Q3 2020 DIRTT Environmental Solutions Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to do that Tony Tony Third quarter Financial results Conference call. At this time, all participants I know listen only mode. I think a speaker Jim likes that will be a question and answer session to ask a question. During the session you will need to pass star one on your telephone.
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Do you require any further assistance. Please press star zero. Thank you.
I would now like to hand, the conference over to your host Mr., Ken <unk> director of Investor Relations Ma'am the floor is yours.
Thank you operator good.
Morning, everyone and welcome to today's call to discuss <unk> third quarter 2020 results.
Joining me on the call are <unk>, Chief Executive Officer, Kevin Nomura, and Chief Financial Officer, Jeff gross.
Management's prepared remarks today are accompanied by presentation slides to access the slides. Please view them from the web page this webcast or go to the investors section of its website.
The earnings press release that was issued yesterday afternoon can also be found on our website.
Today's call will include forward looking statements within the meaning of applicable Canadian and United States Securities Law.
These statements are based on the company's current intent expectations and projections they are not guarantees of future performance.
In addition, this call will include references to non-GAAP results. Excluding special items. Please reference our form 10-Q as filed on November 4th 2020, with the Securities and Exchange Commission or FCC and other reports and filings with the FCC for information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
I will also remind you that this webcast is being recorded and a replay will be available today at approximately one PM Eastern time, I now would like to turn the call over to Kevin.
Thank you Kim and thank you to everyone joining us today.
Starting on slide four is going to be trying to commercial construction.
Mystery works to adjust to the ongoing impacts of the COVID-19 pandemic and we continued to see volatility around the country projects for our platform.
Hurdles or 46.2 million in revenue in the third quarter was slightly higher than both the first and second quarter into the year.
We do have a modestly positive adjusted EBITDA driven by adjusted gross profit benefited from our decision earlier this year to rightsize refractory labor.
For $51 million cash balance at quarter end was higher than at the end of both the first and second quarters of the year.
Healthcare represented 36% of total product and transportation revenue this quarter as we delivered three large health care projects. As a reminder, we depart a large project is a sales generating over $2 million to anyone end user.
One of the projects, whose wouldn't existing strategic accounts and the second was for the delivery of acute care rooms for use in a prefabricated temporary halt their opportunity arising from the current pandemic at our health care Rapid response initiative in the spring.
Further demonstrating our capabilities to innovate and execute rapidly on Cobra Nike Road projects. We recently developed for freestanding kiosks for COVID-19, catching and vaccinations were.
We are currently marketing these health care organizations retailers educational institutions and large employers.
The standalone structures called constructive clinical enclosures.
19 pandemic, while capturing the bulk of the intended benefits.
Starting with commercial execution in the last 12 months, we've heard 36, new people into the commercial organization compared to the over 50 contemplated by our pre pandemic strategic plan.
We've attracted professional who a proven track records, who made an immediate impact on our organization.
Restructured the commercial team into five areas, specifically marketing sales client experience partner success and commercial operations with individuals in place to lead each area.
Reviewing these five areas and turn first it was imperative that we create a strategic marketing function.
Dedicated resources deployed to increase brand awareness supported by clear value proposition Ah consistent dirt story and lead generation program, specifically targeted key customer segments are critical to supporting a successful sales function.
We hired a vice president strategic marketing added six people to the team and in July launched her first ever strategic marketing campaign called make space for possibilities.
Initial responses exceeded our expectations, allowing us to refine a targeted audience for reengagement, whom we can continue to nurture both digitally NCR sales team.
For the first time endures history lead generation from a strategic marketing campaign and the website are being tractor CRM system embedded by a lien development team for follow up by our sales force and distribution partners.
The next phase of the campaign will include a thought leadership piece featuring influential industry leaders, including our New Board member, Michael Ford, who had real estate insecurity globally for Microsoft.
This peaceful explore the future space its impact on people and how that influences the decisions businesses make about their interiors.
We believe the powerful network of advocates for prefabricated construction, we have assembled builds on a brand new minutes and puts us at the forefront of industry thinking.
For our distribution partners and clients without incurring any credit exposure.
In commercial operations, we have strengthened our internal analytical and forecasting capabilities and are developing tools to equip our sales teams and distribution partners to more effectively execute.
As part of the second phase of our CRM system implementation, we plan to fully integrate companywide lead tracking capabilities to maximize our sales effectiveness.
This is basic building block in the sales organization. It is a new capability for Dur, we've developed our total cost of ownership tool, which empowers our sales force to concisely communicate the dirt cost on day, one and over time compared to conventional construction and addresses a key challenge in our sales process and lastly, we are in the process of migrating from 27.
100 pieces of sales collateral to curated set of 30 types of tools to support our core offering and market segments.
Turning to manufacturing operations on slide seven I'm very pleased to report that the third quarter represented our first recordable incident free quarter imply.
Implementing a rigorous safety culture has been a top priority and an immensely proud of everyone who've worked so diligently to major safe place to work.
The ongoing work of our operations team to improve our factories helped mitigate pressure on our gross margins this quarter, despite negative fixed cost leverage compared to the third quarter of 2019.
Over the past 12 months, we appointed leaders in both safety and quality establish an operational team dominant implement a variety of lean manufacturing tools and have made step change improvements across all aspects of our operations.
In addition to safety, we have made sustainable process improvements and balance capacity and demand and driven cost reductions from enhanced material and labor efficiencies. We're.
We're moving forward with our new South Carolina tile plant, which with its significant increase in automation should deliver even greater improvements in labor material efficiency.
Turning to innovation on slide eight our product development team has been integral and developing cobot Nike related solutions on exceptionally tight time frames and under the immense uncertainty of the pandemic.
Our inspiron reflect all offerings will walk to market under a newly formalized new product introduction process that includes sales training and supporting marketing materials I would also like to highlight the tremendous accomplishment accomplishments of our ice team who in October introduced our most significant software release to date offering enhance virtual reality.
Broader accessibility through Android and windows platforms.
All of the changes I've, just articulated will be a major accomplishment in a normal environment much less during a once a century global pandemic and enormous personal financial and operational uncertainty in fraud.
The reason, we may able to do this comes down to one word people when I joined or just over two years ago I quickly realized I had the honor to be working with the best most passionate group of people I've ever worked with over my entire 30 plus year business career.
We've been able to augment this fabulous group with equally talented passionate people who quickly so our incredible business model and appreciate our unique company I look forward aggressively attacking the opportunities and challenges ahead of US with this amazing group of people I'd now like to turn the call over to Jeff to review the financials.
Thank you Kevin.
Before turning to the quarterly results I'd like to quickly go over some points from a liquidity standpoint on slide nine.
As we have discussed in the previous two quarters early in 2020, we undertook a fulsome review of our credit facilities.
During the third quarter, our RBC credit facility remained undrawn with approximately $11.6 million of availability subject to a covenant holiday, which allows us to draw on the facility to the end of the fourth quarter. We have signed an indicative term sheet to convert this existing cash flow base facility to an asset backed loans.
Facility with completion of definitive documentation expected in the fourth quarter.
In the third quarter, we drew three and a half million of our previously disclosed us equipment leasing facility to fund equipment purchases for the South Carolina plant with further draws expected upon receipt of the remaining pieces of major equipment likely in early 2021.
In the third quarter, we qualified for an additional $4.5 million of Canadian emergency wage subsidies from the Canadian government on top of the 4.3 million recognized in the second quarter.
Of these $8.8 million of subsidies, we have already received $6.1 million and expect to receive an additional $2.7 million in the fourth quarter.
In the September 2020 throne speech, the Canadian minority government announced its intention is to extend this program to the summer of 2021, but no legislation has been passed to date, we continue to intend to continue applying for such subsidies if applicable.
Our working capital management focus also continued in the third quarter with no reportable disruptions or delays and accounts receivable collections and with day sales outstanding net of deposits continuing to run at under 30 days.
As a result, we finished the third quarter with cash balances of 50.7 million an increase from the $44.6 million at June Thirtyth.
Our net working capital at September Thirtyth was $56.7 million compared to 52.2 million at June Thirtyth and our current ratio remains very healthy at 2.6 times.
Now, let's turn to the third quarter results beginning on slide 10.
Revenue for the third quarter was 46.2 million a decline of 29% from the 2019 quarter, but up marginally from both the first and second quarters as Kevin said depend Democrats had severe impacts on commercial construction activity levels and decision making behavior amongst.
Yes.
In the context of an ongoing spike in COVID-19 infections, we are finding it to be increasingly difficult to quantify the effect that this is having on customer decision, making project size design and timing are all impacted.
On slide 11, adjusted gross profit was 39.3% of revenue has declined from 41.8% for the comparable period of 2019.
This decrease is primarily the impact of fixed costs on lower revenue. This negative leverage however has been partially offset by the labor force reductions we made earlier in the year combined with the continued progress to improve the efficiency and effectiveness of our manufacturing processes.
During the quarter, we also reduced the warranty provision related to timber as previously discussed $5.5 million.
Turning to the breakdown of operating expenses on slide 12, similar to last quarter I would specifically call out the drop in sales and marketing expense during Q3.
This decrease reflects lower commission expense on decreased revenue and continued attention to cost discipline we.
We also continued to record materially lower travel meals and entertainment expenses as a result of COVID-19, it is reasonable to assume that when the pandemic and associated restrictions ease we will see an increase from current levels.
General and administrative expenses similarly benefited from lower travel and entertainment as well as reduced building operating expenses, reflecting the work from home status of most of our head office employees.
Looking at Slide 13, adjusted EBITDA, and adjusted EBITDA margin for the quarter decreased 2.9 million and 1.8%, respectively compared to $7.9 million and one and 12% respectively for the 2019 period the.
The reduction reflects a $9.1 million decrease in adjusted gross profit and a point 4 million of increased professional fees, partially offset by the reduced commission on lower revenue and decreased expenses I already mentioned.
I would note that this quarter's adjusted EBITDA includes the point 5 million timber provision reversal.
Like Q2, adjusted EBITDA excludes the Canadian urgency wage subsidy of $4.5 million.
On slide 14, net loss for the quarter was $2.1 million or negative point negative two cents per share compared to net income of $5.8 million or seven cents per share for the third quarter of 2019.
The decrease was a result of changes in gross profit and operating expenses as I have discussed a point $7 million increase in foreign exchange loss and a $1.4 million increase in income tax expense, partially offset by $4.5 million in government subsidies.
During the third quarter, we recorded a $3.1 million valuation allowance against our deferred income tax assets, reflecting the significant uncertainty and decline in our Canadian entities sales and profitability caused by the pandemic.
Finally, let's touch on our outlook on slide 15.
As Kevin mentioned, our average daily order entry levels for October has been consistent with what we've seen for 2020. Thus far. However, we are seeing indications of softness in our core business for the balance of the year with such impacts yet to be offset by COVID-19 opportunities or our newly strengthened commercial.
Ladies that said, we will continue to actively manage our costs in the same manner as we have in the past two quarters and we'll continue to execute our strategic plan.
As you know we have already de prioritize some of our sales and marketing hiring and selected less costly alternatives for some sales tools. This.
The substantial progress within our commercial organization the improvements within our manufacturing operations and our solid balance sheets can support operations at current levels. We continue to actively monitor the situation and remain ready to take action should business conditions deteriorate. We also expect to begin to realize.
Lies positive income from our strategic plan implementation.
Operator, we would now like to open the call for questions.
Thank you Ken.
I would like to remind everyone and I'll just ask a question. Please press Star then the number one on your telephone keypad again, Thats, Taiwan to ask a question. If you would like to draw. Your Pat's question you can pass the pack team will possibly get them on to the powder to M&A landscape.
Your first question will come from the line of and we'll take manner from National Bank. Your line is now likely to happen.
Good morning, everyone.
Want to revert more to that.
Are you seeing some headwinds from from Covance, but you have been investing in your sales force and your processes I am wondering can you give us some examples of.
Progress since you're seeing revenue improved CRM and your and your new sales staff and sales process.
Probably the single biggest indicator is our make space campaign.
On the leads we generated were literally we know the exact number of leads.
They tend to use the CRM system. They were distributed to the appropriate ramps bedded to make sure that they were qualified leads that's probably the single biggest the receipt of the easiest embodiment.
Of what we've been able to accomplish because it involves a marketing campaign has never been done before demands marketing and men and translates into sales and sales leads that then get passed to our reps to pursue.
Are you able to quantify the benefit maybe how much of your your sales you can attribute to.
His new ways of doing business.
Eventually we should be able to unfortunately, given those long sales cycle that we operate Andrew it's too early to be able to do that.
At a certain point time, we should be able to say okay. This lead came through make space. It was different for this revenue led to the sales reps, we should be able to quantify that overtime.
Okay, and then similarly with.
Some new partners, new new dealers are you able to give us a sense of how much.
Progress they are making maybe how much of a contribution they are making to your sales pipeline.
It is early days, we are doing a great job onboarding them. They also have the headwinds of the pandemic and it can also just give me the be difficult to get traction.
For instance, in the commercial market like New York, and you've been largely shut down through the Oh.
Through the spring and into the end of the summer.
Our sense is that they will acclimate at least twice as quickly as partners historically, if not more.
Okay. Thanks, and then moving to the new plant in South Carolina, if you're making progress there.
Can you remind us what was the schedule for bringing that online and maybe talk to us about how you will integrate that plant into your operations.
And in any event that activity levels are unchanged or you're going to be able to.
To flex the the other operations without driving costs up too much in the near term.
So to answer your first question, you're expecting it to come on and come online in the first half of the year.
We will balance through ultimately to point out.
It is a criminal coal tar plant, meaning candid calls, which is about 70% of their volume. So those are the 30% of our typical product mix at that plant is not going to be able to address at least initially.
We will look to Hearst rationalize based on geography to reduce freight costs, and then ramp up from there and our expectation is it and Kimberly activity levels stay where they are currently we will fluctuation using operation.
Unclear, who would be any direct one to one auction or how it would compare but no. We would anticipate flexing our point can't pixel pictures extend to accommodate the added capacity.
Okay. Thanks, I'll get back in the queue.
Thank you Sam Yeah next question will come from the line of Greg Palm from Craig Hallum Capital. Your line is now live.
Hey, guys. This is actually Danny acreage on for Greg today.
And any other hurry.
Good.
I guess, thanks for the color on the October trends.
There is anything more any color on the market pop pipeline over the next couple of quarters, you know any certain geographic weakness or particular end markets you want to get out there.
I don't know necessarily so I mean, I can I'm happy to share what we're see it with our partners and our own clients and how they're thinking about things and how that plays out. There's obviously a lot going on there was a U.S. election that hasn't been settled obviously 2020 is a year that everybody would like to forget.
People are watching when premiums coming through.
Grown a virus when viruses get rolled out in any slumps in say in what we're seeing consistently is companies trying to juggle on that and go on.
And pasting activities Accordingly, the one thing that I will highlight that's very different than past commercial construction downturns, where typically its business cycle, driven and so it impacts basically all sectors. As you guys. Obviously have seen did see very bimiodal. There were some sectors in the economy that are any question.
And Dan just gives wouldn't take time to call on and there are others that actually are doing better and so part of what we'll be doing from a strategic marketing and sales tactic standpoint is obviously spending time with those companies, who have the financial wherewithal and where the pull them, it's actually causing them to grow to spend time driving sales with them.
Rather than that then with anybody who has been really adversely hurt expenses talent intensive businesses and companies like that.
Yeah that makes sense.
I guess moving on to these kind of cold and kiosks that you guys launched I mean, what can you say about the market opportunity for that and any additional color on maybe how you're bringing these solutions to market.
It's early days to really quantify the interest level has been significant but it's hard to quantify what that will translate into a into sales.
We're marketing in several different ways, we've got a marketing campaign that we have kicked off we're working through the core partner network and our sales force.
We are deploying our strategic account group I am frankly, helping to solve these with larger role with larger clients and then department that we mentioned it can't help design and they also are undergoing involved in the sales effort. So it's basically all hands on deck.
Working to solve these solutions.
Okay, Great and then a last one for me.
Yes.
Just curious I know you added that drywall partner I guess this past summer.
Im curious if youre going after or more noncore partners like that is that part of the strategy.
Potentially we want to see how that plays out.
And ER and use it as a test case, we've got a handful general contractors that distribution partners I'm, so depending upon how that rolls out we very well may you may do more of that in the future which have to see.
Okay, Great. That's all for me you guys. Thanks.
[noise] clunky Sams and its just time I would like to remind everyone I'd like to ask a question. Please press Star then the number one on your telephone keypad.
Next question will come from the line of Josh <unk> from Raymond James Your line is now like go ahead.
Good morning, Kevin and Jeff Thanks for taking my questions.
Morning.
On the large projects and health care were those completely delivered in the quarter or is there still some left on those.
[noise] I thought there were largely completed in the quarter, we may have a little bit of a punch listing follow but there were larger than you do in the quarter.
What does your pipeline look like for large projects going forward.
[noise] I don't know that we had really gotten into that two level detail and I think your questions is really seeking.
I think it's reflective of kind of the comments that I made earlier, which is its very unsettled time, I guess to give a little bit of additional color. What we are seeing is we were quoting that level has been fairly substantial there is a lot of activity a lot of what we're doing across our organization with the sales force with the marketing with.
On our strategic account approach has generated an enormous amount of activity in northern reasonably significant leads the question is.
Whether and when those will translate into orders and sales and because of everything that's going on in the broader economy and and political environment that timing is uncertain.
Okay that makes sense and then as we think about your cash needs going forward can you give us a sense of what you think capex will be in the fourth quarter and then 2021.
Sure, Yes, Jeff Your you know us as we look at the Capex for Q4 is going to be around.
Two and a half to $3 million as we.
As we finish off the the Carolina that the next the next phase of the Carolina payment stream as well as our software development costs that are that we incur on a normal basis, which tend to be in that million dollar range.
As we look at a as we look at next year.
It is it is probably at similar levels to what we have this year as we continue to.
Build out our dirt experienced centers finish off our past facility and.
Do the.
Do our normal software development enhancements that we do.
Got it good luck with the next quarter.
Thank you.
Thank you and again at this time I would like to remind everyone. If you would like to ask a question you can press star one on your telephone keypad well pause it gets the more money from Paul for taking my questions.
Hi, Good morning, I am seeing no further questions in the queue I would like to hand, the call over back to Mr., Kevin I'll now for closing remarks.
Thank you operator before closing I'd like to again, thank our tremendous employees and partners, who continue to demonstrate resiliency and commitment in the face of extraordinary circumstances their dedication to dirt and our collective mission is propelled our organization forward innumerable ways. This year and they are the foundation of our future success. Thanks for joining us today.
[noise] funky phone. Thank you so much because then I just want to again. Thank you everyone for participating. This concludes today's conference you may now disconnect. They.
They sales I never let me down.
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Ladies and gentlemen, thank you for standing by welcome Tony.
Tony Tony third quarter financial results Conference call.
I'm all set.
<unk>.
I think it's because you're likes there will be a question and answer session.
Ask a question during the session you will need to pass star one on your top selling if you wish to move yourself from the queue. These past.
If you require any further.
Yes, Scott sorry say, Ralph Thank you I would now like the conference over to your home.
Okay great.
At Investor Relations Ma'am the floor is yours.
Thank you operator, good morning, everyone and welcome to today's call to discuss <unk> third quarter 2020 results joint.
Joining me on the call are durch, Chief Executive Officer, Kevin Nomura, and Chief Financial Officer, John close.
Management's prepared remarks today are accompanied by a presentation slides.
To access the slides please do them from the web page of this webcast will go to the investors section of its website.
The earnings press release that was issued yesterday afternoon can also be found on our website.
Today's call will include forward looking statements within the meaning of applicable Canadian and United States Securities Law.
These statements are based on the company's current intent expectations and projections they are not guarantees of future performance.
In addition, this call will include references to non-GAAP results. Excluding special items. Please reference our form 10-Q as filed on November 4th 2020, with the Securities and Exchange Commission or STC and other reports and filings with the FCC for information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
I will also remind you that this webcast is being recorded and a replay will be available today at approximately one PM eastern time.
I now would like to turn the call over to Kevin.
Thank you Kim and thank you to everyone joining us today.
On slide four meters allergy trying to commercial construction industry works to adjust to the ongoing impacts of the COVID-19 pandemic and continue to see volatility around the timing of projects in our pipeline.
Regardless, our 46.2 million in revenue in the third quarter was slightly higher than both the first and second quarters should be here.
We do have a modestly positive adjusted EBITDA driven by adjusted gross profit benefited from our decision earlier this year to rightsize our factory laborer.
Our 51 million dollar cash balance at quarter end was higher than at the end of both the first and second quarters of the year.
Okay represented 36% of total product and transportation revenue this quarter as we deliver three large health care projects as.
As a reminder, we defined a large project is a sales generating over $2 million to anyone end user.
One of the projects was written existing strategic accounts and the second was for the delivery of acute care rooms for Usone prefabricated temporary helps them an opportunity arising from the current pandemic and our health care Rapid response initiative in the spring.
Further demonstrating our capabilities to integrate and execute rapidly I cope with Nike on projects. We recently developed for freestanding kiosks recovered Nike catching and vaccinations.
We are currently marketing needs to health care organization retirement educational institutions and large employers.
The standalone structures called constructing clinical enclosures were developed in partnership with a leading health care innovation company and facilitate direct contact with physical separation between healthcare professionals and patients during examinations and treatments that are available in 14 days water gifts assembled on site.
Well, we're seeing opportunities in health care, we remain cautious on our short term outlook.
The contraction in commercial construction, that's having a prolonged negative impact on demand with more and more projects being delayed or reconsider.
We continue to believe the long term impacts of the pandemic has the potential to be positive for our business by accelerating the chip to pre fabricated construction well yet to see a significant increase in such projects.
We have also yet to see many quarters from remodeling projects in preparation for people to reoccupy their spaces.
October average daily order entry was consistent with the first three quarters of the year. However in the absence of significant traction on short lead time projects, we're anticipating lower volume as we move into the final two months or 2020, an early 2021.
Despite these challenges remain focused on financial management and moving toward.
Forward with the key elements of our strategic plan and our goal to effectively drive market share, but hurting.
Turning to slide five it has now been one year since we presented our strategic plan to investors and I think it's appropriate today to reflect on the progress. We've made this year. In addition to reporting on this quarters accomplishments.
We believe the initiatives, we've undertaken particularly in sales and marketing were necessary to realize the full potential what are unique business model, and thereby achieving sustainable profitable growth and resulting stakeholder value.
As we previously discussed we've adjusted the implementation of our strategic plan to reduce the cost in light of the uncertainty of the cobot Nike pandemic, while capturing the bulk of the intended benefits star.
Starting with commercial execution in the last 12 months, we've had 36 new people into the commercial organization compared to the over 50 contemplated by our pre pandemic strategic plan.
We've attracted professionals with proven track records, who made an immediate impact on our organization we.
We structured the commercial team into five areas, specifically marketing sales quite experienced partner success and commercial operations with individuals in place until each area.
Reviewing these five areas in turn first it was imperative that we create a strategic marketing function.
Dedicated resources deployed to increase brand awareness supported by clear value proposition, a consistent story and lead generation program, specifically target key customer segments are critical to supporting its exceptional sales function.
We hired a vice president strategic marketing added six people to the team and in July we launched our first ever strategic marketing campaign called make space for possibilities.
Initial responses exceeded our expectations, allowing us to refine or targeted audience, Reengagement, whom we continue to nurture both internally and through our sales team.
For the first time in dirt history lead generation from the strategic marketing campaign and the web sites are being tracked for a CRM system embedded by lead development team for followed by our sales force and distribution partners.
The next phase of the campaign will include a thought leadership piece featuring influential industry leaders, including our New Board member, Michael Ford, who had real estate and security globally for Microsoft.
This piece will explore the future of space its impact on people and how that influences the decisions businesses make about their interiors.
We believe the powerful network of advocates for pre fabricated construction, we have assembled builds on our brand in minutes and puts us at the forefront of industry thinking.
Through our strategic marketing function. We've also identified influencers in the construction process that had been historically overlooked by dirt, we're developing communication strategies and tools to increase our engageone were general contractors architects and designers all important decision makers, who should be hearing our story directly and consistently.
Turning next to sales in addition to adding regional directors to manage and develop the core sales team. We identified strategic accounts. There is an important source of future growth.
I'm pleased to say that the number of conversations underway with potential clients as well as existing clients who are candidates to be served to strategic accounts.
We're now than ever.
We've also made great strides structurally in equipping the organization to wind its highly competitive business.
We hired a director strategic accounts the enterprise sales with over 30 years of experience any bad three people to his team they.
They generated a qualified list of end users and we are actively targeting.
Turning to slide six and the pace of covert Nike travel restrictions are enhanced client experience team demonstrated our commitment to innovation across every aspect of our business, creating a virtual client tour that we believe maintains the effectiveness of the many in person tours, we hosted pre pandemic.
There also.
Broaden that virtual approached include comprehensive employee and partner on boarding programs I expect these tools, while created out of diversity to become standard offerings corridor.
Our distribution partner network is critical to our success and we've invested heavily to improve support and engagement.
In addition to our lead generation activities. We now have seven people dedicated to our partners who are testing our partner portal watch following the second phase of our CRM system rollout.
We're designing a program to ensure we support and reward all partners for continued growth in their business.
We felt five of our existing partners expand into new territories, and our Onboarding 80 partners. This year.
Finally, we established a vendor financing program in partnership with a major North American financial institution can make financing easier and more straightforward for our distribution partners and clients without incurring any credit exposure.
In commercial operations, we have strengthened our internal analytical implication capabilities are developing tools to equip our sales teams and distribution partners to more effectively execute.
That's part of the second phase of our CRM system implementation, we plan to fully integrate companywide lead tracking capabilities to maximize our sales effectiveness.
This is the basic building block in the sales organization. It is a new capability for dirt. We've developed our total cost of ownership tool, which empowers our sales force to concisely communicate the dirt cost on day, one and over time compared to conventional construction and addresses a key challenge in our sales process and lastly, we're in the process of migrating from 27.
Hundred pieces of sales collateral to curated set of 30 types of tools to support our core offering and market segments.
Turning to manufacturing operations on slide seven I'm very pleased to report that the third quarter represents our first recordable incident free quarter.
Implementing a rigorous safety culture has been a top priority immensely proud of everyone who've worked so diligently to make dirt safe place to work.
The ongoing work of our operations team to improve our factories helped mitigate pressure on our gross margins this quarter, despite negative fixed cost leverage compared to the third quarter of 25.
Over the past 12 months, we appointed leaders in both safety and quality establish an operational team to implement a variety of lean manufacturing tools and have made step change improvements across all aspects of our operations and.
In addition to safety, we have made sustainable process improvements and balance capacity and demand driven cost reductions from enhanced material and labor efficiencies.
We're moving forward with our new South Carolina tile plant, which was a significant increase in automation should deliver even greater improvements in labor and material efficiency.
Turning to innovation on slide eight our product development team has been integral and developing cobot Nike related solutions are exceptionally tight time frames and under the immense uncertainty of the pandemic.
Our inspired reflect wall offerings will walk to market under a newly formed a lives new product introduction process that includes sales training and supporting marketing materials.
I would also like to highlight the tremendous accomplishments accomplishments of our ice team who in October introduced our most significant soccer release today offering enhanced virtual reality and broader accessibility through Android and windows platforms.
Oh, the change that I, just articulated would be a major accomplishment in a normal environment much less during a once a century global pandemic and the enormous personal financial and operational uncertainty in block.
The reason we've been able to do this comes down to one word people when I joined or just over two years ago I quickly realized I had the honor to be working with the best most passionate group of people I've ever worked with over my entire 30, plus year business career, we've been able to augment this fabulous group of equally talented passionate people who quickly sorry.
Credible business model and appreciate our unique company I look forward aggressively attacking the opportunities and challenges ahead of us with this amazing group of people.
I'd now like to turn the call over to Jeff to review the financials.
Thank you Kevin.
Before turning to the quarterly results I'd like to quickly go over some points from a liquidity standpoint on slide nine.
As we have discussed in the previous two quarters early in 2020, we undertook a fulsome review our credit facilities.
During the third quarter, our RBC credit facility remained undrawn with approximately 11.6 million of availability subject to a covenant holiday, which allows us to draw on the facility to the end of the fourth quarter. We have signed an indicative term sheet to convert this existing cash flow base facility to an asset backed loan.
Facility with completion of definitive documentation expected in the fourth quarter.
In the third quarter, which are three and a half million of our previously disclosed U.S. equipment leasing facility to find equipment purchases for the South Carolina plant, but further draws expected upon receipt of the remaining pieces of major equipment likely in early 2021.
In the third quarter, we qualified for an additional 4.5 million of Canadian emergency wage subsidies from the Canadian government on top of the 4.3 million recognized in the second quarter.
Of these $8.8 million of subsidies, we have already received 6.1 million and expect to receive an additional $2.7 million in the fourth quarter.
In the September 2020 throw a speech the Canadian minority government announced its intention is to extend this program to the summer of 2021, but know that just station has been passed to date, we continue to intend to continue applying for such subsidies if applicable.
Our working capital management focus also continued in the third quarter with no reportable disruptions or delays and accounts receivable collections and with day sales outstanding net deposits continuing to run that under 30 days.
As a result, we finished the third quarter with cash balances of 50.7 million an increase from the $44.6 million at June Thirtyth.
Our net working capital at September Thirtyth was $56.7 million compared to $52.2 million at June Thirtyth and our current ratio remains very healthy at 2.6 times.
Now, let's turn to the third quarter results beginning on slide 10.
Revenue for the third quarter was 46.2 million a decline of 29% from that 2019 quarter, but pop marginally from both the first and second quarters.
As Kevin said, the pandemic has had severe impacts on commercial construction activity levels and decision making behavior amongst users.
In the context of an ongoing spike and COVID-19 infections, we are finding it to be increasingly difficult to quantify the effect that this is having on customer decision making.
Patrick size design and timing are all impacted.
On slide 11, adjusted gross profit was 39.3% of revenue a decline from 41.8% for the comparable period of 2019.
This decrease is primarily the impact of fixed costs on lower revenue.
This negative leverage however has been partially offset by the labor force reductions we made earlier in the year combined with the continued progress to improve the efficiency and effectiveness of our manufacturing processes.
During the quarter, we also reduced the warranty provision related to timber as previously discussed by $2.5 million.
Turning to the breakdown of operating expenses on slide 12, similar to last quarter I would specifically call out the drop in sales and marketing expense during Q3.
This decrease reflects lower commission expense decreased revenue and continued attention to cost discipline we.
We also continued to record materially lower travel meals and entertainment expenses as a result of COVID-19, it is reasonable to assume that when the pandemic and associated restrictions AIDS, we will see an increase from current levels.
General and administrative expenses similarly benefited from lower travel and entertainment as well as reduced building operating expenses, reflecting the work from home status of most of our head office and toys.
Looking at Slide 13, adjusted EBITDA and adjusted EBITDA margin for the quarter decreased 2.9 million and 1.8%, respectively compared to 7.9 million and one and 12% respectively for the 2019 period.
The reduction reflects a $9.1 million decrease in adjusted gross profit and a point 4 million of increased professional fees, partially offset by the reduced commission on lower revenue and decreased expenses I already mentioned I would note that this quarter's adjusted EBITDA includes the point $5 million.
Timber provision reversal.
Like Q2, adjusted EBITDA excludes the Canadian emergency wage subsidy of $4.5 million.
On slide 14, net loss for the quarter was 2.1 million or negative point negative two cents per share compared to net income of 5.8 million or seven cents per share.
For the third quarter of 2019.
The decrease was the result of changes in gross profit and operating expenses as I discussed $8.7 million increase in foreign exchange laws and a $1.4 million increase in income tax expense, partially offset by $4.5 million in government subsidies.
During the third quarter, we recorded a $3.1 billion a valuation allowance against our deferred income tax assets, reflecting the significant uncertainty and decline in our Canadian entities sales and profitability caused by the pandemic.
Finally, let's touch on our outlook on slide 15.
As Kevin mentioned, our average daily order entry levels for October has been consistent with what we've seen for 2020. Thus far. However, we are seeing indications of softness in our core business for the balance of the year with such impacts yet to be offset by COVID-19 opportunities for our newly strengthened commercial capability.
He's.
That said, we will continue to actively manage our costs in the same manner as we have in the past two quarters and we'll continue to execute our strategic plan as.
As you know we have already de prioritize some of our sales and marketing hiring and selected less costly alternatives for some sales tools. This.
The substantial progress within our commercial organization the improvements within our manufacturing operations and our solid balance sheet can support operations at current levels. We continue to actively monitor the situation and remain ready to take action should business conditions deteriorate. We also expect to begin to realize.
Nice positive incomes from our strategic plan implementation.
Operator, we would now like to open the call for questions.
Thank you Ken.
It would be <unk>, how much of your your sales you can attribute to.
So the new ways of doing business.
Eventually we should be able to unfortunately give them a long sales cycle that we operate Andrew it it's sure they'd be able to do that but at a certain point in time, we should be able to say okay. This league came through make space. It was given to this wrapping it led to the sales, we actually should be able to quantify that overtime.
Okay, and then suddenly with you've got some new partners, new new dealers are you able to give us a sense of how much progress they are making maybe how much of a contribution they're making to your yourselves pipeline.
It is early days, we are doing a great job Onboarding then they also have the headwinds of the pandemic and it can also [noise] excuse me be be difficult to get traction for instance, in a commercial market like New York and it has been largely shut down through the.
Through.
Through the spring and into the end of the summer. Our sense is is that they will acclimated at least twice as quickly as partners historically, if not more.
Okay. Thanks, and then I'm moving to the new plant in South Carolina, So you're making progress there can you remind us what what's the schedule for bringing that online and and maybe talk to us about how you'll integrate that plant into your operations.
And then in the event that activity levels are unchanged or are you going to be able to to.
To flex the the other operations without driving the cost up too much in the near term.
So to answer your first question were expecting it to come on and it come online in the first half of the year, we will balance for also need to point out. It is a chromo cotai appointment and kind of calls which is about 70 per cent of our volume says, there's a 30% of our typical product mix it that perhaps not gonna be able to address at least.
I actually we will look to Hurst rationalize based on geography to reduce pay quite cost and then ramp up from there and our expectations if actually activity level stay where they are currently we will flag started using operation uhm unclear if it would be a good direct.
One to one Oxford or how would I would compare but now we would anticipate flexing our phone call fulfilled Fisher extent to accommodate the attic capacity.
Alright, thanks, so I'll get back in the queue.
Thank you same yeah. Our next question will come from the line of credit calm some Craig Hallum capital Your line of my life.
Hey, guys is actually Danny egret, Jon for Greg today.
Are there any other hurry.
Good I guess, thanks for the color on the October trends Seghers anything more any color on the market pop pipeline over the next couple of quarters, you know any certain geographic weakness or particular and markets you want to get out there.
I.
I don't know necessarily so I mean, I can I'm happy to share what we're seeing it with our partners in our our clients and how they're thinking about things and how that plays out.
Trying to see like going on there's a U S election that hasn't been settled obviously 2020 is a year that everybody would like to forget.
People are watching went treatments coming in for.
Corona virus when viruses get rolled out in any slumps and say and what we're seeing consistently is companies trying to juggle that and and paste their activities. Accordingly, the one thing that I will highlight that's very different from past commercial construction downturns, where typically it's <unk>.
As in a cycle driven and so we can parks basically all sectors. As you guys. Obviously obscene. This is very bimodal. There was some sectors of the economy that are of depression, and and just wouldn't take time to call on and there are others, but actually we're getting better and so part of what we'll be doing for my strategic marketing and.
Sales tactic standpoint is obviously spending time with those companies that have the financial wherewithal and where to put them, it's actually causing them to grow to spend time driving sales with them rather than than with anybody who's been really adversely hurt you said, it's your account intensive businesses and companies like that.
Yeah that makes sense I guess moving onto these kind of Covid kiosks that you guys launched I mean, what can you say about the market opportunity for that and and any additional color on maybe how your brain needs solutions to market.
It's early days to really quantify the interest level has been significant but it's hard to quantify what that will translate into into sales. We're marketing of several different ways. We've got a marketing campaign. We've kicked off we're working through our core partner network and our sales force.
We are deploying are strategic account group iron frankly, helping to solve these with larger with larger clients and then department that we mentioned that can help design them. They also are undergoing involved in the in the sales effort. So it's basically all hands on deck working to solve these solutions.
Alright, Great and then last one for me.
I guess, just curious I know you added that dry wall partner I guess this past summer.
I'm curious if if you're going after more non-core partners like that is that part of the strategy.
Potentially we want to see how that plays out and and use it as a test case, we've got a handful of general contractors that that or distribution partners. So depending upon how that rules out <unk> well, maybe made you more of that in the future would check to see.
Okay, Great. That's all for me you guys. Thanks.
[noise] Funky fan and at this time I would like to remind everyone and I'd like to ask a question. Please press the button the number one on your telephone keypad, you're not the question will come from the line of sauce I was out for some Raymond James Your line is on like a husky.
Good morning, and Kevin and Jeff Thanks for taking my question [noise].
Tomorrow morning.
On the large projects and health care, where those completely delivered in the quarters, there's still some left one of those.
I think those are largely completed and a quarter. We may have a little bit of punch list and follow up but there were large.
<unk>.
What is your pipeline looked like for large projects going forward.
[noise] you know I don't know that we have really gotten into that to label detailed I think your questions is really seeking I think it's reflective of kind of the comments that I made earlier, which is it's very unsettled time, I guess to give a little bit of additional color. What we are.
See is we were quoting level has been fairly substantial there's a lot of activity a lot of what we're doing a crossword organization with the sales force with the marketing with our strategic account approach is generated an enormous amount of activity and reasonably skipped can.
Leads the question is whether and when those will translate into orders and sales and because of everything that's going on in the broader economy and and political environment that timing is uncertain.
Okay that makes sense and then as we think about your your cash needs going forward can you give us a sense of what you think capex will be in the fourth quarter and in 2021.
Sure Yeah, just check your you know as as we looked at the Catholics for a Q4, it's going to be around two and a half to $3 million as we.
We finish off the the Carolina. The the next the next phase of the Carolina payment stream as well as our software development costs that that we incur on a normal basis, which tends to be in that million dollar range. As we look at as we look at next year.
It is it is probably a similar levels to what we have this year S. We continue to build out our third experienced centers finish off our paths facility and do the.
Do our normal software development enhancements that we do.
Got it good luck with an expert.
Okay.
Yeah I'm looking at this time I would like to remind everyone. If you would like to ask a question you can pass Taiwan on your telephone keypad, possibly get some I wanted to come home for for answering my questions.
I pause on his I'm seeing those sides of the questions on the <unk> I would like to have the call as a bathroom mistake, having a man that kind of thing.
I think the operator before closing I'd like to again, thank our tremendous employees and partners, who continue to demonstrate resiliency and commitment and the face of extraordinary circumstances their dedication to dirt in our collective mission is propeller organization forward any numerable ways. This year and they're the foundation of our future success. Thanks for joining us today.
Thank you. Thank you so much for granted fun again. Thank you everyone for back by supporting this concludes today's conference you may not it's gonna stay safe and have a lot of anytime.