DIRTT Environmental Solutions Ltd.

These financial statements for DIRTT Environmental Solutions Ltd. are 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 8. Financial Statements and Supplementary Data.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of DIRTT Environmental Solutions Ltd.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of DIRTT Environmental Solutions Ltd. and its subsidiaries (together, the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 due to the adoption of ASC Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants Calgary, Canada February 24, 2021

We have served as the Company’s auditor since 2017.

PricewaterhouseCoopers LLP 111-5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T: +1 403 509 7500, F: +1 403 781 1825

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Consolidated Balance Sheets

(Stated in thousands of U.S. dollars)

	As at December 31,	As at December 31,
	2020	2019
ASSETS
Current Assets
Cash and cash equivalents	45,846	47,174
Trade and other receivables, net of expected credit losses of $0.6 million at December 31, 2020 and$0.1 million December 31,2019	18,953	24,941
Inventory	15,978	17,566
Prepaids and other current assets	4,068	3,340
Total Current Assets	84,845	93,021
Property, plant and equipment,net	49,847	41,365
Capitalized software,net	8,344	8,213
Operatinglease right-of-use assets,net	33,643	20,661
Deferred tax assets,net	-	5,364
Goodwill	1,449	1,421
Other assets	5,016	5,518
Total Assets	183,144	175,563
LIABILITIES
Current Liabilities
Accountspayable and accrued liabilities	20,350	20,384
Other liabilities	3,677	5,187
Customer deposits and deferred revenue	1,819	3,567
Currentportion of lease liabilities	5,503	5,287
Total Current Liabilities	31,349	34,425
Deferred tax liabilities,net	414	-
Long-term debt and other liabilities	5,069	35
Long-term lease liabilities	29,781	16,116
Total Liabilities	66,613	50,576
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 84,681,364 issued and outstandingat December 31,2020 and December 31,2019	180,639	180,639

Additionalpaid-in capital	10,175	8,343
Accumulated other comprehensive loss	(17,018 )	(18,028 )
Accumulated deficit	(57,265 )	(45,967 )
Total Shareholders’ Equity	116,531	124,987
Total Liabilities and Shareholders’ Equity	183,144	175,563

Refer to Note 20 for commitments

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

DIRTT Environmental Solutions Ltd.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Stated in thousands of U.S. dollars, except per share data)

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	20182
Product revenue	166,689	240,659	266,434
Service revenue	4,818	7,076	8,247
Total revenue1	171,507	247,735	274,681
Product cost of sales	113,445	153,128	161,844
Costs of under-utilized capacity	2,010	2,240	-
Service cost of sales	2,769	5,943	5,828
Total cost of sales	118,224	161,311	167,672
Gross profit	53,283	86,424	107,009
Expenses
Sales and marketing	28,049	33,939	40,627
General and administrative	26,663	27,645	28,722
Operations support	9,381	11,037	8,069
Technologyand development	8,111	7,818	4,176
Stock-based compensation	2,351	3,876	3,661
Reorganization	-	4,560	7,380
Impairment	-	-	8,680
Total operating expenses	74,555	88,875	101,315
Operating income(loss)	(21,272 )	(2,451 )	5,694
Government subsidies	12,721	-	-
Foreign exchangegain(loss)	(576 )	(1,324 )	3,214
Interest income	238	529	425
Interest expense	(305 )	(131 )	(503 )
	12,078	(926 )	3,136
Income(loss) before tax	(9,194 )	(3,377 )	8,830
Income taxes
Current tax expense(recovery)	(3,521 )	1,064	2,178
Deferred tax expense(recovery)	5,625	(45 )	1,102
	2,104	1,019	3,280
Net income (loss)	(11,298 )	(4,396 )	5,550
Income (loss) per share
Basic and diluted income(loss) per share	(0.13 )	(0.05 )	0.07
Weighted average number of shares outstanding (in thousands)
Basic	84,681	84,671	84,477
Diluted	84,681	84,671	85,009

1 2020 revenues include $nil from related parties (2019 – $nil, 2018 – $2.9 million)

2 See Note 17

Consolidated Statement of Comprehensive Income (Loss)

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
Income(loss)for theyear	(11,298 )	(4,396 )	5,550
Exchange differences on translation of foreign operations	1,010	4,064	(9,980 )
Comprehensive income (loss) for the year	(10,288 )	(332 )	(4,430 )

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

DIRTT Environmental Solutions Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

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

				Accumulated
	Number of		Additional	other		Total
	Common	Common	paid-in	comprehensive	Accumulated	shareholders’
	shares	shares	capital	income (loss)	deficit	equity
As at December 31, 2017	84,224,527	178,397	7,355	(12,112 )	(47,121 )	126,519
Issued on exercise of options	435,792	2,165	(628 )	-	-	1,537
Stock-based compensation	-	-	2,190	-	-	2,190
Stock option conversion to cash-settled	-	-	(2,302 )	-	-	(2,302 )
awards
Foreign currencytranslation adjustment	-	-	-	(9,980 )	-	(9,980 )
Net income for theyear	-	-	-	-	5,550	5,550
As at December 31, 2018	84,660,319	180,562	6,615	(22,092 )	(41,571 )	123,514
Issued on exercise of options	21,045	77	(1 )	-	-	76
Stock-based compensation	-	-	1,729	-	-	1,729
Foreign currencytranslation adjustment	-	-	-	4,064	-	4,064
Net loss for theyear	-	-	-	-	(4,396 )	(4,396 )
As at December 31, 2019	84,681,364	180,639	8,343	(18,028 )	(45,967 )	124,987
Stock-based compensation	-	-	1,832	-	-	1,832
Foreign currencytranslation adjustment	-	-	-	1,010	-	1,010
Net loss for theyear	-	-	-	-	(11,298 )	(11,298 )
As at December 31, 2020	84,681,364	180,639	10,175	(17,018 )	(57,265 )	116,531

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

DIRTT Environmental Solutions Ltd.

Consolidated Statements of Cash Flows

(Stated in thousands of U.S. dollars)

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
Cash flows from operating activities:
Net income(loss)for theyear	(11,298 )	(4,396 )	5,550
Adjustments:
Depreciation and amortization	11,706	12,242	13,699
Stock-based compensation,net of settlements	2,351	202	1,870
Foreign exchange(gain)loss	746	345	(1,902 )
(Gain)loss on disposal ofproperty, plant and equipment	(46 )	53	67
Deferred income tax expense(recovery)	5,625	(45 )	1,102
Impairment	-	-	8,680
Changes in operatingassets and liabilities:
Trade and other receivables	6,067	21,025	(26,613 )
Inventory	1,638	1,667	(285 )
Prepaid and other assets	(241 )	(873 )	(138 )
Trade accountspayable and accrued liabilities	752	(17,379 )	5,459
Other liabilities	(3,971 )	5,196	673
Lease liabilities	910	(402 )	-
Customer deposits and deferred revenue	(1,754 )	(4,276 )	1,903
Net cash flows provided by operating activities	12,485	13,359	10,065
Cash flows from investing activities:
Purchase ofproperty, plant and equipment,net of accountspayable changes	(16,597 )	(12,303 )	(8,466 )
Capitalized software development expenditures and other asset expenditures	(3,515 )	(3,452 )	(5,234 )
Recoveryof software development expenditures	674	511	178
Proceeds on sale ofproperty, plant and equipment	46	55	60
Net cash flows used in investing activities	(19,392 )	(15,189 )	(13,462 )
Cash flows from financing activities:
Proceeds received on long-term debt	6,130	-	-
Repayment of long-term debt	(406 )	(5,561 )	(4,606 )
Cash received on exercise of options	-	77	1,537
Net cash flows provided by (used in) financing activities	5,724	(5,484 )	(3,069 )
Effect of foreign exchange on cash and cash equivalents	(145 )	1,076	(3,606 )
Net increase (decrease) incash 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
Supplemental disclosure of cash flow information:
Interestpaid	(305 )	(99 )	(503 )
Income taxes received (paid)	1,817	(2,518 )	(3,816 )

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

DIRTT Environmental Solutions Ltd.

Notes to the Consolidated Financial Statements

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

1. GENERAL INFORMATION

DIRTT Environmental Solutions Ltd. and its subsidiaries (“DIRTT,” the “Company,” “we” or “our”) is a leading technologydriven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing ICE® software (“ICE” or “ICE Software”) with integrated in-house manufacturing of its innovative prefabricated interior construction solutions and an extensive 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 – 30th Street S.E., Calgary, AB, Canada T2C 1N6 and its registered office is located at 4500, 855 – 2nd Street S.W., Calgary, AB, Canada T2P 4K7. DIRTT’s common shares trade on the Toronto Stock Exchange under the symbol “DRT” and on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DRTT”.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These consolidated financial statements (“Financial Statements”), including comparative figures, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

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 upon consolidation.

Basis of measurement

These Financial Statements have been prepared on the historical cost convention except for certain financial instruments and stock-based compensation that are measured at fair value, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

Use of estimates

The preparation of the Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the Financial Statements. Estimates are based on historical data and experience, as well as various other factors that management considers reasonable under the circumstances. Actual outcomes can differ from these estimates.

Significant estimates and assumptions made by management include:

Estimates of ability and timeliness of customer payments of accounts receivable;
Estimates of useful lives of depreciable assets as well as the fair value of long-term assets and future cash flows used for impairment calculations;
Estimates of future taxable earnings used to assess the realizable value of deferred tax assets;
Tax interpretations, regulations and legislation in the various jurisdictions in which the Company and its subsidiaries operate;

Estimates of the fair value of stock awards, including whether the performance criteria will be met and measurement of the ultimate payout amount; and
Estimates of liabilities associated with the potential and amount of warranty, legal claims and other contingencies.

Segments

Management has determined that DIRTT has one operating segment. The Company’s chief executive officer, who is DIRTT’s chief operating decision maker, reviews financial information on a consolidated and aggregate basis, together with certain operating metrics principally to make decisions about how to allocate resources and to measure the Company’s performance.

Foreign currency translation

DIRTT Environmental Solutions Ltd. is a Canadian company and its functional currency is the Canadian dollar. DIRTT’s wholly owned subsidiary is domiciled in the United States and its functional currency is the U.S. dollar.

Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into the transacting company’s functional currency at the year-end exchange rate for monetary items and at the historical exchange rates for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the related transactions. Foreign exchange gains and losses, other than those arising from the translation of the Company’s net investments in foreign subsidiaries, are included in income.

The accounts of the Company’s U.S. dollar subsidiary is translated into Canadian dollars, and the Financial Statements are translated into U.S. dollars for financial statement presentation. Assets and liabilities are translated using year-end exchange rates, and revenues, expenses, gains and losses are translated using average monthly exchange rates. Foreign exchange gains and losses arising from the translation of the Company’s assets and liabilities are included in “other comprehensive income (loss)”.

Cash and cash equivalents

Cash and cash equivalents include cash on hand held at banks and cash equivalents, which are defined as highly liquid investments with original maturities of three months or less.

Trade and other receivables, net of allowance for doubtful accounts

For the year-ended December 31, 2020, the Company’s policy was as follows:

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates its allowance for doubtful accounts using the current expected credit loss (“CECL”) methodology, which is designed to capture the Company’s current estimate of all expected credit losses.

Prior Accounting Policy

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates its allowance for doubtful accounts by evaluating specific accounts where information indicates the Company’s customers may have an inability to meet financial obligations, such as bankruptcy and significantly aged receivables outstanding.

Inventory

Inventory is comprised of raw materials and work in progress. The Company does not typically carry a significant amount of finished goods inventory. Inventory is valued at the lower of weighted average cost and net realizable value. Net realizable value is based on an item’s usability in the manufacturing of the Company’s products. The Company records an allowance for obsolescence when the net realizable value of inventory items declines below weighted average cost, net realizable value is determined based on current market prices for inventory less the estimated cost to sell. Work in progress is valued at an estimate of cost, including attributable overheads, based on stage of completion.

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 separately recognized as an expense in the period in which they are incurred.

Leases

The Company categorizes leases at their inception as either operating or finance leases. Leases where the Company assumes substantially all of the rewards or ownership and leases where ownership is transferred at the end of the lease term, or by way of a bargain purchase option, are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges are recognized in the statement of operations.

The Company’s Leasing Facilities (as defined in Note 13) are accounted for as finance leases as ownership of the equipment is expected to return to the Company at the end of the lease term. These transactions are not accounted for as a sale of the underlying equipment as the Company continues to control the equipment.

For leases categorized as operating, the Company determines if an arrangement is a lease or contains a lease element at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases are separately disclosed as operating lease right-of-use (“ROU”) assets, with a corresponding lease liability split between current and long-term components on the balance sheet. Operating leases with an initial term of 12 months or less are not included on the balance sheet.

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

Prior Accounting Policy

For the year-ended December 31, 2018, the Company’s leases policy was as follows:

The Company categorizes leases at their inception as either operating or capital leases. Leases where the Company assumes substantially all the risks and rewards of ownership are classified as capital leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability, so as to achieve a constant rate of interest on the balance of the liability. Finance charges are recognized in the statement of operations. Other leases that qualify as operating leases are not recognized in the Company’s balance sheet. In certain lease agreements, the Company may receive rent holidays or other incentives. The Company recognizes lease costs on a straight-line basis once control of the asset is achieved, without regard to deferred payment terms such as rent holidays that defer the commencement date of required payments. Additionally, incentives received are treated as a reduction of costs over the term of the agreement.

Property, plant and equipment

Property, plant and equipment are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated depreciation and any accumulated impairment losses. Expenditures for repairs and maintenance are expensed as incurred, while renewals and betterments are capitalized.

Depreciation is charged to the consolidated statement of operations on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s property, plant and equipment are as follows:

Building ................................................. 25 years Manufacturing equipment ...................... 10 years Leasehold improvements ....................... Over term of lease (1 to 10 years) Office equipment ................................... 5 years Tooling and prototypes .......................... 4 years Computer equipment .............................. 3 years Vehicles ................................................. 3 years

When assets are disposed of or retired, the cost and accumulated depreciation and impairment losses are removed from the respective accounts and any resulting loss is reflected in operating expenses.

Capitalized software costs

The Company capitalizes costs related to internally developed software during the application development stage when (i) the preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project, and (iii) it is probable that the project will be completed and performed as intended. Capitalized costs includes costs of personnel and related expenses for employees and third parties directly attributable to the projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements are also capitalized. Costs related to preliminary project activities and post implementation activities, including training, maintenance and minor modifications or enhancements are expensed as incurred. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the developed asset, which is generally three to five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of the assets.

Software development is considered internal-use as it is used to design and sell the DIRTT products and is not included in the end client’s product. Revenues received from Distribution Partners for ICE Software are recognized as revenues as they are considered an element of the product sale. Any incidental third-party revenues received for the ICE Software are credited against capitalized software costs.

Impairment of long-lived assets

Management evaluates the recoverability of the Company’s property, plant and equipment, capitalized software costs and ROU assets when events or changes in circumstances indicate a potential impairment exists. Events and changes in circumstances considered by the Company in determining whether the carrying value of long-lived assets may not be recoverable include, but are not limited to, significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, and changes in the Company’s business strategy. Impairment testing is performed at an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (an “asset group”). In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of the asset group. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment at the reporting unit level at least annually or whenever changes in circumstances indicate that goodwill might be impaired. The Company early adopted ASU 2017-04 in 2019, which simplified the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.

The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year, or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If goodwill is determined to be impaired, the impairment charge that would be recognized is based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

Convertible Debentures

The Company accounts for convertible debentures as liabilities. Embedded features included in the convertible debentures that require bifurcation are accounted for separately. Costs incurred directly related to the issuance of convertible debentures are presented as a direct deduction against the carrying amount of the convertible debentures and are amortized to interest expense using the effective interest method.

Income taxes

Income tax expense is comprised of current and deferred tax. Income tax is recognized in the consolidated statement of operations and comprehensive income (loss) except to the extent it relates to items recognized directly in equity.

Current tax

Current tax expense is based on the results for the year, adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that were enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred tax

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated balance sheet. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period during which the change occurs.

When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not that all or some portion of the Company’s deferred tax assets will not be realized, based on management’s judgment using available evidence about future events.

At times, tax benefits claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

Revenue recognition

The Company accounts for revenue in accordance with topic 606, Revenue from Contracts with Customers, (“ASC 606”) and Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. Under ASC 606, an entity recognizes revenue in a manner that reflects the transfer of promised goods or services to customers in an amount which the entity expects to be entitled in exchange for those goods or services.

The Company recognizes revenue upon transfer of control of promised goods or services to customers at transaction price, an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is calculated as selling price net of variable consideration which may include estimates for sales incentives related to current period product revenue. Revenue is measured at the fair value of the consideration received or receivable, after discounts, rebates and sales or income taxes and duties.

Product sales

The Company recognizes revenue upon transfer of control of products to the customer, which typically occurs upon shipment. The Company’s main performance obligation to customers is the delivery of products in accordance with purchase orders. Each purchase order defines the transaction price for the products purchased under the arrangement. Distribution Partners typically sell DIRTT product to end clients and issue purchase orders to the Company to manufacture the product. Distribution Partners utilize ICE licenses to sell DIRTT products, the ICE licenses sold to Distribution Partners are not considered a separate performance obligation as they are not distinct, and ICE license revenue is recognized in conjunction with product sales. The Distribution Partner ICE Software revenue is recognized over the license period.

The Company’s standard sales terms are Free On Board (“FOB”) shipping point, which comprise the majority of sales. The Company usually requires a 50% progress payment on receipt of certain orders, excluding certain government orders or in some special contractual situations. Customer deposits received are recognized as a liability on the balance sheet until revenue recognition criteria is met. At the point of shipment, the customer is required to pay the balance of the sales price within 30 days. The Company’s sales arrangements do not have any material financing components. In addition, the Company’s customer arrangements do not produce contract assets that are material to its consolidated financial statements.

The Company provides sales commissions to internal and external sales representatives which are earned in the period in which revenue is recognized.

The Company accounts for product transportation revenue and costs as fulfillment activities and present the associated costs in costs of goods sold in the period in which the Company sells its product.

Contracts containing multiple performance obligations

The Company offers certain arrangements whereby a customer can purchase products and installation together which are generally capable of being distinct and accounted for as separate performance obligations. Where multiple performance obligations exist, the Company determines revenue recognition by (1) identifying the contract with the customer, (2) identifying the performance obligation in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations based on the relative standalone selling prices, typically based on cost plus a reasonable margin, and (5) recognizing revenue as the performance obligations are satisfied.

Installation and other services

The Company provides installation and other services for certain customers as a distinct performance obligation. Revenue from installation services is recognized over time as the service is performed.

Principal vs Agent Considerations

The Company evaluates the presentation of revenue on a gross vs. net basis based on whether it acts as a principal by controlling the product or service sales to customers. In certain instances, the Company facilitates contracting of certain sales on behalf of Distribution Partners. The Company records these revenues on a gross basis when the Company is obligated to fulfill the service and has the risk associated with service delivery. The Company records these revenues on a net basis when the Distribution Partner has the obligation to fulfill the services and has the risk associated with service delivery.

Distribution Partner rebates

Rebates to Distribution Partners (“Partner Rebates”) are accrued for and recognized as a reduction of revenue at the date of the sale to the customer. Partner Rebates include amounts collected directly by the Company owed to Distribution Partners in accordance with their Distribution Partner agreements, being the difference between the price to the end customer and the Distribution Partners’ price. Other sales discounts, including early pay promotions, are deducted immediately from sales invoices.

Contract balances

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records an unbilled receivable when revenue is recognized prior to invoicing. As the Company’s contracts are less than one year in duration, the Company has elected to apply the practical expedients to expense costs related to costs to obtain contracts and not disclose unfulfilled performance obligations. As deferred revenue and customer deposits are typically recognized during the year the Company does not account for financing elements.

Warranties

The Company provides a warranty on all products sold to its clients and Distribution Partner’s clients. Warranties are not sold separately to customers. Provisions for the expected cost of warranty obligations are recognized based on an analysis of historical costs for warranty claims relative to current activity levels and adjusted for factors based on management’s assessment that increase or decrease the provision. Warranty provision is recognized in cost of goods sold. Warranty claims have historically not been material and do not constitute a separate performance obligation.

Stock-based compensation

The Company follows the fair value-based approach to account for options and restricted share units (“RSUs”). Compensation expense and an increase in “Additional paid-in capital” are recognized for options and RSUs over their vesting period based on their estimated fair values on the grant date, as determined using the Black-Scholes option pricing model for the majority of options and the market value of the Company’s common shares on the grant date for RSUs. Certain executive stock options and RSUs have performance conditions and are valued using a Monte Carlo model.

On exercise of stock options and RSUs, the recorded fair value of the option or RSU is removed from “Additional paid-in capital” and credited to “Share capital”. For options, any consideration paid by employees is credited to “Share capital” when the

option is exercised. The Company’s stock options and RSUs are not shares of the Company and have no rights to vote, receive dividends, or any other rights as a shareholder of the Company.

During 2018 and 2019, the Company provided a cash settlement alternative for certain stock options. The fair value on grants attributable to those awards was reclassified on the balance sheet from shareholders’ equity to other liabilities, and at period end the liability is adjusted to fair value and the excess of fair value over previously recognized stock-based compensation is expensed. The fair value of the awards at the date of modification was greater than the grant date fair value of the previously vested equity awards, therefore the additional fair value was treated as an expense at the date of modification. Increases or decreases in fair value subsequent to the modification date will be recorded in earnings except that the Company shall not recognize a cumulative expense lower than the grant date fair value of the original equity awards. On October 9, 2019, following the listing of its common shares on Nasdaq, the Company ceased cash-settlement of stock options and the associated liability accounting for stock options and returned to equity settlement accounting for stock options, as described above.

Stock based compensation expense is also recognized for performance share units (“PSUs”) and deferred share units (“DSUs”) using the fair value method. Compensation expense is recognized over the vesting period and the corresponding amount is recorded as a liability on the balance sheet.

Technology and development expenditures

Technology and development expenses are comprised primarily of salaries and benefits associated with the Company’s product and software development personnel which do not qualify for capitalization. These costs are expensed as incurred and exclude certain information and technology costs used in operations which are classified as general and administrative costs.

Government subsidies

The Company accounts for 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.

Earnings per share (“EPS”)

Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated using the treasury stock method for determining the dilutive impact of stock options. The Company follows the “if converted” method for accounting for the impact of convertible debentures on earnings (loss) per share, whereby interest charges applicable to the convertible debentures are added to the numerator and the convertible debentures are assumed to have been converted at the beginning of the period (or time of issuance, if later), and the resulting common shares are added to the denominator.

Fair value of financial instruments

ASC 820, “Fair Value Measurements,” requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company’s fair value analysis is based on the degree to which the fair value is observable and grouped into categories accordingly:

Level 1 financial instruments are those which can be derived from quoted market prices (unadjusted) in active markets for similar financial assets or liabilities.
Level 2 financial instruments are those which can be derived from inputs that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 2 financial instruments include current and long-term debt. The carrying amounts of these instruments approximates fair value due to limited changes to interest rates and the Company’s credit rating since issuance.
Level 3 financial instruments are those derived from valuation techniques that include inputs for the financial asset or liability which are not based on observable market data (unobservable inputs). The Company does not have any Level 3 financial instruments.

The carrying amounts of cash and cash equivalents; trade and other receivables; accounts payable and accrued liabilities and other liabilities; and customer deposits approximate fair value due to their short-term nature.

3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

On January 1, 2020, the Company adopted ASU No. 2016-13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses in Financial Instruments ” 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 (“ASC 326”). These ASUs replace the incurred loss methodology with an expected loss methodology that is referred to as the 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. It also applies to off-balance sheet credit exposures not accounted for as insurance and net investments in leases recognized by a lessor in accordance with Topic 842 on Leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with GAAP. The adoption of this standard did not have a significant 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 – InternalUse 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.

On August 5, 2020, the FASB issued ASU 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) . This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for fiscal years beginning after December 15, 2021 and early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company intends to adopt this standard on January 1, 2021 as the guidance helps simplify debt and equity considerations associated with the Company’s convertible debentures which were issued in February 2021.

Although there are 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 pronouncements has had or will have a material impact on its Financial Statements.

4. 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 resulting adverse economic conditions have negatively impacted construction activity and consequently DIRTT’s business, with potential significant negative impacts extending to the first half of 2021 and beyond.

While many construction sites remain open and re-opening strategies have been implemented across North America, certain projects have experienced delays, impacted by both the implementation of social distancing and other safety related measures and the re-emergence of COVID-19 in certain geographic areas. 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 it possible to predict the impact of such developments on the Company’s ability to achieve its business objectives.

COVID-19 has increased the complexity of estimates and assumptions used to prepare the Company’s consolidated financial statements, particularly related to impairment (see Note 5) and deferred tax assets (see Note 14) 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 7). Management will continue to reassess the impact of COVID-19 on our Distribution Partners in future periods. The estimation of such credit losses is complex because of limited historical precedent for the current economic situation. In addition, the 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. See Note 13 for information about our credit facilities.

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”). 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.

5. IMPAIRMENT

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
DIRTT Timber	-	-	6,098
Leasehold and other assets	-	-	2,582
	-	-	8,680

The impact of the COVID-19 pandemic on the Company resulted in a potential indicator of impairment. Management compared forecasted undiscounted cash flows to the book values of non-current assets and determined an impairment provision was not required.

The Company’s goodwill is assessed at the consolidated company level which represents the Company’s sole operating and reporting segment. The Company tests its goodwill for impairment annually during the fourth quarter of the calendar year. For 2020, and 2019, the Company used the quantitative approach to perform its annual goodwill impairment test. The Company’s fair value exceeded the carrying value of its net assets and, accordingly, goodwill was not impaired.

A key assumption in the Company’s impairment test include future sales, for which the Company used three scenarios with compounded annual growth rates (“CAGR”) over a 5-year period ranging from 8% to 17%. The impact of COVID-19 on DIRTT’s Distribution Partners or the Company’s operations may change cash flows and impact the recoverability of our assets in the future. Furthermore, COVID-19 and its related economic and social impacts are rapidly evolving and may affect our ability to accurately use historical sales trends and cash flows to forecast future results leading to additional estimation uncertainty with respect to impairment testing. The cost structure used in the impairment test was kept in line with current periods and included considerations to manage growth. The Company assumed reductions to operating costs of 5% applied from 2022 in the low case scenario. Discounted future cash flows are determined by applying a discount rate of 12% based on the Company’s estimated weighted average cost of capital.

Inflation was estimated at 2%. Increasing the discount rate by 2% or reducing our CAGR by 2% in the three scenarios tested would not have resulted in an impairment of our assets.

DIRTT Timber

During 2018, management decided to shift from the early stage development of its DIRTT Timber market to a commercialized approach focused on large, standalone timber projects and as a pull-through for other DIRTT solutions. Management concluded that this strategy required significantly less timber capacity than currently exists and therefore took steps to right-size its timber capacity by the end of 2018. Management determined these decisions to be an indicator of impairment of the assets of the DIRTT Timber solution line. In determining if impairment exists, the Company estimated the undiscounted cash flows to be generated from the use and ultimate disposition of the asset group and determined the undiscounted cash flows were less than the carrying value of the assets.

To determine the impairment of the DIRTT Timber assets, the net book value of the assets was evaluated against the fair value of the assets. The fair value of the DIRTT Timber assets reflects current projected sales for timber projects on a standalone basis and the pull-through impact to other DIRTT solutions. In its evaluation, management determined it was unable to reliably quantify the pull-through impact of timber on other DIRTT solutions. The equipment related to the timber market was custom built for DIRTT and there is no active market for resale. Therefore, the fair value was determined to be management’s estimate of scrap value for the specialized assets and an estimated resale value for less specialized assets that cannot be redeployed for DIRTT’s other solutions. Management estimated the expected resale values based on the current market and on experience of management in the industry. The fair value of the DIRTT Timber assets was estimated to be $1.1 million. This assessment resulted in an impairment charge of $6.1 million during 2018.

Leasehold and other assets

At December 31, 2018, the Company recognized a lease exit liability of $0.6 million related to certain contracts, which is net of $1.0 million of estimated recoveries from subleases. These leases were considered impaired as the costs of meeting lease obligations exceeded the economic benefits expected to be received. The lease exit liability represents the present value of the difference between the minimum future lease payments the Company is obligated to make under the non-cancellable operating lease contract and any estimated sublease recoveries. Additionally, leasehold and other assets with a carrying value of $2.0 million at December 31, 2018, was expensed as there was no future value attributable to these assets or market for resale

6. LEASES

The Company leases office and factory space under various operating leases. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company gives consideration to instruments with similar characteristics when calculating its incremental borrowing rate. The Company’s operating leases have remaining lease terms of 1 year to 25 years. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

The weighted average remaining lease term and weighted average discount rate at December 31, 2020 were 14 years (2019 - 6 years) and 5.1% (2019 - 4.8%), respectively.

The following table includes ROU assets included on the balance sheet at December 31, 2019 and 2020:

		ROU Assets
	Cost	Accumulated depreciation	Net book value
At January 1, 2019	22,571	-	22,571
Additions	1,673	-	1,673
Depreciation expense	-	(4,061 )	(4,061 )
Exchange differences	534	(56 )	478
At December 31, 2019	24,778	(4,117 )	20,661
Additions	16,805	-	16,805
Depreciation expense	-	(3,884 )	(3,884 )
Exchange differences	257	(196 )	61
At December 31, 2020	41,840	(8,197 )	33,643

The following table includes lease liabilities included on the balance sheet at December 31, 2019 and 2020:

	Lease Liability	Lease Liability
	2020	2019
At January 1,	21,403	23,912
Additions	17,255	1,673
Accretion	1,175	1,092
Repayment of lease liabilities	(5,358 )	(5,567 )
Lease inducements	750	-
Lease cancellation	-	(196 )
Exchange differences	59	489
At December 31,	35,284	21,403
Current lease liabilities	5,503	5,287
Long-term lease liabilities	29,781	16,116

The following table includes maturities of operating lease liabilities at December 31, 2020:

2021		5,900
2022		5,499
2023		3,538
2024		2,998
2025		1,473
Thereafter		24,875
Total		44,283
Total lease liability		35,284
Difference between undiscounted cash flows and lease liability		8,999

In September 2020, the Company commenced the 15 year lease associated with the construction of a new combined tile and millwork facility in Rock Hill, South Carolina (“South Carolina Plant”). The lease may be extended for up to two 5 year periods. Undiscounted rent obligations associated with this lease are $28.1 million which includes the initial 15 year term and two 5 year extensions. The rent obligations have been discounted at a rate of 5.5% to determine the lease liability.

In December 2020, the Company entered into a lease agreement with an initial term of 8 years and one 5 year extension associated with a new DIRTT Experience Center (“DXC”) in Dallas, Texas. Undiscounted rent obligations associated with this lease are $6.7 million. The rent obligations have been discounted at a rate of 4.75% to determine the lease liability.

7. 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 December 31, 2020, approximately 84% of our trade accounts receivable are insured, relating to accounts receivables from counterparties deemed creditworthy by the insurer and excluding accounts receivable from government entities, that have arisen since April 1, 2020.

Our trade balances are spread over a broad Distribution Partner base, which is geographically dispersed. No Distribution Partner accounts for greater than 10% of revenue. In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

	As at December 31,	As at December 31,
	2020	2019
Current	12,500	20,087
Overdue	1,211	2,401
	13,711	22,488
Less: expected credit losses(2019: allowance for doubtful accounts)	(588 )	(84 )
	13,123	22,404
Other receivables	242	402
Government subsidies receivable	1,743	-
Income tax receivable	3,845	2,135
	18,953	24,941

Due to the uncertainties associated with the COVID-19 pandemic as well as the disruption to businesses in North America, the overall credit quality of certain receivables declined at March 31, 2020 compared to January 1, 2020. As a result of this consideration and the Company’s ongoing review of the credit quality of receivables, expected credit losses were increased by $0.6 million during the quarter ended March 31, 2020. During 2020, $0.1 million of receivables were written off (2019 - $nil) and no further adjustments to our expected credit losses were required at December 31, 2020. 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.

8. INVENTORY

	As at December 31,	As at December 31,	As at December 31,	As at December 31,
	2020		2019
Raw material		16,730		17,339
Allowance for obsolescence		(1,073 )		(512 )
Work inprogress		321		739
		15,978		17,566

In 2020, the Company provided $1.1 million (2019 - $0.5 million) for inventory that is not expected to be used in future production and the associated expense was recorded to cost of goods sold. During 2020 and 2019, the Company experienced periods where it was operating below normal capacity levels. During those periods, overheads included in inventory were not increased and $2.0 million (2019 - $2.2 million) was recognized directly and separately in cost of sales. Production overheads capitalized in work in progress were $0.1 million at December 31, 2020 (December 31, 2019 - $0.1 million).

9. PROPERTY, PLANT AND EQUIPMENT, NET

	Office and		Leasehold improvements	Total
	computer
	equipment	Factory equipment
Cost
At December 31, 2018	20,544	44,422	35,973	100,939
Additions	1,630	8,757	2,315	12,702
Disposals	-	(396 )	(298 )	(694 )
Exchange differences	569	1,857	1,241	3,667
At December 31, 2019	22,743	54,640	39,231	116,614
Additions	1,139	11,719	3,777	16,635
Disposals	(28 )	(120 )	(138 )	(286 )
Exchange differences	1,134	284	235	1,653
At December 31, 2020	24,988	66,523	43,105	134,616

Accumulated depreciation and
impairment
At December 31, 2018	11,748	28,934	23,529	64,211
Depreciation expense	1,643	2,297	4,929	8,869
Disposals	-	(293 )	(293 )	(586 )
Exchange differences	521	1,336	898	2,755
At December 31, 2019	13,912	32,274	29,063	75,249
Depreciation expense	1,723	3,059	3,656	8,438
Disposals	(28 )	(120 )	(138 )	(286 )
Exchange differences	755	311	302	1,368
At December 31, 2020	16,362	35,524	32,883	84,769

Net book value
At December 31, 2019	8,831	22,366	10,168	41,365
At December 31, 2020	8,626	30,999	10,222	49,847

As at December 31, 2020, the Company had $16.2 million of assets in progress of completion, primarily related to equipment procured for our South Carolina Plant, which were excluded from assets subject to depreciation (December 31, 2019 – $8.5 million).

10. CAPITALIZED SOFTWARE, NET

	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019
Cost
As at January 1	32,419	28,831
Additions	2,998	2,604
Recoveryof software development expenditures	(674 )	(511 )
Exchange differences	737	1,495
As at December 31	35,480	32,419
Accumulated amortization
As at January 1	24,206	20,496
Amortization expense	2,428	2,637
Exchange differences	502	1,073
As at December 31	27,136	24,206
Net book value	8,344	8,213

Estimated amortization expense on capitalized software is $3.4 million in 2021, $2.5 million in 2022, $1.2 million in 2023, $0.6 million in 2024, and $0.3 million in 2025.

11. GOODWILL

	2020	2019
As at January1	1,421	1,353
Exchange differences	28	68
As at December 31	1,449	1,421

12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER LIABILITIES

	As at December 31,	As at December 31,
	2020	2019
Trade accountspayable	4,921	7,620
Accrued liabilities	9,266	8,193
Wages and commissionspayable	4,577	3,546
Rebates accrued(1)	1,586	1,025
	20,350	20,384

(1) In 2020, $4.5 million of rebates were earned (2019 - $14.2 million) and $3.9 million were paid (2019 - $19.3 million).

Other liabilities

	As at December 31,	As at December 31,
	2020	2019
Legal provisions(1)	45	745
Deferred share unit liability	971	434
Warranty and other provisions(2)	1,763	4,008
Currentportion of long-term debt	898	-
	3,677	5,187

(1) The Company has provided $0.05 million (2019 - $0.7 million) as the estimated amount likely payable for various claims against the Company. The amount provided for is management’s best estimate of the potential payments for amounts claimed.

(2) The following table presents a reconciliation of the warranty and other provisions balance:

	As at December 31,	As at December 31,
	2020	2019
As at January 1	4,008	1,493
Adjustments for timberprovision	(1,750 )	2,500
Additions to warranty provision	1,301	2,569
Payments related to warranties	(1,796 )	(2,554 )
As at December 31	1,763	4,008

13. LONG-TERM DEBT

Revolving Credit Facility

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

During the second quarter of 2020, the Company entered into a letter agreement with RBC pursuant to which the Covenants 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 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 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”). 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 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 FCCR covenant of 1.10:1 on a trailing twelve month basis. Additionally, if the FCCR has been above 1.10:1 for the 3 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 (defined below). The Company anticipates not meeting the 3 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 additional amounts are drawn on the Leasing Facilities. 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 and daily balances will set-off any borrowings and any remaining amounts made available to the Company.

Leasing Facilities

During 2020, the Company entered into a C$5.0 million equipment leasing facility in Canada and a $16.0 million equipment leasing facility in the United States (the “Leasing Facilities”) 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 US$16 million to US$14 million and the revolving Lease 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. 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. leasing facility and commenced the lease term for the U.S. equipment lease expenditures. The Company received C$3.6 million ($2.6 million) of cash consideration under the leasing facility in Canada and commenced the lease term for the Canadian equipment expenditures during 2020. The associated financial liabilities are shown on the consolidated balance sheet in current other liabilities and long-term debt and other liabilities.

Convertible Debentures

On January 25, 2021, the Company completed a C$35 million bought-deal financing of convertible unsecured subordinated debentures (the "Debentures") with a syndicate of underwriters. On January 29, 2020, the Company issued a further C$5.25 million of Debentures under the terms of an overallotment option granted to the underwriters. The Debentures will mature and be repayable on January 31, 2026 (the “Maturity Date”) and will accrue interest at the rate of 6.00% per annum payable semi-annually in arrears on the last day of January and July of each year commencing on July 31, 2021 until the Maturity Date. The Debentures will be convertible into common shares of DIRTT, at the option of the holder, at any time prior to the close of business on the business day prior to the earlier of the Maturity Date and the date specified by the Company for redemption 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. Costs of the transaction are estimated to be C$2.5 million including the underwriters’ commission.

14. INCOME TAXES

Reconciliation of income taxes

The following reconciles income taxes calculated at the Canadian statutory rate with the actual income tax expense. The Canadian statutory rate includes federal and provincial income taxes. This rate was used because Canada is the domicile of the parent entity of the Company.

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
Net income(loss)before tax	(9,194 )	(3,377 )	8,830
Canadian statutoryrate	24.2 %	26.5 %	27.0 %
Expected income tax	(2,225 )	(895 )	2,384

Effect on taxes resultingfrom
Valuation allowance	5,241	-	-
Non-deductible expenses	261	550	447
Non-deductible stock-based compensation	269	674	1,080
Tax rate impacts	(1,288 )	999	(420 )
Adjustments related toprioryear tax filings	(105 )	(205 )	(257 )
Other	(49 )	(104 )	46
Income tax expense	2,104	1,019	3,280

Current tax expense(recovery)
Canada	-	-	-
United States	(3,521 )	1,064	2,178
Deferred tax expense(recovery)
Canada	3,644	1,154	433
United States	1,981	(1,199)	669
Income tax expense	2,104	1,019	3,280

The provision for income taxes is comprised of federal, state, provincial and foreign taxes based on pre-tax income. 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 $3.5 million recovery of income taxes previously paid in the United States.

Deferred tax assets and liabilities

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2020 and 2019 were as follows:

	At December 31, 2020	At December 31, 2020
	Assets	Liabilities	Net
Operatinglosses	9,528	-	9,528
Research and development expenditures	360	-	360
Other	1,834	-	1,834
Propertyand equipment	-	(2,218 )	(2,218 )
Capitalized software and other assets	-	(4,588 )	(4,588 )
Valuation allowance	-	(5,330 )	(5,330 )
Net deferred taxes	11,722	(12,136 )	(414 )

	At December 31, 2019	At December 31, 2019
	Assets	Liabilities	Net
Operatinglosses	6,899	-	6,899
Research and development expenditures	353	-	353
Propertyand equipment	-	(1,916 )	(1,916 )
Capitalized software and other assets	-	(2,345 )	(2,345 )
Other	2,373	-	2,373
Net deferred taxes	9,625	(4,261 )	5,364

Summary of temporary difference movements during the year:

	Balance	Recognized	Foreign	Balance
			Exchange	December 31, 2020
	January 1, 2020	in Income

Operatinglosses	6,899	2,451	178	9,528
Research and development expenditures	353	594	(587 )	360
Propertyand equipment	(1,916 )	(3,600 )	928	(4,588 )
Capitalized software and other assets	(2,345 )	251	(124 )	(2,218 )
Valuation allowance	-	(5,241 )	(89 )	(5,330 )
Other	2,373	(80 )	(459 )	1,834
Net deferred taxes	5,364	(5,625 )	(153 )	(414 )

	Balance	Recognized	Foreign	Balance
			Exchange	December 31, 2019
	January 1, 2019	in Income

Operatinglosses	8,213	(1,772 )	458	6,899
Research and development expenditures	389	(59 )	23	353
Propertyand equipment	(2,408 )	652	(160 )	(1,916 )
Capitalized software and other assets	(2,283 )	425	(487 )	(2,345 )
Other	1,207	799	367	2,373
Net deferred taxes	5,118	45	201	5,364

During 2020, the Company recorded a full valuation allowance (C$6.6 million or $5.2 million) against Deferred Tax Assets (“DTAs”) in its Canadian entity as the Company’s Canadian entity has experienced cumulative losses in recent years. 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 more likely than not that the Canadian entity’s DTAs will be utilized in the near term.

The provincial corporate tax rate in Alberta, Canada was 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, 9% for 2021 and 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, DIRTT reduced its DTAs by $0.9 million with a corresponding deferred income tax expense recorded in the second quarter of 2019.

The amount shown on the balance sheet as deferred income tax assets and liabilities represent the net differences between the tax basis and book carrying values on the Company’s balance sheet at enacted tax rates.

On an annual basis the Company and its subsidiaries file tax returns in Canada and various foreign jurisdictions. In Canada the Company’s federal and provincial tax returns for the years 2017 to 2019 remain subject to examination by taxation authorities. In the United States, both the federal and state tax returns filed for the years 2016 to 2019 remain subject to examination by the taxation authorities.

Tax loss carryforwards and other tax pools

The significant components of the Company’s net future income tax deductions in these consolidated financial statements are summarized as follows:

	2020	2019	2020 2019	2020 2019
	Canadian entity C$		US entity $
Non-capital loss carry-forwards	45,299	38,084	-	-
Undepreciated capital costs	13,225	23,274	3,994	11,922
Share issuance costs	-	-	-	-
Scientific research and experimental development			-
	1,971	1,971		-
tax incentives

Total future tax deductions	60,495	63,329	3,994	11,922

15. STOCK-BASED COMPENSATION

In May 2020, shareholders approved the DIRTT Environmental Solutions Ltd. Long-Term Incentive Plan (the “2020 LTIP”) at the annual and special meeting of shareholders. The 2020 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, restricted shares, dividend equivalent rights granted in connection with restricted share units, vested share awards, and other share-based awards and cash awards to eligible employees, officers, consultants and directors of the Company and its affiliates. In accordance with the 2020 LTIP, the sum of (i) 5,850,000 common shares plus (ii) the number of common shares subject to stock options previously granted under the Company’s Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) that, following May 22, 2020, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance under the 2020 LTIP. As at December 31, 2020, 4,085,093 common shares were available for issuance under the 2020 LTIP.

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

Prior to the approval of the 2020 LTIP, the Company granted awards of options under the Stock Option Plan and awards of 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 Year Ended December 31,	the Year Ended December 31,
	2020	2019	2018
Equity-settled awards	1,832	3,512	3,497
Cash-settled awards	519	364	164
	2,351	3,876	3,661

The following summarizes PSUs, DSUs and RSUs granted, exercised, forfeited and expired during the periods:

	PSU	DSU	RSU
	Number of	Number of	Number of
	units	units	units
Outstanding at December 31, 2018	85,728	25,861	-
Granted	251,744	106,736	-
Forfeited	(82,436 )	-	-
Expired	(31,984 )	-	-
Outstanding at December 31, 2019	223,052	132,597	-
Granted	-	251,470	2,619,609
Exercised	-	(20,403 )	-
Forfeited	(25,581 )	-	(5,543 )
Outstanding at December 31, 2020	197,471	363,664	2,614,066

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, calculated based on certain Adjusted EBITDA, total shareholder return, or revenue growth related to performance conditions.

The fair value of the liability and the expense attributable to the vesting period is charged to profit or loss at the grant date. Subsequently, at each reporting date between the grant date and settlement date, the fair value of the liability is remeasured with any changes in fair value recognized in profit or loss. As at December 31, 2020, outstanding PSUs had a fair value of $0.1 million which is included in other liabilities on the balance sheet (2019 – $0.2 million).

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 December 31, 2020 had a fair value of $0.9 million which is included in other liabilities on the balance sheet (2019 – $0.4 million).

Restricted share units

Of the RSUs granted, 2,419,609 RSUs have an aggregate time-based vesting period of three years and one third of the RSUs vest every year over a three-year period from the date of grant. At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The weighted average fair value of the RSUs granted was C$2.05 which was determined using the closing price of the Company’s common shares on their respective grant dates.

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

Options

In 2018, the Company allowed certain vested stock options to be surrendered for cash. On the date of modification, the fair value of the liability of options eligible for cash surrender of $1.2 million was reclassified on the balance sheet from shareholders’ equity to other liabilities and a $0.2 million was expensed to adjust the liability to the fair value at year-end, and an additional $0.5 million was charged back to additional paid-in capital as, for certain stock options, the cumulative expense calculated was lower than the grant date fair value of the original equity awards. During 2018, $1.8 million of stock options were surrendered for cash and at December 31, 2018 the Company had a liability of $1.8 million in other liabilities for the remaining stock options.

In 2019, $1.8 million was expensed to adjust the liability to fair value, and an additional $0.4 million was charged back to paidin capital as, for certain stock options, the cumulative expense calculated was lower that the grant date fair value of the original equity awards. During the year, $3.6 million of stock options were surrendered for cash. On October 9, 2019, following the listing of its common shares on Nasdaq, the Company ceased cash-settlement of stock options and the associated liability accounting for stock 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, 2018	6,858,376	5.88
Granted	1,382,311	7.45
Exercised	(21,045 )	4.81
Surrendered for cash	(1,544,151 )	5.02
Forfeited	(298,508 )	5.02
Expired	(220,331 )	6.01
Outstanding at December 31, 2019	6,156,652	6.49
Forfeited	(227,368 )	6.81
Expired	(1,154,956 )	6.29
Outstanding at December 31, 2020	4,774,328	6.52
Exercisable at December 31, 2020	2,065,938	6.34

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 December 31, 2020:

	Options outstanding	Options outstanding	Options outstanding	Options exercisable	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	3.89	4.12	7,513	3.89 4.12
C$5.01–C$6.00	669,236	0.89	5.76	669,236	0.89 5.76
C$6.01–C$7.00	3,299,993	2.79	6.38	1,126,772	2.93 6.34
C$7.01–C$8.00	782,562	3.37	7.84	262,417	3.37 7.84
Total	4,774,328			2,065,938

Range of exercise prices outstanding at December 31, 2019:

	Options outstanding	Options outstanding	Options outstanding	Options exercisable	Options exercisable

		Weighted	Weighted		Weighted Weighted
		average	average		average average
	Number	remaining	exercise	Number	remaining exercise
	outstanding	life	price C$	exercisable	life price C$
Range of exercise prices

C$4.01–C$5.00	22,537	4.89	4.12	-	- -
C$5.01–C$6.00	783,889	1.80	5.76	783,889	1.80 5.76
C$6.01–C$7.00	4,339,187	3.04	6.32	1,671,021	2.00 6.19
C$7.01–C$8.00	1,011,039	3.86	7.84	-	- -
Total	6,156,652			2,454,910

The stock options granted had a weighted average grant date fair value of C$2.40 in 2019 and C$2.13 in 2018, estimated using the Black-Scholes option-pricing model with the following assumptions for December 31, 2019 and 2018: a 3.5 year expected life for all periods, 1.6% risk-free interest rate (2018 – 2.2%); a 4.2% expected forfeitures rate (2018 – 3.8%); and 39.2% expected

volatility (2018 – 42.0%). These awards were accounted for using the fair value approach as they were accounted for as liabilities until October 9, 2019 when the Company ceased allowing cash surrenders of stock options. On October 9, 2019, the stock options had

a weighted average fair value of C$1.32 estimated using the Black-Scholes option pricing model with the following assumptions: a 2.9 year expected life, 1.4% risk-free interest rate; and 39.2% expected volatility.

Dilutive instruments

For the year-ended December 31, 2020, 4.8 million options (2019 – 0.5 million, 2018 – 6.3 million) and 2.7 million RSUs (2019 - nil) were excluded from the diluted weighted average number of common shares calculation as their effect would have been antidilutive to the net income (loss) per share.

Subsequent to December 31, 2020, we issued C$40.3 million ($31.6 million) of convertible debentures (see Note 13) which, if converted into common shares, would result in an additional 8.7 million common shares outstanding.

16. 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 18 for the disaggregation of revenue by geographic region.

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
Product	150,004	215,109	240,482
Transportation	15,491	23,903	24,552
License fees from Distribution Partners	1,194	1,647	1,400
Totalproduct revenue	166,689	240,659	266,434
Service revenue	4,818	7,076	8,247
	171,507	247,735	274,681

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

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
At apoint in time	165,495	239,012	265,034
Over time	6,012	8,723	9,647
	171,507	247,735	274,681

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

Contract Liabilities

	As at December 31,	As at December 31,	As at December 31,	As at December 31,
	2020		2019
Customer deposits		1,292		2,436
Deferred revenue		527		1,131
Contract liabilities		1,819		3,567

Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions. The balance of contract liabilities was lower as at December 31, 2020 compared to the prior year period mainly due to lower 2019 fourth quarter orders and revenues. Contract liabilities as at December 31, 2019 and 2018, respectively, totaling $3.6 million and $7.4 million were recognized as revenue during 2020 and 2019, respectively.

Sales by Industry

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

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
Commercial	102,245	158,256	163,199
Healthcare	35,400	44,197	60,748
Government	14,128	14,879	21,477
Education	13,722	21,680	19,610
License fees from Distribution Partners	1,194	1,647	1,400
Totalproduct revenue	166,689	240,659	266,434
Service revenue	4,818	7,076	8,247
	171,507	247,735	274,681

17. OPERATING EXPENSES

The Company changed its presentation of 2018 operating expenses to separate stock-based compensation from each function to provide financial statement readers with a better understanding of DIRTT’s operations. The following table provides a reconciliation from last year’s financial statement presentation to the current year’s presentation:

For theyear ended December 31, 2018	Previously stated	Adjustment	Currently stated
Sales and marketing	40,731	(104 )	40,627
General and administrative	30,861	(2,139 )	28,722
Operations support	8,960	(891 )	8,069
Technologyand development	4,703	(527 )	4,176
Stock-based compensation	—	3,661	3,661
Reorganization	7,380	—	7,380
Impairments	8,680	—	8,680
	101,315	—	101,315

18. SEGMENT REPORTING

The Company has one reportable and operating segment and operates in three principal geographic locations, Canada, the United States and International. Currently, the majority of revenue from international projects is included in the U.S. revenue amount as these projects are sold by U.S.-based Distribution Partners and are delivered to international locations. The Company’s revenue from operations from external customers, based on location of operations, and information about its non-current assets, is detailed below.

Revenue from external customers

	For the Year Ended December 31,	For the Year Ended December 31,	For the Year Ended December 31,
	2020	2019	2018
Canada	18,848	34,085	41,153
U.S.	152,659	213,650	232,035
International	-	-	1,493
	171,507	247,735	274,681

Non-current assets, excluding deferred tax assets

	As at December 31,	As at December 31,
	20201	20191
Canada	42,947	47,892
U.S.	55,352	29,286
	98,299	77,178

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

19. TRANSACTIONS AND BALANCES WITH RELATED PARTIES

One of the Company’s former Distribution Partners is owned by a former director of the Company. Effective June 26, 2018, this individual ceased to be a director of the Company. Up until June 26, 2018, the Company reported revenue of $2.9 million and rebates paid of $0.1 million from and to the Distribution Partner.

A former director of the Company provided advisory and consulting services to the Company of $0.3 million during the year ended December 31, 2018.

20. COMMITMENTS

As at December 31, 2020, the Company had outstanding purchase obligations of approximately $3.2 million related to inventory and property, plant and equipment purchases (December 31, 2019 – $6.8 million). Refer to Note 6 for lease commitments.

21. LEGAL PROCEEDINGS

We have instituted multiple U.S. federal and Canadian lawsuits against our former founders, Mogens Smed and Barrie Loberg, their new company, Falkbuilt Ltd. (“Falkbuilt”) and several other individuals, as described below. We believe that Smed and Loberg conspired to misappropriate DIRTT’s confidential and proprietary information and to compete with DIRTT both before and after their departures from DIRTT, have violated their fiduciary duties and non-competition and non-solicitation covenants contained in their DIRTT executive employment agreements, and encouraged other former DIRTT employees to similarly misappropriate DIRTT’s confidential and proprietary information. In addition, we believe that Falkbuilt, Smed and Loberg, and other individuals have violated numerous Canadian and U.S. state and federal laws pertaining to the protection of trade secrets and proprietary information, and the prevention of false advertising and deceptive trade practices in the subsequent establishment of Falkbuilt. We believe that certain of the Falkbuilt “Branches” have also participated in related unlawful activities.

On May 9, 2019, we filed a claim in the Court of Queen’s Bench of Alberta against Smed and Loberg and their new companies, Falkbuilt and 2179086 Alberta Ltd. (operating in its own right or as Echo), as well as several departed employees, for, among other things, breach of non-competition, non-solicitation and confidentiality obligations; breach of fiduciary duties; and copyright infringement. We are seeking, among other things, an order stopping the defendants from unlawfully competing with us, and payment of lost revenue and damages. Falkbuilt has filed a counterclaim against us and our CEO Kevin O’Meara alleging, among other things, breach of contractual obligations and defamation, and seeking damages. We believe that Falkbuilt’s lawsuit against us and our CEO is without merit and is part of an attempt to obfuscate the clear violations of contract and law by Smed, Loberg, and Falkbuilt.

On November 5, 2019, Falkbuilt filed a lawsuit against us in the Court of Queen’s Bench of Alberta, alleging that we have misappropriated and misused their alleged proprietary information in furtherance of our own product development. Falkbuilt seeks monetary relief and an interim, interlocutory and permanent injunction of our alleged use of the alleged proprietary information. We believe that the suit is without merit and was filed primarily in response to our initiation of litigation against Smed, Loberg, and Falkbuilt.

On December 11, 2019, we filed a claim in the U.S. District Court for the District of Utah against Falkbuilt and other individuals to restrain them from misappropriating our confidential information, trade secrets, business intelligence and customer information, and using that information to advance Falkbuilt's U.S. business to our detriment. We subsequently amended our claim to add Smed as an individual defendant, and to add claims that Falkbuilt and Smed have engaged in false advertising in violation of the United States Lanham Act, the Colorado Consumer Protection Act, and the Ohio Deceptive Trade Practices Act by misrepresenting the nature and character of Falkbuilt’s goods and service, by drawing false comparisons between DIRTT’s products and Falkbuilt’s products, by repeatedly and falsely representing an association or affiliation with DIRTT and co-opting DIRTT’s brand and reputation, and passing

off Falkbuilt as “the new DIRTT” and “DIRTT 2.0”. On February 5, 2020, Falkbuilt filed a counterclaim against us alleging defamation and intentional interference with economic relations.

On March 12, 2020, the U.S. District Court for the District of Utah issued an order granting DIRTT’s motion for a preliminary injunction to preserve the status quo, which preliminary injunction is binding on the U.S. defendants and all then-current and future Falkbuilt “Branches” in the United States. The preliminary injunction (i) enjoins the U.S. defendants and the Falkbuilt “Branches” from using, relying upon, disclosing, disseminating, deleting or disposing of any of DIRTT’s confidential or proprietary information in their possession, custody or control, and (ii) remains in effect until such time as it is modified or vacated by the court.

On August 6, 2020, we filed a federal patent infringement lawsuit in the U.S. District Court for the Northern District of Illinois against Falkbuilt on the basis that its "Echo Dome" app infringes certain of DIRTT’s patents relating to our proprietary ICE Software, which patents list Mr. Logerg as one of the inventors. We are seeking, among other things, an order enjoining Falkbuilt from infringing our patents and damages for past or continuing infringement.

No amounts are accrued for the above legal proceedings.

22. SUBSEQUENT EVENTS

Refer to Note 13. Subsequent to December 31, 2020 we issued C$40.3 million of convertible debentures. Additionally, we converted our revolving operating facility to an asset-based facility.

UNAUDITED SUPPLEMENTARY INFORMATION

Summary of Quarterly Results

	Q4 2020	Q3 2020	Q2 2020 Q1 2020	Q3 2019	Q2 2019 Q1 2019
			($ in thousands)
Revenue	42,192	46,179	42,155 40,981 53,198	65,385	64,091 65,061
Gross Profit	11,540	16,212	14,216 11,315 13,465	24,934	24,421 23,604
Gross Profit Margin	27.4 %	35.1 %	33.7 % 27.6 % 25.3 %	38.1 %	38.1 % 36.3 %
Adjusted Gross Profit Margin, as previously presented(2)(3)	32.0 %	39.3 %	38.2 % 33.1 % 29.2 %	41.8 %	42.1 % 39.6 %
Adjusted Gross Profit Margin(2)	32.0 %	39.3 %	38.2 % 38.0 % 33.4 %	41.8 %	42.1 % 39.6 %
Net income(loss)(1)	(4,178 )	(2,075 )	283 (5,328 ) (7,544 )	5,802	2,611 (5,265 )
Net income (loss) per share - basic and diluted(1)	(0.05 )	(0.02 )	0.00 (0.06 ) (0.09 )	0.07	0.03 (0.06 )
Adjusted EBITDA aspreviously presented(2)(3)	(4,305 )	365	(687 ) (3,164 ) (3,971 )	8,072	5,605 6,986
Other Foreign Exchange(Gains)Losses	1,450	485	960 (2,319 ) 562	(198 )	441 730
Adjusted EBITDA(2)	(2,855 )	850	273 (5,483 ) (3,409 )	7,874	6,046 7,716
Adjusted EBITDA Margin(2)	(6.8 )%	1.8 %	0.6 % (13.4 )% (6.4 )%	12.0 %	9.4 % 11.9 %
Adjusted EBITDA Margin as previously presented(2)(3)	(10.2 )%	0.8 %	(1.6 )% (7.7 )% (7.5 )%	12.3 %	8.7 % 10.7 %

(1) Q1 2019 net income includes the impact of a $6.4 million stock-based compensation charge and Q2 2019 includes a $1.7 million stock-based compensation recovery relating primarily to the impact of fair valuing cash settled stock options.

(2) See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.”

(3) Recalculated from prior periods to exclude the impact of foreign currency gains and losses; previously, only foreign currency impacts on debt revaluation were included in the calculation of Adjusted EBITDA.

AI assistant

DIRTT Environmental Solutions Ltd. — Annual Report 2021

47167_rns_2021-02-24_909ebc6f-04a7-4696-b261-532c1dc7b686.pdf

Report of Independent Registered Public Accounting Firm

Opinion on the Financial Statements

Change in Accounting Principle

Basis for Opinion

DIRTT Environmental Solutions Ltd.

Consolidated Balance Sheets

DIRTT Environmental Solutions Ltd.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Consolidated Statement of Comprehensive Income (Loss)

DIRTT Environmental Solutions Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

DIRTT Environmental Solutions Ltd.

Consolidated Statements of Cash Flows

DIRTT Environmental Solutions Ltd.

Notes to the Consolidated Financial Statements

1. GENERAL INFORMATION

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

Principles of consolidation

Basis of measurement

Use of estimates

Segments

Foreign currency translation

Cash and cash equivalents

Trade and other receivables, net of allowance for doubtful accounts

Prior Accounting Policy

Inventory

Leases

Prior Accounting Policy

Property, plant and equipment

Capitalized software costs

Impairment of long-lived assets

Goodwill

Convertible Debentures

Income taxes

Current tax

Deferred tax

Revenue recognition

Product sales

Contracts containing multiple performance obligations

Installation and other services

Principal vs Agent Considerations

Distribution Partner rebates

Contract balances

Warranties

Stock-based compensation

Technology and development expenditures

Government subsidies

Earnings per share (“EPS”)

Fair value of financial instruments

3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

4. COVID-19

Credit risk

Liquidity risk

Government subsidies

5. IMPAIRMENT

DIRTT Timber

Leasehold and other assets

6. LEASES

7. TRADE AND OTHER RECEIVABLES

8. INVENTORY

9. PROPERTY, PLANT AND EQUIPMENT, NET

10. CAPITALIZED SOFTWARE, NET

11. GOODWILL

12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER LIABILITIES

Other liabilities

13. LONG-TERM DEBT

Revolving Credit Facility

Leasing Facilities

Convertible Debentures

14. INCOME TAXES

Reconciliation of income taxes

Deferred tax assets and liabilities

Tax loss carryforwards and other tax pools

15. STOCK-BASED COMPENSATION

Stock-based compensation expense

Performance share units

DIRTT Environmental Solutions Ltd. Annual Report 2021