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~~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).~~ 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~~85,328,082 common shares outstanding as of July ~~29, 2020.~~30, 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~~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. In particular and without limitation, this Quarterly Report contains forward-looking statements pertaining to the competitiveness of the Company's solutions, the Company's business, financial condition, results of operations and growth prospects and the financial position of the Company. 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~~an 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”), as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 5, 2021, 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;

~~competition in and changes to the interior construction industry;~~
•
our requirements to comply with applicable environmental, health and safety laws;

~~global economic, political, health and social conditions and financial markets, including those related to pandemics such as the~~ ~~COVID-19~~ ~~pandemic;~~
•
our ability to generate sufficient revenue to achieve and sustain profitability;

~~the condition and changing trends of the overall construction industry;~~
•
our periodic fluctuations in results of operations and financial conditions;

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

~~our ability to maintain and manage growth effectively;~~
•
the effect of being governed by the corporate laws of Alberta, Canada, including obstacles to investors seeking to acquire control of our company;

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

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

~~labor overcapacity or shortages and disruptions in our manufacturing facilities;~~
•
the availability of capital or financing on acceptable terms, which may impair our ability to make investments in the business;

~~product liability, product defects and warranty claims brought against us;~~
•
the availability of government subsidies;

~~defects in our designing and manufacturing software;~~
•
the construction, expansion and commissioning of our facilities and buildings; and

~~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 June 30,			As at December 31,
	2021			2020
ASSETS
Current Assets
Cash and cash equivalents		58,326			45,846
Restricted cash		2,807			-
Trade and other receivables, net of expected credit losses of $0.6 million at June 30, 2021 and December 31, 2020		21,918			18,953
Inventory		16,753			15,978
Prepaids and other current assets		4,074			4,068
Total Current Assets		103,878			84,845
Property, plant and equipment, net		53,131			49,847
Capitalized software, net		8,424			8,344
Operating lease right-of-use assets, net		31,405			33,643
Goodwill		1,489			1,449
Other assets		5,196			5,016
Total Assets		203,523			183,144
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities		20,190			20,350
Other liabilities		3,664			2,779
Customer deposits and deferred revenue		3,148			1,819
Current portion of long-term debt and accrued interest		3,295			898
Current portion of lease liabilities		6,373			5,503
Total Current Liabilities		36,670			31,349
Deferred tax liabilities, net		464			414
Long-term debt		41,710			5,069
Long-term lease liabilities		27,577			29,781
Total Liabilities		106,421			66,613
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 85,311,575 issued and outstanding at June 30, 2021 and 84,681,364 at December 31, 2020		181,713			180,639
Additional paid-in capital		10,930			10,175
Accumulated other comprehensive loss		(15,697	)		(17,018	)
Accumulated deficit		(79,844	)		(57,265	)
Total Shareholders’ Equity		97,102			116,531
Total Liabilities and Shareholders’ Equity		203,523			183,144

   As at
   June 30, 2020 December 31, 2019
ASSETS

Current Assets

Cash and cash equivalents
   44,626 47,174
Trade and other receivables, net of expected credit losses of $0.7 million at June 30, 2020 and $0.1 million December 31, 2019
   21,281 24,941
Inventory
   17,651 17,566
Prepaids and other current assets
   3,571 3,340


Total Current Assets
   87,129 93,021


Property, plant and equipment, net
   42,094 41,365
Capitalized software, net
   8,073 8,213
Operating lease right-of-use assets, net
   18,111 20,661
Deferred tax assets, net
   6,073 5,364
Goodwill
   1,354 1,421
Other assets
   4,989 5,518


Total Assets
   167,823 175,563


LIABILITIES

Current Liabilities

Accounts payable and accrued liabilities
   20,458 20,384
Other liabilities
   4,071 5,187
Customer deposits and deferred revenue
   5,256 3,567
Current portion of lease liabilities
   5,136 5,287


Total Current Liabilities
   34,921 34,425


Other long-term liabilities
   2,277 35
Long-term lease liabilities
   13,638 16,116


Total Liabilities
   50,836 50,576


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
Additional paid-in capital
   9,274 8,343
Accumulated other comprehensive loss
   (21,914 ) (18,028 )
Accumulated deficit
   (51,012 ) (45,967 )


Total Shareholders’ Equity
   116,987 124,987


Total Liabilities and Shareholders’ Equity
   167,823 175,563

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

DIRTT Environmental Solutions Ltd.

Interim Condensed Consolidated Statement of Operations

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

   For the three months
ended June 30, For the six months
ended June 30,
   2020 2019 2020 2019
Product revenue
   40,765 61,273 81,064 125,113
Service revenue
   1,390 2,818 2,072 4,039


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


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


Total cost of sales
   27,939 39,670 57,605 81,127


Gross profit
   14,216 24,421 25,531 48,025


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 )


Government subsidies
   (4,284 ) —   (4,284 ) —
Foreign exchange (gain) loss
   960 441 (1,359 ) 960
Interest income
   (57 ) (38 ) (195 ) (92 )
Interest expense
   61 25 96 74


   (3,320 ) 428 (5,742 ) 942


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


Income taxes

Current tax expense (recovery)
   366 936 (215 ) 1,088
Deferred tax expense (recovery)
   (242 ) 786 (987 ) 620


   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 )


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

   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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
Product revenue		40,087			40,765			68,629			81,064
Service revenue		1,015			1,390			1,938			2,072
Total revenue		41,102			42,155			70,567			83,136
Product cost of sales		31,091			26,751			54,642			54,041
Costs of under-utilized capacity		-			-			1,756			2,010
Service cost of sales		787			1,188			1,575			1,554
Total cost of sales		31,878			27,939			57,973			57,605
Gross profit		9,224			14,216			12,594			25,531
Expenses
Sales and marketing		7,564			6,177			14,234			13,585
General and administrative		7,780			6,194			15,021			14,019
Operations support		2,213			2,251			4,510			4,783
Technology and development		1,924			2,082			3,859			4,247
Stock-based compensation		1,861			425			2,955			886
Total operating expenses		21,342			17,129			40,579			37,520
Operating loss		(12,118	)		(2,913	)		(27,985	)		(11,989	)
Government subsidies		3,431			4,284			7,499			4,284
Foreign exchange gain (loss)		(60	)		(960	)		(240	)		1,359
Interest income		23			57			42			195
Interest expense		(794	)		(61	)		(1,294	)		(96	)
		2,600			3,320			6,007			5,742
Income (loss) before tax		(9,518	)		407			(21,978	)		(6,247	)
Income taxes
Current tax expense (recovery)		210			366			210			(215	)
Deferred tax expense (recovery)		10			(242	)		49			(987	)
		220			124			259			(1,202	)
Net income (loss)		(9,738	)		283			(22,237	)		(5,045	)
Income (loss) per share
Basic and diluted loss per share		(0.11	)	0.00				(0.26	)		(0.06	)
Weighted average number of shares outstanding (in thousands)
Basic and Diluted		84,752			84,681			84,717			84,681

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2021			2020		2021			2020
Interim Condensed Consolidated Statement of Comprehensive Income (Loss)
Income (loss) for the period		(9,738	)		283		(22,237	)		(5,045	)
Exchange differences on translation of foreign operations		716			2,882		1,321			(3,886	)
Comprehensive income (loss) for the period		(9,022	)		3,165		(20,916	)		(8,931	)

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
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		—		—		—			1,276			—			1,276			-		-		-			2,882			-			2,882
Net income for the period		—		—		—			—			2,611			2,611			-		-		-			-			283			283

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

As at March 31, 2021																		84,681,364		180,639		10,971			(16,413	)		(69,764	)		105,433
Stock-based compensation		—		—		268			—			—			268			-		-		1,285			-			-			1,285
Issued on vesting of RSUs																		630,211		1,074		(1,074	)		-			-			-
RSUs withheld to settle employee tax obligations																		-		-		(252	)		-			(342	)		(594	)
Foreign currency translation adjustment		—		—		—			2,882			—			2,882			-		-		-			716			-			716
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

Net loss for the period																		-		-		-			-			(9,738	)		(9,738	)
As at June 30, 2021																		85,311,575		181,713		10,930			(15,697	)		(79,844	)		97,102

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 June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019				2021			2020			2021			2020
Cash flows from operating activities:
Net income (loss) for the period		283			2,611			(5,045	)		(2,654	)			(9,738	)		283			(22,237	)		(5,045	)
Adjustments:
Depreciation and amortization		2,761			2,940			5,893			6,335				3,421			2,761			6,823			5,893
Stock-based compensation, net of settlements		425			(4,252	)		886			1,429				1,649			425			2,743			886
Foreign exchange (gain) loss		958			284			(1,256	)		282				68			958			240			(1,256	)
(Gain) loss on disposal of property, plant and equipment		(46	)		(9	)		(46	)		53
Accretion of convertible debentures															94			-			147			-
Gain on disposal of property, plant and equipment															-			(46	)		-			(46	)
Deferred income tax expense (recovery)		(242	)		786			(987	)		620				10			(242	)		49			(987	)
Changes in operating assets and liabilities:
Trade and other receivables		2,010			8,345			3,446			15,263				(2,588	)		2,010			(2,831	)		3,446
Inventory		(671	)		1			(636	)		440				(697	)		(671	)		(500	)		(636	)
Prepaid and other current assets		565			343			(332	)		42				770			609			(178	)		(115	)
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															4,759			(3,368	)		(1,257	)		741
Other liabilities															1,260			(932	)		1,767			(2,911	)
Current portion of long-term debt and accrued interest															604			-			1,006			-
Lease liabilities		(34	)		(102	)		(61	)		(248	)			764			(34	)		903			(61	)
Customer deposits and deferred revenue		624			1,424			1,708			(276	)			(290	)		624			1,317			1,708

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

Net cash flows provided by (used in) operating activities															86			2,377			(12,008	)		1,617
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															(5,799	)		(3,203	)		(8,707	)		(4,763	)
Capitalized software development expenditures and other asset expenditures		(945	)		(1,092	)		(1,915	)		(1,595	)			(631	)		(945	)		(1,336	)		(1,915	)
Recovery of software development expenditures		140			30			215			105				-			140			24			215
Proceeds on sale of property, plant and equipment		46			11			46			55				-			46			-			46
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	)			(6,430	)		(3,962	)		(10,019	)		(6,417	)

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															8,407			2,591			37,952			2,591
Repayment of long-term debt		—			—			—			(5,561	)			(552	)		(64	)		(760	)		(64	)

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

Employee tax payments on vesting of RSUs															(589	)		-			(589	)		-
Net cash flows provided by financing activities															7,266			2,527			36,603			2,527
Effect of foreign exchange on cash, cash equivalents and restricted cash															408			224			711			(275	)
Net increase (decrease) in cash, cash equivalents and restricted cash															1,330			1,166			15,287			(2,548	)
Cash, cash equivalents and restricted cash, beginning of period															59,803			43,460			45,846			47,174
Cash, cash equivalents and restricted cash, end of period															61,133			44,626			61,133			44,626
Supplemental disclosure of cash flow information:
Interest paid		(61	)		(25	)		(96	)		(74	)			(67	)		(61	)		(129	)		(96	)
Income taxes paid		(58	)		(402	)		(58	)		(450	)			(48)			(58	)		(48)			(58	)

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

																				June 30,
																				2021			2020
Cash and cash equivalents																					58,326			44,626
Restricted cash																					2,807			-
Total cash, cash equivalents and restricted cash																					61,133			44,626

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,~~2021, and its results of operations and cash flows for the three and six months ended June 30, ~~2020~~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 and applicable securities commissions or similar regulatory authorities in Canada. 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 tothrough the first half of 2021 and potentially 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~~collections as a result of COVID-19. To address this risk and the uncertainty around the timing of a recovery from COVID-19, the Company issued convertible unsecured subordinated debentures 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 to August 29, 2020), provided that~~September 25, 2021 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 changes enacted as part of 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 received 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, for qualifying periods extending from September 27, 2020 to September 25, 2021, 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~~2021, management determined an impairment provision of non-current assets 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, 2020. In future periods, if our ~~share price has increased. The impact of~~ ~~COVID-19~~ ~~on DIRTT’s Distribution Partners or the Company’s operations~~results 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,~~2021, approximately ~~80%~~88% 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 and six months ended June 30, 2021, 1 Distribution Partner ~~accounts~~accounted for $8.2 million and $11.8 million of revenue, which is greater than 10% of total revenue. No Distribution Partners accounted for more than 10% of total revenue for the three and six months ended June 30, 2020. 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						June 30,			December 31,
	June 30, 2020			December 31, 2019			2021			2020
Current		16,249			20,087			14,706			12,500
Overdue		777			2,401			1,307			1,211
								16,013			13,711
		17,026			22,488
Less: expected credit losses		(742	)		(84	)		(588	)		(588	)
								15,425			13,123
		16,284			22,404
Other receivables		64			402
Sales tax receivable								314			242
Government subsidies receivable		2,771			—			2,496			1,743
Income tax receivable		2,162			2,135			3,683			3,845
								21,918			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,~~June 30, 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~~six month period ended ~~March 31,~~June 30, 2020. No ~~further~~ adjustments to our expected credit losses were required at June 30, ~~2020.~~2021. During the first six months 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 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		-		8,407			29,545		37,952
Accretion		-		-			147		147
Accrued interest		-		-			812		812
Repayments		-		(760	)		-		(760	)
Exchange differences		-		100			787		887
Balance at June 30, 2021		-		13,714			31,291		45,005
Current liabilities		-		2,483			812		3,295
Long-term liabilities		-		11,231			30,479		41,710

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 June 30, 2021, available borrowings are C$10.3 million ($8.3 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 Period3 immediately preceding months, the Company is required to maintain a ~~cash balance~~reserve account equal to the aggregate of ~~$10.0 million if no~~one year of payments on outstanding loans ~~are drawn under~~on the ~~facility, have Adjusted EBITDA of~~Leasing Facilities (defined below). The Company did not ~~less than a loss of $7.0 and $16.5 million for~~meet the ~~twelve~~3 month ~~periods ended June 30 and September 30, 2020, and make capital expenditures of no more than $10.7 million~~FCCR requirement during the ~~Covenant Holiday Period. As~~first and second quarters of 2021 which resulted in requiring the restriction of $2.8 million of cash at June 30, ~~2020,~~2021. Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for 5 consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC ~~Facility was undrawn~~ and daily balances would set-off any borrowings and any remaining amounts made available to 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%~~5.77%. 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~~During the six months ended June 30, ~~2020,~~2021, the Company received ~~C$3.6~~$8.4 million ~~($2.6~~(twelve months ended December 31, 2020: $3.5 million) of cash consideration under the ~~leasing facility in~~U.S. Leasing Facilityrelated to reimbursements for equipment purchases for our South Carolina plant. During the six months ended June 30, 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 ~~other~~ current portion of long-term debt and ~~other~~accrued interest and long-term ~~liabilities.~~debt.

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 and six months ended June 30, 2021was $0.3 million and $0.8 million, respectively, which is included in current portion of long-term debt and accrued interest 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~~Upon vesting of certain LTIP awards, the Company may withhold shares ~~were available for issuance under~~as a means of meeting DIRTT’s tax withholding requirements in respect of the ~~2020 LTIP.~~tax payable by award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.

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

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

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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Equity-settled awards		1,285		268		2,081		931
Cash-settled awards		576		157		874		(45	)
		1,861		425		2,955		886

~~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:

	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		2,378,971			200,000			158,133			-
Forfeited		-			-			-			(25,581	)
Outstanding at June 30, 2020		2,378,971			200,000			290,730			197,471
Outstanding at December 31, 2020		2,414,066			200,000			363,664			197,471
Granted		1,897,281			878,601			57,898			-
Vested		(630,042	)		(169	)		(57,380	)		(9,314	)
Withheld to settle employee tax obligations		(161,031	)		-			-			-
Forfeited		(116,656	)		(9,635	)		-			(1,733	)
Outstanding at June 30, 2021		3,403,618			1,068,797			364,182			186,424

   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

~~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,~~each vesting period, the associated 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$1.89) 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.

~~Of the RSUs granted, 200,000 RSUs were~~Restricted share units (performance-based vesting)

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). Based on share price performance since the date of grant, 33.3% of the 2021 PRSUs and 100% of the 2020 PRSUs will vest upon completion of the three-year service period.

% 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 June 30, 2021 had a fair value of $1.6 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 (see “Non-GAAP Financial Measures” in this Quarterly Report), 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 June 30, 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

(550,259
)

6.79

Outstanding at June 30, 2020

5,606,393

6.46

Outstanding at December 31, 2020

4,774,328

6.52

Forfeited

(21,588
)

7.21

Outstanding at June 30, 2021

4,752,740

6.52

Exercisable at June 30, 2021

2,324,160

6.50

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 June 30, 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

3.39

4.12

7,513

3.39

4.12

C$5.01 – C$6.00

669,153

0.39

5.76

669,153

0.39

5.76

C$6.01 – C$7.00

3,290,598

2.30

6.38

1,126,638

2.34

6.36

C$7.01 – C$8.00

770,452

2.88

7.84

520,856

2.88

7.84

Total

4,752,740

2,324,160

Dilutive ~~instruments~~Instruments

For the three and six months ended June 30, ~~2020, 5.6~~2021, 4.8 million options ~~(2019~~(2020 – ~~1.1~~5.6 million), 4.6 million and ~~4.2 million)~~4.0 million RSUs and PRSUs (2020 – nil and 2.7 million), respectively and 8.7 million ~~RSUs (2019~~shares which would be issued if the principal amount of the convertible debentures were settled in our common shares at the quarter end share price (2020 – nil) ~~respectively,~~ were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net ~~income (loss)~~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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Product		36,462		36,921		62,298		72,919
Transportation		3,484		3,545		5,983		7,540
License fees from Distribution Partners		141		299		348		605
Total product revenue		40,087		40,765		68,629		81,064
Installation and other services		1,015		1,390		1,938		2,072
		41,102		42,155		70,567		83,136

   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~~The Company 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,
   2020    2019    2020    2019
At a point in time
   40,466    60,742    80,459    124,050
Over time
   1,689    3,349    2,677    5,102








   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		June 30, 2021		December 31, 2020		December 31, 2019
Customer deposits		4,423		2,436		6,746		2,668		1,292		2,436
Deferred revenue		833		1,131		955		480		527		1,131

Contract liabilities		5,256		3,567		7,701		3,148		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~~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~~$1.6 million and ~~$7.2~~$2.7 millionwere recognized as revenue during the ~~year-to-date~~ ~~periods~~six months ended June 30, 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 June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Commercial		25,096		39,189		53,370		81,338		19,032		25,096		35,176		53,370
Healthcare		7,417		10,346		12,480		23,260		14,176		7,417		20,663		12,480
Government		3,960		4,313		7,087		8,412		4,249		3,960		8,430		7,087
Education		3,993		6,894		7,522		11,040		2,489		3,993		4,012		7,522
License fees from Distribution Partners		299		531		605		1,063		141		299		348		605

Total product and transportation revenue		40,765		61,273		81,064		125,113		40,087		40,765		68,629		81,064
Installation and other services		1,390		2,818		2,072		4,039		1,015		1,390		1,938		2,072
										41,102		42,155		70,567		83,136
		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 June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Canada		4,341		8,771		10,327		15,839		4,461		4,341		7,456		10,327
U.S.		37,814		55,320		72,809		113,313		36,641		37,814		63,111		72,809
										41,102		42,155		70,567		83,136
		42,155		64,091		83,136		129,152

Non-current assets ~~excluding deferred tax assets~~

   As at
   June 30, 2020¹    December 31, 2019¹
Canada
   43,335    47,892
U.S.
   31,286    29,286




   74,621    77,178

	As at
	June 30, 2021		December 31, 2020
Canada		40,565		42,947
U.S.		59,080		55,352
		99,645		98,299

(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~~For the three and six month periods ended June 30, 2021, the Company recorded valuation allowances of C$2.7 million and C$6.3 million, respectively ($2.3 million and $5.1 million) against deferred tax assets (“DTAs”) incurred

during the periods 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 of income taxes in Canada. Accordingly, the fair value adjustment recorded during~~near term.

11. OTHER LIABILITIES

For the period ended June 30, ~~2019 impacted our effective tax rate during that period.~~2021, the Company separately classified the current portion of long-term debt and accrued interest on the balance sheet, as reconciled below:

	As at,
	June 30, 2021			December 31, 2020
Legal provision		45			45
Deferred share unit liability		1,661			971
Warranty and other provisions⁽¹⁾		1,958			1,763
Interest accrued on Debentures		812			-
Current portion of long-term debt		2,483			898
Other liabilities, as previously presented		6,959			3,677
Reclassified to "Current portion of long-term debt and accrued interest"		(3,295	)		(898	)
Other liabilities		3,664			2,779

	As at,
	June 30, 2021			December 31, 2020
As at January 1		1,763			4,008
Adjustments to timber provision		-			(1,750	)
Additions to warranty provision		668			1,301
Payments related to warranties		(473	)		(1,796	)
		1,958			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 June 30, 2021 were $41.1 million, a decline of $1.1 million or 2% from $42.2 million for the quarter ended June 30, 2020. Revenue decreased 15% to $70.6 million for the six months ended June 30, 2021 compared to $83.1 million for the six months ended June 30, 2020. For the three months ended June 30, 2021 revenues have returned to quarterly ranges experienced in the first half of 2020 and have increased by $11.6 million from the first quarter of 2021. On a year-to-date basis, we believe this decrease principally reflects the severe economic and social impact of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels in North America due to 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 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, offset by 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.
•
Gross profit for the quarter ended June 30, 2021 was $9.2 million or 22.4% of revenue, a decline of $5.0 million or 35% from $14.2 million or 33.7% of revenue for the quarter ended June 30, 2020. The reduction was attributable to $1.3 million of higher transportation costs due to third party trucking cost increases, $1.3 million of higher direct material costs due to the combined impact of a 5% increase in the cost of materials and a specialized project that required additional third party manufactured inputs, $0.5 million of incremental costs related to our new highly automated panel manufacturing facility in Rock Hill, South Carolina (the “South Carolina Facility”) as well as the $1.1 million negative impact of a stronger Canadian dollar on Canadian based manufacturing costs. In addition, the three months ended June 30, 2020 included a $1.2 million reversal of a timber provision that did not reoccur in 2021.

~~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.
•
Gross profit for the six month period ended June 30, 2021 was $12.6 million or 17.8% of revenue, a decline of $12.9 million or 51% from $25.5 million or 30.7% of revenue for the six month period ended June 30, 2020. The decrease was largely due to the impact of fixed costs and excess labor capacity on lower revenues. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days despite the shortfall in revenues relative to capacity. The reduction was also attributable to $1.6 million of higher transportation costs from third party trucking cost increases, $1.6 million higher direct material costs due to the combined impact of a 3% increase in the cost of materials and a specialized project that required additional third party manufactured inputs, $1.0 million of incremental costs related to our new South Carolina Facility as well as the $1.6 million negative impact of a stronger Canadian dollar on Canadian based manufacturing costs. In addition, the six months ended June 30, 2020 included a $1.2 million reversal of a timber provision that did not reoccur in 2021.

~~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~~
•
Adjusted Gross Profit (see “Non-GAAP Financial Measures”) for the quarter ended June 30, 2021 was $11.3 million or 27.4% of revenue, a $4.9 million or 30% decline from $16.1 million or 38.2% of revenue for the quarter ended June 30, 2020 for the reasons described above.

•

Adjusted Gross Profit for the six months ended June 30, 2021 was $18.4million or 26.1% of revenue compared to $31.7million or 38.1% of revenue for the six months ended June 30, 2020. Excluded from Adjusted Gross Profit for the six months ended June 30, 2021 and 2020 are $1.8 million and $2.0 million, 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 future requirements as a result of impacts of the COVID-19 pandemic on the construction industry. We did not make further adjustments to our manufacturing workforce in the first six months of 2021 in anticipation of a recovery of demand.

•

Net loss for the three months ended June 30, 2021 was $9.7 million compared to net income of $0.3 million for the three months ended June 30, 2020. The higher net loss is primarily the result of the above noted reduction in gross profit, a $4.2 million increase in operating expenses, which was largely due to increased stock based compensation, one-time severance costs and salary and wage expenses as we continue to build our sales organization and execute on our strategic plan and increased travel, meals and entertainment costs due to the easing of COVID-19 restrictions, a $0.9 million reduction of government subsidies and a $0.7 increase in interest expense as well as the estimated $1.3 million impact of a stronger Canadian dollar on Canadian based operating expenses. These amounts were partially offset by a $0.9 million reduction in foreign exchange losses.

•

Net loss for the six months ended June 30, 2021 was $22.2 million compared to $5.0 million for the six months ended June 30, 2020. The higher net loss is primarily the result of the above noted reduction in gross profit, a $3.1 million increase in operating expenses, which was largely due to higher one-time severance and salary and wage expenses as discussed 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~~ lower commissions on reduced sales activities ~~the combination of $1.3~~ and lower professional fees, a $1.6million ~~of costs related to our sales and marketing plan, $1.1~~net increase in foreign exchange losses, a $1.2 million ~~related to the listing of our common shares on Nasdaq and $2.6 million of reorganization costs~~increase in ~~2019 that did not recur, other cost reductions both deliberate and as a consequence of the~~ ~~COVID-19~~ ~~pandemic~~interest expense and a ~~$3.9~~ $1.5million ~~decrease~~reduction in ~~stock~~income tax recoveries as well as the estimated $1.9 million impact of a stronger Canadian dollar on Canadian based ~~compensation,~~operating expenses. These decreases were partially offset by ~~higher legal costs~~a $3.2million increase of ~~$3.0 million.~~government subsidies.

~~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 June 30, 2021 was an $6.8 million loss or (16.6%) of revenue, a decline of $7.1 million from $0.3 million, or 0.6% of revenue, for the quarter ended June 30, 2020 for the above noted reasons. Adjusted EBITDA for the six months ended June 30, 2021 was an $18.2 million loss or (25.8%) of revenue, a decline of $13.0 million from a loss of $5.2 million, or (6.3)% of revenue, for the six months ended June 30, 2020 for the above noted reasons.

Outlook

OnIn 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. While the 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.

As expected, second quarter 2021 revenue of $41.1 million was nearly forty percent higher than the first quarter of 2021 and within the quarterly revenue ranges experienced in the first half of 2020. Signs of economic recovery continued in the second quarter of 2021 with the easing of pandemic restrictions across North America. Third party construction indices that are leading indicators of future non-residential activity, including the Dodge Momentum Index and the Architectural Billing Index, were in expansionary territory in the quarter. However, we are closely monitoring potential surges in COVID infection rates, driven by the Delta variant, and the resulting impact on demand, labor availability, supply chains and our own operations.

At the same time, conventional construction has experienced dramatic increases in input costs, particularly steel, alongside significant material and labor shortages. These factors, along with permitting backlogs, are resulting in increases to construction costs and long schedule delays, including both the number of projects experiencing delay and the longer duration of the delay.

We believe that rising input costs for conventional construction are allowing our solutions to become more price competitive on a day one basis. While we have experienced some inflation in the cost of our core raw materials of aluminum, medium density fiberboard and glass, those increases have lagged increases in the cost of steel and other conventional construction raw materials. In addition, to date we have not experienced any major raw material shortages and have been able to maintain sufficient inventory levels to mitigate such risk. As a result, we have strategically elected not to pass along raw material price increases in order to enhance our relative price competitiveness versus conventional construction. We will continue to monitor the impact of input cost inflation; however, we expect that the increased price competitiveness of our solutions will drive higher demand, allowing us to improve profitability through absorption of unused labor capacity and fixed cost leverage within our plants.

Schedule delays have served to further highlight the benefits of our prefabricated approach to interior construction. DIRTT’s short lead and installation times allow clients to recapture a portion of the time lost to schedule delays, which we believe makes DIRTT a more attractive option compared to conventional construction. Further, we believe we are uniquely positioned to reduce labor required for interior construction through the combination of prefabrication in facilities emphasizing Lean manufacturing techniques as well as deploying automation as showcased in our recently opened South Carolina Facility.

While our ability to deliver on short lead times is a distinct advantage, our products are installed in the final stages of a project and as such, delays in the project schedule prior to our installation will negatively impact the timing of delivery and the recognition of related sales revenue. Many of our end customers are experiencing high pre-installation schedule delays, which has resulted in a corresponding shift of projects from the second half of 2021 into 2022. As a result, we are now expecting a slower pace of recovery in the second half of 2021, with third quarter revenue anticipated to be similar to the second quarter.

Companies are expressing an increasing interest in flexible, adaptable spaces and prefabricated, offsite construction as they reoccupy their space and explore new ways of working with their teams. We believe DIRTT is uniquely positioned to address this new built environment. Notwithstanding a slower-than-anticipated return to sales growth, we remain encouraged by the sales activity levels within our business, including increased quoting and large project request for proposal (RFP) activity relative to 2020. These activities, while not directly tied to contracted revenue, are indicative of both the overall increasing interest and demand, and the potential strength of our transformed commercial capabilities. In June 2021, the number of client tours, both physically and virtually, that we hosted at our DIRTT Experience Centres (DXCs), including our Dallas DXC that was under construction, was at a 30-month high and we continue to experience increasing engagement with our existing and potential strategic accounts. Strategic accounts provide us the opportunity to generate repeat sales based on existing relationships and we have expanded our strategic account relationships in the second quarter to 44 from 40 relationships in the first quarter of 2021. Additionally. we have been successful on a number of large strategic account RFPs, which we define as being projects exceeding $2.0 million, with delivery dates anticipated to begin in 2022.

Our strong financial position has allowed us to continue to advance the development of our commercial function. During the second quarter, we continued with selective hiring and completed the rollout of our Customer Relationship Management system to all our sales representatives. We anticipate that our Dallas DXC will be ready for occupancy late in the third quarter of this year. Finally, we welcomed three new Distribution Partners in the quarter and are finalizing the onboarding of two major general contractors that we expect will join our distribution partner network in the third quarter of 2021. We are identifying and establishing relationships with potential new Distribution Partners in underserved regions.

On June 8, 2021, we formally opened our new highly automated panel manufacturing facility in Rock Hill South Carolina for a total cost of $17.6 million. This compares to an initial budget of $18.5 million, reflecting the deferral of the casework component to a later date and the addition of priming and UV equipment not contemplated in the original budget. The plant is fully operational, and we are balancing production and resulting labor requirements with our Calgary panel plant. The South Carolina Facility requires one-sixth the labor of the Calgary facility for the same level of output and improves shipping time up to four days with commensurate reductions in freight costs for our East Coast customers. The South Carolina Facility is also a key asset to enhance our customer experience, we believe representing the future of industrialized construction and how it can improve the quality of the built environment. In preparation for increasing demand, we are continuing to deliberately retain manufacturing capacity, which is expected to negatively impact gross margins due to both negative fixed cost leverage and excess labor capacity. As activity improves, we expect gross margins to improve accordingly.

Our financial position remained strong at June 30, 2021, with $58.3 million of cash on hand at June 30, 2021 compared to $58.7 million at March 31, 2021 and $45.8 million at December 31, 2020. Net working capital of $67.2 million compared to $70.5 million at March 31, 2021 and $53.5 million at December 31, 2020. In the second quarter of ~~2020, the~~ ~~COVID-19~~ ~~pandemic continued to impact our business, specifically causing job site closures~~2021, cash provided by operations of $0.1 million ($12.0 million used in certain jurisdictions, schedule delays resulting from labor restrictions and supply chain shortages on job sites and project deferrals due to economic uncertainty. Late in the first quarter of 2020 and early in the second quarter of 2020, we took decisive actions to ensure employee safety, to ~~right-size~~ our plant labor capacity and our overall cost structure consistent with current activity levels and to increase our available liquidity. These steps allowed us to continue moving forward with our strategic plan, while ~~re-prioritizing~~ ~~the execution of certain aspects of our commercial strategy to reduce or defer specific costs~~operations year-to-date) and capital expenditures ~~while still realizing the majority~~ of ~~the benefits derived from the plan.~~

~~Second quarter 2020 revenue~~$6.4 million ($10.0 million year-to-date) were more than offset by equipment leasing facility draws of ~~$42.2~~$8.4 million was slightly higher than first quarter 2020 revenue. While construction activity on existing projects has continued, the pace of construction has slowed with new social distancing and infection control requirements constraining onsite labor. As DIRTT projects are typically installed at the later stage of the construction process, these job site delays impacted our second quarter results, although the exact amount is difficult($8.4 million year-to-date). We expect to ~~quantify given our short lead times. We estimate approximately $3.7~~draw an additional two to three 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~~equipment leasing facilities ~~and facility renovations. It has also caused a pause in some building programs as healthcare providers~~ ~~re-examine~~ their patient delivery models and the impact on their physical space. Educational institutions are also facing budget challenges. Finally, a decline in overall commercial construction activity from a general economic contraction could negatively impact our sales.

~~As the timing and pace of economic recovery and the fulsome effect of~~ ~~COVID-19~~ on the economy remains uncertain, we are actively managing our cost base. We have benefited from both deliberate cost reductions as well as deferrals that are a direct result of travel and other such shelter in place restrictions. As economies begin to 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 of our west, south and north east regions and two in the central region, and have ended our relationships with three underperforming Distribution Partners. In an innovative response to travel restrictions, we successfully onboarded these Distribution Partners via virtual training programs. We hosted several virtual client tours of DIRTT in June and expect to leverage these tours aggressively within the sales organization in the months to come. In Chicago, construction of our DIRTT Experience Center continued and we anticipate that it will be ready for ~~in-person~~ ~~client tours, with enhanced safety protocols,~~ in the third quarter of ~~2020.~~

~~From a systems perspective, we successfully rolled out phase one of our Client Relationship Management System which coincides with~~2021. In 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 our manufacturing operations, our safety culture is now well ingrained resulting in a recordable incident rate for the first half of the year below 1.0 and more than 75% below industry standards. The next stage of improvement is focused on driving sustained quality improvements. We are pleased to note that we have seen continued improvements in quality and, in the second quarter of 2020, all of our plants exceeded their performance goals of a 50% reduction in deficiencies relative to 2019. We are now embarking on the process of improving the efficiency and cost effectiveness of our manufacturing operations. In 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 the base building is largely complete and in July 2020 we received our first shipment of equipment. We expect to receive the balance of the equipment in the second half of 2020 and are on track for commissioning for this facility in the first half of 2021.

~~Our focus on liquidity and cash preservation has been effective. In the second quarter,~~2021, we completed ~~the definitive documentation~~a C$40.25 million convertible unsecured debenture issuance for ~~our previously announced~~ ~~six-month~~ ~~covenant holiday on our credit facility and drew~~net proceeds of C$~~3.6~~37.6 million ~~($2.6 million) of the Canadian leasing facility~~or $29.5 million. We continued 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 underbenefit from the Canadian Emergency Wage Subsidy ~~program from~~(CEWS) and the Canadian Emergency Rent Subsidy (CERS), qualifying for $3.4 million in the second quarter ($7.5 million year-to-date), of which $2.5 million was receivable at June 30, 2021. The CEWS and CERS programs have been extended by the Canadian government ~~for~~to September 25, 2021.

Our strong balance sheet and our prudent focus on liquidity during this uncertain period provides us the ~~April~~confidence to ~~June period. Of this amount, $1.6 million was received~~continue to execute on our strategic plan. We are encouraged by the improving economic conditions and the increase in ~~June with the balance expected~~opportunities and sales activity and expect that our business is ready 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.respond when these opportunities ultimately translate into orders.

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

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


~~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, ~~2020~~2021 and ~~2019~~2020

The following table presents a reconciliation for the second quarter and 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:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
	($ in thousands)						($ in thousands)
Net income (loss) for the period		(9,738	)		283			(22,237	)		(5,045	)
Add back (deduct):
Interest Expense		794			61			1,294			96
Interest Income		(23	)		(57	)		(42	)		(195	)
Income Tax Expense (Recovery)		220			124			259			(1,202	)
Depreciation and Amortization		3,421			2,761			6,823			5,893
EBITDA		(5,326	)		3,172			(13,903	)		(453	)
Foreign Exchange (Gains) Losses		60			960			240			(1,359	)
Stock-based Compensation		1,861			425			2,955			886
Government Subsidies		(3,431	)		(4,284	)		(7,499	)		(4,284	)
Adjusted EBITDA		(6,836	)		273			(18,207	)		(5,210	)
Net Income (Loss) Margin⁽¹⁾		(23.7	)%		0.7	%		(31.5	)%		(6.1	)%
Adjusted EBITDA Margin		(16.6	)%		0.6	%		(25.8	)%		(6.3	)%

   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 %

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

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

For the three months ended June 30, ~~2020,~~2021, Adjusted EBITDA and Adjusted EBITDA Margin decreased to $6.8million loss or (16.6)%, respectively, from $0.3 million ~~and~~or 0.6% ~~from $6.0 million and 9.4%~~ in the same period of ~~2019.~~2020, respectively. This reflects a ~~$10.9~~ $4.9million decrease in Adjusted Gross Profit discussed below, increased professional fees, one-time severance costs, higher salary and ~~$0.9 million~~wage expenses reflecting the cumulative effect of ~~higher legal costs~~hires in ~~2020. These reductions in Adjusted EBITDA were partially offset by reduced commissions on lower revenues and decreased spending on~~line with our strategic plan, increased 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~~the easing of ~~consulting costs incurred for our sales~~COVID-19 restrictions and ~~marketing plan~~the estimated $1.2 million

impact of a strengthening of the Canadian dollar on Canadian based operating expenses, excluding depreciation and ~~$0.4 million of costs related~~stock-based compensation, compared to the ~~listing of the Company’s common shares on Nasdaq in 2019 that did not recur in 2020.~~prior year period.

For the six months ended June 30, ~~2020,~~2021, Adjusted EBITDA and Adjusted EBITDA Margin decreased to a $18.2 million loss or (25.8)%, respectively, from a $5.2 million loss ~~and~~or (6.3)% ~~from $13.8 million and 10.7%~~ in the same period of ~~2019.~~2020, respectively. This ~~decrease~~ reflects a ~~$19.0~~ $13.3million decrease in Adjusted Gross Profit and ~~$2.0~~$0.3 million ofin lower costs of underutilized capacity, discussed below, ~~$3.0~~higher severance costs and salary and wage expenses as discussed above as well as the estimated $1.7 million impact of ~~higher legal costs~~a stronger Canadian dollar on Canadian based operating expenses, excluding depreciation and stock-based compensation. Reductions in Adjusted EBITDA were partially offset by lower professional fees, reduced commissions and cost reductions as a result of reduced activity related to COVID-19. Additionally, in the first half of 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, ~~2020~~2021 and ~~2019~~2020

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
	($ in thousands)						($ in thousands)
Gross profit		9,224			14,216			12,594			25,531
Gross profit margin		22.4	%		33.7	%		17.8	%		30.7	%
Add: Depreciation and amortization expense		2,033			1,908			4,062			4,169
Add: Costs of under-utilized capacity		-			-			1,756			2,010
Adjusted Gross Profit		11,257			16,124			18,412			31,710
Adjusted Gross Profit Margin		27.4	%		38.2	%		26.1	%		38.1	%

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








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








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








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








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

Gross profit and gross profit margin decreased to ~~$14.2~~$9.2 million or 22.4% for the three months ended June 30, 2021, from$14.2 million or 33.7% for the three months ended June 30, 2020, from $24.4 million or 38.1% for the three months ended 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, 2019.2020. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $11.3million or 27.4% for the three months ended June 30, 2021, from $16.1 million or 38.2% for the three months ended June 30, ~~2020, from $27.0~~2020. The reduction was attributable to $1.3 million ~~or 42.1% for~~of higher transportation costs due to third party trucking cost increases, $1.3 million of higher direct material costs due to the combined impact of a 5% increase in the cost of materials and a specialized project that required additional third party manufactured inputs, $0.5 million of incremental costs related to our new South Carolina Facility as well as the $1.1 million impact of a stronger Canadian dollar on Canadian based manufacturing costs. In addition, the three months ended June 30, ~~2019.~~2020 included a $1.2 million reversal of a timber provision that did not reoccur in 2021.

Gross profit and gross profit margin decreased to $12.6 million or 17.8% for the six months ended June 30, 2021, from$25.5 million or 30.7% for the six months ended June 30, 2020. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $18.4million or 26.1% for the six months ended June 30, 2021, from $31.7 million or 38.1% for the six months ended June 30, ~~2020,~~2020. The decrease was largely due to the impact of fixed costs and excess labor capacity on lower revenues. In anticipation of a recovery in demand for our products and services and to preserve our skilled workforce, we deliberately maintained manufacturing headcount, while implementing selective furlough days despite the shortfall in revenues relative to capacity. The reduction was also attributable to $1.6 million of higher transportation costs from ~~$52.8~~third party trucking cost increases, $1.6 million ~~or 40.9% for~~higher direct material costs due to the combined impact of a 3% increase in the cost of materials and a specialized project that required additional third party manufactured inputs, $1.0 million of incremental costs related to our new South Carolina Facility as well as the $1.6 million impact of a stronger Canadian dollar on Canadian based manufacturing costs. In addition, the six months ended June 30, ~~2019. The decreases are largely due to reduced fixed cost leverage due to reductions~~2020 included a $1.2 million reversal of a timber provision that did not reoccur in revenues and excess labor capacity prior to headcount reductions discussed below combined with approximately $0.5 million and $1.0 million of related severance costs in the second quarter and year to date periods of 2020, respectively.2021.

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 for a total reduction of 25% from prior year levels, and the undertaking of planned factory curtailments. The staffing reductions realigned our capacity with ~~then~~ expected activity levels; however, our fixed costs ~~will~~continued to affect our Adjusted Gross Profit Margin, which we expect to remain below historical percentages until sales improve. ~~Prospectively,~~In the first quarter of 2021, we ~~expect~~experienced the full impact of the slowdown in non-residential construction activity on our ~~fixed~~business. Revenues in the second quarter of 2021 have returned to quarterly ranges experienced in the first half of 2020. 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% first quarter and 2% for the six month period ended June 30, 2021 of gross profit margin) in cost of ~~sales to be approximately $6.0 million per~~sales. In the second quarter ~~and remaining costs~~ of ~~sales to be approximately 54% of revenues comprising materials which are variable, and labor which is quasi-variable~~2021, we did not have abnormal excess capacity as ~~we match~~ our ~~shifts to order~~workforce was better aligned with current production volumes.

Following the completion of ~~third-party~~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 accordingly 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 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 six ~~months~~month period ended June 30, ~~2020,~~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,~~2021, Compared to Three and Six Months Ended June 30, ~~2019~~2020

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2021			2020			% Change			2021			2020			% Change
	($ in thousands)									($ in thousands)
Revenue		41,102			42,155			(2	)		70,567			83,136			(15	)
Gross Profit		9,224			14,216			(35	)		12,594			25,531			(51	)
Gross Profit Margin		22.4	%		33.7	%					17.8	%		30.7	%
Operating Expenses
Sales and Marketing		7,564			6,177			22			14,234			13,585			5
General and Administrative		7,780			6,194			26			15,021			14,019			7
Operations Support		2,213			2,251			(2	)		4,510			4,783			(6	)
Technology and Development		1,924			2,082			(8	)		3,859			4,247			(9	)
Stock-based Compensation		1,861			425			338			2,955			886			234
Total Operating Expenses		21,342			17,129			25			40,579			37,520			8
Operating Loss		(12,118	)		(2,913	)		316			(27,985	)		(11,989	)		133
Operating Margin		(29.5	)%		(6.9	)%					(39.7	)%		(14.4	)%

   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:

	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2021		2020		% Change			2021		2020		% Change
	($ in thousands)							($ in thousands)
Product		36,462		36,921		(1	)		62,298		72,919		(15	)
Transportation		3,484		3,545		(2	)		5,983		7,540		(21	)
License fees from Distribution Partners		141		299		(53	)		348		605		(42	)
Total product revenue		40,087		40,765		(2	)		68,629		81,064		(15	)
Installation and other services		1,015		1,390		(27	)		1,938		2,072		(6	)
		41,102		42,155		(2	)		70,567		83,136		(15	)

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








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








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








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

Revenue decreased in the three ~~and~~months ended June 30, 2021 by $1.1 million or 2% compared to the same period of 2020. Revenue decreased in the six months ended June 30, ~~2020~~2021 by ~~$21.9 million and $46.1~~$12.6 million or ~~34% and 36% respectively~~15% compared to the same ~~periods~~period of ~~2019. Revenue~~2020. For the three months ended June 30, 2021 revenues have returned to quarterly ranges experienced in the first half of 2020 and have increased by $11.6 million from the first quarter of 2021. On a year-to-date basis, 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 since March 2020, 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~~was $1.0 million and $1.9 million for the three ~~months ended June 30, 2020 compared to the same period in 2019~~ and ~~decreased $2.0 million for the~~ six months ended June 30, ~~2020~~2021 compared to $1.4 million and $2.1million in the same period ~~in 2019.~~of 2020, respectively. 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 June 30, 2021, we had 69 Distribution Partners servicing multiple locations. ~~We recently added five~~During 2020 and 2021, 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:

	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2021		2020		% Change			2021		2020		% Change
	($ in thousands)							($ in thousands)
Commercial		19,032		25,096		(24	)		35,176		53,370		(34	)
Healthcare		14,176		7,417		91			20,663		12,480		66
Government		4,249		3,960		7			8,430		7,087		19
Education		2,489		3,993		(38	)		4,012		7,522		(47	)
License fees from Distribution Partners		141		299		(53	)		348		605		(42	)
Total product revenue		40,087		40,765		(2	)		68,629		81,064		(15	)
Service revenue		1,015		1,390		(27	)		1,938		2,072		(6	)
		41,102		42,155		(2	)		70,567		83,136		(15	)

        Three months ended June 30,              Six months ended June 30,
   2020    2019    2020    2019
   ($ in thousands)    ($ in thousands)
Commercial
   25,096    39,189    53,370    81,338
Healthcare
   7,417    10,346    12,480    23,260
Government
   3,960    4,313    7,087    8,412
Education
   3,993    6,894    7,522    11,040
License fees from Distribution

Partners
   299    531    605    1,063








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








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








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

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








Total Product Revenue⁽¹⁾
   100    100    100    100

	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2021		2020		% Change			2021		2020		% Change
	(in %)							(in %)
Commercial		47		62		(24	)		52		67		(22	)
Healthcare		36		18		100			30		15		100
Government		11		10		10			12		9		33
Education		6		10		(40	)		6		9		(33	)
Total Product Revenue⁽¹⁾		100		100	NA				100		100	NA

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

Revenue decreased by ~~34%~~2% and ~~36% respectively~~15% in the three and six months ended June 30, ~~2020~~2021 over the same ~~periods~~period in ~~2019~~2020 and was driven primarily by decreased commercial sales. Commercial revenues decreased by 24% and 34%, respectively from the prior period, due largely to the severe impact of COVID-19 on commercial construction activities in North America. Similarly, education sales ~~which reflects~~decreased by 38% and 47%, respectively from 2020 as most universities and private schools moved to on-line classes in response to the ~~disruption in~~COVID-19 pandemic. During 2021, healthcare sales increased primarily reflecting increased activity levels ~~noted above. Commercial revenues were lower due to~~with a large strategic health care provider and the ~~completion~~delivery of ~~a major project~~COVID-19 vaccination trailers 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.~~second quarter.

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


	Three months ended June 30,				Six months ended June 30,				For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		% Change			2021		2020		% Change
	($ in thousands)				($ in thousands)				($ in thousands)							($ in thousands)
Canada		4,341		8,771		10,327		15,839		4,461		4,341		3			7,456		10,327		(28	)
U.S.		37,814		55,320		72,809		113,313		36,641		37,814		(3	)		63,111		72,809		(13	)
										41,102		42,155		(2	)		70,567		83,136		(15	)
		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 and 2021, revenues from Canada fell to 10% of total sales while sales to the United States increased to 90%, reflecting the impact of pandemic related restrictions on activity levels in the related jurisdictions.

Sales and Marketing Expenses

Sales and marketing expenses ~~decreased $3.4~~increased by $1.4 million and ~~$3.7~~$0.6 million to $7.6 million and $14.2 million for the three and six months ended June 30, 2021, respectively, from $6.2 million and $13.6 million for the three and six months ended June 30, 2020, ~~from $9.5 million and $17.3 million for the three and six months ended June 30, 2019.~~respectively. The ~~decreases~~increases were largely related to increased salary and wage expenses as we continue to build our sales organization, $0.6 million due to staff transferred from Technology and Development to Sales and Marketing and higher depreciation expense as we completed our Chicago DXC in 2020, offset by lower commission expense. Travel, meals and entertainment expenses were lower on a ~~reduction in commission expenses~~year-to-date basis, but increased quarter on ~~lower revenues and lower~~quarter as restrictions on travel have eased. As economies re-open, we anticipate 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. As economies~~ ~~re-open,~~ ~~we anticipate travel and entertainment expenses to~~will 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 million of consulting costs related to our sales and marketing plan that did not recur in 2020.indeterminate at this time.

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~~increased by $1.6 million and $1.0 million to ~~$6.2~~$7.8 million ~~for the three months ended June 30, 2020 from $6.9~~and $15.0 million for the three months ended June 30, 2019. For the six months ended June 30, 2020, general and administrative expenses increased $0.2 million to $14.0 million from $13.8 million for the six months ended June 30, 2019.

For the three months ended June 30, 2020, 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 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 of expected credit losses against our accounts receivable balances. These costs were 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.

~~Operations Support Expenses~~

Operations support expenditures include the fixed costs associated with delivery and project management of DIRTT solutions. Operations support expenses decreased by $0.6 million to $2.3 million from $2.9 million in the prior year period. Operations support costs decreased $0.6 million to $4.8 million for the six months ended June 30, 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~~2021, respectively from $6.2 million and ~~$1.1~~$14.0 million ~~of consulting costs, respectively, to assist with~~for the ~~rectification~~three and six months ended June 30, 2020, respectively.

For the quarter ended June 30, 2021, the increase was the result of the ~~tile warping issue. Decreases in consulting costs were~~impact of the stronger Canadian dollar on our cost structure, higher salaries and benefits expenses, inclusive of a one-time severance cost, and professional fees, partially offset by ~~increases~~decreased variable compensation costs. The six months ended June 30, 2021 increased for the same reasons as the second quarter partially offset by a reduction in ~~personnel~~professional service costs ~~due to increased headcount to better~~and a $0.6 million credit loss recorded in the first quarter of 2020 that was not repeated in 2021.

Operations Support Expenses

Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our Distribution Partner project execution and our manufacturing operations. Operations support ~~of our Distribution Partners.~~expenses decreased by $0.1 million and $0.3 million to $2.2 million and $4.5 million for the three and six months ended June 30, 2021, respectively, from $2.3 million and $4.8 million for the three and six months ended June 30, 2020, respectively, due to higher capitalized labor associated with internal capital projects.

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~~$0.2 million and $0.3 million to ~~$2.1~~$1.9 million and $3.9 million for the three and six months ended June 30, ~~2020,~~2021, respectively, compared to ~~$2.0~~$2.1 million and $4.2 million for the three ~~months ended June 30, 2019. Technology~~ and ~~development costs of $4.2 million for the~~ six months ended June 30, 2020, ~~were consistent with the comparable period in 2019.~~respectively, primarily related to Technology and Development staff transferred to Sales and 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 was $0.4 million, compared to a $1.7 million recovery for the same period of 2019. For the~~and six months ended June 30, ~~2020, stock-based compensation~~2021 was ~~$0.9~~$1.9and $3.0 million, respectively, compared to ~~$4.8~~$0.4 million and $0.9 million for the same ~~period~~respective periods of ~~2019. Stock-based compensation for the second quarter~~2020. The increase was largely due to grants of ~~2019 included a~~restricted share units and deferred share units and fair value ~~adjustment~~adjustments on cash settled ~~options,~~awards as ~~explained above.~~a result of share price appreciation during the three and six months ended June 30, 2021.

~~Reorganization Expenses~~Government Subsidies

InDuring the ~~first half of 2019, we incurred $2.6~~three and six months ended June 30, 2021, the Company recorded $3.4 million and $7.5 million of ~~reorganization expenses, including severance payments~~government subsidies, respectively (2020 – $4.3 million for both the three and ~~related legal~~six month periods). Of these amounts, $2.5 million was receivable at June 30, 2021 and ~~consulting costs associated with management and organizational changes. We do not consider current period severances related to our plant workforce~~is expected to be ~~reorganization expenses~~received in ~~nature.~~

~~Government Subsidies~~the third quarter of 2021.

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, providing 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~~September 25, 2021, 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 changes enacted as part of 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~~also implemented the CERS, which provides a taxable subsidy to ~~extend the availability of CEWS through December 19,~~cover eligible expenses for qualifying properties, subject to certain maximums, for qualifying periods extending from September 27, 2020 to September 25, 2021, with the amount of the subsidy ~~varying depending~~based on the ~~scale~~percentage decline of the ~~Canadian revenue decline. Under~~Company in certain of its Canadian-sourced revenues in each qualifying period. The Company’s eligibility for the ~~legislation, effective July 5, 2020, the CEWS would provide~~CERS may change for each qualifying period and is reviewed by the Company ~~with a taxable subsidy~~ for wages paid to Canadian employees of up to 60%, with the amount of the subsidy varying depending on the scale of Canadian revenue decline and the maximum subsidy being reduced from 60% over the period, provided that, through August 29^th, the Company will qualify for a CEWS subsidy that is at least as generous as under the current CEWS program, Under the proposals, a top-up subsidy of up to 85% of wages paid to Canadian employees would also be available if the Company has a 3-month average revenue drop in Canadian-sourced revenue of more than 50% and certain other requirements are 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~~2021 was ~~$0.1~~$0.2 million, compared to ~~$1.7~~$0.1 million for the same period of ~~2019~~2020 and income tax ~~recovery~~expense for the six months ended June 30, ~~2020~~2021 was ~~$1.2~~$0.3 million as compared to a ~~$1.7~~$1.2 million ~~expense~~recovery for the same period of ~~2019.~~2020. For the three and six month periods ended June 30, 2021, the Company recorded valuation allowances of C$2.7 million and C$6.3 million, respectively against deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada to fully deduct historical losses. As at June 30, ~~2020,~~2021, we had C$~~42.3~~75.8 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 $9.7million or ~~$0.00~~ $0.11net ~~income~~loss per share in the second quarter of ~~2020, compared to~~2021 from net income of ~~$2.6~~$0.3 million or ~~$0.03 net income~~$0.00 per share for the second quarter of ~~2019.~~2020. The ~~decrease in net income~~increased loss is ~~attributable to~~primarily the ~~above noted reduction~~result of a $5.0 million decrease in gross profit, ~~and~~ a ~~$0.5~~$4.2 million increase in ~~foreign exchange loss,~~operating expenses, a $0.9 million reduction of government subsidies and a $0.7 increase in interest expense. These decreases were partially offset by a ~~$2.5~~$0.9 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.foreign exchange losses.

Net loss ~~for the six months ended June 30, 2020 was $5.0~~increased to $22.2 million or ~~$0.06 net loss per share compared to $2.7 million or $0.03~~ $0.26net loss per share in the ~~six months ended June 30, 2019. Compared to~~first half of 2021 from a net loss of $5.0 million or $0.06 per share for the ~~prior year period,~~first half of 2020. The increased loss is primarily the result of a $12.9 million decrease in gross profit, a $3.1 million increase in operating expenses, a $1.6 million net increase in foreign exchange losses, a $1.2 million increase in net ~~loss is attributable to the above noted reduction~~interest expense and a $1.5 million net increase in ~~gross profit,~~income tax expense. These decreases were partially offset by a ~~$10.5~~$3.2 million ~~reduction~~increase in ~~operating costs,~~ government ~~subsidies of $4.3 million, increased foreign exchange gains of $2.3 million and $1.2 million of income tax~~

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

Liquidity and Capital Resources

Cash and cash equivalents at June 30, ~~2020~~2021 totaled ~~$44.6~~$58.3 million, ~~a decrease~~an increase of ~~$2.6~~$12.5 million from ~~$47.2 million at~~ December 31, ~~2019.~~2020. The increase in cash primarily reflects the impact of $29.5 million of net proceeds from the issuance of the Debentures in January 2021 and $8.4 million of drawings under our Leasing Facilities, offset by cash

used in operations of $11.9 million, capital expenditures of $10.0 million and scheduled Leasing Facilities repayments of $0.8 million.

In ~~July 2019,~~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 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~~2021 available ~~borrowing base was USD $12.8~~borrowings are C$10.3 million or $8.3 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 in the United States,~~U.S. Leasing Facility on which $11.9 million has been drawn with RBC and one of its affiliates. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. ~~The~~We anticipate drawing an additional two to three 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 quarter~~remainder of 2020 we borrowed C$3.6 million ($2.6 million) against the Canadian Leasing Facility and we anticipate drawing on the U.S. Leasing Facility in the second half of 2020 when equipment is received at the South Carolina Plant.2021.

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 June 30, 2021 and ~~C$3.5~~$14.9 million outstanding under the Leasing Facilities as of June 30, ~~2020.~~2021.

The following table summarizes our consolidated cash flows for the three and six months ended June 30, ~~2020~~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 June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
	($ in thousands)						($ in thousands)
Net cash flows provided by (used in) operating activities		86			2,377			(12,008	)		1,617
Net cash flows used in investing activities		(6,430	)		(3,962	)		(10,019	)		(6,417	)
Net cash provided by financing activities		7,266			2,527			36,603			2,527
Effect of foreign exchange on cash, cash equivalents and restricted cash		408			224			711			(275	)
Net increase (decrease) in cash, cash equivalents and restricted cash		1,330			1,166			15,287			(2,548	)
Cash, cash equivalents and restricted cash, beginning of period		59,803			43,460			45,846			47,174
Cash, cash equivalents and restricted cash, end of period		61,133			44,626			61,133			44,626

Operating Activities

Net cash flows provided by operating activities was $0.1 million for the three months ended June 30, 2021 and $12.0 million used in operating activities for the six months ended June 30, 2021 compared to $2.4 million and $1.6 million ~~for the first three and six months of 2020, respectively, compared to~~ net cash flows provided by operating activities ~~of $7.5 million and $14.9 million~~ in the ~~corresponding~~same periods of ~~2019.~~2020. The decrease in cash flows from operations is largely due to a decrease in ~~revenues~~gross profit and a reduction in trade ~~accounts payables~~ and other ~~liabilities~~receivables and lower government subsidies, partially offset by ~~the impact of government subsidies, increases~~an increase in accounts ~~receivable collections,~~payable and ~~customer deposits~~accrued liabilities.

Investing Activities

We invested $5.8 million and ~~deferred revenue.~~

~~Investing Activities~~

~~For~~$8.7 million in property, plant and equipment during the three and six months ended June 30, 2021, respectively, compared to $3.2 million and $4.8 million during the three and six months ended June 30, 2020, ~~we invested $4.5 million and $6.2 million, respectively, in property, plant and equipment compared to $1.8 million and $3.2 million in the respective prior year periods.~~respectively. 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~~$0.6 million and ~~$1.9~~$1.3 million on capitalized software during the three and six months ended June 30, ~~2020, respectively,~~2021, as compared to ~~$1.1~~$0.9 million and ~~$1.6~~$1.9 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.2020.

Financing Activities

For the three and six months ended June 30, ~~2020,~~2021, $7.3 million and $36.6 million of cash was provided by financing activities, respectively, mainly due to the proceeds received from the issuance of C$~~3.6~~40.3 million ~~($2.6 million) was received~~of Debentures in January 2021 and the receipt of $8.4 million of cash consideration under the ~~equipment leasing facility in Canada discussed above~~U.S. Leasing Facility. Cash provided by financing activities for the three and ~~$0.1~~six months ended June 30, 2020 was $2.6 million ~~was repaid. We repaid~~and $2.6 million, respectively, entirely comprised of draws under the ~~balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019.~~Leasing Facilities.

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 two to three million on our Leasing Facilities in the second half of 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 June 30, 2021 available borrowings are C$10.3 million ($8.3 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 second quarter of 2021 which resulted in requiring the restriction of $2.8 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%~~5.77%. 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 $11.9 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 months ended June 30, ~~2020,~~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 months ended June 30, ~~2020,~~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.~~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,~~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, their new company Falkbuilt Ltd. (“Falkbuilt”), and other related individual and corporate defendants for violations 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, Messrs. Smed and Loberg, and their associates is currently comprised of four 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 (the “Utah Misappropriation Case”); (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 ~~which~~our proprietary ICE^® software (the “Patent Infringement Case”); and (iv) a new action instituted on June 24, 2021 in the ~~Company~~U.S. District Court for the Northern District of Texas alleging that Falkbuilt has unlawfully used DIRTT’s confidential information in the United States and intentionally caused confusion in the United States in an attempt to steal customers, opportunities, and business intelligence, with the aim of establishing a competing business in the United States market (the “Texas Unfair Competition 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 recently obtained a consent order forcing certain individuals, including defendants Smed and Loberg, to attend depositions beginning in September, 2021. To date, we have questioned six individual defendants or witnesses in the Canadian Non-Compete Case. 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 Utah Misappropriation Case, the court recently ruled that certain of our claims, particularly those against Falkbuilt and Mr. Smed (a Canadian corporation and Canadian resident, respectively), should be dismissed under the doctrine of forum non-conveniens. DIRTT disagrees with this decision, and has appealed to the U.S. Court of Appeals for the Tenth Circuit. Notwithstanding this ruling, the Utah Misappropriation Case continues against the remaining individual and corporate defendants, and we expect to begin taking depositions in the third quarter of 2021.

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

In the Texas Unfair Competition Case, DIRTT alleges violations of the U.S. Lanham Act, the Texas Uniform Trade Secrets Act, the Federal Defend Trade Secrets Act, the Pennsylvania Unform Trade Secrets Act, the Colorado Consumer Protection Act, and the Ohio Deceptive Practices Act, and is seeking preliminary and permanent injunctive relief to restrain Falkbuilt from using or disclosing DIRTT confidential business information in the United States, and awards of ~~which any of its property is subject.~~compensatory damages, exemplary damages, and attorneys’ fees.

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, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 5, 2021, 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.~~Use of Proceeds

On January 11, 2021, we commenced the underwritten public offering of C$35.0 million aggregate principal amount of the Debentures (the “Offering”). The Debentures were offered to the public pursuant to an Underwriting Agreement dated January 11, 2021, by and among DIRTT, National Bank Financial Inc., Craig-Hallum Capital Group LLC, Raymond James Ltd. and Paradigm Capital Inc., with National Bank Financial Inc. as lead manager and book-runner. The Offering was completed on January 25, 2021. On January 29, 2021, we issued a further C$5.25 million of Debentures under the terms of an overallotment option granted to the underwriters.

The offer and sale of the Debentures in the U.S. were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a registration statement on Form S-3, as amended (File No. 333-251660), which was declared effective by the SEC on January 6, 2021, and the offer and sale of the Debentures in Canada (excluding Quebec) were registered pursuant to a short form prospectus under Canadian law. The Debentures are convertible into common shares of DIRTT.

The net proceeds from the Offering 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 expects to use a portion of the net proceeds from the Offering, together with borrowings under the Leasing Facilities and cash reserves on hand, for capital expenditures, including investments in the Company’s technology

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
10.1*		~~First Amending Agreement between Royal Bank~~Base Indenture, dated January 25, 2021, by and among DIRTT Environmental Solutions Ltd., Computershare Trust Company of Canada and ~~DIRTT Environmental Solutions, Ltd. dated March~~ ~~4, 2020~~

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

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

~~10.4*#~~		~~Second Amendment to Lease made~~Computershare Trust Company, National Association 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~~Trustees (incorporated by reference to Exhibit ~~10.1~~4.1 to the Registrant’s Current Report on Form 8-K, File No. 001-39061, filed on ~~May 22, 2020)~~January 29, 2021).
4.2
~~10.6+~~		~~Form~~Supplemental Indenture, dated January 25, 2021, by and among the Company, Computershare Trust Company of ~~Option Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan~~Canada and Computershare Trust Company, National Association as Trustees (incorporated by reference to Exhibit ~~4.4~~4.1 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)~~January 29, 2021).
31.1*
~~10.7+~~		Form of Time-Based Restricted Share Unit Award Agreement Under the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form ~~S-8,~~ ~~File~~ ~~No. 333-238689,~~ ~~filed on May 26, 2020).~~

~~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*		Inline XBRL Instance Document
101.SCH*
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document


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

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*		Filed herewith

Furnished herewith

+	~~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: August 4, 2021

~~Date: July 29, 2020~~

3435


			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	31

PART II – OTHER INFORMATION		30
		32
~~Item 1.~~	~~Legal Proceedings~~			30

Item ~~1A.~~1. Legal Proceedings	~~Risk Factors~~32			30

Item 1A. Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			31
		33
Item 3.	Defaults Upon Senior Securities			31
		33
Item 4.	Mine Safety Disclosures			31
		33
Item 5. Other Information	~~Other Information~~33			31

Item 6. Exhibits	~~Exhibits~~34			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


	As at
	June 30, 2020¹		December 31, 2019¹
Canada		43,335		47,892
U.S.		31,286		29,286

		74,621		77,178

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company