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DIRTT Environmental Solutions Ltd. Interim / Quarterly Report 2023

Nov 9, 2023

47167_rns_2023-11-09_4e379840-15b8-4c27-97f1-355b13df9922.PDF

Interim / Quarterly Report

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These financial statements for DIRTT Environmental Solutions Ltd. are also included in the Form 10-Q for the quarterly period ended September 30, 2023 filed on SEDAR+ on November 9, 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 As at
December 31,
September 30,
2023 2022
ASSETS
Current Assets
Cash and cash equivalents 19,460 10,821
Restricted cash 2,977 3,418
Trade and accrued receivables, net of expected credit losses of 20,516 13,930

$0.1 million at September 30, 2023 and at December 31, 2022
Other receivables 852 7,880
Inventory 17,368 22,251

Prepaids and other current assets		 4,015 3,825
Assets held for sale 2,317 -
Total Current Assets 67,505 62,125
Property, plant and equipment, net 26,324 41,522

Capitalized software, net		 2,168 4,406
Operating lease right-of-use assets, net 30,561 30,490

Other assets		 3,776 5,110
Total Assets 130,334 143,653
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities 18,761 19,881

Other liabilities		 2,021 2,056
Customer deposits and deferred revenue 6,743 4,866
Current portion of long-term debt and accrued interest 8,961 3,306

Current portion of lease liabilities		 5,284 5,889
Total Current Liabilities 41,770 35,998
Long-term debt 53,901 62,129

Long-term lease liabilities		 28,751 27,534
Total Liabilities 124,422 125,661
SHAREHOLDERS’ EQUITY
Common shares, unlimited authorized without par value, 104,789,358 issued 195,747 191,347

and outstanding at September 30, 2023 and 97,882,844 at December 31, 2022
Additional paid-in capital 7,933 9,023
Accumulated other comprehensive loss (15,957
)		 (16,106
)
Accumulated deficit (181,811
)		 (166,272
)
Total Shareholders’ Equity 5,912 17,992
Total Liabilities and Shareholders’ Equity 130,334 143,653

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

1

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

For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2023
2022
2023
2022
Product revenue 48,095
44,307
127,105
124,849
Service revenue 1,442
2,440
3,893
4,885
Total revenue 49,537
46,747
130,998
129,734
Product cost of sales 31,622
37,965
88,529
109,757
Service cost of sales 850
1,774
2,165
3,406
Total cost of sales 32,472
39,739
90,694
113,163
Gross profit 17,065
7,008
40,304
16,571
Expenses

Sales and marketing		 6,161
6,089
18,302
21,094
General and administrative 4,669
6,542
16,003
21,412
Operations support 1,752
2,321
5,564
7,347
Technology and development 1,239
1,695
4,055
5,714

Stock-based compensation		 1,069
918
2,543
3,546
Reorganization 321
3,426
2,857
12,281

Impairment charge on Rock Hill Facility		 7,952
-
7,952
-

Related party expense		 -
-
1,524
-
Total operating expenses 23,163
20,991
58,800
71,394
Operating loss (6,098
)
(13,983
)
(18,496
)
(54,823
)

Government subsidies		 -
7,141
236
7,765
Gain on sale of software and patents -
-
6,145
-
Foreign exchange (loss) gain 822
1,356
(59
)
1,870

Interest income		 161
19
271
50
Interest expense (1,196
)
(1,276
)
(3,636
)
(3,935
)
(213
)
7,240
2,957
5,750
Net loss before tax (6,311
)
(6,743
)
(15,539
)
(49,073
)
Income taxes
Current and deferred income tax recovery -
(16
)
-
(16
)
-
(16
)
-
(16
)
Net loss (6,311
)
(6,727
)
(15,539
)
(49,057
)
Net loss per share
Net loss per share - basic and diluted (0.06
)
(0.08
)
(0.15
)
(0.57
)






Weighted average number of shares outstanding(in thousands)

Basic and diluted
104,449
87,446
101,036
86,229

Interim Condensed Consolidated Statement of Comprehensive Loss

For the Three Months
Ended September 30,		 For the Three Months
Ended September 30,		 For the Nine Months For the Nine Months
Ended September 30,
2023 2022 2023 2022
Loss for the period (6,311
)		 (6,727
)		 (15,539
)		 (49,057
)
Exchange differences on translation of foreign operations (45
)		 (66
)		 149 (227
)
Comprehensive loss for the period (6,356
)		 (6,793
)		 (15,390
)		 (49,284
)

Total revenue for the nine months ended September 30, 2023 includes $0.3 million earned from related parties. All related party income was earned in the first quarter of 2023.

2

Interest expense for the three and nine month ended September 30, 2023 includes $0.4 million owing to a related party (refer to Note 16).

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

3

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
employee tax obligations
-
-
(189
)
-
(9
)
(198
)
Foreign currency translation adjustment
-
 -
-
433
-
433

Netlossforthe period
-
 -
-
-
(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
employee tax obligations
-
-
(536
)
-
-
(536
)
Foreign currency translation adjustment
-
 -
-
(594
)
-
(594
)

Net loss for the period
-


-
-
-
(19,288
)
(19,288
)
As at June 30, 2022
86,988,828
186,253
10,629
(16,077
)
(153,639
)
27,166



Stock-based compensation
-
-
846
-
-
846
Issued on vesting of RSUs and Share Awards
874,266
1,587
(1,587
)
-
-
-

Issued for employee share purchase plan
403,821
9
0
-
-
-
90

RSUs and Share Awards withheld to settle
employee tax obligations
-
 -
(296
)
-
-
(296
)
Foreign currency translation adjustment
-
 -
-
(66
)
-
(66
)

Netlossforthe period
-


-
-
-
(6,727
)
(6,727
)
As at September 30, 2022
88,266,915
187,93		 0
9,592
(16,143
)
(160,366
)
21,013
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 the period
-
-
-
-
(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 the period
-
-
-
-
2,206
2,206
As at June 30, 2023
104,444,936
195,620
7,575
(15,912
)
(175,500
)
11,783



Stock-based compensation
-
-
360
-
-
360
Issued on vesting of RSUs and Share Awards
1,011
2
(2
)
-
-
-



Issued for employee share purchase plan
343,411
125
-
-
-
125

Foreign currency translation adjustment
-
-
-
(45
)
-
(45
)
Net loss for the period
-
-
-
-
(6,311
)
(6,311
)
As at September 30, 2023
104,789,358
195,747
7,933
(15,957
)
(181,811
)
5,912

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

4

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 Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
Cash flows from operating activities:
Net loss for the period (6,311
)
(6,727
)
(15,539
)
(49,057
)
Adjustments:
Depreciation and amortization 2,017 4,236 7,216 12,202
Impairment charge on Rock Hill Facility 7,952 - 7,952 -
Stock-based compensation, net of settlements 1,069 888 2,543 2,596
Foreign exchange loss (gain) (577
)
(1,365
)
563		 (2,147
)
Gain on sale of software and patents - - (6,145
)
-
Loss (gain) on disposal of equipment 97 44 97 (121
)
Accretion of convertible debentures 172 163 515 505
Changes in operating assets and liabilities:
Trade and accrued receivables (5,130
)
(819
)
(6,639
)
(5,814
)
Other receivables (163
)
(7,419
)
7,029		 (4,566
)
Inventory 1,749 1,052 4,902 (6,052
)
Prepaid and other assets, current and long term 477 (254
)
(41
)
(1,421
)
Accounts payable and accrued liabilities (77
)
2,748		 475 5,921
Other liabilities (212
)
(70
)
(421
)
(109
)
Customer deposits and deferred revenue 737 (3,078
)
1,702		 641
Current portion of long-term debt and accrued interest (49
)
(44
)
(64
)
(186
)
Lease liabilities 168 (22
)
542		 99
Net cash flows provided by (used in) operating activities 1,919 (10,667
)
4,687		 (47,509
)
Cash flows from investing activities:
Purchase of property, plant and equipment, net of accounts
payable changes		 (255
)
(360
)
(1,304
)
(2,247
)
Capitalized software development expenditures (425
)
(385
)
(1,530
)
(1,286
)
Other asset expenditures (41
)
(86
)
(186
)
(367
)
Recovery of software development expenditures 49 46 131 91
Proceeds on sale of software and patents - - 9,964 -
Proceeds on sale of equipment 14 141 14 214
Net cash flows provided by (used in) investing activities (658
)
(644
)
7,089		 (3,595
)
Cash flows from financing activities:
Proceeds received on long-term debt - - - 647
Repayment of long-term debt (551
)
(616
)
(3,386
)
(1,852
)
Employee tax payments on vesting of RSUs - (296
)
(26
)
(597
)
Net cash flows used in financing activities (551
)
(912
)
(3,412
)
(1,802
)
Effect of foreign exchange on cash, cash equivalents and
restricted cash		 (117
)
(293
)
(166
)
(73
)
Net increase (decrease) in cash, cash equivalents and
restricted cash		 593 (12,516
)
8,198		 (52,979
)
Cash, cash equivalents and restricted cash, beginning of period 21,844 22,945 14,239 63,408
Cash, cash equivalents and restricted cash, end of period 22,437 10,429 22,437 10,429
Supplemental disclosure of cash flow information:
Interest paid (1,038
)
(1,108
)
(3,077
)
(3,439
)
Income taxes (paid) received - - (10
)
3,207

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

As at September 30, As at September 30,
2023 2022
Cash and cash equivalents 19,460 6,818

Restricted cash		 2,977 3,611
Total cash, cash equivalents and restricted cash 22,437 10,429

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

5

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”. Effective October 12, 2023, DIRTT’s common shares ceased to trade on the Nasdaq Capital Market. DIRTT’s common shares are quoted on the OTC Markets on the “OTC Pink Tier” under the symbol “DRTTF.”

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 September 30, 2023, and its results of operations and cash flows for the three and nine months ended September 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.

Basis of measurement

These Financial Statements have been prepared on the historical cost convention except for certain financial instruments, assets held for sale and certain components of stock-based compensation that are measured at fair value.

6

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. Accounting guidance for assets held for sale was applicable to the Company this quarter and the policy applied has been disclosed below. 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.

Assets held for sale

The Company classifies an asset group (“asset”) as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the consolidated statement of operations in the period in which the held for sale criteria are met. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale. Adjustments made to the fair value are recorded in the consolidated statement of operations in the period it is measured. Refer to Note 6.

4. LIQUIDITY

As at September 30, 2023, the Company had $19.5 million of cash on hand and C$14.6 million ($10.8 million) of available borrowings (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings). Through the first nine months of fiscal year 2023, the Company generated $4.7 million in cash flows from operations, compared to a cash usage of $47.5 million over the first nine months of fiscal year 2022. The Company benefited from the receipt of $7.3 million of government subsidies during the first nine months of 2023 compared to $nil in the nine months ended September 30, 2022 (refer to Note 5).

We have implemented multiple price increases during the past two years 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 reduce our cash usage to operate the business. Gross profit for the nine months ended September 30, 2023 was $40.3 million, or 30.8%, compared to the same period of 2022, which generated gross profit of $16.6 million, or 12.8%.

Over the past four quarters, we have also executed upon several cash 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 for sale and leaseback or sublease opportunities and expect these strategic initiatives to result in positive cash inflows in 2023

7

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 macroeconomic uncertainty. 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 154 employees, or approximately 16% from January 2022 through September 2023.

We have assessed the Company’s liquidity position as at September 30, 2023 taking into account our sales outlook for the next year, our existing cash balances and available credit facilities and expected early settlements related to our Rock Hill Facility equipment lease (refer to Note 10). Based on this analysis, we believe the Company has sufficient liquidity to support ongoing operations for the next twelve months.

5. 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 September 30, 2023, the $7.3 million claim (plus an additional $0.2 million of interest) has been received in full.

6. REORGANIZATION AND ASSETS HELD FOR SALE

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 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 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 nine months ended September 30, 2023, we continued to review costs resulting in the elimination of additional salaried positions in the second and third quarters of 2023. These actions resulted in the Company incurring certain one-time termination costs.

Temporary Suspension of Operations and Subsequent Closure 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 $1.4 million for the three month and nine month period ended September 30, 2023, respectively.

8

On September 27, 2023, we decided to permanently close the Rock Hill Facility. As a result of this decision, we incurred $8.0 million of impairment charges associated with the manufacturing equipment located at the Rock Hill Facility. We expect to incur $0.5 million of costs in dismantling and decommissioning the Rock Hill Facility assets. The Company will continue to maintain the building lease and is pursuing a sublease arrangement.

For the three and nine months ended September 30, 2023, reorganization costs incurred relate to the above mentioned initiatives:

For the Three Months Ended
September 30,		 For the Three Months Ended
September 30,		 For the Three Months Ended
September 30,		 For the Nine Months Ended
September 30,		 For the Nine Months Ended
September 30,		 For the Nine Months Ended
September 30,
2023 2022 2023 2022
Termination benefits 168 2,843 2,138 6,870
Insurance costs on change of control - - - 3,676
Phoenix Facility closure 24 - 96 853

Rock Hill Facility temporary suspension and closure
129 144 129 144
of operations
Other costs - 439 494 738
Total reorganization costs 321 3,426 2,857 12,281
Reorganization costs in accounts payable and accrued liabilities at January 1, 2022 -

Reorganization expense		 13,461
Reorganization costs paid (11,184
)
Reorganization costs in accounts payable and accrued liabilities at December 31, 2022 2,277

Reorganization expense		 2,857
Reorganization costs paid (3,977
)
Reorganization costs in accounts payable and accrued liabilities at September 30, 2023 1,157

The $1.1 million payable relates to termination benefits (December 2022 – $2.1 million).

Assets classified as held for sale as at September 30, 2023 of $2.3 million consist of manufacturing equipment previously used in the Rock Hill Facility. Prior to the decision to permanently close the Rock Hill Facility, the assets were classified as property, plant and equipment.

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 provided 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 second quarter of 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 consolidated statement of operations. Further, $0.9 million was received during the second quarter as a prepayment under the ARMSA, which was recognized into revenue as the performance obligation is met. Part of the proceeds of this transaction were used to

9

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). A final prepayment of $0.9 million under the ARMSA was received in October 2023.

8. TRADE AND ACCRUED RECEIVABLES

Accounts receivable are recorded at the invoiced amount, do not require collateral and typically 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 consolidated 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 September 30, 2023, approximately 80% 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 three and nine months ended September 30, 2023, one Construction Partner accounted for greater than 10% of revenue (one Construction Partner for the nine months ended September 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 :

As at, As at,
September 30, December 31,
2023 2022
Current 16,974 12,381
Overdue 3,642 1,675
20,616 14,056
Less: expected credit losses (100
)		 (126
)
20,516 13,930

No adjustment to our expected credit losses of $0.1 million was required for the three or nine months ended September 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,
September 30, 2023 December 31, 2022
Warranty provisions(1) 867 1,278

DSU liability		 971 594
Sublease deposits 183 139
Other provisions - 45
Other liabilities 2,021 2,056

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

As at, As at,
September 30, 2023 December 31, 2022
As at January 1 1,278 1,451
Additions to warranty provision 845 1,134

Payments related to warranties		 (1,056
)		 (1,307
)

Adjustments to warranty provision
(200
)
-
867 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 - - 515 515
Accrued interest - 447 2,566 3,013
Interest payments - (447
)		 (2,630
)		 (3,077
)
Principal repayments - (3,386
)		 - (3,386
)

Exchange differences		 -
241		 121
362
Balance at September 30, 2023 - 8,667 54,195 62,862

Current portion of long-term debt and accrued interest		 - 8,250 711 8,961
Long-term debt - 417 53,484 53,901

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 not above 1.25 for three consecutive months, a cash balance equivalent to one-year's worth of Leasing Facilities payments must be maintained. At September 30, 2023, available borrowings are C$14.6 million ($10.8 million) (December 31, 2022 – $10.8 million and C$7.2 million ($5.3 million) of available borrowings), calculated in the same manner as the RBC facility described above, of which no amounts have been drawn. The Company did not meet the three-month FCCR requirement during the third quarter of 2023, which resulted in requiring the restriction of $3.0 million of cash ($3.4 million as at December 31, 2022).

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$3.8 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

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Leasing Facility, the “Leasing Facilities”) of which $13.3 million has been drawn and $5.2 million has been repaid, 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%. Refer to Note 6 on the decision to permanently close the Rock Hill Facility. As part of this decision the Company intends to early settle the U.S. Leasing Facility in the next twelve months. The $8.2 million balance of the U.S. Leasing Facility has therefore been classified under current liabilities as at September 30, 2023. On October 31, 2023, the Company paid off $1.0 million of the U.S. Leasing Facility.

The Company did not make any draws on the Leasing Facilities during the three and nine months ended September 30, 2023. During the three and nine months ended September 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 the 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. As at September 30, 2023, C$18.9 million of the January Debentures are held by a related party (refer to Note 16).

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 September 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. As at September 30, 2023, C$13.6 million of the December Debentures are held by a related party (refer to Note 16).

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

12

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 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
September 30,		 For The Three Months Ended
September 30,		 For the Nine Months Ended
September 30,		 For the Nine Months Ended
September 30,
2023 2022 2023 2022
Equity-settled awards 594 846 2,106 3,471

Cash-settled awards		 475 72 437 75
1,069 918 2,543 3,546

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 2,303,287 863,279 162,682 - 890,832
Vested or settled (2,019,550
)		 (566,352
)		 (94,528
)		 - (501,916
)
Withheld to settle employee tax obligations (526,259
)		 (242,460
)		 (68,154
)		 - -
Forfeited (734,855
)		 (502,628
)		 - (157,200
)		 -
Outstanding at September 30, 2022 2,239,159 573,578 - - 750,493
Outstanding at December 31, 2022 1,885,337 343,919 - - 1,165,319
Granted 3,549,500 - 522,883 2,584,161 1,646,420
Vested or settled (987,054
)		 (258,760
)		 (522,883
)		 - (220,590
)
Withheld to settle employee tax obligations (64,230
)		 - - - -
Forfeited orexpired (600,345
)		 - - (738,553
)		 -
Outstanding at September 30, 2023 3,783,208 85,159 - 1,845,608 2,591,149

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, respectively, which was determined using the closing price of the Company’s common shares on their respective grant dates.

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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.

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 second quarter of 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 second quarter of 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 September 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. During the third quarter of 2023, 738,553 PSUs with a $nil value were forfeited as a result of an executive departure and 1,845,608 PSUs with a $nil value are outstanding at September 30, 2023.

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 September 30, 2023 had a fair value of $0.6 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 C$0.44 ($0.33), which was determined using the closing price of the Company’s common shares on the grant date. New DSUs outstanding at September 30, 2023 had a fair value of $0.4 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 and expired during the periods:

Number of Weighted average
options exercise price C$
Outstanding at December 31, 2021 4,064,489 6.64

Forfeited		 (2,530,120
)		 6.40
Outstanding at September 30, 2022 1,534,369 7.03
Outstanding at December 31, 2022 1,480,069 7.03

Forfeited		 (989,066
)		 6.97
Expired (263,725
)		 6.46
Outstanding and Exercisable at September 30, 2023 227,278 7.95

No options were granted during the three months and nine months ended September 30, 2023.

Range of exercise prices outstanding and exercisable at September 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 16,350
0.97
$ 6.12		 16,350
0.97
$ 6.12
C$7.01–C$7.84 210,928
0.63
$ 7.84		 210,928
0.63
$ 7.84
Total 227,278 227,278

Dilutive Instruments

For the three and nine months ended September 30, 2023, 0.2 million options (2022 – 1.5 million) 3.9 million RSUs and PRSUs (2022 – 2.8 million), 1.2 million New DSUs (2022 – nil), 2.6 million PSUs (2022 – nil), 1.1 million shares relating to equity-settled Variable Pay Plan (“VPP”) (2022 – nil), and 134.4 million (2022 – 127.5 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.

12. 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 13 for the disaggregation of revenue by geographic region.

For the Three Months Ended
September 30,		 For the Three Months Ended
September 30,		 For the Nine Months Ended For the Nine Months Ended
September 30,
2023 2022 2023 2022
Product 43,132 39,092 113,323 110,383
Transportation 4,767 5,022 13,169 13,878
License fees from Construction Partners 196 193 613 588
Total product revenue 48,095 44,307 127,105 124,849
Installation and other services 1,442 2,440 3,893 4,885
49,537 46,747 130,998 129,734

15

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
September 30,		 For the Three Months Ended
September 30,		 For the Nine Months Ended For the Nine Months Ended
September 30,
2023 2022 2023 2022
At a point in time 47,899 44,114 126,492 124,261
Over time 1,638 2,633 4,506 5,473
49,537 46,747 130,998 129,734

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
September 30, 2023 December 31, 2022 December 31, 2021
Customer deposits 6,396 4,458 1,959
Deferred revenue 347 408 461
Contract liabilities 6,743 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 as at September 30, 2023 compared to December 31, 2022 mainly due to the timing of orders and payments. Contract liabilities as at December 31, 2022 and 2021, respectively, totaling $4.8 million and $2.4 million were recognized as revenue during the nine months ended September 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
September 30,		 For the Three Months Ended
September 30,		 For the Nine Months Ended
September 30,		 For the Nine Months Ended
September 30,
2023 2022 2023 2022
Commercial 31,272 31,796 82,154 85,458
Healthcare 8,483 3,638 25,111 15,693
Government 4,606 3,358 10,581 11,680
Education 3,538 5,322 8,646 11,430
License fees from Construction Partners 196 193 613 588
Total product and transportation revenue 48,095 44,307 127,105 124,849
Installation and other services 1,442 2,440 3,893 4,885
49,537 46,747 130,998 129,734

13. 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.

16

Revenue from external customers

Revenue from external customers
For the Three Months Ended
September 30,		 For the Nine Months Ended
September 30,
2023 2022 2023 2022
Canada 5,665 7,191 14,577 19,859
U.S. 43,872 39,556 116,421 109,875
49,537 46,747 130,998 129,734
Non-current assets
As at
September 30,
2023		 December 31,
2022
Canada 30,396 28,251
U.S. 32,433 53,277
62,829 81,528

14. INCOME TAXES

As at September 30, 2023, the Company had a valuation allowance of $33.4 million against deferred tax assets as the Company has experienced cumulative losses in recent years (December 31, 2022 – $29.8 million).

15. COMMITMENTS

As at September 30, 2023, the Company had outstanding purchase obligations of approximately $4.2 million related to inventory and property, plant and equipment purchases (December 31, 2022 – $2.2 million). As at September 30, 2023, the Company had undiscounted operating lease liabilities of $46.0 million (December 31, 2022 – $48.7 million). The decrease in undiscounted operating lease liabilities from June 30, 2023 ($61.2 million) was related to a modification on the Rock Hill Facility lease liability, as DIRTT no longer assumes the two 5-year extension options will be exercised (refer to Note 6).

16. 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 owned approximately 19.5% of the Company's issued and outstanding common shares at such time. 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.

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 and special meeting of shareholders held on May 30, 2023, shareholders voted to approve the issuance of common shares to 22NW Group, and on June 2, 2023, the Company issued 3,899,745 common shares to 22NW Group as repayment for the Debt. Upon settlement, the debt was revalued at the higher of the deemed price of $0.40 per common share and the May 30, 2023 market price of $0.38 per common share resulting in a recovery from the balance recorded at March 31, 2023 which had been valued at a price of $0.53 per common share.

17

Other related party transactions for the three and nine months ended September 30, 2023, relate to the sale of DIRTT products and services to the 22NW Group for $nil and $0.3 million, respectively (2022 – $nil). The sale to 22NW Group was based on price lists in force and terms that are available to all employees.

As at September 30, 2023, C$18.9 million and C$13.6 million of the January Debentures and December Debentures, respectively, are held by 22NW Group. Interest accrued on the debentures for the three months ended September 30, 2023 is $0.4 million (2022 – $nil). Interest is earned on terms applicable to all Debenture holders.

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