UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM10-Q~~

FORM 10-Q


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

For the quarterly period ended September 30, ~~2019~~2023


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

For the transition period fromto

Commission file number001-39061

DIRTT ENVIRONMENTAL SOLUTIONS ~~LTD.~~LTD.

(Exact name of registrant as specified in its charter)


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


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

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

Securities registered pursuant to Section 12(b) of the Exchange Act: None

~~Title of Each Class~~

~~Trading~~

~~Symbol(s)~~

~~Name of Each Exchange~~

~~on Which Registered~~

~~Common Shares, without par value~~

~~DRTT~~

~~The Nasdaq Stock Market LLC~~

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). ☐ Yes ☒ No

The registrant had ~~84,681,364~~104,789,358 common shares ~~of common stock~~ outstanding as of October 31, ~~2019.~~2023.

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

FORM10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, ~~2019~~2023

TABLE OF CONTENTS


		Page
			~~Page~~
Cautionary Statement Regarding Forward-Looking Statements				ii

PART I – FINANCIAL INFORMATION				4
Item 1.	Financial Statements (Unaudited)			4
	Interim Condensed Consolidated Balance Sheets			4
	Interim Condensed Consolidated ~~Statements~~Statement of Operations and Comprehensive ~~Income (Loss)~~Loss			5
	Interim Condensed Consolidated ~~Statements~~Statement of Changes in Shareholders’ Equity			6	7
	Interim Condensed Consolidated ~~Statements~~Statement of Cash Flows			7	8
	Notes to the Unaudited Interim Condensed Consolidated Financial Statements			8	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			16	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			28	36
Item 4.	Controls and Procedures			28	37

PART II – OTHER INFORMATION		30	38

Item 1.	Legal Proceedings			30	38
Item 1A.	Risk Factors			30	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			30	39
Item 3.	Defaults Upon Senior Securities			30	39
Item 4.	Mine Safety Disclosures			30	39
Item 5.	Other Information			30	39
Item 6.	Exhibits			30	40

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

Certain statements contained in this Quarterly Report on Form10-Q for the quarter ended September 30, ~~2019~~2023 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” “continue,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.

Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those contained in, or expressed or implied inby such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects can be found in the ~~sections~~section titled ~~Risk~~“Risk Factors” in our ~~Registration Statement~~Annual Report on Form ~~10 (“Registration Statement on Form 10”),~~10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on ~~September 20, 2019~~February 22, 2023 (the “Annual Report on Form 10-K”), and in our subsequently filed Quarterly Reports on Form 10-Q and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:

•

general economic and business conditions in the jurisdictions in which we operate, including inflation;

•

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

•

inflation and material fluctuations of commodity prices, including raw materials and our ability to set prices for our products that satisfactorily adjust for inflation and fluctuations in commodity prices;

•

volatility of our share price;

•

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

•

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

•

our history of negative cash flow from operating activities;

•

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

•

our ability to attract, train and retain qualified hourly labor on a timely basis to increase overall productive capacity in our manufacturing facilities to enable us to capture rising demand in the construction industry;

•

our ability to achieve and manage growth effectively;

•

competition in the interior construction industry;

~~global economic, political~~•

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

•

the condition and ~~financial markets;~~

changing trends of the overall construction industry;

•

our reliance on our network of ~~Distribution Partners (as defined herein)~~construction partners ("Construction Partners"), for sales, marketing and installation of our solutions;

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

•

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

~~loss of our key executives;~~

•

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

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

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

software and warranty and product liability claims brought against us;

•

the effectiveness of our manufacturing processes and our success in implementing improvements to those processes;

•

the effectiveness of certain elements of our administrative systems and the need for investment in those systems;

•

shortages of supplies of certain key components and materials or disruption in supplies due to global events;

•

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

•

our exposure to currency exchange rates, tax rates, interest rates and other fluctuations, including those resulting from changes in laws or administrative practice;

•

legal and regulatory proceedings brought against us;

•

infringement on our patents and other intellectual property;

•

cyber-attacks and other security breaches of our information and technology systems;

~~material~~•

damage to our information technology and software systems;

•

our requirements to comply with applicable environmental, health and safety laws;

•

the impact of increasing attention to environmental, social and governance (ESG) matters on our business;

•

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

•

the effect of being governed by the corporate laws of a foreign country, including ~~raw materials;~~

~~shortages~~the difficulty of ~~supplies of certain key components~~enforcing civil liabilities against directors and ~~materials;~~

~~our ability to achieve requisite capacity from our existing manufacturing facilities;~~

~~our exposure to currency exchange rate, tax rate and other fluctuations that result from general economic conditions and changes~~officers residing in ~~laws;~~

a foreign country;

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

•

the availability and treatment of ~~capital~~government subsidies (including any current or ~~financing on acceptable terms, which~~future requirements to repay or return such subsidies); and

•

future mergers, acquisitions, agreements, consolidations or other corporate transactions we may ~~impair our ability to make investments in the business; and~~

engage in.

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

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

iii

~~iii~~

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

~~Item 1.~~

~~Financial Statements (Unaudited)~~

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Balance Sheets

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


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

   As at
   September 30,
2019 December 31,
2018
ASSETS

Current Assets

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


Total Current Assets
   107,427 118,152


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


Total Assets
   185,767 175,911


LIABILITIES

Current Liabilities

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


Total Current Liabilities
   39,264 48,307


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


Total Liabilities
   56,518 52,397


SHAREHOLDERS’ EQUITY

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


Total Shareholders’ Equity
   129,249 123,514


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

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Operations

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


	For the three months ended September 30,						For the nine months ended September 30,							For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018				2023			2022			2023			2022
Product revenue		63,324			71,720			188,437			193,378				48,095			44,307			127,105			124,849
Service revenue		2,061			2,193			6,100			6,863				1,442			2,440			3,893			4,885

Total revenue		65,385			73,913			194,537			200,241				49,537			46,747			130,998			129,734

Product cost of sales		38,947			42,202			116,117			115,941				31,622			37,965			88,529			109,757
Service cost of sales		1,504			1,626			5,461			4,910				850			1,774			2,165			3,406

Total cost of sales		40,451			43,828			121,578			120,851				32,472			39,739			90,694			113,163

Gross profit		24,934			30,085			72,959			79,390				17,065			7,008			40,304			16,571

Expenses
Sales and marketing		8,568			9,995			25,898			30,169				6,161			6,089			18,302			21,094
General and administrative		7,280			7,212			21,033			21,634				4,669			6,542			16,003			21,412
Operations support		2,419			1,937			7,771			5,933				1,752			2,321			5,564			7,347
Technology and development		1,718			922			5,881			3,048				1,239			1,695			4,055			5,714
Stock-based compensation		(2,389	)		2,037			2,403			3,172				1,069			918			2,543			3,546
Impairment		—			6,098			—			6,098
Reorganization		—			2,236			2,639			4,646				321			3,426			2,857			12,281

Impairment charge on Rock Hill Facility															7,952			-			7,952			-
Related party expense															-			-			1,524			-
Total operating expenses		17,596			30,437			65,625			74,700				23,163			20,991			58,800			71,394

Operating income (loss)		7,338			(352	)		7,334			4,690
Foreign exchange (gain) loss		(198	)		400			762			(805	)
Operating loss															(6,098	)		(13,983	)		(18,496	)		(54,823	)
Government subsidies															-			7,141			236			7,765
Gain on sale of software and patents															-			-			6,145			-
Foreign exchange (loss) gain															822			1,356			(59	)		1,870
Interest income		(228	)		(101	)		(320	)		(327	)			161			19			271			50
Interest expense		3			98			77			301				(1,196	)		(1,276	)		(3,636	)		(3,935	)
															(213	)		7,240			2,957			5,750
Net loss before tax															(6,311	)		(6,743	)		(15,539	)		(49,073	)
Income taxes
Current and deferred income tax recovery															-			(16	)		-			(16	)
		(423	)		397			519			(831	)			-			(16	)		-			(16	)
Net loss															(6,311	)		(6,727	)		(15,539	)		(49,057	)

Income (loss) before tax		7,761			(749	)		6,815			5,521
Income taxes
Current tax expense		818			1,145			1,906			2,733
Deferred tax expense (recovery)		1,141			(461	)		1,761			381
Net loss per share
Net loss per share - basic and diluted															(0.06	)		(0.08	)		(0.15	)		(0.57	)

		1,959			684			3,667			3,114

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

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

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

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

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

Weighted average number of shares outstanding (in thousands)													Weighted average number of shares outstanding (in thousands)
Basic and diluted															104,449			87,446			101,036			86,229

Interim Condensed Consolidated Statement of Comprehensive Loss


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

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

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

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity

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

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






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






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






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






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






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


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

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

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Cash Flows

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

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

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

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

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


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


Cash flows from investing activities:

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


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


Cash flows from financing activities:

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


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


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


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


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


Supplemental disclosure of cash flow information:

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


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

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets.
							As at September 30,
							2023			2022
Cash and cash equivalents								19,460			6,818
Restricted cash								2,977			3,611
Total cash, cash equivalents and restricted cash								22,437			10,429

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

DIRTT Environmental Solutions Ltd.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

1. GENERAL INFORMATION

DIRTT Environmental Solutions Ltd. and its ~~subsidiaries~~subsidiary (“DIRTT”, the “Company”, “we” or ~~the “Company”~~“our”) is a ~~leading technology-driven manufacturer~~leader in industrialized construction. DIRTT's system of ~~highly customized interiors. DIRTT combines its~~physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.

DIRTT’s proprietary 3D design ~~configuration and manufacturing~~integration software, ICE® (“~~ICE~~^®”ICE” or “ICE ~~Software”~~software”) ~~with integratedin-house~~, translates the vision of architects and designers into a 3D model that also acts as manufacturing of its innovative prefabricated interior construction solutions and an extensive distribution partners network (“Distribution Partner”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods.information. ICE is also licensed to unrelated companies and ~~distribution partners~~Construction Partners of the Company. As of May 9, 2023, Armstrong World Industries, Inc. ("AWI") owns a 50% interest in the rights, title and interests in all the intellectual property rights in a portion of the ICE Software that is used by AWI.

DIRTT is incorporated under the laws of the province of Alberta, ~~Canada and its~~Canada. Its headquarters ~~and registered office~~ is located at 7303 – 30th Street S.E., Calgary, AB, Canada T2C ~~1N6. DIRTT trades~~1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” ~~and, effective~~. Effective October ~~9, 2019, trades~~12, 2023, DIRTT’s common shares ceased to trade on ~~The~~the Nasdaq ~~Global Select Market~~Capital Market. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol ~~“DRTT”.~~“DRTTF.”

2. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form10-Q and Article 10 of RegulationS-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of September 30, ~~2019,~~2023, and its results of operations and cash flows for the three and nine months ended September 30, ~~2019~~2023 and ~~2018.~~2022. The condensed balance sheet at December 31, ~~2018,~~2022, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, ~~2018~~2022 and ~~2017~~2021 and for each of the three years in the period ended December 31, ~~2018~~2022 included in the Annual Report on Form 1010-K of the Company as filed with the ~~U.S. Securities~~SEC and ~~Exchange Commission.~~applicable securities commission or similar regulatory authorities in Canada. As described in Note 3, no new accounting standards were adopted by the Company ~~adopted a new accounting standard for leases in~~during the ~~current year, which had a material impact on the Financial Statements.~~quarter.

In these Financial Statements, unless otherwise indicated, all dollar amounts are expressed in United States (“U.S.”) dollars. DIRTT’s financial results are consolidated in Canadian dollars, the Company’s functional currency, and the Company has adopted the U.S. dollar as its reporting currency. All references to US$ or $ are to U.S. dollars and references to C$ are to Canadian dollars.

Principles of consolidation

The Financial Statements include the accounts of DIRTT Environmental Solutions Ltd. and its ~~subsidiaries.~~subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.

Basis of measurement

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

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

Seasonality

~~DIRTT Environmental Solutions Ltd.~~

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

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

~~Seasonality~~

Sales of the Company’s products are driven by consumer and industrial demand for interior construction solutions. The timing of customer’s construction projects can be influenced by a number of factors including the prevailing economic climate and weather. ~~Seasonality of construction results in demand for the Company’s solutions to be typically stronger in the third and fourth quarters compared to the first and second quarter of its fiscal year.~~

3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

~~In February 2016, the FASB issued ASUNo. 2016-02,~~ ~~“Leases (Topic 842),” and issued subsequent amendments to the initial guidance in January 2018 within ASUNo. 2018-01,~~ ~~in July 2018 within ASUNos. 2018-10~~ ~~and2018-11,~~ ~~in December 2018 within ASUNo. 2018-20,~~ ~~and in March 2019 within ASUNo. 2019-01~~ ~~(collectively, the standard). The standard requires lessees to recognize operating leases on the balance sheet as aright-of-use~~ (“ROU”) asset and a lease liability. The liability is equal to the present value of the lease payments over the remaining lease term. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense.

The Company has not adopted ~~the standard on~~any new accounting standards effective January 1, 2019, and elected the transition method of adoption, which allowed the Company to apply the standard as of the beginning of the period of adoption, the comparative period presented is not adjusted and continues to be reported in accordance with the Company’s historical accounting policy. The Company opted to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and certain other practical expedients, including the use of hindsight to determine the lease term2023. Accounting guidance for ~~existing leases and in assessing impairment of theright-of-use~~ ~~asset, and the exception~~assets held for ~~short-term leases.~~

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

~~4. LEASES~~

The Company leases office and factory space under various operating leases. The Company determines if an arrangement is a lease or contains a lease element at inception. The arrangement is a lease if it conveys the rightsale was applicable to the Company this quarter and the policy applied has been disclosed below. Although there are several 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.

Assets held for sale

The Company classifies an asset group (“asset”) as held for sale in the period that (i) it has approved and committed to ~~control~~a plan to sell the ~~use~~asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of ~~identified property, plant,~~the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or ~~equipment~~circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the consolidated statement of operations in the period ~~of time~~ in ~~exchange~~which the held for ~~consideration. Operating leases~~sale criteria are ~~separately disclosed as operating lease ROU assets, with a corresponding lease liability split between current and long-term components~~met. Conversely, gains are generally not recognized on the ~~balance sheet. Operating leases with~~sale of a long-lived asset until the date of sale. Upon designation as an ~~initial term of 12 months~~asset held for sale, the Company stops recording depreciation or ~~less are not included~~amortization expense on the ~~balance sheet.~~

asset. The Company ~~recognizes lease expense~~assesses the fair value of assets held for ~~these leases~~sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale. Adjustments made to the fair value are recorded in the consolidated statement of operations in the period it is measured. Refer to Note 6.

4. LIQUIDITY

As at September 30, 2023, the Company had $19.5 million of cash on hand and C$14.6 million ($10.8 million) of available borrowings (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the first nine months of fiscal year 2023, the Company generated $4.7 million in cash flows from operations, compared to a ~~straight-line basis~~cash usage of $47.5 million over the ~~lease term. ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising~~first nine months of fiscal year 2022. The Company benefited from the ~~lease. Operating lease ROU assets and liabilities are recognized at commencement date based on~~receipt of $7.3 million of government subsidies during the ~~present value~~first nine months of ~~lease payments over~~2023 compared to $nil in the ~~lease term.~~

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

~~DIRTT Environmental Solutions Ltd.~~

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

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

~~For the three months and~~ nine months ended September 30, ~~2019,~~2022 (refer to Note 5).

We have implemented multiple price increases during the past two years to mitigate the impact of inflation on raw materials. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to reduce our cash ~~paid for amounts included in~~usage to operate the measurement of operating lease liabilities was $1.4 million and $4.2 million. The weighted average remaining lease term and weighted average discount rate at September 30, 2019 were 12 years and 4.6%, respectively. The following table includes supplemental cash flow informationbusiness. Gross profit for the nine months ended September 30, ~~2019~~2023 was $40.3 million, or 30.8%, compared to the same period of 2022, which generated gross profit of $16.6 million, or 12.8%.

Over the past four quarters, we have also executed upon several cash initiatives. First, in May 2023, we entered into an agreement with AWI (refer to Note 7) resulting in the receipt of $10.9 million of cash. Second, during March 2023, we entered into an agreement to sublease our Dallas DIRTT Experience Center (“DXC”) to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and ~~supplemental balance sheet information~~other costs as of April 1, 2023, through December 31, 2024, which will provide us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities and expect these strategic initiatives to result in positive cash inflows in 2023

and 2024. Third, we completed a Private Placement (as defined herein) of common shares in November 2022, with certain significant shareholders and directors and officers of the Company, to bridge cash requirements before the completion and closing of the noted strategic transactions.

While we are encouraged by our improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of macroeconomic uncertainty. We have implemented multiple restructuring initiatives (refer to Note 6) designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by 154 employees, or approximately 16% from January 2022 through September 2023.

We have assessed the Company’s liquidity position as at September 30, ~~2019~~2023 taking into account our sales outlook for the next year, our existing cash balances and available credit facilities and expected early settlements related to ~~operating leases (in thousands):~~our Rock Hill Facility equipment lease (refer to Note 10). Based on this analysis, we believe the Company has sufficient liquidity to support ongoing operations for the next twelve months.

5. GOVERNMENT SUBSIDIES

In the United States, the Employee Retention Credit (“ERC”) was established by Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act to provide an incentive for employers to keep their employees on their payroll during COVID-19 closures. The ~~following table includes ROU assets included~~ERC is a refundable payroll tax credit based on qualified wages paid by an eligible employer between March 12, 2020, and October 1, 2021 for companies experiencing a significant decline in gross receipts during a calendar quarter or having operations fully or partially suspended during the ~~balance sheet at~~quarter due to COVID-19. During the third quarter of 2022, the Company determined it was eligible for the ERC for the first three quarters of 2021 and filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). As of September 30, ~~2019:~~2023, the $7.3 million claim (plus an additional $0.2 million of interest) has been received in full.

6. REORGANIZATION AND ASSETS HELD FOR SALE

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

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






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

Closure of Phoenix Aluminum Manufacturing Facility (the “Phoenix Facility”)

On February 22, 2022, we commenced the process of closing our Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary manufacturing facilities. During the first quarter of 2022, the Company incurred $1.0 million of accelerated depreciation, recorded in cost of sales, associated with the closure of the Phoenix Facility. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. The Company entered into a sublease arrangement for part of the Phoenix Facility during the second quarter of 2022, commencing July 1, 2022, which exceeds the contractual lease commitments under the Right of Use assets.

Workforce Reductions, Board and Management Changes

In February and July of 2022, we announced our intention to eliminate a portion of our salaried workforce, including manufacturing and office positions, along with other cost reduction initiatives. The Company’s Board of Directors was reconstituted following ~~table includes lease liabilities included on~~a proxy contest in April 2022, which was deemed a change of control under the ~~balance sheet at~~Company’s insurance policy resulting in additional insurance expenditures. Further, the Company made changes to several executive officer roles during the year ended December 31, 2022. During the nine months ended September 30, ~~2019:~~2023, we continued to review costs resulting in the elimination of additional salaried positions in the second and third quarters of 2023. These actions resulted in the Company incurring certain one-time termination costs.

Temporary Suspension of Operations and Subsequent Closure at Rock Hill, South Carolina (the “Rock Hill Facility”)

On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in cost of sales, were $0.4 million and $1.4 million for the three month and nine month period ended September 30, 2023, respectively.

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

For the three and nine months ended September 30, 2023, reorganization costs incurred relate to the above mentioned initiatives:


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


~~Opening balance (Note 3)~~ Reorganization costs in accounts payable and accrued liabilities at January 1, 2022			~~23,912~~ -
~~Additions~~ Reorganization expense			~~1,673~~ 13,461
~~Accretion~~ Reorganization costs paid			~~829~~ (11,184	)
~~Repayment of lease~~ Reorganization costs in accounts payable and accrued liabilities at December 31, 2022			~~(4,237~~ 2,277	)
~~Lease cancellation~~ Reorganization expense			~~(196~~ 2,857	)
~~Exchange differences~~			~~287~~
		Reorganization costs paid
	(3,977		~~22,268~~	)
~~Current lease~~ Reorganization costs in accounts payable and accrued liabilities			~~5,247~~
~~Long-term lease liabilities~~			~~17,021~~
		at September 30, 2023			1,157

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

Assets classified as held for sale as at September 30, 2023 of $2.3 million consist of manufacturing equipment previously used in the Rock Hill Facility. Prior to the decision to permanently close the Rock Hill Facility, the assets were classified as property, plant and equipment.

7. GAIN ON SALE OF SOFTWARE AND PATENTS

On May 9, 2023, we entered into a Co-Ownership Agreement (the “Co-Ownership Agreement”) and Partial Patent Assignment Agreement with AWI. The agreements provided for a cash payment from AWI to the Company of $10.0 million, subject to certain routine closing conditions, in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the patent rights that relate to the Applicable ICE Code. Under the Co-Ownership Agreement, we also agreed to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.0 million, which is expected to be received by early 2024. The Co-Ownership Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into an Amended and Restated Master Services Agreement (the “ARMSA”) with AWI, under which AWI has also prepaid certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.

The $10.0 million of proceeds on the sale of the 50% interest in the Applicable ICE code, pursuant to the Co-Ownership Agreement, was received during the second quarter of 2023. In accordance with US GAAP, the proceeds were first applied to the net book value of the related cost of software of $2.9 million and patents (other assets) of $0.9 million and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $0.9 million was received during the second quarter as a prepayment under the ARMSA, which was recognized into revenue as the performance obligation is met. Part of the proceeds of this transaction were used to

settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash (refer to Note 10). A final prepayment of $0.9 million under the ARMSA was received in October 2023.

8. TRADE AND ACCRUED RECEIVABLES

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

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial well-being of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At September 30, 2023, approximately 80% 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.

Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the three and nine months ended September 30, 2023, one Construction Partner accounted for greater than 10% of revenue (one Construction Partner for the nine months ended September 30, 2022). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

The Company’s aged receivables were as follows:


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

No adjustment to our expected credit losses of $0.1 million was required for the three or nine months ended September 30, 2023. Receivables are generally considered to be past due when over 60 days old, unless there is a separate payment arrangement in place for the collection of the receivable.

9. OTHER LIABILITIES


	As at,
	September 30, 2023		December 31, 2022
Warranty provisions (1)		867		1,278
DSU liability		971		594
Sublease deposits		183		139
Other provisions		-		45
Other liabilities		2,021		2,056

(1)

The following table ~~includes maturities~~presents a reconciliation of ~~operating lease liabilities at September 30, 2019:~~the warranty balance:


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

10. LONG-TERM DEBT

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


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


Total lease liability
   22,268


Difference between undiscounted cash flows and lease liability
   3,467


	Revolving Credit Facility		Leasing Facilities			Convertible Debentures			Total Debt
Balance on January 1, 2022		-		13,909			56,733			70,642
Issuances		-		647			-			647
Accretion of issue costs		-		-			676			676
Accrued interest		-		735			3,539			4,274
Interest payments		-		(735	)		(3,688	)		(4,423	)
Principal repayments		-		(2,470	)		-			(2,470	)
Exchange differences		-		(274	)		(3,637	)		(3,911	)
Balance at December 31, 2022		-		11,812			53,623			65,435
Current portion of long-term debt and accrued interest		-		2,561			745			3,306
Long-term debt		-		9,251			52,878			62,129

Balance on December 31, 2022		-		11,812			53,623			65,435
Accretion of issue costs		-		-			515			515
Accrued interest		-		447			2,566			3,013
Interest payments		-		(447	)		(2,630	)		(3,077	)
Principal repayments		-		(3,386	)		-			(3,386	)
Exchange differences		-		241			121			362
Balance at September 30, 2023		-		8,667			54,195			62,862
Current portion of long-term debt and accrued interest		-		8,250			711			8,961
Long-term debt		-		417			53,484			53,901

~~DIRTT Environmental Solutions Ltd.~~Revolving Credit Facility

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

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

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

~~5. LONG-TERM DEBT~~

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

~~On July 19, 2019, the Company entered into a~~ C$~~50.0~~25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). ~~The~~Under the RBC Facility, ~~has a three-year term and can be extended for~~the Company is able to borrow up to ~~two additional years at~~a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the ~~Company’s option.~~lesser of (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). Interest is calculated at the Canadian or U.S. prime rate ~~with no adjustment,~~plus 30 basis points or at the ~~bankers’ acceptance rate~~Canadian Dollar Offered Rate or LIBOR plus ~~125~~155 basis points. ~~The~~Under the RBC Facility, if the “Aggregate Excess Availability”, (defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash), is less than C$5.0 million, the Company is subject to a ~~minimum~~ fixed charge coverage ratio (“FCCR”) covenant of ~~1.15:~~1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities (defined below). Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will offset any borrowings and any remaining amounts made available to the Company.

On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a borrowing base of C$15 million and a ~~maximum debt~~one year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate ("SOFR") plus 200 basis points plus the Term SOFR Adjustment (as defined in the amended loan agreement governing the Extended RBC Facility). Under the Extended RBC Facility, if the trailing twelve month FCCR is not above 1.25 for three consecutive months, a cash balance equivalent to ~~Adjusted EBITDA ratio~~one-year's worth of ~~3.0:1 (earnings before~~Leasing Facilities payments must be maintained. At September 30, 2023, available borrowings are C$14.6 million ($10.8 million) (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner as the RBC facility described above, of which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the third quarter of 2023, which resulted in requiring the restriction of $3.0 million of cash ($3.4 million as at December 31, 2022).

Leasing Facilities

The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.3 million) has been drawn and C$3.8 million ($2.8 million) has been repaid, and a $14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada

Leasing Facility, the “Leasing Facilities”) of which $13.3 million has been drawn and $5.2 million has been repaid, each with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred. The Canadian Leasing Facility and the U.S. Leasing Facility, respectively, have seven and five-year terms and bear interest ~~tax, depreciation~~at 4.25% and ~~amortization,non-cash~~ ~~stock-based compensation, plus or minus extraordinary or unusual non-recurring revenue or expenses)~~5.59%. Refer to Note 6 on the decision to permanently close the Rock Hill Facility. As part of this decision the Company intends to early settle the U.S. Leasing Facility in the next twelve months. The $8.2 million balance of the U.S. Leasing Facility has therefore been classified under current liabilities as at September 30, ~~2019, the RBC Facility was undrawn and~~2023. On October 31, 2023, the Company ~~was in compliance with all~~paid off $1.0 million of the ~~covenants of~~U.S. Leasing Facility.

The Company did not make any draws on the ~~RBC Facility.~~

~~6. STOCK-BASED COMPENSATION~~

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

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








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

~~DIRTT Environmental Solutions Ltd.~~

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

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

~~Stock Options~~

~~For~~Leasing Facilities during the three ~~months ended September 30, 2019, stock-based compensation recovery related to stock options was $2.6 million (2018 – $2.0 million expense),~~ and ~~a $1.9 million expense was recorded for the~~ nine months ended September 30, ~~2019 (2018~~2023. During the three and nine months ended September 30, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in the current portion of long-term debt and accrued interest and long-term debt.

As part of RBC's consent to the AWI transaction (refer to Note 7), one of the Canadian lease agreements of $1.6 million was fully settled using AWI proceeds. This resulted in the release of $0.4 million of restricted cash associated with the one year of payments on this lease, as described above.

Convertible Debentures

On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “January Debentures”). On January 29, 2021, the Company issued a further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to the underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the “January Debentures Maturity Date”) and will accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021 until the January Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The January Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the January Debentures Maturity Date and the date specified by the Company for redemption of the January Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately 215.0538 common shares per C$1,000 principal amount of the January Debentures. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission. As at September 30, 2023, C$18.9 million of the January Debentures are held by a related party (refer to Note 16).

On December 1, 2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and December of each year commencing on September 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The December Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the December Debentures Maturity Date and the date specified by the Company for redemption of the December Debentures at a conversion price of C$4.20 per common share, being a ratio of approximately 238.0952 common shares per C$1,000 principal amount of the December Debentures. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission. As at September 30, 2023, C$13.6 million of the December Debentures are held by a related party (refer to Note 16).

11. STOCK-BASED COMPENSATION

In May 2020, shareholders approved the DIRTT Environmental Solutions Long Term Incentive Plan (the “2020 LTIP”). The 2020 LTIP replaced the predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and the Amended and Restated Stock Option Plan (“Stock Option Plan”). Following the approval of the 2020 LTIP, no further awards will be made under either the Stock Option Plan or the PSU Plan, but both remain in place to govern the terms of any awards that were granted pursuant to such plans and remain outstanding.

In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated Long-Term Incentive Plan (the “2023 LTIP”) at the annual and special meeting of shareholders. The 2023 LTIP gives the

Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, 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 2023 LTIP, the sum of (i) 12,350,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May 30, 2023, expire or are cancelled or terminated without having been exercised in full, have been reserved for issuance under the 2023 LTIP. Upon vesting of certain LTIP awards, the Company may withhold and sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the withholding tax remittances required in respect of award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.

Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for Non-Employee Directors (as amended and restated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The terms of the DSU Plan are otherwise materially unchanged as incorporated into the 2023 LTIP. Effective May 30, 2023, no new awards will be made under the DSU Plan, but awards previously granted under the DSU Plan will continue to be governed by the DSU Plan. DSUs are settled following cessation of services with the Company.

Stock-based compensation expense


	For The Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Equity-settled awards		594		846		2,106		3,471
Cash-settled awards		475		72		437		75
		1,069		918		2,543		3,546

The following summarizes RSUs, Share Awards, PSUs, and DSUs activity during the periods:


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

Restricted share units (time-based vesting)

Restricted share units 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 in 2022 and 2023 was C$2.37 and C$0.46, respectively, which was determined using the closing price of the Company’s common shares on their respective grant dates.

Restricted share units (performance-based vesting)

During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for vesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a percentage of the PRSUs will vest at the end of the three-year service period.

The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$1.87 and C$3.27, respectively.

Based on share price performance since the date of grant, none of the 2022 PRSUs and 66.7% of the 2021 PRSUswill vest upon completion of the three-year service period.


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

Share awards

During the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive compensation (“Share Awards”). These Share Awards vested upon grant. The fair value of the Share Awards granted was C$2.40 ($1.88), which was determined using the closing price of the Company’s common shares on the grant date.

In the first quarter of 2023, 36,254 Share Awards were issued to a consultant as compensation for services rendered. During the second quarter of 2023, certain executives were issued Share Awards in lieu of cash paid variable incentive compensation. These Share Awards vested upon grant. The fair value of the Share Awards granted was C$0.49 ($0.34), which was determined using the closing price of the Company’s common shares on the grant date.

Performance share units

During the second quarter of 2023, certain executives were issued a strategic equity grant through Performance share units (“PSUs”). The performance period of the PSUs is from January 1, 2023 to December 31, 2026 with a cliff vesting term for December 31, 2026. 2,584,161 PSUs were granted and depending on the level of performance, the PSUs will vest 100%, 160% or 190% up to a maximum of 4,909,907 PSUs. Settlement will be made in the form of shares issued from treasury. The performance measures are a combination of Revenue and Earnings Before Interest, Taxes, Depreciation and Amortization and both targets have to be achieved. As of September 30, 2023, the fair value of these PSUs have been deemed to be nil based on the likelihood of achieving the targets compared to current results. During the third quarter of 2023, 738,553 PSUs with a $nil value were forfeited as a result of an executive departure and 1,845,608 PSUs with a $nil value are outstanding at September 30, 2023.

Deferred share units

Granted under the DSU Plan

The fair value of the DSU liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the period. DSUs outstanding at September 30, 2023 had a fair value of $0.6 million which is included in other liabilities on the balance sheet (December 31, 2022 – ~~$3.2~~$0.6 million).

Granted under the 2023 LITP

DSUs granted after May 30, 2023 (the "New DSUs") will be settled by way of the provision of cash or shares (or a combination thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common shares. The weighted average fair value of the DSUs granted in 2023 was C$0.44 ($0.33), which was determined using the closing price of the Company’s common shares on the grant date. New DSUs outstanding at September 30, 2023 had a fair value of $0.4 million ~~expense)~~which is included in other liabilities on the balance sheet (December 31, 2022 –$nil).

Options

The following summarizes options forfeited and expired during the periods:


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

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

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


	Options outstanding						Options exercisable
			Weighted		Weighted				Weighted		Weighted
	Number of		average		average				average		average
	options		remaining		exercise		Number		remaining		exercise
Range of exercise prices			life		price C$		exercisable		life		price C$
C$6.01 – C$7.00		16,350		0.97	$	6.12		16,350		0.97	$	6.12
C$7.01 – C$7.84		210,928		0.63	$	7.84		210,928		0.63	$	7.84
Total		227,278						227,278

Dilutive Instruments

For the three and nine months ended September 30, ~~2019,~~2023, 0.2 million options (2022 – 1.5 million) 3.9 million RSUs and PRSUs (2022 – 2.8 million), 1.2 million New DSUs (2022 – nil), 2.6 million PSUs (2022 – nil), 1.1 million shares relating to equity-settled Variable Pay Plan (“VPP”) (2022 – nil), and 134.4 million (2022 – 127.5 million) shares would be issued if the ~~Company paid $0.3 million (2018 – $0.9 million)~~principal amount of the Debentures were settled in our common shares at the quarter end price and $3.6 million (2018 – $0.9 million) respectively on the surrender of cash settled stock options. At September 30, 2019, the Company had a liability of $0.1 million in other liabilities for the stock options (December 31, 2018 – $1.8 million). On October 9, 2019, following its listing on The Nasdaq Global Select Market, the Company ceased cash-settlement of stock options and the associated liability accounting for stock options. The following summarizes options granted, exercised, surrendered, forfeited and expired during the periods:

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




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




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




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

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

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












Total
   6,289,907          1,940,498

~~Performance share units (“PSUs”)~~

~~As at September 30, 2019, there~~ were ~~295,216 PSUs outstanding (December 31, 2018 – 85,728) accounted for at a value of $0.2 million (December 31, 2018 – $0.1 million) which is~~ included in ~~other long-term liabilities on the balance sheet.~~

~~DIRTT Environmental Solutions Ltd.~~

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

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

~~Deferred share units (“DSUs”)~~

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

~~Dilutive instruments~~

~~For the three and nine months ended September 30, 2019, 4.3 million and 3.4 million stock options (2018 – 5.1 million and 5.5 million), respectively, were excluded from~~ the diluted ~~weighted average number of common shares calculation as their effect would have been anti-dilutive to the net income (loss) per share.~~EPS calculation.

12. REVENUE

In the following table, revenue is disaggregated by ~~major products and services lines~~performance obligation and timing of revenue recognition. All revenue comes from contracts with customers. See Note 913 for the disaggregation of revenue by geographic region.


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018		2023		2022		2023		2022
Product		56,486		64,941		168,321		175,286		43,132		39,092		113,323		110,383
Transportation		6,429		6,184		18,644		16,368		4,767		5,022		13,169		13,878
Licenses		409		595		1,472		1,724

License fees from Construction Partners										196		193		613		588
Total product revenue		63,324		71,720		188,437		193,378		48,095		44,307		127,105		124,849
Installation and other services		2,061		2,193		6,100		6,863		1,442		2,440		3,893		4,885
										49,537		46,747		130,998		129,734
		65,385		73,913		194,537		200,241

DIRTT sells its products and services pursuant to fixed-price contracts which generally have a term of one year or less. The transaction price used in determining the amount of revenue to recognize from fixed-price contracts is based upon agreed contractual terms with ~~the~~each customer and is not subject to variability.


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018		2023		2022		2023		2022
At a point in time		62,915		71,125		186,965		191,654		47,899		44,114		126,492		124,261
Over time		2,470		2,788		7,572		8,587		1,638		2,633		4,506		5,473
										49,537		46,747		130,998		129,734
		65,385		73,913		194,537		200,241

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

~~DIRTT Environmental Solutions Ltd.~~

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

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

Contract Liabilities


							As at
	September 30, 2019		As at December 31, 2018		December 31, 2017		September 30, 2023		December 31, 2022		December 31, 2021
Customer deposits		6,296		6,746		5,675		6,396		4,458		1,959
Deferred revenue		1,111		955		701		347		408		461

Contract liabilities		7,407		7,701		6,376		6,743		4,866		2,420

Contract liabilities primarily relate to deposits received from customers and ~~deferred~~maintenance revenue from license subscriptions. The balance of contract liabilities was ~~consistent~~higher as at September 30, ~~2019~~2023 compared to December 31, ~~2018~~2022 mainly due to the timing of orders and payments. Contract liabilities as at December 31, ~~2018~~2022 and ~~2017,~~2021, respectively, totaling ~~$7.5~~$4.8 million and ~~$5.9~~$2.4 millionwere recognized as revenue during the~~year-to-date~~ ~~periods~~ nine months ended September 30, ~~2019~~2023 and ~~2018,~~2022, respectively.

Sales by Industry

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


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018		2023		2022		2023		2022
Commercial		42,910		41,117		124,248		119,021		31,272		31,796		82,154		85,458
Healthcare		9,192		18,698		32,452		40,459		8,483		3,638		25,111		15,693
Government		3,855		4,634		12,267		17,408		4,606		3,358		10,581		11,680
Education		6,958		6,676		17,998		14,766		3,538		5,322		8,646		11,430
Licenses fees from Distribution Partners		409		595		1,472		1,724

Total product revenue		63,324		71,720		188,437		193,378
License fees from Construction Partners										196		193		613		588
Total product and transportation revenue										48,095		44,307		127,105		124,849
Installation and other services		2,061		2,193		6,100		6,863		1,442		2,440		3,893		4,885
										49,537		46,747		130,998		129,734
		65,385		73,913		194,537		200,241

~~8. INCOME TAX~~

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

9.13. SEGMENT REPORTING

The Company has one reportable and ~~one~~ operating segment and operates in ~~three~~two principal geographic locations – Canada and the United ~~States~~States. Revenue continues to be derived almost exclusively from projects in North America and ~~International. Currently,~~predominantly from the ~~majority of revenue from international projects are included in the U.S. revenue amount as these projects are sold by U.S.-based distribution partners and are delivered to international locations.~~United States. The Company’s revenue from operations from external customers, based on location of operations, and information about itsnon-current assets, ~~are~~is detailed below.

~~DIRTT Environmental Solutions Ltd.~~

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

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

Revenue from external customers


	For the three months ended September 30,				For the nine months ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018		2023		2022		2023		2022
Canada		8,956		11,627		24,795		29,998		5,665		7,191		14,577		19,859
U.S.		56,429		62,249		169,742		169,343		43,872		39,556		116,421		109,875
International		—		37		—		900
										49,537		46,747		130,998		129,734
		65,385		73,913		194,537		200,241

Non-current ~~assets(1), excluding deferred tax~~ assets


	As at				As at
	September 30, 2019		December 31, 2018		September 30, 2023		December 31, 2022
Canada		47,536		36,323		30,396		28,251
U.S.		27,317		15,353		32,433		53,277
						62,829		81,528
		74,853		51,676

~~(1)~~

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

~~10. TRANSACTIONS WITH RELATED PARTIES~~14. INCOME TAXES

A DIRTT Distribution Partner, Lane Office Furniture Inc. (“Lane”), is owned by a former director of the Company, Gregory Burke. Effective June 26, 2018, Mr. Burke ceased to be a director of the Company. For the three and nine months ended September 30, 2018, the Company reported revenue of nil and $3.0 million and rebates of nil and $0.1 million from Lane.

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

~~11. COMMITMENTS~~

As at September 30, ~~2019,~~2023, the Company had a valuation allowance of $33.4 million against deferred tax assets as the Company has experienced cumulative losses in recent years (December 31, 2022 – $29.8 million).

15. COMMITMENTS

As at September 30, 2023, the Company had outstanding purchase obligations of approximately ~~$7.7~~$4.2 million related to inventory and property, plant and equipment ~~purchases.~~

~~12. LEGAL PROCEEDINGS~~

~~On May 9, 2019,~~purchases (December 31, 2022 – $2.2 million). As at September 30, 2023, the Company ~~commenced an action~~had undiscounted operating lease liabilities of $46.0 million (December 31, 2022 – $48.7 million). The decrease in ~~the Court of Queen’s Bench of Alberta against two former executives, their company, Falkbuilt Ltd. (“Falkbuilt”), and other individuals,~~undiscounted operating lease liabilities from June 30, 2023 ($61.2 million) was related to a modification on the ~~basis of, among other things, a breach of non-compete and non-solicit obligations.~~Rock Hill Facility lease liability, as DIRTT no longer assumes the two 5-year extension options will be exercised (refer to Note 6).

16. RELATED PARTY TRANSACTIONS

On ~~November 5, 2019, Falkbuilt filed a Statement of Claim (the “Claim”) against~~March 15, 2023, the Company inentered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW Fund, LP ("22NW") and Aron English, 22NW's principal and a director of DIRTT, (together, the ~~Court~~"22NW Group") who, collectively, beneficially owned approximately 19.5% of ~~Queen’s Bench of Alberta alleging that~~the Company's issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company ~~has misappropriated~~agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and ~~misused their alleged proprietary information in furtherance~~special meeting of shareholders of the ~~Company’s product development. The claim seeks monetary relief, including, among other things, damages~~Company held on April 26, 2022, being approximately $1.6 million (the "Debt").

Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of ~~approximately C$30.0 million, disgorgement~~(i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of ~~profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction~~equity securities of the Company to the 22NW Group.

In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by the Company’s ~~use~~shareholders.

At the annual general and special meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares to 22NW Group, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the ~~alleged proprietary information.~~deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.

Other related party transactions for the three and nine months ended September 30, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $nil and $0.3 million, respectively (2022 – $nil). The ~~Company believes~~sale to 22NW Group was based on price lists in force and terms that are available to all employees.

As at September 30, 2023, C$18.9 million and C$13.6 million of the ~~Claim~~January Debentures and December Debentures, respectively, are held by 22NW Group. Interest accrued on the debentures for the three months ended September 30, 2023 is ~~without merit. The Company intends~~$0.4 million (2022 – $nil). Interest is earned on terms applicable to ~~defend it vigorously and to continue to pursue its legal remedies against the former employees.~~all Debenture holders.

~~Item 2.~~

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

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

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes and other financial information appearing in this Quarterly Report. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the headings “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Quarterly Report.

~~Outlook~~

InSummary of Financial Results

DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a global leader in industrialized construction. DIRTT's system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.

DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partners of the Company, including AWI which owns a 50% interest in the rights, title and interests in all the intellectual property rights in a portion of the ICE Software that is used by AWI.

Key Third Quarter Highlights

•

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

•

Gross profit and gross profit margin for the quarter ended September 30, 2023 was $17.1 million or 34.4% of revenue, an increase of $10.1 million or 144% from $7.0 million or 15.0% of revenue for the quarter ended September 30, 2022. Adjusted Gross Profit(see “– Non-GAAP Financial Measures”) for the three months ended September 30, 2023 was $18.3 million. This represents an $8.2 million or 80% increase over the comparative period in 2022 and a $2.1 million or 13% increase from the second quarter of 2023. Adjusted Gross Profit Margin (see “– Non-GAAP Financial Measures”) for the third quarter of ~~2019, we continued to focus on our plan to transform~~2023 was 36.9%, a 1,520 bps improvement over the ~~Company into~~comparative period and a ~~scalable growth platform to drive market penetration~~70 bps improvement from the second quarter of 2023. The increase in Adjusted Gross Profit and improve profitability. Our plan focuses on developing and implementing an efficient and effective sales and marketing function, improving manufacturing efficiency and increasing capacity to serve future growth. Concurrently, we remain committed to innovation within our primary solutions and related complementary offerings, (“DIRTT Solutions”), including the introduction of new products and enhancements to existing products and our proprietary ICE Software platform (“ICE” or “ICE Software”).

~~Management began 2019 with the expectation that our 2019 revenue growth year-over-year would be more moderate than the 22% revenue growth shown in 2018 IFRS results~~Adjusted Gross Profit Margin compared to ~~2017 IFRS results primarily as a result of our management transition~~the previous and ~~our efforts~~comparative quarters is due to scale the Company for sustained, profitable growth. Accordingly, we estimated and announced that our 2019 IFRS revenue would be 5% to 10% higher than 2018 IFRS revenue, with corresponding increases in net income and Adjusted EBITDA. With increasing recognition of challenges associated with the overall management changes and the immature nature of our commercial function, we revised that expectation downward as the year progressed. In addition, we previously stated that we expected Adjusted EBITDA to be impacted by certain~~one-time~~ costs related to the sales and marketing plan, Nasdaq listing, and operating consulting costs. Management now expects 2019 revenue in U.S. GAAP to be 7% to 10% lower than 2018 U.S. GAAP revenue, which equates to estimated fourth quarter revenue of between $52 million and $60 million. Management also expects Adjusted EBITDA to be negatively impacted by deleveraging ofhaving better leverage over fixed costs ~~on lower revenue.~~

~~Revenue in~~through price increases and reduced fixed costs.

•

Net loss for the third quarter of ~~$65.4~~2023 was $6.3 million ~~was 12%~~compared to a $6.7 million net loss for the same period of 2022. The lower ~~than 2018. Several factors continue to impact 2019 revenue,~~net loss is primarily the result of the higher gross profit margin of $10.1 million (as explained above), a $2.2 million increase in operating expenses including the ~~disruption~~$8.0 impairment charge on the Rock Hill Facility, offset by a $3.1 million reduction in reorganization costs, a $0.1 million increase in interest income and $0.1 million decrease in interest expense, offset by a $0.5 million decrease in foreign exchange gain and a $7.1 million government subsidy in 2022 that did not recur.

•

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

•

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

2022. This improvement was driven by the price increases and ~~distribution partner network from 2018’s management transition, the impact of an immaturego-to-market~~ ~~approach, an inadequately supported sales force working on a long sales cycle~~improved product mix, as well as the ~~revised timing of various projects and~~cost reduction measures taken by the ~~loss of certain expected projects. As~~Company over the year has progressed, it has become clear the sales and marketing organization with which we entered the year has been unable to deliver upon the opportunities that it identified and on which the prior guidance was based. This has been driven largely by a historical lack of training, individual accountability and the necessary processes and tools. Our belief in the size of our market opportunity remains unchanged as well as the resonance of DIRTT’s value proposition within it. Accordingly, we have embarked on a comprehensive transformation of these functions that we believe will create a scalable platform from which to generate profitable growth.

We took significant first steps in this commercial transformation in the third quarter. We began implementing our comprehensive commercial strategy based on a sales and marketing plan (the “Sales & Marketing Plan”) that was developed with the assistance of an internationally recognized consulting firm. The total cost to develop the Sales & Marketing Plan was $2.0past twenty four months.

•

Approximately $1.9 million of ~~which $0.7 million~~cash was ~~incurred~~generated by operating activities in the third quarter of ~~2019. Key components~~2023 compared to $10.7 million of cash used in the ~~Sales & Marketing Plan consist~~third quarter of ~~establishing~~2022, with cash increasing $0.6 million overall in the third quarter of 2023. Our cash flow has improved compared to earlier quarters due to improved gross margin, our cost reduction initiatives, strategic actions and careful working capital management.

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

As of additional marketing professionals to newly established roles, the implementation of supporting systems and the creation of marketing programs and communications to drive lead generation. Sales force enhancement includes creating new sales management roles to provide support to sales representatives, creating new sales roles to manage strategic national accounts and address large project opportunities and

~~implementing~~October 1, 2023, our twelve month forward pipeline is projecting a newly created Client Relationship Management (“CRM”) system. The commercial (sales and marketing) function will be led by our new Chief Commercial Officer, Jennifer Warawa, who started this role effective September 16, 2019, and the execution of the Sales & Marketing Plan will be managed by Brandon Jones, our new Vice President of Strategy, who started in this role effective September 30, 2019.

~~In our manufacturing operations, a metric-based approach to lean manufacturing, focusing~~9% growth year on ~~Safety, Quality, Delivery, Inventory and Productivity (SQDIP) was introduced earlier this~~ year and ~~is being implemented~~a 15% growth from January 1, 2023, illustrated in ~~all~~the table below.


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

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

We are cautious on the timing of our ~~facilities along with related systems. In early October 2019, we executed a lease agreement for our previously announced combined tile~~Government and ~~millwork factory, which will be located~~Education pipeline in the ~~Charlotte metropolitan area. In August 2019, we paid deposits totaling $1.6 million~~forward twelve months due to ~~certain equipment suppliers for customized equipment for~~ the ~~new facility, which we anticipate will be delivered~~uncertainty and risk of a potential U.S. federal government shutdown. We continue to increase our penetration in K-12 education and grow a higher education presence in our Central and Southern regions.

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

Outlook

Through the first six months of ~~2020. The total cost of~~2023, we experienced continued volatility in economic conditions, especially in regions with concentrated sales to the ~~facility is expected~~technology and banking sectors. These conditions included layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings, resulting in certain projects that were planned earlier in the year being deferred or canceled. We note that we are exiting our seasonally strongest quarter and are entering our typically weaker winter period.

In response and as discussed in our previous quarterly reports on Form 10-Q, we identified and took action to ~~be approximately $18.5~~reduce annualized overhead costs by $5.0 million ~~and we anticipate that the commencement of commercial operations will begin~~ during the first quarter of ~~2021.~~2023. Further, on May 8, 2023, the Company reduced its salaried workforce, resulting in annualized savings of $2.6 million. One-time costs associated with these reductions, incurred in the second quarter of 2023, were approximately $0.7 million.

~~On October 9, 2019, we commenced trading~~The trend of ~~our common shares~~economic uncertainty has continued into the third quarter of 2023. The conversation on ~~The Nasdaq Global Select Market (“Nasdaq”). As~~“return to work” continues as some companies are mandating a ~~result of~~hybrid “return to work” policy. Various inflation metrics have improved over the ~~Nasdaq listing,~~three months ended September 30, 2023, although there is no guarantee they will continue to do so.

We believe that wider macroeconomic conditions indicate we are ~~now reporting~~in an uncertain late cycle environment with the near-term potential for deteriorating macroeconomic conditions. The increase in long term interest rates can potentially reduce demand for capital intensive projects in our ~~financial statements under the accounting principles generally accepted~~Commercial, Healthcare, and Education segments. The AIA/Deltek Architecture Billings Index fell into contraction across all geographies in ~~the United States (“GAAP”) and in U.S. dollars. In addition, we ceased offering a cash surrender option for employee stock options.Year-to-dateone-time~~ costs of the Nasdaq listing are approximately $2.5 million, and we expect to incur approximately $0.5 million of additional costs in the fourth quarter of 2019. The Nasdaq listing costs are higher than previously anticipated, due in part to our deferral of the listing until later in the year.

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

As we have noted previously, 2019 is a transition year, and we have made significant strides toward enhancing our management team, commercial organization and sales and marketing strategy, in addition to having our shares listed on Nasdaq. Despite incurring associated~~one-time~~ consulting and listing costs, we expect to exit 2019 maintaining our financial strength with cash on hand comparable to last year with no debt and increased liquidity from a larger credit facility. Furthermore,September. Regardless, we continue to ~~believe~~focus on what is within our ~~significant transformational efforts~~control: supporting our current partners, increasing penetration in targeted geographies, onboarding new Construction Partners, and ~~investments~~new strategic partnerships. While we are benefiting from price stability in our input costs as well as a strengthening U.S. dollar, recent unrest in the Middle East may adversely impact our gross margins, and could further impact our pipeline, should energy prices return to 2022 levels.

We have made hard choices and meaningfully reduced our cost footprint and made great progress lowering our estimated revenue breakeven point. We will ~~result~~continue to evaluate our cost structure and respond to the inflationary impacts to labor, materials and services in ~~attractive revenue growth, improved profitability and strong cash generation into the future.~~

Atan efficient manner consistent with our ~~Analyst Day on November 12, 2019 in New York City we will present our strategic plan and revenue~~goal to maintain future healthy gross profit and Adjusted EBITDA ~~Margin targets we are working to achieve by the end of 2023.~~margins while improving our future liquidity.

Non-GAAP Financial Measures

Note Regarding Use ofNon-GAAP Financial Measures

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

As a result, we also provide financial information in this Quarterly Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses thesenon-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that thesenon-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance ~~from period to period~~period-over-period and to compare our financial performance with that of other companies. We believe that thesenon-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure

~~(net~~ (net interest income on cash deposits, interest expense on outstanding debt and debt facilities, or foreign exchange ~~movements on debt revaluation)~~movements), asset base (depreciation and amortization), the impact of under-utilized capacity on gross profit, tax consequences, reorganization expense, one-time non-recurring charges or gains (such as gain on sale of software and patents), and stock-based compensation. We remove the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. We remove the impact of under-utilized capacity from gross profit, and fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In addition, management bases certain forward-looking estimates and budgets onnon-GAAP financial measures, primarily Adjusted EBITDA.

~~Reorganization expenses, impairment expenses,~~Government subsidies, depreciation and amortization, ~~and~~ stock-based compensation expense, reorganization expense, foreign exchange gains and losses and impairment charges are excluded from ournon-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those receipts and expenses may recur, and because management believes that each of these items can distort

the trends associated with the Company’s ongoing performance. We believe that excluding these receipts and expenses provides investors and management with greater visibility to the underlying performance of the business operations, enhances consistency and comparativeness with results in prior periods that do not, or future periods that may not, include such items, and facilitates comparison with the results of other companies in our industry.

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


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


Adjusted Gross Profit Margin		Adjusted Gross Profit divided by revenue

~~EBITDA~~
EBITDA	Net income before interest, taxes, depreciation and amortization


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


Adjusted EBITDA Margin		Adjusted EBITDA divided by revenue

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

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

~~EBITDA~~

Results of Operations

Three and ~~Adjusted EBITDA for~~Nine Months Ended September 30, 2023, Compared to the Three and Nine Months Ended September 30, ~~2019 and 2018~~2022

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


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

Revenue

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

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


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


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


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


Adjusted EBITDA Margin
   12.3 % 17.7 % 10.6 % 15.0 %

~~(1)~~

~~Net income divided by revenue.~~

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

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

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

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

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


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


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

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

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

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

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

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

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








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

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

~~Results of Operations~~

~~Three and Nine Months Ended September 30, 2019, Compared to Three and Nine Months Ended September 30, 2018~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2019 2018 % Change 2019 2018 % Change
   ($ in thousands)
Revenue
   $ 65,385 $ 73,913 (12 )% $ 194,537 $ 200,241 (3 )%
Gross Profit
   $ 24,934 $ 30,085 (17 )% $ 72,959 $ 79,390 (8 )%


��

Gross Profit Margin
   38.1 % 40.7 % (6 )% 37.5 % 39.6 % (5 )%
Operating Expenses

Sales and Marketing
   $ 8,568 9,995 (14 )% 25,898 $ 30,169 (14 )%
General and Administrative
   7,280 7,212 1 % 21,033 21,634 (3 )%
Operations Support
   2,419 1,937 25 % 7,771 5,933 31 %
Technology and Development
   1,718 922 86 % 5,881 3,048 93 %
Stock-based compensation
   (2,389 ) 2,037 NA 2,403 3,172 (24 )%
Impairment
   —   6,098 (100 )% —   6,098 (100 )%
Reorganization
   —   2,236 (100 )% 2,639 4,646 (43 )%


Total Operating Expenses
   $ 17,596 $ 30,437 (42 )% $ 65,625 $ 74,700 (12 )%


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


Operating Margin
   11.2 % (0.5 )% NA 3.8 % 2.3 % 65.2 %

~~Revenue~~

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

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

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









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









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


	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2023		2022		% Change			2023		2022		% Change
	($ in thousands)							($ in thousands)
Product		43,132		39,092		10			113,323		110,383		3
Transportation		4,767		5,022		(5	)		13,169		13,878		(5	)
License fees from Construction Partners		196		193		2			613		588		4
Total product revenue		48,095		44,307		9			127,105		124,849		2
Installation and other services		1,442		2,440		(41	)		3,893		4,885		(20	)
		49,537		46,747		6			130,998		129,734		1

~~Revenue decreased~~Beginning in ~~the three months ended September 30, 2019 by $8.5 million or 12% compared to the same period of 2018. Revenue decreased due to several factors, including the impact of a large project~~2020, we experienced significant increases in ~~2018 that was not replaced in 2019. We also believe the distraction from significant management changes during 2018 on a long sales cycle combined with immature and transitional state~~nearly all of our ~~sales~~material input costs, including raw materials, shipping materials, labor, and ~~marketing function limited our ability~~freight. This led to ~~take advantage~~significant gross margin compression in 2021 and 2022. Effective November 16, 2021, DIRTT increased product and transportation prices on new projects by approximately 6.5%. On February 17, 2022, we implemented a further price increase of ~~growth opportunities in our market for 2019. The recent enhancements to our organizational structure~~5% that came into effect June 1, 2022. On

June 21, 2022 an additional price increase of 10% was announced effective July 21, 2022. These increases have improved revenue and ~~senior management team may have not yet positively affected sales due to, we believe, our long sales cycle.~~

~~For~~profitability through better recovery of the ~~nine months ended September 30, 2019, product revenue decreased by $7.0 million or 4% compared to the same period of 2018 for the same reasons as~~material input costs previously discussed.

Revenue for the nine months ended September 30, ~~2018 included~~2023, was $131.0 million, an ~~estimated $4.0~~increase of $1.3 million compared to ~~$7.0~~$129.7 million ~~(2% to 3%~~in the comparative period of~~year-to-date~~ ~~2018 revenue)~~ 2022. The first nine months of ~~projects~~2023 were impacted by macroeconomic conditions, including layoffs in the tech sector and rising interest rates, both of which have had an impact on our pipeline. For example, one large project with a customer in the technology sector that ~~were delayed from the fourth quarter of 2017 to~~was originally scheduled for the first quarter of ~~2018 as a result~~2023 was deferred indefinitely. During the quarter ended September 30, 2023, revenue was $49.5 million, an increase of ~~significant hurricanes in~~$2.8 million compared to the ~~southern United States affecting 2017 project schedules.~~comparative period of 2022 of $46.7 million.

Installation and other services revenue ~~of $2.1~~was $1.4 million for the ~~three months~~quarter ended September 30, ~~2019 was $0.1~~2023 compared to $2.4 million ~~lower than~~in the ~~same period~~quarter ended September 30, 2022, and $3.9 million in ~~2018 and decreased $0.8 million for~~ the nine months ended September 30, ~~2019~~2023 compared to $4.9 million in the same period ~~in 2018. The changes in installation~~of 2022. This revenue ~~are~~ primarily ~~due to the timing of projects.~~reflects services performed by our ICE and design teams for third parties. Except in limited circumstances, our ~~Distribution~~Construction Partners, rather than the Company, perform installation services, and accordingly, we are not anticipating significant growth in this revenue stream.

Our success is partly dependent on our ability to profitably develop our ~~Distribution~~Construction Partner network to expand our market penetration and ensure best practices are shared across local markets. ~~We had 93 Distribution Partners at~~At September 30, ~~2019. Our clients,~~2023, we had 71 (September 30, 2022: 69; December 31, 2022: 67) Construction Partners servicing multiple locations. During the nine months ended September 30, 2023, we announced the expansion of seven of our DIRTT Construction Partners into new markets as ~~serviced primarily through our Distribution Partners, exist within a variety~~we expand the reach of ~~industries, including healthcare, education, financial services, government and military, manufacturing,non-profit,~~ ~~energy, professional services, retail, technology and hospitality.~~DIRTT products in North America.

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

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


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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
	(in %)				(in %)
Commercial		65		72		65		69
Healthcare		18		8		20		13
Government		10		8		8		9
Education		7		12		7		9
Total Product Revenue(1)		100		100		100		100

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2019    2018    % Change 2019    2018    % Change
   ($ in thousands)
Commercial
   $ 42,910    $ 41,117    4 % $ 124,248    $ 119,021    4 %
Healthcare
   9,192    18,698    (51 )% 32,452    40,459    (20 )%
Government
   3,855    4,634    (17 )% 12,267    17,408    (30 )%
Education
   6,958    6,676    4 % 17,998    14,766    22 %
License fees from Distribution Partners
   409    595    (31 )% 1,472    1,724    (15 )%









Total Product Revenue
   $ 63,324    $ 71,720    (12 )% $ 188,437    $ 193,378    (3 )%









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









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

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2019    2018    % Change 2019    2018    % Change
   (in %)
Commercial
   68    58    17 66    62    6
Healthcare
   15    26    (42 ) 17    21    (19 )
Government
   6    7    (14 ) 7    9    (22 )
Education
   11    9    22 10    8    25









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

(1) Excludes license fees from Construction Partners.

~~(1)~~

~~excluding license fees from Distribution Partners~~

~~Revenue~~Commercial revenues decreased by ~~12%~~2% from the prior year period. Healthcare revenues increased by 133% in the ~~three months~~third quarter of 2023 from the same period of 2022. The quarter ended September 30, ~~2019 over~~2023 includes $2.1 million of revenue from a large healthcare customer. Such sales tend to be larger individual projects and are subject to timing due to a typically longer sales cycle, resulting in variability in sales levels. Government revenues in the third quarter of 2023 increased by 37% from the prior year period. Similar to healthcare, government revenues tend to be larger individual projects. Education sales in the third quarter of 2023 decreased 34% from the same period ~~in 2018 and was driven primarily by decreased healthcare sales, which reflects the completion~~ of 2022. The education sector included a ~~major healthcare projectthat was not replaced in 2019, and decreased government sales, which was mainly due to the timing~~higher magnitude of ~~certain projects. This decrease in revenue was partially offset by growth~~smaller projects in the ~~commercial and education sectors.~~ third quarter of 2023 than in the third quarter of 2022.

For the nine months ended September 30, ~~2019, revenue was lower~~2023 commercial revenues decreased by ~~3% compared to~~4% from the prior year period. Healthcare revenues increased by 60% in the first nine months of 2023 from the same period ~~in 2018, with continued growth in~~of 2022. Government revenues decreased by 9% from the ~~commercial~~prior year period. Education sales for the nine months ended September 30, 2023 were down 24% from 2022. Both the healthcare and education sectors ~~offset by the completion~~included a higher magnitude of ~~a major healthcare project~~smaller projects in ~~2018 that was not replaced in 2019 and a reduced number of installation projects.~~2023 than 2022.

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

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









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


	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2023		2022		% Change			2023		2022		% Change
	($ in thousands)							($ in thousands)
Canada		5,665		7,191		(21	)		14,577		19,859		(27	)
U.S.		43,872		39,556		11			116,421		109,875		6
		49,537		46,747		6			130,998		129,734		1

Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. The third quarter of 2023 included a higher volume of sales to customers in the United States compared to Canada resulting in 11% of sales to Canada with the rest in the United States.

Sales and Marketing Expenses

Sales and marketing expenses ~~decreased $1.4~~increased by $0.1 million to ~~$8.6~~$6.2 million for the three months ended September 30, ~~2019,~~2023, from ~~$10.0~~$6.1 million for the three months ended September 30, ~~2018.~~ 2022. The increase was driven by higher commissions costs offset by lower travel and entertainment costs, marketing costs, and building expenses.

Sales and marketing expenses decreased ~~$4.3~~by $2.8 million to ~~$25.9~~$18.3 million for the nine months ended September 30, ~~2019,~~2023 from ~~$30.2~~$21.1 million from the same period of 2022. The decreases were largely related to a realignment of back office support and territory coverage and cost structure with current demand levels.

General and Administrative Expenses

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

For the nine months ended September 30, 2023, general and administrative expenses decreased by $5.4 million to $16.0 million from $21.4 million driven by a $4.1 million reduction in professional services costs, which included $1.8 million related to the costs of the contested director elections, a $0.6 million reduction in office and communication costs and a $0.7 million reduction in depreciation.

Operations Support Expenses

Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Construction Partner project execution and our manufacturing operations. Operations support expenses decreased by $0.6 million from $2.3 million for the three months ended September 30, 2022 to $1.8 million for the three months ended September 30, 2023. The decrease was primarily due to a $0.4 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of our cost reduction initiatives. Operations support expenses decreased $1.8 million for the nine months ended September 30, ~~2018. Included in sales and marketing expenses~~2023 to $5.6 million from $7.3 million in the ~~three months and nine months ended September 30, 2019 were $0.7 million and $2.0 million, respectively,~~same period of~~one-time~~ ~~consulting costs~~ 2022 mostly related to ~~the Sales & Marketing Plan. These costs were offset by~~ a ~~$1.5 million and~~ $1.6 million ~~reduction~~decrease in ~~commission expense for the three~~salaries and nine months ended September 30, 2019, respectively, on lower revenues. Additionally, we have continued to realize reductions in travel, meals and entertainment costs and cost reductions related to trade shows; however, none of these expense reductions are expected to materially affect our future sales revenue.benefits costs.

Our sales and marketing efforts in 2019 are largely concentrated on establishing the appropriate sales organization and personnel, significantly improving our marketing approach and driving returns on sales and marketing expenditures. In April 2019, we engaged an internationally recognized consulting firm to evaluate our current sales and marketing approach and assist in the development of action plans necessary to drive accelerated growth. Along with the incremental costs associated with this consulting engagement in 2019, we expect sales and marketing expense to increase in conjunction with higher sales due to higher commissions, as well as investment in sales generating initiatives as we implement our Sales & Marketing Plan, including targeted increases in our commercial organization headcount, expansion and refreshment of our DIRTT Experience Centers (formally known as Green Learning Centers), and implementation of related systems and tools. Our ongoing focus is to continue to control costs by emphasizing return on investment on our sales and marketing expenditures.28

~~General and Administrative Expenses~~

General and administrative expenses (“G&A”) increased $0.1 million to $7.3 million for the three months ended September 30, 2019 from $7.2 million for the three months ended September 30, 2018. This includes

~~$1.4 million ofone-time~~ ~~costs related to the Nasdaq listing incurred in the third quarter of 2019, offset by a $1.3 million reversal of a claims provision.~~

G&A expenses decreased $0.6 million to $21.0 million for the nine months ended September 30, 2019 from $21.6 million for the nine months ended September 30, 2018. In 2018, we incurred $1.4 million related to proxy defense costs which did not reoccur in 2019. Additionally, we reversed a $1.3 million claim provision during the third quarter of 2019. These items were partially offset by $2.5 million of costs related to the Nasdaq listing incurred in the nine months ended September 30, 2019. Beginning in 2020, we anticipate incremental annual~~non-listing~~ related costs of approximately $1.5 to $2.0 million, as a result of becoming a U.S. registrant, driven largely by increased director and officer insurance premiums, the costs of maintaining two listings, as well as expected increases in audit, legal, and other compliance costs.

~~Operations Support Expenses~~

Operations support expenditures include the fixed costs associated with delivery and project management of DIRTT Solutions. Operations support expenses increased $0.5 million to $2.4 million for the three months ended September 30, 2019, from $1.9 million for the three months ended September 30, 2018, largely due to an increase in consulting costs during this quarter. Operations support costs increased $1.9 million to $7.8 million for the nine months ended September 30, 2019, from $5.9 million for the nine months ended September 30, 2018, largely due to $1.1 million of consultant costs, as well as increases in personnel costs. The consultant costs incurred were to assist with the evaluation of current operations and to assist with the rectification of the tile warping issue. Increases in personnel costs were due to increased headcount and an increased provision for variable compensation.

Technology and Development Expenses

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

Technology and development expenses ~~increased $0.8~~decreased by $0.5 million to $1.2 million for the three months ended September 30, 2023, compared to $1.7 million for the three months ended September 30, ~~2019, compared~~2022, primarily related to ~~$0.9 million for~~decreased salaries and benefits costs associated with the ~~three months ended September 30, 2018. Technology and development expenses increased $2.8 million to $5.9 million for~~planned headcount reductions as part of our cost reduction initiatives. For the nine months ended September 30, ~~2019, compared~~2023, technology and development costs decreased by $1.7 million to ~~$3.0~~$4.1 million ~~for~~from $5.7 million in the ~~nine months ended September 30, 2018. These increases are due~~same period of 2022 related to a ~~$0.3 million and $1.7 million~~ decrease in salaries and benefits costs and an increase in capitalized ~~salaries~~software development costs.

Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, ~~2019,~~2023 was $1.1 million and $2.5 million, respectively, ascompared to $0.9 million and $3.5 million in the ~~current mix~~same periods of ~~projects undertaken by us included a higher portion~~2022. The movement in this expense was largely due to grants of ~~efforts related~~RSUs and share awards which occurred in the first quarter of 2022 but in 2023 were granted in the second quarter. Grants for RSUs in lieu of cash compensation to ~~business process improvements that~~the Company’s interim Chief Executive Officer in 2022 were not ~~eligible for capitalization. In addition, technology and development expenses included $0.3 million and $0.5 million~~repeated in 2023. DSUs were granted to the Board of ~~salary and benefit costs that were classified~~Directors, but was offset by the impact of fair value adjustments on cash settled awards as ~~cost~~a result of ~~sales of technical services~~our share price decreasing during the ~~three and~~ nine months ended September 30, ~~2018, respectively, as well as a higher provision for variable compensation.~~2023.

~~Stock-Based Compensation~~Reorganization

~~Stock-based compensation reflected a $2.4 million recovery~~Reorganization expenses for the ~~three months ended September 30, 2019, compared~~quarter of $0.3 million decreased from $3.4 million in the prior period. Current quarter costs relate primarily to ~~an expense~~movement of ~~$2.0 million~~inventory from the Rock Hill Facility and termination costs associated with actions taken to streamline our back office and operational support functions, as discussed herein and in our quarterly reports on Form 10-Q for the ~~same period~~periods ended March 31, 2023 and June 30, 2023, which are expected to contribute $2.6 million in annualized savings. Second quarter of ~~2018. Stock-based compensation expense was reduced~~2022 reorganization costs were driven by the closure of Phoenix Facility and the one-time costs associated with a reduction of salaried workforce and two executives.

Reorganization costs decreased to ~~$2.4~~$2.9 million for the nine months ended September 30, ~~2019, compared to $3.2~~2023 from $12.3 million for the same period of ~~2018. We recorded fair value adjustments~~2022. Nine month costs in 2023 relate primarily to termination costs and costs to move materials from Rock Hill to Calgary, while the costs in 2022 relate to expenditures in closing the Phoenix Facility and costs associated with workforce reductions and changes in management.

Impairment charge on ~~cash settled stock options during~~Rock Hill Facility

On September 27, 2023, the three and nine months ended September 30, 2019, respectively, with no fair value adjustment required in the respective periods in 2018. As noted previously, following our listing on Nasdaq on October 9, 2019, we ceased allowing cash surrender of employee stock options. As a result, we will cease the associated liability accounting for the Option Plan which required quarterly fair value adjustments.

~~Impairment Expenses~~

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

~~During 2018, management performed an assessment of the carrying values of DIRTT Timber’s property, plant and~~manufacturing equipment (“PP&E”). To determine the impairment of the DIRTT Timber assets, the net book value of the assets was evaluated against the fair value of the assets. The fair value of the DIRTT Timber assets reflects current projected sales for timber projects on a standalone basis and the pull-through impact to other DIRTT Solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT Solutions. The equipment related to the timber market was custom built for DIRTT, and there was no active market for resale. Therefore, the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for other DIRTT Solutions. Management estimated the expected resale values based on the current market and industry knowledge. The fair value of the timber assets was estimated to be $1.1 million. This assessment resultedresulting in an $8.0 million impairment charge ~~of $6.1 million during 2018.~~

~~Reorganization Expenses~~

We incurred $2.6 million of reorganization expenses during the first quarter of 2019, and no material additional reorganization costs in the second or third quarters of 2019, compared to $2.2 million and $4.6 million in the three and nine months ended September 30, ~~2018, respectively. These~~2023 ($nil for the three and nine months ended September 30, 2022) to reduce the assets to their fair value less costs ~~included severance payments~~to sell certain assets being held for sale.

Related Party Expense

On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW Fund, LP ("22NW") and ~~related legal~~Aron English, 22NW's principal and ~~consulting~~a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially owned approximately 19.5% of the Company’s issued and outstanding common shares at such time. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs ~~associated~~incurred by the 22NW Group in connection with ~~management~~the contested director election at the annual and ~~organizational changes. No further material expenditures are anticipated~~special meeting of shareholders of the Company held on April 26, 2022, being $1.6 million (the "Debt").

Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in ~~2019.~~cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group.

~~Income Tax~~In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by shareholders.

~~Alberta’s~~29

At the annual general ~~provincial tax rate was decreased~~and special meeting of shareholders held on May 30, 2023 shareholders voted to approve the issuance of common shares, and on June ~~28, 2019 from 11.5%~~2, 2023, the Company issued 3,899,745 common shares to ~~11%~~22NW Group as repayment for the ~~second half of 2019, to 10% for 2020, to 9% for 2021 and to 8% thereafter. As a result~~Debt. Upon settlement, the debt was revalued at the higher of the ~~rate change, we reduced our deferred tax asset by $0.9~~deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.

Government Subsidies

The Company was not eligible and did not receive any new government subsidies in the quarter ended September 30, 2023. The Company received $0.2 million of interest with the collection of the ERC during the nine months ended September 30, 2023.

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

Gain on sale of software and patents

On May 9, 2023, we entered into the Co-Ownership Agreement and Partial Patent Assignment Agreement with AWI. The ~~provision~~agreements provide for ~~income taxes is comprised~~a cash payment from AWI to the Company of ~~federal, state, provincial and foreign taxes based onpre-tax~~ ~~income. Income tax expense~~$10.0 million, subject to certain routine closing conditions, in exchange for the ~~three months~~partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the patent rights that relate to the Applicable ICE Code. We also agreed under the Co-Ownership Agreement to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.0 million, which is expected to be received by early 2024. The Co-Ownership Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into the ARMSA with AWI, under which AWI has also prepaid for certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the Co-Ownership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.

The $10.0 million of proceeds from the Co-Ownership Agreement was received during the second quarter of 2023. In accordance with US GAAP, the proceeds were first applied to the net book value of the related cost of software and patents (other assets) and the residual amount of $6.1 million was recognized as a gain in the consolidated statement of operations. Further, $0.9 million was received during the quarter ended June 30, 2023 as prepayment under the ARMSA. Part of the proceeds of this transaction were used to settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash.

Interest Expense

Interest expense decreased by $0.1 million from $1.3 million in the quarter ended September 30, ~~2019, inclusive of~~2022 to $1.2 million in the ~~previously noted charge associated with the Alberta tax rate change, was $2.0~~quarter ended September 30, 2023 and by $0.3 million ~~compared to $0.7 million for the same period of 2018, and income tax expense~~ for the nine months ended September 30, ~~2019 was $3.7~~2023 to $3.6 million ~~as compared~~due to ~~$3.1 million~~foreign exchange impacts and the decrease in equipment lease balances due to principal repayments.

Income Tax

The provision for ~~the same period of 2018.~~income taxes comprises U.S. and Canadian federal, state and provincial taxes based on pre-tax income. As at September 30, ~~2019,~~2023 the Company had a valuation allowance of $33.4 million (December 31, 2022: $29.8 million) against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada and the United States to fully deduct historical losses. As at September 30, 2023, we had C$~~36.7~~ 110.9

million of non-capital loss carry-forwards in Canada and ~~none~~$55.7 million in the United ~~States, compared to C$43.6 million in Canada and none in the United States on December 31, 2018.~~States. These loss carry-forwards will begin to expire in ~~2030.~~2032.

Net ~~Income (Loss)~~Loss

Net ~~income was $5.8~~loss decreased to a $6.3 million loss or ~~$0.07~~$0.06 net loss per share in the ~~third quarter of 2019, compared to~~three months ended September 30, 2023 from a net loss of ~~$1.4~~$6.7 million or ~~$0.02~~a $0.08 net loss per share ~~for the third quarter of 2018. The variances are the result of changes in gross profit and operating expenses as described above. Net income~~ for the three months ended September 30, ~~2019 includes~~2022. The lower net loss is primarily the result of the higher gross profit margin of $10.1 million, a ~~$2.4~~$2.2 million ~~recovery~~increase in ~~stock-based compensation, compared~~operating expenses (including an $8.0 million impairment charge on the closure of the Rock Hill Facility, offset by a $3.1 million reduction in reorganization costs), a $0.1 million increase in interest income and $0.1 million decrease in interest expense, offset by a $0.5 million decrease in foreign exchange gain and a $7.1 million government subsidy in 2022 that did not recur.

Net loss decreased to $15.5 million or $0.15 net loss per share in the nine months ended September 30, 2023 from a ~~$2.0~~net loss of $49.1 million or $0.57 net loss per share for the nine months ended September 30, 2022. The decreased loss is primarily the result of a $23.7 million increase in gross profit, a $12.6 million decrease in operating expenses (including a $9.4 million decrease in reorganization expenses, and a decrease of $1.8 million of incremental professional fees offset by an $8.0 million impairment charge on the Rock Hill Facility, as described previously), a one-time gain of $6.1 million on the sale of software and patents, a $0.3 million decrease in interest expense, a $0.2 million increase in interest income, offset by a $1.9 million increase in foreign exchange loss and a $7.5 million decrease in government subsidies.

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

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


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

(1) Net loss divided by revenue.

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

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

For the three months ended September 30, 2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by $10.7 million to $5.3 million or 10.6% from a $5.4 million loss or (11.6)% in the same period of ~~2018,~~2022. This primarily reflects an $8.2 million increase in Adjusted Gross Profit, a decrease of $1.0 million of professional fees, a $1.1 million decrease in salaries and ~~no reorganization~~benefits costs, a $0.6 million decrease in office, building and communication costs, and a $0.3 million decrease in travel and entertainment costs in the quarter, offset by a $0.5 million increase in commissions.

For the nine months ended September 30, 2023, Adjusted EBITDA and Adjusted EBITDA Margin increased by $30.4 million to $3.6 million or ~~impairment expenses~~2.7% from a $26.8 million loss or (20.7)% in the same period of 2022. This primarily reflects a $19.6 million increase in Adjusted Gross Profit, a decrease of $4.1 million of professional fees, a $5.1 million decrease in salaries and benefits costs, a $0.8 million decrease in travel and entertainment costs, a $0.6 million decrease in marketing costs and a $1.2 million decrease in building, office and communications costs.

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

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
	($ in thousands)						($ in thousands)
Gross profit		17,065			7,008			40,304			16,571
Gross profit margin		34.4	%		15.0	%		30.8	%		12.8	%
Add: Depreciation and amortization expense		1,231			3,132			4,656			8,792
Adjusted Gross Profit		18,296			10,140			44,960			25,363
Adjusted Gross Profit Margin		36.9	%		21.7	%		34.3	%		19.6	%

For the quarter ended September 30, 2023, gross profit and gross profit margin increased to $17.1 million or 34.4% from $7.0 million or 15.0% for the prior period. Adjusted Gross Profit and Adjusted Gross Profit Margin increased 80% to $18.3 million or 36.9% for the three months ended September 30, ~~2019, compared to $2.2 million and $6.1 million, respectively, in the same period of 2018.~~

~~Net income was $3.1~~2023, from $10.1 million or ~~$0.04 per share in~~21.7% for the ~~first~~three months ended September 30, 2022.

For the nine months ~~of 2019, compared~~ended September 30, 2023, gross profit and gross profit margin increased to ~~net income of $2.4~~$40.3 million or ~~$0.03 net income per share~~30.8% from $16.6 million or 12.8% for the ~~first nine months of 2018. The variances are the result of~~

~~changes in gross margin~~prior period. Adjusted Gross Profit and ~~operating expenses as described above. As discussed previously, we recorded a $6.1~~Adjusted Gross Profit Margin increased 77% to $45.0 million ~~impairment expense in the third quarter of 2018. Net income~~or 34.3% for the nine months ended September 30, ~~2019 includes a $2.4~~2023, from $25.4 million ~~expense in stock-based compensation, compared to $3.2 million in the same period of 2018, and $2.6 million of reorganization costs~~or 19.6% for the nine months ended September 30, ~~2019,~~2022. Gross profit for the nine months ended September 30, 2022 included $1.1 million of accelerated depreciation and amortization arising from the change in useful lives of the Phoenix Facility's equipment.

The improvement in Adjusted Gross Profit was a result of improved product mix, a reduction in fixed costs, management of labor hours throughout the period and the impact of the price increases to offset the inflationary impacts on material costs. Labor decreased $0.7 million and $4.0 million and fixed costs decreased $1.1 million and $2.9 million, respectively, for the quarter and nine months ended September 30, 2023 as we closed our Phoenix Facility during the second quarter of 2022 and temporarily suspended operations in our Rock Hill Facility in the third quarter of 2022, as well as cost reduction initiatives taken impacting our overheads. Idle facility costs incurred to the suspension of operations at the Rock Hill Facility of $0.4 million and $1.4 million for the three and nine months ended September 30, 2023, respectively, and are included in cost of sales.

Liquidity and Capital Resources

As at September 30, 2023, the Company had $19.5 million of cash on hand and C$14.6 million ($10.8 million) of available borrowings, compared to ~~$4.6~~$10.8 million ~~expense~~of cash on hand and C$7.2 million ($5.3 million) of available borrowings as at December 31, 2022. Through the first nine months of fiscal 2023, the Company generated $4.7

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

We have implemented multiple price increases to mitigate the impact of inflation on raw materials and improve liquidity during the past two years. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to stabilize our cash usage to operate the business. Gross profit for the nine months ended September 30, 2023 was $40.3 million, or 30.8% compared to the same period of ~~2018.~~2022, which generated gross profit of $16.6 million, or 12.8%.

~~Liquidity~~Over the past twelve months, we have executed upon several initiatives to improve liquidity. First, in May 2023, we entered into an agreement with AWI resulting in the receipt of $10.9 million of cash. Second, during March 2023, we entered into an agreement to sublease our Dallas “DXC” to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and ~~Capital Resources~~other costs as of April 1, 2023, through December 31, 2024, providing us annualized savings of approximately $1 million. We are continuing to evaluate other properties for sale and leaseback or sublease opportunities, including our Rock Hill Facility and expect these strategic initiatives to result in positive cash inflows in 2023 and 2024. Third, we completed a Private Placement (as defined herein) of common shares in November 2022, with certain significant shareholders and directors and officers of the Company to bridge cash requirements before the completion and closing of the noted strategic transactions. The Company entered into irrevocable subscription agreements with its two largest shareholders, 22NW and 726 and all the directors and officers of the Company on November 14, 2022 to issue 8.7 million shares for gross consideration of $2.8 million (the "Private Placement"). The Private Placement closed on November 30, 2022. In addition, in connection with the Private Placement, 22NW and 726, or their principals, have irrevocably committed to backstopping any rights offering occurring by the Company within twelve months of closing the Private Placement in the aggregate amount of $2.0 million.

~~Cash~~While we are encouraged by the improved profitability and cash ~~equivalents~~flow, we have continued to evaluate our fixed cost structure and overhead in light of recent macroeconomic uncertainty. We have implemented multiple restructuring initiatives designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by 154 employees, or approximately 16% from January 2022 through September 2023. The reduced overhead has served to offset the impact from the macroeconomic headwinds experienced over the past year.

Furthermore, the Company is evaluating a rights offering to raise additional capital, as described in the registration statement on Form S-1, filed on October 26, 2023 (File No. 333-275172) (the “S-1”) with the SEC (the “Rights Offering”), the proceeds of which, if pursued, are expected to be used for general corporate purposes, which may include investments in our business, funding potential future cash needs or operating losses, funding working capital and capital expenditure needs, or reductions to our outstanding indebtedness.

We have assessed the Company’s liquidity as at September 30, ~~2019 totaled $56.6 million, an increase~~2023 taking into account our sales outlook for the next twelve months, our existing cash balances and available credit facilities and expected early settlements related to our Rock Hill Facility equipment lease. Based upon this analysis, we believe the Company has sufficient liquidity to remain a going concern for at least the next twelve months. However, a number of $3.2 million from December 31, 2018. On January 31, 2019, we repaid $5.6 million of long-term debt outstanding with cash on hand, without penalty. In July 2019, we entered into a C$50.0 million revolving credit facility withfactors, including the ~~Royal Bank of Canada (the “RBC Facility”). Draw-downs under~~macroeconomic factors discussed above could adversely impact our liquidity over such period.

To the ~~RBC Facility are available in both Canadian and U.S. dollars. The RBC Facility replaced the $18.0 million revolving credit facility with Comerica Bank, which expired on June 30, 2019.~~

~~Management believes~~extent that existing cash and cash equivalents and cash flows from operations will be sufficient to support ongoing working capital and capital expenditure requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including growth rate, the continued expansion of sales and marketing activities and the introduction of new solutions, and software and product enhancements. To the extent existing cash and cash equivalents and cash flows from operationsavailable facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities ~~and could~~or contain ~~covenants~~instruments that ~~restrict operations.~~may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders. While we believe we can access capital markets when needed or under acceptable terms, there can be no assurance we will be able to do so.

~~Historically,~~In January 2021, we ~~have financed operations primarily through~~issued C$40.3 million of the January Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The January Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and be repayable on the January Debenture Maturity Date. Interest and principal are payable in cash ~~flows from operations, long-term debt,~~or shares at the option of the Company. As at September 30, 2023, C$18.9 million of the January Debentures are held by a related party,

22NW. 22NW holds approximately 22.1% of our issued and outstanding common stock as of October 25, 2023. Aron English, manager of 22NW Fund GP, LLC, the ~~sale~~general partner of ~~equity securities. Cash~~22NW, is ~~primarily used~~a director of the Company.

In February 2021, we entered into the RBC Facility, a C$25.0 million senior secured revolving credit facility with RBC. Under the RBC Facility, the “Borrowing Base” is a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. On February 9, 2023, the Company extended the RBC Facility. The Extended RBC Facility has a borrowing base of C$15 million and a one year term. Available borrowings under the Extended RBC Facility at September 30, 2023 were C$14.6 million ($10.8 million).

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

The Company has a C$5.0 million Canada Leasing Facility of which C$4.4 million ($3.3 million) has been drawn, and a $14.0 million U.S. Leasing Facility of which $13.3 million has been drawn with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. In connection with the Company’s decision to ~~fund operations and capital expenditures. Over~~close the ~~past several years, revenue has typically increased from year~~Rock Hill Facility, we intend to ~~year and, as a result, cash flows from account receivable collections have increased. However, operating expenses have also increased as we reinvested capital in growing~~settle the ~~business. Our operating cash requirements may increase~~liability related to the U.S. Leasing Facility of $8.2 million in the ~~future as management continues~~next twelve months. With the settlement of this liability, we expect approximately $2.6 million to ~~invest in~~be released from restricted cash. On October 31, 2023, the ~~strategic growth~~Company paid off $1.0 million of the ~~Company.~~U.S. Leasing Facility.

~~Nine Months Ended September 30, 2019 and 2018~~

The following table summarizes our consolidated cash flows for the ~~nine months ended September 30, 2019 and 2018:~~periods indicated:


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

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




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




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

Operating Activities

Net cash flows provided by operating activities ~~increased to $17.9~~were $1.9 million for the ~~first nine~~three months ended September 30, 2023 compared to $10.7 million used in the same period of ~~2019 from $7.5 million net~~2022. The improvement in cash flows used in ~~operating activities in the first nine months of 2018. The increase in~~

~~cash flows from~~ operations is largely due to anthe $10.7 million increase in ~~collections on accounts receivable balances~~Adjusted EBITDA and ~~lack of an impairment charge~~a $3.1 million decrease in ~~the first nine months of 2019. This was partially~~reorganization expenses offset by ana $1.7 million increase in ~~foreign exchange loss and a decrease in trade accounts payable and other liabilities as compared to~~working capital excluding the ~~first nine months of 2018.~~

~~Investing Activities~~

~~We invested $7.8~~$7.1 million ~~in PP&E in the nine months ended September 30, 2019, compared to $7.0 million during the nine months ended September 30, 2018. The increase was primarily due to manufacturing equipment purchases~~receivable for ~~the new tile and millwork facility of which $1.6 million was incurred in~~government subsidies impacting the third quarter of 2019. We invested $2.5 million on capitalized software during the nine months ended September 30, 2019, as compared to $4.2 million in the nine months ended September 30, 2018. The reduction is due to the current mix of projects undertaken2022.

Net cash flows provided by ~~the Company and included a higher portion of efforts related to business process improvements that~~operating activities were ~~not eligible for capitalization.~~

~~Financing Activities~~

For the nine months ended September 30, 2019, net cash used in financing activities was $5.5 million. We repaid the balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019. Cash used in financing activities was $1.1$4.7 million for the nine months ended September 30, ~~2018.~~2023 compared to $47.5 million used in the same period of 2022. The improved cash flows from operations was driven by the $30.4 million increase in Adjusted EBITDA, a $9.4 million decrease in reorganization expenses, and a $19.0 million net decrease in working capital comprising $11.7 million decrease in routine working capital and a $7.3 million decrease in other receivables relating to the ERC claim. Through September 30, 2023, we have continued to draw down on our inventory supply built up in the first half of 2022.

Investing Activities

Cash flows provided by investing activities during the nine months ended September 30, 2023 benefited from $10.0 million of proceeds from the AWI transaction during the second quarter of 2023.

We invested $0.3 million and $1.3 million in property, plant and equipment during the three and nine months ended September 30, 2023, respectively compared to $0.4 million and $2.2 million, respectively, during the three and nine months ended September 30, 2022. This expenditure consisted of $0.3 million of information technology, $0.4 million of DXC refreshes and $0.6 million of manufacturing upgrades for the nine months ended September 30, 2023. We invested $0.4 million and $1.5 million on capitalized software during the three and nine months ended September 30, 2023, respectively, compared to $0.4 million and $1.3 million for the three and nine months ended September 30, 2022.

Financing Activities

For the three and nine months ended September 30, 2023, $0.6 million and $3.4 million of cash, respectively, was used in financing activities compared to $0.9 million and $1.8 million in the same periods of 2022. The cash used comprised mainly of $0.6 million of scheduled payments under the Leasing Facilities for both periods. During the second quarter of 2023, an additional $1.6 million principal repayment was made against the Canadian Leasing Facility. This payment was required by RBC as part of their consent for the AWI transaction and resulted in the full settlement of one of the Canadian leasing agreements. In the three and nine months ended September 30, 2022, we incurred $0.3 million and $0.6 million of spend on employee tax payments on vesting of RSUs compared to $nil and $0.03 million in the same period of 2023.

We currently expect to fund anticipated future investments with available ~~cash.~~cash and drawings on the Extended RBC Facility. To date, our strategic actions have generated cash through proceeds from the Private Placement in November 2022, the receipt of $7.3 million of government subsidy through the ERC application during the nine months ended September 30, 2023 and proceeds of $10.9 million received in the second quarter of 2023 through the AWI transaction. We continue to evaluate properties we own for sale and lease back and opportunities to sub lease available spaces. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing, may be pursued in the future as we ~~may~~ deem appropriate. ~~In the future, we~~We may also use debt or pursue equity financing depending on the ~~Company’s share~~ price of our common shares at the time, interest rates, and nature of the investment opportunity and economic climate. No assurance can be given that any of these actions will be successful and will be sufficient for our needs.

Credit Facility

On ~~July 19, 2019, we~~February 12, 2021, the Company entered into ~~a C$50 million senior secured revolving credit facility with~~ the ~~Royal Bank of Canada (the “RBC Facility”).The~~RBC Facility. Under the RBC Facility, ~~has a three-year term and can be extended for~~the Borrowing Base is up to ~~two additional years at our option.~~a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Interest is calculated at the Canadian or U.S. prime rate ~~with no adjustment,~~plus 30 basis points or at the ~~bankers’ acceptance rate~~Canadian Dollar Offered Rate or LIBOR plus ~~125~~155 basis points. ~~We are required to comply with certain financial covenants under~~Under the RBC Facility, ~~including maintaining~~if the Aggregate Excess Availability is less than C$5.0 million, the Company is subject to a ~~minimum fixed charge coverage ratio~~FCCR covenant of ~~1.15:~~1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities. Should an event of default occur, or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off any borrowings and any remaining amounts made available to the Company.

On February 9, 2023, the Company extended the RBC Facility. The Extended RBC Facility has a borrowing base of C$15 million and a ~~maximum debt~~one year term. Interest is calculated at the Canadian or U.S. prime rate plus 75 basis points or at the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate ("SOFR") plus 200 basis points plus the Term SOFR Adjustment. Under the Extended RBC Facility, if the trailing twelve month FCCR is above 1.25 for three consecutive months, a cash balance equivalent to ~~Adjusted EBITDA ratio~~one-year's worth of ~~3.0:1.~~ Leasing Facilities payments must be maintained. At September 30, 2023, available borrowings are C$14.6 million ($10.8 million) (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner described above, of which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the third quarter of 2023, which resulted in requiring the restriction of $3.0 million of cash.

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

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

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

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

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

Contractual Obligations

~~The~~Since our disclosure in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K the following ~~table summarizes DIRTT’s~~material contractual ~~obligations at September 30, 2019:~~changes have occurred:

•

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

•

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

•

the modification of our Rock Hill Facility lease.

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

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










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

Significant Accounting Policies and Estimates

There have been no material changes in our significant accounting policies during the ~~nine~~three months ended September 30, ~~2019,~~2023, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K. For information regarding significant accounting policies and estimates, please refer to Item 27 and Item 138 in our ~~Registration Statement~~Annual Report on Form ~~10.~~

~~Recent~~10-K. As disclosed in Note 3, “Adoption of New and Revised Accounting ~~Pronouncements~~

~~For information regarding recent accounting pronouncements, please refer to Note 2, “Significant Accounting Policies”~~Standards” to our condensed consolidated interim financial statements appearing in this Quarterly ~~Report.~~Report, there were no new accounting standards adopted during the three months ended September 30, 2023. We have disclosed the accounting policy applied for the assets held for sale related to the Rock Hill Facility.

Recent Accounting Pronouncements

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

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk exposures since our disclosures in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K. For information regarding our exposure to certain market risks, please refer to Item ~~2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative~~7A. “Quantitative and Qualitative Disclosures about Market Risk” in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K. The Company’s cash and cash equivalents are predominantly all with one AA rated financial institution.

~~Item 4.~~

~~Controls and Procedures~~

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

As required by ~~Rules~~Rule 13a-15 under the Exchange Act, our principal executive ~~officer~~officers and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, ~~2019.~~2023. Based upon their evaluation, our principal executive ~~officer~~officers and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the quarter ended September 30, ~~2019,~~2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

~~On November 5, 2019, Falkbuilt Ltd. (“Falkbuilt”) filed a Statement of Claims~~Item 1. Legal Proceedings

DIRTT is pursuing multiple lawsuits against us in the Court of Queen’s Bench of Alberta, Canada. Falkbuilt alleges that we have misappropriated and misused their alleged proprietary information in furtherance of our own product development. Falkbuilt seeks monetary relief, including, among other things, damages of approximately C$30.0 million, disgorgement of profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction of our use of the alleged proprietary information.

~~Falkbuilt is affiliated with certain of our~~its former ~~employees, including~~founders, Mogens Smed ~~our co-founder and former Executive Chairman and Chief Executive Officer,~~ and Barrie Loberg, ~~our former Vice President~~as well as Falkbuilt Ltd. and Falkbuilt, Inc. (collectively, “Falkbuilt”) and related individuals and corporations. DIRTT alleges breaches of ~~Software Development. As~~fiduciary duties and non-competition and non-solicitation covenants, and the misappropriation of its confidential and proprietary information (in violation of numerous U.S. state and federal laws pertaining to the protection of trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices). Except as described below, there have been no material developments in the legal proceedings previously disclosed in our Annual Report on ~~May 9, 2019, we filed a lawsuit in the Court of Queen’s Bench of Alberta~~Form 10-K.

DIRTT’s litigation against Mr. Smed and Mr. Loberg, to enforce the terms of our Settlement Agreement and their respective obligations, including non-compete and non-solicit provisions, that we entered into in connection with their departure. We believe that Falkbuilt’s lawsuit against us is part of their litigation strategy related to our lawsuit against them, and we believe it is without merit. We intend to defend it vigorously and to continue to pursue our legal remedies againstFalkbuilt, Messrs. Smed and Loberg, and their ~~company, Falkbuilt.~~

~~We may, from time to time, become involved in other legal proceedings or be subject to claims arising~~associates is comprised of three main lawsuits: (i) an action in the ~~ordinary course~~Alberta Court of King’s Bench commenced 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 in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Smed, and other individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade secrets, business ~~including~~intelligence and customer information (the “Utah Misappropriation Case”); and (iii) an action in the ~~initiation~~U.S. District Court for the Northern District of Texas instituted on June 24, 2021 alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States and ~~defense~~intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business intelligence, with the aim of ~~proceedings~~establishing a competing business in the United States market (the “Texas Unfair Competition Case”). DIRTT intends to ~~protect intellectual property rights, product liability claims~~pursue the cases vigorously.

In the Canadian Non-Compete Case, on February 14, 2023, the Court of King’s Bench of Alberta granted DIRTT's application to schedule the hearing of its summary judgment application and ~~employment claims. Regardless~~dismissed Falkbuilt’s cross-application to strike the summary judgment application. On April 5, 2023, the parties appeared before the Associate Chief Justice of the ~~outcome, litigation can have an adverse impact on us because~~Court of ~~defense and settlement costs, diversion~~King’s Bench of ~~management resources and other factors.~~Alberta for a Case Management Conference. In the ~~opinion of our management, none~~Conference, the Associate Chief Justice offered the parties an expedited six-week trial on both liability and damage issues, as an alternative to DIRTT proceeding with its summary judgment application, on the condition that the parties could reach an agreement on the terms of the ~~pending litigation, disputes or~~alternative process. The parties have not reached consensus regarding the terms of an expedited six-week trial, however, DIRTT remains fully cooperative with the Court of King’s Bench. In the meantime, DIRTT plans to aggressively pursue its summary judgment application.

In the Utah Misappropriation Case, on April 11, 2023, the United States Court of Appeals for the Tenth Circuit reversed the U.S. District Court for the Northern District of Utah’s decision that Utah was an inconvenient forum for DIRTT’s claims against usFalkbuilt and others for the misappropriation of confidential information, trade secrets, business intelligence and customer information. The Utah Court had previously, and erroneously, found that DIRTT’s United States-based claims should be litigated in Canada. The Court of Appeals remanded the matter back to the Utah District Court. Falkbuilt filed motions to stay the Tenth Circuit decision pending its petition for a Writ of Certiorari to the Supreme Court of the United States. The Court of Appeals promptly denied the motion to stay. A similar motion subsequently filed with the Supreme Court of the United States on the same basis was also promptly denied. Fallkbuilt also petitioned the Supreme Court to accept review, even after losing the stay motion, that petition was also denied in early October.

The Texas Unfair Competition Case was dismissed, without prejudice, in reliance upon the now-reversed decision in the Utah Misappropriation Case, described above. DIRTT appealed that decision, and the United States Court of Appeals for the Fifth Circuit stayed the appeal pending the Tenth Circuit ruling at Falkbuilt's request. After prevailing in the Tenth Circuit, DIRTT asked Falkbuilt if it would, consistent with its prior representations, agree to remand the appeal to the Texas Court for disposition to Utah. Falkbuilt refused and DIRTT filed a Motion to Remand. The Court denied the Motion for Remand without prejudice and asked for full briefing. Argument is currently scheduled for December 7th, 2023 in New Orleans. The Court will ~~have a material adverse effect on our financial condition, cash flows~~either order the claims transferred to Utah or, ~~results of operations.~~if it affirms the lower court, those claims would proceed, inconveniently, in Canada. We believe it is very unlikely they would proceed in Texas as neither DIRTT or Falkbuilt currently desires that outcome.

~~Item 1A.~~

~~Risk Factors~~

~~As of~~

Item 1A. Risk Factors

In addition to the ~~date of~~other information set forth in this Quarterly Report on Form10-Q, ~~there have been no material changes to~~ you should carefully consider the risk factors ~~disclosed in Item 1A~~and other cautionary statements described under the heading “Risk Factors” included in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K, which could materially affect our businesses, financial condition, or results of operations. Additional risks and uncertainties not currently ~~know~~known to ~~use~~us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.

Our common shares are quoted on the OTC’s Pink® Open Market, and there may be a limited trading market in our common shares in the United States. As a result of the limited trading market, investors may experience limited liquidity, and may experience limited ability to sell shares in the open market.

Our common shares are quoted on the OTC’s Pink® Open Market under the symbol “DRTTF.” There may be a limited trading market in our common shares in the United States. As a result of the limited trading market of our common shares, investors in our common shares may experience limited demand for their shares of common shares, which may limit their ability to sell their shares in the open market.

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~None.~~

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

None.

~~Item 3.~~

~~Defaults Upon Senior Securities~~

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

None.

~~Item 4.~~

~~Mine Safety Disclosures~~

Item 4. Mine Safety Disclosures

Not Applicable.

~~Item 5.~~

~~Other Information~~

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

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

Not Applicable.

~~Item 6.~~

~~Exhibits~~

Item 6. Exhibits

EXHIBIT INDEX


Exhibit No.		Description

3.1	Restated Articles of Amalgamation of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form 10, FileNo. 001-39061, filed on September 20, 2019).
3.2
~~3.2~~	Amended and Restated Bylaw No. 1 of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit ~~3.2~~3.1 to the Registrant’s ~~Registration Statement~~Current Report on Form ~~10,~~8-K, FileNo. 001-39061, filed on ~~September 20, 2019)~~May 22, 2020).
4.1
~~10.1~~	Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd. ~~Amended~~, Computershare Trust Company of Canada and ~~Restated Employee Share Purchase Plan~~Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit ~~4.4~~4.1 to the Registrant’s ~~Registration Statement~~Current Report onForm ~~S-8,~~8-K, File No. ~~333-234143,~~001-39061, filed on ~~October 9, 2019)~~January 29, 2021).
4.2
~~10.2~~	~~Credit Agreement,~~Supplemental Indenture, dated ~~July 19, 2019,~~January 25, 2021, by and among the ~~Royal Bank~~Company, Computershare Trust Company of Canada ~~DIRTT Environmental Solutions Ltd.,~~and Computershare Trust Company, National Association as ~~borrower, and DIRTT Environmental Solutions, Inc., as guarantor~~Trustees (incorporated by reference to Exhibit ~~10.1~~4.1 to the Registrant’s ~~Registration Statement~~Current Report on Form ~~10,~~8-K, FileNo. 001-39061, filed on ~~September 20, 2019)~~January 29, 2021).
4.3
~~10.3~~	~~Employment Agreement,~~Second Supplemental Indenture, dated ~~August 31, 2019,~~December 1, 2021, by and ~~between DIRTT Environmental Solutions Ltd. And Jennifer Warawa~~among the Company, Computershare Trust Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit ~~10.15~~4.1 to the Registrant’s ~~Registration Statement~~Current Report on Form ~~10,~~8-K, FileNo. 001-39061, filed on ~~September 20, 2019)~~December 1, 2021).
10.1*
10.4*	~~Lease~~Executive Employment Agreement, dated ~~October 7, 2019,~~August 2, 2023, by and between DIRTT Environmental Solutions Inc. and ~~SP Rock Hill Legacy East #1, LLC.~~Fareeha Khan
10.2*	Indemnity Agreement, dated August 2, 2023, between DIRTT Environmental Solutions Ltd and Fareeha Khan
31.1*	Certification of the Principal Executive Officer required by Rule13a-14(a) or Rule15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
31.2*	Certification of the Principal Financial Officer required by Rule13a-14(a) or Rule15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
32.1**	Certification of the Principal Executive Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
32.2**	Certification of the Principal Financial Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
101.INS*	Inline XBRL Instance Document
101.SCH*
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*	Filed herewith
**	Furnished herewith

*	~~Filed herewith~~

**	~~Furnished herewith~~

~~SIGNATURES~~

SIGNATURES

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


	DIRTT ENVIRONMENTAL SOLUTIONS LTD.

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

Date: November 9, 2023

~~Date: November 7, 2019~~

3241


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

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

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

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

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

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


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

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


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

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

Total lease liability		22,268

Difference between undiscounted cash flows and lease liability		3,467


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

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

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	($ in thousands)						($ in thousands)
Net income (loss) for the period	$	5,802		$	(1,433	)	$	3,148		$	2,407
Add back (deduct):
Interest Expense		3			98			77			301
Interest Income		(228	)		(101	)		(320	)		(327	)
Income Tax Expense		1,959			684			3,667			3,114
Depreciation and Amortization		2,925			3,544			9,260			10,342

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

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

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

Adjusted EBITDA Margin		12.3	%		17.7	%		10.6	%		15.0	%


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

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

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


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

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

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Non-accelerated filer

Smaller reporting company

Emerging growth company