DIRTT Environmental Solutions Ltd.

Unaudited Condensed Consolidated Financial Statements For the three and six months ended June 30, 2017 and 2016

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INDEX

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DIRTT Environmental Solutions Ltd.

Condensed Consolidated Statements of Financial Position

(Unaudited ‐ Stated in thousands of Canadian dollars)

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

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DIRTT Environmental Solutions Ltd.

Condensed Consolidated Statements of Loss and Comprehensive Loss

(Unaudited ‐ Stated in thousands of Canadian dollars)

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

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DIRTT Environmental Solutions Ltd. Condensed Consolidated Statements of Changes in Equity

(Unaudited ‐ Stated in thousands of Canadian dollars, except for share data)

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

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DIRTT Environmental Solutions Ltd. Condensed Consolidated Statements of Cash Flows

(Unaudited ‐ Stated in thousands of Canadian dollars)

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

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

1. GENERAL INFORMATION

DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) is a leading technology‐driven manufacturer of highly customized interiors. DIRTT combines its proprietary 3D design, configuration and manufacturing software (“ICE^® ” or “ICE Software”) with integrated in‐house manufacturing of its innovative prefabricated interior construction solutions and an extensive Partners network. ICE provides accurate design, drawing, specification, pricing and manufacturing process information, allowing rapid production of high‐ quality custom solutions using fewer resources than traditional manufacturing methods. ICE was developed by Ice Edge Business Solutions Ltd. (“Ice Edge”), a wholly owned subsidiary of DIRTT, and its wholly owned subsidiary, Ice Edge Business Solutions, Inc.

ICE is also licensed to unrelated companies and Partners through Ice Edge. The address of DIRTT’s registered office is 7303 ‐ 30th Street S.E., Calgary, AB, Canada T2C 1N6. DIRTT trades on the Toronto Stock Exchange (“TSX”) under the symbol “DRT”.

2. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of these condensed consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

Statement of compliance

These condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (“IAS 34”). Accordingly, certain information and footnote disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) have been omitted or condensed, and the condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements of the Company for the year ended December 31, 2016.

The condensed consolidated financial statements were approved by the Board of Directors and authorized for issue on August 2, 2017.

Basis of measurement

These condensed consolidated financial statements have been prepared using the same policies and methods as those used in the audited consolidated financial statements for the year ended December 31, 2016.

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. Seasonality of construction results in demand for the Company’s products to be typically stronger in the third and fourth quarters and less strong in the first and second quarters of its fiscal cycle.

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

3. ADOPTION OF NEW AND REVISED IFRS

The Company has adopted the new and revised accounting pronouncements outlined below, and has determined these standards did not have a material impact upon adoption on January 1, 2017.

In December 2016, the International Accounting Standards Board (“IASB”) issued narrow‐scope amendments to IFRS 1, IAS 28 and IFRS 12 as part of its annual improvements process, “Annual Improvements to IFRS (2014‐2016)”. The IASB uses the annual improvements process to make non‐urgent but necessary amendments to IFRS. The amendment to IFRS 12 was effective January 1, 2017.

In January 2016, the IASB issued amendments to IAS 12 “Income Taxes”. The amendments were related to the recognition of deferred tax assets for unrealized losses, which clarified how to account for deferred tax assets related to debt instruments measured at fair value. The amendments were effective for annual periods beginning on or after January 1, 2017, with earlier application permitted.

In January 2016, the IASB also issued amendments to IAS 7 “Statement of Cash Flows”. The amendments will require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non‐cash changes. The amendments were effective for annual periods beginning on or after January 1, 2017, with earlier application permitted.

4. RECENT ACCOUNTING PRONOUNCEMENTS

The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Company:

In April 2016, the IASB issued amendments to IFRS 15 “Revenue from Contracts with Customers”. In May 2014, the IASB and the US Financial Accounting Standards Board issued their joint revenue recognition standard, IFRS 15, which replaces all existing IFRS and US GAAP revenue requirements. The standard applies to all revenue contracts and provides a model for the recognition and measurement of sales of some non‐ financial assets (e.g. disposals of property, plant and equipment). The amendments noted in April 2016 clarified three aspects of the standard (identifying performance obligations, principal versus agent considerations and licensing) and provided some transition relief for modified contracts and completed contracts. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. IFRS 15 introduces a single model for recognizing revenue from contracts with customers. This standard applies to all contracts with customers, with only some exceptions, including certain contracts accounted for under other IFRSs. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected to be received in exchange for transferring those goods or services. This is achieved by applying the following five steps:

1. Identify the contract with a customer;

2. Identify the performance obligations in the contract;

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

4. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

1. Determine the transaction price;

2. Allocate the transaction price to the performance obligations in the contract; and

3. Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company does not anticipate this standard will have a material impact on its consolidated financial statements. While the Company is continuing to assess all potential impacts of the standard, the Company currently believes the most significant impact relates to its ICE software license revenue. The Company expects revenue related to product sales and installations to remain substantially unchanged.

5. LONG‐TERM DEBT

In February 2017, the Company signed a fifth amendment to the amended and restated loan agreement with its lender, which included a change in the determination of the value of the minimum tangible net worth amount as it is reset at the end of each fiscal year. The minimum tangible net worth will be based on $135.0 million plus 50% of consolidated net income for the fiscal year then ending less any amounts paid in connection with a normal course issuer bid to a maximum of $25.0 million. As at June 30, 2017, the adjusted minimum tangible net worth was $133.8 million. At June 30, 2017 and December 31, 2016, $nil had been borrowed against the US$18.0 million revolving operating facility. Advances under the revolving operating facility are subject to interest at the lender’s prime rate minus 0.25% for Canadian dollar advances and the US prime rate minus 0.25% for US dollar advances and are repayable at any time.

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

6. SHARE‐BASED TRANSACTIONS

The Company has a stock option plan which was approved by the Board of Directors and by its shareholders at the annual and special meeting of shareholders held on May 5, 2016, whereby the aggregate number of shares reserved for issuance shall not exceed 10% of the issued and outstanding common shares as at the time of grant of any options. Options granted under the plan generally have a term of five years and vest 1/3 every year over a three‐year period from the date of grant.

The following summarizes options granted, exercised, forfeited and expired during the periods:

Range of exercise prices outstanding at June 30, 2017:

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

7. BASIC AND DILUTED LOSS PER SHARE

The calculation of basic and diluted loss per share for the three and six months ended June 30, 2017 was based on the net loss of $2.9 million and $4.3 million, respectively (June 30, 2016 – $1.5 million, $1.1 million), and a weighted average number of common shares outstanding of 85.0 million (June 30, 2016 – 84.6 million).

As the Company was in a loss position for the three and six months ended June 30, 2017 and 2016, all stock options were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti‐dilutive. For the three and six months ended June 30, 2017, 4.9 million (2016 – 2.8 million) and 5.1 million (2016 – 2.8 million), respectively, options were excluded from the dilutive weighted average number of common shares calculation as their effect would have been anti‐dilutive to the net loss per share.

8. SEGMENT REPORTING

The Company has one operating segment and operates in three principal geographic locations, Canada, the United States (“US”), and International. For the three and six months ended June 30, 2017 and 2016, the majority of revenue from international projects are included in the US revenue amount as these projects are sold by US‐based Partners and are delivered to international locations. The Company’s revenue from operations from external customers, based on location of operations, and information about its non‐current assets, are detailed below.

Revenue from external customers

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

8. SEGMENT REPORTING (CONTINUED)

Selected Condensed Consolidated Statement of Financial Position Information – Non‐current assets

The amounts above exclude deferred tax assets.

9. TRANSACTIONS AND BALANCES WITH RELATED PARTIES

The Company reported the following activities with a certain officer of the Company during the respective periods:

The above transactions were priced at materials plus 10% with the remaining terms and conditions in accordance with standard business practices. Of the $0.7 million outstanding accounts receivable noted in the above chart, $0.5 million was related to third‐party purchases made on behalf of the officer. The Company also incurred $0.4 million in labor, installation and other services as a non‐monetary benefit to the officer.

One of the Company’s Partners is owned by a director of the Company. The Company reported the following activities with this Partner during the respective periods:

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DIRTT Environmental Solutions Ltd.

Notes to the Condensed Consolidated Financial Statements

June 30, 2017 (Unaudited)

10. CAPITAL MANAGEMENT

As at June 30, 2017, the Company has $175.4 million (December 31, 2016 ‐ $182.0 million) of total capital resources, comprised of Shareholders’ Equity. The Company also has total debt of $16.1 million (December 31, 2016 ‐ $18.8 million).

The Company aims to manage its capital resources to ensure financial strength and to maximize its financial flexibility by maintaining strong liquidity and by utilizing alternative sources of capital including equity, debt and bank loans or lines of credit to fund continued growth.

In February 2017, the Company signed a fifth amendment to the amended and restated loan agreement with its lender, which included a change in the determination of the value of the minimum tangible net worth amount as it is reset at the end of each fiscal year. The minimum tangible net worth is based on $135.0 million plus 50% of consolidated net income for the fiscal year then ending, less any amounts paid in connection with a normal course issuer bid to a maximum of $25.0 million. As at June 30, 2017, the adjusted minimum tangible net worth was $133.8 million.

As at June 30, 2017 and December 31, 2016, the Company’s tangible net worth was $181.3 million and $168.0 million, respectively. As at June 30, 2017 and December 31, 2016, the Company is in compliance with all of its lender’s covenants.

11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks: credit risk, liquidity risk, market risk, interest rate risk, foreign exchange risk and commodity price risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company considers credit risk to be one of its main financial risks.

Credit risk

The Company’s principal financial assets are cash and cash equivalents, and trade and other receivables.

The Company’s credit risk is primarily concentrated in its trade receivables. The amounts disclosed in the condensed consolidated statement of financial position are net of allowances for doubtful accounts, estimated by the management of the Company based on previous experience with customers and their assessment of the current economic environment and specific customer circumstances. In order to reduce its risk, management maintains credit policies that include regular review of credit limits of individual customers and the use of accounts receivable insurance (see below) for a significant portion of trade receivables. Aging of trade receivables is systematically monitored by management. Trade balances are spread amongst a broad customer base which is geographically dispersed. The Company does not have significant exposure to any individual customer. A number of factors are considered in determining the likelihood of impairment. The Company had nil bad debt expense for the three and six months ended June 30, 2017 and 2016.

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DIRTT Environmental Solutions Ltd. Notes to the Condensed Consolidated Financial Statements June 30, 2017 (Unaudited)

11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

The Company also has a contract with Export Development Canada (“EDC”), Canada’s export credit agency, whereby some of its trade receivables are insured. EDC determines the coverage amount, if any, on a customer‐by‐customer basis. Based on the Company’s trade receivables balance as at June 30, 2017, 63.1% (December 31, 2016 ‐ 50.7 %) of that balance is covered by EDC. Substantially all of the remaining balance is less than 90 days old and is owed by a small number of DIRTT’s strong‐performing Partners, on which the Company has a high level of confidence of collectability, and government sales that are not covered by EDC. The Company considers trade receivables greater than 90 days as past due and as at June 30, 2017, the amount outstanding was $1.3 million, net of allowance for doubtful accounts of $0.7 million (December 31, 2016 ‐ $7.1 million, $0.7 million). The Company only provides for balances it considers to be at risk of collection. As a result, the Company believes that its exposure to credit risk is limited.

The credit risk on cash and cash equivalents is limited because the counterparties are chartered banks with high credit ratings assigned by national credit‐rating agencies.

Fair value of financial instruments

The fair values of the Company’s financial instruments were determined as follows:

• a) The carrying amounts of cash and cash equivalents; trade and other receivables; trade accounts payable and other liabilities; and customer deposits approximate fair value due to their short‐term nature; and

• b) The Company’s current and long‐term debts are carried at amortized cost. The fair values of these instruments are estimates made at a specific point in time, based on relevant market information. These estimates are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for similar financial instruments subject to similar risks and maturities. The carrying amounts of these instruments approximates fair value due to their respective floating interest rates.

12. COMMITMENTS

As at June 30, 2017, the Company has unpaid capital expenditure commitments of approximately $1.9 million for manufacturing equipment to be delivered by end of 2017.

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