DIRTT Environmental Solutions Ltd. — Interim / Quarterly Report 2023

Aug 2, 2023

These financial statements for DIRTT Environmental Solutions Ltd. are also included in the Form 10-Q for the quarterly period ended June 30, 2023 filed on SEDAR+ on August 2, 2023 in its entirety.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DIRTT Environmental Solutions Ltd. Interim Condensed Consolidated Balance Sheets (Unaudited – Stated in thousands of U.S. dollars)

		As at December 31,
	As at June 30,
	2023	2022
ASSETS
Current Assets
Cash and cash equivalents	18,864	10,821
Restricted cash	2,980	3,418
Trade and accrued receivables, net of expected credit losses of	15,432	13,930
$0.1 million at June 30, 2023 and at December 31, 2022
Other receivables	697	7,880
Inventory	19,412	22,251
Prepaids and othercurrent assets	4,509	3,825
Total Current Assets	61,894	62,125
Property, plant and equipment, net	38,533	41,522
Capitalized software, net	1,886	4,406
Operating lease right-of-use assets, net	37,958	30,490
Otherassets	3,965	5,110
Total Assets	144,236	143,653
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities	19,148	19,881
Other liabilities	1,836	2,056
Customer deposits and deferred revenue	6,012	4,866
Current portion of long-term debt and accrued interest	3,013	3,306
Current portionof leaseliabilities	5,340	5,889
Total Current Liabilities	35,349	35,998
Long-term debt	61,176	62,129
Long-term leaseliabilities	35,928	27,534
Total Liabilities	132,453	125,661
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 104,444,936 issued	195,620	191,347
and outstanding at June 30, 2023 and 97,882,844 at December 31, 2022
Additional paid-in capital	7,575	9,023
Accumulated other comprehensive loss	(15,912 )	(16,106 )
Accumulated deficit	(175,500 )	(166,272 )
Total Shareholders’ Equity	11,783	17,992
Total Liabilities and Shareholders’ Equity	144,236	143,653

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

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DIRTT Environmental Solutions Ltd. Interim Condensed Consolidated Statement of Operations (Unaudited - Stated in thousands of U.S. dollars)

	For the Three Months Ended June 30, For the Six Months Ended June 30,
	2023 2022 2023 2022
Product revenue	43,534 43,091 79,010 80,542
Servicerevenue	1,219 1,610 2,451 2,445
Total revenue	44,753 44,701 81,461 82,987
Product cost of sales	29,484 37,185 56,907 71,792
Service cost ofsales	712 1,240 1,315 1,632
Total cost of sales	30,196 38,425 58,222 73,424
Gross profit	14,557 6,276 23,239 9,563
Expenses
Sales and marketing	6,626 7,777 12,141 15,005
General and administrative	5,501 6,877 11,334 14,870
Operations support	1,822 2,528 3,812 5,026
Technology and development	1,277 1,879 2,816 4,019
Stock-based compensation	678 1,326 1,474 2,628
Reorganization	1,465 5,163 2,536 8,855
Related party expense (recovery)	(532 ) - 1,524 -
Total operating expenses	16,837 25,550 35,637 50,403
Operating loss	(2,280 ) (19,274 ) (12,398 ) (40,840 )
Government subsidies	88 49 236 624
Gain on sale of software and patents	6,145 - 6,145 -
Foreign exchange (loss) gain	(620 ) 1,246 (881 ) 514
Interest income	106 20 110 31
Interest expense	(1,233 ) (1,329 ) (2,440 ) (2,659 )
	4,486 (14 ) 3,170 (1,490 )
Net income (loss) before tax	2,206 (19,288 ) (9,228 ) (42,330 )
Income taxes
Current and deferredincome taxexpense (recovery)	- - - -
	- - - -
Net income (loss)	2,206 (19,288 ) (9,228 ) (42,330 )
Net income (loss) per share
Net income (loss) per share - basic	0.02 (0.22 ) (0.09 ) (0.49 )
Net income (loss) per share - diluted	0.01 (0.22 ) (0.09 ) (0.49 )

Interim Condensed Consolidated Statement of Comprehensive Income (Loss)

	For the Three Months Ended June 30,	For the Three Months Ended June 30,	For the Six Months Ended	For the Six Months Ended
			June 30,
	2023	2022	2023	2022
Income (loss) for the period	2,206	(19,288 )	(9,228 )	(42,330 )
Exchange differences ontranslationof foreignoperations	(79 )	(594 )	194	(161 )
Comprehensive income (loss) for the period	2,127	(19,882 )	(9,034 )	(42,491 )

Total revenue for the six months ended June 30, 2023 includes $0.3 million earned from related parties all earned in the first quarter of 2023.

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

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DIRTT Environmental Solutions Ltd. Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited – Stated in thousands of U.S. dollars, except for share data)

				Accumulated
	Number of		Additional	other		Total
	Common	Common	paid-in	comprehensive	Accumulated	shareholders’
	shares	shares	capital	loss	deficit	equity
As at December 31, 2021	85,345,433	181,782	13,200	(15,916 )	(111,300 )	67,766
Stock-based compensation	-	-	1,339	-	-	1,339
Issued on vesting of RSUs and Share Awards	487,544	1,203	(1,203 )	-	-	-
RSUs and Share Awards withheld to settle	-	-	(189 )	-	(9 )	(198 )
employee tax obligations
Foreign currency translation adjustment	-	-	-	433	-	433
Net loss for theperiod	-	-	-	-	(23,042 )	(23,042 )
As at March 31, 2022	85,832,977	182,985	13,147	(15,483 )	(134,351 )	46,298
Stock-based compensation	-	-	1,286	-	-	1,286
Issued on vesting of RSUs and Share Awards	1,155,851	3,268	(3,268 )	-	-	-
RSUs and Share Awards withheld to settle	-	-	(536 )	-	-	(536 )
employee tax obligations
Foreign currency translation adjustment	-	-	-	(594 )	-	(594 )
Net loss for theperiod	-	-	-	-	(19,288 )	(19,288 )
As atJune 30, 2022	86,988,828	186,253	10,629	(16,077 )	(153,639 )	27,166
As at December 31, 2022	97,882,844	191,347	9,023	(16,106 )	(166,272 )	17,992
Stock-based compensation	-	-	452	-	-	452
Issued on vesting of RSUs and Share Awards	659,473	1,256	(1,256 )	-	-	-
RSUs withheld to settle employee tax obligations	-	-	(26 )	-	-	(26 )
Issued for employee share purchase plan	322,408	128	-	-	-	128
Foreign currency translation adjustment	-	-	-	273	-	273
Net loss for theperiod	-	-	-	-	(11,434 )	(11,434 )
As at March 31, 2023	98,864,725	192,731	8,193	(15,833 )	(177,706 )	7,385
Stock-based compensation	-	-	625	-	-	625
Issued on vesting of RSUs and Share Awards	1,108,213	1,243	(1,243 )	-	-	-
Issued for employee share purchase plan	572,253	122	-	-	-	122
Issued to settle related party debt	3,899,745	1,524	-	-	-	1,524
Foreign currency translation adjustment	-	-	-	(79 )	-	(79 )
Net income for theperiod	-	-	-	-	2,206	2,206
As at June 30, 2023	104,444,936	195,620	7,575	(15,912 )	(175,500 )	11,783

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

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DIRTT Environmental Solutions Ltd. Interim Condensed Consolidated Statement of Cash Flows (Unaudited – Stated in thousands of U.S. dollars)

	For the Three Months Ended	For the Three Months Ended	For the Six Months Ended	For the Six Months Ended
	June 30,		June 30,
	2023	2022	2023	2022
Cash flows from operating activities:
Net income (loss) for the period	2,206	(19,288 )	(9,228 )	(42,330 )
Adjustments:
Depreciation and amortization	2,524	3,344	5,199	7,966
Stock-based compensation, net of settlements	678	406	1,474	1,708
Foreign exchange gain (loss)	794	(1,433 )	1,140	(782 )
Gain on sale of software and patents	(6,145 )	-	(6,145 )	-
Gain on disposal of equipment	-	(165 )	-	(165 )
Accretion of convertible debentures	179	177	343	342
Changes in operating assets and liabilities:
Trade and accrued receivables	(3,620 )	(210 )	(1,509 )	(4,994 )
Other receivables	2,460	3,034	7,192	2,852
Inventory	1,854	(3,661 )	3,153	(7,104 )
Prepaid and other assets, current and long term	(909 )	(1,059 )	(518 )	(1,167 )
Accounts payable and accrued liabilities	3,851	713	552	3,173
Other liabilities	(2,265 )	(39 )	(209 )	(39 )
Customer deposits and deferred revenue	1,985	387	965	3,719
Current portion of long-term debt and accrued interest	41	(86 )	(15 )	(142 )
Lease liabilities	123	80	374	121
Net cash flows provided by (used in) operating activities	3,756	(17,800 )	2,768	(36,842 )
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts payable changes	(678 )	(924 )	(1,049 )	(1,887 )
Capitalized software development expenditures	(573 )	(418 )	(1,105 )	(901 )
Other asset expenditures	(39 )	(107 )	(145 )	(281 )
Recovery of software development expenditures	56	45	82	45
Proceeds on sale of software and patents	9,964	-	9,964	-
Proceeds on sale of equipment	-	73	-	73
Net cash flows provided by (used in) investing activities	8,730	(1,331 )	7,747	(2,951 )
Cash flows from financing activities:
Proceeds received on long-term debt	-	647	-	647
Repayment of long-term debt	(2,193 )	(618 )	(2,835 )	(1,236 )
Employee taxpayments on vestingof RSUs	-	(92 )	(26 )	(301 )
Net cash flows used in financing activities	(2,193 )	(63 )	(2,861 )	(890 )
Effect of foreign exchange on cash, cash equivalents and restricted cash	(13 )	54	(49 )	220
Net increase (decrease) in cash, cash equivalents and restricted cash	10,280	(19,140 )	7,605	(40,463 )
Cash,cash equivalents and restricted cash,beginningofperiod	11,564	42,085	14,239	63,408
Cash, cash equivalents and restricted cash, end of period	21,844	22,945	21,844	22,945
Supplemental disclosure of cash flow information:
Interest paid	(967 )	(1,179 )	(2,039 )	(2,331 )
Income taxes received	15	3,182	10	3,207

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

	As at June 30,	As at June 30,
	2023	2022
Cash and cash equivalents	18,864	19,739
Restricted cash	2,980	3,206
Total cash, cash equivalents and restricted cash	21,844	22,945

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

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DIRTT Environmental Solutions Ltd.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements (Amounts in thousands of U.S. dollars unless otherwise stated)

1. GENERAL INFORMATION

DIRTT Environmental Solutions Ltd. and its subsidiary (“DIRTT”, the “Company”, “we” or “our”) is a leader in industrialized construction. DIRTT's system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes.

DIRTT’s proprietary design integration software, ICE® (“ICE” or “ICE software”), translates the vision of architects and designers into a 3D model that also acts as manufacturing information. ICE is also licensed to unrelated companies and Construction Partners of the Company. As of May 9, 2023, Armstrong World Industries, Inc. ("AWI") owns a 50% interest in the rights, title and interests in all the intellectual property rights in a portion of the ICE Software that is used by AWI.

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 Capital Market (“Nasdaq”) under the symbol “DRTT”. On March 9, 2023, DIRTT's common shares were transferred from The Nasdaq Global Select Market to The Nasdaq Capital Market, under the same symbol.

2. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, the Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company, the Financial Statements contain all adjustments necessary, consisting of only normal recurring adjustments, for a fair statement of its financial position as of June 30, 2023, and its results of operations and cash flows for the three and six months ended June 30, 2023 and 2022. The condensed balance sheet at December 31, 2022, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. These Financial Statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2022 and 2021 and for each of the three years in the period ended December 31, 2022 included in the Annual Report on Form 10-K of the Company as filed with the SEC and applicable securities commission or similar regulatory authorities in Canada. As described in Note 3, no new accounting standards were adopted by the Company during the quarter.

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 Environmental Solutions Ltd. and its subsidiary. All intercompany balances, income and expenses, unrealized gains and losses and dividends resulting from intercompany transactions have been eliminated on consolidation.

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Basis of measurement

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

Seasonality

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

3. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

The Company has not adopted any new accounting standards effective January 1, 2023. Although there are several 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. LIQUIDITY

As at June 30, 2023, the Company had $18.9 million of cash on hand and C$12.3 million ($9.2 million) of available borrowings (December 31, 2022 - $10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the first six months of fiscal year 2023, the Company generated $2.8 million in cash flows provided from operations, compared to a cash usage of $36.8 million over the first six months of fiscal year 2022. The Company benefited from the receipt of $7.3 million of government subsidies during the first six months of 2023 (refer to Note 5).

We have implemented multiple price increases to mitigate the impact of inflation on raw materials. These actions have resulted in a meaningful improvement in our gross profit margins and higher net profit and have served to stabilize our cash usage to operate the business. Gross profit for the six months ended June 30, 2023, was $23.2 million, or 28.5%. This represents a meaningful improvement from the same period of 2022, which only generated gross profit of $9.6 million, or 11.5%, despite having 2% lower revenue during the first six months of 2023.

Over the past three quarters, we have executed upon several initiatives. First, in May 2023, we entered into an agreement with AWI (refer to Note 7) resulting in the receipt of $10.9 million of cash. Second, during March 2023, we entered into an agreement to sublease our Dallas DIRTT Experience Center (“DXC”) to one of our Construction Partners in that region. Under the sublease agreement, the subtenant has assumed responsibility for the monthly rent, utilities, maintenance, taxes and other costs as of April 1, 2023, through December 31, 2024, which will provide us annualized savings of approximately $1 million. We are continuing to evaluate other properties and expect these strategic initiatives to result in positive cash inflows in 2023 and 2024. Third, we completed a Private Placement (as defined herein) of common shares in November 2022, with certain significant shareholders and directors and officers of the Company to bridge cash requirements before the completion and closing of the noted strategic transactions.

While we are encouraged by our improved profitability and cash flow, we have continued to evaluate our fixed cost structure and overhead in light of recent macroeconomic uncertainty. Over the past year, we have implemented multiple restructuring initiatives (refer to Note 6) designed to align our cost structure with current expected levels of demand. In addition, the Company has reduced headcount by 147 employees, or approximately 15% from January 2022 through June 2023. The reduced overhead has served to offset the impact from the macroeconomic headwinds experienced over the past year.

Finally, we have assessed the Company’s liquidity position as at June 30, 2023 taking into account our sales outlook for the next year, our existing cash balances and available credit facilities. Based on this analysis we believe the Company has sufficient liquidity to support ongoing operations for the next twelve months.

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5. COVID-19

The impact of the COVID-19 pandemic on our future consolidated results of operations remains uncertain. The extent to which COVID-19 impacts our employees, operations, customers, suppliers and financial results depends on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic (and whether there is a resurgence or multiple resurgences in the future, including the impact of new variants); government actions taken in response to the pandemic, including required shutdowns or vaccine or testing mandates; the availability, acceptance, distribution and continued effectiveness of vaccines; the short-term and longterm impact on construction activity, including the effect on our customers’ demand for our interior construction systems; supply chain disruptions; rising inflation; labor shortages; sustained remote or hybrid work models; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. While many of our products support life-sustaining activities and essential construction, we and certain of our customers or suppliers may be impacted by national, federal, state and provincial actions, orders and policies regarding the COVID-19 pandemic, including: temporary closures of non-life-sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement of which vary in each of the jurisdictions in which we operate. We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the three months ended June 30, 2023 or the years ended December 31, 2021 and December 31, 2022, but future events may require such charges which could have a material adverse effect on our financial condition, liquidity or results of operations.

Government subsidies

In the United States, the Employee Retention Credit (“ERC”) was established by Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act to provide an incentive for employers to keep their employees on their payroll during COVID-19 closures. The ERC is a refundable payroll tax credit based on qualified wages paid by an eligible employer between March 12, 2020, and October 1, 2021 for companies experiencing a significant decline in gross receipts during a calendar quarter or having operations fully or partially suspended during the quarter due to COVID-19. During the third quarter of 2022, the Company determined it was eligible for the ERC for the first three quarters of 2021 and filed a claim for $7.3 million in payroll tax credits ($7.1 million net of expenses). As of June 30, 2023, all of the claimed $7.3 million of these credits (plus an additional $0.2 million of interest) have been received.

6. REORGANIZATION

During the year ended December 31, 2022, and continuing into 2023, the Company undertook a number of reorganization initiatives:

Closure of Phoenix Aluminum Manufacturing Facility (the “Phoenix Facility”)

On February 22, 2022, we commenced the process of closing our Phoenix Facility, shifting related manufacturing to both our Savannah and Calgary aluminum manufacturing facilities. During the first quarter of 2022, the Company incurred $1.0 million of accelerated depreciation, recorded in cost of sales, associated with the closure of the Phoenix Facility. The closure of the Phoenix Facility was substantially completed in the second quarter of 2022. The Company entered into a sublease arrangement for part of the Phoenix Facility during the second quarter of 2022, commencing July 1, 2022, which exceeds the contractual lease commitments under the Right of Use assets.

Workforce Reductions, Board and Management Changes

In February and July of 2022, we announced our intention to eliminate a portion of our salaried workforce including manufacturing and office positions along with other cost reduction initiatives. The Company’s Board of Directors was reconstituted following a contested proxy contest in April 2022 which was deemed a change of control under the Company’s insurance policy resulting in additional insurance expenditures. Further, the Company made changes to several executive officer roles during the year ended December 31, 2022. During the six months ended June 30, 2023, we continued to review costs and, in May 2023, eliminated additional salaried positions. These actions resulted in the Company incurring certain termination costs.

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Temporary Suspension of Operations at Rock Hill, South Carolina (the “Rock Hill Facility”)

On August 23, 2022, we announced the temporary suspension of operations at our Rock Hill Facility, shifting related manufacturing to our Calgary manufacturing facility. Costs associated with this idle facility, included in cost of sales, were $0.4 million and $0.9 million for the three month and six month period ended June 30, 2023, respectively.

For the three and six months ended June 30, 2023, reorganization costs incurred continue to relate to the above mentioned initiatives:

	For the Three Months Ended June 30,	For the Three Months Ended June 30,	For the Six Months Ended June 30,	For the Six Months Ended June 30,
	2023	2022		2023 2022
Termination benefits	1,272	896		1,970 3,957
Insurance costs on change of control	-	3,691		- 3,691
Phoenix Facility closure	29	533		72 659
Other costs	164	43		494 548
Total reorganization costs	1,465	5,163		2,536 8,855
Reorganization costs in accounts payable and accrued liabilities at January		1, 2022		-
Reorganization expense				13,461
Reorganization costspaid				(11,184 )
Reorganization costs in accounts payable and accrued liabilities at December 31, 2022				2,277
Reorganization expense				2,536
Reorganization costspaid				(2,826 )
Reorganization costs in accounts payable and accrued liabilities at June 30, 2023				1,987

The $2.0 million payable relates to termination benefits.

7. GAIN ON SALE OF SOFTWARE AND PATENTS

On May 9, 2023, we entered into a Co-Ownership Agreement (the “Co-Ownership Agreement”) and Partial Patent Assignment Agreement with AWI. The agreements provide for a cash payment from AWI to the Company of $10.0 million, subject to certain routine closing conditions, in exchange for the partial assignment to AWI and resulting co-ownership of a 50% interest in the rights, title and interests in certain intellectual property rights in a portion of the ICE software that is used by AWI (the “Applicable ICE Code”), including a 50% interest in the patent rights that relate to the Applicable ICE Code. Under the Co-Ownership Agreement, we also agreed to provide AWI a transfer of knowledge concerning the source code of the Applicable ICE Code. In exchange for completing the knowledge transfer, we will receive an additional cash payment of $1.0 million, which is expected to be received by early 2024. The Co-Ownership Agreement provides that we and AWI have separate exclusive fields of use and restrictive covenants with respect to the Applicable ICE Code and related intellectual property, which survive until either party elects to separate from its relationship with the other and for five years thereafter. We concurrently entered into an Amended and Restated Master Services Agreement (the “ARMSA”) with AWI, under which AWI has also prepaid certain development services to be provided by DIRTT. The ARMSA will automatically terminate if the CoOwnership Agreement is terminated or expires, and may also be terminated if either party breaches the exclusive fields of use or restrictive covenants in the Co-Ownership Agreement.

The $10.0 million of proceeds on the sale of the 50% interest in the Applicable ICE code, pursuant to the CoOwnership Agreement, was received during the quarter ended June 30, 2023. In accordance with US GAAP, the proceeds were first applied to the net book value of the related cost of software of $2.9 million and patents (other assets) of $0.9 million and the residual amount of $6.1 million was recognized as a gain in the profit and loss. Further, $0.9 million was received during the quarter as prepayment under the ARMSA which will be recognized into revenue as the performance obligation is met. Part of the proceeds of this transaction were used to settle one of our equipment leases of $1.6 million and resulted in the release of $0.4 million of restricted cash (refer to Note 10).

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8. TRADE AND ACCRUED RECEIVABLES

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

In order to manage and assess our risk, management maintains credit policies that include regular review of credit limits of individual receivables and systematic monitoring of aging of trade receivables and the financial wellbeing of our customers. In addition, we acquired trade credit insurance effective April 1, 2020. At June 30, 2023, approximately 77% 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.

Our trade balances are spread over a broad Construction Partner base, which is geographically dispersed. For the six months ended June 30, 2023 no Construction Partners individually accounted for greater than 10% of revenue. For the three months ended June 30, 2023, one Construction Partner accounted for greater than 10% of revenue (none for the three or six months ended June 30, 2022). In addition, and where possible, we collect a 50% deposit on sales, excluding government and certain other clients.

The Company’s aged receivables were as follows :

The Company’s aged receivables were as follows:
	As at
	June 30,	December 31,
	2023	2022
Current	14,115	12,381
Overdue	1,444	1,675
	15,559	14,056
Less: expected creditlosses	(127 )	(126 )
	15,432	13,930

No adjustment to our expected credit losses of $0.1 million was required for the three or six months ended June 30, 2023. 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.

9. OTHER LIABILITIES

	As at,	As at,
	June 30, 2023	December 31, 2022
Warranty provisions(1)	1,085	1,278
DSU liability	567	594
Sublease deposits	184	139
Otherprovisions	-	45
Other liabilities	1,836	2,056

(1) The following table presents a reconciliation of the warranty balance:

	June 30, 2023	December 31, 2022
As at January 1	1,278	1,451
Additions to warranty provision	493	1,134
Payments related to warranties	(493 )	(1,307 )
Adjustments to warranty provision	(193 )	-
	1,085	1,278

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10. LONG-TERM DEBT

	Revolving Credit Facility	Leasing	Convertible
		Facilities	Debentures	Total Debt
Balance on January 1, 2022	-	13,909	56,733	70,642
Issuances	-	647	-	647
Accretion of issue costs	-	-	676	676
Accrued interest	-	735	3,539	4,274
Interest payments	-	(735 )	(3,688 )	(4,423 )
Principal repayments	-	(2,470 )	-	(2,470 )
Exchange differences	-	(274 )	(3,637 )	(3,911 )
Balance at December 31, 2022	-	11,812	53,623	65,435
Current portion of long-term debt and accrued interest	-	2,561	745	3,306
Long-term debt	-	9,251	52,878	62,129
Balance on December 31, 2022	-	11,812	53,623	65,435
Accretion of issue costs	-	-	343	343
Accrued interest	-	316	1,708	2,024
Interest payments	-	(316 )	(1,723 )	(2,039 )
Principal repayments	-	(2,835 )	-	(2,835 )
Exchange differences	-	9	1,252	1,261
Balance at June 30, 2023	-	8,986	55,203	64,189
Current portion of long-term debt and accrued interest	-	2,252	761	3,013
Long-term debt	-	6,734	54,442	61,176

Revolving Credit Facility

On February 12, 2021, the Company entered into a loan agreement governing a C$25.0 million senior secured revolving credit facility with the Royal Bank of Canada (“RBC”), as lender (the “RBC Facility”). Under the 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 (i) 75% of the book value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory less any reserves for potential prior ranking claims (the “Borrowing Base”). 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 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 fixed charge coverage ratio (“FCCR”) covenant of 1.10:1 on a trailing twelve-month basis. Additionally, if the FCCR has been below 1.10:1 for the three immediately preceding months, the Company is required to maintain a reserve account equal to the aggregate of one year of payments on outstanding loans on the Leasing Facilities (defined below). Should an event of default occur or the Aggregate Excess Availability be less than C$6.25 million for five consecutive business days, the Company would enter a cash dominion period whereby the Company’s bank accounts would be blocked by RBC and daily balances will offset any borrowings and any remaining amounts made available to the Company.

On February 9, 2023, the Company extended the RBC Facility (the “Extended RBC Facility”). The Extended RBC Facility has a borrowing base of C$15 million and a one year term. Interest is calculated as at the Canadian or U.S. prime rate plus 75 basis points or the Canadian Dollar Offered Rate or Term Secured Overnight Financing Rate ("SOFR") plus 200 basis points plus the Term SOFR Adjustment (as defined in the amended loan agreement governing the Extended RBC Facility). Under the Extended RBC Facility, if the trailing twelve month FCCR is above 1.25 for three consecutive months, a cash balance equivalent to one-year's worth of Leasing Facilities payments must be maintained. At June 30, 2023, available borrowings are C$12.3 million ($9.2 million), calculated in the same manner as the RBC facility described above, of which no amounts have been drawn. The Company did not meet the threemonth FCCR requirement during the second quarter of 2023 which resulted in requiring the restriction of $3.0 million of cash.

Leasing Facilities

The Company has a C$5.0 million equipment leasing facility in Canada (the “Canada Leasing Facility”) of which C$4.4 million ($3.3 million) has been drawn and C$3.7 million ($2.8 million) has been repaid, and a $14.0 million equipment leasing facility in the United States (the “U.S. Leasing Facility” and, together with the Canada Leasing Facility, the “Leasing Facilities”) of which $13.3 million has been drawn and $4.8 million has been repaid,

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each with RBC, and one of its affiliates, which are available for equipment expenditures and certain equipment expenditures already incurred. The Canadian Leasing Facility and the U.S. Leasing Facility, respectively, have seven and five-year terms and bear interest at 4.25% and 5.59%. The U.S. Leasing Facility is amortized over a six-year term and extendible at the Company’s option for an additional year.

The Company did not make any draws on the Leasing Facilities during the three and six months ended June 30, 2023. During the three and six months ended June 30, 2022, the Company received C$0.9 million ($0.7 million) under the Canada Leasing Facility. The associated financial liabilities are shown on the consolidated balance sheet in current portion of long-term debt and accrued interest and long-term debt.

As part of RBC's consent to the AWI transaction (refer to Note 7), one of the Canadian lease agreements of $1.6 million was fully settled using AWI proceeds. This resulted in the release of $0.4 million of restricted cash associated with the one year of payments on this lease, as described above.

Convertible Debentures

On January 25, 2021, the Company completed a C$35.0 million ($27.5 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “January Debentures”). On January 29, 2021, the Company issued a further C$5.25 million ($4.1 million) of the January Debentures under the terms of an overallotment option granted to the underwriters. The January Debentures will mature and be repayable on January 31, 2026 (the “January Debentures 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 January Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The January 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 January Debentures Maturity Date and the date specified by the Company for redemption of the January 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 the January Debentures. Costs of the transaction were approximately C$2.7 million, including the underwriters’ commission.

On December 1, 2021, the Company completed a C$35.0 million ($27.4 million) bought-deal financing of convertible unsecured subordinated debentures with a syndicate of underwriters (the “December Debentures” and, together with the January Debentures, the “Debentures”). These December Debentures will mature and be repayable on December 31, 2026 (the “December Debentures Maturity Date”) and will accrue interest at the rate of 6.25% per annum payable semi-annually in arrears on the last day of June and December of each year commencing on June 30, 2022 until the December Debentures Maturity Date. Interest and principal are payable in cash or shares at the option of the Company. The December 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 December Debentures Maturity Date and the date specified by the Company for redemption of the December Debentures at a conversion price of C$4.20 per common share, being a ratio of approximately 238.0952 common shares per C$1,000 principal amount of the December Debentures. Costs of the transaction were approximately C$2.3 million, including the underwriters’ commission.

11. STOCK-BASED COMPENSATION

In May 2020, shareholders approved the DIRTT Environmental Solutions Long Term Incentive Plan (the “2020 LTIP”). The 2020 LTIP replaced the predecessor incentive plans, being the Performance Share Unit Plan (“PSU Plan”) and the Amended and Restated Stock Option Plan (“Stock Option 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.

In May 2023, shareholders approved the DIRTT Environmental Solutions Ltd. Amended and Restated LongTerm Incentive Plan (the “2023 LTIP”) at the annual and special meeting of shareholders. The 2023 LTIP gives the Company the ability to award options, share appreciation rights, restricted share units, deferred share units, restricted shares, dividend equivalent rights, 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 2023 LTIP, the sum of (i) 12,350,000 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 30, 2023, expire or are cancelled or terminated without having been exercised in full have been reserved for issuance

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under the 2023 LTIP. Upon vesting of certain LTIP awards, the Company may withhold and sell shares as a means of meeting DIRTT’s tax withholding requirements in respect of the withholding tax remittances required in respect of award holders. To the extent the fair value of the withheld shares upon vesting exceeds the grant date fair value of the instrument, the excess amount is credited to retained earnings or deficit.

Deferred share units (“DSUs”) have historically been granted to non-employee directors under the Deferred Share Unit Plan for Non-Employee Directors (as amended and restated, the “DSU Plan”) and settleable only in cash. The 2023 LTIP gives the Company the ability to settle DSUs in either cash or common shares, while consolidating future share-based awards under a single plan. The terms of the DSU Plan are otherwise materially unchanged as incorporated into the 2023 LTIP. Effective May 30, 2023, no new awards will be made under the DSU Plan, but awards previously granted under the DSU Plan will continue to be governed by the DSU Plan. DSUs are settled following cessation of services with the Company.

Stock-based compensation expense

	For the Three Months Ended June 30,	For the Three Months Ended June 30,	For the Six Months Ended June 30,	For the Six Months Ended June 30,
	2023	2022	2023	2022
Equity-settled awards	868	1,286	1,512	2,625
Cash-settled awards	(190 )	40	(38 )	3
	678	1,326	1,474	2,628

The following summarizes RSUs, Share Awards, PSUs, and DSUs activity during the periods:

	RSU Time-	RSU Performance-	Share
	Based	Based	Awards	PSU	DSU
	Number of	Number of	Number of	Number of	Number of
	units	units	units	units	units
Outstanding at December 31, 2021	3,216,536	1,021,739	-	157,200	361,577
Granted	2,140,605	863,279	162,682	-	386,083
Vested	(1,245,386 )	(303,568 )	(94,528 )	-	(468,654 )
Withheld to settle employee tax obligations	(526,259 )	(242,460 )	(68,154 )	-	-
Forfeited	(685,229 )	(502,628 )	-	(157,200 )	-
Outstanding at June 30, 2022	2,900,267	836,362	-	-	279,006
Outstanding at December 31, 2022	1,885,337	343,919	-	-	1,165,319
Granted	3,362,000	-	522,883	2,584,161	1,149,673
Vested or settled	(986,043 )	(258,760 )	(522,883 )	-	(220,590 )
Withheld to settle employee tax obligations	(64,230 )	-	-	-	-
Forfeited	(79,407 )	-	-	-	-
Expired	(1,059 )	-	-	-	-
Outstanding at June 30, 2023	4,116,598	85,159	-	2,584,161	2,094,402

Restricted share units (time-based vesting)

Restricted share units that vest based on time have an aggregate time-based vesting period of three years and generally one-third of the RSUs vest every year over a three-year period from the date of grant (“RSUs”). At the end of a three-year term, the RSUs will be settled by way of the provision of cash or shares to employees (or a combination thereof), at the discretion of the Company. The weighted average fair value of the RSUs granted in 2022 and 2023 was C$2.37 and C$0.46 ($0.36), respectively, which was determined using the closing price of the Company’s common shares on their respective grant dates.

Restricted share units (performance-based vesting)

During 2022 and 2021, restricted share units were granted to executives with service and performance-based conditions for vesting (the “PRSUs”). If the Company’s share price increases to certain values for 20 consecutive trading days, as outlined below, a percentage of the PRSUs will vest at the end of the three-year service period.

The grant date fair value of the 2022 and 2021 PRSUs were valued using the Monte Carlo valuation method and determined to have a weighted average grant date fair value of C$1.87 and C$3.27, respectively.

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Based on share price performance since the date of grant, none of the 2022 PRSUs and 66.7% of the 2021 PRSUs will vest upon completion of the three-year service period.

					% of	% of	PRSUs Vesting	PRSUs Vesting
					33.3 %		66.7 %		100.0 %		150.0 %
2022	and	2021	PRSUs	$	3.00	$	4.00	$	5.00	$	7.00

Share awards

During the first quarter of 2022, certain executives were issued share awards in lieu of cash paid variable incentive compensation (“Share Awards”). These Share Awards vested upon grant. The fair value of the Share Awards granted was C$2.40 ($1.88), which was determined using the closing price of the Company’s common shares on the grant date.

In the first quarter of 2023, 36,254 Share Awards were issued to a consultant as compensation for services rendered. During the quarter ended June 30, 2023, certain executives were issued Share Awards in lieu of cash paid variable incentive compensation. These Share Awards vested upon grant. The fair value of the Share Awards granted was C$0.49 ($0.34), which was determined using the closing price of the Company’s common shares on the grant date.

Performance share units

During the quarter ended June 30, 2023, certain executives were issued a strategic equity grant through Performance share units (“PSUs”). The performance period of the PSUs is from January 1, 2023 to December 31, 2026 with a cliff vesting term for December 31, 2026. 2,584,161 PSUs were granted and depending on the level of performance, the PSUs will vest 100%, 160% or 190% up to a maximum of 4,909,907 PSUs. Settlement will be made in the form of shares issued from treasury. The performance measures are a combination of Revenue and Earnings Before Interest, Taxes, Depreciation and Amortization and both targets have to be achieved. As of June 30, 2023, the fair value of these PSUs have been deemed to be nil based on the likelihood of achieving the targets compared to current results.

Deferred share units

Granted under the DSU Plan

The fair value of the DSU 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 period. DSUs outstanding at June 30, 2023 had a fair value of $0.4 million which is included in other liabilities on the balance sheet (December 31, 2022 – $0.6 million).

Granted under the 2023 LITP

DSUs granted after May 30, 2023 (the "New DSUs") will be settled by way of the provision of cash or shares (or a combination thereof) to the Directors, at the discretion of the Company. The Company intends to settle these DSUs through issuances of common shares. The weighted average fair value of the DSUs granted in 2023 was $0.27, which was determined using the closing price of the Company’s common shares on the grant date. New DSUs outstanding at June 30, 2023 had a fair value of $0.2 million which is included in other liabilities on the balance sheet (December 31, 2022 – $nil).

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Options

The following summarizes options forfeited during the periods:

	Number of	Weighted average
	options	exercise price C$
Outstanding at December 31, 2021	4,064,489	6.64
Forfeited	(2,520,220 )	6.40
Outstanding at June 30, 2022	1,544,269	6.82
Outstanding at December 31, 2022	1,480,069	7.03
Forfeited	(906,638 )	6.98
Outstanding and Exercisable at June 30, 2023	573,431	7.02

No options were granted during the three months and six months ended June 30, 2023.

Range of exercise prices outstanding and exercisable at June 30, 2023:

	Options outstanding	Options exercisable
	Weighted Weighted	Weighted Weighted
	Number of average average	average average
	options remaining exercise	Number remaining exercise
Range of exercise prices	life price C$	exercisable life price C$
C$6.01 – C$7.00	333,375 0.29 $ 6.44	333,375 0.29 $ 6.44
C$7.01 –C$7.84	240,056 0.88 $ 7.84	240,056 0.88 $ 7.84
Total	573,431	573,431

Dilutive Instruments

For the three months ended June 30, 2023, 2.2 million RSUs and PRSUs (2022 - 3.7 million), 0.7 million New DSUs (2022 - nil), 2.6 million PSUs (2022 - nil), 1.3 million shares relating to equity-settled Variable Pay Plan (“VPP”) (2022 - nil), and 221.3 million (2022 – 53.8 million) shares would be issued if the principal amount of the Debentures were settled in our common shares at the quarter end price and were included in the diluted EPS calculation. See Note 12 for the dilutive impact on net income per share.

For the six months ended June 30, 2023, 0.6 million options (2022 – 1.5 million), 4.2 million RSUs and PRSUs (2022 – 3.7 million), 0.7 million New DSUs (2022 - nil), 2.6 million PSUs (2022 - nil), 1.3 million shares relating to equity-settled VPP (2022 - nil), and 221.3 million shares which would be issued if the principal amount of the Debentures were settled in our common shares at the quarter end share price (2022 – 53.8 million) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive to the net loss per share.

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12. EARNINGS PER SHARE

	For	the Three Months Ended June 30,	the Three Months Ended June 30,	the Three Months Ended June 30,	For	the Six Months Ended June 30,	the Six Months Ended June 30,	the Six Months Ended June 30,
		2023	2022			2023		2022
Net income (loss) per share - basic
Net income (loss)(thousands of U.S. dollars)	$	2,206	$ (19,288 )		$	(9,228 )	$	(42,330 )
Weighted average number of shares
outstanding(thousands of shares)		100,502	86,023			99,303		85,739
Net income (loss) per share(dollars)	$	0.02	$	(0.22 )	$	(0.09 )	$	(0.49 )
Net income (loss) per share - diluted
Net income (loss)(thousands of U.S. dollars)	$	2,206	$ (19,288 )		$	(9,228 )	$	(42,330 )
Interest onConvertible debentures	$	857		NA		NA		NA
	$	3,063	$ (19,288 )		$	(9,228 )	$	(42,330 )
Weighted average number of shares
outstanding(thousands of shares)		100,502	86,023			99,303		85,739
Dilutive debentures on convertible debt
(thousands of shares) (1)		221,324		-		-		-
Dilutive RSUs and PRSUs(thousands of shares) (2)		2,201		-		-		-
Dilutive New DSUs(thousands of shares) (3)		669		-		-		-
Dilutive PSUs(thousands of shares) (3)		2,584		-		-		-
Dilutive VPP(thousands of shares) (3)		1,296		-		-		-
Weighted average number of shares
outstanding, assuming dilution (thousands of
shares)		328,576	86,023			99,303		85,739
Net income (loss) per share(dollars)	$	0.01	$	(0.22 )	$	(0.09 )	$	(0.49 )

(1) For the three and six months ended June 30, 2022, the Net income (loss) per share - diluted excludes the effect of 53.8 million shares related to the Debentures. For the six months ended June 30, 2023, the Net income (loss) per share - diluted excludes the effect of 221.3 million shares related to the Debentures. These would be issued if the principal amount of the Debentures were settled in our common shares at the quarter end price and are excluded as they would be anti-dilutive.

(2) For the three and six months ended June 30, 2022, the Net income (loss) per share - diluted excludes the effect of 5.5 million and 4.3 million RSUs and PRSUs, respectively. For the six months ended June 30, 2023, the Net income (loss) per share - diluted excludes the effect of 2.1 million RSUs and PRSUs. These would have the potential to dilute basic earnings per share.

(3) For the six months ended June 30, 2023, the Net income (loss) per share - diluted excludes the effect of 0.7 million New DSUs, 2.6 million PSUs, and 1.3 million shares relating to equity-settled VPP. These would have the potential to dilute basic earnings per share.

13. 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 14 for the disaggregation of revenue by geographic region.

	For the Three Months Ended June 30,	For the Three Months Ended June 30,
			For the Six Months Ended June 30,
	2023	2022	2023	2022
Product	38,710	38,098	70,191	71,291
Transportation	4,614	4,795	8,402	8,856
LicensefeesfromConstruction Partners	210	198	417	395
Total product revenue	43,534	43,091	79,010	80,542
Installationand otherservices	1,219	1,610	2,451	2,445
	44,753	44,701	81,461	82,987

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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 Three Months Ended June 30,	For the Three Months Ended June 30,
			For the Six Months Ended June 30,
	2023	2022	2023	2022
At a point in time	43,324	42,893	78,593	80,147
Overtime	1,429	1,808	2,868	2,840
	44,753	44,701	81,461	82,987

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 which are satisfied over the term of the contract.

Contract Liabilities

		As at
	June 30, 2023	December 31, 2022	December 31, 2021
Customer deposits	5,303	4,458	1,959
Deferredrevenue	709	408	461
Contract liabilities	6,012	4,866	2,420

Contract liabilities primarily relate to deposits received from customers and maintenance revenue from license subscriptions. The balance of contract liabilities was higher at June 30, 2023 compared to December 31, 2022 mainly due to the AWI transaction. Contract liabilities as at December 31, 2022 and 2021, respectively, totaling $4.7 million and $2.3 million were recognized as revenue during the six months ended June 30, 2023 and 2022, respectively.

Sales by Industry

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

	For the Three Months Ended June 30,	For the Three Months Ended June 30,	For the Six Months Ended June 30,	For the Six Months Ended June 30,
	2023	2022	2023	2022
Commercial	26,378	29,618	50,882	53,662
Healthcare	10,457	5,091	16,628	12,055
Government	3,268	5,041	5,975	8,322
Education	3,221	3,143	5,108	6,108
LicensefeesfromConstruction Partners	210	198	417	395
Total product and transportation revenue	43,534	43,091	79,010	80,542
Installationand otherservices	1,219	1,610	2,451	2,445
	44,753	44,701	81,461	82,987

14. SEGMENT REPORTING

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

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Revenue from external customers

Revenue from external customers
	For the Three Months Ended June 30,			For the Six Months Ended June 30,
	2023		2022	2023	2022
Canada	4,000		7,417	8,912	12,668
U.S.	40,753		37,284	72,549	70,319
	44,753		44,701	81,461	82,987

Non-current assets

Non-current assets
	As at
	June 30, 2023	December 31, 2022
Canada	31,963	28,251
U.S.	50,379	53,277
	82,342	81,528

15. INCOME TAXES

As at June 30, 2023, the Company had a valuation allowance of $31.9 million against deferred tax assets as the Company has experienced cumulative losses in recent years (December 31, 2022 – $29.8 million).

16. COMMITMENTS

As at June 30, 2023, the Company had outstanding purchase obligations of approximately $3.8 million related to inventory and property, plant and equipment purchases (December 31, 2022 – $2.2 million). As at June 30, 2023, the Company had undiscounted operating lease liabilities of $61.2 million (December 31, 2022 – $48.7 million).

17. RELATED PARTY TRANSACTIONS

On March 15, 2023, the Company entered into a Debt Settlement Agreement (the "Debt Settlement Agreement") with 22NW Fund, LP ("22NW") and Aron English, 22NW's principal and a director of DIRTT, (together, the "22NW Group") who, collectively, beneficially own approximately 19.5% of the Company's issued and outstanding common shares. Pursuant to the Debt Settlement Agreement, the Company agreed to reimburse the 22NW Group for the costs incurred by the 22NW Group in connection with the contested director election at the annual and special meeting of shareholders of the Company held on April 26, 2022, being approximately $1.6 million (the "Debt").

Pursuant to the Debt Settlement Agreement, the Company agreed to repay the Debt by either, or a combination of (i) a payment in cash by the Company to the 22NW Group, and/or (ii) the issuance of equity securities of the Company to the 22NW Group. Under the Debt Settlement Agreement, a cash payment shall not be made to settle the Debt unless permitted under the terms of the Extended RBC Facility.

In connection with the Debt Settlement Agreement, on March 15, 2023, the Company entered into a share issuance agreement with the 22NW Group, pursuant to which the Company agreed to repay the Debt with the issuance to the 22NW Group of 3,899,745 common shares at a deemed price of $0.40 per common share, subject to approval by the Company’s shareholders.

At the Annual General Meeting on May 30, 2023, shareholders voted to approve the issuance of common shares, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt.

Other related party transactions for the three and six months ended June 30, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $nil and $0.3 million, respectively. The sale to 22NW Group was based on price lists in force and terms that are available to all employees.

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