UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

For the quarterly period ended ~~September~~June 30, ~~2019~~2020

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

For the transition period from to

Commission file number001-39061

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

(Exact name of registrant as specified in its charter)


Alberta, Canada		~~N/A~~
(State or other jurisdiction 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) 723-5000

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

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

Title of Each Class

Trading

Symbol(s)

Name of Each Exchange

on Which Registered

Common Shares, without par value

DRTT

The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 ~~shares of~~ common ~~stock~~shares outstanding as of ~~October 31, 2019.~~July 29, 2020.

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

FORM10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

TABLE OF CONTENTS


		Page
Cautionary Statement Regarding Forward-Looking Statements			ii

PART I – FINANCIAL INFORMATION			43

Item 1.	Financial Statements (Unaudited)		3

	Interim Condensed Consolidated Balance Sheets		3
	Interim Condensed Consolidated Statement of Operations and Comprehensive Income (Loss)		4
	Interim Condensed Consolidated ~~Balance Sheets~~		4
	~~Interim Condensed Consolidated Statements~~Statement of ~~Operations and Comprehensive Income (Loss)~~Changes in Shareholders’ Equity		5
	Interim Condensed Consolidated ~~Statements of Changes in Shareholders’ Equity~~		6
	~~Interim Condensed Consolidated Statements~~Statement of Cash Flows		76
	Notes to the Unaudited Interim Condensed Consolidated Financial Statements		87

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28

Item 4.	Controls and Procedures		2829

PART II – OTHER INFORMATION			30

Item 1.	Legal Proceedings		30

Item 1A.	Risk Factors		30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3031

Item 3.	Defaults Upon Senior Securities		3031

Item 4.	Mine Safety Disclosures		3031

Item 5.	Other Information		3031

Item 6.	Exhibits		3032

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form10-Q for the quarter ended ~~September~~June 30, ~~2019~~2020 (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 Exchange Act of 1934, as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.

Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects ~~can be found in~~include, but are not limited to, the ~~sections~~severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled ~~Risk~~“Risk Factors” in our ~~Registration Statement~~Annual Report on Form ~~10 (“Registration Statement on Form 10”),~~10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada (the “Annual Report on ~~September 20, 2019~~Form 10-K”), and in this Quarterly Report under “Part II, Item 1A. Risk Factors.” These factors include, but are not limited to, the following:

competition in and changes to the interior construction industry;

global economic, political, health and social conditions and financial ~~markets;~~markets, including those related to pandemics such as the COVID-19 pandemic;

the condition and changing trends of the overall construction industry;

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

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

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

loss of our key executives;

labor overcapacity or shortages and disruptions in our manufacturing facilities;

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

defects in our designing and manufacturing software;

infringement on our patents and other intellectual property;

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

material fluctuations of commodity prices, including raw materials;

shortages of supplies or disruptions in the supply chain of certain key components and materials;

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

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

legal and regulatory proceedings brought against us;

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

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

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

~~iii~~ii

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Balance Sheets

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


	As at						As at
	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS
Current Assets
Cash and cash equivalents		56,642			53,412			44,626			47,174
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
Trade and other receivables, net of expected credit losses of $0.7 million at June 30, 2020 and $0.1 million December 31, 2019								21,281			24,941
Inventory		18,996			18,650			17,651			17,566
Prepaids and other current assets		4,257			2,217			3,571			3,340

Total Current Assets		107,427			118,152			87,129			93,021

Property, plant and equipment, net		38,166			36,728			42,094			41,365
Capitalized software, net		8,292			8,335			8,073			8,213
Operating leaseright-of-use assets, net		21,530			—			18,111			20,661
Deferred tax assets, net		3,487			6,083			6,073			5,364
Goodwill		1,393			1,353			1,354			1,421
Other assets		5,472			5,260			4,989			5,518

Total Assets		185,767			175,911			167,823			175,563

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		22,217			32,583			20,458			20,384
Other liabilities		4,393			5,523			4,071			5,187
Customer deposits		7,407			7,701
Customer deposits and deferred revenue								5,256			3,567
Current portion of lease liabilities		5,247			—			5,136			5,287
Current portion of long-term debt		—			2,500

Total Current Liabilities		39,264			48,307			34,921			34,425

Deferred tax liabilities, net		—			965
Other long-term liabilities		233			—			2,277			35
Long-term lease liabilities		17,021			—			13,638			16,116
Long-term debt		—			3,125

Total Liabilities		56,518			52,397			50,836			50,576

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
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at June 30, 2020 and December 31, 2019								180,639			180,639
Additionalpaid-in capital		6,591			6,615			9,274			8,343
Accumulated other comprehensive loss		(19,558	)		(22,092	)		(21,914	)		(18,028	)
Accumulated deficit		(38,423	)		(41,571	)		(51,012	)		(45,967	)

Total Shareholders’ Equity		129,249			123,514			116,987			124,987

Total Liabilities and Shareholders’ Equity		185,767			175,911			167,823			175,563

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Operations

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


	For the three months ended September 30,						For the nine months ended September 30,						For the three months ended June 30,						For the six months ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Product revenue		63,324			71,720			188,437			193,378			40,765			61,273			81,064			125,113
Service revenue		2,061			2,193			6,100			6,863			1,390			2,818			2,072			4,039

Total revenue		65,385			73,913			194,537			200,241			42,155			64,091			83,136			129,152

Product cost of sales		38,947			42,202			116,117			115,941			26,751			37,102			54,041			77,170
Costs of under-utilized capacity														—			—			2,010			—
Service cost of sales		1,504			1,626			5,461			4,910			1,188			2,568			1,554			3,957

Total cost of sales		40,451			43,828			121,578			120,851			27,939			39,670			57,605			81,127

Gross profit		24,934			30,085			72,959			79,390			14,216			24,421			25,531			48,025

Expenses
Sales and marketing		8,568			9,995			25,898			30,169			6,177			9,543			13,585			17,330
General and administrative		7,280			7,212			21,033			21,634			6,194			6,856			14,019			13,753
Operations support		2,419			1,937			7,771			5,933			2,251			2,870			4,783			5,352
Technology and development		1,718			922			5,881			3,048			2,082			2,046			4,247			4,163
Stock-based compensation		(2,389	)		2,037			2,403			3,172			425			(1,655	)		886			4,792
Impairment		—			6,098			—			6,098
Reorganization		—			2,236			2,639			4,646			—			—			—			2,639

Total operating expenses		17,596			30,437			65,625			74,700			17,129			19,660			37,520			48,029

Operating income (loss)		7,338			(352	)		7,334			4,690			(2,913	)		4,761			(11,989	)		(4	)

Government subsidies														(4,284	)		—			(4,284	)		—
Foreign exchange (gain) loss		(198	)		400			762			(805	)		960			441			(1,359	)		960
Interest income		(228	)		(101	)		(320	)		(327	)		(57	)		(38	)		(195	)		(92	)
Interest expense		3			98			77			301			61			25			96			74

		(423	)		397			519			(831	)		(3,320	)		428			(5,742	)		942

Income (loss) before tax		7,761			(749	)		6,815			5,521			407			4,333			(6,247	)		(946	)

Income taxes
Current tax expense		818			1,145			1,906			2,733
Current tax expense (recovery)														366			936			(215	)		1,088
Deferred tax expense (recovery)		1,141			(461	)		1,761			381			(242	)		786			(987	)		620

		1,959			684			3,667			3,114			124			1,722			(1,202	)		1,708

Net income (loss)		5,802			(1,433	)		3,148			2,407			283			2,611			(5,045	)		(2,654	)

Income (loss) per share
Basic and diluted income (loss) per share		0.07			(0.02	)		0.04			0.03			0.00			0.03			(0.06	)		(0.03	)

Weighted average number of shares outstanding (stated in thousands)
Weighted average number of shares outstanding (in thousands)
Basic		84,681			84,650			84,668			84,416			84,681			84,661			84,681			84,661
Diluted		85,257			84,650			84,888			84,980			85,094			85,573			84,681			84,661

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	)



	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020			2019
Interim Condensed Consolidated Statement of Comprehensive Income (Loss)
Income (loss) for the period		283		2,611		(5,045	)		(2,654	)
Exchange differences on translation of foreign operations		2,882		1,276		(3,886	)		3,372

Comprehensive income (loss) for the period		3,165		3,887		(8,931	)		718

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


	Number of				Additional			Accumulated other						Total
	Common		Common		paid-in			comprehensive			Accumulated			shareholders’
	shares		shares		capital			income (loss)			deficit			equity
As at December 31, 2018		84,660,319		180,562		6,615			(22,092	)		(41,571	)		123,514

Issued on exercise of options		1,053		4		(1	)		—			—			3
Stock-based compensation		—		—		(429	)		—			—			(429	)
Foreign currency translation adjustment		—		—		—			2,096			—			2,096
Net loss for the period		—		—		—			—			(5,265	)		(5,265	)

As at March 31, 2019		84,661,372		180,566		6,185			(19,996	)		(46,836	)		119,919

Issued on exercise of options		3,825		13		—			—			—			13
Stock-based compensation		—		—		—			—			—			—
Foreign currency translation adjustment		—		—		—			1,276			—			1,276
Net income for the period		—		—		—			—			2,611			2,611

As at June 30, 2019		84,665,197		180,579		6,185			(18,720	)		(44,225	)		123,819

As at December 31, 2019		84,681,364		180,639		8,343			(18,028	)		(45,967	)		124,987

Stock-based compensation		—		—		663			—			—			663
Foreign currency translation adjustment		—		—		—			(6,768	)		—			(6,768	)
Net loss for the period		—		—		—			—			(5,328	)		(5,328	)

As at March 31, 2020		84,681,364		180,639		9,006			(24,796	)		(51,295	)		113,554

Stock-based compensation		—		—		268			—			—			268
Foreign currency translation adjustment		—		—		—			2,882			—			2,882
Net income for the period		—		—		—			—			283			283

As at June 30, 2020		84,681,364		180,639		9,274			(21,914	)		(51,012	)		116,987

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,						For the three months ended June 30,						For the six months ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Cash flows from operating activities:
Net income (loss) for the period		5,802			(1,433	)		3,148			2,407			283			2,611			(5,045	)		(2,654	)
Adjustments:
Depreciation and amortization		2,925			3,544			9,260			10,342			2,761			2,940			5,893			6,335
Impairments		—			6,098			—			6,098
Stock-based compensation		(2,646	)		1,200			(1,217	)		2,335
Non-cash interest expense (income)		(9	)		—			(55	)		—
Stock-based compensation, net of settlements														425			(4,252	)		886			1,429
Foreign exchange (gain) loss														958			284			(1,256	)		282
(Gain) loss on disposal of property, plant and equipment														(46	)		(9	)		(46	)		53
Deferred income tax expense (recovery)		1,141			(461	)		1,761			381			(242	)		786			(987	)		620
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	)		2,010			8,345			3,446			15,263
Inventory		(436	)		(2,947	)		4			(1,443	)		(671	)		1			(636	)		440
Prepaid and other current assets		(2,043	)		425			(2,001	)		(731	)		565			343			(332	)		42
Other assets		76			—			80			—			44			(108	)		217			4
Trade accounts payable and other liabilities		(2,151	)		3,808			(8,560	)		(815	)		(4,300	)		(4,783	)		(2,170	)		(6,409	)
Lease liability		(127	)		—			(375	)		—
Customer deposits		(216	)		(852	)		(492	)		(1,367	)
Lease liabilities														(34	)		(102	)		(61	)		(248	)
Customer deposits and deferred revenue														624			1,424			1,708			(276	)

Net cash flows provided by (used in) operating activities		2,998			208			17,881			(7,514	)
Net cash flows provided by operating activities														2,377			7,480			1,617			14,881

Cash flows from investing activities:
Purchase of property, plant and equipment		(4,594	)		(1,681	)		(7,753	)		(7,013	)		(4,508	)		(1,775	)		(6,186	)		(3,159	)
Capitalized software development expenditures		(918	)		(1,264	)		(2,513	)		(4,248	)
Capitalized software development expenditures and other asset expenditures														(945	)		(1,092	)		(1,915	)		(1,595	)
Recovery of software development expenditures		89			—			194			—			140			30			215			105
Proceeds on sale of property, plant and equipment		—			—			55			66			46			11			46			55
Changes in accounts payable related to investing activities		349			(222	)		(127	)		(371	)		1,305			(140	)		1,423			(476	)

Net cash flows used in investing activities		(5,074	)		(3,167	)		(10,144	)		(11,566	)		(3,962	)		(2,966	)		(6,417	)		(5,070	)

Cash flows from financing activities:
Cash received on exercise of stock options		61			163			77			1,537
Cash received on exercise of options														—			11			—			16
Proceeds received on leasing facilities														2,591			—			2,591			—
Repayment on leasing facilities														(64	)		—			(64	)		—
Repayment of long-term debt		—			(684	)		(5,561	)		(2,620	)		—			—			—			(5,561	)

Net cash flows provided by (used in) financing activities		61			(521	)		(5,484	)		(1,083	)		2,527			11			2,527			(5,545	)

Effect of foreign exchange on cash and cash equivalents		(81	)		97			977			(1,202	)		224			152			(275	)		1,058

Net increase (decrease) in cash and cash equivalents		(2,094	)		(3,383	)		3,230			(21,365	)		1,166			4,677			(2,548	)		5,324
Cash and cash equivalents, beginning of period		58,736			45,502			53,412			63,484			43,460			54,059			47,174			53,412

Cash and cash equivalents, end of period		56,642			42,119			56,642			42,119			44,626			58,736			44,626			58,736

Supplemental disclosure of cash flow information:
Interest paid		3			98			77			301			(61	)		(25	)		(96	)		(74	)
Income taxes paid		953			2,071			1,403			3,136			(58	)		(402	)		(58	)		(450	)

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

DIRTT Environmental Solutions Ltd.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

1. GENERAL INFORMATION

DIRTT Environmental Solutions Ltd. and its subsidiaries (“~~DIRTT”~~DIRTT,” the “Company,” “we” or ~~the “Company”~~“our”) is a leading technology-driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing software (“ICE^®” or “ICE Software”) with integratedin-house manufacturing of its innovative prefabricated interior construction solutions and an extensive distribution partners network (“Distribution ~~Partner”~~Partners”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods. ICE is also licensed to unrelated companies and ~~distribution partners~~Distribution Partners of the Company. DIRTT is incorporated under the laws of the province of Alberta, Canada, ~~and~~ its headquarters ~~and registered office~~ is located at 7303 – ~~30th~~30^th Street S.E., Calgary, AB, Canada T2C ~~1N6. DIRTT trades~~1N6 and its registered office is located at 4500, 855 – 2^nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and ~~effective October 9, 2019, trades~~ on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.

2. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form10-Q and Article 10 of RegulationS-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of ~~September~~June 30, ~~2019,~~2020, and its results of operations and cash flows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. The condensed balance sheet at December 31, ~~2018,~~2019, 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~~2019 and ~~2017~~2018 and for each of the three years in the period ended December 31, ~~2018~~2019 included in the Company’s Annual Report on Form ~~10 of~~10-K. The Company adopted new accounting standards relating to credit losses and cloud computing effective January 1, 2020. Further information on these standards and the impact on the Company ~~as filed with the U.S. Securities and Exchange Commission. As~~of these standards is described in Note ~~3, the Company adopted a new accounting standard for leases in the current year, which had a material impact on the Financial Statements.~~4.

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

Principles of consolidation

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

Basis of measurement

These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and certain components of stock-based compensation that are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The Company’s quarterly tax provision is based upon an estimated annual effective tax rate.

~~DIRTT Environmental Solutions Ltd.~~

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

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

Seasonality

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

3. COVID-19

On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization and has had extraordinary and rapid negative impacts on global societies, workplaces, economies and health systems. The impact of ~~construction results in demand for the Company’s solutions to be typically stronger~~COVID-19 on DIRTT’s business in the ~~third~~near and ~~fourth quarters compared~~mid-term remains uncertain. The resulting adverse economic conditions are expected to negatively impact construction activity in the near term at the very least, with potential significant negative impacts extending to the first half of 2021 and ~~second~~beyond.

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

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

Credit risk

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

Liquidity risk

The Company may have lower cash flows from operating activities available to service debts due to lower sales or collections. Information about our credit facilities is presented in Note 6.

Government subsidies

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). As originally implemented, the CEWS provides the Company with a taxable subsidy of up to 75% of wages paid to Canadian employees during the periods extending from March 15, 2020 to June 6, 2020 (subsequently extended to August 29, 2020), provided that certain Canadian-sourced revenues decline by over 15 – 30%, computed generally on the basis of monthly revenues year-over-year during the available periods.

The Company reviews its ~~fiscal year.~~eligibility for the CEWS for each qualifying period. The Company accounts for such government subsidies on an accrual basis when the conditions for eligibility are met. The Company has adopted an accounting policy to present government subsidies as other income. An optional accounting policy would be to net consideration received with the related expenses on the statement of operations.

3.Impairment

At June 30, 2020, our market capitalization was less than the book value of our equity which is a potential indicator of impairment. For the first quarter of 2020, management compared forecasted undiscounted cash flows to the book values of non-current assets and determined an impairment provision was not required. At June 30, 2020 management determined an impairment provision was not required as our outlook had improved since our initial assessment and our share price has increased. The impact of COVID-19 on DIRTT’s Distribution Partners or the Company’s operations may change cash flows and impact the recoverability of our assets in the future. Furthermore, COVID-19 and its related economic and social impacts are rapidly evolving and may affect our ability to accurately use historical sales trends and cash flows to forecast future results leading to additional estimation uncertainty with respect to impairment testing.

Deferred tax assets (“DTA”)

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

4. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

~~In February 2016,~~On January 1, 2020, the ~~FASB issued~~Company adopted ASUNo. ~~2016-02,~~2016-13, ~~“Leases~~“Financial Instruments – Credit Losses (Topic ~~842),~~326): Measurement of Credit Losses in Financial Instruments” and ~~issued~~the subsequent amendments to the initial guidance issued 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~~April 2019 within ASUNo. ~~2019-01~~2019-04, ~~(collectively, the standard). The standard requires lessees to recognize operating leases on the balance sheet as a~~May 2019 within ASU ~~right-of-use~~No. 2019-05 and February 2020 within ASU No. 2020-02 (“~~ROU”~~ASU 326”). These ASUs replace the incurred loss methodology with an expected loss methodology that is referred to as the Current Expected Credit Loss (“CECL”) ~~asset~~methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance and net investments in leases recognized by a ~~lease liability. The liability is equal~~lessor in accordance with Topic 842 on Leases. In addition, ASC 326 made changes 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.~~accounting for available-for-sale debt securities.

The Company adopted ASC 326 using the ~~standard on~~modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, ~~2019, and elected the transition method of adoption, which allowed the Company to apply the standard as of the beginning of the~~2020 are presented under ASC 326 while prior period ~~of adoption, the comparative period presented is not adjusted and continues~~amounts continue to be reported in accordance with previously applicable accounting principles generally accepted in the ~~Company’s historical accounting policy.~~United States of America (“GAAP”). The ~~Company opted to elect the package~~adoption of ~~practical expedients to~~this standard did 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 term for existing leases and in assessing impairment of the~~right-of-use~~ ~~asset, and the exception for short-term leases.~~

~~Adoption of the standard had~~have a significant impact on the ~~Company’s condensed consolidated~~Company, and no adjustment was required to retained earnings as of January 1, 2020 for the cumulative effect of adopting ASC 326.

On January 1, 2020, the Company adopted ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” which amends ASC 350-40, “Intangibles – Goodwill and Other – Internal-Use Software” (“ASU 2018-15”). ASU 2018-15 clarifies that if a company has the contractual right to take possession of the hosted software at any time during the hosting period without incurring a significant penalty and if a company can feasibly run the software on its own hardware or contract with a third party unrelated to the vendor to host the software, the arrangement is not impacted by ASU 2018-15. If both these conditions are not met, ASU 2018-15 deems the hosting arrangement to be a service contract. The capitalization criteria for implementation costs of a service contract are consistent with the requirements of ASC 350-40 and impairment will be assessed consistent with policies applied to long lived assets. However, these capitalized implementation costs will be amortized over the life of the hosting arrangement and will be classified in the balance sheet ~~due to~~and statement of operations in the ~~recognition of aright-of-use~~ ~~asset and lease liability, as shown in Note 4, upon adoption.~~

~~4. LEASES~~same lines where software license costs are accounted for.

The Company ~~leases office~~adopted this amendment using the prospective transition approach, and ~~factory space under various operating leases.~~no adjustments were required as a result of adoption.

5. TRADE AND OTHER RECEIVABLES

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company ~~determines if~~estimates an ~~arrangement is a lease or contains a lease element~~allowance for credit losses using the lifetime expected credit loss at ~~inception. The arrangement is a lease if it conveys the right~~each measurement date taking into account historical credit loss experience as well as forward-looking information in order to ~~the Company~~establish rates for each class of financial receivable with similar risk characteristics. Adjustments to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases are separately disclosed as operating lease ROU assets, with a corresponding lease liability split between current and long-term components on the balance sheet. Operating leases with an initial term of 12 months or less are not included on the balance sheet.

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

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At June 30, 2020, 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, that have arisen since April 1, 2020. Our trade balances are spread over a broad Distribution Partner base, which is geographically dispersed. No Distribution Partner accounts for greater than 10% of revenue. In addition, and where possible, we collect a 50% deposit on ~~the present value of lease payments over the lease term.~~

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

~~DIRTT Environmental Solutions Ltd.~~The Company’s aged receivables were as follows:

~~Notes~~


	As at
	June 30, 2020			December 31, 2019
Current		16,249			20,087
Overdue		777			2,401

		17,026			22,488
Less: expected credit losses		(742	)		(84	)

		16,284			22,404
Other receivables		64			402
Government subsidies receivable		2,771			—
Income tax receivable		2,162			2,135

		21,281			24,941

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

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

For the three months and nine months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $1.4 million and $4.2 million. The weighted average remaining lease term and weighted average discount rate at September 30, 2019 were 12 years and 4.6%, respectively. The following table includes supplemental cash flow information for the nine months ended September 30, 2019 and supplemental balance sheet information at September 30, 2019 related to operating leases (in thousands):

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

   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

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


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

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

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

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


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


Total lease liability
   22,268


Difference between undiscounted cash flows and lease liability
   3,467

~~DIRTT Environmental Solutions Ltd.~~

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

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

~~Subsequent to September 30, 2019, the Company entered into a lease agreement, expected to commence in the second half of 2020,~~uncertainties associated with the ~~construction~~COVID 19 pandemic as well as the disruption to businesses in North America, the overall credit quality of certain receivables declined at March 31, 2020 compared to January 1, 2020. As a ~~new combined tile~~result of this consideration 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~~the Company’s ongoing review of the credit quality of receivables, expected credit losses were increased by $0.6 million ~~revolving operating facility which expired on~~during the quarter ended March 31, 2020. No further adjustments to our expected credit losses were required at 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.~~2020.

6. LONG-TERM DEBT AND OTHER LIABILITIES

On July 19, 2019, the Company entered into a C$50.0 million senior secured revolving credit facility (the “RBC Facility”) with the Royal Bank of Canada ~~(the “RBC Facility”~~( “RBC”). The RBC Facility has a three-year term and can be extended for up to two additional years at the Company’s option. Interest is calculated at the Canadian or U.S. prime rate with no adjustment, or the bankers’ acceptance rate plus 125 basis points. The RBC Facility is subject to a minimum fixed charge coverage ratio of 1.15:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:1 (earnings before interest, tax, depreciation and amortization,non-cash stock-based compensation, plus or minus extraordinary or unusual non-recurring revenue or expenses) calculated on a trailing four quarter basis (the “Covenants”).

During the second quarter of 2020, the Company entered into a letter agreement with RBC (the “Letter Agreement”). Under the Letter Agreement, the Covenants are waived for the period April 1 to September 30, 2020 (the “Covenant Holiday Period”). During the Covenant Holiday Period, the Company is able to borrow to a maximum of 75% of eligible accounts receivable and 25% of eligible inventory, less priority payables, subject to an aggregate limit of C$50.0 million including amounts borrowed under Leasing Facilities (as defined herein). During the Covenant Holiday Period the Company is required to maintain a cash balance of $10.0 million if no loans are drawn under the facility, have Adjusted EBITDA of not less than a loss of $7.0 and $16.5 million for the twelve month periods ended June 30 and September 30, 2020, and make capital expenditures of no more than $10.7 million during the Covenant Holiday Period. As at ~~September~~June 30, ~~2019,~~2020, the RBC Facility was undrawn and the available borrowing base was $12.8 million. The Company was in compliance with ~~all of~~ the covenants of the RBC ~~Facility.~~Facility as at June 30, 2020.

6.During the three months ended June 30, 2020, the Company entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States (the “Leasing Facilities”), which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 3.5%. The U.S. leasing facility is extendible for an additional year.

As at June 30, 2020, the Company received C$3.6 million ($2.6 million) of cash consideration under the leasing facility in Canada and commenced the lease term for the Canadian equipment expenditures. The associated financial liability is shown on the consolidated balance sheet in other current and other long-term liabilities. The Leasing Facilities are accounted for as finance leases as ownership of the equipment is expected to return to the Company at the end of the lease term. These transactions are not accounted for as a sale of the underlying equipment as the Company continues to control the equipment.

7. STOCK-BASED COMPENSATION

In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested share awards, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2020 LTIP, the sum of (i) 5,850,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May 22, 2020, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance under the 2020 LTIP. As at June 30, 2020, 3,188,123 common shares were available for issuance under the 2020 LTIP.

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

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

Stock-based compensation expense ~~(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)~~


	For the three months ended June 30,					For the six months ended June 30,
	2020		2019			2020			2019
Options		226		(1,811	)		889			4,463
PSUs		6		61			(2	)		79
DSUs		151		95			(43	)		250
RSUs		42		—			42			—

		425		(1,655	)		886			4,792

~~Stock~~ Options

For 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 – $3.2 million expense). ForDuring the three and ~~nine~~six months ended ~~September~~June 30, 2019, the Company ~~paid $0.3 million (2018 – $0.9 million) and $3.6 million (2018 – $0.9 million) respectively on~~accounted for the ~~surrender~~fair value of ~~cash settled stock options. At September 30, 2019,~~outstanding options at the ~~Company had~~end of the reporting period as a liability, ~~of $0.1 million~~with changes in ~~other liabilities for~~ the ~~stock options (December 31, 2018 – $1.8 million)~~liability recorded through net income as a stock-based compensation fair value adjustment (“cash-settlement”). 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. For the three and six months ended June 30, 2019, the Company paid $2.6 million and $3.4 million respectively on the surrender of cash settled options. The following summarizes options granted, exercised, surrendered, forfeited and expired during the periods:


	Number of options			Weighted average exercise price (C$)		Number of			Weighted average
Outstanding at December 31, 2017		5,553,393			5.31
						options			exercise price C$
Outstanding at December 31, 2018							6,858,376			5.88
Granted		3,327,525			6.40		1,095,182			7.84
Surrendered for cash							(1,651,008	)		5.32
Exercised		(435,792	)		4.78		(4,878	)		3.62
Forfeited		(643,849	)		5.81		(52,375	)		4.90
Expired		(15,420	)		6.01		(51,291	)		4.17

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
Outstanding at June 30, 2019							6,194,006			6.56

Outstanding at December 31, 2019							6,156,652			6.49
Forfeited		(243,761	)		6.22		(550,259	)		6.79
Surrendered for cash settlement		(1,544,151	)		4.95
Expired		(119,336	)		5.63

Outstanding at September 30, 2019		6,289,907			6.51
Outstanding at June 30, 2020							5,606,393			6.46

Exercisable at September 30, 2019		1,940,498			5.98
Exercisable at June 30, 2020							2,435,733			6.25

Range of exercise prices of options outstanding at ~~September~~June 30, ~~2019:~~2020:

   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


	Options outstanding						Options exercisable
			Weighted		Weighted				Weighted		Weighted
			average		average				average		average
	Number		remaining		exercise		Number		remaining		exercise
Range of exercise prices	outstanding		life		price C$		exercisable		life		price C$
C$4.01 – C$5.00		22,537		4.39		4.12		—
C$5.01 – C$6.00		677,733		1.39		5.76		677,733		1.39		5.76
C$6.01 – C$7.00		4,115,530		2.67		6.32		1,494,310		1.70		6.20
C$7.01 – C$8.00		790,593		3.88		7.84		263,690		3.88		7.84

Total		5,606,393						2,435,733

~~Performance share units (“PSUs”)~~PSUs

As at ~~September~~June 30, ~~2019,~~2020, there were ~~295,216~~197,471 PSUs outstanding (December 31, ~~2018~~2019 – ~~85,728)~~223,052) accounted for at a value of ~~$0.2~~$0.02 million (December 31, ~~2018~~2019 – ~~$0.1~~$0.2 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”)~~DSUs

~~There~~As at June 30, 2020, there were ~~92,889~~290,730 DSUs outstanding ~~at September 30, 2019~~ (December 31, ~~2018~~2019 – ~~25,962)~~132,597) accounted for at a value of $0.4 million, which is included in current portion of other liabilities on the balance sheet (December 31, ~~2018~~2019 – ~~$0.1~~$0.4 million).

RSUs

On June 17, 2020, the Company granted 2,578,971 RSUs. Of the RSUs granted, 2,378,971 RSUs have an aggregate time-based vesting period of three years and vest one third every year over a three-year period from the date of grant. At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The fair value of the RSUs was determined to be C$1.89, which was the volume weighted average price of the Company’s common shares on the grant date.

Of the RSUs granted, 200,000 RSUs were granted to an executive with service and performance-based conditions for vesting (the “Performance RSUs”). If the Company’s share price increases to C$3.00 for 20 consecutive trading days within three years of the grant date, then 50% (100,000) of the Performance RSUs will vest at the end of the three-year service period. If the Company’s share price increases to C$4.00 for 20 consecutive trading days within three years of the grant date, 100% (200,000) of the Performance RSUs will vest at the end of the three-year service period. If the Company’s share price increases to C$6.00 for 20 consecutive trading days within three years of the grant date, then 150% (300,000) of the Performance RSUs will vest at the end of the three-year service period. The grant date fair value of the Performance RSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$1.70.

Dilutive instruments

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, 4.3~~2020, 5.6 million options (2019 – 1.1 million and ~~3.4~~4.2 million) and nil and 2.7 million ~~stock options (2018~~RSUs (2019 – ~~5.1 million and 5.5 million),~~nil) 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.

7.8. 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 9 for the disaggregation of revenue by geographic region.

   For the three months ended
September 30,    For the nine months ended
September 30,
         2019                2018                2019                2018
Product
   56,486    64,941    168,321    175,286
Transportation
   6,429    6,184    18,644    16,368
Licenses
   409    595    1,472    1,724








Total product revenue
   63,324    71,720    188,437    193,378
Installation and other services
   2,061    2,193    6,100    6,863








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


	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019
Product		36,921		54,886		72,919		111,835
Transportation		3,545		5,856		7,540		12,215
License fees from Distribution Partners		299		531		605		1,063

Total product revenue		40,765		61,273		81,064		125,113
Installation and other services		1,390		2,818		2,072		4,039

		42,155		64,091		83,136		129,152

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


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended June 30,				For the six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
At a point in time		62,915		71,125		186,965		191,654		40,466		60,742		80,459		124,050
Over time		2,470		2,788		7,572		8,587		1,689		3,349		2,677		5,102

		65,385		73,913		194,537		200,241		42,155		64,091		83,136		129,152

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

~~DIRTT Environmental Solutions Ltd.~~

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

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

Contract Liabilities


							As at
	September 30, 2019		As at December 31, 2018		December 31, 2017		June 30, 2020		December 31, 2019		December 31, 2018
Customer deposits		6,296		6,746		5,675		4,423		2,436		6,746
Deferred revenue		1,111		955		701		833		1,131		955

Contract liabilities		7,407		7,701		6,376		5,256		3,567		7,701

Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities was ~~consistent~~higher as at ~~September~~June 30, ~~2019~~2020 compared to December 31, ~~2018~~2019 mainly due to the timing of orders and payments. Contract liabilities as at December 31, ~~2018~~2019 and ~~2017,~~2018, respectively, totaling ~~$7.5~~$2.7 million and ~~$5.9~~$7.2 million were recognized as revenue during theyear-to-date periods ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ 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,
         2019                2018                2019                2018
Commercial
   42,910    41,117    124,248    119,021
Healthcare
   9,192    18,698    32,452    40,459
Government
   3,855    4,634    12,267    17,408
Education
   6,958    6,676    17,998    14,766
Licenses fees from Distribution Partners
   409    595    1,472    1,724








Total product revenue
   63,324    71,720    188,437    193,378
Installation and other services
   2,061    2,193    6,100    6,863








   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.


	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019
Commercial		25,096		39,189		53,370		81,338
Healthcare		7,417		10,346		12,480		23,260
Government		3,960		4,313		7,087		8,412
Education		3,993		6,894		7,522		11,040
License fees from Distribution Partners		299		531		605		1,063

Total product and transportation revenue		40,765		61,273		81,064		125,113
Installation and other services		1,390		2,818		2,072		4,039

		42,155		64,091		83,136		129,152

9. SEGMENT REPORTING

The Company has one reportable and ~~one~~ operating segment and operates in ~~three~~two principal geographic locations – Canada and the United States. Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, ~~and International. Currently, the majority of revenue from~~with periodic international projects ~~are included in the U.S. revenue amount as these projects are sold by U.S.-based distribution partners and are delivered to international locations.~~from North American Distribution Partners. The Company’s revenue from operations from external customers, based on location of operations, and information about itsnon-current assets, are 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 June 30,				For the six months ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Canada		8,956		11,627		24,795		29,998		4,341		8,771		10,327		15,839
U.S.		56,429		62,249		169,742		169,343		37,814		55,320		72,809		113,313
International		—		37		—		900

		65,385		73,913		194,537		200,241		42,155		64,091		83,136		129,152

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


	As at				As at
	September 30, 2019		December 31, 2018		June 30, 2020¹		December 31, 2019¹
Canada		47,536		36,323		43,335		47,892
U.S.		27,317		15,353		31,286		29,286

		74,853		51,676		74,621		77,178

(1)	Amounts include property, plant and equipment, capitalized software, operating lease ~~ROU~~right-of-use assets, goodwill and other assets.

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

~~A DIRTT Distribution Partner, Lane Office Furniture Inc. (“Lane”),~~Certain stock based compensation expense is ~~owned by a former director~~not deductible in the calculation of income taxes in Canada. Accordingly, the ~~Company, Gregory Burke. Effective~~fair value adjustment recorded during the period ended 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.~~2019 impacted our effective tax rate during that period.

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

11. COMMITMENTS

As at ~~September~~June 30, ~~2019,~~2020, the Company had outstanding purchase obligations of approximately ~~$7.7~~$5.5 million related to inventory and property, plant and equipment purchases. As at June 30, 2020, the Company had undiscounted operating lease liabilities of $21.7 million.

~~12. LEGAL PROCEEDINGS~~

~~On May 9,~~During 2019, the Company ~~commenced an action~~entered into a lease agreement with a term of 25 years, expected to commence in the ~~Court~~second half of ~~Queen’s Bench~~2020, associated with the construction of ~~Alberta against two former executives, their company, Falkbuilt Ltd.~~a new combined tile and millwork facility in Rock Hill, South Carolina (“~~Falkbuilt”~~South Carolina Plant”)~~, and other individuals, on~~. Undiscounted rent obligations associated with this lease are $28.9 million.

During the ~~basis~~first quarter of ~~among other things, a breach of non-compete and non-solicit obligations.~~

~~On November 5, 2019, Falkbuilt filed a Statement of Claim (the “Claim”) against~~2020, the Company entered into a lease agreement with a term of 12 years, expected to commence in the ~~Court~~second half of ~~Queen’s Bench of Alberta alleging that the Company has misappropriated and misused their alleged proprietary information~~2020, associated with a new DIRTT Experience Center (“DXC”) in furtherance of the Company’s product development. The claim seeks monetary relief, including, among other things, damages of approximately C$30.0 million, disgorgement of profits, punitive damages, and attorneys’ fees, and an interim, interlocutory and permanent injunction of the Company’s use of the alleged proprietary information.

~~The Company believes the Claim is without merit. The Company intends to defend it vigorously and to continue to pursue its legal remedies against the former employees.~~Plano, Texas. Undiscounted rent obligations associated with this lease are $6.3 million.

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~~

InWe have revised our calculation of Adjusted EBITDA and Adjusted Gross Profit, non-GAAP financial measures, for the third quarter of 2019, we continued to focus on our plan to transform the Company into a scalable growth platform to drive market penetration 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~~presented periods compared to ~~2017 IFRS results primarily as a result of our management transition and our efforts to scale~~ the Company for sustained, profitable growth. Accordingly, we estimated and announced that our 2019 IFRS revenue would be 5% to 10% higher than 2018 IFRS revenue, with corresponding increases in net incomecomparable prior periods. For additional information, see “– Non-GAAP Financial Measures – EBITDA and Adjusted ~~EBITDA. With increasing recognition~~EBITDA for the Three and Six Months Ended June 30, 2020 and 2019.” and “– Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and Six Months Ended June 30, 2020 and 2019.”

Summary of ~~challenges associated with~~Financial Results

Revenue for the ~~overall management changes and~~quarter ended June 30, 2020 was $42.2 million, a decline of $21.9 million or 34% from $64.1 million for the ~~immature nature~~quarter ended June 30, 2019. Revenue decreased by 36% to $83.1 million for the six months ended June 30, 2020, compared to $129.2 million for the six months ended June 30, 2019. We believe the decline is principally related to the ongoing effects of disruptions in our sales activity levels stemming from the transitional state of our commercial function as we ~~revised that expectation downward as~~implement our strategic plan combined with project delays or deferrals due mainly to impacts of the ~~year progressed. In addition, we previously stated that we expected Adjusted EBITDA~~COVID-19 pandemic on construction schedules.

Gross profit for the quarter ended June 30, 2020 was $14.2 million or 33.7% of revenue, a decline of $10.2 million or 42%from $24.4 million or 38.1% of revenue for the quarter ended June 30, 2019. Gross profit margin decreased to ~~be impacted by certainone-time~~ ~~costs related~~30.7% for the six months ended June 30, 2020, compared to 37.2% for the ~~sales~~six months ended June 30, 2019. This reduction was attributable to our decline in revenues 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 deleveragingthe impact of fixed costs on lower ~~revenue.~~

~~Revenue~~revenues and during the three and six month periods ended June 30, 2020, we incurred $0.5 million and $1.0 million of severance costs, respectively, offset by a $1.2 million timber provision reversal in ~~third~~the second quarter of ~~$65.4~~2020, following the validation of an in situ remediation solution that enabled us to meet certain building code specifications under which certain projects were sold, thereby significantly reducing the prior estimated timber liability. Additionally, the three and six month periods ended June 30, 2019 include $0.5 million and $2.0 million of costs, respectively, incurred to mitigate future tile warping.

Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the quarter ended June 30, 2020 was ~~12%~~$16.1 million or 38.2% of revenue, a $10.9 million or 40% decline from $27.0 million or 42.1% of revenue for the quarter ended June 30, 2019. Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the six months ended June 30, 2020 was $31.7 million or 38.1% of revenue, a $21.1 million or 40% decline from $52.8 million or 40.9% of revenue for the six months ended June 30, 2019. Declines in Adjusted Gross Profit for both periods are for the reasons noted above. Excluded from Adjusted Gross Profit in the six months ended June 30, 2020 are $2.0 million of overhead costs associated with operating at lower than ~~2018. Several factors continue~~normal capacity levels, which were charged directly and separately to ~~impact 2019 revenue, including~~cost of sales rather than as a cost attributable to production. Between January and April, 2020, we reduced our manufacturing workforce by 25% to bring labor capacity in line with current activity levels.

Net income for the ~~disruption~~quarter ended June 30, 2020 was $0.3 million, compared to ~~our salesforce~~net income of $2.6 million for the quarter ended June 30, 2019. The decrease in net income is attributable to the above noted reduction in gross profit 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 as well as the revised timing of various projects and the~~$0.5 million increase in foreign exchange loss, of certain expected projects. As the year has progressed, it has become clear the sales and marketing organization with which we entered the year has been unable to deliver upon the opportunities that it identified and on which the prior guidance was based. This has been driven largelypartially offset by a ~~historical lack~~$2.5 million reduction in operating expenses and $4.3 million of ~~training, individual accountability and~~government subsidies. The reduction in operating expenses reflects lower commissions on reduced sales activities, the ~~necessary processes and tools. Our belief in the size~~combination of ~~our market opportunity remains unchanged as well as the resonance~~$1.3 million 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~~costs related 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”~~and $0.4 million of costs related to the listing of our common shares on Nasdaq in 2019 that did not recur, other cost reductions both deliberate and as a consequence of the pandemic, offset by higher legal costs of $0.9 million and an increase in stock based compensation of $2.1 million.

Net loss increased to $5.0 million for the six months ended June 30, 2020 from $2.7 million for the six months ended June 30, 2019. Compared to the prior year period, the increase in net loss is attributable to the above noted reduction in gross profit, partially offset by a $10.5 million reduction in operating costs, government subsidies of $4.3 million, increased foreign exchange gains of $2.3 million and $1.2 million of income tax recoveries.

The reduction in operating expenses reflects lower commissions on reduced sales activities, the combination of $1.3 million of costs related to our sales and marketing plan, $1.1 million related to the listing of our common shares on Nasdaq and $2.6 million of reorganization costs in 2019 that did not recur, other cost reductions both deliberate and as a consequence of the COVID-19 pandemic and a $3.9 million decrease in stock based compensation, offset by higher legal costs of $3.0 million.

Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the quarter ended June 30, 2020 was $0.3 million or 0.6% of revenue, a decline of $5.8 million from $6.0 million, or 9.4% of revenue, for the quarter ended June 30, 2019. Adjusted EBITDA for the six months ended June 30, 2020 was a $5.2 million loss or (6.3)% of revenue, a decline of $19.0 million from $13.8 million, or 10.7% of revenue, for the six months ended June 30, 2019. Reductions for the quarter and year-to-date periods were due to the above noted reasons. We changed our calculation of Adjusted EBITDA beginning in the fourth quarter of 2019 to exclude the impacts of foreign exchange to improve year-on-year comparability of Adjusted EBITDA. We also changed our calculation of Adjusted EBITDA beginning in the second quarter of 2020 to exclude the impact of government subsidies.

Outlook

On November 12, 2019, DIRTT unveiled a four-year strategic plan for the Company, based on three key pillars: commercial execution, manufacturing excellence and innovation. This plan laid out a roadmap to transform a founder-led start-up into a professionally managed operating company. Our long-term objective is to scale our operations to profitably capture the significant market opportunity created by driving conversion from conventional construction to DIRTT’s process of modular, prefabricated interiors.

In the second quarter of 2020, the COVID-19 pandemic continued to impact our business, specifically causing job site closures in certain jurisdictions, schedule delays resulting from labor restrictions and supply chain shortages on job sites and project deferrals due to economic uncertainty. Late in the first quarter of 2020 and early in the second quarter of 2020, we took decisive actions to ensure employee safety, to right-size our plant labor capacity and our overall cost structure consistent with current activity levels and to increase our available liquidity. These steps allowed us to continue moving forward with our strategic plan, while re-prioritizing the execution of certain aspects of our commercial strategy to reduce or defer specific costs and capital expenditures while still realizing the majority of the benefits derived from the plan.

Second quarter 2020 revenue of $42.2 million was slightly higher than first quarter 2020 revenue. While construction activity on existing projects has continued, the pace of construction has slowed with new social distancing and infection control requirements constraining onsite labor. As DIRTT projects are typically installed at the later stage of the construction process, these job site delays impacted our second quarter results, although the exact amount is difficult to quantify given our short lead times. We estimate approximately $3.7 million of projects that ~~was developed~~we were confident of second quarter delivery at March 15 were deferred to future quarters in addition to opportunities that we believe would normally have come to fruition that were delayed or deferred, the amount of which is not possible to quantify. These delays are expected to continue to impact us through the remainder of 2020 as the industry adjusts to the COVID-19 pandemic and the exact timing of the completion of these projects is uncertain.

We believe that the long-term impacts of the COVID-19 pandemic on our business have the potential to be positive, accelerating the shift to modular construction and DIRTT’s product suite. Forced reductions in onsite labor due to social distancing may adversely impact construction schedules and cost, accelerating the trend towards offsite manufacturing and consolidation of subtrade activities. Additionally, increased focus on infection control and risk mitigation in the office environment has the potential to require reduced density, increased use of private offices and other separation strategies all of which could increase the per square foot content of DIRTT solutions. At the same time, work environments will need to evolve with the ~~assistance~~circumstances potentially increasing demand for the flexibility inherent in the modular aspect of ~~an internationally recognized consulting firm.~~ DIRTT’s offerings. We would anticipate all these factors to favorably affect our healthcare and education clients, in addition to commercial clients.

The ~~total~~realization of any potential benefits is uncertain and we caution that the near and mid-term impacts of COVID-19 remain highly uncertain and regionally dependent. While the re-opening of economies has commenced in many jurisdictions, the resurgence in infection rates could delay or even reverse these re-opening activities, adversely affecting interior construction activity. Our customers are taking a measured approach to modifying their offices in reaction to COVID-19, therefore any potential positive impact on our sales would be anticipated to follow that modulated timing. In addition, COVID-19 has had a negative financial impact on many healthcare organizations, potentially materially reducing their construction budgets for new facilities and facility renovations. It has also caused a pause in some building programs as healthcare providers re-examine their patient delivery models and the impact on their physical space. Educational institutions are also facing budget challenges. Finally, a decline in overall commercial construction activity from a general economic contraction could negatively impact our sales.

As the timing and pace of economic recovery and the fulsome effect of COVID-19 on the economy remains uncertain, we are actively managing our cost base. We have benefited from both deliberate cost reductions as well as deferrals that are a direct result of travel and other such shelter in place restrictions. As economies begin to ~~develop~~reopen, we expect that we will begin to incur travel and entertainment expenditures as in-person sales activities resume, although the ~~Sales & Marketing Plan was $2.0 million,~~timing and amount of which ~~$0.7 million was incurred~~is indeterminable at this time.

Within the commercial function, we continued to broaden our Distribution Partner network, and welcomed five new Distribution Partners in the United States since our last reporting date, one in each of our west, south and north east regions and two in the central region, and have ended our relationships with three underperforming Distribution Partners. In an innovative response to travel restrictions, we successfully onboarded these Distribution Partners via virtual training programs. We hosted several virtual client tours of DIRTT in June and expect to leverage these tours aggressively within the sales organization in the months to come. In Chicago, construction of our DIRTT Experience Center continued and we anticipate that it will be ready for in-person client tours, with enhanced safety protocols, in the third quarter of ~~2019. Key components~~2020.

From a systems perspective, we successfully rolled out phase one of the Sales & Marketing Plan consist of establishing a strategic marketing function and enhancing sales and performance management. Implementing the strategic marketing function includes the hiring of additional marketing professionals to newly established roles, the implementation of supporting systems and the creation of marketing programs and communications to drive lead generation. Sales force enhancement includes creating new sales management roles to provide support to sales representatives, creating new sales roles to manage strategic national accounts and address large project opportunities and

~~implementing a newly created~~our Client Relationship Management ~~(“CRM”) system. The commercial (sales~~System which coincides with the launch of DIRTT’s first ever comprehensive strategic marketing campaign, “Make space for possibilities^TM”. This campaign seeks to demonstrate how DIRTT solutions meet the evolving needs of individuals, teams and ~~marketing) function will be led~~organizations seeking greater adaptability within their workplaces and real estate portfolios. We remain on schedule to deliver a total cost of ownership tool, which is expected to go live in the fourth quarter of 2020. These initiatives are expected to significantly enhance our sales efforts 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.demonstrating to potential end-customers DIRTT’s value proposition relative to conventional construction.

InWithin our manufacturing operations, our safety culture is now well ingrained resulting in a ~~metric-based approach~~recordable incident rate for the first half of the year below 1.0 and more than 75% below industry standards. The next stage of improvement is focused on driving sustained quality improvements. We are pleased to ~~lean manufacturing, focusing on Safety, Quality, Delivery, Inventory~~note that we have seen continued improvements in quality and, ~~Productivity (SQDIP) was introduced earlier this year and is being implemented~~ in the second quarter of 2020, all of our ~~facilities along with related systems.~~plants exceeded their performance goals of a 50% reduction in deficiencies relative to 2019. We are now embarking on the process of improving the efficiency and cost effectiveness of our manufacturing operations. In ~~early October 2019,~~the second quarter of 2020, we ~~executed a lease agreement for~~successfully piloted one-piece flow manufacturing in our ~~previously announced combined tile and millwork~~Savannah factory which ~~will be located~~achieved significant efficiency improvements in our aluminum frame manufacturing process. We are now expanding these processes to our other plants. We are also in the ~~Charlotte metropolitan area. In August 2019,~~process of implementing improvements within our supply chain and procurement processes and the benefits are expected to be realized over time as lower cost material flows through our raw material inventory.

At our South Carolina Plant, construction of the base building is largely complete and in July 2020 we ~~paid deposits totaling $1.6 million~~received our first shipment of equipment. We expect to ~~certain~~receive the balance of the equipment ~~suppliers for customized equipment for the new facility, which we anticipate will be delivered~~ in the second half of ~~2020. The total cost~~2020 and are on track for commissioning for this facility in the first half of 2021.

Our focus on liquidity and cash preservation has been effective. In the second quarter, we completed the definitive documentation for our previously announced six-month covenant holiday on our credit facility and drew C$3.6 million ($2.6 million) of the Canadian leasing facility to fund 2019 Canadian equipment purchases. In the event activity levels remain at current levels, we will likely seek an extension to the covenant holiday or replace our facility with an asset backed facility. The U.S. leasing facility will be used to fund the equipment purchases for our new South Carolina Plant, with funding of the equipment, including $4.7 million of deposits paid in 2019, now expected in the late third and fourth quarter when the equipment is delivered and accepted on site. We also qualified for an approximately $4.3 million taxable wage subsidy under the Canadian Emergency Wage Subsidy program from the Canadian government for the April to June period. Of this amount, $1.6 million was received in June with the balance expected to be ~~approximately $18.5 million, and we anticipate that~~received in the ~~commencement of commercial operations will begin during the first quarter of 2021.~~

~~On October 9, 2019, we commenced trading of our common shares on The Nasdaq Global Select Market (“Nasdaq”).~~third quarter. As a result, we finished the second quarter with net working capital of the Nasdaq listing, we are now reporting our financial statements under the accounting principles generally accepted in the United States (“GAAP”) and in U.S. dollars. In addition, we ceased offering a$52.2 million, including cash ~~surrender option for employee stock options.Year-to-dateone-time~~ ~~costs~~balances of ~~the Nasdaq listing are approximately $2.5~~$44.6 million, ~~and we expect~~compared to ~~incur approximately $0.5~~$51.0 million of ~~additional costs in the fourth quarter~~net working capital including $43.5 million 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, we continue to believe our significant transformational efforts and investments will result in attractive revenue growth, improved profitability and strong cash generation into the future.

~~At our Analyst Day on November 12, 2019 in New York City we will present our strategic plan and revenue and Adjusted EBITDA Margin targets we are working to achieve by the end of 2023.~~at March 31, 2020.

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 toover 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 and stock-based compensation. In addition, management bases certain forward-looking estimates and budgets onnon-GAAP financial measures, primarily Adjusted EBITDA.

In the fourth quarter of 2019, we removed 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 have presented a reconciliation to our prior calculation of Adjusted EBITDA for the quarters presented. Additionally, since the fourth quarter of 2019, we have excluded from Adjusted Gross Profit costs associated with under-utilized capacity. 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 the second quarter of 2020, we also removed the impact of government subsidies from Adjusted EBITDA.

Reorganization expenses, ~~impairment expenses,~~government subsidies, depreciation and amortization, ~~and~~ stock-based compensation expense, and foreign exchange gains and losses 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 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 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, as previously presented		Gross profit before deductions for depreciation and amortization

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

Adjusted Gross Profit Margin		Adjusted Gross Profit divided by revenue

EBITDA		Net income before interest, taxes, depreciation and amortization

Adjusted EBITDA, as previously presented		EBITDA adjusted fornon-cash foreign exchange gains or losses on debt revaluation; impairment expenses; stock-based compensation expense; reorganization expenses; and any othernon-core gains or losses

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

Adjusted EBITDA Margin		Adjusted EBITDA divided by revenue

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

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

EBITDA and Adjusted EBITDA for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

The following table presents a reconciliation for the ~~third~~second quarter ~~and~~year-to-date results of ~~2019~~2020 and ~~2018~~2019 of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	($ in thousands)						($ in thousands)						($ in thousands)						($ in thousands)
Net income (loss) for the period	$	5,802		$	(1,433	)	$	3,148		$	2,407			283			2,611			(5,045	)		(2,654	)
Add back (deduct):
Interest Expense		3			98			77			301			61			25			96			74
Interest Income		(228	)		(101	)		(320	)		(327	)		(57	)		(38	)		(195	)		(92	)
Income Tax Expense		1,959			684			3,667			3,114
Income Tax Recovery														124			1,722			(1,202	)		1,708
Depreciation and Amortization		2,925			3,544			9,260			10,342			2,761			2,940			5,893			6,335

EBITDA	$	10,461		$	2,792		$	15,832		$	15,837			3,172			7,260			(453	)		5,371
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
Stock-based Compensation Expense														425			(1,655	)		886			4,792
Non-cash Foreign Exchange Gain on Debt Revaluation														—			—			—			(211	)
Government Subsidies														(4,284	)		—			(4,284	)		—
Reorganization Expense		—			2,236			2,639			4,646			—			—			—			2,639

Adjusted EBITDA, as previously presented⁽¹⁾														(687	)		5,605			(3,851	)		12,591

Other Foreign Exchange (Gains) Losses														960			441			(1,359	)		1,171

Adjusted EBITDA	$	8,072		$	13,062			20,663		$	30,065			273			6,046			(5,210	)		13,762

Net Income Margin(1)		8.9	%		(1.9	)%		1.6	%		1.2	%
Net Income (Loss) Margin⁽²⁾														0.7	%		4.1	%		(6.1	%)		(2.1	%)

Adjusted EBITDA Margin, as previously presented⁽¹⁾														(1.6	%)		8.7	%		(4.6	%)		9.7	%

Adjusted EBITDA Margin		12.3	%		17.7	%		10.6	%		15.0	%		0.6	%		9.4	%		(6.3	%)		10.7	%

⁽¹⁾	As discussed previously, in prior filings, only foreign exchange movements on debt revaluation was included in Adjusted EBITDA.

⁽²⁾	Net income (loss) divided by revenue.

For the three months ended ~~September~~June 30, ~~2019,~~2020, Adjusted EBITDA and Adjusted EBITDA Margin decreased to ~~$8.1~~$0.3 million ~~or 12.3%~~and 0.6% from ~~$13.1~~$6.0 million ~~or 17.7%~~and 9.4% in the same period of ~~2018.~~2019. This reflects ~~the $5.2~~a $10.9 million decrease in Adjusted Gross Profit ~~the impact~~and $0.9 million of ~~$2.4 million ofone-time~~higher legal costs in ~~operating expenses (which included $0.7~~2020. These reductions in Adjusted EBITDA were partially offset by reduced commissions on lower revenues and decreased spending on travel, meals and entertainment, including tradeshows due to COVID-19 related reductions as well as cost reduction initiatives. In 2019 we incurred $1.3 million of consulting costs incurred for our sales and marketing plan and $0.4 million of costs related to the ~~Sales & Marketing Plan, $1.4 million~~listing of the Company’s common shares on 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.~~2019 that did not recur in 2020.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, Adjusted EBITDA and Adjusted EBITDA Margin decreased to ~~$20.7~~a $5.2 million ~~or 10.6%~~loss and (6.3)% from ~~$30.1~~$13.8 million ~~or 15.0%~~and 10.7% in the same period of ~~2018.~~2019. This decrease reflects ~~the $6.5~~a $19.0 million decrease in Adjusted Gross Profit ~~the impacts~~and $2.0 million of ~~$5.5~~costs of underutilized capacity, discussed below, $3.0 million of~~one-time~~ higher legal costs in ~~operating expenses (which included $2.0~~2020 and a $0.6 million increase to our provision for expected credit losses. These decreases were partially offset by lower commissions, and reduced travel, meals and entertainment, including tradeshows due to COVID-19 related reductions as well as cost reduction initiatives. In 2019 we incurred $1.3 million related to third party sales and marketing consulting fees and $1.1 million related to listing the ~~Sales & Marketing Plan, $2.5 million of~~Company’s common shares on Nasdaq ~~listing costs, and $1.0 million of operations consulting costs), and a $2.1 million increase~~that did not recur in ~~foreign exchange losses partially offset by the reversal of a $1.3 million provision and ongoing cost reductions.~~2020.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

The following table presents a reconciliation for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 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 %


	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
	($ in thousands)						($ in thousands)
Gross profit		14,216			24,421			25,531			48,025
Gross profit margin		33.7	%		38.1	%		30.7	%		37.2	%
Add: Depreciation and amortization expense		1,908			2,559			4,169			4,739

Adjusted Gross Profit, as previously presented		16,124			26,980			29,700			52,764
Add: Costs of under-utilized capacity		—			—			2,010			—

Adjusted Gross Profit		16,124			26,980			31,710			52,764

Adjusted Gross Profit Margin, as previously presented		38.2	%		42.1	%		35.7	%		40.9	%

Adjusted Gross Profit Margin		38.2	%		42.1	%		38.1	%		40.9	%

Gross profit and gross profit margin decreased to ~~$24.9~~$14.2 million or 33.7% for the three months ended June 30, 2020, from $24.4 million or 38.1% for the three months ended ~~September~~June 30, ~~2019, from $30.1~~2019. Gross profit and gross profit margin decreased to $25.5 million or ~~40.7%~~30.7% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2020, from $48.0 million or 37.2% for the six months ended June 30, 2019. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to ~~$27.3~~$16.1 million or ~~41.8%~~38.2% for the three months ended ~~September~~June 30, ~~2019,~~2020, from ~~$32.5~~$27.0 million or ~~44.0%~~42.1% for the three months ended ~~September~~June 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.~~2019. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to ~~$80.1~~$31.7 million or ~~41.2%~~38.1% for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, from ~~$86.6~~$52.8 million or ~~43.2%~~40.9% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~ 2019. The decreases are largely due to reduced fixed cost leverage due to reductions in revenues and excess labor capacity prior to headcount reductions discussed below combined with approximately $0.5 million and $1.0 million of related severance costs in the second quarter and year to date periods of 2020, respectively.

During the ~~period,~~fourth quarter of 2019, we ~~incurred $2.8~~determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2020, we separately classified $2.0 million ~~of incremental~~as costs ~~(1.1% reduction in~~related to our under-utilized capacity (5% of gross profit margin) in cost of sales. We took steps to manage our excess capacity, including the reduction in staffing by 14%, with a further 12% reduction in April 2020, and the undertaking of planned factory curtailments. The staffing reductions realigned our capacity with then expected activity levels; however, our fixed costs will affect our Adjusted Gross Profit Margin which we expect to remain below historical percentages until sales improve. Prospectively, we expect our fixed cost of sales to be approximately $6.0 million per quarter, and remaining costs of sales to be approximately 54% of revenues comprising materials which are variable, and labor which is quasi-variable as we match our shifts to order volumes.

Following the completion of third-party testing in 2019, we determined that ~~mitigate~~timber included in certain projects installed between 2016 and 2019 potentially did not meet the ~~tile warping issue~~fire-retardant specifications under which the projects were sold. As a result, we recorded a $2.5 million provision in the fourth quarter of 2019 and ~~$3.0~~have been contacting customers to determine whether remedial actions are required. In the second quarter of 2020, we identified and validated an in-situ solution that we believe will meet the fire-retardant specification under which the projects were sold. As a result, we have reduced the associated provision to $1.2 million which represents expected costs to prepare impacted sites and apply the in-situ solution. During the six months ended June 30, 2020, we incurred $0.1 million of costs associated with ~~headcount additions throughout 2018 in anticipation~~remediating previously installed timber projects, which were recorded against the provision.

In the first six months of ~~higher volumes. We also experienced a $0.7~~2019 we incurred approximately $2.0 million ~~reduction in~~of costs, representing 1.6% of gross profit margin, to mitigate future warping of our tiles. In the first quarter of 2020 we commissioned new equipment to prime our medium density fiberboard (“MDF”). The use of primed MDF addressed the tile warping issues that occurred in late 2018 and early 2019 due to ~~decreases~~higher than expected moisture absorption. Additionally, our costs associated with remediating deficiencies decreased in ~~second quarter gross profit on installation revenue. These cost increases were partially offset by~~ the ~~benefits~~first half of ~~the operational improvement activities as previously described. We expect to further realize benefits from these activities as the year progresses.~~2020.

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

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

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

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








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

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

Results of Operations

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019,~~2020, Compared to Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019


	Three Months Ended September 30,									Nine Months Ended September 30,									Three months ended June 30,						Six months ended June 30,
	2019			2018			% Change			2019			2018			% Change			2020			2019			2020			2019
	($ in thousands)																		($ in thousands)						($ in thousands)
Revenue	$	65,385		$	73,913			(12	)%	$	194,537		$	200,241			(3	)%		42,155			64,091			83,136			129,152
Gross Profit	$	24,934		$	30,085			(17	)%	$	72,959		$	79,390			(8	)%		14,216			24,421			25,531			48,025
														��
Gross Profit Margin		38.1	%		40.7	%		(6	)%		37.5	%		39.6	%		(5	)%		33.7	%		38.1	%		30.7	%		37.2	%
Operating Expenses
Sales and Marketing	$	8,568			9,995			(14	)%		25,898		$	30,169			(14	)%		6,177			9,543			13,585			17,330
General and Administrative		7,280			7,212			1	%		21,033			21,634			(3	)%		6,194			6,856			14,019			13,753
Operations Support		2,419			1,937			25	%		7,771			5,933			31	%		2,251			2,870			4,783			5,352
Technology and Development		1,718			922			86	%		5,881			3,048			93	%		2,082			2,046			4,247			4,163
Stock-based compensation		(2,389	)		2,037			NA			2,403			3,172			(24	)%
Impairment		—			6,098			(100	)%		—			6,098			(100	)%
Stock-based Compensation																				425			(1,655	)		886			4,792
Reorganization		—			2,236			(100	)%		2,639			4,646			(43	)%		—			—			—			2,639

Total Operating Expenses	$	17,596		$	30,437			(42	)%	$	65,625		$	74,700			(12	)%		17,129			19,660			37,520			48,029

Operating Income (Loss)	$	7,338		$	(352	)		NA		$	7,334		$	4,690			56	%		(2,913	)		4,761			(11,989	)		(4	)

Operating Margin		11.2	%		(0.5	)%		NA			3.8	%		2.3	%		65.2	%		(6.9	%)		7.4	%		(14.4	%)		0.0	%

Revenue

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

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

   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 )%


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	($ in thousands)				($ in thousands)
Product		36,921		54,886		72,919		111,835
Transportation		3,545		5,856		7,540		12,215
License fees from Distribution Partners		299		531		605		1,063

Total product revenue		40,765		61,273		81,064		125,113

Installation and other services		1,390		2,818		2,072		4,039

		42,155		64,091		83,136		129,152

Revenue decreased in the three and six months ended ~~September~~June 30, ~~2019~~2020 by ~~$8.5~~$21.9 million and $46.1 million or ~~12%~~34% and 36% respectively compared to the same ~~period~~periods of ~~2018.~~2019. Revenue decreased due to several factors ~~including the impact~~as discussed above in “– Summary of Financial Results” and “– Outlook”. We have been subject to a ~~large project~~disruption in sales activity levels particularly as it relates to larger projects, as discussed below, beginning in 2018 ~~that was not replaced in 2019. We also believe~~and carrying through the current quarter. This disruption stems from the distraction ~~from~~of significant management changes during 2018 on a long sales cycle combined with the immature and transitional state of our sales and marketing function, which limited our ability to take advantage of growth opportunities in our ~~market~~market. Due to the long sales cycle, particularly for ~~2019. The recent enhancements~~larger projects which can be two years or more, this had a corresponding negative effect on our revenue, especially in the last half of 2019 and continuing into the first half of 2020. This effect has lasted longer than we had anticipated. We are in the process of making substantial improvements to our commercial function, as outlined in our strategic plan, including building an appropriate organizational structure, improving the effectiveness of our existing sales force, attracting new sales talent, establishing strategic marketing and ~~senior management team may~~lead generation functions, as well as expanding and better supporting our Distribution Partner network. While we believe these actions are critical to driving long-term, sustainable growth, these actions did not have a measurable effect on 2020 revenues to date.

Our revenues were also impacted by the COVID-19 pandemic. We estimate approximately $3.7 million of projects that we were highly confident of second quarter delivery at March 15 were deferred to future quarters in addition to opportunities that would normally have come to fruition that were delayed or deferred, the amount of which is not possible to quantify. These project delays were primarily a result of construction site restrictions imposed by local regulatory authorities, including the effects of social distancing measures. It is uncertain when these projects will be delivered and it is highly likely that future projects will also experience similar delays as the pandemic runs its course. While we have not ~~yet positively affected sales due to, we believe, our long sales cycle.~~

For the nine months ended September 30, 2019, product revenue decreased by $7.0 million or 4% compared to the same period of 2018 for the same reasons as previously discussed. Revenue for the nine months ended September 30, 2018 included an estimated $4.0 to $7.0 million (2% to 3% of~~year-to-date~~ ~~2018 revenue)~~experienced any material cancellations of projects that were ~~delayed from the fourth quarter of 2017~~underway, it is uncertain as to the ~~first quarter~~impact of ~~2018 as a result of significant hurricanes~~the pandemic on future projects that are either in the ~~southern United States affecting 2017 project schedules.~~planning or conceptual stage. See “Risk Factors”.

Installation and other services revenue ~~of $2.1~~decreased $1.4 million for the three months ended ~~September~~June 30, ~~2019 was $0.1 million lower than the same period in 2018 and decreased $0.8 million for the nine months ended September 30, 2019~~2020 compared to the same period in ~~2018.~~2019 and decreased $2.0 million for the six months ended June 30, 2020 compared to the same period in 2019. The changes in installation revenue are primarily due to the timing of ~~projects.~~projects and overall sales activity, including the impacts of the COVID-19 pandemic. Except in limited circumstances, our Distribution Partners, rather than the Company, perform installation services, and accordingly, we are not anticipating significant growth in this revenue stream.

Our success is partly dependent on our ability to profitably develop our Distribution Partner network to expand our market penetration and ensure best practices are shared across local markets. We ~~had 93~~currently have 80 Distribution Partners, ~~at September 30, 2019.~~servicing multiple locations. We recently added five Distribution Partners, one in each of the west, south and north east, and two in the central regions of the United States, and have ended our relationships with certain underperforming Distribution Partners. Our clients, as serviced primarily through our Distribution Partners, exist within a variety of industries, including healthcare, education, financial services, government and military, manufacturing,non-profit, energy, professional services, retail, technology and hospitality.

We periodically analyze our revenue growth by vertical markets in the defined markets of commercial, healthcare, government and education. The following table presents our product and transportation revenue by vertical market:


	Three Months Ended September 30,							Nine Months Ended September 30,							Three months ended June 30,				Six months ended June 30,
	2019		2018		% Change			2019		2018		% Change			2020		2019		2020		2019
	($ in thousands)														($ in thousands)				($ in thousands)
Commercial	$	42,910	$	41,117		4	%	$	124,248	$	119,021		4	%		25,096		39,189		53,370		81,338
Healthcare		9,192		18,698		(51	)%		32,452		40,459		(20	)%		7,417		10,346		12,480		23,260
Government		3,855		4,634		(17	)%		12,267		17,408		(30	)%		3,960		4,313		7,087		8,412
Education		6,958		6,676		4	%		17,998		14,766		22	%		3,993		6,894		7,522		11,040
License fees from Distribution Partners		409		595		(31	)%		1,472		1,724		(15	)%
License fees from Distribution
Partners																299		531		605		1,063

Total Product Revenue	$	63,324	$	71,720		(12	)%	$	188,437	$	193,378		(3	)%
Total product and transportation revenue																40,765		61,273		81,064		125,113

Installation and other services	$	2,061	$	2,193		(6	)%		6,100		6,863		(11	)%		1,390		2,818		2,072		4,039

Total Revenue	$	65,385	$	73,913		(12	)%	$	194,537	$	200,241		(3	)%
																42,155		64,091		83,136		129,152

   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    —


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	(in %)				(in %)
Commercial		62		65		67		65
Healthcare		18		17		15		19
Government		10		7		9		7
Education		10		11		9		9

Total Product Revenue⁽¹⁾		100		100		100		100

(1)	~~excluding~~Excludes license fees from Distribution Partners

Revenue decreased by ~~12%~~34% and 36% respectively in the three and six months ended ~~September~~June 30, ~~2019~~2020 over the same ~~period~~periods in ~~2018~~2019 and was driven primarily by decreased ~~healthcare~~commercial sales which reflects the disruption in sales activity levels noted above. Commercial revenues were lower due to the completion of a major ~~healthcare projectthat was not replaced in 2019, and decreased government sales, which was mainly due to the timing of certain projects. This decrease in revenue was partially offset by growth~~project in the ~~commercial and education sectors. For the nine months ended September 30,~~first half of 2019 ~~revenue was lower by 3% compared to the same period in 2018, with continued growth in the commercial and education sectors, offset by the completion of a major healthcare project in 2018~~ that was not replaced and the impact of COVID-19 on construction activity. Decreased healthcare sales in ~~2019 and a reduced number~~the first half of ~~installation projects.~~2020 reflect the completion of several major healthcare projects that were not replaced in 2020.

Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, with periodic international projects from North American Distribution Partners. The following table presents our second quarter and year-to-daterevenue 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 )%


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	($ in thousands)				($ in thousands)
Canada		4,341		8,771		10,327		15,839
U.S.		37,814		55,320		72,809		113,313

		42,155		64,091		83,136		129,152

Sales and Marketing Expenses

Sales and marketing expenses decreased ~~$1.4~~$3.4 million and $3.7 million to ~~$8.6~~$6.2 million and $13.6 million for the three and six months ended ~~September~~June 30, ~~2019,~~2020, from ~~$10.0~~$9.5 million and $17.3 million for the three and six months ended ~~September~~June 30, ~~2018. Sales~~2019. The decreases were largely related to a reduction in commission expenses on lower revenues and ~~marketing~~lower travel, meals and entertainment expenses ~~decreased $4.3 million to $25.9 million for~~in the ~~nine~~three and six months ended ~~September~~June 30, ~~2019, from $30.2 million for~~2020 due to restrictions on travel as a result of COVID-19, the ~~nine months ended September 30, 2018.~~cancellation of Connext and other tradeshows as well as continued attention to cost discipline. As economies re-open, we anticipate travel and entertainment expenses to increase over current levels, the timing and amount of which, however, are indeterminate. Included in sales and marketing expenses in the three months ~~and nine months~~ ended ~~September~~June 30, 2019 ~~were $0.7~~was $1.3 million ~~and $2.0 million, respectively,~~ of~~one-time~~ consulting costs related to ~~the Sales & Marketing Plan. These costs were offset by a $1.5 million~~our sales and ~~$1.6 million reduction~~marketing plan that did not recur in commission expense for the three 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.2020.

Our sales and marketing efforts ~~in 2019 are largely concentrated~~continue to focus 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,expenditures, as ~~well as investment in sales generating initiatives as we implement our Sales & Marketing Plan, including targeted increases~~outlined in our ~~commercial organization headcount, expansion and refreshment~~strategic plan. In light of ~~our DIRTT Experience Centers (formally known as Green Learning Centers), and implementation of related systems and tools. Our ongoing focus is~~uncertainty caused by the COVID-19 pandemic, we have prioritized critical hires that are necessary to continue to advance our overall strategy, including the implementation of necessary systems and tools while ensuring appropriate cost control ~~costs by emphasizing return on investment on our sales~~ and ~~marketing expenditures.~~cash conservation.

General and Administrative Expenses

General and administrative expenses (“G&A”) ~~increased $0.1~~decreased $0.7 million to ~~$7.3~~$6.2 million for the three months ended ~~September~~June 30, ~~2019~~2020 from ~~$7.2~~$6.9 million for the three months ended ~~September~~June 30, ~~2018. This includes~~

2019. For the six months ended June 30, 2020, general and administrative expenses increased $0.2 million to $14.0 million from $13.8 million for the six months ended June 30, 2019.

~~$1.4~~For the three months ended June 30, 2020, the decrease was the result of incurring $0.9 million of~~one-time~~ higher legal costs, offset by expense reductions, and during the second quarter of 2019 we incurred $0.4 million of professional fees related to the ~~Nasdaq~~ listing ~~incurred in~~of our common shares on Nasdaq. For the ~~third quarter~~six months ended June 30, 2020, the increase was the result of ~~2019,~~incurring $3.0 million of higher legal costs and recording a $0.6 million of expected credit losses against our accounts receivable balances. These costs were offset by ~~a $1.3 million reversal of a claims provision.~~

~~G&A expenses decreased $0.6 million to $21.0 million for~~expense reductions and during the ~~nine~~six months ended ~~September~~June 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$1.1 million of ~~costs~~professional fees related to the ~~Nasdaq~~ listing ~~incurred in the nine months ended September 30, 2019. Beginning in 2020, we anticipate incremental annualnon-listing~~ ~~related costs~~ of approximately $1.5 to $2.0 million, as a result of becoming a U.S. registrant, driven largely by increased director and officer insurance premiums, the costs of maintaining two listings, as well as expected increases in audit, legal, and other compliance costs.our common shares on Nasdaq.

Operations Support Expenses

Operations support expenditures include the fixed costs associated with delivery and project management of DIRTT ~~Solutions.~~solutions. Operations support expenses ~~increased $0.5~~decreased by $0.6 million to ~~$2.4~~$2.3 million from $2.9 million in the prior year period. Operations support costs decreased $0.6 million to $4.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020 from ~~$1.9~~$5.4 million for the same period of 2019. In the three and six 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~~June 30, 2019 ~~from $5.9~~we incurred $0.7 million ~~for the nine months ended September 30, 2018, largely due to~~and $1.1 million of ~~consultant~~consulting costs, ~~as well as increases in personnel costs. The consultant costs incurred were to assist with the evaluation of current operations and~~respectively, to assist with the rectification of the tile warping issue. ~~Increases~~Decreases in consulting costs were partially offset by increases in personnel costs ~~were~~ due to increased headcount to better support project execution and ~~an increased provision for variable compensation.~~support of our Distribution Partners.

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~~by $0.1 million to ~~$1.7~~$2.1 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$0.9~~$2.0 million for the three months ended ~~September~~June 30, ~~2018.~~2019. Technology and development ~~expenses increased $2.8 million to $5.9~~costs of $4.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019, compared to $3.0 million for~~2020 were consistent with the ~~nine months ended September 30, 2018. These increases are due to a $0.3 million and $1.7 million decrease~~comparable period in capitalized salaries for the three and nine months ended September 30, 2019, respectively, as the current mix of projects undertaken by us included a higher portion of efforts related to business process improvements that were not eligible for capitalization. In addition, technology and development expenses included $0.3 million and $0.5 million of salary and benefit costs that were classified as cost of sales of technical services during the three and nine months ended September 30, 2018, respectively, as well as a higher provision for variable compensation.2019.

Stock-Based Compensation

~~Stock-based compensation reflected~~In the third quarter of 2018, we determined that we no longer qualified as a ~~$2.4 million recovery~~Foreign Private Issuer (“FPI”) 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, including options issued under our Amended and Restated Incentive Stock Option Plan (“Option Plan”), until such time as we requalified as a FPI or we registered our common shares with the SEC. Accordingly, we accounted for the ~~three months ended September~~fair value of outstanding options at the end of June 30, 2019 ~~compared to an expense of $2.0 million for~~as a liability, with changes in the ~~same period of 2018. Stock-based~~liability recorded through net income as a stock-based compensation ~~expense was reduced to $2.4 million for the nine months ended September 30, 2019, compared to $3.2 million for the same period of 2018. We recorded~~ fair value adjustments on cash settled stock options during the three and nine months ended September 30, 2019, respectively, with no fair value adjustment required in the respective periods in 2018. As noted previously, following our listing on Nasdaq onadjustment. On October 9, 2019, we ceased allowing cash surrender of ~~employee stock options. As a result, we will cease the associated liability~~options and returned to equity accounting ~~for~~under the Option Plan ~~which required~~without quarterly fair value ~~adjustments.~~adjustments at that date.

~~Impairment Expenses~~

~~During 2018, management decided to shift from~~Stock-based compensation expense for the ~~early stage development of its DIRTT Timber market~~three months ended June 30, 2020 was $0.4 million, compared to a ~~commercialized approach focused on large, standalone timber projects and as~~$1.7 million recovery for the same period of 2019. For the six months ended June 30, 2020, stock-based compensation was $0.9 million compared to $4.8 million for the same period of 2019. Stock-based compensation for the second quarter of 2019 included a~~tie-in~~ ~~to our other DIRTT Solutions. Management concluded that this strategy required significantly less timber capacity than existed and took steps toright-size~~ ~~its timber capacity by the end of 2018. Management determined these decisions to be an indicator of impairment of the assets of the DIRTT Timber line.~~

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

Reorganization Expenses

WeIn the first half of 2019, 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 costs includedincluding severance payments and related legal and consulting costs associated with management and organizational changes. ~~No further material expenditures~~We do not consider current period severances related to our plant workforce to be reorganization expenses in nature.

Government Subsidies

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government has established the Canadian Emergency Wage Subsidy (“CEWS”) on April 11, 2020. Under the CEWS, the Company may be eligible for a subsidy of up to 75% of wages paid to Canadian employees to August 29, 2020, depending on the Company meeting certain revenue decline thresholds. During the quarter we received or were eligible to receive $4.3 million under the CEWS.

The Canadian government recently introduced legislation to extend the availability of CEWS through December 19, 2020, with the amount of the subsidy varying depending on the scale of the Canadian revenue decline. Under the legislation, effective July 5, 2020, the CEWS would provide the Company with a taxable subsidy for wages paid to Canadian employees of up to 60%, with the amount of the subsidy varying depending on the scale of Canadian revenue decline and the maximum subsidy being reduced from 60% over the period, provided that, through August 29^th, the Company will qualify for a CEWS subsidy that is at least as generous as under the current CEWS program, Under the proposals, a top-up subsidy of up to 85% of wages paid to Canadian employees would also be available if the Company has a 3-month average revenue drop in Canadian-sourced revenue of more than 50% and certain other requirements are ~~anticipated in 2019.~~satisfied. We will continue to assess our eligibility on an ongoing basis for as long as the program is available.

Income Tax

Alberta’s general provincial tax rate was decreased on June 28, 2019 from 11.5% to 11% for the second half of 2019, to 10% for 2020, to 9% for 2021 and to 8% thereafter. As a result of the rate change, we reduced our deferred tax asset by $0.9 million, with a corresponding deferred income tax expense recorded in the second quarter of 2019.

The provision for income taxes is comprised of federal, state, provincial and foreign taxes based onpre-tax income. Income tax expense for the three months ended ~~September~~June 30, ~~2019, inclusive of the previously noted charge associated with the Alberta tax rate change,~~2020 was ~~$2.0~~$0.1 million, compared to ~~$0.7~~$1.7 million for the same period of ~~2018,~~2019 and income tax ~~expense~~recovery for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~$3.7~~$1.2 million as compared to ~~$3.1~~a $1.7 million expense for the same period of ~~2018.~~2019. As at ~~September~~June 30, ~~2019,~~2020, we had C$~~36.7~~42.3 million of loss carry-forwards in Canada and none 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~~$0.3 million or ~~$0.07~~$0.00 net income per share in the ~~third~~second quarter of 2019, compared to a net loss of $1.4 million or $0.02 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 a $2.4 million recovery in stock-based compensation, compared to a $2.0 million expense in the same period of 2018, and no reorganization or impairment expenses 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 million or $0.04 per share in the first nine months of 2019,~~2020, compared to net income of ~~$2.4~~$2.6 million or $0.03 net income per share for the ~~first nine~~second quarter of 2019. The decrease in net income is attributable to the above noted reduction in gross profit and a $0.5 million increase in foreign exchange loss, partially offset by a $2.5 million reduction in operating expenses and $4.3 million of government subsidies. The reduction in operating expenses reflects lower commissions on reduced sales activities, the combination of $1.3 million of costs related to our sales and marketing plan and $0.4 million related to the listing of our common shares on Nasdaq in 2019 that did not recur, other cost reductions both deliberate and as a consequence of the pandemic, offset by higher legal costs of $0.9 million and an increase in stock based compensation of $2.1 million.

Net loss for the six months ended June 30, 2020 was $5.0 million or $0.06 net loss per share compared to $2.7 million or $0.03 net loss per share in the six months ended June 30, 2019. Compared to the prior year period, the increase in net loss is attributable to the above noted reduction in gross profit, partially offset by a $10.5 million reduction in operating costs, government subsidies of ~~2018. The variances are the result~~$4.3 million, increased foreign exchange gains of $2.3 million and $1.2 million of income tax

~~changes~~recoveries. The reduction in ~~gross margin and~~ operating expenses ~~as described above. As discussed previously, we recorded a $6.1~~reflects lower commissions on reduced sales activities, the combination of $1.3 million ~~impairment expense in~~of costs related to our sales and marketing plan, $1.1 million related to the ~~third quarter~~listing of ~~2018. Net income for the nine months ended September 30, 2019 includes a $2.4 million expense in stock-based compensation, compared to $3.2 million in the same period of 2018,~~our common shares on Nasdaq and $2.6 million of reorganization costs ~~for~~in 2019 that did not recur, other cost reductions both deliberate and as a consequence of the ~~nine months ended September 30, 2019, compared to $4.6~~COVID-19 pandemic, and a $3.9 million ~~expense~~decrease in ~~the same period~~stock based compensation, offset by higher legal costs of ~~2018.~~$3.0 million.

Liquidity and Capital Resources

Cash and cash equivalents at ~~September~~June 30, ~~2019~~2020 totaled ~~$56.6~~$44.6 million, ~~an increase~~a decrease of ~~$3.2~~$2.6 million from $47.2 million at December 31, ~~2018. On January 31, 2019, we repaid $5.6 million of long-term debt outstanding with cash on hand, without penalty.~~ 2019.

In July 2019, we entered into a C$50.0 million senior secured revolving credit facility with the ~~Royal Bank of Canada (the “RBC Facility”).~~RBC. Draw-downs under the RBC Facility are available in both Canadian and U.S. dollars. ~~The~~As a result of our decline in revenues, discussed previously, and the potential impact of the COVID-19 pandemic on our outlook, we entered into a letter agreement with RBC during the second quarter. Under the Letter Agreement, the Covenants are waived for the period April 1 to September 30, 2020. During the Covenant Holiday Period the Company is able to borrow to a maximum of 75% of eligible accounts receivable and 25% of eligible inventory, less priority payables, subject to an aggregate limit of C$50.0 million including amounts borrowed under the Leasing Facilities, described below. During the Covenant Holiday Period the Company is required to maintain a cash balance of $10.0 million if no loans are drawn under the facility, have Adjusted EBITDA of not less than a loss of $7.0 million and $16.5 million for the twelve month periods ended June 30 and September 30, 2020, and make capital expenditures of no more than $10.7 million during the Covenant Holiday Period. In the event that activity levels remain at current levels, we will likely seek an extension to the Covenant Holiday Period or permanently convert or replace the RBC Facility ~~replaced the $18.0 million revolving credit facility~~ with ~~Comerica Bank, which expired on~~an asset backed facility. As at June 30, ~~2019.~~2020, the RBC Facility was undrawn and the available borrowing base was USD $12.8 million.

~~Management believes~~During the three months ended June 30, 2020, we entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 3.5%. The U.S. leasing facility is extendible for an additional year. During the second quarter of 2020 we borrowed C$3.6 million ($2.6 million) against the Canadian Leasing Facility and we anticipate drawing on the U.S. Leasing Facility in the second half of 2020 when equipment is received at the South Carolina Plant.

In light of the uncertainty caused by the near and potential mid-term impacts of COVID-19, we have evaluated multiple downside scenarios and have implemented cost control and expenditure management processes. Based on these analyses and the implementation of these spending control processes, we believe that existing cash and cash equivalents ~~and cash flows~~combined with increased liquidity from ~~operations will~~the aforementioned leasing facilities should, based on current activity levels, be sufficient to support ongoing working capital and capital expenditure requirements for at least the next twelve months. ~~Our future capital requirements will depend~~

A prolonged and complete cessation of or sustained significant decrease in North American construction activities or a sustained economic depression and its adverse impacts 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.~~customer demand could adversely affect our liquidity. To the extent that existing cash and cash equivalents and ~~cash flows~~increased liquidity from ~~operations~~the Leasing 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 equity securities ~~and could~~or contain ~~covenants~~instruments that ~~restrict operations.~~may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.

~~Historically,~~Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. ~~Cash is primarily used to fund~~Over the past three years, we have funded our operations and capital ~~expenditures. Over~~expenditures through a combination of cashflow from operations and cash on hand. We had no amounts outstanding under the ~~past several years, revenue has typically increased from year to year~~RBC Facility and C$3.5 million outstanding under the Leasing Facilities as a result, cash flows from account receivable collections have increased. However, operating expenses have also increased as we reinvested capital in growing the business. Our operating cash requirements may increase in the future as management continues to invest in the strategic growth of ~~the Company.~~June 30, 2020.

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

The following table summarizes our consolidated cash flows for the ~~nine~~three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


	Nine Months Ended September 30.						Three months ended June 30,						Six months ended June 30,
	2019			2018			2020			2019			2020			2019
	($ in thousands)						($ in thousands)						($ 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	)
Net cash flows provided by operating activities								2,377			7,480			1,617			14,881
Cash used in investing activities								(3,962	)		(2,966	)		(6,417	)		(5,070	)
Cash provided by (used in) financing activities								2,527			11			2,527			(5,545	)
Effect of foreign exchange on cash and cash equivalents		977			(1,202	)		224			152			(275	)		1,058

Net increase (decrease) in cash and cash equivalents		3,230			(21,365	)		1,166			4,677			(2,548	)		5,324
Cash and cash equivalents, beginning of period	$	53,412		$	63,484			43,460			54,059			47,174			53,412

Cash and cash equivalents, end of period	$	56,642		$	42,119			44,626			58,736			44,626			58,736

Operating Activities

Net cash flows provided by operating activities ~~increased to $17.9~~was $2.4 million and $1.6 million for the first ~~nine~~three and six months of ~~2019 from $7.5 million~~2020, respectively, compared to net cash flows ~~used in~~provided by operating activities of $7.5 million and $14.9 million in the ~~first nine months~~corresponding periods of ~~2018.~~2019. The ~~increase~~decrease in

cash flows from operations is largely due to ~~an increase in collections on accounts receivable balances and lack of an impairment charge in the first nine months of 2019. This was partially offset by an increase in foreign exchange loss and~~ a decrease in revenues and a reduction in trade accounts ~~payable~~payables and other liabilities ~~as compared to~~offset by the ~~first nine months~~impact of ~~2018.~~government subsidies, increases in accounts receivable collections, and customer deposits and deferred revenue.

Investing Activities

WeFor the three and six months ended June 30, 2020, we invested ~~$7.8~~$4.5 million and $6.2 million, respectively, in property, plant and equipment compared to $1.8 million and $3.2 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.~~respective prior year periods. The increase ~~was~~is primarily due to capital investments in manufacturing ~~equipment purchases for~~facilities including the ~~new tile and millwork facility of which $1.6 million was incurred in the third quarter of 2019.~~South Carolina Plant. We invested ~~$2.5~~$0.9 million and $1.9 million on capitalized software during the ~~nine~~three and six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to ~~$4.2~~$1.1 million and $1.6 million in the ~~nine~~three and six months ended ~~September~~June 30, ~~2018.~~2019. The ~~reduction~~increase in the six month period ended June 30, 2020 is due to the current mix of projects undertaken by the Company and included a higher portion of efforts eligible for capitalization compared to the first half of 2019 in which projects were related to business process improvements that were not eligible for capitalization.

Financing Activities

For the ~~nine~~three and six months ended ~~September~~June 30, ~~2019, net cash used~~2020, C$3.6 million ($2.6 million) was received under the equipment leasing facility in ~~financing activities~~Canada discussed above and $0.1 million was ~~$5.5 million.~~repaid. 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 million for the nine months ended September 30, 2018.~~

We currently expect to fund anticipated future investments ~~with~~through the combination of available ~~cash.~~cash and equipment leasing facilities. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the future as we may deem appropriate. In the future, we may also use debt or pursue equity financing depending on the Company’s share price, interest rates, and nature of the investment opportunity and economic climate.

Credit ~~Facility~~Facilities

On July 19, 2019, we entered into the RBC Facility, a C$5050.0 million senior secured revolving credit ~~facility with the Royal Bank of Canada (the “RBC Facility”).The~~facility. The RBC Facility has a three-year term and can be extended for up to two additional years at our option. Interest is calculated at the Canadian or U.S. prime rate with no adjustment, or the bankers’ acceptance rate plus 125 basis points. We are required to comply with certain financial covenants under the RBC Facility, including maintaining a minimum fixed charge coverage ratio of 1.15:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:1.1 on a trailing four quarter basis. 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. At June 30, 2020, we had no amounts drawn on our RBC Facility.

As a result of our decline in revenues, discussed previously, and the potential impact of the COVID-19 pandemic on our outlook, we entered into a Letter Agreement with RBC during the second quarter. Under the Letter Agreement, the Covenants are waived for the period April 1 to September 30, 2020. During the Covenant Holiday Period the Company is able to borrow to a maximum of 75% of eligible accounts receivable and 25% of eligible inventory, less priority

payables, subject to an aggregate limit of C$50.0 million including amounts borrowed under the Leasing Facilities. During the Covenant Holiday Period the Company is required to maintain a cash balance of $10.0 million if no loans are drawn under the facility, have Adjusted EBITDA of not less than a loss of $7.0 and $16.5 million for the twelve month periods ended June 30 and September 30, 2020, and make capital expenditures of no more than $10.7 million during the Covenant Holiday Period. In the event that activity levels remain at current levels, we will likely seek an extension to the Covenant Holiday Period or permanently convert our credit facility to replace our facility with an asset backed facility. As at June 30, 2020, the RBC Facility was undrawn and the available borrowing base was $12.8 million.

We are generally restricted ~~under the RBC Facility~~ from making 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). WeExcept during the Letter Agreement period where such distributions are prohibited, we may also declare and pay dividends to our shareholders provided that such dividends do not exceed 50% of the Free Operating Cash Flow (as defined in the RBC Facility) for the most recently completed fiscal year and meet 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 secured by substantially all of our real property located in Canada and the United States.

During the three months ended June 30, 2020, the Company entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 3.5%. The U.S. leasing facility is extendible for an additional year. During the second quarter of 2020, the Company received C$3.6 million ($2.6 million) of cash consideration and commenced the lease term for the Canadian equipment expenditures.

Contractual Obligations

~~The following table summarizes DIRTT’s~~There have been no material changes in our contractual obligations ~~at September~~during the six months ended June 30, ~~2019:~~2020, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in our Annual Report on Form 10-K, other than forthcoming additional commitments related to the South Carolina Plant, and our new DXC in Plano, Texas, as described in Note 11, “Commitments” to our interim condensed consolidated financial statements in this Quarterly Report.

   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~~six months ended ~~September~~June 30, ~~2019,~~2020, 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.~~10-K. As disclosed in Note 4, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, we adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments”. Adoption of this amendment has impacted the way we determine expected credit loss on trade receivables. The methodology now applied has been explained in the referenced note.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note ~~2, “Significant~~4, “Adoption of New and Revised Accounting ~~Policies”~~Standards” to our interim condensed consolidated ~~interim~~ financial statements ~~appearing~~and “–Significant Accounting Policies and Estimates” in this Quarterly Report.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

~~There~~Credit risk

The overall change and uncertainty in the economy as a result of the COVID-19 pandemic has caused us to increase our expectation of credit losses during the first quarter of 2020, and additionally, we believe the COVID-19 pandemic has affected the ability of certain Distribution Partners to pay amounts owed or owing to DIRTT due to the impact of local shut-downs on businesses in certain markets. Accordingly, we have increased our provision for expected credit losses by $0.6 million to $0.7 million during the six months ended June 30, 2020 and we have implemented trade credit insurance for eligible accounts receivables that have arisen since April 1, 2020.

Foreign exchange risk

The strengthening of the U.S. dollar against the Canadian dollar in March, 2020, resulted in a reduction in Canadian dollar denominated revenues and a reduction in reported operating expenses, as approximately 50% of our expenditures are denominated in Canadian dollars. If the foreign exchange rate moves in the opposite direction it will have a negative impact on our reported results.

Other than the above, there have been no material changes to our market risk exposures since our disclosures in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K. For information regarding our exposure to certain market risks, please refer to Item ~~2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative~~7A. “Quantitative and Qualitative Disclosures about Market Risk” in our ~~Registration Statement~~Annual Report on Form ~~10.~~10-K.

Item 4.

Controls and Procedures

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 and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As required by Rules13a-15 under the Exchange Act, our principal executive officer and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September~~June 30, ~~2019.~~2020. Based upon their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the quarter ended ~~September~~June 30, ~~2019,~~2020, 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 against us in~~During 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 former employees, including Mogens Smed, our co-founder and former Executive Chairman and Chief Executive Officer, and Barrie Loberg, our former Vice President of Software Development. As previously disclosed,period covered by this Quarterly Report on May 9, 2019, we filed a lawsuit in the Court of Queen’s Bench of Alberta against Mr. Smed and Mr. Loberg, to enforce the terms of our Settlement Agreement and their respective obligations, including non-compete and non-solicit provisions, that we entered into in connection with their departure. We believe that Falkbuilt’s lawsuit against us is part of their litigation strategy related to our lawsuit against them, and we believe it is without merit. We intend to defend it vigorously and to continue to pursue our legal remedies against Messrs. Smed and Loberg and their company, Falkbuilt.

~~We may, from time to time, become involved in other~~Form 10-Q, no legal proceedings were commenced, and there were no material developments in already-pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or ~~be subject to claims arising in the ordinary course~~ of ~~business, including the initiation and defense~~which any of ~~proceedings to protect intellectual~~its property rights, product liability claims and employment claims. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, cash flows or results of operations.is subject.

Item 1A.

Risk Factors

~~As of~~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 business, financial condition, results of operations and growth could be harmed by the effects of the COVID-19 pandemic.

The COVID-19 pandemic has negatively affected, and may continue to negatively affect, our operations, including our revenue, expenses, collectability of accounts receivables and other amounts owed, capital expenditures, liquidity, prospects, and overall financial condition. We are subject to risks related to the public health crises such as the global pandemic associated with the coronavirus (COVID-19). In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency. In Canada and the United States, numerous state, local, and provincial jurisdictions, including Alberta, Canada, where our headquarters and a principal manufacturing facility are located, and Phoenix, Arizona and Savannah, Georgia, where our other principal manufacturing facilities are located, have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions, and the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, construction delays and stoppages and cancellation of events, among other effects, thereby negatively affecting our employees, customers, suppliers, Distribution Partners, and offices, among others.

We have responded to the COVID-19 pandemic by, among other things, implementing enhanced safety protocols to protect our employees; commencing an evaluation of potential downside operational risk scenarios and developing action plans; eliminating or deferring uncommitted non-critical or discretionary spending; and commencing the process to secure additional incremental access to liquidity. Due to the shelter-in-place orders in Canada and the United States, we have implemented work-from-home policies for many non-factory employees as well as plant access restrictions and social-distancing measures within our facilities, which may affect productivity and disrupt our business operations, including our ability to maintain operations, financial reporting systems, internal control over financial reporting and disclosure controls and procedures. Shelter-in-place policies in multiple jurisdictions combined with the resulting adverse economic conditions are expected to adversely affect construction activity in the near term, with potential significant adverse effects extending beyond 2020. For example, several projects currently underway are experiencing delay, impacted by both the implementation of social distancing and other safety-related measures. We also believe that the COVID-19 pandemic may have significant influence on future workplace environments, with increasing focus on workplace safety. This could lead to a reduction in open office environments and increased demand for social spacing and separation within the workplace, which may benefit our business. On the other hand, if alternative work arrangements, such as work from home, become more prevalent, demand for our products may decrease. Continued shelter-in-place orders, quarantines, executive orders or related measures to combat the spread of COVID-19, as well as perceived need by individuals to continue such practices, could harm our near- and long-term results of operations and revenue, business and financial condition.

In addition, the COVID-19 outbreak has adversely affected and may continue to adversely affect our plans to grow our business. For example, in light of the uncertainty caused by the COVID-19 pandemic and logistical challenges of hiring and onboarding, we are evaluating our priorities and are phasing the planned increases to our commercial organizational headcount needed to strengthen our sales and marketing efforts to implement our strategic plan. We have also further reduced our manufacturing labor force and have reduced shifts at our manufacturing facilities.

Adverse economic and market conditions could also have a negative effect on others on whom our business depends, such as our suppliers, Distribution Partners, customers, and third-party contractors, which may cause them to fail to meet their obligations to us. Additionally, we are working closely with our Distribution Partners to understand expected activity levels and are actively monitoring our opportunity pipeline and our daily order entry relative to our plant capacity and labor force requirements. However, we believe the COVID-19 pandemic has affected the ability of certain Distribution Partners to pay amounts owed or owing to us due to the impact of local shut-downs on businesses in certain markets. We increased our expected credit losses for the six months ended June 30, 2020 by $0.6 million to reflect increased collection risk related to certain Distribution Partners. We also implemented methods to further decrease our credit risk exposure, including implementing trade credit insurance for eligible accounts receivables that have arisen since April 1, 2020.

While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common shares. Further, a recession or prolonged economic contraction could also harm the business and results of operations of our customers and Distribution Partners, resulting in potential business closures and layoffs of employees. The timing and pace of economic recovery, the resumption of construction activity and related demand, or its effect on achievement of our long-term strategic plan goals is not possible to predict.

The COVID-19 pandemic continues to change rapidly. The extent of the impact of the COVID-19 pandemic or a similar health epidemic on our business and our financial and operational performance is highly uncertain and will depend on future developments, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic; the duration and scope of related federal, state, provincial and local government orders and restrictions; the extent of the impact of the COVID-19 pandemic on the construction market and on our Distribution Partners, customers and suppliers; and our access to capital, all of which are highly uncertain and cannot be predicted at this time.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

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”).

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

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		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).

~~10.1~~10.1*		First Amending Agreement between Royal Bank of Canada and DIRTT Environmental Solutions, Ltd. dated March 4, 2020

10.2*#		Letter Agreement between Royal Bank of Canada and DIRTT Environmental Solutions, Ltd. dated June 19, 2020

10.3*+		Employment Agreement, dated April 6, 2020, by and between DIRTT Environmental Solutions, Inc. and Lindsay Gusso

10.4*#		Second Amendment to Lease made as of the 6th day of July, 2020, by and between SP ROCK HILL LEGACY EAST #1, LLC, an Indiana limited liability company, and DIRTT ENVIRONMENTAL SOLUTIONS, INC., a Colorado corporation.

10.5+		DIRTT Environmental Solutions Ltd. ~~Amended and Restated Employee Share Purchase~~Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).

10.6+		Form of Option Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement onForm S-8,File No. ~~333-234143,~~333-238689, filed on ~~October 9, 2019)~~May 26, 2020).

~~10.2~~10.7+		~~Credit~~Form of Time-Based Restricted Share Unit Award Agreement ~~dated July 19, 2019, by and among~~Under the ~~Royal Bank of Canada,~~ DIRTT Environmental Solutions Ltd.~~, as borrower, and DIRTT Environmental Solutions, Inc., as guarantor~~ Long-Term Incentive Plan (incorporated by reference to Exhibit ~~10.1~~4.5 to the Registrant’s Registration Statement on Form ~~10,~~S-8, FileNo. ~~001-39061,~~333-238689, filed on ~~September 20, 2019)~~May 26, 2020).

~~10.3~~10.8+		~~Employment~~Form of Performance-Based Restricted Share Unit Award Agreement ~~dated August 31, 2019, by and between~~Under the DIRTT Environmental Solutions Ltd. ~~And Jennifer Warawa~~Long-Term Incentive Plan (incorporated by reference to Exhibit ~~10.15~~4.6 to the Registrant’s Registration Statement on Form ~~10,~~S-8, FileNo. ~~001-39061,~~333-238689, filed on ~~September 20, 2019)~~May 26, 2020).

10.4*		~~Lease Agreement, dated October 7, 2019, by and between DIRTT Environmental Solutions, Inc. and SP Rock Hill Legacy East #1, LLC.~~

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*		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**		Certification of the Principal Executive Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of the Principal Financial Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document


Exhibit No.		Description

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith

**	Furnished herewith

+	Compensatory plan or agreement.

#	Specific terms in this exhibit (indicated therein by asterisks) have been omitted because such terms are both not material and would likely cause competitive harm to the Company it publicly disclosed.

SIGNATURES

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


DIRTT ENVIRONMENTAL SOLUTIONS LTD.

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

Date: ~~November 7, 2019~~July 29, 2020

3234


	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


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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company