DIRTT Releases Fourth Quarter and Full Year 2021 Financial Results

DIRTT Environmental Solutions Ltd. (“DIRTT”, the “Company”, “we” or “us”) (Nasdaq: DRTT, TSX: DRT), an interior construction company that uses proprietary software to design, manufacture and install fully customizable environments, today announced its financial results for the three and twelve months ended December 31, 2021. All financial information in this news release is presented in U.S. dollars, unless otherwise stated.

• Revenue of $42.9 million

• Gross profit margin of 19.6%

• Adjusted Gross Profit Margin1 of 25.3%

• Net loss of $16.0 million

• Net loss margin of (37.3%)

• Adjusted EBITDA1 of ($9.7) million

• Adjusted EBITDA Margin1 of (22.7%)

• Revenue of $147.6 million

• Gross profit margin of 15.9%

• Adjusted Gross Profit Margin1 of 23.1%

• Net loss of $53.7 million

• Net loss margin of (36.4%)

• Adjusted EBITDA1 of ($41.3) million

• Adjusted EBITDA Margin1 of (28.0%)

• Unrestricted cash balance of $60.3 million

Note: (1) See “Non-GAAP Financial Measures”

“We believe the changes we announced yesterday put DIRTT on the path to profitability,” said Todd Lillibridge, Interim Chief Executive Officer. “We started a process several months ago at the board, which took on greater urgency following our third quarter. We have had the advantage of being able to capitalize on our directors’ rich, multi-disciplinary experience in the verticals in which we operate and the technology that drives our business. My job since stepping into the Interim CEO role has been to unleash our leadership team.”

“We have made meaningful changes to every area of our business, including having finalized an organization-wide restructuring of positions that reduced our salaried headcount by 18%, which is expected to contribute meaningfully to the previously announced 14% reduction in fixed operating expenses. We will continue to have manufacturing capacity of close to $500 million in annual revenue.”

“This is not simply an exercise in cutting, though. We have launched a Partner Advisory Council to better engage our distribution partners. We will invest in our ICE^® software to include more core products and make it easier to use. A new product development filter will help drive sales of higher-margin products. We are planning a price increase, but also launching aggressive pricing programs for applied headwalls and our glass wall products so that we can capture greater market share. And we have begun rebranding and repositioning DIRTT to enable future growth.”

“We anticipate that 2022 will demonstrate the beginning of a return to revenue growth with budgeted annual revenue of between $170 and $180 million and improvements in Adjusted EBITDA loss and net loss in 2022, driving towards a shift to positive Adjusted EBITDA in 2023. In the short term, we expect first quarter 2022 revenue to be between $38 million and $42 million.”

Mr. Lillibridge concluded: “Many of these changes reflect what our clients and customers want to see. They want it to be easier to work with us, and they want the continued predictability of schedules and costs that we have always delivered. It is a difficult balancing act and the changes we are introducing are complex and necessary and could only be accomplished with the leadership we have – both at the board and management. Rightsizing our organization and taking advantage of changing market dynamics gives us the momentum that we’ve needed at DIRTT.”

Revenue for the quarter ended December 31, 2021 was $42.9 million, an increase of $0.7 million from $42.2 million for the quarter ended December 31, 2020 and in line with our expectations. Revenues for the year ended December 31, 2021 were $147.6 million, a decline of $23.9 million or 14% from $171.5 million for the year ended December 31, 2020. We believe this decrease for the year principally reflects the severe economic and social impact of the COVID-19 pandemic since March 2020, including a major contraction in construction activity levels in North America due to non-essential business closures, work-from-home requirements, lock-down measures and other regulatory responses implemented by governments and public health officials. The majority of the decrease was incurred in the first quarter of 2021 when the full impact of the contraction in construction activity was experienced and with most of our pre-pandemic projects in process completed in 2020. Additionally, in the third quarter of 2021, a resurgence of COVID-19 infections due to the Delta variant delayed return to work plans, customer investment decisions and associated construction activities.

Gross profit for the quarter ended December 31, 2021 was $8.4 million or 19.6% of revenue, a decline from $11.5 million or 27.4% of revenue for the quarter ended December 31, 2020. Gross profit for the year ended December 31, 2021 was $23.5 million or 15.9% of revenue, a decline of $29.8 million or 56% from $53.3 million or 31.1% of revenue for the year ended December 31, 2020. The decrease largely reflects lower revenue levels, significant inflationary increases in the realized cost of materials, transportation and packaging, negative fixed cost leverage and under-utilized labor capacity, incremental fixed costs of our new South Carolina Facility and the impact of a stronger Canadian dollar. Of the 15.2% difference in gross profit as a percentage of revenue in year ended 2021 versus 2020, approximately 6% was due to higher material, transportation and packaging costs, 2% was due to negative fixed cost leverage, 2% was due to the incremental South Carolina facility fixed costs, and 2% was due to a stronger Canadian dollar with the balance related to inherent labor inefficiency at lower revenue levels and reduced timber provision reversals.

Adjusted Gross Profit and Adjusted Gross Profit Margin for the quarter ended December 31, 2021 was $10.8 million or 25.3% of revenue, a decline from $13.5 million or 32.0% of revenue for the quarter ended December 31, 2020. Adjusted Gross Profit and Adjusted Gross Profit Margin for the year ended December 31, 2021 was $34.0 million or 23.1%, respectively, a decrease from $63.4 million or 37.0%, respectively, for the year ended December 31, 2020, due to the reasons described above. Excluded from Adjusted Gross Profit for the year ended December 31, 2021 and 2020 are $1.8 million and $2.0 million, respectively, of overhead costs associated with operating at lower than normal capacity levels, which were charged directly and separately to cost of sales rather than as a cost attributable to production.

Sales and marketing expenses for the quarter ended December 31, 2021 were $9.3 million, an increase of $1.7 million from $7.5 million from the quarter ended December 31, 2020. Sales and marketing expenses for the year ended December 31, 2021 were $31.0 million, an increase of $3.0 million from $28.0 million for the year ended December 31, 2020. The increases were largely related to increased salary and wage expenses as we continue to build our sales organization, higher depreciation and operating expenses as we completed our Chicago and Dallas DXCs in 2020 and 2021, respectively, and increased travel, meals and entertainment as restrictions on travel have eased. These increases were partially offset by lower commission expense.

General and administrative expenses for the quarter ended December 31, 2021 were $8.0 million, an increase of $2.3 million from $5.7 million from the quarter ended December 31, 2020. General and administrative expenses increased $3.9 million to $30.6 million for the year ended December 31, 2021 from $26.7 million for the year ended December 31, 2020. The increase was due to higher salaries, benefits and severance costs and $0.9 million of incremental professional fees, of which $0.8 million were incurred in the fourth quarter. In addition, the year ended December 31, 2020 included a $1.2 million reversal of a provision in the fourth quarter relating to a claim for severance by one of our former founders and a $0.6 million credit loss, both of which were not repeated in 2021.

Operations support expenses for the quarter ended December 31, 2021 were $2.5 million, an increase of $0.2 million from $2.3 million for the quarter ended December 31, 2020. Operations support expenses for the year ended December 31, 2021 of $9.4 million were consistent with 2020.

Technology and development expenses for the quarter ended December 31, 2021 were $2.2 million, an increase of $0.3 million from $1.9 million for the quarter ended December 31, 2020. Technology and development expenses increased by $0.1 million to $8.2 million for the year ended December 31, 2021, compared to $8.1 million for the year ended December 31, 2020, primarily related to a decrease in capitalized software development costs offset by lower variable compensation provision and other burdens in the current year.

Net loss increased to $16.0 million or $0.19 net loss per share for the quarter ended December 31, 2021 from net loss of $4.2 million or $0.05 net loss per share for the quarter ended December 31, 2020. The increase in net loss is due to a $3.1 million decrease in gross profit, a $6.2 million increase in operating expenses, a $2.9 million reduction of government subsidies and a $0.9 million increase in interest expense as a result of the convertible unsecured subordinated debentures issued on January 25, 2021 and December 1, 2021 and draws on the Leasing Facilities. These decreases were partially offset by a $0.8 million reduction in foreign exchange losses and a $0.5 million increase in income tax recoveries.

Net loss increased to $53.7 million or $0.63 net loss per share in the year ended December 31, 2021 from a net loss of $11.3 million or $0.13 net loss per share for the year ended December 31, 2020. The increased loss for the year is primarily the result of a $29.8 million decrease in gross profit, a $10.8 million increase in operating expenses, a $2.8 million increase in interest expense as explained above, and a $1.3 million decrease in government subsidies. These decreases were partially offset by a $2.3 million decrease in income tax expense and a $0.2 million decrease in foreign exchange losses.

Adjusted EBITDA and Adjusted EBITDA Margin for the quarter ended December 31, 2021 was an $9.7 million loss or (22.7%) of revenue, a decline of $6.8 million from a $2.9 million loss, or (6.8%) of revenue, for the quarter ended December 31, 2020. This reflects a $2.7 million decrease in Adjusted Gross Profit, increased travel, meals and entertainment due to the easing of COVID-19 restrictions, higher salaries and wage expenses reflecting the cumulative effect of hires in line with our strategic plan, $0.8 million of incremental professional fees, as well as the estimated $0.5 million impact of stronger Canadian dollar on Canadian-based operating expenses, excluding depreciation and stock-based compensation. These decreases were partially offset by $0.4 million of lower commissions.

For the year ended December 31, 2021, Adjusted EBITDA and Adjusted EBITDA Margin decreased by $34.1 million to a $41.3 million loss or (28.0)% from a $7.2 million loss or (4.2)% in the same period of 2020. This full year decrease primarily reflects a $29.4 million decrease in Adjusted Gross Profit and $0.3 million in lower costs of underutilized capacity, higher salary and wage expenses for the reasons discussed above, $0.9 million of incremental professional fees, as well as the estimated $2.7 million impact of a stronger Canadian dollar on Canadian-based operating expenses, excluding depreciation and stock-based compensation. Reductions in Adjusted EBITDA were partially offset by $2.5 million of lower commissions.

A conference call and webcast for the investment community is scheduled for Thursday, February 24, 2022 at 8:00 a.m. MDT (10:00 a.m. EDT). The call and webcast will be hosted by Todd Lillibridge, interim chief executive officer, Geoff Krause, chief financial officer, and Kim MacEachern, director of investor relations.

The conference call will be broadcast live in listen-only mode available through the company website at dirtt.com/investors. Alternatively, click here to listen to the live webcast.

To join by telephone, dial +1-877-479-7708 (toll-free in North America) or +1-647-427-2478 (international). Please dial in a minimum of 15 minutes prior to the start time to ensure a timely connection to the call.

Investors are invited to submit questions to ir@dirtt.com before and during the call. Supplemental information slides will be available within the webcast and at dirtt.com/investors prior to the call start.

A replay of the webcast will be available online and on DIRTT’s website.