DIRTT Environmental Solutions Ltd. ("DIRTT" or the "Company") (DRT.TO), 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, 2016. 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 months ended June 30, 2016 the Company reported:

Revenue growth of 15.9% to $61.3 million versus the same prior year quarter;
Gross profit % increased by 410 basis points from 40.5% to 44.6% over Q2 2015, and adjusted gross profit % (see "Non-IFRS Measures") also increased by 410 basis points to 46.1% over Q2 2015;
Completion of our largest and most successful DIRTT Connext™ (our annual sales, marketing and industry showcase) in June;
World premiere of ICEreality™, DIRTT's live, collaborative augmented reality technology;
Continuing investment in sales, marketing and business development with a year-over-year sales team headcount increase of 10.7%;
Adjusted EBITDA for the quarter of $4.4 million, representing an 89% increase over the prior year's Q2; and
Shipping trends and order entry momentum support expectations for continuing revenue growth in the next quarter.

For the six months ended June 30, 2016 the Company reported:

Revenue growth of 6.9% to $117.2 million versus the same prior year period, which is below expectations because of weaker than expected Q1 2016 results;
Trailing 12-month revenue was $244.2 million versus $214.2 million in the prior 12-month period, an increase of 14.0%;
Gross profit % increased by 260 basis points from 41.3% to 43.9% over YTD 2015 and adjusted gross profit % (see "Non-IFRS Measures") also increased by 260 basis points to 45.3%;
Successful delivery of DIRTT's first major residential project - 16 healthcare housing units in Barrow, Alaska;
Increasing investment by DIRTT's Distribution Partners including a 97% increase in Green Learning Center (display area) investments vs. YTD 2015; and
Implemented DIRTT DP Movers program for high-performing partners.
"Our second quarter marked a return to strong growth and, with our most successful DIRTT Connext ever, laid a strong foundation for the second half of the year and into 2017," said Mogens Smed, DIRTT CEO. "We continue to invest in our Distribution Partners through the addition of sales and marketing resources to support our DPs' own growing sales teams; the DIRTT Movers Program to align our up-and-coming partners with our top-tier partners; and most importantly our increased investment in DIRTT Connext, which now spans two weeks. Our Partners in turn are increasing their investment in their businesses, leveraging DIRTT's commitment to them. Distribution Partner attendance at DIRTT Connext (which is at their own expense) increased by 55% over the prior year. All of this momentum was perhaps only surpassed by the unveiling of ICEreality™, live-interactive augmented reality for the built environment, once again showcasing our expanding technology lead in the world of construction."
"The second quarter saw a return to solid revenue growth and the third quarter is off to a strong start," said Scott Jenkins, President of DIRTT. "Of particular note was the strength in U.S. sales - our most important market - where our sales increased 24.7% versus the same quarter in 2015. We continue to diversify our business across multiple industry sectors and don't rely on any one industry or geographic market to drive growth. Consistent with overall macro-economic challenges in Canada, our Canadian revenue has been disappointing in the year thus far, and only represented 8.1% of total revenue in Q2. We are confident we will see improving results for this market as we enter the second half of the year and approach 2017."
Mogens Smed added, "We continue to accelerate our investment in our innovative solutions and technology and, working in concert with our Distribution Partners, increase our investment in sales, marketing and business development efforts with the addition of new team members, investment in DIRTT Connext and in our Distribution Partner support programs. While we are excited for the second half of the year we are focused on the longer term and increasing our penetration of the interior construction market where we believe we are still significantly less than 1% of the addressable market ."

Revenue

Revenue increased by $8.4 million, or 15.9%, for Q2 2016 compared with Q2 2015. The increase was partially due to the contribution of $4.3 million in revenue from the residential market during Q2 2016 (7% of total revenue) compared with nil in Q2 2015. The remainder of the increase was the result of a general increase in activity from small and medium-sized projects in Q2 2016, from a diverse range of industry segments. In addition, the stronger US dollar versus the comparable period in 2015 increased the Canadian dollar value of US revenue in Q2 2016.

Below is a breakdown of percentage revenue by sector for Q2 2016 versus Q2 2015:

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Revenue increased by $7.6 million, or 6.9%, for YTD 2016 compared with the same period in 2015. The 2015 period included revenue of $8.4 million from the previously announced US$30.0 million US energy sector contract compared to nil during the 2016 period. This business was partially offset by the $4.3 million contribution (4% of total revenue) from the residential market during the first half of 2016. While total volume was essentially flat year over year, the stronger US dollar versus the comparable period in 2015 increased the Canadian dollar value of US revenue. Sales to the energy sector accounted for 5% of total revenue in 2016, down from 15% of total revenue for the same period in 2015. The reduction reflects the absence of contribution from the previously announced US$30.0 million contract and a general decline in activity in this sector as a result of falling energy prices. This decline was offset by increases in revenue from other sectors.

Below is a breakdown of percentage revenue by sector for YTD 2016 versus YTD 2015:

http://media3.marketwire.com/docs/1064743a.jpg

Gross Profit / Adjusted Gross Profit / Gross Profit % / Adjusted Gross Profit %

Gross profit for Q2 2016 improved to $27.3 million from $21.4 million in Q2 2015, with gross profit % widening 410 basis points to 44.6% from 40.5%. Adjusted gross profit for Q2 2016 improved to $28.2 million from $22.2 million for Q2 2015, with adjusted gross profit % widening 410 basis points to 46.1% from 42.0%. The increase in gross and adjusted gross profit % were due primarily to higher revenue, combined with steady monthly manufacturing volumes and favorable product mix, resulting in reduced material and direct labor costs in 2016 compared with 2015. During Q2 2016, material costs and direct labor costs as a percentage of revenue improved by 230 basis points and 40 basis points, respectively, compared with 2015.

Gross profit for YTD 2016 improved to $51.4 million from $45.2 million for the same period in 2015, with gross profit % widening 260 basis points to 43.9% from 41.3%. Adjusted gross profit for YTD 2016 improved to $53.0 million from $46.7 million for the same period in 2015, with adjusted gross profit % widening 260 basis points to 45.3% from 42.7%. Relatively steady manufacturing volumes throughout the first half of 2016, combined with a diverse project mix, contributed to the increase in gross profit % in 2016.

The higher US dollar to Canadian dollar exchange rate also contributed to increased gross profit and adjusted gross profit in 2016, as the positive impact on US dollar revenue exceeded the negative impact on US dollar-based production costs. US dollar-based production costs include those costs incurred at our manufacturing facilities in Savannah, Georgia and Phoenix, Arizona. Additionally, some of our largest raw material costs incurred in all of our manufacturing facilities are also denominated in US dollars.

Outlook

Our growth strategy consists of five key initiatives: (1) increasing penetration of existing markets by providing continued support and increased investment to our existing DPs throughout North America; (2) expanding into new geographies, such as the Middle East and United Kingdom, by capitalizing on recent and continued investment alongside new international DPs; (3) penetrating new vertical markets such as the healthcare, education 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.

Our previously announced programs to support our top-tier and next tier Distribution Partners, such as the DIRTT Movers Program, DIRTT Green Learning Center loan program, increasing investment in product development and ICE development are contributing to the momentum we are seeing as we start the second half of the year. Our unveiling of ICEreality™, bringing augmented reality to the construction industry, will change, we believe, the way people design, create, collaborate and build interiors. We believe the increasing investment our Distribution Partners are making in our business, with the addition of staff, increased investment in Green Learning Centers and their increased investment in DIRTT Connext, where their attendance was up 55%, is a strong indication of the long-term prospects for our business.

We believe DIRTT Solutions and the resulting more efficient and cost-effective construction experience are a superior alternative to conventional construction across all sectors of the construction industry, and that a continued increase in global construction activity can be expected to result in an ongoing improvement to our revenue. We plan to invest additional resources, including continuing to develop and expand ICE and new DIRTT Solutions and test projects, to pursue further opportunities in the healthcare, education, government, corporate and residential sectors of the construction industry.

Liquidity and Capital Resources

At June 30, 2016, we had $93.9 million in cash and cash equivalents compared with $91.4 million at December 31, 2015.

At June 30, 2016, we also had access to an undrawn US$18.0 million revolving credit facility. In March 2016, we signed a fourth amendment to the amended and restated loan agreement with our lenders which, among other things, provided us with an additional capital financing facility of US$10.0 million, of which $5.3 million (US$4.2 million) was drawn as at June 30, 2016. We expect to draw on the remainder of this facility by December 31, 2016.