DIRTT Announces Results for Q2 2015 and Appointment of New Director

CALGARY, ALBERTA–(Marketwired – Aug. 4, 2015) – DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (TSX:DRT), a leading technology-enabled designer, manufacturer and installer of fully customized, prefabricated interiors, today announced its financial results for the three- and six-month periods ended June 30, 2015 and changes to its board of directors (“Board”). This news release contains references to Canadian dollars and United States dollars. Canadian dollars are referred to as “$” and United States dollars are referred to as “US$”.

Selected Highlights

For the three- and six-month periods ended June 30, 2015 the Company reported:

• Revenue for the quarter increased by $10.6 million, or 25.2%, over Q2 2014, to $52.9 million, and by $26.8 million, or 32.4%, to $109.6 million, compared with the first six months of 2014;
• Trailing 12-month revenue was $214.2 million, a 39.4% increase over the prior trailing 12-month period ($153.6 million);
• Adjusted gross profit as a percentage of revenue (see “Non-IFRS Measures”) for the three and six months ended June 30, 2015 increased to 42.0% and 42.7%, compared with 40.7% and 42.1% in the prior year periods, respectively;
• Adjusted EBITDA (see “Non-IFRS Measures”) increased by $1.2 million over Q2 2014 to $2.3 million, and by $6.1 million to $11.0 million over the first six months of 2014;
• Net cash flows provided by operating activities before changes in non-cash working capital (see “Non-IFRS Measures”) were $2.2 million for the quarter, an increase of $2.0 million over Q2 2014, and $12.4 million for the first six months of 2015, an increase of $8.1 million over the prior year period;
• Launch of new residential interior and timber frame construction offerings at its annual sales, marketing and training initiative, DIRTT Connext™, held in Chicago;
• Entry into a strategic collaboration with Corning Incorporated to bring Corning® Willow® Glass to DIRTT’s suite of interior construction solutions; and
• Completion of a bought-deal financing for gross proceeds of approximately $43.2 million.

“The improvement in revenue over Q2 2014 was largely supported by strong growth from our core business focused on small and medium enterprise, with only a minimal contribution from larger projects,” said Scott Jenkins, President of DIRTT. “In recent quarters we have seen a greater impact from bigger contracts as they become a more regular piece of our business but, while they typically introduce upside volatility, their contribution can vary from quarter to quarter and we have seen work on current projects shift to late 2015 and into 2016.”

“In the second quarter we continued to invest heavily in our staff, Distribution Partners and marketing through our annual DIRTT Connext initiative in Chicago,” said Derek Payne, CFO of DIRTT. “It is our premier annual event for connecting, learning and doing business and, although we incur substantially all the expense in the second quarter, we reap the benefits throughout the year and beyond. This year we hosted a greater number of Distribution Partners and conducted a larger number of tours of our freshly redesigned Green Learning Center than ever before. This translates into stronger Distribution Partners that can more aggressively drive sales growth going forward and increased profile with both new and existing clientele, architects and designers, as well as investors and the media.”

Summary Financial Results

Revenue

Revenue increased by $10.6 million, or 25.2%, for the three months ended June 30, 2015 compared with the same period in 2014. Revenue increased by $26.8 million, or 32.4%, for the six months ended June 30, 2015 compared with the same period in 2014. The increase in revenue was the result of continued momentum throughout North American markets, as well as the strengthening US dollar.

During the three and six months ended June 30, 2015, the Company recognized revenue of $0.3 million and $8.4 million, respectively, from the previously announced US$30.0 million contract awarded to DIRTT and its Distribution Partner (“DP”) Agile OFIS of Houston, Texas.

Adjusted Gross Profit

Adjusted gross profit as a percentage of revenue increased from 40.7% to 42.0% for the three months ended June 30, 2015 compared with the same period in 2014. Adjusted gross profit as a percentage of revenue increased from 42.1% to 42.7% for the six months ended June 30, 2015 compared with the same period in 2014. The increase was due primarily to significantly stronger revenue in the 2015 periods compared with the same periods in 2014, leading to greater efficiencies driven by higher overall volumes in the Company’s production facilities.

Operating efficiencies were somewhat reduced for the three months ended June 30, 2015 and 2014, as monthly sales volume fluctuated within both quarters. Quarters that contain consistent monthly manufacturing volumes tend to generate higher gross profit than those where manufacturing levels vary more significantly from month to month.

The stronger US dollar also contributed to higher adjusted gross profit in the three- and six-month periods ended June 30, 2015, as the positive impact on US dollar revenue exceeded the negative impact on US dollar-based production costs.

Adjusted SG&A Expenses

Adjusted selling, general and administrative expenses (“SG&A”) is SG&A before deductions for non-cash depreciation and amortization of non-manufacturing related assets and stock-based compensation expenses. See Non-IFRS Measures for a reconciliation. Adjusted SG&A expenses increased by $4.2 million, or 26.7%, for the three months ended June 30, 2015 compared with the same period in 2014. The resulting increase in adjusted SG&A as a percentage of revenue was 0.5%, from 37.0% to 37.5% over the same quarterly period. The most significant change can be attributed directly to sales-related efforts as salaries and benefits increased by $1.5 million, and commission expense for internal sales representatives and industry specific experts increased by $0.8 million. These costs reflect personnel additions focused on generating and supporting higher business volumes. Higher commission costs are in line with the greater revenue volumes in the current quarter.

Travel and marketing costs in the period increased by $1.1 million, due primarily to DIRTT Connext, the previously discussed annual sales, marketing and training initiative held in Chicago in June. The total cost for DIRTT Connext in the current period was $2.3 million, compared with $1.3 million in the prior year. The increased cost was due to increased DP and staff attendance at the internally focused, senior management-led training sessions, as well as a significantly higher volume of tours through the completely redesigned GLC, where DIRTT’s new residential and timber frame solutions were rolled out. The Company also conducted a series of media and investor relations activities as part of the week-long event. This annual event occurs in Q2, but includes comprehensive initiatives that significantly enhance regular marketing, training and communications efforts and benefit DIRTT throughout the remainder of the year and beyond.

Adjusted SG&A as a percentage of revenue decreased by 1.9% from 35.9% to 34.0%, in the six months ended June 30, 2015 compared with the same period in 2014. Adjusted SG&A expenses increased by $7.5 million, or 25.3% in the six months ended June 30, 2015 compared with the same period in 2014. The increase was primarily due to increases in salaries and benefits of $2.5 million, commission expense of $1.7 million, and travel and marketing costs of $1.8 million due to the same reasons discussed above.

The stronger US dollar contributed to the overall increase in adjusted SG&A expenses across the organization in the three and six months ended June 30, 2015.

Adjusted EBITDA

Adjusted EBITDA increased by $1.2 million for the three months ended June 30, 2015 compared with the same period in 2014. The increase was mainly due to the $10.6 million increase in revenue and the resulting increase in adjusted gross profit of $5.0 million. Adjusted EBITDA increased by $6.1 million for the six months ended June 30, 2015 compared with the same period in 2014. The increase was mainly due to the $26.8 million improvement in revenue and the resulting increase in adjusted gross profit of $11.9 million. These amounts were partially offset by the increase in adjusted SG&A expenses of $4.2 million for the quarter and $7.5 million for the year to date period for the reasons discussed above.

Outlook

DIRTT’s growth strategy consists of five key initiatives: (1) increasing penetration of existing markets by providing continued support and increased investment to existing DPs throughout North America; (2) expanding into new geographies, such as the Middle East and Singapore, by capitalizing on recent and continued investment alongside new international DPs; (3) penetrating new industries such as the hospitality and residential sectors; (4) continuing to invest in ICE and new innovative interior construction solutions such as the Enzo Approach, residential interiors and timber frame construction; and (5) partnering with industry leaders to monetize innovative solutions – a recent example is the Corning^® Willow^® Glass initiative signed in February 2015.

With the recent launch of the Company’s residential solutions at DIRTT Connext, the Company has officially entered into this market. DIRTT does not expect to see meaningful revenue from this market in the near term.

Management believes that DIRTT Solutions are a superior alternative to conventional construction in all sectors of the construction industry, and that a continued increase in construction activity can be expected to result in an ongoing improvement in revenue. The Company plans to invest additional resources, including the further development of ICE and the development of new DIRTT Solutions and test projects, to pursue further opportunities in healthcare, education and government, and new opportunities in the hospitality and residential sectors of the construction industry. DIRTT’s product development team has been and, is expected to continue to be, expanded to address industry-specific challenges and opportunities.

The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) can be a useful leading economic indicator of how non-residential billing activity could trend. The most recent June billing and inquiries numbers continued to show growth, building on an improving trend following poor weather in the first two months of this year. Billing activity also continued to grow across all four reported regions and was especially strong in the Midwest, South and West. Both DIRTT and the AIA believe these numbers point to improved fundamentals that could support growth across all segments of the building industry for the next nine to 12 months.

DIRTT anticipates that further revenue contribution from the gross US$30.0 million contract announced in mid-2014 will be deferred to Q4 2015, with the majority of the remaining revenue contribution to be realized in 2016. Management believes that continued softness in global commodity pricing could result in weakness for the energy industry segment.

Liquidity and Capital Resources

At June 30, 2015, DIRTT had $92.7 million in cash and cash equivalents compared with $39.8 million at December 31, 2014. At June 30, 2015, the Company had an undrawn US$18.0 million revolving operating facility.

New Director

Effective immediately, Denise Turner has joined the Company’s Board. Over her 30-year career Ms. Turner has held a number of progressively senior positions spanning operations, finance and legal accountabilities for companies involved in the North American commercial real estate space, including ones listed on the Toronto Stock Exchange and TSX Venture Exchange. She is currently the principal of a strategic project management and contract executive services firm. Ms. Turner currently serves on a number of boards including the Vancouver Board of Trade; Surrey City Development Corporation and Musqueam Capital Corporation, both of which are for-profit companies with community capacity building mandates through the development and management of real estate based assets and is the immediate Past Board Chair for Community Living, BC, a $850 million Crown corporation. She also holds the Institute of Corporate Directors ICD.D designation.

Exiting Director

Current board member James A. Gosling has stepped down from his director role effective immediately. Mr. Gosling will remain involved with the Company as a special advisor to DIRTT’s Board.

“James has made an important contribution as a member of DIRTT’s Board and we expect to continue to benefit from his unique perspectives and expertise as he moves into the new advisory role,” said Steve Parry, Chairman of DIRTT. “I also want to welcome Denise, who brings diverse real estate and public company experience to our group.”

Non-IFRS Measures

Adjusted gross profit, adjusted gross profit %, adjusted SG&A, adjusted SG&A as a percentage of revenue, EBITDA, adjusted EBITDA, and cash provided by operating activities before changes in non-cash working capital are non-IFRS measures used by management to assess the Company’s performance and financial condition. Consequently, they do not have a standard meaning as prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented and calculated by other companies. DIRTT believes the non-IFRS measures are useful supplemental measures that may assist investors in assessing the financial performance and the cash anticipated to be generated by DIRTT’s business. The non-IFRS measures should not be considered as the sole measure of the Company’s performance and should not be considered in isolation from, or as a substitute for, analysis of its financial statements.

Conference Call Details

DIRTT will host a conference call and webcast on Wednesday, August 5, 2015 at 9 a.m. ET, 7 a.m. MT to discuss its second quarter results in greater detail. President Scott Jenkins and CFO Derek Payne will host the call.

To access the conference call by telephone dial +1 647.427.7450 (Toronto and international callers) or 1.888.231.8191 (toll-free in North America). Please call 10 minutes prior to the start of the call. In addition, a live webcast (listen only mode) of the conference call will be available at:

http://event.on24.com/r.htm?e=1028808&s=1&k=4C727B67B16520CE56EAC8CD91F20FED

Investors are invited to submit questions by email before and during the conference call. Please send them to ir@dirtt.net.

A replay of the conference call will be available at +1 416.849.0833 or 1.855.859.2056 by entering the passcode 94622937, from noon (ET) Wednesday, August 5, 2015 to midnight (ET) Wednesday, August 12, 2015 or through the webcast archives at www.newswire.ca or on DIRTT’s website at http://ir.dirtt.net.

About DIRTT

DIRTT Environmental Solutions (Doing it Right This Time) uses its proprietary 3D software to design, manufacture and install fully customized prefabricated interiors. The Company’s customers in the corporate, government, education and healthcare sectors benefit from DIRTT’s precise design and costing; rapid lead times with the highest levels of customization and flexibility; and faster, cleaner construction.

DIRTT’s manufacturing facilities are in Phoenix, Savannah, Kelowna and Calgary. DIRTT’s team supports 98 DPs throughout North America, the Middle East and Asia. DIRTT trades on the Toronto Stock Exchange under the symbol “DRT.” For more information visit www.dirtt.net.

Forward-Looking Statements

Certain information and statements contained in this news release constitute “forward-looking information” and “forward-looking statements” (collectively, “Forward-Looking Information”) as defined under applicable Canadian securities laws and the Company hereby cautions investors about important factors that could cause the Company’s actual results or outcomes to differ materially from those projected in any Forward-Looking Information contained in this news release. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “believes”, “estimated”, “intends”, “plans”, “projection” and “outlook”), are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such Forward-Looking Information.

In particular and without limitation, this news release contains Forward-Looking Information pertaining to the following: comments with respect to the Company’s revenue, objectives and priorities for 2015 and beyond; project timetables; its growth strategies and opportunities; its ability to meet working capital requirements and financial obligations; use of proceeds from the bought deal offering; and its outlook for its operations and the Canadian, US and international economies, and in particular, the US construction industry.

With respect to Forward-Looking Information contained in this news release, assumptions have been made regarding the Company, among other things:

• its ability to manage its growth;
• competition in its industry;
• its ability to enhance current products and develop and introduce new products;
• its ability to obtain components and products from suppliers on a timely basis and on favorable terms;
• its ability to obtain qualified staff and equipment in a timely and cost-efficient manner;
• the regulatory framework governing taxes in Canada and the US and any other jurisdictions in which the Company may conduct its business in the future;
• future development plans for its assets unfolding as currently envisioned;
• future capital expenditures to be made by the Company;
• future sources of funding for its capital program;
• the impact of increasing competition on the Company; and
• its success in identifying risks to its business and managing the risks mentioned below.

The Company’s actual results or outcomes could differ materially from those expressed in the Forward-Looking Information as a result of the risks normally encountered in its industry such as:

• maintaining and managing growth;
• history of losses;
• risks related to new technology;
• competition risks;
• operating results and financial condition fluctuations on a quarterly and annual basis;
• risks related to intellectual property;
• risks related to additional capital requirements;
• customer base and market acceptance;
• software and product defects and design risks;
• availability of key supplies;
• dependence on key personnel;
• commodity price risk;
• credit risk;
• the effect of government regulation;
• risks related to international expansion;
• risks related to physical facilities;
• legal risks;
• foreign currency and fiscal matters;
• risks related to future acquisitions;
• risks related to Forward-Looking Information;
• reliance on third parties; and
• conflicts of interest.

Since actual results or outcomes could differ materially from those expressed in the Forward-Looking Information provided by or on behalf of the Company, investors and others should not place undue reliance on any such Forward- Looking Information.

DIRTT cautions that the foregoing lists of factors are not exhaustive. Further, Forward-Looking Information is made as of the date hereof, and the Company undertakes no obligation to update Forward-Looking Information to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable Canadian securities laws. New factors emerge from time to time, and it is not possible for DIRTT’s management to predict all of these factors and to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in Forward-Looking Information. No assurance can be given that these expectations will prove to be correct and such Forward-Looking Information contained in this news release should not be unduly relied upon. In addition, this news release may contain Forward-Looking Information attributed to third party industry sources.

For a detailed description of the risks and uncertainties facing the Company and its business and affairs, readers should refer to the Company’s annual financial statements, management’s discussion and analysis and annual information form for the year ended December 31, 2014, all of which are available at www.sedar.com.

Market and Industry Data

Certain market and industry data contained in this news release is based upon information from government or other third party publications, reports and websites or based on estimates derived from such publications, reports and websites. Government and other third party publications and reports do not guarantee the accuracy or completeness of their information. While the Company believes this data to be reliable, market and industry data is subject to variations and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process and other limitations and uncertainties inherent in any statistical survey. Accordingly, the accuracy, currency and completeness of this information cannot be guaranteed. DIRTT has not independently verified any of the data from government or other third party sources referred to in this press release or ascertained the underlying assumptions relied upon by such sources.