Mr. Benjamin Urban reports

DIRTT REPORTS THIRD QUARTER 2023 FINANCIAL RESULTS

DIRTT Environmental Solutions Ltd. has released its financial results for the three and nine months ended Sept. 30, 2023. All financial information in this news release is presented in U.S. dollars, unless otherwise stated.

Third Quarter 2023 Highlights

• In our seasonally strongest quarter, we generated revenue of $49.5 million, up 11% from the second quarter and 6% compared to the prior year period, and a net loss of $6.3 million, compared to a net loss of $6.7 million in the prior year period.
• Gross Profit margin improvement of 1,950 bps from the prior year period.
• Achieved Adjusted EBITDA( 1) of $5.3 million (10.6% of revenue), up $10.7 million from the prior year period.
• Liquidity of $30.3 million at September 30, 2023 compared to $16.1 million at December 31, 2022.
• On September 27, 2023, we announced the permanent closure of the Rock Hill facility. This resulted in an $8.0 million impairment charge in the quarter and subsequent to quarter end, we expect to settle associated equipment leases of $8.2 million.

(1) See "Non-GAAP Financial Measures"

Management Commentary

Benjamin Urban, chief executive officer remarked "Our Q3 results give us confidence that we are taking the right steps. We are encouraged about the hard decisions we have had to make regarding our cost structure, while optimizing product mix and pricing, and we remain focused on bolstering our commercial organization and our partner network in spite of distressed verticals such as commercial office spaces".

Fareeha Khan, chief financial officer, added "In our seasonally strongest quarter we had a net loss of $6.3 million and achieved Adjusted EBITDA of $5.3 million. Our liquidity continues to improve and we believe DIRTT is well positioned for revenue growth. We are, however, closely monitoring the markets, ensuring we are well positioned to weather adverse macroeconomic uncertainties".

Third Quarter 2023 Results

Third quarter 2023 revenues were $49.5 million, an increase of 6% from the third quarter of 2022 and an increase of $4.8 million, or 11%, from the second quarter of 2023. The year-over-year increase was driven by improved pricing and product mix. Compared to the first and second quarter of 2023, third quarter activity is higher, in line with seasonal demand patterns and timing of project schedules.

Third quarter 2023 gross profit and gross profit margin were $17.1 million and 34.4% respectively, an increase of $10.1 million, or 144%, from $7.0 million and 15.0%, for the third quarter of 2022. The increase in gross profit margin was a result of the realization of our price increases, better product mix, improved labor efficiency and better fixed cost leverage.

Third quarter 2023 Adjusted Gross Profit and Adjusted Gross Profit Margin (see "Non-GAAP Financial Measures") were $18.3 million and 36.9%, respectively, or an increase of $8.2 million and 80% compared to the prior year's third quarter.

Sales and marketing expenses increased by $0.1 million to $6.2 million for the quarter ended September 30, 2023, from $6.1 million for the quarter ended September 30, 2022. The increase was driven by higher commission costs offset by lower travel and entertainment costs, marketing costs, and building expenses.

General and administrative expenses decreased by $1.9 million to $4.7 million for the quarter ended September 30, 2023, from $6.5 million for the quarter ended September 30, 2022. The decrease was primarily related to a decrease in professional services costs of $1.0 million and a $0.5 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of our cost reduction initiatives.

Operations support expenses decreased by $0.6 million from $2.3 million for the quarter ended September 30, 2022, to $1.8 million for the quarter ended September 30, 2023. The decrease was primarily due to a $0.4 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of our cost reduction initiatives.

Technology and development expenses decreased by $0.5 million to $1.2 million for the quarter ended September 30, 2023, compared to $1.7 million for the quarter ended September 30, 2022, primarily related to decreased salaries and benefits costs associated with the planned headcount reductions as part of our cost reduction initiatives.

During the quarter, the Company incurred $0.3 million in reorganization costs which relate primarily to movement of inventory from the Rock Hill Facility and termination costs associated with actions taken to streamline our back office and operational support functions.

Net loss and net loss margin for the quarter were $(6.3) million and (12.7%) compared to $(6.7) million and (14.4)% for the prior year's third quarter, respectively. The improvement in net loss is the result of the higher gross profit margin and reduced operating expenses explained above, offset by the impairment charge on the Rock Hill Facility.

Adjusted EBITDA and Adjusted EBITDA Margin (see "Non-GAAP Financial Measures") for the quarter were $5.3 million and 10.6%, respectively, an improvement of $10.7 million from $(5.4) million and (11.6)% for the prior year's third quarter. Improvements in Adjusted EBITDA for the quarter were due to the above noted reasons.

Outlook

Through the first six months of 2023, we experienced continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. These conditions included layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings, resulting in certain projects that were planned earlier in the year being deferred or canceled. We note that we are exiting our seasonally strongest quarter and are entering our typically weaker winter period.

In response and as discussed in our previous quarterly reports on Form 10-Q, we identified and took action to reduce annualized overhead costs by $5.0 million during the first quarter of 2023. Further, on May 8, 2023, the Company reduced its salaried workforce, resulting in annualized savings of $2.6 million. One-time costs associated with these reductions, incurred in the second quarter of 2023, were approximately $0.7 million.

The trend of economic uncertainty has continued into the third quarter of 2023. The conversation on "return to work" continues as some companies are mandating a hybrid "return to work" policy. Various inflation metrics have improved over the three months ended September 30, 2023, although there is no guarantee they will continue to do so.

We believe that wider macroeconomic conditions indicate we are in an uncertain late cycle environment with the near-term potential for deteriorating macroeconomic conditions. The increase in long term interest rates can potentially reduce demand for capital intensive projects in our Commercial, Healthcare, and Education segments. The AIA/Deltek Architecture Billings Index fell into contraction across all geographies in September. Regardless, we continue to focus on what is within our control: supporting our current partners, increasing penetration in targeted geographies, onboarding new Construction Partners, and new strategic partnerships. While we are benefiting from price stability in our input costs as well as a strengthening U.S. dollar, recent unrest in the Middle East may adversely impact our gross margins, and could further impact our pipeline, should energy prices return to 2022 levels.

We have made hard choices and meaningfully reduced our cost footprint and made great progress in lowering our estimated revenue breakeven point. We will continue to evaluate our cost structure and respond to the inflationary impacts to labor, materials and services in an efficient manner consistent with our goal to maintain future healthy gross profit and Adjusted EBITDA margins while improving our future liquidity.

Conference Call and Webcast Details

A conference call and webcast for the investment community is scheduled for November 10, 2023, at 08:00 a.m. MDT (10:00 a.m. EDT). The call and webcast will be hosted by Benjamin Urban, chief executive officer, and Fareeha Khan, chief financial officer.

The call is being webcast live on the Company's website. The webcast is listen-only.

A webcast replay of the call will be available on DIRTT's website.

About DIRTT Environmental Solutions

DIRTT 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 interior construction solutions are designed to be highly flexible and adaptable, enabling organizations to easily reconfigure their spaces as their needs evolve. Headquartered in Calgary, AB Canada, DIRTT trades on the Toronto Stock Exchange under the symbol "DRT".

We seek Safe Harbor.