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spk06: Ladies and gentlemen, thank you for standing by, and welcome to the DART's 2020 Q4 year-end financial results conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star followed by the number one on your telephone keypad. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker, Ms. Kim McEachern, please go ahead.
spk05: Thank you, Operator, and good morning, everyone. Welcome to today's call to discuss DIRT's fourth quarter 2020 results. Joining me on the call are DIRT's Chief Executive Officer, Kevin O'Meara, and Chief Financial Officer, Jeff Krause. Management's prepared remarks today are accompanied by presentation slides. To access the slides, please view them from the webpage of this webcast. Today's call will include forward-looking statements within the meaning of applicable Canadian and United States securities laws, 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 reference non-GAAP results, excluding special items. Please reference our Form 10-K, as filed on February 24, 2021, with the Securities and Exchange Commission, or SEC, and other reports and filings with the SEC 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 1 p.m. Eastern time. I would now like to turn the call over to Kevin.
spk04: Thank you, Kim, and thank you to everyone joining the call today. Beginning on slide four, the construction industry continues to grapple with the consequences of the ongoing COVID-19 pandemic with pronounced weaknesses in the non-residential sector. This reality negatively impacted our revenue in 2020, Whereas early in the year, we benefited from the projects that were underway at the beginning of the pandemic generally being seen through the completion. What became evident as the pandemic continued was the customers became increasingly reluctant to commit capital to new construction projects due to economic uncertainty for all sectors of society and a lack of clarity for healthcare clients with respect to how their patient delivery models might change post-COVID. all in an environment of ever-changing restrictions due to COVID-19 and the varying surges in infection rates across North America. This dynamic has continued into 2021, and we expect it to negatively impact our revenue during the first half of the year relative to the second and third quarters of 2020. As organizations finalize their real estate needs, and we collectively wait for clarity on, amongst other things, vaccine rollouts and an eventual return of employees to the built environment. Despite these challenges, we remain cautiously optimistic a recovery will begin in the second half of 2021. Statistical analysis from sources like Dodge Data and Analytics predict commercial construction starts will recover slightly this year, increasing by 5%. Further, we are in constant contact with our distribution partners, monitoring activity levels within their respective regions. While the majority of these partners have confirmed our view of solo first half activity levels compared to the third and fourth quarters of 2020, those same partners have recently confirmed their expectations of higher activity levels for the back half of 2021. We find this encouraging, but we'll remain cautious until their expectations turn into orders. We know the expectations of workplaces, healthcare and education spaces will continue to change dramatically over the coming months and years. Similarly, decision makers will now need to worry about building the right environment for their needs. In addition to the historical concerns about meeting budgets and construction schedules, this change will demand spaces that are flexible, adaptable, and supported by technology, all key components of DIRT's value proposition. This past year, we've seen the extraordinary importance of better connectivity and bandwidth in virtually every space. With skilled labor shortages and tighter construction timelines, our capabilities in modular power and data infrastructure, alongside our ability to integrate technology, position us as a full solution interior construction provider. Our ability to deliver these adaptable, connected spaces with faster execution than conventional construction at a competitive cost differentiates us in the world of interior construction. While some organizations may expect to shrink their real estate footprint, our infinitesimal share of what will remain a multi-billion dollar market combined with our enhanced marketing capability, should allow us to identify and address potential clients for whom our value proposition resonates. We believe this will support attractive long-term growth rates for DIRT. So despite a difficult short-term demand outlook, the long-term market opportunity remains very compelling for DIRT, and we remain highly committed to the execution of our strategic plan in order to properly take advantage of that opportunity. While we did not envision a pandemic who renounced our plan in late 2019, the tenants of the plan were to leverage a brilliant, innovative approach to interior construction and build the commercial and manufacturing capabilities necessary for this brilliant idea to scale and achieve its full marketplace potential. The pandemic has not changed the importance of executing this strategy to position the company for future growth. With the successful completion of our $40 million Canadian convertible to venture financing last month, We secured ample financial liquidity for us to continue executing our plan while the recovery takes hold. Additional funds will enable us to avoid costly retrenchments of the transformational investments we've made and increase our flexibility should the recovery take longer than expected. The pandemic has allowed us to flex our innovation muscle and demonstrate our capabilities to North American healthcare customers in ways that we haven't before and would likely not have had the opportunity to do absent COVID. From the delivery of acute care interiors and modular hospitals to the development of freestanding vaccination and testing units as part of our cross-functional rapid response healthcare initiative, we have demonstrated our ability to quickly adapt our DIRT DNA to meet our clients' ever-changing needs and to do it in ways they never would have expected. I'm pleased to say that last week, we received our first order for 30 mobile trailer-based vaccination units for a major U.S. healthcare provider, totaling approximately $2 million. While in itself not sufficient to offset the first half slowdown in non-residential activity, it raises our profile within the healthcare community and with a new breed of customers. Looking at our accomplishments in 2020, I'm happy to confirm that we reached the continuous improvement stage in our manufacturing operations. Since Jeff Calkins, our Chief Operating Officer, joined us in early 2019, he and his team have devoted themselves to establishing infrastructure, processes, and management systems based on lean manufacturing principles. They've also worked to get all our employees up and running and trained with these systems, including lean manufacturing training certification that will lead all the way to lean black belt certification for some. We expect the financial benefits from our improvements in efficiency and material yield to become readily apparent with an increase in sales and positive operating leverage. As we reported throughout the year, we continue to achieve safety performance far better than industry standards, which is one of the highest priority commitments we make on an ongoing basis. Earlier this year, the team introduced one-piece flow to our aluminum manufacturing facilities. In the simplest terms, this means parts are fabricated sequentially with no in-process inventory and a dramatic reduction in unproductive employee movement throughout the plant. The result is increased efficiency with less time and labor required for a wall frame. Our focus for the balance of the year will be to continue to refine the improvements we have made to the operations since Jeff's arrival and leverage them to enhance our quality management systems, sales and operations planning, and sustainability initiatives. I'm also pleased to confirm that our new South Carolina facility is now in the commissioning stage and on schedule to be fully operational during the second quarter. Turning to slide five, within our sales and marketing organization, we will complete filling territory sales representatives roles we identified as priority one hires at the onset of the pandemic and shift our focus to leveraging the commercial organization we built over the last 18 months to drive sales and sales pipeline growth. This will include a continuation of marketing campaigns focused on the new paradigm in interior construction, return of the office initiatives, and refining and promoting the dirt brand. In addition, we will be increasing our focus on the architect and designer community and general contractors, both key participants in the interior construction decision-making process. Finally, we'll be building on segment marketing by targeting key customer segments within our previously defined industry verticals, as well as solutions that are complimentary to our core wall offering, including casework, embedded power, and data networks and timber. The ultimate objective of our marketing organization is to provide qualified lead and sales tools to our sales force. We are supplementing these with continued enhancements to our CRM system to increase the effectiveness of our sales representatives. We've created three focus areas within our sales force. First are the traditional territory sales reps focused on their local markets. Next are segment sales specialists, the most notable of which is our healthcare-focused sales effort, and the last is our strategic accounts team. We're beginning to gain real traction with strategic accounts, even in a business with a long sales cycle with over 35 target strategic accounts in various stages of engagement. As an example, the $2 million sale I mentioned earlier emanated from our strategic accounts group. Finally, we recently signed an agreement to become part of the CBRE Fusion Program. CBRE Group is one of the world's largest commercial real estate services and investment firms. Their project management group facilitated over $25 billion of total construction spending in 2019, and we think inclusion in their fusion program will be a strong source of high quality sales leads. Before concluding, I'd like to comment on some of the core tenants underlying everything we do at DIRT. This year has brought environmental, social, and governance concerns to the forefront like never before. Sustainability is one of the founding pillars of DIRT. The fundamental design advantage of our solutions prolongs the useful life of a built space, allowing reconfiguration and ongoing adaptability, rather than creating landfill waste by demolishing and replacing conventional built spaces. We operate with sustainability in mind in our factories, where precision manufacturing improves material efficiency and limits waste. On the job site, we eliminate drywall, which is one of the largest contributors to landfills from the construction industry. People have always been at the core of Dirt's success because our company is built on intellectual property that is enhanced every day by our highly talented team. Shortly after my arrival, we made employee safety the number one focus of our culture, and we achieved the dramatic results we shared throughout last year. We have internal programs in place to ensure not only that we recruit and retain a diverse group of people, but that these people are also able to comfortably bring their true selves to work and fully participate in the activities of our company. We recognize the increasing importance of making these aspects of our business more transparent to all our stakeholders. I am pleased to say that we are currently developing the analysis, measurement, and metrics required for more formalized reporting, and we look forward to sharing more on these efforts later this year. Finally, in conjunction with announcing our strategic plan in November 2019, We articulated ambitious targets for revenue between $450 million to $550 million and adjusted EBITDA margins between 18% and 22% by the end of 2023. Clearly, the non-residential construction market is much less favorable than in late 2019, and our 2020 revenues declined 31% compared to 2019's. We are starting from a lower base than we anticipated when we originally discussed our plan, and the outlook for at least the first half of 2021 is challenging. However, given our confidence in our business model, our people, our strategic plan, and our progress on its execution, we believe the operating environment and transformation of our company are sufficiently dynamic that these targets are still achievable. With that, I will turn the call over to Jeff for review of the financials.
spk10: Thank you, Kevin.
spk14: As we've done in recent quarterly calls, I'm going to start with a quick review of our liquidity on slide six. Our working capital management focus continued in the fourth quarter with no reportable disruptions or delays in accounts receivable collections. Day sales outstanding, net of deposits and income taxes receivable continued to run at under 30 days. We finished the year with cash balances of $45.8 million, while our net working capital at December 31st was $53.5 million. Our current ratio remains healthy at 2.7 times. In addition, we took further steps to bolster our financial resources to ensure we have the financial wherewithal to weather the current period of uncertainty and to be ready for when the recovery takes hold. During this month, we finalized a $25 million Canadian senior secured asset-backed credit facility, which replaces our previous cash flow and earnings-based facility. Like most asset-backed facilities, the borrowing base is calculated based upon a percentage of our accounts receivable and inventory, and the pricing is only slightly higher than our previous facilities. The specific borrowing terms of the new facility can be found in our 10-K. As of December 31, 2020, available borrowings under the new facility would have been Canadian $9.3 million or $7.3 million U.S. The facility remains undrawn. During 2020, we entered into two equipment leasing facilities, as you know. The first is a Canadian dollar $5 million facility, of which $3.6 million Canadian, was drawn during 2020, unchanged from Q3 of this year. The second is a US dollar facility, on which $3.5 million was drawn during 2020, also unchanged from Q3. As part of the conversion to the asset-backed facility, the equipment facility was decreased to US$14 million from US$16 million. We anticipate drawing an additional approximate US$11 million on these lines in the first half of 2021, as we have now received most of the equipment for our South Carolina plant. Updating on government subsidies, in the fourth quarter, we qualified for an additional US$3.9 million through two Canadian government programs. the Canadian Emergency Wage Subsidy, and the Canadian Emergency Rent Subsidy. For the full year 2020, we qualified for a total of $12.7 million of government subsidies, of which $11 million was received in 2020 and the balance received in 2021. This program has been extended to June 2021, and we will review our eligibility each month. We have already qualified for and made an application for approximately $1.5 million for the January 2021 period. As Kevin mentioned, subsequent to year end, we issued $40.25 million Canadian of convertible unsecured subordinated debentures for net proceeds after cost of Canadian $37.7 million. The debentures will accrue interest at a rate of 6%. and are convertible into common shares at an exercise price of Canadian $4.65 per common share, or if not converted, will mature and will be repayable on January 31st, 2026. To put it in context and pro forma the net financing proceeds, our cash at year end would have been approximately $75 million had it been completed at December 31st, 2020. Now, let's turn to the financial results, beginning on slide seven. Revenue for the fourth quarter of 2020 was $42.2 million compared to $53.2 million in the fourth quarter of 2019. For the full year 2020, revenues declined 31% to $171.5 million compared to the full year 2019. Turning to slide eight, adjusted gross profit margin decreased for the fourth quarter to 32% from 33.4% in the prior year period. In 2019, we excluded $2.2 million from the calculation related to costs of underutilized capacity with no similar adjustments in the fourth quarter of 2020. For the year, adjusted gross profit margin declined to 37% versus 39.5% for 2019. We reduced our factory staffing levels in early 2020, and while those adjustments realigned our capacity with the then expected activity levels, The subsequent market softness caused further negative leverage on our fixed costs, which affected our adjusted gross profit margin. Further, our variable factory labor is sticky to the downside, particularly at slow or highly variable revenue levels. There is a minimum amount of staffing you need at our facilities to keep them running and responsive to activity levels. As a result, we expect to remain below historical percentages until sales improve. Turning to the breakdown of operating expenses on slide nine, general and administrative expenses decreased due to the reversal of a $1.2 million provision relating to a claim for severance by one of our former founders. Lower sales and marketing expenses for Q4 and full year 2020 reflect lower commissions on decreased revenues. In addition, and across the board, COVID-19 restrictions resulted in materially lower travel, meals, and entertainment expenses. lower trade show expenses and reduced building operating expenses. This includes the cancellation of our annual Connext event. It is reasonable to assume that when the pandemic and associated restrictions ease, we will see an increase in these types of expenses from current levels. On slide 10, adjusted EBITDA and adjusted EBITDA margin for the quarter were a $2.9 million loss or a negative 6.8%. a slight improvement from a $3.4 million loss and negative 6.4% in the same period of 2019. For the full year 2020, adjusted EBITDA and adjusted EBITDA margin was a $7.2 million loss or negative 4.2%, a decline of $18.2 million or 6.7% for 2019, most directly impacted by the $33.1 million decrease in adjusted gross profit in 2020 compared to 2019. We have excluded the government subsidies from adjusted EBITDA. On slide 11, net loss for the quarter was $4.2 million, or negative $0.05 per share, compared to net loss of $7.5 million, or a $0.09 loss per share for the fourth quarter of 2019. Net loss for the year ended December 31, 2019, was $11.3 million, compared to a net loss of $4.4 million for 2019. The decrease in net loss is attributable to the reduction in gross profit and a $1.4 million increase in income tax expense, partially offset by a $14.3 million reduction in operating costs, a $.7 million decrease in foreign exchange losses, and government subsidies of $12.7 million. In conclusion, on slide 12, COVID-19 made 2020 an incredibly challenging year. for the economy, our end customers, our partners, and our employees. And we see that extending into at least the first half of 2021. Specifically, we anticipate first quarter 2021 revenues to be sequentially lower compared to Q4 of 2020. That said, the steps we've taken to bolster our liquidity give us the confidence to not only weather these changes, but to prudently continue the execution of our strategic plan. While we remain ready to take action should business conditions worsen, we plan to maintain our current cost and manufacturing capacity structure to ensure that when the inevitable return to a more normalized construction environment happens, we are well poised, both from a sales and production standpoint, to take full advantage of what we believe will eventually be a very active market. Operator, we would like to now open the call for questions.
spk06: As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. That is star one to ask a question. We will pause for just a minute and take a look at the Q&A roster. And our first question comes from Hassan Khan with National Bank.
spk08: Good morning. This is Hassan on behalf of Rupert. uh do we get some color on what we can expect from here on as we see headwinds from covet and the levers at your disposal disposal to help mitigate some of that impact whether it's more subsidies temporary closures or deferral of capex items all right it's jeff here um so uh there's a couple of things that come with it um
spk14: Certainly, we believe and we know that the government subsidies program has been extended to June 2021. And as I said in the remarks, we applied for 1.5 million US of those subsidies in January. If our Canadian revenues continue to be below that threshold, we haven't seen what the calculation thresholds will be for the second quarter. But if we remain within that, certainly we will take advantage of those sorts of programs as they become available. I think the second piece is a key objective for us as the pandemic took hold was to ensure that where possible, we could exit the pandemic in a position that enabled us to take advantage of the pieces that we put in place from a production and marketing perspective and so therefore we've been very reticent to to retrench on on those investments accordingly we did the the 40 million Canadian debenture that we issued, as you know, in January of this year. We put in place the leasing facilities. We've bolstered our credit facilities. And as a result, we believe we have more than enough liquidity to get us through to when the recovery occurs. Last but not least is, as part of our response to the pandemic, we initiated our rapid response health care program. And our rapid response health care program were products that we had never had in the system before. And as Kevin mentioned, we got our first order for $2 million for mobile vaccination trailers. We are going to continue to pursue those types of opportunities, which we hope will mitigate some of the impact of the reduction in commercial construction activity. And then if it takes a lot longer, then we'll continue to revisit. But this is something we're monitoring daily.
spk08: Thank you for the great comment. Now, conversely, how quickly can things turn around when we do see a reopening of the economy? And I ask this because the sales pipeline historically can take long lead times. What I'm trying to get is how much of the lost revenue opportunity can be viewed as deferrals which should come back in given pent-up demand? How much should we view it as a lost opportunity?
spk04: Those are all really good questions and are difficult to answer. The part that I can answer is that as clients and hence partners place orders with us, we can ramp up our capacity very, very quickly. I do think the sales cycle for the next 12 to 18 months will be significantly shorter than it's been historically. I think that could also play to our strength in terms of our short lead times and shorter construction schedules because I do think there may be some pent-up demand or as all the liquidity in the economy starts to release, I'm sure seeing reports of pretty aggressive growth projections in the economy and so forth. I think that there is a reasonable chance that that happens. Unfortunately, from where we sit, it's very hard to have visibility into that. And so we try the best we can talking to clients, talking to partners to get our arms around that. But I think oftentimes even the clients don't really have a sense because they're trying to figure out where their businesses are and when are they coming out and what are their space needs going to be and how are their people going to react and so forth. And so we're only as good as those people figuring out how to manage their businesses.
spk08: And that's fair. And thank you for the great color, guys. I'll step out of the queue for now. Thanks.
spk06: And again, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Your next question comes from Greg Palm with Craig Hallam Capital.
spk00: Yeah, thanks. I guess just first off, as you sort of look back on the last quarter or last couple quarters, any geographies that are performing better or worse? And what about metro versus secondary markets? Kind of curious if there's any noticeable difference there in terms of activity.
spk04: I think the single biggest determinant is COVID restrictions. And so you have fewer of those in the south. So relatively speaking, the south has been stronger. Other areas, the Bay Area and California, it's been pretty locked down. New England was a little bit more locked down than other places. And then New York, just with everything that's going on there, and the density in New York has been softer. So that's how I would characterize the regional differences.
spk00: Okay, makes sense. And of the projects that you're doing now... that maybe weren't in the backlog or the pipeline pre-COVID. I'm curious if there's any noticeable differences in the types of those projects, the average order size. I'm just trying to get a sense for whether the type or the scope of the projects have changed at all over the last year and whether you think that will be significantly different going forward than what you've seen in the past.
spk04: It hasn't been markedly different to date. I do think it will be the complexion of it will be different going forward, but it's not going to be due to COVID. It'll be due to management changes in the commercial organization. And what I mean by that is with salespeople positioned to sell large enterprise-sized projects or to do more strategic accounts, I think you'll see that rippling through. You also saw what we had talked about before in the transformation of the business, fewer larger projects than we historically would have done, say, two or three years ago. And I think you'll see those ramping up as well. But as we've talked before, those tend to have a little bit longer sales cycle as well. So I think the big news will be over the coming two to four years, I think the impact that our specialized sales team that didn't exist before will have on the book of businesses.
spk00: Okay, interesting. And, you know, last one, just in terms of the, you know, the cadence of how we should be thinking about 2021, you know, so Q1 sequentially down from Q4, would you expect growth on a sequential basis, you know, going forward? So as we get into Q2, maybe just remind us what normal seasonality usually looks like.
spk14: Sorry, I was on mute. Greg, I don't think normal seasonality applies in this type scenario. But I think it would be reasonable to expect that the recovery is not going to necessarily hockey stick. There is going to be some recovery into it, but it's really hard to predict. And, you know, if vaccines get delayed, if stuff pushes out, um it's it's tough to tell we do see that back half being stronger but how it builds into that that back half you know is is is it is a tough call understood okay all right i'll get back in the queue best of luck going forward thanks thanks and there are no further questions at this time i would now like to turn the call back over to kevin
spk04: Before closing, I'd like to thank our tremendous employees and distribution partners who continue to demonstrate resiliency and commitment in the face of extraordinary circumstances. I strongly believe that the path we're on, guided by our strategic plan and executed by the incredibly talented team we have at DIRT, will continue to propel our organization forward. In 2021, I look forward to leveraging the investments we've made to date and working with our distribution partners to enhance their ability to drive sales growth and achieve the market penetration this fabulous company and people deserve, as well as increasing the visibility to our sustainability and people strategies and issues. Thank you for joining us today.
spk06: That does conclude today's call. You may now disconnect. you Thank you.
spk07: Thank you. music music Thank you. Ladies and gentlemen, thank you for standing by.
spk06: And welcome to the DIRTS 2020 Q4 year-end financial results conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star followed by the number one on your tooltip and keypad. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker, Ms. Kim McEachern. Please go ahead.
spk05: Thank you, Operator, and good morning, everyone. Welcome to today's call to discuss DIRT's fourth quarter 2020 results. Joining me on the call are DIRT's Chief Executive Officer, Kevin O'Meara, and Chief Financial Officer, Jeff Krause. Management's prepared remarks today are accompanied by presentation slides. To access the slides, please view them from the webpage of this webcast. Today's call will include forward-looking statements within the meaning of applicable Canadian and United States securities laws, 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 reference non-GAAP results, excluding special items. Please reference our Form 10-K as filed on February 24, 2021, with the Securities and Exchange Commission, or SEC, and other reports and filings with the SEC 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 1 p.m. Eastern time. I would now like to turn the call over to Kevin.
spk04: Thank you, Kim, and thank you to everyone joining the call today. Beginning on slide four, the construction industry continues to grapple with the consequences of the ongoing COVID-19 pandemic with pronounced weaknesses in the non-residential sector. This reality negatively impacted our revenue in 2020, Whereas early in the year, we benefited from the projects that were underway at the beginning of the pandemic generally being seen through to completion. What became evident as the pandemic continued was that customers became increasingly reluctant to commit capital to new construction projects due to economic uncertainty for all sectors of society and a lack of clarity for healthcare clients with respect to how their patient delivery models might change post-COVID. all in an environment of ever-changing restrictions due to COVID-19 and the varying surges in infection rates across North America. This dynamic has continued into 2021, and we expect it to negatively impact our revenue during the first half of the year relative to the second and third quarters of 2020. As organizations finalize their real estate needs, and we collectively wait for clarity on, amongst other things, vaccine rollouts and an eventual return of employees to the built environment. Despite these challenges, we remain cautiously optimistic a recovery will begin in the second half of 2021. Statistical analysis from sources like Dodge Data and Analytics predict commercial construction starts will recover slightly this year, increasing by 5%. Further, we are in constant contact with our distribution partners, monitoring activity levels within their respective regions. While the majority of these partners have confirmed our view of solo first half activity levels compared to the third and fourth quarters of 2020, those same partners have recently confirmed their expectations of higher activity levels for the back half of 2021. We find this encouraging, but we'll remain cautious until their expectations turn into orders. We know the expectations of workplaces, healthcare and education spaces will continue to change dramatically over the coming months and years. Similarly, decision makers will now need to worry about building the right environment for their needs. In addition to the historical concerns about meeting budgets and construction schedules, this change will demand spaces that are flexible, adaptable, and supported by technology, all key components of DIRT's value proposition. This past year, we've seen the extraordinary importance of better connectivity and bandwidth in virtually every space. With skilled labor shortages and tighter construction timelines, our capabilities in modular power and data infrastructure, alongside our ability to integrate technology, position us as a full solution interior construction provider. Our ability to deliver these adaptable, connected spaces with faster execution than conventional construction at a competitive cost differentiates us in the world of interior construction. While some organizations may expect to shrink their real estate footprint, our infinitesimal share of what will remain a multi-billion dollar market combined with our enhanced marketing capability, should allow us to identify and address potential clients for whom our value proposition resonates. We believe this will support attractive long-term growth rates for DIRT. So, despite a difficult short-term demand outlook, the long-term market opportunity remains very compelling for DIRT, and we remain highly committed to the execution of our strategic plan in order to properly take advantage of that opportunity. While we did not envision a pandemic who renounced our plan in late 2019, the tenants of the plan were to leverage a brilliant, innovative approach to interior construction and build the commercial and manufacturing capabilities necessary for this brilliant idea to scale and achieve its full marketplace potential. The pandemic has not changed the importance of executing this strategy to position the company for future growth. With the successful completion of our $40 million Canadian convertible to venture financing last month, We secured ample financial liquidity for us to continue executing our plan while the recovery takes hold. Additional funds will enable us to avoid costly retrenchments of the transformational investments we've made and increase our flexibility should the recovery take longer than expected. The pandemic has allowed us to flex our innovation muscle and demonstrate our capabilities to North American healthcare customers in ways that we haven't before and would likely not have had the opportunity to do absent COVID. From the delivery of acute care interiors and modular hospitals to the development of freestanding vaccination and testing units as part of our cross-functional rapid response healthcare initiative, we have demonstrated our ability to quickly adapt our DIRT DNA to meet our clients' ever-changing needs and to do it in ways they never would have expected. I'm pleased to say that last week, we received our first order for 30 mobile trailer-based vaccination units for a major U.S. healthcare provider, totaling approximately $2 million. While in itself not sufficient to offset the first half slowdown in non-residential activity, it raises our profile within the healthcare community and with a new breed of customers. Looking at our accomplishments in 2020, I'm happy to confirm that we reached the continuous improvement stage in our manufacturing operations. Since Jeff Calkins, our Chief Operating Officer, joined us in early 2019, he and his team have devoted themselves to establishing infrastructure, processes, and management systems based on lean manufacturing principles. They've also worked to get all our employees up and running and trained with these systems, including lean manufacturing training certification that will lead all the way to lean black belt certification for some. We expect the financial benefits from our improvements in efficiency and material yield to become readily apparent with an increase in sales and positive operating leverage. As we reported throughout the year, we continue to achieve safety performance far better than industry standards, which is one of the highest priority commitments we make on an ongoing basis. Earlier this year, the team introduced one-piece flow to our aluminum manufacturing facilities. In the simplest terms, this means parts are fabricated sequentially with no in-process inventory and a dramatic reduction in unproductive employee movement throughout the plant. The result is increased efficiency with less time and labor required for a wall frame. Our focus for the balance of the year will be to continue to refine the improvements we have made to the operations since Jeff's arrival and leverage them to enhance our quality management systems, sales and operations planning, and sustainability initiatives. I'm also pleased to confirm that our new South Carolina facility is now in the commissioning stage and on schedule to be fully operational during the second quarter. Turning to slide five, within our sales and marketing organization, we will complete filling territory sales representatives roles we identified as priority one hires at the onset of the pandemic and shift our focus to leveraging the commercial organization we built over the last 18 months to drive sales and sales pipeline growth. This will include a continuation of marketing campaigns focused on the new paradigm in interior construction, return of the office initiatives, and refining and promoting the dirt brand. In addition, we will be increasing our focus on the architect and designer community and general contractors, both key participants in the interior construction decision-making process. Finally, we'll be building on segment marketing by targeting key customer segments within our previously defined industry verticals, as well as solutions that are complementary to our core wall offering, including casework, embedded power, and data networks and timber. The ultimate objective of our marketing organization is to provide qualified lead and sales tools to our sales force. We are supplementing these with continued enhancements to our CRM system to increase the effectiveness of our sales representatives. We've created three focus areas within our sales force. First are the traditional territory sales reps focused on their local markets. Next are segment sales specialists, the most notable of which is our healthcare-focused sales effort, and the last is our strategic accounts team. We're beginning to gain real traction with strategic accounts, even in a business with a long sales cycle with over 35 target strategic accounts in various stages of engagement. As an example, the $2 million sale I mentioned earlier emanated from our strategic accounts group. Finally, we recently signed an agreement to become part of the CBRE Fusion Program. CBRE Group is one of the world's largest commercial real estate services and investment firms. Their project management group facilitated over $25 billion of total construction spending in 2019, and we think inclusion in their fusion program will be a strong source of high quality sales leads. Before concluding, I'd like to comment on some of the core tenets underlying everything we do at DIRT. This year has brought environmental, social, and governance concerns to the forefront like never before. Sustainability is one of the founding pillars of DIRT. The fundamental design advantage of our solutions prolongs the useful life of a built space, allowing reconfiguration and ongoing adaptability, rather than creating landfill waste by demolishing and replacing conventional built spaces. We operate with sustainability in mind in our factories, where precision manufacturing improves material efficiency and limits waste. On the job site, we eliminate drywall, which is one of the largest contributors to landfills from the construction industry. People have always been at the core of Dirt's success because our company is built on intellectual property that is enhanced every day by our highly talented team. Shortly after my arrival, we made employee safety the number one focus of our culture, and we achieved the dramatic results we shared throughout last year. We have internal programs in place to ensure not only that we recruit and retain a diverse group of people, but that these people are also able to comfortably bring their true selves to work and fully participate in the activities of our company. We recognize the increasing importance of making these aspects of our business more transparent to all our stakeholders. I am pleased to say that we are currently developing the analysis, measurement, and metrics required for more formalized reporting, and we look forward to sharing more on these efforts later this year. Finally, in conjunction with announcing our strategic plan in November 2019, We articulated ambitious targets for revenue between $450 million to $550 million and adjusted EBITDA margins between 18% and 22% by the end of 2023. Clearly, the non-residential construction market is much less favorable than in late 2019, and our 2020 revenues declined 31% compared to 2019's. We are starting from a lower base than we anticipated when we originally discussed our plan, and the outlook for at least the first half of 2021 is challenging. However, given our confidence in our business model, our people, our strategic plan, and our progress on its execution, we believe the operating environment and transformation of our company are sufficiently dynamic that these targets are still achievable. With that, I will turn the call over to Jeff for a review of the financials.
spk10: Thank you, Kevin.
spk14: As we've done in recent quarterly calls, I'm going to start with a quick review of our liquidity on slide six. Our working capital management focus continued in the fourth quarter with no reportable disruptions or delays in accounts receivable collections. Day sales outstanding, net of deposits and income taxes receivable continued to run at under 30 days. We finished the year with cash balances of $45.8 million, while our net working capital at December 31st was $53.5 million. Our current ratio remains healthy at 2.7 times. In addition, we took further steps to bolster our financial resources to ensure we have the financial wherewithal to weather the current period of uncertainty and to be ready for when the recovery takes hold. During this month, we finalized a $25 million Canadian senior secured asset-backed credit facility, which replaces our previous cash flow and earnings-based facilities. Like most asset-backed facilities, the borrowing base is calculated based upon a percentage of our accounts receivable and inventory, and the pricing is only slightly higher than our previous facilities. The specific borrowing terms of the new facility can be found in our 10-K. As of December 31, 2020, available borrowings under the new facility would have been Canadian $9.3 million or $7.3 million U.S. The facility remains undrawn. During 2020, we entered into two equipment leasing facilities, as you know. The first is a Canadian dollar $5 million facility, of which $3.6 million Canadian, was drawn during 2020, unchanged from Q3 of this year. The second is a U.S. dollar facility, on which $3.5 million was drawn during 2020, also unchanged from Q3. As part of the conversion to the asset-backed facility, the equipment facility was decreased to US$14 million from US$16 million. We anticipate drawing an additional approximate US$11 million on these lines in the first half of 2021, as we have now received most of the equipment for our South Carolina plant. Updating on government subsidies, in the fourth quarter, we qualified for an additional US$3.9 million through two Canadian government programs. the Canadian Emergency Wage Subsidy, and the Canadian Emergency Rent Subsidy. For the full year 2020, we qualified for a total of $12.7 million of government subsidies, of which $11 million was received in 2020 and the balance received in 2021. This program has been extended to June 2021, and we will review our eligibility each month. We have already qualified for and made an application for approximately $1.5 million for the January 2021 period. As Kevin mentioned, subsequent to year end, we issued $40.25 million Canadian of convertible unsecured subordinated debentures for net proceeds after cost of Canadian $37.7 million. The debentures will accrue interest at a rate of 6%. and are convertible into common shares at an exercise price of Canadian $4.65 per common share, or if not converted, will mature and will be repayable on January 31st, 2026. To put it in context and pro forma the net financing proceeds, our cash at year end would have been approximately $75 million had it been completed at December 31st, 2020. Now, let's turn to the financial results, beginning on slide seven. Revenue for the fourth quarter of 2020 was $42.2 million compared to $53.2 million in the fourth quarter of 2019. For the full year 2020, revenues declined 31% to $171.5 million compared to the full year 2019. Turning to slide eight, adjusted gross profit margin decreased for the fourth quarter to 32% from 33.4% in the prior year period. In 2019, we excluded $2.2 million from the calculation related to costs of underutilized capacity with no similar adjustments in the fourth quarter of 2020. For the year, adjusted gross profit margin declined to 37% versus 39.5% for 2019. We reduced our factory staffing levels in early 2020, and while those adjustments realigned our capacity with the then expected activity levels, The subsequent market softness caused further negative leverage on our fixed costs, which affected our adjusted gross profit margin. Further, our variable factory labor is sticky to the downside, particularly at slow or highly variable revenue levels. There is a minimum amount of staffing you need at our facilities to keep them running and responsive to activity levels. As a result, we expect to remain below historical percentages until sales improve. Turning to the breakdown of operating expenses on slide nine, general and administrative expenses decreased due to the reversal of a $1.2 million provision relating to a claim for severance by one of our former founders. Lower sales and marketing expenses for Q4 and full year 2020 reflect lower commissions on decreased revenues. In addition, and across the board, COVID-19 restrictions resulted in materially lower travel, meals, and entertainment expenses. lower trade show expenses, and reduced building operating expenses. This includes the cancellation of our annual Connext event. It is reasonable to assume that when the pandemic and associated restrictions ease, we will see an increase in these types of expenses from current levels. On slide 10, adjusted EBITDA and adjusted EBITDA margin for the quarter were a $2.9 million loss or a negative 6.8%. a slight improvement from a $3.4 million loss and negative 6.4% in the same period of 2019. For the full year 2020, adjusted EBITDA and adjusted EBITDA margin was a $7.2 million loss or negative 4.2%, a decline of $18.2 million or 6.7% for 2019, most directly impacted by the $33.1 million decrease in adjusted gross profit in 2020 compared to 2019. We have excluded the government subsidies from adjusted EBITDA. On slide 11, net loss for the quarter was $4.2 million, or negative $0.05 per share, compared to net loss of $7.5 million, or a $0.09 loss per share for the fourth quarter of 2019. Net loss for the year ended December 31, 2019, was $11.3 million, compared to a net loss of $4.4 million for 2019. The decrease in net loss is attributable to the reduction in gross profit and a $1.4 million increase in income tax expense, partially offset by a $14.3 million reduction in operating costs, a $.7 million decrease in foreign exchange losses, and government subsidies of $12.7 million. In conclusion, on slide 12, COVID-19 made 2020 an incredibly challenging year. for the economy, our end customers, our partners, and our employees. And we see that extending into at least the first half of 2021. Specifically, we anticipate first quarter 2021 revenues to be sequentially lower compared to Q4 of 2020. That said, the steps we've taken to bolster our liquidity give us the confidence to not only weather these changes, but to prudently continue the execution of our strategic plan. While we remain ready to take action should business conditions worsen, we plan to maintain our current cost and manufacturing capacity structure to ensure that when the inevitable return to a more normalized construction environment happens, we are well poised, both from a sales and production standpoint, to take full advantage of what we believe will eventually be a very active market. Operator, we would like to now open the call for questions.
spk06: As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. That is star one to ask a question. We will pause for just a minute and take a look at the Q&A roster. And our first question comes from Hassan Khan with National Bank.
spk08: Good morning. This is Hassan on behalf of Rupert. Do we get some color on what we can expect from here on as we see headwinds from COVID and the levers at your disposal to help mitigate some of that impact, whether it's more subsidies, temporary closures, or deferral of CapEx items?
spk14: It's Jeff here. So, there's a couple of things that come with it. Certainly, we believe and we know that the government subsidies program has been extended to June 2021. And as I said in the remarks, we applied for one and a half million US of those subsidies in January. If our Canadian revenues continue to be below that threshold, we haven't seen what the calculation thresholds will be for the second quarter. But if we remain within that, certainly we will take advantage of those sorts of programs as they become available. I think the second piece is a key objective for us as the pandemic took hold was to ensure that where possible, we could exit the pandemic in a position that enabled us to take advantage of the pieces that we put in place from a production and marketing perspective. And so, therefore, we've been very reticent to retrench on those investments. Accordingly, we did the $40 million Canadian project. debenture that we issued, as you know, in January of this year. We put in place the leasing facilities. We've bolstered our credit facilities. And as a result, we believe we have more than enough liquidity to get us through to when the recovery occurs. Last but not least is as part of our response to the pandemic, we initiated our rapid response healthcare program. And our rapid response healthcare program were products that we had never had in the system before. And as Kevin mentioned, we got our first order for $2 million for mobile vaccination trailers. We are going to continue to pursue those types of opportunities, which we hope will mitigate some of the impact of the reduction in commercial construction activity. And then if it takes a lot longer, then we'll continue to revisit. But this is something we're monitoring daily.
spk08: Thank you for the great comment. Now, conversely, how quickly can things turn around when we do see a reopening of the economy? And I ask this because the sales pipeline historically can take long lead times. What I'm trying to get is how much of the lost revenue opportunity can be viewed as deferrals which should come back in given pent-up demand? How much should we view as a lost opportunity?
spk04: Those are all really good questions and are difficult to answer. The part that I can answer is that as clients and hence partners place orders with us, we can ramp up our capacity very, very quickly. I do think the sales cycle for the next 12 to 18 months will be significantly shorter than it's been historically. I think that could also play to our strength in terms of our short lead times and shorter construction schedules, because I do think there may be some pent up demand or as all the liquidity in the economy starts to release, I'm sure seeing reports of pretty aggressive growth projections in the economy and so forth. I think that there is a reasonable chance that that happens. Unfortunately, from where we sit, it's very hard to have visibility into that. And so we try the best we can talking to clients, talking to partners to get our arms around that. But I think oftentimes even the clients don't really have a sense because they're trying to figure out where their businesses are and when are they coming out and what are their space needs going to be and how are their people going to react and so forth. And so we're only as good as those people figuring out how to manage their businesses.
spk08: And that's fair. And thank you for the great color, guys. I'll step out of the queue for now. Thanks.
spk06: And again, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Your next question comes from Greg Palm with Craig Hallam Capital.
spk00: Yeah, thanks. I guess just first off, as you sort of look back on the last quarter or last couple quarters, any geographies that are performing better or worse? And what about metro versus secondary markets? Kind of curious if there's any noticeable difference there in terms of activity.
spk04: I think the single biggest determinant is COVID restrictions. And so you have fewer of those in the south. So relatively speaking, the south has been stronger. Other areas, the Bay Area and California, it's been pre-locked down. New England was a little bit more locked down than other places. And then New York, just with everything that's going on there, and the density in New York has been softer. So that's how I would characterize the regional differences.
spk00: Okay, makes sense. And of the projects that you're doing now... that maybe weren't in the backlog or the pipeline pre-COVID. I'm curious if there's any noticeable differences in the types of those projects, the average order size. I'm just trying to get a sense for whether the type or the scope of the projects have changed at all over the last year and whether you think that will be significantly different going forward than what you've seen in the past.
spk04: It hasn't been markedly different to date. I do think it will be The complexion of it will be different going forward, but it's not going to be due to COVID. It'll be due to management changes in the commercial organization. And what I mean by that is with salespeople positioned to sell large enterprise-sized projects or to do more strategic accounts, I think you'll see that rippling through. You also saw... you know, what we had talked about before in the transformation of the business, fewer larger projects than we historically would have done, say, two or three years ago. And I think you'll see those ramping up as well. But as we've talked before, those tend to have a little bit longer sales cycle as well. So I think the big news will be over the coming, you know, two to four years. I think the impact that our specialized sales team that didn't exist before will have on the book of businesses.
spk00: Okay, interesting. And, you know, last one, just in terms of the, you know, the cadence of how we should be thinking about 2021, you know, so Q1 sequentially down from Q4, would you expect growth on a sequential basis, you know, going forward? So as we get into Q2, maybe just remind us what normal seasonality usually looks like.
spk14: Sorry, I was on mute. Greg, I don't think normal seasonality applies in this type scenario. But I think it would be reasonable to expect that the recovery is not going to necessarily hockey stick. There is going to be some recovery into it, but it's really hard to predict. And, you know, if vaccines get delayed, if stuff pushes out, It's tough to tell. We do see that back half being stronger, but how it builds into that back half is a tough call.
spk00: Understood. Okay. All right. I'll get back in the queue. Best of luck going forward. Thanks. Thanks.
spk06: And there are no further questions at this time. I would now like to turn the call back over to Kevin.
spk04: Before closing, I'd like to thank our tremendous employees and distribution partners who continue to demonstrate resiliency and commitment in the face of extraordinary circumstances. I strongly believe that the path we're on, guided by our strategic plan and executed by the incredibly talented team we have at DERC, will continue to propel our organization forward. In 2021, I look forward to leveraging the investments we've made to date and working with our distribution partners to enhance their ability to drive sales growth and achieve the market penetration this fabulous company and people deserve, as well as increasing the visibility to our sustainability and people strategies and issues. Thank you for joining us today.
spk06: That does conclude today's call. You may now disconnect.
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