,292		2,436		5,311		1,959		1,292
Deferred revenue		455		527		1,131		457		461		527
Contract liabilities		3,430		1,819		3,567		5,768		2,420		1,819

Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities was higher as at March 31, ~~2021~~2022 compared to December 31, ~~2020~~2021 mainly due to the timing of orders and payments. Contract liabilities as at December 31, ~~2020~~2021 and ~~2019,~~2020, respectively, totaling ~~$1.5~~$2.1 million and ~~$2.7~~$1.5 million were recognized as revenue during the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

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 March 31,				For the Three Months Ended March 31,
	2021		2020		2022		2021
Commercial		16,144		28,274		24,044		16,144
Healthcare		6,487		5,063		6,964		6,487
Government		4,181		3,127		3,281		4,181
Education		1,523		3,529		2,965		1,523
License fees from Distribution Partners		207		306		197		207
Total product and transportation revenue		28,542		40,299		37,451		28,542
Installation and other services		923		682		835		923
		29,465		40,981		38,286		29,465

The Company has 1 reportable and operating segment and operates in 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, with periodic international projects from North American Distribution Partners. The Company’s revenue from operations from external customers, based on location of operations, and information about its non-current assets, is detailed below.

	For the Three Months Ended March 31,				For the Three Months Ended March 31,
	2021		2020		2022		2021
Canada		2,995		5,986		5,251		2,995
U.S.		26,470		34,995		33,035		26,470
		29,465		40,981		38,286		29,465

	As at				As at
	March 31, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Canada		41,870		42,947		34,704		34,912
U.S.		56,980		55,352		58,466		60,723
		98,850		98,299		93,170		95,635

As at March 31, ~~2021,~~2022, the Company ~~recorded~~had a valuation allowance of ~~C$3.6~~$22.8 million ~~($2.8 million)~~ against deferred tax assets ~~(“DTAs”) incurred during the quarter in its Canadian entity~~ as the ~~Company’s Canadian entity~~Company has experienced cumulative losses in recent years (December 31, ~~2020~~2021 – ~~C$6.6 million or $5.2~~$17.3 million). Although earnings were positive in 2019, ongoing near-term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity impacted the Canadian entity’s ability to generate earnings. Accordingly, it is not more likely than not that the Canadian entity’s DTAs will be utilized in the near term.

~~(1)The following table presents a reconciliation of the warranty and other provisions balance:~~

As at March 31, ~~2021,~~2022, the Company had outstanding purchase obligations of approximately ~~$2.9~~$6.1 million related to inventory and property, plant and equipment purchases (December 31, ~~2020~~2021 – ~~$3.2~~$3.7 million). As at March 31, ~~2021,~~2022, the Company had undiscounted operating lease liabilities of ~~$42.8~~$50.9 million (December 31, ~~2020~~2021 – ~~$44.3~~$49.7 million).

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.

On ~~November 12, 2019,~~April 26, 2022, at the Company's 2022 annual and special meeting of shareholders, shareholders of the Company elected seven individuals to the Company’s board of directors. In total, there were 14 director nominees, seven of whom were nominated by 22 NW Fund, LP and other participants (“22NW”) named in the definitive proxy statement filed on January 7, 2022, as amended. At the meeting, the Company’s shareholders elected all seven candidates recommended by 22NW to the board of directors to serve for one-year terms expiring at the Company’s 2023 annual meeting of shareholders. Following election and appointment, the board of directors terminated the employment of Todd Lillibridge as Interim Chief Executive Officer and appointed Geoffrey D. Krause and Jeffrey A. Calkins as Interim Co-Chief Executive Officers, in each case effective as of April 26, 2022.

The first quarter of 2022 marked the transition of the COVID-19 pandemic to an endemic with the broad easing of health restrictions, including work-from-home mandates, across North America. While the resurgence 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 ~~unveiled~~and its partners experienced an uptick in planning activity and opportunities growth which began to translate into orders in March 2022. As at April 1, our 12-month forward pipeline including leads increased by 5% to $318 million from $302 million at January 1, 2022, comprising of 60% commercial, 19% healthcare, 8% education and 13% government opportunities.

As a ~~four-year strategic plan~~result of the slow start to the year, 46% of first quarter revenue was generated in March, which marked the highest revenue month for the ~~Company, based on three key pillars: commercial execution, manufacturing excellence,~~company since October 2020 and ~~innovation.~~the second highest revenue month since the start of the pandemic. Our ~~long-term objective is to scale~~first quarter 2022 revenue of $38.2 million was at the low end of our ~~operations to profitably capture~~estimate of between $38 and $42 million, but an increase of 30% over the ~~significant market opportunity created by driving conversion from conventional construction to DIRTT’s process~~same period of ~~modular, prefabricated interiors. While the strategic plan was developed and introduced pre-pandemic, we believe it is as or even more relevant~~2021. To date in the ~~post-pandemic world. Furthermore,~~second quarter, activity has been relatively consistent with the March 2022 period. We also continue to experience increased tours, both in person and virtually through our ~~execution~~DIRTT Experience Centers (“ DXCs”). As a result, we currently expect second quarter revenue to be between $43 million and $47 million, an increase of between 13% and 23% from the first quarter of 2022 and between 5% and 14% from the same period of 2021. Based on improving activity levels, we increased our full year revenue targets by $5 million to between $175 and $185 million, with opportunity for additional upside as the year plays out.

During the first quarter of 2022, we made progress on our goal of enhancing partner effectiveness and accountability. On March 28, 2022, we held our first Partner Advisory Council meeting to elevate partner feedback within our organization and provide further insight to support our commercial and operational decision making. This first meeting established the overall objectives and cadence of the ~~plan~~Partner Advisory Council and provided initial partner feedback, which the Company is currently evaluating. The Partner Advisory Council is comprised of 17 Distribution Partners that provide both geographic and vertical representation across North America.

Strategic accounts remain a cornerstone in our go to ~~date positions us well~~market strategy. In the first quarter of 2022, we refined our strategic account targets to 48 from 55 previously as a result of headcount reductions and an increase in focus. During the quarter, sales to strategic accounts totaled approximately $6.0 million with product delivered to 22 of the 48 accounts. For the remainder of 2022, we have identified and continue to develop opportunities with 32 of the 48 accounts.

Gross margin and Adjusted Gross Margin were 8.6% and 17.7% respectively, negatively impacted by both the negative leverage in the first two months of 2022 and continued inflationary pressure on raw materials and transportation costs. In response to continued inflationary pressures, we announced a 5% price increase effective June 1, 2022 in addition to the price increase announced in the fourth quarter of 2021. Approximately 75% of our first quarter 2022 revenues reflected the new fourth quarter pricing as we ~~move forward.~~honored pricing previously quoted for

~~Throughout 2020,~~projects in process. In the near to mid-term, we ~~were able~~expect inflationary pressures to ~~mitigate~~continue, driven by both increased energy prices and the ~~COVID-19 induced slowdown in overall construction activity through~~impact of global tensions on supply as well as a trucking labor shortage. We will continue to assess and implement mitigation strategies where appropriate.

On April 8, 2022, we completed our final shift at the ~~completion~~Phoenix Facility and commenced decommissioning activities, including redeployment of ~~projects that were in progress when~~certain pieces of manufacturing equipment to Calgary and Rock Hill, shipping and rationalization of aluminum inventory to other aluminum frame plants and subletting of the ~~pandemic started. With most of these projects delivered~~space. Decommissioning is expected to be complete by the end of the ~~fourth~~second quarter of ~~2020,~~2022 and is expected to eliminate approximately $2.4 million of annualized costs. Given the uptick in sales activity, in April we began to actively increase variable labor capacity at both our Savannah and Calgary aluminum manufacturing facilities to ensure we can meet our end customer lead times.

In February 2022, we commenced an organization wide restructuring of positions to reduce fixed expenses, resulting in the elimination of approximately 18% of our salaried workforce (excluding those associated with the Phoenix Facility closure) which was largely completed in the first quarter. This, along with other cost reduction initiatives, are expected to result in annualized savings of up to $13 million. As a result of these activities, including the closure of the Phoenix Facility, we expect to incur reorganization costs of approximately $5 million, of which $3.7 million were incurred in the first quarter. We anticipate a further $4.4 million of reorganization costs in the second quarter, as the Company incurred a $3.1 million charge for incremental insurance on change of control of the board on April 26, 2022.

We finished the quarter with net working capital of $49.3 million (December 31, 2021 - $66.7 million), including unrestricted cash of $39.0 million (December 31, 2021 - $60.3 million). Cash usage was driven by the slow start to the quarter which resulted in working capital build combined with one-time reorganization costs and professional fees related to the contested election of directors. We expect cash usage to improve as 2022 progresses as a result of sequential improvements in revenues and a lower fixed cost base, approaching monthly cashflow breakeven in the third or fourth quarters of 2022. That said, we expect one-time costs, comprising of reorganization expenses and activist costs, for the second quarter of 2022 to be consistent with the first quarter of ~~2021 reflected the full impact~~2022 due to certain insurance payments required on account of the ~~slow down in non-residential construction activity~~change of control at the board level.

Based on ~~DIRTT’s business. We are seeing signs which suggest that revenues of $29.5 million in~~budgeted annual revenue levels, taking into account the ~~first quarter of 2021 will be a low point in the pandemic. This view is supported by growing customer engagement through increased demand for tours, both virtual~~initiatives previously described and ~~in-person at~~excluding our DIRTT Experience Centers (“DXC’s”), as well as increased project quoting activity. We continue to advance our strategic accounts strategy, with over 40 relationships in various stages of development in the first quarter compared to 35 at year-end.

Accordingly, we anticipate revenues in the second quarter of 2021 will approach or return to the quarterly ranges experienced in the first half of 2020. The second quarter will benefit from the recognition of $2.0 million of revenue for COVID-19 vaccination trailers that were delivered to one customer in April. While we continue to see signs of a recovery commencing in the second half of 2021, the timingrelated one-time reorganization costs and ~~magnitude of this recovery continues to be uncertain and is subject to a number of factors, both positive and negative as described further below.~~

~~From a macroeconomic viewpoint,~~expected incremental professional fees, (1) we believe that ~~non-residential construction market conditions are beginning~~our 2022 net loss and Adjusted EBITDA loss will demonstrate a significant improvement from 2021 levels and, (2) we believe we will experience a decrease in net loss and, correspondingly, a shift to ~~improve as reflected~~positive Adjusted EBITDA in several industry statistics, particularly in the United States where an accelerated vaccine distribution/rollout program has led some states to ease public health restrictions, and employers to begin the deliberate process of reoccupying their space. Conversely, Canada2023. This is experiencing a resurgence of active COVID-19 cases, the reintroduction of public health measures and a slower vaccine roll out, which we expect to continue to depress activity levels in the short term. The CEWS, which has been extended to June 2021, continues to provide some economic relief by partially funding our Canadian workforce costs. In addition, the 2021 federal budget includes the proposed extension of the CEWS to September 2021, subject to legislative implementation by Parliament.

In conventional construction, we are observing increases in the price of steel and wallboard as well as shortages of raw materials, including wallboard, negatively impacting project budgets and, in some cases, schedules. We believe that this has the potential to drive demand for DIRTT due to ~~increasing price competitiveness of our solutions as well as our ability to help preserve schedules through our short lead times. Conversely, as DIRTT is installed in~~both the final stages of a project, any delays in the pre-installation schedule could negatively impact the timing of DIRTT project delivery, including those in the second half of 2021, making forecasting revenue by specific quarter difficult.

~~Aluminum~~improved sales focus and ~~medium density fiberboard, our two main raw materials, have also experienced some increase in price, but not to the same extent as steel~~operational efficiencies described above, and wallboard and we have largely been able to mitigate these increases through efficiency improvements in our manufacturing process. In addition and to date, we have not experienced any major raw material shortages, but we are actively monitoring supply conditions and seeking to maintain appropriate levels of inventory to mitigate such risk.

Our financial position, which we bolstered with a C$40.25 million issuance of convertible unsecured subordinated debentures in January 2021 for net proceeds of C$37.6 million or approximately $29.5 million, has allowed us to continue advancing the development of our commercial function. In the first quarter, we continued selective hiring, adding to our sales and strategic account representatives as well as our segment and solutions support specialists. The rollout of our Customer Relationship Management system to all of our sales representatives continues and is on track for completion by June 30, 2021. The construction of our Dallas DXC is well underway and is expected to open in the third quarter of 2021. Lastly, we continued to identify and establish relationships with potential new Distribution Partners in underserved regions as well as progressing the onboarding of new partners.

In our manufacturing operations, we have deliberately retained our manufacturing capabilities despite temporarily low activity levels. Gross margin in the first quarter reflects this approach which includes the impacts of $1.8 million of costs of over capacity as wellan improved macroeconomic environment as the negative impact of fixed costs on low production volumes. While we mitigated the impact of low activity levels on labor costs to the extent possible through the use of furlough days, we were unable to absorb the entire impact. As activity improves, we expect gross margins to improve due to the decrease in excess labor capacitypandemic recovery takes hold and ~~leveraging of fixed costs.~~

We recently began commissioning our new tile manufacturing facility in South Carolina (the “South Carolina Facility”), and it began producing saleable tiles in April 2021. The South Carolina Facility is scheduledaccelerates for full commissioning in early June 2021. This new facility, which is highly automated, operates with approximately one-sixth the labor requirement of the similar production capacity in Calgary, reduces single plant risk and increases our total tile production capacity. The South Carolina Facility’s physical proximity to customers located on the East Coast results in an improvement of up to four days in shipping time with commensurate reductions in freight costs for the end customer.

Net working capital at March 31, 2021 was $70.5 million compared to $53.5 million at December 31, 2020. This includes $58.7 million of cash on hand compared to $45.8 million at December 31, 2020. The increase in cash on hand reflects $29.5 million of net proceeds from the issuance of Debentures in January 2021 offset by cash used in operations of $12.1 million and capital expenditures of $3.6 million. In February 2021, we completed the conversion of our cashflow-based credit facility to an asset backed credit facility to provide incremental working capital financing should it be necessary in the future. Subsequent to quarter end, we completed a $7.2 million draw of our U.S. Leasing Facility primarily related to our South Carolina Facility and anticipate drawing an additional three to four million during the second or third quarter. We expect capital expenditures for the balance of 2021 to be approximately $10.4 million.DIRTT.

While we believe the first quarter sales represented a low point in the pandemic, the strength of our balance sheet and the incremental steps we have taken to bolster liquidity give us the confidence to continue the execution of our strategic plan with the continued expectation of a recovery in the second half of 2021, along with increased flexibility should the recovery take longer than expected.

Our condensed consolidated interim financial statements are prepared in accordance with GAAP. These GAAP financial statements include non-cash charges and other charges and benefits that we believe are unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult.

As a result, we also provide financial information in this Quarterly Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses these non-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance ~~period over period~~period-over-period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debtand debt facilities, or foreign exchange 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 on non-GAAP financial measures, primarily Adjusted EBITDA.

Government subsidies, depreciation and amortization, stock-based compensation expense, ~~and~~reorganization expense, foreign exchange gains and losses and impairment expenses are excluded from our non-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those receipts and expenses may recur, and because management believes that each of these items can distort the trends associated with the Company’s ongoing performance. We believe that excluding these receipts and expenses provides investors and management with greater visibility to the underlying performance of the business operations, enhances consistency and comparativeness with results in prior periods that do not, or future periods that may not, include such items, and facilitates comparison with the results of other companies in our industry.

The following non-GAAP financial measures are presented in this Quarterly Report, and a description of the calculation for each measure is included.

You should carefully evaluate these non-GAAP financial measures, the adjustments included in them, and the reasons we consider them appropriate for analysis supplemental to our GAAP information. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider any of these non-GAAP financial measures in isolation or as substitutes for an analysis of our results as reported under GAAP. You should also be aware that we may recognize income or incur expenses in the future that are the same as, or similar to, some of the adjustments in these non-GAAP financial measures. Because these non-GAAP financial measures may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

~~EBITDA and Adjusted EBITDA for the Three Months Ended March 31, 2021 and 2020~~

The following table presents a reconciliation for the first quarter results of 2021 and 2020 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:

For the Three Months Ended March 31,

2021

2020

($ in thousands)

Net loss for the period

(12,499
)

(5,328
)
Add back (deduct):

Interest Expense

500

35

Interest Income

(19
)

(138
)
Income Tax Expense (Recovery)

39

(1,326
)
Depreciation and Amortization

3,402

3,132

EBITDA

(8,577
)

(3,625
)
Foreign Exchange (Gains) Losses

180

(2,319
)
Stock-based Compensation

1,094

461

Government Subsidies

(4,068
)

-

Adjusted EBITDA

(11,371
)

(5,483
)
Net Loss Margin⁽¹⁾

(42.4
)%

(13.0
)%
Adjusted EBITDA Margin

(38.6
)%

(13.4
)%

For the three months ended March 31, 2021, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $11.4 million loss or (38.6)%, respectively, from a $5.5 million loss or (13.4)% in the same period of 2020, respectively. This reflects an $8.4 million decrease in Adjusted Gross Profit and $0.3 lower costs of underutilized capacity, discussed below. Reductions in Adjusted EBITDA were partially offset by lower professional fees, reduced

commissions on lower revenues and cost reductions as a result of reduced activity related to COVID-19. Additionally, in the first quarter of 2020, we increased our provision for expected credit losses by $0.6 million.

~~Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended March 31, 2021 and 2020~~

The following table presents a reconciliation for the three months ended March 31, 2021 and 2020 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:

~~Gross profit and gross profit margin decreased to $3.4 million or 11.4% for the three months ended March 31, 2021, from~~$11.3 million or 27.6% for the three months ended March 31, 2020. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $7.2 million or 24.3% for the three months ended March 31, 2021, from $15.6 million or 38.0% for the three months ended March 31, 2020. The decreases are largely due to reduced fixed cost leverage caused by reductions in revenues partially offset by $0.5 million~~of related severance costs incurred during the first quarter of 2020.~~

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 2020, we separately classified $2.0 million as costs related to our under-utilized capacity (1.2% of gross profit margin) in cost of sales. We took steps to manage our excess capacity, including the reduction in staffing by 14%, with a further 12% reduction in April 2020, and the undertaking of planned factory curtailments. The staffing reductions realigned our capacity with expected activity levels; however, our fixed costs will affect our Adjusted Gross Profit Margin, which we expect to remain below historical percentages until sales improve. Between January and April 2020, we reduced our manufacturing workforce by 25% to bring labor capacity in line with expected ongoing requirements. 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 in the second half of 2021 and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first quarter of 2021 despite the shortfall in revenues relative to capacity. ~~As a result, in the first quarter of 2021 we separately classified $1.8 million as costs related to our under-utilized capacity (6% of gross profit margin) in cost of sales.~~

Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications under which the projects were sold. As a result, we recorded a $2.5 million provision in the fourth quarter of 2019 and began contacting customers to determine whether remedial actions are required. In the second quarter of 2020, we identified and validated an in-situ solution that we believe will meet the fire-retardant specification under which the projects were sold and reduced the associated provision to $1.3 million, which represents expected costs to prepare impacted sites and apply the in-situ solution. In the third quarter of 2020, we completed building code reviews of the affected projects and determined that the timber as installed met the requisite building code requirements as it related to fire retardance. During the fourth quarter of 2020, we further reduced our timber provision by $0.5 million as we believe this reduces any obligation to remediate previously installed projects. Additionally, we entered into agreements with certain customers to compensate them for product charges not fulfilled. During the quarter ended March 31, 2021, we incurred no costs~~(2020 – $0.1 million) associated with remediating previously installed timber projects.~~

Three Months Ended March 31, ~~2021,~~2022, Compared to Three Months Ended March 31, ~~2020~~2021

	For the Three Months Ended March 31,									For the Three Months Ended March 31,
	2021			2020			% Change			2022			2021			% Change
	($ in thousands)									($ in thousands)
Revenue		29,465			40,981			(28	)		38,286			29,465			30
Gross Profit		3,370			11,315			(70	)		3,287			3,370			(2	)
Gross Profit Margin		11.4	%		27.6	%					8.6	%		11.4	%
Operating Expenses
Sales and Marketing		6,670			7,408			(10	)		7,228			6,670			8
General and Administrative		7,241			7,825			(7	)		7,993			7,241			10
Operations Support		2,297			2,532			(9	)		2,498			2,297			9
Technology and Development		1,935			2,165			(11	)		2,140			1,935			11
Stock-based Compensation		1,094			461			137
Stock-Based Compensation											1,302			1,094			19
Reorganization											3,692			-			100
Total Operating Expenses		19,237			20,391			(6	)		24,853			19,237			29
Operating Loss		(15,867	)		(9,076	)		75			(21,566	)		(15,867	)		36
Operating Margin		(53.9	)%		(22.1	)%					(56.3	)%		(53.9	)%

Revenue reflects sales to our Distribution Partners for resale to their clients and, in limited circumstances, our direct sales to clients. Our revenue is generally affected by the timing of when orders are executed, particularly large orders, which can add variability to our financial results and shift revenue between quarters.

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

	For the Three Months Ended March 31,							For the Three Months Ended March 31,
	2021		2020		% Change			2022		2021		% Change
	($ in thousands)							($ in thousands)
Product		25,836		35,998		(28	)		33,193		25,836		28
Transportation		2,499		3,995		(37	)		4,061		2,499		63
License fees from Distribution Partners		207		306		(32	)		197		207		(5	)
Total product revenue		28,542		40,299		(29	)
Total product and transportation revenue									37,451		28,542		31
Installation and other services		923		682		35			835		923		(10	)
		29,465		40,981		(28	)		38,286		29,465		30

~~Revenue decreased in the three months ended March 31, 2021~~Our sales activity and associated revenues continue to be impacted by $11.5 million or 28% compared to the same period of 2020. Revenue decreased due to several factors as discussed above in “– Summary of Financial Results” and “– Outlook”. We believe the decrease principally reflects 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. ~~While we did not experience any material cancellations~~

During the quarter ended March 31, 2022, revenue was $38.3 million, an increase of ~~projects that were underway at~~$8.8 million or 30% from the ~~start~~same period in 2021 and of which 46% was generated in March 2022. The first quarter of 2022 marked the transition of the COVID-19 pandemic ~~it is~~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 Distribution Partners experienced an uptick in planning activity and opportunities growth in our commercial vertical which began to translate into orders in March 2022 that has continued into the second quarter. 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 ~~highly~~ likely that future projects will ~~also~~ experience similar delays as the COVID-19 pandemic runs its course. See Item 1A. “Risk Factors”.

~~We are~~In response to significant increases in the ~~process~~costs of ~~making substantial improvements~~raw materials, shipping materials 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 ~~our commercial function, as outlined~~be realized in ~~our strategic plan, including building an appropriate organizational structure, improving the effectiveness~~2022. On February 17, 2022, we announced a further price increase of ~~our existing sales force, attracting new sales talent, establishing strategic marketing and lead generation functions,~~5% effective June 1, 2022 as well as ~~expanding~~pricing strategy changes on our Reflect and ~~better supporting our Distribution Partner network. While~~Inspire lines of glass wall products, which we ~~believe~~expect to result in increased sales volumes of these ~~actions~~products. The benefits of these changes are ~~critical~~largely expected to ~~driving long-term, sustainable growth, particularly as~~be realized in the ~~recovery from the COVID-19 pandemic commences, these actions did not have a measurable effect on 2021 revenues in light~~latter quarters of ~~the severe economic adversity caused by the pandemic.~~2022.

Installation and other services revenue ~~increased to $0.9~~was $0.8 million for the three months ended March 31, ~~2021~~2022 compared to ~~$0.7~~$0.9 million in the same period of ~~2020. The changes in installation and other services revenue are primarily due to the timing of projects.~~2021. Except in limited circumstances, our Distribution 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 Partner network to expand our market penetration and ensure best practices are shared across local markets. At March 31, ~~2021,~~2022, we had 6770 Distribution Partners servicing multiple locations. During ~~2020,~~2021 and the first quarter of 2022, we made several changes and upgrades to our Distribution Partner network, expanding our relationships with new and existing partners and ending our relationships with others. ~~Our clients, as serviced primarily through our~~In February 2022, we announced the establishment of a Partner Advisory Council to provide a greater link with Distribution Partners ~~exist within a variety~~and end clients 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:

	For the Three Months Ended March 31,							For the Three Months Ended March 31,
	2021		2020		% Change			2022		2021		% Change
	($ in thousands)							($ in thousands)
Commercial		16,144		28,274		(43	)		24,044		16,144		49
Healthcare		6,487		5,063		28			6,964		6,487		7
Government		4,181		3,127		34			3,281		4,181		(22	)
Education		1,523		3,529		(57	)		2,965		1,523		95
License fees from Distribution Partners		207		306		(32	)		197		207		(5	)
Total product revenue		28,542		40,299		(29	)		37,451		28,542		31
Service revenue		923		682		35			835		923		(10	)
		29,465		40,981		(28	)		38,286		29,465		30

	For the Three Months Ended March 31,							For the Three Months Ended March 31,
	2021		2020		% Change			2022		2021
	(in %)							(in %)
Commercial		57		70		(19	)		64		57
Healthcare		23		13		77			19		23
Government		15		8		88			9		15
Education		5		9		(44	)		8		5
Total Product Revenue⁽¹⁾		100		100	NA
Total Product Revenue⁽¹⁾									100		100

~~Revenue decreased~~Commercial revenues increased by ~~28%~~49% from the prior year period, reflecting improving market conditions as health restrictions and work-from-home requirements ease and include one large customer in the ~~three months ended March 31, 2021~~technology sector of over $3 million. Healthcare increased by 7% in the first quarter of 2022 from the same period in ~~2020~~2021. Such sales tend to be larger individual projects and ~~was driven primarily~~are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Current quarter healthcare revenues included two large projects of approximately $3 million, which is consistent with same period of 2021 where we had two separate large projects of approximately $3 million. Education sales in the first quarter of 2022 increased by ~~decreased commercial sales. Commercial~~95% over the prior period. 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 95% increase represents higher volumes of projects due to the easing of health restrictions and many students returning to in-person learning. Government revenues in the first quarter of 2022

decreased by ~~43% from~~22% over the prior period due ~~largely~~ to a one-time project in the ~~severe impact~~prior period of ~~COVID-19 on commercial construction activities~~approximately $0.8 million that did not recur in ~~North America~~. ~~Similarly, education sales decreased by 57% from 2020 as most universities and private schools moved to on-line classes in response to~~ the ~~COVID-19 pandemic. During 2021, healthcare and government revenues increased due to the timing~~first quarter of ~~certain projects.~~2022.

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

	For the Three Months Ended March 31,							For the Three Months Ended March 31,
	2021		2020		% Change			2022		2021		% Change
	($ in thousands)							($ in thousands)
Canada		2,995		5,986		(50	)		5,251		2,995		75
U.S.		26,470		34,995		(24	)		33,035		26,470		25
		29,465		40,981		(28	)		38,286		29,465		30

Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. In the quarter ended March 31, 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 March 31, 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 decreased $0.7 million to $6.7 million for the three months ended March 31, 2021, from $7.4 million for the three months ended March 31, 2020. The decrease during the three months ended March 31, 2021 was largely related to a reduction in commission expense on lower revenues and lower travel, meals and entertainment expenses due to restrictions on travel as a result of the COVID-19 pandemic. As economies re-open, we anticipate travel, meals and entertainment expenses will increase over current levels, the timing and amount of such expenses, however, are indeterminate at this time. These reductions were partially offsetincreased by ~~$0.2 million of increased salary and wage expenses as we continue to build our sales organization and $0.3 million of staff transferred from Technology and Development to Sales and Marketing.~~

Our sales and marketing efforts continue to focus on establishing the appropriate sales organization and personnel, significantly improving our marketing approach and driving returns on sales and marketing expenditures, as outlined in our strategic plan. In light of uncertainty caused by the COVID-19 pandemic, we have prioritized critical hires that are necessary to continue to advance our overall strategy, including the implementation of necessary systems and tools while ensuring appropriate cost control and cash conservation.

~~General and administrative expenses (“G&A”) decreased~~ $0.6 million to $7.2 million for the three months ended March 31, ~~2021~~2022 from ~~$7.8~~$6.7 million for the three months ended March 31, ~~2020. For~~2021. The increase was largely related to an increase of $0.4 million in travel, meals and entertainment expenses as business activity has increased and restrictions on travel have eased, a $0.3 million increase in commissions due to higher sales volumes and increased facilities costs related to the Dallas DXC which opened in the third quarter of 2021, offset by a decrease in salaries and benefits costs.

General and administrative expenses increased $0.8 million to $8.0 million for the three months ended March 31, ~~2021,~~2022 from $7.2 million for the ~~decrease was the result~~three months ended March 31, 2021. The increase reflects $1.5 million of ~~lower~~incremental professional fees ~~and a $0.6 million credit loss recorded in~~associated with the ~~first quarter~~contested election of ~~2020 that was not repeated in 2021, partially~~directors offset by ~~increased severance~~a $0.7 million decrease in salaries and benefits costs.

Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Distribution Partner project execution and our manufacturing operations. Operations support expenses ~~decreased~~increased by $0.2 million tofrom $2.3 million for the three months ended March 31, 2021 ~~from~~to $2.5 million for the three months ended March 31, ~~2020,~~2022. The increase was due to ~~reduced activity.~~lower costs capitalized to internal projects with the completion of the South Carolina Facility and Dallas DXC.

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

Technology and development expenses ~~decreased~~increased by ~~$0.3~~$0.2 million to $2.1 million for the three months ended March 31, 2022, compared to $1.9 million for the three months ended March 31, 2021, ~~compared to $2.2 million for the three months ended March 31, 2020,~~ primarily related to ~~staff transferred to Sales and Marketing.~~a decrease in capitalized software development costs.

Stock-based compensation expense for the three months ended March 31, ~~2021~~2022 was ~~$1.1~~$1.3 million compared to ~~$0.5~~$1.1 million ~~for the same period of 2020.~~in 2021. The increase was largely due to grants of RSUs, including those in lieu of cash compensation to the Company’s interim Chief Executive Officer 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 ~~appreciation~~decreasing during the ~~three months~~quarter ended March 31, 2022.

On February 22, 2022, we announced a plan to close the Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. Additionally, we announced our intention to eliminate approximately 18% 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. One-time costs associated with these reductions and other costs savings measures were previously estimated to be $5 million. For the quarter ended March 31, 2022, we incurred $3.7 million in reorganization costs, and we anticipate a further $4.4 million of reorganization costs in the second quarter, as the Company incurred a $3.1 million charge for incremental insurance on change of control of the board on April 26, 2022.

The Company was not eligible and did not receive any new government subsidies in the quarter ended March 31, 2022 compared to $4.1 million of subsidies received during the quarter ended March 31, 2021. Upon finalization of 2021 compensation to specified executives, approximately C$0.5 million ($0.4 million) of subsidies is expected to be returned to the Canadian authorities in the second quarter of 2022. The amount was fully provided for in the third quarter of 2021 and in the first quarter of 2022 and the Company reversed a $0.6 million incremental provision related to this that is no longer necessary. The CEWS and CERS programs expired on October 23, 2021.

Interest expense increased by $0.8 million from $0.5 million in the quarter ended March 31, 2021 ~~compared~~ to ~~a reduction~~$1.3 million in the ~~prior year period.~~

~~During the three months~~quarter ended March 31, ~~2021,~~2022 as a result of the ~~Company recorded $4.1~~issuance of C$70.3 million of ~~government subsidies (2020 – $nil), of which $2.0 million (2020: $nil) were received during~~ the ~~period~~Debentures in ~~addition to $1.7 million that was receivable at December 31, 2020.~~

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established 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~~and draws 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 CERS, which 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.Leasing Facilities.

The provision for income taxes is comprised of U.S. and Canadian federal, state and provincial taxes based on pre-tax income. ~~Income~~The Company incurred no income tax expense ~~for~~or recovery during the ~~three months~~quarter ended March 31, ~~2021 was $0.04 million,~~2022, compared to a ~~$1.3~~$0.04 million ~~recovery~~expense for the same period of ~~2020. We have recorded~~2021. As at March 31, 2022 the Company had a valuation allowance of ~~$2.8~~$22.8 million (December 31, 2021 $17.3 million) against ~~Canadian~~ deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at March 31, ~~2021,~~2022, we had C$~~60.3~~76.3 million of non-capital loss carry-forwards in Canada and ~~none~~$53 million in the United States. These loss carry-forwards will begin to expire in 2032.

Net loss increased to $23.0 million or $0.27 net loss per share in the three months ended March 31, 2022 from a net loss of $12.5 million or $0.15 net loss per share ~~in the first quarter of 2021 from a net loss of $5.3 million or $0.06 net loss per share~~ for the ~~first quarter of 2020.~~three months ended March 31, 2021. The increased loss is primarily the result of a ~~$7.9~~$0.1 million decrease in gross profit, a ~~$2.5~~$5.6 million ~~net decrease~~increase in operating expenses including $3.7 million of reorganization expenses and $1.5 million of incremental professional fees as described previously, a $0.8 million increase in interest expense, a $0.6 million increase in foreign exchange ~~gains,~~loss and a ~~$1.4~~$3.5 million decrease in government subsidies.

The following table presents a reconciliation for the first quarter 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 March 31,
	2022			2021
	($ in thousands)
Net loss for the period		(23,042	)		(12,499	)
Add back (deduct):
Interest Expense		1,330			500
Interest Income		(11	)		(19	)
Income Tax Expense		-			39
Depreciation and Amortization		4,622			3,402
EBITDA		(17,101	)		(8,577	)
Foreign Exchange Losses		732			180
Stock-Based Compensation		1,302			1,094
Government Subsidies		(575	)		(4,068	)
Reorganization Expense		3,692			-
Adjusted EBITDA		(11,950	)		(11,371	)
Net Loss Margin⁽¹⁾		(60.2	)%		(42.4	)%
Adjusted EBITDA Margin		(31.2	)%		(38.6	)%

For the three months ended March 31, 2022, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $0.6 million to a $12.0 million loss or (31.2)% from $11.4 million loss or (38.6)% in the same period of 2021. This primarily reflects a $0.4 million decrease in Adjusted Gross Profit, $1.5 million of incremental professional fees as described previously, $0.4 million reduction in capitalized costs due to fewer internal projects, $0.4 million increase in ~~income tax~~sales travel and entertainment costs and $0.3 million of higher commission expense due to increased activity, offset by $1.8 million of costs of underused capacity in the first quarter of 2021 which did not re-occur and lower salaries and benefits costs due to headcount reductions.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three Months Ended March 31, 2022 and 2021

The following table presents a ~~$0.6 increase~~reconciliation for the three months ended March 31, 2022 and 2021 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:

Gross profit and gross profit margin decreased to $3.3 million or 8.6% for the three months ended March 31, 2022, from $3.4 million or 11.4% for the three months ended March 31, 2021. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $6.8 million or 17.7% for the three months ended March 31, 2022, from $7.2 million or 24.3% for the three months ended March 31, 2021.

The decrease in ~~net interest expense,~~gross profit margin largely reflects significant inflationary increases in the realized cost of materials, transportation and packaging, partially offset by improved labor utilization and fixed cost leverage on higher revenues. Gross profit decreased as material, transportation and packaging costs increased by approximately 9% as a ~~$1.2~~percentage of revenue, and gross profit was reduced by approximately 1% due to incremental South Carolina Facility

fixed costs. Additional depreciation and amortization due to revision to the useful lives of assets, including the Phoenix Facility, contributed $1.1 million ~~decrease~~or 2% of the gross margin. This 12% increased cost impact was offset by 3% of improved labor utilization and fixed cost leverage on account of the $8.8 million or 30% increase in ~~operating expenses and $4.1 million of government subsidies~~revenue compared to the same period in 2021.

Like many other industries and as noted above, we experienced a significant increase in the cost of raw materials, transportation and packaging, largely driven by the effects of the pandemic with much of the increases experienced in the second half of 2021. In response, effective November 16, 2021, we increased prices on new orders by approximately 6.5% to effectively offset these cost increases, with the benefits largely expected to be realized in the latter half of 2022. We expect such inflationary pressures to continue into 2022 and accordingly announced a further 5% price increase on February 17, 2022, effective June 1, 2022. We did not realize the full benefit of the initial price increase in the first quarter, and in addition we incurred higher than historical discounts on sales which further compressed our gross profit margin.

Cash and cash equivalents at March 31, ~~2021~~2022 totaled ~~$58.7~~$38.9 million, ~~an increase~~a decrease of ~~$12.8~~$21.5 million from December 31, ~~2020.~~2021. The ~~increase~~decrease in cash primarily reflects the impact of ~~$29.5~~$19.0 million ~~of net proceeds from the issuance of the Debentures in January 2021, offset by~~ cash used in operations, ~~of $12.1 million and~~ capital expenditures of ~~$3.6~~$1.6 million and scheduled Leasing Facilities repayments of $0.6 million.

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 ~~will~~ be repayable on the January ~~31, 2026.~~ Debenture Maturity Date. Interest and principal are payable in cash or shares at the option of the Company.

In February 2021, we entered into ~~a loan agreement governing~~the RBC Facility, a C$25.0 million senior secured revolving credit facility with RBC. Under the RBC Facility, the ~~Borrowing Base~~“Borrowing Base” is a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. ~~Under~~Available borrowings under the RBC Facility at March 31, ~~2021 available borrowings are~~2022 were C$~~9.4~~14.5 million or ~~$7.5~~$11.6 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 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 onof which C$3.6 million ($2.6 million) ~~of cash consideration~~ has been drawn, and a $14.0 million U.S. Leasing Facility onof which ~~$3.5~~$13.3 million has been drawn ~~and a further $7.2 million was drawn in April 2021~~ with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. ~~We anticipate drawing an additional three~~Subsequent to ~~four~~March 31, 2022, the Company received C$0.9 million ~~on our~~($0.7 million) under the Canada Leasing ~~Facilities during the second or third quarter of 2021 primarily related to equipment purchases in the South Carolina Facility as commissioning activities are completed.~~Facility.

In light of the uncertainty caused by the near and potential mid-term impacts of COVID-19, we have evaluated multiple downside scenarios and have implemented cost control and expenditure management processes. ~~Based on these analyses~~On February

22, 2022 we announced multiple initiatives to improve liquidity and return to a positive EBITDA position by 2023. These initiatives include the rationalizing of our manufacturing footprint through the closure of the Phoenix Facility, organization-wide restructuring of positions that will contribute to the reduction of fixed expenses and the ~~implementation~~conversion of certain payroll costs into shares rather than cash. To offset the impacts of continued inflationary pressure on the cost of raw materials and transportation, a price increase of 5% effective June 1, 2022 was announced as well as pricing strategy changes on our Reflect and Inspire lines of glass walls to drive increased sales of these ~~spending control processes, we~~products.

The first quarter of 2022 included the impact of one-time costs associated with our reorganization, and professional fees incurred as described previously. These costs will be largely completed in the second quarter with an additional $1.3 million of reorganization expenses expected and $3.1 million for run-off directors and officers insurance purchased by the previous board on the change of control.

While the previously discussed COVID-19 impacts and upstream supply chain issues causing project delays during 2021 resulted in a significant usage of cash reserves, the combination of an improved sales outlook for 2022, our cost optimization activities and our cash reserves and available credit facilities lead us to believe that ~~existing cash and cash equivalents combined with increased~~we have sufficient liquidity ~~from the aforementioned Leasing Facilities and RBC Facility should, except in very extreme cases, be sufficient to support ongoing working capital and capital expenditure requirements~~ for at least the next twelve months.

~~A prolonged and complete cessation~~Should the recovery of ~~or sustained significant decrease in~~the North American construction activities from the pandemic be delayed or a sustained economic depression and its adverse impacts on customer demand occur, this could continue to adversely affect our liquidity. To the extent that existing cash and cash equivalents and increased liquidity from the aforementioned 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 or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.

Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of cash flow from operations, long-term debt, government subsidies and cash on hand. WeAs at March 31, 2022, we had no amounts outstanding under the RBC Facility, ~~as of March 31, 2021 and $5.8~~$13.3 million outstanding under the Leasing Facilities asand $57.7 million of ~~March 31, 2021.~~Debentures outstanding.

The following table summarizes our consolidated cash flows for the ~~three months ended March 31, 2021 and 2020:~~periods indicated:

	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2021			2020			2022			2021
	($ in thousands)						($ in thousands)
Net cash flows used in operating activities		(12,094	)		(760	)		(19,042	)		(12,094	)
Net cash flows used in investing activities		(3,589	)		(2,455	)		(1,620	)		(3,589	)
Net cash provided by financing activities		29,337			-
Effect of foreign exchange on cash, cash equivalents and restricted cash		303			(499	)
Net increase (decrease) in cash, cash equivalents and restricted cash		13,957			(3,714	)
Net cash (used in) provided by financing activities								(827	)		29,337
Effect of foreign exchange on cash, cash equivalents and restricted Cash								166			303
Net (decrease) increase in cash, cash equivalents and restricted Cash								(21,323	)		13,957
Cash, cash equivalents and restricted cash, beginning of period		45,846			47,174			63,408			45,846
Cash, cash equivalents and restricted cash, end of period		59,803			43,460			42,085			59,803

Net cash flows used in operating activities was ~~$12.1~~$19.0 million for the first three months of ~~2021~~2022 compared to ~~$0.8~~$12.1 million ~~net cash flows used in operating activities~~ in the first three months of ~~2020.~~2021. The decrease is cash flows

from operations is largely due to ~~a decrease in revenues~~reorganization costs of $3.7 million and a ~~reduction~~$2.7 million net increase in operating assets and liabilities. Accounts receivable increased by $5.0 million as our March revenues were higher than January and February by a corresponding amount while inventory increased by $3.4 million. As a result of ongoing supply chain issues, the Company increased its inventory to ensure it can meet its end customers’ expectations of lead times. Offsetting this increase in operating assets was a $3.3 million increase in customer deposits and deferred revenue and a $2.4 million increase in accounts payable and accrued liabilities, ~~and partially offset by~~both reflecting the ~~receipt~~increased activity in March 2022. For the quarter ended March 31,

2021 we were eligible for $4.1 million of government subsidies ~~and increases~~ compared to $0.6 million in ~~customer deposits and deferred revenue.~~the quarter ended March 31, 2022.

We invested ~~$2.9~~$1.0 million in property, plant and equipment during the three months ended March 31, ~~2021,~~2022, compared to ~~$1.6~~$2.9 million during the three months ended March 31, ~~2020.~~2021. This expenditure comprised of $0.4 million of working capital changes, $0.3 million of information technology and the continued enhancement of our customer relationship management system and website redesign, $0.1 million of DXC refreshes and $0.1 million of manufacturing upgrades. Our 2022 capital expenditure program is comprised of approximately $2.5 million related to refreshes of DXCs, continued enhancement of our customer relationship management system and website redesign, approximately $2.5 million on software development and approximately $2.0 million on manufacturing and other capital upgrades. The ~~increase~~decrease is ~~primarily~~ due to ~~capital investments in manufacturing facilities including~~reduced spending as the South Carolina Facility and ~~our new~~ Dallas ~~DXC.~~DXC were completed in 2021. We invested ~~$0.7~~$0.5 million on capitalized software during the three months ended March 31, ~~2021,~~2022, as compared to ~~$1.0~~$0.7 million in the three months ended March 31, ~~2020.~~2021.

For the three months ended March 31, ~~2021, $29.3~~2022, $0.8 million of cash was ~~provided by~~used in financing activities comprising mainly ~~due to~~of $0.6 million of scheduled payments under the ~~proceeds~~Leasing Facilities. In the same period last year, we received $29.5 million of cash from the issuance of ~~C$40.3~~the January Debentures and had lower Leasing Facility scheduled payments of $0.2 million ~~of Debentures in January 2021. Cash used in financing activities for the three months ended~~due to a lower outstanding Leasing Facility balance at March 31, ~~2020 was $nil.~~2021.

We currently expect to fund anticipated future investments with available cash, including the proceeds from our issuance of Debentures issued in 2021, and drawings on our Leasing Facilities. Subsequent to March 31, 2022, C$0.9 million ($0.7 million) was drawn under the Canada Leasing Facility. We do not expect to ~~draw approximately $11.0 million on our~~make any significant further draws under the Leasing Facilities in the first half of 2021, of which $7.2 million was drawn in April 2021, financing the equipment purchases for our new South Carolina Facility that were largely paid for in installments in 2019 and 2020.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 deem appropriate. We may also use debt or pursue equity financing depending on the share price at the time, interest rates, and nature of the investment opportunity and economic climate.

On February 12, 2021, the Company entered into the RBC Facility. Under the RBC Facility, the Borrowing Base is up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. At March 31, ~~2021~~2022, available borrowings are C$~~9.4~~14.5 million ($~~7.5~~11.6 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under the RBC Facility, if the Aggregate Excess Availability ~~defined 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 FCCR covenant of 1.10:1 on a trailing ~~twelve month~~twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the 3three immediately ~~consecutive~~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 ~~3 month~~three-month FCCR requirement during the first quarter of ~~2021~~2022, which resulted in requiring the restriction of $~~1.1~~$3.2 million of cash. Should an event of default occur, or the Aggregate Excess Availability be less than C$6.25 million for 5five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off 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 ~~4.50%~~5.59%. The U.S. Leasing Facility is amortized over a six-year term and is extendible at the Company’s option for an additional year.

The Company has drawn ~~$3.5~~$13.3 million of cash consideration under the U.S. Leasing Facility and commenced the lease term in 2020 for the equipment at the South Carolina Facility. The Company has drawnC$3.6 million ($2.6

million) of cash consideration under the Canada Leasing Facility and commenced the lease term for the Canadian equipment expenditures during 2020. Subsequent to March 31, 2022, C$0.9 million ($0.7 million) was drawn under the Canada Leasing Facility.

We are restricted from paying dividends unless Payment Conditions (as defined in the RBC Facility) are met, including having a net borrowing availability of at least C$10 million over the proceeding ~~30 day~~30-day period, and having a trailing ~~twelve month~~twelve-month fixed charge coverage ratio above 1.10:1 and certain other ~~conditions~~

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

There have been no material changes in our contractual obligations during the three months ended March 31, ~~2021,~~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. See Note ~~12,~~13, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report for additional information.

There have been no material changes in our significant accounting policies during the three months ended March 31, ~~2021,~~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 Annual Report on Form 10-K. For information regarding significant accounting policies and estimates, please refer to Item 7 and Item 8 in our Annual Report on Form 10-K. As disclosed in Note 4,5, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, we adopted Accounting Standards Update No. ~~2020-06, “~~2021-10, ~~Debt – Debt~~Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The ASU provides guidance on required disclosures with ~~Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts~~respect to government assistance in ~~Entity’s Own Equity (Subtopic 815-40)”~~.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 ~~had~~has adopted this standard effective January 1, 2022 and notes there is no ~~convertible debt instruments outstanding at December 31, 2020 and the Debentures issued in January 2021 have been evaluated under~~impact of this ~~new guidance and there were no other transitional impacts to consider. The methodology now applied has been explained in Note 6 and the impact~~standard on ~~diluted earnings per share has been reflected in Note 7.~~our accounting or disclosures of government assistance.

For information regarding recent accounting pronouncements, please refer to Note 4,5, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing and “–Significant Accounting Policies and Estimates” in this Quarterly Report.

There have been no material changes to our market risk exposures since our disclosures in our Annual Report on Form 10-K. For information regarding our exposure to certain market risks, please refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K.

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

As required by Rule 13a-15 under the Exchange Act, our principal executive ~~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 March 31, ~~2021.~~2022. Based upon their evaluation, our principal executive ~~officer~~officers and principal financial

officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, ~~2021,~~2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We ~~continue to pursue~~are pursuing multiple lawsuits against our former founders, Mogens Smed and Barrie Loberg, ~~and~~ their new company Falkbuilt Ltd. (“Falkbuilt”), and other related individual and corporate defendants for ~~violation~~violations of fiduciary duties and ~~non-competition~~noncompetition and non-solicitation covenants contained in their ~~DIRTT~~ executive employment agreements, and the misappropriation of ~~DIRTT’s~~our confidential and proprietary information in violation of numerous Canadian and U.S. state, and federal laws pertaining to the protection of ~~DIRTT’s~~our trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices.

~~Our litigation against Falkbuilt and Messrs. Smed and Loberg is currently comprised of three main lawsuits: (i) an action~~ Except as described below, there have been no material developments in the ~~Alberta Court of Queen’s Bench instituted~~legal proceedings previously disclosed in our Annual Report on May 9, 2019 against Falkbuilt, Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty, fidelity and confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action inForm 10-K.

On March 10, 2022, the U.S. District Court for the Northern District of ~~Utah instituted on December 11, 2019~~Texas dismissed our complaint by DIRTT Environmental Solutions Inc., a Colorado corporation, against Falkbuilt ~~Smed, and other individual and corporate defendants alleging misappropriation~~Inc., a Delaware corporation, under the doctrine of DIRTT’s confidential information, trade secrets, business intelligence and customer information, and false advertising in violation of the United States Lanham Act, the Colorado Consumer Protection Act, and the Ohio Deceptive Trade Practices Act (the “U.S. Misappropriation Case”); and (iii) an action for federal patent infringement in the U.S. District Court for the Northern District of Illinois instituted on August 6, 2020 against Falkbuilt, alleging that Falkbuilt infringes certain of DIRTT’s patents relating to our proprietary ICE® software (the “U.S. Patent Case”).

~~In the Canadian Non-Compete Case,~~ ~~we are seeking, among other things, an order stopping the defendants from unlawfully competing~~forum non conveniens. We disagree with ~~us, and payment of lost revenue and damages.~~ We were recently successful in defeating an application for partial summary dismissal of our claims against Mr. Loberg for violating the restrictive covenants in his executive employment agreement (which are identical to the restrictive covenants in Mr. Smed’s agreement). Mr. Loberg had claimed that the non-compete obligations were unenforceable, and filed a summary dismissal application. The court denied Mr. Loberg’s application, and awarded DIRTT costs. Mr. Loberg appealed the decision and ~~on April 1, 2021, the dismissal was upheld on~~have filed a notice of appeal and DIRTT was again awarded costs. To date, we have questioned six individual defendants or witnesses in the Canadian Non-Compete Case, and are scheduled to question additional individuals over the next several months, including Messrs. Smed and Loberg. We are pleased with the ~~results~~Fifth Circuit Court of ~~the questioning to date and believe they give strong support to our allegations. We intend to continue to pursue the case vigorously.~~

~~In the U.S. Misappropriation Case, we are seeking~~ Appeals.to restrain the defendants from misappropriating our confidential information, trade secrets, business intelligence and customer information, and using that information to advance Falkbuilt’s U.S. business to our detriment. Falkbuilt had previously filed a countersuit against DIRTT alleging defamation and intentional interference with economic relations. On March 30, 2021, the U.S. District Court for the Northern District of Utah granted our motion to dismiss those counterclaims, meaning that DIRTT is no longer a defendant by counterclaim in the U.S. Misappropriation Case. The court previously granted a preliminary injunction to maintain the status quo, and we continue to seek discovery in the case through motions to compel and subpoenas issued across the Falkbuilt “Branch” network.

~~In the U.S. Patent Case,~~ ~~we are seeking, among other things, an order enjoining Falkbuilt from infringing our patents and damages for past or continuing infringement.~~ ~~Falkbuilt is attempting to initiate an~~ ~~inter partes~~ review and post grant review of DIRTT’s subject patents, and has filed a motion to stay the case pending resolution of these reviews. DIRTT has filed a motion opposing the stay, and believes that Falkbuilt’s actions are simply an attempt to delay the court proceedings.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our

Annual Report on Form 10-K, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.

We are under the leadership of a reconstituted board of directors and new Interim Co-Chief Executive Officers who plan to implement a variety of operational, organizational, cultural and other changes to our business, ~~financial condition, results of operations~~ and ~~growth could be harmed by the effects of the COVID-19 pandemic.~~

The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption. The extent to which COVID-19, or other public health pandemics or epidemics, impact our employees, operations, customers, suppliers and financial results will depend on numerous evolving factors that we may not be able to ~~accurately predict, including: the duration and scope~~achieve some or all of the ~~COVID-19 pandemic (and whether there is a resurgence or multiple resurgences~~anticipated benefits of ~~the virus in the future, including as~~this transformation plan.

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 D. Krause and Jeffrey A. Calkins were appointed Interim Co-Chief Executive Officers. As a result of ~~strain variations);~~these events, during the ~~actions taken by governments~~second quarter of 2022, we expect to record severance payments and ~~public health officials in response to~~other compensation expense associated with the ~~pandemic; the availability and effectiveness~~departure of vaccines, approvals thereof and the speed of vaccine distribution; the impact on construction activity; the effect on our customers’ demand for our DIRTT Solutions; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. For example, while many of our products support life sustaining activities and essential construction, we, and certain of our ~~customers~~officers and other employees, and we may incur other similar types of expenses and charges during the second quarter and thereafter related to other employee departures or ~~suppliers,~~otherwise associated with implementation of the new board’s plan. In addition, while we believe that the successful implementation of the plan will improve our operational and financial performance, 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 ~~be impacted by state or provincial actions, orders and policies regarding the COVID-19 pandemic, including temporary closures~~encounter short-term disruptions of ~~non-life sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement~~certain aspects of ~~which may vary by individual jurisdictions. Any of these events could have a material adverse effect on~~ our business ~~liquidity or results~~as elements of ~~operations.~~the plan are implemented.

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.

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

Large accelerated filer	☐	Accelerated filer	☐☒

Non-accelerated filer	☒☐	Smaller reporting company	☒☐

		Emerging growth company	☒

		Page
Cautionary Statement Regarding Forward-Looking Statements		ii
PART I – FINANCIAL INFORMATION		4
Item 1. Financial Statements (Unaudited)		4
Interim Condensed Consolidated Balance Sheets		4
Interim Condensed Consolidated Statement of Operations and Comprehensive Loss		5
Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity		6
Interim Condensed Consolidated Statement of Cash Flows		7
Notes to the Unaudited Interim Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. ~~Controls~~Quantitative and ~~Procedures~~ Qualitative Disclosures About Market Risk		2930
Item 4. Controls and Procedures		30

PART II – OTHER INFORMATION		3032

Item 1. Legal Proceedings		3032
Item 1A. Risk Factors		3032
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3132
Item 3. Defaults Upon Senior Securities		3132
Item 4. Mine Safety Disclosures		3132
Item 5. Other Information		3132
Item 6. Exhibits		3233

	As at,
	March 31, 2022		December 31, 2021
Legal provisions⁽¹⁾		145		143
DSU liability		759		785
Warranty and other provisions⁽²⁾		1,455		1,451
Other liabilities		2,359		2,379

	March 31, 2022			December 31, 2021
As at January 1		1,451			1,763
Adjustments to timber provision		-			(500	)
Additions to warranty provision		150			1,019
Payments related to warranties		(146	)		(831	)
		1,455			1,451

	Revolving Credit Facility		Leasing Facilities			Convertible Debentures		Total Long-Term Debt
Balance on December 31, 2019		-		-			-		-
Issuances		-		6,165			-		6,165
Repayments		-		(420	)		-		(420	)
Exchange differences		-		222			-		222
Balance at December 31, 2020		-		5,967			-		5,967
Current liabilities		-		898			-		898
Long-term liabilities		-		5,069			-		5,069

Balance on December 31, 2020		-		5,967			-		5,967
Issuances		-		-			29,545		29,545
Accretion		-		-			53		53
Repayments		-		(208	)		-		(208	)
Exchange differences		-		31			351		382
Balance at March 31, 2021		-		5,790			29,949		35,739
Current liabilities		-		902			-		902
Long-term liabilities		-		4,888			29,949		34,837


	% of PRSUs vesting
	33.3%	50.0%	66.7%	100.0%	150.0%
2021 PRSUs	$3.00	-	$4.00	$5.00	$7.00
2020 PRSUs	-	C$3.00	-	C$4.00	C$6.00

	% of PRSUs Vesting
			33.3	%		50.0	%		66.7	%		100.0	%		150.0	%
2022 and 2021 PRSUs		$	3.00		$	-		$	4.00		$	5.00		$	7.00


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

Adjusted Gross Profit Margin	Adjusted Gross Profit divided by revenue

EBITDA	Net income before interest, taxes, depreciation and amortization

Adjusted EBITDA	EBITDA adjusted ~~for~~to remove foreign exchange gains or losses; impairment expenses; reorganization expenses, stock-based compensation expense; government subsidies, and any other non-core gains or losses

Adjusted EBITDA Margin	Adjusted EBITDA divided by revenue


Exhibit No.		Description

3.1		Restated Articles of Amalgamation of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form 10, File No. 001-39061, filed on September 20, 2019).
3.2		Amended and Restated Bylaw No. 1 of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).
4.1		Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd., Computershare Trust Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
4.2		Supplemental Indenture, dated January 25, 2021, by and among the Company, Computershare Trust Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
~~10.1~~4.3		~~Loan Agreement,~~Second Supplemental Indenture, dated ~~February 12,~~December 1, 2021, by and among the ~~Royal Bank~~Company, Computershare Trust Company of Canada ~~DIRTT Environmental Solutions Ltd.~~ and ~~DIRTT Environmental Solutions, Inc.,~~Computershare Trust Company, National Association as ~~borrowers~~Trustees (incorporated by reference to Exhibit ~~10.1~~4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on ~~February 19,~~December 1, 2021).
~~10.2+~~10.1		~~Indemnification~~Letter Agreement, dated as of January 18, 2022, by and between ~~the Company~~Todd W. Lillibridge and ~~James A. Lynch, dated March 22, 2021~~DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit ~~10.1~~10.26 to the Registrant’s ~~Current~~Annual Report on Form ~~8-K,~~10-K, File No. 001-39061, filed on ~~March~~February 23, ~~2021)~~2022).
~~10.3+~~10.2*		~~Indemnification~~DIRTT Environmental Solutions Ltd. Employee Share Purchase Plan.
10.3*		Indemnity Agreement, ~~by and~~dated April 26, 2022, between the Company and ~~Diana R. Rhoten, dated March 22, 2021 (incorporated by reference to Exhibit 10.2 to~~Douglas A. Edwards, together with a schedule identifying other substantially identical agreements between the ~~Registrant’s Current Report~~Company and each of the other persons identified on ~~Form 8-K, File No. 001-39061, filed on March 23, 2021).~~the schedule.
31.1*		Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of the Principal Executive Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of the Principal Financial Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed herewith
**		Furnished herewith
+		~~Compensatory plan or agreement.~~
#		~~Specific terms in this exhibit (indicated therein by asterisks) have been omitted because such terms are both not material and would likely cause competitive harm to the Company it publicly disclosed.~~

	DIRTT ENVIRONMENTAL SOLUTIONS LTD.

	By:	/s/ Geoffrey D. Krause
		Geoffrey D. Krause
		Interim Co-Chief Executive Officer & Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Date: May ~~5, 2021~~4, 2022