UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June 30, 2020~~March 31, 2021

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

For the transition period from to

Commission file number 001-39061

DIRTT ENVIRONMENTAL SOLUTIONS LTD.

(Exact name of registrant as specified in its charter)


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

7303 30th Street S.E. Calgary, Alberta, Canada (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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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

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

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

The registrant had ~~84,681,364~~84,694,913 common shares outstanding as of ~~July 29, 2020.~~May 3, 2021.

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

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2020~~March 31, 2021 (this “Quarterly Report”) are “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”) and “forward-looking information” within the meaning of applicable Canadian securities laws. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “project,” “outlook,” “may,” “will,” “should,” “would,” “could,” “can,” the negatives thereof, variations thereon and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Forward-looking statements are based on certain estimates, beliefs, expectations and assumptions made in light of management’s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that may be appropriate.

Forward-looking statements necessarily involve unknown risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed or implied in such statements. Due to the risks, uncertainties and assumptions inherent in forward-looking information, you should not place undue reliance on forward-looking statements. Factors that could have a material adverse effect on our business, financial condition, results of operations and growth prospects include, but are not limited to, the severity and duration of the coronavirus (“COVID-19”) pandemic and related economic repercussions and other risks described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) and applicable securities commissions or similar regulatory authorities in Canada on February 24, 2021 (the “Annual Report on 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:

•

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

•

our ability to implement our strategic plan;

•

our ability to maintain and manage growth effectively;

•

competition in the interior construction industry;

•

competitive behaviors by our co-founders and former executives;

•

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

•

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

•

defects in our designing and manufacturing software and warranty and product liability claims brought against us;

•

material fluctuations of commodity prices, including raw materials;

•

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

•

global economic, political and social conditions and financial markets;

•

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

•

legal and regulatory proceedings brought against us;

•

infringement on our patents and other intellectual property;

•

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

•

damage to our information technology and software systems;

•

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

•

our ability to generate sufficient revenue to achieve and sustain profitability;

~~competition in and changes to the interior construction industry;~~
•
our periodic fluctuations in results of operations and financial conditions;

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

~~the condition and changing trends of the overall construction industry;~~
•
the effect of being governed by the corporate laws of Alberta, Canada, including obstacles to investors seeking to acquire control of our company;

~~our reliance on our network of Distribution Partners (as defined herein) for sales, marketing and installation of our solutions;~~
•
the effect of being governed by the corporate laws of a foreign country, including the difficulty of enforcing civil liabilities against directors and officers residing in a foreign country;

~~our ability to maintain and manage growth effectively;~~
•
turnover of our key executives and difficulties in recruiting or retaining key employees;

~~our ability to introduce new designs, solutions and technology and gain client and market acceptance;~~
•
the availability of capital or financing on acceptable terms, which may impair our ability to make investments in the business;

~~loss of our key executives;~~
•
the availability of government subsidies;

~~labor overcapacity or shortages and disruptions in our manufacturing facilities;~~
•
the construction, expansion and commissioning of our facilities and buildings; and

~~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 balance capacity within our existing manufacturing facilities;~~

~~our exposure to currency exchange rates, tax 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 Annual Report on Form~~ ~~10-K.~~

•

future mergers, acquisitions, agreements, consolidations or other corporate transactions we may engage in.

PART I – FINANCIAL INFORMATION

~~Item 1.~~

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 March 31,			As at December 31,
	June 30, 2020			December 31, 2019			2021			2020
ASSETS
Current Assets
Cash and cash equivalents		44,626			47,174			58,656			45,846
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
Restricted cash								1,147			-
Trade and other receivables, net of expected credit losses of $0.6 million at March 31, 2021 and December 31, 2020								19,249			18,953
Inventory		17,651			17,566			15,912			15,978
Prepaids and other current assets		3,571			3,340			4,874			4,068

Total Current Assets		87,129			93,021			99,838			84,845

Property, plant and equipment, net		42,094			41,365			51,322			49,847
Capitalized software, net		8,073			8,213			8,337			8,344
Operating lease right-of-use assets, net		18,111			20,661			32,512			33,643
Deferred tax assets, net		6,073			5,364
Goodwill		1,354			1,421			1,467			1,449
Other assets		4,989			5,518			5,212			5,016

Total Assets		167,823			175,563			198,688			183,144

LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		20,458			20,384			15,747			20,350
Other liabilities		4,071			5,187			4,495			3,677
Customer deposits and deferred revenue		5,256			3,567			3,430			1,819
Current portion of lease liabilities		5,136			5,287			5,662			5,503

Total Current Liabilities		34,921			34,425			29,334			31,349

Other long-term liabilities		2,277			35
Deferred tax liabilities, net								453			414
Long-term debt								34,837			5,069
Long-term lease liabilities		13,638			16,116			28,631			29,781

Total Liabilities		50,836			50,576			93,255			66,613

SHAREHOLDERS’ EQUITY
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
Common shares, unlimited authorized without par value, 84,681,364 issued and outstanding at March 31, 2021 and December 31, 2020								180,639			180,639
Additional paid-in capital		9,274			8,343			10,971			10,175
Accumulated other comprehensive loss		(21,914	)		(18,028	)		(16,413	)		(17,018	)
Accumulated deficit		(51,012	)		(45,967	)		(69,764	)		(57,265	)

Total Shareholders’ Equity		116,987			124,987			105,433			116,531

Total Liabilities and Shareholders’ Equity		167,823			175,563			198,688			183,144

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 June 30,						For the six months ended June 30,						For the Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020
Product revenue		40,765			61,273			81,064			125,113			28,542			40,299
Service revenue		1,390			2,818			2,072			4,039			923			682

Total revenue		42,155			64,091			83,136			129,152			29,465			40,981

Product cost of sales		26,751			37,102			54,041			77,170			23,551			27,290
Costs of under-utilized capacity		—			—			2,010			—			1,756			2,010
Service cost of sales		1,188			2,568			1,554			3,957			788			366

Total cost of sales		27,939			39,670			57,605			81,127			26,095			29,666

Gross profit		14,216			24,421			25,531			48,025			3,370			11,315

Expenses
Sales and marketing		6,177			9,543			13,585			17,330			6,670			7,408
General and administrative		6,194			6,856			14,019			13,753			7,241			7,825
Operations support		2,251			2,870			4,783			5,352			2,297			2,532
Technology and development		2,082			2,046			4,247			4,163			1,935			2,165
Stock-based compensation		425			(1,655	)		886			4,792			1,094			461
Reorganization		—			—			—			2,639

Total operating expenses		17,129			19,660			37,520			48,029			19,237			20,391

Operating income (loss)		(2,913	)		4,761			(11,989	)		(4	)

Operating loss														(15,867	)		(9,076	)
Government subsidies		(4,284	)		—			(4,284	)		—			4,068			-
Foreign exchange (gain) loss		960			441			(1,359	)		960
Foreign exchange gain (loss)														(180	)		2,319
Interest income		(57	)		(38	)		(195	)		(92	)		19			138
Interest expense		61			25			96			74			(500	)		(35	)
														3,407			2,422
		(3,320	)		428			(5,742	)		942

Income (loss) before tax		407			4,333			(6,247	)		(946	)

Loss before tax														(12,460	)		(6,654	)
Income taxes
Current tax expense (recovery)		366			936			(215	)		1,088			-			(581	)
Deferred tax expense (recovery)		(242	)		786			(987	)		620			39			(745	)
														39			(1,326	)
		124			1,722			(1,202	)		1,708

Net income (loss)		283			2,611			(5,045	)		(2,654	)

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

Net loss														(12,499	)		(5,328	)
Loss per share
Basic and diluted loss per share														(0.15	)		(0.06	)
Weighted average number of shares outstanding (in thousands)
Basic		84,681			84,661			84,681			84,661
Diluted		85,094			85,573			84,681			84,661

Basic and diluted														84,681			84,681

   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

Interim Condensed Consolidated Statement of Comprehensive Loss

	For the Three Months Ended March 31,
	2021			2020

Loss for the period		(12,499	)		(5,328	)
Exchange differences on translation of foreign operations		605			(6,768	)
Comprehensive loss for the period		(11,894	)		(12,096	)

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)

																							Accumulated
	Number of				Additional			Accumulated other						Total			Number of				Additional		other						Total
	Common		Common		paid-in			comprehensive			Accumulated			shareholders’			Common		Common		paid-in		comprehensive			Accumulated			shareholders’
	shares		shares		capital			income (loss)			deficit			equity			shares		shares		capital		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
As at December 31, 2019																		84,681,364		180,639		8,343		(18,028	)		(45,967	)		124,987
Stock-based compensation		—		—		(429	)		—			—			(429	)		-		-		663		-			-			663
Foreign currency translation adjustment		—		—		—			2,096			—			2,096			-		-		-		(6,768	)		-			(6,768	)
Net loss for the period		—		—		—			—			(5,265	)		(5,265	)		-		-		-		-			(5,328	)		(5,328	)

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

As at March 31, 2020																		84,681,364		180,639		9,006		(24,796	)		(51,295	)		113,554
As at December 31, 2020																		84,681,364		180,639		10,175		(17,018	)		(57,265	)		116,531
Stock-based compensation		—		—		663			—			—			663			-		-		796		-			-			796
Foreign currency translation adjustment		—		—		—			(6,768	)		—			(6,768	)		-		-		-		605			-			605
Net loss for the period		—		—		—			—			(5,328	)		(5,328	)		-		-		-		-			(12,499	)		(12,499	)

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

As at March 31, 2021																		84,681,364		180,639		10,971		(16,413	)		(69,764	)		105,433

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 June 30,						For the six months ended June 30,						For the Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020
Cash flows from operating activities:
Net income (loss) for the period		283			2,611			(5,045	)		(2,654	)
Net loss for the period														(12,499	)		(5,328	)
Adjustments:
Depreciation and amortization		2,761			2,940			5,893			6,335			3,402			3,132
Stock-based compensation, net of settlements		425			(4,252	)		886			1,429
Stock-based compensation														1,094			461
Foreign exchange (gain) loss		958			284			(1,256	)		282			172			(2,214	)
(Gain) loss on disposal of property, plant and equipment		(46	)		(9	)		(46	)		53
Accretion of convertible debentures														53			-
Deferred income tax expense (recovery)		(242	)		786			(987	)		620			39			(745	)
Changes in operating assets and liabilities:
Trade and other receivables		2,010			8,345			3,446			15,263			(243	)		1,436
Inventory		(671	)		1			(636	)		440			197			35
Prepaid and other current assets		565			343			(332	)		42			(948	)		(724	)
Other assets		44			(108	)		217			4
Trade accounts payable and other liabilities		(4,300	)		(4,783	)		(2,170	)		(6,409	)
Trade accounts payable and accrued liabilities														(5,614	)		4,109
Other liabilities														507			(1,979	)
Lease liabilities		(34	)		(102	)		(61	)		(248	)		139			(27	)
Customer deposits and deferred revenue		624			1,424			1,708			(276	)		1,607			1,084

Net cash flows provided by operating activities		2,377			7,480			1,617			14,881

Net cash flows used in operating activities														(12,094	)		(760	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(4,508	)		(1,775	)		(6,186	)		(3,159	)
Purchase of property, plant and equipment, net of accounts payable changes														(2,908	)		(1,560	)
Capitalized software development expenditures and other asset expenditures		(945	)		(1,092	)		(1,915	)		(1,595	)		(705	)		(970	)
Recovery of software development expenditures		140			30			215			105			24			75
Proceeds on sale of property, plant and equipment		46			11			46			55
Changes in accounts payable related to investing activities		1,305			(140	)		1,423			(476	)

Net cash flows used in investing activities		(3,962	)		(2,966	)		(6,417	)		(5,070	)		(3,589	)		(2,455	)

Cash flows from financing activities:
Cash received on exercise of options		—			11			—			16
Proceeds received on leasing facilities		2,591			—			2,591			—
Repayment on leasing facilities		(64	)		—			(64	)		—
Proceeds received on long-term debt														29,545			-
Repayment of long-term debt		—			—			—			(5,561	)		(208	)		-

Net cash flows provided by (used in) financing activities		2,527			11			2,527			(5,545	)

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

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

Cash and cash equivalents, end of period		44,626			58,736			44,626			58,736

Net cash flows provided by financing activities														29,337			-
Effect of foreign exchange on cash, cash equivalents and restricted cash														303			(499	)
Net increase (decrease) in cash, cash equivalents and restricted cash														13,957			(3,714	)
Cash, cash equivalents and restricted cash, beginning of period														45,846			47,174
Cash, cash equivalents and restricted cash, end of period														59,803			43,460
Supplemental disclosure of cash flow information:
Interest paid		(61	)		(25	)		(96	)		(74	)		(62	)		(35	)
Income taxes paid		(58	)		(402	)		(58	)		(450	)

Income taxes received (paid)														-			-

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

	March 31,
	2021		2020
Cash and cash equivalents		58,656		43,460
Restricted cash		1,147		-
Total cash, cash equivalents and restricted cash		59,803		43,460

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

DIRTT Environmental Solutions Ltd.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

1. GENERAL INFORMATION

DIRTT Environmental Solutions Ltd. and its subsidiaries (“~~DIRTT,”~~DIRTT”, the ~~“Company,”~~“Company”, “we” or “our”) is a leading technology-driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing ICE® software (“~~ICE~~^®”ICE” or “ICE Software”) with integrated in-house manufacturing of its innovative prefabricated interior construction solutions and an extensive network of distribution partners ~~network~~ (“Distribution Partners”). ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high-quality custom solutions using fewer resources than traditional manufacturing methods. ICE is also licensed to unrelated companies and Distribution Partners of the Company. DIRTT is incorporated under the laws of the province of Alberta, Canada, its headquarters is located at 7303 – 30^th30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2^nd2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.

2. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of ~~June 30, 2020,~~March 31, 2021, and its results of operations and cash flows for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020. The condensed balance sheet at December 31, ~~2019,~~2020, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020 included in the ~~Company’s~~ Annual Report on Form ~~10-K.~~ ~~The~~10-K of the Company as filed with the U.S. Securities and Exchange Commission. As described in Note 4, the Company adopted a new accounting ~~standards~~standard relating to ~~credit losses and cloud computing~~convertible debentures effective January 1, ~~2020.~~2021. Further information on ~~these standards~~this standard and the impact on the Company of ~~these standards~~this standard is described in Note 4.

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

Principles of consolidation

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

Basis of measurement

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

Seasonality

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

3. COVID-19

On March 11, 2020, 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~~ ~~COVID-19~~ ~~on DIRTT’s business in the near and~~ ~~mid-term~~ ~~remains uncertain. The~~ resulting adverse economic conditions ~~are expected to~~have negatively ~~impact~~impacted construction activity ~~in the near term at the very least,~~and consequently DIRTT’s business, with potential significant negative impacts extending to the first half of 2021 and beyond.

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

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

Credit risk

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

Liquidity risk

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

Government subsidies

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). ~~As originally implemented, the~~The CEWS provides the Company with a taxable subsidy in respect of ~~up to 75%~~a specific portion of wages paid to Canadian employees during ~~the~~qualifying periods extending from March 15, 2020 to June ~~6, 2020 (subsequently extended~~5, 2021 (with an extension to ~~August 29, 2020)~~September 25, 2021 having been announced in the 2021 Canadian federal budget), ~~provided that~~based on the percentage decline of the Company in certain of its Canadian-sourced revenues ~~decline by over 15 – 30%, computed generally on~~during each qualifying period. Pursuant to proposed changes announced in the ~~basis~~2021 Canadian federal budget, the Company may be required to repay all or a portion of ~~monthly revenues year-over-year~~the CEWS amounts for any qualifying period commencing after June 5, 2021 where the aggregate compensation for specified executives during the ~~available periods.~~

2021 calendar year exceeds the aggregate compensation for specified executives during the 2019 calendar year. The ~~Company reviews its~~Company’s eligibility for the CEWS may change for each qualifying period and is reviewed by the Company for each qualifying period.

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

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~~March 31, 2021, management determined an impairment provision was not required as our outlook ~~had improved since~~is consistent with the assumptions used in our ~~initial assessment and~~impairment test undertaken at December 31, 2021. In future periods, if our ~~share price has increased. The impact of~~ ~~COVID-19~~ ~~on DIRTT’s Distribution Partners~~results or ~~the Company’s operations~~outlook are less than our forecast, this conclusion 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~~need 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.revisited.

4. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

On ~~January 1,~~August 5, 2020, the ~~Company adopted~~Financial Accounting Standards Board issued Accounting Standards Update No. 2020-06, “Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)” (the “ASU”). The ASU ~~No. 2016-13,~~ ~~“Financial Instruments – Credit Losses (Topic 326):~~ ~~Measurement of Credit Losses in Financial Instruments~~”eliminates the beneficial conversion and ~~the subsequent amendments to the initial guidance issued in April 2019 within ASU~~ ~~No. 2019-04,~~ ~~May 2019 within ASU~~ ~~No. 2019-05~~ ~~and February 2020 within ASU~~ ~~No. 2020-02~~ (“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”) 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.~~cash conversion accounting models for convertible instruments. It also ~~applies to~~ ~~off-balance~~ ~~sheet credit exposures not~~amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as ~~insurance and net investments in leases recognized by a lessor in accordance with Topic 842 on Leases.~~derivatives because of specific settlement provisions. In addition, ~~ASC 326 made changes to~~ the ~~accounting~~new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The amendments in the ASU are effective for ~~available-for-sale~~ ~~debt securities.~~fiscal years beginning after March 15, 2021 and early adoption is permitted, but no earlier than fiscal years beginning after March 15, 2020, including interim periods within those fiscal years.

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

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

~~On January 1, 2020, the Company adopted 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 and statement of operations in the same lines where software license costs are accounted for.

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

5. TRADE AND OTHER RECEIVABLES

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

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. ~~In addition, we acquired trade credit insurance effective April 1, 2020.~~ At ~~June 30, 2020,~~March 31, 2021, approximately ~~80%~~85% of our trade accounts receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities, that have arisen since April 1, ~~2020.~~ 2020 when the trade credit insurance became effective.

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

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

							As at
	As at						March 31,			December 31,
	June 30, 2020			December 31, 2019			2021			2020
Current		16,249			20,087			12,362			12,500
Overdue		777			2,401			1,074			1,211
								13,436			13,711
		17,026			22,488
Less: expected credit losses		(742	)		(84	)		(588	)		(588	)
								12,848			13,123
		16,284			22,404
Other receivables		64			402
Sales tax receivable								302			242
Government subsidies receivable		2,771			—			2,254			1,743
Income tax receivable		2,162			2,135			3,845			3,845
								19,249			18,953
		21,281			24,941

Due to the uncertainties associated with the ~~COVID 19~~COVID-19 pandemic as well as the disruption to businesses in North America, the overall credit quality of certain receivables declined at March 31, 2020 compared to January 1, 2020. As a result of this consideration and the Company’s ongoing review of the credit quality of receivables, expected credit losses were increased by $0.6 million during the quarter ended March 31, 2020. No ~~further~~ adjustments to our expected credit losses were required at ~~June 30, 2020.~~March 31, 2021. During the first quarters of 2021 and 2020, 0 receivables were written off. Receivables are generally considered to be past due when over 60 days old unless there is a separate payment arrangement in place for the collection of the receivable.

6. LONG-TERM DEBT ~~AND OTHER LIABILITIES~~

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

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

Revolving Credit Facility

On ~~July 19, 2019,~~February 12, 2021, the Company entered into a loan agreement governing a C$~~50.0~~25.0 million senior secured revolving credit facility ~~(the “RBC Facility”)~~ with the Royal Bank of Canada ~~( “RBC”~~(“RBC”), as lender (the “RBC Facility”). ~~The~~Under the RBC Facility, ~~has a three-year term and can be extended for~~the Company is able to borrow up to ~~two additional years at~~a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the ~~Company’s option.~~lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). At March 31, 2021, available borrowings are C$9.4 million ($7.5 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate ~~with no adjustment,~~plus 30 basis points or at the ~~bankers’ acceptance rate~~Canadian Dollar Offered Rate or LIBOR plus ~~125~~155 basis points. ~~The~~Under the RBC Facility, if the Aggregate Excess Availability, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash, is less than C$5.0 million, the Company is subject to a ~~minimum~~ fixed charge coverage ratio (“FCCR”) covenant of ~~1.15:~~1.10:1 ~~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~~twelve month basis. Additionally, if 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~~FCCR has been below 1.10:1 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 3 immediately preceding months,

the Company is required to maintain a ~~cash balance~~reserve account equal to the aggregate of ~~$10.0~~one year of payments on outstanding loans on the Leasing Facilities (defined below). The Company did not meet the 3 month FCCR requirement during the first quarter of 2021 which resulted in requiring the restriction of $1.1 million ~~if no loans are drawn under~~of cash. Should an event of default occur or the ~~facility, have Adjusted EBITDA of not~~Aggregate Excess Availability be less than ~~a loss of $7.0 and $16.5~~C$6.25 million for 5 consecutive business days, the ~~twelve month periods ended June 30~~Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and ~~September 30, 2020,~~daily balances will set-off any borrowings and ~~make capital expenditures of no more than $10.7 million during~~any remaining amounts made available to the ~~Covenant Holiday Period. As at June 30, 2020, the RBC Facility was undrawn and the available borrowing base was $12.8 million.~~ Company.

Leasing Facilities

The Company ~~was in compliance with the covenants of the RBC Facility as at June 30, 2020.~~

~~During the three months ended June 30, 2020, the Company entered into~~has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) and a ~~$16.0~~$14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”), with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and ~~3.5%~~4.50%. The U.S. ~~leasing facility~~Leasing Facility is amortized over a six-year term and extendible at the Company’s option for an additional year.

~~As at June 30, 2020,~~During the first quarter of 2021, the Company received ~~C$3.6 million ($2.6~~$nil (twelve months ended December 31, 2020: $3.5 million) of cash consideration under the ~~leasing facility in~~U.S. Leasing Facility. Subsequent to March 31, 2021, we completed a $7.2 milliondraw of ourU.S. Leasing Facility related to reimbursements for equipment purchases for our South Carolina plant, $1.4 million of the proceeds was deposited into restricted cash. During the first quarter of 2021, the Company received $nil (twelve months ended December 31, 2020 – C$3.6 million or $2.6 million) of cash consideration under the Canada ~~and commenced the lease term for the Canadian equipment expenditures.~~Leasing Facility. The associated financial ~~liability is~~liabilities are shown on the consolidated balance sheet in current other ~~current~~liabilities and long-term debt and other ~~long-term~~ liabilities.

Convertible Debentures

On January 25, 2021, the Company completed a C$35.0 million bought-deal financing of convertible unsecured subordinated debentures (the “Debentures”) with a syndicate of underwriters. On January 29, 2021, the Company issued a further C$5.25 million of Debentures under the terms of an overallotment option granted to the underwriters. The ~~Leasing Facilities~~Debentures will mature and be repayable on January 31, 2026 (the “Maturity Date”), unless earlier redeemed, repurchased or converted. The Debentures accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021.

The Debentures are ~~accounted for as finance leases as ownership~~convertible into common shares of DIRTT, at the option of the ~~equipment is expected to return~~holder, at any time prior to the ~~Company at~~close of business on the ~~end~~business day prior to the earlier of the ~~lease term. These transactions are not accounted~~Maturity Date and the date specified by the Company for asredemption of the Debentures at a conversion price of C$4.65 per common share, being a ratio of approximately 215.0538 common shares per C$1,000 principal amount of Debentures. The conversion rate is subject to adjustment if certain corporate events occur prior to the Maturity Date.

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

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

7. STOCK-BASED COMPENSATION

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

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

Stock-based compensation expense

   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

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

~~Options~~

During the three and six months ended June 30, 2019, the Company accounted for the fair value of outstanding 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 (“cash-settlement”). On October 9, 2019, following its listing on Nasdaq, the Company ceased cash-settlement of options and the associated liability accounting for 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~~PSUs, DSUs and RSUs (as defined below) granted, exercised, ~~surrendered,~~ forfeited and expired during the periods:

   Number of    Weighted average
   options    exercise price C$
Outstanding at December 31, 2018
   6,858,376    5.88
Granted
   1,095,182    7.84
Surrendered for cash
   (1,651,008 )    5.32
Exercised
   (4,878 )    3.62
Forfeited
   (52,375 )    4.90
Expired
   (51,291 )    4.17




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




Outstanding at December 31, 2019
   6,156,652    6.49
Forfeited
   (550,259 )    6.79




Outstanding at June 30, 2020
   5,606,393    6.46
Exercisable at June 30, 2020
   2,435,733    6.25

	RSU Time-			RSU Performance-
	Based			Based		DSU		PSU
	Number of			Number of		Number of		Number of
	units			units		units		units
Outstanding at December 31, 2019		-			-		132,597		223,052
Granted		-			-		83,915		-
Forfeited		-			-		-		(25,581	)
Outstanding at March 31, 2020		-			-		216,512		197,471
Outstanding at December 31, 2020		2,414,066			200,000		363,664		197,471
Granted		1,890,987			878,601		31,837		-
Forfeited		(5,588	)		-		-		-
Outstanding at March 31, 2021		4,299,465			1,078,601		395,501		197,471

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

   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

~~PSUs~~

As at June 30, 2020, there were 197,471 PSUs outstanding (December 31, 2019 – 223,052) accounted for at a value of $0.02 million (December 31, 2019 – $0.2 million) which is included in other long-term liabilitiesRestricted share units that vest based on ~~the balance sheet.~~

~~DSUs~~

As at June 30, 2020, there were 290,730 DSUs outstanding (December 31, 2019 – 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, 2019 – $0.4 million).

~~RSUs~~

~~On June 17, 2020, the Company granted 2,578,971 RSUs. Of the RSUs granted, 2,378,971 RSUs~~time have an aggregate time-based vesting period of three years and generally one-third of the RSUs vest ~~one third~~ every year over a three-year period from the date of ~~grant.~~grant (“RSUs”). At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The weighted average fair value of the RSUs granted was C$3.11 (2020 – C$2.05) which was determined ~~to be C$1.89, which was~~using the ~~volume weighted average~~closing price of the Company’s common shares on ~~the~~their respective grant ~~date.~~dates.

Restricted share units (performance-based vesting)

~~Of the RSUs granted, 200,000 RSUs were~~The Company granted to ~~an executive~~certain executives and senior employees restricted share units with service and performance-based conditions for vesting (the ~~“Performance RSUs”~~“PRSUs”). If the Company’s share price increases to ~~C$3.00~~certain values for 20 consecutive trading days, ~~within three years~~as outlined below, a percentage 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$6.00 for 20 consecutive trading days within three years of the grant date, then 150% (300,000) of the Performance RSUsPRSUs will vest at the end of the three-year service period. The grant date fair value of the ~~Performance RSUs~~PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$~~1.70.~~3.27 (2020 – C$1.70).

% of PRSUs vesting

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

Deferred share units

The fair value of the liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss for the year. DSUs outstanding at March 31, 2021 had a fair value of $1.2 million which is included in other liabilities on the balance sheet (December 31, 2020 –$0.9 million).

Performance share units

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

The fair value of the liability and the expense attributable to the vesting period is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss. As at March 31, 2021, outstanding PSUs had a fair value of $0.1 million which is included in other liabilities on the balance sheet (December 31, 2020 – $0.1 million).

Options

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

Number of

Weighted average

options

exercise price C$

Outstanding at December 31, 2019

6,156,652

6.49

Forfeited

(523,549
)

6.80

Outstanding at March 31, 2020

5,633,103

6.46

Outstanding at December 31, 2020

4,774,328

6.52

Forfeited

(3,213
)

6.81

Outstanding at March 31, 2021

4,771,115

6.52

Exercisable at March 31, 2021

2,065,938

6.35

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

Range of exercise prices outstanding at March 31, 2021:

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

3.64

4.12

7,513

3.64

4.12

C$5.01 – C$6.00

669,236

0.64

5.76

669,236

0.64

5.76

C$6.01 – C$7.00

3,298,644

2.54

6.38

1,126,772

2.59

6.34

C$7.01 – C$8.00

780,698

3.13

7.84

262,417

3.13

7.84

Total

4,771,115

2,065,938

Dilutive ~~instruments~~Instruments

For the three ~~and six~~ months ended ~~June 30, 2020, 5.6~~March 31, 2021, 4.8 million options ~~(2019~~(2020 – ~~1.1 million and 4.2~~5.6 million) ~~and nil and 2.7~~, 4.4 million RSUs ~~(2019~~and PRSUs (2020 – nil) ~~respectively,~~and 11.0 million shares which would be issued if the principal amount were settled in our common shares at the quarter end share price (2020 – nil) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net ~~income (loss)~~loss per share.

8. REVENUE

In the following table, revenue is disaggregated by 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 March 31,
	2021		2020
Product		25,836		35,998
Transportation		2,499		3,995
License fees from Distribution Partners		207		306
Total product revenue		28,542		40,299
Installation and other services		923		682
		29,465		40,981

   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 June 30,				For the six months ended June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
At a point in time		40,466		60,742		80,459		124,050		28,335		39,993
Over time		1,689		3,349		2,677		5,102		1,130		988
										29,465		40,981
		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.

Contract Liabilities


	As at						As at
	June 30, 2020		December 31, 2019		December 31, 2018		March 31, 2021		December 31, 2020		December 31, 2019
Customer deposits		4,423		2,436		6,746		2,975		1,292		2,436
Deferred revenue		833		1,131		955		455		527		1,131

Contract liabilities		5,256		3,567		7,701		3,430		1,819		3,567

Contract liabilities primarily relate to deposits received from customers and deferred revenue from license subscriptions. The balance of contract liabilities washigher as at ~~June 30, 2020~~March 31, 2021 compared to December 31, ~~2019~~2020 mainly due to the timing of orders and payments. Contract liabilities as at December 31, ~~2019~~2020 and ~~2018,~~2019, respectively, totaling ~~$2.7~~$1.5 million and ~~$7.2~~$2.7 millionwere recognized as revenue during the ~~year-to-date~~ ~~periods~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ 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 June 30,				For the six months ended June 30,				For the three months ended March 31,
	2020		2019		2020		2019		2021		2020
Commercial		25,096		39,189		53,370		81,338		16,144		28,274
Healthcare		7,417		10,346		12,480		23,260		6,487		5,063
Government		3,960		4,313		7,087		8,412		4,181		3,127
Education		3,993		6,894		7,522		11,040		1,523		3,529
License fees from Distribution Partners		299		531		605		1,063		207		306

Total product and transportation revenue		40,765		61,273		81,064		125,113		28,542		40,299
Installation and other services		1,390		2,818		2,072		4,039		923		682
										29,465		40,981
		42,155		64,091		83,136		129,152

9. SEGMENT REPORTING

The Company has ~~one~~1 reportable and operating segment and operates in ~~two~~2 principal geographic locations –- Canada and the United States. Revenue continues to be derived almost exclusively from projects in North America and predominantly from the United States, with periodic international projects from North American Distribution Partners. The Company’s revenue from operations from external customers, based on location of operations, and information about its non-current assets, ~~are~~is detailed below.

Revenue from external customers


	For the three months ended June 30,				For the six months ended June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Canada		4,341		8,771		10,327		15,839		2,995		5,986
U.S.		37,814		55,320		72,809		113,313		26,470		34,995
										29,465		40,981
		42,155		64,091		83,136		129,152

Non-current assets, excluding deferred tax assets


	As at				As at
	June 30, 2020¹		December 31, 2019¹		March 31, 2021		December 31, 2020
Canada		43,335		47,892		41,870		42,947
U.S.		31,286		29,286		56,980		55,352
						98,850		98,299
		74,621		77,178

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

10. INCOME TAXES

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

11. OTHER LIABILITIES

	As at,
	March 31, 2021		December 31, 2020
Legal provision		45		45
Deferred share unit liability		1,275		971
Warranty and other provisions⁽¹⁾		1,953		1,763
Interest accrued on Debentures		320		-
Current portion of long-term debt		902		898
		4,495		3,677

(1)The following table presents a reconciliation of ~~income taxes in Canada. Accordingly,~~ the ~~fair value adjustment recorded during the period ended June 30, 2019 impacted our effective tax rate during that period.~~

	As at,
	March 31, 2021			December 31, 2020
As at January 1		1,763			4,008
Adjustments for timber provision		-			(1,750	)
Additions to warranty provision		527			1,301
Payments related to warranties		(337	)		(1,796	)
		1,953			1,763

Item 2.

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

Revenue for the quarter ended June 30, 2020 was $42.2 million, a decline of $21.9 million or 34% from $64.1 million for the 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 implement our strategic plan combined with project delays or deferrals due mainly to impacts of the ~~COVID-19~~ ~~pandemic on construction schedules.~~
•
Revenues for the quarter ended March 31, 2021 were $29.5 million, a decline of $11.5 million or 28% from $41.0 million for the quarter ended March 31, 2020. We believe this decrease principally reflects the severe economic and social impact of the COVID-19 pandemic, including a major contraction in construction activity levels in North America due to non-essential business closures, work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials.

~~Gross profit for the quarter ended June 30, 2020 was $14.2~~
•
Gross profit for the quarter ended March 31, 2021 was $3.4 million or 11.4% of revenue, a decline of $7.9 million or 70% from $11.3 million or 27.6% of revenue for the quarter ended March 31, 2020. This reduction was attributable to our decline in revenues, the impact of fixed costs and excess labor capacity on lower revenues. In anticipation of a recovery in demand for our products and services in the second half of 2021 and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first quarter of 2021 despite the shortfall in revenues relative to capacity.

•

Adjusted Gross Profit (see “Non-GAAP Financial Measures”) for the quarter ended March 31, 2021 was $7.2 million or 24.3% of revenue, an $8.4 million or 54% decline from $15.6 million or 38.0% of revenue for the quarter ended March 31, 2020. Excluded from Adjusted Gross Profit in 2021 and 2020 are $1.8 million and $2.0 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 30.7% for the six months ended June 30, 2020, compared to 37.2% for the six months ended June 30, 2019. This reduction was attributable to our decline in revenues and the impact of fixed costs on lower 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, of overhead costs associated with operating at lower than normal capacity levels, which were charged directly and separately to 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 expected ongoing requirements, but did not make further adjustments to our manufacturing workforce in the first quarter of 2021 in anticipation of a recovery of demand in the second half of 2021 as vaccination distribution efforts continue.

•

Net loss for the three months ended March 31, 2021 and 2020 was $12.5 million and $5.3 million, respectively. The higher net loss is primarily the result of the above noted reduction in gross profit, a $2.5 million reduction in foreign exchange gains, a $1.4 million reduction of income tax recoveries and a $0.6 million increase in net interest expense. These decreases were partially offset by $4.1 million of government subsidies and a $1.2 million timber provision reversal in the second quarter of 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 $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 normal capacity levels, which were charged directly and separately to 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 quarter ended June 30, 2020 was $0.3 million, compared to 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 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 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~~which was largely due to lower commissions on reduced sales activities, ~~the combination of $1.3 million of costs related to our sales~~reduced professional fees, 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~~lower activity as a ~~consequence~~result of ~~the~~ ~~COVID-19~~ ~~pandemic and a $3.9 million decrease in stock based compensation, offset by higher legal costs of $3.0 million.~~COVID-19.

~~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.~~
•
Adjusted EBITDA (see “Non-GAAP Financial Measures”) for the quarter ended March 31, 2021 was an $11.4 million loss or (38.6)% of revenue, a decline of $5.9 million from a loss of $5.5 million, or (13.4)% of revenue, for the quarter ended March 31, 2020 for the above noted reasons.

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 While the ~~second~~strategic plan was developed and introduced pre-pandemic, we believe it is as or even more relevant in the post-pandemic world. Furthermore, our execution of the plan to date positions us well as we move forward.

Throughout 2020, we were able to mitigate the COVID-19 induced slowdown in overall construction activity through the completion of projects that were in progress when the pandemic started. With most of these projects delivered by the end of the fourth quarter of 2020, the ~~COVID-19~~ ~~pandemic continued to~~first quarter of 2021 reflected the full impact ~~our business, specifically causing job site closures~~of the slow down in ~~certain jurisdictions, schedule delays resulting from labor restrictions and supply chain shortages~~non-residential construction activity on ~~job sites and project deferrals due to economic uncertainty. Late~~DIRTT’s business. We are seeing signs which suggest that revenues of $29.5 million in the first quarter of ~~2020~~2021 will be a low point in the pandemic. This view is supported by growing customer engagement through increased demand for tours, both virtual and ~~early~~in-person at our DIRTT Experience Centers (“DXC’s”), as well as increased project quoting activity. We continue to advance our strategic accounts strategy, with over 40 relationships in various stages of development in the first quarter compared to 35 at year-end.

Accordingly, we anticipate revenues in the second quarter of ~~2020,~~2021 will approach or return to the quarterly ranges experienced in the first half of 2020. The second quarter will benefit from the recognition of $2.0 million of revenue for COVID-19 vaccination trailers that were delivered to one customer in April. While we ~~took decisive actions~~continue to ~~ensure employee safety,~~see signs of a recovery commencing in the second half of 2021, the timing and magnitude of this recovery continues to ~~right-size~~ ~~our plant labor capacity~~be uncertain and ~~our overall cost structure consistent with current~~is subject to a number of factors, both positive and negative as described further below.

From a macroeconomic viewpoint, we believe that non-residential construction market conditions are beginning to improve as reflected in several industry statistics, particularly in the United States where an accelerated vaccine distribution/rollout program has led some states to ease public health restrictions, and employers to begin the deliberate process of reoccupying their space. Conversely, Canada is experiencing a resurgence of active COVID-19 cases, the reintroduction of public health measures and a slower vaccine roll out, which we expect to continue to depress activity levels in the short term. The CEWS, which has been extended to June 2021, continues to provide some economic relief by partially funding our Canadian workforce costs. In addition, the 2021 federal budget includes the proposed extension of the CEWS to September 2021, subject to legislative implementation by Parliament.

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

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

Our financial position, which we bolstered with a C$40.25 million issuance of convertible unsecured subordinated debentures in January 2021 for net proceeds of C$37.6 million or approximately $29.5 million, has allowed us to continue ~~moving forward with our strategic plan, while~~ ~~re-prioritizing~~advancing the ~~execution of certain aspects~~development of our commercial ~~strategy to reduce or defer specific costs and capital expenditures while still realizing~~function. In 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~~we 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 difficultselective hiring, adding to quantify given our short lead times. We estimate approximately $3.7 million of projects that 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 circumstances potentially increasing demand for the flexibility inherent in the modular aspect of DIRTT’s offerings. We would anticipate all these factors to favorably affect our healthcare and education clients, in addition to commercial clients.

~~The 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~~strategic account representatives as well as ~~deferrals that are a direct result of travel~~our segment and ~~other such shelter in place restrictions. As economies begin to reopen, we expect that we will begin to incur travel and entertainment expenditures as~~ ~~in-person~~ ~~sales activities resume, although the timing and amount of which 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~~solutions support specialists. The rollout of our ~~west, south~~Customer Relationship Management system to all of our sales representatives continues 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 inis on track for completion by June ~~and expect to leverage these tours aggressively within the sales organization in the months to come. In Chicago,~~30, 2021. The construction of our ~~DIRTT Experience Center continued~~Dallas DXC is well underway and ~~we anticipate that it will be ready for~~ ~~in-person~~ ~~client tours, with enhanced safety protocols,~~is expected to open in the third quarter of ~~2020.~~2021. Lastly, we continued to identify and establish relationships with potential new Distribution Partners in underserved regions as well as progressing the onboarding of new partners.

From a systems perspective, we successfully rolled out phase one of our Client Relationship Management 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 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 demonstrating to potential ~~end-customers~~ ~~DIRTT’s value proposition relative to conventional construction.~~

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

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

Net working capital at March 31, 2021 was $70.5 million compared to $53.5 million at December 31, 2020. This includes $58.7 million of cash on hand compared to $45.8 million at December 31, 2020. The increase in cash on hand reflects $29.5 million of net proceeds from the ~~year below 1.0~~issuance of Debentures in January 2021 offset by cash used in operations of $12.1 million and ~~more than 75% below industry standards. The next stage~~capital expenditures of ~~improvement is focused on driving sustained quality improvements. We are pleased~~$3.6 million. In February 2021, we completed the conversion of our cashflow-based credit facility to ~~note that we have seen continued improvements in quality and,~~an asset backed credit facility to provide incremental working capital financing should it be necessary in the ~~second~~future. Subsequent to quarter ~~of 2020, all~~end, we completed a $7.2 million draw of our ~~plants exceeded their performance goals of a 50% reduction in deficiencies relative~~U.S. Leasing Facility primarily related to ~~2019. We are now embarking on the process of improving the efficiency and cost effectiveness of our manufacturing operations. In the second quarter of 2020, we successfully piloted~~ ~~one-piece~~ flow manufacturing in our Savannah factory which 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 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~~Facility and anticipate drawing an additional three to four million during the ~~base building is largely complete and in July 2020 we received our first shipment of equipment.~~second or third quarter. We expect ~~to receive~~capital expenditures for the balance of 2021 to be approximately $10.4 million.

While we believe the ~~equipment~~first quarter sales represented a low point in the pandemic, the strength of our balance sheet and the incremental steps we have taken to bolster liquidity give us the confidence to continue the execution of our strategic plan with the continued expectation of a recovery in the second half of ~~2020 and are on track for commissioning for this facility in~~2021, along with increased flexibility should the ~~first half of 2021.~~recovery take longer than expected.

~~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 received in the third quarter. As a result, we finished the second quarter with net working capital of $52.2 million, including cash balances of $44.6 million, compared to $51.0 million of net working capital including $43.5 million of cash at March 31, 2020.

Non-GAAP Financial Measures

Note Regarding Use of Non-GAAP Financial Measures

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

As a result, we also provide financial information in this Quarterly Report that is not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. Management uses these non-GAAP financial measures in its review and evaluation of the financial performance of the Company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our GAAP results and as a basis to compare our financial performance period over period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debtand debt facilities, or foreign exchange movements), asset base (depreciation and amortization), the impact of under-utilized capacity on gross profit, tax consequences and stock-based compensation. ~~In addition, management bases certain forward-looking estimates and budgets on~~ ~~non-GAAP~~ ~~financial measures, primarily Adjusted EBITDA.~~

~~In the fourth quarter of 2019, we removed~~We remove the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-to-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. We ~~have presented a reconciliation to our prior calculation~~remove the impact of ~~Adjusted EBITDA for the quarters presented. Additionally, since the fourth quarter of 2019, we have excluded~~under-utilized capacity from ~~Adjusted Gross Profit costs associated with under-utilized capacity. Fixed~~gross profit, and fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred. In ~~the second quarter of 2020, we also removed the impact of government subsidies from~~addition, management bases certain forward-looking estimates and budgets on non-GAAP financial measures, primarily Adjusted EBITDA.

~~Reorganization expenses, government~~Government subsidies, depreciation and amortization, stock-based compensation expense, and foreign exchange gains and losses are excluded from our non-GAAP financial measures because management considers them to be outside of the Company’s core operating results, even though some of those 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 following non-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 for~~ ~~non-cash~~ ~~foreign exchange gains or losses on debt revaluation; impairment expenses; stock-based compensation expense; reorganization expenses; and any other~~ ~~non-core~~ ~~gains or losses~~

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

Adjusted EBITDA Margin		Adjusted EBITDA divided by revenue

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

EBITDA and Adjusted EBITDA for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

The following table presents a reconciliation for the ~~second~~first quarter~~year-to-date~~ results of ~~2020~~2021 and ~~2019~~2020 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 June 30, Six months ended June 30,
   2020 2019 2020 2019
   ($ in thousands) ($ in thousands)
Net income (loss) for the period
   283 2,611 (5,045 ) (2,654 )
Add back (deduct):

Interest Expense
   61 25 96 74
Interest Income
   (57 ) (38 ) (195 ) (92 )
Income Tax Recovery
   124 1,722 (1,202 ) 1,708
Depreciation and Amortization
   2,761 2,940 5,893 6,335


EBITDA
   3,172 7,260 (453 ) 5,371
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
   —   —   —   2,639


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
   273 6,046 (5,210 ) 13,762


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
   0.6 % 9.4 % (6.3 %) 10.7 %

	For the Three Months Ended March 31,
	2021			2020
	($ in thousands)
Net loss for the period		(12,499	)		(5,328	)
Add back (deduct):
Interest Expense		500			35
Interest Income		(19	)		(138	)
Income Tax Expense (Recovery)		39			(1,326	)
Depreciation and Amortization		3,402			3,132
EBITDA		(8,577	)		(3,625	)
Foreign Exchange (Gains) Losses		180			(2,319	)
Stock-based Compensation		1,094			461
Government Subsidies		(4,068	)		-
Adjusted EBITDA		(11,371	)		(5,483	)
Net Loss Margin⁽¹⁾		(42.4	)%		(13.0	)%
Adjusted EBITDA Margin		(38.6	)%		(13.4	)%

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

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

For the three months ended ~~June 30, 2020,~~March 31, 2021, Adjusted EBITDA and Adjusted EBITDA Margin decreased to ~~$0.3~~$11.4 million ~~and 0.6%~~loss or (38.6)%, respectively, from ~~$6.0~~a $5.5 million ~~and 9.4%~~loss or (13.4)% in the same period of ~~2019.~~2020, respectively. This reflects ~~a $10.9~~an $8.4 million decrease in Adjusted Gross Profit and ~~$0.9 million~~$0.3 lower costs of ~~higher legal costs in 2020. These reductions~~underutilized capacity, discussed below. Reductions in Adjusted EBITDA were partially offset by lower professional fees, reduced

commissions on lower revenues and ~~decreased spending on travel, meals and entertainment, including tradeshows due to~~ ~~COVID-19~~ ~~related~~cost reductions as ~~well as cost reduction initiatives. In 2019 we incurred $1.3 million~~a result of ~~consulting costs incurred for our sales and marketing plan and $0.4 million of costs~~reduced activity related to ~~the listing of the Company’s common shares on Nasdaq in 2019 that did not recur in 2020.~~

~~For the six months ended June 30, 2020, Adjusted EBITDA and Adjusted EBITDA Margin decreased to a $5.2 million loss and (6.3)% from $13.8 million and 10.7%~~COVID-19. Additionally, in the ~~same period~~first quarter of ~~2019. This decrease reflects a $19.0 million decrease in Adjusted Gross Profit and $2.0 million of costs of underutilized capacity, discussed below, $3.0 million of higher legal costs in~~ 2020, ~~and a $0.6 million increase to~~we increased our provision for expected credit ~~losses. These decreases were partially offset~~losses 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 Company’s common shares on Nasdaq that did not recur in 2020.

$0.6 million.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

The following table presents a reconciliation for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:


	Three months ended June 30,						Six months ended June 30,						For the Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020
	($ in thousands)						($ in thousands)						($ in thousands)
Gross profit		14,216			24,421			25,531			48,025			3,370			11,315
Gross profit margin		33.7	%		38.1	%		30.7	%		37.2	%		11.4	%		27.6	%
Add: Depreciation and amortization expense		1,908			2,559			4,169			4,739			2,029			2,261

Adjusted Gross Profit, as previously presented		16,124			26,980			29,700			52,764
Add: Costs of under-utilized capacity		—			—			2,010			—			1,756			2,010

Adjusted Gross Profit		16,124			26,980			31,710			52,764			7,155			15,586

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	%		24.3	%		38.0	%

Gross profit and gross profit margin decreased to ~~$14.2~~$3.4 million or ~~33.7%~~11.4% for the three months ended ~~June 30, 2020,~~March 31, 2021, from ~~$24.4~~$11.3 million or ~~38.1%~~27.6% for the three months ended ~~June 30, 2019. Gross profit and gross profit margin decreased to $25.5 million or 30.7% for the six months ended June 30, 2020, from $48.0 million or 37.2% for the six months ended June 30, 2019.~~March 31, 2020. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to ~~$16.1~~$7.2 million or ~~38.2%~~24.3% for the three months ended ~~June 30, 2020,~~March 31, 2021, from ~~$27.0~~$15.6 million or ~~42.1%~~38.0% for the three months ended June 30, 2019. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $31.7 million or 38.1% for the six months ended June 30, 2020, from $52.8 million or 40.9% for the six months ended June 30, 2019.March 31, 2020. The decreases are largely due to reduced fixed cost leverage ~~due to~~caused by reductions in revenues ~~and excess labor capacity prior to headcount reductions discussed below combined with approximately~~partially offset by $0.5 million ~~and $1.0 million~~ of related severance costs inincurred during the ~~second~~first quarter ~~and year to date periods~~ of ~~2020, respectively.~~2020.

During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2020, we separately classified $2.0 million as costs related to our under-utilized capacity ~~(5%~~(1.2% of gross profit margin) in cost of sales. We took steps to manage our excess capacity, including the reduction in staffing by 14%, with a further 12% reduction in April 2020, and the undertaking of planned factory curtailments. The staffing reductions realigned our capacity with ~~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,~~Between January and April 2020, we ~~expect~~reduced our ~~fixed~~manufacturing workforce by 25% to bring labor capacity in line with expected ongoing requirements. In the first quarter of 2021, we experienced the full impact of the slowdown in non-residential construction activity on our business. In anticipation of a recovery in demand for our products and services in the second half of 2021 and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days, in the first quarter of 2021 despite the shortfall in revenues relative to capacity. As a result, in the first quarter of 2021 we separately classified $1.8 million as costs related to our under-utilized capacity (6% of gross profit margin) in cost of sales 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.sales.

Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications under which the projects were sold. As a result, we recorded a $2.5 million provision in the fourth quarter of 2019 and ~~have been~~began contacting customers to determine whether remedial actions are required. In the second quarter of 2020, we identified and validated an in-situ solution that we believe will meet the fire-retardant specification under which the projects were ~~sold. As a result, we have~~sold and reduced the associated provision to ~~$1.2~~$1.3 million, which represents expected costs to prepare impacted sites and apply the in-situ solution. In the third quarter of 2020, we completed building code reviews of the affected projects and determined that the timber as installed met the requisite building code requirements as it related to fire retardance. During the ~~six months ended June 30,~~fourth quarter of 2020, we further reduced our timber provision by $0.5 million as we believe this reduces any obligation to remediate previously installed projects. Additionally, we entered into agreements with certain customers to compensate them for product charges not fulfilled. During the quarter ended March 31, 2021, we incurred no costs(2020 – $0.1 ~~million of costs~~million) associated with remediating previously installed timber ~~projects, which were recorded against the provision.~~projects.

In the first six months of 2019 we incurred approximately $2.0 million 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 higher than expected moisture absorption. Additionally, our costs associated with remediating deficiencies decreased in the first half of 2020.

Results of Operations

Three ~~and Six~~ Months Ended ~~June 30, 2020,~~March 31, 2021, Compared to Three ~~and Six~~ Months Ended ~~June 30, 2019~~March 31, 2020

	For the Three Months Ended March 31,
	2021			2020			% Change
	($ in thousands)
Revenue		29,465			40,981			(28	)
Gross Profit		3,370			11,315			(70	)
Gross Profit Margin		11.4	%		27.6	%
Operating Expenses
Sales and Marketing		6,670			7,408			(10	)
General and Administrative		7,241			7,825			(7	)
Operations Support		2,297			2,532			(9	)
Technology and Development		1,935			2,165			(11	)
Stock-based Compensation		1,094			461			137
Total Operating Expenses		19,237			20,391			(6	)
Operating Loss		(15,867	)		(9,076	)		75
Operating Margin		(53.9	)%		(22.1	)%

   Three months ended June 30, Six months ended June 30,
   2020 2019 2020 2019
   ($ in thousands) ($ in thousands)
Revenue
   42,155 64,091 83,136 129,152
Gross Profit
   14,216 24,421 25,531 48,025
Gross Profit Margin
   33.7 % 38.1 % 30.7 % 37.2 %
Operating Expenses

Sales and Marketing
   6,177 9,543 13,585 17,330
General and Administrative
   6,194 6,856 14,019 13,753
Operations Support
   2,251 2,870 4,783 5,352
Technology and Development
   2,082 2,046 4,247 4,163
Stock-based Compensation
   425 (1,655 ) 886 4,792
Reorganization
   —   —   —   2,639


Total Operating Expenses
   17,129 19,660 37,520 48,029


Operating Income (Loss)
   (2,913 ) 4,761 (11,989 ) (4 )


Operating Margin
   (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 June 30,				Six months ended June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020		% Change
	($ in thousands)				($ in thousands)				($ in thousands)
Product		36,921		54,886		72,919		111,835		25,836		35,998		(28	)
Transportation		3,545		5,856		7,540		12,215		2,499		3,995		(37	)
License fees from Distribution Partners		299		531		605		1,063		207		306		(32	)

Total product revenue		40,765		61,273		81,064		125,113		28,542		40,299		(29	)

Installation and other services		1,390		2,818		2,072		4,039		923		682		35
										29,465		40,981		(28	)
		42,155		64,091		83,136		129,152

Revenue decreased in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 by ~~$21.9 million and $46.1~~$11.5 million or ~~34% and 36% respectively~~28% compared to the same ~~periods~~period of ~~2019.~~2020. Revenue decreased due to several factors as discussed above in “– Summary of Financial Results” and “– Outlook”. We ~~have been subject to~~believe the decrease principally reflects the severe economic and social impact of the COVID-19 pandemic, including a ~~disruption~~major contraction in ~~sales~~construction activity levels ~~particularly~~in North America due to work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials. While we did not experience any material cancellations of projects that were underway at the start of the COVID-19 pandemic, it is uncertain as it relates to larger projects, as discussed below, beginning in 2018 and carrying through the current quarter. This disruption stems from the distraction 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. Due to the ~~long sales cycle, particularly for larger~~impact of the pandemic on future projects ~~which can be two years or more, this had a corresponding negative effect on our revenue, especially~~that are either in the ~~last half of 2019 and continuing into~~planning or conceptual stage. It is highly likely that future projects will also experience similar delays as the ~~first half of 2020. This effect has lasted longer than we had anticipated.~~ COVID-19 pandemic runs its course. See Item 1A. “Risk Factors”.

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 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, particularly as the recovery from the COVID-19 pandemic commences, these actions did not have a measurable effect on ~~2020~~2021 revenues ~~to date.~~

~~Our revenues were also impacted~~in light of the severe economic adversity caused 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 experienced any material cancellations of projects that were underway, it is uncertain as to the impact of the pandemic on future projects that are either in the planning or conceptual stage. See “Risk Factors”.

Installation and other services revenue ~~decreased $1.4~~increased to $0.9 million for the three months ended ~~June 30, 2020~~March 31, 2021 compared to $0.7 million in the same period ~~in 2019 and decreased $2.0 million for the six months ended June 30, 2020 compared to the same period in 2019.~~of 2020. The changes in installation and other services revenue are primarily due to the timing of ~~projects and overall sales activity, including the impacts of the~~ ~~COVID-19~~ ~~pandemic.~~projects. 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 currently have 80~~At March 31, 2021, we had 67 Distribution Partners servicing multiple locations. ~~We recently added five~~During 2020, we made several changes and upgrades to our 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~~Partner network, expanding our relationships with ~~certain underperforming Distribution Partners.~~new and existing partners and ending our relationships with others. 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 June 30,				Six months ended June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020		% Change
	($ in thousands)				($ in thousands)				($ in thousands)
Commercial		25,096		39,189		53,370		81,338		16,144		28,274		(43	)
Healthcare		7,417		10,346		12,480		23,260		6,487		5,063		28
Government		3,960		4,313		7,087		8,412		4,181		3,127		34
Education		3,993		6,894		7,522		11,040		1,523		3,529		(57	)
License fees from Distribution
Partners		299		531		605		1,063
License fees from Distribution Partners										207		306		(32	)
Total product revenue										28,542		40,299		(29	)
Service revenue										923		682		35
										29,465		40,981		(28	)
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


	Three months ended June 30,				Six months ended June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020		% Change
	(in %)				(in %)				(in %)
Commercial		62		65		67		65		57		70		(19	)
Healthcare		18		17		15		19		23		13		77
Government		10		7		9		7		15		8		88
Education		10		11		9		9		5		9		(44	)

Total Product Revenue⁽¹⁾		100		100		100		100

Total Product Revenue⁽¹⁾										100		100	NA

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

Revenue decreased by ~~34% and 36% respectively~~28% in the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 over the same ~~periods~~period in ~~2019~~2020 and was driven primarily by decreased commercial ~~sales which reflects the disruption in sales activity levels noted above.~~sales. Commercial revenues ~~were lower~~decreased by 43% from the prior period, due largely to the severe impact of COVID-19 on commercial construction activities in North America. Similarly, education sales decreased by 57% from 2020 as most universities and private schools moved to on-line classes in response to the COVID-19 pandemic. During 2021, healthcare and government revenues increased due to the ~~completion~~timing of ~~a major project in the first half of 2019 that was not replaced and the impact of~~ ~~COVID-19~~ ~~on construction activity. Decreased healthcare sales in the first half of 2020 reflect the completion of several major healthcare projects that were not replaced in 2020.~~certain projects.

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.~~projects. The following table presents our ~~second~~first quarter ~~and~~ ~~year-to-date~~ revenue dispersion by geography:


	Three months ended June 30,				Six months ended June 30,				For the Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020		% Change
	($ in thousands)				($ in thousands)				($ in thousands)
Canada		4,341		8,771		10,327		15,839		2,995		5,986		(50	)
U.S.		37,814		55,320		72,809		113,313		26,470		34,995		(24	)
										29,465		40,981		(28	)
		42,155		64,091		83,136		129,152

Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. In 2020, revenues from Canada fell to 10% of total sales while sales to the United States increased to 90%.

Sales and Marketing Expenses

Sales and marketing expenses decreased ~~$3.4 million and $3.7~~$0.7 million to ~~$6.2 million and $13.6~~$6.7 million for the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, from ~~$9.5 million and $17.3~~$7.4 million for the three ~~and six~~ months ended ~~June 30, 2019.~~March 31, 2020. The ~~decreases were~~decrease during the three months ended March 31, 2021 was largely related to a reduction in commission ~~expenses~~expense on lower revenues and lower travel, meals and entertainment expenses ~~in the three and six months ended June 30, 2020~~ due to restrictions on travel as a result of ~~COVID-19,~~the ~~cancellation of Connext and other tradeshows as well as continued attention to cost discipline.~~COVID-19 pandemic. As economies re-open, we anticipate travel, meals and entertainment expenses towill increase over current levels, the timing and amount of ~~which,~~such expenses, however, are ~~indeterminate. Included in sales and marketing expenses in the three months ended June 30, 2019 was $1.3~~indeterminate at this time. These reductions were partially offset by $0.2 million of ~~consulting costs related~~increased salary and wage expenses as we continue to build our sales organization and ~~marketing plan that did not recur in 2020.~~$0.3 million of staff transferred from Technology and Development to Sales and Marketing.

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

General and Administrative Expenses

General and administrative expenses (“G&A”) decreased ~~$0.7~~$0.6 million to ~~$6.2~~$7.2 million for the three months ended ~~June 30, 2020~~March 31, 2021 from ~~$6.9~~$7.8 million for the three months ended ~~June 30, 2019.~~March 31, 2020. For the ~~six months~~quarter 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.~~

~~For the three months ended June 30, 2020,~~March 31, 2021, the decrease was the result of ~~incurring $0.9 million of higher legal costs, offset by expense reductions, and during the second quarter of 2019 we incurred $0.4 million of~~lower professional fees ~~related to the listing of our common shares on Nasdaq. For the six months ended June 30, 2020, the increase was the result of incurring $3.0 million of higher legal costs~~ and ~~recording~~ a $0.6 million credit loss recorded in the first quarter of ~~expected credit losses against our accounts receivable balances. These costs were~~2020 that was not repeated in 2021, partially offset by ~~expense reductions and during the six months ended June 30, 2019 we incurred $1.1 million of professional fees related to the listing of our common shares on Nasdaq.~~increased severance costs.

Operations Support Expenses

Operations support ~~expenditures include~~is comprised primarily of project managers, order entry and other professionals that facilitate the ~~fixed costs associated with delivery~~integration of our Distribution Partner project execution and ~~project management of DIRTT solutions.~~our manufacturing operations. Operations support expenses decreased ~~by $0.6~~$0.2 million to $2.3 million for the three months ended March 31, 2021, from ~~$2.9 million in the prior year period. Operations support costs decreased $0.6 million to $4.8~~$2.5 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020, from $5.4 million for the same period of 2019. In the three and six months ended June 30, 2019 we incurred $0.7 million and $1.1 million of consulting costs, respectively, to assist with the rectification of the tile warping issue. Decreases in consulting costs were partially offset by increases in personnel costs due to ~~increased headcount to better support project execution and support of our Distribution Partners.~~reduced activity.

Technology and Development Expenses

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

Technology and development expenses ~~increased~~decreased by ~~$0.1~~$0.3 million to ~~$2.1~~$1.9 million for the three months ended ~~June 30, 2020,~~March 31, 2021, compared to ~~$2.0~~$2.2 million for the three months ended ~~June 30, 2019. Technology~~March 31, 2020, primarily related to staff transferred to Sales and ~~development costs of $4.2 million for the six months ended June 30, 2020 were consistent with the comparable period in 2019.~~Marketing.

Stock-Based Compensation

In the third quarter of 2018, we determined that we no longer qualified as a 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 fair value of outstanding options at the end of June 30, 2019 as a liability, with changes in the liability recorded through net income as a stock-based compensation fair value adjustment. On October 9, 2019, we ceased allowing cash surrender of options and returned to equity accounting under the Option Plan without quarterly fair value adjustments at that date.

Stock-based compensation expense for the three months ended ~~June 30, 2020~~March 31, 2021 was ~~$0.4~~$1.1 million, compared to ~~a $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~~$0.5 million for the same period of ~~2019. Stock-based compensation for the second quarter of 2019 included a~~2020. The increase was largely due to fair value ~~adjustment~~adjustments on cash settled ~~options,~~awards as ~~explained above.~~a result of share price appreciation during the three months ended March 31, 2021 compared to a reduction in the prior year period.

~~Reorganization Expenses~~Government Subsidies

InDuring the ~~first half of 2019, we incurred $2.6~~three months ended March 31, 2021, the Company recorded $4.1 million of ~~reorganization expenses, including severance payments and related legal and consulting costs associated with management and organizational changes. We do not consider current~~government subsidies (2020 – $nil), of which $2.0 million (2020: $nil) were received during the period ~~severances related~~in addition to ~~our plant workforce to be reorganization expenses in nature.~~

~~Government Subsidies~~$1.7 million that was receivable at December 31, 2020.

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government ~~has~~ established the ~~Canadian Emergency Wage Subsidy (“CEWS”) on April 11, 2020. Under the~~ CEWS provides the Company ~~may be eligible for~~with a taxable subsidy in respect of ~~up to 75%~~a specific portion of wages paid to Canadian employees during qualifying periods extending from March 15, 2020 to ~~August 29, 2020, depending~~June 5, 2021 (with an extension to September 25, 2021 having been announced in the 2021 Canadian federal budget), based on the percentage decline of the Company ~~meeting~~in certain ~~revenue decline thresholds. During~~of its Canadian-sourced revenues during each qualifying period. Pursuant to proposed changes announced in the ~~quarter we received~~2021 Canadian federal budget, the Company may be required to repay all or ~~were eligible to receive $4.3 million under~~a portion of the ~~CEWS.~~

CEWS amounts for any qualifying period commencing after June 5, 2021 where the aggregate compensation for specified executives during the 2021 calendar year exceeds the aggregate compensation for specified executives during the 2019 calendar year. The Company’s eligibility for the CEWS may change for each qualifying period and is reviewed by the Company for each qualifying period. On November 19, 2020, the Canadian government ~~recently introduced legislation to extend~~also implemented 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 withCERS, which provides a taxable subsidy to cover eligible expenses for ~~wages paid~~qualifying properties, subject to certain maximums, starting on September 27, 2020 to June 5, 2021 (with an extension to September 25, 2021 having been announced in the 2021 Canadian ~~employees of up to 60%~~federal budget), with the amount of the subsidy ~~varying depending~~based on the ~~scale~~percentage decline 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~~in certain of its Canadian-sourced revenues in each qualifying period. The Company’s eligibility for ~~a CEWS subsidy that~~the CERS may change for each qualifying period and 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~~reviewed by the Company ~~has a 3-month average revenue drop in Canadian-sourced revenue of more than 50% and certain other requirements are satisfied. We will continue to assess our eligibility on an ongoing basis~~ for ~~as long as the program is available.~~each qualifying period.

Income Tax

The provision for income taxes is comprised of U.S. and Canadian federal, state ~~provincial~~ and ~~foreign~~provincial taxes based on pre-tax income. Income tax expense for the three months ended ~~June 30, 2020~~March 31, 2021 was ~~$0.1~~$0.04 million, compared to ~~$1.7~~a $1.3 million recovery for the same period of ~~2019~~2020. We have recorded a valuation allowance of $2.8 million against Canadian deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income ~~tax recovery for the six months ended June 30, 2020 was $1.2 million as compared~~in Canada to ~~a $1.7 million expense for the same period of 2019.~~fully deduct historical losses. As at ~~June 30, 2020,~~March 31, 2021, we had C$~~42.3~~60.3 million of loss carry-forwards in Canada and none in the United States. These loss carry-forwards will begin to expire in 2032.

Net ~~Income (loss)~~Loss

Net ~~income was $0.3~~loss increased to $12.5 million or ~~$0.00~~$0.15 net ~~income~~loss per share in the ~~second~~first quarter of ~~2020, compared to~~2021 from a net ~~income~~loss of $2.6 million or $0.03 net income per share for the 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~~$5.3 million or $0.06 net loss per share ~~compared to $2.7~~for the first quarter of 2020. The increased loss is primarily the result of a $7.9 million ~~or $0.03~~decrease in gross profit, a $2.5 million net ~~loss per share~~decrease in ~~the six months ended June 30, 2019. Compared to the prior year period, the~~foreign exchange gains, a $1.4 million increase in income tax expense and a $0.6 increase in net ~~loss is attributable to the above noted reduction in gross profit,~~interest expense, 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~~decrease in operating expenses ~~reflects lower commissions on reduced sales activities, the combination of $1.3~~and $4.1 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~~government subsidies 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.~~2021.

Liquidity and Capital Resources

Cash and cash equivalents at ~~June 30, 2020~~March 31, 2021 totaled ~~$44.6~~$58.7 million, ~~a decrease~~an increase of ~~$2.6~~$12.8 million from ~~$47.2 million at~~ December 31, ~~2019.~~2020. The increase in cash reflects the impact of $29.5 million of net proceeds from the issuance of the Debentures in January 2021, offset by cash used in operations of $12.1 million and capital expenditures of $3.6 million.

In January 2021, we issued C$40.3 million of the Debentures for net proceeds after costs of C$37.6 million ($29.5 million). The Debentures accrue interest at a rate of 6.00% per annum and are convertible into common shares of DIRTT at an exercise price of C$4.65 per common share, or if not converted will mature and will be repayable on January 31, 2026.

In ~~July 2019,~~February 2021, we entered into a loan agreement governing a C$~~50.0~~25.0 million senior secured revolving credit facility with ~~the~~ RBC. ~~Draw-downs under~~Under the RBC Facility, ~~are available in both Canadian and U.S. dollars. 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 CompanyBorrowing Base is ~~able to borrow to~~ a maximum of ~~75%~~90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and ~~25%~~85% of the net orderly liquidation value 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 millionany reserves 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 replacepotential prior ranking claims. Under the RBC Facility, ~~with an asset backed facility. As~~ at ~~June 30, 2020, the RBC Facility was undrawn and the~~March 31, 2021 available ~~borrowing base was USD $12.8~~borrowings are C$9.4 million or $7.5 million.

~~During the three months ended June 30, 2020, we entered into~~The Company has a C$5.0 million ~~equipment leasing facility in~~ Canada Leasing Facility on which C$3.6 million ($2.6 million) of cash consideration has been drawn, and a ~~$16.0~~$14.0 million ~~equipment leasing facility~~U.S. Leasing Facility on which $3.5 million has been drawn and a further $7.2 million was drawn in ~~the United States, which~~April 2021 with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. ~~The~~We anticipate drawing an additional three to four million on our 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~~during the second or third 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~~2021 primarily related to equipment purchases in ~~the second half of 2020 when equipment is received at~~ the South Carolina ~~Plant.~~Facility as commissioning activities are completed.

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 combined with increased liquidity from the aforementioned ~~leasing facilities~~Leasing Facilities and RBC Facility should, ~~based on current activity levels,~~except in very extreme cases, be sufficient to support ongoing working capital and capital expenditure requirements for at least the next twelve months.

A prolonged and complete cessation of or sustained significant decrease in North American construction activities or a sustained economic depression and its adverse impacts on customer demand could adversely affect our liquidity. To the extent that existing cash and cash equivalents and increased liquidity from the ~~Leasing Facilities~~aforementioned facilities are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our Debentures and our equity securities or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.

Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of ~~cashflow~~cash flow from operations, long-term debt, and cash on hand. We had no amounts outstanding under the RBC Facility as of March 31, 2021 and ~~C$3.5~~$5.8 million outstanding under the Leasing Facilities as of ~~June 30, 2020.~~March 31, 2021.

The following table summarizes our consolidated cash flows for the three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

   Three months ended June 30,    Six months ended June 30,
   2020    2019    2020 2019
   ($ in thousands)    ($ in thousands)
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
   224    152    (275 ) 1,058






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






Cash and cash equivalents, end of period
   44,626    58,736    44,626 58,736

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

Operating Activities

Net cash flows ~~provided by~~used in operating activities was ~~$2.4 million and $1.6~~$12.1 million for the first three ~~and six~~ months of ~~2020, respectively,~~2021 compared to $0.8 million net cash flows ~~provided by~~used in operating activities ~~of $7.5 million and $14.9 million~~ in the ~~corresponding periods~~first three months of ~~2019.~~2020. The decrease inis cash flows

from operations is largely due to a decrease in revenues and a reduction in ~~trade~~ accounts ~~payables~~payable and ~~other~~accrued liabilities, and partially offset by the ~~impact~~receipt of government subsidies and increases in ~~accounts receivable collections, and~~ customer deposits and deferred revenue.

Investing Activities

~~For the three and six months ended June 30, 2020, we~~We invested ~~$4.5~~$2.9 million ~~and $6.2 million, respectively,~~ in property, plant and equipment during the three months ended March 31, 2021, compared to ~~$1.8~~$1.6 million ~~and $3.2 million in~~during the ~~respective prior year periods.~~three months ended March 31, 2020. The increase is primarily due to capital investments in manufacturing facilities including the South Carolina ~~Plant.~~Facility and our new Dallas DXC. We invested ~~$0.9 million and $1.9~~$0.7 million on capitalized software during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, as compared to ~~$1.1 million and $1.6~~$1.0 million in the three ~~and six~~ months ended June 30, 2019. The 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.March 31, 2020.

Financing Activities

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2021, $29.3 million of cash was provided by financing activities mainly due to the proceeds received from the issuance of C$40.3 million of Debentures in January 2021. Cash used in financing activities for the three months ended March 31, 2020 ~~C$3.6 million ($2.6 million)~~ was received under the equipment leasing facility in Canada discussed above and $0.1 million was repaid. We repaid the balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019.$nil.

We currently expect to fund anticipated future investments ~~through the combination of~~with available cash, including the proceeds from our issuance of Debentures, and drawings on our Leasing Facilities. We expect to draw approximately $11.0 million on our Leasing Facilities in the first half of 2021, of which $7.2 million was drawn in April 2021, financing the equipment ~~leasing facilities.~~purchases for our new South Carolina Facility that were largely paid for in installments in 2019 and 2020. Apart from cash flow from operations, issuing equity and debt has been our primary source of capital to date. Additional debt or equity financing may be pursued in the future as we ~~may~~ deem appropriate. ~~In the future, we~~We may also use debt or pursue equity financing depending on the ~~Company’s~~ share price at the time, interest rates, and nature of the investment opportunity and economic climate.

Credit ~~Facilities~~Facility

On ~~July 19, 2019, we~~February 12, 2021, the Company entered into the RBC ~~Facility, a C$50.0 million senior secured revolving credit facility. The~~Facility. Under the RBC Facility, ~~has a three-year term and can be extended for~~the Borrowing Base is up to ~~two additional years at our option.~~a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. At March 31, 2021 available borrowings are C$9.4 million ($7.5 million), of which no amounts have been drawn. Interest is calculated at the Canadian or U.S. prime rate ~~with no adjustment,~~plus 30 basis points or at the ~~bankers’ acceptance rate~~Canadian Dollar Offered Rate or LIBOR plus ~~125~~155 basis points. ~~We are required to comply with certain financial covenants under~~Under the RBC Facility, if the Aggregate Excess Availability, defined as the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including ~~maintaining~~unrestricted cash, is less than C$5.0 million, the Company is subject to a ~~minimum fixed charge coverage ratio~~FCCR covenant of ~~1.15:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:~~1.10:1 on a trailing ~~four quarter~~twelve month basis. ~~We are also required to comply with certain~~ ~~non-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~~Additionally, if 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~~FCCR has been below 1.10:1 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~~3 immediately consecutive months, the Company is required to maintain a ~~cash balance~~reserve account equal to the aggregate of ~~$10.0~~one year of payments on outstanding loans on the Leasing Facilities. The Company did not meet the 3 month FCCR requirement during the first quarter of 2021 which resulted in requiring the restriction of $1.1 million ~~if no loans are drawn under~~of cash. Should an event of default occur or the ~~facility, have Adjusted EBITDA of not~~Aggregate Excess Availability be less than ~~a loss of $7.0 and $16.5~~C$6.25 million for 5 consecutive business days, the ~~twelve month periods ended June 30~~Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and ~~September 30, 2020,~~daily balances will set-off any borrowings 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~~any remaining amounts made available 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 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). Except 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 a ~~one-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.~~Company.

During ~~the three months ended June 30,~~ 2020, the Company entered into athe Leasing Facilities, consisting of the C$5.0 million ~~equipment leasing facility in~~ Canada Leasing Facility and ~~a $16.0~~the $14.0 million ~~equipment leasing facility in the United States,~~U.S. Leasing Facility with RBC, which are available for equipment expenditures and certain equipment expenditures already incurred. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and ~~3.5%~~4.50%. The U.S. ~~leasing facility~~Leasing Facility is amortized over a six-year term and is extendible at the Company’s option for an additional year. ~~During~~

The Company has drawn $3.5 million of cash consideration under the ~~second quarter of~~U.S. Leasing Facility and commenced the lease term in 2020 for the equipment at the South Carolina Facility. The Company ~~received~~ has drawnC$3.6 million ($2.6 million) of cash consideration under the Canada Leasing Facility and commenced the lease term for the Canadian equipment ~~expenditures.~~expenditures during 2020.

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

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

Contractual Obligations

There have been no material changes in our contractual obligations during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, 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~~10-K. See Note ~~11,~~12, “Commitments” to our interim condensed consolidated financial statements in this Quarterly ~~Report.~~Report for additional information.

Significant Accounting Policies and Estimates

There have been no material changes in our significant accounting policies during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K. For information regarding significant accounting policies and estimates, please refer to Item 7 and Item 8 in our Annual Report on Form 10-K. As disclosed in Note 4, “Adoption of New and Revised Accounting Standards” to our condensed consolidated interim financial statements appearing in this Quarterly Report, we adopted ~~ASU~~ Accounting Standards Update No. ~~2016-13,~~ ~~“Financial Instruments~~2020-06, “Debt – ~~Credit Losses (Topic 326):~~ ~~Measurement of Credit Losses~~Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in ~~Financial Instruments~~Entity’s Own Equity (Subtopic 815-40)”. ~~Adoption of~~The Company had no convertible debt instruments outstanding at December 31, 2020 and the Debentures issued in January 2021 have been evaluated under this ~~amendment has impacted the way we determine expected credit loss on trade receivables.~~new guidance and there were no other transitional impacts to consider. The methodology now applied has been explained in Note 6 and the ~~referenced note.~~impact on diluted earnings per share has been reflected in Note 7.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, please refer to Note 4, “Adoption of New and Revised Accounting 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~~

~~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 Annual Report on Form~~ ~~10-K.~~ ~~For information regarding our exposure to certain market risks, please refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form~~ ~~10-K.~~

Item 4.3.

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 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 ~~Rules~~ Rule 13a-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 ~~June 30, 2020.~~March 31, 2021. Based upon their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended ~~June 30, 2020,~~March 31, 2021, 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

~~During~~We continue to pursue multiple lawsuits against our former founders, Mogens Smed and Barrie Loberg, and their new company Falkbuilt Ltd. (“Falkbuilt”) for violation of fiduciary duties and non-competition and non-solicitation covenants contained in their DIRTT executive employment agreements, and the ~~period covered by this Quarterly Report on Form~~ ~~10-Q,~~ ~~no legal proceedings were commenced,~~misappropriation of DIRTT’s confidential and ~~there were no material developments~~proprietary information in ~~already-pending legal proceedings, other than ordinary routine litigation incidental~~violation of numerous Canadian and U.S. state and federal laws pertaining to the protection of DIRTT’s trade secrets and proprietary information and the prevention of false advertising and deceptive trade practices.

Our litigation against Falkbuilt and Messrs. Smed and Loberg is currently comprised of three main lawsuits: (i) an action in the Alberta Court of Queen’s Bench instituted on May 9, 2019 against Falkbuilt, Messrs. Smed and Loberg, and several other former DIRTT employees alleging breaches of restrictive covenants, fiduciary duties, and duties of loyalty, fidelity and confidentiality, and the misappropriation of DIRTT’s confidential information (the “Canadian Non-Compete Case”); (ii) an action in the U.S. District Court for the Northern District of Utah instituted on December 11, 2019 against Falkbuilt, Smed, and other individual and corporate defendants alleging misappropriation of DIRTT’s confidential information, trade secrets, business intelligence and customer information, and false advertising in violation of the United States Lanham Act, the Colorado Consumer Protection Act, and the Ohio Deceptive Trade Practices Act (the “U.S. Misappropriation Case”); and (iii) an action for federal patent infringement in the U.S. District Court for the Northern District of Illinois instituted on August 6, 2020 against Falkbuilt, alleging that Falkbuilt infringes certain of DIRTT’s patents relating to our proprietary ICE® software (the “U.S. Patent Case”).

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

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

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

No amounts are accrued for the above legal proceedings.

Item 1A.

Risk Factors

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

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

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,~~created significant volatility, uncertainty and ~~may continue~~economic disruption. The extent to ~~negatively affect, our operations, including our revenue, expenses, collectability of accounts receivables and~~which COVID-19, or 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~~pandemics 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 affectingepidemics, impact our employees, operations, 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;~~numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of ~~related federal,~~the COVID-19 pandemic (and whether there is a resurgence or multiple resurgences of the virus in the future, including as a result of strain variations); the actions taken by governments and public health officials in response to the pandemic; the availability and effectiveness of vaccines, approvals thereof and the speed of vaccine distribution; the impact on construction activity; the effect on our customers’ demand for our DIRTT Solutions; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. For example, while many of our products support life sustaining activities and essential construction, we, and certain of our customers or suppliers, may be impacted by state or provincial ~~and local government~~actions, orders and ~~restrictions;~~policies regarding the ~~extent~~COVID-19 pandemic, including temporary closures of non-life sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the ~~impact~~implementation and enforcement of ~~the~~ ~~COVID-19~~ ~~pandemic on the construction market and~~which may vary by individual jurisdictions. Any of these events could have a material adverse effect on our ~~Distribution Partners, customers and suppliers; and our access to capital, all~~business, liquidity or results of ~~which are highly uncertain and cannot be predicted at this time.~~operations.

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

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, File No. 001-39061, filed on September 20, 2019).
3.2
~~3.2~~		Amended and Restated Bylaw No. 1 of DIRTT Environmental Solutions Ltd. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on May 22, 2020).
4.1		Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd., Computershare Trust Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
10.1* 4.2		~~First Amending~~Supplemental Indenture, dated January 25, 2021, by and among the Company, Computershare Trust Company of Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on January 29, 2021).
10.1		Loan Agreement, ~~between~~dated February 12, 2021, by and among the Royal Bank of Canada, DIRTT Environmental Solutions Ltd. 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. Long-Term Incentive Plan~~borrowers (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)~~February 19, 2021).
10.2+
~~10.6+~~		~~Form of Option Award~~Indemnification Agreement, ~~Under~~by and between the ~~DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan~~Company and James A. Lynch, dated March 22, 2021 (incorporated by reference to Exhibit ~~4.4~~10.1 to the Registrant’s ~~Registration Statement~~Current Report on Form ~~S-8,~~8-K, File No. ~~333-238689,~~001-39061, filed on ~~May 26, 2020)~~March 23, 2021).
10.3+
~~10.7+~~		~~Form of Time-Based Restricted Share Unit Award~~Indemnification Agreement, ~~Under~~by and between the ~~DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan~~Company and Diana R. Rhoten, dated March 22, 2021 (incorporated by reference to Exhibit ~~4.5~~10.2 to the Registrant’s ~~Registration Statement~~Current Report on Form ~~S-8,~~8-K, File No. ~~333-238689,~~001-39061, filed on ~~May 26, 2020)~~March 23, 2021).
31.1*
~~10.8+~~		Form of Performance-Based Restricted Share Unit Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form ~~S-8,~~ ~~File~~ ~~No. 333-238689,~~ ~~filed on May 26, 2020).~~

31.1*		Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
31.2*		Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
32.1**		Certification of the Principal Executive Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
32.2**		Certification of the Principal Financial Officer required by 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
101.INS*		XBRL Instance Document
101.SCH*
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document


~~Exhibit~~ ~~No.~~ 101.LAB*		~~Description~~

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
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:~~	By:	/s/ Geoffrey D. Krause
		Geoffrey D. Krause
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Date: May 5, 2021

~~Date: July 29, 2020~~

3433


			Page
Cautionary Statement Regarding Forward-Looking Statements		ii

PART I – FINANCIAL INFORMATION		3
		4
Item 1.	Financial Statements (Unaudited)			3	4

	Interim Condensed Consolidated Balance Sheets			3	4
	Interim Condensed Consolidated Statement of Operations and Comprehensive ~~Income (Loss)~~Loss			4	5
	Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity			5	6
	Interim Condensed Consolidated Statement of Cash Flows			6	7
	Notes to the Unaudited Interim Condensed Consolidated Financial Statements			7
		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			16

~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~18			28

~~Item 4.~~	~~Controls and Procedures~~			29

Item 3. Controls and Procedures	29

PART II – OTHER INFORMATION		30

~~Item 1.~~	~~Legal Proceedings~~			30

Item ~~1A.~~1. Legal Proceedings	~~Risk Factors~~30			30

Item 1A. Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			31

Item 3.	Defaults Upon Senior Securities			31

Item 4.	Mine Safety Disclosures			31

Item 5. Other Information	~~Other Information~~31			31

Item 6. Exhibits	~~Exhibits~~32			32


	Number of			Weighted average
	options			exercise price C$
Outstanding at December 31, 2018		6,858,376			5.88
Granted		1,095,182			7.84
Surrendered for cash		(1,651,008	)		5.32
Exercised		(4,878	)		3.62
Forfeited		(52,375	)		4.90
Expired		(51,291	)		4.17

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

Outstanding at December 31, 2019		6,156,652			6.49
Forfeited		(550,259	)		6.79

Outstanding at June 30, 2020		5,606,393			6.46

Exercisable at June 30, 2020		2,435,733			6.25


	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


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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company