DIRTT Environmental Solutions Ltd. - Annual Report 2020

The Management's Discussion and Analysis of Financial Condition and Results of Operations for DIRTT Environmental Solutions Ltd. is also included in the Form 10-K for the year ended December 31, 2020 filed on SEDAR on February 24, 2021 in its entirety.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 2020 and 2019 together with our consolidated financial statements and related notes and other financial information appearing in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, operations, and product candidates, includes forward-looking statements that involve risks and uncertainties. You should review the sections of this Annual Report captioned “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We have revised our calculation of Adjusted EBITDA and Adjusted Gross Profit, which are non-GAAP financial measures, for the presented periods. For additional information, see “– Non-GAAP Financial Measures – EBITDA and Adjusted EBITDA for the Years Ended December 31, 2020, 2019 and 2018.” and “– Non-GAAP Financial Measures – Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2020, 2019 and 2018.”

Overview

We are an innovative manufacturing company featuring a proprietary software and virtual reality visualization platform, coupled with vertically integrated manufacturing that designs, configures and manufactures prefabricated interior solutions used primarily in non-residential spaces across a wide range of industries and businesses. We combine innovative product design with our industryleading, proprietary ICE Software, and technology-driven, lean manufacturing practices and sustainable materials to provide end-toend solutions for the traditionally inefficient and fragmented interior construction industry. We create customized interiors with the aesthetics of conventional construction but with greater schedule and cost certainty, shorter lead times, greater future flexibility, and better environmental sustainability than conventional construction.

Our ICE Software allows us to sell, design, visualize (including 3D virtual reality modeling of interiors), configure, price, communicate, engineer, specify, order and manage projects, thereby reducing challenges associated with traditional construction, including cost overruns, change orders, inconsistent quality, delays and material waste. While other software programs and virtual reality tools are used in the architectural and construction industries, we believe our ICE Software is the only interior construction technology that provides end-to-end integration, from design through engineering, manufacturing and installation. Our interior construction solutions include prefabricated, customized interior modular walls, ceilings, and floors; decorative and functional millwork; power infrastructure; network infrastructure; and pre-installed medical gas piping systems. We strive to incorporate environmentally sustainable materials and reusable components into our solutions while creating flexible, functional and welldesigned environments for the people who will use them.

We offer our interior construction solutions throughout the United States and Canada, as well as in select international markets, through a network of independent Distribution Partners and an internal sales team. Our Distribution Partners use ICE to work with end users to envision and design their spaces, and orders are electronically routed through ICE to our manufacturing facilities for production, packing and shipping. Our Distribution Partners then coordinate the receipt and installations of our interior solutions at the end users’ locations.

Summary of Financial Results

Revenues for the year ended December 31, 2020 were $171.5 million, a decline of $76.2 million or 31% from $247.7 million for the year ended December 31, 2019. We believe this decrease principally reflects the severe economic and social impact of the COVID-19 pandemic, including a major contraction in construction activity levels in North America due to non-essential business closures, work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials.
Gross profit for the year ended December 31, 2020 was $53.3 million or 31.1% of revenue, a decline of $33.1 million or 38% from $86.4 million or 34.9% of revenue for the year ended December 31, 2019. This reduction was largely attributable to our decline in revenues and the impact of fixed costs on lower revenues. During the year ended December 31, 2020, we incurred $1.0 million of severance costs to reduce headcount in response to excess labor capacity caused by lower revenues. These costs were offset by reversals of the timber provision of $1.8 million in 2020. In 2019, we provided $2.5 million of timber provision because we determined that timber included in certain projects installed between 2016 and 2019 may not have met certain building class fire retardant specifications under which the projects were sold. The timber liability was reduced from the prior estimated liability following further analysis of building code requirements for the specific projects sold, the validation of an in-situ remediation solution, and related discussions with our affected customers. The year ended December 31, 2019 also included $2.5 million of costs incurred to mitigate future tile warping.

Adjusted Gross Profit (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2020 was $63.4 million or 37.0% of revenue, a $34.5 million or 35% decline from $97.9 million or 39.5% of revenue for the year ended December 31, 2019 for the above noted reasons. Excluded from Adjusted Gross Profit in 2019 and 2020 are $2.2 million and $2.0 million, respectively, of costs of overhead associated with operating at lower than normal capacity levels, which were charged directly and separately to cost of sales rather than as costs attributable to production.
Operating expenses for the year ended December 30, 2020 were $74.6 million, a $14.3 million or 16% decline from $88.9 million for the year ended December 31, 2019. The reduction in operating expenses reflects lower commissions on reduced sales activities, as well as cost reductions, both deliberate and as a result of the COVID-19 pandemic, a $1.5 million decrease in stock based compensation and a $1.2 million reversal of a provision relating to a claim for severance by one of our former founders, offset by $2.3 million in higher professional fees and consulting costs. Additionally, in 2019 we incurred $2.0 million of costs related to our sales and marketing plan, $2.6 million related to the listing of our common shares on Nasdaq, $1.1 million of operations consulting costs and $4.6 million of reorganization costs partially offset by the reversal of a $1.3 million claims provision.
Net loss for the year ended December 31, 2020 was $11.3 million, an increase of $6.9 million from net loss of $4.4 million for the year ended December 31, 2019. Compared to the prior year period, the increase in net loss is attributable to the above noted reduction in gross profit and a $1.1 million increase in income tax expense, partially offset by a $14.3 million reduction in operating costs, a $0.7 million decrease in foreign exchange losses, and government subsidies of $12.7 million.
Adjusted EBITDA (see “– Non-GAAP Financial Measures”) for the year ended December 31, 2020 was a $7.2 million loss or (4.2)%, a decline of $25.4 million or 140% from $18.2 million or 7.4% for the year ended December 31, 2019 for 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.

Outlook

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

Since its declaration as a global pandemic in March 2020, COVID-19 has had severe and ongoing impacts on commercial construction activity in North America, driven largely by regulatory responses implemented by governments and public health officials, lock-down measures and work-from-home requirements for non-essential workers. While commercial construction projects that were underway at the commencement of the pandemic generally continued to completion, albeit with some experiencing COVID19 driven delays, North America experienced a significant contraction in the development of new projects as the pandemic took hold. As a result, DIRTT’s 2020 revenue declined 31% compared to 2019, driven largely by a 35% and 37% decline in our commercial and education vertical sales, respectively, partially offset by more moderate declines in our healthcare vertical. Quarterly revenues remained relatively consistent throughout 2020 as small projects and projects in process at the start of the pandemic were completed during the year.

In early 2021, we experienced further softening of our commercial vertical sales. We expect this softness to continue through the first half of 2021 which reflects the aforementioned contraction in new project development, the continuation of a pronounced second wave of infections in North America with new lockdown measures and the inherent reluctance of end customers to commit to construction projects while such lockdowns and work from home restrictions are ongoing. We are cautiously optimistic, however, that a recovery will begin in the second half of 2021 based on third-party industry indices combined with the general sentiment of our clients and partners and the commencement of major vaccination programs across North America.

While in general we have not seen a strong correlation between third-party indices and DIRTT performance given our low market penetration, and, thus, tend not to rely on these indices to manage our business, the scope and scale of the impact of the pandemic make such indicators more relevant for 2021. The Architecture Billing Index (ABI), which measures increases or decreases in architectural and design billings and is considered a leading indicator for non-residential construction activity nine to twelve months in the future, during 2020, reported an approximate 50% drop from the February to March and April periods with a significant recovery in September and October, albeit below expansion level. This improvement indicates the potential for a recovery in the second half of 2021. Similarly, Dodge Data & Analytics expects commercial construction to increase by approximately 5% in 2021.

Return to office planning is ongoing across North America as industry leaders recognize the need for in-person employee interaction to drive collaboration and innovation and address the inherent challenges and limitations of the current work-from-home environment. A critical consideration of this process is the office environment that employees are willing to return to and resulting

changes required thereto. Through our improved sales force, targeted marketing plans and strategic accounts, we are seeing increases in overall activity to support this planning activity. The timing of when this activity translates to sales is dependent upon when business leaders are willing to commit capital. Through the improvements we have made to our manufacturing operations, combined with the anticipated capacity and capabilities our new South Carolina facility, we expect to be poised and ready to deliver when these end customers commit to move forward.

Ultimately, we believe the long-term impact of COVID-19 will be a higher demand for flexible spaces that can be easily adapted post-installation. We expect that this will be a positive catalyst for the conversion from conventional site-built construction to the prefabricated, offsite solution provided by DIRTT. As a result, our objective throughout the pandemic has been to continue the prudent implementation of our strategic plan, while balancing the safeguards of our balance sheet and liquidity with our desire to enhance and improve our commercial and operational capabilities to take advantage of expected increases in demand when the recovery of non-residential construction occurs.

In early 2021 we took steps to further bolster our liquidity in the face of continued uncertainty and near-term sales softness. In January 2021, we completed a C$40.3 million (approximately $31.6 million) issuance of convertible debentures with a five-year term and convertible into common shares at a price of C$4.65 per share. In early February, we completed the conversion of our undrawn existing cash-flow-based credit facility to an asset-backed facility, eliminating the need for a covenant holiday and ensuring future borrowing availability based upon accounts receivable and inventory balances. We expect to draw approximately $11 million on our existing equipment leasing facilities in the first half of 2021, financing the equipment purchases for our new South Carolina facility, largely paid for in instalments in 2019 and 2020. We also intend to apply for further government subsidy programs, including the Canadian Emergency Wage Subsidy program (CEWS) to the extent that it is applicable. In 2020, we qualified for $12.7 million of government subsidies of which $11.0 million was received with the balance expected to be received in 2021. This financial foundation provides the basis for us to continue to execute our strategic plan while the recovery from the COVID-19 pandemic takes hold, enables us to avoid costly retrenchments of the transformational investments we have made, and increases our flexibility should the recovery take longer than expected.

Our commercial transformation is the key pillar of our growth strategy, against which we made significant progress in 2020. This includes the hiring of personnel for key roles in the commercial organization and the establishment of both strategic marketing and strategic account and enterprise sales functions. We completed our Customer Relationship Management infrastructure buildout and are now in the process of rolling it out to all our sales representatives with full deployment expected in the first half of 2021. Our total cost of ownership tool, which provides an objective comparison with conventional construction, has been fully developed and deployed and further refinements and expansion of the tool’s capabilities will be a focus in 2021. During 2020 we added eight new Distribution Partners and expanded the territory of five others, mitigating the effects of partners who we chose to terminate due to performance or competitive issues. In 2021, we expect to build upon the work completed in 2020. This will include priority hires to drive enhanced market coverage, the buildout of our DXC in Dallas, with completion expected in the third quarter, the continuation of our strategic marketing campaigns focused on return to work and the nurturing of new and existing strategic account relationships.

Manufacturing excellence is the second pillar of our growth strategy. Our core commitment to organizational safety resulted in a TRIF of 0.48 in 2020, more than 75% below the industry average and included the Company’s first ever recordable incident-free quarter. Our enhanced safety protocols and robust contact tracing have been effective thus far in mitigating the spread of COVID-19 infections within our facilities and have helped us to avoid any material production disruptions. During 2020, we realized production efficiencies and yield improvements at both our aluminum manufacturing plants, and at our Calgary tile facility through changes in process flow. We also completed strategic sourcing agreements for major suppliers and enhanced quality and delivery processes. Having achieved continuous improvement by year end, in 2021, we will focus on the maturation and further integration of our processes to drive ongoing advancements in all areas of quality, delivery, inventory and productivity. We also remain on schedule for the commencement of commercial operations at our South Carolina tile facility in the second quarter of 2021.

The third pillar of our growth strategy is innovation. During 2020, in response to the needs of the pandemic, we developed four interior and exterior free-standing kiosks for COVID-19 testing and vaccinations, which we are currently marketing to healthcare organizations, retailers and large employers. Regardless of whether these kiosks drive incremental sales, we believe they increase the prominence of our brand and demonstrate our overall capabilities to a new set of potential customers. From a software perspective, we released ICE 21, our most significant ICE release to date, allowing more people to experience ICEreality with added Android and Windows desktop platform capability and expanded functionality across a broader range of virtual reality head-mounted display hardware. In 2021, we expect innovation within our interior solutions and software to continue, including expanded functionality of our Inspire low profile modular and Reflect ultra-sleek glass wall solutions and ongoing improvements to the integration and core functionality of ICE.

Throughout the last two years, we have made improvements in cost control and investment discipline which has served us well, particularly during the COVID-19 pandemic. In addition, we have benefited from reduced expenditures on travel and entertainment due to travel restrictions and deliberate reductions of certain discretionary expenditures until such time as the recovery occurs. Our capital expenditure program in 2021 is expected to total approximately $14 million, of which approximately $3.5 million relates to our

investment in the Dallas DXC, $3.0 million relates to the equipment and commissioning of our South Carolina tile and millwork facility, $3.0 million relates to the investments in our technology platform, with the remaining associated with required maintenance capital and certain corporate initiatives.

In November 2019, our strategic plan articulated financial targets of $450 million to $550 million in revenue and 18% to 22% adjusted EBITDA margins to be achieved by the end of 2023. While the non-residential construction market is much less favorable than in late 2019 and our 2020 revenues were more than 30% below our 2019 revenues, the operating environment and transformation of the Company are sufficiently dynamic, which lead us to believe these goals are still achievable.

Non-GAAP Financial Measures

Note Regarding Use of Non-GAAP Financial Measures

Our consolidated financial statements are prepared in accordance with GAAP. These GAAP financial statements include noncash 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 Annual 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 debt and 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 the impact of all foreign exchange from Adjusted EBITDA. Foreign exchange gains and losses can vary significantly period-on-period due to the impact of changes in the U.S. and Canadian dollar exchange rates on foreign currency denominated monetary items on the balance sheet and are not reflective of the underlying operations of the Company. We have presented a reconciliation to our prior calculation of Adjusted EBITDA for all years presented. Additionally, in the fourth quarter of 2019, we excluded from Adjusted Gross Profit costs associated with under-utilized capacity. Fixed production overheads are allocated to inventory on the basis of normal capacity of the production facilities. In periods where production levels are abnormally low, unallocated overheads are recognized as an expense in the period in which they are incurred.

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

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

Adjusted Gross Profit, as previously Gross profit before deductions for depreciation and amortization presented 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 EBITDA adjusted for non-cash foreign exchange gains or losses on debt revaluation; presented impairment expenses; stock-based compensation expense; government subsidies; reorganization expenses; and any other non-core gains or losses

Adjusted EBITDA

Adjusted EBITDA Margin

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

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 Years Ended December 31, 2020, 2019 and 2018

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

	For the	Year Ended December	31,	31,
	2020	2019	2018
		($ in thousands)
Net income(loss) for theperiod	(11,298 )	(4,396 )		5,550
Add back(deduct):
Interest Expense	305	131		503
Interest Income	(238 )	(529 )		(425 )
Income Tax Expense	2,104	1,019		3,280
Depreciation and Amortization	11,706	12,242		13,699
EBITDA	2,579	8,467		22,607
Stock-based Compensation	2,351	3,876		3,661
Non-cash Foreign Exchange Gain on Debt Revaluation	-	(211 )		546
Government Subsidies	(12,721 )	-		-
Reorganization Expense	-	4,560		7,380
Impairment Expense	-	-		8,680
Adjusted EBITDA, aspreviously presented(1)	(7,791 )	16,692		42,874
Other Foreign Exchange(Gains)Losses	576	1,535		(3,760 )
Adjusted EBITDA	(7,215 )	18,227		39,114
Net Income(Loss) Margin(2)	(6.6 )%	(1.8 )%		2.0 %
Adjusted EBITDA Margin, as previously presented(1)	(4.5 )%	6.7 %		15.6 %
Adjusted EBITDA Margin	(4.2 )%	7.4 %		14.2 %

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

(2) Net income divided by revenue.

As discussed above, we have removed the impact of all foreign exchange gains or losses from Adjusted EBITDA and have presented a reconciliation to our prior calculation of Adjusted EBITDA for the periods presented above.

For the year ended December 31, 2020, Adjusted EBITDA and Adjusted EBITDA Margin decreased to a $7.2 million loss or (4.2)% from $18.2 million or 7.4% in the same period of 2019. This decrease reflects a $34.5 million decrease in Adjusted Gross Profit, partially offset by an $8.2 million aggregate decrease in sales and marketing, general and administrative, operations support and technology and development expenses as discussed in more detail below.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the Years Ended December 31, 2020, 2019 and 2018

The following table presents a reconciliation for the years ended December 31, 2020, 2019, and 2018 of Adjusted Gross Profit to our gross profit, which is the most directly comparable GAAP measure for the periods presented:

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020		2019		2018
	($ in thousands)
Gross profit		53,283		86,424		107,009
Gross profit margin		31.1 %		34.9 %		39.0 %
Add: Depreciation and amortization expense		8,110		9,195		9,528
Adjusted Gross Profit, as previously presented		61,393		95,619		116,537
Add: Costs of under-utilized capacity		2,010		2,240		-
Adjusted Gross Profit		63,403		97,859		116,537
Adjusted Gross Profit Margin, as previously presented		35.8 %		38.6 %		42.4 %
Adjusted Gross Profit Margin		37.0 %		39.5 %		42.4 %

Gross profit and gross profit margin decreased to $53.3 million or 31.1% for the year ended December 31, 2020, from $86.4 million or 34.9% for the year ended December 31, 2019. Adjusted Gross Profit and Adjusted Gross Profit Margin decreased to $63.4 million or 37.0% for the year ended December 31, 2020, from $97.9 million or 39.5% for the year ended December 31, 2019. The decreases are largely due to reduced fixed cost leverage caused by reductions in revenues and excess labor capacity prior to headcount reductions discussed below combined with $1.0 million of related severance costs incurred during the first six months of 2020.

During the fourth quarter of 2019, we determined that we were carrying abnormal excess capacity in our manufacturing facilities as a result of the slowdown in sales and determined certain production overheads should be directly expensed in cost of sales, representing production overheads that were not attributable to production. In the first quarter of 2020, we separately classified $2.0 million as costs related to our under-utilized capacity (1.2% of gross profit margin) in cost of sales. We took steps to manage our excess capacity, including the reduction in staffing by 14%, with a further 12% reduction in April 2020, and the undertaking of planned factory curtailments. The staffing reductions realigned our capacity with then expected activity levels; however, our fixed costs will affect our Adjusted Gross Profit Margin, which we expect to remain below historical percentages until sales improve. Prospectively, we expect our fixed cost of sales to be approximately $6.4 million per quarter, and remaining costs of sales to be approximately 50% to 55% of revenues comprising materials that are variable and dependent on product mix, and labor which is quasi-variable as we match our shifts to order volumes to the extent possible.

Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications under which the projects were sold. As a result, we recorded a $2.5 million provision in the fourth quarter of 2019 and have been contacting customers to determine whether remedial actions are required. In the second quarter of 2020, we identified and validated an in-situ solution that we believe will meet the fire-retardant specification under which the projects were sold and reduced the associated provision to $1.3 million, which represents expected costs to prepare impacted sites and apply the in-situ solution. In the third quarter of 2020, we completed building code reviews of the affected projects and determined that the timber as installed met the requisite building code requirements as it related to fire retardance. 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.

In 2019, we incurred approximately $2.5 million of costs, representing 1.1% 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 2020.

Results of Operations

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	% Change
	($ in thousands)
Revenue	171,507	247,735	(31 )
Gross Profit	53,283	86,424	(38 )
Gross Profit Margin	31.1 %	34.9 %	(11 )
OperatingExpenses
Sales and Marketing	28,049	33,939	(17 )
General and Administrative	26,663	27,645	(4 )
Operations Support	9,381	11,037	(15 )
Technologyand Development	8,111	7,818	4
Stock-based Compensation	2,351	3,876	(39 )
Reorganization	-	4,560	(100 )
Total OperatingExpenses	74,555	88,875	(16 )
Operating Income (Loss)	(21,272 )	(2,451 )	768
Operating Margin	(12.4 )%	(1.0 )%	1,140

Revenue

The following table sets forth the contribution to revenue of our DIRTT Solutions and related offerings.

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	% Change
		($ in thousands)
Product	150,004	215,109	(30 )
Transportation	15,491	23,903	(35 )
License fees from Distribution Partners	1,194	1,647	(28 )
Totalproduct revenue	166,689	240,659	(31 )
Installation and other services	4,818	7,076	(32 )
	171,507	247,735	(31 )

Revenue decreased in the year ended December 31, 2020 by $76.2 million or 31% compared to the year ended December 31, 2019. Revenue decreased due to several factors, as discussed above in “– Summary of Financial Results” and “– Outlook”. We believe the decrease principally reflects the severe economic and social impact of the COVID-19 pandemic, including a major contraction in construction activity levels in North America due to work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials. While we did not experience any material cancellations of projects that were underway at the start of the COVID-19 pandemic, it is uncertain as to the impact of the pandemic on future projects that are either in the planning or conceptual stage. It is highly likely that future projects will also experience similar delays as the COVID-19 pandemic runs its course. See Item 1A. “Risk Factors”.

We are in 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 revenues in light of the severe economic adversity caused by the pandemic.

Installation and other services revenue decreased $2.3 million for the year ended December 31, 2020 compared to the same period in 2019. The changes in installation revenue are primarily due to the timing of projects and overall sales activity, including the impacts of the COVID-19 pandemic. Except in limited circumstances, our Distribution Partners, rather than the Company, perform installation services, and accordingly, we are not anticipating significant growth in this revenue stream.

Our success is partly dependent on our ability to profitably develop our Distribution Partner network to expand our market penetration and ensure best practices are shared across local markets. We currently have 72 Distribution Partners, servicing multiple

locations. During 2020, we made several changes and upgrades to our Distribution Partner network, expanding our relationships with new and existing partners and ending our relationships with others. Our clients, as serviced primarily through our 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 th	e Year Ended December 31,
	2020	2019 % Change
		($ in thousands)
Commercial	102,245	158,256 (35 )
Healthcare	35,400	44,197 (20 )
Government	14,128	14,879 (5 )
Education	13,722	21,680 (37 )
License fees from Distribution Partners	1,194	1,647 (28 )
Totalproduct revenue	166,689	240,659 (31 )
Service revenue	4,818	7,076 (32 )
	171,507	247,735 (31 )

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	% Change
		(in%)
Commercial	63	67	(6 )
Healthcare	21	18	17
Government	8	6	33
Education	8	9	(11 )
Total product revenue(1)	100	100	NA

(1) Excludes license fees from Distribution Partners.

Revenue decreased by 31% in the year ended December 31, 2020 over the same period in 2019 and was driven primarily by decreased commercial sales. Commercial revenues decreased by 35% from the prior year, due largely to the severe impact of COVID19 on commercial construction activities in North America in 2020 and the completion of a major project in 2019 that was not replaced. Similarly, education sales decreased by 37% from 2019 as most universities and private schools moved to on-line classes in response to the COVID-19 pandemic in 2020. During 2020, healthcare revenues were impacted to a lesser degree, decreasing by 20% from 2019 and reflecting approximately $5 million of revenues that were directly related to COVID-19. Included in this amount was the delivery of specifically designed acute care rooms for use in prefabricated temporary hospital spaces to an end customer in the Southeastern 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 following table presents our revenue dispersion by geography.

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	% Change
		($ in thousands)
Canada	18,848	34,085	(45 )
U.S.	152,659	213,650	(29 )
	171,507	247,735	(31 )

Historically, approximately 15-25% and 75-85% of revenues are derived from sales to Canada and the United States, respectively. In 2020, revenues from Canada fell to 11% of total sales while sales to the United States increased to 89%. COVID-19 infection rates and resulting regulatory responses by governments and public health officials vary significantly by region, impacting the relative contribution of sales from each country.

Sales & Marketing Expenses

Sales and marketing expenses decreased $5.9 million to $28.0 million for the year ended December 31, 2020, from $33.9 million for the year ended December 31, 2019. The decreases were largely related to a reduction in commission expenses on lower revenues and lower travel, meals and entertainment expenses during the year ended December 31, 2020 due to restrictions on travel as a result of the COVID-19 pandemic, the cancellation of Connext and other tradeshows as well as continued attention to cost discipline. As economies re-open, we anticipate travel, meals and entertainment expenses to increase over current levels, the timing and amount of which, however, are indeterminate. These reductions were partially offset by $1.1 million of increased salary and wage expenses as we continue to build our sales organization. Included in sales and marketing expenses for the year ended December 31, 2019 were $2.0 million of one-time consulting costs related to the sales and marketing plan developed with the assistance of an internationally recognized consulting firm that did not recur in 2020.

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 (“G&A”) expenses decreased $0.9 million to $26.7 million for the year ended December 31, 2020 from $27.6 million for the year ended December 31, 2019. For the year ended December 31, 2020, the decrease was the result of $1.9 million of expense reductions due to COVID-19 and a $1.2 million reversal of a provision relating to a claim for severance by one of our former founders, offset by $3.2 million of increased professional fees and a $0.6 million provision recorded for expected credit losses against our accounts receivable balances. During 2019, we incurred $2.6 million of expenses related to the listing of our common shares on Nasdaq which did not occur in 2020, offset by the reversal of the $1.3 million claims provision.

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 expenses decreased $1.6 million to $9.4 million for the year ended December 31, 2020, from $11.0 million for the year ended December 31, 2019. The decrease was the result of lower consulting costs and a decrease in travel, meals and entertainment costs in 2020 due COVID-19 restrictions. These decreases were partially offset by an increase in personnel costs due to increased headcount to better support project execution and support of our Distribution Partners. In 2019, we incurred $1.1 million of consulting costs to assist with the rectification of the tile warping issue.

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 by $0.3 million to $8.1 million for the year ended December 31, 2020, compared to $7.8 million for the year ended December 31, 2019, due to increased professional fees related to patents for our technology.

Stock-Based Compensation

During 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 approved the availability of a cash surrender feature for certain options, including options issued under our Amended and Restated Incentive Stock Option Plan (“Stock Option Plan”), until such time as we requalified as a FPI or we registered our common shares with the SEC, which occurred on October 9, 2019 upon the listing of our common shares on Nasdaq. Accordingly, we accounted for the fair value of outstanding stock options at the end of the reporting period as a liability, with changes in the liability recorded through net income as a stock-based compensation fair value adjustment. On October 9, 2019, we ceased allowing cash surrender of options and returned to equity accounting under the Stock Option Plan without quarterly fair value adjustments at that date.

Stock-based compensation for the year ended December 31, 2020 was $2.4 million compared to $3.9 million for the same period of 2019. Prior to the return to equity settled accounting, we had a liability of $1.8 million.

Reorganization Expenses

We recorded $nil reorganization expenses for the year ended December 31, 2020, compared to $4.6 million for the year ended December 31, 2019. These costs included severance payments, and related legal and consulting costs associated with management and organizational changes.

Government Subsidies

The Company recorded $12.7 million of government subsidies during the year ended December 31, 2020, of which $11.0 million were received during the year.

As part of the Canadian federal government’s COVID-19 Economic Response Plan, the Canadian government established the Canadian Emergency Wage Subsidy (“CEWS”). The CEWS provides the Company with a taxable subsidy in respect of a specific portion of wages paid to Canadian employees during the periods extending from March 15, 2020 to March 13, 2021 (with a potential extension to June 30, 2021), based on the percentage decline of the Company in certain of its Canadian-sourced revenues during each qualifying period. The Company's eligibility for the CEWS may change for each qualifying period and is reviewed by the Company for each qualifying period.

On November 19, 2020, the Canadian government also implemented the Canada Emergency Rent Subsidy (“CERS”). CERS provides a taxable subsidy to cover eligible expenses for qualifying properties, subject to certain maximums, starting on September 27, 2020 to March 13, 2021 (with a potential extension to June 30, 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 for each qualifying period.

Income Tax

The provision for income taxes is comprised of federal, state, provincial and foreign taxes based on pre-tax income. During 2020, DIRTT recorded a full valuation allowance of $5.2 million against Canadian deferred tax assets due to ongoing near term uncertainties on the business caused by the COVID-19 pandemic and the related decline in business activity which impacted our ability to generate sufficient taxable income in Canada to fully deduct historical losses.

In the United States, the CARES Act of 2020 allows, among other provisions, for the recovery of taxes paid over the preceding five years from current year losses. The 2020 current income tax recovery reflects a $3.6 million recovery of income taxes previously paid in the United States.

Alberta’s provincial corporate tax rate decreased on June 28, 2019 from 11.5% to 11% for the second half of 2019, and was scheduled to further reduce to 10% for 2020, to 9% for 2021 and to 8% thereafter. As part of Alberta’s Recovery Plan, the decrease in provincial tax rates was accelerated such that the provincial corporate tax rate is 8% effective July 1, 2020. As a result of this rate change, we reduced our deferred tax asset by $0.9 million, with a corresponding deferred income tax expense recorded in the second quarter of 2019. Income tax expense for the year ended December 31, 2019, inclusive of the charge associated with the Alberta tax rate change, was $1.1 million.

As at December 31, 2020, we had C$45.3 million of loss carry-forwards in Canada and none in the United States. These loss carry-forwards will begin to expire in 2032.

Net Loss

Net loss was $11.3 million or $0.13 net loss per share for the year ended December 31, 2020, compared to net loss of $4.4 million or $0.05 net loss per share in 2019. The variance is primarily the result of a $33.1 million decrease in gross margin and a $1.1 million increase in income tax expense, partially offset by a $14.3 million reduction in operating costs, decreased foreign exchange losses of $0.7 million and government subsidies in 2020 of $12.7 million (2019 - $nil).

Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2019 compared to the fiscal year ended December 31, 2018 is included under the heading Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on February 26, 2020.

Seasonality

The construction industry has historically seen seasonal slowdowns related to winter weather conditions and holiday schedules in the fourth and first quarters of each calendar year. Our business has generally, but not always, followed this trend with a slight time

lag, leading to stronger sales in the second half of the year versus the first half. Weather factors can also influence third-party exterior construction schedules and site conditions, which may in turn affect timing of interior renovations.

Due to the fixed nature of some of our manufacturing costs, such as our facilities leases and related indirect operating costs, periods of higher revenue volume tend to generate higher gross profit and operating income margins while periods of lower volume tend to generate lower gross profit and operating income margins. Quarters that contain consistent monthly manufacturing volumes tend to generate higher gross profit than those where manufacturing levels vary significantly from month to month. Product and service revenue mix also tends to impact gross profit, as simplistic product and service revenue mix can result in lower gross profit, while “full solution” or comprehensive product and service revenue mixes tend to have higher gross profit.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 2020 totaled $45.8 million, a decrease of $1.4 million from $47.2 million at December 31, 2019.

During 2020, the Company entered into a C$5.0 million equipment leasing facility in Canada on which C$3.6 million ($2.6 million) of cash consideration was drawn during the year, and a $16.0 million equipment leasing facility in the United States on which $3.5 million was drawn during the year (the “Leasing Facilities”) with RBC. In February 2021, the equipment leasing facility in the United States was reduced to $14.0 million in conjunction with the negotiation of a new credit facility. The Leasing Facilities are available for equipment expenditures and certain equipment expenditures already incurred. We anticipate further drawings in 2021 as available on equipment in the South Carolina Facility as commissioning activities are completed.

At December 31, 2020, we had a C$50.0 million revolving operating facility (the “Previous RBC Facility”) with the Royal Bank of Canada (“RBC”) under which $10.6 million was available.

In January 2021, we issued C$40.3 million of convertible unsecured subordinated debentures (the “Debentures”) for net proceeds after costs of C$37.7 million. The Debentures will accrue interest at a rate of 6.00% 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 C$25.0 million senior secured revolving credit facility with RBC (the “New RBC Facility”), replacing the Previous RBC Facility. Under the New RBC Facility, the Company is able to borrow up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 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”). As at December 31, 2020, available borrowings under the New RBC Facility would have been C$9.3 million ($7.3 million).

In light of the uncertainty caused by the near and potential mid-term impacts of the COVID-19 pandemic, 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 Leasing Facilities and the issuance of the Debentures in January 2021 should, except in very extreme cases, be sufficient to support ongoing working capital and capital expenditure requirements for at least the next twelve months.

A prolonged and complete cessation 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 are not sufficient to fund future activities, we may seek to raise additional funds through equity or debt financings. If additional funds are raised through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities or contain instruments that may be dilutive to our existing shareholders. Any additional equity or debt financing may be dilutive to our existing shareholders.

Since our inception, we have financed operations primarily through cash flows from operations, long-term debt, and the sale of equity securities. Over the past three years, we have funded our operations and capital expenditures through a combination of cash

flow from operations and cash on hand. We had no amounts outstanding under the Previous RBC Facility and $6.0 million outstanding under the Leasing Facilities as of December 31, 2020.

The following table summarizes our consolidated cash flows for the years indicated:

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
		($ in thousands)
Net cash flowsprovided byoperatingactivities	12,485	13,359	10,065
Net cash flows used in investingactivities	(19,392 )	(15,189 )	(13,462 )
Net cashprovided by (used in)financingactivities	5,724	(5,484 )	(3,069 )
Effect of foreign exchange on cash and cash equivalents	(145 )	1,076	(3,606 )
Net decrease in cash and cash equivalents	(1,328 )	(6,238 )	(10,072 )
Cash and cash equivalents,beginningofyear	47,174	53,412	63,484
Cash and cash equivalents, end of year	45,846	47,174	53,412

Operating Activities

Net cash flows provided by operating activities decreased to $12.5 million for the year ended December 31, 2020 from $13.4 million for the comparative period in 2019. The decrease is cash flows from operations is largely due to a decrease in revenues and a reduction in trade and other payables partially offset by the receipt of government subsidies and improved collections of trade accounts receivable.

Investing Activities

We invested $16.6 million in property, plant and equipment assets (“PP&E”) during 2020 compared to $12.3 million in 2019. The increase was primarily due to capital investments in manufacturing facilities including $9.9 million of equipment purchases for the South Carolina facility, $2.9 million on the renovation of our Chicago DXC and $0.5 million on development to our new Dallas DXC. The balance of our investment in PP&E reflects corporate expenditures and sustaining capital for our manufacturing facilities. We invested $3.5 million on capitalized software and other assets in both 2020 and 2019.

Financing Activities

Net cash provided by financing activities was $5.7 million in 2020 compared to $5.5 million used in financing activities in 2019. During the year ended December 31, 2020 $6.1 million was received under the Leasing Facilities, of which $0.4 million of payments were made during the year. In 2019, we repaid the balance of $5.6 million on long-term debt outstanding and related interest during the first quarter of 2019.

We currently expect to fund anticipated future investments with available cash, including approximately C$37.7 million of proceeds from our convertible debenture issuance that was completed in February 2021, and drawings on our Leasing Facilities. We expect to draw approximately $11.0 million on our Leasing Facilities in the first half of 2021, financing the equipment purchases for our new South Carolina facility, 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 deem appropriate. We may also use debt or pursue equity financing depending on the share price at the time, interest rates, and nature of the investment opportunity and economic climate.

Credit Facility

On July 19, 2019, we entered into the Previous RBC Facility, a C$50.0 million senior secured revolving credit facility with RBC. The Previous RBC Facility had a three- year term and could be extended for up to two additional years at our option. Interest was calculated at the Canadian or U.S. prime rate with no adjustment, or the bankers’ acceptance rate plus 125 basis points. We were required to comply with certain financial covenants under the Previous RBC Facility, including maintaining a minimum fixed charge coverage ratio (“FCCR”) of 1.15:1 and a maximum debt to Adjusted EBITDA ratio of 3.0:1 calculated on a trailing four quarter basis (the “Covenants”). We were 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 December 31, 2020, we had no amounts drawn on the Previous RBC Facility.

During the second quarter of 2020, the Company entered into a letter agreement with RBC pursuant to which the Covenants under the Previous RBC Facility were waived for the June 30 and September 30, 2020 quarterly measurement dates (the "Covenant

Holiday Period"). In the fourth quarter of 2020, the Company entered into a letter agreement with RBC pursuant to which the Covenants under the Previous RBC Facility were waived for the December 31, 2020 quarterly measurement date (the "Covenant Holiday Period Extension"). During the Covenant Holiday Period and the Covenant Holiday Period Extension, the Company was 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 $50.0 million including amounts borrowed under the Leasing Facilities. During the Covenant Holiday Period and the Covenant Holiday Period Extension, the Company was required to maintain a cash balance of C$10.0 million if no loans were drawn under the facility, have Adjusted EBITDA of not less than a loss of $7.0, $16.5 million and $3.0 million for the twelve-month periods ended June 30, September 30, 2020 and December 31, 2020, and make capital expenditures of no more than $10.7 million during the Covenant Holiday Period and $8.8 million during the Covenant Holiday Period Extension. As at December 31, 2020, the Previous RBC Facility was undrawn and the available borrowing base was $10.6 million. The Company was in compliance with the requirements of the covenant holiday as at December 31, 2020.

On February 12, 2021, the Company entered into the New RBC Facility, a C$25.0 million senior secured revolving credit facility with RBC, replacing the Previous RBC Facility. Under the New RBC Facility, the Company is able to borrow up to a maximum of 90% of investment grade or insured accounts receivable plus 85% of eligible accounts receivable plus the lesser of 75% of the book value of eligible inventory and 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims. Under the New RBC facility, available borrowings would have been C$9.3 million ($7.3 million) at December 31, 2020 if the New RBC Facility was in place. Interest is calculated at the Canadian or U.S. prime rate plus 30 basis points or at the Canadian Dollar Offered Rate or LIBOR plus 155 basis points. Under the New RBC Facility, if the Borrowing Base less any loan advances or letters of credit or guarantee and if undrawn including unrestricted cash (the “Aggregate Excess Availability”), is less than C$5.0 million, the Company is subject to a fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 calculated on a trailing twelve month basis. Additionally, if the FCCR has been above 1.10:1 for the three immediately consecutive months, the Company is required to maintain a reserve account equal to the aggregate of one-year of payments on the Leasing Facilities. We anticipate not meeting the three month FCCR requirement for the end of the first quarter of 2021, which would result in requiring $1.1 million of cash, being one-year payments on the Leasing Facilities, to be restricted. This amount could increase as we draw additional amounts on the Leasing Facilities. Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will set-off any borrowings and any remaining amounts made available to the Company.

During 2020, the Company entered into the Leasing Facilities, consisting of a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States (the “Leasing Facilities”) with RBC, which are available for equipment expenditures and certain equipment expenditures already incurred. Pursuant to the Covenant Holiday Period Extension, the equipment leasing facility in the United States was reduced from $16.0 million to $14.0 million and the revolving Leasing Facilities were amended to be amortizing facilities. The Leasing Facilities, respectively, have seven and five-year terms and bear interest at 4.25% and 4.50%. The U.S. equipment Leasing Facility is amortized over a six-year term and extendible at the Company’s option for an additional year.

During 2020, the Company received $3.5 million of cash consideration under the U.S. equipment Leasing Facility and commenced the lease term for the equipment at the South Carolina Facility. The Company received C$3.6 million ($2.6 million) of cash consideration under the equipment Leasing Facility in Canada and commenced the lease term for the Canadian equipment expenditures during 2020.

We were subject to certain restrictive and financial covenants under the Previous RBC Facility. Under the New RBC Facility, we are restricted from paying dividends unless Payment Conditions (as defined in the New 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 Previous RBC Facility was and the New RBC Facility is currently secured by substantially all of our real property located in Canada and the United States.

Contractual Obligations

The following table summarizes DIRTT’s contractual obligations at December 31, 2020:

		Payments due by period	Payments due by period	Payments due by period
	Less than			Greater than
	1 year	1 to 3 years	3 to 5 years	5 years	Total
		($in thousands)
Accountspayable and accrued liabilities	20,350	-	-	-	20,350
Other liabilities	3,677	-	-	-	3,677
Customer deposits and deferred revenue	1,819	-	-	-	1,819
Lease liabilities(undiscounted)	5,900	9,037	4,471	24,875	44,283
Long-term debt1	1,141	2,281	2,057	1,293	6,772
Purchase obligations	3,228	-	-	-	3,228
Total	36,115	11,318	6,528	26,168	80,129

(1) Includes principal and interest. See Note 13 to our Consolidated Financial Statements for additional information.

Significant Accounting Policies and Estimates

Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements appearing elsewhere in this Annual Report. Our critical accounting estimates include the areas where we have made what we consider to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly affect our financial results under different assumptions and conditions. We prepare our financial statements in conformity with GAAP. As a result, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. Critical estimates and assumptions made by management include:

Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies

We have warranty obligations with respect to manufacturing defects on most of our manufactured products. Warranty periods generally range from one to 10 years. We have recorded a reserve for estimated warranty and related costs based on historical experience and periodically adjust these provisions to reflect actual experience. We assess the adequacy of our warranty accrual on a quarterly basis, and adjust the previous amounts recorded, if necessary, to reflect the change in estimate of the future costs of claims yet to be serviced. Typically, product deficiencies requiring our warranty are identified and remediated within a year of production. The following provides information with respect to our warranty accrual. At December 31, 2020 and 2019, we had $1.8 million and $4.0 million, respectively, accrued for warranty and other provisions, and third-party costs associated with remedying deficiencies were $1.3 million during the fiscal year ended December 31, 2020, as compared to $2.6 million during the fiscal year ended December 31, 2019. Following the completion of third-party testing in 2019, we determined that timber included in certain projects installed between 2016 and 2019 potentially did not meet the fire-retardant specifications under which the projects were sold. As a result, we recorded a $2.5 million provision in the fourth quarter of 2019 and have been 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 fireretardant specification under which the projects were sold and reduced the associated provision to $1.3 million, which represents expected costs to prepare impacted sites and apply the in-situ solution. In the third quarter of 2020, we completed building code reviews of the affected projects and determined that the timber as installed met the requisite building code requirements as it related to fire retardance. 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.

We establish reserves for estimated legal contingencies when we believe a loss on litigation is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liability reserves are reflected in operations in the period in which there are changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. We estimate the probable cost by evaluating historical precedent as well as the specific facts relating to each contingency (including the opinion of outside advisors). Should the outcome differ from our assumptions and estimates, or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known. At December 31, 2020 and 2019, we had $nil and $0.7 million, respectively, provided for legal provisions.

Estimates of useful lives of depreciable assets and the fair value of long-term assets used for impairment calculations

We evaluate the recoverability of our PP&E and capitalized software costs when events or changes in circumstances indicate a potential impairment exists. If impairment is indicated, the impairment loss is measured as the amount the assets carrying value exceeds the fair value of the assets.

Our determination of the fair value associated with long-term assets involves significant estimates and assumptions, including those with respect to the determination of asset groups, future cash inflows and outflows, discount rates, and asset lives. In the current year, estimates of cash inflows are dependent on the timing and extent of recovery of the slowdown experienced as a result of the COVID-19 pandemic. These significant estimates require considerable judgment, which could affect our future results if the current estimates of future performance and fair values change.

We estimate the useful lives of PP&E and capitalized software costs based on the period over which the assets are expected to be available for use. The estimated useful lives are reviewed annually and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of the relevant assets may be based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the PP&E and capitalized software assets would increase the recorded expenses and decrease the non-current assets.

Estimates of future taxable earnings used to assess the realizable value of deferred tax assets

We use the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their carrying amounts reported in the financial statements. Deferred income tax assets also reflect the benefit of unutilized tax losses that can be carried forward to reduce income taxes in future years. Such method requires the exercise of significant judgment in determining whether or not our deferred tax assets are probable of recovery from taxable income of future years and, therefore, can be recognized in the financial statements. Also, estimates are required to determine the expected timing upon which tax assets will be realized and upon which tax liabilities will be settled. We assess the ability to recover our deferred tax assets every quarter and concluded that a valuation allowance was required against our Canadian deferred tax assets.

Tax interpretations, regulations and legislation in the various jurisdictions in which the Company and its subsidiaries operate

The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, and Canadian federal and provincial, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

We have no liability for uncertain tax positions. However, should we accrue for such liabilities, when and if they arise in the future, we will recognize interest and penalties associated with uncertain tax positions as part of our income tax provision.

Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of the ultimate payout amount

We use a fair-value based approach for measuring stock-based compensation and record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant. Our awards vest based on service conditions, and compensation expense is recognized on a straight-line basis. Stock-based compensation expense is recognized only for those awards that ultimately vest.

Prior to October 2019, we allowed certain vested stock options to be surrendered for cash, resulting in the stock options being accounted for as liabilities at fair value every period, which increases the sensitivity of our accounting to share price movements.

Estimates of ability and timeliness of customer payments of accounts receivable

Our expected credit loss reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating expected credit losses. In estimating the Company’s current estimate of expected

credit losses, management considers 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. While we believe these processes effectively address our exposure for doubtful accounts and credit losses have historically been within expectations, changes in the economy, industry, or specific customer conditions may require adjustments to the expected credit loss. We have a contract with a trade credit insurance provider, whereby a portion of our trade receivables are insured. The trade credit insurance provider determines the coverage amount, if any, on a customer-by-customer basis. Based on our trade receivables balance as at December 31, 2020 and 2019, 84% and nil%, respectively, of that balance was covered by trade credit insurance provider.

At December 31, 2020, we had an allowance for expected credit loss of $0.6 million (2019 - $0.1 million).

Recent Accounting Pronouncements

Please refer to Note 3 to our Consolidated Financial Statements presented elsewhere in this Annual Report.